The 1998 tobacco settlement is a sophisti-cated, white-collar crime instigated by contin-gency fee lawyers in pursuit of unimaginableriches. In collaboration with state attorneysgeneral and the four leading tobacco compa-nies, they concocted a scheme that forces alltobacco companies—even new companies andcompanies that didn’t join the settlement—toengage in a program of price fixing andmonopolization. Essentially, the major ciga-rette makers bought permission to fix pricesand exclude competitors.

Not surprisingly, the object of the crime ismoney—$206 billion to the states and billionsmore to contingency fee lawyers. The cover forthe crime is the maddening complexity of theMaster Settlement Agreement, which docu-ments the deal. The real victims are the peoplewhom the states and their lawyers set out to pro-tect—smokers, who get nothing out of the set-tlement yet must pay the entire cost.

Have the collaborators found a loopholethrough which to enrich themselves at the

expense of politically powerless smokers? Theanswer is no. Put bluntly, the MSA is illegal andunconstitutional. It is an agreement among thestates that, without congressional approval, isspecifically prohibited by the Commerce andCompacts Clauses of the Constitution. Becausethe MSA exceeds the power and authority of thestates, Noerr-Pennington and state action exemp-tions to the antitrust laws do not apply. TheMSA thus constitutes per se antitrust violations.

States that are receiving billions of dollarsfrom the settlement can hardly be expected toprosecute tobacco companies for antitrustinfractions. Nor can the Clinton administration,which helped negotiate the MSA and is nowpursuing a similar federal settlement with theindustry. Fortunately, there are alternatives topublic-sector enforcement. Injunctive relief andtreble damage remedies are available in privatelawsuits brought directly by injured parties,including smokers and nonparticipating tobac-co companies. This paper lays out the legal the-ories in support of those actions.

Constitutional and Antitrust Violationsof the Multistate Tobacco Settlement

by Thomas C. O’Brien

_____________________________________________________________________________________________________

Thomas C. O’Brien is assistant general counsel to Corning Incorporated. The views expressed here are hisown and do not represent those of Corning Incorporated.

Executive Summary

No. 371 May 18, 2000

Introduction

The Master Settlement Agreement, enteredinto on November 17, 1998, by the major U.S.tobacco companies1 and the attorneys gener-al of 46 states, provides for the payment bythe tobacco companies of $206 billion in“damages,”2 plus billions more in fees to thestates’ private lawyers. The costs are added tothe prices of the companies’ tobacco prod-ucts and paid by consumers as price increas-es. The settling tobacco companies are ableto pass the costs of the settlement on to con-sumers because the MSA forces all othertobacco companies—even those that were notpart of the settlement—to pay “damages” aswell.3 The result of the settlement is that thesettling tobacco companies have purchased,with smokers’ money, permission to raiseprices collusively and suppress competition.In return for not enforcing the antitrust laws,the states receive a new source of revenue,which is essentially the same as a nationalexcise tax but without the budgetary andfiscal controls applicable to taxes. The peo-ple who devised that scheme—namely, thestates’ contingency fee lawyers—have becomemultimillionaires and, in a few cases, billion-aires through payment to them of “fees” (col-lected from smokers). The problem that liesat the root of all this—namely, sick smokers—has simply been forgotten. They receive vir-tually nothing of value from the settlementand are forced to pay for the whole thing.

The ostensible justification for the MSA isthat the states spent money over the years formedical services provided to indigent smok-ers under the Medicaid laws, and the tobaccocompanies are claimed to owe that money tothe states. The MSA is the settlement ofapproximately 40 state lawsuits assertingsuch claims. Although there are studies thatindicate that the states have made moremoney from taxing the sales of cigarettesthan they ever spent on medical services forsmokers, that is not the subject of this paper.Rather, the focus of this paper is the legalityof the MSA and the price-fixing mechanisms

that it uses to impose and pass on to con-sumers the “damages” and attorneys’ fee pay-ments required from the tobacco companies.

As we shall see, the MSA involves actions bythe states that exceed the powers of the statesas limited by the Commerce Clause and theCompacts Clause of the Constitution. Thecollusive actions of the tobacco companiesunder the MSA are destructive of competition;they are the types of actions that constituteper se violations of the antitrust laws.Inasmuch as the states have exceeded theirconstitutional authority in agreeing to andimplementing the MSA, neither they nor thesettling tobacco companies are exempt fromthe antitrust laws under the state actionexemption doctrine or the Noerr-Penningtonimmunity doctrine. In the absence of anexemption or immunity under one of thosedoctrines, the MSA violates the federalantitrust laws.

Because the states are receiving billions ofdollars in “damages” pursuant to the MSA,the state attorneys general can hardly beexpected to enforce the antitrust laws withrespect to the agreement. And inasmuch asthe White House helped negotiate the MSAand the Department of Justice is pursuing asimilar type of settlement with tobacco com-panies, neither the Department of Justice northe Federal Trade Commission is likely toprosecute participants in the MSA for viola-tions of the antitrust laws. However, injunc-tive relief and treble damage remedies areavailable to the injured parties—smokers andthe nonsettling tobacco companies—in pri-vate lawsuits.

A Brief History of the MSA

The MSA is the settlement of approxi-mately 40 lawsuits commenced by variousstates to recover amounts expended by thestates under their respective Medicaidstatutes for medical services provided overthe years to indigent smokers. The states’lawsuits did not claim any damages for thebenefit of injured or sick smokers.

2

Tobacco compa-nies have pur-

chased, withsmokers’ money,

permission toraise prices

collusively andsuppress

competition.

Settlement discussions between the tobac-co companies and the state attorneys generalbegan in early 1997. An initial settlementagreement (referred to as the Resolution) wasannounced on June 20, 1997, by MichaelMoore, the attorney general of Mississippi,who had been instrumental in prosecutingMississippi’s suit against the tobacco compa-nies and in lobbying other states to commencesimilar lawsuits.4 The Resolution was a settle-ment agreement among the state attorneysgeneral, their contingency fee lawyers, and thetobacco companies, as well as a proposal toCongress for legislation; and by its terms theResolution was not effective until approved byCongress. The Resolution contained essential-ly the same scheme as the MSA for the collec-tion and payment of taxlike revenues (charac-terized as “damages”) by the tobacco compa-nies to the states in exchange for settlement ofclaims and permission to raise prices collu-sively and exclude competitors.

Upon receipt of the Resolution in June1997, Congress immediately began to devel-op amendments and alternative settlementarrangements that were substantially moreonerous to the tobacco companies. The lead-ing contender among those was the McCainbill in the Senate, which would have provid-ed for more than $500 billion in “damages”payments in exchange for releases (broaderthan those of the MSA but narrower thanthose of the Resolution), as well as the rightto pass the costs on to consumers.

The McCain bill failed to obtain approvalin the Senate, and, by January 1998, both itand the Resolution had been effectivelyrejected by Congress.5

Four states—Florida, Mississippi, Texas,and Minnesota—signed separate settlementagreements with the tobacco companiesshortly after Congress’s rejection of theMcCain bill. Those agreements are substan-tially similar to the MSA and served as mod-els for the MSA. The MSA itself was signedby the tobacco companies and the attorneysgeneral of the other 46 states on November17, 1998. The states have not asked Congressto approve the MSA. By its terms, the MSA

could not be fully implemented until courtsin 80 percent of the states in number andaggregate “damages” allocations hadapproved it.6

The most significant provisions of theMSA are the prohibition of many types ofadvertising, the funding of studies on under-age smoking, the assessment and paymentof “damages,” and the protection of the set-tling tobacco companies against competi-tion from other existing or yet-to-be-formedtobacco companies.7

Anti-competitive Natureof the MSA

The MSA is essentially a contract for thepurchase by the tobacco companies of alicense to restrain trade.8 The purchase priceis the “damages” and attorneys’ fees (nearly aquarter of a trillion dollars) that the settlingtobacco companies agreed to pay to thestates and their contingency fee lawyers. Inreturn, the settling tobacco companiesreceived permission to employ collusive andcoercive measures to protect their profitabil-ity and 99 percent market share of the tobac-co business.9 There are two parts to thescheme: (1) agreements among the settlingtobacco companies to equalize their per-cig-arette “damages” costs and protect theirrespective market shares from competitionfrom each other and (2) measures to neu-tralize the cost disadvantages that settlingtobacco companies would otherwise experi-ence vis-à-vis nonsettling tobacco companiesas a result of their agreement to pay “dam-ages.” The following is a summary of howthe scheme works.

Equalizing Costs and Raising PricesIn the MSA, the settling tobacco compa-

nies allocated the obligation to pay the $206billion “damages” among themselves on thebasis of their current market shares.1 0Those“damages” constitute more than 33 percentof the wholesale price of cigarettes.1 1 TheMSA’s allocation system ensures that each

3

The purchaseprice is the “dam-ages” and attor-neys’ fees that thesettling tobaccocompanies agreedto pay to thestates and theircontingency feelawyers.

settling tobacco company will pay propor-tionately (i.e., in proportion to its marketshare) the same amount of “damages” andcan pass its “damages” on to its customerswithout creating a relative price disadvan-tage for itself. The settling tobacco compa-nies have thus equalized a major componentof their costs.12

Through the MSA, moreover, the set-tling tobacco companies have eliminatedprice competition and agreed to maintaintheir prices at elevated levels. Specifically,because the MSA’s “damages” allocationsystem is based on current market shares, ifa participating tobacco company were tocut its prices and increase its market share,its allocation of the fixed amount of “dam-ages” would increase by the same percent-age as its market share, and its profitabilitywould decrease. Also, the MSA providesthat, if the settling tobacco companies as agroup lose market share, individual settlingtobacco companies that lose market sharemay reduce their “damages” by three timestheir market share loss in excess of 2 per-centage points. On the other hand, settlingtobacco companies that increase their mar-ket shares are not allowed to reduce their“damages.”1 3 Thus, it does not make eco-nomic sense for the settling tobacco com-panies to compete on the basis of priceunder the rules of the MSA.

To eliminate one remaining possiblemeans of competition, the MSA prohibitsvirtually all forms of tobacco advertising.1 4

Finally, the MSA provides for three meetingsper year among the participating tobaccocompanies, the attorneys general, and thedirectors of the Foundation1 5 “to evaluatethe success of this Agreement.” Since allthree of those parties profit from the tobac-co companies’ anti-competitive practices,the discussions in those meetings willundoubtedly concern how well the MSA isdoing at maintaining the participatingtobacco companies’ market shares, keepingprices up, and excluding nonparticipatingcompetitors and additional measures forimproving success in those activities.1 6

By those devices, the settling tobaccocompanies have created, for and amongthemselves, a cartel controlling costs andprices in over 99 percent of the tobaccomarket.

Fixing Prices and Excluding CompetitorsAlthough the settling tobacco companies

accounted for over 99 percent of the tobaccomarket in 1997, the addition of “damages” tothe prices charged to consumers would give aprice advantage to nonsettling tobacco com-panies that had not agreed to pay “damages,”and, as a result, those companies mightcharge lower prices. To eliminate the risk thatsuch a price differential might reduce the set-tling tobacco companies’ profitability andmarket shares,17 the settling tobacco compa-nies and the states agreed to a number ofmeasures to prevent nonsettling tobaccocompanies from increasing their sales andmarket shares at the expense of the settlingtobacco companies. Generally, those mea-sures involve forcing all states to join theMSA and forcing nonsettling tobacco com-panies to increase their prices, freeze theirlevel of sales, or get out of the business.Specific measures incorporated in the MSAinclude the following:

1. The MSA punishes states that refuseto join (or that drop out of) the MSA.Consumers in any state that refuses tojoin the MSA must nevertheless paycollusively raised tobacco prices, butthe state does not receive any “dam-ages” payments. Moreover, if a statecourt invalidates (e.g., because it isunconstitutional or otherwise illegal)the Qualifying Statute1 8of a state thathad previously joined the MSA, thatstate’s “damages” payments can bereduced by up to 65 percent.1 9

2. The Qualifying Statute that the MSAcompels each state to enact gives non-settling tobacco companies threechoices: (i) they can sign the MSA andpay “damages” (if they increase theirsales above a certain amount); (ii) they

The settlingtobacco compa-

nies have created,for and among

themselves, a car-tel controlling

costs and pricesin over 99 percent

of the tobaccomarket.

4

can refuse to sign the MSA and deposit150 percent of what they would other-wise pay as “damages” into a 25-yearescrow as “security” against possibleliabilities in the future; or (iii) they candrop out of the business.2 0Any tobac-co company that fails to adopt one ofthose three choices is liable for finesand can be banned from the tobaccobusiness for two years.

