In the United States District Court for the District Of

Case 1:16-cv-00296-JB-LF Document 132 Filed 12/21/17 Page 1 of 249

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO

IN RE: SANTA FE NATURAL TOBACCO COMPANY MARKETING & SALES PRACTICES AND PRODUCTS

LIABILITY LITIGATION

No. MD 16-2695 JB/LF

MEMORANDUM OPINION AND ORDER

THIS MATTER comes before the Court on: (i) the Defendants’ Request for Judicial Notice in Support of Motion to Dismiss, filed November 18, 2016 (Doc. 71)(“First JN Motion”); (ii) Defendants’ Second Motion for Judicial Notice in Support of the Motion to Dismiss the Consolidated Amended Complaint, filed February 23, 2017 (Doc. 91)(“Second JN Motion”); (iii) Defendants’ Third Motion for Judicial Notice in Support of the Motion to Dismiss the Consolidated Amended Complaint, filed May 30, 2017 (Doc. 109)(“Third JN Motion”); and (iv) the Defendants’ Motion to Dismiss the Consolidated Amended Complaint and Incorporated Memorandum of Law, filed February 23, 2017 (Doc. 90)(“MTD”). The Court held hearings on June 16, 2017 and July 20, 2017. The primary issues are: (i) whether the Court may consider the items presented in the First JN Motion, the Second JN Motion, and the Third JN Motion without converting the MTD into one for summary judgment; (ii) whether the Court may exercise personal jurisdiction over Reynolds American, Inc. for claims that were not brought in a North Carolina forum; (iii) whether the Federal Trade Commission’s Decision and Order, In re Santa Fe Nat. Tobacco Co., No. C-3952 (FTC June 12, 2000), filed November 18, 2016 (Doc. 71)(“Consent Order”), requiring Defendant Santa Fe Natural Tobacco Company, Inc. to use a disclosure that “No additives in our tobacco does NOT mean a safer cigarette” impliedly preempts the Plaintiffs’¹claims

¹There are twelve named Plaintiffs in this action: Jacques-Rene Hebert and Albert Lopez, citizens of the State of Illinois; Sara Benson, a citizen of the State of Colorado; Justin Sproule and

to the extent that the Defendants’ advertising misled the Plaintiffs into believing that Natural American cigarettes are safer or healthier than other cigarettes; (iv) whether “natural,” “additivefree,” and “substantially similar terms” mislead a consumer into believing: (a) that Natural American cigarettes are safer or healthier than other cigarettes, (b) that Natural American’s menthol cigarettes do not include any additives; or (c) that Natural American cigarettes undergo fewer engineering processes than other cigarettes; (v) whether the Defendants’ use of those descriptors is protected commercial speech under the First Amendment to the Constitution of the United States of America; (vi) whether state law safe harbors shield the Defendants from liability; (vii) whether the Plaintiffs’ unjust-enrichment claims fail, because: (a) the descriptors did not deceive consumers, so there is no injustice for equity to correct; (b) the Plaintiffs have an adequate legal remedy under the various state consumer statutes; or (c) state specific law otherwise bars them; (viii) whether the Plaintiffs’ breach-of-express-warranty claims are barred, because: (a) the FDA-mandated disclosure and the menthol ingredient modify the warranty such that there is no breach; (b) the Plaintiffs’ Consolidated Complaint, filed January 12, 2017 (Doc. 82)(“Amended Complaint”) does not serve as the requisite pre-litigation notice under California, Florida, Illinois, New Mexico, New York, and North Carolina law; and (c) the Plaintiffs failed to allege privity of contract with the Defendants as required by Florida, Illinois, and New York law; and (ix) whether the Memorandum of Agreement Between the United States Food and Drug Administration’s (FDA) Center for Tobacco Products (CTP) and RAI Services Company (RAIS)/Santa Fe Natural Tobacco Company, Inc. (Santa Fe), dated January 19, 2017, filed February 23, 2017 (Doc. 91-1)(“Memorandum of Agreement), in which the Defendants

Joshua Horne, citizens of the State of Florida; Abigail Emmons and Ceyhan Haskal, citizens of the State of New Mexico; Rudolph Miller and Charlene Blevins, citizens of the State of North Carolina; Carol Murphy, a citizen of the State of Idaho; Robert Litwin, a citizen of the State of Maryland; and Francisco Chavez, a citizen of the State of California. See Amended Complaint ¶¶ 12-23, at 4-11, filed January 12, 2017 (Doc. 82).

