Tobacco Settlement Going Up in Smoke

March 9, 2004

In 1998, the four biggest cigarette manufacturers signed a $200 billion settlement with the nation's state attorneys general to cover the states' costs of health care for smokers. A key aspect of the deal involves the states assessing fees on small rivals not covered by the settlement, thus making it difficult for competitors to undercut the prices of the big manufacturers.

Aspiring industry competitors have alleged the settlement creates a government-sanctioned cartel, whereby the states stand to enjoy higher payments the more profitable the big brands become.

Through judicial rulings, relentless efforts by rival upstarts, and rising prices, the states' settlement has slowly deteriorated:

  • In January, a federal court ruled unanimously that states cannot shelter companies from anti-trust legislation (i.e. laws that prevent firms from colluding or conspiring to restrict market entry) solely in order to share monopoly profits.
  • Today, the market share of smaller competitors has reached 9 percent, up from 1 percent in 1998.
  • States expect their settlement fees from the Big Four to fall 16 percent this year to a total of $7.8 billion.

Vermont's attorney general, William Sorrell, is so concerned that he recently wrote a confidential memo to his fellow AGs "to underscore the urgency of all states taking steps to deal with the proliferation" of small brands and called for new regulation -- a request to which 19 states have already acquiesced -- in order to burden the upstarts with even higher fees.

Source: Scott Woolley, "A Cozy Cancer Cartel," Forbes, February 2004.

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