Regulating Tribal Cigarette Sales under the Master Settlement Agreement

By Patricia Molteni, Tobacco Project Counsel

Patricial Molteni, Tobacco Staff Attorney

The Supreme Court of Oklahoma, in Edmondson v. Native Wholesale Supply, 2010 OK 58, 237 P.3d 199 (2010), recently issued a ruling affirming the authority of the state of Oklahoma to regulate the sale of cigarettes in Oklahoma even though the cigarettes as issued were manufactured by an Indian tribe, distributed through a business owned by a tribal member, and sold to a tribal wholesaler located on an Oklahoma reservation. Similar litigation has arisen against Native Wholesale Supply (NWS) in New Mexico, California, and Idaho, as each of these states seeks to enforce their tobacco laws to prevent the alleged unlawful sale of cigarettes into their states.

The Edmondson decision made important findings about tribal immunity and the application of the Indian Commerce Clause in the context of tobacco regulation by the state. With respect to sovereign immunity, it held that only an entity owned and managed by the tribe for the benefit of the tribe enjoys immunity from suit. An entity owned by a Native American but operated for his or her personal benefit is not eligible for such protection. And with respect to the Indian Commerce Clause, states may clearly enforce their tobacco laws against entities owned by a Native American if their cigarette sales involve sales to non-tribal members, sales between different tribes, or sales off a reservation.

NWS is a cigarette importer and distributor. Its principal business is importing cigarettes from Canada manufactured by Grand River Enterprises Six Nations, Ltd. (GRE), and distributing them to wholesalers in the United States. GRE is a tribally owned, Canadian chartered company located in Canada. It manufactures several brands of cigarettes, including Seneca and Opal. NWS is a corporation chartered by the Sac and Fox Tribe of Oklahoma (Sac and Fox). Its president and sole owner is Arthur Montour who is a member of the Seneca Nation, which is a different tribe than the Sac and Fox. NWS’ principal place of business is located on the Cattaraugus Indian Reservation in New York. In the Oklahoma case, NWS imported Seneca brand cigarettes from GRE, stored them in various locations in the United States, including the Nevada Free Trade Zone, and sold them to the Muscogee Creek Nation Wholesale, a tribal entity located on trial land in Oklahoma.

In its case, the state of Oklahoma sued to enjoin NWS from selling Seneca cigarettes into Oklahoma because neither GRE nor any of its brands were listed on the Oklahoma Attorney General’s Directory of approved tobacco product manufacturers, making their sale in Oklahoma a violation of Oklahoma’s Master Settlement Agreement Complementary Act and rendering the cigarettes contraband.

The Master Settlement Agreement

Oklahoma’s Master Settlement Agreement Complementary Act was passed in conjunction with its participation in the tobacco Master Settlement Agreement. In 1998, the four major domestic tobacco companies, Philip Morris, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corp. and Lorillard Tobacco Company, entered into a landmark settlement called the Master Settlement Agreement (MSA) with 46 states (Florida, Minnesota, Mississippi and Texas had settled separately), the District of Columbia, and the five U.S. territories: American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and Virgin Islands. Under the MSA, the states agreed to dismiss the lawsuits pending against the tobacco companies and to release them from the health care, antitrust, consumer fraud, and other related claims asserted against them in exchange for annual payments, based on their volume of cigarette sales, in perpetuity; their requirement to fund a national foundation devoted to the pursuit of public health interests; and their obligation to make substantial changes in their advertising and marketing practices and corporate culture with the intention of reducing underage smoking. The payments required under the MSA (a) force settling tobacco manufacturers to internalize the health care costs caused by cigarette smoking, (b) increase the price of cigarettes to consumers thereby reducing smoking rates, and (c) provide a revenue stream to the states to compensate them for the ongoing health care costs expended by the state on smoking-related illnesses.

In 2004, Oklahoma, like most settling states, passed complementary legislation designed to more stringently regulate the sale of tobacco products. As part of this legislation, known as the Oklahoma Tobacco Master Settlement Agreement Complementary Act (Complementary Act), codified at Title 68 O.S. §360.1, et seq., Oklahoma created the Directory of Compliant Tobacco Product Manufacturers and Brand Families (Directory). This is a list of tobacco product manufacturers published and maintained by Oklahoma showing those manufacturers and their brand families that have been certified as being in compliance with Oklahoma tobacco laws and thus can be sold by wholesalers and retailers in the state. The sale of any brand in Oklahoma that is not on the Directory is unlawful.

The Case Against NWS

In its case against NWS, Oklahoma alleged that NWS had sold millions of cartons of Seneca brand cigarettes into Oklahoma for resale to Oklahoma citizens in violation of the Complementary Act because neither GRE nor Seneca were listed on the Oklahoma Directory. NWS asserted, among other defenses, that it had sovereign immunity because of its tribal status and that enforcing the Complementary Act against it was a violation of the Indian Commerce Clause.

