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GoodCat, LLC v. Cook

United States District Court, S.D. Indiana, Indianapolis Division

August 19, 2016

GOODCAT, LLC, Plaintiff,
v.
DAVID COOK, DAVID COLEMAN, DALE GRUBB, and MARJORIE MAGINN, in their official capacities for the Indiana Alcohol and Tobacco Commission; and the STATE OF INDIANA, Defendants. CLOUDTOWN, LLC, DB VAPES, LLC, DNM VENTURES, LLC, VAPOR BANK E-LIQUID, LLC, LICENSED E-LIQUID MANUFACTURING LLC, and VAPEING, LLC, Intervenors.

          FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

          RICHARD L. YOUNG, CHIEF JUDGE

         GoodCat LLC, the Plaintiff, challenges the constitutionality of certain requirements that Indiana Code § 7.1-7-1 et seq. (the “Indiana Act” or the “Act”) imposes on manufacturers of electronic vapor liquids (“e-liquids”) who wish to sell their products in Indiana. Effective July 1, 2016, any manufacturer of e-liquids destined for sale or distribution in Indiana must have a manufacturing permit issued by the Indiana Alcohol and Tobacco Commission (“ATC”). On June 20, the ATC rejected GoodCat’s permit application. That same day, GoodCat filed this lawsuit seeking a temporary restraining order (“TRO”) and a preliminary injunction against Defendants, Commissioners of the ATC and the State of Indiana, enjoining the ATC from enforcing certain provisions against GoodCat. Other manufacturers of e-liquids, Cloudtown LLC, et al. (collectively, “Intervenors”), subsequently requested to intervene in this action to oppose GoodCat’s challenges to the Act. On June 30, the statutory deadline for the ATC to issue permits, the court granted GoodCat’s request for a TRO and ordered the ATC to issue GoodCat a provisional manufacturing permit.

         Also on June 30, this court issued an opinion in a related case, Legato Vapors LLC v. Cook, No. 1:15-cv-761, 2016 WL 3548658 (S.D. Ind. June 30, 2016). In that case, the plaintiffs challenged the Act on several constitutional grounds, including the dormant Commerce Clause, the Equal Protection and Due Process Clauses of the Fourteenth Amendment, and the Indiana Constitution’s Privileges and Immunities Clause. The court rejected each of the plaintiffs’ arguments and granted summary judgment in favor of the State. GoodCat, unlike the plaintiffs in Legato Vapors, challenges only a narrow group of provisions-commonly known as the “security requirements”-on legal theories not squarely before the court in Legato Vapors. The court, therefore, confines the scope of its consideration in this matter to issues not raised in Legato Vapors.

         On July 11, the court held a preliminary injunction hearing. GoodCat, Defendants, and Intervenors appeared by counsel. Having considered GoodCat’s Verified Complaint, the parties’ briefs in support of and opposition to the motion for a preliminary injunction, and evidence and argument of counsel at the hearing, the court now issues the following findings of fact and conclusions of law.

         I. Findings of Fact[1]

         A. Introduction to e-liquids and GoodCat LLC

         1. E-liquids typically contain nicotine, flavorings, propylene glycol, and/or vegetable glycerin. The nicotine concentrations and flavor combinations vary widely among e-liquids. (Stipulated Facts ¶¶ 2, 4).

         2. Electronic nicotine delivery devices (or “ENDS”), including electronic cigarettes, heat and aerosolize e-liquids. Once the device aerosolizes the e-liquid, the user of the device inhales the vapor through a mouthpiece. (Id. ¶¶ 1, 3).

         3. Since 2009, GoodCat has manufactured e-liquids from its manufacturing facility in Naples, Florida. (Filing No. 46 (“Hr’g Tr.”) at 53:16-54:5).

         4. GoodCat has forty employees, including nine degreed scientists, and the capacity to produce up to 3 million bottles a month and approximately 100 metric tons of e-liquid products per year. (Id. at 54:6-15, 55:8-11, 57:15-18).

         5. GoodCat produces e-liquid products for approximately 104 brands with approximately 20, 000 unique products, or “SKUs.” (Id. at 56:15-23). In addition to shipping bottled e-liquids, approximately 20 to 25 percent of its sales consists of stock, or “white label, ” e-liquids sold by the barrel to other distributors or smaller retailers who wish to bottle their own products. (Id. at 87:11-88:10). GoodCat’s products are sold through convenience stores, big box stores, and so-called vape shops in Indiana.[2] (Id. at 56:8-14). It is estimated that approximately 200 retail outlets in Indiana sell GoodCat’s products. (Id. at 56:21-23).

