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City of New York v. Golden Feather Smoke Shop

August 25, 2009

THE CITY OF NEW YORK, PLAINTIFF,
v.
GOLDEN FEATHER SMOKE SHOP, INC., KIMO SMOKE SHOP, INC., SMOKE AND ROLLS INC., SHAWN MORRISON, KIANA MORRISON, IN HER INDIVIDUAL CAPACITY, MONIQUE'S SMOKE SHOP, ERNESTINE WATKINS, IN HER INDIVIDUAL CAPACITY, JESSEY WATKINS, WAYNE HARRIS, PEACE PIPE SMOKE SHOP, RODNEY MORRISON, SR., CHARLOTTE MORRISON, IN HER INDIVIDUAL CAPACITY, RED DOT & FEATHERS SMOKE SHOP, INC., RAYMOND HART, IN HIS INDIVIDUAL CAPACITY, SMOKING ARROW SMOKE SHOP, DENISE PASCHALL, IN HER INDIVIDUAL CAPACITY, TONY D. PHILLIPS, TDM DISCOUNT CIGARETTES, AND THOMASINA MACK, IN HER INDIVIDUAL CAPACITY, DEFENDANTS.



The opinion of the court was delivered by: Amon, United States District Judge

FINDINGS OF FACT CONCLUSIONS OF LAW

TABLE OF CONTENTS

I. Introduction ............................................................................................................................. 3

II. Procedural History ................................................................................................................... 4

III. Motion for Reconsideration ................................................................................................. 6

IV. Background and Findings of Fact ........................................................................................ 9

A. New York State's Cigarette Tax Scheme ............................................................................ 9

1. Taxation of Indian Cigarette Sales ................................................................................... 9

2. The Cost of Cigarettes .................................................................................................... 10

a. Legal Framework ........................................................................................................ 10

b. Historical Minimum CMSA Prices ............................................................................ 12

B. Poospatuck Smoke Shops .................................................................................................. 13

1. Mari A. ........................................................................................................................... 14

2. Ahman Aldabeshes ......................................................................................................... 16 1

C. Specific Defendants ........................................................................................................... 17

1. Monique's Smoke Shop ................................................................................................. 17

a. Background ................................................................................................................. 17

b. Bulk Sales of Unstamped Cigarettes .......................................................................... 18

c. Continuing Sales of Unstamped Cigarettes ................................................................ 19

d. Continuing Sales at Prices Below CMSA Minimum ................................................. 20

2. Peace Pipe Smoke Shop ................................................................................................. 21

a. Background ................................................................................................................. 21

b. Bulk Sales of Unstamped Cigarettes .......................................................................... 21

c. Continuing Sales of Unstamped Cigarettes ................................................................ 24

d. Continuing Sales at Prices Below CMSA Minimum ................................................. 24

3. Red Dot and Feather Smoke Shop ................................................................................. 25

a. Background ................................................................................................................. 25

b. Bulk Sales of Unstamped Cigarettes .......................................................................... 26

c. Continuing Sales of Unstamped Cigarettes ................................................................ 28

d. Continuing Sales at Prices Below CMSA Minimum ................................................. 29

4. Smoking Arrow Smoke Shop ......................................................................................... 29

a. Background ................................................................................................................. 29

b. Bulk Sales of Unstamped Cigarettes .......................................................................... 30

c. Continuing Sales of Unstamped Cigarettes ................................................................ 33

d. Continuing Sales at Prices Below CMSA Minimum ................................................. 34

5. TDM Discount Cigarettes .............................................................................................. 34

a. Background ................................................................................................................. 34

b. Bulk Sales of Unstamped Cigarettes .......................................................................... 35

c. Continuing Sales of Unstamped Cigarettes ................................................................ 37

d. Continuing Sales at Prices Below CMSA Minimum ................................................. 39

D. Injury to the City ................................................................................................................ 39

E. Irreparable Harm ................................................................................................................ 41

1. New York City's Tobacco Control Program .................................................................. 42

2. Dr. Frieden's Study ........................................................................................................ 42

3. Relationship Between Cigarette Cost and Consumption ............................................... 43

4. Relationship Between Cost of Cigarettes and Smoking Cessation ................................ 44

V. Motion for Preliminary Injunction: Conclusions of Law ..................................................... 45

A. Standard of Review ............................................................................................................ 45

B. Likelihood of Success on the Merits .................................................................................. 47

1. The CCTA ...................................................................................................................... 47

a. Applicable Tax ........................................................................................................... 47

b. Defendants' Violation of the CCTA ........................................................................... 61

