The states are absorbed to the money it provides. But the comically camp acclimation is riddled with problems, and judges’ backbone for it is cutting thin.
(FORTUNE Magazine) – THE RECENT KEVIN BACON MOVIE The Woodsman strives to present an accordant d of a adolescent molester. In this commodity we adventure a footfall beyond: an accordant d of a cigarette maker.
Malcolm “Mac” Bailey is a fourth-generation tobacco agriculturalist in Keysville, Va., in the rolling hills a the North Carolina border. “I had this abstraction in the aback of my mind,” he recalls, that “one day I’d try to see if I could booty tobacco off of our acreage and advertise it as a cigarette.” Bailey knows that cigarettes are bad for people, but he additionally knows that some bodies will smoke anyway, that cigarettes are a allowable product, and that tobacco is “the way of activity in this community,” as he says. “It’s the alone activity that I absolutely know, is tobacco.”
In 1994, Bailey asked his son Steven to put calm a alloy of American tobaccos for a cigarette. Steven approved out several, rolling them into cigarettes with a hand-held apparatus and accretion them about the countryside in artificial accoutrements for bounded bodies to sample. In June 1994 the Baileys started authoritative a cigarette commercially. They alleged it Bailey’s, and it became a success. Today S&M Brands (for Steven and Mac) sells cigarettes in ten Southeastern states and employs about 225 bodies in an economically depressed rural community.
A bill now awaiting in the Virginia assembly ability put the Baileys out of business. It would force them to accession their prices to a akin at which they could no best attack adjoin the majors, Mac Bailey contends. “It is collapsed meant to put us down,” he says. Agnate laws accept already been anesthetized in 38 states, pushed through by a ahead absurd but now frequently empiric accord amid the above tobacco companies and the attorneys accepted who already sued them.
Bailey’s asperity is a window into the added bizarre, caitiff apple that the tobacco business has become aback November 1998. That’s aback a scattering of do-gooders, contingency-fee lawyers, and “merchants of death” all got calm in a appointment allowance and addled a accord to achieve the Medicaid acceding apparel that abounding states had filed adjoin the above tobacco companies in the mid-1990s. That acclaimed but little accepted pact, formally accepted as the Master Acclimation Acceding (MSA), re-created the tobacco industry, admitting not consistently in the means its signers envisioned. It was an acceding in which litigators affected roles aforetime anticipation aloof alone for democratically adopted legislators. They created a apple in which rules are set by a certificate that looks like a contract, but whose obligations extend akin to those who haven’t active it. Arch amid those obligations is the acquittal of a tax that’s not absolutely a tax, the bulk of which varies from actor to participant, depending on absolute accident and political leverage. Aback the dust cleared, the new order’s alone ablaze winners were–predictably–the guys who had been in that appointment allowance in November 1998. It’s a adjustment that alone Ogden Nash could abundantly alarm and alone M.C. Escher could accurately depict.
Most bodies accept that the six-year-old MSA is a done deal–yesterday’s news. Absolutely the states would like to accept that, aback they are now counting on its revenues to bung big holes in their budgets for years to come. The media are understandably focused elsewhere: on the U.S. Justice Department’s $280 billion RICO clothing adjoin the industry, abundantly defanged by a federal appeals cloister aftermost month; on the $10.1 billion acumen adjoin Philip Morris USA in a chic activity over ablaze cigarettes, now beneath analysis by the Illinois Supreme Court; and on the $145 billion acumen in a Florida chic action, attenuated aftermost year but now beneath reconsideration by the Florida Supreme Court. (See “Tobacco’s Month of Living Dangerously,” on fortune.com.)
But the MSA is additionally absolute abundant in play. It requires connected tinkering by accompaniment legislatures to accomplish it work. Anniversary acclimation prompts new cloister challenges, and anniversary new claiming armament board to booty a adamantine attending at its broken structure, about in contexts that could apparently beforehand to abatement of the accomplished kit and caboodle. Such an aftereffect would be annihilation beneath than adverse for abounding accompaniment budgets.
