Case: 10-3165 Document: 227 Page: 1 09/28/2010 114238 74 ... · 10-3165-cv 10-3191-cv 10-3213-cv in...

10-3165-cv10-3191-cv10-3213-cv

IN THE UNITED STATES COURT OF APPEALSFOR THE SECOND CIRCUIT

RED EARTH LLC, d/b/a SENECA SMOKESHOP, AARON J. PIERCE,SENECA FREE TRADE ASSOCIATION,

Plaintiffs-Appellees/Cross-Appellants,

v.

UNITED STATES OF AMERICA, ERIC H. HOLDER, in his official capacity asAttorney General of the United States, UNITED STATES DEPARTMENT OF

JUSTICE, JOHN E. POTTER, in his official capacity as Postmaster General andChief Executive Officer of the United States Postal Service, UNITED STATES

POSTAL SERVICE,

Defendants-Appellants/Cross-Appellees.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK

OPENING BRIEF FOR APPELLANTS/CROSS-APPELLEES

[Counsel Listed On Following Page]

Case: 10-3165 Document: 227 Page: 1 09/28/2010 114238 74

COUNSEL FOR DEFENDANTS-APPELLANTS/CROSS-APPELLEES

TONY WEST Assistant Attorney General

WILLIAM J. HOCHUL, Jr. United States Attorney MARK B. STERN

ALISA B. KLEIN MICHAEL P. ABATE

(202) 616-8209 Attorneys, Appellate Staff Civil Division, Room 7318

Department of Justice 950 Pennsylvania Ave., N.W. Washington, D.C. 20530-0001


TABLE OF CONTENTSPage

STATEMENT OF JURISDICTION. ....................................................................... 1

STATEMENT OF THE ISSUES. ............................................................................ 1

STATEMENT OF THE CASE................................................................................. 2

STATEMENT OF FACTS. ...................................................................................... 5

I. Statutory Background........................................................................... 5

A. State and local excise taxes curb tobacco use, particularly underage use.. ......................................................... 5

B. The PACT Act addresses the problems presentedby remote sales of cigarettes and smokeless tobacco................. 7

II. Factual Background............................................................................ 12

III. District Court Proceedings. ................................................................ 14

SUMMARY OF ARGUMENT. ............................................................................. 16

STANDARD OF REVIEW. ................................................................................... 18

ARGUMENT.......................................................................................................... 18

I. Plaintiffs Have No Likelihood Of Success On The Merits. . ............. 19

A. The PACT Act's Requirement That State AndLocal Taxes Be Paid In Advance Of Delivery Does Not Violate Due Process................................................. 19

B. The District Court Offered No Basis for Enjoining The PACT Act Provisions That Require Compliance With Laws ThatGovern The Sale and Distribution Of Cigarettes.. ................... 35


II. The Balance Of Equities And The Public Interest Require That The Preliminary Injunction Be Vacated.. ..................... 39

CONCLUSION....................................................................................................... 43

CERTIFICATE OF COMPLIANCE WITH RULE 32(a)(7)(c)OF THE FEDERAL RULES OF APPELLATE PROCEDURE

CERTIFICATE OF SERVICE

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TABLE OF AUTHORITIES

Cases: Page

Almontaser v. N.Y. City Dep’t of Educ.,519 F.3d 505 (2d Cir. 2008). ............................................................................. 18

Brown & Williamson v. Pataki,320 F.3d 200 (2d Cir. 2003). ................................................................... 6, 36, 39

Busch v. Buchman, Buchman & O’Brien, Law Firm,11 F.3d 1255 (5th Cir. 1994). ............................................................................ 27

Chloe v. Queen Bee of Beverly Hills, LLC,571 F. Supp. 2d 518 (S.D.N.Y. 2010). .............................................................. 32

Chloe v Queen Bee of Beverly Hills, LLC,__ F.3d __, 2010 WL 3035495 (2d Cir. 2010). ........................................... 17, 32

Consumer Mail Order Ass’n of America v. McGrath,94 F. Supp. 705 (D.D.C. 1950), aff'd, 340 U.S. 925 (1951). ............................. 26

Department of Tax. & Fin. of New York v. Milhelm Attea & Bros., Inc.,512 U.S. 61 (1994)........................................................................... 11, 39, 40, 41

FDA v. Brown & Williamson Tobacco Corp.,529 U.S. 120 (2000)......................................................................................... 5, 6

Gordon v. Holder,No. 10-1092-HHK (D.D.C.), appeal pending, No. 10-5227 (D.C. Cir.). .... 13, 31

Gordon v. Holder,No. 10-5227 (D.C. Cir.). .................................................................................... 37

Grand River Enterprise Six Nations, Ltd. v. Pryor,481 F.3d 60 (2d Cir. 2007). ............................................................................... 37

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Hemi Group, LLC v. City of New York,130 S. Ct. 983 (2010). .................................................................................... 8, 19

Illinois v. Hemi Group LLC,__ F.3d __, 2010 WL 3547647 (7th Cir. Sept. 14, 2010). ............... 17, 32, 33, 36

International Shoe Co. v. Washington,326 U.S. 310 (1945)..................................................................................... 27, 28

James Clark Distilling Co. v. Western Maryland R. Co.,242 U.S. 311 (1917)........................................................................................... 25

Kentucky Whip & Collar Co. v. Illinois Cent. R. Co.,299 U.S. 334 (1937)........................................................................................... 25

Lorillard Tobacco Corp. v. Reilly,533 U.S. 525 (2001)........................................................................................... 36

In re Magnetic Audiotape Antitrust Litigation,334 F.3d 204 (2d Cir. 2003). ............................................................................. 27

Meadwestvaco Corp. v. Illinois Dep’t of Revenue,553 U.S. 16 (2008)....................................................................................... 22, 29

Moe v. Salish & Kootenai Tribes,425 U.S. 463 (1976)............................................................................... 11, 39, 40

New York v. Smoke-Spirits.com, Inc.,541 F.3d 425 (2d Cir. 2008), overruled on other grounds by Hemi GroupLLC v. City of New York, 130 S.Ct. 983 (2010)................................................... 9

Oklahoma Tax Comm'n v. Citizen Band of Potawatomi Tribe of Okla.,498 U.S. 505 (1991)........................................................................................... 40

Porina v. Marward Shipping Co., Ltd.,521 F.3d 122 (2d Cir. 2008). ............................................................................. 27

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Quill Corp. v. North Dakota,504 U.S. 298 (1992)............................................................. 22, 27, 28, 29, 30, 31

Red Earth LLC et al. v. United States et al.,__ F. Supp. 2d __, 2010 WL 3061103 (W.D.N.Y. July 30, 2010). ..................... 2

SEC v. Bilzerian,378 F.3d 1100 (D.C. Cir. 2004). ........................................................................ 27

State v. Maybee,224 P.3d 1109 (Idaho 2010). ............................................................................. 36

United States v. Brewer,528 F.2d 492 (4th Cir. 1975). .............................................................................. 9

United States v. DeFiore,720 F.2d 757 (2d Cir. 1983). ............................................................................... 9

United States v. Melvin,544 F.2d 767 (5th Cir. 1977). .............................................................................. 9

Wash. State Grange v. Wash. State Repub. Party,552 U.S. 442 (2008)........................................................................................... 34

Washington v. Confederated Tribes of Colville Indian Reservation,447 U.S. 134 (1980)......................................................................... 30, 39, 40, 41

Winter v. Natural Resources Defense Council, Inc.,129 S. Ct. 365 (2008). ........................................................................................ 18

Zippo Mfg. Co. v. Zippo Dot Com, Inc.,952 F. Supp. 1119 (W.D. Pa. 1997)................................................................... 33

Statutes:

7 U.S.C. § 1571....................................................................................................... 24

7 U.S.C. § 1573....................................................................................................... 24

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15 U.S.C. § 375 Note. ................................................... 3, 8, 9, 10, 11, 19, 22, 38, 39

15 U.S.C. § 376a(1). ........................................................................................... 4, 10

15 U.S.C. § 376a(a)(3). ..................................................................................... 10, 35

15 U.S.C. § 376a(a)(3)-(4). ............................................................... 4, 10, 15, 19, 22

15 U.S.C. § 376a(b). ........................................................................................... 4, 10

15 U.S.C. § 376a(b)(4)............................................................................................ 38

15 U.S.C. § 376a(c)............................................................................................. 4, 10

15 U.S.C. § 376a(d). ......................................................................... 3, 10, 15, 19, 22

15 U.S.C. § 376a(e)............................................................................................. 4, 10

15 U.S.C. § 376a(e)(5)(C). ..................................................................................... 36

15 U.S.C. § 377................................................................................................... 4, 10

15 U.S.C. § 378................................................................................................... 4, 10

18 U.S.C. § 842(c). ................................................................................................. 24

18 U.S.C. § 922(b)(2). ............................................................................................ 23

18 U.S.C. § 1716E. ....................................................................................... 4, 10, 15

18 U.S.C. § 2341(2). ............................................................................................... 24

18 U.S.C. § 2342(a). ............................................................................................... 24

18 U.S.C. §§ 2341-2346. ........................................................................................ 10

18 U.S.C. § 2343(c)(1)............................................................................................ 10

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21 U.S.C. § 387 Note. ............................................................................................... 6

21 U.S.C. § 831(b). ................................................................................................. 24

26 U.S.C. § 5701(b). ................................................................................................. 7

26 U.S.C. § 5712....................................................................................................... 7

28 U.S.C. § 1292(a)(1).............................................................................................. 1

28 U.S.C. § 1331....................................................................................................... 1

31 U.S.C. § 5362(10)(A). ....................................................................................... 24

Conn Gen. Stat. § 12-285c. ..................................................................................... 36

Idaho Code § 39-5704............................................................................................. 38

Idaho Code § 39-5710............................................................................................. 38

Idaho Code § 39-8403(1). ....................................................................................... 37

Idaho Code § 39-8403(3). ....................................................................................... 37

Ind. Code. § 24-3-5-4.5........................................................................................... 36

Md. Code. Ann. Business Reg. § 16-222................................................................ 36

Pub. L. No. 111-31, 123 Stat. 1776 (2009)............................................................... 7

Pub. L. No. 111-154, 124 Stat. 1087 (2010)......................................................... 1, 7

Legislative Materials:

Prevent All Cigarette Trafficking Act of 2007, and the Smuggled Tobacco Prevention Act of 2008: Hearing Before the Subcomm. on Crime, Terrorism,and Homeland Security of the H. Comm. On the Judiciary, 110 Cong. 50(May 1, 2008). ..................................................................................... 7, 8, 20, 21

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Statement of Vice Admiral Richard H. Carmona, U.S. Surgeon General, reprinted at 155 Cong. Rec. S6000 (June 3, 2009). ............................................................ 5

Youth Smoking Prevention and State Revenue Enforcement Act: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of theH. Comm. on the Judiciary, 108th Cong. 119 (May 1, 2003). ........ 20, 22, 38, 39

Other Authorities:

Chaloupka et al., Policy Levers For the Control of Tobacco Consumption,90 Ky. L.J. 1009 (2002). .................................................................................... 21

Government Accountability Office (“GAO”), GAO-02-743, Internet Cigarette Sales: Giving ATF Investigative Authority May Improve Reporting and Enforcement (2002). ...................................................................................... 8, 19

Institute of Medicine, “Ending the Tobacco Problem: A Blueprint for the Nation,” (2007)....................................................................................................... 6, 35, 38

Koh et al., Poverty, Socioeconomic Position, and Cancer Disparities: Global Challenges and Opportunities, 15 Geo. J. on Poverty L. & Pol’y663 (2008).......................................................................................................... 21

March 9, 2010 Letter from National Association of Attorneys General to All Members of the United States Senate,http://www.naag.org/assets/files/pdf/signons/PACT_Final.pdf. ......................... 8

President’s Cancer Panel, “Promoting Healthy Lifestyles,” (2007),http://deainfo.nci.nih.gov/advisory/pcp/annualReports/pcp07rpt/pcp07rpt.pdf. ........................................................................................................ 6

Richard Carver, State Weighs Reintroduction of Tax Stamps for Cigarettes, Winston-Salem Journal, Feb. 2, 2010, http://www2.journalnow.com/ content/2010/feb/02/state-weighs-reintroduction-of-tax-stamps-for-ciga/. ....... 40

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STATEMENT OF JURISDICTION

The district court’s jurisdiction arises under 28 U.S.C. § 1331. The court

granted in part and denied in part plaintiffs’ motion for a preliminary injunction on

July 30, 2010. See JA 4-46. The government filed a timely notice of appeal on

August 6, 2010. See JA 300. Plaintiffs Red Earth and Seneca Free Trade

Association (“SFTA”) filed timely notices of cross-appeal on August 10, 2010 and

August 6, 2010, respectively. See JA 305, 309. This Court has appellate

jurisdiction under 28 U.S.C. § 1292(a)(1).