2. The CMSA ..................................................................................................................... 64

a. Applicable Tax ........................................................................................................... 64

b. Standing under the CMSA .......................................................................................... 64

c. Defendants' Violation of the CMSA .......................................................................... 66

C. Additional Required Showing ............................................................................................ 66

1. Irreparable Harm ............................................................................................................ 66

a. Not Required to be Shown.......................................................................................... 66

b. Irreparable Harm in any event Established ................................................................. 72

2. Violations Will Likely Be Repeated .............................................................................. 73

VI. Defendants' Application for a Stay Pending Appeal ......................................................... 75

VII. Conclusion and Preliminary Injunction ............................................................................. 76

I. Introduction

The City of New York brought this action against the above-captioned defendants, seeking injunctive relief, penalties and damages under the Contraband Cigarette Trafficking Act, 18 U.S.C. § 2341 et seq. (the "CCTA"), and the Cigarette Marketing Standards Act, N.Y. TAX L. § 483 et seq. (the "CMSA"). Defendants are individuals and businesses engaged in the sale of cigarettes from the Poospatuck Indian Reservation in Mastic, New York (the "Poospatuck Reservation" or the "Reservation"). The City seeks a preliminary injunction pursuant to Rule 65(a) of the Federal Rules of Civil Procedure, enjoining certain defendants from selling untaxed cigarettes to nonmembers of the Unkechauge Indian Nation (the "Unkechauge Nation" or the "Tribe").*fn1 Certain defendants have moved for reconsideration of this Court's March 16, 2009 order denying their motion to dismiss for lack of subject matter jurisdiction. For the reasons set forth below, defendants' motion for reconsideration is denied. The City's motion for a preliminary injunction is granted. The preliminary injunction is stayed for thirty days to permit defendants to file a Notice of Appeal and to request a further stay from the Court of Appeals.

II. Procedural History

The City commenced this action against the above-captioned defendants on September 29, 2008 and moved for a preliminary injunction against all defendants on October 28, 2008. By motion dated November 24, 2008, defendants Monique's Smoke Shop, Ernestine Watkins, Wayne Harris, Red Dot & Feather Smoke Shop, Inc., Raymond Hart, Smoking Arrow Smoke Shop, Denise Paschall, TDM Discount Cigarettes, Thomasina Mack, Kimo Smoke Shop, Golden Feather Smoke Shop, Smoke and Rolls, and Kiana Morrison (the "Moving Defendants") moved to dismiss all claims against them pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction on the grounds of Tribal sovereign immunity.

On March 16, 2009, this Court issued an order denying the Moving Defendants' motion to dismiss, finding that defendants could not assert the defense of sovereign immunity because they are private businesses, not arms of the Tribe.*fn2 See City of New York v. Golden Feather Smoke Shop, No. 08-CV-3966, 2009 WL 705815, at *7 (E.D.N.Y. Mar. 16, 2009). The Court further concluded that the CCTA exemption for "Indian[s] in Indian country," 18 U.S.C. § 2346(b)(1), is not a bar to the City's CCTA claims. Id. at *12. Although the Court reiterates some aspects of its prior order here for the sake of context, familiarity with this Court's March 16, 2009 order is assumed.

On or about May 14, 2009, defendants Golden Feather Smoke Shop, Inc., Kimo Smoke Shop, Inc., Shawn Morrison, and Kiana Morrison agreed to a consent injunction, which this Court entered on May 21, 2009. (DE # 138.) Pursuant to the consent injunction, these defendants were "enjoined from purchasing, receiving, possessing, distributing and selling unstamped cigarettes." (Id.) Separately, the City agreed not to seek injunctive relief against defendant Smoke and Rolls, Inc. because Smoke and Rolls is not currently operational. (See Tr. of Oral Argument, July 30, 2009, at 3.) Defendants Tony D. Phillips and Jessey Watkins are currently in default. By motion dated March 30, 2009, the City moved for default judgments against Phillips and Watkins. This motion is currently before the Court. Watkins has since made an informal application to set aside the entry of default against him.

The Court held a four day hearing on the City's motion for a preliminary injunction. Defendants Monique's Smoke Shop, Ernestine Watkins, Wayne Harris, Peace Pipe Smoke Shop, Rodney Morrison, Sr., Charlotte Morrison, Red Dot & Feather Smoke Shop, Inc., Raymond Hart, Smoking Arrow Smoke Shop, Inc., Denise Paschall, TDM Discount Cigarettes, and Thomasina Mack participated in the hearing. Both the City and defendants presented evidence.

