Star Scientific, Inc. v. Beales

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

STAR SCIENTIFIC, INCORPORATED, a 

Delaware corporation,

Plaintiff-Appellant,

v.

RANDOLPH A. BEALES, in his official

capacity as Attorney General,

Defendant-Appellee.

DKT LIBERTY PROJECT; ALABAMA;

ALASKA; ARIZONA; ARKANSAS;

CALIFORNIA; CONNECTICUT; DELAWARE;

THE DISTRICT OF COLUMBIA; GEORGIA;

HAWAII; IDAHO; ILLINOIS; INDIANA;

IOWA; KANSAS; KENTUCKY; LOUISIANA;



MAINE; MARYLAND; MASSACHUSETTS;

MICHIGAN; MINNESOTA; MISSOURI; No. 01-1502

MONTANA; NEBRASKA; NEVADA; NEW

HAMPSHIRE; NEW JERSEY; NEW MEXICO;

NEW YORK; NORTH CAROLINA; NORTH

DAKOTA; NORTHERN MARIANA ISLANDS;

OHIO; OKLAHOMA; OREGON;

PENNSYLVANIA; PUERTO RICO; SOUTH

CAROLINA; SOUTH DAKOTA; TENNESSEE;

UTAH; VERMONT; WASHINGTON; WEST

VIRGINIA; WISCONSIN; WYOMING;

AMERICAN LEGACY FOUNDATION;

AMERICAN CANCER SOCIETY; AMERICAN

HEART ASSOCIATION; AMERICAN LUNG

ASSOCIATION; NATIONAL CENTER FOR

TOBACCO-FREE KIDS,

Amici Curiae. 

2 STAR SCIENTIFIC, INC. v. BEALES

Appeal from the United States District Court

for the Eastern District of Virginia, at Richmond.

James R. Spencer, District Judge.

(CA-00-835-3)

Argued: November 1, 2001

Decided: January 22, 2002

Before NIEMEYER, WILLIAMS, and GREGORY,*

Circuit Judges.

Affirmed by published opinion. Judge Niemeyer wrote the opinion,

in which Judge Williams joined.

COUNSEL

ARGUED: Charles Fried, Cambridge, Massachusetts, for Appellant.

Gregory E. Lucyk, Senior Assistant Attorney General, OFFICE OF

THE ATTORNEY GENERAL, Richmond, Virginia, for Appellee.

ON BRIEF: Patrick M. McSweeney, Kathleen Moriarty Mueller,

John L. Marshall, Jr., MCSWEENEY & CRUMP, P.C., Richmond,

Virginia; James F. Neal, James G. Thomas, W. David Bridgers,

NEAL & HARWELL, P.L.C., Nashville, Tennessee, for Appellant.

Randolph A. Beales, Attorney General of Virginia, Francis S. Fergu-

son, Chief Deputy Attorney General, J. Steven Sheppard, III, Senior

Assistant Attorney General, David B. Irvin, Senior Assistant Attorney

General, Sydney E. Rab, Assistant Attorney General, OFFICE OF

THE ATTORNEY GENERAL, Richmond, Virginia, for Appellee.

William M. Hohengarten, Julie M. Carpenter, Janis C. Kestenbaum,

JENNER & BLOCK, L.L.C., Washington, D.C., for Amicus Curiae

DKT Liberty Project. Bill Lockyer, Attorney General of the State of

*Judge Gregory heard oral argument in this case but has since recused

himself. The decision is filed by a quorum of the panel pursuant to 28

U.S.C. § 46(d).

STAR SCIENTIFIC, INC. v. BEALES 3

California, Richard M. Frank, Chief Assistant Attorney General, Den-

nis Eckhart, Senior Assistant Attorney General, Karen Leaf, Deputy

Attorney General, OFFICE OF THE ATTORNEY GENERAL, Sac-

ramento, California, for Amici Curiae States. Ellen J. Vargyas,

AMERICAN LEGACY FOUNDATION, Washington, D.C.; Jona-

than E. Nuechterlein, Jonathan J. Frankel, Mary E. Kostel, C. Colin

Rushing, WILMER, CUTLER & PICKERING, Washington, D.C.,

for Amici Curiae Foundation, et al.

OPINION

NIEMEYER, Circuit Judge:

Star Scientific, Inc., a cigarette manufacturer, challenges the consti-

tutionality of the Master Settlement Agreement of November 16,

1998, between the Commonwealth of Virginia — as well as 45 other

States — and the major tobacco manufacturers. It also challenges the

constitutionality of legislation enacted by the Commonwealth of Vir-

ginia to qualify it to receive payments under the Master Settlement

Agreement.

To settle the States’ lawsuits against the major tobacco manufactur-

ers arising from their development and marketing of cigarettes, Vir-

ginia and the 45 other States, as well as the District of Columbia and

5 territories, entered into a Master Settlement Agreement with Phillip

Morris, Inc., R.J. Reynolds Tobacco Company, Brown & Williamson

Tobacco Corporation, and Lorillard Tobacco Company. The Master

Settlement Agreement calls for the tobacco manufacturers to pay the

States, in exchange for releases from liability for past and future dam-

ages, approximately $200 billion over the next 25 years, including

approximately $4.1 billion to the Commonwealth of Virginia.

Star Scientific, which contends that it has not engaged in the mis-

conduct attributed to the major tobacco manufacturers and was not

sued by any of the States, asserts that it will be unjustly burdened by

the requirements of the Master Settlement Agreement and the legisla-

tion that Virginia enacted pursuant to the agreement. It therefore com-

menced this action to challenge the constitutionality of both the

4 STAR SCIENTIFIC, INC. v. BEALES

settlement agreement and the statute. The district court granted Vir-

ginia’s motion to dismiss the complaint under Federal Rule of Civil

Procedure 12(b)(6).

On appeal, Star Scientific contends that the statute enacted pursu-

ant to the Master Settlement Agreement, Va. Code Ann. §§ 3.1-336.1

& 3.1-336.2, violates its rights under the Due Process, Equal Protec-

tion, and Commerce Clauses of the United States Constitution. It also

contends that the Master Settlement Agreement itself violates the

Compact Clause.

For the reasons that follow, we affirm.

I

In 1994, the Attorneys General of Mississippi, Minnesota, West

Virginia, and Massachusetts filed lawsuits in their respective State

courts against the major tobacco manufacturers, Phillip Morris, R.J.

Reynolds, Brown & Williamson, and Lorillard, seeking reimburse-

ment for healthcare expenditures made by those states on behalf of

citizens suffering from tobacco-related diseases. By 1996, 15 addi-

tional states had filed similar suits. Although the States’ respective

complaints varied, they shared a common theme, alleging that the

major tobacco companies (1) had misled and deceived the public by

suppressing internal research about the risks and addictive properties

of cigarettes, (2) had committed fraud and had engaged in racketeer-

ing activity through their efforts to disseminate false statements about

the addictive nature of nicotine and the adverse health effects of

smoking, and (3) had violated antitrust laws by, among other things,

conspiring to suppress the development and marketing of safer ciga-

rettes.

By 1997, after several more States had filed similar lawsuits, the

major tobacco manufacturers negotiated with a group of State Attor-

neys General to reach a comprehensive nationwide settlement of the

claims. The settlement, which was known as "the Tobacco Resolu-

tion," was contingent on congressional approval. Accordingly, federal

legislation to implement the Tobacco Resolution was introduced in

the Senate in November 1997. The major tobacco manufacturers,

however, withdrew their support of this legislation when it appeared

STAR SCIENTIFIC, INC. v. BEALES 5

that the legislation would require them to pay more money and accept

greater regulatory and marketing restrictions than they had agreed to

in the Tobacco Resolution. Thus, the legislation was never enacted.

