Sanders v. Lockyer

• Citation: 365 F.Supp.2d 1093
• Decision Date: 28 March 2005
• Docket Number: No. C 04-02281 SI.,C 04-02281 SI.
• Court: U.S. District Court — Northern District of California
• Parties: Steve SANDERS, individually and as class representative, Plaintiff, v. Bill LOCKYER, in his official capacity as Attorney General of the State of California; Philip Morris USA, Inc.; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco Corporation; and Lorillard Tobacco Company, Defendants.

Page 1093

365 F.Supp.2d 1093

Steve SANDERS, individually and as class representative, Plaintiff, v. Bill LOCKYER, in his official capacity as Attorney General of the State of California; Philip Morris USA, Inc.; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco Corporation; and Lorillard Tobacco Company, Defendants.

No. C 04-02281 SI.

United States District Court, N.D. California.

March 28, 2005.

COPYRIGHT MATERIAL OMITTED

Thad Alan Davis, A. William Urquhart, Daryl M. Crone, Ryan Geoffrey Baker, Quinn Emanuel Urquhart Oliver & Hedges LLP, Los Angeles, CA, for Plaintiff.

Jeanne Finberg, California Office of the Attorney General, Oakland, CA, Karen Tapley Leaf, California Attorney General's Office, Sacramento, CA, Anna S. McLean, Heller Ehrman White & McAuliffe LLP, Patrick J. Gregory, Shook Hardy & Bacon LLP, San Francisco, CA D. Eric Shapland, Heller Ehrman White & McAuliffe LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS

ILLSTON, District Judge.

On January 12, 2005, this Court heard oral argument on motions to dismiss brought by defendant Bill Lockyer ("Lockyer") and defendants Philip Morris USA, Inc., R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, and Lorillard Tobacco Company (collectively "manufacturer defendants"). Having carefully considered the arguments of counsel and the papers submitted, the Court hereby GRANTS defendants' motions for the reasons set forth below.

BACKGROUND

This case arises out of the Master Settlement Agreement ("MSA") entered into on November 23, 1998, between the four leading domestic cigarette manufacturers and the attorneys general of forty-six states, including California.¹ The MSA and related legislation have been subject to multiple legal challenges, and two different district courts in this circuit have rejected such challenges. See PTI, Inc. v. Philip Morris, Inc., 100 F.Supp.2d 1179 (C.D.Cal.2000); Forces Action Project LLC v. California, 2000 WL 20977 (N.D.Cal.2000).²

Under the MSA, the states agreed to dismiss pending suits and to refrain from filing suit against the four cigarette manufacturers, and the manufacturers agreed to pay billions of dollars to the states over a number of years, to be used to pay health costs from smoking-related illnesses and to fund smoking prevention programs. These four manufacturers also agreed to numerous restrictions regarding sales, marketing, advertising, lobbying, research, education, and disclosure practices. MSA § III. Courts in the settling states issued consent decrees and final judgments approving the MSA.

The four manufacturer defendants in this case, Philip Morris USA Inc., R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, and Lorillard Tobacco Company, are referred to in the MSA as the "Original Participating Manufacturers," or OPMs. Under the MSA, the OPMs are required to make annual payments to the settling states based on their relative market shares. Other cigarette manufacturers existing at the time of the MSA were given ninety days to elect to participate in the MSA. Those who did are called "Subsequent Participating Manufacturers," or SPMs. An SPM is subject to the same marketing restrictions as the OPMs but guaranteed a permanent exemption from the annual payment requirement as long as its market share remains below 1998 levels or 125% of 1997 levels, whichever is greater. MSA § IX(i). Plaintiff alleges that the OPMs and SPMs account for at least 96% of all U.S. cigarette sales. Compl. ¶ 18. Manufacturers electing not to participate in the MSA are called "Non-Participating Manufacturers," or NPMs. NPMs are not subject to any marketing restrictions.

Plaintiff Steve Sanders represents a class of California consumers who purchased cigarettes manufactured by one or more of the manufacturer defendants from June 9, 2000, to the present. Compl. ¶ 6. Plaintiff challenges the MSA as an "anticompetitive hybrid agreement" that permits the OPMs and SPMs to prevent price competition and raise cigarette prices. Compl. ¶ 3, 20. Plaintiff also alleges that the manufacturer defendants have "further protect[ed] their market dominance" by "obtain[ing] the passage of two California statutes" and have dramatically increased the price of cigarettes since the enactment of the MSA. Id. According to plaintiff, the MSA creates a cartel accomplished through several of its provisions: (1) the Relative Market Share Adjustment; (2) the Renegade Clause; (3) the NPM Downward Adjustment; (4) the Qualifying Acts; (5) the Contraband Amendments; and (6) the Severability Clause.

