ECF Nos. 1 & 2. 1 AUSA Kathleen Midian was present in Chambers while DOJ attorney Lisa Bellamy 2 attended by telephone from Washington, D.C. DOWD, J. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION RYO MACHINE RENTAL, LLC, et al., Plaintiffs, v. U.S. DEPARTMENT OF THE TREASURY, ALCOHOL AND TOBACCO TAX AND TRADE BUREAU, et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) CASE NO. 4:10-CV-2462 MEMORANDUM OPINION AND ORDER GRANTING PRELIMINARY INJUNCTION Plaintiffs RYO Machine Rental, LLC, Tobacco Outlet Express, LLC, and Tightwad Tobacco, LLC (“Plaintiffs”) filed a complaint and motion for temporary restraining order and preliminary injunction, concomitantly, against the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau and John J. Manfreda, Administrator, Alcohol and Tobacco Tax and Trade Bureau (“Defendants”) on October 28, 2010, to enjoin Defendants from enforcing Ruling No. 2010-4 issued on September 30, 2010. On October 29, 2010, the Court conducted 1 an informal conference in Chambers, not on the record, with counsel for Plaintiffs and Defendants present. On the same day, the Court denied Plaintiffs’ motion for a temporary 2 restraining order and scheduled a hearing on the motion for a preliminary injunction for Case: 4:10-cv-02462-DDD Doc #: 41 Filed: 12/14/10 1 of 23. PageID #: 573
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DOWD, J. NORTHERN DISTRICT OF OHIO EASTERN DIVISION …...(4:10-CV-2462) 9 ECF No. 18 at 12. 10 ECF No. 1 at 8.-4-use of commercial cigarette-making machines in retail establishments
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ECF Nos. 1 & 2. 1
AUSA Kathleen Midian was present in Chambers while DOJ attorney Lisa Bellamy2
attended by telephone from Washington, D.C.
DOWD, J.
UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF OHIO
EASTERN DIVISION
RYO MACHINE RENTAL, LLC, et al.,
Plaintiffs,
v.
U.S. DEPARTMENT OF THETREASURY, ALCOHOL AND TOBACCOTAX AND TRADE BUREAU, et al.,
Defendants.
)))))))))))
CASE NO. 4:10-CV-2462
MEMORANDUM OPINIONAND ORDER GRANTINGPRELIMINARY INJUNCTION
The Court ordered in part as follows: “[T]he U.S. Treasury Department, Alcohol and5
Tobacco Tax and Trade Bureau (“TTB”) and their agents, servants, employees, successors,representatives and assigns, and all others in active concert and privity with them who receiveactual notice of this Temporary Restraining Order by personal service or otherwise, areimmediately restrained from enforcing the TTB’s September 30, 2010 Ruling No. 2010-4 and allrequirements set forth therein. . . .” ECF No. 20.
See ECF Nos. 25 & 26.6
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November 12, 2010. On November 10, 2010, Defendants filed a motion to dismiss Plaintiffs’3
Complaint arguing that the Court lacks subject matter jurisdiction under Federal Rule of Civil
Procedure 12(b)(1) and an opposition to Plaintiffs’ motion for a preliminary injunction.4
After hearing the parties’ arguments during the November 12, 2010 preliminary
injunction hearing and having reviewed all of the briefs and evidence presented, the Court
reconsidered its denial of Plaintiffs’ motion for a temporary restraining order and granted the
motion on November 15, 2010. The Court also ordered the parties to file post-hearing briefs to5
which the parties complied on November 29, 2010.6
Having had the benefit of oral argument and thorough briefing, pre- and post-hearing, of
the issues by the parties, the Court GRANTS Plaintiffs’ motion for preliminary injunction and
DENIES in part and GRANTS in part Defendants’ motion to dismiss for the reasons that follow.
“The Homeland Security Act renders functions of the Bureau of Alcohol, Tobacco and 7
Firearms (ATF) into two new organizations. This Act creates with the Department of theTreasury a new Alcohol and Tobacco Tax and Trade Bureau (TTB) and moves certain lawenforcement functions of ATF to the Department of Justice.
