A.d. Bedell Wholesale Company, Inc. v. Philip Morris Incorporated

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 00-3410
___________
A.D. BEDELL WHOLESALE COMPANY, INC.;
TRIANGLE CANDY & TOBACCO CO., on behalf of
themselves and all others similarly situated,
Appellants
v.
PHILIP MORRIS INCORPORATED;
R.J. REYNOLDS TOBACCO COM PANY, INC.;
BROWN AND WILLIAMSON TOBACCO CORP.
_______________________________________________
On Appeal from the United States District Court
for the Western District of Pennsylvania
D.C. Civil Action No. 99-cv-00558
(Honorable Donetta W. Ambrose)
___________________
Argued December 14, 2000
Before: SCIRICA, FUENTES and GARTH, Circuit Judges
(Filed: June 19, 2001)

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2
DAVID F. DOBBINS, ESQUIRE (ARGUED)
Patterson, Belknap, Webb & Tyler
1133 Avenue of the Americas
New York, New York 10036
WILLIAM M. WYCOFF, ESQUIRE
Thorp, Reed & Armstrong
One Oxford Centre
301 Grant Street
Pittsburgh, Pennsylvania 15219
ALAN R. WENTZEL, ESQUIRE
Windels, Marx, Lane & Mittendorf
156 West 56th Street
New York, New York 10019
Attorneys for Appellants
DOUGLAS L. WALD, ESQUIRE (ARGUED)
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
BERNARD D. MARCUS, ESQUIRE
Marcus & Shapira
One Oxford Centre, 35th Floor
301 Grant Street
Pittsburgh, Pennsylvania 15219
Attorneys for Appellee,
Philip Morris Incorporated

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3
GREGORY G. KATSAS, ESQUIRE (ARGUED)
Jones, Day, Reavis & Pogue
51 Louisiana Avenue, N.W.
Washington, D.C. 20001
JOHN E. IOLE, ESQUIRE
Jones, Day, Reavis & Pogue
500 Grant Street, 31st Floor
Pittsburgh, Pennsylvania 15219
Attorneys for Appellee,
R.J. Reynolds Tobacco Company, Inc.
TIMOTHY P. RYAN, ESQUIRE
Eckert, Seamans, Cherin & Mellott
600 Grant Street, 44th Floor
Pittsburgh, Pennsylvania 15219
Attorney for Appellee,
Brown and Williamson Tobacco Corp.
ERIK S. JAFFE, ESQUIRE (ARGUED)
5101 34th Street, N.W.
Washington, D.C. 20008
THOMAS C. O'BRIEN, ESQUIRE
36 West 5th Street
Corning, New York 14830
Attorneys for Amici Curiae-Appellants,
The Cato Institute, The Competitive Enterprise Institute,
and The National Smokers Alliance

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4
JOEL M. RESSLER, ESQUIRE
Office of Attorney General of Pennsylvania
Strawberry Square, 15th Floor
Harrisburg, Pennsylvania 17120
Attorney for Amici Curiae-Appellees,
Attorneys General of Pennsylvania, California, Alaska,
American Samoa, Arizona, Arkansas, Colorado, Connecticut,
Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada,
New Hampshire, New Jersey, New M exico, New York, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina,
South Dakota, Tennessee, Utah, Vermont, Virginia, Washington,
West Virginia, and Wyoming
__________________
OPINION OF THE COURT
__________________
SCIRICA, Circuit Judge.
This is an appeal from the dismissal under Fed. R. Civ. P. 12(b)(6) of claims
brought under the Sherman Antitrust Act attacking the multi-billion dollar national
tobacco settlement. Endeavoring to recoup billions of dollars in public health care costs
and to reduce cigarette smoking, several states brought suit against the leading United
States tobacco manufacturers. In view of the magnitude of potential liability and the
prospect of multiple actions, the parties asked Congress to resolve the suits through a

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1Forty-six states and six other U.S. jurisdictions (District of Columbia, Puerto Rico,
Virgin Islands, American Samoa, Guam and the Northern Mariana Islands) signed the
agreement. Four states (Florida, Minnesota, Mississippi, and Texas) entered into prior
separate settlements with the tobacco companies and are thus not signatories to the
Multistate Settlement Agreement. PTI, Inc. v. Philip Morris, Inc., 100 F.Supp.2d 1179,
1185 n.2 (C.D. Cal. 2000).
2These portions of the Sherman Act are codified at 15 U.S.C. §§ 1, 2. A claim under §
7 of the Clayton Act, 15 U.S.C. § 18, was voluntarily dismissed without prejudice.
3E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961);
United Mine Workers v. Pennington, 381 U.S. 657 (1965).
4Parker v. Brown, 317 U.S. 341, 352 (1943).
5A.D. Bedell Wholesale Co., Inc., v. Philip Morris, Inc., 104 F.Supp.2d 501 (W.D. Pa.
2000).
6The District Court had subject matter over these federal claims under 15 U.S.C. §§ 15,
26 as well as under 28 U.S.C. § 1331. We have jurisdiction over this appeal of dismissal
under Fed. R. Civ. P. 12(b)(6) pursuant to 28 U.S.C. § 1291.
5
national legislative remedy. After congressional efforts stalled, forty-six states1 forged a
settlement with the tobacco manufacturers known as the Multistate Settlement
Agreement. Plaintiffs, who are cigarette wholesalers, challenge the Multistate Settlement
Agreement as a violation of § 1 and § 2 of the Sherman Antitrust Act.2
The District Court held that plaintiffs failed to state a claim under the Sherman Act
because the tobacco companies were immune from antitrust liability under both the
Noerr-Pennington3 and Parker4 immunity doctrines.5 We agree they are immune under
the Noerr-Pennington doctrine but not under the Parker doctrine. We will affirm.6

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7Amicus Briefs were filed by Attorneys General from signatory states supporting the
tobacco companies and from the Cato Institute supporting plaintiffs.
8Lorillard is not named as a defendant, but is an original participating manufacturer.
9See Michael Janofsky, Mississippi Seeks Damages from Tobacco Companies, N.Y.
Times, May 24, 1994, at A12 (“Mississippi today became the first state to demand that
cigarette makers bear the health care costs of smoking.”); Gordon Slovut, State, Blue
Cross Sue Tobacco Industry, Star Tribune, August 18, 1994, at A1 (stating Minnesota
filed suit against the tobacco industry); Andrew Wolfson, West Virginia Takes on
Tobacco Over Health Costs, The Courier-Journal, Sept. 22, 1994, at A1; Amy Goldstein,
Maryland to Sue Makers of Cigarettes; Effect of Smoking on Medicaid at Issue,
Washington Post, Nov. 17, 1995, at B1 (reporting Maryland Governor Parris
(continued...)
6
I.
Facts and Procedural History
A.D. Bedell, a cigarette wholesaler, brought this class action on behalf of itself and
900 similarly situated wholesalers seeking damages and a permanent injunction of the
Multistate Settlement Agreement. Defendants, Philip Morris, Inc., R.J. Reynolds
Tobacco Co., Inc., and Brown & Williamson Tobacco Corp., are cigarette manufacturers
who were original signatories to the Multistate Settlement Agreement.7 Along with
Lorillard Tobacco Co.,8 the fourth largest cigarette producer, they are collectively known
as the major tobacco companies or the Majors. The Majors are responsible for 98% of
cigarette sales in the United States. Bedell, as a wholesaler, bought directly from the
Majors.
In the mid 1990's, individual states commenced bringing law suits against the
Majors to recoup healthcare costs and reduce smoking by minors.9 As one state Attorney

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9(...continued)
Glendening’s announcement of decision to sue tobacco companies).
10For example, Pennsylvania brought suit alleging a “conspiracy in concealing and
misrepresenting the addictive and harmful nature of tobacco/nicotine[,] . . . industry
control and manipulation of nicotine to foster addiction and thus profits[,] . . .
intentionally attracting and addicting children to tobacco products,” and “targeting
African Americans.” (complaint in Commonwealth of Pennsylvania v. Philip Morris,
Inc.). These claims encompass civil conspiracy, willful and negligent breach of a special
duty, fraudulent misrepresentation, fraudulent concealment, negligent design, strict
liability, unfair trade practices, public nuisance, and negligent and intentional
entrustment.
11As of October 1996, sixteen states had brought suit. See Utah Sues Tobacco
Companies, The Washington Post, Oct. 1, 1996, at A9 (reporting Utah joined fifteen other
states, along with many counties and cities, in filing lawsuits against major tobacco
companies).
7
General declared, “‘[The] lawsuit is premised on a simple notion: you caused the health
crisis; you pay for it.’” Janofsky, Mississippi Seeks Damages from Tobacco Companies,
N.Y. Times, May 24, 1994, at A12 (quoting Mississippi Attorney General Mike M oore).
The States alleged a wide range of deceptive and fraudulent practices by the tobacco
companies over decades of sales.10 Faced with the prospect of defending multiple actions
nationwide, the Majors sought a congressional remedy, primarily in the form of a national
legislative settlement.11 In June 1997, the National Association of Attorneys General and
the M ajors jointly petitioned Congress for a global resolution.
The proposed congressional remedy (1997 National Settlement Proposal) for the
cigarette tobacco problem resembled the eventual Multistate Settlement Agreement, but
with important differences. For example, although the congressional proposal would

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12Because the congressional proposal also would have involved much higher payments
by the Majors (by up to $170 billion), it was expected that cigarette prices would increase
$.60/pack. See FTC Report on Competition and the Financial Impact of the Proposed
National Tobacco Settlement 34 (September 1997).
13This baseline payment is subject to
the Inflation Adjustment, the Volume Adjustment, the
Previously Settled States Reduction, the Non-Settling States
Reduction, the NPM Adjustment, the offset for miscalculated
or disputed payments described in subsection XI(i), the
Federal Tobacco Legislation Offset, the Litigating Releasing
Parties Offset, and the offsets for claims over described in
subsections XII(a)(4)(B) and XII(a)(8).
(continued...)
8
have earmarked 1/3 of all funds to combat teenage smoking, no such restrictions appear
in the Multistate Settlement Agreement. 1997 National Settlement Proposal, Title VII,
available at http://www.cnn.com/us/9705/tobacco/docs/proposal.html (last visited June
18, 2001). In addition, the congressional proposal would have mandated Food & Drug
Administration oversight and imposed federal advertising restrictions. It also would have
granted immunity from state prosecutions; eliminated punitive damages in individual tort
suits; and prohibited the use of class actions, or other joinder or aggregation devices
without the defendant’s consent, assuring that only individual actions could be brought.
See id. at Title V(A), VIII(A), VIII(B). The congressional proposal called for payments
to the States of $368.5 billion over twenty-five years. 1997 National Settlement Proposal,
Title VI.12 By contrast, assuming that the Majors would maintain their market share, the
Multistate Settlement Agreement provides baseline payments of about $200 billion over
twenty-five years.13 See Multistate Settlement Agreement, §§ IX(a), (b), (c).

