sanders will have an opportunity to try to develop facts to support our allegations that the master settlement agreement together with california's implementing statutes the escrowed contraband statutes create an a second theory which is quite clear from the allegations that are on the in the record excerpts of record fourteen or second theory is that if you don't buy the hybrid restraint theory we should at least have the chance to go back develop on the facts facts to show that there was conscious parallelism among the original and it tobacco manufacturers after and as a result of the master settlement agreements in the statutes of those two different areas hybrids are strange and there's no dispute here that there was parallel pricing there is no dispute here that there is no active supervision of those that pricing in this case there's no rent stabilization board as there wasn't fisheries the city of berkeley there is no city utility city taxicab commission there's no state utility commission there are no state actors that are supervising the price rises that we contend represents a massive transfer of wealth from market decisions out of the n t trust laws it has to actively supervise the activity that causes the anti competitive harm and here that activity is not the payment to the stage the activity that causes the har equivalent of a price posting statute to explain that your honor let me remind you that the master settlement agreement and the enforcing statutes have three main parts first they penalize price rises as are they penalize price  by the original purchase of hating manufacturers by saying well if you just can't your prices in relation to your competitors were going to make you pay a higher share of the historical liability we've distributed through the payments to the f price the others will be penalize if they don't raise their prices too because they'll pick up an additional obligation to pay settlement payments for the space but there's two other parts that w that's correct your honor so there you  place their market share their price discounting if their grandfathers they're going to go off the cliff and lose their dues holiday if they increase market share to above one thousand ninety eight levels or one hundred twenty five percent of their nine hundred ninety seven levels and if they  hundred eight got clobbered twice by the scheme and then the key feature here is really the prohibition of new entry by nonparticipating manufacturers those who try to come into the market after nine hundred ninety eight and what the states have done is here you're out and this makes it quite like the price coasting statues in midtown three twenty four letter here the status had it and nonparticipating manufacture comes into the market it wasn't responsible for that historical liability that is divvied up posting went on and that if a producer posted a price that wholesalers then had to follow or if a wholesaler posted a price that retailers had to follow the bite in the hybrid restraint came from the fact that the state was going to punish anybody who dared sorry that nonparticipating manufacturers have to pay those extra payments fence people out of the market and that's exactly what the court is concerned about in cases like michelle in cases like three twenty four liquor market there was a vertical resale price maintenance but the anti competitive effect that is it meant that the wholesalers couldn't compete with well with one another to sell at lower prices the retailers couldn't compete against one another to sell at lower prices and here the state has a different kind of hammer because that was really what the hybrid restraints were doing in the misspelled line of cases what the court was what the state was doing which was held to be preempted by the sherman act and violation of law because the state was in a sense protecting and output cartels to protecting non competition between people in the same tier of the businesses it was in guaranteeing that no wholesaler could undercut another wholesaler and retail could under retailer could undercut another retailer and here no tobacco manufacture no matter how cost efficient no matter how innovative is allowed to come into the market and undercut the old companies without facing a prohibitive payment of escrow payments and you're out of the not even tax deductible believe the n s a by itself creates such an obvious incentive for the states to enact the statutes at the track of companies wouldn't have entered into the agreements unless they thought they could protect the market share and the states all did follow suit there are very strong incentive california allows the big four now the big three tobacco companies to lose any of their individual market share california might lose revenue because california will lose up to three times the amount of lost market share  t price increases in excess of cost increases for a long time second you now have barriers to entry imposed by the states for the contraband and escrow statutes that say no new competitors can come in and threaten the oligopoly because we're going to set the price of entry so high that they can't compete it's as if you lock in for the four biggest hurley law firms in california and said no new law firms can be set up or if any new law firm gets set up it has to pay and such a high state is a code venture the state has an incentive to keep the market shares of the original participating manufacturers going because there's a penalty to the state fish if heaven forfend any new competitor comes into the market price posting this is better than price posting it's better than opec you don't have to get together and agree in under this scheme because new competitors are fenced out by the hammer of the state because new competitor we