3. The MSA requires a participatingmanufacturer (i.e., other than the orig-inal four settling tobacco companies)to pay “damages” in the same propor-tionate amounts as the original partic-ipating manufacturers if it increases itsmarket share above its 1998 marketshare or 125 percent of its 1997 marketshare, whichever is higher.2 1If a tobac-co company reaches the point of pay-ing “damages,” it is prevented fromgrowing any further by the MSA’s banon many types of advertising thatwould otherwise be allowed, and bythe addition of approximately 33 per-cent to the company’s costs (i.e., “dam-ages”). Those measures effectivelylimit all tobacco companies, otherthan the original five settling tobaccocompanies, to less than 1 percent ofthe tobacco market.

4. The apportionment of “damages”among participating manufacturers(including tobacco companies thatsubsequently join the MSA) on thebasis of their current market shares,and the system for reducing “damages”payments for participating tobaccocompanies that lose market share orsales (but not for tobacco companiesthat gain market share), eliminatesprice competition and enforces pricemaintenance on the part of all partici-pating manufacturers.2 2

5. The MSA creates a $50 millionenforcement fund for use by the stateattorneys general to threaten nonpar-ticipating tobacco companies or todefend against challenges to the MSA

scheme.2 3 Thus, the state attorneysgeneral have become the enforcers forthe settling tobacco companies’ cartel.

6. The MSA prohibits the sale of assets orproducts by participating tobacco com-panies to tobacco companies that donot sign the MSA.2 4

7. The MSA prohibits most types ofadvertising for tobacco products, there-by stabilizing the market shares of thesettling tobacco companies (arguablyat a higher level of profitability sincethey no longer have to pay for compet-itive ads) and creating a barrier to entryinto or expansion in the business bynonsettling tobacco companies.2 5

8. Compliance with the MSA throughoutthe industry is monitored by mandato-ry, secret meetings and the sharing ofcompetitive information among thesettling tobacco companies.2 6

The end result is that the states and a smallnumber of their favored attorneys receive“damages” of $206 billion plus contingencyfee payments; the settling tobacco companieshave purchased (at the expense of smokersand at virtually no cost to themselves) theability to raise prices collusively and confinecompetitors to less than 1 percent of thetobacco market; and smokers, who are thepurported victims, receive nothing of valueand are punished for the legal act of smokingby having to pay the “damages” and attor-neys’ fees agreed to by the tobacco companies.

If there is concern that similar tactics mightbe used to punish other unpopular groups inthe future, the good news is that the schemeconstitutes criminal violations of the federaland state antitrust laws. Of course, that is thebad news as well.

Interstate Operationof the MSA

A legal analysis of the MSA must startwith an examination of the effects of theMSA on interstate commerce.2 7The $206 bil-

5

The MSA consti-tutes criminalviolations of thefederal and stateantitrust laws.

lion of “damages” that the tobacco compa-nies agreed to pay does not come from thetobacco companies’ assets or customary rev-enues. It comes from price-fixing premiumscharged to their customers. So long as alltobacco companies raise their prices by theamount of their “damages” payments, andthe final prices of cigarettes remain at orbelow the “monopoly” pricing level (i.e., theprice to which a monopolist could raise itsprices without suffering a significant loss ofsales), the tobacco companies will maintaintheir respective market shares and (at least)their customary levels of profitability. Thatscheme will work, however, only if all com-petitors in the business pay “damages” andadd the same to their prices. If a single com-pany can charge significantly less per packthan the rest of the industry, or if a singlestate refuses to participate, the scheme willcome tumbling down. Much of the MSA isdevoted to preventing competing tobaccocompanies from charging lower prices and toforcing all states to sign the MSA. To theextent it operates and achieves its effectsacross state lines, the MSA constitutes aninterstate (as opposed to intrastate) restraint,or regulation, of trade.

Some of the basic interstate features of theMSA (referred to sometimes as the “interstateprovisions of the MSA”) are the following:

1. The “damages” payable to each stateare based on total, national sales of cig-arettes, not on each state’s individualsales.28

2. A state that refuses to adopt aQualifying Statute, or that adopts thestatute and subsequently repeals it, ispenalized in that its citizens are stillcharged the “price-fix” premium andthe state could lose part of its share ofthe “damages” payments. That schemerequires the participation of manystates.2 9

3. A “Firm” is retained by the participatingstates to determine which states andwhich tobacco companies are comply-ing with the MSA and which are not,

and how much to penalize those thatare not complying.3 0

4. Tobacco companies that sign the MSAare forbidden to sell their products ormanufacturing assets to nonparticipat-ing manufacturers anywhere in theUnited States.3 1

5. The MSA sets up a $50 millionEnforcement Fund and an organiza-tion of attorneys general to conductlitigation against tobacco companiesthat do not comply with, or that chal-lenge, the MSA.3 2

6. The MSA protects price-fixing tobaccocompanies by reducing their “dam-ages” payments if they lose nationalmarket share to nonparticipatingtobacco companies.33

7. The MSA sets up a system of advertis-ing regulations that is intended to beinterstate in effect.3 4

Although the MSA is characterized as 46 sep-arate agreements, all parties sign the samedocument, and the MSA does not go intoeffect until 80 percent of the states havesigned.35 Most important, the MSA isdesigned to operate on a national, interstatebasis and to exert financial and political pres-sure, through the manipulation of rewardsand punishments, on all states and tobaccocompanies to sign up. The MSA directlyaffects interstate commerce through its “mul-tistate” design and operation.

Constitutional Violations

The Commerce ClauseTo the extent that the MSA obstructs or

regulates interstate commerce without con-gressional consent, it violates the CommerceClause of the Constitution (Article I, section8), which provides, “The Congress shall havepower . . . To regulate Commerce . . . among theseveral States.”

There are limitations to the constitutionaldelegation of regulatory power to Congressunder the Commerce Clause and the implicit

6

To the extentthat the MSA

obstructs orregulates inter-

state commercewithout congres-

sional consent,it violates

the CommerceClause of theConstitution.

prohibition of regulatory power to the states,but the interstate provisions of the MSA clear-ly trespass on federal territory.

An analysis of permissible regulation ofcommerce by states is contained in Parker v.Brown.3 6 In that case, the Supreme Courtdefined two general areas within which statesmay regulate commerce: (i) “where the regu-lation is imposed before any operation ofinterstate commerce occurs”3 7(referred to asthe “mechanical test”) and (ii) where suchregulation must be allowed for the “accom-modation of the competing demands of thestate and national interests involved”3 8

(referred to as the “accommodation test”). The interstate provisions of the MSA do

not satisfy the mechanical test because theyoperate directly on people, organizations,and businesses outside any one state (as wellas within the state). In that respect, they arequite different from state regulations involv-ing local zoning laws or local, intrastate salestaxes or user fees (which have been found tofall within the mechanical test). The MSA isintended to exert powerful forces on all statesto create an interstate regime to raise pricescollusively; exclude competition; and, gener-ally, regulate the tobacco business. One obvi-ous example of the interstate nature of thescheme is that, under the MSA, if a statecourt invalidates that state’s QualifyingStatute, the other participating states cantake away (and redistribute among them-selves) up to 65 percent of the offendingstate’s allocated share of the “damages” pay-ments.39 Clearly, such interstate effects can-not be viewed as “imposed before any opera-tion of interstate commerce occurs.”

As for the accommodation test, the Parkercase describes five circumstances in whichthe federal government might be willing to“accommodate” state actions with interstateconsequences,4 0 none of which is applicableto the MSA. Each exception is summarizedbelow, followed by a brief statement explain-ing why it does not apply:

1. Where “Congress has not exerted its powerunder the Commerce Clause.” In the case of

tobacco, however, Congress hasaddressed regulation of the tobaccoindustry in the Cigarette Advertising andLabeling Act of 1965, as amended.41

2. Where the state regulations apply to “mat-ters of local concern.” In the case of tobac-co, the MSA is designed to preventnonparticipating manufacturers fromselling cigarettes at lower prices any-where in the nation. The MSA effec-tively sets up a national regime for reg-ulating the tobacco business and fixingprices.

3. Where the matter regulated “is one whichmay appropriately be regulated in the interestof the safety, health and well-being of localcommunities, and which, because of its localcharacter and the practical difficultiesinvolved, may never be adequately dealt withby Congress.” As the state attorneys gen-eral are quick to point out wheneverasked why smokers receive none of the“damages” payments, the MSA hasnothing to do with sick smokers. It isintended to settle state claims either formonies spent under state Medicaid pro-grams or for antitrust, consumer fraud,and racketeering violations.42 Less than4 percent of the “damages” is ear-marked for anti-youth-smoking adver-tising, with the rest going unrestrictedto attorneys general and their contin-gency fee attorneys. Inasmuch as all 50states already prohibited cigarette salesto minors, the “health and welfare” con-nection is window-dressing.

4. Where “[because] of its local character . . . stateregulation can operate without substantiallyimpairing the national interest in the regula-tion of commerce by a single authority.” Inthe case of tobacco, however, the MSAcreates a second national regulatoryauthority in addition to Congress (i.e.,the National Association of AttorneysGeneral). Recall that Congress rejectedboth the Resolution and the McCainbill, which suggests an unwillingness tosubordinate its regulatory authority tothe states under the MSA.

7

The MSA isdesigned toprevent nonpar-ticipatingmanufacturersfrom sellingcigarettes atlower pricesanywhere inthe nation.

5. Where the regulations involved are “localregulations whose effect upon the nationalcommerce is such as not to conflict but tocoincide with a policy which Congress hasestablished with respect to it.” The MSAcreates a national (not local) regulato-ry regime, at least with respect to theinterstate provisions of the MSA. Thecollusive pricing and exclusion of non-participating manufacturers clearlyconflict with the federal antitrust laws;the “damages” are based on nationalsales and operate in the same manneras a national sales tax (even thoughstates are not permitted to imposenational taxes); and the advertisingprovisions conflict with the CigaretteAdvertising and Labeling Act of 1965,as amended. Congress refused toapprove the Resolution and theMcCain bill, so Congress cannot besaid to have consented to the policy ofthe attorneys general.

As the Supreme Court in Parker explains, theaccommodation test reflects the desire of thefederal government to recognize and accom-modate the interface between the separateareas of federal and state autonomy in ourfederal system of government. It is notintended, however, to allow the states tointrude into and regulate interstate com-merce in tobacco or any other product.

Two further attempts to fit the MSA with-in some exemption from the CommerceClause should be addressed, because an obvi-ous effort has been made to construct theappearance of an argument. The first con-tention is that the MSA is 46 separate andindependent agreements and that, as to eachstate, the MSA is strictly an internal, localmatter between the tobacco companies andthat state. If that were so, the identical natureof each of the 46 agreements would be merecoincidence, which is beyond credibility.Moreover, the MSA could go into effect onlyafter ratification by 80 percent of all states,43

and all states signed the same document,directly or by counterpart signature pages.44

The plain purpose of the interstate provi-sions of the MSA is to create and enforce anational, interstate regime for collusive pric-ing and exclusion of competitors. It is impos-sible to view the MSA as a local, individualstate matter.

The second contention is that all 50 stateswill have agreed to virtually identical arrange-ments; thus there is no one to complain. Thatoverlooks 45 million smokers of a perfectlylegal product who must pay more than $206billion in collusive price increases. It alsooverlooks any tobacco company forced by theMSA to pay “damages,” even though it wasnever determined to have any liability.

In short, the MSA is an extreme intrusionby the states into interstate commerce, whichinfringes on the federal government’s powersover interstate commerce and violates theCommerce Clause of the Constitution.

The Compacts ClauseThe Founding Fathers did not intend

that the states should be able to get togeth-er and by agreement create a new govern-ment or regime among themselves, replac-ing the prerogatives and powers of the con-stitutionally created federal government.That concern is specifically addressed in theCompacts Clause of the Constitution(Article I, section 10), which provides, “NoState shall, without the Consent ofCongress . . . enter into any Agreement orCompact with another State.”

The Supreme Court has interpreted thatprovision as prohibiting the states fromforming “any combination tending to theincrease of political power in the states,which may encroach upon or interfere withthe just supremacy of the United States.”4 5

The constitutional prohibition applies toany form of agreement. “The Clause reachesboth ‘agreements’ and ‘compacts,’ the for-mal as well as the informal. The relevantinquiry must be one of impact on our feder-al structure.”4 6 Moreover, application of theCompacts Clause need not await evidencethat federal prerogatives have been eroded.As the Court went on to state, “The perti-

8

“Damages” arebased on nationalsales and operatein the same man-ner as a national

sales tax.

nent inquiry is one of potential, rather thanactual, impact upon federal supremacy.”4 7

Short of secession from the Union, it is hardto imagine an agreement or compact among thestates that would be more in violation of theCompacts Clause than the MSA.48 Raisingmany of the same concerns that the SupremeCourt raised in Multistate Tax Commission, theMSA authorizes member states to exercise pow-ers they could not exercise in its absence, such asthe collection of “damages” based on sales inother states and the interstate regulation of cig-arette advertising. States are forced by otherstates to join the MSA by the threat of loss of“damages” payments if they do not join, or ifthey resign from, the MSA. A $50 millionEnforcement Fund is established and adminis-tered by a centralized group to litigate or defendagainst those who do not comply with the MSA.The loss of “damages” payments is determinedby a “Firm” on behalf of the overall group. Noneof those actions could be accomplished by a sin-gle state acting alone, without the involvementof other states bound together by the MSA.