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13(...continued)
MSA § IX(c).
14An alternative settlement, proposed by Senator John McCain of Arizona, which
included even higher payments from the industry ($500 billion) and would not have
provided antitrust exemptions was also defeated, and along with it the prospects of a
federal solution.
9
Significantly for our purposes, the congressional proposal included an explicit
exemption from the federal antitrust laws. See 1997 National Settlement Proposal, App.
IV(C)(2) (stating cigarette manufacturers would have been permitted to “jointly confer,
coordinate or act in concert, for this limited purpose [of achieving the goals of the
settlement]”). The Multistate Settlement Agreement contains no corresponding
exemption from the federal antitrust laws.
Congress rejected the proposed settlement in the spring of 1998.14 Undeterred, the
State Attorneys General and the Majors continued to negotiate and on November 23,
1998, they executed the Multistate Settlement Agreement. Afterwards, twenty other
tobacco manufacturers, representing 2% of the market, joined the settlement as
Subsequent Participating Manufacturers (SPMs). The addition of the Subsequent
Participating Manufacturers meant that nearly all of the cigarette producers in the
domestic market had signed the Multistate Settlement Agreement. Their addition was
significant. The Majors allegedly feared that any cigarette manufacturer left out of a
settlement (Non-Participating Manufacturers or NPMs) would be free to expand market

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15Small cigarette producers (who generally sell at a discount) are referred to as
“Renegades.” The “Renegade Clause” incorporates two distinct sections of the M ultistate
Settlement Agreement, one part deals with Non-Participating Manufacturers or NPMs,
the other with Subsequent Participating M anufacturers or SPMs. See MSA §§ IX(i)
(SPMs), (d) (NPMs). The Attorneys General object to the appellation “Renegade”
claiming that only voluntary signatories are affected by its provisions. But there are
penalties imposed on non-signatories under the Qualifying Statutes which each State must
try to implement in accordance with the M ultistate Settlement Agreement.
10
share or could enter the market with lower prices, drastically altering the Majors’ future
profits and their ability to increase prices to pay for the settlement.
Plaintiffs brought suit challenging sections of the Multistate Settlement Agreement
allegedly designed to maintain market share and restrict entry. The challenged sections of
the M ultistate Settlement Agreement are the so-called “Renegade Clause,”15 the
settlement’s primary mechanism for allocating payment responsibilities based on
production levels, and the provision calling for “Qualifying Statutes,” which are state
laws passed as a result of commitments made in the Multistate Settlement Agreement that
require Non-Participating Manufacturers to pay into state escrow accounts for each sale
made. Plaintiffs claim the Multistate Settlement Agreement and resulting state
implementing statutes create an output cartel that imposes draconian monetary penalties
for increasing cigarette production beyond 1998 levels and effectively bars new entry into
the cigarette market.
The Renegade Clause allegedly was designed to prevent current cigarette
manufacturers from decreasing prices to increase market share and to bar new entrants

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16There were similar provisions in the congressional proposal designed to restrict Non-
Participating M anufacturers (NPMs). These provisions provided for escrow payments
and also subjected them to the broad regulatory authority that would have been created
under the proposal. See 1997 National Settlement Proposal, Title II, Part C.
17The Multistate Settlement Agreement provides, “A Subsequent Participating
Manufacturer shall have payment obligations under this Agreement only in the event that
its Market Share in any calendar year exceeds the greater of (1) its 1998 Market Share or
(2) 125 percent of its 1997 Market Share.” MSA § IX(i)(1). These payments “are in
addition to the corresponding payments that are due from the Original Participating
Manufacturers.” M SA § IX(i)(1).
11
from the market.16 One part of the Renegade Clause affects tobacco companies (SPMs)
that later join the Multistate Settlement Agreement. This section creates strong
disincentives for Subsequent Participating Manufacturers to increase their production and
market share. If a Subsequent Participating Manufacturer exceeds its 1998 market share
(or exceeds 125% of 1997 market share if that is greater), then it must pay into the
settlement fund.17 By maintaining historic market share, it would owe nothing to the
settlement fund. For every carton of cigarettes sold in 1999 over its 1998 level, a SPM
would have to pay $.19/pack into the settlement fund. Plaintiffs contend this equaled
75% of the wholesale price, which defendants do not contest. See Br. of Appellants at 14
(applying MSA § IX(C)); MSA Ex. E. This mechanism allegedly discourages
Subsequent Participating Manufacturers from underpricing the Majors to increase market
share, even if they could efficiently do so.
Another part of the Renegade Clause affects Non-Participating M anufacturers
(NPMs), cigarette companies that never sign the Multistate Settlement Agreement. Non-

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18Section IX(d) of the Multistate Settlement Agreement describes the calculation of the
NPM adjustment as follows:
(d) Non-Participating Manufacturer Adjustment
(1) Calculation of NPM Adjustment for Original
Participating Participant
Manufacturers. To protect the public health gains
achieved by this Agreement, certain payments made
pursuant to this Agreement shall be subject to an NPM
(continued...)
12
Participating Manufacturers include potential new entrants into the tobacco market. See
MSA § IX(d). But as noted, between the SPMs and the Majors, about 99% of the current
cigarette producers signed the Multistate Settlement Agreement. The strictures of the
Multistate Settlement Agreement affecting NPMs were largely responsible for such
participation. Potential new entrants into the cigarette market would bear the burden of
the Renegade Clause’s future effects.
Under the Renegade Clause, if Non-Participating Manufacturers gain market share
(thereby reducing the Majors’ market share) the Majors may decrease their principal
payments to the settlement fund. If the Majors lose market share to NPMs, the payments
to the settlement fund are not merely reduced proportionately. See MSA § IX(d)(1)(A) &
(B). For example, if a participating tobacco company lost 10% of its market share to a
new entrant or other company that did not sign the Multistate Settlement Agreement, it
may be able to reduce its payments by as much as 24%. See Hanoch Dagan & James J.
White, Governments, Citizens, and Injurious Industries, 75 N.Y.U. L. Rev. 354, 381
(2000) (making hypothetical calculations based on the formulas in MSA § IX(d)).18

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18(...continued)
Adjustment. Payments by the Original Participating
Manufacturers to which the NPM Adjustment applies
shall be adjusted as provided below:
(A) Subject to the provisions of subsections
(d)(1)(C), (d)(1)(D) and (d)(2) below, each
Allocated Payment shall be adjusted by
subtracting from such Allocated Payment the
product of such Allocated Payment amount
multiplied by the NPM Adjustment Percentage.
The “NPM Adjustment Percentage” shall be
calculated as follows:
(i) If the Market Share Loss for the year
immediately preceding the year in which
the payment in question is due is less
than or equal to 0 (zero), then the NPM
Adjustment Percentage shall equal zero.
(ii) If the Market Share Loss for the year
immediately preceding the year in which
the payment in question is due is greater
than 0 (zero) and less than or equal to 16
2/3 percentage points, then the NPM
Adjustment Percentage shall be equal to
the product of (x) such Market Share
Loss and (y) 3 (three).
(iii) If the Market Share Loss for the year
immediately preceding the year in which
the payment in question is due is greater
than 16 2/3 percentage points, then the
NPM Adjustment Percentage shall be
equal to the sum of (x) 50 percentage
points and (y) the product of (1) the
Variable Multiplier and (2) the result of
such Market Share Loss minus 16 2/3
percentage points.
The remainder of § IX(d) gives definitions for some of the terms and describes
who will make this calculation and when it will be made each year, as well as how the
(continued...)
13

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18(...continued)
adjusted payments will be allocated among the States and the signatories. See MSA §
IX(d).
19The Multistate Settlement Agreement provides:
(B) A Settling State’s Allocated Payment shall not be subject
to an NPM Adjustment: (i) if such Settling State continuously
had a Qualifying Statute (as defined in subsection (2)(E)
below) in full force and effect during the entire calendar year
preceding the year in which the payment in question is due
and diligently enforced the provisions of such statute during
such entire calendar year; or (ii) such Settling State enacted
the Model Statute (as defined in subsection (2)(E) below) for
the first time during the calendar year immediately preceding
the year in which the payment in question is due, continuously
had the Model Statute in full force and effect during the last
six months of such calendar year, and diligently enforced the
provisions of such statute during the period in which it was in
full force and effect.
MSA § IX(d)(2)(B). Aside from the financial incentive, the Multistate Settlement
Agreement also encourages the States to enact the Qualifying Statutes. See MSA §
IX(d)(2)(E).
14
By enacting the Qualifying Statute set forth in the Multistate Settlement
Agreement, see MSA Ex. T, a state can preclude reduced payments.19 The model statute
provides,

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15
Any tobacco product manufacturer selling cigarettes to
consumers within the State . . . after the date of enactment of
this Act shall do one of following:
(a) become a participating manufacturer (as that term is defined in
section II(jj) of the Master Settlement Agreement) and generally
perform its financial obligations under the Master Settlement
Agreement; or
(b) (1) place into a qualified escrow fund . . . the following amounts .
. . .
Id.
The model Qualifying Statute would impose a tax on new tobacco entrants of
approximately $.27/pack in the year 2001, rising to $.36/pack by the year 2007. See MSA
Ex. T. A Non-Participating Manufacturer only can recover its deposited funds: (1) if it is
forced to pay a judgment or settlement in connection with a claim brought by the state, or
(2) after the passage of twenty years free from any such judgments. See id. Because the
Non-Participating Manufacturers are not part of the settlement, they have no immunity
and would be subject to similar suits brought by the State Attorneys General against the
Majors (for fraudulent concealment, misrepresentation, conspiracy, etc.). To encourage
and assist the States in bringing these suits, the Multistate Settlement Agreement created a
$50 million Enforcement Fund (paid for by the M ajors) to investigate and sue NPMs to
enforce the settlement. See MSA § VIII(c). Because of the Qualifying Statutes, a Non-
Participating Manufacturer must decide either to join the Multistate Settlement
Agreement and abide by the same restrictions on market share facing a SPM (which for
new manufacturers would be costly because they would have a baseline production level

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20Because this is an appeal from a dismissal under Fed. R. Civ. P. 12(b)(6), we address
only the complaint’s allegations. But we note that news reports have stated that although
the Multistate Settlement Agreement was designed to frustrate new cigarette market
entrants, it appears that some new discount cigarette manufacturers have been able to
enter the market. Gordon Fairclough, Tobacco Deal Has Unintended Effect: New
Discount Smokes, Wall St. J., May 1, 2001, at A1. Some new entrants apparently have
failed to make required payments into escrow accounts as required by the state enacted
Qualifying Statutes. Others apparently have accepted significantly lower profit margins.
See id.
21Demand for a product is inelastic if the price can rise without a corresponding drop in
(continued...)
16
of zero), or face litigation and pay a tax into a state established escrow account for any
potential adverse judgments.
Together, the Renegade Clause, the Qualifying Statutes and the Enforcement Fund
allegedly create severe obstacles to market entry, or to increasing production and market
share.20 This is not accidental. The Multistate Settlement Agreement explicitly proclaims
its purpose to reduce the ability of non-signatory cigarette manufacturers to seize market
share because of the competitive advantage accruing from not contributing to the
settlement. It declares that the agreement “effectively and fully neutralizes the cost
disadvantages that the Participating Manufacturers experience vis-a-vis Non-Participating
Manufacturers with such Settling States as a result of the provisions of this Agreement.”
MSA § IX(d)(2)(E).
It is these barriers to entry and increased production that plaintiffs claim form an
output cartel that violates the antitrust laws. Because output is restricted and because of
the inelastic demand for cigarettes,21 in part due to their addictive nature, the Multistate

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21(...continued)
demand.
22See Vanessa O'Connell, Philip Morris, RJR Lift Wholesale Price For Cigarettes 45
Cents a Pack Today, Wall St. J., November 24, 1998, at A1; Gordon Fairclough, Major
Makers of Cigarettes Raise Prices, Wall St. J., August 31, 1999, at A3 ($.18/pack
increase); Gordon Fairclough , Philip Morris Boosts Prices of Cigarettes, Wall St. J.,
January 17, 2000, at B12 ($.13/pack increase).
17
Settlement Agreement allegedly permitted the Majors to raise their prices to near
monopoly levels ) levels allegedly above those necessary to fund the settlement
payments. For example, assert plaintiffs, the settlement could have been funded by only a
$.19/pack increase in price, but the Majors immediately raised prices by $.45/pack, and
subsequently by another $.31/pack.22 When this lawsuit was filed, the Majors had already
raised the wholesale price of cigarettes $.76/pack since the adoption of the M ultistate
Settlement Agreement. Rapid price increases of this magnitude would ordinarily permit
competitors to maintain or reduce prices or prompt new competitors to enter the market.
But neither occurred, assert plaintiffs, because the barriers erected by the Multistate
Settlement Agreement effectively barred entry and discouraged tobacco companies from
maintaining a lower price because of the penalties for increased production.
Defendants contend the Multistate Settlement Agreement did not violate the
antitrust laws, but even if so, they are immune under both the Noerr-Pennington doctrine,
which protects petitioning activity, and the Parker doctrine, which protects sovereign acts
of states from antitrust liability. We turn first to the antitrust issues.
II.

