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Winnebago cigarette plant

A worker grabs cartons of Silver Cloud cigarettes to put into a case box at Rock River Manufacturing in April 2017. A federal judge on Monday will hear arguments on a motion to dismiss a lawsuit filed by HCI Distribution and Rock River, both subsidiaries of Ho-Chunk Inc., the Winnebago Tribe's economic development arm, against Nebraska officials, claiming their efforts to regulate tribal tobacco are unconstitutional.

OMAHA -- A federal judge has denied a U.S. government request to freeze proceedings in a lawsuit in which tribal tobacco companies in Winnebago claim Nebraska state officials' attempts to regulate their cigarette sales are unconstitutional.

U.S. Magistrate Judge Susan Bazis last week ruled that U.S. attorneys failed to show that the civil lawsuit would affect an ongoing federal criminal investigation into HCI Distribution Inc. and Rock River Manufacturing Inc. She denied the government's request to allow U.S. attorneys to intervene in the case and stay proceedings.

The government had asked that the case be stayed until the investigation is completed.

In her denial of the motion, Bazis said that no indictments have been issued, and a grand jury has not been impaneled.

"It is impossible to predict whether the criminal investigation will ultimately result in criminal charges," Bazis wrote.

The government also failed to show any legal or factual overlap between the lawsuit and criminal investigation, a point argued by an attorney for the tobacco companies when resisting the government motion.

HCI Distribution and Rock River Manufacturing -- both subsidiaries of Ho-Chunk Inc., the Winnebago Tribe's economic development arm -- sued Nebraska Attorney General Doug Peterson and Tax Commissioner Tony Fulton in U.S. District Court in Omaha in April, saying that the state's efforts to regulate the Winnebago Tribe's production of tobacco products on its reservation are unconstitutional and an attack on the tribe's sovereignty. The cigarette makers argued that tribal commercial activities are protected by federal law, and Nebraska has no regulatory authority over the tribe's cigarette operations that take place on tribal land.

In the wake of Bazis' ruling, state attorneys now have 14 days to respond to the lawsuit.

The tribe collects its own tobacco taxes that fund health, education and infrastructure programs. HCI and Rock River say the uncertainty caused by the threat of penalty and retaliation by the state has impeded business operations and caused production reductions.

Federal agents in January raided four sites owned by Ho-Chunk in Winnebago and seized records related to the tribe's tobacco operations, which have been under both state and federal scrutiny.

In March 2014, the Nebraska Department of Revenue issued tax assessments against several reservation-based cigarette retailers, claiming they made sales subject to state cigarette tax laws. That action led to compact negotiations to settle a dispute over whether Nebraska laws apply to HCI Distribution and Rock River's manufacture, sale and distribution of cigarettes. Negotiations on the compact broke down in 2016.

In July, a federal appeals court ruled in a separate case that Ho-Chunk must turn over certain tobacco records to federal authorities under provisions of the Contraband Cigarettes Trafficking Act. Ho-Chunk had argued that some of those record-keeping provisions did not apply to tribal entities.

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