A D Bedell Wholesale v. Philip Morris Inc , 263 F.3d 239 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
6-19-2001
A D Bedell Wholesale v. Philip Morris Inc
Precedential or Non-Precedential:
Docket 00-3410
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 00-3410
___________
A.D. BEDELL WHOLESALE COMPANY, INC.;
TRIANGLE CANDY & TOBACCO CO., on behalf of
themselves and all others similarly situated,
Appellants
v.
PHILIP MORRIS INCORPORATED;
R.J. REYNOLDS TOBACCO COMPANY, INC.;
BROWN AND WILLIAMSON TOBACCO CORP.
_______________________________________________
On Appeal from the United States District Court
for the Western District of Pennsylvania
D.C. Civil Action No. 99-cv-00558
(Honorable Donetta W. Ambrose)
___________________
Argued December 14, 2000
Before: SCIRICA, FUENTES and GARTH, Circuit Judges
(Filed: June 19, 2001)
DAVID F. DOBBINS, ESQUIRE (ARGUED)
Patterson, Belknap, Webb & Tyler
1133 Avenue of the Americas
New York, New York 10036
WILLIAM M. WYCOFF, ESQUIRE
Thorp, Reed & Armstrong
One Oxford Centre
301 Grant Street
Pittsburgh, Pennsylvania 15219
ALAN R. WENTZEL, ESQUIRE
Windels, Marx, Lane & Mittendorf
156 West 56th Street
New York, New York 10019
Attorneys for Appellants
DOUGLAS L. WALD, ESQUIRE (ARGUED)
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
BERNARD D. MARCUS, ESQUIRE
Marcus & Shapira
One Oxford Centre, 35th Floor
301 Grant Street
Pittsburgh, Pennsylvania 15219
Attorneys for Appellee,
Philip Morris Incorporated
GREGORY G. KATSAS, ESQUIRE (ARGUED)
Jones, Day, Reavis & Pogue
51 Louisiana Avenue, N.W.
Washington, D.C. 20001
JOHN E. IOLE, ESQUIRE
Jones, Day, Reavis & Pogue
500 Grant Street, 31st Floor
Pittsburgh, Pennsylvania 15219
Attorneys for Appellee,
R.J. Reynolds Tobacco Company, Inc.
TIMOTHY P. RYAN, ESQUIRE
Eckert, Seamans, Cherin & Mellott
600 Grant Street, 44th Floor
Pittsburgh, Pennsylvania 15219
Attorney for Appellee,
Brown and Williamson Tobacco Corp.
ERIK S. JAFFE, ESQUIRE (ARGUED)
5101 34th Street, N.W.
Washington, D.C. 20008
THOMAS C. O'BRIEN, ESQUIRE
36 West 5th Street
Corning, New York 14830
Attorneys for Amici Curiae-Appellants,
The Cato Institute, The Competitive Enterprise Institute,
and The National Smokers Alliance
JOEL M. RESSLER, ESQUIRE
Office of Attorney General of Pennsylvania
Strawberry Square, 15th Floor
Harrisburg, Pennsylvania 17120
Attorney for Amici Curiae-Appellees,
Attorneys General of Pennsylvania, California, Alaska,
American Samoa, Arizona, Arkansas, Colorado, Connecticut,
Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada,
New Hampshire, New Jersey, New Mexico, New York, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina,
South Dakota, Tennessee, Utah, Vermont, Virginia, Washington,
West Virginia, and Wyoming
__________________
OPINION OF THE COURT
__________________
SCIRICA, Circuit Judge.
This is an appeal from the dismissal under Fed. R. Civ. P. 12(b)(6)
of claims
brought under the Sherman Antitrust Act attacking the multi-billion dollar
national
tobacco settlement. Endeavoring to recoup billions of dollars in public
health care costs
and to reduce cigarette smoking, several states brought suit against the
leading United
States tobacco manufacturers. In view of the magnitude of potential
liability and the
prospect of multiple actions, the parties asked Congress to resolve the
suits through a
national legislative remedy. After congressional efforts stalled, forty-
six states forged a
settlement with the tobacco manufacturers known as the Multistate
Settlement
Agreement. Plaintiffs, who are cigarette wholesalers, challenge the
Multistate Settlement
Agreement as a violation of 1 and 2 of the Sherman Antitrust Act.
The District Court held that plaintiffs failed to state a claim under
the Sherman
Act because the tobacco companies were immune from antitrust liability
under both the
Noerr-Pennington and Parker immunity doctrines. We agree they are immune
under
the Noerr-Pennington doctrine but not under the Parker doctrine. We will
affirm.
I.
Facts and Procedural History
A.D. Bedell, a cigarette wholesaler, brought this class action on
behalf of itself
and 900 similarly situated wholesalers seeking damages and a permanent
injunction of
the Multistate Settlement Agreement. Defendants, Philip Morris, Inc.,
R.J. Reynolds
Tobacco Co., Inc., and Brown & Williamson Tobacco Corp., are cigarette
manufacturers
who were original signatories to the Multistate Settlement Agreement.
Along with
Lorillard Tobacco Co., the fourth largest cigarette producer, they are
collectively known
as the major tobacco companies or the Majors. The Majors are responsible
for 98% of
cigarette sales in the United States. Bedell, as a wholesaler, bought
directly from the
Majors.
In the mid 1990's, individual states commenced bringing law suits
against the
Majors to recoup healthcare costs and reduce smoking by minors. As one
state Attorney
General declared, "'[The] lawsuit is premised on a simple notion: you
caused the health
crisis; you pay for it.'" Janofsky, Mississippi Seeks Damages from
Tobacco Companies,
N.Y. Times, May 24, 1994, at A12 (quoting Mississippi Attorney General
Mike Moore).
The States alleged a wide range of deceptive and fraudulent practices by
the tobacco
companies over decades of sales. Faced with the prospect of defending
multiple
actions nationwide, the Majors sought a congressional remedy, primarily in
the form of a
national legislative settlement. In June 1997, the National Association
of Attorneys
General and the Majors jointly petitioned Congress for a global
resolution.
The proposed congressional remedy (1997 National Settlement Proposal)
for the
cigarette tobacco problem resembled the eventual Multistate Settlement
Agreement, but
with important differences. For example, although the congressional
proposal would
have earmarked 1/3 of all funds to combat teenage smoking, no such
restrictions appear
in the Multistate Settlement Agreement. 1997 National Settlement
Proposal, Title VII,
available at http://www.cnn.com/us/9705/tobacco/docs/proposal.html (last
visited June
18, 2001). In addition, the congressional proposal would have mandated
Food & Drug
Administration oversight and imposed federal advertising restrictions. It
also would
have granted immunity from state prosecutions; eliminated punitive damages
in
individual tort suits; and prohibited the use of class actions, or other
joinder or
aggregation devices without the defendant's consent, assuring that only
individual
actions could be brought. See id. at Title V(A), VIII(A), VIII(B). The
congressional
proposal called for payments to the States of $368.5 billion over twenty-
five years. 1997
National Settlement Proposal, Title VI. By contrast, assuming that the
Majors would
maintain their market share, the Multistate Settlement Agreement provides
baseline
payments of about $200 billion over twenty-five years. See Multistate
Settlement
Agreement, IX(a), (b), (c).
Significantly for our purposes, the congressional proposal included
an explicit
exemption from the federal antitrust laws. See 1997 National Settlement
Proposal, App.
IV(C)(2) (stating cigarette manufacturers would have been permitted to
"jointly confer,
coordinate or act in concert, for this limited purpose [of achieving the
goals of the
settlement]"). The Multistate Settlement Agreement contains no
corresponding
exemption from the federal antitrust laws.
