Sanders v. Lockyers

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

STEVE SANDERS, Individually and 

as Class Representative,

Plaintiff-Appellant,

v.

EDMUND G. BROWN Jr.,* in his No. 05-15676

official capacity as Attorney

General of the State of California;  D.C. No.

CV-04-02281-SI

PHILIP MORRIS USA, INC.; R.J.

OPINION

REYNOLDS TOBACCO COMPANY;

BROWN & WILLIAMSON TOBACCO

CORP.; LORILLARD TOBACCO

COMPANY,

Defendants-Appellees.



Appeal from the United States District Court

for the Northern District of California

Susan Yvonne Illston, District Judge, Presiding

Argued and Submitted

February 15, 2007—Stanford, California

Filed September 26, 2007

Before: Betty B. Fletcher, Richard R. Clifton, and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Clifton

*Edmund G. Brown Jr. is substituted for his predecessor, Bill Lockyer,

as Attorney General of the State of California, pursuant to Fed. R. App.

P. 43(c)(2).

13205

13208 SANDERS v. BROWN

COUNSEL

A. William Urquhart, Thad A. Davis, Kent J. Bullard, Kath-

leen M. Sullivan (argued), Quinn Emanuel Urquhart Oliver &

Hedges, LLP, Los Angeles and Redwood Shores, California;

for the appellant.

Attorney General Edmund G. Brown Jr., Chief Assistant

Attorney General Tom Greene, Senior Assistant Attorney

General Dennis Eckhart, Deputy Attorney General Margaret

SANDERS v. BROWN 13209

Spencer, Deputy Attorney General Karen Leaf (argued), State

of California, Sacramento, California; Darryl Snider (argued),

James F. Speyer, Eric Shapland, Heller Ehrman LLP, Los

Angeles, California; for the appellees.

OPINION

CLIFTON, Circuit Judge:

This case involves an indirect legal challenge to the mas-

sive settlement agreement between the nation’s largest

tobacco companies and the attorneys general of 46 states and

several territories. The 1998 settlement known as the Master

Settlement Agreement, or “MSA,” resolved all of these states’

and territories’ claims against those tobacco companies,

which the states had sued for billions of dollars in damages

related to the harmful effects of smoking.

Plaintiff Steve Sanders, a smoker, alleges that cigarette

prices have skyrocketed in the nine years since the MSA, and

that the price increases are the result of an illegal price-fixing

scheme that the MSA enabled. On behalf of a putative class

of cigarette smokers, Sanders sued the Attorney General of

the State of California and the four largest tobacco compa-

nies: Philip Morris USA Inc., R.J. Reynolds Tobacco Co.,

Brown & Williamson Tobacco Corp., and Lorillard Tobacco

Co.1 Sanders does not allege that the MSA itself is illegal, but

rather alleges that the MSA, the post-MSA price increases,

and the state statutes implementing the MSA’s terms (the

“implementing statutes”) are evidence of a cigarette price-

fixing cartel that violates the Sherman Act, 15 U.S.C. § 1 et

seq.; the Cartwright Act, Cal. Bus. & Prof. Code §§ 16720 et

1

Unless otherwise noted, this opinion will refer to the tobacco compa-

nies as “tobacco defendants” and the attorney general as “the State of Cali-

fornia.” It will use the term “defendants” when referring to both groups

collectively.

13210 SANDERS v. BROWN

seq.; other California unfair competition statutes, Cal. Bus. &

Prof. Code §§ 17200 et seq.; and California’s common law of

unfair competition. Sanders also alleges that the Sherman Act

preempts the implementing statutes.

The defendants moved to dismiss under Fed. R. Civ. P.

12(b)(6). The district court granted the motions and dismissed

the claims with prejudice. See Sanders v. Lockyer, 365 F.

Supp. 2d 1093 (N.D. Cal. 2005). The district court held that

the Sherman Act does not preempt the implementing statutes;

that Sanders failed to adequately plead an antitrust violation;

and that even if Sanders had done so, the defendants were

immune from liability. We affirm.

I. Background

The following facts are undisputed for the purpose of the

motion to dismiss, unless otherwise noted. The United States

cigarette market is dominated by four companies: Philip Mor-

ris USA Inc., R.J. Reynolds Tobacco Co., Brown & William-

son Tobacco Corp., and Lorillard Tobacco Co. Their

combined sales have accounted for more than 90 percent of

cigarette sales for at least the last decade.

These four companies in the 1990s faced coordinated law-

suits by the attorneys general of most states and U.S. territo-

ries, who sought money and other relief to help their

governments cope with the harmful effects of smoking and

the costs imposed by those effects. In late 1998, the tobacco

companies and the attorneys general signed the MSA.2 State

courts, including the California Superior Court, then approved

the MSA in consent decrees and dismissed the lawsuits

against the tobacco companies.

2

The MSA in its entirety can be found at www.naag.org/

backpages/naag/tobacco/msa/msa-pdf (last visited Aug. 23, 2007).

SANDERS v. BROWN 13211

The MSA requires the four major tobacco companies —

who, as the initial signatories of the MSA, are known as the

“Original Participating Manufacturers” — to pay the states

billions of dollars each year. The total annual payments are

based on a formula that considers inflation and the total num-

ber of individual cigarettes sold in the fifty United States, the

District of Columbia and Puerto Rico. Each Original Partici-

pating Manufacturer (or “OPM”) must annually contribute a

portion of the total payment that is equal to the OPM’s share

of that year’s cigarette sales (the OPM’s “market share”). For

example, if an OPM’s market share is 25 percent, that OPM

must contribute 25 percent of that year’s settlement payment.

The OPMs expected to raise cigarette prices to help pay for

the settlement and feared that smaller manufacturers, which

were not part of the negotiations, would seize the chance to

compete with cheaper cigarettes, possibly cutting into the

OPMs’ market share. The settling parties addressed this prob-

lem in three ways. First, the MSA offered a carrot to non-

OPM tobacco companies to join the settlement agreement.

