Sixth Circuit upholds national tobacco agreement

Jessica M. Karmasek Feb. 24, 2012, 2:45pm


CINCINNATI (Legal Newsline) - A federal appeals court has upheld a district court's ruling in favor of a group of tobacco manufacturers and 52 attorneys general.

In its 22-page opinion Wednesday, the U.S. Court of Appeals for the Sixth Circuit affirmed a decision by the U.S. District Court for the Western District of Kentucky against plaintiff VIBO Corporation Inc.

VIBO, doing business as General Tobacco, appealed the district court's Jan. 6, 2010 order dismissing its antitrust claims against the tobacco companies, its constitutional claims against the attorneys general, and denying its motion for preliminary injunctive relief.

The claims at issue revolve around the Master Settlement Agreement, which was reached in November 1998 to end litigation between several states and the four largest tobacco companies at the time.

The litigation involved the tobacco companies' advertising strategies, which allegedly misled consumers as to the harmful and addictive effects of tobacco and inappropriately targeted underage consumers.

Under the MSA, the attorneys general of several states agreed to release their past and future claims against the tobacco companies in exchange for large settlement payments, future annual disbursements from the tobacco companies managed under an approved payment scheme, and restrictions on the companies' future advertising and marketing.

In addition to releasing their claims against the original participating manufacturers under the MSA, the attorneys general released claims against their suppliers, retailers and distributors.

The release also provided an incentive for these businesses to partner with the original manufacturers rather than tobacco companies that had not joined the MSA, referred to as non-participating manufacturers.

General Tobacco entered the tobacco market in 2000, two years after the MSA was reached.

The company originally operated as a non-participating manufacturer in a few states, including Kentucky, Florida and North Carolina. It paid into state escrow accounts, but the states began to amend their escrow statutes to make the payments more burdensome.

Ultimately, General Tobacco decided it would be more profitable to operate as a subsequent participating manufacturer.

It joined the MSA in 2004 by negotiating its adherence agreement with the attorneys general.

The agreement outlined the company's mandatory back-payment amount and the payment amounts it would make going forward. These payment amounts were determined, in part, based on the company's 2 percent share in the national tobacco market.

However, General Tobacco alleged that during negotiations for the agreement, the attorneys general failed to explain the extent of the payment reductions granted to grandfathered subsequent participating manufacturers and denied the company access to this information on the grounds that other participating manufacturers' payment arrangements were confidential.

After joining the MSA, the company also became dissatisfied with the "disparate treatment" afforded the other tobacco companies.

In particular, General Tobacco contends its per-carton payment obligation was higher than the obligations of others.

Eventually, because of the higher costs, the now-defunct company was unable to meet its back-payment obligations and its payments going forward as required under its agreement.

In an attempt to renegotiate, it sought an amended adherence agreement with the attorneys general, lessening its payment obligations.

However, the attorneys general declined to execute such an agreement.

The company subsequently filed a lawsuit.

The Sixth Circuit said the attorneys general acted in their "sovereign capacities," and not their "market participant capacities," in enacting and enforcing the MSA and in deciding to forgo the amended adherence agreement with General Tobacco.

"Therefore, they are protected by state-action immunity," Judge Eric L. Clay wrote.

The same immunity extends to the tobacco manufacturers, the court said.

In addition, the Sixth Circuit noted that the company agreed to be bound by the MSA when it signed its adherence agreement.

Section XV of the MSA addresses the possibility of constitutional claims between the parties and contains a waiver clause. The provision states, in relevant part:

"Each Participating Manufacturer further acknowledges that it understands that certain provisions of this Agreement may require it to act or refrain from acting in a manner that could otherwise give rise to state or federal constitutional challenges and that, by voluntarily consenting to this Agreement it... waives for the purposes of performance of this Agreement any and all claims that the provisions of this Agreement violate the state or federal constitutions."

The Sixth Circuit, which read the section more broadly than the district court, determined that all constitutional claims related to the MSA are waived.

"Plaintiff has not alleged that it did not understand that it was waiving its constitutional claims. The Section XV waiver is clear, and Plaintiff is a sophisticated corporation that was represented by counsel in the course of its arms-length negotiations. The waiver is valid," the court wrote.

"Because Plaintiff knowingly, voluntarily, and intelligently agreed to Section XV, we find all of its constitutional claims, including its Compact Clause claim, properly dismissed as waived."

From Legal Newsline: Reach Jessica Karmasek by email at

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