On August 14, 2014, R.J. Reynolds Tobacco Company (“RJR”) and Santa Fe Natural Tobacco Company, Inc. (“Santa Fe”) sued the United States Department of Agriculture (the “USDA”), among others, in the United States District Court for the District of Columbia.  In their two-count complaint, RJR and Santa Fe allege violations of the Fair and Equitable Tobacco Reform Act (the “FETRA”) and the Administrative Procedure Act (the “APA”).

Background on the FETRA

In an effort to end government support and regulation of tobacco cultivation, Congress passed the FETRA in October 2004, and the USDA is the federal agency that Congress tasked with implementing the FETRA.  The FETRA, often referred to as the “tobacco buy-out,” eliminated policies such as weight quotas, price supports and tobacco production limits.  Rather than completely eliminate tobacco price supports and marketing caps, the FETRA established the Tobacco Transition Payment Program (the “TTPP”), which provided for ten years of annual payments (from 2004 through October 2014) to assist eligible tobacco growers as they transitioned to other agriculture or industry.  In implementing the FETRA, the USDA was responsible for assessing how much each tobacco manufacturer and importer should pay into the TTPP fund.

Under the FETRA, Congress outlined a two-step process for the USDA to determine quarterly assessments owed by tobacco product manufacturers and importers.  USDA refers to the two-step process as “Step A” and “Step B.”  Step A allocates assessments among six classes of tobacco products: (1) cigarettes; (2) cigars; (3) snuff; (4) chewing tobacco; (5) pipe tobacco; and (6) 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.  Under the regime, tobacco manufacturers and importers are assessed user fees on a quarterly basis.

Plaintiffs Allege a Violation of the FETRA

The FETRA prohibits the USDA from issuing assessments on manufacturers or importers in excess of their market shares of the gross domestic volume.  Plaintiffs allege that the USDA violated the FETRA because the USDA assessed fees in excess of their respective market shares.

Plaintiffs challenge their respective September 1, 2013 (for the second-quarter) and December 1, 2013 (for the third-quarter) assessments.  Although RJR disputed over $350,000 of its combined September and December 2013 assessments, the company paid the assessed amounts.  Santa Fe also paid its September and December 2013 assessments, over $20,000 of which it disputed.

Plaintiffs’ challenge was initially made to the Commodity Credit Corporation (“CCC”), an agency of the USDA.  The CCC concluded that no revisions to the assessments were warranted.  RJR and Santa Fe appealed the CCC’s determination to the USDA, and the USDA denied the Plaintiffs’ joint appeals of the September and December 2013 assessments.

In their complaint to the District Court, Plaintiffs allege that multiple Native American cigarette manufacturers failed to comply with the FETRA.  Plaintiffs allege that they were assessed and paid in excess of their pro-rata share of gross domestic volume because the USDA failed to account for cigarette production by Native American manufacturers.  In support of their position, Plaintiffs offer data that the USDA failed to account for cigarettes produced by Onondaga Nation and T&D Enterprises, two New York-based Native American manufacturers.  In particular, the complaint alleges that Onondaga Nation “manufactures approximately 1 million cartons of cigarettes per year” and T&D Enterprises “produces approximately 2.5 million cartons of cigarettes per year” and that both manufacturers sell a large portion of their cigarettes to non-Native Americans.

Plaintiffs Allege a Violation of the APA

RJR and Santa Fe also allege that the USDA violated the APA, which requires a court to “hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious, . . . or otherwise not in accordance with law.”  As discussed above, both at the agency level and in its recently-filed complaint, Plaintiffs challenge the USDA’s September and December 2013 quarterly assessments.  By failing to take into account cigarette production and sales by Onondaga Nation and T&D Enterprises, as well as well as production and sales by other non-reporting manufacturers, RJR and Santa Fe contend that the September and December 2013 assessments were in excess of each company’s pro rata share of the gross domestic volume.  According to RJR and Santa Fe, the USDA’s over-assessment, coupled with the USDA’s denial of their appeal of those assessments, was arbitrary, capricious and contrary to law, in violation of the APA.

We will report back as the litigation progresses.

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