Philip Morris USA, Inc. v. Vilsack, No. 12-2498

Decided: November 20, 2013

The Fourth Circuit held that (1) there is no clear statement of Congressional intent in the Fair and Equitable Tobacco Reform Act (FETRA), 7 U.S.C. §§ 518 et seq., regarding the applicable excise tax rates to be used in determining the total national FETRA assessment paid by the collective manufacturers of each class of tobacco product, and that (2) the United States Department of Agriculture (USDA) permissibly interpreted FETRA by using only 2003 tax rates to determine this assessment allocation.  The Fourth Circuit therefore affirmed the United States District Court for the Eastern District of Virginia’s decision to grant the USDA’s motion for summary judgment.

FETRA created the Tobacco Trust Fund (the Fund), which funds “a temporary system of periodic payments to tobacco growers and other holders of tobacco quotas.”  The Fund is administered by the Commodity Credit Corporation (CCC), which is funded with CCC assets and assessments taken from manufacturers of tobacco products.  Under FETRA, the USDA—which administers the CCC—must annually determine the total funds that must be raised through the assessments (the initial allocations).  This determination involved two steps: determining the total national assessment to be paid by the collective manufacturers of each class of tobacco product (inter-class allocations)—including cigarettes and cigars—and determining the individual liability of each manufacturer.  FETRA provides that the assessment burden for each class—measured in percentages of the total nation assessment—must be adjusted “to reflect changes in the share of gross domestic volume” held by each class of tobacco product.  FETRA includes specific percentages of the initial allocations to be applied to the respective classes of tobacco products in fiscal year 2005, 7 U.S.C. § 518d(c)(1), and the USDA determined that, to calculate these allocations, Congress converted the applicable class volumes into dollars “by multiplying each class’s volume by the maximum excise tax rate applicable to that class.”  However, FETRA does not actually direct the USDA to use this method of calculating initial allocations.

Congress subsequently passed the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA), which increased excise taxes on each class of tobacco product and equalized the tax rates for small cigars and cigarettes.  The equalization resulted in a much larger relative increase in tax rates for cigars than cigarettes.  Because the USDA’s regulations implied that inter-class allocations would be determined with current tax rates, CHIPRA would have increased the liability of the cigar industry and decreased the liability of the cigarette industry.  However, the USDA subsequently promulgated a technical amendment to 7 C.F.R. § 1463.5, in which the USDA stated it would continue to apply 2003 tax rates—which Congress used to set the initial allocations for fiscal year 2005.

Philip Morris contented that, under the new calculation framework, it would experience higher assessments than it would have if the USDA had applied current tax rates.  After unsuccessfully appealing the assessment and pursuing rulemaking from the USDA, Philip Morris brought the present lawsuit, arguing that the technical amendment was inconsistent with FETRA.  The district court granted summary judgment to the USDA, finding that the USDA calculation method “faithfully adjust[s] the percentage of the total amount required to be assessed against each class of tobacco product” and “reasonably reflects the congressional intent underlying FETRA.”  Philip Morris appealed.

Applying the two-part test from Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, the Fourth Circuit first determined that Congress had not “directly spoken to the precise question at issue.”  The Fourth Circuit noted that FETRA does not direct the USDA to use any specific tax rate to calculate the inter-class allocations.  The Fourth Circuit also concluded that Philip Morris’s various arguments did not meet its burden of proving the USDA’s decision “contrary to the unambiguously expressed intent of Congress.”  The Fourth Circuit then determined that the USDA’s interpretation of FETRA was reasonable, given Congress’s intent in passing it.  The Fourth Circuit stated that “there is no evidence that Congress intended for FETRA to do anything more than provide a workable methodology for the allocation of assessments across manufactures of tobacco product,” and found that Philip Morris could not provide anything more than a plausible alternative reading of the applicable statutes.

 Full Opinion

– Stephen Sutherland

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