New York Law Implementing Tobacco Settlement Not Shown to Violate Federal Antitrust Laws

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

Earlier this week, the U.S. Court of Appeals in New York City rejected claims that New York’s Escrow and Contraband Statutes—which were enacted in furtherance of a 1998 Master Settlement Agreement (MSA) between cigarette manufacturers and the states—violated the federal antitrust laws. Judgment in favor of the defendants (2009-1 Trade Cases ¶76,504, 592 F. Supp. 2d 684) was affirmed.

The litigation began in 2002. The putative class action was brought by cigarette importers, who were not participants in the MSA. They contended that the challenged statutes coerced manufacturers who had not joined the MSA to join the alleged market-sharing agreement set up by the MSA. According to the plaintiffs, under the MSA, participating manufacturers fixed and maintained inflated prices and penalized gains in market share.

The Escrow Statute required each cigarette manufacturer either (1) to join the MSA as a participating manufacturer or (2) to make annual payments into a state escrow fund. It required cigarette manufacturers to make per-cigarette payments to the state according to a statutorily specified formula.

The Contraband Statute enforced these payment obligations by requiring cigarette manufacturers to certify their compliance with the Escrow Statute.

At the outset, the appellate court rejected the notion that the Sherman Act preempted the New York statutes. The plaintiffs failed to prove that the challenged statutes granted regulatory power to private parties in violation of the antitrust laws that caused them injury. According to the appellate court, the plaintiffs merely showed that the challenged statutes operated as a flat tax that was imposed on manufacturers who had not joined the MSA and whose only arguably “anti-competitive” effect was to raise cigarette prices.

State Action Immunity

The importers' failure “to prove that New York’s Escrow and Contraband Statutes authorize[d] Sherman Act violations obviate[d] the need for detailed analysis of whether their alleged anti-competitive aspects [we]re clearly articulated, affirmatively expressed, or actively supervised,” according to the court. However, it considered these factors in concluding that any potentially anti-competitive aspects of the statutes were shielded from antitrust attack under the state action doctrine.

The appellate court agreed with an approach taken by a number of its sister circuits—that the MSA and statutes enacted in furtherance of it constitute unilateral state action exempt from the application of the antitrust laws. However, “out of an abundance of caution,” it applied the Midcal test to determine whether the conduct was state action immune from antitrust preemption.

The challenged statutes were clearly articulated and affirmatively expressed as state policy. Moreover, New York’s control and active enforcement of escrow payment obligations satisfied the requirement that the conduct by actively supervised by the state. The legislative enactments of state policy neither mandated nor authorized private parties to exercise unsupervised power to restrain trade, the court held.

The October 18, 2010, decision in Freedom Holdings, Inc. v. Cuomo, Docket No. 09-0547-cv, will appear at 2010-2 Trade Cases ¶77,195.