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agree to remove the descriptors from its packaging and labeling, except for the term natural in its brand name, renders the Plaintiffs’ request for injunctive relief moot.
The Court concludes that: (i) the Court may consider all but one of the documents the
Defendants submit without converting the MTD into one for summary judgment, because the documents are incorporated in the Amended Complaint by reference, or they are government documents publically available and capable of ready and accurate determination; (ii) the Court lacks personal jurisdiction over Reynolds American, as to the claims filed outside of North Carolina; (iii) the Consent Order does not preempt the Plaintiffs’ claims, because (a) a consent order is not a “law” under the Supremacy Clause, (b) the Consent Order -- as an agreement not to enforce a federal statute -- does not permit conduct; (c) the Consent Order only binds the parties to it, so does not bind all of the Defendants; and (d) the Consent Order covers only the Defendants’ advertising, so cannot preempt the Plaintiffs’ claims targeting the Defendants’ labeling; (iv) the descriptors “natural,” “organic,” and “additive-free” would mislead a reasonable consumer into believing that: (a) Natural American Cigarettes are healthier or safer than other cigarettes, because decades of marketing have equated those terms with healthy products; and (b) Natural American menthol cigarettes have no additives, because menthol is a substance that a reasonable consumer would not know much about; (v) the First Amendment does not protect the Defendants’ use of the descriptors at issue, because the state action doctrine precludes a First Amendment defense to the claims premised on mutual assent, and the government has a substantial interest in regulating deceptive commercial speech regarding tobacco products; (vi) the state-law safe harbors do not preclude relief, except in Illinois, because the Consent Order does not permit conduct, and the Ohio consumer protection claims are barred for state-specific reasons; (vii) Rule 8 allows pleading in the alternative, but New Jersey and Ohio law do not permit the Plaintiffs’ unjust-enrichment claims, because the Plaintiffs cannot allege a

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remuneration nor can they allege that they conferred a direct benefit on the Defendants; (viii) Florida, Illinois, and New York law preclude the Plaintiffs’ express warranty claims, because the Plaintiffs Amended Complaint cannot serve as the requisite pre-litigation notice, and are independently defective under Florida and Illinois law, because there is no privity between the Plaintiffs and the Defendants; and (ix) the Plaintiffs’ request for injunctive relief is not rendered moot, because the Memorandum of Agreement is subject to a lawsuit that might invalidate it. The Court therefore grants the MTD in part and denies it in part.

FACTUAL BACKGROUND

The Court takes the facts from the Amended Complaint. As the Court must, it accepts all factual allegations in the Amended Complaint as true for the purposes of a motion to dismiss. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court may also consider facts judicially noticed on a motion to dismiss without converting the motion into one for summary judgment. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 322 (2007)(“[C]ourts must consider the complaint in its entirety, as well as . . . matters of which a court may take judicial notice.”); S.E.C. v. Goldstone, 952 F. Supp. 2d 1060, 1191 (D.N.M. 2013)(Browning, J.). The Court recites facts from the documents included in the First JN Motion, the Second JN Motion, and the Third JN Motion to the extent that the Court concludes that it can consider those documents. See infra § I (“The Court concludes that it may consider all of the documents, which the Defendants submit, except the FTC Letter, without converting the MTD into one for summary judgment.”).
Santa Fe Tobacco is a New Mexico corporation that sells Natural American Spirit cigarettes and uniformly advertises them as “Natural” and “100% Additive Free.” Amended Complaint ¶¶ 1, 24, 40, at 1, 12, 15. Those same descriptors appear on Natural American cigarettes’ packaging.

