Court Opinion

ID: 9600124
Source: CourtListenerOpinion
Date Created: 2023-08-22 01:24:27.163596+00
Date Added: 2024-06-11T18:01:49.866328
License: Public Domain

LIMBAUGH, District Judge,
concurring in part and dissenting in part.
I respectfully dissent from the majority’s holding that plaintiffs failed to state a cause of action on their Sherman Act claim. However, I would not reach the merits of that claim because I agree with the majority that even if plaintiffs stated a cause of action, the Attorney General of Arkansas is immune from Sherman Act liability (though not Commerce Clause liability) under the state action immunity doctrine announced in Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943). Additionally, I respectfully dissent from that part of the majority opinion dismissing the Commerce Clause claim.
This is a difficult case, indeed, as seen by the conflicting holdings of the Circuit Courts in similar cases, and the principal opinion does an admirable job in outlining the respective positions. But all in all, I am persuaded more by the analysis in the cases that the majority acknowledges but rejects, than by the cases on which the majority relies.
A.
If I were to reach the Sherman Act claim, I would hold that the plaintiffs have stated a cause of action. The central allegations in their complaint are these:
The Allocable Share Amendment’s ... design and purpose is to coerce Grand River and plaintiffs to raise the price of Grand River’s cigarettes in Arkansas, thereby preventing Grand River’s products from competing in the Arkansas market against Participating Manufacturers, particularly Subsequent Participating Manufacturers who have been granted payment exemptions that amount to hundreds of millions of dollars annually. The Allocable Share Amendment achieves this result by denying Grand River refunds on escrow payments that exceed the amount it would have paid Arkansas under the terms of the MSA.
If Grand River is deprived of its allocable share refund under the Amended *947Escrow Statute, its escrow costs relative to 2004 sales in Arkansas will far exceed the revenue Grand River received relative to those sales, thus placing Grand River at a financial hardship which threatens its future viability. In short, the Allocable Share Amendment effectively raises Grand River’s escrow expense for 2004 by over $3,000,000,000 [presumably the amount of additional escrow expense nationwide from all states’ allocable share amendments8]. In addition for 2005, Grand River will be forced to raise its prices, by more than $3.00 per carton, resulting in similar price increase to the remaining plaintiffs. This will result in significant loss of sales and market share for Plaintiffs and a loss of their trade relationships with retailers and distributors, particularly in comparison to grandfathered Subsequent Participating Manufactures.
The issue here, as framed by the majority, is whether the Allocable Share Amendment “places irresistible pressure on a private party [the plaintiffs herein] to violate the antitrust laws [the Sherman Act] in order to comply with the state statute [the Amendment].” This test is one of the standards under Rice v. Norman Williams Co., 458 U.S. 654, 661, 102 S.Ct. 3294, 73 L.Ed.2d 1042 (1982), for determining whether there is “an irreconcilable conflict between the federal and state regulatory schemes,” id. at 659, 102 S.Ct. 3294, and whether the state statute is thus preempted, id. at 659-61, 102 S.Ct. 3294. The Sherman Act, of course, prohibits “restraint of trade or commerce among the several states.” But as the majority correctly notes, again citing Rice, “[a] state statute is not preempted merely ‘because the state scheme might have an anti-competitive effect,’ ” and it is for that reason that the “pressure” put on private parties to become anti-competitive in order to comply with the statute must be “irresistible.” The ultimate question, then, is the degree to which the Allocable Share Amendment — the state statute — places “pressure” on plaintiffs to engage in restraint of trade in order to comply with the Amendment. Although the majority concedes that the Amendment has an anti-competitive effect, it holds as a matter of law that the pressure on plaintiffs to succumb to that anticompetitive effect is not “irresistible.” I would give the plaintiffs the opportunity to prove otherwise.
My concern is that the Amendment may well operate, consistent with plaintiffs allegations, to place irresistible pressure on plaintiffs to increase their cigarette prices to match those of the OPMs and SPMs which will correspondingly reduce plaintiffs’ current market share. A statutory penalty — the additional overall escrow expense caused by the reduction in refunds from their escrow payments — is imposed against them if they refuse to do so. That is an expense they allegedly cannot bear and that will soon drive them out of business.
