Illegal Settlement

Fighting the cigarette cartel.

The 1998 agreement that settled 46 state lawsuits against the four major tobacco companies is mind-numbingly complex. But the essence of the deal, according to a federal lawsuit filed in August by the Competitive Enterprise Institute (CEI), is pretty simple: The states got payments totaling more than $200 billion during the first 25 years; the tobacco companies got protection from liability and competition; and consumers got screwed.

CEI, a D.C.-based pro-market think tank, is suing on behalf of a smoker, a tobacconist, a distributor, and two small manufacturers. The plaintiffs argue that the Master Settlement Agreement (MSA) negotiated by state attorneys general with the leading tobacco companies violates the Constitution's Compact Clause, which says "no State shall, without the consent of Congress…enter into any Agreement or Compact with another State."

Under the MSA, the states use a system of financial punishments to prevent companies that did not participate in the deal from gaining market share at the expense of those that did. Freed from the threat of competition, the major cigarette makers raised prices and forced smokers to cover the cost of the settlement payments. According to CEI, they raised their prices even more than was necessary to pay the states.

In addition to the Compact Clause, CEI says, the MSA violates federal antitrust law, bankruptcy law (by giving the states privileged status as creditors), the Federal Cigarette Labeling and Advertising Act (by regulating cigarette advertising and promotion, an area the law reserves to Congress), and the First Amendment (by restricting advertising and lobbying). The suit also argues that the MSA usurped the federal government's authority over interstate commerce by regulating the national cigarette market and its fiscal authority by imposing what amounts to a nationwide cigarette tax.

But the heart of the case is the Compact Clause, since there's good reason to believe Congress, if given the opportunity, would have objected to the MSA. In 1997 the attorneys general who put together the agreement asked Congress to endorse a similar deal, implicitly conceding that the Compact Clause required such approval. When Congress turned them down, they decided they didn't need permission after all.