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Amended Complaint ¶ 4, at 2. The twelve named Plaintiffs believed that, based on those terms and others, Natural American cigarettes were “safer and healthier” than other cigarettes. Amended Complaint ¶¶ 12-23, at 4-11. Because of that belief, the Plaintiffs purchased Natural American cigarettes at a premium over other cigarettes. See Amended Complaint ¶¶ 11-23, at 3-11.
Reynolds American -- Santa Fe Tobacco’s parent corporation -- is heavily involved in
Natural American cigarette advertising, and approves “all decisions” that Santa Fe Tobacco makes “with respect to the marketing, design, and composition.” Amended Complaint ¶ 28, at 12. Reynolds American actively monitors the publications in which Natural American cigarettes are advertised. See Amended Complaint ¶ 28, at 12-13. Santa Fe Tobacco’s and Reynolds American’s assets are identical, and Reynolds American “essentially controls” Santa Fe Tobacco’s business initiatives, capital expenditures, and financial operations. Amended Complaint ¶ 35, at 13-14.
Natural American advertisements from 2013 through 2015 include images of water and plants, along with statements like: “When you work with the best materials, you don’t need to add anything else. That’s why we use only tobacco and water. We stick with premium quality, whole leaf natural tobacco that’s 100% additive-free for a very simple reason -- it’s all we need.” Tobacco & Water Advertisement at 113-114, filed November 18, 2016 (Doc. 71-1)(“Tobacco & Water Advertisement”). See Complaint ¶ 43, at 17-21. Advertisements from that period also state in large

bold writing, “100% ADDITIVE-FREE NATURAL TOBACCO,” and advertisements include, in

smaller writing, “No additives in our tobacco does NOT mean a safer cigarette.” Tobacco and Water Advertisement (all caps, bold, and emphasis in original); Complaint ¶ 43, at 17-21(all caps, bold, and emphasis in original). In 2015, the Defendants launched a nationwide advertising campaign and targeted Sports Illustrated, Time, Field and Stream, Southern Living, Architectural Digest, Vanity Fair, and US Weekly magazines. See Amended Complaint ¶ 44, at 21. Regarding

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that advertising campaign, a spokesman for Santa Fe Tobacco explained: “The aim is to drive brand awareness, highlight Natural American Spirit’s 100-percent additive-free natural tobacco proposition.” Amended Complaint ¶ 45, at 21-22.
Natural American cigarettes are the most expensive major brand of cigarette. See
Complaint ¶ 88, at 36. Reynolds American explains that the higher price stems from “its use of all natural, additive-free tobacco.” Complaint ¶ 89, at 36 (citing Reynolds American, Inc. Form 10-Q United States Securities and Exchange Commission Filing for the Quarterly Period Ended March 31, 2016, available at http://s2.q4cdn.com/129460998/files/doc_financials/2016/RAI-Q116-10-Q.pdf (last visited Oct. 28, 2017)). Despite their higher price, Natural American cigarette sales increased eighty-six percent from 2009 through 2014, while cigarette sales in the United States of America declined overall by seventeen percent. See Amended Complaint ¶ 45, at 22. Its market share during a similar period “more than doubled.” Amended Complaint ¶ 45, at 22. Between 2014 and 2015 alone, Natural American cigarette sales increased by 21.4%. See Amended Complaint ¶ 45, at 22.
The Plaintiffs cite numerous studies regarding the popularity and consumer perceptions of cigarettes branded as “natural.” Amended Complaint ¶¶ 50-54, at 23-27.²On August 27, 2015, the

²The Amended Complaint notes that, in 2007, researchers at the University of California performed a study regarding the ways in which smokers “down-play the risks” by determining that “natural” cigarettes are safer or healthier than other cigarettes containing chemicals. Amended Complaint ¶ 50, at 23 (quoting McDaniel, Patricia A. & Ruth E. Malone, “I Always Thought They Were All Pure Tobacco”: American Smokers’ Perceptions of “Natural” Cigarettes and Tobacco Industry Advertising Strategies, 16(6) Tobacco Control (2007), available at

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2807204/. The study, according to the Plaintiffs,

concludes that tobacco companies seek to alleviate smokers’ concerns about health by modifying products and describing them as “natural.” Amended Complaint ¶ 51, at 22-23. The Amended Complaint notes that a study from the Schroeder Institute, a non-profit that researches tobacco and policy with a goal of reducing tobacco use, observes that consumers rely on companies’ branding of cigarettes as “‘natural, organic, and additive free,’” so such branding possibly encourages consumers to try a product that they otherwise would not try or to switch to Natural American cigarettes rather than quitting smoking. Amended Complaint ¶ 52, at 24 (quoting Pearson, Jennifer L., et al., Misperceptions of harm among Natural American Spirit smokers: results from wave 1 of the

