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Can states sell immunity from federal antitrust laws? That’s the issue the 3rd U.S. Circuit Court of Appeals will hear today in the case of B edell v. Philip Morris. If your response is that a federal court should not be wasting its time on self-evident questions, think again. The sale of antitrust immunity is precisely what an unholy cabal of tobacco companies, state attorneys general, and trial lawyers were up to when they negotiated the multistate tobacco settlement two years ago. The seductive thing about the settlement is that everybody at the negotiating table went home a winner. The state attorneys general — the sellers of immunity — will collect $206 billion that they can spend on their favorite “smoking-related” programs like reduced college tuition and flood control; the cigarette companies get to raise prices as high as their addicted customers can tolerate; and the lawyers get contingent fees of $750 million per year for the first five years, and $500 million per year thereafter, in perpetuity. The only losers are the smokers, who weren’t at the table. They don’t receive a penny for their illnesses — past, present, or future — and they pay for the entire deal. But smokers aren’t very popular, so who cares? And that, in a nutshell, is the tobacco settlement. Never mind that the whole scheme is illegal and unconstitutional. OVERLOOKED LAW It doesn’t take a constitutional law scholar to recognize that individual states are now collecting payments (euphemistically labeled “damages”) on cigarette sales in other states. In effect, the attorneys general arrogated unto themselves the power to regulate interstate commerce in tobacco. But the Constitution — more specifically, the commerce clause in Article I, section 8 — assigns regulation of interstate commerce to Congress. A little further down, the compacts clause in Article I, section 10, prohibits the states from entering into multistate compacts or agreements that could infringe on the powers of the federal government without the consent of Congress. It is difficult — in fact, preposterous — to argue that the multistate tobacco settlement is not an agreement among the states or that it does not infringe on the powers of the federal government. It is and it does. Revealingly, the states asked for congressional approval of an earlier version of the settlement in June 1997. Congress declined. Sen. John McCain introduced his version in May 1998. Congress declined again. The tobacco companies, attorneys general, and trial lawyers went ahead with the current deal anyway. This time, they didn’t bother asking Congress. If they weren’t deterred by the Constitution, how about the antitrust laws? Under the settlement, nonsigning tobacco companies that later elect to be bound by the agreement have to make pro rata “damages” payments if their market shares materially exceed 1997 levels. And any nonsigning companies that reject the settlement have to make similar contributions into an escrow fund for 25 years. Those expenditures prevent nonsigners from cutting prices and capturing market share from the five major companies. Essentially, the industry minus the Big Five is limited to its current market share of roughly 1 percent. And the Big Five are guaranteed a 99 percent combined market share forever — protected by the state attorneys general and immune from federal antitrust laws. That’s what a quarter of a trillion dollars buys. Of course, the real value of an exemption from the antitrust laws is astronomical. After nearly two years under the settlement, the tobacco companies have raised prices with impunity and increased their profits by more than twice the amount of their “damages” payments. THE REAL DAMAGES That brings us to the 3rd Circuit case set to be argued today. The A.D. Bedell Wholesale Co. is an independent wholesaler that wants to compete in the sale of discount-priced cigarettes. Prior to the multistate settlement, Bedell could buy such cigarettes from a number of small manufacturers as well as from the majors. After the settlement, virtually all manufacturers raised their prices in lock step, effectively eliminating the discount trade. In consequence, Bedell can no longer obtain discount cigarettes and is thus foreclosed from price competition. Also under the settlement, state attorneys general agreed to use their criminal enforcement powers to encourage all existing and potential competitors of the tobacco giants to play along. The result is to replace a competitive industry with a five-company cartel, and to guard against destabilization of the cartel by erecting barriers to price competition. Those barriers are justified, say the attorneys general, because discounting by small manufacturers and wholesalers could undermine the deal. The 3rd Circuit may see it differently. The key question for the court is whether state attorneys general have the right to sell immunity from the antitrust laws. In their Bedell court papers, the tobacco companies assert that their cartel is exempt from the antitrust laws because their partners, the states, are exempt under a doctrine called state action immunity (originally set out in a 1943 Supreme Court case, Parker v. Brown). But that argument is nonsense when applied to the multistate settlement. The state action doctrine has been limited by the Court to “acts of government” taken by the state as “sovereign.” The tobacco deal cannot satisfy either precondition. A state is “sovereign” where its actions are not subject to a superior legal authority. For example, a state would not be acting in its sovereign capacity in authorizing a corporation in another state to fix prices. Nor would the state be acting as sovereign in contracting with other states to enforce anti-competitive laws affecting interstate commerce without congressional approval. In the former instance, the state would be acting outside its borders, where another state or the federal government has sovereign power. In the latter, the state would be violating both the compacts clause and the commerce clause of