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In another victory for Big Tobacco, a federal appeals court on Tuesday rejected an antitrust challenge to the $200 billion settlement between tobacco companies and 46 states in which tobacco retailers complained that the settlement created a “cartel” that protects the major tobacco companies from future competition. Although it found that the plaintiffs had properly alleged an antitrust violation, the 3rd U.S. Circuit Court of Appeals held that since the settlement was struck with the government — the 46 states — the tobacco companies are immune under the Noerr-Pennington doctrine from being sued for antitrust violations. The Noerr-Pennington doctrine generally protects anyone who petitions the government for redress from later being sued. But so far, the courts have never extended the doctrine to protect those who settle lawsuits with states. Now, in A.D. Bedell Wholesale Co. Inc. v. Philip Morris Inc., the 3rd Circuit has ruled that there is no reason not to extend the doctrine to settlements. “We see no reason to distinguish between settlement agreements and other aspects of litigation between private actors and the government which give rise to antitrust immunity,” 3rd Circuit Judge Anthony J. Scirica wrote in an opinion joined by Judges Julio M. Fuentes and Leonard I. Garth. “The rationale is identical. Freedom from the threat of antitrust liability should apply to settlement agreements as it does to other more traditional petitioning activities,” Scirica wrote. The so-called “multistate settlement” resulted from a wave of lawsuits in the mid-1990s brought by individual states against the major tobacco companies to recoup health-care costs and reduce smoking by minors. At one point, both sides petitioned Congress to resolve the suits through a national legislative remedy. But those efforts failed, and the settlement ultimately struck between the states and the tobacco companies was significantly different. While the congressional proposal called for payments to the states of $368.5 billion over 25 years, the multistate settlement calls for payments of only $200 billion over the same period. And while the congressional proposal would have earmarked one-third of all funds to combat teen smoking, no such restrictions appear in the multistate settlement. Congress also would have mandated U.S. Food and Drug Administration oversight and imposed federal advertising restrictions. It would have granted immunity from state prosecutions; eliminated punitive damages in individual tort suits; and prohibited the use of class actions or other joinder or aggregation devices without the defendant’s consent, assuring that only individual actions could be brought. Significantly, the congressional proposal included an explicit exemption from the federal antitrust laws while the multistate settlement contains no antitrust exemption. The four major tobacco companies signed on to the settlement, and 20 others later joined it. The addition of the smaller companies — who together share only 2 percent of the market — was significant because the major companies feared that any cigarette manufacturer left out of a settlement would be free to expand market share or could enter the market with lower prices, drastically altering the major companies’ future profits and their ability to increase prices to pay for the settlement. In the suit challenging the settlement, tobacco wholesalers complained that several provisions would have the effect of creating a tobacco cartel that could raise prices to monopoly levels without any fear of competition. The so-called “renegade clause,” they said, was designed to prevent current cigarette manufacturers from decreasing prices to increase market share and to bar new entrants from the market. The renegade clause creates strong disincentives for the 20 smaller settling companies to increase their production and market share. If any of them exceeds its 1998 market share, it must pay into the settlement fund. But by maintaining historical market share, it would owe nothing. And the settling states also promised to impose a tax on new entrants into the tobacco market of about 27 cents per pack in 2001, rising to 36 cents by 2007. The wholesalers complained that the two clauses create severe obstacles to market entry, or to increasing production and market share. But Judge Scirica found that “this is not accidental” since the settlement “explicitly proclaims its purpose to reduce the ability of nonsignatory cigarette manufacturers to seize market share because of the competitive advantage accruing from not contributing to the settlement.” But the wholesalers complained that the settlement has allowed the big manufacturers to raise their prices to near monopoly levels. While the settlement could have been funded by only a 19-cent-per-pack increase in price, they say, the four big companies immediately raised prices by 45 cents and later by an additional 31 cents. Such rapid price increases, they said, would ordinarily permit competitors to maintain or reduce prices or prompt new competitors to enter the market. But neither occurred, they said, because the barriers erected by the settlement effectively barred entry and discouraged tobacco companies from maintaining a lower price because of the penalties for increased production. Defense lawyers argued that the settlement did not violate the antitrust laws, but that even if it did, they were immune under the Noerr-Pennington doctrine, which protects activity involving petitioning the government. Scirica found that the wholesalers had properly pleaded an antitrust violation by alleging the defendants agreed to form an output cartel through the settlement that violates Sections 1 and 2 of the Sherman Antitrust Act. But Scirica also found that any anticompetitive effects of the settlement are protected from suit under the Noerr-Pennington doctrine. The Noerr-Pennington doctrine provides that “a party who petitions the government for redress generally is immune from antitrust liability.” Scirica found that such petitioning is immune from liability “even if there is an improper purpose or motive.” The doctrine is “rooted in the First Amendment and fears about the threat of liability chilling political speech,” Scirica said. And the roots of such immunity run even deeper, Scirica found. “The importance of the right to petition has been long recognized. As early as 1215, the Magna Carta granted barons the right to petition the King of England for redress,” Scirica wrote. The immunity Noerr-Pennington confers, he said, “reaches not only to petitioning the legislative and executive branches of government, but the right to petition extends to all departments of the government, including the judiciary.” The Supreme Court, he said, has held that the doctrine applies to actions that might otherwise violate the Sherman Act because “the federal antitrust laws do not regulate the conduct of private individuals in seeking anticompetitive action from the government.” The immunity takes two forms, Scirica said, protecting a petitioner both from the antitrust injuries that result from the petitioning itself and from any antitrust injuries caused by government action that results from the petitioning. But the tobacco settlement presented a new question, Scirica said. “Here, we must determine whether a settlement agreement between private parties and sovereign states fits within the context of protected petitioning envisioned by the Noerr-Pennington doctrine,” Scirica wrote. Scirica found that the protection should apply because the tobacco companies were “engaged in petitioning activity with sovereign states” when they struck the settlement. The wholesalers argued that the motivating purpose behind the settlement was to create a cartel guaranteeing tobacco companies supracompetitive profits. The states, they said, were also motivated by a desire to share in those revenues. But Scirica found that when it comes to Noerr-Pennington immunity, “the parties’ motives are generally irrelevant and carry no legal significance.” The wholesalers were represented by attorneys David F. Dobbins of Patterson Belknap Webb & Tyler in New York, William M. Wycoff of Thorp Reed & Armstrong in Pittsburgh, and Alan R. Wentzel of Windels Marx Lane & Mittendorf in New York. Philip Morris was represented by Douglas L. Wald of Arnold & Porter in Washington, D.C., and Bernard D. Marcus of Marcus & Shapira in Pittsburgh. R.J. Reynolds Tobacco Co. was represented by Gregory G. Katsas and John E. Iole of Jones Day Reavis & Pogue in Washington, D.C. Attorney Timothy P. Ryan of Eckert Seamans Cherin & Mellott in Pittsburgh represented Brown and Williamson Tobacco Corp. Deputy Attorney General Joel M. Ressler of the Pennsylvania Attorney General’s Office filed an amicus brief on behalf of the 46 settling states.

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