STATEMENT OF THE ISSUES

These cross-appeals arise out of constitutional challenges to provisions of

the Prevent All Cigarette Trafficking (“PACT”) Act, Pub. L. No. 111-154, 124

Stat. 1087 (2010). The government’s appeal presents the following questions:

1. Whether the district court erred in holding that the PACT Act’s

requirement that Internet and other remote sellers of cigarettes and smokeless

tobacco comply with the laws of the jurisdictions to which they deliver their

products, including tax laws, violates due process.

2. Whether the balance of equities and the public interest also require that

the preliminary injunction be vacated.


STATEMENT OF THE CASE

The preliminary injunction before the Court was issued by Judge Richard

Arcara and is reported at Red Earth LLC et al. v. United States et al., __ F. Supp.

2d __, 2010 WL 3061103 (W.D.N.Y. July 30, 2010). See JA 4-46.

Plaintiff Aaron Pierce operates a business, Red Earth LLC, that sells

cigarettes via the Internet, telephone, and mail to customers across the country.

See Red Earth Compl. ¶ 6 (JA 70); Pierce Decl. ¶ 6 (JA 95). Red Earth’s principal

place of business is located on the territory of the Seneca Nation of Indians in

upstate New York. See Red Earth Compl. ¶ 5 (JA 70). Red Earth admits that it

does not pay state or local taxes on the cigarettes that it sells to customers

nationwide. See Red Earth Compl. ¶¶ 25, 29 (JA 79, 80). Red Earth declares that

“[s]hipment of tax-free cigarettes” is “an integral and important aspect of

plaintiffs’ business model, and allows plaintiffs to realize cost savings that result,

in part, in the lower prices plaintiffs’ customers pay for tobacco products.” Id.

¶ 29 (JA 80); see also Pierce Decl. ¶¶ 11-12 (JA 96-97) (describing plaintiff’s

business model).

Plaintiff Seneca Free Trade Association represents 141 tobacco retailers,

including Red Earth, that are located on Seneca Territory. See SFTA Compl. ¶ 6

(JA 102). SFTA alleges that 61 of the tobacco businesses it represents take orders

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only though the internet, telephone, or fax, and that 80 of the businesses have both

an internet/telephone/fax operation and a small brick-and-mortar store. See id.

¶ 48 (JA 111).

Plaintiffs challenge the constitutionality of provisions of the PACT Act, a

federal statute that regulates Internet and other “remote” sales of cigarettes and

smokeless tobacco — i.e., sales that do not take place in person. In legislative

findings set out in the statute, Congress found that the majority of Internet and

other remote sales of cigarettes and smokeless tobacco are made without payment

of state and local taxes, without compliance with existing federal registration and

reporting requirements, and without adequate precautions to prevent sales to

minors. Congress found that sales over the Internet and through mail, fax, or

phone orders make it cheaper and easier for children to obtain tobacco products;

that criminals and terrorist groups profit from trafficking in untaxed cigarettes; and

that billions of dollars of tax revenue are lost each year. See 15 U.S.C. § 375 Note

(Findings).

To address these problems, the PACT Act prohibits remote sales of

cigarettes and smokeless tobacco unless the applicable state and local taxes are

paid in advance, see 15 U.S.C. § 376a(d), and requires remote sellers to comply

with the laws of the jurisdictions to which they deliver their products, including

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tax laws and laws relating to the distribution of cigarettes and smokeless tobacco,

see id. § 376a(a)(3)-(4). In addition, the PACT Act makes it unlawful to deliver

cigarettes and smokeless tobacco through the U.S. mail, see 18 U.S.C. § 1716E;

imposes new federal registration, shipping, record-keeping, and age-verification

requirements, see id. §§ 376(a)(1), 376a(b), (c), (e); and established new penalties

and enforcement mechanisms, see, e.g., id. §§ 377, 378.

The PACT Act was signed into law on March 31, 2010, with the support of

major public health groups and all fifty states. Just days before it took effect, Red

Earth filed suit, challenging the constitutionality of PACT Act provisions and

seeking a preliminary injunction. See JA 69. SFTA filed a similar lawsuit, see

JA 101, and the actions were consolidated.

The district court entered temporary restraining orders and, on July 30,

2010, issued an order that granted in part and denied in part plaintiffs’ motion for

a preliminary injunction. See JA 4-46. The court denied the motion to enjoin the

PACT Act provision that makes it unlawful to send cigarettes and smokeless

tobacco through the U.S. mail, finding it “beyond dispute that Congress has the

authority to completely ban those products from the mails.” JA 40. However, the

court enjoined the government from enforcing against plaintiffs the PACT Act

provisions that prohibit remote sales unless the state and local taxes are paid in

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advance and that require remote sellers to comply with the laws of the

jurisdictions to which their products are delivered. See JA 46. The district court

believed that these federal requirements violate the due process rights of sellers

that do not solicit out-of-state business via the Internet or through other means.

See JA 17-27.

Both sides appealed and sought emergency relief pending appeal. The

district court denied both motions. See JA 47-54. This Court denied emergency

relief and ordered expedited briefing and argument. See 9/8/2010 Order.

STATEMENT OF FACTS

I. Statutory Background

A. State and local excise taxes curb tobacco use, particularly underage use.

“[T]obacco use, particularly among children and adolescents, poses perhaps

the single most significant threat to public health in the United States.” FDA v.

Brown & Williamson Tobacco Corp., 529 U.S. 120, 161 (2000). “Each year,

440,000 people die of diseases caused by smoking or other form of tobacco use —

that is about 20 percent of all deaths in our nation.” Statement of Vice Admiral

Richard H. Carmona, U.S. Surgeon General, reprinted at 155 Cong. Rec. S6000

(June 3, 2009). The “overwhelming majority of Americans who use tobacco

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products begin using such products while they are minors and become addicted to

the nicotine in those products before reaching the age of 18.” 21 U.S.C. § 387

Note, Finding 31. “Every day, approximately 4,000 children under age 18

experiment with cigarettes for the first time; another 1,500 become regular

smokers. Of those who become regular smokers, about half eventually will die

from a disease caused by tobacco use.” President’s Cancer Panel, “Promoting

Healthy Lifestyles,” at 64 (2007) (emphasis added).1

Before 2009, no federal agency had comprehensive authority to regulate

tobacco products. See Brown & Williamson, 529 U.S. at 126. Responsibility to

address the crisis caused by tobacco use fell primarily to state and local

governments, which have relied in part on excise taxes to curb demand for tobacco

products. It is well established that “‘an increase in the price of cigarettes will

lead to a decrease in the demand of cigarettes.’” Brown & Williamson v. Pataki,

320 F.3d 200, 217 (2d Cir. 2003) (citation omitted). Indeed, “raising tobacco

excise taxes is one of the most effective policies for reducing the use of tobacco.”

Institute of Medicine, “Ending the Tobacco Problem: A Blueprint for the Nation,”

at 182 (2007) (“2007 IOM Report”). Studies show that minors are particularly

See 1 http://deainfo.nci.nih.gov/advisory/pcp/annualReports/pcp07rpt/pcp07rpt.pdf (last visited Sept. 27, 2010).

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deainfo.nci.nih.gov/advisory/pcp/annualReports/pcp07rpt/pcp07rpt.pdf

deainfo.nci.nih.gov/advisory/pcp/annualReports/pcp07rpt/pcp07rpt.pdf

price-sensitive and that every 10% increase in real cigarette prices will reduce the

number of youth smokers by six or seven percent. See Prevent All Cigarette

Trafficking Act of 2007, and the Smuggled Tobacco Prevention Act of 2008:

Hearing Before the Subcomm. on Crime, Terrorism, and Homeland Security of the

H. Comm. On the Judiciary, 110 Cong. 50, 52 (May 1, 2008) (“2008 Hearing”)

(Statement of Matthew L. Myers, President, Campaign for Tobacco-Free Kids).

B. The PACT Act addresses the problems presented byremote sales of cigarettes and smokeless tobacco.

The PACT Act forms part of Congress’s comprehensive regulation of

tobacco products. The Family Smoking Prevention and Tobacco Control Act of

2009, Pub. L. No. 111-31, 123 Stat. 1776, vests the Food and Drug Administration

with authority to regulate tobacco products and imposes new requirements and

restraints on the marketing of tobacco products. Congress separately raised the

federal excise tax on a pack of cigarettes from 39 cents to $1.01, see 26 U.S.C.

§ 5701(b), and required anyone who manufacturers or imports processed tobacco

to obtain a federal permit, see id. § 5712.

The PACT Act, Pub. L. No. 111-154, 124 Stat. 1087, addresses the

particular problems presented by Internet and other remote sales (also known as

“delivery sales”) of cigarettes and smokeless tobacco. The PACT Act was passed

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on March 31, 2010, with the strong support of all fifty states and major public

health groups including the Campaign for Tobacco-Free Kids, the American

Cancer Society, the American Lung Association, and the American Heart

Association.2

In enacting the PACT Act, Congress found that the majority of Internet and

other remote sales of cigarettes and smokeless tobacco are made without payment

of applicable taxes. See 15 U.S.C. § 375 Note, Findings 1 & 5. Since 1949, a

federal law known as the Jenkins Act has required all “out-of-state cigarette sellers

to register and to file a report with state tobacco tax administrators listing the

name, address, and quantity of cigarettes purchased by state residents,” in order to

facilitate state and local collection of taxes from the buyers. Hemi Group, LLC v.

City of New York, 130 S. Ct. 983, 987 (2010). Congress found, however, that the

majority of Internet and other remote sellers do not comply with the registration

and reporting requirements of the Jenkins Act. See 15 U.S.C. § 375 Note,

Finding 5; see also Government Accountability Office (“GAO”), GAO-02-743,

See 2 http://www.naag.org/assets/files/pdf/signons/PACT_Final.pdf (March 9, 2010 Letter from National Association of Attorneys General to AllMembers of the United States Senate); 2008 Hearing, at 50, 52 (Statement ofMatthew L. Myers, President, Campaign for Tobacco-Free Kids, noting thesupport of other public health groups).

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www.naag.org/assets/files/pdf/signons/PACT_Final.pdf

Internet Cigarette Sales: Giving ATF Investigative Authority May Improve

Reporting and Enforcement, at 4-5 (2002) (reporting that none of the

approximately 150 Internet cigarette vendor websites reviewed indicated

compliance with the Jenkins Act, and that 78% of those websites indicated that

they did not comply with the Act).

Congress found that billions of dollars of tax revenue are lost each year due

to remote sales of cigarettes and smokeless tobacco, and that sales over the

Internet and through mail, fax, or phone orders make it cheaper and easier for

children to obtain cigarettes and smokeless tobacco. See 15 U.S.C. § 375 Note,

Findings 1 & 4. Congress found that criminals and terrorist groups profit from

trafficking in illegal cigarettes, see Findings 2 & 3, and that unfair competition

from illegal sales takes billions of dollars of sales away from law-abiding retailers

throughout the country, see Finding 6. Congress also found that the majority of3

remote sales are made without adequate precautions to prevent sales to children.

See Finding 5.

