"Tax-free cigarettes" case continues

Gristede's Foods, Inc. v. Unkechauge Nation, 2008 WL 3334032 (E.D.N.Y.)

Previous discussion here. Gristede’s sued the Unkechauge for falsely advertising its cigarettes as “tax-free,” when purchasers were supposed to pay the tax to the state.

First, the Unkechauge defendants argued that the Lanham Act claim was time-barred. The Lanham Act has no limitations period of its own, and borrows from coordinate state claims. The defendants argued that plaintiff’s claim was a statutorily created penalty, and thus subject to NY’s three-year statute of limitations for general penalties imposed by statute. Gristede’s contended that NY’s six-year statute of limitations for fraud was more appropriate. Since the Second Circuit has already held that the six-year fraud period is the most analogous statute of limitations, Gristede’s had the better of the argument. This was true even of Gristede’s claim for damages, which the defendants argued should be treated separately than the injunctive relief claim.

Next, defendants argued that the claim accrued in 2000, when Gristede’s became aware of a competitive injury. Under federal law, a claim accrues when a plaintiff discovers, or should have discovered, its injury. Though the complaint alleged that defendants have been falsely advertising “tax-free” cigarettes since 2000, a time bar doesn’t appear on the face of the complaint. Gristede’s filed in March 2006, so even assuming awareness as of 2000, there’s not necessarily a time bar.

The defendants then argued that, because N.Y. Tax Law § 471-a does not require payment of an excise tax for purchases of less than 400 cigarettes, “tax-free” isn’t false where no quantity term appears in the ads. The court found the complaint stated a Lanham Act claim. It specifically alleged that the ads induce non-tribe members to purchase “large quantities,” which may be more than 400 cigarettes (2 cartons). The defendants argued that, when an ad does’t contain a quantity term, no such term may be inferred to show falsity; the court saw no reason to apply such a rule.

Defendants then creatively attempted to turn the doctrine of falsity by necessary implication into a shield rather than a sword, arguing that “tax-free” must be evaluated in context and was not false, given that there was a debate in NY about the taxation of cigarette sales by reservation retailers to non-tribe members. In addition, defendants argued that they did not intend to convey a message of total tax exemption.

The court rejected these arguments. The “context” in which a particular claim must be evaluated is the ad itself, not the “larger political and social context.” And, if the larger context or intent were relevant, it would not be at the motion to dismiss stage.

Finally, defendants argued that the ads weren’t false, given that NY has a “policy of forbearance on the collection of taxes on cigarette sales made to Native American retailers for re-sale to the public.” The court had rejected this argument in its earlier opinion, holding that the law was clear that non-tribal consumers are in fact liable for the tax; it is a criminal misdemeanor to wilfully fail to pay it or attempt to evade it.