These “Subsequent Participating Manufacturers” (“SPMs”)

could join the settlement within 90 days of the enactment of

the MSA. They would not have to make any part of the pay-

ments due to the states so long as their market share remained

at or below their 1998 market share (or 125 percent of their

1997 market share, whichever was greater). If an SPM’s mar-

ket share increased, however, the SPM would have to contrib-

ute to the settlement payment, with the contribution based on

the sales in excess of the SPM’s 1998 sales (or 125 percent

of 1997 sales, if applicable). For example, if an SPM sold

250,000 cigarettes in 1998, and then one year later sold a

larger share of the market — say, 300,000 cigarettes — the

SPM would have to contribute to the settlement payment. If

the extra 50,000 cigarettes equaled 1 percent of the market

share, the SPM would have to pay 1 percent of the settlement

13212 SANDERS v. BROWN

payment. As of August 15, 2007, forty-four smaller tobacco

companies are participating in the MSA as SPMs.3

Second, the OPMs would pay less money under the MSA

if their total sales dropped below a certain amount. If the rea-

son for this drop is competition by tobacco companies that did

not participate in the MSA, the settlement payment would be

reduced even further.

Third, most states have enacted two sets of statutes that

allegedly make it harder for non-signatory tobacco companies

(and any future market entrants) to undercut the OPMs’ and

SPMs’ market shares. Sanders alleges that the states were

motivated to pass these statutes out of fear that the OPMs’

higher prices would cause their market share to fall, thereby

reducing the amount of the settlement payments to the states.

These “implementing statutes” are known in most states as

the “Qualifying Act” and the “Contraband Amendment.”

Under the “Qualifying Act,” non-signatory tobacco compa-

nies (also known as “Non-Participating Manufacturers,” or

“NPMs”) have to pay a portion of their revenues into an

escrow account. The money in the escrow account acts as a

liability reserve. If the NPMs are successfully sued for

cigarette-related harms, the money in the escrow accounts

will pay the damage awards. Each NPM’s payment is based

on market share, and is roughly the same per-cigarette cost as

the amount that OPMs must pay to abide by the MSA. The

payments can only be used to pay a judgment or settlement

on a claim against the NPM, up to the amount that the NPM

would otherwise pay under the MSA. Any remaining funds in

the escrow account revert back to the NPM after twenty-five

years.

3

The list can be found on the website of the National Association

of Attorneys General, www.naag.org/backpages/naag/tobacco/msa/

participating _manu/ (last visited Aug. 22, 2007).

SANDERS v. BROWN 13213

This law allegedly prevents the NPMs from undercutting

the prices of OPMs’ cigarettes by taking away the extra prof-

itability that an NPM would enjoy. For example, say that

OPMs’ sales are such that for a given year, they must pay 25

cents per cigarette to the states under the MSA. This would

seem to give NPMs a cost advantage of 25 cents per cigarette.

But under the Qualifying Act, if an NPM also sold cigarettes

that year, the NPM would have to pay roughly 25 cents per

cigarette into an escrow account, which the NPM could not

touch for 25 years. In other words, the NPM’s cost advantage

over the OPMs is erased.

The “Contraband Amendment,” for its part, penalizes

NPMs who refuse to make escrow payments under the Quali-

fying Act. The Contraband Amendment allows a state to “de-

list” NPMs from a list of approved tobacco manufacturers.

De-listing effectively prevents the offending NPM from sell-

ing cigarettes in that state.

The California legislature has enacted a Qualifying Act and

a Contraband Amendment. Cal. Health & Safety Code

§§ 104556, 104557 (Qualifying Act); Cal. Bus. & Prof. Code

§ 22979(a), (b), and Cal. Rev. & Tax Code § 30165.1(d), (e)

(Contraband Amendment).

As expected, the OPMs’ cigarette prices rose when the

MSA took effect. Sanders alleges, however, that the price

increases have far exceeded the tobacco companies’ costs of

complying with the MSA. The OPMs allegedly raised their

prices by $12.20 per carton between late 1998 and early 2002

— more than twice the amount necessary to meet the OPMs’

obligations under the MSA. Also, the price increases have

been “parallel.” Whenever one OPM has raised its cigarette

prices, the others have generally matched the increase.

Despite these increases, the OPMs’ cigarette sales still

account for more than 90 percent of the market.

The price increases and other factors have prompted several

legal challenges against the MSA, most alleging antitrust and

13214 SANDERS v. BROWN

constitutional violations. The challenges have been largely

unsuccessful. See, e.g., Tritent Int’l Corp. v. Kentucky, 467

F.3d 547 (6th Cir. 2006); Mariana v. Fisher, 338 F.3d 189 (3d

Cir. 2003); A.D. Bedell Wholesale Co. v. Philip Morris Inc.,

263 F.3d 239 (3d Cir. 2001); Xcaliber Int’l Ltd. v. Kline, No.

05-2261-JWL, 2006 WL 288705 (D. Kan. Feb. 7, 2006);

Xcaliber Int’l Ltd. v. Edmondson, No. 04-CV-0922-CVE-PJC,

2005 WL 3766933 (N.D. Okla. Dec. 13, 2005); S & M

Brands, Inc. v. Summers, 393 F. Supp. 2d 604 (M.D. Tenn.

2005); PTI, Inc. v. Philip Morris Inc., 100 F. Supp. 2d 1179

(C.D. Cal. 2000); Forces Action Project LLC v. California,

No. C99-0607 MJJ, 2000 WL 20977 (N.D. Cal. Jan. 5, 2000),

aff’d in relevant part, No. 00-15280, 16 Fed. Appx. 774 (9th

Cir. Aug. 15, 2001) (unpublished disposition); Hise v. Philip

Morris Inc., 46 F. Supp. 2d 1201 (N.D. Okla. 1999), aff’d,

208 F.3d 226 (10th Cir. 2000) (unpublished disposition). But

see Freedom Holdings Inc. v. Spitzer, 357 F.3d 205 (2d Cir.