In determining these issues, the Supreme Court of Oklahoma provided an extensive review of Native American jurisprudence. With respect to sovereign immunity from suit, it held, that this bars only suits by the state against a tribe, but that such criterion does not automatically cover “every business that happens to be tribally chartered or owned by individuals of Native-American ancestry.” Edmondson, 237 P.3d at 210. The distinction is whether the defendant entity “acts as an arm of the tribe so that its activities are properly deemed to be those of the tribe” or is instead acting for its own benefit. Id. (internal citations omitted). To apply this standard, a court should look at factors like (i) whether the enterprise is incorporated under tribal law, (ii) whether the business is managed by tribal officials, (iii) whether it operates to further tribal government objectives, and (iv) whether the business’ property is owned by the tribe. Id.

The Court stated its reasoning most succinctly when it held, “[w]e find persuasive the reasoning of those authorities that would restrict tribal immunity from suit to tribal entities that operate as an arm of the tribe. Individual Native Americans acting for their own purposes are no more entitled to the immunity from suit afforded a tribe than a private state citizen engaging in his or her own business is entitled to the State’s sovereign immunity. Tribal freedom from suit . . . may not and should not be extended to cover private entities operating for private gain based solely on the ethnicity of their owners.” Id.

Using this standard, the Court determined that NWS was not the type of tribal enterprise entitled to sovereign immunity. Although NWS was charted by the Sac and Fox Nation, it did business on the land of a different tribe—the Seneca Nation. It was not managed by tribal officials of either tribe. And it did not operate to further the governmental objectives of any tribe. “It operates solely as a private business for the personal profit of its owner who happens to be a Native American belonging to the Seneca Nation.” Id. at 211.

With respect to the Indian Commerce Clause, U.S. Const. art. 1, § 8, the Court similarly held that this did not bar Oklahoma’s suit. This clause vests Congress with the power to “regulate Commerce . . . with the Indian Tribes.” This simple language has created over 200 years of case law wherein courts have tried to balance a tribe’s right to govern all activities on its own land and the state’s completing right to govern all persons living within its borders. Looking to the U.S. Supreme Court precedent articulated in White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 100 S. Ct. 2578 (1980), the Oklahoma Court determined that if the NWS sales at issue here occurred in Indian country, then Oklahoma could enforce its Complementary Act against NWS only if (1) it was not preempted by federal law and (2) it did not impermissibly infringe on the right of reservation Indians to make their own laws and be ruled by them. Id. at 211.

Ultimately, the Court found that it was not necessary to apply the Bracker test because the NWS activities at issue were not conducted by tribal members within their own reservation boundaries. When the activity occurs off the reservation or among more than one tribe, this conduct is generally subject to all non-discriminatory state laws so long as they are not expressly prohibited by federal law. Id. at 215. Here, the Court found that NWS’s sales clearly went beyond the bounds of any single reservation and that even if its sales were only between two different tribes, this would not bar the state from enforcing its Complementary Act against NWS. However, the Court held that NWS’ cigarette sales into Oklahoma consisted of activities that involved more than two tribes and took place in multiple states both on and off different tribal lands. Therefore, these sales constituted “off-reservation” conduct by members of different Indian tribes for purposes of the Indian Commerce Clause. Id.

Specifically, the Court found that the Seneca cigarettes sold by NWS into Oklahoma were manufactured in Canada, shipped to the United States, and stored in a Free Trade Zone in Nevada. Id. The Muscogee Creek Nation Wholesale placed orders for the cigarettes from its reservation located within Oklahoma to NWS at NWS’ business in New York on the Seneca reservation. Id. NWS delivered the cigarettes to Muscogee Creek Nation Wholesale by shipping them from the Nevada Free Trade Zone to the Muscogee Creek reservation in Oklahoma where they were then sold to other retailers who offer them for sale to the general public in Oklahoma. Id. at 208 and 216.

Because NWS’ cigarette sales involved no less than three tribes (the Seneca tribe, the Sac and Fox tribe, and the Muscogee Creek) and transportation of cigarettes off the reservation (Canada to the Nevada Free Trade Zone) and sale to the general public (not just tribal members), this conduct was subject to all states laws so long as they did not discriminate against tribes and were not expressly preempted by federal law. As a final matter, the Court found that the Complementary Act was not discriminatory and that Congress had not preempted state regulation of the distribution and sale of tobacco product in the Oklahoma market. Id. at 216. Therefore, the Indian Commerce Clause did not preclude Oklahoma from enforcing its Complementary Act against NWS.

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