October 2005

OBSERVER

By Christopher Swope

 

PUFF OF COLLUSION

Cigarette companies and state regulators have discovered it pays to
stick together.

Ever since the states made their settlement with Big Tobacco in 1998,
there have been reasons to wonder about the propriety of the deal.
Trial lawyers walked away unbelievably rich--their take added up to
$13 billion, by conservative estimates. Then, of course, there's the
issue of how the states spent their $200 billion windfall. They were
expected to put most of it into smoking cessation programs and public
health. But the majority of states have felt free to use the funds for
plugging budgetary gaps unrelated to any health issue at all.
Now, critics are making a new argument: that the states and Big
Tobacco have effectively formed a cartel with one another. They may be
right.

In a number of ways, the states and major cigarette manufacturers are
joined at the hip. State laws implementing the 1998 agreement were
written expressly to protect the four biggest cigarette manufacturers-

-Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard--
against competition from smaller upstart companies. As those laws came
to be challenged in court, the original adversaries in the tobacco
dispute--attorneys general and tobacco industry lawyers--found
themselves on the same side.

"States effectively became the largest shareholder of the big tobacco
companies," says Hans Bader, an attorney with the Competitive
Enterprise Institute. "States have an incentive to be Big Tobacco's
business partners because of the fact that they're getting so much
money from them."

 In August, Bader filed suit in federal court, claiming that the four
companies and the states have established "one of the most effective
and destructive cartels in the history of the nation." Bader's clients
are three small cigarette manufacturers--you might call them Little
Tobacco. They charge that state laws practically force small companies
to join the settlement, even if they never engaged in the same sins
Big Tobacco admitted to. Little Tobacco companies that don't join are
legally bound to pay a portion of their profits into escrow accounts.
Effectively, Bader argues, that's a check against their underselling
the big boys.

Bader's quest to kill the settlement may be a longshot--similar
cases, using a different legal reasoning, have failed. But he does
have a point. Seven years on, it's clear that the tobacco settlement
did more than create a cash windfall for the states. It created a
complex regulatory regime governing sales, marketing and pricing of a
major product.