2004).

II. The Present Case

Sanders alleges that the MSA has spawned a “cartel”

because it lets the participating tobacco companies “raise

prices without fear of losing sales or market share.” Sanders

does not allege that the tobacco companies have agreed

amongst themselves to fix prices. Instead, he alleges that the

MSA penalizes tobacco companies for competing on price,

because they have to pay more money under the MSA as their

market shares increase. As a result, tobacco companies alleg-

edly will be reluctant to increase market share. Thus, when

one tobacco company raises its prices, all other tobacco com-

panies allegedly can raise prices in lockstep without fearing

that their rivals will try to undercut them. “[I]n effect,” the

complaint alleges, “the OPMs have agreed to compensate

each other [f]or any market share increase . . . by imposing a

SANDERS v. BROWN 13215

proportionate increase in the settlement payment for such

market share gain.”4

Sanders also alleges that the MSA encouraged other

tobacco companies to join the cartel. Any company that has

joined the MSA as an SPM will be reluctant to increase its

market share beyond 1998 levels, because by doing so it

would be forced to pay some money to the states.5 As a result,

the SPMs followed the OPMs when they increase their prices.

Sanders further alleges that the MSA encouraged the states

to pass anti-competitive laws protecting the alleged cartel

from price competition. This is because the OPMs’ payments

to the states drop if their total sales drop below a threshold

level, or if non-signatory NPMs take away OPMs’ market

share. The states, Sanders alleges, therefore passed the Quali-

fying Acts and Contraband Amendments to keep NPMs from

entering the market.

The sum of these parts, Sanders alleges, is an illegal “hori-

zontal output-restriction cartel” in which the OPMs, backed

by state authority (or, at least, state acquiescence), have raised

cigarette prices to artificially high (or “supracompetitive”)

levels without fear of price competition. This scheme is pre-

empted by the Sherman Act, Sanders argues, because it so

obviously conflicts with federal antitrust law. Furthermore,

Sanders argues that even if the scheme consisting of the MSA

and its implementing statutes is not facially preempted, the

4

It is not clear that a proportionate price increase, which would not

affect the per-cigarette cost of doing business, would dissuade a tobacco

company from attempting to increase its market share. We need not, how-

ever, address the merits of this claim, as the following discussion will

show.

5

It is not clear whether this extra payment would really dissuade the

SPM from seeking extra market share. If an SPM would pay to the states

less money than it would make by selling extra cigarettes, an SPM still

might turn a higher profit by increasing its market share. Again, we need

not address the merits of this claim.

13216 SANDERS v. BROWN

tobacco defendants have still committed illegal price-fixing,

as evidenced by the parallel price increases. Finally, Sanders

argues that the State of California failed to adequately super-

vise the tobacco companies’ pricing actions.6

The defendants filed motions to dismiss, arguing, among

other things, that they are immune to antitrust liability under

either (1) the Noerr-Pennington immunity doctrine, described

in E. R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365

U.S. 127, 135-145 (1961), and United Mine Workers of Amer-

ica v. Pennington, 381 U.S. 657, 669-70 (1965); or (2) the

“state action” immunity doctrine that originated in Parker v.

Brown, 317 U.S. 341, 350-52 (1943).

The district court granted the motions to dismiss. See Sand-

ers, 365 F. Supp. 2d at 1105. The district court held that the

Sherman Act did not preempt the MSA implementing statutes

because those statutes do not authorize any per se illegal

activity. See id. at 1101. The district court also held that the

state action immunity doctrine protected the defendants from

suit because the MSA and its implementing statutes were

6

The relief Sanders seeks includes:

(1) A declaratory judgment that California’s Qualifying Act

and Contraband Amendment are both “facially void as a per se

restraint of trade,” and therefore preempted by the Sherman Act.

(2) An injunction against the state to keep it from enforcing the

MSA and the implementing statutes, and against the tobacco

defendants to make them “cease their anticompetitive activity

taken in furtherance of the MSA.”

(3) Money damages against the tobacco defendants for oper-

ating an illegal price-fixing cartel.

Sanders’s complaint also seeks to enjoin implementation of the “anti-

competitive provisions” of the MSA. His appeal, however, does not

address whether the MSA itself is illegal. Sanders instead argues that the

MSA is one part of a larger illegal scheme. We therefore need not address

whether the MSA itself would be legal in the absence of the alleged larger

scheme.

SANDERS v. BROWN 13217

formed by sovereign state acts that cannot be challenged

under federal antitrust law. See id. at 1098-1101, 1103-05.

The district court further held that the defendants were enti-

tled to Noerr-Pennington immunity because their acts of

negotiating and entering into the MSA constituted protected

speech. See id. at 1101-03. Finally, the district court held that

Sanders’s state law claims failed because the defendants were

immune to those claims as well. See id. at 1104-05.

III. Analysis

A dismissal under Rule 12(b)(6) is reviewed de novo. See

Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005). All

allegations of fact are taken as true. See id. Conclusory allega-

tions and unreasonable inferences, however, are insufficient

to defeat a motion to dismiss. See Cholla Ready Mix, Inc. v.

Civish, 382 F.3d 969, 973 (9th Cir. 2004); Warren v. Fox

Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003).

Review is generally limited to the contents of the com-

plaint, but a court can consider a document on which the com-

plaint relies if the document is central to the plaintiff’s claim,

and no party questions the authenticity of the document. See

Warren, 328 F.3d at 1141 n.5. We therefore can analyze the

MSA, which is obviously central to the claim, in evaluating

the strength of Sanders’s allegations.

A. Preemption

Sanders argues that California’s Qualifying Act and Con-

traband Amendment are preempted by Section 1 of the Sher-

man Act, which states that “[e]very contract, combination in

the form of trust or otherwise, or conspiracy, in restraint of

trade or commerce . . . is declared to be illegal.” 15 U.S.C.