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18
Antitrust Injury
The defendants argue the express terms of the Multistate Settlement Agreement do
not constitute an agreement to limit output in violation of the antitrust laws. Plaintiffs
counter that the Multistate Settlement Agreement’s Renegade Clause, Qualifying Statutes,
and Enforcement Fund, have the “unequivocal purpose and effect” to “effectuate a cartel
limiting the output of cigarettes, thereby allowing the Majors to maintain
supracompetitive prices,” which is a per se violation of the antitrust laws. Br. of
Appellants at 29.
To maintain a cause of action under the Sherman Act, “[p]laintiffs must prove
antitrust injury, which is to say (1) injury of the type the antitrust laws were intended to
prevent and (2) that flows from that which makes defendants’ acts unlawful.” Brunswick
Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 489 (1997) (emphasis in original). The
antitrust injury requirement “ensures that the harm claimed by the plaintiff corresponds to
the rationale for finding a violation of the antitrust laws in the first place, and it prevents
losses that stem from competition from supporting suits by private plaintiffs.” 2 Philip E.
Areeda & Herbert Hovenkamp, Antitrust Law ¶ 362 (Rev. ed. 1997).
Here, the losses plaintiffs allege resulted from explicit provisions of the M ultistate
Settlement Agreement, not from competition. Plaintiffs allege the major tobacco
companies formed and enforced a cartel to restrict output through the M ultistate
Settlement Agreement. As a result, plaintiffs claim the Majors “imposed artificially high

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19
prices on direct purchasers,” without fear of competition. See Complaint ¶ 2. Although
this result would affect cigarette prices for retailers and consumers, as well as for
wholesalers like plaintiffs, the Supreme Court has determined that direct buyers are the
only parties with standing to assert damage claims under the antitrust laws for
overcharges based on an output cartel. Ill. Brick Co. v. Illinois, 429 U.S. 477, 734 (1977)
(“[T]he antitrust laws will be more effectively enforced by concentrating the full recovery
for the overcharge in the direct purchasers rather than by allowing every plaintiff
potentially affected by the overcharge to sue only for the amount it could show was
absorbed by it.”). Although plaintiffs, as wholesalers, have alleged an injury, they must
also demonstrate that the conduct which caused the injuries violated the antitrust laws.
An agreement which has the purpose and effect of reducing output is illegal under
§ 1 of the Sherman Act. Cal. Dental Ass’n v. FTC, 526 U.S. 756, 777 (1999) (output
restrictions are anticompetitive); Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of
Univ. of Okla., 468 U.S. 85, 99 (1984) (where “the challenged practices create a
limitation on output; our cases have held that such limitations are unreasonable restraints
of trade”) (citing United States v. Topco Assocs., Inc., 405 U.S. 596, 608-09 (1972));
United States v. Sacony Vacuum Oil Co., 310 U.S. 150, 223 (1940). In California Dental,
the Court restated that output restrictions are anticompetitive. At the same time, it refused
to apply a “quick look analysis” where a local professional association had restricted
certain types of advertising, but it was not obvious that the restrictions would be

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23A "quick-look" analysis under the rule of reason, may be used when “an observer
with even a rudimentary understanding of economics could conclude that the
arrangements in question would have an anticompetitive effect on customers and
markets,” yet the violation is also not one considered illegal per se. Cal. Dental Ass’n,
526 U.S. at 770. We need not address whether the output cartel alleged here would be
illegal per se or would be illegal under a “rule of reason” analysis. As the Supreme Court
has held:
The truth is that our categories of analysis of anticompetitive
effect are less fixed than terms like ‘per se,’ ‘quick look,’ and
‘rule of reason’ tend to make them appear. We have
recognized, for example, that ‘there is often no bright line
separating per se from rule of reason analysis,’ since
‘considerable inquiry into market conditions’ may be required
before the application of any so-called ‘per se’ condemnation
is justified.
Id. at 779 (quoting NCAA, 468 U.S. at 104 n.26). "‘[W]hether the ultimate finding is the
product of a presumption or actual market analysis, the essential inquiry remains the same
) whether or not the challenged restraint enhances competition.’" Id. at 779-80 (quoting
NCAA, 468 U.S. at 104).
24See, e.g., NCAA, 486 U.S. at 85 (holding where there is an intrinsic need for output
(continued...)
20
anticompetitive.23 Remanding for further analysis, the Court acknowledged that a
reduction in output was an antitrust violation. Cal. Dental Ass’n, 526 U.S. at 777, 781.
The Court cited with approval a case from the Court of Appeals of the Seventh Circuit
which held that if “‘firms restrict output directly, price will rise in order to limit demand
to the reduced supply. Thus, with exceptions not relevant here, raising price, reducing
output, and dividing markets have the same anticompetitive effects.’” Id. at 777 (quoting
General Leaseways, Inc. v. Nat’l Truck Leasing Ass’n, 744 F.2d 588, 594-95 (7th Cir.
1984)). The Court has made clear that a pure restriction on output is anticompetitive and
in the absence of special circumstances,24 would violate the antitrust laws. NCAA, 486

-- 20 of 61 --

24(...continued)
restrictions to ensure a market for the product at all, the restriction may not violate the
antitrust laws).
21
U.S. at 85 (recognizing that output restrictions may be permissible if required in order to
market the product at all). By limiting production, the cartel is able to raise prices above
competitive levels.
Federal Trade Commission/Department of Justice Guidelines also recognize that
agreements to reduce output violate the antitrust laws. See FTC/DOJ Guidelines
–Antitrust Guidelines for Collaborations Among Competitors, § 3.2, reprinted in 4 Trade
Reg. Rep. (CCH) ¶ 20 (2000) (citing Broadcast Music Inc. v. Columbia Broad. Sys., 441
U.S. 1, 19-20 (1979)). These regulations define output agreements as “hard core cartel
agreements” and violators are prosecuted criminally without regard to “claimed business
purposes, anticompetitive harms, procompetitive benefits, or overall competitive effects.”
Id.
Plaintiffs allege the agreement between the States and the M ajors purposefully
creates powerful disincentives to increase cigarette production. Although the Multistate
Settlement Agreement contains no explicit agreement to raise prices or restrict market
share, any signatory who increases production beyond historic levels automatically will
increase its proportionate share of payments to the Multistate Settlement Agreement.
Normally, a company which lowers prices would be expected to increase market share.
But the penalty of higher settlement payments for increased market share would

-- 21 of 61 --

22
discourage reducing prices here. For this reason, signatories have an incentive to raise
prices to match increases by competitors. It appears this incentive structure has proven
true. The Majors’ prices increased dramatically and simultaneously after signing the
Multistate Settlement Agreement. As noted, this included a $.45/pack increase just days
after the settlement was announced, an $.18/pack increase less than a year later, and a
$.13/pack increase in January of 2000. The initial $.45 increase alone was more than
double what some analysts considered necessary to fund the settlement’s first two annual
payments. See Stuart Taylor Jr., All for Tobacco and Tobacco for All, 23 Legal Times
40, Oct. 9, 2000.
Defendants contend an antitrust analysis is unnecessary if we find either Noerr-
Pennington or Parker immunity applies. But plaintiffs argue that immunity cannot attach
to per se antitrust violations. We disagree. Recently we recognized immunity attached
even where the plaintiff alleged a boycott regarded as illegal per se. Armstrong Surgical
Ctr. Inc., v. Armstrong Mem’l Hosp., 185 F.3d 154, 157-58 (3d Cir. 1999) (applying
Parker and Noerr-Pennington immunity where complaint alleged a threat of a boycott
which would have constituted an antitrust violation in the absence of immunity), cert.
denied, 530 U.S. 1261 (2000). Similarly, in Pennington, the alleged conduct granted
immunity would have been a per se violation of the antitrust laws. United M ine Workers
v. Pennington, 381 U.S. 657, 660-61 (1965).
Our review at this stage is limited to the allegations in plaintiffs’ complaint. On a

-- 22 of 61 --

25We exercise de novo review over dismissal of claims under Fed. R. Civ. P. 12(b)(6).
Wilson v. Quadramed Corp., 225 F.3d 350, 353 (3d Cir. 2000). In evaluating the
propriety of the dismissal, we examine all factual allegations and all reasonable
inferences as true and view them in the light most favorable to the plaintiff. Colburn v.
Upper Darby Tp., 838 F.2d 663, 666 (3d Cir.1988). A court may dismiss a plaintiff's
complaint only if the plaintiff can prove no set of facts which would entitle him to relief.
Conley v. Gibson, 355 U.S. 41, 45 (1957).
26Defendants do not dedicate much of their argument to contesting the antitrust injury,
perhaps because the District Court did not address it. The District Court found it
unnecessary to decide whether plaintiffs properly pleaded an antitrust violation if it held
defendants immune. A.D. Bedell Wholesale Co., Inc., v. Philip Morris, Inc., 104
F.Supp.2d 501, 503 (W.D. Pa. 2000).
27Section 2 of the Sherman Act applies to, “Every person who shall monopolize, or
attempt to monopolize, or combine or conspire with any other person or persons, to
monopolize any part of the trade or commerce among the several States, or with foreign
nations . . . .” 15 U.S.C. § 2. Parties violate § 2 if they are involved in "(1) the possession
of monopoly power in the relevant market and (2) the willful acquisition or maintenance
of that power as distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident." United States v. Grinnell Corp.,
384 U.S. 563, 570-71 (1966); see also Weiss v. York Hosp., 745 F.2d 786, 825 (3d Cir.
1984). Here, plaintiffs properly pleaded such a violation. Plaintiffs allege that the
(continued...)
23
motion to dismiss under Fed. R. Civ. P. 12(b)(6), the issue is whether plaintiffs have
properly pleaded an antitrust violation.25 Plaintiffs allege that defendants formed an
output cartel through the Multistate Settlement Agreement that restricts production and
effectively bars entry to the cigarette tobacco market. Plaintiffs also allege the cartel
injured the tobacco wholesalers by charging artificially high prices.26
We hold that plaintiffs have properly pleaded an antitrust violation by alleging
defendants agreed to form an output cartel through the Multistate Settlement Agreement
that violates § 1 and § 227 of the Sherman Antitrust Act. But we will affirm if the parties

