FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
STEVE SANDERS, Individually and
as Class Representative,
Plaintiff-Appellant,
v.
EDMUND G. BROWN Jr.,* in his No. 05-15676
official capacity as Attorney
General of the State of California; D.C. No.
CV-04-02281-SI
PHILIP MORRIS USA, INC.; R.J.
OPINION
REYNOLDS TOBACCO COMPANY;
BROWN & WILLIAMSON TOBACCO
CORP.; LORILLARD TOBACCO
COMPANY,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Susan Yvonne Illston, District Judge, Presiding
Argued and Submitted
February 15, 2007—Stanford, California
Filed September 26, 2007
Before: Betty B. Fletcher, Richard R. Clifton, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Clifton
*Edmund G. Brown Jr. is substituted for his predecessor, Bill Lockyer,
as Attorney General of the State of California, pursuant to Fed. R. App.
P. 43(c)(2).
13205
13208 SANDERS v. BROWN
COUNSEL
A. William Urquhart, Thad A. Davis, Kent J. Bullard, Kath-
leen M. Sullivan (argued), Quinn Emanuel Urquhart Oliver &
Hedges, LLP, Los Angeles and Redwood Shores, California;
for the appellant.
Attorney General Edmund G. Brown Jr., Chief Assistant
Attorney General Tom Greene, Senior Assistant Attorney
General Dennis Eckhart, Deputy Attorney General Margaret
SANDERS v. BROWN 13209
Spencer, Deputy Attorney General Karen Leaf (argued), State
of California, Sacramento, California; Darryl Snider (argued),
James F. Speyer, Eric Shapland, Heller Ehrman LLP, Los
Angeles, California; for the appellees.
OPINION
CLIFTON, Circuit Judge:
This case involves an indirect legal challenge to the mas-
sive settlement agreement between the nation’s largest
tobacco companies and the attorneys general of 46 states and
several territories. The 1998 settlement known as the Master
Settlement Agreement, or “MSA,” resolved all of these states’
and territories’ claims against those tobacco companies,
which the states had sued for billions of dollars in damages
related to the harmful effects of smoking.
Plaintiff Steve Sanders, a smoker, alleges that cigarette
prices have skyrocketed in the nine years since the MSA, and
that the price increases are the result of an illegal price-fixing
scheme that the MSA enabled. On behalf of a putative class
of cigarette smokers, Sanders sued the Attorney General of
the State of California and the four largest tobacco compa-
nies: Philip Morris USA Inc., R.J. Reynolds Tobacco Co.,
Brown & Williamson Tobacco Corp., and Lorillard Tobacco
Co.1 Sanders does not allege that the MSA itself is illegal, but
rather alleges that the MSA, the post-MSA price increases,
and the state statutes implementing the MSA’s terms (the
“implementing statutes”) are evidence of a cigarette price-
fixing cartel that violates the Sherman Act, 15 U.S.C. § 1 et
seq.; the Cartwright Act, Cal. Bus. & Prof. Code §§ 16720 et
1
Unless otherwise noted, this opinion will refer to the tobacco compa-
nies as “tobacco defendants” and the attorney general as “the State of Cali-
fornia.” It will use the term “defendants” when referring to both groups
collectively.
13210 SANDERS v. BROWN
seq.; other California unfair competition statutes, Cal. Bus. &
Prof. Code §§ 17200 et seq.; and California’s common law of
unfair competition. Sanders also alleges that the Sherman Act
preempts the implementing statutes.
The defendants moved to dismiss under Fed. R. Civ. P.
12(b)(6). The district court granted the motions and dismissed
the claims with prejudice. See Sanders v. Lockyer, 365 F.
Supp. 2d 1093 (N.D. Cal. 2005). The district court held that
the Sherman Act does not preempt the implementing statutes;
that Sanders failed to adequately plead an antitrust violation;
and that even if Sanders had done so, the defendants were
immune from liability. We affirm.
I. Background
The following facts are undisputed for the purpose of the
motion to dismiss, unless otherwise noted. The United States
cigarette market is dominated by four companies: Philip Mor-
ris USA Inc., R.J. Reynolds Tobacco Co., Brown & William-
son Tobacco Corp., and Lorillard Tobacco Co. Their
combined sales have accounted for more than 90 percent of
cigarette sales for at least the last decade.