In the meantime, the major tobacco companies reached individual

settlements with Mississippi, Florida, Texas, and Minnesota. And,

upon failure of the Tobacco Resolution, several other State Attorneys

General initiated negotiations with two of the tobacco companies on

a new multi-state settlement. On November 16, 1998, a group of State

Attorneys General and the major tobacco manufacturers reached an

agreement called the "Master Settlement Agreement." This agreement

permitted nonsettling States to participate if they acted within seven

days.

The Commonwealth of Virginia, which had not participated in the

original settlement discussions, decided to join the Master Settlement

Agreement and, for that purpose, commenced an action in State court

against Brown & Williamson, Liggett Group, Inc., Lorillard, Phillip

Morris, R.J. Reynolds, and United States Tobacco Company on

December 23, 1998. In its complaint, Virginia alleged that it spends

millions of dollars each year to pay healthcare costs caused by

tobacco-related diseases. It contended that the tobacco companies

misrepresented the health effects of tobacco while simultaneously

suppressing research revealing the dangers of tobacco products. The

complaint also asserted that the defendants acted in concert to sup-

press research and preserve their markets. Finally, it alleged that the

companies specifically targeted youth in their advertisements and

marketing campaigns "to induce such persons to start using tobacco

products and increase [the manufacturers’] sales of tobacco products."

The complaint alleged violations of the Virginia Antitrust Act, the

Virginia Consumer Protection Act, and claims for unjust enrichment

and restitution, and sought declaratory relief, injunctive relief, restitu-

tion, damages, costs, and attorneys fees.

After filing its complaint, Virginia, along with the other 45 states

that had not already settled with the major tobacco companies, the

District of Columbia, and 5 territories, agreed to sign on to the Master

Settlement Agreement. Virginia’s litigation in State court was accord-

ingly terminated by a consent decree and final judgment, dated Febru-

ary 23, 1999, providing that "the [Master Settlement Agreement] set

6 STAR SCIENTIFIC, INC. v. BEALES

forth therein, and the establishment of the escrow provided for therein

are hereby approved in all respects, and all claims are hereby dis-

missed with prejudice as provided therein." Star Scientific was not

named a defendant in that action and did not participate in the Master

Settlement Agreement.

Under the Master Settlement Agreement, the States released the

participating tobacco manufacturers from all claims for past conduct

based on the sale, use, and marketing of tobacco products. They also

released future monetary claims arising out of exposure to tobacco

products, including future claims for reimbursement of healthcare

costs allegedly associated with the use of or exposure to tobacco

products.

In return, the participating tobacco manufacturers agreed to con-

duct restrictions and to annual payments to the States. Among the

conduct restrictions were agreements (1) to refrain from targeting

youth in the advertising and marketing of tobacco products; (2) to

refrain from using cartoon characters to promote cigarette sales; (3)

to limit tobacco brand-name sponsorships of athletic and other events;

(4) to refrain from lobbying Congress to preempt or diminish the

States’ rights under the Master Settlement Agreement or to advocate

that settlement proceeds under the Master Settlement Agreement be

used for programs other than those related to tobacco or health; (5)

to dissolve the Tobacco Institute, the Council for Tobacco Research,

and the Center for Indoor Air Research; and (6) to refrain from sup-

pressing research relating to smoking and health and misrepresenting

the dangers of using tobacco products. The participating manufactur-

ers also agreed to make annual payments "in perpetuity" for the dam-

ages caused to the States. It is estimated that through these payments,

the States will receive more than $200 billion through 2025, of which

Virginia will receive 2.045% or approximately $4.1 billion. Finally,

the participating manufacturers agreed to pay the States’ costs and

attorneys fees.

The Master Settlement Agreement permits other tobacco compa-

nies to participate in the benefits of the agreement as "Subsequent

Participating Manufacturers." Subsequent Participating Manufacturers

are not required to make any payments under the Master Settlement

Agreement unless their share of the national cigarette market exceeds

STAR SCIENTIFIC, INC. v. BEALES 7

the greater of their 1998 market share or 125% of their 1997 market

share. Any payments that would be required would be tied to the Sub-

sequent Participating Manufacturers’ market shares.

Because of a concern that manufacturers participating in the Master

Settlement Agreement might suffer a competitive disadvantage when

compared to nonparticipating manufacturers and that this disadvan-

tage could affect the participating manufacturers’ ability to make the

settlement payments, the Master Settlement Agreement includes pro-

visions to protect the market shares and profitability of the participat-

ing manufacturers. Thus, one provision of the Master Settlement

Agreement allows for participating manufacturers to reduce their

damage payments if they lose market share during a given year, as

determined by the "Firm," a group of economic consultants desig-

nated under procedures established in the Master Settlement Agree-

ment. In addition, the Master Settlement Agreement requires the

States to enact a qualifying statute that "effectively and fully neutral-

izes the cost disadvantages that the Participating Manufacturers expe-

rience vis-a-vis Non-Participating Manufacturers within such Settling

State[s] as a result of the provisions of this Agreement." If a State

does not enact and "diligently enforce[ ]" a qualifying statute, it can

lose future payments under the Master Settlement Agreement.

Virginia enacted a qualifying statute in March 1999 in a form sub-

stantially similar to the model qualifying statute included in the Mas-

ter Settlement Agreement. See Va. Code Ann. §§ 3.1-336.1 & 3.1-

336.2. Virginia’s qualifying statute provides that any tobacco manu-

facturer "selling cigarettes to consumers within the Commonwealth,"

whether directly or indirectly, shall (1) become a participating manu-

facturer and sign the Master Settlement Agreement, or (2) place into

an escrow fund an amount determined by the number of cigarettes

that the nonparticipating manufacturer sells in Virginia. The amount

ranges from slightly less than one cent per cigarette in 1999 to almost

two cents per cigarette in the year 2007 and thereafter, adjusted for

inflation. Id. § 3.1-336.2.A.2. Any nonparticipating tobacco manufac-

turer failing to comply with the duties imposed by the qualifying stat-

ute becomes subject to a civil fine and ultimately to loss of the

privilege of selling cigarettes to consumers in Virginia. Id. § 3.1-

336.2.C.

8 STAR SCIENTIFIC, INC. v. BEALES

The escrow fund established by the statute is to be used to pay any

judgment or settlement in a lawsuit brought by Virginia to recover on

a claim (of the kind released in the Master Settlement Agreement)

against a nonparticipating manufacturer. Otherwise, the escrow funds

are returned to the nonparticipating manufacturer either annually to

the extent that they exceed what that manufacturer would have paid

had it participated under the Master Settlement Agreement or com-

pletely after 25 years. In the interim, all interest earned on the escrow

account is paid to the manufacturer. Va. Code Ann. § 3.1-336.2.B.

Star Scientific, a "technology-oriented" tobacco company that

focuses on developing tobacco-processing technology to reduce cer-

tain cancer-causing toxins in tobacco leaf and tobacco smoke, began

operations in 1990. It did not participate in the Master Settlement

Agreement because of the financial burden of the required payments.

The company estimated that under the agreement, it would have to

pay approximately $19.8 million during 2000 and more thereafter. It

asserts that it never engaged in the misconduct alleged against the

major manufacturers by the States, and it was never sued by the

States. Accordingly, Star Scientific elected — albeit under duress —

to comport with the requirements of the qualifying statutes. It depos-

ited approximately $11.6 million in escrow in April 2000, approxi-

mately $409,000 of which was attributable to the sale of cigarettes in

Virginia under Virginia’s qualifying statute.

Because of the substantial payments required by the States’ various

qualifying statutes, Star Scientific commenced this action, seeking to

have Virginia’s qualifying statute declared unconstitutional and

enjoined. It alleged in its complaint that the statute deprives Star Sci-

entific of its rights under the Due Process, Equal Protection, Com-

merce, and Takings Clauses of the United States Constitution. It also

challenged the Master Settlement Agreement, arguing that the agree-

ment is an unconstitutional interstate compact because it has not

received congressional authorization, as required by the Compact

Clause of Article I, § 10 of the Constitution.

