Challenge to the State Attorney General-Tobacco Cartel

On August 2, 2005 the Competitive Enterprise Institute launched a legal challenge to the multi-state tobacco settlement of 1998. Nearly seven years after the settlement was signed, the consequences of that $246 billion backroom deal continue to undermine rule of law, harm consumers and taxpayers, and expand government power at the expense of liberty. The consequences extend well beyond smokers and the tobacco industry. The tobacco lawsuits and settlement of the 1990s launched a new regulator-in-chief: state attorneys general. 

Before state AGs targeted major tobacco companies with unprecedented, multi-state lawsuits in the 1990s, smokers and trial lawyers had for years repeatedly sued tobacco companies over the adverse health effects of cigarette smoking. But juries consistently rejected the argument that smokers were unaware of the health risks, which had became increasingly well publicized since the 1960s.  It wasn’t until state attorneys general stepped in that things changed.

In the early 1990s, a handful of trial lawyers and state attorneys general devised a new strategy for suing tobacco companies. Mississippi Attorney General Michael Moore, in partnership with prominent trial lawyers such as Richard Scruggs, filed suit against major tobacco companies, seeking to force the tobacco companies to reimburse the state for the Medicaid costs of treating sick smokers. Other states soon filed copycat lawsuits.  

The state lawsuits were widely regarded as long shots initially, because the claim was untested and because states faced the same burden of proof as private plaintiffs: The states had to prove that smoking had directly caused the illnesses in question and that smokers were unaware of the health risks. Florida took the lead in dispensing with that problem. The state simply changed the rules—retroactively. In 1994, the legislature passed the Medicaid Third-Party Liability Act, which bars defendants, such as the tobacco companies, from raising those defenses in cases where the state seeks Medicaid reimbursement.

“I took a little known statute called the Florida Medicaid recovery statute, changed a few words here and a few words there, which allowed the State of Florida to sue the tobacco companies without ever mentioning the words ‘tobacco’ or cigarettes,” boasted Florida trial lawyer Fred Levin in 1998. “It meant it was almost a slam dunk” against the tobacco industry.

Meanwhile, a Mississippi judge ruled that tobacco companies could not introduce evidence that the alleged Medicaid costs had been offset by cigarette taxes and shorter-than-average lifespans of sick smokers. Not surprisingly, Big Tobacco decided by 1997 to settle the state lawsuits in order to cap their losses.  Four states—Florida, Minnesota, Mississippi, and Texas—settled their suits separately, while 46 states signed a multi-state Master Settlement Agreement (MSA). All together, settlement payments were estimated at $246 billion over the first 25 years—not including the estimated $13 billion awarded to trial lawyers.

Worse, even attorneys general who had been publicly critical of the state lawsuits, like Alabama’s William Pryor, were induced to sign the MSA to get a share of the money. After all, tobacco companies would raise cigarette prices in all states to cover settlement costs, which meant smokers in every state would be paying for it. In essence, a minority of state AGs were able to railroad other states into a national tobacco tax and regulatory system.

To safeguard the new revenue stream, states agreed to protect Big Tobacco from competitors by imposing a special set of taxes and regulations. When smaller competitors, so-called Nonparticipating Manufacturers (NPMs), unexpectedly found ways to grow and gain market share, the states responded by simply changing the rules, forcing NPMs to make higher payments. As Vermont Attorney General William Sorrell explained in a “privileged and confidential” memo to his colleagues in 2003, “all states have an interest in reducing sales by Nonparticipating Manufacturers in every state” in order to prevent NPMs from gaining market share and shrinking settlement payments to the states.

The tobacco model represents a radical new mode of governing. Since the tobacco settlement, state AGs have targeted other industries with investigations and lawsuits, including pharmaceutical companies, investment banks, insurers, utilities, and mutual funds. And, as long as industries continue to settle such suits, they’re unlikely to stop. “I thought these plaintiffs with badges would go away after they forced the tobacco industry to pay the largest settlement in the history of jurisprudence,” observed former tobacco industry lawyer Phil Carlton in 2003. Instead, he wrote, “the settlement just whetted the AGs’ appetites.”

Attorneys general themselves have acknowledged a trend of multi-state lawsuits. At a 2004 U.S. Chamber of Commerce event, Michigan Attorney General Michael Cox said that his office receives a steady stream of “sign on requests” for multi-state suits from the National Association of Attorneys General, the organization that coordinates enforcement of the tobacco settlement. There is an “implicit incentive to sign on” to multi-state lawsuits, said Cox, in case a suit wins money. Delaware Attorney General Jane Brady, speaking at a 2004 American Legislative Exchange Council conference, reported that her office is regularly approached by trial lawyers pitching new ideas for state lawsuits.

Nearly two dozen state attorneys general have sued pharmaceutical companies over the disparity between “average wholesale prices” that impact Medicaid and Medicare reimbursement costs and the prices charged to doctors and pharmacists. A group of eight AGs sued the nation’s five largest utility companies—tellingly, from other states—demanding the utilities reduce carbon dioxide (CO2) emissions. Once again pursuing a novel legal approach, the AGs claim that the nontoxic CO2 emissions contribute to global warming and, thus, constitute a public nuisance under federal common law. The case is still pending in federal court.

New York Attorney General Eliot Spitzer, in particular, has targeted numerous companies and industries through investigations and lawsuits. For example, in 2002, Spitzer announced an investigation of Merrill Lynch, which quickly yielded a $100 million, multi-state settlement. A new round of investigations of other investment firms followed, along with a $1.4 billion settlement and new, “voluntary” industry regulations.

The American system of separation of powers reserves lawmaking power to the legislature and law enforcement powers to the executive branch, of which the attorney general is a part. When the state’s top law enforcement officer uses prosecutorial powers to actually make law, it represents a major transfer of power to the office of the attorney general and circumvents the democratic process. Taxpayers, consumers, and affected businesses are excluded from the process, and no legislator votes on it. The result is that government becomes less accountable to its citizens.

Legal scholars and tort reformers have suggested a number of ways to curtail AG activism. With its legal challenge to the tobacco settlement, the Competitive Enterprise Institute is undertaking one such effort. The Compact Clause (Article I, Section 10) of the Constitution prohibits states from entering into any agreement or compact with another state without the consent of Congress. The Founding Fathers crafted a check on multi-state agreements by giving the federal government—Congress—the responsibility of determining whether such agreements are in the public interest.  The tobacco settlement never gained the approval of Congress, which is the basis for CEI’s complaint. In fact, Congress debated and rejected a similar settlement agreement proposed in 1997. 

The outcome of the lawsuit will have far reaching consequences, not just for the tobacco industry and the plaintiffs CEI represents, but on all industries, taxpayers, and consumers. The case gives the courts an opportunity to enforce the words of the Constitution as written by the Founding Fathers and make government more accountable to the citizens it represents.