King Mountain Tobacco Company, Inc. v. Robert McKenna

King Mountain Tobacco Company and the Confederated

Tribes and Bands of the Yakama Indian Nation (collectively

"Appellants”) sued the Attorney General of the State of

Washington for declaratory and injunctive relief from

Washington's escrow statute, Wash. Rev. Code

§§ 70.157.005–70.157.030 (2013). The escrow statute

requires King Mountain to place money into escrow to

reimburse the State for health care costs related to the use of

tobacco products. The amount placed in escrow is based on

the number of cigarette sales made that are subject to state

cigarette taxes. Appellants argue that the Yakama Treaty of

1855 is an "express federal law” that exempts the Yakama

people from Washington's escrow statute. The State argues

that the Treaty does not preclude it from regulating tobacco

products sold nationally and that, as a nondiscriminatory state

law that is not expressly preempted by federal law, the

escrow statute applies to King Mountain. The district court

granted summary judgment in favor of the State, and

KING MOUNTAIN TOBACCO 4 CO. V. MCKENNA

Appellants appeal. We have jurisdiction under 28 U.S.C.

§ 1291, and we affirm the judgment of the district court.

BACKGROUND

The Treaty between the Confederated Tribes and Bands

of the Yakama Indian Nation and the United States was

negotiated and signed in 1855. See Treaty with the Yakamas,

12 Stat. 951 (1855).1 Under the Treaty, the people of the

Yakama Nation agreed to cede a majority of their lands to the

United States in return for certain reserved rights. Id. The

Yakama Nation also agreed to live on reserved lands held in

trust by the United States. Id.

A. King Mountain Tobacco Company

King Mountain Tobacco Company is owned and operated

by Delbert Wheeler, an enrolled member of the Yakama

Nation. King Mountain initially obtained all of its tobacco

from an entity in North Carolina. Today, King Mountain

grows some of its tobacco and manufactures its tobacco

products, in part, on trust lands within the boundaries of the

Yakama Nation. In 2009, approximately 3.1% of the tobacco

used in King Mountain's products was grown on trust lands.

By 2010, that amount had risen to 9.5%. In 2011, it rose

again, to 37.9%.

King Mountain ships its tobacco crop to Tennessee where

it is threshed. From there, the tobacco is sent to a factory in

North Carolina where more tobacco is added to the

reservation tobacco. This process is called "blending.” After

1 The Treaty refers to the tribe as the "Yakamas” but the parties use

"Yakama,” so we adopt that convention.

KING MOUNTAIN TOBACCO CO. V. MCKENNA 5

blending is complete, the tobacco is sent back to the

reservation. King Mountain sells cigarettes and other tobacco

products on the reservation, throughout Washington, and in

about sixteen other states.

B. Washington's Escrow Statute

In 1998, forty-six states, the District of Columbia, and

five United States territories settled a lawsuit against four

major cigarette manufacturers, creating a Master Settlement

Agreement (MSA). The MSA requires the manufacturers to

make substantial annual cash payments to the settling states

and territories, in perpetuity, to offset the increased cost to the

health care system created by smoking. In return, the

manufacturers obtained a release of specified past and future

tobacco-related claims against them.

Not all cigarette manufacturers joined the MSA, either

initially or later. The states feared that these nonparticipating

manufacturers (NPMs) would become insolvent

against future liability for smoking-related health care costs.

Because of this concern, many states adopted escrow statutes.

The escrow statutes require NPMs to either join the MSA or

pay into a qualified escrow fund. See, e.g., Wash. Rev. Code

§ 70.157.020(b) (2013).

Washington adopted an escrow statute to offset smokingrelated

health care costs caused by NPMs. Id. § 70.157.005.

For each qualifying unit of tobacco sold, NPMs must make a

flat-fee payment into an escrow fund. Id. § 70.157.020(b)(1).

The NPMs earn interest on the escrow account balances. Id.

§ 70.157.020(b)(2). The money in the escrow account may

be released only: (1) to pay a judgment or settlement; (2) as

a refund to the NPM for overpayment to the account; or (3)

KING MOUNTAIN TOBACCO 6 CO. V. MCKENNA

as a refund to the NPM after the funds have been in the

account for 25 years. Id.