On Virginia’s motion, made under Federal Rule of Civil Procedure

12(b)(6), the district court dismissed Star Scientific’s complaint. The

court ruled that Star Scientific lacked standing to challenge the Master

Settlement Agreement under the Compact Clause because Star Scien-

STAR SCIENTIFIC, INC. v. BEALES 9

tific could not allege an injury that was "concrete and particularized,"

nor could it show any legal prejudice caused by the Master Settlement

Agreement. The court recognized that Star Scientific had standing to

challenge Virginia’s qualifying statute, but it dismissed all of Star

Scientific’s constitutional challenges to the statute for failure to state

a claim on which relief could be granted.

From the district court’s judgment dismissing the complaint, Star

Scientific filed this appeal. Star Scientific did not, however, appeal

the district court’s ruling on its Takings Clause claim.

II

Star Scientific contends first that Virginia’s qualifying statute —

Va. Code Ann. §§ 3.1-336.1 & 3.1-336.2 — violates its rights under

the Due Process Clause. It argues that the statute unconstitutionally

aims effectively to neutralize the economic impact of the Master Set-

tlement Agreement on the participating manufacturers by placing

equivalent financial burdens on the nonparticipating manufacturers,

who are competitors of the participating manufacturers. The statute

accomplishes this end, they argue, by depriving nonparticipating com-

petitors, such as Star Scientific, of their property for 25 years either

to force them to sign the Master Settlement Agreement or to impose

on them a competitive disadvantage that they otherwise would not

have suffered because they engaged in no wrongdoing.

Star Scientific focuses on two legislative means which it asserts are

illegal. First, it contends that the State deprives Star Scientific of its

property without due process of law by forcing it to pay its funds into

an escrow account for 25 years, citing to Eastern Enterprises v. Apfel,

524 U.S. 498, 547 (1988) (Kennedy, J., concurring in judgment and

dissenting in part); id. at 556-57 (Breyer, J., dissenting); North Ga.

Finishing, Inc. v. Di-Chem, Inc., 419 U.S. 601, 606 (1975). Second,

it contends that Virginia seeks to compel it to sign an agreement set-

tling a case to which it was not a party and for which it could not be

made a party. Star Scientific contends that in an effort to force non-

signing parties to join the Master Settlement Agreement, Virginia dis-

advantages nonparticipating manufacturers such as Star Scientific

because their payments in escrow are not tax deductible. It asserts that

this purpose is impermissible because it is unconstitutional for "an

10 STAR SCIENTIFIC, INC. v. BEALES

agent of the State to pursue a course of action whose objective is to

penalize a person’s reliance on his legal rights" (quoting United States

v. Goodwin, 457 U.S. 368, 372 n.4 (1982) (internal quotation marks

and citation omitted)).

In response, Virginia argues that the qualifying statute is designed

to protect the physical and fiscal health and welfare of the Common-

wealth and thus is a constitutionally sound exercise of the State’s

police powers. The Commonwealth asserts that the statute serves the

expressly stated legitimate purpose of providing a source of recovery

for the smoking-related healthcare costs that it will inevitably be

forced to bear. It concludes that, under rational basis review, the exis-

tence of this legitimate purpose ends the due process inquiry. The dis-

trict court agreed with the Commonwealth and dismissed Star

Scientific’s due process claim.

"In reviewing a district court’s order dismissing a complaint under

Federal Rule of Civil Procedure 12(b)(6) for plaintiff’s ‘failure to

state a claim upon which relief can be granted,’ we determine de novo

whether the complaint, under the facts alleged and under any facts

that could be proved in support of the complaint, is legally sufficient."

Eastern Shore Mkts., Inc. v. J.D. Assoc. Ltd. Partnership, 213 F.3d

175, 180 (4th Cir. 2000).

The Due Process Clause includes a substantive component that

provides some protection against economic legislation interfering

with property interests. See, e.g., Concrete Pipe & Prods. of Cal., Inc.

v. Constr. Laborers Pension Trust for So. Cal., 508 U.S. 602, 636-37

(1993); Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 14-15

(1976). This protection, however, is severely limited. The Supreme

Court has long recognized that "[t]he day is gone when this Court

uses the Due Process Clause of the Fourteenth Amendment to strike

down state laws, regulatory of business and industry conditions,

because they may be unwise, improvident, or out of harmony with a

particular school of thought." Williamson v. Lee Optical of Okla., 348

U.S. 483, 488 (1955); see also Ferguson v. Skrupa, 372 U.S. 726, 730

(1963) ("We have returned to the original constitutional proposition

that courts do not substitute their social and economic beliefs for the

judgment of legislative bodies, who are elected to pass laws").

STAR SCIENTIFIC, INC. v. BEALES 11

To comport with the limited scope of substantive due process pro-

tection, economic legislation need only be rationally related to a legit-

imate government interest. See, e.g., Concrete Pipe, 508 U.S. at 637;

Duke Power Co. v. Carolina Environmental Study Group, 438 U.S.

59, 84 (1978); Holland v. Keenan Trucking Co., 102 F.3d 736, 740

(4th Cir. 1996) ("If a piece of economic legislation ‘is supported by

a legitimate legislative purpose furthered by [a] rational means, judg-

ments about the wisdom of such legislation remain within the exclu-

sive province of the legislative and executive branches’") (quoting

Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729

(1984)). Under rational basis review, therefore, "there is no need for

mathematical precision in the fit between justification and means,"

Concrete Pipe, 508 U.S. at 639, and "the law need not be in every

respect logically consistent with its aims to be constitutional. It is

enough that there is an evil at hand for correction, and that it might

be thought that the particular legislative measure was a rational way

to correct it." Lee Optical, 348 U.S. at 487-88. Moreover, economic

legislation "come[s] to the Court with a presumption of constitutional-

ity, and . . . the burden is on one complaining of a due process viola-

tion to establish that the legislature has acted in an arbitrary and

irrational way." Usery, 428 U.S. at 15. Thus, "[i]t is difficult to exag-

gerate the burden" that a party must overcome to demonstrate that

economic legislation fails rational basis review. Holland, 102 F.3d at

740.

The courts defer to rational legislative decisionmaking with respect

to economic legislation because the legislatures are better equipped to

consider and evaluate the "profound and far reaching consequences"

that such legislation may have. Duke Power Co., 438 U.S. at 83.

Thus, the Supreme Court has admonished that "it is for the legislature,

not the courts, to balance the advantages and disadvantages" of eco-

nomic legislation. Lee Optical, 348 U.S. at 487. This deference is

appropriate because the people may "resort to the polls" to protect

themselves against abuses by the legislature. Id. at 488 (quoting Munn

v. Illinois, 94 U.S. 113, 134 (1876)).

Now applying this highly deferential standard, we determine

whether Star Scientific has demonstrated that the Virginia General

Assembly "acted in an arbitrary and irrational way" when it passed its

qualifying statute. See Usery, 428 U.S. at 15.

12 STAR SCIENTIFIC, INC. v. BEALES

The qualifying statute at issue — Va. Code Ann. §§ 3.1-336.1 &

3.1-336.2 — was passed with a fully articulated purpose. In the pre-

amble to the legislation, the Virginia General Assembly stated that

cigarette smoking "presents serious public health concerns" which in

turn present "serious financial concerns for the Commonwealth." It

stated that it was therefore adopting the policy that "financial burdens

imposed on the Commonwealth by cigarette smoking be borne by

tobacco product manufacturers rather than by the Commonwealth to

the extent that such manufacturers either determine to enter into a set-

tlement with the State or be found culpable by the courts." Against

these background facts and the policy announced, the Virginia Gen-

eral Assembly articulated the purpose of the qualifying statute, as fol-

lows:

Whereas, it would be contrary to the policy of the Common-

wealth if tobacco product manufacturers who determine not

to enter into such a settlement could use a resulting cost

advantage to derive large, short-term profits in the years

before liability may arise without ensuring that the Com-

monwealth will have an eventual source of recovery from

them if they are proven to have acted culpably. It is thus in

the interest of the Commonwealth to require that such man-

ufacturers establish a reserve fund to guarantee a source of

compensation and to prevent such manufacturers from

deriving large, short-term profits and then becoming

judgment-proof before liability may arise.

