Trustbuster
by Scott Woolley,
Forbes
Feb 11 2005
A tiny upstart in the cigarette business threatens to topple a
comfortable cartel engineered by big tobacco companies and their
strange bedfellows, the state attorneys general. Big tobacco was
supposed to come under harsh punishment for decades of deception when
it acceded to a tort settlement seven years ago. Philip Morris,
R.J.Reynolds, Lorillard and Brown & Williamson agreed to pay 46
states $206 billion over 25 years. This was their punishment for
burying evidence of cigarettes’ health risks.
But the much-maligned tobacco giants have subtly and shrewdly turned
their penance into a windfall. Using that tort settlement, the big
brands have hampered tiny cut-rate rivals and raised prices with near
impunity. Since the case was settled, the big four have nearly
doubled wholesale cigarette prices from a national average of $1.25 a
pack (not counting excise taxes) in 1998 to $2.10 now. And they have
a potent partner in this scheme: state governments, which have become
addicted to tort-settlement payments, now running at $6 billion a
year.
A key feature of the Big Tobacco-and-state-government cartel: rules
that levy tort-settlement costs on upstart cigarette companies,
companies that were not even in existence when the tort was being
committed. The 1998 scheme came under legal attack almost from the
start. While the cartel has fought off most of these challenges, it
has just taken a palpable hit.
A federal court in New York tossed out a key antidiscounter rule, and
the entire settlement could yet crumble. This is due to the
doggedness of one Jeffrey Uvezian, who sells cheapie cigs under such
brands as Cobra, Boston and Tough Guy, through his company,
International Tobacco Partners. Uvezian has since 2002 been waging an
antitrust attack on the big tobacco companies and their allies in the
state attorneys general offices.
The one academic study to measure the impact of the settlement on Big
Tobacco backs up Uvezian: The deal raised both profits and stock
prices of the big companies. This finding comes from economist Frank
Sloan of Duke University–an institution founded, ironically, with
tobacco money. New York Attorney General Eliot Spitzer’s office
dismisses Uvezian as a dangerous renegade intent on undoing the
“spectacular results” of the 1998 settlement. Spitzer’s deputy
counsel Avi Schick says the settlement is directly responsible for a
17% decline in cigarette consumption since 1997. He rejects Uvezian’s
charge that Big Tobacco has profited from the tort case and calls the
Duke University study so flawed “as to be worthless.”
Regardless, Schick says, the higher prices and lower sales “directly
translates into tens of thousands of longer, better and healthier
lives.” “It is very common for vice to masquerade as virtue,” Uvezian
retorts. He stole that line from U.S. Judge Dennis Jacobs of the
Second Circuit Court of Appeals in NewYork, who made the observation
in a hearing related to Uvezian’s case earlier this month.
A second zinger came after a deputy attorney general for New York
declared that to believe the states had sold out to Big Tobacco, you
would have to assume that 46 attorneys general are liars. “That’s
tempting,” Judge Guido Calabresi shot back. “It may be that when the
states were offered a stake in a monopoly, they took it.” In getting
the four cigarette titans to agree to pay the states princely sums,
which would require price increases, the states agreed to help the
big brands avoid getting undersold by discounters. They did so by
requiring even new off-price brands to pay roughly the same level of
fees (now about 40 cents a pack). The states were disarmingly
transparent about their intent: to “fully neutralize” the competitive
advantage of the discounters, the settlement says.
The settlement took hold in November 1998, and the giants instantly
raised prices by 45 cents a pack–this at a time when Marlboros
retailed for about two bucks a pack. That was enough to cover
payments to the states and then some, but the big brands continued
with a spree of price hikes–up 18 cents a pack the next year, then
up 19 cents the year after that. The incessant price hikes created an
opening for discounters, who spotted and then exploited a loophole in
the fee rules.
The settlement let them get refunds from states where they didn’t do
business, so a newcomer who sold cigarettes only in, say, Virginia
would get back 98% of the state-imposed fees. And so a flood of new
cut-rate brands popped up, including a handful of upstarts from
Jeffrey Uvezian. The son of a well-known cigarmaker, he previously
was running a cigar factory in the Dominican Republic and had begun
importing cheap smokes from Armenia, his ancestral homeland.
Discounters sold less than 1% of the cigarettes in the U.S. in 1997,
garnering a tiny share of the $49 billion smokers spent. The
discounters hiked their take to 8% in 2003 and cost the states a
cumulative $600 million in payments they otherwise would have
received. William Sorrell, attorney general for Vermont, who was
overseeing the settlement, urged state legislators to close the
loophole by passing a new law to eliminate any refunds. In a
confidential memo to fellow attorneys general, he noted that all
states have an interest in reducing the sales of discount brands.
So far 39 states have passed this measure, requiring all discounters
to pay the full fees even if they operate in only a few states. After
Indiana passed the law, Uvezian was forced to hike his prices by 50%.
His monthly sales in the state dropped from 20,000 packs to 11,600.
Four months later he abandoned the state altogether. In August the
nation’s biggest discounter, General Tobacco, capitulated and joined
in the settlement, agreeing to pay $1.7 billion to the states over
the next ten years even though it had no part in the cancer coverup.
Uvezian hired a venerable antitrust lawyer, David Dobbins, 76, and in
early 2002 sued in federal court to overturn the new law in NewYork
State and derail the settlement itself. Dobbins says that in 50 years
as a lawyer he had never seen a cartel so brazen: “If you’re an
experienced antitrust lawyer, this case just blows your mind.”
Dobbins previously had sued to challenge the settlement, representing
two tiny wholesalers in a federal lawsuit against the big brands
filed in western Pennsylvania. The case was thrown out. Then the
Third Circuit Court of Appeals in Philadelphia took on the matter.In
June 2001 it declared that while “it is clear” the accord “empowers
the tobacco companies to make anticompetitive decisions with no
regulatory oversight by the states,” the settlement was immune from
antitrust laws.
Dobbins and his new client, Uvezian, similarly lost the first round
in their case in early 2002, when a federal District Court judge in
New York rejected it. They filed an appeal to the Second Circuit in
New York, argued the case in August 2002–and won a surprising ruling
in their favor in January 2004. The decision let Uvezian pursue his
lawsuit on antitrust grounds, returning the case to federal trial
court in New York.
Then last October the trial judge issued a split decision:He sided
with Uvezian and enjoined the New York State law that eliminated the
discounter refunds. “The state has failed to elicit any justification
whatsoever for its passage,” the judge said. The refund ruling was a
landmark, the first settlement-related rule ever to be knocked down
by a court.
Related challenges are under way in Kentucky, Tennessee and Idaho,
filed by other cheapie-cig sellers. So far an Oklahoma judge has
sided with the challengers while a Louisiana judge went with the
states. Spitzer’s deputy warned that the ruling “will flood New York
with cheap cigarettes.” Dobbins responds that New York is perfectly
free to levy a straightforward excise tax on all cigarette makers–it
just can’t get away with participating in a cartel.
But the judge refused to touch any of the settlement’s other
protections. So now Uvezian and his lawyer are back at the Second
Circuit Court of Appeals, imploring a panel of judges to go even
further and declare the deal a violation of federal antitrust law.
The appeals judges bombarded Dobbins with procedural challenges in
the hearing earlier this month, but also showed deep concern about
what Dobbins says the $200 billion state settlement has wrought–a
cozy oligopoly protected by state governments eager for tobacco cash.
As U.S. Judge Jacobs put it:”This may be one of the most successful
cartels ever.”
From: Emil Lazarian | Ararat NewsPress
http://www.forbes.com/work/compensation/forbes/2005/0228/086.html