King Mountain initially complied with Washington's

escrow statute; but in 2011, it filed this lawsuit to contest its

obligation to comply.

C. The District Court's Order

Appellants and the State filed cross-motions for summary

judgment in district court. Appellants offered evidence of the

Yakama people's understanding of the 1855 Treaty to support

their claim that the Treaty is an express federal law that

exempts King Mountain's activities from state economic

regulation. The district court made findings regarding how

Washington's escrow statute operates and regarding King

Mountain's business.

The district court began its analysis by observing: "It is

well-settled that a state can regulate (i) off-reservation

transactions conducted by Native Americans; (ii) onreservation

sales to persons other than Native Americans; and

(iii) impose certain requirements upon Native Americans in

regulating those sales.” It also explained, quoting Mescalero

Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973):

"Absent express federal law to the contrary, Indians going

beyond reservation boundaries have generally been held

subject to nondiscriminatory state law otherwise applicable

to all citizens of the State.”

The district court found that "King Mountain's operations

involve extensive off-reservation activity” and that "the

cigarettes and roll-your-own tobacco products produced by

King Mountain are not principally generated from the use of

KING MOUNTAIN TOBACCO CO. V. MCKENNA 7

reservation land and resources.” Rejecting King Mountain's

argument to the contrary, the district court concluded:

"Washington['s] escrow statutes are non-discriminatory state

laws of general application.” Applying Mescalero, the court

ruled that "King Mountain ha[d] not met its burden of

showing express federal law exempting its business from

state regulation nor [did] it offer case authority invalidating

application of any state's escrow statute based on an Indian

Treaty or any other federal law.” The district court granted

the State's motion for summary judgment and denied

Appellants' motion.

STANDARD OF REVIEW

This court reviews a district court's order granting

summary judgment de novo. Ramsey v. United States,

302 F.3d 1074, 1077 (9th Cir. 2002). Viewing the evidence

in the light most favorable to the nonmoving party, we

determine "whether there are any genuine issues of material

fact and whether the district court correctly applied the

relevant substantive law.” Id. We also review de novo the

interpretation and application of treaty text. Cree v. Flores,

157 F.3d 762, 768 (9th Cir. 1998) (Cree II). "Underlying

factual findings, including findings of historical fact, are

reviewed for clear error.” Id.

DISCUSSION

Appellants argue that summary judgment in favor of the

State was improper because the district court failed to

consider evidence showing how the Yakama people

understood the Treaty in 1855. They also argue that the

Yakama Treaty is express federal law exempting the Yakama

people from the Washington escrow statute. In response, the

KING MOUNTAIN TOBACCO 8 CO. V. MCKENNA

State counters that its escrow statute is a nondiscriminatory

law that applies to the Yakama people's off-reservation

activities because there is no express federal law that prevents

its application.

The Supreme Court has explained: "Absent express

federal law to the contrary, Indians going beyond reservation

boundaries have generally been held subject to

nondiscriminatory state law otherwise applicable to all

citizens of the State.” Mescalero, 411 U.S. at 148–49.

Accordingly, our court has explained: "[A] state's authority

to tax tribal members is limited depending on the subject and

location of the tax.” Ramsey, 302 F.3d at 1078. We also

have explained that federal laws, such as treaties, ordinarily

must be interpreted in the light most favorable to Indians:

When a court interprets a state's taxation of

Indians' off-reservation activities, the court

determines if there is an express federal law

prohibiting the tax. The federal law must be

interpreted in the light most favorable to the

Indians, and extrinsic evidence may be used to

show the federal government's and Indians'

intent. Unlike the federal standard, there is no

requirement to find express exemptive

language before employing the canon of

construction favoring Indians.

Id. at 1079. But "even though legal ambiguities are resolved

to the benefit of the Indians, courts cannot ignore plain

language that, viewed in historical context and given a fair

appraisal, clearly runs counter to a tribe's later claims.” Or.

Dep't of Fish & Wildlife v. Klamath Indian Tribe, 473 U.S.

KING MOUNTAIN TOBACCO CO. V. MCKENNA 9

753, 774 (1985) (citations and internal quotation marks

omitted).