These four companies in the 1990s faced coordinated law-
suits by the attorneys general of most states and U.S. territo-
ries, who sought money and other relief to help their
governments cope with the harmful effects of smoking and
the costs imposed by those effects. In late 1998, the tobacco
companies and the attorneys general signed the MSA.2 State
courts, including the California Superior Court, then approved
the MSA in consent decrees and dismissed the lawsuits
against the tobacco companies.
2
The MSA in its entirety can be found at www.naag.org/
backpages/naag/tobacco/msa/msa-pdf (last visited Aug. 23, 2007).
SANDERS v. BROWN 13211
The MSA requires the four major tobacco companies —
who, as the initial signatories of the MSA, are known as the
“Original Participating Manufacturers” — to pay the states
billions of dollars each year. The total annual payments are
based on a formula that considers inflation and the total num-
ber of individual cigarettes sold in the fifty United States, the
District of Columbia and Puerto Rico. Each Original Partici-
pating Manufacturer (or “OPM”) must annually contribute a
portion of the total payment that is equal to the OPM’s share
of that year’s cigarette sales (the OPM’s “market share”). For
example, if an OPM’s market share is 25 percent, that OPM
must contribute 25 percent of that year’s settlement payment.
The OPMs expected to raise cigarette prices to help pay for
the settlement and feared that smaller manufacturers, which
were not part of the negotiations, would seize the chance to
compete with cheaper cigarettes, possibly cutting into the
OPMs’ market share. The settling parties addressed this prob-
lem in three ways. First, the MSA offered a carrot to non-
OPM tobacco companies to join the settlement agreement.
These “Subsequent Participating Manufacturers” (“SPMs”)
could join the settlement within 90 days of the enactment of
the MSA. They would not have to make any part of the pay-
ments due to the states so long as their market share remained
at or below their 1998 market share (or 125 percent of their
1997 market share, whichever was greater). If an SPM’s mar-
ket share increased, however, the SPM would have to contrib-
ute to the settlement payment, with the contribution based on
the sales in excess of the SPM’s 1998 sales (or 125 percent
of 1997 sales, if applicable). For example, if an SPM sold
250,000 cigarettes in 1998, and then one year later sold a
larger share of the market — say, 300,000 cigarettes — the
SPM would have to contribute to the settlement payment. If
the extra 50,000 cigarettes equaled 1 percent of the market
share, the SPM would have to pay 1 percent of the settlement
13212 SANDERS v. BROWN
payment. As of August 15, 2007, forty-four smaller tobacco
companies are participating in the MSA as SPMs.3
Second, the OPMs would pay less money under the MSA
if their total sales dropped below a certain amount. If the rea-
son for this drop is competition by tobacco companies that did
not participate in the MSA, the settlement payment would be
reduced even further.
Third, most states have enacted two sets of statutes that
allegedly make it harder for non-signatory tobacco companies
(and any future market entrants) to undercut the OPMs’ and
SPMs’ market shares. Sanders alleges that the states were
motivated to pass these statutes out of fear that the OPMs’
higher prices would cause their market share to fall, thereby
reducing the amount of the settlement payments to the states.
These “implementing statutes” are known in most states as
the “Qualifying Act” and the “Contraband Amendment.”
Under the “Qualifying Act,” non-signatory tobacco compa-
nies (also known as “Non-Participating Manufacturers,” or
“NPMs”) have to pay a portion of their revenues into an
escrow account. The money in the escrow account acts as a
liability reserve. If the NPMs are successfully sued for
cigarette-related harms, the money in the escrow accounts
will pay the damage awards. Each NPM’s payment is based
on market share, and is roughly the same per-cigarette cost as
the amount that OPMs must pay to abide by the MSA. The
payments can only be used to pay a judgment or settlement
on a claim against the NPM, up to the amount that the NPM
would otherwise pay under the MSA. Any remaining funds in
the escrow account revert back to the NPM after twenty-five
years.
3
The list can be found on the website of the National Association
of Attorneys General, www.naag.org/backpages/naag/tobacco/msa/
participating _manu/ (last visited Aug. 22, 2007).