From the day it was announced, the MSA was aggress with apparel alleging built-in violations. But board afresh begin means to advocate it, aloof as they had beforehand begin means to let the states’ Medicaid acceding apparel go forward, admitting ample agnosticism in acknowledged academia about their activity beneath acceptable abomination theory. As “merchants of death,” the above cigarette makers had never appear beyond as affectionate parties in court, and “renegade” cigarette makers like Bailey (i.e., those that hadn’t active the MSA) fared no better. The board were not absorbed to disengage a accord that, whatever abroad ability be said about it, did beforehand important accessible bloom objectives.
That affectionate attitude may be changing. In January 2004, a federal appeals cloister in New York captivated that the MSA was not accustomed from antitrust challenge. In response, Moody’s downgraded $18 billion annual of borough tobacco bonds. (More than 40 states and municipalities accept issued such bonds, anchored by advancing MSA payments.) Then, in September, a federal commune adjudicator allowable administration of New York’s latest MSA-tinkering law–similar to the Virginia bill that Bailey fears–finding that it was “discriminatory,” “unnecessary for the accepted accessible bloom needs of the state,” and acceptable to breach antitrust laws. Yet the adjudicator banned to adjure the MSA itself. Attorneys for both abandon affirmation not to accept how he could accomplish such a distinction; the acknowledged justifications for both are the same, and if one falls, both would assume to. Accordingly, this abstruse case–still at an aboriginal stage–carries the abeyant to alter the absolute tobacco settlement.
Frankly, we agnosticism the case will beforehand to that apocalyptic outcome. Federal antitrust challenges to accompaniment authoritative accomplishments accept to ablaze a alarming set of hurdles. Nevertheless, at atomic four added lawsuits arduous genitalia or all of the MSA are now alive their way through the federal courts, and the accepted adjustment is one that cries out for reform. In a country area laws and precedents are declared to administer universally, we should affliction about the injustices actuality visited aloft Bailey–even if he is a cigarette maker. “If the MSA was about any added industry,” says Jeremy Bulow, a Stanford Business Academy assistant and above arch economist for the FTC, “it would accept been addled bottomward connected ago.” The ideal band-aid would be for Congress to devise an equitable, internally connected scheme. While we wait, the angled apple of the MSA grows drifter every day.
LET’S QUICKLY REHEARSE how we got here. In March 1994 the advocate accepted of Mississippi brought the aboriginal of the Medicaid acceding suits, application contingency-fee plaintiffs advocate Dickie Scruggs as his beforehand alfresco counsel. Over the aing two years, added than a dozen added accompaniment attorneys accepted filed agnate suits. The apparel accused the above tobacco companies of conspiring over a 40-year aeon to aish accurate affirmation of the dangers and addictiveness of cigarettes; business to children; customer fraud; apocryphal advertising; civilian racketeering; and antitrust violations. There were bristles capital defendants: Philip Morris (maker of Marlboros); R.J. Reynolds (Camels, Winstons); Brown & Williamson (Kools); Lorillard (Newports); and Liggett Accumulation (L&Ms, a cast it after awash to Philip Morris).
In 1996, Liggett, afresh ambiguous on bankruptcy, breach from the others and angry state’s evidence. It handed over abundance of centralized abstracts that adequate the states’ artifice claims and in acknowledgment won favorable acclimation terms. As we’ll see, Liggett’s move after skewed the anatomy of the MSA in aberrant and cogent ways.
In June 1997, in a celebrated capitulation, the four absolute defendants, none of which had anytime had to pay a penny to a plaintiff in a cigarette lawsuit, agreed to a “global tobacco resolution” that, as originally envisioned, would accept been allowable by the U.S. Congress. The majors hoped to put all industry-threatening action abaft them and restore angary to their business. The accord would accept appropriate the companies to pay the states through a framework abundant like the one that after emerged beneath the MSA, although the payments would accept been higher. While the all-around resolution was awaiting afore Congress, the four states whose cases adjoin the industry were extreme forth in the courts–Mississippi, Florida, Texas, and Minnesota–settled with the four majors beneath acceding that advancing access of the all-around resolution.
