In the aftermath of the entry of the Multistate Tobacco Settlement Agreement (“MSA”), and enactment by the California Legislature of legislation to implement the terms of the MSA, a class of California consumers, who purchased cigarettes manufactured by one or more of the settling defendant tobacco manufacturers, claimed that the MSA and the state legislation constituted an “anticompetitive hybrid agreement”, in violation of Section 1 of the Sherman Act and the California Cartwright Act and Unfair Competition Act.1

In granting motions to dismiss by the California Attorney General, and the MSA defendants, (Sanders v. Lockyer, N.D. Cal., No. C 04-02281 Si,) 3/28/05, the U.S. District Court, Northern District of California held that the action was barred by the state action doctrine of Parker v. Brown,2 and was also immune under the Noerr-Pennington doctrine.3 Of interest is the district court’s determination that contrary to decisions by the Second and Third circuits, the participation of the settling MSA tobacco defendants in the market structure, created by the MSA and the state legislation, did not require application of the “actively supervised” standard of Midcal Aluminum, Inc.4 The district court held that pursuant to the subsequent United States Supreme Court decision in Hoover v. Ronwin,5 and the Ninth Circuit’s state action decision in Charlie’s Taxi,6 state supervision is not necessary where the challenged conduct is that of the sovereign itself.7

The MSA was entered into in 1998 between 46 states, including California, and the four leading domestic cigarette manufacturers. It resolved the states’ claims that deceptive advertising had increased the states’ health expenditures for smoking related illnesses. The settling defendants (OPMs) agreed to numerous restrictions regarding sales, marketing, advertising, lobbying, research, education and disclosure. The settling OPMs also agreed to make annual payments to the settling states.

The MSA also encouraged other cigarette manufactures to participate by signing on as “subsequent participating manufacturers” (“SPM”s). An SPM was required to make payments if its market share increased from its 1998 level, or 125% of its 1997 level. Finally, cigarette manufacturers who opted not to participate in the MSA (“NPM”s), while not subject to the marketing restrictions of the MSA, were subject to the “Enabling Laws” passed by the settling states, which required the NPMs to make flat fee payments to the states, based upon sales. The complaint alleged that the MSA was an “anticompetitive hybrid agreement” that permitted the OPMs and SPMs to utilize the market structure resulting from the MSA to prevent price competition and to raise prices. The plaintiff class sought injunctive relief under Section 1 of the Sherman Act, declaratory relief, and damages for violations of California Business and Professions Code Sections 16720 and 17200, and common law unfair competition and restitution. Plaintiffs alleged that the challenged state legislation, California’s Qualifying Act and Contraband Amendment,8 created a barrier to market entry, as it required NPMs to escrow a percentage of each unit sold, and thus required them to charge higher prices than SPMs.9

Judge Illston ruled that California’s enabling legislation is shielded from antitrust attack under the state action doctrine of Parker.10 The court held that the conduct in issue is the act of California as a sovereign state, and not the conduct of private parties. In addition, the enabling legislation is “direct legislative activity”.11 Under Hoover,12 the court held that Midcal13 is inapplicable, and neither appropriate nor required where the complained of conduct consists of “direct acts of the sovereign”.14

While the complaint seemingly challenged only the enabling statutes enacted to implement the MSA, rather than the MSA itself, the court agreed with Attorney General Lockyer that to the extent that the MSA is implicated, the claims asserted are barred by the petitioning activity immunity provided by Noerr.15 The court rejected the plaintiff’s argument that while Noerr might be applicable to the petitioning activity itself, it did not apply to the governmental action that resulted from successful petitioning. The court held, that Noerr immunity “would mean nothing if a petitioner were then subjected to antitrust liability for his success.16 Accordingly, the court held that as to all defendants, each was protected by the state action doctrine of Parker v. Brown as well as the Noerr-Pennington doctrine. The MSA and the enabling statutes are state action, and not “hybrid” restraints which delegated regulatory power to private parties to enforce private marketing decisions. So long as the settling MSA defendants acted independently within the confines of the modified market structure created by the MSA and the enabling statutes, the complaint did not state a claim upon which relief could be granted.

  1. Plaintiffs claim that California’s Qualifying Act and a Contraband Amendment created a cartel that would allow participating settling defendants to engage in anticompetitive collusive activity.
  2. 317 U.S. 341 (1943).
  3. Eastern R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S., 127 (1961); United Mine Workers v. Pennington, 381 U.S. 657 (1965).
  4. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980).
  5. 466 U.S. 558 (1984).
  6. Charlie’s Taxi Radio Dispatch Corp. v. SIDA of Hawaii, Inc., 810 F.2d 869 (1987).
  7. The Third Circuit denied Parker immunity on the “actively supervised” ground in A.D. Bedell Wholesale Co. v. Phillip Morris, Inc., 263 F.3d 239 (3d. Cir. 2001), cert. denied, 534 U.S. 1081 (2002), but granted a motion to dismiss based upon the Noerr-Pennington lobbying exemption. In the Second Circuit, the Court of Appeals denied state action immunity in Freedom Holdings, Inc. v, Spitzer, 357 F.3d 205 (2004), reh’g denied, 363 F.3d 149 (2004).
  8. California’s Qualifying Act is Calif. Health & Safety Code Section 104557. The Contraband Amendment is Calif. Bus. & Prof. Code Section 22979.
  9. The Contraband Amendment authorized the State Attorney General to prevent a tobacco manufacturer from selling cigarettes in California, if it was not in compliance with the Qualifying Act.
  10. Parker v. Brown, 317 U.S. 341 (1943).
  11. Slip Opinion, page 7, lines 18-19.
  12. Hoover v. Ronwin, 466 U.S. 558 (1984).
  13. California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97 (1980).
  14. Slip Opinion, page 7, line 24.
  15. Supra, n.3.
  16. Slip Opinion, page 12, lines 21-22. The court noted further that there was no allegation in the case that the MSA was a “sham”, and exempted from the Noerr exemption.

Authored by:
Don T. Hibner, Jr.