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Archive for Wednesday, August 3, 2005

Lawrence cigarette distributor joins suit

Companies say settlement created noncompetitive cartel

August 3, 2005

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— A Lawrence-based cigarette distributor is among several plaintiffs attacking a 1998 legal settlement that requires major tobacco companies to hand over $206 billion to the states, saying that the settlement actually created a government-protected cartel that keeps cigarette prices artificially high.

A.B. Cokler Co. Inc., 1923 Moodie Road, is among the plaintiffs in a lawsuit filed Tuesday in Louisiana that is aimed at Louisiana and its attorney general, Charles Foti, who is in charge of enforcing the agreement. Similar actions have been filed in five other states by different challengers.

The plaintiffs in the Louisiana suit also include two small cigarette manufacturers not covered by the original settlement and now are forced to make escrow payments; a discount cigarette store in Shreveport, La.; and a smoker who lives in Shreveport and who claims he is forced to pay artificially high prices for cigarettes.

No tobacco companies are named as defendants in the suit, which was filed in federal court in Shreveport.

The landmark agreement between 46 states and major tobacco companies, requiring payments to be made over 25 years, settled all of the state's lawsuits over the public costs of treating ill smokers.

However, to receive their shares, states were required to pass laws requiring nonparticipating cigarette-makers to make escrow payments.

In addition, Louisiana passed a law making it a crime to sell cigarettes made by any company not covered by the settlement that does not make escrow payments.

The suit alleges that those escrow payments drove up competitors' costs and "erected barriers to entry and expansion that ensured the majors would maintain their market shares despite their dramatic price increases to pay off the states."

In essence, the states have become the biggest stakeholders in the business of the major tobacco companies and have "used the power of government to protect their newfound allies."

The suit said the agreement violates the commerce clause of the U.S. Constitution, federal antitrust laws, and federal laws forbidding state regulation of tobacco advertising. Although the settlement was presented as a state-by-state compact, it was really an interstate compact that should have been, but never was, approved by Congress, the suit also alleges.

"We think this master settlement is the granddaddy of all interstate compacts. It has 46 states and several territories," said Sam Kazman, general counsel for the Competitive Enterprise Institute, a Washington, D.C.-based free-market advocacy group that is bringing the suit. "Congress had the chance to vote on it in 1998, but they passed on it. We think this is a pretty flagrant violation."

Dave Butler, manager of A.B., Coker, declined to comment Tuesday, referring questions to a law office in Washington, D.C. The company has been in Lawrence since 1923, and today has a warehouse near Dallas and distributes cigarettes in 10 states, including Kansas and Missouri.

The company also distributes other tobacco products, candy and restaurant supplies. A.B. Coker is owned by John Blakely, of Overland Park, and has 17 employees.

The suit asks that the settlement be declared unconstitutional and for a ban against Louisiana enforcing the settlement or any of the state laws associated with it. The suit gives no indication whether the state would have to repay any of the settlement money.

Since 1999, Louisiana has brought in $1.6 billion from its share of the tobacco settlement, including more than $1 billion from selling 60 percent of the settlement to investors. Most of the money has been poured into trust funds for education and health care services.

Kris Wartelle, a spokeswoman for the Louisiana attorney general, said there would be no comment until the office was formally served with the lawsuit.

Citing antitrust issues, discounters and other tobacco companies have filed similar challenges in Oklahoma, New York, Kentucky, Tennessee and Arkansas. In addition, the largest tobacco companies have recently questioned payments they made to the states under the settlement, saying that higher prices they are forced to charge have boosted lower-cost competitors not covered by the agreement.

Kazman said that although the suit is aimed only at Louisiana, a victory likely would trigger lawsuits in other federal court districts. He said the tobacco companies are not being sued because "the violation here is Louisiana entering into this agreement with other states."

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