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Not long ago, it was easy to identify the heroes and villains in America’s war against the evils of tobacco. The villains, of course, were the major cigarette manufacturers who publicly denied the addictive nature of nicotine and privately laced their cigarettes with secret and potentially toxic ingredients. The heroes were the gallant politicians and do-good attorneys who took on the tobacco companies by forcing them to fork over monetary damages and regulate their industry under the multistate Master Settlement Agreement of 1998. A just released report by the Cato institute, however, contends that the government’s battle to regulate tobacco did not produce any heroes at all. The report charges that the Master Settlement Agreement was nothing less than a conspiracy among the tobacco companies and the states to defraud the country as all involved parties lined their pockets with billions of dollars. “This agreement is an example of the privileged elite in the American legal system abusing that system for its own benefit,” says Thomas C. O’Brien, the author of the study. “It just might be the most sophisticated piece of skullduggery that’s ever been done.” The settlement agreement resolved 46 lawsuits commenced by various state attorneys general against the major tobacco companies to recover amounts expended under their respective Medicaid statutes for medical services provided over the years to indigent smokers. Four states, Florida, Mississippi, Texas, and Minnesota, signed separate settlement agreements with the tobacco companies several months before the Master Settlement Agreement was negotiated. The agreement provides, among other specifications, that the companies pay $206 billion in damages to the states. In addition to those damages, the companies agreed to pay billions more in attorneys fees to private lawyers hired by the states to assist in the implementation of the settlement. A problem inherent in the agreement, though, is that the tobacco companies are not the ones who are actually paying the damages. The agreement stipulates that the costs of the damages be offset by the cigarette manufacturers collectively raising the price of their product. At absolutely no expense to the tobacco companies, therefore, the so-called damages are coming directly out of the pockets of the smokers the agreement was supposed to protect. In fact, the report alleges, the agreement actually benefits the cigarette companies by eliminating price competition among participating tobacco companies. The settlement agreement even contains provisions that prevent non-participating tobacco companies from keeping their prices low. The agreement compels each state to force the non-participating companies to agree to the terms of the Master Settlement Agreement or deposit 150 percent of what they would otherwise pay as damages into a 25-year escrow as security against possible liabilities in the future. O’Brien’s report alleges that, by compelling the tobacco companies to engage in such collusive price fixing and by making competition among both participating and non-participating companies virtually impossible, the Master Settlement Agreement is a per se violation of federal and state antitrust laws. While some may argue that there is a judicially created “state action” exemption to antitrust laws, there are three criteria a state action must meet before it qualifies for such an exemption. To qualify, state action must be within the realm of a state’s autonomy, properly authorized, and properly supervised by the state. O’Brien argues that the settlement agreement does not meet this criteria. “It is impossible for this agreement to meet the state action exemption because it violates the constitution,” O’Brien said. “Any state action that is unconstitutional certainly cannot be within the realm of a state’s autonomy.” O’Brien reasons that the agreement is unconstitutional because it was entered into among states without federal congressional approval. By subverting congress and enacting the agreement, the report argues, the attorneys general violated both the Commerce Clause’s provision that only congress can regulate interstate commerce and the Compacts Clause’s prohibition of states entering into independent contracts among each other. While O’Brien’s antitrust argument is compelling, he does not expect action to be taken any time soon. Because the states are parties to the agreement, and because they are receiving billions of dollars from the settlement, it is highly unlikely they would ever prosecute the tobacco companies for any antitrust violations. The Clinton administration, which helped negotiate the agreement and expressed an intention to seek a similar federal settlement with the tobacco companies, is also unlikely to bring an antitrust violation against the agreement. It might be easy for some people to forgive the legal transgressions of the Master Settlement Agreement if it was actually successful in benefiting the afflicted smokers it was supposedly intended to protect. Unfortunately for the smokers financing the tobacco companies’ damages, though, the agreement placed no restrictions on how the funds should be spent and many state legislatures have used the money to finance projects completely unrelated to smoking. North Dakota, for example, is using 45 percent of its funds to pay the debt service on bonds that are financing a water allocation and flood control project. Nevada used a portion of its funds to assist the state’s Public Broadcasting System develop DVD television, and nine southeastern states are even considering using the funds to assist tobacco growers. The private attorneys for the states will receive $750 million per year for the first five years following the settlement and $500 million per year indefinitely thereafter. That money, presumably, will remain with them. “Whether they know it or not, smokers are being humiliated,” stated O’Brien. “What you have here are billionaire lawyers paying themselves for an illegal scheme.”

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