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Washington-Thirty state attorneys general, in an unusual state sovereignty challenge, are asking the U.S. Supreme Court to step into the increasingly complicated legal fallout from their 1998 massive settlement of litigation against the nation’s largest tobacco companies. But this time the battle is not with “Big Tobacco,” but with “Little Tobacco,” specifically, three small tobacco manufacturers who did not join the $245 billion Master Settlement Agreement. The state AGs are seeking review of a federal appellate court decision that found personal jurisdiction in New York over all 30 top state law officers in an antitrust and commerce clause lawsuit brought by the three small tobacco companies. King v. Grand River Enterprises Six Nations Ltd., No. 05-1343. Those companies, which also have filed suits against individual states around the country, are attacking a key aspect of the master settlement: state escrow statutes that require tobacco companies either to join the settlement or to put in escrow funds to satisfy any future damage awards in cigarette-related litigation against them. The amount of the funds set aside is based on the number of cigarettes they sell within a state. Within days of filing the Supreme Court petition, many of the same state AGs also headed into state courts to force the largest tobacco companies to fund fully their annual payments under the settlement. Those companies claim that they have lost market share as a result of the master settlement, and that under that agreement they are entitled to reduced payments if the states have failed to enforce the escrow statutes against their smaller competitors who did not join the settlement. And the AGs are awaiting a decision any day now from a federal district court in Louisiana on their motion to dismiss a constitutional challenge to the settlement brought by a pro-enterprise, Washington-based public policy organization. Whether the Supreme Court will agree to review the personal jurisdiction challenge is difficult to predict, said Erwin Chemerinsky of Duke Law School, author of the treatise Federal Jurisdiction. An important criterion for high court review-a split among the federal circuits-is missing here, he noted. But, he added, “It’s such an important question of constitutional law-one the Supreme Court has never addressed-and the stakes and the potential amount of money are so great, it’s easy to see the court taking it.” New York experience Over a period of five months in 1998, state AGs met in New York to negotiate a settlement with the nation’s four largest tobacco companies. The master settlement was the result of the negotiations. Signed by the AGs of 46 states, it ended pending litigation against the four companies, and it released them from future suits by the settling states. The participating companies are required to make annual payments to the states. Those payments can be increased or reduced under certain circumstances. And they agreed to certain restrictions on the advertisement and sale of their cigarettes. The settlement also included provisions authorizing other tobacco companies to join. And it included a model state statute that would require companies that declined to join, so-called nonparticipating manufacturers, to pay into a state-maintained escrow fund. This statute had a two-fold purpose: to satisfy future damage awards against nonparticipants, and to prevent them from enjoying a windfall benefit in avoiding settlement payments. Between 1999 and 2001, each of the settling states enacted an escrow statute, substantially identical to the model statute. Almost all of the settling states subsequently enacted so-called certification statutes requiring nonparticipants to attest periodically to their compliance with the state escrow statute. Grand River Enterprises Six Nations Ltd., Nationwide Tobacco Inc. and 3B Holdings Inc. sued 31 state attorneys general in New York federal court, basing personal jurisdiction on the ground that the settlement was negotiated in New York. (New York’s attorney general did not contest personal jurisdiction.) These three companies claimed that the escrow and certification statutes violated Section 1 of the Sherman Antitrust Act and the dormant commerce clause. The district court dismissed the claims for lack of personal jurisdiction, finding that the AGs’ presence in New York in 1998 was “purely coincidental,” and that the negotiations were “not part of an attempt to formulate a business or commercial contract,” the traditional requirement to confer personal jurisdiction. A panel of the 2d U.S. Circuit Court of Appeals disagreed. “Here the various state attorneys general purposefully dedicated five months to negotiating the [master settlement agreement] and the interconnected model escrow legislation with the majors in New York,” said the panel. “Settling a civil suit seeking compensation for healthcare costs is a business transaction. And we see no reason why the negotiation and execution of the [settlement agreement] should be viewed any differently than an ordinary commercial contract,” the 2d Circuit said. Fighting jurisdiction In the high court, the state AGs, whose counsel is Illinois Solicitor General Gary Feinerman, said that the 2d Circuit ruling violates state sovereignty and due process by treating a state’s most sovereign act-the passage of legislation-as if it were the “culmination of a commercial antitrust conspiracy.” The question for the justices, he said, is whether a court in one state can exercise personal jurisdiction over the attorney general or