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A.D. BEDELL WHOLESALE CO., INC. v. PHILIP MORRIS

March 22, 2000

A.D. BEDELL WHOLESALE COMPANY, INC., ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
V.
PHILIP MORRIS, INCORPORATED, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Ambrose, District Judge.

OPINION and ORDER OF COURT

Pending before the Court is the Joint Motion of Defendants Philip Morris Incorporated ("Philip Morris"), R.J. Reynolds Tobacco Company ("R.J.Reynolds") and Brown & Williamson Tobacco Corp. ("B & W") (collectively "the Defendants") to Dismiss the Complaint filed against them by Plaintiff A.D. Bedell Wholesale Company, Inc. ("Plaintiff") pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiff has brought a putative class action against Defendants under § 1 and 2 of the Sherman Act, 15 U.S.C. § 1 and 2, and § 7 of the Clayton Act, 15 U.S.C. § 18. The primary basis for the motion to dismiss is that "[a]s a matter of law, plaintiff's Complaint fails to state a claim for relief under the anti-trust laws" in that "plaintiff's claims are barred in their entirety by either (or both) of two closely-related antitrust immunity doctrines: the Noerr-Pennington doctrine and the `state action' doctrine." Defendants' Joint Memorandum of Law in Support of Their Motion to Dismiss the Complaint ("Defendants' Supporting Brief"), p. 3. Additionally, Defendants argue that Plaintiff's Third Claim for Relief ("Count III"), which is brought only against Defendant Philip Morris, must be dismissed for failure to state a claim under § 7 of the Clayton Act upon which relief can be granted. An amici curiae Brief in Support of the Defendants' Motion to Dismiss has been filed by certain state Attorneys General, all members of the Tobacco Committee of the National Association of Attorneys General "to the extent that Plaintiff seeks to impose antitrust liability upon the Defendants for the entering into settlement agreements with the sovereign states, and acts taken in compliance with the terms of such settlement agreements. Brief of Amici Curiae State Attorneys General ("Amici Curiae Brief"), p. 5.

STANDARD OF REVIEW

In deciding a motion to dismiss, all factual allegations and all reasonable inferences therefrom must be accepted as true and viewed in the light most favorable to the plaintiff. Colburn v. Upper Darby Tp., 838 F.2d 663, 666 (3d Cir. 1988), cert. den'd, 489 U.S. 1065, 109 S.Ct. 1338, 103 L.Ed.2d 808 (1989). A court may dismiss a plaintiff's complaint only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claims which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In ruling on a motion to dismiss for failure to state a claim, the court looks to "whether sufficient facts are pleaded to determine that the complaint is not frivolous, and to provide defendants with adequate notice to frame an answer." Colburn, 838 F.2d at 666.

FACTUAL BACKGROUND

In November, 1998, the Defendants entered into a settlement agreement (the "Master Settlement Agreement" or "MSA") with forty-six (46) states and six (6) other United States jurisdictions (collectively "the settling states") to settle lawsuits brought or threatened by the settling states for violation of their laws, including consumer protection and/or antitrust laws. MSA, Section 1. Various officials of the settling states (the attorney generals, governors, corporation counsel and mayors) signed the Master Settlement Agreement "on behalf of their respective Settling States." Id. The Master Settlement Agreement was voluntarily entered into by each of the settling states and the Defendants and is the result of arms-length negotiations between the parties to the Agreement. The stated reason for the settling states entering into the M.S.A. § was because "the undersigned Settling State officials believe that entry of this Agreement . . . with the tobacco industry is necessary in order to promote the Settling States' policies designed to reduce Youth smoking, to promote the public health and to secure monetary payments to the Settling States." MSA, Section 1.

