Commentary

Joel Klein’s Legacy: The Mother of All Antitrust Violations

The deification of Joel Klein has picked up considerable steam with his resignation as antitrust chief at the Justice Department. “He warrants the nation’s gratitude,” gushed a New York Times editorial. “He will depart government with the kind of halo that most lawyers only dream about,” eulogized David Ignatius in the Washington Post, adding that Klein “helped reinvent antitrust law for the 21st century.”

That he did. But Klein’s real legacy is surely not heroic - not even laudable. His record is blotted by cases litigated that never should have been, and one case in particular - a quarter-of-a-trillion-dollar conspiracy - that he studiously ignored.

How ironic that Klein’s antitrust division, so fervent to dismember Microsoft for selling integrated products that consumers want, and so eager to lend a helping hand when American Express petitions for competitive relief from Visa and MasterCard, is so timid when it comes to challenging a collusive tobacco settlement that is bilking 45 million smokers out of $250 billion. Many of those smokers, so we are told, are hopelessly addicted victims of an industry that has, in effect, been immunized from antitrust enforcement. Curiously, while one division of the Justice Department pursues its bizarre lawsuit to recapture Medicare costs from cigarette makers, Joel Klein’s division stands idly by as those same companies team up with state attorneys general and trial lawyers to violate the antitrust laws.

The Master Settlement Agreement, signed in November 1998 by the major tobacco companies and 46 state attorneys general, works like this. Philip Morris, R.J. Reynolds, Lorillard, and Brown & Williamson knew they would have to raise prices substantially to cover their settlement obligations. Accordingly, they were concerned that smaller domestic manufacturers, importers, and new tobacco companies would gain market share by under-pricing cigarettes. To guard against that likelihood, the big four and their state collaborators added a provision to the settlement that requires non-signing cigarette makers to post pro-rata damages, based on sales, in escrow for 25 years to offset any liability that might later be assessed. No evidence, no trial, no verdict, no injury, just damages - sufficient to prevent price-cutting.

If the would-be price cutter caved, however, and agreed to sign the settlement, it would be allowed to increase its market share by 25 percent. Big deal. The tobacco giants already control 99 percent of the market, so all the non-signers combined would be permitted to grow from 1 percent to a whopping 1.25 percent. Essentially, the majors guaranteed themselves about 99 percent of the market - in perpetuity.

To be sure, the industry would have preferred to avoid the settlement. But given the perverse legal rules under which the state Medicaid recovery suits were unfolding, the cigarette giants were effectively bludgeoned into negotiating with the states and the trial lawyers. Finding themselves in that untenable position, tobacco executives shrewdly bargained for something pretty close to a sweetheart deal. As fiduciaries to their shareholders, maybe they shouldn’t be blamed for working out the best deal under the circumstances. But the underlying question is whether the antitrust laws were violated. The answer is “yes,” and fiduciary responsibility is certainly not a valid legal defense.

Let there be no confusion, however: The state attorneys general and the contingency fee lawyers they hired were the real instigating parties. The tobacco companies were unwilling participants, simply paying ransom in return for an exemption from the antitrust laws. In other words, the settlement is no better than an illegal protection racket, run by the states, that imposes hundreds of billions of dollars in costs on smokers - all of which Joel Klein has been perfectly willing to disregard.

Back in May, when Klein spoke at the University of California, Berkeley, on “Rethinking Antitrust Policies for the New Economy,” he emphasized the “core principles that have proven to be effective in protecting and preserving competitive markets.” He identified two principles in particular: “assuring low prices for consumers” and minimizing “barriers to entry.” Of course, the settlement flouts both of those goals. Yet Klein looked the other way as giant tobacco companies, in collaboration with state attorneys general and a cabal of plaintiffs’ attorneys, committed what is indisputably the mother of all antitrust violations.

As to Joel Klein’s heritage: Where, we must ask, have he and his posse of antitrust activists been hiding? In the one area where everyone agrees that government should intervene - that is, to dismantle the barriers to entry that government itself has been responsible for erecting - Klein’s enforcers are oddly and inexcusably silent.

Robert A. Levy is senior fellow in constitutional studies at the Cato Institute.