In my view, this statutory scheme is in the nature of a so-called “hybrid” restraint of trade, another form of state law that is per se illegal under the Sherman Act. Fisher v. City of Berkeley, 475 U.S. 260, 267-68, 106 S.Ct. 1045, 89 L.Ed.2d 206 (1986) As the majority notes, a hybrid restraint of trade is a “nonmarket mechanism” (a state statute, for example) that “merely enforce[s] private marketing decisions.” Id. In this case, the apparent effect of the Amendment is to enforce a parallel pricing structure dictated by the OPMs and SPMs that will in turn fix the *948relative market shares between the OPMs, SPMs and the NPMs for the duration of the MSA. The scheme thus deprives NPMs of the competitive advantage they held based on their choice not to enter into the MSA and clearly interferes with the market forces that establish cigarette prices. As such, it is illegal per se under the Sherman Act. See Nat’l Elec. Contractors Ass’n, Inc. v. Nat’l. Constructors Ass’n, 678 F.2d 492, 501 (4th Cir.1982).
In short, I agree with the opinion of the 3rd Circuit in A.D. Bedell Wholesale Co., Inc. v. Philip Morris Inc., 263 F.3d 239 (3rd Cir.2001) which held that the state-by-state escrow scheme for NPMs — even before the advent of the states’ allocable share amendments — was indeed an “output cartel” and thus a Sherman Act violation. Id. at 249-50. This, in essence, was also the holding in Freedom Holdings, Inc. v. Spitzer, 357 F.3d 205 (2d Cir.2004), a case that deals directly with allocable share amendments. Although the majority, here, disparages the circuit opinion in Spitzer for the reason that the district court on remand found no facts to support the antitrust violation, that fact finding has no relation to the legal issue on which the circuit court based its ruling, which was that the plaintiff alleged facts sufficient to state a cause of action and thereby survive a motion to dismiss. And of course, the determination that the plaintiff failed in its proof in the Spitzer case is of no event because the facts in the case at hand may well be altogether different.
And finally, as I have noted, there is no need to decide the merits of the Sherman Act claim because in any event, the state of Arkansas is immune from liability.
B.
I would find a dormant Commerce Clause violation for essentially the same reasons that I would find a Sherman Act violation, as extrapolated to the national market. It appears to me that the operation of the MSA and its enabling statutes, in conjunction with the Allocable Share Amendment, creates a parallel pricing scheme in restraint of trade that applies not only in Arkansas, but all other states that have adopted the same or similar versions of those various statutes.
In Healy v. The Beer Inst., 491 U.S. 324, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989), the Supreme Court summarized the “cases concerning the extraterritorial effects of state economic regulation,” stating:
[A] State may not adopt legislation that has the practical effect of establishing “a scale of prices for use in other states,”.... The critical inquiry is whether the practical effect of the regulation is to control conduct beyond the boundaries of the State.... [T]he practical effect of the statute must be evaluated not only by considering the consequences of the statute itself, but also by considering how the challenged statute may interact with the legitimate regulatory regimes of other States and what effect would arise if not one, but many or every, State adopted similar legislation. Id. at 336,109 S.Ct. 2491 (citations omitted).
Although the Commerce Clause violation in Healy was clear cut because it involved a beer-pricing scheme that expressly applied to out-of-state shippers, the Healy court also was concerned that,
the practical effect of this [beer-pricing statute], in conjunction with the many other beer-pricing and affirmation laws that have been or might be enacted throughout the country, is to create just the kind of competing and interlocking local economic regulation that the Commerce Clause was meant to preclude.
Id. at 337, 109 S.Ct. 2491. The court further warned against the “price gridlock” that could occur if multiple states *949enacted “essentially identical” statutes. Id. at 339-40, 109 S.Ct. 2491.
