Court Nixes Challenge to|Tobacco Settlement Law

(CN) - The 2nd Circuit upheld a New York law requiring cigarette manufacturers who refused to participate in the state's settlement with the tobacco industry to make annual payments into a reserve fund.

The Manhattan-based federal appeals court rejected a challenge by cigarette importers to New York's Escrow and Contraband Statutes, which the state enacted to enforce the 1998 landmark Master Settlement Agreement between 46 states and four leading tobacco companies.

Cigarette importers Freedom Holdings and International Tobacco Partners sued the state in 2002, claiming the statutes violated the Sherman Act and the Commerce Clause.

They argued that the laws, by effectively forcing them to join the settlement, improperly restrained trade and attempted to regulate out-of-state commerce.

After five amended complaints and six years, a federal judge rejected the importers' claims in 2008.

The 2nd circuit affirmed on appeal, joining many of its sister circuits in finding that such state escrow and contraband laws, which all of the settling states have enacted, do not violate federal law.

"The record evidence supports the district court's finding that plaintiffs failed to prove that New York's Escrow and Contraband Statutes delegate any regulatory power to private parties," Judge Reena Raggi wrote.

"The record evidence further supports the district court's determination that any potentially anti-competitive aspects of the New York Escrow and Contraband Statutes were clearly articulated and affirmatively expressed as state policy as well as actively supervised by the state itself, such that defendants qualified for state action immunity."

Raggi added that the state laws require tobacco companies that refuse to join the settlement agreement to deposit an amount of money "roughly equivalent" to the costs borne by the settling companies, and thus amounts to a "flat tax."

"A tax increase, like any cost, will likely be passed on to consumers in the form of higher prices," she wrote, "but where, as here, the state alone imposes the increased cost, there is no private collusion implicating the antitrust laws."

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