Smoke-and-Mirrors: Eliot's Post-Cartel Cigarette

Smoke-and-Mirrors: Eliot's Post-Cartel Cigarette

Hall-Reis Op-ed in National Review Online
June 28, 2004

Good news: At long last, an American company has sued New York Attorney General Eliot Spitzer, rather than the other way around.  Now here's the bad news: The lawsuit was filed over Spitzer's and his fellow state AGs' alleged failure to make good on their promise to protect an industry cartel.  That failure, the suit claims, has facilitated a "huge increase" in the number of "renegade companies" selling "very cheap" products and making unprecedented gains in market share.  Welcome to the strange world of tobacco regulation.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The plaintiff in the case against Spitzer is Commonwealth Brands, a Kentucky-based maker of discount-cigarette brands like <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Malibu, USA Gold, and Sonoma that signed the 1998 tobacco-settlement agreement.  Commonwealth charges that Spitzer and other state AGs have failed to collect mandatory-escrow payments from companies that never signed the 1998 tobacco settlement.  But this is an adversarial "lawsuit" in name only, for the plaintiffs are in bed with the nominal defendants.

Americans have been led to believe that tobacco companies were punished by the $200-billion-settlement agreement signed with 46 states.  But the reality is that state attorneys general and major tobacco companies forged a government-backed tobacco cartel.  The states got cash and major tobacco companies got a measure of protection against competition.

Like the "Big Four" companies that originally negotiated and signed the settlement, Commonwealth is required to make annual payments to states based on its share of the U.S. cigarette market.  But to ensure that the companies could pay the states and their trial-lawyer cronies hefty "damages" (taxes) without suffering market-share losses, the tobacco settlement obligated the states to enact laws that would "effectively and fully neutralize" lower prices offered by competing, much smaller cigarette manufacturers that had not signed the agreement.

Despite that many non-signatories — officially dubbed Non-Participating Manufacturers, or NPMs — didn't even exist when the major companies were accused of marketing to kids and lying about the health consequences of smoking, the NPMs must still make annual escrow payments to the states.  State AGs must "diligently enforce" those terms.

The signatories hoped that escrow-payment obligations would keep competing companies at bay.  But things haven't worked out that way.  Because NPM payments are based on sales volume (rather than market share) and made only to states where a company's cigarettes are actually sold, some NPMs have been able to offer their products at competitive prices and prosper.  Over the five years since state ratification of the "Master Settlement Agreement" (MSA), the "renegade" companies have increased their market share some five-fold, from around 2 percent to somewhere between (the figure is disputed) 8 and 15 percent of the U.S. cigarette market.

Commonwealth and other signatories want this "loophole" closed.  They have lobbied state lawmakers across the country to pass "allocable share" laws making NPMs pay hundreds of millions of dollars more to the states, which would drive many NPMs out of business.  In Kentucky, Commonwealth's own general counsel sponsored such a bill while wearing his other hat — as a state legislator.

The bottom line is that attorneys general and companies in the MSA both want to sock it to outside competitors and their price-conscious consumers.  So they're trying to get a court order to accomplish what the tobacco settlement itself, despite the signatories' clever intention, has failed to achieve.

Such increasingly desperate attempts to salvage the tobacco settlement reveal it as nothing but a rank, state-sponsored cartel — a scheme to limit competition and to fix prices under an umbrella of government protection.  It's a bad precedent for a free country, and it shouldn't be allowed to stand.