Congress rejected the proposed settlement in the spring of 1998.
Undeterred, the
State Attorneys General and the Majors continued to negotiate and on
November 23,
1998, they executed the Multistate Settlement Agreement. Afterwards,
twenty other
tobacco manufacturers, representing 2% of the market, joined the
settlement as
Subsequent Participating Manufacturers (SPMs). The addition of the
Subsequent
Participating Manufacturers meant that nearly all of the cigarette
producers in the
domestic market had signed the Multistate Settlement Agreement. Their
addition was
significant. The Majors allegedly feared that any cigarette manufacturer
left out of a
settlement (Non-Participating Manufacturers or NPMs) would be free to
expand market
share or could enter the market with lower prices, drastically altering
the Majors' future
profits and their ability to increase prices to pay for the settlement.
Plaintiffs brought suit challenging sections of the Multistate
Settlement
Agreement allegedly designed to maintain market share and restrict entry.
The
challenged sections of the Multistate Settlement Agreement are the so-
called "Renegade
Clause," the settlement's primary mechanism for allocating payment
responsibilities
based on production levels, and the provision calling for "Qualifying
Statutes," which are
state laws passed as a result of commitments made in the Multistate
Settlement
Agreement that require Non-Participating Manufacturers to pay into state
escrow
accounts for each sale made. Plaintiffs claim the Multistate Settlement
Agreement and
resulting state implementing statutes create an output cartel that imposes
draconian
monetary penalties for increasing cigarette production beyond 1998 levels
and effectively
bars new entry into the cigarette market.
The Renegade Clause allegedly was designed to prevent current
cigarette
manufacturers from decreasing prices to increase market share and to bar
new entrants
from the market. One part of the Renegade Clause affects tobacco
companies (SPMs)
that later join the Multistate Settlement Agreement. This section creates
strong
disincentives for Subsequent Participating Manufacturers to increase their
production
and market share. If a Subsequent Participating Manufacturer exceeds its
1998 market
share (or exceeds 125% of 1997 market share if that is greater), then it
must pay into the
settlement fund. By maintaining historic market share, it would owe
nothing to the
settlement fund. For every carton of cigarettes sold in 1999 over its
1998 level, a SPM
would have to pay $.19/pack into the settlement fund. Plaintiffs contend
this equaled
75% of the wholesale price, which defendants do not contest. See Br. of
Appellants at
14 (applying MSA IX(C)); MSA Ex. E. This mechanism allegedly
discourages
Subsequent Participating Manufacturers from underpricing the Majors to
increase market
share, even if they could efficiently do so.
Another part of the Renegade Clause affects Non-Participating
Manufacturers
(NPMs), cigarette companies that never sign the Multistate Settlement
Agreement. Non-
Participating Manufacturers include potential new entrants into the
tobacco market. See
MSA IX(d). But as noted, between the SPMs and the Majors, about 99% of
the current
cigarette producers signed the Multistate Settlement Agreement. The
strictures of the
Multistate Settlement Agreement affecting NPMs were largely responsible
for such
participation. Potential new entrants into the cigarette market would
bear the burden of
the Renegade Clause's future effects.
Under the Renegade Clause, if Non-Participating Manufacturers gain
market
share (thereby reducing the Majors' market share) the Majors may decrease
their
principal payments to the settlement fund. If the Majors lose market
share to NPMs, the
payments to the settlement fund are not merely reduced proportionately.
See MSA
IX(d)(1)(A) & (B). For example, if a participating tobacco company lost
10% of its
market share to a new entrant or other company that did not sign the
Multistate
Settlement Agreement, it may be able to reduce its payments by as much as
24%. See
Hanoch Dagan & James J. White, Governments, Citizens, and Injurious
Industries, 75
N.Y.U. L. Rev. 354, 381 (2000) (making hypothetical calculations based on
the formulas
in MSA IX(d)).
By enacting the Qualifying Statute set forth in the Multistate
Settlement
Agreement, see MSA Ex. T, a state can preclude reduced payments. The
model statute
provides,
Any tobacco product manufacturer selling cigarettes to
consumers within the State . . . after the date of enactment of
this Act shall do one of following:
(a) become a participating manufacturer (as
that term is defined in
section II(jj) of the Master Settlement Agreement) and
generally
perform its financial obligations under the Master
Settlement
Agreement; or
(b) (1) place into a qualified escrow fund .
. . the following amounts
. . . .
Id.
The model Qualifying Statute would impose a tax on new tobacco entrants of
approximately $.27/pack in the year 2001, rising to $.36/pack by the year
2007. See
MSA Ex. T. A Non-Participating Manufacturer only can recover its
deposited funds: (1)
if it is forced to pay a judgment or settlement in connection with a claim
brought by the
state, or (2) after the passage of twenty years free from any such
judgments. See id.
Because the Non-Participating Manufacturers are not part of the
settlement, they have no
immunity and would be subject to similar suits brought by the State
Attorneys General
against the Majors (for fraudulent concealment, misrepresentation,
conspiracy, etc.). To
encourage and assist the States in bringing these suits, the Multistate
Settlement
Agreement created a $50 million Enforcement Fund (paid for by the Majors)
to
investigate and sue NPMs to enforce the settlement. See MSA VIII(c).
Because of the
Qualifying Statutes, a Non-Participating Manufacturer must decide either
to join the
Multistate Settlement Agreement and abide by the same restrictions on
market share
facing a SPM (which for new manufacturers would be costly because they
would have a
baseline production level of zero), or face litigation and pay a tax into
a state established
escrow account for any potential adverse judgments.
Together, the Renegade Clause, the Qualifying Statutes and the
Enforcement
Fund allegedly create severe obstacles to market entry, or to increasing
production and
market share. This is not accidental. The Multistate Settlement
Agreement explicitly
proclaims its purpose to reduce the ability of non-signatory cigarette
manufacturers to
seize market share because of the competitive advantage accruing from not
contributing
to the settlement. It declares that the agreement "effectively and fully
neutralizes the cost
disadvantages that the Participating Manufacturers experience vis-a-vis
Non-
Participating Manufacturers with such Settling States as a result of the
provisions of this
Agreement." MSA IX(d)(2)(E).
It is these barriers to entry and increased production that
plaintiffs claim form an
output cartel that violates the antitrust laws. Because output is
restricted and because of
the inelastic demand for cigarettes, in part due to their addictive
nature, the Multistate
Settlement Agreement allegedly permitted the Majors to raise their prices
to near
monopoly levels Ä levels allegedly above those necessary to fund the
settlement
payments. For example, assert plaintiffs, the settlement could have been
funded by only
a $.19/pack increase in price, but the Majors immediately raised prices by
$.45/pack, and
subsequently by another $.31/pack. When this lawsuit was filed, the
Majors had
already raised the wholesale price of cigarettes $.76/pack since the
adoption of the
Multistate Settlement Agreement. Rapid price increases of this magnitude
would
ordinarily permit competitors to maintain or reduce prices or prompt new
competitors to
enter the market. But neither occurred, assert plaintiffs, because the
barriers erected by
the Multistate Settlement Agreement effectively barred entry and
discouraged tobacco
companies from maintaining a lower price because of the penalties for
increased
production.
Defendants contend the Multistate Settlement Agreement did not
violate the
antitrust laws, but even if so, they are immune under both the Noerr-
Pennington doctrine,
which protects petitioning activity, and the Parker doctrine, which
protects sovereign acts
of states from antitrust liability. We turn first to the antitrust
issues.
II.