The states infringe on Congress’s taxingpowers (Article I, section 8, of theConstitution) by collecting “damages”based on sales in other states. They infringeon Congress’s powers over interstate com-merce by effectively repealing the federalantitrust laws as they apply to tobacco andby regulating an area of interstate com-merce already regulated by Congress underthe Cigarette Advertising and Labeling Actof 1965, as amended.4 9

In addition, the MSA has, in effect, byagreement among the states, created a newbankruptcy system for tobacco companiesdespite Congress’s enumerated power in thatarea.5 0The MSA provides that tobacco com-panies may not seek relief from the MSA in abankruptcy proceeding.5 1 That provisionwould appear to violate the federal bank-ruptcy code. Indeed, the MSA itself is a sub-stitute bankruptcy scheme designed by thestates for the tobacco companies, which thestates’ lawsuits rendered “insolvent.”5 2 The$206 billion liability agreed to by the tobaccocompanies exceeds the fair valuation of all

their property.53 Instead of reorganizing orliquidating the tobacco companies in a man-ner that protects all creditors (as the bank-ruptcy laws require), the MSA allows thetobacco companies to have their liabilitiespaid by their customers (many of whomcould be claimants as a result of smoking-related diseases). The states’ multistate bank-ruptcy scheme effectively preserves the share-holders’ interests intact, while shifting thedebtor’s liability costs to one of the classes ofcreditors—the smokers.

Finally, not only does the MSA infringe onthe prerogatives of Congress, it contradicts theTobacco Control Act.5 4 In that act, Congressgave its consent that “any of the states inwhich tobacco is produced may negotiate acompact or compacts for the purpose of regu-lating and controlling the production of, orcommerce in, any one or more kinds of tobac-co therein.” That grant of authority to thestates was carefully limited, however.“Nothing in [the Tobacco Control Act] shallbe construed to grant the consent of Congressto negotiate any compact for regulating orcontrolling the production of, or commercein, tobacco for the purpose of fixing the pricethereof, or to create or perpetuate monopoly,or to promote regimentation.”5 5

The state attorneys general, by compactamong the states, have agreed to do whatCongress made clear the states could notdo—namely, enter into a multistate agree-ment that implements and promotes pricefixing, creates and perpetuates a monopoly,and promotes regimentation in the market.

If the states can do those things withoutthe consent of Congress, they are free, byagreement among themselves, to rewrite theConstitution. The actions of the states clear-ly have both actual and potential impacts onfederal supremacy and thus violate theCompacts Clause of the Constitution.

The MSA Exceeds the ConstitutionalAuthority of the States

In violating the Commerce Clause and theCompacts Clause, the MSA exceeds thepower and authority of the states to take cer-

9

It is hard to imag-ine an agreementor compactamong the statesthat would bemore in violationof the CompactsClause thanthe MSA.

tain actions. As the Supreme Court stated inParker, “The governments of the states aresovereign within their territory save only asthey are subject to the prohibitions of theConstitution or as their action in some mea-sure conflicts with powers delegated to theNational Government or with Congressionallegislation enacted in the exercise of thosepowers.”56 The Commerce Clause of theConstitution does not withdraw from thestates all authority over interstate commerce,yet the MSA crosses the limits into areas ofinterstate authority reserved to the federalgovernment. With respect to the CompactsClause, the MSA violates a direct constitu-tional prohibition. The states, by agreementamong themselves and without the consentof Congress, have created an assessment(which they call “damages”) on revenuesearned in other states; they have repealed theantitrust laws, collusively raised prices,restricted output, and excluded competitionin tobacco on a nationwide basis; they havecreated a national regulatory system for theadvertising and sale of tobacco; they have cre-ated a substitute bankruptcy system fortobacco companies; and they have violatedthe Tobacco Control Act. The states have nomore power or authority to take such actionsthan they have to declare war on a foreigncountry to force it to stop selling cigarettes.5 7

Antitrust Violations

The collection of nearly a quarter trilliondollars of “damages” and attorneys’ fees fromsmokers for payment to the state attorneysgeneral and their contingency fee lawyers iseffectuated through a system of collusive costsharing, price fixing, and exclusion of competi-tors agreed to in the MSA. Unquestionably, theofficers of private companies attempting toimplement such a scheme would go to jail andpay substantial fines under the ShermanAntitrust Act. That act provides in relevantpart: “Every contract . . . in restraint of trade orcommerce among the several states . . . isdeclared to be illegal. Every person who shall

make any contract . . . hereby declared to be ille-gal shall be deemed guilty of a felony.”5 8

On its face, the MSA appears to violate theSherman Act in exquisite detail. But does theMSA in fact violate the Sherman Act? Theanswer to that question depends on theapplication of three principles of interpreta-tion of the antitrust laws—the doctrines ofpreemption, state action exemption, andNoerr-Pennington immunity.

PreemptionThe doctrine of preemption provides, “A

state or local government act may be pre-empted on its face when it compels some-thing that the federal antitrust laws clearlyprohibit, which generally means a per se vio-lation of the antitrust laws.”5 9

The Supreme Court stated the preemp-tion principle in Parker: “A state does not giveimmunity to those who violate the ShermanAct by authorizing them to violate it, or bydeclaring that their action is lawful.”6 0

Indisputably, collusive pricing and con-spiring to exclude competition are per se vio-lations of the antitrust laws. Without ques-tion the MSA embodies a national schemefor collusive pricing and exclusion of compe-tition. Certainly, if the tobacco companies,acting alone, concocted such a scheme, theywould be committing per se violations of theSherman Act. Applying the preemption doc-trine, the Sherman Act preempts stateactions under the MSA that purport to legal-ize the tobacco companies’ interstate collu-sive pricing and exclusion of competition—atleast to the extent the tobacco companiesand the states are not entitled to an exemp-tion or immunity under the state actionexemption or Noerr-Pennington immunitydoctrines.

State Action ExemptionThe state action doctrine of exemption

from the antitrust laws was formulated by theSupreme Court in Parker. As explained in alater Supreme Court case applying the doc-trine: “Parker v. Brown . . . held that the federalantitrust laws do not prohibit a state ‘as sover-

10

The SupremeCourt stated,

“A state does notgive immunity tothose who violatethe Sherman Act

by authorizingthem to violate it,

or by declaringthat their action is

lawful.”

eign’ from imposing certain anticompetitiverestraints ‘as an act of government.’” 6 1

Defining the limits of the Parker stateaction exemption, the Lafayette opinion wenton to explain: “We therefore conclude thatthe Parker doctrine exempts only anticom-petitive conduct engaged in as an act of govern-ment by the state as sovereign, or, by its subdi-vision, pursuant to state policy to displacecompetition with regulation or monopolypublic service.”6 2

The Court was quite clear that “for pur-poses of the Parker doctrine, not every act ofa state or a state agency is that of the state assovereign.”6 3In the landmark case of Ex ParteYoung, the Supreme Court held that uncon-stitutional actions by a state are void andbeyond the sovereign and governmentalcapacity of the state:

[If the] act to be enforced is . . .unconstitutional . . . the use of thename of the state to enforce anunconstitutional act to the injury ofthe complainants is a proceedingwithout the authority of, and one whichdoes not affect, the state in its sover-eign or governmental capacity. It is sim-ply an illegal act upon the part of astate official, in attempting by theuse of the name of the state toenforce a legislative enactmentwhich is void, because unconstitu-tional. If the act which the stateAttorney General seeks to enforce bea violation of the Federal Constitution,the officer in proceeding under suchenactment comes into conflict withthe superior authority of thatConstitution, and he is in that casestripped of his official or representa-tive character and is subjected in hisperson to the consequences of hisindividual conduct.6 4

Clearly, unconstitutional actions by astate cannot be the basis for exemption fromthe antitrust laws under the state actionexemption, since such actions are beyond the

states’ sovereignty and are, therefore, not actsof government.

In an area in which the state is ordinarilysovereign, such as intrastate commerce, thestate may, as an act of government, regulatecommerce or create a monopoly, so long asthe relevant branch of the state is operatingwithin the realm of the state’s sovereigntyand its acts are both authorized by the stateand supervised by the state. For example, astate department of commerce could, withinthe state action exemption from the antitrustlaws, establish a single, private power compa-ny to provide electricity within the state, solong as the creation of the monopoly wasauthorized by the state and the operation ofthe monopoly was adequately supervised bythe state. In such a case, intrastate activity iswithin the realm of the state’s sovereignty.The creation of the monopoly is authorizedby the state, and the operation of the monop-oly is supervised by the state. In the case ofthe MSA, on the other hand, the states areacting beyond their powers and in areas inwhich they are not sovereign and that areoutside their governmental capacity. Thatconclusion must be reached regardless ofwhether the analysis focuses on the actionsof the states themselves in approving theMSA and adopting Qualifying Statutes or onthe actions of the state attorneys general insigning the MSA and implementing it.

Recall that the MSA is essentially an inter-state regulation of commerce in tobacco thatfixes prices and excludes competition. Thestates are acting in violation of the CommerceClause and the Compacts Clause of theConstitution (and thus beyond their author-ity) in agreeing among themselves to adoptand implement the interstate provisions ofthe MSA. Inasmuch as those provisions ofthe MSA are beyond the authority of thestates and in violation of the Constitution, itcannot be said that in adopting and imple-menting the MSA the states are acting with-in an area in which they are “sovereign,” orthat their acts in violation of theConstitution are legitimate “acts of govern-ment.” Clearly, in those areas, the states are

11

Unconstitutionalactions by a statecannot be thebasis for exemp-tion from theantitrust lawsunder the stateaction exemption.

not sovereign, their acts are not acts of gov-ernment, and the state action exemptiondoes not apply.

The acts of the attorneys general underthe MSA cannot be “authorized” within themeaning of the Parker doctrine if the statesthemselves (i.e., the ultimate authorizingentities) are not empowered to take theactions. Again, the state action exemptionsimply does not apply.

Noerr-Pennington ImmunityAnother possible exemption from the

antitrust laws for the MSA is the Noerr-Pennington immunity doctrine.65 The doctrineprovides a limited exemption from theantitrust laws for individuals petitioning thegovernment, initiating suit in the courts, orfacilitating communications to governmentaldecisionmakers. As the Court stated in Noerr,“No violation of the [Sherman] Act can bepredicated upon mere attempts to influencethe passage or enforcement of laws.”66

Under the doctrine, competitors acting inconcert to request legislation to legalize anti-competitive behavior are not liable under theSherman Act, even if the conduct that theyseek to legalize would otherwise be illegal.The doctrine applies to the commencementof litigation as well as to petitioning for leg-islation or regulatory action, and the avail-ability of immunity under the doctrine isnot affected by the petitioners’ motives inseeking the particular government action.

The doctrine does not, however, absolvepetitioners from all antitrust concerns; and,as will be seen, it has little if any effect on anyliability of the parties to the MSA.

The doctrine applies to the act or processof petitioning for governmental action. Inthe case of the MSA, that would be the initialsuits by the states against the tobacco com-panies for refunds of their Medicaid pay-ments and the joint petition of the statesand tobacco companies to Congress forapproval of the Resolution. Also, in imple-menting the MSA, the tobacco companiesand the attorneys general have petitioned orwill petition state courts for judicial consent

decrees, and they have petitioned or will peti-tion the state legislatures to enactQualifying Statutes. Those particular actsmight qualify for Noerr-Pennington immunity(but probably do not, because of the “sham”exception discussed below).

Such immunity would not apply, howev-er, to collusion among the tobacco compa-nies whereby they determined the amount of“damages” that each would pay (and tack onto its cigarette prices) or the tactics thatwould be used to exclude competitors; itwould not apply to the MSA itself; nor wouldit apply to the carrying out of the MSAthrough collusion among tobacco compa-nies to fix prices and exclude competitors.Those actions are the essence of the anti-competitive scheme irrespective of whetheranyone petitions the government, and theyare per se violations of the Sherman Act.

The focus of the Noerr-Pennington doc-trine is on the effort to influence public offi-cials. It does not immunize collusive activityapart from the process of petitioning thegovernment. In the Pennington case, forexample, the Supreme Court specificallyfound that collusive activity between a unionand certain favored employers to imposehigher costs on other employers was viola-tive of the antitrust laws, notwithstandingthat the union and the employers had peti-tioned the secretary of labor to facilitatetheir scheme.6 7 Moreover, in his concurringopinion in that case, Justice Douglas statedthat “an industry-wide agreement contain-ing those features [to force some competingemployers out of business] is prima facie evi-dence of a violation.”6 8 The MSA is likewiseprima facie evidence of a violation.