SANDERS v. BROWN 13213
This law allegedly prevents the NPMs from undercutting
the prices of OPMs’ cigarettes by taking away the extra prof-
itability that an NPM would enjoy. For example, say that
OPMs’ sales are such that for a given year, they must pay 25
cents per cigarette to the states under the MSA. This would
seem to give NPMs a cost advantage of 25 cents per cigarette.
But under the Qualifying Act, if an NPM also sold cigarettes
that year, the NPM would have to pay roughly 25 cents per
cigarette into an escrow account, which the NPM could not
touch for 25 years. In other words, the NPM’s cost advantage
over the OPMs is erased.
The “Contraband Amendment,” for its part, penalizes
NPMs who refuse to make escrow payments under the Quali-
fying Act. The Contraband Amendment allows a state to “de-
list” NPMs from a list of approved tobacco manufacturers.
De-listing effectively prevents the offending NPM from sell-
ing cigarettes in that state.
The California legislature has enacted a Qualifying Act and
a Contraband Amendment. Cal. Health & Safety Code
§§ 104556, 104557 (Qualifying Act); Cal. Bus. & Prof. Code
§ 22979(a), (b), and Cal. Rev. & Tax Code § 30165.1(d), (e)
(Contraband Amendment).
As expected, the OPMs’ cigarette prices rose when the
MSA took effect. Sanders alleges, however, that the price
increases have far exceeded the tobacco companies’ costs of
complying with the MSA. The OPMs allegedly raised their
prices by $12.20 per carton between late 1998 and early 2002
— more than twice the amount necessary to meet the OPMs’
obligations under the MSA. Also, the price increases have
been “parallel.” Whenever one OPM has raised its cigarette
prices, the others have generally matched the increase.
Despite these increases, the OPMs’ cigarette sales still
account for more than 90 percent of the market.
The price increases and other factors have prompted several
legal challenges against the MSA, most alleging antitrust and
13214 SANDERS v. BROWN
constitutional violations. The challenges have been largely
unsuccessful. See, e.g., Tritent Int’l Corp. v. Kentucky, 467
F.3d 547 (6th Cir. 2006); Mariana v. Fisher, 338 F.3d 189 (3d
Cir. 2003); A.D. Bedell Wholesale Co. v. Philip Morris Inc.,
263 F.3d 239 (3d Cir. 2001); Xcaliber Int’l Ltd. v. Kline, No.
05-2261-JWL, 2006 WL 288705 (D. Kan. Feb. 7, 2006);
Xcaliber Int’l Ltd. v. Edmondson, No. 04-CV-0922-CVE-PJC,
2005 WL 3766933 (N.D. Okla. Dec. 13, 2005); S & M
Brands, Inc. v. Summers, 393 F. Supp. 2d 604 (M.D. Tenn.
2005); PTI, Inc. v. Philip Morris Inc., 100 F. Supp. 2d 1179
(C.D. Cal. 2000); Forces Action Project LLC v. California,
No. C99-0607 MJJ, 2000 WL 20977 (N.D. Cal. Jan. 5, 2000),
aff’d in relevant part, No. 00-15280, 16 Fed. Appx. 774 (9th
Cir. Aug. 15, 2001) (unpublished disposition); Hise v. Philip
Morris Inc., 46 F. Supp. 2d 1201 (N.D. Okla. 1999), aff’d,
208 F.3d 226 (10th Cir. 2000) (unpublished disposition). But
see Freedom Holdings Inc. v. Spitzer, 357 F.3d 205 (2d Cir.
2004).
II. The Present Case
Sanders alleges that the MSA has spawned a “cartel”
because it lets the participating tobacco companies “raise
prices without fear of losing sales or market share.” Sanders
does not allege that the tobacco companies have agreed
amongst themselves to fix prices. Instead, he alleges that the
MSA penalizes tobacco companies for competing on price,
because they have to pay more money under the MSA as their
market shares increase. As a result, tobacco companies alleg-
edly will be reluctant to increase market share. Thus, when
one tobacco company raises its prices, all other tobacco com-
panies allegedly can raise prices in lockstep without fearing
that their rivals will try to undercut them. “[I]n effect,” the
complaint alleges, “the OPMs have agreed to compensate
each other [f]or any market share increase . . . by imposing a
SANDERS v. BROWN 13215
proportionate increase in the settlement payment for such
market share gain.”4
Sanders also alleges that the MSA encouraged other
tobacco companies to join the cartel. Any company that has
joined the MSA as an SPM will be reluctant to increase its
market share beyond 1998 levels, because by doing so it
would be forced to pay some money to the states.5 As a result,
the SPMs followed the OPMs when they increase their prices.
