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On June 19, the 3rd U.S. Circuit Court of Appeals unanimously dismissed an antitrust challenge by a wholesaler to the giant tobacco settlement, which was negotiated nearly three years ago by the four tobacco giants, state attorneys general, and trial lawyers. Yet that apparent loss may turn into a resounding victory for plaintiffs who seek to invalidate the settlement, and, indeed, the Supreme Court is now considering the petition for certiorari for Bedell v. Philip Morris that was filed a month ago. First, a little background: A.D. Bedell Wholesale Cos. is an independent wholesaler that would like to compete in the sale of discount-priced cigarettes. Prior to the tobacco Master Settlement Agreement (MSA), Bedell was able to purchase those cigarettes from a number of small manufacturers, as well as from the majors. But after the price increases to pay for the $250 billion settlement, Bedell found itself locked out of the market. Here’s how: Philip Morris, Reynolds, Lorillard and Brown & Williamson knew they would have to raise prices substantially to cover their settlement obligations. The four companies were justifiably concerned that smaller domestic manufacturers and importers that didn’t sign the agreement would gain market share by underpricing cigarettes. DRUG MONEY To guard against that likelihood, the big four and their state collaborators provided in the MSA that each state would enact a statute requiring nonsettling tobacco companies to pay “damages” proportionate to sales into an escrow fund for 25 years — to offset any liability that might thereafter be assessed. No evidence, no trial, no verdict, no injury — just damages. In fact, because the escrow payments aren’t deductible against income taxes, they are actually about one-and-a-half times what the majors pay per cigarette. If a nonsettling tobacco company agreed to sign the MSA, however, it would be allowed, without paying damages, to increase its market share by 25 percent of its 1997 level. Bear in mind that all of the nonsettling companies combined had only 2 percent of the market in 1997. So a nonsettling company with, say, a 1 percent market share could grow its share to a whopping 1.25 percent. Before damages kicked in, essentially, the dominant companies guaranteed themselves virtually all of the market forever. That’s what gave rise to Bedell’s antitrust claim. Naturally, MSA proponents trumpeted the settlement as a victory for public health. But that claim is a sham. Why, for example, were late MSA signers not required to pay damages even if their market share grew by up to 25 percent? Obviously, cigarettes sold by a late signer are no less harmful than cigarettes sold by Philip Morris. The critical difference is that a modest increase in sales by a small company wouldn’t threaten the cartel, but a significant increase would. It’s apparent that the MSA has less to do with public health than with securing the dominance of the tobacco giants. That’s what gave rise to Bedell’s antitrust claim. Responding to that claim, the tobacco companies asserted that their cartel and its anti-competitive acts are inoculated from the antitrust laws under two related legal doctrines. First, the Noerr-Pennington doctrine — originated by the Supreme Court in Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc. (1961) and United Mine Workers v. Pennington (1965) — allows competitors to petition the government for an antitrust exemption without incurring liability for the petitioning act itself. Second, state action immunity — set out by the Supreme Court in Parker v. Brown (1943) — exempts states from antitrust violations when they are performing acts of government in their sovereign capacity (e.g., authorizing and regulating a public utility monopoly). A state thus immunized can transfer its immunity to the regulated industry. CIRCUIT COUGH In its bizarre opinion, the 3rd Circuit held that the tobacco companies are indeed immunized from an antitrust claim by the Noerr-Pennington doctrine, but not by the Parker state action doctrine. Yet the decision in Noerr was itself predicated upon — and cited Parker for — the principle that immunity attaches only if “a restraint upon trade or monopolization is the result of valid government action.” Thus, if the anti-competitive conduct resulting from the petition is not valid government action, and hence does not confer Parker immunity, the mere fact that it was procured through petitioning the government does not independently confer immunity. Contrary to the court’s holding, the Noerr-Pennington doctrine immunizes the request for action, not the result. Here is the thrust of the court’s analysis upholding Noerr-Pennington immunity: First, Noerr stands for the proposition that “parties are immune from liability arising from antitrust injuries caused by government action which results from … petitioning … . Where the restraint upon trade … is the result