In short, the statute’s stated purpose is to ensure that Virginia will be

able to recover healthcare costs from cigarette manufacturers regard-

less of whether the manufacturer has signed on to the Master Settle-

ment Agreement. Giving effect to this purpose falls within the State’s

police power to promote the public health of the State and "do[es] not

run afoul of some specific federal constitutional prohibition, or of

some valid federal law." Ferguson, 372 U.S. at 730-31 (quoting Lin-

coln Fed. Labor Union v. Northwestern Iron & Metal Co., 335 U.S.

525, 536 (1949)). Because the qualifying statute unquestionably has

a legitimate purpose, the only viable remaining question is whether

the statute is rationally related to furthering this purpose.

The statute requires that tobacco manufacturers who have not

signed the Master Settlement Agreement place funds in escrow in

STAR SCIENTIFIC, INC. v. BEALES 13

proportion to the number of cigarettes that they sell in Virginia,

directly or through intermediaries. The funds are held to secure any

claim by the Commonwealth against the manufacturer for health-

related claims arising from cigarette smoking. While we recognize the

financial burden that such payments might create for any given ciga-

rette manufacturer — a burden represented by the loss of use of sig-

nificant amounts of money for 25 years — we note that the State

surely could properly accomplish the same end by enacting a more

financially burdensome form of legislation, such as an act imposing

a tax on cigarette manufacturers but giving a tax credit to those who

sign the Master Settlement Agreement. Under the escrow arrange-

ment, the manufacturer receives interest currently on the funds in the

escrow account and the full principal not used to pay judgments after

25 years. This mechanism is rationally related to the stated purpose

of the statute, and beyond that we must leave the weighing of interests

and the wisdom of the legislation to the legislature. See Ferguson,

372 U.S. at 731 (recognizing the "social utility" of debt adjusting, but

nonetheless upholding a law that allowed only lawyers to engage in

debt adjusting and, therefore, put out of business nonlawyer debt

adjusters). Stated differently, because the creation of the escrow

account is rationally related to Virginia’s legitimate purpose of ensur-

ing that it can recover future judgments against nonparticipating

tobacco manufacturers, we defer to the legislature’s judgment that the

qualifying statute is the best way of dealing with the possibility of

culpable manufacturers becoming judgment proof in the future. See

Duke Power, 438 U.S. at 83-84 (noting that the fact that the legisla-

tion has "profound and far-reaching consequences . . . provides all the

more reason for this Court to defer to the congressional judgment

unless it is demonstrably arbitrary or irrational").

Star Scientific’s challenge to the qualifying statute is based on a

rejection of the statute’s articulated purpose. It would rather infer that

the statute was enacted to coerce cigarette manufacturers to sign on

to the Master Settlement Agreement. This argument ignores the fact

that even if we were to reject the State’s articulated purpose for enact-

ing the statute, we would then need only determine that the legislation

has some conceivable purpose that is not prohibited by the Constitu-

tion. See Lee Optical, 348 U.S. at 487 (considering various purposes

on which the legislature "might" have based the legislation at issue);

see also Minnesota v. Cloverleaf Creamery Co., 449 U.S. 456, 463

14 STAR SCIENTIFIC, INC. v. BEALES

n.7 (1981) (noting that, in equal protection analysis, the "Court will

assume that the objectives articulated by the legislature are actual pur-

poses of the statute, unless an examination of the circumstances

forces us to conclude that they ‘could not have been a goal of the leg-

islation’" (quoting Weinberger v. Wiesenfeld, 420 U.S. 636, 648 n.16

(1975))). Obviously, one of the conceivable purposes of the statute is

the legitimate purpose stated by Virginia and to which the means

adopted rationally relates. Accordingly, we agree with the district

court that the qualifying statute does not violate the Due Process

Clause of the United States Constitution.

III

Star Scientific next contends that Virginia’s qualifying statute vio-

lates its rights under the Equal Protection Clause. It argues that the

statute treats tobacco companies differently based on whether or not

they joined the Master Settlement Agreement, and that this differen-

tial treatment is not rationally related to a legitimate government pur-

pose. Star Scientific asserts first that the statute’s purpose is to protect

the market share of the four largest cigarette manufacturers and that

this protectionist purpose is illegitimate. Second, it argues that even

if the purpose of the statute is to ensure a source of recovery for

health care costs imposed on Virginia by cigarette smoking, this pur-

pose is not rationally fulfilled by imposing the requirements of the

qualifying statute only on nonparticipating members.

In response, Virginia contends that the different classifications of

cigarette manufacturers under the qualifying statute are rationally

related to the overall purpose of providing a source of recovery for

healthcare costs. Just as participating manufacturers are required to

make payments under the Master Settlement Agreement for past and

future damages, nonparticipating members are required to put money

into escrow which is held only for assuring that the nonparticipating

manufacturers’ future liability is satisfied. In either case, Virginia’s

future costs resulting from cigarette smoking are placed on the

tobacco manufacturers who sell cigarettes in the State.

Like the analysis used in evaluating the constitutionality of eco-

nomic legislation under the Due Process Clause, an analysis of eco-

nomic legislation under the Equal Protection Clause is a deferential

STAR SCIENTIFIC, INC. v. BEALES 15

one. "In areas of social and economic policy, a statutory classification

that neither proceeds along suspect lines nor infringes fundamental

constitutional rights must be upheld against equal protection chal-

lenge if there is any reasonably conceivable state of facts that could

provide a rational basis for the classification." FCC v. Beach Commu-

nications, Inc., 508 U.S. 307, 313 (1993). Stated otherwise, a statu-

tory classification that neither employs inherently suspect distinctions

nor burdens the exercise of a fundamental constitutional right will be

upheld if the classification is rationally related to a legitimate state

interest. See, e.g., Cloverleaf Creamery, 449 U.S. at 461; City of New

Orleans v. Dukes, 427 U.S. 297, 303 (1976). This rational basis

review is "a paradigm of judicial restraint." Beach Communications,

508 U.S. at 314. Thus, "those attacking the rationality of the legisla-

tive classification have the burden ‘to negative every conceivable

basis which might support it.’ Moreover, . . . it is entirely irrelevant

for constitutional purposes whether the conceived reason for the chal-

lenged distinction actually motivated the legislature." Dukes, 427 U.S.

at 314 (internal citations omitted) (quoting Lehnhausen v. Lake Shore

Auto Parts Co., 410 U.S. 356, 364 (1973)).

Turning to whether Virginia’s qualifying statute violates the Equal

Protection Clause, we conclude that Star Scientific has not met its

very difficult burden. Although it is true that the qualifying statute

creates distinctions among tobacco manufacturers based on whether

a manufacturer signs the Master Settlement Agreement, the distinc-

tions are rationally related to Virginia’s legitimate purpose of ensur-

ing a source of recovery from all manufacturers for Virginia’s future

costs related to cigarette smoking.

For those manufacturers sued by Virginia for wrongdoing, the

Master Settlement Agreement mandates not only strict conduct

restrictions but also nonrefundable payments in perpetuity. Manufac-

turers joining the agreement as Subsequent Participating Manufactur-

ers — those manufacturers who were not sued for wrongdoing —

while not required to make the same payments as the original partici-

pating manufacturers, nevertheless agree to be bound by conduct

restrictions. In contrast, nonparticipating manufacturers are subject to

no conduct restrictions, and their payments in escrow last for only 25

years. In addition, these manufacturers receive interest on the funds

while they are held in escrow, and the principal is fully refundable if

16 STAR SCIENTIFIC, INC. v. BEALES

the money is not needed to pay a judgment in a tobacco-related law-

suit. Thus, the refundability of the payments is directly related to the

nonparticipating manufacturers’ future liability for tobacco-related

losses.

