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Jonathan Rauch Condemns the Tobacco Settlement:

Thoughtful and well-written, as is characteristic of Jonathan's work.

Observer (mail):
Rauch misses the point. The lawsuits brought by the states were legally without merit (except maybe in one state where the legislature enacted ex post facto legislation to support the AG's case). However, the tobacco companies realized (1) the states have the sovereign power to prohibit and/or tax tobacco and (2) it would severely damage future jury pools in individual cases to have three years of TV news interviews of numerous Attorney Generals calling the tobacco companies "criminals." The settlements of those suits, then, are not in any real sense payment of damages but just disguised taxes. The states could have imposed those taxes directly but for political reasons chose to do so through lawsuits that were legally infirm but which had the potential to inflict great harm on the defendants through continuous adverse publicity.

So, the question that Rauch ought to address is why shouldn't new entrants to the tobacco business pay the same taxes as all the other participants in the tobacco business?
8.5.2005 3:43pm
Anonymous:
The compact-clause argument is very interesting, but seems like a real long shot given United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978) (upholding the 1967 Multistate Tax Compact and Multistate Tax Commission, despite a lack of Congressional assent).


The Fourth Circuit addressed dead-on the compact-clause implications of the tobacco settlement in Star Scientific, Inc. v. Beales, 278 F.3d 339, 360 (4th Cir. 2002). The court thought Multistate Tax Comm'n was so controlling that it dealt with the issue in just one page. (Star Scientific, a "Subsequent Participating Manufacturer" subject to the escrow requirements, lost.)

8.5.2005 4:28pm
Hans Bader (mail):
The multistate tobacco settlement is a lot worse from a Compact Clause perspective than the Multistate Tax Commission upheld in 1978, since it encroaches more deeply on federal sovereignty and policy.

The settlement itself regulates the tobacco industry on a national basis (including cigarette sales and advertising occurring outside any of the 46 States that joined it), encroaching far more directly on Congress's authority to regulate interstate commerce and on sister states' rights to govern themselves.

It restricts constitutionally-protected lobbying by tobacco companies directed at Congress (the regulatory competitor of the National Association of Attorneys General, which administers the settlement), and advertising and marketing practices protected by the federal FCLAA and the First Amendment.

The escrow statutes adopted to enforce the settlement required tobacco companies to either join this national regulatory scheme -- in essence, becoming members of a tobacco cartel -- or make escrow payments that currently exceed what companies that joined the settlement make (owing to a grandfather clause in the settlement).

Even those companies that didn't join the multistate settlement and don't even sell in the states that joined it wind end up making payments, since the states demand payments based on cigarettes lawfully sold in other states that later end up being resold within their borders.

The Compact Clause says that "No State shall, without the Consent of Congress . . . enter into any Agreement or Compact with another State." No ifs, ands, or buts about the need for Congressional consent to any interstate agreement. Logically, that would doom the multistate tobacco settlement, which Congress never approved. (A precursor of the settlement died in the Senate in 1997).

Yet in its 1978 decision in the Multistate Tax Commission case, the Supreme Court held that the Compact Clause doesn't really mean what it says, and that an interstate agreement only needs Congressional consent if it potentially encroaches on federal sovereignty or policy.

Michael Greve has an interesting law journal article which explains both why the Supreme Court's 1978 decision upholding the Multistate Tax Commission was a mistake, and why the multistate tobacco settlement is even worse, and unconstitutional even under that bad precedent. See Michael Greve, "Compacts, Cartels, and Congressional Consent," 68 Mo. L. Rev. 285 (2003).

There's much less discussion of the Compact Clause in the briefs in Star Scientific, the case Anonymous describes, in which a Non-Participating Manufacturer raised several constitutional arguments against the tobacco settlement including (buried deep within its brief) a short Compact Clause objection (this was not the focus of its brief).

On another note, the Second Circuit revived an antitrust challenge to the tobacco settlement in 2004 in the Freedom Holdings case. The plaintiffs in that case argue that the settlement is not immune from challenge under the state-action (Parker immunity) exception to the antitrust laws. The Second Circuit held that the tobacco settlement amounted to a cartel, which might or might not qualify for Parker immunity.

I would like to raise an argument that the Second Circuit didn't consider: why should Parker immunity, which is rooted in federalism, even apply to the tobacco settlement, which applies on a national basis (even outside the boundaries of the states that joined it)?

All of the previous Supreme Court decisions applying this immunity have involved intra-state monopolies, not interstate monopolies. It is one thing to allow a state to govern itself, but quite another to let it govern the nation as whole. Under the division of authority in our federal system, Congress is supposed to regulate interstate markets, not individual states.
8.5.2005 6:21pm
Melvin Hagerman (mail):
One question that seems to be missed here: Isn't there an ex post facto provision in the Constitution, and wouldn't that stop not only the state lawsuits (and changes in states' laws) against tobacco but the federal suit as well as make the settlement itself unconstitutional on its face?
8.6.2005 1:30am
Anonymous:
Only in the right-wing echo chamber could the filing of yet another challenge to the Master Settlement Agreement be considered news. One of the lawyers on the brief, conspiritor Erik Jaffee, argued unsuccesfully against the agreement more than a half-decade ago in the 3rd Circuit. Since then, numerous challenges have been filed, and noe has succeded. Perhaps Jaffe thinks he will fare better in another part of the country, or has now come up with a more clever argument. Either way, it's not news.

And while Rauch is entitleed to make up his own mind, he is not entitled to make up facts. The two most egrigious errors in his piece are his assertions that (1) companies that do not join the settlement are "forced . . . to place an even larger amount into "escrow" against wrongs that might be committed someday" and (2) "Congress never approved the deal. Nor did any court order it."

Those two statements are demonstrably false. Escrow deposits are set by statute and are not larger than the payments made by comnpanies that joined the Master Settlement Agreement. To the contrary, the statutes mandating the escrow deposits limit them to the per-cigarette amounts paid by participants in the agreements. As for the assertion that no court ordered the agreement, the MSA was "so ordered" as a consent decree by more than 40 state courts in individual actions, often after hearings and the appointments of special masters.

Oddly, Rauch argues both that claims against cigareete companies are legally meritless and that there should be no damages because smokers die young, thereby saving states money. Which one is it, Jonathan?

The Master Settlement Agreement and the escrow requirement both require cigarette companies to internalize at least some of the health costs associated with cigarette smoking. Rauch may think that we are better off leaving those costs as externalities paid for by the states, but I see no convincing reason to agree with him.
8.7.2005 12:25am
Cartel Me:
Hans Bader doesn't quite get it right when discussing the Freedom Holdings case. The Second Circuit didn't hold that the Master Settlement Agreement established a cartel, it simply found that the plaintiffs had alleged the existance of a cartel, which was sufficient to survive a motion to dismiss. The postscript, as VC readers might be interested to know, was a long opinion by the district court on remand that demolished the allegation of a cartel. The Second Circuit affirmed that decision of the district court.
8.7.2005 9:52am