§ 1. To be preempted by this Act, a state statute must be in

“irreconcilable” conflict with the federal antitrust regulatory

scheme. Rice v. Norman Williams Co., 458 U.S. 654, 659

(1982). The only way such a conflict can exist, according to

13218 SANDERS v. BROWN

the Supreme Court, is if the state statute “mandates or autho-

rizes conduct that necessarily constitutes a violation of the

antitrust laws in all cases, or if it places irresistible pressure

on a private party” to violate those laws. Fisher v. City of

Berkeley, 475 U.S. 260, 265 (1986) (quoting Rice, 458 U.S.

at 661) (internal quotation marks omitted). A conflict that is

“hypothetical or potential” is “insufficient” to warrant pre-

emption. Rice, 458 U.S. at 659. Thus, a state statute is only

preempted by the Sherman Act “when the conduct contem-

plated by the statute is in all cases a per se violation. If the

activity addressed by the statute does not fall into that cate-

gory . . . the statute cannot be condemned in the abstract.” Id.

at 661.

Neither the Qualifying Act nor the Contraband Amendment

explicitly allow price fixing, market division, or other per se

illegal monopolistic behavior. Sanders argues, however, that

these statutes create such high barriers to NPMs’ market entry

and ability to price-compete that they have “virtually guaran-

teed collusion and monopoly prices in the cigarette market.”

(Quoting 1 Phillip E. Areeda & Herbert Hovenkamp, Antitrust

Law, ¶ 226(a), at 35 (2006 Supp.)). The statutes therefore

place irresistible pressure on all cigarette companies to fix

prices, Sanders argues.

[1] The statutes do place some pressure on some new-

entrant tobacco companies to charge higher prices if they

decide to enter the market. The Qualifying Act forces NPMs

to place into escrow a per-cigarette payment roughly equal to

the per-cigarette payment that participating manufacturers pay

under the MSA. The Contraband Amendment prevents NPMs

who fail to make the escrow payments from distributing their

cigarettes. If NPMs wish to remain profitable, they must fac-

tor the escrow payments into the prices they charge per ciga-

rette. The statutes thus may cause higher prices and dissuade

some potential market entrants. Nothing, however, forces the

NPMs to either peg their prices to those of participating man-

ufacturers, or to refrain altogether from entering the market.

SANDERS v. BROWN 13219

If the OPMs really are charging artificially high prices, and

thus making artificially high profits, an NPM conceivably

could compete on price by charging a “normal” price and still

make a “normal” profit, even taking the escrow payment into

account.

[2] Sanders therefore has failed to adequately allege that

the implementing statutes mandate or authorize conduct that

“in all cases” violates federal antitrust law. See Fisher, 475

U.S. at 265 (quoting Rice, 458 U.S. at 661) (internal quotation

marks omitted). The implementing statutes are thus not pre-

empted by the Sherman Act. See, e.g., Tritent, 467 F.3d at

557-58 (holding that Kentucky statutes implementing the

MSA in that state were not preempted because they did not

mandate or authorize illegal activity “in all cases”).7

B. Immunity

Sanders next argues that even if the Sherman Act does not

preempt the implementing statutes, the tobacco companies

have nonetheless violated the Act by using the MSA and

implementing statutes to create a price-fixing cartel. The state

of California, for its part, has allegedly fostered this cartel

either by passing the implementing statutes and thus encour-

7

The Second Circuit has held that the MSA and its companion statutes

are preempted by federal law. See Freedom Holdings, 357 F.3d at 222-32.

The Freedom Holdings opinions (both the original and the denial of the

petition for rehearing) feature forceful economic arguments on how

tobacco companies could potentially use the MSA and its companion stat-

utes to minimize price competition and keep new entrants out. The court

concludes that the “alleged arrangement, even without the protection of

the Contraband Statutes . . . would be a per se violation because it is a

naked restraint on competition . . . . With the Contraband Statutes in force,

the scheme as alleged threatens to become a permanent, nationwide car-

tel.” 357 F.3d at 226. Freedom Holdings, however, ignores the Rice

requirement that the statute “in all cases” mandate per se illegal conduct.

The Sixth Circuit in Tritent disagreed with Freedom Holdings for that

very reason. Tritent, 467 F.3d at 557-58. We agree with the Sixth Circuit

and, likewise, decline to follow the Second Circuit’s approach.

13220 SANDERS v. BROWN

aging price-fixing, or at least by failing to prevent it from hap-

pening.

The defendants argue that Sanders has failed to allege any

conduct that would violate the Sherman Act. The defendants

also argue that even if Sanders has adequately pleaded Sher-

man Act violations, they are nonetheless immune from prose-

cution under the Noerr-Pennington immunity doctrine, the

state action doctrine, or both.

1. Noerr-Pennington immunity

The tobacco defendants argue that their acts of (1) negotiat-

ing the MSA, (2) petitioning the California courts for

approval of the MSA, and finally (3) acting according to the

MSA’s terms, are constitutionally protected from antitrust lia-

bility under the Noerr-Pennington immunity doctrine.

[3] The Noerr-Pennington doctrine arises from two

Supreme Court cases, E. R.R. Presidents Conf. v. Noerr

Motor Freight, Inc., 365 U.S. 127, 135-145 (1961), and

United Mine Workers of America v. Pennington, 381 U.S.

657, 669-70 (1965). The Court, citing First Amendment and

federalism concerns, held that private actors are immune from

antitrust liability for petitioning the government, even when

the private actors’ motives are anticompetitive. Noerr-

Pennington immunity protects petitions to all departments of

the government. See Cal. Motor Transport Co. v. Trucking

Unlimited, 404 U.S. 508, 510 (1972); Kottle v. Northwest

Kidney Ctrs., 146 F.3d 1056, 1059 (9th Cir. 1998).

[4] The Supreme Court has interpreted “petitioning” to

encompass activities other than legislative lobbying. For

example, Noerr-Pennington immunity protects private actors

when they file court documents and enter contracts with the

government. See Trucking Unlimited, 404 U.S. at 510; see

also Greenwood Utilities Comm’n. v. Mississippi Power Co.