Thus, the distinctions between manufacturers signing the Master

Settlement Agreement and manufacturers not signing are rationally

related to their status vel non as defendants, their willingness to agree

to conduct limitations, and Virginia’s need to ensure a source of

recovery for all future tobacco-smoking related healthcare costs. All

manufacturers thus bear responsibility in differing manners and

degrees for limiting the State’s future liability for these costs. Those

manufacturers who have not admitted to any wrongdoing and who do

not wish to limit their future conduct retain the ability to manufacture

and market their product in the manner they pursued before, but they

essentially provide a surety bond against future liability for tobacco-

smoking related healthcare costs.

Under the rational basis review applicable here, we conclude that

Virginia’s qualifying statute is constitutional. "States are accorded

wide latitude in the regulation of their local economies under their

police powers, and rational distinctions may be made with substan-

tially less than mathematical exactitude." Dukes, 427 U.S. at 303; see

also Kimel v. Florida Bd. of Regents, 528 U.S. 62, 83 (2000) (holding

that, under rational basis review, the Equal Protection Clause does not

require States "to match age distinctions and the legitimate interests

they serve with razorlike precision"). Even though the tobacco manu-

facturers are treated differently, the differences in treatment are

related to their different circumstances, allowing the State to accom-

plish its legitimate purposes. "[W]e will not overturn such a statute

unless the varying treatment of different groups or persons is so unre-

lated to the achievement of any combination of legitimate purpose

that we can only conclude that the legislature’s actions were irratio-

nal." Vance v. Bradley, 440 U.S. 93, 97 (1979). This deference that

we give Virginia’s legislative decisions recognizes that "[e]vils in the

same field may be of different dimensions and proportions, requiring

different remedies. Or so the legislature may think. Or the reform may

take one step at a time, addressing itself to the phase of the problem

which seems most acute to the legislative mind." Lee Optical, 348

U.S. at 489 (internal citations omitted).

STAR SCIENTIFIC, INC. v. BEALES 17

Star Scientific acknowledges that providing a source of recovery

for the possible harm caused to the State treasury by cigarettes is a

legitimate state purpose. It argues, however, that the distinction in

Virginia’s qualifying statute between manufacturers who signed the

Master Settlement Agreement and those who did not is not rationally

related to this purpose or any other legitimate State purpose. It gives

several examples.

First, Star Scientific argues that nonparticipating manufacturers are

actually treated more harshly under the qualifying statute than are par-

ticipating manufacturers because nonparticipating manufacturers are

required to pay more money and do more to assure against becoming

judgment proof in the future than are participating manufacturers. It

points to the fact that Subsequent Participating Manufacturers who

signed the Master Settlement Agreement within 90 days are not obli-

gated to pay any damages as long as their market share stays within

specified bounds. On the other hand, Star Scientific, as a nonpartici-

pating manufacturer, is obligated to pay a fixed amount for each ciga-

rette sold in Virginia regardless of its market position there.

Similarly, Star Scientific notes that the payments made by nonpar-

ticipating members under the qualifying statute greatly exceed the

equivalent payments made by participating manufacturers to cover

future liability. It explains that while all of the payments made by

nonparticipating manufacturers under the qualifying statute are used

to pay for future harms caused to the Commonwealth, only 5% of the

payments made by participating manufacturers go to addressing

future harms. To support this assertion, Star Scientific refers to the

consent decree entered in Virginia’s lawsuit against the major manu-

facturers, which provides that Virginia has determined that 5% of the

payments required under the Master Settlement Agreement "shall be

apportioned and deemed attributed to the monetary payment" sought

in its complaint.

Star Scientific’s arguments demonstrate that Virginia’s qualifying

statute does not treat nonparticipating manufacturers the same as it

does manufacturers who subscribed to the Master Settlement Agree-

ment. But the fact that manufacturers in different circumstances are

not treated the same does not mean that the distinctions are irrational

or so unrelated to a legitimate purpose that they must be struck down

18 STAR SCIENTIFIC, INC. v. BEALES

under the Equal Protection Clause. Indeed, the distinctions made by

Virginia are rational. Virginia initially made an assessment of those

manufacturers who contributed most to its healthcare costs from ciga-

rette smoking, and it sued those manufacturers. Star Scientific was not

one of those accused by the Commonwealth and, therefore, was not

named a defendant in the litigation. That litigation was resolved

against the major manufacturers by the Master Settlement Agreement,

under which the manufacturers agreed not only to make payments and

pay attorneys fees but also to restrict their conduct. They agreed to

limit their advertising and marketing of cigarettes, to limit their lob-

bying efforts, to disband their industrial associations, and to alter their

research policies. These agreements are not insignificant and, indeed,

such restrictions might not be enforceable as involuntary governmen-

tal bans. Moreover, the payments made to the Commonwealth by the

participating manufacturers are not refundable, nor do the manufac-

turers receive interest on their payments.

The nonparticipating manufacturers, on the other hand, are not

required to limit their conduct. Their payments are refundable and

earn interest. In addition, they are not required to pay the Common-

wealth’s attorneys fees.

In short, the distinction between participating manufacturers and

nonparticipating manufacturers is rationally related to Virginia’s

efforts to redress alleged wrongdoing and, at the same time, to assure

a future source for covering the costs of cigarette smoking from all

tobacco manufacturers.

While the Master Settlement Agreement resolved the litigation

between Virginia and the major tobacco manufacturers — those

determined by the Commonwealth to be principally responsible for its

losses — it also provided an incentive to other manufacturers to par-

ticipate in the limitations on conduct that the Commonwealth felt

were beneficial to it and the citizens of Virginia. Thus, every other

manufacturer not sued by the Commonwealth was invited to join the

Master Settlement Agreement as a "Subsequent Participating Manu-

facturer." Such Subsequent Participating Manufacturers were not

required to make payments but agreed to limit their conduct. Star Sci-

entific was free to join the Master Settlement Agreement as a Subse-

quent Participating Manufacturer if it concluded that this would have

STAR SCIENTIFIC, INC. v. BEALES 19

been a better deal for it, but, apparently for business reasons, it

elected not to participate in that capacity.

Also, the fact that Star Scientific may end up paying relatively

more toward future healthcare costs than participating manufacturers

is directly related to Star Scientific’s future liability, which may be

higher than that of participating manufacturers because it is not bound

by any conduct restrictions. If its liability is not higher, it will receive

its escrow payments back, with interest.

In sum, we conclude that the distinctions drawn in Virginia’s quali-

fying statute between tobacco manufacturers participating in the Mas-

ter Settlement Agreement and those not participating are rationally

related to the State’s purpose of ensuring a source of recovery from

all cigarette manufacturers who are held liable for smoking-related

healthcare costs. The Commonwealth’s decision to require nonpartici-

pating manufacturers to place funds in an escrow account is not "in-

vidious discrimination" or a "wholly arbitrary act." Dukes, 427 U.S.

at 303-04. Rather, it is a rational system for assessing tobacco manu-

facturers for the costs of cigarette smoking as well as regulating their

conduct to the extent that they were sued and agreed to resolve that

suit through settlement. We therefore conclude that the qualifying

statute does not violate the Equal Protection Clause.

IV

Star Scientific contends that Virginia’s qualifying statute also vio-

lates the Commerce Clause, which gives Congress the power "[t]o

regulate Commerce with foreign Nations, and among the several

States, and with the Indian Tribes." U.S. Const. art. I, § 8, cl. 3. This

argument focuses on the aspect of the qualifying statute that assesses

an escrow payment amount on each cigarette sold by nonparticipating

tobacco manufacturers "within the Commonwealth, whether directly

or through a distributor, retailer or similar intermediary or intermedi-

aries." Va. Code Ann. § 3.1-336.2.A (emphasis added); see also id.

