- The Washington Times - Tuesday, August 2, 2005

NEW ORLEANS — The 1998 legal settlement requiring major tobacco companies to hand over $206 billion to the states actually created a government-protected cartel that keeps cigarette prices artificially high, according to a lawsuit filed in Louisiana yesterday.

The suit, brought by the Competitive Enterprise Institute, a free-market advocacy group with headquarters in Washington, is aimed at Louisiana and its attorney general, Charles Foti, who is in charge of enforcing the agreement. Similar actions have been filed in five other states by different challengers.

The plaintiffs in the Louisiana suit include a tobacco distribution company and two small Virginia cigarette manufacturers not covered by the original settlement and now forced to make escrow payments to the settlement fund. Other plaintiffs are a discount cigarette store in Shreveport, La., and a smoker who lives in Shreveport who contends he is forced to pay artificially high prices for cigarettes.

No tobacco companies are named as defendants in the suit, which was filed in federal court in Shreveport.

The landmark 1998 agreement between 46 states and major tobacco companies, requiring payments to be made over 25 years, settled nearly all lawsuits over the public costs of treating ill smokers. However, to receive their shares, states were required to pass laws requiring nonparticipating cigarette makers to make escrow payments to the fund.

In addition, Louisiana passed a law making it a crime to sell cigarettes made by any company not covered by the settlement that does not make escrow payments.

The suit contends that those escrow payments drove up competitors’ costs and “erected barriers to entry and expansion that ensured the majors would maintain their market shares despite their dramatic price increases to pay off the states.”

In essence, the states have become the biggest stakeholders in the business of the major tobacco companies and have “used the power of government to protect their newfound allies.”

The suit says the agreement violates the commerce clause of the U.S. Constitution, federal antitrust laws, and federal laws forbidding state regulation of tobacco advertising. Although the settlement was presented as a state-by-state compact, it was really an interstate compact that should have been, but never was, approved by Congress, the suit also contends.

“We think this master settlement is the granddaddy of all interstate compacts. It has 46 states and several territories,” said Sam Kazman, CEI’s general counsel. “Congress had the chance to vote on it in 1998, but they passed on it. We think this is a pretty flagrant violation.”

The suit asks that the settlement be declared unconstitutional and for a ban against Louisiana enforcing the settlement or any of the state laws associated with it. The suit gives no indication whether the state would have to repay any of the settlement money.

Kris Wartelle, a spokeswoman for the Louisiana attorney general, said there would be no comment until the office was formally served with the lawsuit.

Citing antitrust issues, discounters and other tobacco companies have filed similar challenges in Oklahoma, New York, Kentucky, Tennessee and Arkansas.

In addition, the largest tobacco companies have recently questioned payments they made to the states under the settlement, saying that higher prices they are forced to charge have boosted lower-cost competitors not covered by the agreement.

Mr. Kazman said that although the suit is aimed only at Louisiana, a victory likely would trigger lawsuits in other federal court districts. He said the tobacco companies are not being sued because “the violation here is Louisiana entering into this agreement with other states.”

The plaintiffs in the Louisiana suit are A.B. Coker Co. Inc., a Lawrence, Kan., cigarette distributor; S&M; Brands Inc., a Keysville, Va., cigarette manufacturer; CLP Inc., a cigarette maker based in Ayden, N.C.; Tobacco Discount House 1 Inc. of Shreveport and Shreveport resident Mark Heacock, who asserts the agreement has illegally raised prices he pays for cigarettes.

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