Cato News Release - May 18, 2000

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News Release

May 18, 2000

Study: 1998 multistate tobacco settlement unconstitutional, violates antitrust laws
Agreement should be dismantled, price fixing ended and competition restored

The nationwide tobacco settlement of 1998 between the major tobacco companies and the attorneys general of 46 states violates both the antitrust laws and the Constitution, concludes the author of a Cato Institute study released today.

Thomas C. O'Brien, the study's author and assistant general counsel of Corning Incorporated, reveals that the Master Settlement Agreement signed in November 1998 transforms a competitive tobacco industry into a cartel and erects barriers to entry so that the major cigarette companies can raise prices with impunity.

Far from being victims, he contends, the big four tobacco companies collaborated with state attorneys general and trial lawyers to carve out a protected market for themselves at the expense of smokers and those tobacco companies that did not sign the agreement. The MSA forces all tobacco companies-even new companies and companies that were not part of the settlement-to pay "damages." The tobacco giants-Phillip Morris, Reynolds, Lorillard and Brown & Williamson-negotiated a deal whereby they would pay $206 billion to the states and billions of dollars more to private contingency fee attorneys and pass the costs on to smokers.

O'Brien's analysis concludes that the MSA violates the antitrust laws and defies both the Commerce Clause and the Compacts Clause of the Constitution, which states in Art. I, § 10 that "no State shall, without the Consent of Congress . . . enter into any Agreement or Compact with another State." Those constitutional provisions prevent the states from imposing regulations or taxes on a multistate basis through agreements among themselves, except with the consent of Congress, which they did not obtain. Thus, O'Brien contends, the states acted unconstitutionally and cannot, therefore, claim immunity from federal antitrust statutes.

Because the states are receiving billions of dollars in "damages," the state attorneys general can hardly be expected to enforce the antitrust laws with respect to the MSA, O'Brien writes. The author does not believe the Clinton administration, which helped negotiate the MSA and is pursuing a similar federal settlement with tobacco companies, can be expected to enforce the law. O'Brien lays out a legal theory that would enable injured parties, including smokers and nonparticipating tobacco companies, to seek injunctive relief and other remedies in private lawsuits.

Constitutional and Antitrust Violations of the Multistate Tobacco Settlement