December 8, 2016
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.
Manion, Kanne, and Hamilton, Circuit Judges.
Hamilton, Circuit Judge.
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.
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.
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.
Factual and Procedural Background
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.
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.
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).
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
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,
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.
The Dormant Commerce Clause
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 ...