This Court has held that trafficking in untaxed cigarettes may constitute3

violations of the federal mail and wire fraud statutes and serve as predicateconduct for racketeering violations. See New York v. Smoke-Spirits.com, Inc.,541 F.3d 425, 441 (2d Cir. 2008), overruled on other grounds by Hemi GroupLLC v. City of New York, 130 S.Ct. 983 (2010); United States v. DeFiore, 720F.2d 757, 761 (2d Cir. 1983); see also United States v. Melvin, 544 F.2d 767, 774(5th Cir. 1977); United States v. Brewer, 528 F.2d 492, 496 (4th Cir. 1975).

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Congress confronted these serious and growing problems through the PACT

Act. The Act makes it unlawful to deliver cigarettes or smokeless tobacco through

the U.S. mail, see 18 U.S.C. § 1716E, and prohibits remote sales unless the

applicable state and local taxes are paid in advance, see 15 U.S.C. § 376a(a)(3)-

(4), (d). The Act requires remote sellers to comply with the laws of the

jurisdictions to which their products are delivered, including restrictions on sales

to minors and requirements pertaining to the distribution of cigarettes or

smokeless tobacco, see id. § 376a(a)(3). The Act imposes new federal

registration, shipping, record keeping, and age-verification requirements, see id.

§§ 376(a)(1), 376a(b), (c), (e), and creates new penalties and enforcement

mechanisms, see, e.g., id. §§ 377, 378. The PACT Act also amends the

Contraband Cigarette Trafficking Act, 18 U.S.C. §§ 2341-2346 — which bans the

possession, receipt and shipment of more than 10,000 cigarettes that do not bear

state tax stamps — by granting the Bureau of Alcohol , Tobacco, Firearms and

Explosives (“ATF”) authority to enter the business premises and inspect the

records of any person who distributes more than 10,000 cigarettes in a single

transaction. See 18 U.S.C. § 2343(c)(1).

The PACT Act contains specified “Exclusions Regarding Indian Tribes and

Tribal Matters.” 15 U.S.C. § 375 Note. This provision states (among other

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things) that the Act shall not be construed to modify existing limitations imposed

by treaties or federal common law on state and local taxing and regulatory

authority with respect to the sale, use, or distribution of cigarettes and smokeless

tobacco by or to Indian tribes, tribal members, tribal enterprises, or in Indian

country. See ibid. Accordingly, under principles set out by the Supreme Court,

“cigarettes to be consumed on the reservation by enrolled tribal members are tax

exempt.” Department of Tax. & Fin. of New York v. Milhelm Attea & Bros., Inc.,

512 U.S. 61, 64 (1994). By contrast, “sales to persons other than reservation

Indians . . . are legitimately subject to state taxation.” Ibid. The Supreme Court

has “rejected the proposition that ‘principles of federal Indian law, whether stated

in terms of pre-emption, tribal self-government, or otherwise, authorize Indian

tribes thus to market an exemption from state taxation to persons who would

normally do their business elsewhere.’” Id. at 72 (citations omitted). The Court

also has held that Native American sellers may be required to collect state taxes

owed by the purchasers, explaining that “[w]ithout the simple expedient of having

the retailer collect the sales tax from non-Indian purchasers, it is clear that

wholesale violations of the law by the latter class will go virtually unchecked.”

Moe v. Salish & Kootenai Tribes, 425 U.S. 463, 482 (1976).

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II. Factual Background

Plaintiff Aaron Pierce operates a business, Red Earth LLC, that sells

cigarettes via the Internet, telephone, and mail to customers across the country.

See Red Earth Compl. ¶ 6 (JA 70); Pierce Decl. ¶ 6 (JA 95); see also

http://www.senecasmokeshop.com/ (Red Earth’s website, visited 9/21/10, attached

at AD-1 ). Red Earth admits that it does not pay taxes on the cigarettes that it4

sells. See, e.g., Red Earth Compl. ¶¶ 22, 25, 29 (JA 78-80). Red Earth declares

that “[s]hipment of tax-free cigarettes” is “an integral and important aspect of

plaintiffs’ business model, and allows plaintiffs to realize cost savings that result,

in part, in the lower prices plaintiffs’ customers pay for tobacco products.” Id.

¶ 29 (JA 80); see also Pierce Decl. ¶¶ 11-12 (JA 96-97) (describing plaintiff’s

business model of “acquir[ing] cigarettes free of” state taxes and then “resell[ing]

to consumers and other end users free of such taxes”).

Plaintiff Seneca Free Trade Association represents 141 businesses that sell

tobacco products over the Internet, fax, and phones. See SFTA Compl. ¶ 48

(JA 111). The three largest businesses employ, in total, more than 310 employees.

Moll Decl. ¶ 39 (JA 124). Most of the businesses employ 12-20 employees, and

many employ substantially more. See Moll Decl. ¶ 39 (JA 125).

“AD” refers to the addendum to this brief.4

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http://www.senecasmokeshop.com/

Although SFTA has not identified the businesses that it represents, Red

Earth has identified itself as an SFTA member. Moreover, another self-identified5

SFTA member, Robert Gordon, has filed a parallel PACT Act challenge in the

District of Columbia and described his operations in connection with that lawsuit.

See Gordon v. Holder, No. 10-1092-HHK (D.D.C.), appeal pending, No. 10-5227

(D.C. Cir.). Mr. Gordon’s internet tobacco retail business employs 22 people and

earned about $2 million each month in gross revenues last year. See Affidavit of

Marcia Gordon, ¶¶ 4, 13 (AD-3, AD-5). Ninety-five percent of Mr. Gordon’s

revenue comes from the sale of cigarettes and other tobacco products over the

Internet and by phone. See Affidavit of Marcia Gordon, ¶ 5 (AD-3).

Like Red Earth, Mr. Gordon admits that his business does “not pay state

taxes on cigarettes and tobacco products” and “then pass[es] this savings on to all

of our customers nationwide by offering discount cigarettes, chewing tobacco,

pipe tobacco and domestic cigars online.” His website further declares that he6

does not “report tax or customer information to any government agency or other

See No. 10-3165 (2d Cir.), Docket Entry 173-1, at 4.5

6 http://www.allofourbutts.com/ (Mr. Gordon’s website, visited 9/16/2010)(attached at AD-9).

-13-


http://www.allofourbutts.com/

entity.” Other Seneca Nation tobacco retailers make similar representations on7

their websites.8

III. District Court Proceedings

Red Earth filed its lawsuit on Friday, June 25, 2010, shortly before the

PACT Act was due to go into effect, and sought emergency injunctive relief to

block enforcement of the Act. See JA 55, 69-93. The district court entered a

temporary restraining order the following Monday, June 28. See JA 56.

On July 1, SFTA filed its complaint. See JA 101-115. The case was

consolidated with Red Earth and the district court entered a new temporary

restraining order that applied to all members of the SFTA. See JA 57, 65.

On July 30, the district court issued an Opinion and Order that granted in

part and denied in part plaintiffs’ motion for a preliminary injunction. See JA 4-

7 http://allofourbutts.com/?page=shop/help#q11 (Mr. Gordon’s website, visited9/16/2010) (attached at AD-12).

See, e.g., 8 http://www.eecigs.com (seller located on “sovereign Seneca Nationof Indians Reservation” “do[es] not report sales, names or personal information!!!”(visited 9/18/2010) (attached at AD-16); http://www.tribaldiscounts.com (“We’re100% native owned located on the Seneca Nation of Indians reservation, whichmeans that you WON’T get a large tax bill stating that you owe anything.”)(visited 9/182010) (attached at AD-17); http://www.smoke-it-up.com/id6.html(“We are wholly owned and operated on Seneca Nation Sovereign Territory”;“[S]overeign means: 1. We DO NOT report our sales to anyone! . . . 3. No surprisetax bill in the mail. . . .”) (visited 9/18/2010) (attached at AD-18).

-14-


http://allofourbutts.com/?page=shop/help#q11

http://www.eecigs.com

http://www.tribaldiscounts.com

http://www.http://www.smoke-it-up.com/id6.html

46. The court denied plaintiffs’ motion to enjoin the PACT Act provision that

makes it unlawful to send cigarettes and smokeless tobacco through the U.S. mail,

18 U.S.C. § 1716E. The court observed that it is “beyond dispute that Congress

has the authority to completely ban those products from the mails.” JA 40. The

court rejected plaintiffs’ contention that the statutory exception for intra-state

mailings within the States of Alaska and Hawaii is irrational, noting that “without

such an exception, some citizens in Alaska and Hawaii would not be able to obtain

those products at all.” Ibid.

The court granted plaintiffs’ motion to enjoin the PACT Act provisions that

prohibit remote sales of cigarettes and smokeless tobacco unless the applicable

state and local taxes are paid in advance, and that require remote sellers to comply

with the laws of the jurisdictions to which they ship their products, including laws

imposing excise taxes, licensing and tax-stamping requirements, restrictions on

sales to minors, and other payment obligations or legal requirements relating to the

sale, distribution, or delivery of cigarettes or smokeless tobacco. See JA 46

(enjoining enforcement of 15 U.S.C. § 376a(a)(3)-(4), (d)). The court believed

that these federal requirements violate the due process rights of retailers that

engage in interstate commerce. See JA 17-27.

-15-


SUMMARY OF ARGUMENT

The preliminary injunction rests on an error of law. The PACT Act

provisions that were enjoined by the district court prohibit remote sales of

cigarettes and smokeless tobacco unless the applicable state and local taxes are

paid in advance of delivery, and require remote sellers to abide by other tobacco

control measures including state-law restrictions on direct delivery to customers.

These federal requirements fall easily within the legislative jurisdiction of

Congress. Congress has broad power to regulate interstate commerce, and it

routinely requires interstate businesses to comply with state and local law. Such

requirements do not offend the due process rights of businesses that choose to

make interstate sales.

Plaintiffs’ due process challenge would fail even if the federal requirements

were analyzed as if they had been imposed by a state, acting unilaterally. A state

has a compelling interest in curbing in-state demand for tobacco products, which

are lethal and addictive. To that end, states have imposed excise taxes and other

measures designed to reduce the use of the tobacco products, particularly by

children and adolescents. A requirement that a purveyor of such products abide by

the tobacco control measures applicable in the jurisdiction where the products are

delivered does not offend the notions of fairness that underlie due process.

-16-


In any event, the district court’s own due process analysis does not support

the injunction that it entered. The district court believed that the PACT Act’s tax-

payment requirement would violate the due process rights of unidentified remote

sellers that do not have Internet websites or otherwise solicit out-of-state business.

The court provided no basis for its order enjoining enforcement of PACT Act

requirements against Internet vendors like Red Earth, which solicit out-of-state

business through their websites. See Chloe v. Queen Bee of Beverly Hills, LLC, __

F.3d __, 2010 WL 3035495, *10 (2d Cir. Aug. 10, 2010); Illinois v. Hemi Group

LLC, __ F.3d __, 2010 WL 3547647 (7th Cir. Sept. 14, 2010).

The balance of equities and the public interest also require that the

injunction be vacated. Plaintiffs have no legitimate claim of irreparable harm.

The Supreme Court has repeatedly rejected the contention that principles of tribal

sovereignty allow tribal members to sell tax-free cigarettes to persons who are not

members of the local tribe, and it has specifically held that a state may require

tribal vendors to collect the taxes owed by its customers. By contrast, the harm

that the injunction is causing is manifest. Congress enacted the PACT Act

because it found that the majority of remote sales are made without payment of

taxes and provide a cheap supply of tobacco products that encourages underage

demand and undermines tobacco control efforts. Congress found that billions of

-17-


dollars in federal, state, and local tax revenues are lost each year, and that the

profits from illegal sales are also used to finance other criminal activities. The

injunction blocks enforcement of requirements enacted by Congress to address

these serious and growing problems and directly undermines important federal

objectives. The order should be vacated.

STANDARD OF REVIEW

This Court reviews a preliminary injunction for abuse of discretion. See

Almontaser v. N.Y. City Dep’t of Educ., 519 F.3d 505, 508 (2d Cir. 2008) (per

curiam). A preliminary injunction is necessarily an abuse of discretion if it rests

on an error of law. See ibid.