(Greenwood Utilities), 751 F.2d 1484, 1505 (5th Cir. 1985).

SANDERS v. BROWN 13221

Neither the Supreme Court nor the Ninth Circuit have specifi-

cally held that a settlement agreement like the MSA qualifies

as “petitioning” that may be protected by Noerr-Pennington

immunity. The Seventh Circuit, however, has explicitly held

that Noerr-Pennington immunity protects private parties from

liability for negotiating and entering into settlements or other

agreements with the government. See Campbell v. City of

Chicago, 823 F.2d 1182, 1186-87 (7th Cir. 1987). We now

join that circuit in so holding.

In Noerr, the Supreme Court reasoned that petitioning of

government officials deserved immunity from antitrust liabil-

ity for two reasons. 365 U.S. at 137-38. First, allowing liabil-

ity for such petitions would “substantially impair the power of

[state] government to take actions through its legislature and

executive that operate to restrain trade.” Id. at 137. Second,

“[t]he right of petition is one of the freedoms protected by the

Bill of Rights,” and nothing in the Sherman Act indicated an

intent to “invade” that freedom. Id. at 138. Furthermore, the

Court concluded that it is inappropriate to base liability on

whether a petitioner has an anticompetitive motive, because

that would unduly chill speech:

It is inevitable, whenever an attempt is made to

influence legislation by a campaign of publicity, that

an incidental effect of that campaign may be the

infliction of some direct injury upon the interests of

the party against whom the campaign is directed.

And it seems equally inevitable that those conduct-

ing the campaign would be aware of, and possibly

even pleased by, the prospect of such injury. To hold

that the knowing infliction of such injury renders the

campaign itself illegal would thus be tantamount to

outlawing all such campaigns.

Id. at 143-44.

[5] The act of negotiating a settlement with a state undoubt-

edly is a form of speech directed at a government entity.

13222 SANDERS v. BROWN

Given the Court’s desire to protect free speech from Sherman

Act attack, it is clear why Noerr-Pennington immunity should

protect a private party from liability for such an act. If a per-

son undertaking to negotiate a way out of his legal troubles

were to fear that the very act of negotiating would expose him

to further liability, he might be afraid to attempt a settlement

in the first place. The result would be fewer settlements, even

when the parties would otherwise be willing to reach a princi-

pled compromise, and more cases dragging on for years to the

detriment of all parties, not to mention the court system.

Furthermore, holding that a private party’s settlements with

the government are exposed to antitrust liability would surely,

as the Supreme Court in Noerr warned, “substantially impair

the power of [state] government to take actions through its

legislature and executive that operate to restrain trade.” Id. at

137. If a state can restrain trade through its “legislature and

executive,” that means the attorney general, an executive offi-

cer, can negotiate trade restraints in the context of litigation,

so long as those restraints are not preempted by the Sherman

Act.

[6] We therefore hold that Noerr-Pennington immunity

protects a private party from liability for the act of negotiating

a settlement with a state entity.8 Immunity thus protects the

tobacco defendants from liability for the act of negotiating the

MSA with the State of California.

Sanders argues that even if Noerr-Pennington immunity

protects the defendants from liability for the MSA itself, it

does not protect the tobacco defendants from liability for

increasing prices after the MSA. Sanders bases his argument

on the plurality opinion in Cantor v. Detroit Edison Co., 428

8

We do not address whether Noerr-Pennington immunity may protect

an anticompetitive settlement agreement between two private entities, who

conceivably could claim that the act of petitioning the court to accept their

agreement immunizes the agreement itself.

SANDERS v. BROWN 13223

U.S. 579 (1976). In Cantor, a private utility gave free light

bulbs to customers, an act that allegedly harmed light bulb

retailers. See id. at 581-82. Even though the free-bulb pro-

gram had technically been “approved” by state regulators —

it was included in the utility’s proposed rate plan — the plu-

rality declined to extend Noerr-Pennington immunity to the

program. The plurality said that “nothing in the Noerr opinion

implies that the mere fact that a state regulatory agency may

approve a proposal . . . and thereby require that the proposal

be implemented . . . is a sufficient reason for conferring anti-

trust immunity on the proposed conduct.” Id. at 601-02. Jus-

tice Blackmun, concurring separately, said he agreed with the

plurality “insofar as it holds that the fact that anticompetitive

conduct is sanctioned, or even required, by state law does not

of itself put that conduct beyond the reach of the Sherman

Act.” Id. at 605 (Blackmun, J., concurring in the judgment).

Subsequent cases cast doubt on the precedential value of

this fragmented opinion. The Court itself undercut the Cantor

plurality in Allied Tube & Conduit Corp. v. Indian Head, Inc.,

486 U.S. 492 (1988), in which the Court stated that “ ‘where

a restraint upon trade or monopolization is the result of valid

governmental action, as opposed to private action,’ those urg-

ing the governmental action enjoy absolute immunity from

antitrust liability for the anticompetitive restraint.” Id. at 499

(quoting Noerr, 365 U.S. at 136) (internal alteration omitted).

The lower courts have also interpreted Cantor narrowly. In

Greenwood Utilities, the Fifth Circuit held that Cantor “can-

not support” a broad rule that Noerr-Pennington immunity

never extends to the consequences of government acts that

result from immunized petitioning. See 751 F.2d at 1504.

Such a rule would weaken Noerr-Pennington, the Fifth Cir-

cuit held: “First Amendment petitioning privileges would

indeed be hollow if upon achieving a petitioned-for end the

petitioner were then subjected to antitrust liability for his suc-

cess.” Id. at 1505. The Fifth Circuit distinguished Cantor

because, in that case, the private actor (not the government)

13224 SANDERS v. BROWN

had independently created the restraint. See id. at 1504. The

Fifth Circuit therefore held that Noerr-Pennington immunity

extends to restraints that are created by the government in

response to private-party petitions, as long as those restraints

are “not simply government approval of private conduct.” Id.;

see also Bonollo Rubbish Removal, Inc. v. Town of Franklin,

886 F. Supp. 955, 965 (D. Mass. 1995) (“A Noerr-Pennington

doctrine which shielded a private party in its attempt to secure

a benefit from the government but left the party open to suit

if the benefit was actually received would not serve the inter-

ests of free speech and open access to government that the

Noerr and Pennington Courts intended to protect.”).