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Food and Drug Administration (“FDA”) sent a Warning Letter, filed November 18, 2016 (Doc. 71- 1)(Ex. 8)(“Warning Letter”) to Santa Fe Tobacco asserting that some of the Defendants’ cigarette labeling practices “explicitly and/or implicitly” represent that Natural American cigarettes do not contain certain materials, so they represent that Natural American cigarettes pose less of a risk than other tobacco products. Amended Complaint ¶ 58, at 28-29 (quoting Warning Letter at 2). Santa Fe Tobacco previously entered into a Consent Order with the FTC regarding its advertising practices, because the FTC had concerns that the Defendants’ advertising mislead consumers into believing that “Additive-Free” or “Chemical-Free” cigarettes are safer or less harmful than other tobacco products. Consent Order at 1-10 [on CM/ECF at 10-19]. The Consent Order requires that, “beginning no later than (30) days after the date of service of this order,” Santa Fe Tobacco’s advertisements must display the warning: “No additives in our tobacco does NOT mean a safer cigarette.” Consent Order, at 4 [at 13 on CM/ECF]. Among other requirements, this statement must be “[i]n the same style and type size as that required for health warnings for tobacco cigarettes.” Consent Order at 3 [at 12 on CM/ECF]. A later “Assurance of Voluntary Compliance” stipulates that, effective March 1, 2010, all advertisements found in either “display or distribution” of any Santa Fe Tobacco cigarette made with organic tobacco should display the statement “Organic

Population Assessment of Tobacco and Health (PATH) study (2013-2014) at 1, Tobacco Control (Dec. 6, 2016)(“Misperceptions”). The study further finds, according to the Plaintiffs, that 8.3 percent of other cigarette brand smokers believe that their brand is “less harmful than other brands” whereas 63.9 percent of Natural American smokers believe that their brand is less harmful. Amended Complaint ¶ 52, at 24 (quoting Misperceptions, at 1). Additionally, the study determines that Natural American smokers believe their brand is less harmful, because the branding has “natural” and “additive free” descriptors. Amended Complaint ¶ 52, at 25 (citing Misperceptions, at 1). In a recent survey of 1000 smokers in the United States, sixty percent believe that cigarettes without additives are safer to smoke than other cigarettes, and seventy-three percent think that cigarettes containing additives are more dangerous than cigarettes that do not contain additives. See Amended Complaint ¶ 53, at 25-26 (citing Cummings, K.M., et al., Are smokers adequately informed about the health risks of smoking and medicinal nicotine?, Nicotine & Tobacco Research 6(3), 333-340 (2004)).

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tobacco does NOT mean a safer cigarette.” Assurance of Voluntary Compliance at 5-6 [on CM/ECF at 33-34], (dated March 1, 2010), filed November 18, 2016 (Doc. 71-1)(ex. F)(“Voluntary Compliance Agreement”).
Neither the Plaintiffs nor the Defendants allege that Natural American cigarettes are in any way safer than other cigarettes. See Amended Complaint ¶ 59, at 29. One scientific study, according to the Plaintiffs, found that Natural American blue box cigarettes contain the highest level of polycyclic aromatic hydrocarbons³of fifty United States cigarette brands tested. See Amended Complaint ¶ 61, at 29 (citing An T. Vu et al., Polycyclic Aromatic Hydrocarbons in the Mainstream Smoke of Popular U.S. Cigarettes, National Center for Biotechnological Information (July 30, 2015) available at http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4540633/). Also according to the Plaintiffs, the Centers for Disease Control and Prevention found that Natural American cigarettes contain higher concentrations of both cadmium and mercury than the other fifty varieties of United States cigarettes tested.⁴See Amended Complaint ¶ 62, at 30 (citing Mark R. Fresquez, R. Steven Pappas, and Clifford H. Watson, Establishment of Toxic Metal Reference Range in Tobacco from U.S. Cigarettes, J. Analytical Toxicology, 37(5) 298-304 (2013)). Another study evaluated the levels of “free-base” nicotine in United States cigarettes, and the Plaintiffs allege that it determined that Natural American cigarettes has a higher nicotine concentration than Camel, Marlboro, and

³Polycyclic aromatic hydrocarbons are “the sooty part of smoke or ash.”