A. Washington's escrow statute is a nondiscriminatory

law and King Mountain's activities are largely offreservation.

As an initial matter, Mescalero requires that we determine

whether Washington's escrow statute is discriminatory and

whether King Mountain's activities go beyond the boundaries

of the reservation. See 411 U.S. at 148–49. Appellants argue

that Washington's escrow statute is discriminatory, without

explaining what the statute discriminates against.2 Their

citation to Hunt v. Washington State Apple Advertising

Commission, 432 U.S. 333, 335 (1977), is inapposite because

they provide no evidence to suggest that the Washington

escrow statute treats in-state cigarette manufacturers

differently than out-of-state manufacturers. We conclude the

district court correctly determined that Washington's escrow

statute is nondiscriminatory.

Appellants also argue that the district court erred by

creating a new rule requiring courts to determine whether a

product is principally generated from reservation land before

extending the Treaty protections. The district court found

that "King Mountain's operations involve extensive offreservation

activity.” It also found that "the cigarettes and

roll-your-own tobacco products produced by King Mountain

are not principally generated from the use of reservation land

2 At oral argument, Appellants took the position that the statute

discriminates against the Yakama because it requires the Tribe to waive

its treaty rights. This argument is circular; it presupposes that the Treaty

exempts the Yakama from Washington's escrow statute.

KING MOUNTAIN TOBACCO 10 CO. V. MCKENNA

and resources.” This was a proper application of Mescalero

by the district court, not a new test. It was appropriate for the

court to make a preliminary determination about whether

King Mountain's activities were "off-reservation” for

purposes of applying the test from Mescalero. See Ramsey,

302 F.3d at 1079.

The district court found that King Mountain ships its

tobacco crop to Tennessee where it is threshed. Then the

tobacco is sent to a factory in North Carolina where more

tobacco is purchased and blended with reservation tobacco.

In 2011, less than half of the tobacco in King Mountain's

products was grown on the reservation. After the blending

process, the tobacco is sent back to the reservation, where

much of it is made into cigarettes. King Mountain sells its

tobacco products throughout Washington and in about sixteen

other states. Appellants do not argue that any of the district

court's factual findings were clearly erroneous, see Cree II,

157 F.3d at 768, and we find no support for Appellants'

implied argument that the district court clearly erred by

finding that King Mountain's tobacco-related activities were

largely "off-reservation.”

Having concluded that Washington's escrow statute is

nondiscriminatory and that King Mountain's tobacco related

activities take place largely off-reservation, Mescalero

requires that we decide whether there is an express federal

law that exempts King Mountain's activities from state

economic regulation. See Mescalero, 411 U.S. at 148–49; see

also Ramsey, 302 F.3d at 1077, 1079; Cree v. Waterbury,

78 F.3d 1400, 1403 (9th Cir. 1996) (Cree I).

KING MOUNTAIN TOBACCO CO. V. MCKENNA 11

B. The plain text of the Yakama Treaty does not create

a federal exemption from Washington's escrow

statute.

Appellants argue that the district court erroneously

applied the standard for determining whether a federal law,

rather than a state law, applies to an Indian tribe. They also

argue that the Yakama Treaty is express federal law that

exempts King Mountain from Washington's escrow statute.

The State responds that the district court correctly applied the

Mescalero test and concluded that the Treaty is not an express

federal law that exempts King Mountain from state economic

regulations. We agree with the State.