ARGUMENT

A preliminary injunction is an extraordinary remedy. To prevail, a plaintiff

“must establish that he is likely to succeed on the merits, that he is likely to suffer

irreparable harm in the absence of preliminary relief, that the balance of equities

tips in his favor, and that an injunction is in the public interest.” Winter v. Natural

Resources Defense Council, Inc., 129 S. Ct. 365, 374 (2008). Plaintiffs have not

met these requirements. They have no likelihood of success on the merits, and the

balance of equities and public interest preclude a preliminary injunction.

-18-


I. Plaintiffs Have No Likelihood Of Success On The Merits.

A. The PACT Act’s Requirement That State And Local Taxes BePaid In Advance Of Delivery Does Not Violate Due Process.

1. The PACT Act prohibits remote sales of cigarettes and smokeless

tobacco products unless the applicable state and local taxes are paid in advance of

delivery. See 15 U.S.C. § 376a(a)(3)-(4), (d). This provision amends the Jenkins

Act, which was enacted in 1949 to facilitate the collection of state and local taxes

on interstate cigarette sales. The Jenkins Act requires “out-of-state cigarette

sellers to register and to file a report with state tobacco tax administrators listing

the name, address, and quantity of cigarettes purchased by state residents.” Hemi

Group, LLC v. City of New York, 130 S. Ct. 983, 987 (2010).

In enacting the PACT Act, Congress found that the majority of remote

sellers do not comply with the registration and reporting requirements of the

Jenkins Act, and that the majority of remote sales are made without payment of

applicable taxes. See 15 U.S.C. § 375 Note, Finding 5. In 2002, the GAO

reported that of the approximately 150 Internet cigarette vendors it reviewed, none

showed compliance with the Jenkins Act and 78% of the websites affirmatively

revealed noncompliance. See GAO-02-743, Internet Cigarette Sales: Giving ATF

Investigative Authority May Improve Reporting and Enforcement, at 4-5 (2002).

-19-


Moreover, even the Online Tobacco Retailers Association, which opposed state

and local taxes on interstate tobacco sales, recognized that it is “difficult to

conceive of a less efficient means of tax collection than reporting sales in the hope

that sums can later be collected from consumers.” Youth Smoking Prevention and

State Revenue Enforcement Act: Hearing Before the Subcomm. on Courts, the

Internet, and Intellectual Property of the H. Comm. on the Judiciary, 108th Cong.

119 (May 1, 2003) (Statement of Ali Davoudi, President of the Online Tobacco

Retailers Association).

As Representative Weiner, the PACT Act’s sponsor, explained, there is a

dramatic difference between the price of legally taxed cigarettes and untaxed

cigarettes. See 2008 Hearing, at 10. For example, consumers can purchase a

carton of Marlboro cigarettes online for $31.95, whereas the same carton would

sell for $70 in New York City. See ibid. Matthew Myers, the President of the

Campaign for Tobacco-Free Kids, advised Congress that “sales of these illegally

tax-free products undermine ongoing state and local efforts to reduce tobacco use

by increasing tobacco tax rates.” Id. at 52. “Studies show, for example, that every

10% increase in real cigarette prices will reduce overall use by approximately

three or four percent and reduce the number of youth smokers by six or seven

-20-


percent.” Ibid. “The availability of cheap cigarettes therefore increases overall9

tobacco use, thereby leading to higher levels of tobacco-caused disease, deaths and

costs.” Ibid. “By reducing the easy access to contraband tobacco products and

other tobacco products on which taxes have not been paid,” the PACT Act assists

“in the effort to reduce tobacco use and its harms, especially among youth and

lower-income persons.” Ibid.

The price differentials between taxed and untaxed cigarettes also make it

highly profitable to smuggle cigarettes for resale at a reduced price, and the profits

from cigarette smuggling can be used to finance other illicit activities including

organized crime and terrorism. See, e.g., id. at 3 (Statement of Rep. Gohmert); id.

at 10-11 (Statement of Rep. Weiner). The Assistant Director for Field Operations

at ATF advised Congress that cigarettes are believed to be “the number one

illegally trafficked ‘legal’ commodity in the world,” and explained that estimates

of world wide tax loss to governments are between $40 and $50 billion per year.

See also, e.g., Koh et al., Poverty, Socioeconomic Position, and Cancer9

Disparities: Global Challenges and Opportunities, 15 Geo. J. on Poverty L. &Pol’y 663, 685 (2008) (“Economists have estimated that a 10% increase incigarette price reduces cigarette consumption by 3-5% overall, and over 6%among youths.” ) (citations omitted); Chaloupka et al., Policy Levers For theControl of Tobacco Consumption, 90 Ky. L.J. 1009, 1024 (2002) (“[O]lder youth(twelfth graders) were highly sensitive to cigarette prices, smoking less whereexcise taxes are higher.”).

-21-


Id. at 42-43 (Statement of William Hoover, Assistant Director for Field

Operations, ATF). Congress noted that there were more than 450 active tobacco

investigations conducted by ATF in 2005. See 15 U.S.C. § 375 Note, Finding 8.

Accordingly, the PACT Act prohibits remote sales of cigarettes and

smokeless tobacco unless the applicable state and local taxes are paid before the

products are delivered. See 15 U.S.C. § 376a(a)(3)-(4) & (d). The district court

believed that this federal requirement violates the due process rights of remote

sellers that engage in interstate sales. See JA 17-27. The court’s analysis was

incorrect and, even on its own terms, would not support the broad injunction

entered by the court.

The district court analyzed the federal ban on interstate shipments of

untaxed cigarettes and smokeless tobacco as if that ban had been imposed by a

state, acting unilaterally. The court noted that principles of legislative due process

require “‘that there exist some definite link, some minimum connection, between a

state and the person, property, or transaction it seeks to tax.’” JA 17 (quoting

Meadwestvaco Corp. v. Illinois Dep’t of Revenue, 553 U.S. 16, 24 (2008)). The

court believed that under Quill Corp. v. North Dakota, 504 U.S. 298 (1992), due

process precludes a state from requiring an out-of-state seller to pay sales taxes on

products shipped into the state unless the seller also solicits business in the state.

-22-


See JA 17-23. The court enjoined the government from enforcing the PACT Act’s

tax-payment provision against Red Earth and the 140 other businesses that SFTA

represents because the court believed that the provision would be unconstitutional

as applied to unidentified remote sellers that do not sell tobacco products via the

Internet or otherwise solicit out-of-state business. See JA 20-24.

As an initial matter, the court’s legislative due process analysis incorrectly

treats the PACT Act’s tax-payment requirement as if it had been imposed by a

state, acting unilaterally. The requirement was imposed by Congress, and the

legislative due process analysis must reflect the federal character of the legislation.

It is hardly novel for Congress, in regulating interstate commerce, to require

interstate businesses to comply with state and local law. For example, firearms

distributors may not deliver a firearm “to any person in any State where the

purchase or possession by such person of such firearm would be in violation of

any State law or any published ordinance applicable at the place of sale, delivery

or other disposition.” 18 U.S.C. § 922(b)(2). An online pharmacy must “comply

with the requirements of State law concerning the licensure of pharmacies in each

State from which it, and in each State to which it, delivers, distributes, or

dispenses or offers to deliver, distribute, or dispense controlled substances by

means of the Internet, pursuant to applicable licensure requirements, as determined

-23-


by each such State.” 21 U.S.C. § 831(b). A farmer may not deliver agricultural

seeds in interstate commerce without “compliance with the seed laws of the State

into which the seed is transported.” 7 U.S.C. §§ 1571, 1573. Explosive dealers

may not distribute explosives to any person who intends to transport the materials

“into a State where the purchase, possession, or use of explosive materials is

prohibited.” 18 U.S.C. § 842(c). It is unlawful to accept an online bet or wager if

“such bet or wager is unlawful under any applicable . . . State law in the State . . .

in which the bet or wager is initiated, received, or otherwise made.” 31 U.S.C.

§ 5362(10)(A). And the Contraband Cigarette Trafficking Act has long barred any

person from knowingly distributing contraband cigarettes, which are defined to

mean a quantity of more than 10,000 cigarettes “which bear no evidence of the

payment of applicable State or local cigarette taxes in the State or locality where

such cigarettes are found, if the State or local government requires a stamp,

impression, or other indication to be placed on packages or other containers of

cigarettes to evidence payment of cigarette taxes.” 18 U.S.C. §§ 2341(2), 2342(a).

It has never been suggested that federal requirements of this sort offend

notions of legislative due process. Interstate businesses are subject to the

legislative jurisdiction of Congress, which is free to require compliance with state

and local law. Even before passage of the 21st Amendment, Congress prohibited

-24-


the shipment of alcoholic beverages “when liquor is intended to be used in

violation of the law of the state.” James Clark Distilling Co. v. Western Maryland

R. Co., 242 U.S. 311, 324-25 (1917) (discussing the Webb-Kenyon Act). The

Supreme Court rejected the contention that this federal statute exceeded

Congress’s power to regulate interstate commerce “because it submitted liquors to

the control of the states.” Id. at 326. The Court explained that the “argument as

to delegation to the states rests upon a mere misconception”: “It is true the

regulation which the Webb-Kenyon Act contains permits state prohibitions to

apply to movements of liquor from one state into another, but the will which

causes the prohibitions to be applicable is that of Congress, since the application

of state prohibitions would cease the instant the act of Congress ceased to apply.”

Ibid. (emphasis added). Likewise, in Kentucky Whip & Collar Co. v. Illinois Cent.

R. Co., 299 U.S. 334, 343 (1937), the Supreme Court rejected a due process

challenge to a federal statute that makes it unlawful to ship prisoner-made goods

into states where the “goods are intended to be received, possessed, sold, or used

in violation of its laws.” The Court explained: “The Congress has formulated its

own policy and established its own rule. The fact that it has adopted its rule in

order to aid the enforcement of valid state laws affords no ground for

constitutional objection.” Id. at 352.

-25-


Applying these settled principles, a three-judge district court rejected a due

process challenge to the Jenkins Act that was analogous to the challenge urged

here. See Consumer Mail Order Ass’n of America v. McGrath, 94 F. Supp. 705

(D.D.C. 1950), aff’d, 340 U.S. 925 (1951). The plaintiffs in McGrath argued that

the Jenkins Act violates due process because it “forces a resident of one state to

submit to the jurisdiction of a second state.” Id. at 712. The three-judge court

disagreed, explaining that “it is the power of Congress, not of any state, which

requires the information to be submitted.” Ibid. (emphasis added). The court

explained that the Jenkins Act merely “imposes a condition upon the use of the

facilities of interstate commerce”; the fact that the requirement is “imposed in

order to cooperate with the power of the states to tax does not change the

situation.” Ibid.

The same principles are controlling here. Congress made it unlawful to

distribute cigarettes and smokeless tobacco in interstate commerce unless the

applicable state and local sales taxes have been paid. Because all interstate

businesses are subject to the legislative jurisdiction of Congress, it is irrelevant

whether such a business also would be subject to the legislative jurisdiction of a

particular state, acting unilaterally. When an Act of Congress is at issue, the

relevant “minimum contacts” are the contacts with the United States, not with a

-26-


particular state. See, e.g., In re Magnetic Audiotape Antitrust Litigation, 334 F.3d

204, 207 (2d Cir. 2003) (examining whether defendant in federal antitrust suit

possessed “sufficient minimum contacts with the United States to satisfy due

process”); Porina v. Marward Shipping Co., Ltd., 521 F.3d 122, 128 (2d Cir.

2008) (contacts with United States are sufficient for purposes of nationwide

service of process statute); SEC v. Bilzerian, 378 F.3d 1100, 1106 n.8 (D.C. Cir.

2004) (same); Busch v. Buchman, Buchman & O'Brien, Law Firm, 11 F.3d 1255,

1258 (5th Cir. 1994) (same) (collecting authorities).

