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Sante Fe Natural Tobacco Co., Inc. v. Eliot Spitzer

00 Civ. 7274 (LAP)(S.D.N.Y. June , 2001)

Court holds that Section 1399-11 of New York's Public Health Law runs afoul of the Commerce Clause of the United States Constitution, and accordingly permanently enjoins its enforcement. Section 1399-11 prohibits the shipments of cigarettes to consumers in New York. The statute's prohibitions apply to both retailers and common carriers, and effectively preclude the use of the Internet and mail order catalogues as a means of selling cigarettes to New Yorkers. "The statute … thus restrict[s] retail sales of cigarettes in New York to face-to-face transactions at in state retail locations." The Court held that the statute was unconstitutional because it violated the "dormant" aspects of the Commerce Clause, which prohibit States from passing legislation which discriminates against, or unduly burdens, interstate commerce.

In an effort to reduce cigarette smoking in New York, the New York legislature in 1999 increased the New York tax on cigarettes from $.56 per pack to the national high of $1.11 per pack. This move reduced the sales of tax-paid cigarettes in New York, which in turn adversely impacted the profits of in-state cigarette retailers, particularly those near either the State's borders or Indian reservations. In-state retailers responded with complaints about 'unfair competition' from those selling untaxed cigarettes via the Internet, mail order or telephone. "Apparently, in response", New York enacted into law section 1399-11 of the Public Health Law.

Section 1399-11 prohibits the shipment of cigarettes to New York consumers. Section 1 prohibits the shipment of cigarettes to New York consumers, thereby "in essence .. prohibit[ing] sales of cigarettes to consumers in New York via direct sales channels" such as the Internet or mail-order. Section 2 prohibits common or contract carriers from knowingly transporting cigarettes to New York consumers. The statute contains an exception, which permits someone other than a contract or common carrier from transporting not more than 800 cigarettes at one time to any person in the State.

The State claimed that it enacted Section 1399-11 to prohibit cigarette sales 'via the Internet, or by telephone or by mail order to residents' of New York in an effort to promote four state interests: "(1) public health, (2) funding of health care pursuant to the Health Care Reform Act of 2000, (3) the economy of the State and (4) improving the state's ability to measure and monitor cigarette consumption and to better determine the public health and fiscal consequences of smoking."

The "dormant" aspect of the Commerce Clause of the United States Constitution, Article I, Section 8, clause 3, limits the power of States to enact legislation that interferes with interstate commerce. State statutes that discriminate against interstate commerce (i.e. that treat non-state residents who engage in certain commercial activities differently from in-state residents engaging in the same activities) are subject to "strict scrutiny" and are "virtually per se invalid." Such statutes will only pass constitutional muster if the State "can demonstrate, under rigorous scrutiny, that it has no other means [apart from the challenged legislation] to advance a legitimate local interest." State statutes which do not discriminate against interstate commerce, but instead regulate evenhandedly with only "incidental effects on interstate commerce, are valid unless 'the burden imposed on such commerce is clearly excessive in relation to the putative benefits'" achieved by the challenged legislation.

Finding that Section 1399-11 did not pass muster under either analysis, the Court, after a five day trial, declared it unconstitutional, and permanently enjoined its enforcement.

Looking at the statute, the Court determined that, on its face, and by its practical effect, it discriminated against interstate commerce. While the law prohibited all direct sales to New York consumers, whether accomplished by those inside or outside the State, 'a state law may be discriminatory even though it limits activities of in-state as well as out-of-state business[es]." Such discrimination was achieved by requiring that retail sales take place only in state. In-state retailers were thus much more likely to be able to sell to the New York market, given their presence here, than their out-of-state brethren. As stated by the "court "the only way an out-of-state seller could legally sell retail cigarettes to New York consumers under Section 1399-11 is to establish a brick-and-mortar outlet in New York" which the Court found would be both "unworkable" and "uneconomic."

The Court further determined that "Section 1399-11 was enacted in part for the purpose of protecting in-state retailers from competition from out-of-state direct sellers. Such a protectionist purpose … is impermissible under the Commerce Clause."

Having found that the statute discriminates against interstate commerce, it was invalid unless the State could demonstrate that "it has no other means [other that the challenged legislation] to advance a legitimate local interest."

