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

• Decision Date: 11 July 2001
• Docket Number: No. 00-3410,00-3410
• Parties: (3rd Cir. 2001) A.D. BEDELL WHOLESALE COMPANY, INC.; TRIANGLE CANDY & TOBACCO CO., on behalf of themselves and all others similarly situated, Appellants v. PHILIP MORRIS INCORPORATED; R.J. REYNOLDS TOBACCO COMPANY, INC.; BROWN AND WILLIAMSON TOBACCO CORP
• Court: U.S. Court of Appeals — Third Circuit

Page 239

263 F.3d 239 (3rd Cir. 2001)

A.D. BEDELL WHOLESALE COMPANY, INC.; TRIANGLE CANDY & TOBACCO CO., on behalf of themselves and all others similarly situated, Appellants v. PHILIP MORRIS INCORPORATED; R.J. REYNOLDS TOBACCO COMPANY, INC.; BROWN AND WILLIAMSON TOBACCO CORP.

No. 00-3410

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued December 14, 2000

Filed June 19, 2001

Amended July 11, 2001

DAVID F. DOBBINS, ESQUIRE (ARGUED), Patterson, Belknap, Webb & Tyler, New York, New York. WILLIAM M. WYCOFF, ESQUIRE, Thorp, Reed & Armstrong, Pittsburgh, Pennsylvania. ALAN R. WENTZEL, ESQUIRE, Windels, Marx, Lane & Mittendorf, New York, New York, DENNIS J. O'BRIEN, ESQUIRE, USX Tower, Suite 660, 600 Grant Street, Pittsburgh, Pennsylvania 15219, Attorneys for Appellants.

DOUGLAS L. WALD, ESQUIRE (ARGUED), Arnold & Porter, Washington, D.C. BERNARD D. MARCUS, ESQUIRE, Marcus & Shapira, Pittsburgh, Pennsylvania, Attorneys for Appellee, Philip Morris Incorporated.

GREGORY G. KATSAS, ESQUIRE (ARGUED), Jones, Day, Reavis & Pogue, Washington, D.C. JOHN E. IOLE, ESQUIRE, Jones, Day, Reavis & Pogue, Pittsburgh, Pennsylvania, Attorneys for Appellee, R.J. Reynolds Tobacco Company, Inc.

TIMOTHY P. RYAN, ESQUIRE, Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pennsylvania, Attorney for Appellee, Brown and Williamson Tobacco Corp.

ERIK S. JAFFE, ESQUIRE (ARGUED), Washington, D.C. THOMAS C. O'BRIEN, ESQUIRE, Corning, New York, 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, Harrisburg, Pennsylvania, 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.

Before: SCIRICA, FUENTES and GARTH, Circuit Judges.

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 states¹ 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.²

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-Pennington³ and Parker⁴ immunity doctrines.⁵ We agree they are immune under the Noerr-Pennington doctrine but not under the Parker doctrine. We will affirm.⁶

I. 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.⁷ Along with Lorillard Tobacco Co.,⁸ 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.⁹ 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.¹⁰ Faced with the prospect of defending multiple actions nationwide, the Majors sought a congressional remedy, primarily in the form of a national legislative settlement.¹¹ 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 in 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.¹² 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.¹³ 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 1998.¹⁴ 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,"¹⁵ 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.¹⁶ 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.¹⁷ 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...