The case on which the district court relied, Quill Corp. v. North Dakota, did

not involve a federal statute. Instead, it addressed a North Dakota law that

required out-of-state sellers to collect an excise tax on products delivered into the

state. The Supreme Court concluded that the North Dakota statute was invalid

under the dormant commerce clause even though the state law did not offend

standards of legislative due process. In the course of its discussion, the Supreme

Court noted that “Congress has plenary power to regulate commerce among the

States and thus may authorize state actions that burden interstate commerce” but

“does not similarly have the power to authorize violations of the Due Process

Clause.” Quill, 504 U.S. at 305 (citing International Shoe Co. v. Washington, 326

U.S. 310, 315 (1945)). The Court did not overrule Clark or Kentucky Whip or

-27-


suggest that a federal statute that requires compliance with state law as a condition

of engaging in interstate commerce exceeds Congress’s legislative jurisdiction.

Such federal statutes do not “authorize” due process violations; they impose

conditions on interstate commerce that fall easily within Congress’s authority.

Indeed, apart from the district court in this case, no court has ever invoked Quill as

a basis for invalidating an Act of Congress.10

Congress’s decision to ban remote sales of cigarettes and smokeless tobacco

unless the applicable taxes have been paid in advance of delivery does not offend

the “traditional notions of fair play and substantial justice” that are the touchstone

of due process. Id. at 307 (quoting International Shoe, 326 U.S. at 316). The

PACT Act regulates interstate sales of an addictive product that kills half of its

regular users. See p. 6, supra. Congress’s authority to regulate interstate

commerce is plenary, and it is hardly “unjust” for Congress to require that tobacco

retailers pay state and local taxes that are used to curb in-state demand.

The federal statute discussed in International Shoe did not require10

compliance with state law as a condition of engaging in interstate commerce; itprovided that “‘No person required under a State law to make payments to anunemployment fund shall be relieved from compliance therewith on the groundthat he is engaged in interstate or foreign commerce, or that the State law does notdistinguish between employees engaged in interstate or foreign commerce andthose engaged in intrastate commerce.’” International Shoe, 326 U.S. at 315.

-28-


2. Plaintiffs’ due process objection also would fail even if the state taxes

were examined independently, apart from the federal statute. It is common ground

that due process is satisfied if there is “some definite link, some minimum

connection, between a state and the person, property or transaction it seeks to tax.”

Meadwestvaco, 553 U.S. at 24. As long as a “foreign corporation purposefully

avails itself of the benefits of an economic market in the forum State,” the

“requirements of due process are met irrespective of a corporation’s lack of

physical presence in the taxing State.” Quill, 504 U.S. 307-08.

There is no doubt that states have a strong interest in the payment of the

excise taxes that are used to curb demand for tobacco products. Nor is there any

doubt that remote sellers of cigarettes and smokeless tobacco purposefully avail

themselves of the benefits of the economic markets of the taxing states. As the

Red Earth complaint illustrates, the business model of remote sellers is predicated

on selling discount tobacco products to customers nationwide who otherwise

would pay state excise taxes at the point of sale. See Red Earth Compl. ¶ 21 (JA

78) (Red Earth “acquire[s] cigarettes free of New York excise taxes” and “resell[s]

[them] to customers and other end users in New York and other States free of such

taxes”); see also AD-10 (SFTA member Robert Gordon does “not pay state taxes

on cigarettes and tobacco products” and “then pass[es] this savings on to all of our

-29-


customers nationwide by offering discount cigarettes, chewing tobacco, pipe

tobacco and domestic cigars online”). Other Seneca Nation member websites

likewise feature “tax-free” cigarettes. See supra n.8; AD-16-18. As the Supreme

Court explained in rejecting a tribal challenge to a state excise tax scheme: “What

the smokeshops offer these customers, and what is not available elsewhere, is

solely an exemption from state taxation.” Washington v. Confederated Tribes of

Colville Indian Reservation, 447 U.S. 134, 155 (1980).

Contrary to the district court’s understanding, see JA 26, the

constitutionality of a state excise tax collection requirement does not turn on

whether a seller sends mail-order catalogs into the state. Although Quill noted

that the seller had sent catalogs into North Dakota, see 504 U.S. at 308, the

Supreme Court did not suggest that such solicitation was a constitutional

minimum. Instead, the Court declared that Quill’s contacts with North Dakota

were “more than sufficient for due process purposes.” Ibid. Where, as here, an

out-of-state seller undermines a state’s tobacco control program by distributing

untaxed cigarettes in the state, the seller purposefully avails itself of the benefits of

the state’s economic market and the requirement of “minimum contacts” is met.

3. In any event, the district court’s own analysis does not support the

injunction that it entered. Even assuming that due process requires solicitation of

-30-


out-of-state business, Red Earth solicits out-of-state customers through its Internet

website, which “is accessible via the Internet in all Tribal Territories, from each of

the fifty states and from other locations throughout the world.” AD-1. SFTA11

member Robert Gordon likewise admits that, through his websites, customers “are

able to see what products are available for sale” and “choose what items they wish

to purchase on the website, similar to a mail order catalog.” Other SFTA12

members also operate Internet websites. See SFTA Compl. ¶ 48 (JA 111)

(representing that 61 of the tobacco businesses that SFTA represents take orders

only though the internet, telephone, or fax, and that 80 of the businesses have both

an internet/telephone/fax operation and a small brick-and-mortar store).

Quill makes quite clear that a seller’s use of a website rather than mail-order

catalogs does not alter the due process analysis. The Supreme Court observed that

“[i]n ‘modern commercial life’ it matters little that such solicitation is

accomplished by a deluge of catalogs rather than a phalanx of drummers: The

requirements of due process are met irrespective of a corporation’s lack of

physical presence in the taxing State.” Quill, 504 U.S. at 308. In 1992, when

11 http://www.senecasmokeshop.com/ (visited 9/21/2010, attached at AD-1)

Amended Complaint ¶ 77, Gordon v. Holder, No. 10-1092-HHK (D.D.C.);12

see also note 8, supra (other Seneca Nation member websites)

-31-


http://www.senecasmokeshop.com

Quill was decided, it was irrelevant that the seller solicited business by means of

mail-order catalogs instead of maintaining a physical presence in the state. In the

age of the Internet, it is likewise irrelevant that Red Earth and other remote sellers

solicit out-of-state business through their websites rather than through physical

mail-order catalogs.

Citing Chloe v. Queen Bee of Beverly Hills, LLC, 571 F. Supp. 2d 518

(S.D.N.Y. 2010), the district court suggested that an Internet-based sale does not

provide adequate contacts to support personal jurisdiction. See JA 25. However,

this Court reversed the Chloe decision after the district court issued its injunction

in this case. This Court held that “by offering bags for sale to New York

consumers on the Queen Bee website and by selling bags-including at least one

counterfeit Chloé bag-to New York consumers, [defendant] has purposefully

availed himself of the privilege of conducting activities within the forum State,

thus invoking the benefits and protections of its laws.” Chloe v Queen Bee of

Beverly Hills, LLC, __ F.3d __, 2010 WL 3035495, *10 (2d Cir. 2010) (quotation

marks, citation, and alterations omitted).

The Seventh Circuit reached the same conclusion in a case involving an

Internet cigarette vendor. In Illinois v. Hemi Group LLC, __ F.3d __, 2010 WL

3547647 (7th Cir. Sept. 14, 2010), the State of Illinois sued an online cigarette

-32-


vendor for shipping cigarettes into the State in violation of state laws, and for its

failure to comply with the Jenkins Act’s reporting requirements. Id. at *1. The

seller argued that the state court lacked personal jurisdiction over it because it was

an out-of-state business without “minimum contacts” in the State. The Seventh

Circuit rejected that argument, noting that “Hemi created several commercial,

interactive websites through which customers could purchase cigarettes”; that it

“held itself out as open to do business with every state (including Illinois) except

New York”; and that, “[a]fter the customers made their purchases online, Hemi

shipped the cigarettes to their various destinations.” Id. at *4. The Seventh

Circuit explained that the seller could not have “the benefit of a nationwide

business model with none of the exposure” and held that “[t]here is nothing

constitutionally unfair about allowing Illinois, a state with which Hemi has had

sufficient minimum contacts, to exercise personal jurisdiction over Hemi.” Id. at

*6.13

The district court entered an injunction because it believed that the PACT

Act’s tax-payment requirement would violate the due process rights of

Contrary to the district court’s suggestion, a website that forms part of a retail13

sales operation is in not a “passive” website. JA 22. A “passive” website “doeslittle more than make information available to those who are interested in it.” Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997).

-33-


unidentified remote sellers that do not sell tobacco products through the Internet or

otherwise solicit out-of-state business. See JA 22-24. The court’s due process

analysis was wrong for the reasons already discussed. But even if the court’s

reasoning were correct, it would not support the injunction that it entered. The

court broadly enjoined the government from enforcing the PACT Act’s tax-

payment provisions against all of the remote sellers that SFTA represents,

including Red Earth and other Internet vendors. SFTA did not identify a single

remote seller that does not operate a website or otherwise solicit out-of-state

business. SFTA’s unsubstantiated assertion that such sellers exist is not a basis for

an injunction of any kind, much less an order that enjoins enforcement of the

federal statute against Internet vendors. In effect, the district court invalidated the

PACT Act’s tax-payment requirement on its face. But facial challenges are

strongly disfavored and cannot succeed unless the challenging party shows that

“the law is unconstitutional in all of its applications” or has no “plainly legitimate

sweep,” Wash. State Grange v. Wash. State Repub. Party, 552 U.S. 442, 449-450

(2008), a showing that could not possibly be made here.

-34-


B. The District Court Offered No Basis for Enjoining The PACT ActProvisions That Require Compliance With Laws ThatGovern The Sale and Distribution Of Cigarettes.

In addition to the tax-payment requirement discussed above, the PACT Act

also requires remote sellers to comply with other laws of the jurisdictions to which

they deliver cigarettes and smokeless tobacco, including state licensing

requirements, restrictions on sales to minors, and other payment obligations or

legal requirements relating to the sale, distribution, or delivery of cigarettes or

smokeless tobacco. See 15 U.S.C. § 376a(a)(3). The district court provided no

basis for its order enjoining enforcement of these requirements, see JA 46 (order),

which its opinion did not discuss.

As Congress understood, the difficulties of enforcing age verification and

tax collection requirements have led some states to prohibit direct shipments of

tobacco products to consumers altogether. See 2007 IOM Report, at 209. For

example, in 2000, New York State enacted a law that prohibits direct shipment of

cigarettes to state residents and bans carriers from transporting such shipments.

Ibid. This Court rejected a dormant commerce clause challenge to the New York

law, and held that the burden on interstate commerce was significantly outweighed

by the statute’s in-state benefits, including reduced overall demand for tobacco (a

result of higher cigarette prices reflecting excise taxes), and fewer sales to minors.

-35-


See Brown & Williamson, 320 F.3d at 217. Other states have enacted similar laws,

see Conn Gen. Stat. § 12-285c; Ind. Code. § 24-3-5-4.5; Md. Code. Ann. Business

Reg. § 16-222, and the PACT Act expressly preserved these state restrictions on

delivery sales. See 15 U.S.C. § 376a(e)(5)(C). Yet the district court, without

analysis, enjoined the federal requirement that remote sellers respect these state-

law restrictions on the means by which cigarettes and smokeless tobacco are

distributed within a state.