But politicians were anon ambitious above changes to the deal, and the companies withdrew their support. In addition, some arch accessible bloom advocates against the bill because it would restore appropriateness to the tobacco industry. A bill to achieve the all-around resolution went bottomward to defeat in June 1998.
The 39 states that were still suing afresh entered into a clandestine acclimation acceding with the companies. The majors agreed to accept by assertive announcement and lobbying restrictions, to armamentarium a foundation that would beforehand smoker blockage and abeyance programs, and to pay “about $200 billion over 25 years” (a ambiguous byword that we’ll acknowledgment to shortly). This was the MSA. For midwifing it, the states’ alfresco attorneys were ultimately awarded added than $13 billion in accident fees, according to American Lawyer. Admitting seven states had not yet sued the companies, they now active on too. So today there are 46 MSA states added the Commune of Columbia and bristles territories. The four beforehand settlers–Mississippi, Florida, Texas, and Minnesota–did not assurance the MSA and are accepted as “previously acclimatized states.”
THE MSA HAD the attending and feel of a routine, if huge, acknowledged settlement. But it was absolutely a civic tobacco tax in disguise. From 1999 forward, anniversary aggregation that active was appropriate to accomplish an anniversary acquittal to the states. The levy, recalculated anniversary year application a complicated formula, is currently set at about 2 cents a cigarette, about $4 a carton. (There are 20 cigarettes in a pack, and ten packs in a carton.) This tax, the parties understood, would be anesthetized through to consumers in the anatomy of added prices, and the added prices, in turn, would beforehand accessible bloom goals by black cigarette consumption, abnormally amid the young.
Where does the $200 billion bulk appear from? That cardinal was accomplished by abacus up the accumulative absolute of MSA taxes advancing over the aboriginal 25 years of the acclimation (plus added than $12 billion in added ancient payments). The 25-year cutoff, though, is arbitrary, because the MSA goes on forever. After 2024 the companies will accumulate advantageous the states a tax advised to crop about $9 billion per year–adjusted advancement for aggrandizement and bottomward for drops in cigarette consumption–“in perpetuity.”
But no one calls the acclimation a tax, for a absolute acceptable reason: Accompaniment attorneys accepted accept no ascendancy to appoint a tax. Akin accompaniment legislatures accept no built-in ability to get calm and actualize a civic tax, which is what the MSA accountability absolutely resembles. In fact, one acumen that journalists and attorneys akin accept a adamantine time anecdotic the MSA succinctly is that about any attack leads to formulations that complete clearly unconstitutional. It would be tempting, for instance, to alarm the MSA an acceding amid 46 states to tax and adapt the business of cigarettes. But the MSA can’t be absolutely that, because the states, beneath the federal Constitution’s business clause, accept no ability to adapt artery commerce. In addition, beneath the Constitution’s bunched article they are banned to access into agreements with one accession to exercise civic political ability after aldermanic approval.
Of course, none of this would be an affair if the MSA activated alone to its autonomous signatories, the big tobacco companies. But it doesn’t–and it wouldn’t assignment appropriate if it did. Although the four majors allowable 97% of the cigarette bazaar in 1997, the drafters of the MSA still had to anguish about Liggett and all the tiny players that angled out the field. If the MSA imposed no agnate obligation on them, they would aback accept a huge bulk advantage and their shares could be accepted to abound explosively, abbreviation the states’ MSA assets and gradually abrasive all the added goals of the MSA as well. So the claiming was to allurement these added players into signing the MSA or to appoint a agnate banking accountability on them.
The band-aid was a devilishly able and maddeningly complicated adjustment of carrot-and-stick mechanisms. The capital allotment was alive enough: Any aggregation that active would be assured that the MSA states could never sue it gluttonous Medicaid reimbursement. In addition, any banker or banker that dealt with an MSA attestant would additionally never accept to anguish about actuality sued by the state. In practice, this creates a able allurement for wholesalers and retailers to accord alone with MSA signatories. (To this day, about all above chains of accessibility stores, drugstores, discounters, and advantage debris to handle nonparticipants’ brands.)
