              Case: 17-13261       Date Filed: 05/29/2019      Page: 1 of 11


                                                                                [PUBLISH]


                IN THE UNITED STATES COURT OF APPEALS

                          FOR THE ELEVENTH CIRCUIT
                            ________________________

                                   No. 17-13261
                             ________________________

                         D.C. Docket No. 1:16-cv-04469-SCJ


S&M BRANDS, INC.,

                                                                      Plaintiff – Appellant,

                                          versus

STATE OF GEORGIA EX REL.,
Christopher M. Carr, Attorney General,

                                                                    Defendant – Appellee.

                             ________________________

                    Appeal from the United States District Court
                       for the Northern District of Georgia
                          ________________________

                                     (May 29, 2019)

Before TJOFLAT and ROSENBAUM, Circuit Judges, and UNGARO, * District
Judge.



      *
       Honorable Ursula Ungaro, United States District Judge for the Southern District of
      Florida, sitting by designation.
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TJOFLAT, Circuit Judge:

      S&M Brands, Inc., a tobacco producer, appeals the dismissal of its suit

against the State of Georgia. In its complaint for declaratory and injunctive relief,

S&M pleaded several constitutional and state-law violations based on Georgia’s

scheme of tobacco regulation. Georgia moved to dismiss, and the District Court

granted the motion, dismissing the complaint on the grounds that its allegations

did not amount to constitutional violations and its state-law claims were barred by

sovereign immunity. After thorough consideration, and with the benefit of oral

argument, we affirm the dismissal of S&M’s complaint.

                                          I.

      Every tobacco producer that operates in Georgia is licensed to do business

via one of two routes. Many of the producers are parties to the Master Settlement

Agreement (“MSA”), a 20-year-old omnibus settlement between the tobacco

industry and most U.S. states, including Georgia. KT & G Corp. v. Att’y Gen. of

State of Okla., 535 F.3d 1114, 1118–19 (10th Cir. 2008); see generally Nat’l Ass’n

of Att’ys Gen., Master Settlement Agreement (1999) (hereinafter “MSA”). These

producers—the “participating manufacturers,” or PMs—are saddled with ongoing

obligations under the MSA, including a collective payment obligation of billions

of dollars per year, in exchange for the states’ releasing them from liability for

state public-health expenditures caused by cigarette smoking. MSA §§ I, II(jj).

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Other producers—the “non-participating manufacturers,” or NPMs—did not sign

the MSA, do not make payments to the states, and could potentially be sued in the

future if they incur liability for the states’ public-health costs. Since NPMs may

become liable, Georgia requires them to self-insure by contracting with an escrow

agent to establish an escrow fund into which they pay a set amount per cigarette

sold. O.G.C.A. § 10-13-3(2)(A). Otherwise, an NPM could make short-term

profits, rack up liability to the state, and then become judgment-proof before the

state could recover its public-health expenditures. Id. § 10-13-1(f). PMs are not

required to self-insure; their liability is already settled, and they are contractually

required to make payments. Id. § 10-13-3.

      NPM escrow funds are governed by the requirements of Georgia’s escrow

statute, which is implemented and enforced by the Attorney General. Id. § 10-13-

3(2)(C). The principal funds deposited are available to pay judgments on or

settlements of claims like those settled in the MSA. Id. § 10-13-3(2)(B)(i). If not

paid to the state, the funds are returned to the NPM after 25 years. Id. § 10-13-

3(2)(B)(iii). The interest and other returns on the invested deposits are paid to the

NPM as earned. Id. § 10-13-3(2)(B). NPMs must make several quarterly and

annual certifications, including that they have complied with the escrow statute

and that their funds are governed by a compliant escrow agreement that has been

reviewed and approved by the Attorney General. Id. §§ 10-13-3(2)(C), 10-13A-

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3(d)(2). The Attorney General has exercised his review and approval authority by

requiring that each NPM use a model escrow agreement drafted by his office. 1 The

Attorney General’s model escrow agreement includes investment class restrictions

for escrow funds: only cash, a money-market fund, and U.S. Treasury securities

are permitted investments. Noncompliance with the escrow statute or the Attorney

General’s requirements can lead to a statewide ban on sales of the NPM’s

products. O.G.C.A. §§ 10-13A-4(b), 10-13A-5.

