R.J. Reynolds complains in court of ‘rogue’ tribal cigarette industry

A melodramatic and high-stakes case illuminating a complaint by the R.J. Reynolds Tobacco Co. about Native American tribes’ alleged “rogue cigarette” manufacturing challenged a federal judge Tuesday.

Wading into a civil lawsuit built on covert investigations, aerial surveillance and confidential informants, U.S. District Judge Ketanji B. Jackson tried to clear the air during a 90-minute hearing. She pressed, almost equally, attorneys for both R.J. Reynolds and the Justice Department.

“I want to get to the bottom of things,” Jackson said, “and that takes time.”

An Obama administration appointee, Jackson now must decide whether to grant the administration’s motion to dismiss the lawsuit filed last August by the North Carolina-based R.J. Reynolds and the New Mexico-based Santa Fe Natural Tobacco Co. Though she did not blatantly tip her hand Tuesday, her questions seemed slightly more pointed when directed at the tobacco company’s lawyer.

“The question is,” Jackson said at one point, “how do you calculate the amount of illegal (cigarette) smuggling?

Technically, the companies’ suit targets the Agriculture Department, though a critical light is cast on tribal operations.

The suit is rooted in the Tobacco Trust Fund, created by Congress in 2004 as part of the so-called “tobacco buyout,” which phased out tobacco subsidies. Manufacturers and importers of tobacco products paid assessments, and the money went to holders of the government-allocated “quotas” required for production.

The 10-year trust fund program was capped at $10.1 billion. The assessments ended last year, and final accounting and appeals are scheduled to be completed next year.

Companies contributed based on their estimated share of the U.S. tobacco product market, with the Agriculture Department calculating the total market. The lawsuit contends USDA underestimated gross domestic volume of cigarette production, causing the agency to overstate R.J. Reynolds’ and Santa Fe’s market shares.

R.J. Reynolds was overcharged at least $376,000 for six months in 2013, the company claims.

The inaccurate estimate, the tobacco giant argues, results from the Agriculture Department’s failure to account for illicit cigarette manufacturing by the Onondaga Nation, near Syracuse, N.Y., and a separate tribal entity called T&D Enterprises. Investigators hired by the tobacco companies used myriad undercover and other techniques to track the alleged illicit production.

The Onondaga Nation “manufactures approximately 1 million cartons of cigarettes per year,” the lawsuit claims. T&D Enterprises “produces approximately 6.5 million cartons of cigarettes per year,” according to the suit

“We’re not talking about a hypothetical, in-the-shadows black market. We know where their buildings are,” Ashley C. Parrish, an attorney representing R.J. Reynolds, said Tuesday. “These are significant manufacturers … it’s a lot of money we’re talking about.”

Justice Department attorney Peter J. Phipps countered that the Agriculture Department looked at the investigative report presented by R.J. Reynolds, but USDA acted reasonably in rejecting its conclusions.

“They said, ‘This is very different from the kind of empirical data we use,’” Phipps said, adding that the Agriculture Department relies on “exactitude, certainty and hard numbers” in calculating the size of the cigarette market.”

Congress, Phipps added, “did not give to USDA,” as a law enforcement agency might, the role of enforcing or investigating might the precise contours of the illicit cigarette scene.

“I’m not going to deny there is smuggling going on,” Phipps said.

An attorney representing the Onondaga Nation and T&D Enterprises could not be reached Tuesday. In an interview last year, tribal attorney Joe Heath said tribal cigarette production was “infinitesimal compared to RJR,” and said the tribe used the revenues for needed public services. Heath further said the tribe’s sovereign immunity posed a “very significant problem” to those seeking legal action on the trust fund issue.