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Ninth Circuit Upholds Washington State's Regulation of Cigarettes Made on the Yakama Indian Reservation

The Ninth Circuit in King Mountain Tobacco Co. v. McKenna,[1] affirmed in September the lower court’s decision that a tobacco product manufacturer, although owned by a Native American and located on the Yakama Indian reservation in Washington state, had to comply with the escrow statutes[2] passed by the state of Washington when making sales of cigarettes off-reservation. Specifically, the court found that Washington’s escrow statutes were non-discriminatory laws as applied to King Mountain’s off-reservation cigarette sales and that the Yakama Treaty of 1855 did not create an express exemption to these laws. Therefore, King Mountain had to comply with them. As explained further below, the escrow statutes at issue in King Mountain were passed by Washington shortly after it executed the landmark tobacco settlement in 1998 known as the Master Settlement Agreement (MSA).

MSA Background

In the mid-1990s, Washington and over 40 other states sued the major U.S. cigarette manufacturers, Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard for claims related to concealing the dangers of smoking and the health care costs caused by smoking which were ultimately paid for by the states through Medicaid.[3] In 1998, the parties reached a “landmark”[4] settlement called the MSA. Under the MSA, the signatory states (collectively known as “Settling States”) settled past and future claims against the signatory tobacco companies (known as “Participating Manufacturers” or PMs) in exchange for unprecedented restrictions on the advertising and marketing of cigarettes and payments to the Settling States in perpetuity based, in part, on the PMs’ volume of future cigarette sales. Not all tobacco manufacturers settled with the states under the MSA. Those who did not settle are known as “Non-Participating Manufacturers” or NPMs.

Because NPMs were not subject to the same advertising restrictions and payment obligations as the PMs, there was concern that they would sell cigarettes at a much lower price and advertise in a manner now prohibited to PMs, such as using cartoons, outdoor billboards and signs, and cigarette brand merchandise. This would enable them to generate large, short-term profits in the years before liability may arise and potentially leave the states without a source to pay future health-related claims. Such an outcome could undermine the public health protections achieved by the MSA. To address these concerns, the MSA encouraged the Settling States to enact escrow statutes. These statutes require each NPM to deposit a certain dollar amount per unit of cigarettes sold in a Settling State. This amount is slightly less than the amount required of PMs under the MSA. For cigarettes sold in 2014, the escrow deposit amount is about $6.50 per carton. These escrow deposits ensure that NPMs (i) internalize the health care costs of their cigarette sales, which increases the price of their cigarettes, and in turn discourages consumption particularly by youth, and (ii) provide a source of funds against which future claims by a Settling State can be satisfied. Under these statutes, the deposits must be held in escrow for 25 years and made available to pay claims brought by the Settling States. If any funds remain after 25 years, the remaining money passes back to the NPM.

The escrow statutes have been in effect for over 10 years and have withstood many legal challenges. King Mountain is the most recent challenge and involves issues specific to the regulation of cigarettes produced on Native American reservations. In King Mountain, Delbert Wheeler, an enrolled member of the Yakama Indian Nation, owns and operates King Mountain Tobacco Company.[5] King Mountain manufactures tobacco products with a mixture of tobacco grown on the Yakama Reservation and tobacco grown in North Carolina.[6] The company sends its tobacco from the reservation to Tennessee for threshing,[7] then to North Carolina to be mixed with other tobacco, and then back to the reservation.[8] King Mountain then sells its tobacco products on tribal lands and in approximately 17 states, including Washington.[9] Pursuant to state statute, Washington imposed its escrow requirement on King Mountain, and the company filed a suit challenging its obligation to comply.[10]

The King Mountain Case

In Mescalero Apache Tribe v. Jones,[11] the U.S. Supreme Court held that a state may impose a nondiscriminatory tax on Indians going beyond reservation boundaries in the absence of “express federal law” to the contrary.[12] An Indian treaty can qualify as an “express federal law.”[13] King Mountain claimed that the Yakama Treaty of 1855 (the Treaty) was an express federal law with ambiguous provisions that might grant the company immunity from Washington’s escrow requirement. The company thus wished to introduce extrinsic evidence of the Yakama tribe’s understanding of the Treaty in 1855, in order to clarify the intent of the parties. However, the district court granted summary judgment to Washington before considering King Mountain’s evidence. King Mountain appealed, and the case went to the Ninth Circuit.[14]

Mescalero left open the question of precisely when a treaty will exempt tribe members from state taxation. The Ninth Circuit has made clear that, if a treaty contains ambiguous language, the interpreting court “must undertake a factual inquiry into the intent and understanding of the parties at the time the Treaty was signed.”[15] This inquiry is guided by the Supreme Court’s mandate that ambiguous treaty language should be interpreted in the light most favorable to the Indians.[16] However, courts may not create ambiguities where none exist or otherwise distort the clearly expressed intent of the parties.[17] A court’s interpretation is thus constrained on one side by the plain language of the statute, and on the other by the canon of construction favoring the Indians.

King Mountain claimed that two separate clauses in the Treaty provided express federal law exempting the company from Washington’s escrow requirement. First, King Mountain pointed to Article II of the Treaty, which established the boundaries of the Yakama Reservation and set the land apart “for the exclusive use and benefit” of the Yakama.[18] This “use-and-benefit” clause, King Mountain asserted, meant that the Yakama were to be the sole beneficiaries of the resources cultivated on reservation lands. By taxing tobacco products grown on the land, Washington was attempting to appropriate the benefit of Yakama lands in violation of Article II of the Treaty.