Antitrust scholars Philip Areeda andHerbert Hovenkamp are quite clear that prepe-tition collusion (such as that of the tobaccocompanies to agree on each company’s level of“damages” and the tactics for excluding com-petitors) violates the antitrust laws regardless ofwhether the government is later petitioned.

[C]onsider a combination of com-petitors that discussed among them-

12

The focus of theNoerr-Pennington

doctrine is on theeffort to influencepublic officials. It

does not immu-nize collusiveactivity apart

from the processof petitioning the

government.

selves the “appropriate price” fortheir product in order to petition thegovernment for legislation thatwould support their price in somemanner. This should constituteunlawful price collaboration becausetheir discussions create a severe dan-ger to competition without being inany way indispensable for conduct-ing protected political activity.6 9

The Noerr-Pennington distinction betweenanti-competitive activities, on the one hand,and advocacy, on the other, is explicit in theAirport Car Rental Antitrust Litigation decision:“[The] Sherman Act prohibits participation in,not advocacy of, anticompetitive activities. . . .For liability to be imposed on them [i.e., thoseattempting to influence public officials], theymust be participants in the scheme.”7 0

The Noerr-Pennington doctrine must also beread in relation to the Parker state actionexemption (discussed above). Noerr-Penningtonis complementary to the state action exemp-tion; it does not override it or swallow it up.Thus, if anti-competitive conduct is exemptedfrom antitrust liability because it constitutesstate action, Noerr-Pennington completes thepurpose of the state action exemption by pro-viding that citizens petitioning the govern-ment for the particular state action do notincur a separate antitrust liability. On theother hand, if the anti-competitive actions failto qualify for the state action exemption, thefact that the actors petitioned the governmentfor approval does not somehow immunizethose actions from antitrust liability. The dif-ference between the two doctrines is thatNoerr-Pennington is an exemption for citizensengaging in the political process (i.e., petition-ing government) whereas Parker state action isan exemption for state governing bodies (andtheir employees) in the exercise of their gov-ernmental functions. If the anti-competitivestate actions are not legitimate acts of govern-ment, the fact that the proponents petitionedthe state to perform them does not legalizethem under the antitrust laws.

Under the Commerce Clause and the

Compacts Clause, the states lack the powerand authority to enter into a multistate com-pact that infringes on federal prerogatives;consequently, the tobacco companies haveno antitrust immunity in collaborating withthe states to carry out the anti-competitiveelements of the MSA, regardless whetherthey may at some time or other have peti-tioned the government.

In fact, in the case of the MSA, it is likelythat even the petitioning by the tobacco com-panies fails to qualify for immunity underNoerr-Pennington as a result of the “sham”exemption to the doctrine.

The Supreme Court in City of Columbia v.Omni Outdoor Advertising, Inc. described a“sham” situation as one that “involves adefendant whose activities are ‘not genuinelyaimed at procuring favorable governmentalaction’ at all . . . , not one ‘who genuinelyseeks to achieve his governmental result, butdoes so through improper means.’”7 1

The key determinant of whether or notthe action is a “sham” is whether the peti-tioner had (in the case of filing a lawsuit)probable cause on which to base his claim.7 2

In commencing their lawsuits against thetobacco companies, the states may conceiv-ably have had some element of probablecause for their claims. The settlement ofthose lawsuits, however, is a different mat-ter. It involved a period of intense collusionduring which the parties concocted thescheme, agreed to the “damages” withwhich each tobacco company would beassessed, and determined the mechanismsand details of the price-fixing and competi-tion-suppressing scheme that became theMSA. The tobacco companies and the attor-neys general then took the package to thestate courts for approval. The former (inter-company negotiation) activities did notinvolve petitioning, and the latter activities(petitioning the courts) constituted a base-less petition, in that the states lacked thepower to adopt and implement the MSA.Areeda and Hovenkamp describe the stan-dard applicable to litigation: “[T]he issue isdifferent in the adjudication setting. One

13

Under theCommerce Clauseand the CompactsClause, the stateslack the powerand authority toenter into a mul-tistate compactthat infringeson federalprerogatives.

who requests a court to do something thatis clearly unconstitutional or unlawful is ineffect filing a ‘baseless’ petition which isthen governed by the rules for such claims[applicable to sham transactions].”7 3

Inasmuch as the states and the tobaccocompanies knew that the MSA violated theCompacts Clause and the antitrust laws (see“Prior Knowledge of Antitrust Violations,”below), the requests for state court approvalsof the MSA were a sham—to which Noerr-Pennington does not apply.

The MSA is also implemented throughlegislation—namely, the enactment of theQualifying Statutes. Areeda and Hovenkampcompare the litigation standard for “sham”with the legislation standard for “sham”:“The all-important difference is that a definedbody of law and procedure sets limits on thecontent of judicial or quasi-judicial opinions,but no equivalent body establishes effectivelimits on the petition to the legislature.”74

Yet the Constitution is one body of lawthat does, indeed, limit legislative acts.Accordingly, the petitions of the attorneysgeneral and the tobacco companies to thestate legislatures to approve the QualifyingStatutes under the MSA are every bit asmuch a sham as are the petitions to statecourts. The Constitution, in particular, theCompacts Clause, prohibits states fromadopting such statutes. Thus, there was nomerit to the petitions. The states and tobac-co companies knew that their petitions hadno merit. Their actions were thus a “sham,”75

with no immunity under the Noerr-Pennington doctrine.

In summary, Noerr-Pennington immunityclearly does not apply to the prepetition col-lusion of the tobacco companies in allocating“damages” among themselves and devising ascheme for excluding competition, to theMSA itself, or to the price-fixing and compe-tition-excluding implementation activities ofthe MSA. Inasmuch as the states actedbeyond their powers and authority in adopt-ing the MSA, the “sham” exception probablyprevents application of Noerr-Penningtonimmunity even to the petitioning involved in

obtaining state court approvals of the MSAand state legislature approvals of theQualifying Statutes.

Summary of Preemption, State Action,and Noerr-Pennington Analyses

Neither state action exemption nor Noerr-Pennington immunity applies to the MSA. Inthe absence of those exemptions or immuni-ties, the actions of the tobacco companiesand the states relating to the MSA must beviewed as attempts to authorize federalantitrust violations. But the preemption doc-trine causes the federal antitrust laws to pre-vail over such invalid state actions. TheLafayette case makes it quite clear that, in theabsence of an exemption under the stateaction doctrine, the federal antitrust lawsapply.76 Pennington reaches a similar result inthe absence of immunity under the Noerr-Pennington doctrine.77 Thus, the interstatepricing collusion and suppression of compe-tition provisions embodied in the MSA are,per se, actionable violations of the federalantitrust laws.

Prior Knowledge of Antitrust ViolationsThe authors of the MSA will not be sur-

prised to hear that it constitutes criminalviolations of the federal antitrust laws. Theevidence that they knew that before theMSA was negotiated is overwhelming.

Some of the lawyers who negotiated anddrafted the MSA also negotiated and draft-ed the earlier Resolution, which was madecontingent on congressional approval,undoubtedly because its lawyer-authorswere aware that the Compacts Clause of theConstitution requires congressionalapproval of compacts or agreements amongthe states that infringe on the sovereigntyof the United States.7 8 In anticipation ofcongressional approval, the Resolutioncontained the following exemption fromthe federal antitrust laws: “In order toachieve the goals of this agreement, . . . thetobacco product manufacturers may,notwithstanding the provisions of theSherman Act, the Clayton Act, or any other

14

The authors ofthe MSA will not

be surprised tohear that it con-stitutes criminalviolations of thefederal antitrust

laws. The evi-dence that they

knew that beforethe MSA wasnegotiated is

overwhelming.

federal or state antitrust law, act unilateral-ly, or may jointly confer, coordinate or actin concert, for this limited purpose.”7 9

The subsequent McCain bill in theSenate (which failed to pass) eventually hada similar provision. That language does notappear in the MSA. Instead, the MSA con-tains the following disclaimer:

Each Participating Manufacturer . . .acknowledges . . . that certain provi-sions of this Agreement may requireit to act or refrain from acting in amanner that could otherwise giverise to state or federal constitutionalchallenges, and that . . . it . . . waives . . .any and all claims that the provi-sions of this Agreement violate stateor federal constitutions.80

When the Resolution bogged down inCongress in late 1997 and the often-amended McCain bill became the leadingcontender for a congressionally approvedsettlement agreement, the tobacco indus-try, unhappy with many aspects of theMcCain bill, became concerned with a ver-sion of the bill that lacked a specific exemp-tion from the federal antitrust laws. At thattime, the tobacco companies maintained aWeb site on which they addressed the mostimportant issues of the day relating to thetobacco settlement. The following “issuepaper” appeared among other industrystatements on that site:8 1

LIMITED ANTITRUST PROTECTION

The McCain bill (S.1414) does notinclude the narrow, limited antitrustprotection that is essential to allow thetobacco industry to enter into theProtocol and carry out various of thecommitments that are designed to reduceunderage tobacco use. The bill shouldaccordingly be amended to reflectthe following considerations:

Advertising and marketingchanges require antitrust protec-

tion. In order to avoid constitution-al difficulties, the companies’ agree-ment to change marketing andadvertising practices—for example,by eliminating all billboards andother outdoor advertising, brandsponsorships of sporting events andconcerts, and human images in anyadvertising—must be voluntary andnot compelled. Any such voluntary col-lective agreement constitutes a restraint oncompetition that is per se illegal under theantitrust laws. Only if the industry isgranted limited protection from both gov-ernment and private lawsuits can it enterinto voluntary agreements to limit adver-tising and marketing competition.

The “Pass-Through” of indus-try payments requires antitrustprotection. The settlement requiresthe industry to pass through to con-sumers the costs of settlement pay-ments (thereby increasing the priceof tobacco products). The industryshould not be exposed to antitrust liabilityfor any such pass-through requirementwhich has been demanded as a step tocombat underage use of tobacco products.

Industry boycotts of sellers oftobacco products to underage per-sons require antitrust immunity.The industry must be free collectivelyto cut off distributors or retailers thatsell tobacco products to underage per-sons (or disregard the industry’s volun-tary advertising and marketing restric-tions). Ordinarily, any such collective cutoffcould be regarded as an illegal group boycottunder the antitrust laws. Under theProposed Resolution, any such action by theindustry would, in each instance, requireapproval by the Department of Justice.Limited antitrust protection is essential tolegalize collective industry action to deal withbusinesses that sell tobacco products tounderage users and to authorize the DOJ toapprove such actions by the industry.

Attorney General approval ofnew plans to reduce underage

15

The tobaccoindustry canenter into volun-tary agreementsto limit advertis-ing and market-ing competitiononly if it is grant-ed limited protec-tion from bothgovernment andprivate lawsuits.

tobacco use. In addition to the reso-lution’s proposed measures forreducing underage use of tobaccoproducts, other approaches may besuggested in the future. Accordingly,any legislation should include provisions toallow the industry to present plans for newmeasures to the Attorney General forapproval, and to exempt the industryfrom antitrust liability for approved activ-ities under such plans.

Thus, the tobacco industry, which tried butwas unable to obtain congressional approvalof either the Resolution or the McCain bill,was fully aware that without such approvalarrangements substantially similar to thosein the MSA would violate the federalantitrust laws.

Another proof that the industry, the stateattorneys general, and the contingency feelawyers knew that the MSA violated federalantitrust laws is that they buried a $50 mil-lion war chest (financed by moneys takenfrom smokers) in the MSA to discourage anddelay any challenges to their illegal scheme.Specifically, the MSA provides:

The Attorneys General of the SettlingStates, acting through NAAG, shallestablish a fund (“The States’ Anti-trust/Consumer Protection TobaccoEnforcement Fund”) . . . which will bemaintained by such AttorneysGeneral to supplement the SettlingStates’ (1) enforcement and imple-mentation of the terms of thisAgreement and the Consent Decrees,and (2) investigation and litigation ofpotential violations of laws withrespect to Tobacco Products. . . . EachOriginal Participating Manufacturershall . . . severally pay its RelativeMarket Share of $50,000,000 to theEscrow Agent . . . who shall disbursesuch monies to NAAG.8 2

The Resolution and the McCain bill requiredthe payment of substantially greater “dam-

ages” and imposed substantially more strin-gent advertising and marketing requirementson the industry than does the MSA.Consequently, if the tobacco companies wereinclined to violate their agreements, theywould have been far more likely to violate theResolution or the McCain bill than the MSA.However, no such “war chest” provisionappeared in either the Resolution or theMcCain bill—undoubtedly, because theauthors anticipated receiving congressionalapproval. In fact, why would the tobaccoindustry violate an agreement that grants itthe right to fix prices and exclude competi-tors on a national basis? Obviously, the attor-ney generals’ war chest is not meant to beused against the tobacco companies. It is arecognition that the MSA violates theantitrust laws, and its purpose is to discour-age and delay anyone who chooses to chal-lenge the MSA’s illegal scheme.