of valid governmental action, as opposed to private action, there is immunity.” Second, “the right to petition extends to all departments of the Government, including the judiciary.” Third, the parties to the MSA successfully petitioned the judiciary to approve their settlement. Therefore, the parties are entitled to Noerr immunity. By contrast, the court rejected Parker immunity on these bases: First, “only an affirmative decision by the state itself, acting in its sovereign capacity, and with active supervision, can immunize otherwise anti-competitive activity.” Second, the test is “whether the antitrust injuries were more attributable to private parties than to government action.” Third, although state attorneys general negotiated the MSA, state legislatures passed the related statutes, and state courts approved the settlement, “these acts by the governmental parties were not the direct source of the anti-competitive injuries.” The injury resulted from conduct (price fixing) after implementation of the MSA — “acts involving private parties” operating pursuant to a joint settlement with the states. For Parker immunity to apply, concluded the court, the anti-competitive acts must be “actively supervised by the state.” But the MSA “empowers the tobacco companies to make anti-competitive decisions with no regulatory oversight … . Specifically, the defendants are free to fix and raise prices, allegedly without fear of competition.” To be sure, the states “are involved in the maintenance of the scheme, but they lack oversight or authority over the tobacco manufacturers’ prices and production levels. These decisions are left entirely to the private actors.” Thus, the parties are not entitled to Parker immunity. Clearly, the court’s Noerr analysis cannot be reconciled with its Parker analysis. In granting Noerr immunity, the court notes that immunity vests only “where the restraint upon trade … is the result of valid governmental action, as opposed to private action.” Yet, if the MSA is not state action under Parker because there is no pricing supervision, and if the MSA’s injuries are, in the court’s own words, “more attributable to private parties,” then Noerr immunity cannot apply. That inconsistency is the main basis for Bedell’s pending petition for certiorari to the Supreme Court. But there’s another intriguing possibility that could transform the 3rd Circuit’s opinion from a defeat for Bedell into a stunning victory. The 3rd Circuit says that Parker is not a valid defense to antitrust claims against the MSA. That suggests an opening for a new antitrust suit — one against the states rather than the tobacco majors. Noerr, which was invoked by the court in dismissing the current suit, is not applicable to the states. They do not petition themselves, of course. Therefore, the states can defend the MSA only if they are entitled to antitrust immunity under Parker — and the 3rd Circuit has made clear it thinks they are not. THE FIRE NEXT TIME That means an antitrust challenge to the MSA against one or more states is an odds-on bet. Even if sovereign immunity shuts off recovery of damages against the states, injunctive relief is available against state officials. The end result could be invalidation of the anti-competitive statutes that force nonsettling tobacco companies to pay royalties into escrow. With the demise of those statutes, competition will reign and the entire MSA scheme unravels. The prospect that a $250 billion spigot might be turned off must be somewhat unsettling to the states, the trial lawyers and, indeed, the panel of judges on the 3rd Circuit. Why, then, did the court proceed to address Parker after concluding that Noerr was an adequate antitrust defense for the tobacco companies? Two answers come to mind. First, a cynic might conclude that the three-judge panel didn’t want the political burden of overturning the MSA, but believed it should be overturned, and wanted to provide Bedell and other potential plaintiffs with a road map to pursue their claims to the Supreme Court. Second, perhaps the panel wanted the high court to grant certiorari, and therefore reached the Parker issue to ensure that no base would remain uncovered. Conceivably, if an alternative theory of the case were not addressed by the appellate court, the Supreme Court might be disinclined to grant certiorari. Whatever the reason that the 3rd Circuit ventured, of its own volition, into the Parker arena, the upshot could be an ignominious end to the mother of all antitrust violations. Meaning that the tobacco settlement — an unholy alliance of private lawyers and state attorneys general who sold antitrust immunity to the tobacco giants for a quarter of a trillion dollars — could come tumbling down. Robert A. Levy is senior fellow in constitutional studies at the Cato Institute. An abbreviated version of this article appeared in Pensions & Investments on Sept. 17, 2001.

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