Contrary to King Mountain's position, the district court

did not apply the "express exemptive language” test for

determining whether a federal law applies to the tribe. See

Ramsey, 302 F.3d at 1078–79 (explaining the differences

between the "express exemptive language” test, which applies

to federal laws, and the "express federal law” test, which

applies to state laws). The district court applied the test from

Mescalero to determine whether there was an "express

federal law exempting [King Mountain's] business from state

regulation.” The district court did not engage in an

exhaustive review of the meaning the Yakama would have

given to the Treaty as of 1855 because it reasoned that "King

Mountain can prove no set of facts in support of the claim

that Washington's escrow statutes are in conflict with the

Treaty or federal law which would entitle Plaintiffs to

relief.”3

3 The State argues that Appellants did not preserve their factual inquiry

argument regarding the meaning of the Yakama Treaty to the Yakama

people. In its motion for summary judgment, King Mountain repeatedly

KING MOUNTAIN TOBACCO 12 CO. V. MCKENNA

Because the Washington escrow statute is a

nondiscriminatory law, Appellants bear the burden of proving

that the Yakama Treaty is an express federal law that exempts

it from Washington's escrow statute. See, e.g., Washington

v. Confederated Tribes of Colville Indian Reservation,

447 U.S. 134, 160 (1980) ("The Tribes, and not the State as

the District Court supposed, bear the burden of showing that

the [state] recordkeeping requirements which they are

challenging are invalid.”). "A treaty can constitute such an

express federal law.” Cree I, 78 F.3d at 1403. As we have

noted, there is no requirement to find express exemptive

language before employing the canon of construction

favoring Indians under the state standard. Ramsey, 302 F.3d

at 1079. But "[t]he canon of construction regarding the

resolution of ambiguities in favor of Indians . . . does not

permit reliance on ambiguities that do not exist; nor does it

permit disregard of the clearly expressed intent of Congress.”

South Carolina v. Catawba Indian Tribe, Inc., 476 U.S. 498,

506 (1986); see also Klamath Indian Tribe, 473 U.S. at 774

("[E]ven though legal ambiguities are resolved to the benefit

of the Indians, courts cannot ignore plain language that,

viewed in historical context and given a fair appraisal, clearly

runs counter to a tribe's later claims.” (citations and internal

quotation marks omitted)).

stated that an Indian Treaty must be construed in favor of the Indians, and

it summarized the evidence that it submitted in support of this argument.

After reviewing the record, we conclude that the State's waiver claim is

not supported. Appellants continually argued that the district court had to

consider the meaning of the Treaty to the Yakama people, and that it

believed there were no disputed facts about how the Yakama people

understood the Treaty in 1855. These arguments are not inconsistent and

they were preserved.

KING MOUNTAIN TOBACCO CO. V. MCKENNA 13

The Indian canon of construction does not alter the

outcome in this case because the relevant text of the Yakama

Treaty is not ambiguous and the plain language of the Treaty

does not provide a federal exemption from the Washington

escrow statute.

1. Article II of the Yakama Treaty does not

constitute an express federal law that exempts

King Mountain from Washington's escrow statute.

Article II of the Yakama Treaty establishes the physical

boundaries of the Yakama reservation and prohibits non-

Indians from inhabiting reservation land unless an exception

applies. Article II of the Treaty reads in relevant part:

There is, however, reserved, from the lands

above ceded for the use and occupation of the

aforesaid confederated tribes and bands of

Indians, the tract of land included within the

following boundaries, to wit: [Description of

the physical boundaries of the reservation]

All which tract shall be set apart and, so far as

necessary, surveyed and marked out, for the

exclusive use and benefit of said confederated

tribes and bands of Indians, as an Indian

reservation; nor shall any white man,

excepting those in the employment of the

Indian Department, be permitted to reside

upon the said reservation without permission

of the tribe and the superintendent and agent.

And the said confederated tribes and bands

agree to remove to, and settle upon, the same,

within one year after the ratification of this

KING MOUNTAIN TOBACCO 14 CO. V. MCKENNA

treaty. In the mean time it shall be lawful for

them to reside upon any ground not in the

actual claim and occupation of citizens of the

United States; and upon any ground claimed

or occupied, if with the permission of the

owner or claimant.

Treaty with the Yakamas, art. II, 12 Stat. 951 (1855).

Appellants argue that, under the Treaty "the Yakama

people were to be the sole residents of the reserved lands

('use and occupation') and were to be the sole beneficiaries

of the resources cultivated on the reserved lands ('exclusive

use and benefit').” They conclude that as understood by the

Yakama, the Treaty "would preserve [the tribe's] traditional

practices of using their lands for growing tobacco and trading

that product with other Yakama and non-Yakama alike,

without economic restrictions.”

