R.J. Reynolds suit challenges tribes over cigarette fees

08/15/2014 3:29 PM

08/15/2014 3:40 PM

The R.J. Reynolds Tobacco Co. is taking on tribal cigarette manufacturers, in a fight that’s already included covert investigations, aerial surveillance and confidential informants.

With a lawsuit quietly filed Thursday in Washington, the North Carolina-based R.J. Reynolds and another firm challenge the Agriculture Department’s failure to collect Tobacco Trust Fund fees from two tribal cigarette manufacturers in particular. Money is at stake, and more.

“Certainly, it’s a matter of significant importance,” R.J. Reynolds spokesman David Howard said in an interview Friday. “The government has failed in its duty to diligently enforce the laws.”

If R.J. Reynolds and the Santa Fe Natural Tobacco Co. win their suit, they’ll get a refund from some of the trust fund payments they’ve made. Other cigarette manufacturers, too, could be empowered. Tribal sovereignty might be challenged, while the Agriculture Department would have to start taking account of the tribal companies’ market share.

While the lawsuit is against the Agriculture Department, it really zeroes in on cigarette production from two New York state tribal entities, the Onondaga Nation and T&D Enterprises.

“They fear competition,” Joe Heath, general counsel of the Onondaga Nation, said of the lawsuit in a telephone interview Friday. “Here, you have a multibillion-dollar corporation whining about an Indian nation that’s trying to serve its people.”

Congress created the Tobacco Trust Fund in 2004 as part of the so-called “tobacco buyout,” which was designed to phase out federal tobacco subsidies. Manufacturers and importers of tobacco products pay quarterly assessments, and the money goes for payments to producers and holders of the government-allocated “quotas” required for production.

The 10-year trust fund program was capped at $10.1 billion. It’s set to end this year.

Companies contribute to the trust fund based on their estimated share of the U.S. tobacco-product market. It’s up to the Agriculture Department to calculate the total market. A similar formula is used to determine payments to a Food and Drug Administration tobacco program.

The 53-page lawsuit contends that the Agriculture Department “underestimated gross domestic volume of cigarette production, causing the agency to overstate (R.J. Reynolds’) and Santa Fe’s respective market shares.”

The low-ball estimate, R.J. Reynolds argues, results from the Agriculture Department’s failure to account for “rogue cigarette manufacturers.” The company’s lawsuit cites the two tribal businesses in New York state.

The Onondaga Nation, near Syracuse, “manufactures approximately 1 million cartons of cigarettes per year,” the lawsuit claims. A separate tribal entity called T&D Enterprises “produces approximately 6.5 million cartons of cigarettes per year,” according to the suit. In both cases, the suit contends, a “substantial portion” of the cigarettes are sold to non-Native Americans.

Neither manufacturer contributes to the trust fund, though the law that set up the trust fund doesn’t exempt Native American manufacturers.

“It’s putting an unfair burden on tobacco manufacturers like us, who are playing by the rules,” Howard said.

Heath countered that the Onondaga Nation’s sales of its Eagles brand cigarette are “infinitesimal compared to RJR,” and said the tribe used the revenues for needed public services such as health programs and the fire department. Heath further said the tribe’s sovereign immunity posed a “very significant problem” to those seeking legal action on the trust fund issue.

The lawsuit notes that R.J. Reynolds hired a Virginia-based investigations firm called GlobalSource LLC to conduct a “rigorous” inquiry into unlicensed tobacco operations. The investigation included “on-the-ground and aerial surveillance, visiting retailers, conducting interviews and utilizing confidential sources,” the suit says.

Investigators counted cars to estimate workforce size, checked shipping manifests for information on equipment, videotaped customers and bought several cartons of cigarettes, among other techniques, the suit reports.

Neither the Onondaga Nation nor T&D Enterprises report their sales volumes or pay federal excise taxes, which the Agriculture Department uses to calculate what a company owes the trust fund, according to the suit.

Heath said the Onondaga Nation maintained that its sovereign immunity shielded it from owing the federal taxes. Other New York state tribes have come to a different legal conclusion, and do pay excise taxes.

The second-largest tobacco manufacturer in the United States, R.J. Reynolds overpaid the trust fund by about $376,000 for a six-month period last year and Santa Fe overpaid by about $22,000, according to the suit.

In an administrative proceeding, the Agriculture Department declined earlier this year to reduce the companies’ assessments. The Agriculture Department concluded, in part, that other federal agencies “must substantiate” the claims about tribal cigarette manufacturing before it takes action or adjusts a company’s trust fund assessments.

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