In an earlier blog post, we discussed a case pending before the United States Court of Appeals for the Fourth Circuit in which the United States District Court for the Eastern District of Virginia evaluated the methodology used by the United States Department of Agriculture (the “USDA”) to determine the amount of assessments levied against tobacco product manufacturers and importers under the Fair and Equitable Tobacco Reform Act (“FETRA”). Philip Morris sued the USDA, claiming that the USDA had improperly calculated the FETRA assessments.
Under FETRA, Congress adopted a two-step process for the USDA to determine assessments owed by tobacco product manufacturers and importers. The two-step process administered by the USDA is known as Step A and Step B. Step A allocates assessments among six classes of tobacco products – cigarettes, cigars, chewing tobacco, pipe tobacco, snuff and roll-your-own tobacco. Step B then allocates the assessments on a pro-rata basis among the manufacturers and importers within each of the six classes of tobacco products.
The District Court’s review was limited to whether the USDA properly administered the elements of Step A. Step A is intended to allocate the assessments among the six classes of tobacco products based on each class’s current share of the overall market. The USDA calculates overall market share by multiplying the volume of taxable units per class by the maximum federal excise tax rate per class from 2003. Based on this calculation, the volume of taxable units may vary but the federal excise tax rate will remain the same. That is, regardless of what the federal excise tax rate is for the current year, the Step A calculation is based on the maximum federal excise rates from 2003.
The District Court held that the USDA’s methodology for determining each class’s share under Step A was reasonable because: (1) FETRA explicitly requires the USDA to periodically adjust the assessments based on changes in volume; and (2) FETRA does not require or prohibit the USDA make adjustments based on changes to the federal excise tax rate.
On appeal, the Fourth Circuit evaluated the District Court’s ruling with respect to the USDA’s calculation of Step A. In reviewing an agency’s interpretation of a statute, courts apply a two-part test to assess Congressional intent. First, a court considers whether Congress has answered the question – meaning, whether the statute, in this case FETRA, directly addresses the question at issue. If the question is resolved within the plain meaning of the statute, a court does not move to the second portion of the two-part test. Second, if a court concludes that the statute addresses the question at issue, the court considers if the agency’s interpretation, in this case the USDA, is based on a permissible construction of the statute.
Philip Morris argued that the USDA’s methodology for calculating the assessments allocated to each class under Step A is improper. Philip Morris did not dispute that the volume of taxable units will change when sales in the six classes fluctuate. Rather, Philip Morris argued that, under FETRA, the rate must also vary based on changes in a particular year’s maximum federal excise tax rate. However, in applying the first part of the test, the Fourth Circuit concluded that there was “no clear statement of Congressional intent.”
Because FETRA did not directly address which tax rates should be used, the Fourth Circuit then evaluated the second step of the two-part test. That is, whether the USDA’s interpretation is permissible. The Fourth Circuit stated that many of the arguments Philip Morris made in support of its view that the USDA’s position was inconsistent with the law are reiterations of arguments it had previously made. In evaluating the USDA’s decision to use the 2003 maximum federal excise tax rates, the Fourth Circuit stated that “[w]e defer to an agency’s interpretation – even if it constitutes a change of position – so long as that decision resulted from a deliberate exercise of the agency’s judgment and expertise.”
The Fourth Circuit concluded that the USDA’s decision to utilize 2003 tax rates was a permissible interpretation of FETRA. The Fourth Circuit affirmed the District Court’s ruling in favor of the USDA.