Article II defines the geographic boundaries of the

Yakama reservation, and reserves it for Yakama use and

benefit, while prohibiting non-Indians from living on the

reserved land. The "use and occupation” phrase describes the

agreement that the reserved land would be dedicated for the

Yakama to live on and work on: "There is, however,

reserved, from the lands above ceded for the use and

occupation of the aforesaid confederated tribes and bands of

Indians, the tract of land included within the following

boundaries.” Id. (emphasis added). The "exclusive use and

benefit” language concerns who may live on reservation land:

"All which tract shall be set apart and, so far as necessary,

surveyed and marked out, for the exclusive use and benefit of

said confederated tribes and bands of Indians, as an Indian

reservation; nor shall any white man . . . be permitted to

KING MOUNTAIN TOBACCO CO. V. MCKENNA 15

reside upon the said reservation without permission . . . .” Id.

(emphasis added).

There is no ambiguity in Article II requiring us to decide

how the Treaty would be interpreted with regard to the rights

of the Yakama to trade outside the reservation. Washington's

escrow statute does not interfere with King Mountain's ability

to grow tobacco on reservation lands and benefit from the

sale of its tobacco products. Further, Supreme Court

authority precludes interpreting the Yakama Treaty in the

manner urged by Appellants; "exclusive benefit” cannot

mean that King Mountain is free to sell cigarettes to non-

Indians and nonmembers without any regulation by the state.

See Confederated Tribes of Colville Indian Reservation,

447 U.S. at 151.

In Confederated Tribes of Colville Indian Reservation, the

Supreme Court explained that a "State may sometimes

impose a nondiscriminatory tax on non-Indian customers of

Indian retailers doing business on the reservation.” Id. In

that case, the Court held that cigarette sales by a tribe to non-

Indians and nonmember Indians were taxable by the state,

even though sales to tribal members were not taxable by the

state and the tribe imposed its own tax. Id. at 155–56,

160–61. The Court explained that state taxes were not

preempted by federal law and did not interfere with tribal

self-government. Id. at 155–56. In Colville, the Supreme

Court specifically addressed the same treaty at issue here, the

Yakama Treaty of 1855. Id. at 156.

The Washington escrow statute is not a tax. King

Mountain earns interest on the money held in escrow and may

receive a refund after 25 years. Wash. Rev. Code

§ 70.157.020(b)(2) (2013). This provision is significant

KING MOUNTAIN TOBACCO 16 CO. V. MCKENNA

because the escrow scheme imposes a less significant burden

on trade than the tax approved by the Supreme Court in

Colville. Further, Colville involved activity by the Yakama

tribe, 447 U.S. at 139–40, whereas the activity here is by a

private company owned by one Yakama tribal member. We

fail to see how a cigarette tax on tribal activity would not be

preempted by the Yakama Treaty, but a less intrusive escrow

requirement on a private business owned by one tribal

member would be preempted.

Although a treaty may constitute an express federal law

that could exempt tribal activity from state economic

regulation, Cree I, 78 F.3d at 1403, Article II of the Yakama

Treaty does not provide such an exemption in this case.

Article II does not address trade, and there is no ambiguity

that required the district court to conduct an exhaustive

review to discern the meaning the Yakama people would

have given to the Treaty at the time of its signing. We agree

with the district court that Article II does not provide an

express federal exemption from Washington's escrow statute.

2. Article III of the Yakama Treaty does not

constitute an express federal law that exempts

King Mountain from Washington's escrow statute.

Article III of the Yakama Treaty reserves to the tribe the

right to travel on public highways and the right to fish and

hunt. Appellants claim that "[t]his Court's controlling case

law has interpreted Article III as unequivocally prohibiting

imposition of economic restrictions or pre-conditions on the

Yakama people's Treaty right to engage in the trade of

tobacco products.” The language of Article III and our

precedent do not support this claim. The relevant part of

Article III reads:

KING MOUNTAIN TOBACCO CO. V. MCKENNA 17

And provided, That, if necessary for the public

convenience, roads may be run through the

said reservation; and on the other hand, the

right of way, with free access from the same

to the nearest public highway, is secured to

them; as also the right, in common with

citizens of the United States, to travel upon all

public highways.

Treaty with the Yakamas, art. III, 12 Stat. 951 (1855). As

shown by the plain text of Article III, the Treaty reserved to

the Yakama the right "to travel upon all public highways.”

Nowhere in Article III is the right to trade discussed.

