Fighting the State Tobacco Racket

Huddled behind closed doors, a small group of lawyers bargaining on behalf of States, law firms, and Big Tobacco hammered out a mega-billion dollar deal back in 1998.  In exchange for state attorneys general dropping their lawsuits against the four major tobacco companies, tobacco companies would pay the states over $200 billion. 

There was a catch: the states would have to protect the companies from competition, essentially becoming partners in the tobacco business.  Thus, the most expensive racket in history was conceived.

The $240 billion deal was sold to the American people as a way of making the big, bad tobacco companies pay for past lies about the health hazards of smoking.  But the truth is that the costs of the settlement are paid by smokers, the supposed “victims,” as tobacco companies simply passed along settlement costs by raising cigarette prices.  Smokers couldn’t even escape the settlement costs by switching brands, because competitors, who were never targets of the lawsuits or part of the backroom deal, were also forced to make payments.

It was a corrupt deal that continues to wreak havoc today, harming consumers, free markets, and the principle of separation of powers — the foundation of this country’s system of government.  It’s also unconstitutional.  The tobacco settlement is an agreement among 46 states — an interstate compact– signed by their attorneys general and the tobacco companies.  It regulates an entire national industry.  Yet it was entered into without the consent of Congress, which had already rejected a similar proposed settlement.  The Compact Clause of the Constitution provides that "No State shall, without the Consent of Congress … enter into any Agreement or Compact with another State." 

A new lawsuit by the Competitive Enterprise Institute seeks to restore that constitutional safeguard against such multi-state rackets and prevent consumers of other politically disfavored products becoming the next targets.  Representing two little tobacco makers, a small distributor and a smoker, CEI filed the lawsuit challenging the settlement agreement.

While the tobacco settlement is clearly unconstitutional under the plain language of the Compact Clause, the legal case is somewhat complicated by a 1978 Supreme Court decision. In that case, the Supreme Court declared—in the teeth of the constitutional language—that  the Compact Clause applies only to state compacts that potentially encroach on federal powers or interests.  

Still, even that analysis cannot save the tobacco settlement from constitutional infirmity.  The agreement encroaches on federal power by regulating interstate commerce beyond the jurisdiction of any individual state.   And it undermines a core purpose of the Compact Clause  — preventing States from ganging up on other states.  Several states got together and negotiated the tobacco settlement with the major tobacco companies.  Then they forced it on the other States, which had seven days to decide whether or not to join.  As former Alabama Attorney General William Pryor pointed out, states had little choice but to join the tobacco settlement, since smokers in every state would be paying for it no matter what.   By refusing to join, a state forfeits the benefits of the settlement, but not the costs.  A state only gets its share of the $240 billion if it joins and passes laws requiring little tobacco companies outside the settlement to pay escrow fees on every cigarette they sell.

A great irony of the extraordinary and unprecedented lawsuits and settlement is that its supposed purpose was to protect public health, yet very little of the money has gone to anti-smoking education.  Instead, the settlement has funneled billions of dollars into the pockets of trial lawyers.  At least $13 billion has been paid to lawyers hired by state attorney generals to sue the tobacco industry.  Never mind that many of the lawyers did little to bring about the settlement and were hired based on their political connections to the state attorney generals.  In New York State, for example, lawyers received $650 million under the tobacco settlement just for bringing a copycat lawsuit against the tobacco companies.  They received thousands of dollars for every hour they worked, even though victory was all but certain by that time, since the tobacco companies had already agreed to pay billions to two other states.

Nearly seven years after the tobacco settlement was signed, it’s become increasingly evident that tobacco companies aren’t adversaries of the states–they’re business partners.  And smokers?  They are the cash cows.