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Hegar v. Texas Small Tobacco Coalition

Court of Appeals of Texas, Third District, Austin

March 24, 2017

Glenn Hegar, in his official capacity as Texas Comptroller, and Ken Paxton, in his official capacity as Texas Attorney General, Appellants
v.
Texas Small Tobacco Coalition and Global Tobacco, Inc., Appellees

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT NO. D-1-GN-13-002414, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING

          Before Justices Puryear, Goodwin, and Field

          MEMORANDUM OPINION

          David Puryear, Justice

         Following remand from the Texas Supreme Court, we consider the remaining constitutional challenges to a tax statute made by appellees Texas Small Tobacco Coalition and Global Tobacco, Inc. ("Small Tobacco"). We reverse the trial court's order and render judgment granting summary judgment in favor of appellants Glenn Hegar, in his official capacity as Texas Comptroller, and Ken Paxton, in his official capacity as Texas Attorney General ("the State").[1]

         In the 1990s, the largest tobacco companies in the United States were sued by the states for wrongs such as fraud, racketeering, conspiracy, deceptive advertising, and antitrust violations.[2] In March 1997, one of the defendant manufacturers, Liggett Group, Inc., settled with Texas and a number of other states ("the Liggett Settlement"), agreeing to cooperate with the states in their suits against the remaining defendant manufacturers, Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., and Lorillard Tobacco Co. ("Big Tobacco"). Liggett agreed to provide relevant documents and information, including documents protected by attorney-client privilege and work-product protections, related to the health effects of tobacco use. Liggett also agreed to pay a $25 million initial payment and then to pay 25% of its pretax income each year, subject to adjustments related to market share.

         Once Liggett agreed to cooperate and to turn over industry documents, Big Tobacco settled the lawsuits pending against them. Forty-six states entered into a "Master Settlement Agreement" under which Big Tobacco agreed to make ongoing annual payments to the states and to comply with restrictions on marketing and sponsorship activity and other requirements largely related to advertising and not to object to or lobby against legislation intending to reduce tobacco use by minors. Texas did not enter into the Master Settlement Agreement, instead entering into its own settlement under which Big Tobacco agreed to pay $725 million and to "make annual payments in perpetuity, " which vary with the manufacturer's market share and sales ("the Texas Settlement"). In exchange for their settlements, Liggett and Big Tobacco were released from the states' claims to recover for public health expenses caused by the use of tobacco products.

         Some manufacturers other than Big Tobacco were also allowed to join the Master Settlement Agreement; those manufacturers are referred to as "subsequent participating manufacturers" ("SPMs"). See Tex. Health & Safety Code § 161.602(14), (15). SPMs agreed to the Master Settlement Agreement's advertising, lobbying, and activity restrictions and also agreed to make annual payments in exchange for a release of claims against them (those payments are not made to Texas). Global Tobacco, Inc. and Texas Small Tobacco Coalition's members are non-settling manufacturers, as none of those companies are parties to any of the settlement agreements.

         In 2013, the legislature enacted chapter 161, subchapter V, of the health and safety code, which taxes tobacco products manufactured by non-settling manufacturers. See id. §§ 161.601, .602(9), .603; see generally id. §§ 161.601-.614 (Subchapter V, "Fee on Cigarettes and Cigarette Tobacco Products Manufactured by Certain Companies"). Subchapter V also taxes products made by SPMs, but at a much lower rate than the products made by non-settling manufacturers. See id. §§ 161.602(11), (14), (15), .604(c).

         Small Tobacco sued, alleging that the tax imposed on its tobacco products under subchapter V was unconstitutional under Texas's Equal and Uniform Clause, see Tex. Const. art. VIII, §§ 1, 2, the federal Equal Protection Clause, see U.S. Const. amend. XIV, § 1, and the federal Due Process Clause, see id. amend. XIV, § 1. The State filed a plea to the jurisdiction, and Small Tobacco and the State filed competing motions for summary judgment. The trial court signed an order denying the State's plea to the jurisdiction and motion for summary judgment and granting Small Tobacco's motion for summary judgment, finding that subchapter V was unconstitutional. The State appealed, and we affirmed, determining that the tax violated Texas's Equal and Uniform Clause. Combs v. Texas Small Tobacco Coal., 440 S.W.3d 304, 313 (Tex. App.-Austin 2014), rev'd, Hegar v. Texas Small Tobacco Coal., 496 S.W.3d 778 (Tex. 2016).

         The State appealed to the Texas Supreme Court, which held that we had incorrectly focused on the identical nature of the products produced by settling and non-settling manufacturers rather than "the nature of the taxpayer[s]" affected by the tax. 496 S.W.3d at 786. The court determined that the classifications imposed by subchapter V, distinguishing between non-settling manufacturers and settling manufacturers, were rational and reasonably related to the tax and did not violate the Equal and Uniform Clause. Id. at 787. The court held that subchapter V was justified by "sufficient differences in business operations" between Small Tobacco and settling manufacturers, which make payments under the settlement agreements and operate under broader marketing and lobbying restrictions than are imposed on non-settling manufacturers under current legislation, and by the "legitimate purposes for the tax" articulated by the legislature-to recover healthcare costs related to the use of the non-settling manufacturers' products and to prevent non-settling manufacturers from undermining Texas's attempts to reduce underage smoking. Id. at 787-88. The supreme court reversed this Court's decision and remanded for consideration of Small Tobacco's remaining challenges under the federal Equal Protection and Due Process clauses. Id. at 793. In light of the supreme court's decision in Hegar, we reverse the trial court's order granting summary judgment for Small Tobacco and render judgment granting the State's motion for summary judgment.

         Federal Equal Protection

         On remand, Small Tobacco asserts that subchapter V is unconstitutional under the federal Equal Protection Clause because (1) the tax is unequal as between Small Tobacco and SPMs, none of which make settlement payments to Texas; (2) the settling manufacturers benefitted from "sweeping releases" from past and future tort liability, while Small Tobacco is taxed without receiving any such benefit; and (3) the tax does not distinguish between the different formulae used in the Texas and Liggett settlement agreements, resulting in all of the manufacturers who entered into those settlements receiving the same tax exemptions despite making different payments to Texas.[3] Small Tobacco contends that "[e]ach of these three arbitrary distinctions renders irrational the classifications between settling manufacturers, subsequent participating manufacturers, and Small Tobacco" and that subchapter V thus violates the federal Equal Protection Clause.

         The federal Equal Protection Clause provides that the State may not "deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws." U.S. Const. amend. XIV, § 1. However, the federal Equal Protection Clause "'simply keeps governmental decisionmakers from treating differently persons who are in all relevant respects alike, '" while Texas's Equal and Uniform clause "is more strict." In re Nestle, Inc., 387 S.W.3d 610, 624 (Tex. 2012) (quoting Nordlinger v. Hahn, 505 U.S. 1, 10 (1992)). Because the Texas Supreme Court has held that subchapter V does not violate the more stringent requirements of Texas's Equal and Uniform Clause, we need not address the federal equal-protection issue. See id.

         Further, Small Tobacco urges that in only "clarif[ying] the test under the Texas Equal and Uniform Clause, " the supreme court "chose not [to] consider" Small Tobacco's three arguments related to federal equal protection but rather remanded them for our consideration. However, as the State notes, our opinion and the supreme court's review was limited to Texas's Equal and Uniform Clause, the parties did not ask the supreme court to reach ...


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