By motion dated July 15, 2009, defendants Monique's Smoke Shop, Ernestine Watkins, Wayne Harris, Red Dot & Feather Smoke Shop, Inc., Raymond Hart, Smoking Arrow Smoke Shop, Inc., Denise Paschall, TDM Discount Cigarettes, and Thomasina Mack moved for reconsideration of this Court's March 16, 2009 order denying their motion to dismiss this case for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure. The Court first addresses this reconsideration motion.

III. Motion for Reconsideration

The defendants challenge this Court's determination that defendants cannot assert the defense of tribal sovereign immunity because they are privately owned businesses, and not "arms of the tribe." See Golden Feather, 2009 WL 705815, at *7. They further challenge this Court's conclusion that the CCTA exemption for "Indian[s] in Indian country" is not a bar to the City's CCTA claim. See id. at *12.

The decision whether to grant or deny a motion for reconsideration falls within the discretion of the district court. See Devlin v. Transp. Commc'ns Int'l Union, 175 F.3d 121, 132 (2d Cir. 1999). "The standard for granting such a motion is strict, and reconsideration will generally be denied unless the moving party can point to controlling decisions or data that the court overlooked-matters, in other words, that might reasonably be expected to alter the conclusion reached by the court." Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995). A motion for reconsideration may be granted based upon "an intervening change of controlling law, the availability of new evidence, the need to correct a clear error, or to prevent manifest injustice." T.Z. v. City of New York, No. 05-CV-5111, 2009 WL 1794702, at *3 (citing Doe v. New York City Dept. of Social Servs., 709 F.2d 782, 789 (2d Cir. 1983)). A motion for reconsideration, however, "is neither an occasion for repeating old arguments previously rejected nor an opportunity for making new arguments that could have been previously advanced." Associated Press v. U.S. Dep't of Def., 395 F. Supp. 2d 17, 19 (S.D.N.Y. 2005) (internal citations omitted); see also E.E.O.C. v. Fed. Express Corp., 268 F. Supp. 2d 192, 195 (E.D.N.Y. 2003) (stating that a party seeking reconsideration "must demonstrate that the Court overlooked controlling decisions or factual matters that were put before it on the underlying motion" (internal quotation marks omitted)).

Defendants do not point to any intervening change of controlling law. Defendants argue unsuccessfully that the New York State Appellate Division's decision in Cayuga Indian Nation of New York v. Gould, ___ N.Y.S.2d ____, 2009 WL 1981848 (N.Y. App. Div. July 10, 2009), constitutes a change in substantive law with respect to the issue of whether defendants are Indians in Indian country. Cayuga, however, is a state case, and did not involve application of the federal CCTA. The Appellate Division's determination that the definition of "qualified reservation" under New York tax law should reflect existing federal common law at the time the legislation was passed has no relevance to the definition of "Indian country" under the CCTA.

Nor do defendants present any evidence that the Court has overlooked, which might reasonably be expected to alter this Court's decision. Although defendants assert that the Tribe has increasingly exerted more control over the defendant smoke shops during the pendency of this litigation, this evidence does not in any way undermine this Court's conclusion that the shops are subject to regulation by Tribal government, but not extensions of the Tribe itself.

