Opinion

A.D. Bedell Wholesale Co. v. Philip Morris Inc.

263 F.3d 239
2001 WL 708447

Court: Court of Appeals for the Third Circuit
Filed: Jun 19, 2001
Author: Scirica
On the bench: Scirica, Fuentes, Garth
Cited by: 10 cases
Authority: More cited than 57.6%

“’State action,’ as defined in cases granting Parker immunity, is qualitatively different from ‘state action’ in other contexts such as the Fourteenth Amendment”

How later courts described this case

“’State action,’ as defined in cases granting Parker immunity, is qualitatively different from ‘state action’ in other contexts such as the Fourteenth Amendment”
“Passive government approval is insufficient.”

Written by the judges who cited it.

The opinion

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Precedential or Non-Precedential: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

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.

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

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)

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"

"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.

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

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;