But that wasn’t activity to be abundant to attract Liggett, which had acclimatized with added than 40 states and accordingly already enjoyed these immunities. So the drafters of the MSA devised an amazing ancient incentive: If a aggregation active up aural 90 canicule (by Feb. 23, 1999), it would be accepted an absolution from accepting to pay the MSA accountability as connected as it backward aural its 1998 bazaar allotment (or 125% of its 1997 bazaar share, whichever was greater). If its allotment expanded, the aggregation would pay the aforementioned per-cigarette accountability that the majors paid, but alone on those cigarettes that exceeded its adequate share. The accord would accord these companies an able abatement on their boilerplate per-cigarette MSA tax in perpetuity. Offered to all, it mainly benefited the two bigger absolute players: Liggett and Commonwealth Brands (maker of USA Golds), which affective the deal, as did a scattering of abate companies. These players are now referred to as consecutive accommodating manufacturers (SPMs).
To annihilate any bulk advantage for the companies that still banned to sign–the aloof manufacturers–the MSA drafters added accession twist: Anniversary MSA state, as a action of accepting its abounding MSA payments, would accept to canyon a law acute nonparticipants to pay a per-cigarette “escrow deposit” about according to the accountability on participants. (Incredibly, the MSA additionally specifies that if any adjudicator strikes bottomward an escrow law as unconstitutional, that accompaniment can lose up to 65% of its MSA payments–an allurement for adopted accompaniment board to advocate those laws.) The camp absolution for the escrow laws above bottomward to this: They would ensure that money would be accessible to pay amercement if the states anytime absitively to sue the aloof companies. If the states concluded up not suing, anniversary year’s escrow deposits would be returned–25 years later.
Even d that these laws fabricated sense, they created still accession bigotry amid competitors. Escrow deposits are not about tax-deductible, while MSA payments are. Nonparticipants affirmation that a $4-per-carton nondeductible escrow acquittal is according to a $5.45 per carton MSA levy. The attorneys accepted altercation that and affirmation there are means to anatomy escrow payments to accomplish them deductible–but no one absolutely knows.
NOT SURPRISINGLY, this improbable, jerry-rigged, Rube Goldberg–like credible tax seemed preposterously arbitrary to manufacturers like Mac Bailey. But it additionally angry out to accept some anemic spots, and it didn’t booty connected for association like Bailey to acquisition them.
“In 19-and-98,” says Bailey, “the affair that really, absolutely hit aloft us bound was the accommodation with the MSA.” Bailey got a letter from plaintiffs advocate Joe Rice, who had taken the beforehand in negotiating the MSA on annual of the attorneys general. (See “Welcome to the New Asbestos Scandal,” on fortune.com.) “I was offered–ordered, almost–to appear to New York and assurance this document,” Bailey continues, apropos to the MSA. “I had a bulk of a few canicule to sign, and I’m attractive at a assemblage that’s probably–I don’t anticipate I’d exaggerate–an inch-and-a-half thick.” (The MSA’s altercation is about 150 pages, and 21 exhibits are added to it.)
Bailey got an addendum so he could accept an alfresco advocate apprehend the document. Bailey saw that the adequate allotment actuality offered him wasn’t activity to beggarly anything, because S&M Brands was afresh alone at the breakeven point and would accept to abound about to breach in business. Bailey’s advocate (and stepson), Everett Gee, additionally anticipation it was amiss for a aggregation that hadn’t been accused of atrocity to pay the aforementioned bulk as those that had been sued for a connected annual of sins. But Bailey did see a blink of light. “My advocate apprehend and accent a branch in the MSA out of all those pages that I acquainted like dealt with me,” Bailey recalls. “And that branch says that you’ll pay no added as a nonmember to any accompaniment than you would as a member.”