Polycyclic

Aromatic Hydrocarbons (PAHs), Wisconsin Department of Health Services (March 13, 2017) available at https://www.dhs.wisconsin.gov/chemical/pah.htm (last accessed October 27, 2017).

⁴Cadmium and mercury are both heavy metals that have adverse health effects. See
Amended Complaint ¶ 62, at 30. Cadmium is a carcinogen that is linked to chronic obstructive pulmonary disease and nephrotoxicity -- a toxicity of the kidneys. See Amended Complaint ¶ 62, at 30.

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Winston-brand cigarettes.⁵Amended Complaint ¶ 66, at 31 (citing Pankow, J., Barsanti, K., & Peyton, D., Fraction of Free-Base Nicotine in Fresh Smoke Particulate Matter from the Eclipse Cigarette by 1H NMR Spectroscopy, Chem. Res. in Toxicology 16(1): 23-27 (2003)).
Although labeled as “additive free,” the Defendants add menthol in certain varieties of
Natural American cigarettes. See Amended Complaint ¶ 68, at 31. Natural American cigarettes are also “flue-cured,” meaning that the Defendants process the tobacco with heat to secure the sugars, which synthetically lowers the cigarette smoke’s pH⁶and makes it easier to inhale. Amended Complaint ¶ 72, at 32. The tobacco in the Defendants’ cigarettes is artificially blended and modified, much like other cigarettes in the industry. See Amended Complaint ¶¶ 73-74, at 33. Despite these alterations to the tobacco product, the Natural American cigarettes are labeled “Natural.” Amended Complaint ¶¶ 74-76, at 33.

PROCEDURAL BACKGROUND

The Plaintiffs brought thirteen separate actions in eight federal district courts, alleging similar liability theories. See In re Santa Fe Nat. Tobacco Co. Mktg. & Sales Practices Litig., 178 F. Supp. 3d 1377, 1378 (U.S. Jud. Pan. Mult. Lit. 2016)(“Transfer Order”).⁷One Plaintiff with an action pending in the District of New Mexico, Ceyhan Haskal, moved for centralization under 28 U.S.C §

⁵Free-base nicotine is a basic form of nicotine that is more volatile, particularly when smoked. See Amended Complaint ¶ 64, at 30. Free-base nicotine is therefore more quickly absorbed into the lungs when smoking, and as a result, reaches the brain faster. See Amended Complaint ¶ 64, at 30. Elevated concentrations of free-base nicotine do not arise naturally. See Amended Complaint ¶ 66, at 31.

⁶pH is a measure of hydrogen ion concentration in a solution, and signals a solution’s acidity or alkalinity. See Anne Marie Helmenstine, pH Definition and Equation in Chemistry, Chemistry Glossary Definition of pH at 1 (August 31, 2017) available at https://www.thoughtco.com/definition-

of-ph-in-chemistry-604605.

⁷The Court now has sixteen separate actions before it. See In Re Santa Fe Natural Tobacco
Co. Marketing and Sales Practice Litig., No. 16-2695 (Apr. 11, 2016).

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1407. See Transfer Order, 178 F. Supp. 3d at 1378. Santa Fe Tobacco and Reynolds American opposed centralization, but agreed that the District of New Mexico was an appropriate transferee forum. See Transfer Order, 178 F. Supp. 3d at 1378. All responding Plaintiffs agreed on centralization, but disagreed upon the transferee district.⁸See Transfer Order, 178 F. Supp. 3d at 1378. The Judicial Panel on Multidistrict Litigation concluded that the actions presented “involve common questions of fact, and that centralization will serve the convenience of the parties,” and ordered consolidation. Transfer Order, 178 F. Supp. 3d at 1378-79. The Panel further concluded that the District of New Mexico was an appropriate transferee district because: (i) Santa Fe Natural Tobacco is headquartered in the District of New Mexico; (ii) key witnesses reside in the District of New Mexico; (iii) four actions were pending in the District of New Mexico; (iv) the Defendants agreed that the District of New Mexico provides a “convenient and accessible location for the geographically dispersed litigation”; and (v) centralizing before the Court allowed the Panel “to assign [the] litigation to an able and experienced jurist who has not had the opportunity to preside over [a multidistrict litigation].” Transfer Order, 178 F. Supp. 3d at 1379.