Federal Suit Attacks Master Settlement

CHICAGO A think tank that advocates free enterprise and limited government involvment in business has filed a federal court challenge to the 1998 Master Settlement Agreement (MSA), contending that the pact between 46 states and major tobacco manufacturers is unconstitutional.

The Competitive Enterprise Institute (CEI) submitted its challenge in the U.S. District Court of the Western District of Louisiana on behalf of a wholesaler, two small tobacco manufacturers, a tobacco retailer and an individual smoker against Louisiana Attorney General Charles Foti.

The suit contends that the MSA violates the constitutional proviso in Article I forbidding states to enter into any agreement or compact with another state without the consent of Congress. Seven years ago, the attorneys general from 46 states settled lawsuits seeking reimbursement from cigarette manufacturers of Medicaid payments to smokers with an agreement that called for tobacco companies—R.J. Reynolds, Philip Morris, Lorillard and Brown & Williamson—to pay $246 billion to states over 25 years.

MSA created the American Legacy Foundation, which disseminates national anti-smoking ads crafted mainly by Havas’ Arnold in Boston and MDC Partners’ Crispin Porter + Bogusky in Miami.

The CEI charges the MSA essentially set up a national government/tobacco cartel that harmed consumers and small businesses by increasing cigarette prices and restricting competition. Even though small manufacturers did not participate in the settlement, they are required to make escrow settlements to states to cover potential liabilities.

“This lucrative backroom deal between state attorneys general and the trial bar has created a new model for targeting other politically incorrect industries and their customers,” said Sam Kazman, CEI’s general counsel.

Initially, average cigarette prices decreased as foreign manufacturers and deep-discount producers rushed in and undercut the major brands, which saw their prices increase due to a combination of Big Tobacco’s MSA payments and hikes in state excise taxes.

Big brands such as Marlboro and Camel eventually narrowed the pricing gap last year as states improved their enforcement of escrow payments from small manufacturers and clamped down on Internet sales, some of which circumvent the collection of state sales taxes.