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Federal Judge Loretta A. Preska of the U.S. District Court for the Southern District of New York may have been compelled by the Constitution on Friday when she enjoined enforcement of a state law banning the sale of cigarettes to consumers by out-of-state concerns, but she was not happy about it. While she lauded the goals of Public Health Law Section 1399-11 — New York Gov. George Pataki’s move to prevent Internet and direct marketing sales from hurting state revenues from the local retail sales of cigarettes — Preska said the law failed to pass muster under either of the standards for evaluating burdens on interstate commerce. “Regrettably, I am constrained to hold that Section 1399-11 fails both tests proscribed by the Supreme Court under the Commerce Clause, and, therefore, must be enjoined,” Judge Preska wrote at the start of her 77-page opinion in Santa Fe Natural Tobacco Co. Inc. v. Spitzer, 00 Civ. 7274. The decision permanently enjoining the execution of the law came after a five-day bench trial in April, and seven months after Preska issued a temporary restraining order against it. The law was passed in 1999 in the aftermath of the New York state’s decision to increase the tax on cigarettes from 56 cents per pack to $1.11 per pack, the highest in the nation. It became effective on March 1, 2000. But when sales of cigarettes decreased as a result of the new law, cigarette retailers in New York complained of unfair competition from Internet, mail order and telephone sellers. A related problem was the huge volume of tax-free cigarette sales on Native American tribal reservations — an exemption the state initially attacked until questions of sovereignty forced a halt to the effort. The governor and the Legislature responded to retailers by passing Section 1399-11, citing several justifications, including the importance of preventing minors from having access to cigarettes, the health of New Yorkers, and the reliance the state had placed on increased cigarette tax revenues to fund health care programs. Two suits were filed, one by Sante Fe Natural Tobacco and a second by Brown & Williamson Tobacco Corporation. Both plaintiffs argued the law was a barrier to interstate commerce in violation of Article I of the Constitution. “While the statute is reasonable — indeed commendable — solution by a concerned governor and responsive legislature to certain pressing problems facing New Yorkers, that is not the test imposed by the Constitution,” Judge Preska said. “Even a wise statute, beneficial to most New Yorkers, must be judged by the Constitutional mandate.” The state argued that the Commerce Clause was not implicated. In a series of proposed findings of fact, it stated that “in light of the predominance of New York-based Indian reservations among direct mail sellers” the statute’s effects are “imposed primarily [on] businesses within New York state boundaries.” But Judge Preska said the argument fails because sovereign Indian nations are entirely distinct entities from the state and, “therefore, direct sales from such reservations are not ‘in-state’ sales.” She added that “the fact that the statute falls predominantly on New York entities is irrelevant to determining whether a statute discriminates against interstate commerce.” The state and the tobacco companies disagreed on whether the statute actively discriminates against interstate commerce, and therefore should be subject to the “strict scrutiny” of the court, or whether, as New York asserted, it has only incidental effects on interstate commerce, and should be evaluated under a less stringent standard: a balancing test that assumes the regulation is valid unless the burden imposed on commerce is “clearly excessive” when compared to the law’s putative benefits. Preska found that the “statute discriminates on its face against interstate commerce by providing a delivery exemption for New York brick-and-mortar businesses with their own delivery services.” TRIAL EVIDENCE Saying she was persuaded by the evidence at trial, including the law’s legislative history, that Section 1399-11 was “enacted in part for the purpose of protecting in-state retailers” from out-of-state direct sellers, Preska said, “[s]uch a protectionist purpose, while welcomed by in-state retailers, is impermissible under the Commerce Clause.” She also said that the plaintiffs had met their burden of showing that the law “discriminates against interstate commerce by attempting to isolate New York from the national cigarette retail market.” Therefore, with the strict scrutiny standard in force, the burden shifted to the state to justify the discrimination by showing that important, local benefits flow from the law, and that there is a lack of nondiscriminatory alternatives. The state failed to meet this burden across the board, Preska said. New York did not prove that the use of direct sales channels by minors was significant, and the judge was convinced the law had little effect in stemming sales to minors. Moreover, Preska said “the evidence establishes that it is possible to reduce youth smoking without banning direct sales.” SECOND JUSTIFICATION Turning to a second justification for the statute, the state contended at trial that the high price of cigarettes led to a drop in demand, and therefore improved the health of New Yorkers. “While this is a worthy goal, defendants have not carried the burden of demonstrating that the statute will effect the desired benefit and that there is no less discriminatory alternative,” she said. And not only does the law fail under the strict standard, it also falls short under the lesser standard that calls for balancing “incidental burdens” and the benefits of the law, Preska said. Contrary to New York’s argument, she said, the court was not required to “defer to the Legislature’s determination that the avowed purposes of Section 1399-11 are legitimate and, without further inquiry, that Section 1399-11 will meet the goals of reducing access to cigarettes and reduced smoking.” David H. Remes and Laurence Silverman of Covington & Burling represented Brown & Williamson. Franklin B. Velie and Dierdre A. Burgman of Salans, and Rodrick J. Enns of Enns & Archer in Winston-Salem, N.C., represented Sante Fe Natural Tobacco Co. Inc. Assistant Attorneys General Martin Bienstock, Avi Schick and Lisa Landau represented New York state.

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