-- 23 of 61 --

27(...continued)
Multistate Settlement Agreement creates a cartel controlling 99.9% of the market, giving
Philip Morris “the greatest market or monopoly power ) i.e. the power to raise prices or
decrease output.” Complaint at ¶ 98. Plaintiffs also allege Philip M orris had the specific
intent to monopolize the cigarette market and has done so. Complaint at ¶ 99. Immunity,
if found, will apply to violations of both § 1 and § 2.
28David McGowan & Mark A. Lemley, Antitrust Immunity: State Action and
Federalism, Petitioning and the First Amendment, 17 Harv. J.L. & Pub. Pol’y 293, 300
(1994).
24
to the Multistate Settlement Agreement are immune under the Noerr-Pennington or the
Parker doctrines. We turn now to that question.
III.
Antitrust Immunity
Defendants contend they are immune from antitrust liability under both the Noerr-
Pennington doctrine, which immunizes parties involved in petitioning the government,
and under the Parker doctrine, which immunizes sovereign state action. Although distinct
doctrines, there is substantial overlap as both “work at the intersection of antitrust and
governance.”28 The two doctrines share a fundamental similarity. The Supreme Court
has stated they are “complementary expressions of the principle that the antitrust laws
regulate business, not politics; Parker protects the States’ acts of governing, and Noerr the
citizens’ participation in government.” City of Columbia v. Omni Outdoor Adver. Inc.,
499 U.S. 365, 383 (1991). The District Court found defendants immune under both. We
must affirm if defendants are immune under either doctrine.
A. Noerr-Pennington Immunity

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29There is a “sham” exception to the Noerr-Pennington doctrine which holds that using
the petitioning process simply as an anticompetitive tool without legitimately seeking a
positive outcome to the petitioning destroys immunity. See Omni, 499 U.S. 365. There is
no suggestion that the sham exception applies here.
25
Under the Noerr-Pennington doctrine, “[a] party who petitions the government for
redress generally is immune from antitrust liability.” Cheminor Drugs, Ltd. v. Ethyl
Corp., 168 F.3d 119, 122 (3d Cir.), cert. denied, 528 U.S. 871 (1999). Petitioning is
immune from liability even if there is an improper purpose or motive.29 See E. R.R.
Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 138 (1961) (holding
that even if the petitioner’s sole purpose was to destroy its competition through passage of
legislation, petitioner would be immune); Prof’l Real Estate Investors, Inc. v. Columbia
Pictures Indus., Inc., 508 U.S. 49, 56 (1993) (same). Rooted in the First Amendment and
fears about the threat of liability chilling political speech, the doctrine was first
recognized in two Supreme Court cases holding federal antitrust laws inapplicable to
private parties who attempted to influence government action - even where the petitioning
had anticompetitive effects. See Noerr, 365 U.S. 127; United Mine Workers v.
Pennington, 381 U.S. 657 (1965). Under the Noerr-Pennington doctrine, “mere attempts
to influence the Legislative Branch for the passage of laws or the Executive Branch for
their enforcement” are given immunity from the Sherman Act and other antitrust laws.
Cal. Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 510 (1972). The immunity
reaches not only to petitioning the legislative and executive branches of government, but

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26
“the right to petition extends to all departments of the Government,” including the
judiciary. Id.
Noerr-Pennington immunity applies to actions which might otherwise violate the
Sherman Act because “[t]he federal antitrust laws do not regulate the conduct of private
individuals in seeking anticompetitive action from the government.” Omni, 499 U.S. at
379-80. The antitrust laws are designed for the business world and “are not at all
appropriate for application in the political arena.” Noerr, 365 U.S. at 141. This was
evident in Noerr, where defendant railroads campaigned for legislation intended to ruin
the trucking industry. Even though defendants employed deceptive and unethical means,
the Supreme Court held that they were still immune. This is because the Sherman Act is
designed to control “business activity” and not “political activity.” Id. at 129. With this
underpinning, the Court stated, “[Because] [t]he right of petition is one of the freedoms
protected by the Bill of Rights, . . . we cannot, of course, lightly impute to Congress an
intent to invade these freedoms.” Noerr, 365 U.S. at 136. The antitrust laws were
enacted to regulate private business and do not abrogate the right to petition.
The scope of Noerr-Pennington immunity, however, depends on the “source,
context, and nature of the competitive restraint at issue.” Allied Tube & Conduit Corp. v.
Indian Head, Inc., 486 U.S. 492, 499 (1988). If the restraint directly results from private
action there is no immunity. See id. at 500 (where the “restraint upon trade or
monopolization is the result of valid governmental action, as opposed to private action,”

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27
there is immunity). Passive government approval is insufficient. Private parties cannot
immunize an anticompetitive agreement merely by subsequently requesting legislative
approval.
Under the Noerr-Pennington doctrine, private parties may be immunized against
liability stemming from antitrust injuries flowing from valid petitioning. This includes
two distinct types of actions. A petitioner may be immune from the antitrust injuries
which result from the petitioning itself. See Noerr, 365 U.S. at 143 (finding trucking
industry plaintiffs’ relationships with their customers and the public were hurt by the
railroads’ petitioning activities, yet the railroads were immune from liability). Also, and
particularly relevant here, parties are immune from liability arising from the antitrust
injuries caused by government action which results from the petitioning. See Pennington,
381 U.S. at 671 (holding plaintiffs could not recover damages resulting from the state’s
actions); Mass. Sch. of Law at Andover, Inc. v. Am. Bar Assoc., 107 F.3d 1026, 1037 (3d
Cir. 1997) (holding Noerr gave immunity for any damages stemming from state adoption
of requirements for bar admission to petitioners who lobbied for their adoption); 1 Areeda
& Hovenkamp, supra, at ¶ 202c. Therefore, if its conduct constitutes valid petitioning,
the petitioner is immune from antitrust liability whether or not the injuries are caused by
the act of petitioning or are caused by government action which results from the
petitioning. Here, we must determine whether a settlement agreement between private
parties and sovereign states fits within the context of protected petitioning envisioned by

-- 27 of 61 --

30Despite plaintiffs’ assertions, the Supreme Court has also made it clear that there is
no “conspiracy” exception to Noerr-Pennington immunity. See Omni, 499 U.S. at 382
(“[W]e conclude that a ‘conspiracy’ exception to Noerr must be rejected.”). Simply
because the state officials might conspire with a private party to stifle competition does
not mean that the action loses immunity. See id. at 350-51 (“We find nothing in the
language of the Sherman Act or in its history which suggests that its purpose was to
restrain a state or its officers or agents from activities directed by its legislature.”).
31In doing so, we join other federal courts which have held the Multistate Settlement
Agreement is entitled to Noerr-Pennington immunity, though we recognize these cases
did not involve identical facts. See, e.g., Hise v. Philip Morris, Inc., 46 F.Supp.2d 1201,
1206 (N.D. Okla. 1999) (finding Noerr-Pennington immunity and not addressing Parker
immunity), aff’d mem., 208 F.3d 226 (10th Cir. 2000); Forces Action Project LLC v.
California, No. C 99-0607 MJJ, 2000 WL 20977, at *8 (N.D. Cal. Jan. 5, 2000) (same);
PTI, Inc. v. Philip Morris, Inc., 100 F.Supp.2d 1179, 1193 (C.D.Cal. 2000) (finding
Noerr-Pennington immunity and finding Parker immunity due to direct state action
because “[t]he M.S.A. was negotiated by the states' attorneys general and approved by the
state courts, and thus cannot be violative of the antitrust laws”).
28
the Noerr-Pennington doctrine.30
Finding that negotiating the settlement was akin to petitioning the government, the
District Court held defendants immune under Noerr-Pennington. Specifically, it held that
the “concerted effort by defendants to influence public officials, i.e., the states’ Attorneys
General, to accept a settlement in exchange for dismissing the numerous lawsuits pending
against defendants is among the activities protected by the Noerr-Pennington doctrine.”
A.D. Bedell, 104 F.Supp.2d at 506. We agree that defendants engaged in petitioning
activity with sovereign states and are immune under the Noerr-Pennington doctrine.31
1.
The importance of the right to petition has been long recognized. As early as
1215, the Magna Carta granted barons the right to petition the King of England for

-- 28 of 61 --

32See Aaron R. Gary, First Amendment Petition Clause Immunity From Tort Suits: In
Search of A Consistent Doctrinal Framework, 33 Idaho L. Rev. 67, 113-17 (1996)
(discussing the importance of the freedom to petition beyond that of expression, in part
because the Petitioning Clause guarantees access to elected representatives and directly
promotes republican government).
29
redress. See Julie M. Spanbauer, The First Amendment Right to Petition Government for
a Redress of Grievances: Cut From a Different Cloth, 21 Hastings Const. L.Q. 15, 17
(1993) (detailing history of the right to petition from 1215 through colonial times, the
constitutional convention, and today). During our colonial period, the right to petition
was widely used. The importance of this right was fundamental - it guaranteed not
merely expression but the preservation of democracy.32 “The very idea of government,
republican in form, implies a right on the part of its citizens to meet peaceably for
consultation in respect to public affairs and to petition for a redress of grievances.”
United States v. Cruikshank, 92 U.S. 542, 552 (1875).
Because of the importance of the right to petition the government freely, and
because “[a]ntitrust law was . . . not intended to impose a barrier between the people and
their government,” Noerr-Pennington immunity extends beyond filing formal grievances
directly with the government. Balt. Scrap Corp. v. David J. Joseph Co., 237 F.3d 394,
398 (4th Cir. 2001) (holding secret funding of a lawsuit brought against a potential
competitor to maintain a monopoly was protected under Noerr-Pennington, even though
the funding party was not a litigant).
In a recent survey of the application of Noerr-Pennington immunity to non-

-- 29 of 61 --

30
traditional petitioning, Primetime 24-Joint Venture v. Nat’l Broad. Co., Inc., 219 F.3d 92,
99-100 (2d Cir. 2000), the Court of Appeals for the Second Circuit noted the Supreme
Court has extended Noerr immunity to actions before administrative agencies and the
courts, Cal. Motor Transp., 404 U.S. at 508, 510-11, and that other courts have extended
Noerr-Pennington immunity to include efforts to influence governmental action incidental
to litigation such as prelitigation threat letters. McGuire Oil Co. v. Mapco., Inc., 958 F.2d
1552, 1560 (11th Cir. 1992); Coastal States Mktg., Inc. v. Hunt, 694 F.2d 1358, 1367-68
(5th Cir. 1982). There would seem to be no reason to differentiate settlement from other
acts associated with litigation. See Columbia Pictures Indus., Inc. v. Prof’l Real Estates
Investors, Inc., 944 F.2d 1525, 1528-29 (9th Cir. 1991), aff’d, 508 U.S. 49 (1993)
(affirming, but not addressing whether settlement creates immunity because sham
exception defeated immunity). The Court of Appeals for the Seventh Circuit has
recognized the application of Noerr-Pennington immunity to settlements between private
parties and state government. In Campbell v. City of Chicago, 823 F.2d 1182, 1186 (7th
Cir. 1987), two cab companies were found immune from antitrust liability for their
agreement to settle their lawsuits against the city in exchange for the passage of a
favorable and arguably anticompetitive ordinance. The settlement in Campbell resonates
favorably with the Multistate Settlement Agreement here.
The Supreme Court has yet to speak definitively on extending petitioning
immunity to settlement agreements with sovereign states. Relying on a statement in

