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Legato Vapors LLC v. Cook

United States Court of Appeals, Seventh Circuit

January 30, 2017

Legato Vapors, LLC, et al., Plaintiffs-Appellants,
David Cook, et al., Defendants-Appellees. and Right to Be Smoke-Free Coalition, Inc., Intervenor-Appellant,

          Argued December 8, 2016

         Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. l:15-cv-00761-SEB/TAB - Sarah Evans Barker, Judge.

          Before Manion, Kanne, and Hamilton, Circuit Judges.

          Hamilton, Circuit Judge.

         In 2015 the State of Indiana enacted the Vapor Pens and E-Liquid Act to regulate the manufacture and distribution of vapor pens and the liquids used in so-called e-cigarettes. 2015 Ind. Acts 1870, Ind. Code §§ 7.1-7-1-1 et seq. The Act is written so as to have extraterritorial reach that is unprecedented, imposing detailed requirements of Indiana law on out-of-state manufacturing operations. The Act regulates the design and operation of out-of-state production facilities, including requirements for sinks, cleaning products, and even the details of contracts with outside security firms and the qualifications of those firms' personnel. Imposing these Indiana laws on out-of-state manufacturers violates the dormant Commerce Clause of the United States Constitution.

         The federal Constitution leaves Indiana ample authority to regulate in-state commerce in vapor pens, e-liquids, and e-cigarettes to protect the health and safety of its residents. For example, the Act's prohibitions on sales to minors, its requirements for child-proof packaging, ingredient labeling, and purity, and requirements for in-state production facilities pose no inherent constitutional problems. Indiana may not, however, try to achieve those health and safety goals by directly regulating out-of-state factories and commercial transactions. As applied to out-of-state manufacturers, the challenged provisions of the Act violate the dormant Commerce Clause prohibition against extraterritorial legislation.

         We reverse the judgment of the district court dismissing this case and remand with instructions to enjoin enforcement of the challenged provisions against the plaintiffs and to declare the challenged provisions unenforceable against out-of-state manufacturers. To explain our reasons, we first review the statutory provisions and procedural history of the case. Then we apply the Commerce Clause analysis to three categories of challenged provisions: security terms, clean room specifications, and audit requirements.

         I. Factual and Procedural Background

         In 2015, the Indiana legislature passed the Vapor Pens and E-Liquid Act, regulating the production and sale of e-liquid solutions. E-liquid solutions-generally consisting of a mixture of propylene glycol, vegetable glycerin, flavorings, water, and a range of nicotine concentrations-are ingested by the consumer using an e-vapor device. E-vapor devices are often shaped like cigarettes. They use a battery and atomizer to turn an e-liquid solution into an aerosol that can be inhaled through a mouthpiece, simulating the act of smoking a cigarette. The popularity of "vaping" has increased dramatically since its introduction to the United States market in 2007. Currently, there are an estimated 138 brick-and-mortar "vape" shops in Indiana, and products are also available online to Indiana consumers. Total annual sales of vape devices and e-liquids in the state are more than $77 million.

         In some ways, the Act is unremarkable and uncontroversial. It regulates in-state sales of e-liquids with requirements for tamper-evident and child-proof packaging, as well as labels designating active ingredients, nicotine content, and expiration dates. Ind. Code § 7.1-7-4-6(b)(1)-(7). The Act prohibits sales to minors. § 7.1-7-6-2(a)(1). The Act itself explains that its purpose is to protect public health and safety in the use of these products "in the absence of federal regulations, " § 7.1-7-1-2, since the federal government has not adopted comparable regulations for safety and purity of e-cigarette products.

         What is remarkable, however, is the Act's extensive regulation beyond the manufacture and sale of e-liquid solutions in Indiana. The statute requires not just that in-state and out-of-state manufacturers meet stringent security standards, but it also goes so far as to require the manufacturer to contract with an independent security firm rather than provide the security services in-house. It requires the manufacturer to enter a service agreement with a security firm that is valid for five years after the date of permit application. Ind. Code §§ 7.1-7-4-l(d)(2)(B), (d)(3). The security firm must meet stringent certification standards and provide 24-hour video monitoring and high-security key systems. § 7.1-7-4-6(b)(12)-(13). The Act also dictates details for the construction, design, and operation of the manufacturing facility, including requiring a "clean room" for mixing and bottling that adheres to requirements of the Indiana Commercial Kitchen Code. §§ 7.1-7-4-l(d)(1), 7.1-7-2-4(3).

         The Act imposes each of these substantive requirements governing manufacturing processes and facilities as a condition of obtaining and keeping a permit. If a manufacturer's products are sold in Indiana, the manufacturer must obtain a permit from the Indiana Alcohol and Tobacco Commission. § 7.1-7-4-1 (a). To obtain a permit, the substantial requirements for security and clean room facilities must be met, and audit provisions apply to ensure compliance after the permit is granted. See, e.g., § 7.1-7-4-6(b)(17). A permitted manufacturer "must submit to random audits, " § 7.1-7-4-6(b)(16), defined as procedures "performed by the commission, including inspection of manufacturing facilities and preparation areas, review of required records, compliance checks, and auditing of samples of e-liquid, " § 7.1-7-2-3. The Act defines a "manufacturer" as "a person or cooperative, located inside or outside Indiana, that is engaged in manufacturing e-liquid." § 7.1-7-2-15 (emphasis added).

         The plaintiffs are three out-of-state manufacturers of regulated products: Legato Vapors, Rocky Mountain E Cigs, and Derb E Cigs. They filed suit in the district court for injunctive and declaratory relief against members of the Indiana Alcohol and Tobacco Commission on several state and federal grounds. The parties filed cross-motions for summary judgment on stipulated facts. The district court granted summary judgment for the defendants. Legato Vapors LLC v. Cook, - F.Supp.3d -, 2016 WL 3548658 at *18 (S.D. Ind. June 30, 2016).

         Where the district court has decided cross-motions for summary judgment on stipulated facts, our review on appeal is de novo, without deference to the legal analysis of the district court. On appeal, plaintiffs have narrowed both their theory and the scope of their challenge. They have narrowed their legal theory to the argument that the Act, as applied to out-of-state manufacturers, violates the dormant Commerce Clause prohibition on extraterritorial state regulation of commerce. Plaintiffs have narrowed their challenges to the Act's direct regulations applicable to manufacturing facilities, including those regulating the physical manufacturing facility, security and cleaning arrangements, and facility audits.

         II. The Dormant Commerce Clause

         The Commerce Clause gives Congress the power to regulate commerce "among the several States." U.S. Const, art. I, § 8, cl. 3; see Gibbons v. Ogden,22 U.S. 1 (1824); Wilson v. Black-Bird Creek Marsh Co., 27 U.S. 245 (1829). While the clause expressly grants power to Congress, since before the Civil War it has been settled that it also has an implicit or "dormant" dimension: "Although the Clause thus speaks in terms of powers bestowed upon Congress, the Court long has recognized that it also limits the power of the States to erect barriers against interstate trade." Lewis v. BT Investment Managers, Inc.,447 U.S. 27, 35 ...

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