Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316 (2003)

The Cigarette Marketing Standards Act (CMSA) prohibits cigarette sales below cost with the intent to harm competition, and manufacturer promotions that create price differentiation among retailers can be presumed to violate this act.

Summary

Lorillard Tobacco Co. challenged the New York Department of Taxation and Finance’s interpretation of the Cigarette Marketing Standards Act (CMSA), arguing that certain manufacturer promotions did not violate the prohibition on selling cigarettes below cost. The Court of Appeals held that manufacturer promotions resulting in price differentiation among retailers could be presumed to violate the CMSA because they could harm competition, even if the retailer ultimately receives the full price for each pack of cigarettes. The court found that the Department’s interpretation was correct, focusing on the legislative intent to prevent unfair price competition at the retail level.

Facts

Lorillard, a cigarette manufacturer, used promotions like paper coupons, affixed coupons/stickers, and “buy-down” promotions where the manufacturer reimbursed retailers for price reductions. The Department of Taxation and Finance issued a TSB Memorandum asserting that master-type and buy-down promotions violated the CMSA, threatening retailers with fines and license suspensions. Lorillard and ATN, a retailer, sued for declaratory and injunctive relief after some retailers refused to participate in these promotions.

Procedural History

The Supreme Court denied the Tax Department’s motion to dismiss and later granted the Department’s motion for summary judgment, finding its interpretation of the CMSA rational. The Appellate Division affirmed. Lorillard appealed to the New York Court of Appeals.

Issue(s)

Whether manufacturer-funded cigarette promotions, such as buy-down and master-type promotions, that result in different retail prices for the same cigarettes violate the Cigarette Marketing Standards Act’s prohibition on sales below cost with the intent to harm competition.

Holding

Yes, because the Cigarette Marketing Standards Act (CMSA) is designed to limit price differences at the retail level, and manufacturer promotions resulting in price differentiation among retailers can be presumed to violate the CMSA’s prohibition on sales below cost with the intent to harm competition.

Court’s Reasoning

The Court of Appeals determined that the Department of Taxation and Finance’s interpretation of the CMSA was correct, although the court declined to give deference to the Department’s interpretation. The court emphasized that while the CMSA doesn’t explicitly require universal availability of manufacturer promotions, it also doesn’t allow prices reduced by promotions that create price differentiation among retailers. The court noted that Tax Law § 485 (a)(2) states that payments from a manufacturer to a retailer for promotional purposes “shall not be considered in determining the cost of cigarettes,” indicating that the legislature did not intend to let such promotions distort the retail price structure. The legislative history showed a concern for protecting independent retailers from unfair price competition from larger chains. The court distinguished between presumptively lawful promotions, like widely distributed paper coupons, and those like buy-down or master-type promotions that might not be available to all retailers. The court stated, “Nothing suggests that such a sale is permissible if the retailer ultimately recovers the difference between the sale price and its cost. Such a reimbursement would be cold comfort to a competing retailer excluded from the promotion and, at bottom, we find more persuasive the Tax Department’s view that the CMSA aims, in part, to protect that competing retailer.”