§ 3.1-336.1 (defining cigarette "units sold" as those sold in the Com-

monwealth "whether directly or through a distributor, retailer or simi-

lar intermediary or intermediaries"). More particularly, Star Scientific

argues that the statute requires it to make payments on cigarettes sold

by it to independent distributors in other states if the cigarettes are

20 STAR SCIENTIFIC, INC. v. BEALES

later sold into Virginia. It maintains that, in this manner, the qualify-

ing statute regulates transactions beyond the Commonwealth’s bor-

ders and excessively burdens interstate commerce.

In response, Virginia maintains that its qualifying statutes regulate

only the sale of cigarettes in Virginia. It contends that any incidental

burden placed on interstate commerce by operation of the statute is

outweighed by Virginia’s strong interest in assuring its ability to

recover the costs of tobacco use imposed on it by cigarette manufac-

turers.

The constitutional grant of authority to Congress to regulate inter-

state commerce "has long been understood, as well, to provide ‘pro-

tection from state legislation inimical to the national commerce [even]

where Congress has not acted.’" Barclays Bank PLC v. Franchise Tax

Bd. of Cal., 512 U.S. 298, 310 (1994) (quoting Southern Pac. Co. v.

Arizona ex rel. Sullivan, 325 U.S. 761, 769 (1945)). This "negative

command, known as the dormant Commerce Clause," prohibits States

from legislating in ways that impede the flow of interstate commerce.

Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 179

(1995). The dormant Commerce Clause’s limitation on State power,

however, "is by no means absolute. In the absence of conflicting fed-

eral legislation the States retain authority under their general police

powers to regulate matters of ‘legitimate local concern,’ even though

interstate commerce may be affected." Lewis v. BT Investment Mgrs.,

Inc., 447 U.S. 27, 36 (1980).

To determine whether a State statute violates the dormant Com-

merce Clause, we conduct a two-tiered analysis. Brown-Forman Dis-

tillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 578-79

(1986); Environmental Technology Council v. Sierra Club, 98 F.3d

774, 785 (4th Cir. 1996). "When a state statute directly regulates or

discriminates against interstate commerce, or when its effect is to

favor in-state economic interests over out-of-state interests," the stat-

ute is generally struck down "without further inquiry." Brown-

Forman, 476 U.S. at 579. Thus, for State statutes that discriminate

against interstate commerce, we apply "a virtually per se rule of inva-

lidity." Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978); see

also Wyoming v. Oklahoma, 502 U.S. 437, 454-55 (1992). When,

however, a statute does not discriminate against interstate commerce

STAR SCIENTIFIC, INC. v. BEALES 21

but rather "regulates evenhandedly and only indirectly affects inter-

state commerce," we conduct a fuller analysis — the second tier —

involving a balancing test. See Environmental Technology Council,

98 F.3d 785; see also Brown-Forman, 476 U.S. at 579. In conducting

this second-tier analysis, we look to "whether the State’s interest is

legitimate and whether the burden on interstate commerce clearly

exceeds the local benefits." Brown-Forman, 476 U.S. at 579 (citing

Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)).

Star Scientific argues first that the qualifying statute is invalid per

se because it directly regulates commerce occurring wholly outside of

Virginia’s boundaries. It maintains that "a State violates the Com-

merce Clause if it attempts to regulate aspects of the stream of com-

merce that occur upstream, outside the State’s borders." It correctly

notes that a State may not regulate commerce occurring wholly out-

side of its borders. See Edgar v. Mite Corp., 457 U.S. 624, 642-43

(1982) (noting that "[t]he Commerce Clause . . . precludes the appli-

cation of a state statute to commerce that takes place wholly outside

of the State’s borders, whether or not the commerce has effects within

the State"); Brown-Forman, 476 U.S. at 582-83; Healy v. Beer Inst.,

491 U.S. 324, 335-36 (1989). Nor may a State pass laws that have

"the ‘practical effect’ of regulating commerce occurring wholly out-

side the State’s borders." Healy, 491 U.S. at 332. This proposition is

based on the common sense conclusion that "a statute that directly

controls commerce occurring wholly outside the boundaries of a State

exceeds the inherent limits of the enacting State’s authority," regard-

less of the State’s legislative intent. Healy, 491 U.S. at 336. Star Sci-

entific maintains that Virginia’s qualifying statute is analogous to the

statutes held unconstitutional in Brown-Forman and Healy.

In Brown-Forman, the Supreme Court struck down a provision of

the New York Alcoholic Beverage Control Law that required liquor

distillers to affirm that their prices were no higher than the lowest

price at which the same product would be sold in any other state dur-

ing the month. 476 U.S. at 575-76. The Court found that, while the

law was addressed only to the sale of liquor in New York, "the ‘prac-

tical effect’ of the law [was] to control liquor prices in other States"

because "[o]nce a distiller has posted prices in New York, it is not

free to change its prices elsewhere in the United States during the rel-

evant month." Id. at 582-83. Thus, the Court found the law invalid

22 STAR SCIENTIFIC, INC. v. BEALES

because "[f]orcing a merchant to seek regulatory approval in one

State before undertaking a transaction in another directly regulates

interstate commerce." Id. at 582.

In the same vein, the Court in Healy struck down the Connecticut

Liquor Control Act which required out-of-state beer shippers to

affirm that the prices at which their products were sold to Connecticut

wholesalers were no higher than the prices at which those same prod-

ucts were sold in bordering states. 491 U.S. at 326-27. The Court held

the statute unconstitutional because it had the practical effect of con-

trolling liquor prices in other States and interfered with the regulatory

schemes in those States. Id. at 338-39.

Virginia’s qualifying statute, however, rather than aiming at or

reacting to commerce outside of Virginia, specifically limits its appli-

cability to the sale of cigarettes "within the Commonwealth." Va.

Code Ann. § 3.1-336.2.A; see also id. § 3.1-336.1 (defining "units

sold" as "individual cigarettes sold in the Commonwealth"). Thus,

rather than regulate "upstream transactions" outside of the State, the

Virginia qualifying statute imposes a fee only for cigarettes actually

sold within the State. It has no effect on transactions undertaken by

out-of-state distributors in other States.

To the extent that the statute may affect the prices charged by out-

of-state distributors, the effect is applicable only to prices charged on

cigarettes sold within Virginia. The statute does not insist on price

parity with cigarettes sold outside of the State. The statute therefore

does not have the "practical effect" of controlling prices or transac-

tions occurring wholly outside of the boundaries of Virginia, as was

the case in Brown-Forman and Healy. Thus, the rule of per se invalid-

ity does not apply to the qualifying statute.

Star Scientific argues that in any event, Virginia’s qualifying stat-

ute fails the balancing test applicable to State economic regulations

that indirectly affect interstate commerce. It asserts that the burden

that the qualifying statute places on interstate commerce clearly

exceeds its local benefits.

The balancing test applicable to nondiscriminatory legislation

affecting interstate commerce was set out in Pike, 397 U.S. at 142:

STAR SCIENTIFIC, INC. v. BEALES 23

Where the statute regulates even-handedly to effectuate a

legitimate local public interest, and its effects on interstate

commerce are only incidental, it will be upheld unless the

burden imposed on such commerce is clearly excessive in

relation to the putative local benefits. If a legitimate local

purpose is found, then the question becomes one of degree.

And the extent of the burden that will be tolerated will of

course depend on the nature of the local interest involved,

and on whether it could be promoted as well with a lesser

impact on interstate activities.

(internal citation omitted). To apply this Pike balancing test, we con-

sider (1) the nature of the local benefits advanced by the statute; (2)

the burden placed on interstate commerce by the statute; and (3)

whether the burden is "clearly excessive" when weighed against these

local benefits. Id.

As we discussed in Parts II and III, above, Virginia’s qualifying

statute serves the legitimate state interest of ensuring that Virginia has

a source of recovery for future smoking-related healthcare costs

attributable to tobacco manufacturers who have not subscribed to the

Master Settlement Agreement and who, therefore, are not already

compensating the Commonwealth for these healthcare costs. Thus,

the putative local benefits are both legitimate and important. We also

conclude that the burden of the State’s economic regulation on inter-

state commerce is minimal.