other official of another state in a lawsuit challenging laws enacted and enforced entirely within the latter state. It’s a question, he added, that the justices expressly reserved in a 1979 decision, Leroy v. Great Western United Corp., 443 U.S. 173, but need to answer now. The settlement negotiations did not create a unique situation, said Feinerman, and if the 2d Circuit ruling stands, state officials could find themselves targets of all kinds of lawsuits. “States oftentimes in a variety of circumstances collaborate in a prelegislative setting for purposes of discussing laws that might, in the future, be passed by state legislatures,” he said. For example, he said, if the National Association of Insurance Commissioners met in Chicago and drafted some uniform laws that were subsequently enacted in their states, could the AGs of those states be sued in Chicago? “Federalism is part and parcel of the due process analysis, and part of where the 2d Circuit went wrong, in our view, was in not paying sufficient attention to federalism in determining whether exercising personal jurisdiction comported with due process,” he said. But Leonard Violi of Mamaroneck, N.Y., counsel to the three companies, said that the AGs’ petition shows how far they will go “to hide beyond a fa�ade.” The 2d Circuit’s view of the settlement and escrow model statute negotiations, he said, was entirely correct. “We’re essentially dealing with a shadow government-the National Association of Attorneys General,” he said. “And this whole process by which you can only comply with state law by satisfying unstated, unwritten and unestablished demands and rules set apparently by the AGs and their private trade association is beyond comprehension. “This is a template for these AGs to meet and confer and essentially coordinate litigation against any industry,” he said. “They could target it, pick the four biggest companies, and say, ‘Let’s make a deal and we’ll protect you from competition.’ That template is a dangerous one.” The escrow statutes are supposed to neutralize cost advantages, he said, but they are a blunt sword that threatens to put the smaller companies out of business. Hans Bader, legal counsel to the Competitive Enterprise Institute (CEI), which has brought the constitutional challenge on compact clause grounds to the settlement in Louisiana federal court, said the tobacco settlement cannot be looked at in isolation. After the settlement, some companies felt coerced by the escrow statutes into joining it, he said. “It’s very risky to deal with the cigarettes of an [nonparticipant] because of all the state-by-state requirements. Any little thing can get you closed out of a state.” Robert A. Levy, senior fellow in constitutional studies at the Washington-based Cato Institute, said: “There was no question in the 2d Circuit’s mind that the settlement and escrow negotiations were integrated in the [master settlement] and [it] was a multistate compact, agreed upon and negotiated in New York, and that satisfied New York jurisdictional requirements.” If the Grand River suit proceeds and is successful, he said, it could “bring down” the master settlement. Under the settlement, if the participating companies’ market share in any calendar year dips 2% below its 1997 market share, the companies become eligible for a payment reduction under an established formula. But they have two conditions on the reduced payments. They have to obtain a determination from an independent economic consulting firm that the master settlement was a “significant factor” contributing to the market share loss. (The companies this year received that determination on March 27 from the Brattle Group.) And they cannot get a payment reduction in any individual state if the state shows that it has diligently enforced its escrow/certification laws against the nonparticipants. The Big Three tobacco companies and 27 other companies that joined the settlement have made payment reduction claims against the 46 settling states. The total at stake is more than $1.2 billion, a good portion of which is already built into state budgets. During the last week of April, most of the 46 state AGs headed into state court to enforce full payments. At the end of the day, said CEI’s Bader, Big Tobacco will lose that fight on the merits. “They don’t really expect to get their settlement payments reduced, but it puts pressure on the states to make them work harder to protect [Big Tobacco's] market share from Little Tobacco.” And it is that anti-competitive effect, among other alleged antitrust and commerce and compact clauses problems, that underlie challenges by CEI, Grand River and other nonparticipants. Duke’s Chemerinsky said that the state AGs are correct in saying in their high court petition that the personal jurisdiction question presented to the justices has never been decided. “The ability to sue a state in a different state’s court with the effect of trying to prevent a state law from being enforced is presented in a context unlike any other sovereign immunity issue because it is presented as a personal jurisdiction question,” Chemerinsky said. “I’m no fan of sovereign immunity, yet if ever there is a reason to be concerned about sovereign immunity, it is in this context.” It’s conceivable, he added, that the context is so unusual that the court could decide that is a reason not to take the case. “On the other hand, precisely because they haven’t addressed it before and it has the potential to unravel the [settlement] could be reasons for them to take it,” Chemerinsky added.

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