[7] For our part, we have followed Allied Tube and explic-

itly held that Noerr-Pennington immunity protects a private

party from liability not only for the petition, but also for any

injuries that result “directly” from valid government action

taken on the petitioner’s behalf. Sessions Tank Liners, Inc. v.

Joor Mfg., Inc., 17 F.3d 295, 299 (9th Cir. 1994). This rule

is dispositive of Sanders’s case, to the extent the injury he

alleges — supracompetitive cigarette prices — resulted

directly from the action of the State of California, that is, from

“the MSA and the Attorney General’s enforcement of the

escrow statute and contraband statute.” Although subsequent

agreements by the plaintiffs to engage in the “operation of an

output cartel” might not be immune from liability under this

rule, Sanders’s complaint does not allege any such subsequent

agreement in restraint of trade. Therefore, because Sanders’s

complaint is based on injuries caused directly by government

action, Noerr-Pennington immunity shields the tobacco

defendants from liability for the alleged supracompetitive

price increases.9 Since Sanders’s claim against the tobacco

9

The Second Circuit in Freedom Holdings found that the MSA imple-

menting statutes were not themselves protected by Noerr-Pennington

immunity because “the immunity for advocacy cannot sensibly protect the

resultant anticompetitive legislation from being held to be preempted as in

conflict with the Sherman Act. Otherwise, all such legislation would be

immune.” 357 F.3d at 233. This holding may be correct, but the defen-

dants here do not claim that Noerr-Pennington immunity protects the

implementing statutes from preemption.

SANDERS v. BROWN 13225

defendants is predicated on these price increases, his claim

against the tobacco defendants must fail.

2. State action immunity

The State of California, for its part, argues that state action

immunity, or “Parker immunity,” protects it from liability

both for entering into the MSA and for enacting the imple-

menting statutes. We agree.

[8] The Parker immunity doctrine protects most state laws

and actions from antitrust liability. The doctrine originated in

Parker v. Brown, 317 U.S. 341, 350-52 (1943). In Parker, the

Court dismissed a Sherman Act challenge to a California law

that restricted competition among raisin manufacturers. The

Court held that nothing in the Sherman Act suggests its pur-

pose is “to restrain a state or its officers or agents from activi-

ties directed by its legislature.” Id. at 350-51. Thus, even a

state law that would violate the Sherman Act is immune from

attack on antitrust grounds. See id. The only exception to this

rule is a state law that attempts to “give immunity to those

who violate the Sherman Act by authorizing them to violate

it, or by declaring that their action is lawful.” Id. at 351.

The Supreme Court has never specified what conduct com-

prises a state action that is “directed” by the state legislature

and is therefore immune. In post-Parker cases, however, the

Supreme Court has articulated some general tests to help

decide whether a particular action qualifies for Parker immu-

nity. A threshold question, therefore, is whether a court-

approved settlement like the MSA may be protected by Par-

ker immunity. The next question is whether the MSA scheme

in particular meets the Supreme Court criteria for Parker

immunity.

[9] The answer to the first question is clear under our

court’s precedents. If a government entity enters into a settle-

ment like the MSA, the settlement is a “state action” that may

13226 SANDERS v. BROWN

be protected by Parker immunity. We have held that Parker

covers not only state legislation, but also the acts of courts

and executive-branch officials. See Charley’s Taxi Radio Dis-

patch Corp. v. SIDA of Hawaii, Inc., 810 F.2d 869, 876 (9th

Cir. 1987); Deak-Perera Hawaii, Inc. v. Dept. of Transporta-

tion, 745 F.2d 1281, 1283 (9th Cir. 1984). The MSA in partic-

ular seems to involve several state actions. To begin with, the

lawsuits against the tobacco defendants were initially filed by

the states. Even though private tobacco companies initiated

the settlement negotiations, the California attorney general

ultimately approved the MSA, and the state court approved

the settlement in a consent decree and final judgment. The

MSA thus fits the basic definition of “state action” for Parker

purposes.

[10] The second question — whether the MSA scheme

meets all the criteria for Parker immunity — is considerably

more complex. Even though the MSA is probably a state act,

it does not necessarily qualify for Parker immunity from anti-

trust liability. A series of Supreme Court cases holds that any

action in restraint of trade is only immune if it satisfies a two-

part test: The anticompetitive policy not only must be (1)

“clearly articulated and affirmatively expressed as state poli-

cy,” but also must be (2) “actively supervised by the state

itself.” Cal. Retail Liquor Dealers Ass’n. v. Midcal Alumi-

num, Inc. (Midcal), 445 U.S. 97, 105 (1980) (quoting City of

Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 410

(1978) (plurality opinion)) (internal quotation marks omitted);

see also 324 Liquor Corp. v. Duffy, 479 U.S. 335, 343-44

(1987); Patrick v. Burget, 486 U.S. 94, 100 (1988); FTC v.

Ticor Title Ins. Co., 504 U.S. 621, 631 (1992). Other Supreme

Court cases, however, explicitly hold that a state’s own acts

in the antitrust area are always immune; these cases suggest

that the two-part “Midcal test” is only needed to decide

whether private conduct pursuant to a state statute gets Parker

immunity. In other words, a state need not show it “actively

supervises” private parties, as long as the state itself, acting as

sovereign, created the restraint of trade. See Hoover v. Ron-

SANDERS v. BROWN 13227

win, 466 U.S. 558, 568-69 (1984); City of Columbia v. Omni

Outdoor Advertising, Inc., 499 U.S. 365, 377-79 (1991).

