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A federal judge said Tuesday that small tobacco manufacturers are unlikely to succeed in their antitrust challenge to the national tobacco settlement, but he did give them a partial victory over the payments the agreement requires them to make to New York state. Southern District of New York Judge Alvin K. Hellerstein denied the companies a preliminary injunction against the nationwide settlement. But he ruled that the small sellers were likely being asked to pay disproportionate fees under the settlement compared to large tobacco companies. Freedom Holdings, Inc. v. Spitzer, 02 Civ. 2939. The four major tobacco companies signed a master settlement agreement in 1998 that covered 46 states. The companies agreed to make annual payments to the states — based on market share and sales — to cover smoking-related health care costs and future lawsuits. For companies that did not participate in the agreement, the states enacted “escrow statutes” imposing a per-pack fee on cigarette manufacturers. The fee goes to the state in which each pack is sold. Until recently, companies could recover part of the money under several circumstances, largely based on how many markets they were in. For example, if a company sold cigarettes only in New York, it would pay only a percentage of the fee into escrow. In 2003, New York amended the escrow statute to sharply curtail the extent to which companies could reduce their fees. To date, 31 other states have made similar changes. The effect, Judge Hellerstein said, has been to stifle small tobacco manufacturers and increase cigarette prices. According to affidavits filed in the lawsuit, some non-participating tobacco companies in the Southeast have increased the price of their cigarettes by $3 a carton and have suffered sales decreases of 40 percent to 70 percent. “The repeal discriminated against [non-participating companies] and served to deter them from competing in local regional markets, where they otherwise could have concentrated costly marketing and distribution expenses, minimized their payments to the states, and competed effectively against the cigarette majors,” the judge wrote. He said the change in the rules provided a windfall to states where the smaller manufacturers sold cigarettes. Hellerstein enjoined New York from enforcing the 2003 version of the escrow statute, finding that the plaintiffs were likely to prove an irreparable injury under the new rules. He did not, however, have much sympathy for the plaintiffs’ chief complaint, which alleged that the master settlement and the former New York escrow statute were anti-competitive and should not be enforced against them. Because the settlement allowed the big companies to reduce state payments when they lost market share and required others to increase payments as their market share increased, the plaintiffs said, it hampered price competition and created a cigarette cartel of larger manufacturers. The larger cigarette manufacturers were effectively allowed to set the price of cigarettes, the plaintiffs said. Through the settlement, the plaintiffs said, the state had sanctioned a monopoly and benefitted by receiving increased fees. CLAIM REINSTATED The plaintiffs originally sued under the Sherman Act and the Commerce Clause. Judge Hellerstein granted the state’s request for summary judgment in April 2002. In January, the 2nd U.S. Circuit Court of Appeals reinstated the Sherman Act claim and sent it back to Hellerstein. In his ruling Tuesday, the judge denied a request for a preliminary injunction against the entire settlement. Though the modified 2003 escrow statute would hurt the companies, he said, they could not prove that the previous statute or the settlement itself was unfair or harmful to business. Pointing to the significant sales inroads the companies made since the settlement was enacted, the judge said the plaintiffs had essentially conceded that the settlement and original escrow rules had not caused them to lose market share. Mariatere Arce, a spokeswoman for Attorney General Eliot Spitzer, said his office was pleased with the ruling and believed the judge would lift the injunction once the state had an opportunity to present its case for the revised escrow rules. “We feel that this is a significant victory for public health,” she said. Daniel F. Dobbins of Patterson, Belknap, Webb & Tyler represented the plaintiffs. He was out of the office Tuesday and could not be reached for comment.

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