Mariana v. Fisher

• Decision Date: 30 July 2003
• Docket Number: No. 02-2906.,02-2906.
• Citation: 338 F.3d 189
• Parties: Robert MARIANA; Michael J. McFadden; Karen M. Moran; Edward M. Nankervis, Appellants v. D. Michael FISHER, in his official capacity as Attorney General of the Commonwealth of Pennsylvania; Larry Williams, in his official capacity as Secretary of Revenue of the Commonwealth of Pennsylvania.
• Court: U.S. Court of Appeals — Third Circuit

338 F.3d 189

Robert MARIANA; Michael J. McFadden; Karen M. Moran; Edward M. Nankervis, Appellants v. D. Michael FISHER, in his official capacity as Attorney General of the Commonwealth of Pennsylvania; Larry Williams, in his official capacity as Secretary of Revenue of the Commonwealth of Pennsylvania.

No. 02-2906.

United States Court of Appeals, Third Circuit.

Argued March 12, 2003.

Decided July 30, 2003.

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David F. Dobbins, Patterson, Belknap, Webb & Tyler, New York, NY, Alan R. Wentzel (Argued), Leonard Violi, Windels, Marx, Lane & Mittendorf, New York, NY, William M. Wycoff, Thorp, Reed & Armstrong, Pittsburgh, PA, Dennis J. O'Brien, Pittsburgh, PA, Donald W. Ricketts, Santa Clarita, CA, Peter R. Mahler, Derfner & Mahler, New York, NY, for Appellants.

D. Michael Fisher (Argued), Attorney General of Pennsylvania, John G. Knorr, III, Chief Deputy Attorney General, Chief, Appellate Litigation Section, Joel M. Ressler, Chief Deputy Attorney General, Chief, Tobacco Enforcement Section Office of Attorney General of Pennsylvania, Department of Justice, Harrisburg, PA, for Appellees.

Bill Lockyer, Attorney General of California, Richard M. Frank, Chief Assistant Attorney General, Dennis Eckhart, Senior Assistant Attorney General, Michelle L. Fogliani, Karen Leaf, Deputy Attorneys General, Office of the Attorney General of California, Sacramento, CA, for Amici Curiae, Alaska, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North Dakota, Northern Mariana Islands, Ohio, Oklahoma, Oregon, Puerto Rico, South Carolina, South Dakota, Tennessee, Utah, Vermont, Govt. V.I., Washington, West Virginia, Wisconsin, Wyoming.

Before: SLOVITER, NYGAARD, and ALARCÓN,^* Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

This appeal presents us with yet another round of litigation surrounding the multi-billion dollar national tobacco settlement, known as the Master Settlement Agreement ("MSA").¹ In 1998, the M.S.A. was entered into between 46 States and the four largest domestic tobacco companies that together made 98% of cigarette sales in the United States at that time, referred to as the "Majors."² Plaintiffs Robert Mariana, Michael McFadden, Karen Moran and Edward Nankervis, all Pennsylvania residents who smoke cigarettes, filed suit claiming that certain provisions of the M.S.A. violate Section 1 of the Sherman Act, 15 U.S.C. § 1, the Commerce Clause, U.S. Const. art. I, § 8, cl. 3, and the Compact Clause, U.S. Const. art. I, § 10, cl. 3, of the United States Constitution.

In their complaint, Plaintiffs sued Larry Williams, Pennsylvania's Secretary of Revenue, and Michael Fisher, the Attorney General of Pennsylvania in their official capacities. We note that the Majors are not named defendants in this particular litigation as this court concluded in an earlier decision that the Majors were immune from antitrust liability under the Noerr-Pennington doctrine. See A.D. Bedell Wholesale Co., Inc. v. Philip Morris Inc., 263 F.3d 239 (3d Cir.2001), cert. denied, 534 U.S. 1081, 122 S.Ct. 813, 151 L.Ed.2d 697 (2002).

The District Court dismissed the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), and Plaintiffs appeal.

I. FACTS AND PROCEDURAL HISTORY

A comprehensive history of the M.S.A. can be found in Bedell and will be repeated here only to the extent necessary for the discussion and analysis. The M.S.A. was negotiated after various lawsuits were either brought or threatened against the Majors and other tobacco companies by States seeking to recover Medicaid funds that they spent to treat tobacco-related diseases. Pennsylvania filed suit against the Majors in April 1997 and the suit was settled as part of the MSA.³

Under the MSA, the Majors agreed to pay the settling States billions of dollars and to restrict their marketing of cigarettes, one of the practices complained about in the States' lawsuits. In return, the M.S.A. included provisions designed to enable the Majors to transfer billions of dollars to the States, provisions that the Plaintiffs allege were to be funded by the payment by wholesalers and consumers of artificially high prices for cigarettes. Plaintiffs further contend that after the M.S.A. was entered into, the prices charged by the Majors have generated revenue much greater than needed to fund the M.S.A. and have enabled the Majors to spend record amounts on advertising.