Sanders further alleges that the MSA encouraged the states
to pass anti-competitive laws protecting the alleged cartel
from price competition. This is because the OPMs’ payments
to the states drop if their total sales drop below a threshold
level, or if non-signatory NPMs take away OPMs’ market
share. The states, Sanders alleges, therefore passed the Quali-
fying Acts and Contraband Amendments to keep NPMs from
entering the market.
The sum of these parts, Sanders alleges, is an illegal “hori-
zontal output-restriction cartel” in which the OPMs, backed
by state authority (or, at least, state acquiescence), have raised
cigarette prices to artificially high (or “supracompetitive”)
levels without fear of price competition. This scheme is pre-
empted by the Sherman Act, Sanders argues, because it so
obviously conflicts with federal antitrust law. Furthermore,
Sanders argues that even if the scheme consisting of the MSA
and its implementing statutes is not facially preempted, the
4
It is not clear that a proportionate price increase, which would not
affect the per-cigarette cost of doing business, would dissuade a tobacco
company from attempting to increase its market share. We need not, how-
ever, address the merits of this claim, as the following discussion will
show.
5
It is not clear whether this extra payment would really dissuade the
SPM from seeking extra market share. If an SPM would pay to the states
less money than it would make by selling extra cigarettes, an SPM still
might turn a higher profit by increasing its market share. Again, we need
not address the merits of this claim.
13216 SANDERS v. BROWN
tobacco defendants have still committed illegal price-fixing,
as evidenced by the parallel price increases. Finally, Sanders
argues that the State of California failed to adequately super-
vise the tobacco companies’ pricing actions.6
The defendants filed motions to dismiss, arguing, among
other things, that they are immune to antitrust liability under
either (1) the Noerr-Pennington immunity doctrine, described
in E. R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365
U.S. 127, 135-145 (1961), and United Mine Workers of Amer-
ica v. Pennington, 381 U.S. 657, 669-70 (1965); or (2) the
“state action” immunity doctrine that originated in Parker v.
Brown, 317 U.S. 341, 350-52 (1943).
The district court granted the motions to dismiss. See Sand-
ers, 365 F. Supp. 2d at 1105. The district court held that the
Sherman Act did not preempt the MSA implementing statutes
because those statutes do not authorize any per se illegal
activity. See id. at 1101. The district court also held that the
state action immunity doctrine protected the defendants from
suit because the MSA and its implementing statutes were
6
The relief Sanders seeks includes:
(1) A declaratory judgment that California’s Qualifying Act
and Contraband Amendment are both “facially void as a per se
restraint of trade,” and therefore preempted by the Sherman Act.
(2) An injunction against the state to keep it from enforcing the
MSA and the implementing statutes, and against the tobacco
defendants to make them “cease their anticompetitive activity
taken in furtherance of the MSA.”
(3) Money damages against the tobacco defendants for oper-
ating an illegal price-fixing cartel.
Sanders’s complaint also seeks to enjoin implementation of the “anti-
competitive provisions” of the MSA. His appeal, however, does not
address whether the MSA itself is illegal. Sanders instead argues that the
MSA is one part of a larger illegal scheme. We therefore need not address
whether the MSA itself would be legal in the absence of the alleged larger
scheme.
SANDERS v. BROWN 13217
formed by sovereign state acts that cannot be challenged
under federal antitrust law. See id. at 1098-1101, 1103-05.
The district court further held that the defendants were enti-
tled to Noerr-Pennington immunity because their acts of
negotiating and entering into the MSA constituted protected
speech. See id. at 1101-03. Finally, the district court held that
Sanders’s state law claims failed because the defendants were
immune to those claims as well. See id. at 1104-05.