Attempts to Rationalize AntitrustViolations

The MSA constitutes violations of the fed-eral antitrust laws, which are criminal laws.Considering the stature of the offices andinstitutions involved in the illegal price-fixingactivities, we must ask whether there are anyother explanations that might decriminalizethose activities. Three arguments come tomind: (i) the price-fix premiums charged tosmokers are “just a tax”; (ii) the price-fix pre-miums are a “regulatory fee”; and (iii) theentire scheme is justified because it is a “set-tlement” of tobacco companies’ liabilities.The arguments do not withstand scrutiny.

The Price-Fix Premium Is “Just a Tax.”Whether or not Congress could or shouldimpose a tax on the sale of cigarettes equiva-lent to the “damages” imposed by the MSA,Congress did not do so. Under ourConstitution, moreover, not just anybodycan impose a tax. If the price-fix premiumon cigarettes were a tax, it would be a nation-al tax that would go to the federal govern-ment and not to the states. Only Congresscan impose a tax on the national sales of aproduct.8 3 The states could impose a tax on

16

The state attor-neys general

buried a $50 mil-lion war chest in

the MSA to dis-courage and delayany challenges to

their illegalscheme.

cigarette sales within their respective borders,but the Compacts Clause of the Constitutionprevents them from imposing such a tax on amultistate basis through agreements amongthe states, except with the consent ofCongress (which they did not obtain).

The tobacco companies argued againstcharacterizing the “damages” assessments astaxes in one of their Internet issue paperstitled “Excise Tax Treatment for IndustryPayments Is Inappropriate.”84 The industrynoted that tax treatment would subject thepayments to budget rules and fiscal controlsapplicable to tax revenues. Another reasonnot to treat “damages” as taxes, not openlyaddressed by the industry, is that tax revenuesdo not usually form the basis for awardinglawyers’ contingency fees. In any event, nei-ther Congress nor the states have enacted theprice-fix premiums as taxes on the sale of cig-arettes, and the argument that the paymentsare “just a tax” simply does not apply.

The Price-Fix Premium Is a Regulatory Fee.Again, whether Congress could or shouldimpose a national regulatory fee on the saleof cigarettes, it has not chosen to do so. Thestates could impose a regulatory fee on thesale of tobacco within their respective bor-ders, but the Compacts Clause of theConstitution prohibits them from imposinga national regulatory fee without the consentof Congress (which they have not received).Congress never delegated regulatory authori-ty over tobacco to the state attorneys general.Consequently, there is no basis for arguingthat the price-fix premiums are a regulatoryfee imposed on the sale of cigarettes.

The “Damages” Are Merely “SettlementPayments.” In its issue paper, “Excise TaxTreatment for Industry Payments IsInappropriate,” the industry argues that its“payments are properly characterized as set-tlement payments paid to settle previousdamages claims.”8 5 Given the history of theMSA and the fact that the payments are nei-ther taxes nor regulatory fees, it is undoubt-edly true that the payments are, in fact, a set-tlement. Nonetheless, the method by whichthe industry obtains the money to make the

payments is price fixing and restraint of trade,which are crimes. By analogy, if the tobaccocompanies were to steal the money to settlethe states’ claims, they would be guilty ofstealing, which is a crime. The fact that stateofficials are involved in facilitating the steal-ing or price fixing in order to maximize thestates’ settlement payments does not lessenthe crime but compounds it. There is noexception to the antitrust laws or any othercriminal law merely because the money beingtaken illegally is to be used to settle a claim.

Remedies

The MSA violates the Constitution andthe antitrust laws, and there are victims ofthose violations. The victims include smok-ers, whose money is being taken to settle law-suits in which they were not involved or rep-resented. The victims also include tobaccobusinesses that were not parties to the settle-ment but are forced to pay “damages” forwhich they have no liability. Another victim isCongress, which has been replaced in a num-ber of its constitutional roles by the NationalAssociation of Attorneys General and theMSA assemblage of states.

There are violators of the law who are prof-iting from their crimes: The major tobaccocompanies have used consumers’ money topersuade law enforcement officials to refrainfrom enforcing (and to violate) the antitrustlaws. Contingency fee lawyers have used theMSA to pay themselves billions of dollars as areward for having devised an illegal price-fix-ing scheme. Under the MSA, the privatelawyers for 46 states will receive $750 millionper year for the first five years and $500 mil-lion per year thereafter indefinitely.86 The viola-tors include the states, which have ignored theConstitution to tap into the wealth of 45 mil-lion (mostly medium- to low-income)Americans—namely, smokers. The violatorsalso include the state attorneys general, whorefrain from enforcing the antitrust laws inexchange for the political and other rewardsthat accrue to them as the recipients and dis-

17

There is no excep-tion to theantitrust laws orany other crimi-nal law merelybecause themoney beingtaken illegally isto be used to set-tle a claim.

pensers of $206 billion of “damages” and bil-lions more in attorneys’ fees.

Is there a remedy? Or are we witnessingthe commission of a perfect crime? Theanswer to the first question is that remediesare available. The answer to the second ques-tion depends on whether and how the reme-dies are used. The factors that must be exam-ined are (a) customary law enforcement agen-cies and their self-imposed disabilities, (b)victims of the violations and the nature of thevictims’ injuries, and (c) terms and condi-tions of the legal remedies.

Who Will Enforce the Law?State Law Enforcement Officials. The states’

attorneys general are responsible for protect-ing all the citizens of their respective states,including citizens who smoke cigarettes, fromviolations of the law. Among the laws that theattorneys general are expected to enforce arethe federal and state antitrust laws. The stateattorneys general have not brought anyactions on behalf of their citizens for violationby the MSA of the antitrust laws, because it isquite clear that they would lose the “dam-ages” payments provided for them under theMSA. Thus, by constructing a settlementmechanism (the MSA) that is based on viola-tions of the antitrust laws, the state attorneysgeneral have put themselves in a scandalousconflict of interest: they can enforce theantitrust laws on behalf of consumers andlose the price-fix premium for their states, orthey can implement the MSA and allow theconsumers of their respective states to bebilked by an illegal price-fixing scheme.

Federal Law Enforcement Officials. TheDepartment of Justice, Antitrust Division, hasauthority to enforce the antitrust laws onbehalf of the United States. On September 22,1999, however, the department commencedan action against the tobacco companies, verysimilar to the actions of the states. Prof.G. Robert Blakey of Notre Dame Law School(one of the consultants engaged by the DOJto plan the lawsuit) explained that “this case isnot made to win, it’s made to settle.”8 7

Undoubtedly, the DOJ plans a settlement

similar to the MSA. Moreover, the MSA itself,at least in its early stages, is reported to havebeen brokered and negotiated by presidentialaide Bruce Lindsey at the request of the presi-dent.88 Thus, the DOJ is not likely to prose-cute antitrust violations by the MSA.

The Federal Trade Commission, which alsohas authority to enforce the antitrust laws, isunlikely to proceed against MSA antitrust vio-lations for much the same political reasons.89

The Settling Tobacco Companies. The settlingtobacco companies must not be mistaken forvictims of the MSA. If the settlement stands,they have bought, at somebody else’s expense,the right to fix prices and exclude competitors;they have settled at least some of their liabili-ties; and they have evaded bankruptcy. Themechanism by which they have done thosethings, moreover, will serve to divert losses infuture lawsuits away from themselves andonto their consumers. Thus, the tobacco com-panies will not challenge the settlement.

Who Are the Victims?Smokers. Forty-five million smokers are the

primary victims of the MSA. The major tobac-co companies have colluded to raise cigaretteprices by $206 billion over the next 25 years.Smokers cannot change suppliers or brandsto escape the higher prices because the MSAexcludes tobacco companies that do not pay“damages.”90 Smokers (who according to thestates’ lawsuits are addicted to cigarettes) aretrapped into paying the price-fix premiums.Those are classic “antitrust injuries,” engi-neered by masters of the trade.9 1

Nonsettling Tobacco Companies. The nonset-tling tobacco companies are confined to lessthan 1 percent of the tobacco business. Ifthey try to increase their market shares, theymust pay “damages” even though they haveno liability and were not involved in anycases. The ban on advertising is another bar-rier to any possible market growth for them.The nonsettling tobacco companies thatlater signed the MSA were compelled to do soby the threat of litigation and the rewardsand punishments dispensed through theMSA. Those companies that have refused to

18

The nonsettlingtobacco compa-

nies must pay“damages” even

though they haveno liability and

were not involvedin any cases.

sign the MSA are effectively excluded fromthe tobacco business by the penaltiesimposed by the Qualifying Statutes.

Congress. The institution of Congress is alsoa victim of the MSA. The states, by forming aseparate compact among themselves, have cre-ated a new tax for 45 million Americans and anew bankruptcy system for tobacco compa-nies; they have effectively repealed the antitrustlaws in the area of tobacco products; and theyhave created a new regulatory regime adminis-tered by the National Association of AttorneysGeneral in an area of interstate commerce pre-viously regulated by Congress. The states havealso ignored Congress’s Tobacco Control Actand the Cigarette Advertising and Labeling Actof 1965, as amended. Those actions diminishthe authority and role of Congress.

What Legal Redress Is Available?The primary remedies for the type of

injuries caused by the MSA are declaratoryjudgment under the Federal DeclaratoryJudgment Act9 2and injunctive relief and mon-etary damages (including treble damages)under the federal and state antitrust laws.93 Inappropriate circumstances those remedies canbe pursued on an individual or class actionbasis, but they do not apply to all potentialplaintiffs under all circumstances. Accord-ingly, we turn to a discussion of those reme-dies and the applicable rules of standingaffecting who may bring an action and underwhat circumstances.

Declaratory Judgment. The Federal Decla-ratory Judgment Act provides a means forchallenging the constitutionality of theMSA. An action brought under that actwould probably be combined with a requestfor a permanent injunction barring furtherimplementation of the unconstitutional orillegal provisions of the MSA. Key require-ments for standing to bring such an actionare the following:

a. The petitioner must have a practicalinterest in the declaration being sought.

b. There must be an actual case or contro-versy.

c. In the case of a statute or regulation,the petitioner must be subject to andadversely affected by the statute orregulation.9 4

A declaratory judgment would seem mostappropriate for a (nonsettling) tobacco com-pany seeking to enter the market or expand itsmarket share. The state Qualifying Statutes ineffect require that such a company sign theMSA or pay the equivalent of “damages” intoa 25-year escrow (or stay out of the business).The petitioner would seek a declaration thatthe Qualifying Statute is unconstitutional andunenforceable, because it violates theCommerce Clause and the Compacts Clauseof the Constitution, and request a permanentinjunction against enforcement of the MSA.Under the Supreme Court’s ruling in Ex ParteYoung, the action would be brought againstthe state attorney general rather than the stateitself to avoid the problem of state immunityunder the Eleventh Amendment to theConstitution.9 5

A smoker or class of smokers would havea more difficult time obtaining relief underthe Declaratory Judgment Act. Although thesmoker is clearly injured by having to pay theprice-fix premiums, he is not a party to theMSA, and the state Qualifying Statute doesnot directly apply to him.

Federal and State Antitrust Injunctive Reliefand Damages.9 6 Injunctive relief and trebledamages are remedies under the federalantitrust laws,9 7and similar remedies are avail-able under most states’ laws.98

The rules of standing for injunctive reliefare relatively uncomplicated and are similarunder the federal antitrust laws and moststate antitrust laws. Generally, a party musthave sustained or be threatened withantitrust injuries arising from a violation ofthe antitrust laws. It is not necessary thatthe plaintiff will receive (or has received)injuries as a result of direct dealings with thedefendant. Consequently, both smokers(who are usually indirect purchasers of ciga-rettes from the settling tobacco companies)and nonsettling tobacco companies (which

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Injunctive reliefand treble dam-ages are remediesunder the federalantitrust laws,and similar reme-dies are availableunder moststates’ laws.

may be direct or indirect purchasers or man-ufacturers) have standing to seek injunctiverelief under the federal and state antitrustlaws, provided that they can show actual orthreatened antitrust injuries, such as thoseresulting from the MSA.

The rules of standing are more complicat-ed with respect to the federal and state trebledamages antitrust statutes. Generally, underthe federal statute (e.g., section 4 of theClayton Act) there are the following require-ments for standing to sue:9 9

a. Plaintiff must have suffered anantitrust injury.

b. Plaintiff’s injury must have beencaused by defendant.

c. Damages must not be speculative ordifficult to quantify or apportion. Normay damages create the risk of overlap-ping claims (i.e., between different buy-ers in the distribution chain).

d. There must not be a risk of duplicaterecovery.