The Court determined that the statute neither advanced the legitimate ends the State claimed it would achieve, nor was the only means available for achieving those ends. It accordingly held that the statute was unconstitutional.

The State claimed that Section 1399-11, by prohibiting direct sales to New York residents via the Internet, mail order or telephone, would aid in reducing cigarette smoking, especially among minors. This would be achieved by (1) ensuring age verification of purchasers by requiring face-to-face transactions, thus preventing sales to minors, and (2) preventing the sale of untaxed cigarettes, which would raise the price of cigarettes and reduce smoking by adults and minors.

The Court found to the contrary. The court held that "defendants have failed to demonstrate that minors use direct sales to obtain cigarettes to any significant degree…". As such, a prohibition on direct sales would not decrease use among minors. The Court further held that even if the State had shown that minors purchased cigarettes extensively through direct sales, the statute would not effectively prevent such purchases. The Court pointed to two big "loopholes" it found in the statute. First, the statute could not prevent shipments by the U.S. Postal Service (New York has no jurisdiction over the Postal Service). Second, based on the evidence before it, the Court determined that New York was not likely to enforce the statute against direct sales by Indian nations residing in New York. These loopholes, in the Court's opinion, significantly undermined the effectiveness of the statute.

Lastly, the court determined that there were less burdensome methods of achieving the goal of preventing sales of cigarettes to minors than a complete ban on all direct sales to all New York consumers. After noting the substantial existing barriers to minors purchasing cigarettes via direct sale (for example, the need for a credit card, the risk of detection when the cigarettes are shipped to a home where child and parent both reside, the minimum purchase requirements of one carton or more and the resulting cost of puchase, and the delay between order and delivery) the court noted there were other, less burdensome means of achieving this goal available to the State. These included enforcing existing minimum age laws against direct vendors (via 'test purchase' programs) or requiring the employment of age verification procedures by direct sellers. Such procedures could include those currently employed by BWT Direct. BWT Direct attempts to match a customer's age, date of birth and address against a series of databases to verify the individual's age. If that cannot be accomplished, the potential purchases must submit an age verification kit, which includes valid governmental identification. BTWDirect also requires payment by credit card or personal check, and will only deliver the cigarettes to the address found on the check, or the credit card billing address. Lastly, BTWDirect imposes a two carton minimum. Combined, the Court found that these safeguards "provide an effective barrier to cigarette purchases by minors via direct sale channels."

The Court also rejected the State's arguments that the statute, by eliminating direct sales, will reduce the amount of untaxed cigarettes sold in New York, which in turn will increase the number of taxed cigarette that are sold, and accordingly increase the cost of cigarettes to the public. The State contended that this increased cost would have the effect of decreasing cigarette purchases, by minors or otherwise.. While the Court agreed that increasing the cost of cigarettes decreases consumption among minors, it did not believe the statute would achieve that result. Again, the Court pointed to the fact that even under the statute, Indian retailers would be able to continue to engage in direct sales, and that the U.S. Postal Service would continue to be able to transport such cigarettes. "Because of these various loopholes in the ban Section 1399-11 seeks to impose on direct sales, 'whatever the relation there may be between [high prices] and [a decrease in smoking] is too remote and indirect to justify obstructions to the normal flow of commerce in its movement between the States.'"

Moreover, the Court again pointed to the existence of less burdensome means of achieving this end, such as collecting the tax on out-of-state sales (and thereby increasing the price of such sales to match New York in-state sales).

Finally, the Court determined that even if it applied the lower Pike standard for statutes that regulate evenhandedly with only incidental effects on interstate commerce, Section 1399-11 would not pass muster. Such statutes are valid "unless the burden imposed on … commerce is clearly excessive in relation to the putative benefits." The court found that such was in fact the case here -- finding both that 1399-11 will not help achieve the goals the Legislature seeks to obtain, and that Section 1399-11 will have a "direct[] and substantial[] burden [on] interstate commerce [by] isolat[ing] New York from the national cigarette market." Accordingly, the Court concluded: "On balance, thus, although 'designed for a salutary purpose' section 1399-11 'further(s) the purpose so marginally and interferes[s] with commerce so substantially, as to be invalid under the Commerce Clause.'"

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