280 billion disgorgement gone!

Forbes.com ^ | 02.28.05 | Scott Woolley

[SheLion]

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."

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[SheLion]

Good news, first 280 billion disgorgement gone! Now maybe the damn MSA!

[SheLion]

[Madame Dufarge]

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."

[SheLion]

"It may be that when the states were offered a stake in a monopoly, they took it."

And boy! Did they take it!

[Mears]

Unbelievable.

Jeffrey Vrezian is my new hero. The Armenians always were a canny bunch,I know quite a few of them.

The entire thing reeks of corruption,doesn't it,and the general public just doesn't care?

[Madame Dufarge]

and the general public just doesn't care?

No, we're the new lepers.

[SheLion]

The entire thing reeks of corruption,doesn't it,and the general public just doesn't care?

The general public that do not smoke are untouched by all of this. :(

[TexasCowboy]

I'm finding more reason to laugh these days.

There seems to be a flicker of a light in the darkness of anti-smoking stupidity.

[Montfort]

"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."

It is hard to understand what the legal basis would be for making companies that are guilty of nothing pay States under some dettlement agreement to which the upstarts were not a party.

It makes it pretty clear that the whole suit and settlement were nothing more than a way to tax.

[VermiciousKnid]

Good news and more good news.

I like this upstart. He's got guts.

Regards,

[Enterprise]

"the states agreed to help the big brands avoid getting undersold by discounters."

WOW!

[ccmay]

There's an old Middle Eastern proverb that says something like: it takes two Arabs to cheat a Greek, two Greeks to cheat a Jew, and two Jews to cheat an Armenian.

-ccm

[Publius6961]

Spitzer's deputy counsel Avi Schick says the settlement is directly responsible for... 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."

Are Deputy attorneys general allowed to make unfounded asserions willy nilly now and with a straight face present them as facts? Without a micrometer of supporting facts?
This is mind boggling.
Assuming "his tens of thousands of longer, better and healthier" lives to be verifiable and documented, where is the study? And where is the reaults of the negative aspects of smoking cessassion, increased obesity, heart disease and stress related strokes? I would love to pore through the statistics, the length and breadth of that study!

[Still Thinking]

Forget antitrust. How can these legal masterminds justify with a straight face enforcing a legal settlement against entities who didn't commit the wrongs leading to the settlement, in fact did not even exist when the wrongs were committed, and who were not represented at the settlement table.

As far as believing that 46 attorneys general were liars, I would have thought that would not only not have been beyond the pale, but would have in fact been the DEFAULT position. They do work for the government after all.

[SheLion]

There seems to be a flicker of a light in the darkness of anti-smoking stupidity.

I just pray the good news continues.

[dennisw]

This "upstart" must be doing something right if he had Elliot Spitzer going nuts

[Mears]

The main thing I know about Jews and Armenians(and there are lots of both where I live)is that they are smart and successful.

By the way,I'm neither Jewish nor Armenian.LOL

[Gabz]

You don't have to be a judge or a lawyer to see the damned MSA for what it is - just a bit of common sense says it's a money grab by the states...........and now that others have tried to hone in on the money the states and TC's are screaming foul..........the heck with them.

Smokers saw what happened to them with the big companies and so went with the upstarts and now the biggies are acting like 2nd graders.

[Gabz]

"the states agreed to help the big brands avoid getting undersold by discounters."

I've been trying to tell people that for several years - but no one wanted to believe me.

[Enterprise]

I haven't been aware that the states colluded with the tobacco companies. I just more or less figured that this whole thing was a "tax grab" scheme. It appears it is a tax grab scheme as well as an anticompetitive cooperative effort. The whole thing is disgusting.