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31
Broadcast Music, Inc. v. Columbia Broadcasting Systems Inc., plaintiffs claim the
Supreme Court refused to extend immunity to settlement agreements when it stated that a
“consent judgment, even one entered at the behest of the Antitrust Division, does not
immunize the defendant from liability for actions, including those contemplated by the
decree, that violates the rights of nonparties.” 441 U.S. 1, 13 (1979). “But in any event,
[we are] bound by holdings, not language.” Alexander v. Sandoval, 2001 WL 408983
(U.S.). We believe this case is easily distinguished. There was no settlement agreement in
Broadcast Music. Rather, Broadcast Music involved actions taken years after the
resolution of a claim by private actors who claimed they were acting under the protection
of a consent decree. The Supreme Court ruled that the consent decree did not immunize
the anticompetitive actions taken by private parties. For the above quoted language,
Broadcast Music relied upon Sam Fox Publishing Co. v. United States, 366 U.S. 683, 689
(1961), which did not involve Noerr-Pennington immunity. Sam Fox addressed whether
a non-participant is bound by the outcome of government antitrust litigation. Id. Neither
Broadcast Music nor Sam Fox mentioned Noerr-Pennington immunity, and neither is
applicable to the facts here.
Plaintiffs claim a motivating purpose behind the Multistate Settlement Agreement
was to create a cartel guaranteeing tobacco companies supracompetitive profits. Br. of
Appellants at 49. Similarly, plaintiffs claim the States were motivated by a desire to share
in these revenues. But the parties’ motives are generally irrelevant and carry no legal

-- 31 of 61 --

33Motive may be relevant if it demonstrates the party acted without a legitimate desire
for government action, and desired to inflict harm only through petitioning, thus falling
within the sham exception to Noerr-Pennington immunity. See Noerr, 365 U.S. at 138
(1961) (a party will not have immunity when petitioning activity "ostensibly directed
toward influencing governmental action, is a mere sham to cover . . . an attempt to
interfere directly with the business relationships of a competitor"). See supra note 29.
Plaintiffs do not claim the defendants’ conduct places them within the sham exception.
32
significance.33 See Noerr, 365 U.S. at 138. At the same time, it bears noting that the
petitioning here invoked the States’ traditional powers to regulate the health and welfare
of its citizens. See, e.g., Great Atlantic and Pac. Tea Co., Inc. v. Hugh B. Cottrell, 424
U.S. 366, 370 (1976) (“[U]nder our constitutional scheme the States retain ‘broad power’
to legislate protection for their citizens in matters of local concern such as public
health.”).
In sum, we see no reason to distinguish between settlement agreements and other
aspects of litigation between private actors and the government which give rise to
antitrust immunity. The rationale is identical. Freedom from the threat of antitrust
liability should apply to settlement agreements as it does to other more traditional
petitioning activities. We hold the defendants are immune under the Noerr-Pennington
doctrine.
B. Parker Immunity
Having found the defendants immune under Noerr-Pennington, our analysis could
end here. But the District Court found Parker immunity, so we will address it as well.
Antitrust laws do not bar anticompetitive restraints that sovereign states impose

-- 32 of 61 --

34“State action” as defined by the Parker doctrine also differs from the government
“actions” which results from petitioning discussed previously. See supra, Section III.A.
The two are not coterminous. A finding of Noerr-Pennington immunity from injury
caused by government action does not require a finding of Parker state action. See 1
Areeda & Hovenkamp, supra, at ¶ 206 (interpreting our dicta in Massachusetts School of
Law, 107 F.3d 1026 (3d Cir. 1997) as noting this distinction). If the government “action”
taken is the result of petitioning, Noerr-Pennington immunity attaches to a broader range
of government action than does Parker immunity. Noerr-Pennington immunity protects
(continued...)
33
“as an act of government.” Parker v. Brown, 317 U.S. 341, 352 (1943); see also Mass.
Sch. of Law at Andover, Inc. v. Am. Bar Assoc., 107 F.3d 1026, 1035 (3d Cir. 1997).
The Parker doctrine relies heavily on the clarity of the State’s goals and actions. “[S]tates
must accept political responsibility for the actions they intend to undertake.” FTC v.
Ticor Title Ins. Co., 504 U.S. 621, 636 (1992). The key question is whether the allegedly
anticompetitive restraint may be considered the product of sovereign state action. If it is
not, then even if sectors of state government are involved, the activity will not constitute
“state action” under the Parker doctrine and will not receive immunity.
“State action,” as defined in cases granting Parker immunity, is qualitatively
different from “state action” in other contexts such as the Fourteenth Amendment. See 1
Areeda & Hovenkamp, supra, at ¶ 221. While the Fourteenth Amendment can cover
inadvertent or unilateral acts of state officials not acting
pursuant to state policy . . . the term “state action” in antitrust
adjudication refers only to government policies that are
articulated with sufficient clarity that it can be said that these
are in fact the state’s policies, and not simply happenstance,
mistakes, or acts reflecting the discretion of individual
officials.34

-- 33 of 61 --

34(...continued)
petitioning, so long as it is not a sham. See Subscription Television v. S. Cal. Theatre
Owners Ass’n, 576 F.2d 230, 233-34 (9th Cir. 1978) (holding defendants immune from
antitrust liability under Noerr-Pennington even though their petitioning led to the passage
of an unconstitutional initiative). Under Noerr-Pennington immunity, the government
actions which flow from valid petitioning need not qualify as Parker “state action.”
Petitioning “would be considerably chilled by a rule which would require an advocate to
predict whether the desired legislation would withstand a constitutional challenge in the
courts and to expose itself to a potential treble antitrust action based on that prediction.”
Subscription Television, 576 F.2d at 233.
34
Id. Because it is grounded in federalism and respect for state sovereignty, this interest in
protecting the acts of the sovereign state, even if anticompetitive, outweighs the
importance of a freely competitive marketplace, especially in the absence of contrary
congressional intent.
Without clear congressional intent to preempt, federal laws should not invalidate
state programs. "In a dual system of government in which, under the Constitution, the
states are sovereign, save only as Congress may constitutionally subtract from their
authority, an unexpressed purpose to nullify a state's control over its officers and agents is
not lightly to be attributed to Congress." Parker v. Brown, 317 U.S. 341, 351 (1943).
While individual anticompetitive acts of state governments may be considered unwise or
counterproductive, the decision to make such choices lies within the sovereign power of
the states. Congress did not intend to override important state interests in passing the
Sherman Act. “The general language of the Sherman Act should not be interpreted to
prohibit anticompetitive actions by the States in their governmental capacities as

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35
sovereign regulators.” City of Columbia v. Omni Outdoor Adver., 499 U.S. 365, 374
(1991).
The Sherman Act was enacted to address the unlawful combination of private
businesses. See Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 n.15 (1940) (“The
history of the Sherman Act as contained in the legislative proceedings is emphatic in its
support for the conclusion that 'business competition' was the problem considered and
that the act was designed to prevent restraints of trade which had a significant effect on
such competition.”). “There is no suggestion of a purpose to restrain state action in the
Act's legislative history.” Parker, 317 U.S. at 313. The Sherman Act was passed “in the
era of 'trusts' and of 'combinations' of businesses and of capital organized and directed to
control of the market by suppression of competition in the marketing of goods and
services, the monopolistic tendency of which had become a matter of public concern.”
Apex, 310 U.S. at 493. Given its focus on the problems of private monopolies and
combinations, it is not surprising that the Sherman Act does not set out to curb clearly
defined anticompetitive state actions. See Cal. Retail Liquor Dealers Assoc. v. Midcal
Aluminum, Inc., 445 U.S. 97, 104 (1980).
When a state clearly acts in its sovereign capacity it avoids the constraints of the
Sherman Act and may act anticompetitively to further other policy goals. See S. Motor
Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 54 (1985). For example,
state governments frequently sanction monopolies to ensure consistent provision of

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36
essential services like electric power, gas, cable television, or local telephone service.
But “a state does not give immunity to those who violate the Sherman Act by authorizing
them to violate it, or by declaring that their action is lawful.” Parker, 317 U.S. at 351
(states cannot authorize private parties to set a price and then enforce those prices without
any evaluation of their reasonableness). Only an affirmative decision by the state itself,
acting in its sovereign capacity, and with active supervision, can immunize otherwise
anticompetitive activity.
When it is uncertain whether an act should be treated as state action for the
purposes of Parker immunity, we apply the test set forth in California Retail Liquor
Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 104 (1980), to “determine
whether anticompetitive conduct engaged in by private parties should be deemed state
action and thus shielded from the antitrust laws.” Patrick v. Burget, 486 U.S. 94, 100
(1988). Applying Midcal is unnecessary if the alleged antitrust injury was the direct
result of a clear sovereign state act. Mass. Sch. of Law at Andover v. Am. Bar Assoc.,
107 F.3d 1026, 1036 (3d Cir. 1997); Session Tank Liners, Inc. v. Joor Mfg., Inc., 17 F.3d
295, 299 (9th Cir. 1994) (finding immunity from antitrust liability where “injuries for
which [the plaintiff] seeks recovery flowed directly from government action”). In
Massachusetts School of Law, we held that where “the states are sovereign in imposing
the bar admission requirements [the alleged anticompetitive restraints], the clear
articulation and active supervision requirements . . . are inapplicable.” 107 F.3d at 1036.

-- 36 of 61 --

35Parker, by its own terms, immunizes only states. But in order to give effect to Parker
immunity, private parties to state action must also be immune. Armstrong Surgical Ctr,
Inc. v. Armstrong County Mem’l Hosp., 185 F.3d 154, 159 (3d Cir. 1999) (“[I]f relief is
sought solely for injury as to which the state would enjoy immunity under Parker, the
(continued...)
37
There is less need for scrutiny “[w]hen the conduct is that of the sovereign itself . . .
[because] the danger of unauthorized restraint of trade does not arise.” PTI, Inc. v. Philip
Morris, Inc., 100 F.Supp.2d 1179, 1196 (C.D. Ca. 2000). Similarly, concerns about the
legitimacy of the action are reduced. Thus we must first decide if Midcal applies to the
States’ actions in negotiating and implementing the Multistate Settlement Agreement.
The Supreme Court has recognized state legislative and judicial action as
sovereign under Parker. But “[c]loser analysis is required” when the action is less
directly that of the legislature or judiciary. Hoover v. Ronwin, 466 U.S. 558, 568 (1984)
(relying in part on Midcal). One Court of Appeals has decided that executive officers and
agencies “are entitled to Parker immunity for actions taken pursuant to their constitutional
or statutory authority, regardless whether these particular actions or their anticompetitive
effects were contemplated by the legislature,” without the need for Midcal analysis.
Charley’s Taxi Radio Dispatch Corp. v. SIDA of Haw., Inc., 810 F.2d 869, 876 (9th Cir.
1987). We have yet to address whether the acts of executive officials constitute state
action that avoids Midcal analysis. Furthermore, in this case, we must determine whether
the antitrust injuries were more attributable to private parties than to government action,
as was the case in Midcal.35

-- 37 of 61 --

35(...continued)
private petitioner also enjoys immunity.”). Otherwise, plaintiffs could sue only the
private parties and by winning antitrust judgments against them, could thwart state
policies as if there were no state immunity. No state could enter into an agreement with
private groups, even to further clear state policies, because the potential liability of the
private groups would prevent them from joining. Artful pleading should not frustrate
state policy. S. Motor Carriers Rate Conference, Inc., v. United States, 471 U.S. 48, 56-
57 (1985) (absent immunity for private parties, a “plaintiff could frustrate any [State]
program merely by filing suit against the regulated private parties”). If Parker immunity
attaches, it would also reach the private participants of the Multistate Settlement
Agreement.
36The District Court found direct state action and thus did not apply Midcal. A.D.
Bedell, 104 F.Supp.2d at 507 (“After careful consideration of the submissions of the
parties and the amici curiae, I conclude that because the conduct of entering into,
executing and implementing the M.S.A. was undertaken by the settling states functioning
in their sovereign capacities, to the extent Plaintiff's injuries are premised upon said
conduct, liability for said conduct by the states would be subject to Parker state action
immunity. Obviously in so holding, I opine, contrary to the argument presented by
Plaintiff, that in this case, application of the Cal. Retail Liquor Dealers Ass'n v. Midcal
Aluminum, Inc., 445 U.S. 97 (1980), test is inappropriate.”). Similarly, one other court
which has addressed the Multistate Settlement Agreement has found the presence of
direct state action and did not undertake a Midcal analysis. See PTI, Inc. v. Philip Morris,
Inc., 100 F.Supp.2d 1179, 1196 (C.D. Cal. 2000) (finding that because of the direct
actions by the State Attorneys General, approval by state courts, and implementation of
Qualifying Statutes by state legislatures, the Multistate Settlement Agreement was the
result of direct state action, rendering Midcal inapplicable).
38
1. Direct Application of Parker
An argument can be made that the Multistate Settlement Agreement, and any of its
anticompetitive effects, were the direct result of state government action.36 For each
signatory state, there was active involvement by high ranking executive officials and the
agreement was subject to state court approval. The Multistate Settlement Agreement was

