Tuesday, August 09, 2005

Compact Clause & Tobacco

Have you ever heard of the Compact Clause of the Constitution? Article 1, Section 10 of the Constitution reads:
No State shall, without Consent of Congress . . . enter into any Agreement or Compact with another State . . .
Could this mean the tobacco settlement is unconstitutional? The Competitive Enterprise Institute thinks so.

Ilya Shapiro writes about it:
On August 2, the Competitive Enterprise Institute (CEI), a Washington think tank advocating free markets and limited government, filed a constitutional challenge to the 1998 Master Settlement Agreement (MSA, otherwise known as the Tobacco Settlement). The suit alleges that the agreement between 46 states and the four major tobacco companies is unconstitutional because it violates the Compact Clause of the Constitution: "No State shall, without the Consent of Congress … enter into any Agreement or Compact with another State." (Article I, Section 10). [Full disclosure: I interned at CEI many years ago.]

According to the terms of the Tobacco Settlement -- negotiated in response to snowballing suits seeking to recover for public health costs allegedly related to smoking -- the major tobacco companies would make annual payments to the states in perpetuity, with an estimated cost of $200-250 billion over 25 years. Anybody else that wanted to sell cigarettes -- even a new company that had yet to sell "coffin nails" to anyone or be sued by a single rapacious plaintiffs' lawyer, let alone enter into any settlement -- would be forced either to pay "damages" for others' past "wrongs" or set aside an even larger amount as a sort of collateral against torts that have yet to be committed/invented. Not surprisingly, the small competitors -- about 50 of them so far -- have "agreed" to pay into the extortion scheme.

Thus, Big Tobacco showers the states with money in exchange for protection from competition. It's a win-win, except for retailers, distributors, and small manufacturers -- and smokers. Not to be forgotten, the lawyers negotiating the deal also won a handsome reward of several billion dollars in legal fees for their work on behalf of the public.

"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 General Counsel.

CEI filed the suit in federal court in Shreveport, Louisiana, on behalf of a distributor, two small manufacturers, a tobacco store, and an individual smoker against Charles C. Foti, Jr., that state's AG. Its complaint begins with the allegation that the major tobacco companies and the states "became business partners in establishing one of the most effective and destructive cartels in the history of the Nation."

Detailing how the settlement of the state suits morphed into a massive government-enforced tobacco cartel, the complaint concludes that the MSA violated the Compact Clause, which was meant to prevent states from stepping on federal power or bullying other states. In effect, this is an "antitrust" suit against the public acts of states (as opposed to conventional antitrust actions against private entities or behaviors).

That is, by restricting competition and increasing cigarette prices, the states bestowed upon Big Tobacco a sweetheart deal that "transformed the States from adversaries into business partners." The four companies were allowed to maintain their market share and increase revenues to such an extent that, CEI argues, they are on net better off than before having to make the MSA payments. And Congress and the courts were completely cut out of this lucrative deal-making.

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