Using Tort Settlement to Cartelize

Abstract

The cigarette manufacturer settlements with four individual states (Florida, Minnesota, Mississippi and Texas) and the subsequent multi-state agreement of November 1998 represent a legal innovation in cartelization technology. These new settlements allow state and local government to act as cartel ringmasters?writing enforceable contracts which will predictably (i) raise the market price toward the monopoly level, (ii) split the supra-competitive profits with the government, and (iii) deter new entry. It has been understood that anticompetitive settlements can be produced when competitors sue each other in intellectual property or merger contexts. And it has been understood that captured state agencies may cartelize in-state producers of a particular product. But the individual state settlements suggest that a state may profitably cartelize out-of-state producers. If such settlements are enforceable, states that have virtually no nexus with a set of industry producers - and in fact have not been injured by the industry - may nonetheless "race to the bottom" by suing and settling with an industry in order enjoy a share of the cartel profits. Unfortunately, it is far from clear that such settlements currently run afoul of the law. The imprimatur of the state shields the settlements from antitrust liability. And while one might object that the settlements usurp the legislative taxing function, the fact that the companies consented to the state settlements may be considered by the courts as a substitute for the legislative-political check. The strongest legal argument against the settlements is that they constitute extraterritorial taxation, but this argument faces grave procedural barriers. Accordingly, I recommend that federal legislation prohibit the types of settlement structures that are most likely to produce cartel-like results.

JEL Classification: H77, K13, K21, L40