-- 38 of 61 --

39
negotiated by Attorneys General from each state to settle existing and contemplated
lawsuits. The Multistate Settlement Agreement required that,
each Settling State that is a party to a lawsuit . . . and each
Participating M anufacturer will:
(A) tender this agreement to the Court in such Settling
State for its approval; and
(B) tender to the Court in such Settling state for
entry of a consent decree conforming to the
model consent decree attached hereto as Exhibit
L.
MSA § XIII(b)(1); see also PTI, 100 F.Supp.2d at 1196.
In most cases, the state legislatures were involved as well. Although they lacked a
direct role in forming or approving the Multistate Settlement Agreement, the legislatures
were charged with, and responsible for, the enactment of the Qualifying Statutes which,
although technically voluntary, enforce important components of the M ultistate
Settlement Agreement. See MSA § IX(d)(2)(E), (F) and (G). It is apparent that
legislative enactment of the Qualifying Statutes signified state approval of the M ultistate
Settlement Agreement. See Cal. Aviation Inc. v. City of Santa Monica, 806 F.2d 905,
909 n.5 (9th Cir. 1986) (noting statutes passed afterwards can be evidence of pre-existing
state policy to allow anticompetitive behavior). In a few states, the legislatures played an
even greater role by applying pressure on the Attorney General or Governor to bring suit
or by passing legislation authorizing the Attorney General to bring suit against the

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37See Kris Mayes, Legislators Say State Should Sue Tobacco Firms, The Arizona
Republic, March 23, 1996, at B1 (reporting state lawmakers in Arizona urged the State
Attorney General to join other states and file suit); Ron Scherer, More States Plan to Sue
for Costs of Smoking, The Christian Science Monitor, July 12, 1994, at 6 (stating the
Florida and Massachusetts legislatures passed bills that permitted the states to sue the
tobacco companies for reimbursement of medical expenses).
40
tobacco companies.37 Additionally, each branch of state government had a role in the
execution or operation of the Multistate Settlement Agreement. Under this analysis, one
could find direct state action foreclosing the application of Midcal.
Under a different view, we focus not on the negotiation and consummation of the
Multistate Settlement Agreement, but on its actual operation and resulting effects, since
that is the true cause of the anticompetitive effects. This is how the Supreme Court
analyzed the behavior in Midcal.
In Midcal, the price setting structure that resulted in antitrust injury would not have
existed but for the state regulation. Only because of state legislative enactments did
California wine producers hold power over the wholesalers to engage in resale price
maintenance. Midcal, 445 U.S. at 105. Because the actual parties involved in the
anticompetitive behavior were private parties, the Supreme Court determined the alleged
violation of the antitrust laws was not obvious state action and devised what has come to
be known as the Midcal test.
We have found direct state action, without Midcal analysis, only when the
allegedly anticompetitive behavior was the direct result of acts within the traditional

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38The defendants claim any injury here occurs because of the these acts and not because
of private action. Br. of Appellees at 31.
41
sovereign powers of the state. See Mass. Sch. of Law, 107 F.3d at 1036; see also
Zimomra v. Alamo Rent-A-Car, Inc., 111 F.3d 1495, 1500 (10th Cir. 1997). In
Massachusetts School of Law, we held Midcal inapplicable because the state acted as
sovereign in imposing bar admission requirements. 107 F.3d at 1036 (Massachusetts
School of Law at Andover, Inc., an unaccredited law school, had challenged the state
requirement that a student graduate from an ABA accredited law school as an
anticompetitive restraint). We distinguished Midcal and its progeny as “inapplicable
because they dealt with situations where private parties were engaging in conduct . . .
which led directly to the alleged antitrust injury.” Id. Similarly, in Zimomra, the Court of
Appeals for the Tenth Circuit held Midcal inapplicable in a challenge to rental car price
fixing because the city and county, and not a private actor, had the ultimate responsibility
for setting rental car daily use fees and the private parties “had no such discretionary
authority.” 111 F.3d at 1500. In neither case was a private party responsible for the
resulting anticompetitive act; and thus there was no need to apply the Midcal analysis.
Although the Multistate Settlement Agreement was a negotiated settlement by
State Attorneys General, and the state legislatures were responsible for passing the
Qualifying Statutes to enforce important components of the agreement, these acts by the
governmental parties were not the direct source of the anticompetitive injuries.38

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39The Supreme Court has “twice held that hybrid price-fixing restraints are prohibited
by the Sherman Act.” Id. “In both cases the private decision to fix prices was
unsupervised by the State but made effective by state law.” Rice, 458 U.S. at 666
(Stevens, J., concurring) (citing Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S.
384 (1951); Midcal, 445 U.S. 97).
42
Therefore, it would appear that, just as the injury in Midcal was caused by private parties
taking advantage of the state imposed market structure, the anticompetitive injury here
resulted from the tobacco companies’ conduct after implementation of the Multistate
Settlement Agreement, and not from any further positive action by the States. Even
though, as defendants argue, the Multistate Settlement Agreement created the cartel, this
fact makes the case analogous to Midcal, not different.
The signing of the Multistate Settlement Agreement and the establishment of the
output cartel are not purely private actions, nor are they entirely attributable to the state in
the manner of a legislative act. As such, this case resembles a “hybrid restraint” as
discussed by Justice Stevens in his concurrence in Rice v. Norman Williams Co., 458
U.S. 654, 666-67 (1982) (Stevens, J., concurring).39 Hybrid restraints are not the type of
sovereign state action found in Massachusetts School of Law or Zimomra, that avoid
Midcal treatment. Instead, hybrid restraints involve a degree of private action which calls
for Midcal analysis. See Rice, 458 U.S. at 666 (“Hybrid restraints of this character
require analysis that is different from a public regulatory scheme on the one hand, and a
purely private restraint on the other.”) (citations omitted) (Stevens, J., concurring).
Therefore, to determine if the allegedly anticompetitive sections of the M ultistate

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43
Settlement Agreement were “state action” under the Parker doctrine, we will apply the
Midcal analysis.
For the reasons expressed, namely that the antitrust injuries here were not caused
by the solitary acts of the state acting in its traditional capacity, but were instead caused
by hybrid acts involving private parties in the unique setting of a joint settlement, we
believe this form of alleged anticompetitive restraint requires the Midcal analysis.
2. Midcal
To qualify as state action under the Midcal test, “the challenged restraint must be
one ‘clearly articulated and affirmatively expressed as state policy.’” 445 U.S. at 104
(quoting City of Lafayette v. La. Power & Light Co., 435 U.S. 389, 410 (1978) (opinion
of Brennan, J.)). A government entity need not “be able to point to a specific, detailed,
legislative authorization” to assert a successful Parker defense. Lafayette, 435 U.S. at
415. But it must be evident that under the “clear articulation” standard the challenged
restraint is part of state policy. As the Supreme Court has stated, “Midcal confirms that
while a State may not confer antitrust immunity on private persons by fiat, it may displace
competition with active state supervision if the displacement is both intended by the State
and implemented in its specific details.” FTC v. Ticor Title Ins. Co., 504 U.S. 621, 633
(1992).
Here, the States’ reasons for bringing suits against the Majors ) to reduce teenage
smoking, address public health concerns, and recoup state health care expenditures )

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40See, e.g., Maryland Seeks Billions From Tobacco Firms for Medicaid Costs,
Washington Post, May 2, 1996, at B5 (quoting Maryland Attorney General Joseph
Curran’s press conference where he stated, “[The tobacco companies] have knowingly
peddled a killer product, and their victims come to hospitals just like this to be treated and
to die. Now we will take them to a courthouse to seek justice for their deceitful
conduct.”); Kendrick Blackwood, Iowa Sues Over Costs of Smoking; 22 Tobacco Groups
Named Defendants, Omaha World Herald, Nov. 27, 1996, at 1 (quoting Iowa Governor
Terry Branstad announcing the decision to bring suit and stating, “For too long, taxpayers
have footed the bill for the immense strain that smoking has caused on hour health-care
system. With this suit, we are seeking justice.”).
41See, e.g., Oklahoma Sues Tobacco Industry for Over $1 Billion; State Seeks
Medicaid Funds on Smoke-Related Interests, The Baltimore Sun, Aug. 23, 1996, at C2
(quoting Oklahoma Attorney General Drew Edmondson’s statement that “Oklahoma has
spent about $70 million a year in M edicaid contributions since 1980 to treat patients with
smoking-related illnesses”); Kevin McDermott, Illinois to Sue Tobacco Firms; State
Seeks to Recover Medicaid Expenditures, St. Louis Post-Dispatch, Sept. 18, 1996, at A1
(reporting that Illinois Attorney General Jim Ryan’s office estimates that Illinois spent
$2.75 billion in Medicaid to treat smoking related illnesses between 1980 and 1993);
Amy Goldstein, Maryland to Sue Makers of Cigarettes; Effect of Smoking on Medicaid at
Issue, Washington Post, Nov. 17, 1995, at B1 (quoting a state study referred to by the
Attorney General and Governor of Maryland in support of their decision to sue the
tobacco companies which concluded that 40% of cancer deaths in Maryland were cancers
often caused by smoking).
44
were evident and clearly articulated. State Attorneys General and Governors made public
pronouncements which received national coverage.40 Other suing states made similar
announcements and cited to studies demonstrating the enormous impact of cigarette
smoking on health and finances.41 The proclaimed goals of the States were clear.
As noted, the State Attorneys General and the Governors were not the only state
actors involved. The State Attorneys General took the lead in negotiations, but the state
courts played an important role in approving the Multistate Settlement Agreement by
issuing consent judgments and dismissing the lawsuits. This was required by the

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42See, e.g., Kris Mayes, Legislators Say State Should Sue Tobacco Firms, The Arizona
Republic, March 23, 1996, at B1 (reporting state lawmakers in Arizona urged the state
Attorney General to join other states and file suit); Ron Scherer, More States Plan to Sue
for Costs of Smoking, The Christian Science M onitor, July 12, 1994, at 6.
43We do not hold that public pronouncement through the media is necessarily required
to satisfy the clear articulation prong.
45
Multistate Settlement Agreement which provided that each signatory state would “tender
to the Court in such Settling State for entry of a consent decree conforming to the model
consent decree” included in the agreement. See MSA § XIII(b)(1). The lawsuits were
dismissed under the consent agreements. The state legislatures also demonstrated their
approval in most of the States by passing implementing legislation. See Cal. Aviation
Inc., 806 F.2d at 909 n.5 (noting that statutes passed afterwards are evidence of pre-
existing state policy to allow anticompetitive behavior). Even before the settlement,
legislatures of some states targeted the tobacco industry by putting pressure on the
Attorney General or Governor to bring suit.42 In view of public pronouncements of the
States’ intentions and goals, along with active involvement from each branch of state
government, it is evident the Multistate Settlement Agreement was backed by clearly
articulated state policy.43
The second prong of the Midcal test is whether the resulting antitrust violation was
“actively supervised” by the state. This standard is more problematic. The essential
inquiry of the “actively supervised” prong is to determine if the “anticompetitive scheme
is the State’s own.” FTC v. Ticor Title Ins. Co., 504 U.S. 621, 635 (1992). The active