Star Scientific argues, however, that because the escrow payments

are imposed on cigarettes sold not only by it, but also by its distribu-

tors, even when the distributors purchased the cigarettes outside of the

State, Star Scientific is required to "police interstate sales or channel

those sales into contractual forms that may be more burdensome to

commerce." Star Scientific is, however, overstating its burden. As

Virginia points out, distributors in Virginia are already required to

record the number of cigarettes they stamp with the Virginia excise

stamp and report that information to the Commonwealth. See Va.

Code Ann. § 58.1-1000 et seq. Because distributors already have to

keep track of this information, any additional burden caused by

requiring manufacturers to obtain this information from the distribu-

tors is minimal.

24 STAR SCIENTIFIC, INC. v. BEALES

Given the important State interest advanced by the qualifying stat-

ute and the minimal burden placed on interstate commerce by its

operation, we conclude that the burden on interstate commerce is not

"clearly excessive" when compared to the putative local benefits. See

Pike, 397 U.S. at 142. Thus, we agree with district court that the qual-

ifying statute does not violate the Commerce Clause.

V

Finally, Star Scientific challenges the Master Settlement Agree-

ment itself, contending that it violates the Compact Clause of Article

1, § 10, of the Constitution, which provides that "no State shall, with-

out the consent of Congress, . . . enter into any Agreement or Com-

pact with another State." U.S. Const. art. I, § 10, cl. 3. Star Scientific

asserts that the Master Settlement Agreement is in fact an interstate

compact and that, because it has not been approved by Congress, the

Agreement, as well as the qualifying statutes enacted pursuant to it,

are invalid.

Virginia contends that Star Scientific lacks standing to challenge

the Master Settlement Agreement, a settlement to which it is not a

party. It argues that because invalidating the Master Settlement

Agreement would not release Star Scientific from its obligations

under the qualifying statute, the purported injury that Star Scientific

claims from having to pay into the escrow fund under the qualifying

statute is not redressable by its challenge to the Master Settlement

Agreement. On the merits, Virginia argues that the Compact Clause

is, in any event, not applicable to the Master Settlement Agreement

because the agreement does not enhance the political power of Vir-

ginia or any other State in a way that encroaches upon the supremacy

of the United States. In addition, Virginia asserts that Congress has

implicitly, if not expressly, provided any consent that might be

needed. See Cuyler v. Adams, 449 U.S. 433, 441 (1981) (recognizing

implied consent given in a statute enacted prior to the formation of

an interstate compact); Virginia v. Tennessee, 148 U.S. 503, 521-22

(1893) (recognizing implied consent to a Border Agreement by treat-

ing Border as valid for subsequent revenue, electoral, and judicial

purposes); Greene v. Biddle, 21 U.S. (8 Wheat.) 1, 86-87 (1823) (rec-

ognizing implied consent given by admitting State into the Union). In

support of this argument, Virginia points to Congress’ amendment to

STAR SCIENTIFIC, INC. v. BEALES 25

the Medicaid statute in 1991, in which Congress authorized the States

to use Master Settlement Agreement funds "for any expenditures

determined appropriate." Specifically, the amendment provided that

federal rules governing health overpayments "shall not apply to any

amount recovered or paid to a State as part of the comprehensive set-

tlement of November 1998 between manufacturers of tobacco prod-

ucts . . . and State Attorneys General." 42 U.S.C. § 1396b(d)(3)(B)(i-

ii) (Supp. V 1999).

The district court agreed with Virginia and did not reach the merits

of the Compact Clause argument. We will address both the standing

and the merits issues, seriatim.

A

Article III of the Constitution limits the jurisdiction of federal

courts to actual "cases" or "controversies." U.S. Const. art. III, § 2.

Thus, it is a jurisdictional requirement that a person challenging a

government action be a party to a live case or controversy. This stand-

ing requirement "is an essential and unchanging part of the case-or-

controversy requirement of Article III." Lujan v. Defenders of Wild-

life, 504 U.S. 555, 560 (1992) (citing Allen v. Wright, 468 U.S. 737,

751 (1984)). To establish standing, a party must establish, as "the irre-

ducible constitutional minimum," three elements: (1) that it has suf-

fered an injury in fact that is both concrete and particularized and

"actual or imminent, not conjectural or hypothetical"; (2) that there is

a causal connection between the injury and the conduct complained

of, i.e. the injury is "fairly traceable" to the challenged action; and (3)

that it is "likely . . . that the injury will be redressed by a favorable

decision." Id. at 560-61 (internal quotation marks and citations omit-

ted); Burke v. City of Charleston, 139 F.3d 401, 405 (4th Cir. 1998).

In this case, Star Scientific contends that its payments into escrow

pursuant to Virginia’s qualifying statute impose an actual and con-

crete injury that is "fairly traceable" to the Master Settlement Agree-

ment because the Master Settlement Agreement coerced the

Commonwealth to enact the qualifying statute that causes Star Scien-

tific’s injury. Accordingly, it argues, its injury will be redressed by a

favorable decision invalidating the Master Settlement Agreement.

26 STAR SCIENTIFIC, INC. v. BEALES

Virginia contends, however, that instead of requiring the States to

enact escrow statutes, the Master Settlement Agreement only encour-

ages the enactment of such statutes. It asserts that every settling State

retains "full freedom not to pass the ‘contemplated’ law, and a State

that chooses not to do so remains a full party to the Master Settlement

Agreement." If a state does not enact a qualifying statute, the tobacco

companies remain released from liability for past and future claims

and the States receive the benefit of the conduct restrictions imposed

on the tobacco companies by the agreement. In addition, in certain

peculiar circumstances a State that fails to enact a qualifying statute

might still receive some payments.

Star Scientific acknowledges that there is not a complete depen-

dency between the Master Settlement Agreement and the qualifying

statute, but it maintains it has standing to challenge the Master Settle-

ment Agreement because the agreement is powerfully coercive. The

Master Settlement Agreement, it argues, "provides enormous finan-

cial incentives for the Commonwealth to adopt the Qualifying Statute

and imposes large penalties if the statute is repealed." We agree with

Star Scientific.

In Bennett v. Spear, 520 U.S. 154 (1997), the Supreme Court was

presented with a similar situation and found sufficient coercion to

form the basis for standing. In that case, the plaintiffs challenged a

Biological Opinion issued by the Fish and Wildlife Service, claiming

that the allocation of water required by the Opinion affected the

amount of water available to the plaintiffs. Id. at 167-68. The govern-

ment argued that the harm asserted by the plaintiffs was not caused

by the Biological Opinion because the Bureau of Reclamation was an

intervening actor determining whether to implement the requirements

of the Opinion. Id. at 168. The Supreme Court rejected this argument

and concluded that while the Bureau was "technically free to disre-

gard the Biological Opinion . . . it [did] so at its own peril" and faced

substantial penalties if it ignored the opinion. Id. at 170. In these cir-

cumstances, the Court concluded that the plaintiffs’ injuries were

fairly traceable to the Biological Opinion despite the intervening

action of the Bureau of Reclamation.

Similarly, the Master Settlement Agreement, while not technically

requiring Virginia to enact a qualifying statute, nevertheless imposes

STAR SCIENTIFIC, INC. v. BEALES 27

a powerful incentive for it to do so. Virginia would suffer large penal-

ties if it failed to enact the statute. For example, if the participating

manufacturers were to lose market share and their loss was attribut-

able to their payments under the Master Settlement Agreement and to

the nonparticipating manufacturers’ freedom from such payments, the

"Firm" (the administrative body created under the Master Settlement

Agreement) could determine that this loss was caused by Virginia’s

failure to enact a qualifying statute and, on that basis, decrease Vir-

ginia’s payments from the manufacturers under the agreement.

Because Virginia could face a substantial financial burden if it were

not to enact a qualifying statute, the Master Settlement Agreement is

coercive in requiring the states to pass such a statute. We conclude

that this coercion is significant and that, therefore, Star Scientific’s

injuries may be fairly traceable to the requirements of the Master Set-

tlement Agreement. Accordingly, we conclude that Star Scientific has

standing to challenge the Master Settlement Agreement under the

Compact Clause.