Defendants' principal complaint is that in determining that the defendant businesses are not arms of the Tribe, the Court has overlooked the unique cultural history of the Unkechauge Nation. In support of this argument, defendants present the affidavit of history professor John A. Strong, which briefly traces the development of business activity among members of the Unkechauge Nation since the Seventeenth Century. (See Affidavit of John A. Strong, July 15, 2009 ("Strong Aff.") and additional affidavit of Gilbert Davis, a member and officer of the Unkechauge Tribal Council, Apr. 3, 2009.) As an initial matter, the Court notes that it is difficult to understand the claim that the Court "overlooked" this information since it was not presented to the Court until the motion for reconsideration. There is no indication that this evidence was unavailable to defendants on the underlying motion. This deficiency alone is sufficient grounds for denying defendants' motion. In any event, the history presented by defendants does not undermine the fact that the Tribe has allowed its members to operate businesses constrained only by certain regulation by Tribal authorities. Compare Strong Aff. ¶ 6 (explaining that traditional law was codified into "a system of regulation and community participation" including licensing procedures and the requirement of Tribal referendum to authorize business activity); with Golden Feather, 2009 WL 705815, at *7 ("[D]efendants' relationship with the Tribe appears to be no different from that of the State and State-licensed businesses: the Tribe issues licenses to the businesses, collects taxes and fees, and promulgates regulations governing their activity."). As the Court concluded in its March 16, 2009 order, "[d]efendants' activities are not properly considered those of the Tribe itself, but are instead those of separate business entities, which confer incidental benefits on the Tribe in exchange for the right to operate on Reservation land." Golden Feather, 2009 WL 705815, at *7; compare Strong Aff. ¶ 7 ("In order to meet the challenges of reservation enterprises which bring important economic resources into the reservation community, the Tribal Council has introduced as system which includes licensing, regulation, and a requirement which distributes a percentage of tobacco profits to benefit the reservation as a whole."). Nor is the Court persuaded to alter its conclusion by the belated and conclusory assertions contained in the post-decision affidavit of Gilbert Davis. In fact, the Court's decision on this issue was further reinforced by the testimony introduced at the hearing, which confirmed that the defendant smoke shops are owned and controlled by individuals, for private benefit, even if they are subject to regulation by and pay fees to the Tribe. (See, e.g., Ex. 95 at 14:1-15:19 (Mack testifying that she is the sole owner of TDM Discount Cigarettes); Ex. 94 at 14:23-15:1 (Paschall testifying that she is the owner of Smoking Arrow Smokes, although her daughter runs the store); Ex. 92 at 10:4-5 (Jessey Watkins testifying that Anitra Monique Watkins is the owner of Monique's Smoke Shop); Ex. 93 at 6:3-4, 12:15-17, 20:4-6 (Hart testifying that he is the owner of Red Dot Smokes and that nobody other than Hart and his employees receives payments from the money made at the store); see also Ex. 89 ¶¶ 1, 4 (stipulating that Peace Pipe is a sole proprietorship owned by defendant Charlotte Morrison).)

Accordingly, defendants' motion for reconsideration is denied.

IV. Background and Findings of Fact

A. New York State's Cigarette Tax Scheme

1. Taxation of Indian Cigarette Sales

Article 20 of the New York Tax Law imposes a tax on all cigarettes possessed for sale or use in New York State, except for those cigarettes that New York is "without power" to tax. See N.Y. TAX L. § 471 ("There is hereby imposed and shall be paid a tax on all cigarettes possessed in the state by any person for sale, except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax . . . ."); Dep't of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61, 64, 114 S.Ct. 2028, 2031 (1994) ("Milhelm Attea & Bros.") (citing N.Y. TAX L. § 471(1)). Under New York law, cigarette taxes are normally pre-paid by State-licensed "stamping agents," usually wholesale cigarette dealers, who purchase tax stamps from the State and affix them to cigarette packages as evidence of payment. The tax burden is built into the cost of the cigarettes and passed along the distribution chain to each subsequent purchaser, ultimately falling on the consumer. See N.Y. TAX L. § 471(2); New York Assoc. of Convenience Stores v. Urbach, 699 N.E.2d 904, 906 (N.Y. 1988).

The purpose of this system is to prevent the widespread evasion of New York cigarette taxes. See Milhelm Attea & Bros., 512 U.S. at 75, 114 S.Ct. at 2036.

Federal and state governments lack authority to tax cigarettes sold to members of Native American tribes for their own consumption. Thus, cigarettes to be consumed on the reservation by enrolled tribal members are tax-exempt and need not bear stamps ("unstamped cigarettes"). Milhelm Attea & Bros., 512 U.S. at 64, 114 S.Ct. at 2031 (citing Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 475-81, 96 S.Ct. 1634, 1642-45 (1976)). "On-reservation cigarette sales to persons other than reservation Indians, however, are legitimately subject to state taxation." Id. (citing Washington v. Confederated Tribes of Colville Reservation, 447 U.S. 134, 160-61, 100 S.Ct. 2069, 2084-85 (1980)). This Court has held that § 471 constitutes an "applicable" tax for the purposes of the CCTA and may serve as the basis for claims under both the CCTA and the CMSA. See Golden Feather, 2009 WL 705815, at *1; City of New York v. Milhelm Attea & Bros., Inc., 550 F. Supp. 2d 332, 346-49 (E.D.N.Y. 2008) ("Milhelm Attea").