         6. Raymond Keller founded GoodCat and currently serves as the company’s president. Mr. Keller has a degree in biology and a background in nuclear engineering. Mr. Keller built GoodCat’s production facility to implement stringent security measures similar to those he experienced in the nuclear industry. (Id. at 52:24-53:1, 92:19-93:3).

         7. GoodCat uses keycard locks on all doors at its manufacturing facility to limit access to authorized personnel. A security computer records who enters or exits each door at GoodCat’s facility, including the date and time. GoodCat also has a sophisticated, realtime surveillance system consisting of sixty-four camera views of the facility. (Id. at 62:12-64:6).

         8. GoodCat does not have a physical presence in Indiana. (Id. at 54:2-3).

         9. Since 2009, GoodCat has been registered as a tobacco product establishment with the United States Food and Drug Administration (“FDA”). GoodCat has filed each of its product formulations with the FDA. (Id. at 64:17-65:1).

         B. The Federal Government’s regulation of e-liquid

         10. In 2009, Congress enacted the Family Smoking Prevention and Tobacco Control Act (“TCA”), codified at 21 U.S.C. § 387 et seq., to grant the Food and Drug Administration (“FDA”) authority to regulate tobacco products under the Food, Drug, and Cosmetics Act (“FDCA”), 21 U.S.C. § 301 et seq. See 21 U.S.C. § 387a(a).

         11. The TCA extends the FDA’s authority to regulate “all cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco and to any other tobacco products that the [FDA] by regulation deems to be subject to [the TCA].” Id. § 387a(b).

         12. The TCA established certain regulations, such as “annual registration” and “premarket review” requirements, see Id. §§ 387e and 387j, and gives the FDA the authority to promulgate further regulations in certain areas, such as for manufacturing standards. Id. § 387f(e).

         13. On May 10, 2016, the FDA exercised its authority under § 387a(b) to promulgate what is known as its “Deeming Rule, ” by which the FDA deems e-liquid a “tobacco product” and therefore subject to regulation as such under the FDCA. See Deeming Tobacco Products to be Subject to the FDCA, 81 Fed. Reg. 28, 974 (May 10, 2016). The Deeming Rule takes effect on August 8, 2016. Id.

         14. As a consequence of the Deeming Rule, which took effect on August 8, 2016, the FDCA’s requirements concerning manufacturer and product registration, submission of ingredient listings, marketing, and premarket review applies to e-liquids. Id. at 28, 976.

         15. The Deeming Rule also established three new regulations governing the sale of e-liquids: (1) prohibitions on sales to persons under 18 years of age; (2) requirements that packages bear health warnings; and (3) prohibitions on vending machine sales. Id.

         16. Although the FDA has had authority to promulgate regulations since 2009, it has not promulgated regulations concerning good manufacturing standards.

         17. With respect to tobacco products, the FDCA specifically addresses preservation and preemption in Section 916 of the TCA, codified at 21 U.S.C. § 387p(a). That section, in pertinent part, provides as follows:

         (1) Preservation

Except as provided in paragraph (2)(A), nothing in this subchapter, or rules promulgated under this subchapter, shall be construed to limit the authority of . . . a State or political subdivision of a State . . . to enact, adopt, promulgate, and enforce any law, rule, regulation, or other measure with respect to tobacco products that is in addition to, or more stringent than, requirements established under this subchapter, including a law, rule, regulation, or other measure relating to or prohibiting the sale, distribution, possession, exposure to, access to, advertising and promotion of, or use of tobacco products by individuals of any age, information reporting to the State, or measures relating to fire safety standards for tobacco products.
(2) Preemption of certain State and local requirements
(A) In General
No State . . . may establish or continue in effect with respect to a tobacco product any requirement which is different from, or in addition to, any requirement under the provisions of this subchapter relating to tobacco product standards, premarket review, adulteration, misbranding, labeling, registration, good manufacturing standards, or modified risk tobacco products.
(B) Exception
Subparagraph (A) does not apply to requirements relating to the sale, distribution, possession, information reporting to the State, exposure to, access to, the advertising and promotion of, or use of, tobacco products by individuals of any age, or relating to fire safety standards for tobacco products.

