Tobacco Settlement Challenged in Court

Published January 1, 2007

In early November, a Louisiana federal district court judge ruled the Competitive Enterprise Institute’s (CEI) lawsuit challenging the constitutionality of the Multistate Settlement Agreement (MSA) on tobacco may proceed to trial.

The MSA was brokered in 1998 between 46 states and the four major tobacco companies, the resolution of a lawsuit brought by the states to recover expenses incurred on behalf of Medicaid patients with tobacco-related diseases. Payments from tobacco companies are expected to total approximately $205 billion by 2023.

Under the MSA, the money is being raised by mandatory payments from tobacco companies, with amounts distributed to the states according to a formula determined by a group selected by the National Association of Attorneys General (NAAG) and the four major tobacco companies.

Sales even in the four states that did not sign the MSA are included in the funds distributed to the participating states, and tobacco companies that did not join the MSA are also required to pay the taxes.

Breaking Laws

CEI alleges in its suit, brought against Louisiana Attorney General Charles C. Foti Jr., that the MSA violates the United States Constitution, which prohibits agreements among states that encroach on federal power without first obtaining the consent of Congress.

“The MSA was an incredibly lucrative backroom deal, paid for by smokers, that has become a blueprint for state attorney general activism,” CEI General Counsel Sam Kazman stated in a November 14 news release. “It should be struck down.”

CEI argues the MSA violates federal antitrust laws, usurps exclusive federal powers over cigarette advertising, and imposes a nationwide tax that only the federal government has the power to levy.

The CEI suit also claims the MSA violates the Tenth Amendment by forcing states to impose the sales tax and by delegating state enforcement powers to NAAG.

Louisiana moved to dismiss the suit, saying CEI failed to allege a monopoly claim; that the MSA does not impose a nationwide sales tax, but merely individual state sales taxes; and that parties are free to limit the exercise of their constitutional rights by contract, which is what happened with the MSA.

Jennifer Cluck, Foti’s assistant public information officer, said his office had no comment on the ruling.

Dismissing Claim

The federal district court denied most of the state’s motion, dismissing only the Tenth Amendment claim, to hand CEI a substantial win in the first round of its MSA bout.

But the court’s opinion makes plain it’s too early for MSA opponents to celebrate. Faced with the motion to dismiss the CEI suit, Federal District Court Judge S. Maurice Hicks Jr. first handed it off to a federal magistrate–a sort of “assistant judge”–to analyze. The magistrate recommended dismissing the case completely.

In declining to follow the magistrate’s recommendation, Hicks stated that while he was “inclined to agree” with the magistrate’s reasoning, he was bound not to follow his recommendation because of a ruling by the Fifth Circuit Court of Appeals in March 2006 in a similar case, Xcaliber International Ltd., LLC v. Foti, 442 F.3d 233 (5th Cir. 2006).

In that suit, a tobacco products manufacturer alleged the Louisiana MSA tobacco tax statute was unconstitutional because it violates manufacturers’ rights to free speech, due process, and equal protection. A trial court dismissed the case on February 3, 2005, but the Fifth Circuit reversed the decision without setting out its reasoning. The Fifth Circuit remanded the case to the district court, where it is now proceeding toward trial.

Maureen Martin ([email protected]) is The Heartland Institute’s senior fellow for legal affairs and managing editor of Lawsuit Abuse Fortnightly.

For more information …

The text of the federal district court judge’s ruling in A.B. Coker Co., Inc., S&M Brands, Inc., CLP Inc., Tobacco Discount House #1, Inc. and Mark Heacock v. Charles C. Foti, Jr. is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to and search for document #20196.

Louisiana Office of the Attorney General on MSA,