Puff Of Collusion

Cigarette companies and state regulators have discovered it pays to stick together.
by | October 2005

Ever since the states made their settlement with Big Tobacco in 1998, there have been reasons to wonder about the propriety of the deal. Trial lawyers walked away unbelievably rich--their take added up to $13 billion, by conservative estimates. Then, of course, there's the issue of how the states spent their $200 billion windfall. They were expected to put most of it into smoking cessation programs and public health. But the majority of states have felt free to use the funds for plugging budgetary gaps unrelated to any health issue at all.

Now, critics are making a new argument: that the states and Big Tobacco have effectively formed a cartel with one another. They may be right.

In a number of ways, the states and major cigarette manufacturers are joined at the hip. State laws implementing the 1998 agreement were written expressly to protect the four biggest cigarette manufacturers- -Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard-- against competition from smaller upstart companies. As those laws came to be challenged in court, the original adversaries in the tobacco dispute--attorneys general and tobacco industry lawyers--found themselves on the same side.

"States effectively became the largest shareholder of the big tobacco companies," says Hans Bader, an attorney with the Competitive Enterprise Institute. "States have an incentive to be Big Tobacco's business partners because of the fact that they're getting so much money from them."

In August, Bader filed suit in federal court, claiming that the four companies and the states have established "one of the most effective and destructive cartels in the history of the nation." Bader's clients are three small cigarette manufacturers--you might call them Little Tobacco. They charge that state laws practically force small companies to join the settlement, even if they never engaged in the same sins Big Tobacco admitted to. Little Tobacco companies that don't join are legally bound to pay a portion of their profits into escrow accounts. Effectively, Bader argues, that's a check against their underselling the big boys.

Bader's quest to kill the settlement may be a longshot--similar cases, using a different legal reasoning, have failed. But he does have a point. Seven years on, it's clear that the tobacco settlement did more than create a cash windfall for the states. It created a complex regulatory regime governing sales, marketing and pricing of a major product.