Antitrust Injury
The defendants argue the express terms of the Multistate Settlement
Agreement do
not constitute an agreement to limit output in violation of the antitrust
laws. Plaintiffs
counter that the Multistate Settlement Agreement's Renegade Clause,
Qualifying
Statutes, and Enforcement Fund, have the "unequivocal purpose and effect"
to
"effectuate a cartel limiting the output of cigarettes, thereby allowing
the Majors to
maintain supracompetitive prices," which is a per se violation of the
antitrust laws. Br.
of Appellants at 29.
To maintain a cause of action under the Sherman Act, "[p]laintiffs
must prove
antitrust injury, which is to say (1) injury of the type the antitrust
laws were intended to
prevent and (2) that flows from that which makes defendants' acts
unlawful." Brunswick
Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 489 (1997) (emphasis in
original). The
antitrust injury requirement "ensures that the harm claimed by the
plaintiff corresponds to
the rationale for finding a violation of the antitrust laws in the first
place, and it prevents
losses that stem from competition from supporting suits by private
plaintiffs." 2 Philip E.
Areeda & Herbert Hovenkamp, Antitrust Law 362 (Rev. ed. 1997).
Here, the losses plaintiffs allege resulted from explicit provisions
of the Multistate
Settlement Agreement, not from competition. Plaintiffs allege the major
tobacco
companies formed and enforced a cartel to restrict output through the
Multistate
Settlement Agreement. As a result, plaintiffs claim the Majors "imposed
artificially high
prices on direct purchasers," without fear of competition. See Complaint
2. Although
this result would affect cigarette prices for retailers and consumers, as
well as for
wholesalers like plaintiffs, the Supreme Court has determined that direct
buyers are the
only parties with standing to assert damage claims under the antitrust
laws for
overcharges based on an output cartel. Ill. Brick Co. v. Illinois, 429
U.S. 477, 734
(1977) ("[T]he antitrust laws will be more effectively enforced by
concentrating the full
recovery for the overcharge in the direct purchasers rather than by
allowing every
plaintiff potentially affected by the overcharge to sue only for the
amount it could show
was absorbed by it."). Although plaintiffs, as wholesalers, have alleged
an injury, they
must also demonstrate that the conduct which caused the injuries violated
the antitrust
laws.
An agreement which has the purpose and effect of reducing output is
illegal under
1 of the Sherman Act. Cal. Dental Ass'n v. FTC, 526 U.S. 756, 777
(1999) (output
restrictions are anticompetitive); Nat'l Collegiate Athletic Ass'n v. Bd.
of Regents of
Univ. of Okla., 468 U.S. 85, 99 (1984) (where "the challenged practices
create a
limitation on output; our cases have held that such limitations are
unreasonable restraints
of trade") (citing United States v. Topco Assocs., Inc., 405 U.S. 596,
608-09 (1972));
United States v. Sacony Vacuum Oil Co., 310 U.S. 150, 223 (1940). In
California
Dental, the Court restated that output restrictions are anticompetitive.
At the same time,
it refused to apply a "quick look analysis" where a local professional
association had
restricted certain types of advertising, but it was not obvious that the
restrictions would
be anticompetitive. Remanding for further analysis, the Court
acknowledged that a
reduction in output was an antitrust violation. Cal. Dental Ass'n, 526
U.S. at 777, 781.
The Court cited with approval a case from the Court of Appeals of the
Seventh Circuit
which held that if "'firms restrict output directly, price will rise in
order to limit demand
to the reduced supply. Thus, with exceptions not relevant here, raising
price, reducing
output, and dividing markets have the same anticompetitive effects.'" Id.
at 777 (quoting
General Leaseways, Inc. v. Nat'l Truck Leasing Ass'n, 744 F.2d 588, 594-95
(7th Cir.
1984)). The Court has made clear that a pure restriction on output is
anticompetitive and
in the absence of special circumstances, would violate the antitrust laws.
NCAA, 486
U.S. at 85 (recognizing that output restrictions may be permissible if
required in order to
market the product at all). By limiting production, the cartel is able to
raise prices above
competitive levels.
Federal Trade Commission/Department of Justice Guidelines also
recognize that
agreements to reduce output violate the antitrust laws. See FTC/DOJ
Guidelines
Antitrust Guidelines for Collaborations Among Competitors, 3.2,
reprinted in 4 Trade
Reg. Rep. (CCH) 20 (2000) (citing Broadcast Music Inc. v. Columbia
Broad. Sys., 441
U.S. 1, 19-20 (1979)). These regulations define output agreements as
"hard core cartel
agreements" and violators are prosecuted criminally without regard to
"claimed business
purposes, anticompetitive harms, procompetitive benefits, or overall
competitive effects."
Id.
Plaintiffs allege the agreement between the States and the Majors
purposefully
creates powerful disincentives to increase cigarette production.
Although the Multistate
Settlement Agreement contains no explicit agreement to raise prices or
restrict market
share, any signatory who increases production beyond historic levels
automatically will
increase its proportionate share of payments to the Multistate Settlement
Agreement.
Normally, a company which lowers prices would be expected to increase
market share.
But the penalty of higher settlement payments for increased market share
would
discourage reducing prices here. For this reason, signatories have an
incentive to raise
prices to match increases by competitors. It appears this incentive
structure has proven
true. The Majors' prices increased dramatically and simultaneously after
signing the
Multistate Settlement Agreement. As noted, this included a $.45/pack
increase just days
after the settlement was announced, an $.18/pack increase less than a year
later, and a
$.13/pack increase in January of 2000. The initial $.45 increase alone
was more than
double what some analysts considered necessary to fund the settlement's
first two annual
payments. See Stuart Taylor Jr., All for Tobacco and Tobacco for All, 23
Legal Times
40, Oct. 9, 2000.
Defendants contend an antitrust analysis is unnecessary if we find
either Noerr-
Pennington or Parker immunity applies. But plaintiffs argue that immunity
cannot attach
to per se antitrust violations. We disagree. Recently we recognized
immunity attached
even where the plaintiff alleged a boycott regarded as illegal per se.
Armstrong Surgical
Ctr. Inc., v. Armstrong Mem'l Hosp., 185 F.3d 154, 157-58 (3d Cir. 1999)
(applying
Parker and Noerr-Pennington immunity where complaint alleged a threat of a
boycott
which would have constituted an antitrust violation in the absence of
immunity), cert.
denied, 530 U.S. 1261 (2000). Similarly, in Pennington, the alleged
conduct granted
immunity would have been a per se violation of the antitrust laws. United
Mine Workers
v. Pennington, 381 U.S. 657, 660-61 (1965).
Our review at this stage is limited to the allegations in plaintiffs'
complaint. On a
motion to dismiss under Fed. R. Civ. P. 12(b)(6), the issue is whether
plaintiffs have
properly pleaded an antitrust violation. Plaintiffs allege that
defendants formed an
output cartel through the Multistate Settlement Agreement that restricts
production and
effectively bars entry to the cigarette tobacco market. Plaintiffs also
allege the cartel
injured the tobacco wholesalers by charging artificially high prices.
We hold that plaintiffs have properly pleaded an antitrust violation
by alleging
defendants agreed to form an output cartel through the Multistate
Settlement Agreement
that violates 1 and 2 of the Sherman Antitrust Act. But we will
affirm if the parties
to the Multistate Settlement Agreement are immune under the Noerr-
Pennington or the
Parker doctrines. We turn now to that question.
III.
Antitrust Immunity
Defendants contend they are immune from antitrust liability under
both the Noerr-
Pennington doctrine, which immunizes parties involved in petitioning the
government,
and under the Parker doctrine, which immunizes sovereign state action.
Although
distinct doctrines, there is substantial overlap as both "work at the
intersection of
antitrust and governance." The two doctrines share a fundamental
similarity. The
Supreme Court has stated they are "complementary expressions of the
principle that the
antitrust laws regulate business, not politics; Parker protects the
States' acts of
governing, and Noerr the citizens' participation in government." City of
Columbia v.