haven't even we haven't the chance to make discovery of injured firm communications after the n s a of motive which is a plus factor under this court's president's so it isn't really a mystery that's correct your honor no no no we would need to show additional evidence what we object to on  irreconcilably conflict with federal antitrust law and the so called m s a scheme is not a hybrid restraint instead the challenge statutes and the amas say provisions that standards challenge constitute straight direct straight state action by the state of california that is simply not governed by federal antitrust law we have to begin by applying the right hander which mandate conduct that necessarily constitutes a violation of federal antitrust law in all cases or places it would be resisted all pressure on a private party to violate federal antitrust law or to comply with the state stat the california law was standers challenges to do nothing of the sort they merely require are tobacco manufacturers to make certain payments either into escrow as security for potential liabilit this point one can accept the notion that there are not economic incentives built into the system we don't believe that they exist but you can accept that notion and a farm in the state an regulations from parker requires that the action be the action of the state to the extent that you are in a realm where there is some  effect on the marketplace the only thing that the state can do is what is the standard in that cal cast and kamikaze cloak over anti competitive behavior  i think the reason it wasn't mentioned was clear the agreement here which is the emissary and that's the only agreement alleged in the complaint cannot serve as the agreement for section one purposes because they have conceded that it's a new all eleven judges looking at embassy challenges in the past including the third circuit of the tenth circuit in three district court judges in this circuit have all concluded the same thing which is that the manufacturers are inspired your and some other fashion violence section one post agreement that yes we still need to go on and analyze the complaint and look at that and it's certainly possible that there could be some behavior after the agreement that would not be protected by  of the state can come in and adopt a statute or enter into a settlement even if it is anti competitive that's what the supreme court says in rife's even if it is that a competitor that's not the test there's only two exceptions narrow exceptions to this immunity and those two exceptions are private restraints and hybrid restraints they don't contend we have a private restraint here that would be like if they authorized the companies to go out and fix prices and said you can go out and fix prices it's ok that's what to set the price and then force other competitors or private parties to follow with the force of law in other words there has to be a component of legal compulsion we only need to look at the only three supreme court cases where any hybrid restraint is ever been found to understand this important element of legal compulsion and that's in detail three twenty four liquor and inch wakening and in each of those cases it wasn't a case about incentives or whether somebody had an incentive to do this or do that it was about there was one party who could set the price in mccalla of the distributors and manufacturers can tell the whole state what price to the retailers had to charge and that was backed up by the force of law and as  only comes into play when in fact you have a situation where the statute would otherwise be preempted it would otherwise be void and then you would look at move carol to see whether active supervision can save ok that's not what we have here they don't even get to first base because they have not established that there's any preemption they have not us temperatures an irreconcilable conflict with the federal and i trust laws as a judge rehnquist that and rice there would have to be something that would be the person a violation in all cases that would be something that would be preempted and so you have to go from looking at preemption to these two narrow exceptions and the one that's relevant h restraint then you have to look at what is a hybrid restraint and that gets you right into the analysis about whether there's legal compulsion what is the legal compulsion here the only legal compulsion here is that the n s a legally compels the o also they also charge these escrow contributions or require n p r news these not participating manufacturers who are not party to this agreement to make escrow contributions to the state but that's that's the only legal compulsion that's backed up by the force of law in the state of california that legal compulsion isn't the legal compulsion that the cases are talking about it's not legal compulsion to make a payment it would have to be legal compulsion where one private party here could make another party didn't hear her say that what we heard her say today is that somehow there's an economic incentive that comes into play in this economic consent that an economic incentive will lead to perhaps in an oligopoly setting that will lead to and whatever incentives come out of me but one can look in vain for any facts in the complaint that would actually allege that there is some kind of kind of agreement to fix prices they m s a excited about prices it doesn't authorize the companies to do anything about prices so what you have to accept is the notion that once just once the state has affected people's incentives and it affects them in a way that leads to price increases and even for the sake of argument conceding that they were left that those price increases would be in lockstep fact and that's not the compulsion that the courts are