It is unclear whether Hoover and Midcal are coexisting

“live” precedents, or whether one overrules the other. It is

possible that the Midcal test is limited, as Hoover suggests, to

cases in which the courts must decide whether private conduct

is actually protected “state action.” The Midcal line of cases,

however, never mentions the Hoover line of cases, even

though they chronologically overlap. Indeed, 324 Liquor,

which was decided after Hoover, explicitly states that the way

a state statute gets Parker immunity is by satisfying the two-

part Midcal test. See 479 U.S. at 343-44. Since 324 Liquor

never mentions Hoover, it is unclear whether the Supreme

Court was saying that even sovereign state acts must meet the

Midcal test (therefore overruling Hoover without saying so)

or merely applying the Midcal test in an appropriate circum-

stance (by analyzing whether private conduct gets Parker

immunity).

Whether the Midcal test applies to the MSA is a critical

question for the present case. The lower courts have split on

whether the MSA should get Parker immunity, chiefly

because some apply Midcal, and some — following the Hoo-

ver precedent — do not. Compare Bedell, 263 F.3d at 259-65

(applying the Midcal test and finding no Parker immunity);

Freedom Holdings, 357 F.3d at 226-32 (same), with PTI, 100

F. Supp. 2d at 1195-96 (citing Hoover, declining to apply

Midcal, and holding that Parker immunity protects defendants

from liability); S & M Brands, 393 F. Supp. 2d at 621-29

(same).

Sanders argues that the Midcal test is appropriate here and

reasons that since California has never “actively supervised”

the tobacco defendants’ price increases, state action immunity

protects none of the defendants from antitrust liability. The

defendants, however, argue that the Midcal test is inappropri-

ate because the MSA and the implementing statutes were

13228 SANDERS v. BROWN

“sovereign acts,” and that under Hoover, the MSA, the Quali-

fying Act and the Contraband Amendment are automatically

immune from suit.

Our circuit precedent indicates that the defendants are cor-

rect. In Deak-Perera Hawaii, we held that a state “acting as

sovereign” is “immune from the federal antitrust laws.” 745

F.2d at 1282 (internal citations and quotation marks omitted).

We distinguished Midcal by noting that “this is not a case of

private parties imposing competitive restraints in conjunction

with state authorities. In such a case the inquiry would be dif-

ferent.” Id. at 1283; see also Charley’s Taxi, 810 F.2d at

875-76 (following Deak-Perera).

Nonetheless, Sanders argues that the Midcal line of cases

have overruled Hoover, and that Deak-Perera and Charley’s

Taxi therefore are dead precedents. Sanders points to Ninth

Circuit cases that, like the Midcal line of cases, apply the

Midcal test without considering the Hoover rule that sover-

eign state acts are per se immune. See, e.g., Snake River Val-

ley Elec. Ass’n. v. Pacificorp, 238 F.3d 1189, 1192-95 (9th

Cir. 2001). Even though these cases might be read to shed

some doubt on Hoover’s viability, we conclude that the Hoo-

ver rule survives both logical scrutiny and a semantic parsing

of the Midcal cases.

First, it makes no sense to apply the Midcal test to a sover-

eign state act. Midcal holds that an anticompetitive restraint

is protected under Parker only if the state “actively supervise-

[s]” the anticompetitive conduct. 445 U.S. at 105. Parker,

however, appears to extend immunity from antitrust liability

to all government officers’ acts if those acts are “directed by

[a state’s] legislature.” 317 U.S. at 350-51. If the Midcal test

applied to those government officers’ acts, it would dramati-

cally narrow the scope of immunized acts to those in which

the government took an active role in supervising the market-

place. Rigid pricing schemes in which the state government

itself sets prices for products, and enforces penalties on those

SANDERS v. BROWN 13229

who violated the controls, might be immune from antitrust lia-

bility, but gentler schemes that restrained competition without

engaging in onerous “active supervision” might be illegal.

Such a rule appears to conflict with a key holding of Parker:

that the Sherman Act is not intended to interfere with state

attempts to impose market restraints. See Parker, 317 U.S. at

350-51.

Second, the holding in Hoover is broader than the holdings

in the Midcal line of cases. The Court in Hoover said that

“[t]he starting point in any analysis involving the state-action

doctrine is the reasoning of Parker v. Brown.” 466 U.S. at 567

(emphasis added). Since Parker held that state acts are

immune from antitrust liability, the Hoover Court reasoned,

“[w]here the conduct at issue is in fact that of the state legisla-

ture or supreme court, we need not address the issues of ‘clear

articulation’ and ‘active supervision.’ ” Id. at 569. “Closer

analysis” is only required “when the activity at issue is not

directly that of the legislature or supreme court, but is carried

out by others pursuant to state authorization.” Id. at 568. In

short, Hoover clearly states that the Midcal test does not apply

to sovereign state acts, which are immune from antitrust lia-

bility so long as they avoid preemption by authorizing per se

illegal activities.

Midcal, however, makes no such blanket statements. In that

opinion, the Court was chiefly concerned with how to distin-

guish between a private price-fixing scheme and an immu-

nized state act. Indeed, each of the Midcal line of cases

involved a private body — not a state — making anticompeti-

tive decisions under the aegis of a state regulatory scheme. In

Midcal and 324 Liquor, the Court considered whether state-

authorized pricing schemes for wholesale alcohol, which gave

price-fixing control to private parties, had enough active state

supervision to qualify for Parker immunity. Midcal, 445 U.S.

at 103-06; 324 Liquor, 479 U.S. at 342-45. In Ticor, the Court

examined whether states had given too much leeway to title

search companies to set their own rates. 504 U.S. at 632-40.

13230 SANDERS v. BROWN

And in Patrick v. Burget, the Court analyzed a state-

authorized, but privately-run, medical review board that alleg-

edly restricted competition among doctors. 486 U.S. at 99-

106.