2. The Cost of Cigarettes

a. Legal Framework

New York's cigarette tax is incorporated into a set of minimum price requirements for the sale of cigarettes within the state. The CMSA, N.Y. TAX L. §§ 483-89, "prohibits the sale of cigarettes below cost when the seller intends thereby to harm competition or evade taxes." Lorillard Tobacco Co. v. Roth, 786 N.E.2d 7, 8 (N.Y. 2003). The statute makes it unlawful for any agent, wholesale dealer or retail dealer, with intent to injure competitors or destroy or substantially lessen competition, or with intent to avoid the collection or paying over of such taxes as may be required by law, to advertise, offer to sell, or sell cigarettes at less than the cost of such agent wholesale dealer or retail dealer, as the case may be.

N.Y. TAX L. § 484(a)(1). "Cost" is defined to include several components, incorporating the added costs at each step in the supply chain. For the purposes of the present motion, the most significant cost requirement is the "cost of the retail dealer," which is the minimum price at which a retail dealer may sell cigarettes to a customer.

The baseline for cost calculations under the CMSA is the "basic cost of cigarettes." The statute defines the "basic cost of cigarettes" as "the invoice cost of cigarettes to the agent who purchases from the manufacturer . . . less all trade discounts, except discounts for cash, to which shall be added the full face value of any stamps which may be required by law." Id. § 483(a)(1). The statute defines the "cost of the retail dealer," in turn, as (1) the "basic cost of cigarettes," plus (2) "the cost of doing business by the retail dealer," plus (3) "the cost of doing business by the agent with respect to the sales of cigarettes to retail dealers." Id. § 483(b)(3)(A). Thus, the minimum price at which a retail dealer may sell cigarettes to a customer is the sum of the "basic cost of cigarettes" and two markups, one for each step in the supply chain.

Although this cost "consists of overhead and operational expenses theoretically unique to a given agent or dealer, . . . in practice [it is] determined using statutory default rates." Lorillard Tobacco, 786 N.E.2d at 9 n.2; see also Tr. 541:6-542:14. Under the CMSA, the "cost of doing business by the retail dealer" is "presumed to be seven per centum of the sum of the basic cost of cigarettes plus the cost of doing business by the agent with respect to the sales of cigarettes sold to retail dealers." N.Y. Tax L. § 483(b)(3)(B). The "cost of doing business by the agent" with respect to sales to retail dealers is presumed to be 3.875% of the "basic cost of cigarettes" plus twenty cents per carton. Id. § 483(b)(1)(B). These statutory markups have not changed since 1989. (Tr. 541:6-542:4.) The New York State Department of Taxation and Finance ("DTF") publishes a guide to this pricing framework, known as Publication 508, which lists the appropriate sale prices depending on the manufacturer's list price for a particular brand of cigarettes. (See Ex. 39.)

b. Historical Minimum CMSA Prices

Andrew DeFrancesco, Chief Financial Officer of Harold Levinson Associates ("HLA") (Tr. 254:15-23), testified regarding these minimum price requirements imposed by the CMSA. As a licensed stamping agent and dealer, HLA is bound to follow these requirements. (Tr. 258:16-19.) DeFrancesco testified consistently with the legal requirements of the CMSA. The Court finds his testimony to be credible and adequately supported by the governing legal framework and by documentary evidence in the record.

Specifically, DeFrancesco explained how to determine the minimum price at which a retail dealer is permitted to sell a carton of a particular brand of cigarettes to a consumer in New York State, under the legal framework described above. First, the retail dealer calculates the "basic cost of cigarettes" by adding the cost of applicable tax stamps to the list price supplied by the manufacturer for the particular brand. In December 2006, New York City and New York State each imposed a cigarette tax of $15 per carton, making the total cigarette tax $15 for each carton sold outside New York City or $30 for each carton sold within New York City. (Ex. 72A; Tr. 537:23-538:1.) On June 3, 2008, the New York State cigarette tax increased to $27.50 per carton. (Tr. 554:18-23.) To calculate the "cost of the retail dealer," the retail dealer would start with the "basic cost of cigarettes" and add the two statutory markups. Finally, the retail dealer would subtract any manufacturer's discount that may apply to the brand at that particular time.

For example, DeFrancesco explained that the minimum price at which a retail dealer was permitted to sell a carton of Newport cigarettes in December 2006 to a consumer in New York State, outside New York City, was $42.72. To arrive at this price, one would start with the manufacturer's list price of $28.64 and add the cost of New York State tax stamps ($15.00), which would yield the basic cost of $43.64. Adding the two statutory markups results in a retail minimum price per carton of $48.72. This minimum retail price is reflected in Publication 508. (Ex. 39 at 31.) From the minimum retail price listed in Publication 508, the retail dealer would subtract the Newport discount in effect in December 2006, which was $6.00 per carton. ...


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