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46
supervision prong "requires that state officials have and exercise power to review
particular anticompetitive acts of private parties and disapprove those that fail to accord
with state policy." Patrick v. Burget, 486 U.S. 94, 101 (1988). “Absent such a program
of supervision, there is no realistic assurance that a private party's anticompetitive
conduct promotes state policy, rather than merely the party's individual interests." Id. at
100-01. “Such active state review is clearly necessary where private defendants are
empowered with some type of discretionary authority in connection with the
anticompetitive acts (e.g. to determine price or rate structures).” Zimomra, 111 F.3d at
1500. Rubber stamp approval of private action does not constitute state action. A state
must independently review and approve the anticompetitive behavior to satisfy this prong
of the Parker doctrine. Patrick, 486 U.S. at 101 (“The active supervision requirement
mandates that the State exercise ultimate control over the challenged anticompetitive
conduct.”); Ticor, 998 F.2d at 1139.
Here, plaintiffs allege the Multistate Settlement Agreement primarily furthers the
private tobacco companies’ interests and not those of the States. While we do not agree
with this characterization, it is clear the Multistate Settlement Agreement empowers the
tobacco companies to make anticompetitive decisions with no regulatory oversight by the
States. Specifically, the defendants are free to fix and raise prices, allegedly without fear
of competition. The question then is whether the Multistate Settlement Agreement, with

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47
all its duties and responsibilities, creates sufficient state supervision even though the
pricing decisions are unregulated.
The States actively and continually monitor the implementation of portions of the
Multistate Settlement Agreement. See MSA §§ VII-VIII. After requiring a state court
consent decree, the Multistate Settlement Agreement also mandates state courts to
maintain continuing jurisdiction over enforcement of disputes between the States and the
tobacco companies. See MSA § VII(a). Under the Multistate Settlement Agreement, the
state courts may order compliance in the form of an Enforcement Order. See MSA §
VII(c)(3). If a State Attorney General believes a manufacturer has failed to comply with
an Enforcement Order, it may seek an order for civil contempt or monetary sanction to
force compliance. See MSA § VII(c)(4). Furthermore, for a period of seven years after
settlement, the Attorney General of a Settling State may inspect all non-privileged records
of the tobacco companies, and will have access to interview directors, officers and
employees upon reasonable belief of a violation of the M ultistate Settlement Agreement.
See MSA § VII(g).
The Multistate Settlement Agreement also establishes a $50 million fund to assist
the States in enforcing the M ultistate Settlement Agreement. See MSA § VIII(c). This
fund is to be used
to supplement the States’
(1) enforcement and implementation of the terms of [the Multistate
Settlement Agreement] and consent decrees, and

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44The Multistate Settlement Agreement also creates administrative obligations. The
Multistate Settlement Agreement provides:
VIII. CERTAIN ONGOING RESPONSIBILITIES OF THE SETTLING
STATES
(a) Upon approval of the NAAG [National Association of Attorneys
General] executive committee, NAAG will provide coordination and
facilitation for the implementation and enforcement of this
Agreement on behalf of the Attorneys General of the Settling States,
including the following:
(1) NAAG will assist in coordinating and inspection and
discovery activities referred to in subsections III(p)(3) and
VII(g) regarding compliance with this Agreement by the
Participating Manufacturers and any new tobacco-related
trade associations.
(2) NAAG will convene at least two meetings per year and
one major national conference every three years for the
Attorneys General of the Settling States, the directions of the
Foundation and three persons designated by each Participating
Manufacturer. The purpose of the meetings and conference is
to evaluate the success of this Agreement and coordinate
efforts by the Attorneys General and the Participating
Manufacturers to continue to reduce Youth Smoking.
(3) NAAG will periodically inform NGA, NCSL, the National
Association of Counties and the National League of Cities of
the results of the meetings and conferences referred to in
subsection (a)(2) above.
(4) NAAG will support and coordinate the efforts of the
Attorneys General of the Settling States in carrying out their
responsibilities under this Agreement.
(5) NAAG will perform other the other functions specified for
(continued...)
48
(2) investigation and litigation of potential violations of laws with
respect to Tobacco Products.
Id.
This includes prosecution of non-signatories for those underlying “torts” which initially
led the States to sue the major tobacco companies.44

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44(...continued)
it in this Agreement, including the functions specified in
section IV.
MSA § VIII(a).
45In pertinent part, payments are calculated as follows:
(c) Annual Payments and Strategic Contribution Payments
(1) On April 15, 2000 and on April 15 of each year thereafter
in perpetuity, each Original Participating Manufacturer shall
severally pay to the Escrow Agent (to be credited to the
Subsection IX(c)(1) Account) its Relative Market Share of the
base amounts specified below, as such payments are modified
in accordance with this subsection (c)(1):
Year Base Amount
2000 $4,500,000,000
2001 $5,000,000,000
2002 $6,500,000,000
2003 $6,500,000,000
2004 $8,000,000,000
2005 $8,000,000,000
2006 $8,000,000,000
2007 $8,000,000,000
2008 $8,139,000,000
2009 $8,139,000,000
2010 $8,139,000,000
2011 $8,139,000,000
2012 $8,139,000,000
2013 $8,139,000,000
2014 $8,139,000,000
2015 $8,139,000,000
2016 $8,139,000,000
2017 $8,139,000,000
2018 and each year thereafter $9,000,000,000
(continued...)
49
The largest responsibilities for the tobacco companies are financial. The
Multistate Settlement Agreement details how and when the payments will be made to the
settling states each year. See MSA § IX.45 In addition, there is a limited

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45(...continued)
The Payments made by the Original Participating
Manufacturers pursuant to this subsection (c)(1) shall be
subject to the Inflation Adjustment, the Volume Adjustment,
the Previously Settled States Reduction, the Non-Settling
States Reduction, the NPM Adjustment, the offset for
miscalculated or disputed payments described in Section
XI(i), the Federal Tobacco Legislation Offset, the Litigating
Release Parties Offset, and the offsets for claims over
described in subsections XII(a)(4)(B) and XII(a)(8).
MSA § IX(c)(1).
46The “most-favored nations” clause provides:
If any Settling State resolves by settlement Claims against any
Non-Participating Manufacturer after the MSA Execution
Date comparable to any Released Claim, and such resolution
includes overall terms that are more favorable to such Non-
Participating Manufacturers than the terms of this Agreement
(including, without limitation, any terms that related to the
marketing or distribution of Tobacco Products and any term
that provides for a lower settlement cost on a per pack sold
basis), then the overall terms of this Agreement will be
revised so that the Original Participating Manufacturers will
obtain, with respect to that Settling State, overall terms at
least as relatively favorable (taking into account, among other
things, all payments previously made by the Original
Participating Manufacturers and the timing of any payments)
as those obtained by such Non-Participating M anufacturers
pursuant to such resolution of claims . . . .
(continued...)
50
“most-favored nation” provision. In the event a State settles with a non-signatory tobacco
company (NPM ) on terms more favorable than the M ultistate Settlement Agreement (a
lower payment-per-pack amount), then all signatories will be entitled to a revision of the
Multistate Settlement Agreement to at least match the new agreement. See MSA §
XVIII(b)(2).46 There are also significant ongoing restrictions placed on the tobacco

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46(...continued)
MSA § XVIII(b)(2)
51
manufacturers. They are prohibited from taking “any action, directly or indirectly, to
target Youth within any Settling State in the advertising, promotion, or marketing of
Tobacco Products,” M SA § III(a); they also agreed to refrain from using “any cartoon in
the advertising, promoting, packaging or labeling of Tobacco products.” MSA § III(b).
Despite these factors, we are not convinced that the States satisfy Midcal’s “active
supervision” prong. This is because the States’ supervision does not reach the parts of the
Multistate Settlement Agreement that are the source of the antitrust injury. It is the
conduct that violates the antitrust laws that states must “actively supervise” in order for
Parker immunity to attach.
As we recognized in Norman’s on the Waterfront, Inc. v. Wheatley, “an
arrangement sponsored by the state is not necessarily state action for the purposes of the
antitrust laws.” 444 F.2d 1011, 1017 (3d Cir. 1971) (citing Woods Exploration &
Producing Co., Inc. v. Aluminum Co. of Am., 438 F.2d 1286, 1294 (5th Cir. 1971) for the
proposition that “it is not every governmental act that points a path to an antitrust
shelter”). In Wheatley, we analyzed a series of Parker cases demonstrating the state must
be actively involved in establishing the rules of the market as well as in the
anticompetitive activity. Because “‘states can neither authorize individuals to perform
acts which violate the antitrust laws nor declare that such action is lawful,’” many of

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47Although some of these statutory provisions have been amended since Midcal, the
bulk were enacted before Midcal (in 1953). Here we cite the statutes as they existed when
Midcal was decided.
48Cal. Bus & Prof. Stat. Ann. § 25602 (West 1964) (prohibiting sales to an intoxicated
person); Cal. Bus & Prof. Stat. Ann. § 25607 (prohibiting the sale of alcohol without a
license for the specific alcohol); Cal. Bus & Prof. Stat. Ann. § 25608 (prohibiting
possession, consumption or sale of alcohol on school property); Cal. Bus & Prof. Stat.
Ann. § 25631 (prohibiting the sale of alcoholic beverages between 2 a.m. and 6 a.m.).
49Cal. Bus & Prof. Stat. Ann. § 25610 (prohibiting the destruction of labels whose
(continued...)
52
these cases of hybrid restraints turn on whether the state remains involved in the actual
pricing by the regulated parties. Wheately, 444 F.2d at 1017 (quoting Asheville Tobacco
Bd. of Trade, Inc. v. Fed. Trade Comm’n, 263 F.2d 502, 509 (4th Cir. 1959)).
Significantly, in Midcal, the State of California enacted a pricing system for the
wine industry. Because the State did not exercise direct control over the resulting prices
set by the private actors, and did not review the reasonableness of the prices, the Supreme
Court found insufficient “active supervision” to qualify as state action. Midcal, 445 U.S.
at 105-06. Therefore, there was no immunity for setting anticompetitive prices under this
system. Id.
In Midcal, the challenged “restraints” were state statutes on pricing and resale
price maintenance. But there were several other ways in which the State of California
regulated the wine industry. See, e.g., Cal. Bus & Prof. Stat. Ann. § § 25600-67 (West
1964).47 California actively supervised when, where, and to whom wine or other
alcoholic beverages could be sold,48 the markings and signs on labels,49 penalties for

