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.

California Unfair Competition Class Standing Hurdle Removed in Tobacco Ad Case

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In a class action, the standing requirements of the California Unfair Competition Law (UCL) apply only to class representatives, not to class members, the California Supreme Court has ruled. The court reversed an order decertifying a class of California smokers on the theory that all class members were required to demonstrate standing.

The smokers alleged that tobacco companies violated the UCL by conducting a decades-long campaign of deceptive advertising and misleading statements about the addictive nature of nicotine and the relationship between tobacco use and disease.

The court further held that a class representative is not required to plead or prove with “an unrealistic degree of specificity” reliance on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign.

California Proposition 64

California Proposition 64 mandated that a class representative in a UCL action comply with the civil procedural requirements applicable to California class actions. After Prop 64, a UCL class action is a procedural device that enforces substantive law by aggregating many individual claims into a single claim of a representative plaintiff.

These procedural modifications to the UCL, however, left entirely unchanged the substantive rules governing business and competitive conduct. Nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted, the court explained.

Standing

Proposition 64 did not alter accepted principles of class action procedure that treat the issue of standing as referring only to the class representative and not the absent class members, the court found. Imposing an unprecedented standing requirement on unnamed class members would undermine the guarantee made by Proposition 64’s proponents that the initiative would not undermine the efficacy of the UCL as a means of protecting consumer rights.

Requiring all unnamed members of a class action to individually establish standing would effectively eliminate the class action lawsuit as a vehicle for the vindication of such rights. The UCL remedies provision, left unchanged by Proposition 64, offered additional support for the conclusion that the initiative was not intended to have any effect at all on unnamed members of UCL class actions, the court noted.

Causation of Injury—Reliance

Proposition 64 provided that a private suit under the UCL can be brought only by “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” While it was clear that the phrase indicated there must be some connection between the injury and the defendant’s conduct, the parties disagreed about the type of causation the plaintiff must demonstrate.

There is no doubt that reliance is the causal mechanism of fraud, the court said. However, a plaintiff need not demonstrate individualized reliance on specific misrepresentations to satisfy the reliance requirement.

When, as in this case, a plaintiff alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements, according to the court. An allegation of reliance is not defeated merely because there was alternative information available to the consumer-plaintiff, even regarding an issue as prominent as whether cigarette smoking causes cancer, the court added.

The class decertification order was reversed and the case was remanded for further proceedings to determine whether the class representatives could establish standing and, if not, whether leave to amend should be granted to add a new class representative.

The May 18 decision in Tobacco II Cases will be reported in CCH Advertising Law Guide and CCH State Unfair Trade Practices Law.