III. Analysis
A dismissal under Rule 12(b)(6) is reviewed de novo. See
Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005). All
allegations of fact are taken as true. See id. Conclusory allega-
tions and unreasonable inferences, however, are insufficient
to defeat a motion to dismiss. See Cholla Ready Mix, Inc. v.
Civish, 382 F.3d 969, 973 (9th Cir. 2004); Warren v. Fox
Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003).
Review is generally limited to the contents of the com-
plaint, but a court can consider a document on which the com-
plaint relies if the document is central to the plaintiff’s claim,
and no party questions the authenticity of the document. See
Warren, 328 F.3d at 1141 n.5. We therefore can analyze the
MSA, which is obviously central to the claim, in evaluating
the strength of Sanders’s allegations.
A. Preemption
Sanders argues that California’s Qualifying Act and Con-
traband Amendment are preempted by Section 1 of the Sher-
man Act, which states that “[e]very contract, combination in
the form of trust or otherwise, or conspiracy, in restraint of
trade or commerce . . . is declared to be illegal.” 15 U.S.C.
§ 1. To be preempted by this Act, a state statute must be in
“irreconcilable” conflict with the federal antitrust regulatory
scheme. Rice v. Norman Williams Co., 458 U.S. 654, 659
(1982). The only way such a conflict can exist, according to
13218 SANDERS v. BROWN
the Supreme Court, is if the state statute “mandates or autho-
rizes conduct that necessarily constitutes a violation of the
antitrust laws in all cases, or if it places irresistible pressure
on a private party” to violate those laws. Fisher v. City of
Berkeley, 475 U.S. 260, 265 (1986) (quoting Rice, 458 U.S.
at 661) (internal quotation marks omitted). A conflict that is
“hypothetical or potential” is “insufficient” to warrant pre-
emption. Rice, 458 U.S. at 659. Thus, a state statute is only
preempted by the Sherman Act “when the conduct contem-
plated by the statute is in all cases a per se violation. If the
activity addressed by the statute does not fall into that cate-
gory . . . the statute cannot be condemned in the abstract.” Id.
at 661.
Neither the Qualifying Act nor the Contraband Amendment
explicitly allow price fixing, market division, or other per se
illegal monopolistic behavior. Sanders argues, however, that
these statutes create such high barriers to NPMs’ market entry
and ability to price-compete that they have “virtually guaran-
teed collusion and monopoly prices in the cigarette market.”
(Quoting 1 Phillip E. Areeda & Herbert Hovenkamp, Antitrust
Law, ¶ 226(a), at 35 (2006 Supp.)). The statutes therefore
place irresistible pressure on all cigarette companies to fix
prices, Sanders argues.
[1] The statutes do place some pressure on some new-
entrant tobacco companies to charge higher prices if they
decide to enter the market. The Qualifying Act forces NPMs
to place into escrow a per-cigarette payment roughly equal to
the per-cigarette payment that participating manufacturers pay
under the MSA. The Contraband Amendment prevents NPMs
who fail to make the escrow payments from distributing their
cigarettes. If NPMs wish to remain profitable, they must fac-
tor the escrow payments into the prices they charge per ciga-
rette. The statutes thus may cause higher prices and dissuade
some potential market entrants. Nothing, however, forces the
NPMs to either peg their prices to those of participating man-
ufacturers, or to refrain altogether from entering the market.
SANDERS v. BROWN 13219
If the OPMs really are charging artificially high prices, and
thus making artificially high profits, an NPM conceivably
could compete on price by charging a “normal” price and still
make a “normal” profit, even taking the escrow payment into
account.
[2] Sanders therefore has failed to adequately allege that
the implementing statutes mandate or authorize conduct that
“in all cases” violates federal antitrust law. See Fisher, 475
U.S. at 265 (quoting Rice, 458 U.S. at 661) (internal quotation
marks omitted). The implementing statutes are thus not pre-
empted by the Sherman Act. See, e.g., Tritent, 467 F.3d at
557-58 (holding that Kentucky statutes implementing the
MSA in that state were not preempted because they did not
mandate or authorize illegal activity “in all cases”).7
B. Immunity
Sanders next argues that even if the Sherman Act does not
preempt the implementing statutes, the tobacco companies
have nonetheless violated the Act by using the MSA and
implementing statutes to create a price-fixing cartel. The state
of California, for its part, has allegedly fostered this cartel
either by passing the implementing statutes and thus encour-
7
The Second Circuit has held that the MSA and its companion statutes
are preempted by federal law. See Freedom Holdings, 357 F.3d at 222-32.