After the execution of the MSA, additional tobacco manufacturers representing 2% of the market joined the settlement as Subsequent Participating Manufacturers ("SPMs"). That joinder meant that nearly all of the domestic cigarette producers had signed the MSA. Bedell, 263 F.3d at 243.

The addition of the SPMs was significant, as the Majors allegedly had feared that cigarette manufacturers who had been left out of the M.S.A. would be able to expand their market share or enter the market by offering lower prices. Id. The M.S.A. is explicit that its purpose is to reduce the ability of non-signatory cigarette manufacturers to gain market share due to the competitive advantage gained by not contributing to the multi-billion dollar settlement. Id. at 246. Indeed, the M.S.A. declares that it "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).

On January 10, 2002, Plaintiffs filed this suit against the Pennsylvania Attorney General and the Secretary of Revenue, in their official capacities, seeking injunctive relief from the continued implementation, enforcement and performance of the M.S.A. on behalf of Pennsylvania. Plaintiffs claim that a major objective of the M.S.A. is to prevent SPMs and Non-Participating Manufacturers ("NPMs") from expanding their market share and to prevent new or potential competitors from entering the market. Specifically, they challenge the MSA's so-called "Renegade Clause," the settlement's primary mechanism for allocating payment responsibilities based on production levels, and the MSA's provision calling for enactment by the settling States of "Qualifying Statutes," laws requiring NPMs to make payments into state escrow accounts for each sale made. See Bedell, 263 F.3d at 243. Pennsylvania's Qualifying Statute, the Tobacco Settlement Agreement Act ("TSAA"), 35 Pa. Cons.Stat. §§ 5672-5674 (2003), requires each NPM either to become a signatory to the M.S.A. as an SPM or to make payments into an escrow account fund to be held to pay any judgment or settlement that the Commonwealth secures in subsequent litigation against the NPM. 35 Pa. Cons.Stat. § 5674(a) and (b)(1). The payments are to be returned to the NPM after 25 years if they are not needed to pay judgments or settlements. 35 Pa. Cons.Stat. § 5674(b)(3).

The Renegade Clause provides that the SPM need not make payments to the States under the M.S.A. as long as the market share of an SPM does not exceed the greater of its 1998 market share or 125% of its 1997 market share. MSA IX(I). This mechanism allegedly discourages SPMs from underpricing the Majors to increase their market share, even if they could do so efficiently. See Bedell, 263 F.3d at 244. This provision, the Plaintiffs claim, effectively puts a market share cap on SPMs and restricts their output.

Similarly, if NPMs, including potential new entrants into the market, gain market share, thereby reducing the Majors' market share, the Majors may decrease their payments to the settlement fund. Bedell, 263 F.3d at 244. The Qualifying Statute requires that the NPMs choose between joining the MSA, thereby subjecting themselves to the same restrictions on market share as SPMs, or be subject to tobacco related lawsuits for which they must make payments into the State established escrow account for any potential adverse judgments. Id. at 246. The M.S.A. § also creates a $50 million Enforcement Fund provided by the Majors to investigate and sue NPMs to enforce the settlement. Id. at 245-46.

According to Plaintiffs, economics force SPMs to join the scheme while new entry is precluded. This enables the Majors to cling to their 98% market share, thereby creating an unregulated cartel. Plaintiffs claim that this output cartel has allowed and continues to allow the Majors to raise prices to artificially high and supracompetitive levels without fear of significant competition and without any monitoring, regulation, or active supervision by the States. In fact, Plaintiffs allege that since the execution of the MSA, the Majors have raised wholesale prices of cigarettes by nearly 60% while losing less than 5% of their market share. This, according to Plaintiffs, is a violation of the Sherman Act. Finally, Plaintiffs allege that the M.S.A. violates the Commerce and Compact Clauses of the U.S. Constitution.

In dismissing the antitrust claims asserted in the complaint, the District Court held that in light of Bedell, Defendants, like the Majors, enjoy Noerr-Pennington immunity. It further found that Plaintiffs could prove no set of facts that would establish violations of the Commerce and Compact Clauses of the United States Constitution. Plaintiffs timely appealed. Forty states, the District of Columbia, and the Northern Mariana Islands, all parties to the MSA, have filed an amicus brief urging us to affirm the order of the District Court.

II. JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction to hear this appeal pursuant to 28 U.S.C. § 1291. We exercise de novo review over the dismissal of claims under Federal Rule of Civil Procedure 12(b)(6). Bedell, 263 F.3d at 249 n. 25. Furthermore, we must take all factual...