As a practical matter, those standing require-ments have prevented consumers who pur-chase indirectly from a price-fixing seller fromsuing for treble damages under the federalantitrust laws. The “indirect purchaser rule”derives from the fact that those who violatethe federal antitrust laws are not allowed todefend against their direct purchasers byclaiming that the plaintiffs passed the priceincrease on to their own customers and were,to such extent, not harmed. The direct pur-chaser is entitled to claim the full amount ofthe illegal price increases as his damages.100

Exceptions to the indirect purchaser ruleexist for situations in which (i) the injury isnecessarily passed down the distributionalchain, as in “cost-plus agreements,” and (ii)the defendant controls the plaintiff’s directseller or the plaintiff controls the direct pur-chaser from the defendant.1 0 1 Unless theMSA produces the equivalent of those excep-tions, the federal treble damages remedy isprobably limited to direct purchasers fromthe price-fixing tobacco companies. Plaintiffs

could include distributors, jobbers, and someretailers, but not smokers.

In recent years, a number of states haveenacted treble damages statutes that have theeffect of eliminating the indirect purchaserrule. New York is one such state and Californiais another. The Supreme Court has held thatstate statutes that allow indirect purchasersto sue for damages under state antitrust lawssupplement the federal antitrust laws and donot violate them.1 0 2In states that have elimi-nated the indirect purchaser rule, smokers,retailers, manufacturers, and others who didnot purchase directly from the settling tobac-co companies still have standing under stateantitrust law to sue for treble damages.

As a general rule, unless a state has waivedimmunity, it is immune from suits for dam-ages under the Eleventh Amendment to theConstitution.1 0 3Pursuant to a fiction createdby the Supreme Court, however, state officerscan be enjoined by the federal courts fromviolating the Constitution. An officer’sunconstitutional actions are not attributedto the state for purposes of EleventhAmendment immunity because unconstitu-tional actions are beyond the sovereignty orgovernmental capacity of the state.1 0 4

Antitrust suits can be brought by classesof individuals or firms as well as by a singleindividual or firm. Rule 23 of the FederalRules of Civil Procedure specifies the condi-tions for bringing class actions in federalcourt.1 0 5The rule applies in the same mannerto antitrust claims as to other claims.106

Congressional Remedies and Risks. The MSAhas been very profitable to those who con-ceived and implemented it, and the tempta-tion will exist to effect similar deals in thefuture. That type of deal, however, is destruc-tive of the nation’s economy, the Constitu-tion, and the rule of law. Unfortunately, if theMSA is allowed to stand, it will create andfinance a rich and powerful industry oflawyers who know how to manipulate thesystem and are not averse to violating theConstitution or the laws.

The most important protections againstthat threat are the Constitution and Congress.

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If the MSA isallowed to stand,it will create andfinance a power-

ful industry oflawyers who are

not averse toviolating the

Constitution orthe laws.

In the present instance, the Constitution hasnot failed. The people who drafted the MSA didnot find constitutional loopholes that enabledthem to enrich themselves at the expense ofothers. Instead, they violated the Constitution(and the antitrust laws).

The greatest risk going forward probably liesin the congressional arena, because that is wherethe next step in the tobacco conspiracy will playout. Recall that DOJ sued the tobacco compa-nies for Medicare recovery on September 22,1999. When the lawsuit was announced, therewas much criticism that the suit lacked meritand constituted “piling on.”107 However, thelawsuit may be an important element in theoverall plan by governmental proponents of theMSA (and, most likely, the tobacco companies).Specifically, the lack of congressional approvalof the MSA is a gaping hole in the legal fabric ofthe MSA. If the DOJ lawsuit is settled pursuantto a scheme similar to that of the MSA, or if thefederal government otherwise indicates itsapproval of the tobacco litigation, an argumentwill be made that the equivalent of congression-al approval has been received. That purpose isconsistent with the history of the DOJ lawsuit,namely: (i) Congress was asked to make anunusual appropriation of $20 million to financethe litigation (which Congress declined to do);(ii) Professor Blakey commented, “This case isnot made to win, it’s made to settle”; and (iii)Attorney General Reno originally opposedbringing the case because it was baseless.108 Howwill Congress or a U.S. district court react to aproposed settlement offer of the DOJ suit in thearea of $160 billion or so?109 Avoiding approv-ing the MSA (and thus completing the perfectcrime) will take courage, an understanding ofhow the scheme undermines Congress’s role inthe government, and a high regard for theConstitution.

Conclusion

The MSA violates the Commerce Clauseand the Compacts Clause of the Constitution.Consequently, the states acted beyond theirpowers in constructing and implementing the

MSA, and their actions are not exempted fromthe antitrust laws by the state action doctrineor the Noerr-Pennington doctrine. The MSAeffectuates collusion, price fixing, and exclu-sion of competition by the major tobaccocompanies; it violates federal and stateantitrust laws; and it subsidizes a coterie oftrial lawyers at over $500 million per yearindefinitely for having devised an illegal price-fixing scheme. Victims of the MSA—smokers,sellers, and (nonsettling) manufacturers oftobacco products—have incurred and areincurring antitrust injuries; and smokers arebeing forced to finance a scheme that takestheir money and gives them nothing in return.The institution of Congress and the rule of laware also victims. Fortunately, remedies areavailable. Victims who assert those remedieswill perform a great service for themselves and,more important, for the nation.

Notes1. The original tobacco companies that enteredinto the MSA were Brown & Williamson TobaccoCorporation, Lorillard Tobacco Company, PhilipMorris Incorporated, and R. J. Reynolds TobaccoCompany. Those companies are referred to in theMSA as the “original participating manufactur-ers.” The next largest tobacco manufacturer,Liggett Group, Inc., joined the settlement threedays after the others signed and is included(together with the original participating manu-facturers) wherever this study refers to the “set-tling tobacco companies.”

2. The term “damages” is used in quotation marksbecause the payments provided for in the MSA arenot based on a calculation of losses suffered by thestates or injuries suffered by smokers. Rather, theyare amounts that the settling parties determinedcould be added to the price of cigarettes withoutsignificantly reducing sales of cigarettes. Theobligation to pay the “damages” is allocatedamong the settling tobacco companies on thebasis of their respective market shares. See MasterSettlement Agreement §§ II(mm), IX(b), and IX(c).(Cited hereafter as MSA.) The full text, includingexhibits, of the MSA can be found athttp://www.awpublish.com/settle.html. See alsoJeremy Bulow and Paul Klemperer, “The TobaccoDeal,” Brookings Papers on Economic Activity:Microeconomics 1998, November 1998, p. 19.Professors Bulow and Klemperer present an eco-nomic analysis of the MSA and also the predeces-

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The most impor-tant protectionsagainst thethreats posed bythe MSA are theConstitution andCongress.

sor settlement attempts, the Resolution, and theMcCain bill. Bulow and Klemperer explain that“damages” under the MSA are assessed and col-lected in much the same way as state excise taxes.However, the assessments are not characterized astaxes in order to avoid state budgeting and spend-ing controls, and to enable the states’ private attor-neys to assess contingency fees against the totalpayment amounts. Professor Bulow is the currentdirector of the Bureau of Economics of the FederalTrade Commission.

3. The nonsettling tobacco companies are givenan alternative to paying “damages”: they canmaintain a market share equal to their 1998share or no more than 125 percent of their 1997share. Sales of the nonsettling tobacco compa-nies represented less than 1 percent of the tobac-co market divided among more than 100 com-petitors. Either way, the nonsettling tobaccocompanies are confined to a minuscule slice ofthe tobacco business.

4. An account of events leading up to theResolution is contained in Carrick Mollenkampet al., The People vs. Big Tobacco, New Jersey(Princeton, N.J.: Bloomberg, 1998).

5. Defeat of the McCain bill came within one weekafter the Senate approved an amendment thatwould have limited contingency fees for thestates’ private lawyers to $4,000 per hour. The feecap apparently killed the bill, with various anti-tobacco groups claiming that the fee award capwould discourage plaintiffs’ lawyers from takingtobacco cases in the future. Mealey’s LitigationReport: Tobacco (King of Prussia, Pa.: Mealey, June18, 1988), p. 4. The reason the states’ privatelawyers balked at that limit was that they expect-ed (and ultimately received) far more. Lawyers’fees under the Texas settlement were expected toexceed $90,000 per hour. David E. Rosenbaum,“Senate Approves Limiting Fees Lawyers Get inTobacco Cases,” New York Times, June 17, 1998,p. A1.

6. See MSA §§ II(U) and (SS), VI(c)(3), andXI(f)(4)(C).

7. The following is a brief synopsis of the MSA:

Article I: Recitals. Article II: Definitions.Article III: Permanent Relief. Bans many types of

advertising, including use of cartoon characters,sponsorship by tobacco brands of concerts orsporting events, billboard and transit advertis-ing, use of tobacco brand names on other prod-ucts (e.g., T-shirts) for merchandising.

Article IV: Public Access to Documents. Requiresthe tobacco companies to provide access to

industry documents through creation of a docu-ment repository and Web site.

Article V: Tobacco Control and Underage UseLaws. Prohibits the tobacco companies fromchallenging state tobacco laws.

Article VI: Establishment of a National Foun-dation. Authorizes the National Association ofAttorneys General (NAAG) to set up a founda-tion to fund studies to reduce youth smokingand prevent tobacco-related diseases; allocates$9.2 billion of “damages” for that purpose.

Article VII: Enforcement. Provides state courtjurisdiction for enforcement of the MSA andconsent decrees entered pursuant to it.

Article VIII: Certain Ongoing Responsibilities ofthe Settling States. Describes MSA enforcementand implementation roles for the NAAG, includ-ing creation and use of a $50 million States Anti-trust/Consumer Protection Tobacco Enforce-ment Fund (the Enforcement Fund).

Article IX: Payments. Provides for collection of$206 billion of “damages” and the mechanismwhereby the tobacco companies are protectedfrom competitors who might charge lowerprices.

Article X: Effect of Federal Tobacco-Related Legis-lation. Protects the tobacco companies againstbeing required to make double payments in theevent the federal government enacts tobacco-related legislation providing benefits to thestates.

Article XI: Calculation and Disbursement of Pay-ments. Specifies who will decide adjustments topayments made by tobacco companies in theevent some tobacco companies increase ordecrease market shares, how those payments willbe calculated, and when payments will be made.

Article XII: Settling States’ Release, Discharge and Covenant. Provides for releases by the statesrelating to settled litigation.

Article XIII: Consent Decrees and Dismissal of Claims.Requires states and tobacco companies to termi-nate Medicaid recoupment suits and submit theMSA and consent decrees to the courts forapproval.

Article XIV: Participating Manufacturers’ Dismissalof Related Lawsuits. Provides for releases by thetobacco companies of certain claims against thestates.

Article XV: Voluntary Act of the Parties. Requiresthat the tobacco companies waive claims thatthe MSA violates state or federal constitutions.

Article XVI: Construction. Provides that neitherside will receive a preference with respect tointerpretation of the MSA, and affirms that thestates do not approve the acts or practices of thetobacco companies.

Article XVII: Recovery of Costs and Attorneys’ Fees.Requires that the tobacco companies pay thestates’ attorneys’ fees, and specifies the mannerfor establishing attorneys’ fees.

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Article XVIII: Miscellaneous. Contains approxi-mately nine pages of devices to protect theresults of the MSA, such as “most-favored-nation” provisions, prohibitions on sales ofassets by tobacco companies, arrangements forongoing meetings and consultation, and prohi-bitions against declaring bankruptcy.

Exhibits: Exhibits A through U to the MSA includesuch things as a “Tobacco Enforcement FundProtocol” (Exhibit J) relating to use of theNAAG’s $50,000,000 Enforcement Fund; thetobacco companies’ respective “MarketCapitalization Percentages” (Exhibit K); a“Model Consent Decree” (Exhibit L); a “ModelState Fee Payment Agreement” (Exhibit O) fordetermining states’ private attorneys’ contin-gency fees; and a “Model Statute,” referred toelsewhere as a Qualifying Statute (Exhibit T),which forces nonsettling tobacco companieseither to pay “damages” or to stay out of thebusiness.

8. The MSA states that it is intended to protectunderage smokers. That is not the real intent, asthe following considerations demonstrate:

a. The MSA’s advertising restrictions are thework product of state attorneys generaland their contingency fee lawyers, whohave no authority or competence to legis-late or regulate. There is considerable dis-pute as to whether the ad restrictions willhave any significant effect on underagesmoking.

b. The elimination of advertising reducescosts for the tobacco cartel and creates abarrier to entry for potential competitors.That is consistent with and supportive ofthe anti-competitive purposes of the MSA.

c. The advertising regulations would besuperfluous if the states enforced laws pro-hibiting the sale of cigarettes to minors,which prior to the MSA were on the booksin all 50 states.

d. The moneys allocated to curb underagesmoking are a small percentage of the“damages” being collected (approximately4 percent).

e. The participating tobacco companies areexcused from making anti-youth-smokingpayments in any year after 2004 in whichtheir combined market share decreases by 1percent from the preceding year. MSA § IX(e). Thus, such purpose is secondary atmost.

f. The lawsuits settled by the MSA were notbrought for the benefit of smokers, under-age or otherwise. They were brought toobtain reimbursement for the states.

g. The uses to which the states are puttingthe “damages” that they collect have little

to do with the prevention of underagesmoking. Funds are being used for suchthings as new sidewalks, tax cuts, bootcamps, and school construction. Less than8 percent of the states’ discretionary “dam-ages” payments is earmarked for anti-smoking campaigns. Alissa J. Rubin,“States Fund Variety of Programs withTobacco Money,” Washington Post,December 27, 1999, p. A5.