the Constitution. BEYOND GOVERNMENT The second precondition for state action immunity is that the state must be carrying out an “act of government.” That means the act must qualify as an official undertaking of the state in its governmental capacity — i.e., it can’t be unauthorized. Although the lawyers involved all three branches of state government in the settlement, they could not sidestep the fundamental problem: The settlement is unconstitutional. It is not merely that the states improperly exercised a legitimate power. Rather, they lacked the power to enter into the agreement at all. A long-established Supreme Court rule under Ex parte Young (1908) provides that “the use of the name of the state to enforce an unconstitutional act … is a proceeding without the authority of, and one which does not affect, the state in its sovereign or governmental capacity. It is simply an illegal act upon the part of a state official.” On that basis alone, the tobacco agreement does not qualify for state action immunity. And there’s more. The settlement also exceeds state sovereignty by interfering with federal legislation, which, of course, pre-empts contrary state enactments. The Federal Cigarette Labeling and Advertising Act, for example, establishes “a comprehensive Federal program to deal with cigarette labeling and advertising.” The act provides that “[n]o requirement or prohibition based on smoking and health shall be imposed under State law with respect to the advertising or promotion of any cigarettes the packages of which are labeled in conformity with the provisions of this chapter.” But the tobacco agreement imposes multiple prohibitions with respect to advertising and promotion, thus violating the clear text of the federal statute and frustrating its explicit purpose. A second cigarette-related statute, the Tobacco Control Act, actually permits selected compacts among tobacco-producing states, but expressly disavows “any compact for regulating or controlling the production of, or commerce in, tobacco for the purpose of fixing the price thereof, or to create or perpetuate monopoly, or to promote regimentation.” The tobacco agreement effectuates precisely what the Tobacco Control Act forbids. Thus, the multistate settlement exceeds the bounds of state sovereignty in a variety of ways: It constitutes extraterritorial action with respect to other states; it interferes with congressional legislation governing the tobacco trade; it encroaches upon Congress’ enumerated power to regulate interstate commerce; and it violates the constitutional prohibition against interstate compacts not approved by Congress. For each of these reasons, the settlement is not a valid “act of government” imposed by a state as “sovereign,” and thus cannot immunize conduct in violation of the Sherman Act. NO PERMISSION TO VIOLATE The tobacco cartel also claims immunity based on a legal doctrine that allows competitors to petition for an antitrust exemption without incurring liability. The Noerr-Pennington doctrine was first articulated by the Supreme Court in Eastern Railroad Presidents Conference v. Noerr Motor Freight (1961) and U nited Mine Workers v. Pennington (1965). But to petition means to solicit government officials to perform or not perform specified acts. Noerr-Pennington immunizes that solicitation, not any subsequent conduct. Otherwise, prospective price-fixers could avoid liability simply by asking first. Indeed, Noerr expressly recognizes that cases insulating government action “rest upon the fact” that the government’s prerogative to pass an anti-competitive law exists only “so long as the law itself does not violate some provision of the Constitution.” Thus, if the state action resulting from the petition is itself invalid, and hence unable to confer state action immunity, the mere fact that it was procured through petitioning the government does not independently confer immunity. In short, Bedell v. Philip Morris is about a company victimized by a private cartel and its allies, who seek to absolve themselves from liability for illegal conduct by exploiting two legal doctrines that simply don’t apply. Ordinarily, the Justice Department or the state attorneys general would prosecute such antitrust infractions vigorously. In this instance, neither seems willing to enforce the law. Perhaps we shouldn’t be surprised. Because the attorneys general negotiated the deal and because it has enriched their state coffers to the tune of billions of dollars, they have a profound conflict of interest in prosecuting antitrust claims against the cigarette makers. Likewise, the Clinton administration has begun a lawsuit to garner a piece of the action; and the major contributors to Clinton’s party are contingent fee lawyers, who get a boatload of money from the settlement. Still, companies like Bedell and small manufacturers, who are excluded from the market or must pay inflated prices, and smokers, who are footing the bill, can challenge the deal on antitrust and constitutional grounds. To be sure, it’s an uphill battle. Those who crafted the tobacco deal dropped in a $50 million war chest for just such an occasion — to litigate against anybody who challenges or refuses to abide by the agreement. Without ever turning to their legislatures for funding, the state attorneys general and their industry partners can litigate until their opponent runs out of money. At Bedell, hopes are high that the 3rd Circuit will see through this insidious scheme and bring an ignominious end to the peddling of antitrust exemptions. Any bagel shop owner who conspires with his competitors to fix prices for an extra hundred dollars a week can go to jail. Surely, if giant companies buy phony antitrust immunity and palm off the $250 billion cost to innocent customers, their culpability is immeasurably greater. Thomas C. O’Brien is assistant general counsel at Corning Inc. The views expressed here are his own and do not represent those of Corning. Robert A. Levy is senior fellow in constitutional studies at the Cato Institute.

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