The Freedom Holdings opinions (both the original and the denial of the
petition for rehearing) feature forceful economic arguments on how
tobacco companies could potentially use the MSA and its companion stat-
utes to minimize price competition and keep new entrants out. The court
concludes that the “alleged arrangement, even without the protection of
the Contraband Statutes . . . would be a per se violation because it is a
naked restraint on competition . . . . With the Contraband Statutes in force,
the scheme as alleged threatens to become a permanent, nationwide car-
tel.” 357 F.3d at 226. Freedom Holdings, however, ignores the Rice
requirement that the statute “in all cases” mandate per se illegal conduct.
The Sixth Circuit in Tritent disagreed with Freedom Holdings for that
very reason. Tritent, 467 F.3d at 557-58. We agree with the Sixth Circuit
and, likewise, decline to follow the Second Circuit’s approach.
13220 SANDERS v. BROWN
aging price-fixing, or at least by failing to prevent it from hap-
pening.
The defendants argue that Sanders has failed to allege any
conduct that would violate the Sherman Act. The defendants
also argue that even if Sanders has adequately pleaded Sher-
man Act violations, they are nonetheless immune from prose-
cution under the Noerr-Pennington immunity doctrine, the
state action doctrine, or both.
1. Noerr-Pennington immunity
The tobacco defendants argue that their acts of (1) negotiat-
ing the MSA, (2) petitioning the California courts for
approval of the MSA, and finally (3) acting according to the
MSA’s terms, are constitutionally protected from antitrust lia-
bility under the Noerr-Pennington immunity doctrine.
[3] The Noerr-Pennington doctrine arises from two
Supreme Court cases, E. R.R. Presidents Conf. v. Noerr
Motor Freight, Inc., 365 U.S. 127, 135-145 (1961), and
United Mine Workers of America v. Pennington, 381 U.S.
657, 669-70 (1965). The Court, citing First Amendment and
federalism concerns, held that private actors are immune from
antitrust liability for petitioning the government, even when
the private actors’ motives are anticompetitive. Noerr-
Pennington immunity protects petitions to all departments of
the government. See Cal. Motor Transport Co. v. Trucking
Unlimited, 404 U.S. 508, 510 (1972); Kottle v. Northwest
Kidney Ctrs., 146 F.3d 1056, 1059 (9th Cir. 1998).
[4] The Supreme Court has interpreted “petitioning” to
encompass activities other than legislative lobbying. For
example, Noerr-Pennington immunity protects private actors
when they file court documents and enter contracts with the
government. See Trucking Unlimited, 404 U.S. at 510; see
also Greenwood Utilities Comm’n. v. Mississippi Power Co.
(Greenwood Utilities), 751 F.2d 1484, 1505 (5th Cir. 1985).
SANDERS v. BROWN 13221
Neither the Supreme Court nor the Ninth Circuit have specifi-
cally held that a settlement agreement like the MSA qualifies
as “petitioning” that may be protected by Noerr-Pennington
immunity. The Seventh Circuit, however, has explicitly held
that Noerr-Pennington immunity protects private parties from
liability for negotiating and entering into settlements or other
agreements with the government. See Campbell v. City of
Chicago, 823 F.2d 1182, 1186-87 (7th Cir. 1987). We now
join that circuit in so holding.
In Noerr, the Supreme Court reasoned that petitioning of
government officials deserved immunity from antitrust liabil-
ity for two reasons. 365 U.S. at 137-38. First, allowing liabil-
ity for such petitions would “substantially impair the power of
[state] government to take actions through its legislature and
executive that operate to restrain trade.” Id. at 137. Second,
“[t]he right of petition is one of the freedoms protected by the
Bill of Rights,” and nothing in the Sherman Act indicated an
intent to “invade” that freedom. Id. at 138. Furthermore, the
Court concluded that it is inappropriate to base liability on
whether a petitioner has an anticompetitive motive, because
that would unduly chill speech:
It is inevitable, whenever an attempt is made to
influence legislation by a campaign of publicity, that
an incidental effect of that campaign may be the
infliction of some direct injury upon the interests of
the party against whom the campaign is directed.