That accouterment angry out to accept astronomic after-effects for bounded companies like S&M Brands. Bailey was absolutely bigger off not signing, as connected as he was accommodating to breach regional. The aberration arises from the way the MSA computes its attestant companies’ obligations: Levies are imposed on civic sales, with anniversary MSA accompaniment demography a anchored share; Virginia, for example, gets 2%. The end aftereffect was that if Bailey operated alone in Virginia as a nonsignatory and had to accomplish $1 actor in escrow payments, he would anon accredit for a acquittance of 98% of that amount, aback alone 2% would go to Virginia if he were an MSA signatory. With a acquittance like that, Bailey could allow the escrow obligation.
Bailey absitively not to sign. “Makes no faculty for me to pay all these states I don’t akin advertise in,” he says. “I haven’t done annihilation wrong. And I acquaint you accession reason,” Bailey adds. “I was brought up with the aesthetics from my parents which is, you don’t accessory with the amiss crowd. If this accumulation is in agitation and they’re actuality sued by all these states, my aesthetics is, why do I appetite to be complex with them?” So in Virginia today, area a carton of Marlboros sells for about $24.50, a carton of Bailey’s goes for a aggressive $18. Foreign-made superdiscount brands advertise for as little as $13 to $15.
CRITICS OF THE MSA allegation that its camp anatomy absolutely created a bunch that allows the majors to accession prices after abhorrence of competition–a affirmation hotly contested by the majors and abounding discounters alike. But there is no catechism that the majors did backpack prices dramatically. In November 1998, aback the MSA took effect, all the above cigarette manufacturers announced, in concert, a broad bulk access of $4.50 a carton, which analysts said was abundant added than they bare to accommodated their MSA obligations. In August 1999 the majors aloft broad prices accession $1.80 a carton. The afterward year they imposed three added hikes, accretion $2.30. They tacked on accession $1.40 in April 2001 and $1.20 in April 2002, bringing the accumulative backpack to $11.20 aback 1998 and putting broad prices at aing to bifold their pre-MSA levels.
Retail prices rose akin faster. As the abridgement nosedived in 2000, broad shortfalls opened up in the states’ budgets. Accompaniment admiral began attractive to their MSA payments to accomplish up the aberration (enraging antitobacco advocates, who had hoped the money would go for antismoking programs). Aback akin those funds accepted insufficient, accompaniment legislators began hiking cigarette customs taxes. By now, added than 35 states accept aloft customs taxes, with the boilerplate jumping from $3.46 a carton in 1998 to $6.41 a carton in 2004. Eighteen states appoint added than $10-per-carton taxes, with Rhode Island out in advanced at $24.60. New York City adds its own levy, bringing the bulk of a carton of Marlboros to about $70, with accompaniment and bounded customs taxes accounting for $30 of that. Akin Virginia aloft its on tax from 25 cents to $2 a carton aftermost year. And Congress upped the federal customs tax from $2.40 in 1998 to $3.90 a carton in 2002.
As prices went up, cigarette consumption, predictably, went down, accomplishing the accessible bloom cold of the MSA. Admitting cigarette sales in the U.S. accept been steadily crumbling aback 1981, they fell an aberrant 10.3% in 1999. Sales accept connected falling added gradually since, but still at a faster blow than afore the MSA. The MSA seems to accept helped abbreviate active smoker as well. Admitting smoker amid aerial academy acceptance rose 33% from 1991 to 1997, it has alone about 40% aback then. (But smoker amid adolescent adults 18 to 25 went up 24% from 1991 to 2002.)
Despite crumbling sales, the above tobacco companies thrived in the aboriginal years of the MSA, acknowledgment to college prices. Admitting Philip Morris’s operating assets (excluding charges) from its calm tobacco business biconcave from $5.2 billion in 1998 to $5 billion the afterward year, it climbed to about $5.8 billion by 2001. (Philip Morris commands about 50% of the calm market.)
By 2002, with the abridgement slumping, the bulk hikes began to bite. Smokers started abrogation in ample numbers to abatement and superdiscount brands, awash mainly by consecutive accommodating manufacturers and nonparticipants. In response, the majors resorted to cher discounts and promotions like “Buy one, get one free.” As a result, Philip Morris’s operating assets from calm tobacco sales fell 13.1% in 2002, to $5 billion, and afresh plummeted accession 22.4% in 2003, to $3.9 billion. (Philip Morris afflicted its name to Altria Accumulation in 2003; its calm tobacco assemblage is accepted as Philip Morris USA.)
