Monday, August 10, 2009

Antitrust Challenge to State Law Implementing Tobacco Master Settlement Fails

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals in St. Louis has rejected a cigarette manufacturer’s claims that an Arkansas law implementing the 1998 Master Settlement Agreement (MSA) between the states and large tobacco companies violated the Sherman Act.

The challenged “Allocable Share Amendment” was neither a per se nor hybrid restraint of trade in violation of the Sherman Act, in the court’s view. Accordingly, dismissal of the antitrust claims (2006-1 Trade Cases ¶75,175) was affirmed.

Under the MSA, the settling tobacco companies agreed to make annual payments for the benefit of the settling states. The amount of each payment is based on the settling tobacco company’s relative national market share. Thus, settling tobacco companies that increase production must increase their proportionate MSA payments.

The MSA allowed settling states to enact statutes requiring nonparticipating manufacturers (NPMs) to make annual payments to an escrow account to settle or pay judgments in potential lawsuits. The State of Arkansas passed such a statute, and later amended it through the Allocable Share Amendment, to ensure that sufficient funds were collected to cover potential liabilities.

The complaining cigarette manufacturer, which was an NPM, challenged the amendment on the ground that it pressured NPMs to charge higher prices to offset escrow payments. It contended that the law was preempted by the Sherman Act because it violated the antitrust laws.

Anticompetitive Effect

Even though the Allocable Share Amendment had an anticompetitive effect, it was not a per se violation of the Sherman Act, the appeals court ruled, because it did not mandate or authorize antitrust conduct in all cases. An anticompetitive effect was insufficient to constitute an antitrust violation. Thus, the “irreconcilable conflict” required for preemption by the Sherman Act was not met.

The higher prices purportedly prevented the complaining tobacco company from competing with other competitors, including those that participated in the MSA. The statutory scheme, however, did not force NPMs to raise prices in all cases. The Allocable Share Amendment did not expressly allow price-fixing or output-fixing or other illegal behavior, nor did it place “irresistible pressure” on the complaining manufacturer to violate the antitrust laws.

The Allocable Share Amendment was also not a hybrid restraint of trade, according to the court. A hybrid restraint of trade occurs when the state passes a law that reinforces a decision by multiple companies to set a pricing scheme in violation of the Sherman Act. The complaining manufacturer alleged that the Allocable Share Amendment imposed on NPMs a parallel cost or pricing structure. However, the Allocable Share Amendment did not mandate a minimum price or cost requirement for NPMs. Moreover, the escrow amount was neither tied to nor authorized by manufacturers participating in the MSA.

State Action Immunity

The court also ruled that the state was immune from Sherman Act liability under the state action doctrine. The MSA was reviewed and approved by Arkansas’s attorney general, properly enacted by the state’s legislation, and duly signed by the governor. Thus, it could be readily characterized as state action.

The challenged Allocable Share Amendment automatically received immunity, pursuant to the U.S. Supreme Court’s 1984 decision in Hoover v. Ronwin (1984-1 Trade Cases ¶65,980).


One of the judges on the panel dissented from the majority’s holding that plaintiffs failed to state a cause of action on their Sherman Act claim. The dissenter suggested that the apparent effect of the challenged amendment was to enforce a parallel pricing structure dictated by the tobacco companies that participated in the MSA, which in turn fixed the relative market shares of cigarette manufacturers for the duration of the MSA. The scheme deprived NPMs of the competitive advantage they held based on their choice not to enter into the MSA and interfered with the market forces that establish cigarette prices, the dissent maintained.

In any event, the issue of whether the statute created a hybrid restraint would not be reached because the state action immunity doctrine shielded the state from Sherman Act liability.

The August 4 decision in Grand Rivers Enterprises Six Nations, Ltd. v. Beebe will appear at 2009-2 Trade Cases ¶76,694.

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