On August 2, the U.S. Court of Appeals for the Eighth Circuit decided a case addressing Nebraska’s authority to require tribal cigarette manufacturers that are not parties to the Master Settlement Agreement (MSA) to comply with the state’s escrow statute with respect to cigarettes sold in Indian country. See HCI Distrib., Inc. v. Peterson, No. 23-2311 (8th Cir., Aug. 2, 2024).
Ultimately, the court concluded that tribal sovereignty prohibits Nebraska from enforcing its escrow statute requirements for sales made by tribal companies on their own reservation to their own tribal members, but Nebraska may enforce its escrow statute requirements against tribal companies that sell cigarettes to nontribal members, including members of other tribes. See id. at 14. This case will undoubtedly impact tribal, nonparticipating manufacturers (NPMs) that sell cigarettes on their own reservations or to other tribal entities located on other reservations.
Background
In general, participating manufacturers (PMs), or those that signed the MSA, must make payments to settling states based on relative national market share. Many states have adopted a version of the model statute located in Exhibit T of the MSA that requires NPMs to place funds into escrow accounts. Nebraska is one such state that has passed legislation based on the model statute. Nebraska’s escrow statute requires cigarette manufacturers to either join the MSA or (1) place money into escrow accounts for cigarettes sold in the state; (2) post bonds of $100,000 or the highest escrow amount due from the manufacturers over the previous 20 calendar quarters, whichever is higher; and (3) annually certify compliance with the escrow statute to be listed in the state’s tobacco directory. See Neb. Rev. Stat. §§ 69-2702, -2703, -2706, -2707.
In this case, the Winnebago Tribe of Nebraska, a federally recognized Indian tribe, wholly owns two tribal businesses — Rock River Manufacturing, Inc., and HCI Distribution, Inc. See HCI Distrib., Inc., No. 23-2311 at 3. Rock River manufactures cigarettes on the Winnebago reservation using tobacco blends purchased from off-reservation suppliers, but has also sold imported cigarettes from other manufacturers. See id. at 4. HCI Distribution purchases cigarettes from Rock River for resale to tribal retailers and others throughout the country. See id.
Both Rock River and HCI Distribution alleged that Nebraska’s enforcement of its escrow statute violated the Indian Commerce Clause of the U.S. Constitution and asked the court to enjoin enforcement of the escrow statute for cigarettes sold in Indian country, including on the Winnebago reservation and other tribes’ reservations. Id.
The court outlined the relevant legal principles as follows:
The extent of a state’s regulatory power turns on the location of (where) and participants in (who) the targeted conduct…. “Indians going beyond reservation boundaries” are generally subject to state law…. But once a state reaches into a reservation, its power weakens…. That’s when the “who” comes in.
“When on-reservation conduct involving only Indians is at issue, state law is generally inapplicable, for the State’s regulatory interest is likely to be minimal and the federal interest in encouraging tribal self-government is at its strongest….” Only in “exceptional circumstances” may a State regulate the “on-reservation activities of tribal members….” The State’s power increases, though, when its law targets the conduct of nonmembers … or members’ “dealings” with nonmembers…. These “[m]ore difficult” cases call for a “particularized inquiry into the nature of the state, federal, and tribal interests at stake, an inquiry designed to determine whether, in the specific context, the exercise of state authority would violate federal law….”
Id. at 5-6.
With respect to the “where,” the court concluded that the Winnebago reservation was the “where” for purposes of its analysis because Nebraska’s escrow statute targeted cigarette sales and the sales at issue were the ones on the Winnebago reservation. See id. at 6-7.
With respect to the “who,” even when a state law directly regulates tribal members, the court found it important to consider whether other participants in the conduct at issue are members or nonmembers. See id. at 8. The court used the term “nonmembers,” rather than “non-Indians,” because members of other tribes are generally treated as non-Indians. See id. at 6, n. 3. In this case, Nebraska’s escrow statute targeted tribal companies’ on-reservation cigarette sales to nonmembers and on-reservation sales to members. See id. at 9. For on-reservation sales to nonmembers, the court determined that Nebraska’s interests must outweigh the tribal and federal interests at stake. For on-reservation sales to members, however, the court determined that Nebraska would have to show exceptional circumstances to overcome tribal and federal interests. See id.
After considering the state, tribal, and federal interests involved, the court concluded “for on-reservation cigarette sales to nonmembers, the State’s strong interest in protecting public health and redressing harm outweighs the Tribe’s and Federal Government’s comparatively minimal interests.” Id. at 12. Thus, Nebraska may impose escrow statute requirements on cigarette sales by tribal companies to nonmembers, even when those sales are made on the tribal companies’ reservations.
For cigarette sales to members, however, the court concluded that “the Tribe bears the brunt of protecting the buyers’ health and recovering public health costs. So the State’s interests do not outweigh the Tribe’s and Federal Government’s — let alone amount to exceptional circumstances.” Id. Thus, federal law preempts Nebraska’s authority to impose its escrow statute requirements on cigarette sales by tribal companies to tribal members on their reservations.
The court was confident that enjoining Nebraska from imposing its escrow statute requirements on “member-to-member sales on the Winnebago Reservation leaves in place a workable, independently enforceable plan that is not contrary to legislative intent” because the escrow statute already allows tribes to seek release of escrow funds deposited for on-reservation cigarettes sales to its tribal members and the court’s remedy “simply allows the tribal companies to hold onto these funds at the outset.” Id. at 13.
Why It Matters
The Eighth Circuit includes Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota, and opinions of the Court of Appeals are binding on federal district courts in each of these states. Furthermore, the court’s opinion is likely to be persuasive authority in federal courts located in other circuits. Although this case deals with Nebraska’s escrow statute, most states’ escrow statutes are substantially similar because they are based on the MSA’s model statute. Thus, the principles the court outlined in this case are likely to apply in similar situations involving other tribes in other states.