Part of the majors’ allotment was activity to the abate signatories–mainly Liggett (now allotment of Vector Group) and Commonwealth. From 1997 to 2003, such firms angled their sales and added their allotment from 2.6% to 7.3%. The big breach accustomed to these companies to attract them into the MSA–their grandfathered shares–was now advantageous dividends. In 2002, for instance, Liggett awash 9.7 billion cigarettes but paid the accountability alone on the aftermost 2.8 billion. That year, aback best MSA signatories were advantageous about $3.28 a carton, Liggett’s boilerplate was $0.94.
But the majors were accident akin added allotment to the nonparticipants, which awash added than 33 billion cigarettes in 2003, up from 2.5 billion in 1997, accretion their allotment added than 20-fold, from 0.37% to 8.1%. Why weren’t the escrow laws bruised them? Some nonparticipants were artlessly actionable them. Others–particularly adopted firms–were arena accumulated carapace amateur to balk them. Still others, like Bailey’s S&M Brands, were blockage bounded to accumulate their levies down.
The bead in cigarette burning and the majors’ allotment losses meant affecting declines in payments to the states. Had the majors’ sales remained constant, they would accept owed $9.3 billion in 2003; the absolute acquittal came in at $5.78 billion. In one sense, the attorneys accepted were in no position to complain, because the declivity stemmed abundantly from crumbling cigarette consumption. That was one of the goals of the MSA, remember?
But there was article the attorneys accepted could accuse about: the appropriate fabricated by the aloof manufacturers. “Increasing sales by [nonparticipating manufacturers] will acutely abate the aing appointed payments,” Vermont advocate accepted William Sorrell wrote in a announcement to all accompaniment attorneys accepted in September 2003. Sorrell afresh chaired the board administering administration of the MSA. “These after-effects accentuate the coercion of all states demography accomplish to accord with the admeasurement of [nonparticipant] sales…. [Nonparticipant] sales in any accompaniment abate payments to any added state.”
Sorrell estimated that the absent MSA acquirement from nonparticipant sales in 2003 came to $600 million. He additionally warned that the states were flirting with acknowledgment to a callous accouterment in the MSA: If a state’s lax administration of the MSA contributes to accident of allotment by accommodating manufacturers, that accompaniment can ache whopping penalties that could calmly clean out its absolute anniversary MSA payment.
Acting beneath this brand of Damocles, in 2001 the states–with the agog abetment of the majors–began assuming a beachcomber of laws aimed at annoyance artifice of the escrow requirement, abnormally by adopted manufacturers. Forty-three states accept now anesthetized such laws. In 2003, aback the nonparticipants were still accretion their bazaar share, the attorneys accepted and the majors began acute the states to end the acquittance accouterment that manufacturers like Bailey had been relying on, which the attorneys accepted now alleged a “loophole.” Eighteen states allowable such laws in 2003, and accession 20 anesthetized them aftermost year.
The majors are captivated with the results. Philip Morris’s operating assets for calm tobacco went up 13.3% in 2004, as the aggregate of bargain alien cigarettes slowed and the company’s able cigarette prices–taking into annual bargain discounting and giveaways–began ascent again. In accessible statements Altria CEO Louis Camilleri and CFO Dinyar DeVitre anniversary affiliated the unit’s brightening accumulation angle to its success in accepting the two after-effects of MSA-related laws passed.
Those laws work, of course, by binding firms like Bailey’s. Strangely enough, Bailey claims he couldn’t accompany the MSA now akin if he capital to. To assurance now, the MSA requires him not alone to about-face over all his escrowed money but additionally to pay the added money he would accept owed had he been a attestant all along–a absolute of added than $115 million. “All that money … goes to states area we accept never awash cigarettes,” addendum Gee, S&M’s accepted counsel.
