Judge rules in favor of scorned e-liquid manufacturer in vaping case

August 23, 2016

Opponents of Indiana’s controversial vaping law scored a victory Friday when a federal judge ruled in favor of a Florida e-liquid manufacturer that argued the law was unconstitutional.

Richard Young, chief judge for the Southern District of Indiana, granted a preliminary injunction that applies only to the one company, GoodCat LLC, after finding that it had a reasonable likelihood of success in overturning at least part of the law.

Young ordered the Indiana Alcohol and Tobacco Commission to issue the company a manufacturing permit for e-liquids until its lawsuit against the state can be fully heard.

The U.S. Constitution's commerce clause “implicitly prohibits state and local governments, even in the absence of federal legislation, from enacting laws that discriminate against or excessively burden interstate commerce,” Young wrote in his ruling.

"If the court denied preliminary relief, GoodCat would have to withdraw its commercial presence in Indiana,” Young wrote. "GoodCat would incur lost profits during the pendency of this litigation and have no way to recover. More fundamentally, however, a reasonable likelihood of a constitutional violation, such as GoodCat alleges, rises to the level of irreparable harm for the purposes of injunctive relief.”

The state law went into effect July 1 and the FBI is probing whether any illegal activity led to its creation and passage.

GoodCat argued in its suit that the law negatively impacted interstate commerce because "90 percent of the revenue from branded e-liquids came from e-liquids manufacturers outside of Indiana.” The e-liquid brands sold in Indiana were associated with 177 businesses—only 13 of which were located in Indiana.

Now, Young noted, "two-thirds of the permittees producing e-liquids for sale in Indiana have Indiana addresses.” After the law took effect, the ATC approved only six manufacturers—and two of them don't appear to be actually making any product.

GoodCat, which has operated since 2009 and has been selling its products in about 200 Indiana retail stores, also argued the law’s stringent security firm requirements were discriminatory.

The Florida company was one of 18 applicants to try to get a contract with Lafayette security firm Mulhaupt’s, which is the only firm that appears to meet the stringent requirements of the law. But Mulhaupt’s denied GoodCat's application, along with several other manufacturers from in and outside of Indiana.

After Mulhaupt’s denial, GoodCat tried independently to meet the requirements of the law by contracting and subcontracting with vendors who had many of the requirements set forth in the law.

It tried unsuccessfully to get approved by the Indiana Alcohol and Tobacco Commission, but its application was returned because the state law required that it have a five-year contract with an approved security firm.

Young wrote that the act “effectively delegated a policy of economic protectionism to a private entity” by giving “complete discretion” to Mulhaupt’s to decide who it wanted to work with.

"The Act’s security requirements are such that only one local firm can provide a state-mandated service for commercial access to Indiana’s market for e-liquids,” Young wrote. "As one might predict, the lone firm’s capacity in fact favors local commerce at the expense of interstate commerce."

Young's ruling noted that he did not believe GoodCat was likely to succeed on the merits of a separate argument that the federal regulations preempted the state law.

It is unclear when the lawsuit will go to trial. The Indiana Attorney General’s office, which represents the state, said it was still deciding whether to appeal the preliminary ruling.

“We respect the court’s ruling, particularly that the state is not likely to be preempted by federal authority so Indiana can protect the health and safety of its citizens,” said Indiana Attorney General Greg Zoeller. "The state contends that decisions about how to regulate the businesses that manufacture the chemicals used in e-cigarettes ought to be made by the people’s elected representatives in the Legislature—and if this current statute is found to be inadequate, then legislators should consider revising the law next session."

That the ruling only applies to the Florida company was a letdown to local and in-state manufacturers who believed they were shut out of the market due to Mulhaupt's control over the industry.

Evan McMahon, chairman of advocacy group Hoosier Vapers, said the ruling was “more evidence that this monopolistic law was ill-conceived and runs counter to Hoosier free-market values.”

“We believe this is a step in the right direction, but since it only applies to one out-of-state manufacturer, we must continue to call on the courts and the Legislature to act on behalf of the Indiana businesses that have been forced to leave the state or close entirely because of this law.”

Two other lawsuits filed against the law have so far led to rulings for the state. A federal judge on June 30 upheld the vaping law as constitutional, and a Marion County Superior Court judge on June 2 denied the opponents' request for a preliminary injunction.

In the other federal case, Judge Sarah Evans Barker of the Southern District of Indiana said that although the law was “quite restrictive,” its requirements were "rationally related" to the concerns that the law addresses.

But the GoodCat lawsuit challenged the narrow provisions aimed at security firms on legal theories that it argued were not squarely before the court in previous lawsuits.

That prompted Young in late June to issue a temporary restraining order in the case and order the Indiana ATC to grant a provisional manufacturing permit to GoodCat LLC so that it could continue participating in the Indiana market. He extended the order several times before deciding to issue the preliminary injunction.


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