Constitutional Law—Personal Jurisdiction—A State’s Ability to Exercise Jurisdiction Over a Foreign Manufacturer

by Karissa Hazzard

In 1999 a Florida-based entrepreneur, Basil Battah, founded FTS Distributors (“FTS”) and began importing cigarettes. FTS purchased NV Sumatra Tobacco Trading Company’s United brand “American Blend” cigarettes from a company located in California. NV Sumatra Tobacco Trading Company, the defendant, is an Indonesian-based manufacturer. Prior to FTS acquiring the cigarettes, the defendant had obtained United States trademarks for the United brand. After successfully advertising and selling all of his inventory, Mr. Battah wanted to purchase more cigarettes from the defendant and secure the exclusive United States sales and distribution rights. The defendant, however, had existing exclusive distribution agreements for its United brand cigarettes with other international distributors and directed Mr. Battah to contact the proper agent from the distributors. After purchasing more inventory from the independent distributors, Mr. Battah began taking the necessary steps to comply with the regulations of the tobacco industry and continued to advertise the product.

Although the defendant had already acquired United States trademarks for its brand, Mr. Battah and his attorney were responsible for ensuring compliance with the Federal Trade Commission (“FTC”) and filing the required information regarding the cigarettes’ ingredients with the Department of Health and Human Services. Mr. Battah’s attorney also sent him a letter reminding him to comply with all state and local laws, including any state tobacco escrow laws that might be in force under the Master Settlement Agreement (“MSA”) entered into by certain states and tobacco companies after the nationwide settlement of litigation with the companies in the late 1990s. This litigation concerned the responsibility of tobacco companies for the costs associated with tobacco-related health conditions in the United States.

The MSA had separated the tobacco companies into three categories: the Original Participating Manufacturers (“OPAs”), the Subsequent Participating Manufacturers (“SPMs”), and the Non-Participating Manufacturers (“NPMs”). The states agreed to dismiss their pending suits, releasing all past and future claims against the OPAs and SPMs in exchange for regulatory concessions and substantial monetary payments. The NPMs, however, did not have any financial obligations under the MSA and could enter the cigarette market, undercutting participating members’ prices without any ramifications under the MSA. The MSA allowed the participating members to reduce their annual financial obligation if they lost any market share to the NPMs. The MSA also provided for states to establish qualifying statutes to mitigate the impact of NPMs on the payments received from the participating members. Tennessee was one of the states to approve the MSA and established the “Tennessee Tobacco Manufacturers’ Escrow Fund Act of 1999” to mitigate any monetary losses due to the NPMs. This act required any tobacco product manufacturer selling cigarettes to consumers in Tennessee after May 16, 1999, to either become a participating manufacturer by joining the MSA or begin making payments to a “qualified escrow fund.”

In July 2001, one of the distributor’s agents forwarded a facsimile from the defendant to Mr. Battah acknowledging that because United cigarettes were being sold in multiple states subject to the Escrow Fund Act (including Tennessee), FTS needed to have its attorney investigate if escrow funds needed to be opened in these states. Previously, the United States Custom Service had also notified FTS that the United brand packing needed to be changed.

Mr. Battah requested a meeting with the defendant and its distributors to address the issues of the packaging and the escrow funds, hoping to resolve the issues quickly because he was nearly out of inventory. During the meeting, which was held in China, Mr. Battah presented both of the issues and concluded that the best course of action would be to change the packaging and open an escrow fund in each of the states. In early 2002, an agent of the defendant called Mr. Battah and informed him it would not be changing its packaging nor opening any state escrow funds because it had decided to no longer serve the United States market. Shortly after the call, Mr. Battah sold the rest of his inventory and founded his own cigarette manufacturing company.

On June 5, 2003, the State of Tennessee filed suit against the defendant for not depositing funds in a required escrow account for sales between 2000 and 2002. The total sales were estimated at 11,592,800 cigarettes. Based upon these estimates, the State alleged that the defendant owed $168,316.83 into escrow and was thus subject to penalties up to three hundred percent of unpaid escrow amounts as well as the State’s costs and attorney’s fees.

In October 2004, the defendant moved to dismiss for lack of personal jurisdiction. The trial court denied the motion and commenced discovery. On cross-motions for summary judgment, the trial court ruled in favor of the defendant, finding no basis for person jurisdiction because the defendant had done nothing to purposefully direct its products to Tennessee; instead, it had merely placed them into the stream of commerce. The Tennessee Court of Appeals reversed, holding that the desire to target all fifty states for distribution supported a finding of minimum contacts and that the stream of commerce theory authorized jurisdiction over foreign manufacturers who derive benefits from the distribution and sale of products throughout the United States. On appeal to the Tennessee Supreme Court, held, reversed. A foreign manufacturer cannot have reasonable expectations of being brought to court in a state where it did not purposefully avail itself of that state. The necessary minimum contacts are not established by simply placing a product into the stream of commerce, nor are they established by the manufacturer’s distributors targeting only the United States market as a whole (rather than targeting specific states). State v. NV Sumatra Tobacco Trading Co., 403 S.W.3d 726 (Tenn. 2013).

 

To read the full text please visit our Subscriptions page or one of the links below:

99b7a752_WestlawNext_logo            lexis