Federal court finds part of vaping law unconstitutional

A federal appeals court struck down part of Indiana's controversial law regulating out-of-state production and sale of e-liquids used in vaping.

In a decision issued today by a three-judge panel from the 7th U.S. Circuit Court of Appeals, Judge David Hamilton wrote:

"The Act is written so as to have extraterritorial reach that is unprecedented, imposing detailed requirements of Indiana law on out-of-state manufacturing operations. The Act regulates the design and operation of out-of-state production facilities, including requirements for sinks, cleaning products, and even the details of contracts with outside security firms and the qualifications of those firms’ personnel. Imposing these Indiana laws on out-of-state manufacturers violates the dormant Commerce Clause of the United States Constitution."

The vaping law, enacted in 2015 and amended last year, has been a lightning rod of controversy since it went into effect over the summer, driving dozens of vaping businesses out of the state and increasing the cost of e-liquid.

The law requires e-liquid makers to obtain a certificate from a security firm, but the law's requirements for security firms are so narrow that only one company qualified — Lafayette-based Mulhaupt's Inc. Mulhaupt's in turn approved only six companies, dramatically reducing the number of companies making e-liquid for sale in Indiana.

The law's unusual requirements have prompted the FBI to look into how the law was passed.

At least two lawmakers who voted for the legislation have since landed jobs in the industry.

The appeals court called the security firm requirements “astoundingly specific” and noted that “only one company in the entire United States, located not so coincidentally in Indiana, satisfied the criteria” of the law.

“These circumstances raise obvious concerns about protectionists purposes and what looks very much like a legislative grant of a monopoly to one favored in-state company in the security business,” the court said.

The ruling comes as state lawmakers are considering legislation to "fix" the law that has generated several lawsuits by manufacturers of the substance used in e-cigarettes. A state senate committee is expected to vote Wednesday on a proposed fix.

"The e-vapor industry is thrilled with today’s ruling, and looks forward to working cooperatively with the Indiana Legislature now and in the future in crafting meaningful regulations within the framework of the ruling," said Louisville attorney J. Gregory Troutman, who represented Legato Vapors, LLC, in the lawsuit.

"This is a case which the entire e-vapor industry has closely watched because a vast majority of e-liquid production occurs outside Indiana’s borders. E-liquid manufacturers have always been concerned that Indiana’s regulatory model could be replicated in other states in such a way that created a network of regulations which would strangle the industry."

Troutman noted the court used terms like “extraordinary” to describe Indiana’s e-liquid law, and pointed out Hamilton wrote "nearly two centuries of Commerce Clause cases have never yielded the approval of a law so broad in its scope and extraterritorial reach."

Sandy Brown, owner of Cool Breeze Vapors, said the appeals court ruling is a step in the right direction. She said her company had to abandon a 5,000-square-foot e-liquid plant in Evansville when the new law went into effect, relocating across the Ohio River to Henderson, Ky.

The sharp increase in e-liquid prices also forced the company to shutter two of its storefront vapor shops in Indianapolis, she said.

"I’m very happy that the market is opened back up," she said. "I can’t go back home yet, but it is one step closer."

The appeals court order overturns a June federal district court ruling that dismissed a challenge to the law by three out-of-state manufacturers.

The Indiana attorney general had argued in the appeal that the law was not flawed. A spokesman said the attorney general "will review the court’s ruling with our state government client and decide on the next steps by the appropriate court deadlines."

In the ruling Monday, Hamilton said the state has some interest and authority to oversee the new and growing industry, but the state law extended beyond that authority.

"The federal Constitution leaves Indiana ample authority to regulate in-state commerce in vapor pens, e-liquids, and e-cigarettes to protect the health and safety of its residents," Hamilton wrote.

"For example, the Act’s prohibitions on sales to minors, its requirements for child-proof packaging, ingredient labeling, and purity, and requirements for in-state production facilities pose no inherent constitutional problems. Indiana may not, however, try to achieve those health and safety goals by directly regulating out-of-state factories and commercial transactions. As applied to out-of-state manufacturers, the challenged provisions of the Act violate the dormant Commerce Clause prohibition against extraterritorial legislation."

Sen. Ron Alting, R-Lafayette, who pushed for the revision last year that effectively made Mulhaupt's the industry's gatekeeper, repeated Monday that it was never the law's intent to create a monopoly.

At this point, I guess we did find out obviously that there were extreme flaws in the bill, which was not the intent," he said. "I'm just pleased we’re moving forward, that we didn’t just dig in the trenches and say it was going to be last year’s bill and we’re not going to make any attempt to clean it up."

Mulhaupt's owner, Doug Mulhaupt, did not immediately return a phone call seeking comment.

Michelle Baldwin Skaggs, general counsel for the Vapor Association of Indiana, which represents Mulhaupt's and the six companies it approved to manufacture e-liquid, said the ruling had only a limited impact.

"The decision states that only those limited provisions are unconstitutional, leaving the remaining provisions of the vaping law intact," Baldwin said.

Contact IndyStar reporter Tim Evans at (317) 444-6204 or tim.evans@indystar.com.