California Tobacco Statutes Withstand Antitrust Attack

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The State of California’s participation in the multi-billion dollar Master Settlement Agreement (MSA) of the national tobacco litigation and enactment and enforcement of California statutes implementing the MSA did not implicate federal antitrust law, the U.S. Court of Appeals in San Francisco has ruled.

The MSA and implementation statutes were not preempted by the Sherman Act, and the state and four major tobacco manufacturers that were parties to the MSA were immune from any antitrust liability stemming from the MSA or implementation statutes, the court decided.

Thus, dismissal of a cigarette purchaser’s putative class action antitrust claims against the state and tobacco manufacturers (2005-1 Trade Cases ¶74,753) was affirmed.

Output Cartel, Price Fixing Scheme

The complaining smoker alleged that the state and tobacco manufacturers had created a per se illegal output cartel and price fixing scheme through their execution of the MSA and the enactment and enforcement of the two state statutes—the “Qualifying Act” and the “Contraband Amendments.”

These laws were allegedly designed to protect the MSA’s anticompetitive provisions by (1) requiring tobacco manufacturers to become participants in the settlement or to pay a percentage of their sales to the participant and (2) authorizing the attorney general to bar noncompliant manufacturers from selling cigarettes in the state. As a result of this regulatory structure, prices “skyrocketed,” the smoker alleged.

Federal Preemption

Stating that the MSA and California statutes were not subject to preemption, the appellate court explained that, although the settlement and implementing statutes arguably created an output cartel, they did not explicitly permit tobacco manufacturers to fix prices, limit output, divide markets, or engage in any other per se illegal monopolistic behavior.

The settlement and implementing statutes did not create such high barriers to market entry and to the ability to price-compete that they placed irresistible pressure on all tobacco manufacturers to fix prices. Even though the statutes did place some pressure on new-entrant tobacco manufacturers to charge higher prices and dissuaded some potential market entrants, nothing in the laws forced those companies either to peg their prices to those of participating manufacturers or to refrain from entering the market. In fact, the new entrant could compete on price by charging a normal price.

State Action Immunity

Even if the smoker had adequately pleaded an antitrust violation, the State of California was immune from antitrust liability under the state action doctrine, the court noted. The settlement, as a sovereign act of the State of California, clearly constituted direct state action. Since the statutes were direct legislative activity resulting from the MSA, they too constituted direct state action. The state was not required to show clear articulation of state policy and active supervision, as required for state action immunity to apply to private actors.

Noerr-Pennington Immunity

The tobacco manufacturers were immune under the Noerr-Pennington doctrine from claims that they violated antitrust laws by negotiating and then operating under the provisions of the MSA and the statutes, the court ruled. The Noerr-Pennington doctrine protects from antitrust liability those who petition the government in order to secure or amend their rights. The act of negotiating a settlement with the state undoubtedly was a form of speech direct at a government entity.

The decision is Sanders v. Brown, No. 05-15676, filed September 26, 2007, 1997-2 Trade Cases ¶75,888.