Last month, a New York federal court upheld the Department of Agriculture’s (“USDA”) computation of delinquent tobacco buy-out assessments against Native Wholesale Supply (“NWS”) under the Fair and Equitable Tobacco Reform Act of 2004 (“FERTA”).  NWS claimed, in pertinent part, that (1) the government had erroneously computed the amount of its assessments, (2) FERTA violates the 5th Amendment takings and due process clauses; and (3) FERTA is inappliable to Native American-owned corporations like NWS.  The court rejected each of NWS’s arguments.

First, the court found that USDA’s interpretation of FETRA with regard to the calculation of quarterly assessments was reasonable.  Under FERTA, a manufacturer’s or importer’s assessment within each of six classes of tobacco products is calculated by multiplying its market share of the tobacco class by the total amount of the assessment for the tobacco class.  According to NWS, USDA had used an incorrect “base period” in calculating NWS’s FERTA assessments.  More specifically, NWS asserted that FERTA requires that each quarterly assessment be based on a manufacturer’s market share from the previous calendar year quarter in the base period, which would commence approximately 18 months prior to the assessment date.  The USDA, on the other hand, interpreted FERTA to mean that a manufacturer’s assessment is to be adjusted quarterly by determining the manufacturer’s share of a tobacco product sector based on the prior three month sales of the manufacturer.  In upholding the USDA’s interpretation, the court noted that, although FERTA “is not a model of clarity,” the government’s interpretion “is reasonable and results in assessments based on current market data.”  The court further observed that there was no evidence that the government’s interpretation resulted in assessments in excess of any manufacturer’s pro rata share of total gross domestic volume, a result expressly prohibited by FERTA.

Regarding NWS’s due process and takings arguments, the court, relying heavily on Supreme Court precedent, concluded that a takings analysis is not appropriate when evaluating the constitutionality of an obligation imposed by Congress merely to pay money.  Similarly, the court found no due process violation because the statute has a legitimate legislative purpose, in that it facilitates the transition of the domestic tobacco market from a subsidized, regulated market to a free market system, and achieves this purpose through rational means because the manufacturers and importers subject to the FERTA assessments are likely to benefit from deregulation and are best suited to pass increased costs along to consumers.

The court likewise rejected NWS’s claim that FERTA violates Native American treaty rights and is thus inapplicable to Native American-owned corporations.  The court noted that other courts have determined that the exemption relied upon by NWS was eliminated.  Even if it was not eliminated, the court held that the exemption does not apply to the importation of cigarettes for commercial sale.

Contributor: Brenna Newman

For questions and/or comments, please contact Bryan Haynes, Troutman Sanders Tobacco practice partner, at 804.697.1420 or by email.