The court’s opinion also failed to explain why Red Earth and the 140 other

SFTA retailers should be relieved of the federal requirement that they abide by

state laws restricting the sale of cigarettes to only those brands listed in approved

state directories. See, e.g., State v. Maybee, 224 P.3d 1109, 1113-14 (Idaho 2010)

(discussing Idaho Directory); Hemi Group, 2010 WL 3547647 at *1 (state sued

retailer for, inter alia, selling cigarettes not listed in Illinois Directory). These

directories were established as part of the “Complementary Acts” passed by the

states in order to effectuate the terms of the “landmark” Master Settlement

Agreement (“MSA”) executed between the four major tobacco manufacturers and

over 40 states, Lorillard Tobacco Corp. v. Reilly, 533 U.S. 525, 533 (2001),

pursuant to which the manufacturers must “internalize the health care costs created

by their products, by making three sets of payments for a combined value of

-36-


approximately $206 billion over twenty-five years,” Grand River Enterprise Six

Nations, Ltd. v. Pryor, 481 F.3d 60, 63 (2d Cir. 2007) (per curiam). The

Complementary Acts require tobacco manufacturers who were not party to the

original MSA to either join the Agreement, or set aside funds in an escrow account

that could be used to fund “damage awards . . . for any successful cigarette-related

claims,” Grand River, 481 F.3d at 63, and to certify annually that they are

compliant with this requirement, see, e.g., Idaho Code § 39-8403(1). To ensure

compliance with these laws, Complementary Acts also prohibit the sale of any

cigarette that is not listed in the directory of compliant manufacturers. See, e.g.,

id.§ 39-8403(3). Thus, while retailers have no direct obligations under the MSA,

they play an important role in implementing it; only retailers can ensure that they

do not sell any unauthorized cigarettes across state lines. The district court offered

no basis for excusing retailer compliance with such laws.14

In an amicus brief filed in Gordon v. Holder, No. 10-5227 (D.C. Cir.), the14

State of Idaho described the important interests furthered by its ComplementaryAct and other state requirements related to the distribution of cigarettes. Theamicus brief explained that other states have laws similar to Idaho’s, andsupported the arguments it made in support of the PACT Act, including: Arizona,Arkansas, California, Delaware, District of Columbia, Hawaii, Illinois, Iowa,Kansas, Maryland, Massachusetts, Nebraska, New Hampshire, New Mexico, NewYork, Ohio, Oklahoma, Pennsylvania, Tennessee, Vermont, and Washington. SeeBrief of Amicus Curiae Idaho at 5 n.3.

-37-


Similarly, the court’s injunction overrides state laws imposing

administrative requirements that states have enacted to ensure minors are not able

to obtain cigarettes over the Internet and by other remote means. For example,

Idaho’s Minors Access Act requires that every retailer of cigarettes in the state

apply for a no-cost permit each year before selling any cigarettes or smokeless

tobacco in the state, and subjects permittees to oversight, regulation, inspection,

and compliance checks. See Idaho Code §§ 39-5704, 39-5710. Such

administrative requirements are especially important in light of Congress’s finding

that the majority of delivery sales are made without adequate protection against

sales to minors, see 15 U.S.C. § 375 Note, Finding 5. Although the district court

assumed that retailer compliance with the PACT Act’s age-verification

requirement would be universal, see JA 52 (noting that the court had not enjoined

enforcement of 15 U.S.C. § 376a(b)(4)), “recent studies have revealed that most

Internet tobacco vendors fail to verify their customer’s age, and those that purport

to do so have largely been ineffective in obtaining age verification.” 2007 IOM

Report, at 207. A nationwide survey conducted in 2001 showed that more than

100,000 children aged 12 to 17 had recently purchased cigarettes from the

Internet. See 2008 Hearing, at 52 (Myers). A New York study found that in 2004

and 2005 more than 5% of 9th graders (14 and 15 year olds) had bought

-38-


cigarettes – more than three times as many as in 2001. See ibid. Purchase rates

are even higher among older children. See ibid. Moreover, as this Court

observed, a cheap supply of “tax-free” cigarettes means that “purchasers of any

age may supply youthful smokers who do not themselves purchase through direct

channels.” Brown & Williamson, 320 F.3d at 217.

II. The Balance Of Equities And The Public Interest Require That The Preliminary Injunction Be Vacated.

As shown above, plaintiffs have no likelihood of success on the merits and

the injunction should be vacated on that basis. In addition, the balance of equities

and the public interest require that the preliminary injunction be vacated.

In discussing plaintiffs’ harm, the district court did not suggest that Red

Earth and other SFTA members are entitled to undercut their “law-abiding”

competitors throughout the United States, 15 U.S.C. § 375 Note, Finding 6, by

marketing “an exemption from State taxation.” Confederated Tribes, 447 U.S. at

155. The Supreme Court has repeatedly “rejected the proposition that ‘principles

of federal Indian law, whether stated in terms of pre-emption, tribal

self-government, or otherwise, authorize Indian tribes thus to market an exemption

from state taxation to persons who would normally do their business elsewhere.’”

Milhelm, 512 U.S. at 71-72 (discussing Moe, 425 U.S. 463; Confederated Tribes,

-39-


447 U.S. 134 (1980); and Oklahoma Tax Comm’n v. Citizen Band of Potawatomi

Tribe of Okla., 498 U.S. 505 (1991)). Under the principles set out by the Supreme

Court, “cigarettes to be consumed on the reservation by enrolled tribal members

are tax exempt.” Milhelm, 512 U.S. at 64. By contrast, “sales to persons other

than reservation Indians . . . are legitimately subject to state taxation.” Ibid.

The district court instead cited the administrative burden of having to

ascertain state and local tax obligations and ensure that the taxes are paid before

the products are delivered. See JA 29. But compliance with the laws of different

jurisdictions is an administrative burden that is commonly borne by a businesses

that choose to engage in nationwide commerce, and cannot suffice to establish

irreparable harm. The Supreme Court has specifically held that Indian retailers

may be required to collect taxes from their customers because, “[w]ithout the

simple expedient of having the retailer collect the sales tax from non-Indian

purchasers, it is clear that wholesale violations of the law by the latter class will go

virtually unchecked.” Moe, 425 U.S. at 482.

Moreover, the asserted administrative burden is overstated. All but three

states require that cigarettes bear state tax stamps, which are typically purchased15

See Richard Carver, State Weighs Reintroduction of Tax Stamps for15

Cigarettes, Winston-Salem Journal, Feb. 2, 2010, http://www2.journalnow.com/content/2010/feb/02/state-weighs-reintroduction-of-tax-stamps-for-ciga/ (visited

-40-


http://www2.journalnow.com/content/2010/feb/02/state-weighs-reintroduction-of-tax-stamps-for-ciga/

http://www2.journalnow.com/content/2010/feb/02/state-weighs-reintroduction-of-tax-stamps-for-ciga/

and affixed by state-licensed stamping agents. See, e.g., Milhelm, 512 U.S. at 64

(describing New York state excise tax regime); Confederated Tribes, 447 U.S. at

141 (describing Washington state taxing regime). Like their brick-and-mortar

competitors, SFTA members can include the applicable taxes in the sale prices of

their cigarettes and rely on state-licensed stamping agents to obtain and affix the

necessary stamps prior to making delivery. Alternatively, if they choose, they may

become licensed stamping agents for the states in which they deliver their

products. Indeed, Internet retailer Scott Maybee — also a member of the Seneca

Nation — has announced on his website that he has come into compliance with the

PACT Act. In “A Message To Our Customers Regarding The PACT ACT,” he

explains: “You may notice our prices have gone up. Because of the PACT ACT

which comes into effect June 29th excise taxes are now included in the price of

our tobacco products.” The website identifies the states to which Mr. Maybee is16

currently delivering and explains that he is “working quickly to become compliant

with tobacco laws in additional states.” 17

Sept. 16, 2010).

16 http://www.ordersmokesdirect.com (visited Sept. 10, 2010) (copy attached asAD-15).

Ibid.17

-41-


http://www.ordersmokesdirect.com

Whereas plaintiffs’ assertions of harm are unsubstantiated, the important

interests served by the PACT Act are reflected in express legislative findings and

supported by the legislative record. As discussed, Congress enacted the PACT

Act because it found that the majority of Internet and other remote sales are made

without payment of taxes, without compliance with existing federal registration

and reporting requirements, and without adequate precautions to protect children.

Congress found that untaxed cigarettes and smokeless tobacco provide a cheap

supply of tobacco products that encourages underage demand and undermines

tobacco control efforts. Congress found that billions of dollars in federal, state,

and local tax revenues are lost each year, and that the profits from illegal sales are

also used to finance other criminal activities. Accordingly, Congress prohibited

the delivery of cigarettes and smokeless tobacco unless the applicable taxes are

paid in advance and required remote sellers to comply with the laws of the

jurisdictions to which their products are delivered. The district court’s injunction

undermines these important federal objectives and is, therefore, manifestly against

the public interest.

-42-


CONCLUSION

For the foregoing reasons, the preliminary injunction should be vacated.

Respectfully submitted,

TONY WEST Assistant Attorney General

WILLIAM J. HOCHUL, Jr. United States Attorney

s/Michael P. Abate MARK B. STERN (202) 514-5089ALISA B. KLEIN (202) 514-1597MICHAEL P. ABATE (202) 616-8209 Attorneys, Appellate Staff Civil Division, Room 7318 Department of Justice 950 Pennsylvania Ave., NW Washington, D.C. 20530

SEPTEMBER 2010


CERTIFICATE OF COMPLIANCE WITH RULE 32(a)(7)(c)OF THE FEDERAL RULES OF APPELLATE PROCEDURE

I hereby certify pursuant to Fed. R. App. P. 32(a)(7)(C) that the foregoing

brief satisfies the type-face and volume limitations set forth in Federal Rule of

Appellate Procedure 32(a)(7)(B) because the type face is Times New Roman,

proportionally spaced, fourteen-point font, and it contains 9,418 words, according

to the count of Corel WordPerfect X4.

/s/ Michael P. Abate Michael P. Abate

-44-


ADDENDUM

www.senecasmokeshop.com (Red Earth website). . . . . . . . . . . . . . . . . . . . . . AD-1

Affidavit of Marcia Gordon, No. 10-1092-HHK (D.D.C.) (Dkt. No. 1-3).. . . AD-2

http://www.allofourbutts.com (Robert Gordon website). . . . . . . . . . . . . . . . . AD-9

http://www.cigarettesavers.com (Robert Gordon website).. . . . . . . . . . . . . . AD-14

http://www.ordersmokesdirect.com (Scott Maybee website). . . . . . . . . . . . . AD-15

http://www.eecigs.com (Seneca retailer website). . . . . . . . . . . . . . . . . . . . . . AD-16

http://www.tribaldiscounts.com (Seneca retailer website). . . . . . . . . . . . . . . AD-17

http://www.smoke-it-up.com/id6.html (Seneca retailer website). . . . . . . . . . AD-18


http://www.senecasmokeshop.com

http://www.allofourbutts.com

http://www.cigarettesavers.com

http://www.ordersmokesdirect.com

http://www.eecigs.com

http://www.tribaldiscounts.com

http://www.smoke-it-up.com/id6.html

Seneca Smokeshop offers discount cigarettes, loose tobacco, chewing tobacco and cigars. Buy cigarettes from the convenience of your own home AND save money! We offer premium brands such as Marlboro, Camel, Kool and Newport, but we also offer your favorite native brands such as Seneca, Native, Niagara, Heron, and Berkley! Why pay retail prices when you can shop online AND save

money?

SenecaSmokeShop.com operates this website from its business offices located within the Territories of the Seneca Nation of Indians. Our website is accessible via the Internet in all Tribal Territories, from each of the fifty states and from other locations throughout the world. Because each viewing location may have laws that

are different from those of the Seneca Nation of Indians, and to avoid the significant expenses associated with being sued in a remote jurisdiction, we require all customers and any other persons using this website to agree

to the terms of this Provision.

You agree by using this website that this Provision and your future access to, and use of this website is governed in all respects by the laws, regulations, rules and codes of the Seneca Nation of Indians

(notwithstanding any choice/conflict of laws provisions of your home jurisdiction). Any person who uses this website to transact business with us, or who uses it to communicate with us, agrees that his or her use for

such purposes and/or the resolution of any disputes relating to such use are subject to the laws and territorial jurisdiction of the Seneca Nation of Indians. In addition, you agree that the Seneca Nation of Indians maintains exclusive jurisdiction over all disputes, claims, suits, or controversies relating to this website, your use of this

website and your relationship with us.

Use of this website is unauthorized in any jurisdiction that does not recognize and give full effect to all the terms and conditions set forth in this Provision.

Seneca Smokeshop offers discount cigarettes, loose tobacco, chewing tobacco and cigars. Buy cigarettes from the convenience of your own home AND save money! We offer premium brands such as Marlboro, Camel, Kool and Newport, but we also offer your favorite native brands such as Seneca, Native, Niagara, Heron, and Berkley! Why pay retail prices when you can shop online AND save money?