21 U.S.C. § 387p(a).

         C. Indiana’s regulation of e-liquid

         18. During its 2015 legislative session, the Indiana General Assembly enacted Indiana Public Law 176-2015, as amended by Indiana Public Law 214-2016 and codified at Indiana Code § 7.1-7-1 et seq. The Act imposes a comprehensive regulatory and permitting scheme on the manufacture of e-liquids for use in electronic cigarettes and other vaping devices. It applies to (1) “[t]he commercial manufacturing, bottling, selling, bartering, or importing of e-liquid in Indiana”; and (2) “[t]he sale, possession, and use of e-liquid products in Indiana.” Ind. Code § 7.1-7-1-1; (see Stipulated Facts ¶ 5).

         19. The purpose of the Act is:

in the absence of federal regulations, to protect public health and safety by: (1) ensuring the safety and security of e-liquid manufactured for sale in Indiana; (2) ensuring that e-liquid manufactured or sold in Indiana conforms to appropriate standards of identity, strength, quality, and purity; and (3) ensuring that e-liquid is not contaminated or adulterated by the inclusion of ingredients or other substances that might pose unreasonable threats to public health and safety.

Ind. Code § 7.1-7-1-2.

         20. The Act requires a “manufacturer, ” defined as “a person or cooperative, located inside or outside Indiana, that is engaged in manufacturing e-liquid, ” id. § 7.1-7-2-15, to obtain a permit from the ATC “before mixing, bottling, packaging, or selling e-liquid to retailers or distributors in Indiana.” Id. § 7.1-7-4-1(a).

         21. Defendants interpret the Act as requiring an out-of-state manufacturer to obtain a manufacturing permit under the Act if the manufacturer sells e-liquid to: (i) a distributor or retailer located in Indiana; (ii) a distributor located outside of Indiana who then sells or distributes the product to a retailer located in Indiana; (iii) a consumer or end-user in Indiana over the Internet; or (iv) an out-of-state retailer who then sells the product to a consumer or end user in Indiana over the Internet. (Stipulated Facts ¶ 8).

         22. In the event an e-liquid manufacturer sells its product in Indiana without first having obtained a manufacturing permit, the manufacturer commits a Class A infraction and may be subject to civil liability for damages and attorney’s fees in a lawsuit by one or more permittee-manufacturers. Ind. Code §§ 7.1-7-6-3, 7.1-7-6-4.

         1. Security firm requirements

         23. To obtain a permit, a manufacturer must submit an application to the ATC containing, inter alia, evidence that it has a service agreement with a single security firm, valid for a period of five years. Id. § 7.1-7-4-1(d)(2).

         24. The Act defines “security firm” as any entity that (1) “is independent from an applicant and manufacturer”; (2) “has experience in the security business”; and (3) as of July 1, 2015, (i) satisfies the requirements under Section 7.1-7-4-1(d)(3), (ii) is a locksmith as defined under Section 7.1-7-2-14, and (iii) provides security services to the manufacturer. Id. § 7.1-7-2-22.

         25. To qualify for a permit, the applicant-manufacturer must contract with a single security firm that, inter alia:

. has continuously employed, for not less than the previous one-year period, at least one employee who is accredited or certified by the Door and Hardware Institute as an Architectural Hardware Consultant;
. has continuously employed, for not less than the previous one-year period, at least one employee who is accredited or certified as a certified Rolling Steel Fire Door Technician by the International Door Association or the Institute of Door Dealer Education and Accreditation;
. employs an employee that, for at least a one-year period, has been certified as a professional locksmith by the Associated Locksmiths of America;
. has at least one year of commercial experience in the preceding year with owning and operating a security monitoring station with ownership, control, and use of a redundant offsite backup security monitoring station; and
. has at least one year of commercial experience in the preceding year with operating a facility that modifies commercial hollow metal doors, frames, and borrowed lights with authorization to apply the Underwriters Laboratories label.

Id. §§ 7.1-7-4-1(d), 7.1-7-2-14, and 7.1-7-2-22(3). A qualifying security firm may not subcontract with another entity or person to meet the credential requirements above. Id.ยง7.1-7- ...


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