Omni Outdoor Adver. Inc., 499 U.S. 365, 383 (1991). The District Court
found
defendants immune under both. We must affirm if defendants are immune
under either
doctrine.
A. Noerr-Pennington Immunity
Under the Noerr-Pennington doctrine, "[a] party who petitions the
government for
redress generally is immune from antitrust liability." Cheminor Drugs,
Ltd. v. Ethyl
Corp., 168 F.3d 119, 122 (3d Cir.), cert. denied, 528 U.S. 871 (1999).
Petitioning is
immune from liability even if there is an improper purpose or motive. See
E. R.R.
Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 138
(1961) (holding
that even if the petitioner's sole purpose was to destroy its competition
through passage
of legislation, petitioner would be immune); Prof'l Real Estate Investors,
Inc. v.
Columbia Pictures Indus., Inc., 508 U.S. 49, 56 (1993) (same). Rooted in
the First
Amendment and fears about the threat of liability chilling political
speech, the doctrine
was first recognized in two Supreme Court cases holding federal antitrust
laws
inapplicable to private parties who attempted to influence government
action - even
where the petitioning had anticompetitive effects. See Noerr, 365 U.S.
127; United Mine
Workers v. Pennington, 381 U.S. 657 (1965). Under the Noerr-Pennington
doctrine,
"mere attempts to influence the Legislative Branch for the passage of laws
or the
Executive Branch for their enforcement" are given immunity from the
Sherman Act and
other antitrust laws. Cal. Motor Transp. Co. v. Trucking Unlimited, 404
U.S. 508, 510
(1972). The immunity reaches not only to petitioning the legislative and
executive
branches of government, but "the right to petition extends to all
departments of the
Government," including the judiciary. Id.
Noerr-Pennington immunity applies to actions which might otherwise
violate the
Sherman Act because "[t]he federal antitrust laws do not regulate the
conduct of private
individuals in seeking anticompetitive action from the government." Omni,
499 U.S. at
379-80. The antitrust laws are designed for the business world and "are
not at all
appropriate for application in the political arena." Noerr, 365 U.S. at
141. This was
evident in Noerr, where defendant railroads campaigned for legislation
intended to ruin
the trucking industry. Even though defendants employed deceptive and
unethical means,
the Supreme Court held that they were still immune. This is because the
Sherman Act is
designed to control "business activity" and not "political activity." Id.
at 129. With this
underpinning, the Court stated, "[Because] [t]he right of petition is one
of the freedoms
protected by the Bill of Rights, . . . we cannot, of course, lightly
impute to Congress an
intent to invade these freedoms." Noerr, 365 U.S. at 136. The antitrust
laws were
enacted to regulate private business and do not abrogate the right to
petition.
The scope of Noerr-Pennington immunity, however, depends on the
"source,
context, and nature of the competitive restraint at issue." Allied Tube &
Conduit Corp.
v. Indian Head, Inc., 486 U.S. 492, 499 (1988). If the restraint directly
results from
private action there is no immunity. See id. at 500 (where the "restraint
upon trade or
monopolization is the result of valid governmental action, as opposed to
private action,"
there is immunity). Passive government approval is insufficient. Private
parties cannot
immunize an anticompetitive agreement merely by subsequently requesting
legislative
approval.
Under the Noerr-Pennington doctrine, private parties may be immunized
against
liability stemming from antitrust injuries flowing from valid petitioning.
This includes
two distinct types of actions. A petitioner may be immune from the
antitrust injuries
which result from the petitioning itself. See Noerr, 365 U.S. at 143
(finding trucking
industry plaintiffs' relationships with their customers and the public
were hurt by the
railroads' petitioning activities, yet the railroads were immune from
liability). Also, and
particularly relevant here, parties are immune from liability arising from
the antitrust
injuries caused by government action which results from the petitioning.
See
Pennington, 381 U.S. at 671 (holding plaintiffs could not recover damages
resulting from
the state's actions); Mass. Sch. of Law at Andover, Inc. v. Am. Bar
Assoc., 107 F.3d
1026, 1037 (3d Cir. 1997) (holding Noerr gave immunity for any damages
stemming
from state adoption of requirements for bar admission to petitioners who
lobbied for their
adoption); 1 Areeda & Hovenkamp, supra, at 202c. Therefore, if its
conduct
constitutes valid petitioning, the petitioner is immune from antitrust
liability whether or
not the injuries are caused by the act of petitioning or are caused by
government action
which results from the petitioning. Here, we must determine whether a
settlement
agreement between private parties and sovereign states fits within the
context of
protected petitioning envisioned by the Noerr-Pennington doctrine.
Finding that negotiating the settlement was akin to petitioning the
government, the
District Court held defendants immune under Noerr-Pennington.
Specifically, it held
that the "concerted effort by defendants to influence public officials,
i.e., the states'
Attorneys General, to accept a settlement in exchange for dismissing the
numerous
lawsuits pending against defendants is among the activities protected by
the Noerr-
Pennington doctrine." A.D. Bedell, 104 F. Supp. 2d at 506. We agree that
defendants
engaged in petitioning activity with sovereign states and are immune under
the Noerr-
Pennington doctrine.
1.
The importance of the right to petition has been long recognized. As
early as
1215, the Magna Carta granted barons the right to petition the King of
England for
redress. See Julie M. Spanbauer, The First Amendment Right to Petition
Government
for a Redress of Grievances: Cut From a Different Cloth, 21 Hastings
Const. L.Q. 15, 17
(1993) (detailing history of the right to petition from 1215 through
colonial times, the
constitutional convention, and today). During our colonial period, the
right to petition
was widely used. The importance of this right was fundamental - it
guaranteed not
merely expression but the preservation of democracy. "The very idea of
government,
republican in form, implies a right on the part of its citizens to meet
peaceably for
consultation in respect to public affairs and to petition for a redress of
grievances."
United States v. Cruikshank, 92 U.S. 542, 552 (1875).
Because of the importance of the right to petition the government
freely, and
because "[a]ntitrust law was . . . not intended to impose a barrier
between the people and
their government," Noerr-Pennington immunity extends beyond filing formal
grievances
directly with the government. Balt. Scrap Corp. v. David J. Joseph Co.,
237 F.3d 394,
398 (4th Cir. 2001) (holding secret funding of a lawsuit brought against a
potential
competitor to maintain a monopoly was protected under Noerr-Pennington,
even though
the funding party was not a litigant).
In a recent survey of the application of Noerr-Pennington immunity to
non-
traditional petitioning, Primetime 24-Joint Venture v. Nat'l Broad. Co.,
Inc., 219 F.3d
92, 99-100 (2d Cir. 2000), the Court of Appeals for the Second Circuit
noted the
Supreme Court has extended Noerr immunity to actions before administrative
agencies
and the courts, Cal. Motor Transp., 404 U.S. at 508, 510-11, and that
other courts have
extended Noerr-Pennington immunity to include efforts to influence
governmental action
incidental to litigation such as prelitigation threat letters. McGuire
Oil Co. v. Mapco.,
Inc., 958 F.2d 1552, 1560 (11th Cir. 1992); Coastal States Mktg., Inc. v.
Hunt, 694 F.2d
1358, 1367-68 (5th Cir. 1982). There would seem to be no reason to
differentiate
settlement from other acts associated with litigation. See Columbia
Pictures Indus., Inc.
v. Prof'l Real Estates Investors, Inc., 944 F.2d 1525, 1528-29 (9th Cir.