Under the Act, the Alcohol and Tobacco Tax and Trade Bureau is responsible foradministration and enforcement of:
Internal Revenue Code of 1986, 26 USC (IRC): Chapter 51 (Distilled Spirits, Wine and Beer), Chapter 52 (Tobacco Products and Cigarette Papers and Tubes), and Sections 4181-4182 (Firearms and Ammunition Excise Taxes); . . . .” TTB.GOV,
Defendant United States Department of the Treasury, Alcohol and Tobacco Tax and
Trade Bureau (“TTB) issued Ruling No. 2010-4 (the “Ruling”) on September 30, 2010. The7
Ruling held:
The proprietor of a retail establishment who is in the business of making cigarettesfor others, or who facilitates the making of cigarettes by or for others by providingthe use of a commercial cigarette-making machine at its premises is engaged in thebusiness of a tobacco products manufacturer and must qualify for and obtain a permitfrom TTB to engage in such business. The proprietor must also obtain a bond andcomply with the applicable regulatory recordkeeping, reporting, and inventoryrequirements. As a manufacturer of tobacco products, the proprietor is liable for thepayment of tax on the cigarettes produced. Once qualified as a manufacturer oftobacco products, a proprietor may, under the IRC, obtain roll-your-own tobacco andcigarette papers or tubes without payment of tax for use in the manufacture ofcigarettes. 8
Non-compliance with the regulatory requirements subjects a violator to forfeiture and civil and
criminal penalties. Defendants assert that “TTB issued the Ruling because it determined that the
The Court declines to determine the merits of Plaintiffs’ substantive claims at this14
juncture of the case. Accordingly, the Court reserves its judgement as to whether, under theWilliams Packing exception, “it is clear that the government cannot ultimately prevail under anycircumstances.”
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Supreme Court recognized another equitable exception to the AIA for situations in which the
plaintiff has no recourse to alternative legal remedies. South Carolina v. Regan, 465 U.S. at 378.
Plaintiffs rely primarily on the exception found in South Carolina v. Regan. Plaintiffs
briefly argue that the exception found in Williams Packing also applies, but with much less
enthusiasm. Because, as discussed below, the Court finds that the exception found in South
Carolina v. Regan applies in this case, albeit only to Plaintiffs RYO Machine and Tobacco
Outlet, the analysis is accordingly limited to the South Carolina v. Regan exception.14
In South Carolina v. Regan, the State of South Carolina sought leave to file a complaint
against Donald T. Regan, the Secretary of the Treasury at that time. The State of South Carolina
sought an injunction and other relief on the ground that a particular tax law was unconstitutional.
The State of South Carolina argued that the practical effect of the tax law in question required it
to issue bonds in a specific way so “that the [tax law] destroy[ed] its freedom to issue obligations
in the form that it chooses.” South Carolina v. Regan, 465 U.S. at 372. Additionally, the tax
law would cause its bondholders to be liable for the tax on the interest earned on the bonds. The
Secretary of the Treasury objected on the ground that the Anti-Injunction Act barred the claim.
The Court found that “South Carolina will incur no tax liability. Under these circumstances, the
State will be unable to utilize any statutory procedure to contest the constitutionality of [the tax
law]. Accordingly, the [AIA] cannot bar this action.” South Carolina v. Regan, 465 U.S. at
Furthermore, RYO Machine and Tobacco Outlet assert injuries that allegedly arise from
the TTB’s Ruling regulating the behavior of others—namely retailers like Tightwad Tobacco.
The Supreme Court in Lujan teaches the proper standard governing such a situation.
When, however, as in this case, a plaintiff’s asserted injury arises from thegovernment’s allegedly unlawful regulation (or lack of regulation) of someone else,much more is needed. In that circumstance, causation and redressability ordinarilyhinge on the response of the regulated (or regulable) third party to the governmentaction or inaction-and perhaps on the response of others as well. The existence of oneor more of the essential elements of standing “depends on the unfettered choicesmade by independent actors not before the courts and whose exercise of broad andlegitimate discretion the courts cannot presume either to control or to predict,”ASARCO Inc. v. Kadish, 490 U.S. 605, 615, 109 S.Ct. 2037, 2044, 104 L.Ed.2d 696(1989) (opinion of KENNEDY, J.); see also Simon, supra, 426 U.S., at 41-42, 96S.Ct., at 1925, 1926; and it becomes the burden of the plaintiff to adduce factsshowing that those choices have been or will be made in such manner as to producecausation and permit redressability of injury. E.g., Warth, supra, 422 U.S., at 505, 95S.Ct., at 2208. Thus, when the plaintiff is not himself the object of the governmentaction or inaction he challenges, standing is not precluded, but it is ordinarily“substantially more difficult” to establish. Allen, supra, 468 U.S., at 758, 104 S.Ct.,at 3328; Simon, supra, 426 U.S., at 44-45, 96 S.Ct., at 1927; Warth, supra, 422 U.S.,at 505, 95 S.Ct., at 2208.