I Accept the Terms I Do Not Accept the Terms

Page 1 of 1Seneca Smokeshop - Discount cigarettes, tobacco, cigars, and tobacco accessories ...

9/27/2010http://www.senecasmokeshop.com/

AD-1


: Case 1:1 0-cv-01 092-HHK Document 1-3 Filed 06/28/10 Page 1 of9

IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA

ROBERT GORDON, ))

Plaintiff, ))

va, ))

ERIC HOLDER, In hisofflcial capacity as )Attorney General ofthe United States; )

950 Pennsylvania Ave., NW )Washington, DC 20530-000 I )

)ONITED STATES DEPARTMENT )OF JUSTICE; )

950 Pennsylvania Ave., NW )Washington, DC 20530-0001 )

)KENNETH MELSON, in his offroial capocitjl )as Acting Director ofthe Bureau ofAlcohol, )Tt'baeco, Firearms and Explosives, )

99 New York Avenue, NE )Washlngton, DC 20226 )

)BUREAU OF ALCOHOL, TOBACCO, )FIREARMS AND EXPLOSIVES; )

99 New York Avenue, NE )Washington. DC 20226 )

)JOHN "JACK" POTTER, in ki.r ojJIciai )capacitjl as Postmaster General; )

475 L'llnfant Plaza SW )Washington DC 20260·0010 )

)UNITED STATES POSTAL SERVIC:£, )

475 L'Enfant Plaza SW )Washington DC 20260·0010 )

)Defendant., )

Case No, _

Affidavit of Marcia Gordon

Appx.33

Case: 10-5227 Document: 1261840 Filed: 08/20/2010 Page: 38

AD-2


Case 1:10-cv-01092-HHK Document 1-3 Filed 06/28/10 Page 2 of 9

Marcia Gordon, of foliage, being dilly sworn according to law, upon his oath,

deposes and says:

1. My name is Marcia Gordon. J am manied to Robert

Gordon, the plaintiff in tbis case.

2. My husband owns a retail cigarette and tobacco products

business on the Allegheny Territory. I handle the day-to-day operations of this business.

I have personal knowledge of all facts in this affidavit.

3. This business has been in opexations since March 2002 and

had its first internet sale in May 2002. The postal address is 719 :aroad St., Salamanca,

New York, 14779.

4, This business employees 22 people, some of whOOl are

Seneca Indians, The5e employees assist in office-related tasks as well as packaging and

shipping prodllcts.

5. Our store sells cigarettes, cigars, smokeless tobacco

products and some tobacco prodllcts sllch as rolling papers. Ninety-five percent (95%) of

our business, however, Is based on orden (telephone and interneI) from outside the

Alleghany Territory. The remaining 5% is from walk-in bUsiness.

6. We maintain two websites on which customers can place

orders: www,elgarettesavers.com and www.aIlofourbutts.com. The vast majority of our

cuslOOlers place orders through those websites. Some customers also place orders by

telephone.

7. The Seneca Nation has certain regulations requiring us to

verify the age of our purchasers and we follow those regulations.

Appx. 34·


AD-3



8, To comply with laws pl'(lbibiling sales of our products to

minors, we have implemented two procedures designed to ensure !bat only adults can

purchase our cigarettes. First, we use a payment service called CheckCare. CheckCare

requires buyers to provide !beir drivers license numbers and !be last four digits of their

SOcial Security Numbers, CheckCare uses this information to verify that every customer

is over the age of 18. Second, we use a pl'(lgram called "Postal Package Partner" to pay

for and label our packages, I believe that Postal Package Partner is produced by the U.S.

Postal Service ("US:I'S"). or by some sub-c:ontractor to the USPS One option on Postal

Package Partner is to mark packages as requiring an adult signature. On at least two

occasions, we have discovered througb this signature verification process that our

products had been ordered by minors using stolen identification numbers. On those

occasions we communicated with the minors' parents and arranged for the products to be

returned.

9. Since November of 2004, we have been unable to deliver

our products using Dm.. Federal Express. or UPS. All of those companies refuse to

accept tobacco pl'(lducts for delivery in the state of NewYork. II has been widely

reported !bat these companies gave in to pressure by the former governor of New York,

Eliot Spitzer, and agreed not to ship tobacco products. As a result, our only method of

shipping is through the USPS. To our knOWledge, we have no alternative means of

shipping our products across the country.

10. Last week, our local USPS informed us that, as of June 29,

2010, they would nO longer pick up our packages because of !be PAcr Act. Specifically,

the local USPS sent uS a letter saying lIlat the PACT Act will make cigarettes and tobacco

Appx.35


AD-4


Case 1:10-cv-01092-HHK Document 1-3 Filed 06/28/10 Page 4 of9

products nonmailable as ofJune 29. 2010. It also ~tated that "the United States p~ta1

Service will nO longer provide pick up service tnmsportalion for cigarette product

mailings effective June 29, 2010." A copy of this letter is attached as Exhibit A.

11. Without postal delivery, we caDIlOt fill our online orders

which are 95% of our business. As of June 29, 2010, our entire business will effectively

cea~ to C2<ist.

12. Because of the PACT Act, we have already been forced to

take steps to shut down our business. Because we cannot process new customers or new

orders in time for the deadline, we cannot take any orders. We have also started 10 refund

money to eldsling customers whose orders we cannot fill by June 29, 2010. last week, I

informed our shipping and packing employees that they should not report for work after

June 28, 2010. I have told some of our ten office employees that they will be paid for a

few additional days to help wind up the business, but that they will be let go immediately

after that. One of our office staff employees has already been laid off. Four of our

shipping employees have already quit in anticipation of the deadline, either to find other

work or to apply for welfare benefits.

13. If the PACf Act goes into effect, our business will suffer

immediate injury that cannot be fixed in the future. We will lose substantial expected

profits for every day we are out of business. Last year, we had approximately $2 million

in monthly gross revenues. The profit margin for our business ranges between 5 and

10%. Based on those figures, we will lose approximately $100,000 and $200,000 each

month that the PACT Act is in effect.

14. To make matters worse, we will have to continue to pay

Appx.36


AD-5


Case 1:1 0-cv-01 092-HHK Document 1-3 Filed 06/28/10 Page 5 of 9

long-term contracts for services we are no longer able 10 use. For instance, we have

another three years on our set rate phone conlraCt. Each line costs us $19.95 per month

per phone in fixed costs. We have five phone lines. We are in a three year contract. We

also pay a malriculated fee each month. last month, we also paid $6000 iri annual fees

for our annual website and postal managemem services. Once the PAcr Act gOes into

effect, we will have no need for these colltracts, but will still be obligate<! to pay for them.

15. Even if the USPS later sIarIS delivering our packages, our

business will be difficult to recover. Our C\lStomers will soon find other distributors, and

we may fOld that we cannot rebuild our C\lStomer base after weeks, months, or years out

of the business. Our employees have already begun to look for work elsewhere. SOllle of

those employees would be difficult to replace. The office staff, in particolar, are highly

trained and halfe skills that are uncommon on the Allegany Territory.

16. Ifwe cannot operate an internet-based cigarette business on

this land, I cannot think of another useful purpose for the building. It will effectively be

wortbJCllS. My husband and I have tried several other businesses on this location and

none have succeeded.

17. Our business is not alone inilS lroubles. Mail-order

tobacco retailers represent an enOrmOUS proportion of Seneca-run businesses. There are

hondreds of S\1ch businesses on the Seneca Territory and if the Act goes into effect,

thousands of jobs will be lost. 111 addition, the wholesalers and distributors who supply us

with cigarettes will have 10 go out of businClls. The Seneca Nation of Indians will also

lose substantial revenuCll as a result of the drop in licenSing fees and the enormous

increase in unemployment.

Appx.37


AD-6



18. Even ifwe could ship our products after the PAcr Act

goes into effect, we do not know, and have been unable to find out, how to comply with

the provision of the Act requiring us to pay any state excise taxes before we sell or send

any of our products into olber states. My husband and I are concerned about facing

criminalliabllity ifw.. do ship our products but do not comply with state laws because we

have no guidance from those states about how 10 comply.

Appx.38


AD-7


Case 1:10-cv-01092-HHK Document 1-3 Filed 06/28/10 Page 7 of9

I declare under pellaity of perjury thai the foregoing is true and correct.

Marcia Gordon

Sworn to me this ;.gttdsy ofJune, 2010

~i~- Bo~KAREN J. PLOETZ

Notary PuDlic. Stilt, of New Yol1IQualifiad In catlaraUgYlt~':'13

COmmission e<plra, ~!::j.'/:.M-J,;;.~--""-

Appx.39


AD-8


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We're located in the city of Salamanca, New York - Home of the Seneca Nation of Indians on the Allegany Indian Reservation. You'll find a wide variety of discount tobacco products here, we have some of the lowest prices on the net! For your ease and convenience, we have developed this user friendly website. Stop paying those high retail prices and start saving with Allofourbutts.com! Join the many satisfied customers who order all their discount cigarettes, direct from our store. Browse our extensive selections of Premium, Generic and our Economy Brands and be sure to check out our monthly specials in the Special Offers section. If you don't see your brand or product, just give us a call at 1-800-337-2043 and we will try to get them for you!

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AD-9


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Allofourbutts.com sells tobacco products, discounted daily and at very competitive prices. We are located in Western New York state on the Allegany Indian Reservation. The business is Native American Indian (Seneca) owned and operated, and we offer discount tobacco products in our store, online, e-mail or by phone. As a Sovereign Nation, we do not pay state taxes on cigarettes and tobacco products, we then pass this savings on to all of our customers nationwide by offering discount cigarettes, chewing tobacco, pipe tobacco and domestic cigars online. To place an order you can use our online shopping cart and secure transaction system or call 1.800.337.2043 six days a week between the hours of 9 AM to 5:30 PM Monday thru Friday and 9 AM to 4 PM Saturdays.

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Allofourbutts.com Frequently Asked Questions

Here you will find answers to the most common questions we get regarding our business processes. If you have any questions or don't find what your looking for, please call one of our sales representatives at 1.800.337.2043 and they will help you with your questions.

How is my order shipped? How can we sell at such low discounted prices? What if I don't see my type of cigarette or cigar? How do I pay for my tobacco order? How can I place my order? Why are shipping charges high? Can I use my credit or debit card? Why are first-time customer's orders held? How fresh are your tobacco products? What if I have a problem with my order? Will I be charged taxes? Do you accept manufacture's coupons? What is your Privacy Policy? What is your User Account Policy? What are your Terms of Use for your web site? How old do I have to be to place and order? What is your Return Policy?

How is my order shipped? We ship all orders by USPS Priority Mail only. It usually takes 3-7 business days. Please remember that the USPS does not include weekends or holidays as business days. Shipping will be added to your order and a handling fee of $1.50 is charged per order, and not per carton. You will know at the time when you place your order, exactly what your shipping cost will be. We usually are able to pack & ship your order out the following day after receiving your online or phone order. All our tobacco products are received fresh from the manufactures and distributors daily. All shipping charges are based on your shipping zip code and the total weight of the items in your order. We strive to ship all orders we receive within 24 hours of processing, but some orders may take a little longer due to delivery times of products coming in to us and/or our wholesalers and product demand. If you would like to know the status of your package, please feel free to call us or email us, and we will gladly let you know the status of your order or package.

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How can we sell at such low discounted prices? We are a Native American owned business located on the Seneca Nation (a Sovereign Nation) in Western New York. Because we are a Native American enterprise in New York State, and all transactions are consummated on the Allegany Indian Reservation, we do not have to pay sales tax. Even if you live in the state of California and you wish to order from us, you will not be charged a New York State sales tax or your states.

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What if I don't see my type of cigarette or cigar? Allofoubutts.com is constantly updating our inventory. In the event that you don't see something that you want please call or email us. In most cases, if we don't have the item in stock, we can order it for you. We have an extensive network of suppliers and vendors and we can usually get what you want very quickly. Some products may take a little longer to obtain due to manufacturer's delivery to a wholesaler and also product demand. In the event that we cannot get your product, we will do our best to find another supplier to see if we can obtain a product; if we're unable to get it, we will see when it will be available to us. Please remember that allot depends on the manufacturer's current supply and when and where they distribute their products to the wholesalers. Your satisfaction is our main concern, and we'll do our best to get your orders filled as quickly as possible.

