Legato Vapors, LLC v. David Cook
2017 U.S. App. LEXIS 1598
| 7th Cir. | 2017Background
- In 2015 Indiana enacted the Vapor Pens and E-Liquid Act regulating e-liquids and vapor pen products, including in-state sales (labeling, child-proof packaging, and sales-to-minors prohibitions) and detailed manufacturing standards.
- The Act requires any manufacturer (defined to include out-of-state firms) who sells products in Indiana to obtain a permit tied to facility requirements: mandatory clean rooms, specified cleaning materials/equipment, strict security systems, long-term contracts with certified third‑party security firms, and retention of samples.
- Permit applicants must consent to audits, on-site inspections, and background checks; the Act potentially reaches manufacturers whose products later enter Indiana through distributors or online retailers.
- Three out-of-state manufacturers sued Indiana officials seeking declaratory and injunctive relief, arguing the challenged provisions unlawfully regulate conduct outside Indiana in violation of the dormant Commerce Clause. The district court granted summary judgment to the state; the Seventh Circuit reversed.
- The Seventh Circuit narrowed the challenge to provisions governing security contract terms/qualifications, clean-room construction/operations and sanitation standards, and audit/inspection provisions as applied to out-of-state manufacturers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Security provisions (mandatory third‑party contract, firm qualifications, 5‑year term, monitoring and key systems) | Indiana cannot force out‑of‑state manufacturers to contract with particular types of security firms or employees; those provisions directly regulate out‑of‑state facilities and services. | Law is facially neutral and protects health/safety; Indiana must ensure product integrity and has authority to set security standards tied to sales in Indiana. | Invalid as applied to out‑of‑state manufacturers: the provisions are extraterritorial regulation that govern out‑of‑state commercial relationships and production facilities, violating the dormant Commerce Clause. |
| Clean‑room and sanitation specifications (construction, sinks, specific cleansers, Indiana Commercial Kitchen Code) | Requiring specific physical plant designs and cleaning protocols for out‑of‑state facilities is direct extraterritorial regulation and risks inconsistent laws among states. | These are reasonable safety requirements to prevent contamination of products sold in Indiana. | Invalid as applied to out‑of‑state manufacturers: the provisions directly regulate out‑of‑state production facilities and processes and therefore are extraterritorial. |
| Audit and inspection provisions (consent to entry, sampling, background checks, projected output reporting) | On‑site audits/inspections and background checks enforced to implement Indiana’s facility/process standards are extraterritorial when applied to out‑of‑state manufacturers. | Audits are necessary to verify compliance with safety standards for products sold in Indiana. | Audits and on‑site inspections are invalid insofar as they enforce Indiana’s out‑of‑state facility/process requirements; some sampling/inspections not directly tied to production processes left open for future challenge. |
| Regulation of wholly out‑of‑state commercial transactions (sales to out‑of‑state distributors or retailers that later sell into Indiana; online sales) | The Act effectively regulates transactions that occur entirely outside Indiana because manufacturers can be held liable if their products later reach Indiana. | The Act targets sales into Indiana and is facially neutral; regulation is justified to protect Indiana consumers. | Sales and distribution transactions that occur wholly outside Indiana are impermissibly regulated by Indiana when the statute is applied extraterritorially; law cannot reach those out‑of‑state transactions. |
Key Cases Cited
- Gibbons v. Ogden, 22 U.S. 1 (early Commerce Clause power case)
- Wilson v. Black Bird Creek Marsh Co., 27 U.S. 245 (early Commerce Clause precedent)
- Lewis v. BT Investment Managers, Inc., 447 U.S. 27 (dormant Commerce Clause limits on states)
- Southern Pacific Co. v. Arizona, 325 U.S. 761 (balancing test for undue burdens on interstate commerce)
- Healy v. Beer Institute, 491 U.S. 324 (state law may not have extraterritorial reach)
- Brown‑Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573 (invalidating extraterritorial/discriminatory state regulation)
- Edgar v. MITE Corp., 457 U.S. 624 (state law that directly burdens interstate commerce is invalid)
- Maine v. Taylor, 477 U.S. 131 (strict scrutiny for discriminatory state laws)
- Pike v. Bruce Church, Inc., 397 U.S. 137 (permissible balancing approach for non‑discriminatory laws)
- Midwest Title Loans, Inc. v. Mills, 593 F.3d 660 (7th Cir.) (invalidating state law that regulated wholly out‑of‑state loan transactions)
- Dean Foods Co. v. Brancel, 187 F.3d 609 (7th Cir.) (state cannot apply price rules to sales occurring outside the state)
- National Solid Wastes Management Ass'n v. Meyer, 63 F.3d 652 (7th Cir.) (invalidating extraterritorial regulation of out‑of‑state conduct)
- National Electrical Manufacturers Ass'n v. Sorrell, 272 F.3d 104 (2d Cir.) (upholding state labeling law as not extraterritorial)
- International Dairy Foods Ass'n v. Boggs, 622 F.3d 628 (6th Cir.) (upholding labeling/disclosure law against extraterritorial challenge)