THE ATTEMPT by the attorneys accepted to aing the MSA’s acquittance “loophole” has admiring far added administrative analysis than the aboriginal beachcomber of MSA-tinkering laws. It faces at atomic four federal cloister challenges. Louisiana’s acquittance aition statute was aloof upheld in February, but New York’s has been preliminarily enjoined, and the accompaniment of Oklahoma has agreed to append administration of its law, awaiting a cardinal there. Admitting the apparel booty aim at the aition law, they accordingly tend to alarm into catechism the MSA itself. The apparel are actuality brought on abounding grounds, but the best abounding so far has been an antitrust argument.
“This is the best acknowledged achievement bunch in the history of the Sherman Act,” claims advocate David Dobbins, who is bringing that suit. “You aloof can’t get any bigger than this.” Dobbins, 76, has been an antitrust litigator for added than 40 years. The angle that the accord ability breach the antitrust laws has been addictive the MSA aback afore its inception. In 1997, aback the attorneys accepted and the tobacco companies asked Congress to achieve the all-around resolution, they had included an accurate antitrust absolution in their proposal. So aback the all-around resolution bootless to canyon and the MSA was signed–without the exemption–everyone accepted that some awkward antitrust issues ability arise.
For instance, an acceding amid competitors not to advertise–one arresting basic of the MSA–would commonly breach the antitrust laws. Similarly, the tacit compassionate amid the majors that MSA levies would be anesthetized forth to consumers additionally ability accession antitrust issues. Akin the accoutrement of the MSA that alarm for twice-a-year powwows amid all the signatories ability at atomic actualize opportunities for abuse. On the added hand, aback states achieve a authoritative scheme, which is what the MSA about is, they are accustomed to accredit some anticompetitive arrangements. It was likely, therefore, that small-scale antitrust problems would survive acknowledged scrutiny.
The added acute catechism is whether the MSA created an achievement cartel, as abounding bourgeois critics accept connected claimed. An achievement cartel–OPEC is the accessible example–is an acceding amid competitors to authority bottomward assembly to aerate prices. Critics affirmation that beneath the MSA the states are enabling the majors to crank up prices at will, squelching antagonism from discounters, and afresh bribery off bisected the anticompetitive profits as their reward. If the courts were to actuate that the MSA led to an achievement cartel, akin the states’ captivation ability not immunize it.
Attorney Dobbins, whose son is accepted admonition to a aloof manufacturer, filed his aboriginal clothing to bang bottomward the MSA in aboriginal 1999. A federal appeals cloister in Philadelphia absolved it in 2001, cardinal that akin if the MSA had created a cartel, it was immunized because it was allotment of a accompaniment authoritative scheme. Dobbins’s additional suit, in the Commune of Columbia, was befuddled out on procedural grounds. His third, filed in Manhattan on annual of two importers of nonparticipant cigarettes, was additionally initially dismissed. But in January of 2004, Dobbins seemed to hit pay dirt. In a ample assessment by Adjudicator Ralph Winter, a longtime assistant at Yale Law School, the federal appeals cloister in New York reinstated the case, which is accepted as Freedom Holdings v. Spitzer. Winter not alone disqualified that an achievement bunch would not be adequate by amnesty but additionally seemed to go out of his way to arresting his alacrity to clutter the MSA. “Had the admiral of the above tobacco companies entered into such an adjustment after the captivation of the states and their attorneys general,” Adjudicator Winter wrote, “those admiral would connected ago accept had black conversations with their attorneys about the United States Sentencing Guidelines.” In abnegation the approach that the states’ captivation ability accomplish the adjustment legal, he continued: “States may not absorber clandestine parties from antagonism alone to account those parties. The battle with the Sherman Act is arguably not lessened by the actuality that the clandestine parties pay the accompaniment a allotment of their cartel revenues for that protection.” Adjudicator Winter beatific the case aback to U.S. commune adjudicator Alvin Hellerstein for trial.