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How do I pay for my tobacco order? We accept checks over the phone by Electronic Check Transfer, online E-Checks and money orders through the mail. We do not accept check through the US Mail, just money orders at this time. If you would like to use money order through the mail, you can place an order online and select the Money Order option, or call us and we can help you complete your order. Please make sure that all Money Orders are made payable to: Allofourbutts.Com.

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How can I place my order? There a couple of different ways to order. You are welcome to shop on this website, Allofourbutts.com, 365 days of the year. We are open from 9 AM – 5:30 PM Monday thru Friday and 9 AM – 4 PM on Saturday. We are closed on Sundays. We can take your order by phone by calling our toll free number 1-800-337-2043. When


9/16/2010http://allofourbutts.com/?page=shop/help&ps_session=23b6cbd1eb43284cc209...

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you create an account online, our online system will remember you when you return and when you log in. We are closed for some holidays (We will put a note on the front page of early closings or when we will not be open.)

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Why are shipping charges high? We can only use USPS Priority Mail to ship our orders. To do so, we have purchased a Delivery Confirmation with Signature Required. This ensures that you receive the package, and if it is ever lost/stolen/damaged, we can recover it and reship your order if needed. USPS Priority mail goes by weight of package, so it does increase slightly as the amount you order goes up, but it works out better per carton for shipping.

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Can I use my credit or debit card? We do not accept credit cards at this time. We are hoping to regain this soon, but at this time, we cannot accept any type of credit card or bank debit cards.

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Why are first-time customer's orders held? The first orders for customers, regardless of size, quantity or amount, are held for your protection and ours. There is alot of fraud attempts on the internet today, so in order to curb these attempts and to protect you and us, we have instituted this rule. There are NO exceptions to this rule. Fraud is a serious offense, if you are attempting to use a stolen or unauthorized check or other bogus activity, don't do it here. If you have any further questions about this, please feel free to contact us.

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How fresh are your tobacco products? Because we do such a high volume of sales we receive new stock daily. We guarantee that the products we sell are the freshest available. If you receive a product that is not fresh please let us know and we will promptly replace it.

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What if I have a problem with my order? In the event that you have a problem with your order, please email us immediately at [email protected] or call us Toll Free Monday-Friday 9:00-5:30 ET at 1.800.337.2043. All shortages must be reported within 24hrs of delivery. Please keep all packaging material in case you need to return any product back to us. If you receive an incorrect item due to a mistake on our part, please call or email us immediately and we will gladly replace the wrong item with the correct item and ship the correct order back to you at our cost. If there was a mistake on your part you can ship the incorrect merchandise back to us at your expense. If you decide that after you receive your order you do not want an item(s) just return the "unopened" carton(s) back to us and we will refund your money. Shipping fees cannot be refunded. Refunds take up to 10 business days to process. All returns must be made within 7 days of receiving your purchase.

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Will I be charged taxes? We are a Native American owned business located on the Seneca Nation (a Sovereign Nation) in Western New York. Because we are a Native American enterprise in New York State, and all transactions are consummated on the Allegany Indian Reservation, we do not collect sales tax. Nor do we report tax or customer information to any government agency or other entity. It is the responsibility of the Buyer to ascertain and comply with any laws in regard to the purchase and use of any cigarette products. In order to determine the applicable limits on purchases or taxing responsibilities, if any, imposed by your particular state, the consumer may want to contact their state authorities.

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Do you accept manufacture's coupons? Sorry, we are unable to accept manufacturer coupons at this time. Any coupons sent to us will not be returned.

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What is your Privacy Policy? At Allofourbutts.com, we are committed to protecting your privacy. We consider the information obtained from our consumers and from other visitors to this site to be confidential; no information is ever given to anyone for any reason. We use the information we collect about you to process orders and to provide a more personalized shopping experience. We will not collect any personal information about you except when you specifically and knowingly provide it. Access to such information is limited to only those employees and representatives of Allofourbutts.com who need to use it in the course of their assigned responsibilities.

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What is your User Account Policy? In order to assure proper use of Customer Service and smooth processing, we may need to contact customers regarding their orders. Therefore we require that customers provide and maintain current phone numbers and email addresses within their account for as long as the account remains in use and orders are placed. We do not use this information for any other reason than the issue that may be at hand and we will never sell or share this information with another party. Orders that are placed with incorrect contact information or placed with user accounts that contain incorrect contact info will be canceled immediately, as will the corresponding account.

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What are your Terms of Use for your web site? Using our website constitutes agreement to our Web Site Terms and any breach of said Web Site Terms can result in refusal of service and in extreme cases criminal prosecution. We reserve the right to refuse service to anyone for any reason. You agree to hold Allofourbutts.com harmless from any damages that may arise form the use of our website. You also acknowledge that our tobacco products are for your personal use only and not intended for commercial resale.

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How old do I have to be to place and order? You must be at least 18 years of age or older or of legal age within your state to order tobacco products from All of Our Butts. By accepting these terms and conditions you are indicating you are of legal age to purchase cigarettes. To misrepresent your age is a felony charge. Those found falsifying their age may be prosecuted by the law.

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What is your Return Policy? We want you to be totally satisfied with anything that you order from us. Inspect your purchase immediately upon receipt. If you are not satisfied with the condition of the products, or the products are faulty or incorrect, please let us know immediately and we will give you return instructions. Then, return the unused and unopened merchandise within 7 days of receipt and we will exchange the merchandise or refund your money. The customer will be responsible for arranging return transportation, and postage costs; we will pay the shipping cost in the event that the error or damaged product was our fault when we ship the corrected items back to you.

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© Copyright 2010 AllOfOurButts.Com, All Rights Reserved. [Web Site Usage Terms] [Our Privacy Policy and Security Information.]

Web site development and design by J.T.Stokkeland and Sauen.Com. Surgeon General’s Warning: Cigarette Smoke Contains Carbon Monoxide.



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Dear Valued Customer: We are now able to accept orders by phone only. Note: Shipping times to the West Coast are taking longer due to high volume . Please plan accordingly and order early. Please call:

CigarettesAmerica.com: 888-388-1964

CigaretteSavers.com: 800-383-8852 Please check back regularly for updates. Thank you for your support! Sincerely, CigarettesAmerica.com and CigaretteSavers.com

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To place orders or get more information please call us toll free at: 1-800-536-7014. Our discounted cigs products will be delivered to you via USPS from the sovereign Seneca Nation of Indians Reservation. Personal Check or Money Order. Elliott Enterprise requires age verification via government issued id along with first order.

Click Product for details:

10 Pack Sampler $22.20

A One $23.70

American Club $8.00

American Club Tobacco $8.00

American Spirit $25.00

ARIVA Dissolvable Tobacco $11.50

Backwoods $31.00

Basic $44.40 Beechnut $38.00

Benson & Hedges $56.50

Berkley $22.20

Between The Act $20.00

BISHOP $23.80 Bronco $28.00 Buffalo $22.20 Buglar $23.00 Bugler $6.00 Calon $22.20 Camel $45.10 Capri $59.10

Captain Black $20.00

Carlton $59.40 Carnival $23.00 Carter Hall $21.00

Chesterfield $56.20

Cheyenne $20.00

Copenhagen 5 ct $18.00

Copenhagen 5ct $18.00

Cougar 5 ct $17.00

Cougar 5ct $17.00

Elliott EnterpriseToll Free: 1-800-536-7014

Fax: 716-945-3575

Please make checks out to: Elliott EnterpriseElliot Enterprise has merged with deerpath to bring you

outstanding savings for your tobacco products. You can now also find us at eecigs.com

Elliott Enterprise

38 Main Street - PO Box 21 Salamanca, NY 14779

All Prices subject to change without notice.

Please phone ahead for accurate order total with shipping charges.Best Prices, Service and Selection!!

All orders delivered by United States Priority Mail.

All orders received will ship within 2 business days except for out of stocks.

Thank You. Elliott Enterprise

Store Hours Monday thru Friday 9-6 Saturday 10-4

You must be 18 years of age or older to order tobacco products. Some popular value brands: Niagara, Seneca, Smoking Joe, Native, GT One, Bronco

Please call to verify current shipping cost for your order. Due to increasing costs from the Manufacturers', we are forced to raise prices immediately. Dare to compare...Elliott Enterprise still remains the best source for all your discounted cigs tobacco. Great service and unbeatable PRICES!!! Delivered fast, fresh and confidential...you've tried the rest but now order from the best!! We do not report sales, names or personal information!!! Give us a call for unbelievable savings!! You'll love the savings! $$$$ 1-800-536-7014 $$$$$$

Page 1 of 4discounted cigs TOBACCO PRODUCTS, RESERVATION CIGS, INDIAN RESERVA...

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Welcome to Tribal Discounts, your online one stop shop for your favorite tobacco products! Due to the PACT ACT Volume and status, Tribal Discounts is temporarily requiring customers to phone in all orders. We apologize for the problems and thank you for your patience. You can reach Tribal Discounts toll free at 1-888-889-9232. PACT ACT UPDATE 6/28/10: Injunction granted from PACT ACT!! We'll keep our customers informed on the latest information as we get it! We carry 100% American made tobacco from the top brands, delivered fresh to your door within 5-7 days of first time customers, and 3-5 days for continuous customers. Why wait 21 days to get harsh tobacco from Switzerland/EU/Israel? Duty free tobacco is more susceptible to search and seizure, and has to clear customs. Our tobacco is made, shipped, and delivered in the US, so there's no delay, no unauthorized mail, and there's no reporting! "Duty Free Cigarettes means that Duty tax is not charged for buying and importing up to 200 cigarettes per 21 days for Europe, or 1,200 cigarettes per 21 days for USA. Each carton of Duty Free Cigarettes is shipped separately to you. So. if you order 5 cartons, your order will be shipped to you in 5 separate packages, all sent at a few days interval and thus they will not arrive simultaneously and you will normally have a few days separating the arrival of your cigarettes." Sounds great if you plan ahead, but what about when you're running low? Do you really want to run to the convenience store and pay that hefty $60+ price tag for just one carton? Or what if you want more than just 5 cartons? Then Tribal Discounts can deliver from great customer service, help, shipping and more. Have you received a large tax bill from ordering cigarettes online? That doesn't happen withTribal Discounts. We're 100% native owned located on the Seneca Nation of Indians reservation, which means that you WON'T get a large tax bill stating that you owe anything. Try Tribal Discounts today, using check, money order, echeck, or even American Express. Call us Monday-Friday 9:00 a.m.-5:00 p.m. EST for any further questions!

1-888-889-9232

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Smoke-It-Up.Com

About Us

Home Premium Cigars Cheap Cigars Little Cigars

Loose Tobacco Cigarettes

Crafts Contact Us Shipping

About Us

Thank you for your interest in Smoke-It-Up.com We are wholly owned and operated on Seneca Nation Sovereign Territory.

we are located approximately 20 miles south of Buffalo, New York.

Enter your starting address:

Street Address:

City:

State:

ZIP Code:

Sovereign means:1. We DO NOT report our sales to anyone! 2. Complete confidentiality. 3. No surprise tax bill in the mail. 4. The best prices for discount cigarettes online.

Our Company

We commenced operations in May of 1999. Since our inception, our company has taken

great pride in providing our customers with the best prices online, and the finest service and

confidentiality.

We look forward to servicing your needs and are always available to answer your

questions or concerns.

[email protected]

We accept checks, money orders, and all major credit cards only:

NASS Enterprises

551 Milestrip Road Irving, NY 14081

Page 1 of 1About Us

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CERTIFICATE OF SERVICE

I certify that on this 28th day of September, 2010, I caused the foregoing

Opening Brief For Appellants/Cross-Appellees to be filed with the Court in hard

copy and through the Court’s CM/ECF system. Counsel of record are registered

ECF users.

/s/ Michael P. Abate Michael P. Abate


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