2000 Monsanto Lecture in Tort Reform and Jurisprudence: Using Tort Settlements to Cartelize

Abstract

The tobacco company settlements, with four individual states (Florida, Minnesota, Mississippi and Texas) and the subsequent multistate agreement of November 1998, represent a legal innovation in cartelization technology. These new settlements allow state and local governments 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. 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 to enjoy a share of the cartel profits. Unfortunately, it is far from clear that such settlements currently run afoul of the law, and this Article accordingly recommends that federal legislation should prohibit the types of settlement structures that are most likely to produce cartel-like results. It has been understood that anticompetitive settlements can be produced when competitors sue each other in intellectual property or merger contexts. It has also been understood that captured state agencies may cartelize in-state producers of a particular product. But the individual state tobacco settlements suggest that a state may profitably cartelize out-of-state producers. States may settle fallacious tort claims to cartelize industries with which the state has no contacts whatsoever. The Minnesota tobacco settlement, for example, allowed out-of-state cigarette manufacturers to coordinate charging higher prices in exchange for reduced legal liability.