1991), aff'd, 508
U.S. 49 (1993) (affirming, but not addressing whether settlement creates
immunity
because sham exception defeated immunity). The Court of Appeals for the
Seventh
Circuit has recognized the application of Noerr-Pennington immunity to
settlements
between private parties and state government. In Campbell v. City of
Chicago, 823 F.2d
1182, 1186 (7th Cir. 1987), two cab companies were found immune from
antitrust
liability for their agreement to settle their lawsuits against the city in
exchange for the
passage of a favorable and arguably anticompetitive ordinance. The
settlement in
Campbell resonates favorably with the Multistate Settlement Agreement
here.
The Supreme Court has yet to speak definitively on extending
petitioning
immunity to settlement agreements with sovereign states. Relying on a
statement in
Broadcast Music, Inc. v. Columbia Broadcasting Systems Inc., plaintiffs
claim the
Supreme Court refused to extend immunity to settlement agreements when it
stated that a
"consent judgment, even one entered at the behest of the Antitrust
Division, does not
immunize the defendant from liability for actions, including those
contemplated by the
decree, that violates the rights of nonparties." 441 U.S. 1, 13 (1979).
"But in any event,
[we are] bound by holdings, not language." Alexander v. Sandoval, 2001 WL
408983
(U.S.). We believe this case is easily distinguished. There was no
settlement agreement
in Broadcast Music. Rather, Broadcast Music involved actions taken years
after the
resolution of a claim by private actors who claimed they were acting under
the protection
of a consent decree. The Supreme Court ruled that the consent decree did
not immunize
the anticompetitive actions taken by private parties. For the above
quoted language,
Broadcast Music relied upon Sam Fox Publishing Co. v. United States, 366
U.S. 683,
689 (1961), which did not involve Noerr-Pennington immunity. Sam Fox
addressed
whether a non-participant is bound by the outcome of government antitrust
litigation. Id.
Neither Broadcast Music nor Sam Fox mentioned Noerr-Pennington immunity,
and
neither is applicable to the facts here.
Plaintiffs claim a motivating purpose behind the Multistate
Settlement Agreement
was to create a cartel guaranteeing tobacco companies supracompetitive
profits. Br. of
Appellants at 49. Similarly, plaintiffs claim the States were motivated
by a desire to
share in these revenues. But the parties' motives are generally
irrelevant and carry no
legal significance. See Noerr, 365 U.S. at 138. At the same time, it
bears noting that
the petitioning here invoked the States' traditional powers to regulate
the health and
welfare of its citizens. See, e.g., Great Atlantic and Pac. Tea Co., Inc.
v. Hugh B.
Cottrell, 424 U.S. 366, 370 (1976) ("[U]nder our constitutional scheme the
States retain
'broad power' to legislate protection for their citizens in matters of
local concern such as
public health.").
In sum, we see no reason to distinguish between settlement agreements
and other
aspects of litigation between private actors and the government which give
rise to
antitrust immunity. The rationale is identical. Freedom from the threat
of antitrust
liability should apply to settlement agreements as it does to other more
traditional
petitioning activities. We hold the defendants are immune under the
Noerr-Pennington
doctrine.
B. Parker Immunity
Having found the defendants immune under Noerr-Pennington, our
analysis could
end here. But the District Court found Parker immunity, so we will
address it as well.
Antitrust laws do not bar anticompetitive restraints that sovereign
states impose
"as an act of government." Parker v. Brown, 317 U.S. 341, 352 (1943); see
also Mass.
Sch. of Law at Andover, Inc. v. Am. Bar Assoc., 107 F.3d 1026, 1035 (3d
Cir. 1997).
The Parker doctrine relies heavily on the clarity of the State's goals and
actions.
"[S]tates must accept political responsibility for the actions they intend
to undertake."
FTC v. Ticor Title Ins. Co., 504 U.S. 621, 636 (1992). The key question
is whether the
allegedly anticompetitive restraint may be considered the product of
sovereign state
action. If it is not, then even if sectors of state government are
involved, the activity will
not constitute "state action" under the Parker doctrine and will not
receive immunity.
"State action," as defined in cases granting Parker immunity, is
qualitatively
different from "state action" in other contexts such as the Fourteenth
Amendment. See 1
Areeda & Hovenkamp, supra, at 221. While the Fourteenth Amendment can
cover
inadvertent or unilateral acts of state officials not
acting
pursuant to state policy . . . the term "state action" in
antitrust
adjudication refers only to government policies that are
articulated with sufficient clarity that it can be said that
these
are in fact the state's policies, and not simply happenstance,
mistakes, or acts reflecting the discretion of individual
officials.
Id. Because it is grounded in federalism and respect for state
sovereignty, this interest in
protecting the acts of the sovereign state, even if anticompetitive,
outweighs the
importance of a freely competitive marketplace, especially in the absence
of contrary
congressional intent.
Without clear congressional intent to preempt, federal laws should
not invalidate
state programs. "In a dual system of government in which, under the
Constitution, the
states are sovereign, save only as Congress may constitutionally subtract
from their
authority, an unexpressed purpose to nullify a state's control over its
officers and agents
is not lightly to be attributed to Congress." Parker v. Brown, 317 U.S.
341, 351 (1943).
While individual anticompetitive acts of state governments may be
considered unwise or
counterproductive, the decision to make such choices lies within the
sovereign power of
the states. Congress did not intend to override important state interests
in passing the
Sherman Act. "The general language of the Sherman Act should not be
interpreted to
prohibit anticompetitive actions by the States in their governmental
capacities as
sovereign regulators." City of Columbia v. Omni Outdoor Adver., 499 U.S.
365, 374
(1991).
The Sherman Act was enacted to address the unlawful combination of
private
businesses. See Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 n.15 (1940)
("The
history of the Sherman Act as contained in the legislative proceedings is
emphatic in its
support for the conclusion that 'business competition' was the problem
considered and
that the act was designed to prevent restraints of trade which had a
significant effect on
such competition."). "There is no suggestion of a purpose to restrain
state action in the
Act's legislative history." Parker, 317 U.S. at 313. The Sherman Act was
passed "in the
era of 'trusts' and of 'combinations' of businesses and of capital
organized and directed to
control of the market by suppression of competition in the marketing of
goods and
services, the monopolistic tendency of which had become a matter of public
concern."
Apex, 310 U.S. at 493. Given its focus on the problems of private
monopolies and
combinations, it is not surprising that the Sherman Act does not set out
to curb clearly
defined anticompetitive state actions. See Cal. Retail Liquor Dealers
Assoc. v. Midcal
Aluminum, Inc., 445 U.S. 97, 104 (1980).
When a state clearly acts in its sovereign capacity it avoids the
constraints of the
Sherman Act and may act anticompetitively to further other policy goals.
See S. Motor
Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 54 (1985).
For example,
state governments frequently sanction monopolies to ensure consistent
provision of
essential services like electric power, gas, cable television, or local
telephone service.
But "a state does not give immunity to those who violate the Sherman Act
by authorizing
them to violate it, or by declaring that their action is lawful." Parker,
317 U.S. at 351
(states cannot authorize private parties to set a price and then enforce
those prices
without any evaluation of their reasonableness). Only an affirmative
decision by the state
itself, acting in its sovereign capacity, and with active supervision, can
immunize
otherwise anticompetitive activity.
When it is uncertain whether an act should be treated as state action
for the
purposes of Parker immunity, we apply the test set forth in California
Retail Liquor
Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 104 (1980), to
"determine
whether anticompetitive conduct engaged in by private parties should be
deemed state
action and thus shielded from the antitrust laws." Patrick v. Burget,
486 U.S. 94, 100
(1988). Applying Midcal is unnecessary if the alleged antitrust injury
was the direct
result of a clear sovereign state act. Mass. Sch. of Law at Andover v.