-- 52 of 61 --

49(...continued)
presence is required by federal or state law).
50Cal. Bus & Prof. Stat. Ann. § 25658 (prohibiting consumption or purchase of alcohol
by a minor).
51Cal. Bus & Prof. Stat. Ann. § 25611 (restricting the size of signs advertising alcoholic
beverages); Cal. Bus & Prof. Stat. Ann. § 25612 (prohibiting “obnoxious, gaudy, blatant,
or offensive” alcohol advertisements); Cal. Bus & Prof. Stat. Ann. §25664 (prohibiting
the use of any advertisement intended to encourage minors to drink).
53
underage use,50 and advertisements, including prohibiting advertising to minors.51 This
“supervision” was not cited in Midcal because it did not constitute part of the
anticompetitive restraint at issue. Under Parker, a comprehensive regulatory scheme
would be immune from antitrust liability because the “State would ‘displace unfettered
business freedom’ with its own power,” Midcal, 445 U.S. at 106. But the Supreme Court
in Midcal was silent about the impact of other regulatory provisions in the California
Code denoting, we believe, the absence of a comprehensive regulatory scheme in this
sense.
Since Midcal, other courts have found that if a state creates or sanctions a
monopoly or cartel through its sovereign powers, but does not regulate the resulting
prices, the resulting anticompetitive behavior should not be granted immunity. In
Wheately, we held that because the Virgin Islands Alcoholic Beverages Fair Trade Law
did not grant the power to “approve, disapprove, or modify the prices fixed by private
persons,” the program could not meet the active supervision prong of Midcal and was not
immune under Parker. In Asheville Tobacco, the Court of Appeals for the Fourth Circuit

-- 53 of 61 --

52See MSA § III (restricting the targeting of youth, the use of cartoons, and imposing
other wide reaching regulations on advertising).
54
held that where a state statute authorized the creation of local tobacco boards to regulate
tobacco sales at auctions, and where the states did not continue to supervise the decisions
of these boards, the board’s actions were not protected by Parker immunity. This
principle has also been applied in state granted monopoly cases. In Gas Light Co. of
Columbus v. Georgia Power Co., 440 F.2d 1135 (5th Cir. 1971), the Court of Appeals for
the Fifth Circuit found a utility which had been given a monopoly by the state was
entitled to Parker immunity only because its prices were regulated extensively by the state
through a process of full adversarial hearings.
In each of these cases, the decision by the state to allow, or even to create, an
anticompetitive scheme did not establish immunity. As a leading antitrust treatise has
recognized, “A state may be free to determine for itself how much competition is
desirable, provided that it substitutes adequate control wherever it has substantially
weakened competition.” Areeda & Hovenkamp, supra, at ¶ 221 (citing Wheatley,
Asheville Tobacco, and Georgia Power). Under this jurisprudence, only when the state
approves and actively supervises the results of the anticompetitive scheme does Parker
immunity attach.
As noted, some provisions of the Multistate Settlement Agreement actively
regulate the tobacco companies, like those imposing advertising restrictions.52 But these

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53We could speculate that this prong might be met if there were provisions in the
Multistate Settlement Agreement which granted the state oversight authority on the
reasonableness of price increases. It is also the case that under certain circumstances,
immunity may attach even in the absence of supervision where the state action creates a
scheme where anticompetitive behavior is certain to occur and where further supervision
would serve no purpose. See 1 Areeda & Hovenkamp, supra, at ¶ 221e4, ¶ 226e (citing
examples). However, in this case, the Multistate Settlement Agreement left significant
decisions to private decision makers. The actual pricing decisions are exclusively under
(continued...)
55
provisions have no effect on pricing or production and thus do not regulate the challenged
anticompetitive conduct. Patrick, 486 U.S. at 101. In contrast, the anticompetitive
restraints in the M ultistate Settlement Agreement that permit the tobacco companies to
maintain an output cartel are the Renegade Clause and, arguably, the resulting Qualifying
Statutes.
The States here are actively involved in the maintenance of the scheme, but they
lack oversight or authority over the tobacco manufacturers’ prices and production levels.
These decisions are left entirely to the private actors. Nothing in the Multistate
Settlement Agreement or its Qualifying Statutes gives the States authority to object if the
tobacco companies raise their prices. In fact, it appears these increases have already
happened. As noted, the Majors have raised their prices sharply and uniformly since the
implementation of the M ultistate Settlement Agreement ) according to plaintiffs, by 50%
since 1997. See Complaint at ¶ 36. These price increases have not been monitored or
regulated by the States. The Multistate Settlement Agreement imposes no restrictions on
pricing or provisions to temper the effects of the output cartel.53 Under this set of facts,

-- 55 of 61 --

53(...continued)
the control of the tobacco companies. Only their effects are governed by the structure of
the M ultistate Settlement Agreement.
54An argument could be made that the Multistate Settlement Agreement cannot be
parsed into anticompetitive restraints and non-anticompetitive restraints. But the better
argument appears to be that restrictions on advertising and the like cannot save a pricing
system or output control system that is not actively supervised — even if those
regulations are within the same document (like the Multistate Settlement Agreement) or
are located within the same statutory code (as in Midcal). That other restrictions on wine
distribution and consumption and other supervision of the wine industry are not discussed
in Midcal supports this conclusion.
55Plaintiffs assert that even if we were to find Parker immunity, there is a conspiracy
exception, and that the defendants here fall within that exception. There is also a market
participant exception to actions which might otherwise be entitled to Parker immunity.
The District Court addressed neither argument but on appeal both parties briefed these
issues. Although we do not find Parker immunity, we find it useful to clarify these
exceptions.
At one point, several courts of appeals had opined that the language in Parker
which discusses the market participant exception, created a broad conspiracy exception.
See City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. 365, 374 (1991). The
Court in Parker stated, “[W]e have no question of the state or its municipality becoming a
participant in the private agreement or combination by others for restraint of trade.” 317
U.S. at 351-52 (citing Union Pac. R.R Co. v. United States, 313 U.S. 450 (1941). The
reading of a conspiracy exception also based on language in Parker which said, “The state
in adopting and enforcing the prorate program made no contract or agreement and entered
into no conspiracy in restraint of trade or to establish monopoly but, as sovereign,
imposed the restraint as an act of government which the Sherman Act did not undertake
(continued...)
56
there is insufficient evidence of active supervision of the allegedly anticompetitive
restraints to satisfy this prong of Midcal.54
Although the M ultistate Settlement Agreement is the product of a “clearly
articulated” state policy, because the States do not “actively supervise” the
anticompetitive restraints, the participants are not entitled to Parker immunity.55

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55(...continued)
to prohibit.” Id. at 352. But just as under Noerr-Pennington immunity, the state does not
forfeit Parker immunity simply because it acts with a private party. In Omni, the Supreme
Court made it clear that “[t]here is no such conspiracy exception.” Id. The Court has
clarified that the language in Parker meant “immunity does not necessarily obtain where
the State acts not in a regulatory capacity but as a commercial participant in a given
market.” Id.
As an example of what it means to be a commercial or market participant, the
Court in Omni cites Union Pac. R. Co. v. United States, 313 U.S. 450 (1941), in which
the City of Kansas City was held liable for certain “rebates and concessions made . . . in
its capacity as the owner and operator of a wholesale produce market that was integrated
with railroad facilities.” Id. at 375. The government entity therefore was involved in the
market as a buyer or seller. Other than Union Pacific, there has been little elaboration
about the commercial participant exception to Parker immunity.
The commercial or market participant exception, however, is a concept made
familiar by Dormant Commerce Clause jurisprudence. State actions are immune from the
Dormant Commerce Clause when they are regulatory actions but not where the state acts
as a market participant ) just as in Sherman Act antitrust cases. See New Energy Co. v.
Limbach, 486 U.S. 269, 277 (1988) (“[The market participant exception] differentiates
between a State’s acting in its distinctive governmental capacity, and a State’s acting in
the more general capacity of a market participant; only the former is subject to the
limitations of the negative Commerce Clause.”). Dormant Commerce Clause cases have
found the market participant exception appropriate where the state action “constituted a
direct state participation in the market.” Camps Newfound/Owatonna, Inc. v. Town of
Harrison, 520 U.S. 564, 593 (1997). This includes a state program to pay people who
remove abandoned cars from streets and junkyards because the payment was interpreted
as an entry into the market for abandoned cars, Hughes v. Alexandria Scrap Corp., 426
U.S. 794, 810 (1976); a program to sell output from a state owned and operated cement
plant, Reeves, Inc. v. Stake, 447 U.S. 429, 431-32 (1980); and a program to fund
construction projects entirely by a city, White v. Mass. Council of Constr. Employers,
Inc., 460 U.S. 204, 208 (1983). None of these cases is analogous to the facts here. In
joining the Multistate Settlement Agreement, the States did not enter the tobacco market
as a buyer or seller, nor did they assume control or ownership of any entity within the
market. If we had found Parker immunity, the States’ actions would not fall under the
market participant exception to Parker immunity.
57
3.

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56See supra note 35.
58
The question of Parker immunity’s applicability is a difficult one. As noted, we
hold we must apply the Midcal test. Although the States satisfy Midcal’s “clear
articulation” prong, they fail the second prong requiring them to actively supervise the
anticompetitive restraints causing injury. Because private participants in state action
enjoy Parker immunity only to the extent the States enjoy immunity, the defendants are
not shielded by Parker.56 Therefore, consistent with the Supreme Court’s treatment of
hybrid restraints, we hold defendants are not immune under the Parker immunity doctrine.
IV.
Constitutional Claims
In its brief, and again at oral argument, plaintiffs asked us to find the Multistate
Settlement Agreement unconstitutional under the Commerce Clause or the Compact
Clause of the United States Constitution. But plaintiffs did not allege constitutional
violations in their amended complaint, nor did the District Court address them.
Therefore, these claims will not be addressed on appeal. Mahone v. Addicks Utility Dist.,
836 F.2d 921, 935 (5th Cir. 1988) (“It is black-letter law that ‘[a] motion to dismiss for
failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is to be evaluated
only on the pleadings.’”) (quoting O'Quinn v. Manuel, 773 F.2d 605, 608 (5th Cir.1985));
N.A.M.I. v. Essex County Bd. of Freeholders, 91 F.Supp.2d 781, 787 n.7 (D.N.J. 2000)
(“This Court need not consider claims that have not been pleaded in the complaint.”); 5A

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57We note that plaintiffs failed to respond to defendants’ briefing on this point.
59
Charles Alan Wright & Arthur R. M iller, Federal Practice and Procedure § 1356 (1990).
“‘Absent exceptional circumstances, an issue not raised in the district court will not be
heard on appeal.’” Walton v. Mental Health Ass’n of Southeastern Pa., 168 F.3d 661,
671 (3d Cir. 1999) (quoting Altman v. Altman, 653 F.2d 755, 758 (3d Cir.1981)). When
exceptional circumstances exist or to avoid “manifest injustice,” issues not previously
raised may be heard to protect the public interest. See id. No such interests are present.
Although the Cato Institute, amicus curiae for plaintiffs, argues the constitutional claims,
“new issues raised by an amicus are not properly before the court” in the absence of
exceptional circumstances. General Eng’g Corp. v. Virgin Islands Water and Power
Auth. Caribbean Energy Co., Inc., 805 F.2d 88, 92 (3d Cir. 1986) (citing United Parcel
Serv. v. Mitchell, 451 U.S. 56, 60 n.2 (1981)). These constitutional claims are not
properly before us.57
V.
Conclusion
The Multistate Settlement Agreement creates novel issues because of the
uniqueness of the instrument ) involving forty-six states and over 98% of an industry.
Although plaintiffs have properly pleaded an antitrust injury, the right to petition the
government is paramount. Therefore, we hold defendants immune from antitrust liability

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60
under the Noerr-Pennington doctrine. But we find no immunity under the Parker
doctrine. We will not address the constitutional issues.
We will affirm the judgment of the District Court.

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61
TO THE CLERK:
Please file the foregoing opinion.
/s/ Anthony J. Scirica
Circuit Judge

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