Applying the Healy principles, the Second Circuit held that a Commerce Clause violation was properly pled in a similar Grand River case brought in New York. That case, Grand River Enters. Six Nations, Ltd. v. Pryor, 425 F.3d 158 (2d Cir.2005) was accurately summarized in the majority opinion here, and that summary bears repetition:
In Grand River, the plaintiffs asserted that “the aggregate effect of the [statutes at issue] is to create a uniform system of regulation that results in higher prices nationwide.” Id. at 171. The Second Circuit agreed, concluding that both the SPM settlement payments and the NPM escrow payments are tied to the national market share. Id. at 171—72. The court emphasized that the amount an NPM pays into the state’s escrow fund is “keyed to the amount an NPM would have paid if it had joined the MSA as an SPM — a national-market-share-dependent amount — because the [NPM] is refunded any excess over what it would have paid under the MSA.” Id. at 172. Therefore, the Second Circuit held that the plaintiffs “successfully stated a possible claim that the practical effect of the challenged statutes and the MSA is to control prices outside of the enacting states by tying both the SPM settlement and NPM escrow payments to national market share, which is turn affects interstate pricing decisions.” Id. at 173.
The Second Circuit’s analysis in Pryor applies no less to the case at hand. Unfortunately, the majority’s primary response to that analysis, like its similar treatment of the Second Circuit analysis in the Freedom Holdings case, is to criticize the opinion on the ground that the district court on remand found no violation. But again, the district court’s fact finding has no relation to the legal issue on which the circuit court based its ruling, and the facts in the case at hand may well be different. Furthermore, the findings of the district court in Pryor (now King) are all the more insignificant because they were made pursuant to a request for preliminary injunctive relief, and in fact, the case is still in the discovery stage, see Grand River Enters. Six Nations, Ltd. v. King, No. 2 Civ. 5068, 2009 WL 1739893 (S.D.N.Y. June 16, 2009), and has not proceeded to trial on the merits.
In dismissing the Commerce Clause claim, the majority also maintains that the Allocable Share Amendment “is not based on cigarette sales outside of Arkansas,” that “NPM escrow payments are entirely a function of an NPM’s sales in Arkansas,” and that “[t]he payments are not based on nationwide sales.” All this, however, is to discount the real basis of plaintiffs’ claim, which, under Healy, is that the MSA and its implementing statutes, in conjunction with the Allocable Share Amendments, have created an interconnecting and interdependent system of regulation in the participating states. And the practical effect of this system, they allege, is that it requires NPMs to increase their prices both in Arkansas and nationwide so to avoid increasing market share that would in turn increase their escrow costs to a level that would be impossible for them to meet. In this way, the claim is indeed based, at least in part, on cigarette sales outside of Arkansas, and the escrow payment are not entirely a function of an NPM’s sales in Arkansas, but instead are based, in part, on nationwide sales. Though the majority also finds that “there has been [no] showing by appellants that escrow payments by NPMs in Arkansas have any effect, either directly or indirectly, on cigarette prices in other states,” that finding ignores that the case is still in the pleading stage and that *950plaintiffs have not yet been given the opportunity to make such a showing.
In a way, plaintiffs’ Commerce Clause challenge is really to the entire scheme of the MSA. The escrow obligations of NPMs under the Allocable Share Amendments are merely a small component of the larger MSA scheme — a component that is designed to reign in non-MSA cigarette producers in order to perfect the goals of the MSA. Essentially, then, plaintiffs’ position is that any statute that serves to implement or enforce the MSA is no less a Commerce Clause violation than the MSA itself. Regardless, I would hold that plaintiffs have made sufficient allegations in their complaint to establish that the “practical effect” of the Allocable Share Amendments (and the MSA) is to directly regulate interstate commerce, and for that reason, plaintiffs have stated a cause of action for a Commerce Clause violation.

. Plaintiffs later alleged that "the amendment increased Grand River's escrow payment obligation in Arkansas from approximately $600,000, to over $6,000,000, for sales in 2005 alone.”