Cree I and Cree II involved the same Article III provision

of the Yakama Treaty. Cree II, 157 F.3d at 764; Cree I,

78 F.3d at 1402. In Cree I, our court explained that the

Yakama Nation brought suit to prevent the State of

Washington "from applying state truck license and permit

fees to members of the Yakama tribe.” 78 F.3d at 1401. The

district court granted summary judgment in favor of the

Yakama Nation "on the ground that the phrase 'in common

with,' as used in the Treaty in reference to the highway right”

precluded imposition of those fees. Id. at 1401–02. Our

court reversed the district court's ruling and remanded for

fact-finding regarding the meaning the parties would have

given to the highway right at the time the Treaty was

executed. Id. at 1404.

On remand, the district court conducted an extensive

review of the facts and made several findings. Cree II,

157 F.3d at 766. It granted summary judgment in favor of the

Yakama Nation after concluding that the Treaty provided an

exemption for the Yakama people from the Washington truck

KING MOUNTAIN TOBACCO 18 CO. V. MCKENNA

license and permit fees. Id. at 764. We affirmed the district

court's decision. Id. at 774. We reasoned that the Treaty was

evidence of the importance of the right to travel to the

Yakama, id. at 772, and concluded that "the Treaty clause

must be interpreted to guarantee the Yakamas the right to

transport goods to market over public highways without

payment of fees for that use,” id. at 769.

This right was reaffirmed in United States v. Smiskin,

487 F.3d 1260 (9th Cir. 2007). Smiskin involved Yakama

members who were criminally indicted for trafficking in

contraband cigarettes. Id. at 1262. The federal statute

criminalizing this conduct incorporated state law definitions

and notice requirements. Id. at 1263. We affirmed a district

court order dismissing the indictment because the Yakama

Treaty exempted the Yakama people from complying with

state law notice requirements. Id. at 1272. We concluded

that "[a]pplying [that] type of requirement to the Yakamas

imposes a condition on travel that violates their treaty right

to transport goods to market without restriction.” Id. at 1266

(emphasis added).

We had previously found ambiguity in Article III's right

to travel, and required application of the Indian canon of

construction to clarify the extent of that right. See Cree I,

78 F.3d at 1404. But the right to travel is express in Article

III of the Yakama Treaty, and the Cree cases involved the

right to travel (driving trucks on public roads) for the purpose

of transporting goods to market. In Smiskin, we rejected the

government's argument that the right to travel did not apply

when the Yakama were engaged in commerce. 487 F.3d at

1266–67 ("[T]he right to travel overlaps with the right to

trade under the Yakama Treaty such that excluding

commercial exchanges from its purview would effectively

KING MOUNTAIN TOBACCO CO. V. MCKENNA 19

abrogate our decision in Cree II and render the Right to

Travel provision truly impotent.”). These cases clarified the

extent of the right to travel found in Article III of the Yakama

Treaty.

But there is no right to trade in the Yakama Treaty. The

Indian canon of construction "does not permit reliance on

ambiguities that do not exist; nor does it permit disregard of

the clearly expressed intent of Congress.” Catawba Indian

Tribe, 476 U.S. at 506. The district court did not err by

granting summary judgment to the State without making

findings about the historic meaning of the Treaty to the

Yakama people, because the Treaty's meaning to the Yakama

people cannot overcome the plain and unambiguous text of

the Treaty. See Klamath Indian Tribe, 473 U.S. at 774.

Article III does not provide an express federal exemption

from Washington's escrow statute.

CONCLUSION

Washington's escrow statute is a nondiscriminatory law

that applies to off-reservation activity. Appellants failed to

prove that the Yakama Treaty is an express federal law that

exempts King Mountain from Washington's escrow statute.

The plain language of the Yakama Treaty does not provide an

express federal exemption from the escrow statute. And the

district court did not err by declining to make findings

regarding the Treaty's meaning to the Yakama people at the

time of its signing, because the meaning to the Yakama

people cannot overcome the clear words of the Treaty. We

affirm the district court's order granting summary judgment

KING MOUNTAIN TOBACCO 20 CO. V. MCKENNA

in favor of the State and dismissing Appellants' motion for

summary judgment.

AFFIRMED