9. Bulow and Klemperer describe the tobaccoindustry as “a tight oligopoly dominated by fourhighly profitable firms controlling 98.6 percent ofthe market” (Philip Morris, RJR, Brown &Williamson, and Lorillard) with a fifth company(Liggett) holding a 1.3 percent share. Beyond thatgroup, “over 100 fringe firms . . . in aggregate haveperhaps 0.1 percent of the market.” Bulow andKlemperer, p. 4 n. 7.

10. “[Each] Original Participating Manufacturershall severally pay . . . its Market CapitalizationPercentage (as set forth in Exhibit K) of . . . [theinitial $12.7 billion of ‘damages’ payments].”MSA § 1X(b). “[Each] Original ParticipatingManufacturer shall severally pay . . . its RelativeMarket Share of the . . . [specified annual pay-ments ‘in perpetuity’].” MSA § IX(c). TheMarket Capitalization Percentage measures therelative market shares in 1997 of a market con-sisting of Philip Morris, Brown & Williamson,Lorillard, and R. J. Reynolds (i.e., the OriginalParticipating Manufacturers). MSA Exhibit K.The Relative Market Share measures anOriginal Participating Manufacturer’s respec-tive share of the total number of cigarettesshipped in the immediately preceding year by allOriginal Participating Manufacturers. MSA §II(mm).

11. Bedell Wholesale Company, Inc. v. Philip MorrisIncorporated, et al., Civil Action No. 99-558 (W.D.Pa.), Brief in Support of Plaintiffs’ Motion forPartial Summary Judgment, at 4.

12. Basing the “damages” allocation on currentmarket share means that the allocation is notintended to reflect the settling tobacco compa-nies’ relative degrees of liability. Since there is asignificant latency period between tobacco expo-sure and tobacco-related disease, an allocationbased on each company’s actual liability wouldreflect past market shares, past sales, and pastmarketing claims (and possibly past levels of tarand nicotine of the various brands). In fact, theMSA’s system for allocating “damages” has noth-ing to do with relative degrees of liability andeverything to do with rigging the tobacco marketand paying for permission to do so. See Bulowand Klemperer, pp. 18, 22.

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13. The MSA prescribes a formula whereby a par-ticipating manufacturer may receive a reduction ofits “damages” payments if the participating tobac-co companies collectively suffer a market share losscaused by “disadvantages experienced as a result ofthe provisions of this Agreement.” The aggregateamount of the “damages” adjustment (referred toas the “NPM Adjustment Percentage”) is calculatedas follows: “[If] the Market Share Loss for theimmediately preceding year . . . is greater than 0(zero) and less . . . than 16 2/3 percentage points,then the NPM Adjustment Percentage shall beequal to the product of (x) such Market Share Lossand (y) 3 (three).” MSA § IX(d)(1)(A)(ii). The loss ofmarket share is based on comparison with a BaseAggregate Participating Manufacturer MarketShare, which is the aggregate market shares of allParticipating Manufacturers in 1997 minus twopercentage points. MSA § IX(d)(1)(B)(i). Theamount of the “damages” adjustment is allocatedamong participating manufacturers whose marketshares fall below their respective 1997 marketshares. MSA § IX(d)(3). “[A] nationally recognizedfirm of accountants (the ‘Firm’) shall determinewhether the disadvantages experienced as a resultof the provisions of this Agreement were a signifi-cant factor contributing to the Market Share Loss.. . . If [so], the NPM Adjustment . . . shall apply.”MSA § IX(d)(1)(C).

14. MSA, Article III.

15. The Foundation is a charitable trust or foun-dation created by the attorneys general under theMSA to support the study of underage smokingand programs to prevent tobacco-related diseases.MSA, Article VI.

16. MSA § VIII(a)(2).

17. Tobacco companies that are not subject to“damages” payments (either because the states inwhich they operate do not support the MSA orbecause the tobacco companies operate in marketsoutside the reach of the MSA) also pose a risk tothe “damages” income of the states. But the MSAallows participating tobacco companies that losemarket share or sales to reduce their “damages”payments. MSA § IX(d) and Exhibit E.

18. The MSA requires each state to enact a QualifyingStatute, which is defined in the MSA as a “SettlingState’s statute . . . that effectively and fully neutralizesthe cost disadvantages that the Participating Manu-facturers experience vis-à-vis Non-ParticipatingManufacturers . . . as a result of the provisions of thisAgreement.” MSA § IX(d)(2)(E).

19. “A Settling State’s Allocated Payment shall not besubject to an NPM Adjustment . . . if such SettlingState continuously had a Qualifying Statute . . . in

full force and effect.” MSA § IX(d)(2)(B). “If . . . acourt . . . invalidates . . . the . . . [Qualifying Statute]with respect to such Settling State . . . then the NPMAdjustment . . . shall still apply to such SettlingState’s Allocated Payments but . . . shall not exceed65 percent of the amount of such AllocatedPayments.” MSA § IX(d)(2)(F).

The effect of the MSA on state officials consid-ering whether or not to join the MSA is reflectedin the following statement by Attorney GeneralBill Pryor of Alabama:

For those, like me, who rejected the legal the-ories used to sue the tobacco industry, thesettlement was structured to persuade allstates, even states with substantial tobaccofarming, to participate. The settlement creat-ed an increase in the price of cigarettes forpayments to all states; if a state refused toparticipate in the settlement, the smokers ofthat state nevertheless would pay higherprices to fund payments to other states.States that opposed the deal as “too soft” onthe industry likewise were in a difficult posi-tion. That is why all 46 states that had notalready settled with the industry agreed tothe settlement.

WilliamH. Pryor Jr., “A Comparison of Abuses andReforms of Class Actions and MultigovernmentLawsuits,” Tulane Law Review, forthcoming.

20. A model form of Qualifying Statute is annexedto the MSA as Exhibit T. The model QualifyingStatute provides that any tobacco company thatrefuses to sign the MSA must deposit in 25-yearescrow an amount that (because it is not deductiblefor income tax purposes) is approximately 150 per-cent of the amount it would be required to pay as“damages” if it signed the MSA. The ostensiblepurpose of that escrow is security against potentialfuture liability.

21. “A Subsequent Participating Manufacturer shallhave payment obligations under this Agreementonly in the event that its Market Share . . . exceeds thegreater of (1) its 1998 Market Share or (2) 125 per-cent of its 1997 Market Share. . . . [Such] SubsequentParticipating Manufacturer shall make paymentscorresponding to those due . . . from the . . . [OriginalParticipating Manufacturers].” MSA § IX(i)(1). Theformula for calculating those payments is specifiedin MSA § IX(i)(2).

22. MSA §§ IX(c), IX(d), and Exhibit E.

23. “The Attorneys General . . . shall establish a fund. . . to supplement ‘the Settling States’ (1) enforce-ment . . . of this Agreement . . . , and (2) . . . litigationof potential violations of laws. Each OriginalParticipating Manufacturer shall . . . pay its Relative

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Market Share of $50,000,000.” MSA § VIII(c).

24. “[The] release [from litigation provided underthe MSA for settling tobacco companies] . . . shallnot apply to retailers, suppliers or distributors tothe extent of any liability arising from the sale ordistribution of Tobacco Products of . . . any non-Released Party.” MSA § XII(a)(8). “No OriginalParticipating Manufacturer may sell . . . any of itscigarette brands . . . or cigarette businesses . . . to anyperson or entity unless such person or entity is anOriginal Participating Manufacturer . . . [or] agreesto assume the obligations of . . . [an OriginalParticipating Manufacturer].” MSA § XVIII(c).

25. MSA, Article III.

26. The MSA requires tobacco companies to sharesales, pricing, profitability, market share, and othertraditionally confidential information. See, forexample, MSA §§ II(jj), IX(d)(3)(C)(ii), XI(a)(1), andXI(d)(2). A “Firm” and independent auditor hiredunder the MSA for collecting such information arerequired to share it with the tobacco companies,which are required, in turn, to “cooperate” witheach other. See MSA §§ IX(d)(1)(C) and XI(a)(1).Tobacco companies designate representatives tomeet with each other, and regular meetings arescheduled “to evaluate the success of thisAgreement” (MSA § VIII(a)(2)) and to discuss “dis-putes” (MSA § XVIII(m)). The proceedings of suchmeetings are secret (MSA § IX(d)(2)(G)). The ModelConsent Decree prescribed by the MSA prohibitssome types of collusion but very pointedly does notprohibit collusion with respect to pricing and anti-competitive market practices. MSA, Exhibit L, PartV. The state attorneys general are participants inand profit from the price collusion and market allo-cation scheme prescribed in the MSA—yet no onecan inquire into the meetings and data sharedamong the tobacco companies and the state attor-neys general. For example, MSA § III(p) provides:“Documents and information provided to SettlingState antitrust authorities shall be kept confidentialby and among such authorities.” To the same effect,see MSA §§ IX(d)(1)(C) and X(a)(1).

27. Much of the following legal analysis focuseson the interstate nature of the MSA and therestraints, incentives, and collaboration embod-ied in the MSA. States have substantial autonomyover matters that take place solely within theirboundaries but very limited rights to engage inactivities that affect interstate commerce.Moreover, states are prohibited from enteringinto agreements with other states that couldinfringe on federal prerogatives without the con-sent of Congress. To the extent the states,through the MSA, go too far into either of thoseareas, they not only violate the Constitution, theyalso expose themselves, their contingency fee

lawyers, and the settling tobacco companies to lia-bilities under the antitrust laws from which theymight otherwise be exempt. As we shall see, thestates and the MSA go far into the forbiddenareas.

28. Bulow and Klemperer, p. 18.

29. MSA § IX(d)(2).

30. See MSA § IX(d)(1)(C).

31. See MSA §§ XII(a)(8) and XVIII(c).

32. See MSA § VIII(c).

33. See MSA § IX(d)(1)(C).

34. See MSA § III.

35. See MSA §§ II(U), II(SS), VI(c)(3), andXI(f)(4)(C).

36. Parker v. Brown, 317 U.S. 341 (1943).

37. Ibid. at 361.

38. Ibid. at 362.

39. See MSA § IX(d)(2)(F).

40. Parker at 362–63.

41. 15 U.S.C. §§ 1331–41. An amendment to the1965 act states, among other things: “Norequirement or prohibition based on smokingand health shall be imposed under State lawwith respect to the advertising or promotion ofany cigarettes the packages of which are labeledin conformity with the provisions of this chap-ter.” Public Health Cigarette Smoking Act of1969, 15 U.S.C. § 1334(b). Congress has thusclearly evidenced its intent to regulate tobacco.

42. Stephen Labaton, “Smokers Seek to GainShare of Settlement,” New York Times, January 26,2000, p. A1.

43. MSA § II(u).

44. MSA § XVIII(q).

45. Virginia v. Tennessee, 148 U.S. 503, 519 (1893).

46. United States Steel Corp. v. Multistate TaxCommission, 434 U.S. 452, 470–71 (1978).

47. Ibid.

48. A history of the Compacts Clause and evolvingSupreme Court interpretation are contained inibid. at 459–69.

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49. In the act’s declaration of policy and purpose,Congress provides that “the purpose of this chap-ter [is] to establish a comprehensive Federal pro-gram to deal with cigarette labeling and advertis-ing with respect to any relationship betweensmoking and health.” 15 U.S.C. § 1331.

50. “The Congress shall have Power . . . [to] establish. . . uniform Laws on the subject of Bankruptciesthroughout the United States.” Constitution,Article I, section 8.

51. MSA § XVIII(u)(1)(D).

52. The term “insolvent” is defined in the bank-ruptcy code as a “financial condition such that thesum of such entity’s debts is greater than all ofsuch entity’s property, at a fair valuation.” 11U.S.C. § 101(32).

53. Bulow and Klemperer estimated the marketvalue of the equity of the firms at about $150 bil-lion before subtracting the MSA liability. Bulowand Klemperer, p. 19 n. 78.

54. Tobacco Control Act, 7 U.S.C. § 515 et seq.

55. The House of Representatives debates that ledto inclusion of the foregoing language, limitingthe states’ ability to enter into anti-competitivecompacts, illustrate the concerns of Congress:

[I]f this bill is enacted into law [withoutthe limitation] a dangerous precedentwill become established whereby a fewstates can control any particular com-modity they produce. . . . Any form ofcompact or agreement which . . .amounts to collusion that would tend tofoster and encourage monopoly wouldpenalize the many to take care of the few.80 Cong. Rec. 5187 (1936) (Rep. DeweyJackson Short, R-Mo.).