Am. Bar Assoc.,
107 F.3d 1026, 1036 (3d Cir. 1997); Session Tank Liners, Inc. v. Joor
Mfg., Inc., 17
F.3d 295, 299 (9th Cir. 1994) (finding immunity from antitrust liability
where "injuries
for which [the plaintiff] seeks recovery flowed directly from government
action"). In
Massachusetts School of Law, we held that where "the states are sovereign
in imposing
the bar admission requirements [the alleged anticompetitive restraints],
the clear
articulation and active supervision requirements . . . are inapplicable."
107 F.3d at 1036.
There is less need for scrutiny "[w]hen the conduct is that of the
sovereign itself . . .
[because] the danger of unauthorized restraint of trade does not arise."
PTI, Inc. v. Philip
Morris, Inc., 100 F. Supp. 2d 1179, 1196 (C.D. Ca. 2000). Similarly,
concerns about the
legitimacy of the action are reduced. Thus we must first decide if Midcal
applies to the
States' actions in negotiating and implementing the Multistate Settlement
Agreement.
The Supreme Court has recognized state legislative and judicial
action as
sovereign under Parker. But "[c]loser analysis is required" when the
action is less
directly that of the legislature or judiciary. Hoover v. Ronwin, 466 U.S.
558, 568 (1984)
(relying in part on Midcal). One Court of Appeals has decided that
executive officers
and agencies "are entitled to Parker immunity for actions taken pursuant
to their
constitutional or statutory authority, regardless whether these particular
actions or their
anticompetitive effects were contemplated by the legislature," without the
need for
Midcal analysis. Charley's Taxi Radio Dispatch Corp. v. SIDA of Haw.,
Inc., 810 F.2d
869, 876 (9th Cir. 1987). We have yet to address whether the acts of
executive officials
constitute state action that avoids Midcal analysis. Furthermore, in this
case, we must
determine whether the antitrust injuries were more attributable to private
parties than to
government action, as was the case in Midcal.
1. Direct Application of Parker
An argument can be made that the Multistate Settlement Agreement, and
any of its
anticompetitive effects, were the direct result of state government
action. For each
signatory state, there was active involvement by high ranking executive
officials and the
agreement was subject to state court approval. The Multistate Settlement
Agreement was
negotiated by Attorneys General from each state to settle existing and
contemplated
lawsuits. The Multistate Settlement Agreement required that,
each Settling State that is a party to a lawsuit . . .
and each
Participating Manufacturer will:
(A) tender this agreement to the Court in
such Settling
State for its approval; and
(B) tender to the Court in such Settling
state for
entry of a consent decree conforming to the
model consent decree attached hereto as Exhibit
L.
MSA XIII(b)(1); see also PTI, 100 F. Supp. 2d at 1196.
In most cases, the state legislatures were involved as well.
Although they lacked a
direct role in forming or approving the Multistate Settlement Agreement,
the legislatures
were charged with, and responsible for, the enactment of the Qualifying
Statutes which,
although technically voluntary, enforce important components of the
Multistate
Settlement Agreement. See MSA IX(d)(2)(E), (F) and (G). It is apparent
that
legislative enactment of the Qualifying Statutes signified state approval
of the Multistate
Settlement Agreement. See Cal. Aviation Inc. v. City of Santa Monica, 806
F.2d 905,
909 n.5 (9th Cir. 1986) (noting statutes passed afterwards can be evidence
of pre-existing
state policy to allow anticompetitive behavior). In a few states, the
legislatures played an
even greater role by applying pressure on the Attorney General or Governor
to bring suit
or by passing legislation authorizing the Attorney General to bring suit
against the
tobacco companies. Additionally, each branch of state government had a
role in the
execution or operation of the Multistate Settlement Agreement. Under this
analysis, one
could find direct state action foreclosing the application of Midcal.
Under a different view, we focus not on the negotiation and
consummation of the
Multistate Settlement Agreement, but on its actual operation and resulting
effects, since
that is the true cause of the anticompetitive effects. This is how the
Supreme Court
analyzed the behavior in Midcal.
In Midcal, the price setting structure that resulted in antitrust
injury would not
have existed but for the state regulation. Only because of state
legislative enactments did
California wine producers hold power over the wholesalers to engage in
resale price
maintenance. Midcal, 445 U.S. at 105. Because the actual parties
involved in the
anticompetitive behavior were private parties, the Supreme Court
determined the alleged
violation of the antitrust laws was not obvious state action and devised
what has come to
be known as the Midcal test.
We have found direct state action, without Midcal analysis, only when
the
allegedly anticompetitive behavior was the direct result of acts within
the traditional
sovereign powers of the state. See Mass. Sch. of Law, 107 F.3d at 1036;
see also
Zimomra v. Alamo Rent-A-Car, Inc., 111 F.3d 1495, 1500 (10th Cir. 1997).
In
Massachusetts School of Law, we held Midcal inapplicable because the state
acted as
sovereign in imposing bar admission requirements. 107 F.3d at 1036
(Massachusetts
School of Law at Andover, Inc., an unaccredited law school, had challenged
the state
requirement that a student graduate from an ABA accredited law school as
an
anticompetitive restraint). We distinguished Midcal and its progeny as
"inapplicable
because they dealt with situations where private parties were engaging in
conduct . . .
which led directly to the alleged antitrust injury." Id. Similarly, in
Zimomra, the Court
of Appeals for the Tenth Circuit held Midcal inapplicable in a challenge
to rental car
price fixing because the city and county, and not a private actor, had the
ultimate
responsibility for setting rental car daily use fees and the private
parties "had no such
discretionary authority." 111 F.3d at 1500. In neither case was a
private party
responsible for the resulting anticompetitive act; and thus there was no
need to apply the
Midcal analysis.
Although the Multistate Settlement Agreement was a negotiated
settlement by
State Attorneys General, and the state legislatures were responsible for
passing the
Qualifying Statutes to enforce important components of the agreement,
these acts by the
governmental parties were not the direct source of the anticompetitive
injuries.
Therefore, it would appear that, just as the injury in Midcal was caused
by private parties
taking advantage of the state imposed market structure, the
anticompetitive injury here
resulted from the tobacco companies' conduct after implementation of the
Multistate
Settlement Agreement, and not from any further positive action by the
States. Even
though, as defendants argue, the Multistate Settlement Agreement created
the cartel, this
fact makes the case analogous to Midcal, not different.
The signing of the Multistate Settlement Agreement and the
establishment of the
output cartel are not purely private actions, nor are they entirely
attributable to the state in
the manner of a legislative act. As such, this case resembles a "hybrid
restraint" as
discussed by Justice Stevens in his concurrence in Rice v. Norman Williams
Co., 458
U.S. 654, 666-67 (1982) (Stevens, J., concurring). Hybrid restraints
are not the type
of sovereign state action found in Massachusetts School of Law or Zimomra,
that avoid
Midcal treatment. Instead, hybrid restraints involve a degree of private
action which
calls for Midcal analysis. See Rice, 458 U.S. at 666 ("Hybrid restraints
of this character
require analysis that is different from a public regulatory scheme on the
one hand, and a
purely private restraint on the other.") (citations omitted) (Stevens, J.,
concurring).
Therefore, to determine if the allegedly anticompetitive sections of the
Multistate
Settlement Agreement were "state action" under the Parker doctrine, we
will apply the
Midcal analysis.
For the reasons expressed, namely that the antitrust injuries here
were not caused
by the solitary acts of the state acting in its traditional capacity, but
were instead caused
by hybrid acts involving private parties in the unique setting of a joint
settlement, we
believe this form of alleged anticompetitive restraint requires the Midcal
analysis.