As bull as Adjudicator Winter’s cardinal was, it appears to accept been based in cogent allotment aloft a confounding of how the gnarly accession of the MSA works. Winter anticipation the MSA penalized consecutive accommodating manufacturers for demography allotment from the majors by accretion their per-cigarette MSA levies–eventually to the point area they would beat the majors’ levies. In consecutive proceedings, however, the attorneys general, backed by an MIT economist, accept argued that Winter’s algebraic was wrong. (Even Dobbins has not appear to Winter’s defense.) Already the credible algebraic absurdity is austere up, it’s cryptic whether Adjudicator Winter’s rage–or that of any added judge–will bake as bright.
In September, Adjudicator Hellerstein issued his baby-splitting decision, enjoining administration of New York’s aition of the escrow-refund accouterment while abrogation aggregate abroad intact. (Hellerstein fatigued that the empiric affirmation showed that MSA itself was accepting a procompetitive effect, not an anticompetitive one, aback the majors’ bazaar allotment had collapsed from 97% to 85% aback the MSA began.) Dobbins’s address of the adverse aspects of that cardinal was heard by the appeals cloister on Feb. 1. Meanwhile the case is proceeding afore Adjudicator Hellerstein, admitting no balloon has yet been scheduled.
AS WE AWAIT added rulings, the cigarette industry’s already caitiff mural is always accumulating beginning layers of irrationality. Minnesota, for example, has allowable its own appropriate “cigarette fee” law. As one of the four states that fabricated abstracted deals with the majors afore the MSA, Minnesota accustomed no money from “subsequent signers” like Commonwealth and has allowable no escrow law to appoint costs on the non-signers. Now it has absitively to appoint its own absolute $3.50-per-carton fee on consecutive signers and nonparticipants. But consecutive signers are already advantageous the MSA accountability on their Minnesota sales–even admitting none of that money goes to Minnesota. That’s because the MSA imposes its levies on all sales nationwide, including those in Minnesota, afresh divvies up the money alone amid the 46 states that active the MSA. Thus Minnesota’s new law finer armament consecutive signers to pay twice. “So we’re advantageous $7.50 per carton in Minnesota,” says Rob Wilkey, accepted admonition of Commonwealth Brands–$4 to the MSA states and $3.50 to Minnesota. In contrast, the majors pay about $4.25 per carton there, while nonparticipants pay $3.50 per carton. Admitting the appearing inequity, the law has already been upheld by one Minnesota appeals court, and agnate laws are beneath application in the three added states that acclimatized afore the MSA: Florida, Mississippi, and Texas.
Meanwhile, MSA states Alaska, Michigan, and Utah accept anniversary bent that alone arty escrow laws on nonparticipant manufacturers is inadequate, aback escrow moneys do not go anon into accompaniment coffers. Accordingly, these states accept hit nonparticipants with absolute fees in accession to their escrow obligations–$3.50 a carton in Michigan and Utah, $2.50 a carton in Alaska. Obviously the escrow laws no best accomplish any faculty in those states: Why actualize a accidental assets armamentarium from which to balance Medicaid reimbursements in the approaching if you are already accession that money now? A Michigan cloister is now reviewing a claiming to that state’s law.
It has been so connected aback cigarette-related laws accept fabricated any faculty that we’ve entered a affray situation. How connected can this absurdity go on? Board abominate a built-in vacuum, and this one can’t abide indefinitely.
There is a solution, and it’s breathtakingly simple. Congress needs to booty cigarette adjustment out of the closet. First, it should alter the affected MSA tax with a absolute one: a $4-per-carton backpack in the federal customs tax on tobacco–affecting all competitors equally. The gain would be broadcast to the states in admeasurement to their tobacco-related Medicaid expenditures. Second, Congress would appoint announcement restrictions agnate to those that accept already been “voluntarily” adopted by the companies that accept been bribed, cajoled, harassed, or apprenticed into signing the MSA. That’s basically it. And you apperceive what the best affair about this academic band-aid would be? Congress wouldn’t charge to pay any attorneys’ fees for the advantage of casual it.
Simple, yes. Sensible, yes. But if accepting it through Congress were as accessible as anecdotic it, we wouldn’t be in this blend in the aboriginal place. ■
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