Finally, may I say that this measure[without the limitation] contemplates acompact or agreement between states tocontrol production and raise prices. Tocorporations who attempt such a policy,we point an accusing finger and say theyare attempting to violate the antitrustlaws by a monopolistic practice. Canstates do it with Federal sanction? To saythe least, it presents an interesting ques-tion that will one day return to plague usif this bill [without the limitation]becomes law. 80 Cong. Rec. 5205 (1936)(Rep. Everett Dirksen, R-Ill.).

56. Parker at 359–60.

57. The Compacts Clause is in the same section (i.e.,Article I, section 10) of the Constitution that pro-hibits states from entering into treaties with foreigncountries, laying imposts or duties on imports orexports, or engaging in war. Violations of theCompacts Clause, like state declarations of war, areclearly beyond the powers of the states.

58. 15 U.S.C.A. §§ 1–7.

59. Philip Areeda and Herbert Hovenkamp, AntitrustLaw, rev. ed. (New York: Aspen Law & Business,1997), ¶ 222(a)(I)(A).

60. Parker at 351.

61. Lafayette v. Louisiana Power & Light Co., 435 U.S.389, 391 (1978). Emphasis added.

62. Ibid. at 413. Emphasis added.

63. Ibid. at 410.

64. Ex Parte Young, 209 U.S. 123, 159–60 (1908).Emphasis added.

65. The doctrine was first announced in the 1961Supreme Court case of Eastern Railroad Conferencev. Noerr Motor Freight, 365 U.S. 127 (1961), andconfirmed four years later in United Mine Workersof America v. Pennington, 381 U.S. 657 (1965).

66. Noerr at 135.

67. The Pennington case involved a conspiracybetween the United Mine Workers and certainemployers to impose onerous contract terms onother employers in order to force them out of busi-ness. Although petitioning of the secretary of laborwas held to be immune from antitrust liability, thatwas not the case with respect to the conspiratorialactivities themselves. The Court stated: “Thus therelevant labor and antitrust policies compel us toconclude that the alleged agreement betweenUMW and the large operators to secure uniformlabor standards throughout the industry, if proved,was not exempt from the antitrust laws.”Pennington at 669.

68. Ibid. at 673.

69. Areeda and Hovenkamp, ¶ 203, p. 198.

70. Airport Car Rental Antitrust Litig., 521 F. Supp.568, 583 (N.D. Cal. 1981), aff’d, 693 F.2d 84 (9thCir. 1982), cert. denied, 462 U.S. 1133 (1983); citedby Areeda and Hovenkamp, p. 242.

71. Columbia v. Omni Outdoor Advertising, Inc., 499U.S. 365, 380 (1991).

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72. William C. Holmes, Antitrust Law Handbook(St. Paul, Minn.: West, 1999), p. 758.

73. Areeda and Hovenkamp, p. 242.

74. Ibid.

75. Noerr at 144.

76. Lafayette at 416–17.

77. Pennington at 669.

78. Bulow and Klemperer also note that the col-lusive nature of the Resolution necessitated con-gressional approval: “In effect the Resolutionfacilitated collusion among the companies toraise prices. . . . The only problems were that theantitrust authorities might challenge theResolution’s collusive pricing and the relatedentry deterrence provisions needed to maintainhigh prices. Therefore these terms of the deal and oth-ers . . . required Congressional legislation.” Bulow andKlemperer, p. 2. Emphasis added.

79. Resolution, Appendix IV § C2, http://www.tobaccoresolution.com/index1.html.

80. MSA, Article XV. A similar provision alsoappeared in the Resolution (Title III, Part B, finalparagraph) even though the proponents antici-pated receiving congressional approval.

81. http://www.tobaccoresolution.com/index1.html, under “Issue Briefs.” Emphasis added.

82. MSA § VIII(c).

83. Article I, section 8, of the Constitution pro-vides: “The Congress shall have Power To lay andcollect Taxes.”

84. http://www.tobaccoresolution.com/index1.html,under “Issue Briefs.”

85. Ibid.

86. Bulow and Klemperer, p. 36.

87. Quoted in Holman W. Jenkins Jr., “AnotherTobacco Lawsuit (Yawn),” Wall Street Journal,September 29, 1999, p. A23.

88. Mollenkamp et al., p. 212 et seq.

89. In a prepared statement to the SenateSubcommittee on Antitrust on October 29, 1997,FTC chairman Robert Pitofski concluded thathigher tobacco prices are desirable; still, he rec-ommended against a special antitrust exemptionfor the tobacco industry because he felt the risk of

collusion was too great and the tobacco compa-nies would raise their prices too much. Thatstrange conclusion reflects the dilemma of anantitrust law enforcer who has decided that hewill tolerate a limited amount of price fixing. Atthe time of the hearing, it was assumed that theResolution would receive congressional approval(which it did not). Thus, although its reasoningseems confused, the FTC is fully aware of theantitrust issues and has chosen not to act.

90. See MSA § IX(i) and Exhibit T.

91. An “antitrust injury,” as defined by theSupreme Court, is “injury of the type the antitrustlaws were intended to prevent and that flows fromthat which makes defendants’ acts unlawful.”Brunswick Corp. v Pueblo Bowl-O-Mat, Inc., 429 U.S.477, 489 (1977). Antitrust injuries must be estab-lished in order for an antitrust plaintiff to prevail.

92. 28 U.S.C.A. § 2201.

93. The MSA may also involve additional criminaland constitutional violations—for example, federaland state anti-bribery laws prohibit payments bythe tobacco companies to the state attorneys gen-eral to influence the enforcement (or nonenforce-ment) of antitrust laws. See, for example, the feder-al anti-bribery laws at 18 U.S.C. § 201 et seq. and 18U.S.C. § 666; and, in New York, McKinneys PenalLaw § 200 et seq. See also the RacketeeringInfluenced Corrupt Organization (RICO) laws thatprohibit the use of monies obtained through a pat-tern of illegal activities. 18 U.S.C. § 1961. Therequirement of the MSA’s Qualifying Statute thatnonparticipating manufacturers deposit “dam-ages” in a 25-year escrow as security against poten-tial future liability undoubtedly constitutes a bill ofattainder in violation of Article I, section 10, of theConstitution and a violation of due process underthe Fifth and Fourteenth Amendments to theConstitution.

94. See the discussion of standing in “DeclaratoryJudgment,” American Jurisprudence 22A, 2d ed.,secs. 25–32.

95. Ex Parte Young at 155–56.

96. To date, there has been relatively little antitrustlitigation concerning the MSA. A case on behalf ofsmokers, Hise v. Philip Morris, 46 F. Supp. 2d 1201(N.D. Okla. 1999), aff’d, 2000 WL 192892 (10thCir. Feb. 18, 2000), was dismissed on Noerr-Pennington (immunity) and Illinois Brick (standing)grounds, among others. The judgment was ren-dered before any discovery had occurred. The fol-lowing statement indicates that the court did notwaste much time on the case: “Because theComplaint and the allegations contained therein

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must fail as a matter of law, the Court sees no rea-son to burden defendants with the additional timeand expense involved in proceeding to discovery.”Ibid. at 1205.

In support of its Noerr-Pennington rationale,the court stated: “The Court finds no evidencewhich even remotely suggests that defendantsintended to use the MSA as an anti–competitiveweapon to exclude or harass competitors.” Ibid. at1207. With respect to price fixing, the court foundthat “plaintiffs failed to adequately plead a price-fixing conspiracy.” Ibid. at 1208. On that point,however, the court did state: “Of course, theCourt does not believe that defendants were freeat any time, either prior to or after execution ofthe MSA, to enter into a conspiracy to fix tobaccoprices.” Ibid. at 1208.

The plaintiffs apparently raised theCompacts Clause argument, but again, ineffec-tively: “Citing Article 1, Sec. 10 of theConstitution, plaintiffs allege that the parties tothe MSA formed an unlawful confederation . . . byentering into and executing the MSA. Plaintiffscite no authority for their extraordinary claim,and the Court finds and concludes that this claimis plainly frivolous.” Ibid. at 1210.

In another action against tobacco companies,this one by a cigarette distributor, Bedell v. PhilipMorris, Civil Action No. 99-558 (W.D. Pa. 2000),the court dismissed two counts under theSherman Act. Notably, however, the plaintiffs inboth Bedell and Hise failed to comprehend, or atleast they appear not to have argued, the interre-lationship of the Commerce Clause, theCompacts Clause, state action immunity, and theNoerr-Pennington exemption. Nor did the courts’decisions address that interrelationship.

In Bedell, for example, the court ruled that thetobacco companies were protected by Noerr-Pennington in negotiating and executing the MSA,and by state action exemption to the extent thatthe companies’ acts were mandated by the MSA.Moreover, said the court, “[T]he MSA was under-taken by the settling states functioning in theirsovereign capacities.” Bedell at 11. Yet it is impossi-ble to reconcile the MSA with the Commerce andCompacts Clauses. And, to the extent the MSAviolates those provisions of the Constitution, thestates could not approve and implement the MSA“functioning in their sovereign capacities.”Because the plaintiffs failed to make that connec-tion in their briefs, neither Bedell nor Hise comes togrips with the central thesis of this paper.

See also the following two cases:

(a) PTI, Inc. v. Philip Morris, Case No. 99-08235NM (C.D. Cal., Aug. 13, 1999). Plaintiff,PTI, Inc., an importer of cigarettes, issuing the settling tobacco companies forantitrust violations, constitutional viola-tions, and unfair competition, among

other things, in a 142-page complaint. Thecase is still in its early stages.

(b) Forces Action Project LLC v. State of California,Case No. C99-0607 MJJ (N.D. Cal., Jan. 5,2000). This smokers’ case, which was dis-missed on summary judgment motion, iscurrently on appeal. The plaintiffs basedtheir action on equal protection and dueprocess theories under the FourteenthAmendment to the Constitution and 42U.S.C. §§ 1983 and 1985.

97. Section 4 of the Clayton Act, 15 U.S.C. § 14,provides for treble damages as follows: “[A]ny per-son who shall be injured in his business or prop-erty by reasons of anything forbidden in theantitrust laws may sue therefor in any districtcourt of the United States in the district in whichthe defendant resides or is found . . . and shallrecover threefold the damages by him sustained,and the cost of the suit including a reasonableattorneys fee.”

Section 16 of the Clayton Act provides forinjunctive relief as follows: “Any person . . . shall beentitled to sue for and have injunctive relief in anycourt of the United States having jurisdictionover the parties, against threatened loss or dam-age by a violation of the antitrust laws.”

98. New York’s treble damages statute (McKinney’sGeneral Business Law § 340), which provides con-sumers with a remedy against indirect sellers, pro-vides in pertinent part: “[A]ny person who shallsustain damages by reason of any violation of [theNew York antitrust laws] shall recover three-foldthe actual damages sustained thereby, as well ascosts not exceeding ten thousand dollars, and rea-sonable attorneys fees. . . . In any action pursuantto this section, the fact that . . . any person whohas sustained damages by reason of violation ofthis section has not dealt directly with the defen-dant shall not bar or otherwise limit recovery.”

99. Thomas V. Vakerics, Antitrust Basics (New York:Law Journal Seminars Press, 1987) § 3.03[2].

100. Hanover Shoe, Inc. v. United Shoe MachineryCorp., 392 U.S. 481 (1968).

101. Illinois Brick Co. v. Illinois, 431 U.S. 720, 736 (1977).

102. California v. ARC America Corp., 490 U.S. 93 (1989).

103. The Eleventh Amendment provides: “The judi-cial power of the United States shall not be construedto extend to any suit in law or equity, commenced orprosecuted against one of the United States by citi-zens of another state, or by citizens or subjects of anyforeign state.” In Haus v. Louisiana, 134 U.S. 1 (1890),the doctrine of sovereign immunity was expanded tocover suits against a state by its own citizens.

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104. Ex Parte Young at 159. See also Charles AlanWright, Arthur R. Miller, and Edward H. Cooper,Federal Practice and Procedure: Jurisdiction, 2d ed. (St.Paul, Minn.: West, 1988) § 4231.

105. For certification as a class, Federal Rule ofCivil Procedure 23 requires that the members ofthe class be too numerous to join in the action;the named plaintiffs’ claim must be typical ofthe claims of the other class members; commonquestions of law and fact must predominateover questions affecting individual members ofthe class; the named plaintiff must be able toprotect fairly and adequately the interest of themembers of the class; and a class action must be

superior to other possible methods for the fairand efficient adjudication of the controversy.

106. See Holmes § 8.09.

107. See “Uncle Sam vs. Big Tobacco,” TheEconomist, October 2, 1999, p. 22.

108. See Jenkins.

109. That represents the approximate differencebetween the $365 billion “damages” agreed inthe Resolution and the $206 billion “damages”of the MSA. And, of course, it will all be paid bysmokers.

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