2. Midcal
To qualify as state action under the Midcal test, "the challenged
restraint must be
one 'clearly articulated and affirmatively expressed as state policy.'"
445 U.S. at 104
(quoting City of Lafayette v. La. Power & Light Co., 435 U.S. 389, 410
(1978) (opinion
of Brennan, J.)). A government entity need not "be able to point to a
specific, detailed,
legislative authorization" to assert a successful Parker defense.
Lafayette, 435 U.S. at
415. But it must be evident that under the "clear articulation" standard
the challenged
restraint is part of state policy. As the Supreme Court has stated,
"Midcal confirms that
while a State may not confer antitrust immunity on private persons by
fiat, it may
displace competition with active state supervision if the displacement is
both intended by
the State and implemented in its specific details." FTC v. Ticor Title
Ins. Co., 504 U.S.
621, 633 (1992).
Here, the States' reasons for bringing suits against the Majors Ä to
reduce teenage
smoking, address public health concerns, and recoup state health care
expenditures Ä
were evident and clearly articulated. State Attorneys General and
Governors made
public pronouncements which received national coverage. Other suing
states made
similar announcements and cited to studies demonstrating the enormous
impact of
cigarette smoking on health and finances. The proclaimed goals of the
States were
clear.
As noted, the State Attorneys General and the Governors were not the
only state
actors involved. The State Attorneys General took the lead in
negotiations, but the state
courts played an important role in approving the Multistate Settlement
Agreement by
issuing consent judgments and dismissing the lawsuits. This was required
by the
Multistate Settlement Agreement which provided that each signatory state
would "tender
to the Court in such Settling State for entry of a consent decree
conforming to the model
consent decree" included in the agreement. See MSA XIII(b)(1). The
lawsuits were
dismissed under the consent agreements. The state legislatures also
demonstrated their
approval in most of the States by passing implementing legislation. See
Cal. Aviation
Inc., 806 F.2d at 909 n.5 (noting that statutes passed afterwards are
evidence of pre-
existing state policy to allow anticompetitive behavior). Even before the
settlement,
legislatures of some states targeted the tobacco industry by putting
pressure on the
Attorney General or Governor to bring suit. In view of public
pronouncements of the
States' intentions and goals, along with active involvement from each
branch of state
government, it is evident the Multistate Settlement Agreement was backed
by clearly
articulated state policy.
The second prong of the Midcal test is whether the resulting
antitrust violation
was "actively supervised" by the state. This standard is more
problematic. The essential
inquiry of the "actively supervised" prong is to determine if the
"anticompetitive scheme
is the State's own." FTC v. Ticor Title Ins. Co., 504 U.S. 621, 635
(1992). The active
supervision prong "requires that state officials have and exercise power
to review
particular anticompetitive acts of private parties and disapprove those
that fail to accord
with state policy." Patrick v. Burget, 486 U.S. 94, 101 (1988). "Absent
such a program
of supervision, there is no realistic assurance that a private party's
anticompetitive
conduct promotes state policy, rather than merely the party's individual
interests." Id. at
100-01. "Such active state review is clearly necessary where private
defendants are
empowered with some type of discretionary authority in connection with the
anticompetitive acts (e.g. to determine price or rate structures)."
Zimomra, 111 F.3d at
1500. Rubber stamp approval of private action does not constitute state
action. A state
must independently review and approve the anticompetitive behavior to
satisfy this prong
of the Parker doctrine. Patrick, 486 U.S. at 101 ("The active supervision
requirement
mandates that the State exercise ultimate control over the challenged
anticompetitive
conduct."); Ticor, 998 F.2d at 1139.
Here, plaintiffs allege the Multistate Settlement Agreement primarily
furthers the
private tobacco companies' interests and not those of the States. While
we do not agree
with this characterization, it is clear the Multistate Settlement
Agreement empowers the
tobacco companies to make anticompetitive decisions with no regulatory
oversight by the
States. Specifically, the defendants are free to fix and raise prices,
allegedly without fear
of competition. The question then is whether the Multistate Settlement
Agreement, with
all its duties and responsibilities, creates sufficient state supervision
even though the
pricing decisions are unregulated.
The States actively and continually monitor the implementation of
portions of the
Multistate Settlement Agreement. See MSA VII-VIII. After requiring a
state court
consent decree, the Multistate Settlement Agreement also mandates state
courts to
maintain continuing jurisdiction over enforcement of disputes between the
States and the
tobacco companies. See MSA VII(a). Under the Multistate Settlement
Agreement, the
state courts may order compliance in the form of an Enforcement Order.
See MSA
VII(c)(3). If a State Attorney General believes a manufacturer has failed
to comply with
an Enforcement Order, it may seek an order for civil contempt or monetary
sanction to
force compliance. See MSA VII(c)(4). Furthermore, for a period of
seven years after
settlement, the Attorney General of a Settling State may inspect all non-
privileged
records of the tobacco companies, and will have access to interview
directors, officers
and employees upon reasonable belief of a violation of the Multistate
Settlement
Agreement. See MSA VII(g).
The Multistate Settlement Agreement also establishes a $50 million
fund to assist
the States in enforcing the Multistate Settlement Agreement. See MSA
VIII(c). This
fund is to be used
to supplement the States'
(1) enforcement and implementation of the
terms of [the Multistate
Settlement Agreement] and consent decrees, and
(2) investigation and litigation of
potential violations of laws with
respect to Tobacco Products.
Id.
This includes prosecution of non-signatories for those underlying "torts"
which initially
led the States to sue the major tobacco companies.
The largest responsibilities for the tobacco companies are financial.
The
Multistate Settlement Agreement details how and when the payments will be
made to the
settling states each year. See MSA IX. In addition, there is a limited
"most-favored nation" provision. In the event a State settles with a non-
signatory
tobacco company (NPM) on terms more favorable than the Multistate
Settlement
Agreement (a lower payment-per-pack amount), then all signatories will be
entitled to a
revision of the Multistate Settlement Agreement to at least match the new
agreement.
See MSA XVIII(b)(2). There are also significant ongoing restrictions
placed on the
tobacco manufacturers. They are prohibited from taking "any action,
directly or
indirectly, to target Youth within any Settling State in the advertising,
promotion, or
marketing of Tobacco Products," MSA III(a); they also agreed to refrain
from using
"any cartoon in the advertising, promoting, packaging or labeling of
Tobacco products."
MSA III(b).
Despite these factors, we are not convinced that the States satisfy
Midcal's "active
supervision" prong. This is because the States' supervision does not
reach the parts of
the Multistate Settlement Agreement that are the source of the antitrust
injury. It is the
conduct that violates the antitrust laws that states must "actively
supervise" in order for
Parker immunity to attach.
As we recognized in Norman's on the Waterfront, Inc. v. Wheatley, "an
arrangement sponsored by the state is not necessarily state action for the
purposes of the
antitrust laws." 444 F.2d 1011, 1017 (3d Cir. 1971) (citing Woods
Exploration &
Producing Co., Inc. v. Aluminum Co. of Am., 438 F.2d 1286, 1294 (5th Cir.
1971) for
the proposition that "it is not every governmental act that points a path
to an antitrust
shelter"). In Wheatley, we analyzed a series of Parker cases
demonstrating the state must
be actively involved in establishing the rules of the market as well as in
the
anticompetitive activity. Because "'states can neither authorize
individuals to perform
acts which violate the antitrust laws nor declare that such action is
lawful,'" many of
these cases of hybrid restraints turn on whether the state remains
involved in the actual
pricing by the regulated parties. Wheately, 444 F.2d at 1017 (quoting
Asheville Tobacco
Bd. of Trade, Inc. v. Fed. Trade Comm'n, 263 F.2d 502, 509 (4th Cir.
