How to Build a Better Cigarette—and How to Snuff It Out

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What not many people appreciated until recently was that the deal's biggest beneficiaries, arguably, were none other than the major tobacco companies themselves. They could not raise prices and pass the cost along to the consumer if newcomers were free to enter the market and undersell them. So the states agreed that, as a condition for getting their cash, they would pass laws requiring any upstart tobacco company to pay even more (per pack and after taxes) to the settlement authorities than the majors pay. This despite the fact that new entrants, by definition, were not around to commit the wrongs that the tobacco settlement purported to settle.

The end result was to exclude new entrants and lock in the five leading tobacco companies' 98 percent market share. "The barrier to entry is the secret that protects the nearly quarter of a trillion dollars that's flowing to these states," says Robert A. Levy of the libertarian Cato Institute. "What's involved here is the cartelization of an industry and the sale of an immunity from antitrust laws to the tobacco companies."

That might be fine if the only result were to keep cigarette prices high. But there turns out to be another result: shutting out an innovative and possibly safer cigarette. "It has a direct and crippling effect on our ability to fulfill our mission," Perito says of the tobacco settlement. "This was designed to make it impossible to compete with the major companies." In 1999, Star was required to pay the settlement authorities more than its entire after-tax income from all sources.

To lift this boulder from its chest, Star filed a federal lawsuit in December arguing that the tobacco deal is unconstitutional on a number of grounds. The suit is, by all accounts, a long shot. According to Cato's Levy, federal courts have so far dismissed five out of five legal challenges to the settlement agreement. No court will be eager to cut off a $200 billion cash pipeline beloved by states, Big Tobacco, health advocates, and lawyers.

On the other hand, Star's case is arguably the strongest yet and is certainly the most sympathetic, since earlier plaintiffs were mostly discounters who wanted to make cigarettes cheaper, not safer. Also, there is the black-letter text of the Constitution's so-called compacts clause, which says, "No state shall, without the consent of Congress, ... enter into any agreement or compact with another state." That clause has rarely been invoked, but its plain purpose is to prevent states from joining forces to make de facto national policy behind Congress's back. If the tobacco settlement is not a violation of the compacts clause, it is hard to imagine what would be.

While the courts deliberate, Star Scientific hangs on. The rest of us might contemplate who wins when a few self-dealing interests--contemptuous of "gridlocked" (read: democratic) legislatures and enthralled by dancing dollar signs--repair to back rooms and do the country a favor.

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