Furthermore, the Supreme Court has repeatedly hinted that

the Midcal test is limited only to situations in which private

bodies operate under state regulatory authority. In Southern

Motor Carriers Rate Conf., Inc. v. United States, 471 U.S. 48

(1985), the Court stated that Midcal’s two-pronged test is “ap-

plicable to private parties’ claims of state action immunity,”

but said nothing about whether the test applied to sovereign

state acts. 471 U.S. at 61. In Ticor, the Court clarified that in

Midcal, “we announced the two-part test applicable to

instances where private parties participate in a price-fixing

regime.” 504 U.S. at 633 (emphasis added).

[11] Hoover therefore controls in cases where the state,

acting as a sovereign, imposes restraints on competition. The

state in such situations is immune from antitrust liability,

regardless of whether the restraint in question would satisfy

the Midcal test.

[12] Since the California attorney general’s act of entering

into the MSA is a sovereign act, as are the legislature’s

actions in enacting the Qualifying Act and Contraband

Amendment, the state is immune from antitrust liability for

these actions, unless the MSA scheme is an attempt to “give

immunity to those who violate the Sherman Act by authoriz-

ing them to violate it, or by declaring that their action is law-

ful.” Parker, 317 U.S. at 351. The MSA and the

implementing statutes authorize no illegal activity, as we dis-

cussed above in analyzing whether the implementing statutes

are preempted. See Part III.A supra. We therefore hold that

Parker immunity protects the state from antitrust liability for

entering into the MSA and for passing the implementing stat-

utes.

SANDERS v. BROWN 13231

In so holding, we recognize that we disagree with two other

circuits. The Second Circuit in Freedom Holdings and the

Third Circuit in Bedell applied the Midcal analysis and held

that Parker immunity does not protect the state from liability

for entering into the MSA. Freedom Holdings, 357 F.3d at

226-32; Bedell, 263 F.3d at 259-66. As discussed above, how-

ever, we believe the Midcal analysis would only be appropri-

ate if the MSA is not a sovereign act, which we conclude it

is.

We also reject the Bedell Court’s conclusion that the MSA

is not a sovereign state act, but rather resembles a “hybrid

restraint” existing somewhere outside the realm of Par-

ker immunity. Bedell, 263 F.3d at 258. To explain why we

disagree, it is necessary to briefly touch on the concept of a

“hybrid restraint.”

A hybrid restraint is one form of state law that is illegal per

se under the Sherman Act. See Fisher, 475 U.S. at 267-270.

A hybrid restraint exists when the state creates “nonmarket

mechanisms [that] merely enforce private marketing deci-

sions.” Id. at 267-68. In other words, it exists when the state

passes laws that enforce companies’ decisions to collude on

prices, to dictate prices by which other companies must abide,

or to otherwise violate the Sherman Act.

Ninth Circuit and Supreme Court cases provide a few

examples of hybrid restraints. Each of these cases hinged on

a state’s decision to let producers dictate market conditions to

others — for example, by “posting” prices that then became

legally binding on buyers and other producers. See id. at 268-

69 (characterizing as hybrid restraints the price-posting

schemes that had been the subjects of Midcal and of Schweg-

mann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951));

see also 324 Liquor, 479 U.S. at 345 n.8 (noting that a New

York law allowing liquor wholesalers to fix their own prices

could be called a hybrid restraint); Miller, 813 F.2d at

1349-51 (finding a hybrid restraint where a statutory scheme

13232 SANDERS v. BROWN

let wholesalers set prices that retailers were legally bound to

honor).

[13] Such a scheme necessarily involves a delegation of

market power to private parties that is per se illegal under the

Sherman Act. See Miller, 813 F.2d at 1349-51 (citing Fisher,

465 U.S. at 267-68). Otherwise, the hybrid restraint could not

be attacked as facially invalid. As we have already discussed,

the MSA involves no such delegation of per se illegal power

such as the ability to fix prices. See Part III.A supra. We must

therefore conclude that the MSA cannot be classified as a

hybrid restraint.10 Accordingly, we decline to follow the Third

Circuit and instead hold that the state is entitled to Parker

immunity in this case.11

C. State law claims

[14] Sanders also brought claims under California antitrust

law. California courts have held that the Noerr-Pennington

immunity doctrine applies to protect private petitioners of the

government from state-law antitrust liability in exactly the

same way as it protects them from federal antitrust liability.

See Blank v. Kirwan, 703 P.2d 58, 63-65 (Cal. 1985). Since

Noerr-Pennington immunity shields the tobacco defendants

from Sherman Act liability, it also shields them from state

antitrust liability. See PTI, 100 F. Supp. 2d at 1196.

10

The Sixth Circuit, in Tritent, reached a similar conclusion about the

Kentucky version of the MSA scheme. The Sixth Circuit held that the Rice

v. Norman Williams Co., 458 U.S. 654 (1982), preemption analysis “must

precede the analysis under the hybrid-restraint theory.” Tritent, 467 F.3d

at 558. Since the plaintiffs in Tritent had failed to demonstrate preemption,

the Sixth Circuit declined to hold that the Kentucky version of the MSA

scheme was a hybrid restraint. Id.

11

The tobacco defendants argue that they, too, are entitled to Parker

immunity. We need not reach this issue, since we have already held that

they are entitled to immunity under the Noerr-Pennington doctrine.

SANDERS v. BROWN 13233

[15] As for the State of California’s liability under its own

laws, the district court correctly noted that the California leg-

islature could hardly have violated its own statutes by passing

another statute. See Sanders, 365 F. Supp. 2d at 1104-05. Fur-

thermore, the California courts have held that political divi-

sions of the State of California are not subject to the

Cartwright Act, which means that the state cannot be held lia-

ble for entering into the MSA. See Blank, 703 P.2d at 65.

D. Conclusion

[16] Sanders has failed to show that the MSA implement-

ing statutes are per se illegal under the Sherman Act. Sanders

also has failed to show that any of the defendants are liable

under either the Sherman Act or under California antitrust

law. Sanders therefore has failed to state a claim entitling him

to relief, and the district court properly dismissed his lawsuit.

AFFIRMED.