1959)).
Significantly, in Midcal, the State of California enacted a pricing
system for the
wine industry. Because the State did not exercise direct control over the
resulting prices
set by the private actors, and did not review the reasonableness of the
prices, the
Supreme Court found insufficient "active supervision" to qualify as state
action. Midcal,
445 U.S. at 105-06. Therefore, there was no immunity for setting
anticompetitive prices
under this system. Id.
In Midcal, the challenged "restraints" were state statutes on pricing
and resale
price maintenance. But there were several other ways in which the State
of California
regulated the wine industry. See, e.g., Cal. Bus & Prof. Stat. Ann.
25600-67 (West
1964). California actively supervised when, where, and to whom wine or
other
alcoholic beverages could be sold, the markings and signs on labels,
penalties for
underage use, and advertisements, including prohibiting advertising to
minors. This
"supervision" was not cited in Midcal because it did not constitute part
of the
anticompetitive restraint at issue. Under Parker, a comprehensive
regulatory scheme
would be immune from antitrust liability because the "State would
'displace unfettered
business freedom' with its own power," Midcal, 445 U.S. at 106. But the
Supreme Court
in Midcal was silent about the impact of other regulatory provisions in
the California
Code denoting, we believe, the absence of a comprehensive regulatory
scheme in this
sense.
Since Midcal, other courts have found that if a state creates or
sanctions a
monopoly or cartel through its sovereign powers, but does not regulate the
resulting
prices, the resulting anticompetitive behavior should not be granted
immunity. In
Wheately, we held that because the Virgin Islands Alcoholic Beverages Fair
Trade Law
did not grant the power to "approve, disapprove, or modify the prices
fixed by private
persons," the program could not meet the active supervision prong of
Midcal and was not
immune under Parker. In Asheville Tobacco, the Court of Appeals for the
Fourth Circuit
held that where a state statute authorized the creation of local tobacco
boards to regulate
tobacco sales at auctions, and where the states did not continue to
supervise the decisions
of these boards, the board's actions were not protected by Parker
immunity. This
principle has also been applied in state granted monopoly cases. In Gas
Light Co. of
Columbus v. Georgia Power Co., 440 F.2d 1135 (5th Cir. 1971), the Court of
Appeals
for the Fifth Circuit found a utility which had been given a monopoly by
the state was
entitled to Parker immunity only because its prices were regulated
extensively by the
state through a process of full adversarial hearings.
In each of these cases, the decision by the state to allow, or even
to create, an
anticompetitive scheme did not establish immunity. As a leading antitrust
treatise has
recognized, "A state may be free to determine for itself how much
competition is
desirable, provided that it substitutes adequate control wherever it has
substantially
weakened competition." Areeda & Hovenkamp, supra, at 221 (citing
Wheatley,
Asheville Tobacco, and Georgia Power). Under this jurisprudence, only
when the state
approves and actively supervises the results of the anticompetitive scheme
does Parker
immunity attach.
As noted, some provisions of the Multistate Settlement Agreement
actively
regulate the tobacco companies, like those imposing advertising
restrictions. But these
provisions have no effect on pricing or production and thus do not
regulate the challenged
anticompetitive conduct. Patrick, 486 U.S. at 101. In contrast, the
anticompetitive
restraints in the Multistate Settlement Agreement that permit the tobacco
companies to
maintain an output cartel are the Renegade Clause and, arguably, the
resulting Qualifying
Statutes.
The States here are actively involved in the maintenance of the
scheme, but they
lack oversight or authority over the tobacco manufacturers' prices and
production levels.
These decisions are left entirely to the private actors. Nothing in the
Multistate
Settlement Agreement or its Qualifying Statutes gives the States authority
to object if the
tobacco companies raise their prices. In fact, it appears these increases
have already
happened. As noted, the Majors have raised their prices sharply and
uniformly since the
implementation of the Multistate Settlement Agreement Ä according to
plaintiffs, by
50% since 1997. See Complaint at 36. These price increases have not
been monitored
or regulated by the States. The Multistate Settlement Agreement imposes
no restrictions
on pricing or provisions to temper the effects of the output cartel.
Under this set of
facts, there is insufficient evidence of active supervision of the
allegedly anticompetitive
restraints to satisfy this prong of Midcal.
Although the Multistate Settlement Agreement is the product of a
"clearly
articulated" state policy, because the States do not "actively supervise"
the
anticompetitive restraints, the participants are not entitled to Parker
immunity.
3.
The question of Parker immunity's applicability is a difficult one.
As noted, we
hold we must apply the Midcal test. Although the States satisfy Midcal's
"clear
articulation" prong, they fail the second prong requiring them to actively
supervise the
anticompetitive restraints causing injury. Because private participants
in state action
enjoy Parker immunity only to the extent the States enjoy immunity, the
defendants are
not shielded by Parker. Therefore, consistent with the Supreme Court's
treatment of
hybrid restraints, we hold defendants are not immune under the Parker
immunity
doctrine.
IV.
Constitutional Claims
In its brief, and again at oral argument, plaintiffs asked us to find
the Multistate
Settlement Agreement unconstitutional under the Commerce Clause or the
Compact
Clause of the United States Constitution. But plaintiffs did not allege
constitutional
violations in their amended complaint, nor did the District Court address
them.
Therefore, these claims will not be addressed on appeal. Mahone v.
Addicks Utility
Dist., 836 F.2d 921, 935 (5th Cir. 1988) ("It is black-letter law that
'[a] motion to dismiss
for failure to state a claim under Federal Rule of Civil Procedure
12(b)(6) is to be
evaluated only on the pleadings.'") (quoting O'Quinn v. Manuel, 773 F.2d
605, 608 (5th
Cir.1985)); N.A.M.I. v. Essex County Bd. of Freeholders, 91 F. Supp. 2d 781,
787 n.7
(D.N.J. 2000) ("This Court need not consider claims that have not been
pleaded in the
complaint."); 5A Charles Alan Wright & Arthur R. Miller, Federal Practice
and
Procedure 1356 (1990). "'Absent exceptional circumstances, an issue not
raised in the
district court will not be heard on appeal.'" Walton v. Mental Health
Ass'n of
Southeastern Pa., 168 F.3d 661, 671 (3d Cir. 1999) (quoting Altman v.
Altman, 653 F.2d
755, 758 (3d Cir.1981)). When exceptional circumstances exist or to avoid
"manifest
injustice," issues not previously raised may be heard to protect the
public interest. See id.
No such interests are present. Although the Cato Institute, amicus curiae
for plaintiffs,
argues the constitutional claims, "new issues raised by an amicus are not
properly before
the court" in the absence of exceptional circumstances. General Eng'g
Corp. v. Virgin
Islands Water and Power Auth. Caribbean Energy Co., Inc., 805 F.2d 88, 92
(3d Cir.
1986) (citing United Parcel Serv. v. Mitchell, 451 U.S. 56, 60 n.2
(1981)). These
constitutional claims are not properly before us.
V.
Conclusion
The Multistate Settlement Agreement creates novel issues because of
the
uniqueness of the instrument Ä involving forty-six states and over 98% of
an industry.
Although plaintiffs have properly pleaded an antitrust injury, the right
to petition the
government is paramount. Therefore, we hold defendants immune from
antitrust liability
under the Noerr-Pennington doctrine. But we find no immunity under the
Parker
doctrine. We will not address the constitutional issues.
We will affirm the judgment of the District Court.
TO THE CLERK:
Please file the foregoing opinion.
/s/ Anthony J. Scirica
Circuit Judge