Relevant for purposes of this action, the Master Settlement Agreement contains a clause, termed by Plaintiff in its Complaint as the Renegade Clause. The Renegade Clause states: "[a] Subsequent Participating Manufacturer ("SPM") 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% of its 1997 market share." The Master Settlement Agreement also provides for the creation of a $50 million fund by the Attorneys General of the United States, acting through the National Association of Attorneys General ("NAAG"), which is to be maintained by the Attorneys General to supplement the settling states' enforcement and implementation of the terms of the Master Settlement Agreement and consent decrees and investigation and litigation of potential violation of laws with respect to tobacco products.

SUMMARY OF PLAINTIFF'S CLAIMS AGAINST THE DEFENDANTS

Count I of Plaintiff's Complaint alleges a violation of § 1 of the Sherman Act. More specifically, Count I of the Plaintiff's Complaint alleges that the Renegade Clause of the Master Settlement Agreement and the $50 million enforcement fund were made part of the Master Settlement Agreement by the Defendants as part of a conspiracy to prevent competition at a discount level by existing SPMs and nonparticipating manufacturers ("NPMs") and potential new entrants to the cigarette sales market and to raise and maintain the price of cigarettes in the U.S. cigarette market at artificially high levels. Thus, Plaintiff argues, the Master Settlement Agreement on its face sets forth a classic horizontal conspiracy to restrict output, allocate market shares and raise prices between three competitors having nearly 90% of the market. In Count I, Plaintiff also alleges that the acts committed by the Defendants in furtherance of their unlawful conspiracy included the payment by Philip Morris to Liggett, a tobacco manufacturer and then a NPM in the MSA, of $300 million for the sale of three relatively insignificant brands of cigarettes which was conditioned upon Liggett signing the Master Settlement Agreement and the pressuring by the Defendants, through their own attorneys and indirectly through the NAAG and its private attorneys, of the few remaining small competitors to join the Master Settlement Agreement.

Count II of Plaintiff's Complaint alleges a violation of § 2 of the Sherman Act. More particularly, in Count II of the Complaint, Plaintiff alleges that the above-described alleged acts and agreements by the Defendants constitute a conspiracy in furtherance of Philip Morris' monopolization of the U.S. cigarette market in violation of § 2 of the Sherman Act in that the agreements and the acts taken in furtherance of the agreements were specifically intended to exclude and have in fact excluded meaningful price competition in the United States domestic cigarette market. Plaintiff further alleges in Count II that the acts of Philip Morris constitute monopolization and attempted monopolization of the U.S. cigarette market; that Philip Morris has and has had the specific intent to monopolize the U.S. cigarette market; and that there is a reasonable probability that it has or soon will have attained monopoly power in the U.S. cigarette market.

Count III of Plaintiff's Complaint alleges a violation of § 7 of the Clayton Act against Defendant Philip Morris only. More specifically, Plaintiff alleges that Philip Morris paid Liggett to join the Master Settlement Agreement to remove Liggett as a competitive threat. Specifically, Plaintiff alleges that on November 20, 1998, three (3) days after the Master Settlement Agreement was signed, Philip Morris purchased three brands of premium cigarettes from Liggett which constituted about two-thirds of the 2% of the overall domestic cigarette market that were sold by NPMs (or 0.2% of the domestic cigarette market) in exchange for Liggett's agreement to become a SPM in the MSA. Plaintiff further alleges that this acquisition would constitute a purchase of assets illegal under § 7 of the Clayton Act in that its effect may be, and has been, to substantially lessen competition and to further or create a monopoly in the sale of domestic cigarettes. Plaintiff argues that until that time Liggett was a NPM and although NPMs comprised only approximately 2% of the overall domestic cigarette market, they represented a clear and present danger of price competition. Liggett sales made up about two-thirds of that 2% and therefore, Plaintiff argues, having Liggett join the Master Settlement Agreement was a necessary step to eliminating virtually all price competition with the domestic tobacco market.

LEGAL ANALYSIS

A. Counts I and II: Sherman Act claims.

1. Application of Noerr-Pennington ...


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