The Relative Market Share Adjustment provides that each individual manufacturer defendant's share of the annual payment obligation is based on its relative market share.³ Plaintiff alleges that the Relative Market Share Adjustment restricts output and eliminates price competition because if one OPM raises prices, the others will be "induced and/or coerced" into following the price increase, since any increase in market share will be offset, exceeded, or substantially reduced by increased payment obligations. Compl. ¶ 21.

The Renegade Clause permanently exempts an SPM from making annual payments as long as its market share remains below 1998 or 125% of 1997 levels. For each increase in market share, an SPM is penalized by having to pay a pro rata share of the annual payment. Thus, plaintiff alleges that the Renegade Clause effectively prevents SPMs from price competing with the manufacturer defendants by penalizing SPMs that increase their market share and offsetting the profits an SPM can get from additional sales. Compl. ¶ 22.

The NPM Downward Adjustment compensates manufacturer defendants for any loss in market share due to "disadvantages" associated with participating in the MSA, including price competition with a NPM. In some circumstances, the manufacturer defendants' payment obligation may be decreased up to three times the amount of revenue lost, which coerces states to protect the manufacturer defendants' market share so as not to suffer this reduction in revenue. Compl. ¶ 23. According to plaintiff, the states have enacted laws that protect the MSA's anti-competitive provisions, specifically the Qualifying Acts and Contraband Amendments, and these statutes are preempted by federal antitrust laws.⁴

The Qualifying Act aims to "effectively and fully neutralize[] the cost disadvantages that the Participating Manufacturers experience vis-a-vis Non-Participating Manufacturers." MSA § IX(d)(2)(E).⁵ The Qualifying Act creates a barrier to entry for cigarette manufacturers who did not begin selling cigarettes until after 1998. These manufacturers "have no practical choice" but to become NPMs, since without 1997 or 1998 market share they cannot benefit from the permanent payment exception of SPMs. Compl. ¶ 27(a)(1). As NPMs, these manufacturers pay a percentage of each unit sale into escrow, forcing them to set prices higher than SPMs. The escrow payments discourage price competition with the OPMs and SPMs. The Contraband Amendment, a subsequent amendment to the Qualifying Act, permits the Attorney General to prevent a tobacco manufacturer from selling cigarettes in California if the manufacturer is not complying with the Qualifying Act.

Plaintiff alleges that the manufacturer defendants have used the MSA, the Qualifying Act, and the Contraband Amendment to protect their market shares while they price gouge California consumers. Specifically, plaintiff contends that the OPMs raised the price of a carton of cigarettes by $4.50 on the day the MSA was enacted, and by $7.70 per carton in the three and a half years since then, earning an additional $20 billion per year in revenue. Compl. ¶ 29. Plaintiff alleges that the OPMs' market shares "have not appreciably changed" despite these price increases. Id. at ¶ 30. In addition, the State of California does not supervise the OPMs' pricing decisions. Id. at ¶ 29.

Plaintiff seeks declaratory relief under 28 U.S.C. § 2201 against defendant Lockyer; injunctive relief under 42 U.S.C. § 1983 against defendant Lockyer; and injunctive relief under the Sherman Antitrust Act, 15 U.S.C. § 1, against all defendants, on grounds that the statutes implementing the MSA are preempted by federal antitrust laws. Plaintiff also seeks damages from the manufacturer defendants for violations of Cal. Bus. & Prof.Code §§ 16720, Cal. Bus. & Prof.Code §§ 17200, common law unfair competition, and restitution.

Now before the Court are motions to dismiss the complaint by defendant Lockyer and the manufacturer defendants.⁶

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether the plaintiff is entitled to offer evidence in support of the claim. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) (overruled on other grounds by Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012, 82 L.Ed.2d 139 (1984)).

In answering this question, the court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow the plaintiff to develop the case at this stage of the proceedings. See United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir.1981).

If the court dismisses the complaint, it must then decide whether to grant leave to amend. The Ninth Circuit has "repeatedly held that a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, ...