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Lorillard Tobacco Co. v. Elston Self Service Wholesale Groceries

June 9, 2009

LORILLARD TOBACCO CO., A DELAWARE CORPORATION, PLAINTIFF,
v.
ELSTON SELF SERVICE WHOLESALE GROCERIES, INC, AN ILLINOIS CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge Joan B. Gottschall

MEMORANDUM OPINION & ORDER

Before the court are two motions for partial summary judgment by Defendants Elston Self Service Wholesale Groceries, Inc., Masshour Dukum, Ibrahim Dukum, and David Dukum (collectively Defendants or "Elston"). Elston seeks partial summary judgment on parts of Count VI and Count VIII of the amended complaint.

Count VI is based on the Illinois Uniform Deceptive Trade Practices Act, 815 Ill. Comp. Stat. 510/2 ("Deceptive Practices Act" or "the Act"), and presents two distinct theories-indeed, two separate counts. The first is related to accusations that Elston has sold counterfeit Newport cigarettes in violation of the Act. The second is related to accusations that Elston participated in a cigarette recirculation scheme in violation of the Act. Elston is moving for summary judgment only on the recirculation scheme claim, which is GRANTED.

Count VIII is based on a theory of common-law fraud, and again contains two theories of relief. The first relates to accusations that Elston produced false, inflated invoices to be used by retailers to defraud Lorillard through its promotional programs. The second relates to the sale of recirculated cigarettes, alleging that Elston created a market for recirculated cigarettes and induced some retailers to defraud Lorillard's promotional programs. Elston is moving for summary judgment only on the recirculation scheme claim, which is DENIED.

Before turning to the merits of these claims, a comment on the parties' pleadings is necessary. Elston's initial brief in support of its motion for partial summary judgment on Count VI mistakenly refers to the Consumer Fraud and Deceptive Business Practices Act ("CFDBPA"), and focused significantly on a question of "consumer nexus" that is relevant only to the CFDBPA, but is not relevant to the Deceptive Practices Act that the complaint actually cites. Still, the brief relied in small part on the Deceptive Practices Act. In its response brief, Lorillard focused exclusively on the mistaken reference to the CFDBPA, and the inapplicability of the "consumer nexus" standard, and did not respond to Elston's other arguments. In its reply, Elston acknowledged its error, but pointed out that it had provided an alternative basis for its motion under the Deceptive Practices Act. Elston also presented additional arguments in its reply that had not been made in its opening brief. Lorillard thereafter sought leave to file a sur-reply, which argues first that Elston's additional arguments are waived, and second, that they should be denied on the merits. Lorillard was given leave to file its sur-reply.

Arguments raised for the first time in a reply brief may be considered waived, see Palmer v. Marion County, 327 F.3d 588, 597--98 (7th Cir. 2003), but the court will not do so here since both parties have been permitted to fully brief the merits of the issue.

I. BACKGROUND*fn1

Plaintiff Lorillard Tobacco Company ("Lorillard") has brought suit against Elston, pleading eight counts stemming from two general allegations. The first is that Elston sold counterfeit cigarettes that improperly carry the Newport mark. The second is that Elston purchased "recirculated" cigarettes-that is, cigarettes that were sold first from wholesalers to retailers, then from retailers to intermediaries, and next from the intermediaries to Elston, who would then sell the cigarettes to different retailers. Lorillard alleges that this recirculation scheme violates a promotional program offered by Lorillard, referred to as a "buy-down rebate program."

Elston is a wholesaler of various products, including cigarettes. Elston does not purchase directly from Lorillard, but purchases from other wholesalers and then re-sells the cigarettes (and other items) to retailers such as gas companies and convenience stores. Elston is not a "retailer," meaning that Elston does not sell directly to end-user consumers.

Lorillard offers certain retailers a buy-down rebate program. Programs like this are common throughout the industry. The program involves an agreement between Lorillard and a retailer. The retailer typically agrees to display signage and related promotional materials that advertise Lorillard's product, and in exchange the retailer typically receives a rebate on the price paid for the cigarettes, which rebate must be passed on to consumers. The retailer does not receive a direct financial incentive from Lorillard to participate in this program, but benefits from the program by being able to offer Newport cigarettes at a lower price, resulting in the potential for a larger volume of sales.

Wholesalers like Elston do not participate directly in the buy-down program, and are not a party to buy-down agreements between Lorillard and the retailer. But wholesalers like Elston provide electronic reporting services to Lorillard regarding their cigarette sales, which Lorillard requires them to do in order for the retailers purchasing from the wholesaler to be able to participate in the buy-down program.

Though the agreement between Lorillard and a retailer requires the retailer to sell the buy-down cigarettes to end-user customers, some retailers do not follow those rules, and instead sell the cigarettes to an intermediary, who sells the cigarettes back to wholesalers such as Elston. This arrangement can potentially be profitable to the retailer, intermediary, and wholesaler, and costly to Lorillard. A hypothetical example is illustrative. If a carton of cigarettes would normally be sold from a wholesaler to a retailer for $40, the rebate program may permit the retailer to receive a $10 rebate from Lorillard, so that the retailer could sell the carton for $30 to an end-user consumer.*fn2 In this example, the retailer may instead sell the carton to an intermediary for $33, while still collecting the $10 rebate from Lorillard, generating a $3 profit for the retailer. The intermediary may sell the carton to a wholesaler for $36, thereby realizing a $3 profit for itself. The wholesaler could then sell the same carton to a new retailer for $40, realizing a $4 profit. The carton may then be sold to a new retailer as part of the buy-down rebate program, and Lorillard could end up paying a second discount on the same carton.

The parties agree that Elston has at least occasionally purchased from intermediaries cigarettes for which Lorillard had previously paid a rebate. The parties dispute whether Elston was aware that the cigarettes it was purchasing were being "recirculated."

Some facts related to the shelf-life of Newports is also relevant. Newport cigarettes become stale as they age, though neither party discloses when a typical Newport becomes stale. All cartons are encoded with a time-stamp from which the carton's age, and approximate freshness, can be calculated, but it is a proprietary code that wholesalers such as Elston are unable to read. Lorillard periodically comes to wholesalers like Elston to inspect their Newport stock, and to ensure that any cartons ...


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