talking about if you look at the language in in rice for example in fisher they talk about the  industry in this time period including conduct after the m s a there has been no conspiracy with respect to setting prices now that's it that's a matter of fact and run a motion to dismiss but the point is you can't even if even if they had alleged conscious parallelism that would not be enough and they haven't really even alleged conscious promise and that's her second theory today because i think she perceives that hybrid restraint is going down the tubes so now they're switching over to what about conscious pe all we have to look at are the following cases to know that that is not going to be sufficient to state a claim and therefore should be dismissed if you look at judge briars opinion when he was on the first circuit unclamp will if you look at recruitment if you look at williamson oil in the eleventh circuit judge marcus they made it clear that conscious parallel is not enough and the argument was even made that certain activity of creative incentives and facilitated price coronation and the increasing of prices that was not enough so that theory really gets t nowhere it was never really mentioned in the complaint it was not mentioned in the lower court below as such and so we come back to the fundamental notion that the only agreement that it's alleged in this complaint is the n s a itself and the two statutes say that's on the other side of the line welcome thing i mean i can and then i can imagine a lot of scenarios and then one could be creative in it but and create something that is virtually tantamount to a price fixing conspiracy by using different words but that's not what happened here  can't enter the market and that these barriers to entry are so high is that all their competitors are excluded that's not their claim they're clean in the complaint is that these incentives have been created that require people to pay a price in only two cents per cigarette let's keep in mind that one of the things that is also part of the a mistake is that the m p s these nonparticipating manufacturers the so called smaller little guys that she's concerned about they never have to pay more than a non korean father  subsequent participating manufacture they never have to pay more than that if in fact more has been collected from them and they made a greater contribution into the escrow fund they get it back more importantly we're talking about a violation of the i trust laws here even if there is just competition at the opium of the manufacturer level of the largest companies is long as they have an incentive to compete which they do and that incentive has not been eliminated which is not by just making these that in one place they see the word woman in another place they say the word less and less and they try to fudge it but here's the most important point the most important point is that in this theory that they lay out with respect to the relative market share adjustment and  that that's their main theory in fact that's what they get medicaid down below they said if the relative market share adjustment worked out so that it was imposing a flat cost per cigarette it would be neutral as to competition those are their words not mine neutral competition they admitted that below and in fact it makes sense and so another alternative basis for affirming the decision below is what we have said is the n s a itself is incorporated by reference it's part of the pleadings for all purposes under tenancy and in fact it doesn't work the way they say it works now we will not nor pennington in state action as a matter of law even if you assume that everything they've said about the about the n s a is true we went on those to anyway now i'm coming to a third point which is wonderful the courts should not just accept without at least comparing and reviewing the m s a and what they say about of the complaint the court's obligated to look at in fact if the m s a terms refute their allegations under both  architecture adjustment does not work as they say it does and they were silent in their reply they have completely dropped it they've abandoned it and we didn't even hear an argument today we heard an assertion and of course assertions and legal conclusions are not part of a well pleaded complaint that test on the twelve the six obviously is to look at the complaint itself and the factual allegations that are made it that's that's a conclusion to say that eliminates competition they have to oblige facts that you know would lead to the elimination of competition and that they have not done and secondly their chief theory this is this one that i just described as being the one that they were basing virtually this entire case on they drop and so now today for the first time we hear this new increases that so yes we did allege that the legal compulsion your honor is that new competitors are fenced out and that legal compulsion is every bit  what the additional plus factors are that will help us show that agreement what we're asking for is the chance to show that on page sixteen of our great reply brief we cited the trombley case which reminds us that we can try to prove conscious parallelism and discovery at trial even if we haven't been able yet because we haven't had discovery as to say what they are we have title to look into nano or pennington protected communications among the firms after the settlement we're entitled to look into motives and we're entitled to look into behavior that  dispense it can never be undone it's not like a fifteen year franchise in charlie's taxi there's no chance for the people to come in and try to hold back the back of companies from these anti competitive price hikes for fifty the first day seven fifty seven fifty additionally by two thousand