More on the antitrust state-action doctrine: Implications for the tobacco MSA

Those of you who have been interested in my postings on FTC v. Phoebe Putney might be interested in a recent student note in the Columbia Law Review, Antitrust Immunity Up In Smoke: Preemption, State Action, And The Master Settlement Agreement, by Matthew McDonald. Here’s the abstract:

In antitrust law, the state action doctrine allows states to take regulatory actions that would otherwise result in violations of the federal antitrust laws. Unfortunately, the Supreme Court has not always provided clear guidance in its state action jurisprudence, and lower courts have expressed frustration with this doctrinally confusing area of antitrust law. There is confusion among the lower courts over the relationship between state action immunity and the related doctrine of federal antitrust preemption. Further, lower courts are confused as to how they should apply the Midcal two-pronged test regulating the availability of state action immunity to private actors.

The judicial response to antitrust suits over the tobacco Master Settlement Agreement (MSA), a settlement signed between tobacco manufacturers and forty-six states, provides a stark example of this confusion. The Second and Third Circuits have held that the antitrust preemption and state action doctrines do not immunize the MSA from charges of facilitating a price-fixing conspiracy among cigarette makers, while five other circuits have held the contrary.

This Note explores the MSA circuit split and contends that the Second and Third Circuits were correct in holding that antitrust preemption and state action immunity do not shield the MSA. This result is consistent with Supreme Court precedent and antitrust policy.

It turns out that, in addition to the state-action doctrine, as exemplified by Parker v. Brown, Midcal Aluminum, and Town of Hallie (and now FTC v. Phoebe Putney), there’s also an antitrust preemption doctrine. What happens if you want to challenge a state statute as being preempted by federal antitrust law? Essentially, a state statute isn’t preempted by federal antitrust law unless it mandates or authorizes conduct that’s a per se violation of antitrust law. (And even in those cases, the state could still avoid antitrust treatment under the state action doctrine.)

Rice v. Norman Williams Co. (1982), for instance, concerned a California statute that made it illegal to import any brand of liquor into the state unless one was an “authorized importer” of that brand. That was a vertical nonprice restraint, which is analyzed under the rule of reason; so the conduct that the California statute mandated or permitted wasn’t necessarily an antitrust violation; so the state statute wasn’t preempted.

Or consider Fisher v. City of Berkeley (1986), where Berkeley passed a rent control ordinance; that was indeed price fixing, but it was a sovereign act, not the coordinated activity of landlords, so that likewise didn’t violate antitrust law. So that statute likewise wasn’t preempted by federal antitrust law.

When the statute isn’t preempted by federal antitrust law, that means it’s valid — no need to check whether it’s saved by state action doctrine, though it’s still possible that certain private acts under the statute could still be challenged under antitrust law, in which case the private actors might seek state action immunity at that point.

For greater details about these overlapping and somewhat confusing areas of antitrust law, read the student note. But the point of the note is to explore how these doctrines apply to the tobacco Master Settlement Agreement (MSA). The MSA requires the major tobacco companies to make payments to the states based on their market shares, deters competition by nonparticipating tobacco companies, and also provides that states can pass statutes forcing nonparticipating tobacco companies to either participate or contribute an amount to a fund that would neutralize any cost advantage they may have over participating companies.

Obviously, economists and antitrust scholars have criticized the MSA as tantamount to a government-enforced cartel. Some circuit courts have allowed antitrust challenges to the MSA to go forward. The Third Circuit reasoned that the anticompetitive conduct was that of the tobacco companies, which took advantage of the MSA’s structure to raise prices. Therefore, the Midcal test applied, and the tobacco companies could be liable because there was no active state supervision. (But I’m still wondering: even though the case can go forward, on what theory of antitrust can the plaintiffs win?) A case in the Second Circuit challenged New York’s Contraband Statute, which was held to be preempted under Rice because it compelled per se antitrust violations. (I’d have to read this case to be sure, but the reasoning here seems iffy to me.)

Obviously, my short summary glosses over a lot of important details, and some of the statements I make above are somewhat oversimplified. Those who are interested in the potential vulnerability of the MSA to antitrust challenge should check out this student note and the underlying cases.

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