       S&M Brands is an NPM and has operated in Georgia for decades. From the

signing of the MSA and imposition of the two-route scheme until 2016, S&M

performed its obligations under the escrow statute. Back then, the escrow statute

did not impose any restrictions on escrow fund investments; the restrictions came

solely from the Attorney General’s prerogative to deny approval to NPM escrow

agreements, informed by the State’s general policy of seeking to ensure a source

of recovery from potential-defendant NPMs. In 2016, the General Assembly

amended the escrow statute, adding a provision that requires the value of the




       1
          This requirement raises a thorny question of Georgia administrative law: does the
Attorney General have discretion to refuse to approve an escrow agreement that meets all the
substantive requirements of the escrow statute? Answering that question would require a
thorough inquiry into Georgia’s Administrative Procedure Act and the caselaw interpreting it.
But this issue is not before us—the District Court dismissed S&M’s claim raising this point, and
S&M has not appealed that ruling—so we will operate under the assumption that the Attorney
General’s review-and-approval authority allows him to require a specific form agreement.
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escrow fund not to diminish below the amount paid into it. 2 2016 Ga. Laws 529–

30. To implement this amendment, the Attorney General’s office modified its

form escrow agreement, changing the list of permitted investments for escrow

funds. Formerly, escrow monies could be invested in any U.S. Treasury

securities; under the new model agreement, any U.S. Treasury securities bought

with escrow funds must mature in no more than 20 years, although already-

purchased securities may be kept until they mature or are sold.

       S&M sued to enjoin the Attorney General from requiring it to use the

revised escrow agreement. The District Court dismissed the case, and this appeal

followed. We affirm.

                                              II.

                                              A.

       S&M alleges that the investment restrictions in the revised escrow

agreement reduce the returns it can expect to earn on its escrow money, and the

Attorney General’s imposition of the new restrictions (pursuant to the statutory

amendment) is a “Law impairing the Obligation of Contracts” within the meaning



       2
         The statute is ambiguous as to what would be required if the value of the escrow
investments were to dip below the amount of principal deposited. If this were to happen, then
presumably the NPM could not certify that its escrow fund was compliant; it would have to
make up the difference by depositing additional funds in order to so certify. But the statute
makes no express provision for supplemental deposits, and whether such deposits could be
required (and how they would be administered) is an open question. The Attorney General’s
policy seems to be to try to avoid the question by requiring minimally risky investments.
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of the Contract Clause. It also alleges that several differences between how the

escrow statute is administered for NPMs and how MSA payments are

administered for PMs violate the Fourteenth Amendment’s Equal Protection

Clause. Finally, it alleges that it is owed a release of some excess escrow funds

due to having paid more than is required by state law.

      We start with S&M’s Contract Clause claim. The Contract Clause protects

contracting parties’ reasonable contractual expectations against unreasonable

abrogation by the states. The threshold inquiry is whether the law “operate[s] as a

substantial impairment of a contractual relationship” involving the plaintiff. Allied

Structural Steel Co. v. Spannaus, 438 U.S. 234, 244, 98 S. Ct. 2716, 2722 (1978).

If an industry is already heavily regulated, regulatory changes that abrogate

industry players’ contract rights are less likely to be considered substantial

impairments. Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S.

400, 413, 103 S. Ct. 697, 705 (1983). And when the subject matter of the contract

itself is already subject to state regulation, the substantial-impairment case is even

weaker. Veix v. Sixth Ward Bldg. & Loan Ass’n, 310 U.S. 32, 38, 60 S. Ct. 792,

795 (1940).

      Here, S&M’s escrow agreement does not give rise to any reasonable

contractual expectations that implicate the Contract Clause. Every term of the old

model escrow agreement was specifically dictated by the Attorney General as a

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condition of approval under O.G.C.A. § 10-13A-3(d)(2). It is hard to say that such

a contract could give rise to any reasonable contractual expectations that would

implicate the Clause, at least vis-à-vis the state that dictated the terms. 3 Georgia

does not strip itself of police power when it regulates by requiring private parties

to contract. Nor does the Contract Clause ossify the state’s regulatory scheme in

these circumstances; the general rule, that states can exercise the police power to

supersede old regulations, prevails. 4 So S&M has not plausibly alleged a Contract

Clause violation.

                                               B.

       On to S&M’s Equal Protection claim. S&M alleges that it is similarly

situated to the PMs, who are also required to pay money into escrow, and that

Georgia is discriminating against them in favor of the PMs with no rational basis

and in a way that burdens their fundamental right of free speech. Our threshold

inquiry in an Equal Protection case is whether the plaintiff and the proposed

comparator are similarly situated, since the Equal Protection Clause requires that




       3
          The analysis could, of course, be different if the State were a party to the contract,
rather than a mere beneficiary. We do not mean to suggest that the State cannot bind itself by
contract to limit some of its own powers. See U.S. Tr. Co. v. New Jersey, 431 U.S. 1, 23–24, 97
S. Ct. 1505, 1518 (1977).
       4
           “One whose rights, such as they are, are subject to state restriction, cannot remove
them from the power of the state by making a contract about them. The contract will carry with
it the infirmity of the subject-matter.” Hudson Cty. Water Co. v. McCarter, 209 U.S. 349, 357,
28 S. Ct. 529, 531–32 (1908).
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“persons similarly situated . . . be treated alike.” City of Cleburne v. Cleburne

Living Ctr., 473 U.S. 432, 439, 105 S. Ct. 3249, 3254 (1985); see also Dawson v.

Scott, 50 F.3d 884, 892 (11th Cir. 1995). If the plaintiff has not been treated

differently than a similarly situated comparator, no Equal Protection violation

exists. Dawson, 50 F.3d at 892.

