DALLAS - A lawsuit filed Tuesday in federal district court in Shreveport, La., alleges that the 1998 Master Settlement Agreement between states and major tobacco companies is illegal because it violates a clause in the Constitution that prohibits states from entering into compacts without the consent of Congress.
The lawsuit, filed by the Washington, D.C.-based Competitive Enterprise Institute, is expected to be served at the office of Louisiana Attorney General Charles Foti in the next few days. The institute calls itself a nonprofit, nonpartisan public policy group dedicated to the principles of free enterprise and limited government. Other plaintiffs include a smoker, a tobacco distributor, a tobacco store, and two small tobacco companies.
They are not seeking damages, but injunctive relief that would enjoin states from further enforcing the agreement. Because the case has just been filed, no schedule has yet been set for trial.
Under the terms of the MSA, large tobacco companies agreed to make payments worth $246 billion to states to compensate for the cost of caring for sick smokers. The MSA was negotiated by the attorneys general from the 46 states that signed on to the agreement, and the National Association of Attorneys General helps fight challenges to its enforcement.
So far, states and counties have issued about $25 billion of tobacco settlement revenue bonds backed by securitized annual MSA payments. A successful legal challenge to the MSA could make it difficult to enforce those payments.
The tobacco bond market has traded well in recent weeks, with the market absorbing tobacco paper from such issuers as the Golden State Tobacco Securitization Corp. of California and the Erie County, N.Y., Tobacco Asset Securitization Corp. with yields in the 5% range. A planned $2.4 billion offering by the New Jersey Tobacco Settlement Financing Corp. was delayed yesterday because of the threat of a lawsuit challenging the use of bond proceeds in the state's budget.
The lawsuit filed this week differs from the majority of current constitutional challenges to the MSA because its main arguments do not challenge the agreement's validity under anti-trust law. Instead, the plaintiffs say the agreement violates the compact clause of the Constitution.
That clause states that "no State shall, without the Consent of Congress ... enter into any Agreement or Compact with another State."
According to Hans Bader, counsel for special projects for CEI, the MSA violates the compact clause because it set up a cartel between large tobacco companies and states. Payments made under the terms of the MSA are based on national shipments, including shipments to states that did not sign the agreement.
"In addition, the MSA violates the compact clause because it circumvents Congress' power to regular cigarette labeling and pricing," Bader said.
He said the agreement also touches on what he calls anti-trust violations, including the fact that small tobacco companies that signed on to the agreement when it was written don't have to make payments to states.
"However, they are not allowed to expand their operations beyond the number of shipments they were making at the time they signed the agreement," he said. "If they do, they must pay at a higher rate than if they'd agreed to make payments in the beginning. And those companies that didn't sign the agreement have to make payments into escrow statutes that are in most cases higher than if they'd signed on -- and the escrow payments are not tax-deductible. The agreement encourages small companies not to compete."
Bader said that the smoker listed as a plaintiff, Mark Heacock, signed on to the case because while the MSA alludes to smokers as victims of the tobacco industry, they have been forced to bear the brunt of the cost of the agreement.
"This agreement has the purported victims of the tobacco companies being forced to foot the bill and pay the trial lawyers," he said. "It's reverse Robin Hood -- robbing the poor to give to the rich."
There are a number of lawsuits currently in court that challenge the MSA or laws written to uphold it -- including the laws that require non-participating manufacturers to make escrow payments -- on anti-trust arguments. One such case, Freedom Holdings v. New York Attorney General Eliot Spitzer, is currently pending in a federal appeals court.
A ruling in the case in 2004 stated that the MSA might in fact create a state-authorized cartel among domestic tobacco manufacturers. Justices stated that the MSA could violate antitrust law under the 1943 ruling in Parker v. Brown mandating that the state government must supervise actions of companies involved in a state authorized monopoly.
The ruling also stated that states are not immune to legal action in such a case under the Noerr-Pennington doctrine, a First Amendment right that guarantees private citizens the right to petition the government for remedy from injuries caused by private groups.
Previous challenges had upheld the validity of the MSA based on the precedent set by Parker and the Noerr-Pennington doctrine. (c) 2005 The Bond Buyer and SourceMedia, Inc. All rights reserved. http://www.bondbuyer.com http://www.sourcemedia.com