B

The Compact Clause does not require congressional approval of

every agreement between or among States. Instead, the Supreme

Court has held that "the proper balance between federal and state

power with respect to compacts and agreements among states" is

maintained by limiting application of the Compact Clause to agree-

ments that are "directed to the formation of any combination tending

to the increase of political power in the States, which may encroach

upon or interfere with the just supremacy of the United States." Vir-

ginia v. Tennessee, 148 U.S. 503, 519 (1893); see also Northeast Ban-

corp., Inc. v. Board of Governors of the Fed. Res. Sys., 472 U.S. 159,

175-76 (1985); United States Steel Corp. v. Multi-State Tax Comm’n,

434 U.S. 452, 471 (1978); New Hampshire v. Maine, 426 U.S. 363,

369 (1975).

The Master Settlement Agreement principally operates vertically

between each State and the signatory tobacco companies, providing

releases from liability to the tobacco companies in exchange for con-

duct restrictions and payments. But in administering the amount of

payments under the Master Settlement Agreement and their relation-

ship to the escrow accounts established under qualifying statutes, the

28 STAR SCIENTIFIC, INC. v. BEALES

Master Settlement Agreement creates an administrative body — the

Firm, consisting of economic consultants — to determine compliance

with the Master Settlement Agreement. To the extent that the States

agree on the creation of this single administrative body and its func-

tioning, there is a horizontal aspect to the Master Settlement Agree-

ment that establishes a compact among the States, implicating the

Compact Clause.

Although the Master Settlement Agreement implicates the Com-

pact Clause, we see no reason to conclude that it encroaches on fed-

eral power. In Multi-State Tax Commission, the Supreme Court

upheld a compact resulting in reciprocal State legislation and estab-

lishing an administrative body to coordinate State taxation of certain

entities. 434 U.S. at 472-73. The Court noted that the compact might

result in an increase in bargaining power of the member States with

respect to the corporations subject to their taxing jurisdictions, but it

found such an increase in power to be acceptable because "the test is

whether the Compact enhances state power quoad the National Gov-

ernment." Id. at 473. Similarly, the Master Settlement Agreement may

result in an increase in bargaining power of the States vis-a-vis the

tobacco manufacturers, but this increase in power does not interfere

with federal supremacy because the Master Settlement Agreement

"does not purport to authorize the member States to exercise any pow-

ers they could not exercise in its absence." Multi-State Tax Comm’n,

434 U.S. at 473.

In addition, the Master Settlement Agreement does not derogate

from the power of the federal government to regulate tobacco. Sec-

tions X and XVIII(a) of the agreement specifically anticipate that

Congress may, in the future, pass laws regulating tobacco and pro-

vides for adjustments of the Master Settlement Agreement’s terms if

that occurs. Similarly, Star Scientific’s argument that the Master Set-

tlement Agreement derogates from the federal bankruptcy policy is

without merit. Again, Section XVIII(w)(1)(c) of the Master Settle-

ment Agreement, dealing with bankruptcy, specifically states that the

provision is only enforceable if consistent with the Bankruptcy Code.

In sum, we conclude that the Master Settlement Agreement does

not increase the power of the States at the expense of federal suprem-

STAR SCIENTIFIC, INC. v. BEALES 29

acy and that, therefore, it is not an interstate compact requiring con-

gressional approval under the Compact Clause.

VI

Today, it is generally recognized that "tobacco use, particularly

among children and adolescents, poses perhaps the single most signif-

icant threat to public health in the United States." Lorillard Tobacco

Co. v. Reilly, 121 S. Ct. 2404, 2430 (2001) (internal quotation marks

and citation omitted). The costs attributable to this major public

health issue are borne by various constituencies, including the States.

Through years of lawsuits and settlement agreements, the States and

the major tobacco companies have finally reached an agreement

broadly addressing the public health threat, and this agreement, if it

is to be effective, necessarily has implications beyond the parties,

reaching nonsettling tobacco companies, such as Star Scientific.

Regardless of Star Scientific’s innocence in any alleged wrongdo-

ing — allegations that made the Master Settlement Agreement with

the major manufacturers possible — Star Scientific remains a tobacco

company whose products continue to threaten the public health. For

that reason alone, its inclusion in a legislative scheme to establish

financial responsibility for this public health issue is not inherently

irrational. Indeed, it falls squarely within the States’ police power to

promote the public health, safety, welfare, and morals of the State.

See Berman v. Parker, 348 U.S. 26, 32 (1954).

Star Scientific might rightly claim innocence as to past wrongdoing

and might even be justified in claiming credit for its efforts to educate

would-be smokers about the adverse effects of smoking and for its

efforts to reduce, through research, cancer-causing toxins in ciga-

rettes. But it cannot deny that it is a cigarette manufacturer whose

products will continue to threaten the public health. While it does not

suggest any such denial, it nevertheless persists in its particular claim

that the entire arrangement created by the Master Settlement Agree-

ment and qualifying statutes effects an improper and unjust transfer

of large amounts of money from cigarette manufacturers to settling

States while openly protecting the profits of the alleged wrongdoers.

It characterizes this claim as follows:

30 STAR SCIENTIFIC, INC. v. BEALES

Such naked rent-seeking legislation to protect the position of

politically favored actors usually comes cloaked in the

sheep’s clothing of some legitimate state purpose to which

the regulation bears a plausible relation. And in the dim

light of rational basis review, this often-transparent disguise

is good enough.

"But this wolf comes as a wolf," Morrison v. Olson, 487

U.S. 654, 699 (1988) (Scalia, J. dissenting), because the

MSA states that the "Qualifying Statute" must "effectively

and fully neutralize[ ] the cost disadvantages that the Partici-

pating Manufacturers experience vis-a-vis Non-Participating

Manufacturers within such Settling State as a result of the

provisions of this Agreement." Whether viewed under the

lens of due process or equal protection, that purpose is con-

stitutionally impermissible. The Constitution simply does

not allow a State to protect its judgment creditors by impos-

ing financial burdens on their competitors who have not

been found liable to the State.

This viewpoint, however, fails to account fully for the larger continu-

ing problem to which Star Scientific necessarily and unquestionably

contributes. It also fails to recognize the justifications for the mean-

ingful distinctions in the treatment of the major tobacco manufactur-

ers, who were targeted with alleged wrongdoing, and the smaller

tobacco companies, such as Star Scientific, who were not, but yet still

threatened the public health.

Not only are the major tobacco manufacturers’ payments of over

$200 billion irrevocable and without interest, their conduct in associ-

ating with each other, in advertising, in marketing, and in researching

tobacco products is permanently restricted. These manufacturers also

have agreed to reimburse the States for their attorneys fees. Even

though nonparticipating tobacco manufacturers, such as Star Scien-

tific, are required to pay comparable amounts into an escrow fund,

such payments earn interest for the manufacturer, and the principal is

returned after 25 years if the company does not incur tobacco-related

liability. If Star Scientific had found these differences in treatment

unfair, it was free to participate in the Master Settlement Agreement

as a Subsequent Participating Manufacturer. While this choice may

STAR SCIENTIFIC, INC. v. BEALES 31

not have been an ideal one for Star Scientific and either option would

surely burden its operations, the effect of either option is no different

than the effect of a tax that might have been imposed to pay for the

public health costs. When viewed in this larger context, Star Scientif-

ic’s claim of irrationality and impermissible discrimination by Vir-

ginia cannot be sustained.

For the reasons we have given, we reject Star Scientific’s constitu-

tional challenge to the qualifying statute based on the Due Process,

Equal Protection, and Commerce Clauses of the United States Consti-

tution, and we likewise reject its challenge to the Master Settlement

Agreement under the Compact Clause. The judgment of the district

court is accordingly

AFFIRMED.