Lujan, 504 U.S. at 562.
“[E]conomic injuries may constitute an injury-in-fact for the purposes of Article III
standing.” White v. U.S., 601 F.3d 545, 552 (6th Cir. 2010) (citing Lujan, 504 U.S. at 559-61).
The TTB Ruling applies to all fifty states. RYO Machine and Tobacco Outlet claim that the
ultimate effect of the Ruling will put them out of business because retailers such as Tightwad
Tobacco will not apply for or be able to obtain the required permit and will therefore not utilize
the RYO Filling Station. Whether or not a retailer will be able to obtain the required permit is
too speculative a reason to confer standing on RYO Machine and Tobacco Outlet. Not applying
for the permit, however, is not speculative and factually shown given that Tightwad Tobacco has
not made an attempt to apply for the permit. Additionally, RYO Machine indicated in the
Complaint that production of the RYO Filling Station “has already been suspended by virtue of
the TTB Ruling, resulting in the furlough of 30 employees.” 18
RYO Machine and Tobacco Outlet manufacture and distribute cigarette-rolling machines
to retail tobacco stores. The Ruling prohibits retailers to use the cigarette-rolling machines
without a permit. Since the TTB issued the Ruling, Tightwad Tobacco, a retailer, has not
attempted to obtain a permit due to the rigorous standards and time involved obtaining the
permit. Since the TTB issued the Ruling, at a minimum, RYO Machine has suspended
production of the cigarette-rolling machine and furloughed employees. RYO Machine and
Tobacco Outlet’s claim in the Complaint that they will likely cease operations as a result of the
Ruling is “entirely plausible on its face.” Iqbal, - - - U.S. - - - -, 129 S.Ct. at 1949. It follows
that it is likely that this “injury will be ‘redressed by a favorable decision’” enjoining
enforcement of the Ruling. See Fednav, 547 F.3d at 614 (quoting Lujan, 504 U.S. at 561). The
Court finds that RYO Machine and Tobacco Outlet have satisfied all three elements to confer
constitutional standing under Article III.
C. Preliminary Injunction Standard of Law
The Supreme Court teaches that
[t]he purpose of a preliminary injunction is merely to preserve the relative positionsof the parties until a trial on the merits can be held. Given this limited purpose, andgiven the haste that is often necessary if those positions are to be preserved, apreliminary injunction is customarily granted on the basis of procedures that are lessformal and evidence that is less complete than in a trial on the merits. A party thus
is not required to prove his case in full at a preliminary-injunction hearing[,]Progress Development Corp. v. Mitchell, 286 F.2d 222 (C.A.7 1961), and thefindings of fact and conclusions of law made by a court granting a preliminaryinjunction are not binding at trial on the merits, Industrial Bank of Washington v.Tobriner, 132 U.S.App.D.C. 51, 54, 405 F.2d 1321, 1324 (1968); Hamilton WatchCo. v. Benrus Watch Co., 206 F.2d 738, 742 (C.A.2 1953). In light of theseconsiderations, it is generally inappropriate for a federal court at thepreliminary-injunction stage to give a final judgment on the merits. E. g., Brown v.Chote, supra; Gellman v. Maryland, 538 F.2d 603 (C.A.4 1976); Santiago v.Corporacion de Renovacion Urbana y Vivienda de Puerto Rico, 453 F.2d 794 (C.A.11972).
Univ. of Texas v. Camenisch, 451 U.S. 390, 395 (1981).
“When ruling on a motion for a preliminary injunction, a district court must consider and
balance four factors: (1) whether the movant has a strong likelihood of success on the merits; (2)
whether the movant would suffer irreparable injury without the injunction; (3) whether issuance
of the injunction would cause substantial harm to others; and (4) whether the public interest
would be served by issuance of the injunction.” Chabad of S. Ohio & Congregation Lubavitch v.
City of Cincinnati, 363 F.3d 427, 432 (6th Cir. 2004). The test is flexible and the factors are not
prerequisites that must be met, but each factor must be balanced. Id.
1. Likelihood of success on the merits
The heart of this case is whether the TTB’s Ruling is considered interpretive or
legislative. If the Court finds the Ruling to be interpretive, then the Ruling does not violate the
Administrative Procedures Act. If the Ruling is legislative, then Defendants have violated the
APA upon issuing the Ruling. Plaintiffs RYO Machine and Tobacco Outlet assert that the
Ruling issued by the TTB violates the Administrative Procedure Act, is ultra vires and otherwise