King Mountain further claimed that Article III, which gives the Yakama the right “to travel upon all public highways,” exempted it from Washington’s escrow requirement.[19] In Cree v. Flores (Cree II)[20]the Ninth Circuit held that this “highway” clause gave the Yakama “the right to transport goods to market over public highways without payment of fees for that use.”[21] The travel right was further clarified in United States v. Smiskin,[22] which emphasized that the right of the Yakama to transport goods to market included the right to travel “when the Yakama were engaged in commerce.”[23] Importantly, both Cree II and Smiskin held that the “highway” clause was ambiguous, and therefore required the district court to embark upon a thorough investigation into the Yakama understanding of the Treaty in 1855.[24] King Mountain urged the Ninth Circuit to again require that the district court explore the Treaty’s historic meaning.[25]

Ultimately, the Ninth Circuit declined King Mountain’s invitation to delve into the meaning the Yakama would have assigned to the Treaty in 1855.[26] Instead, the court held that the use-and-benefit and highway clauses were unambiguous, and thus did not require extrinsic evidence to interpret. Addressing first the use-and-benefit clause, the court relied heavily on Washington v. Confederated Tribes of Colville Indian Reservation,[27] a case in which the Supreme Court had allowed Washington to tax on-reservation cigarette sales by the Yakama to non–tribe members. The Ninth Circuit reasoned that, because the use-and-benefit clause allowed taxation of Indian cigarette sales, Article II “cannot mean that King Mountain is free to sell cigarettes to non-Indians and nonmembers without any regulation by the state.”[28] Instead, the court held that the use-and-benefit clause unambiguously “concerns who may live on reservation land,” instead of the right of the Yakama to trade. Washington’s escrow requirement did not interfere with the Yakamas’ ability to live or grow tobacco on the land, or to sell tobacco thus grown. Therefore, the court held that the statute did not violate any right the Yakama had under Article II of the Treaty.[29]

The Ninth Circuit then turned to the highway clause. The court noted that it had previously considered extrinsic evidence in order to determine the scope of Article III’s right to travel. However, the court emphasized that the right to travel itself “is express in Article III,” and the court’s decisions in Cree II and Smiskin concerned only the “extent of that right.”[30] To extract meaning from the highway clause, the court had considered extrinsic evidence of the Yakama tribe’s historic intent and applied the canon of construction favoring the Indians. By doing so, the court had determined that the right to travel included the right to travel for commerce. Now, the court was being asked to create a right to trade that was nonexistent in the Treaty—in other words, to “rel[y] on ambiguities that do not exist.”[31] The Ninth Circuit thus succinctly concluded that “there is no right to trade in the Yakama treaty,” and that therefore “Article III does not provide an express federal exemption from Washington’s escrow statute.”[32]

The Ninth Circuit concluded that the “plain language of the Yakama Treaty does not provide an express federal exemption” from Washington’s escrow requirement. The district court hence correctly refused to consider extrinsic evidence of the Treaty’s meaning to the Yakama, as such evidence could not overcome the clear words of the Treaty. King Mountain then petitioned the Ninth Circuit for a rehearing en banc. The Ninth Circuit denied this request on Nov. 3. Accordingly, the Ninth Circuit’s holding that it will not “read in” a right to trade when it does exist within the plain text of the treaty remains.

[1] 768 F.3d 989 (9th Cir. 2014).

[2] Wash. Rev. Code ¿¿ 70.157.005-70.157.030 (2013).

[3] The states, through Medicaid, are the payers of last resort for health care costs of citizens who suffer smoking-related illnesses. See Grand River Enterprises Six Nations, Ltd. V. Pryor, 425 F.3d 158, 169-70 (2nd Cir. 2005).

[4] Lorillard Tobacco Co. V. Reilly, 533 U.S. 525, 533 (2001).

[5] Id. at *4.

[6] Id.

[7] Threshing is the process by which the tobacco stem is removed from the leaves of the tobacco plant.

[8] King Mountain, 768 F.3d at *4-5.

[9] Id. at *5.

[10] Id. at *6.

[11] 411 U.S. 145.

[12] Id. at 148-49.

[13] Cree v. Waterbury (Cree I), 78 F.3d 1400, 1403 (9th Cir. 1996).

[14] King Mountain, 768 F.3d at *6-7.

[15] Cree I, 78 F.3d at 1404.

[16] S.C. v. Catawba Indian Tribe, 476 U.S. 498, 506 (1986).

[17] Id.

[18] King Mountain, 768 F.3dat *13.

[19] Id. at *17.

[20] 157 F.3d 762 (9th Cir. 1998).

[21] Id. at 769.

[22] 487 F.3d 1260 (9th Cir. 2007).

[23] King Mountain, 768 F.3d at *18 (citing Smiskin, 487 F.3d at 1266-67).

[24] Id.

[25] Id. at *19.

[26] Id.

[27] 447 U.S. 134 (holding that the state of Washington could tax sales of cigarettes on tribal lands to non–tribal-members).

[28] King Mountain, 768 F.3d at*15.

[29] Id. at *14-15.

[30] Id. at *18

[31] Catawba, 476 U.S. 506

[32] *19

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