      Here, S&M Brands and the other NPMs are not similarly situated to the

PMs with respect to the challenged provisions of law. The PMs have settled their

liability to the state; S&M and the NPMs have not. The PMs need not establish an

insurance fund, since Georgia has contract remedies available if a PM fails to

make an MSA payment. S&M makes much of the fact that MSA payments are

administered via an escrow system with different investment restrictions than

those applicable to NPMs. But the NPM and PM escrow systems are not

comparable: NPM escrow money stays in escrow for 25 years and then returns to

the NPM unless taken to pay a claim, while PM payments stay in escrow for only

a few days or weeks while the monies owed to each state are apportioned. The

role of escrow is different in PM and NPM regulation, so Georgia may impose

different requirements on PM and NPM escrow accounts without violating equal

protection.

      All the provisions S&M challenges under the Equal Protection clause—the

investment restrictions, the quarterly rather than annual deposit schedule, the

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registered-agent and surety-bond requirements, and the delisting sanction for

noncompliance with the escrow statute—are provisions with respect to which PMs

and NPMs are not similarly situated. So S&M has not plausibly alleged an Equal

Protection violation.5

                                               C.

       S&M’s final claim is for a violation of state law; specifically, S&M claims

that the Attorney General was required to release escrow funds to it because it paid

more into escrow than it was required to under O.C.G.A. § 10-13-3(2)(B)(ii). The

District Court dismissed this claim under Rule 12(b)(1) for lack of jurisdiction.

Because the claim is barred by state sovereign immunity, we affirm.

       State sovereign immunity limits federal court jurisdiction. Seminole Tribe

of Fla. v. Florida, 517 U.S. 44, 54, 116 S. Ct. 1114, 1122 (1996). Some suits

requesting injunctive or declaratory relief against state officials are not considered

suits against the state and thus are not barred by sovereign immunity. Ex parte




       5
          S&M contends on appeal that its Complaint also states a standalone First Amendment
claim. We disagree. S&M makes one conclusory allegation of a First Amendment violation in
¶ 114 of its Complaint; this is insufficient on its own to survive a motion to dismiss. See
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009). S&M argues on appeal that
the facts it pleaded show that Georgia is either 1) coercing it to sign the MSA and thus waive its
First Amendment rights or 2) neutralizing the effect of its commercial speech by imposing
economic disadvantages on it that are not imposed on the PMs. But neither of these theories are
plausibly supported by factual allegations in S&M’s Complaint. S&M has not alleged that it
would be better off economically if it joined the MSA, a necessary component of its coercion
theory. Nor has S&M alleged that the restrictions are sufficiently tied to its speech to support a
claim on its neutralization theory. So S&M has not stated a First Amendment claim.
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Young, 209 U.S. 123, 159–60, 28 S.Ct. 441, 454 (1908) (injunctive relief); Verizon

Md., Inc. v. Pub. Serv. Comm'n of Md., 535 U.S. 635, 646, 122 S. Ct. 1753, 1760

(2002) (declaratory relief). But when the claim of entitlement to relief is based on

a violation of state law, sovereign immunity applies. Pennhurst State Sch. &

Hosp. v. Halderman, 465 U.S. 89, 121, 104 S. Ct. 900, 919 (1984). And

conclusory allegations that the same conduct that violates state law also violates

the U.S. Constitution will not boost the claim over the sovereign-immunity bar.

DeKalb Cty. Sch. Dist. v. Schrenko, 109 F.3d 680, 688 (11th Cir. 1997).

      Schrenko’s facts are on point. There, a school district sought

reimbursement from the state of Georgia for transportation costs. Id. at 684–85.

The entitlement to and amount of reimbursement were determined by a state

statute. Id. at 688. Although the school district referenced the Fourteenth

Amendment and federal statutory law in its complaint, its claim necessarily relied

on a determination that state officials had not complied with state law. We thus

held the claim barred by sovereign immunity. Id. at 690.

      Here, S&M’s claim is that Georgia is required to release escrow funds back

to it. Georgia’s obligation to do this comes from state law; specifically, O.C.G.A.

§ 10-13-3(2)(B)(ii), which provides for release of excess escrow funds in the event

an NPM deposits more than it would have paid in MSA payments were it a PM.

S&M claims that this is really a constitutional claim, since the refusal to release

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funds serves to coerce it to give up its First Amendment rights and constitutes a

Fifth Amendment taking.

      We don’t buy it. Here, as in Schrenko, the obligation to release (or

reimburse) funds comes from state law. The proper release amount is determined

by state law. Accordingly, the “gravamen of [the] complaint appears to be that the

State has improperly interpreted and failed to adhere to a state statute,” and

Pennhurst bars such claims. Id. at 688. We affirm the dismissal of S&M’s state-

law claim.

      For the foregoing reasons, the dismissal of S&M Brands’ Complaint is

      AFFIRMED.




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