And it seems equally inevitable that those conduct-
ing the campaign would be aware of, and possibly
even pleased by, the prospect of such injury. To hold
that the knowing infliction of such injury renders the
campaign itself illegal would thus be tantamount to
outlawing all such campaigns.
Id. at 143-44.
[5] The act of negotiating a settlement with a state undoubt-
edly is a form of speech directed at a government entity.
13222 SANDERS v. BROWN
Given the Court’s desire to protect free speech from Sherman
Act attack, it is clear why Noerr-Pennington immunity should
protect a private party from liability for such an act. If a per-
son undertaking to negotiate a way out of his legal troubles
were to fear that the very act of negotiating would expose him
to further liability, he might be afraid to attempt a settlement
in the first place. The result would be fewer settlements, even
when the parties would otherwise be willing to reach a princi-
pled compromise, and more cases dragging on for years to the
detriment of all parties, not to mention the court system.
Furthermore, holding that a private party’s settlements with
the government are exposed to antitrust liability would surely,
as the Supreme Court in Noerr warned, “substantially impair
the power of [state] government to take actions through its
legislature and executive that operate to restrain trade.” Id. at
137. If a state can restrain trade through its “legislature and
executive,” that means the attorney general, an executive offi-
cer, can negotiate trade restraints in the context of litigation,
so long as those restraints are not preempted by the Sherman
Act.
[6] We therefore hold that Noerr-Pennington immunity
protects a private party from liability for the act of negotiating
a settlement with a state entity.8 Immunity thus protects the
tobacco defendants from liability for the act of negotiating the
MSA with the State of California.
Sanders argues that even if Noerr-Pennington immunity
protects the defendants from liability for the MSA itself, it
does not protect the tobacco defendants from liability for
increasing prices after the MSA. Sanders bases his argument
on the plurality opinion in Cantor v. Detroit Edison Co., 428
8
We do not address whether Noerr-Pennington immunity may protect
an anticompetitive settlement agreement between two private entities, who
conceivably could claim that the act of petitioning the court to accept their
agreement immunizes the agreement itself.
SANDERS v. BROWN 13223
U.S. 579 (1976). In Cantor, a private utility gave free light
bulbs to customers, an act that allegedly harmed light bulb
retailers. See id. at 581-82. Even though the free-bulb pro-
gram had technically been “approved” by state regulators —
it was included in the utility’s proposed rate plan — the plu-
rality declined to extend Noerr-Pennington immunity to the
program. The plurality said that “nothing in the Noerr opinion
implies that the mere fact that a state regulatory agency may
approve a proposal . . . and thereby require that the proposal
be implemented . . . is a sufficient reason for conferring anti-
trust immunity on the proposed conduct.” Id. at 601-02. Jus-
tice Blackmun, concurring separately, said he agreed with the
plurality “insofar as it holds that the fact that anticompetitive
conduct is sanctioned, or even required, by state law does not
of itself put that conduct beyond the reach of the Sherman
Act.” Id. at 605 (Blackmun, J., concurring in the judgment).
Subsequent cases cast doubt on the precedential value of
this fragmented opinion. The Court itself undercut the Cantor
plurality in Allied Tube & Conduit Corp. v. Indian Head, Inc.,
486 U.S. 492 (1988), in which the Court stated that “ ‘where
a restraint upon trade or monopolization is the result of valid
governmental action, as opposed to private action,’ those urg-
ing the governmental action enjoy absolute immunity from
antitrust liability for the anticompetitive restraint.” Id. at 499
(quoting Noerr, 365 U.S. at 136) (internal alteration omitted).
The lower courts have also interpreted Cantor narrowly. In
Greenwood Utilities, the Fifth Circuit held that Cantor “can-
not support” a broad rule that Noerr-Pennington immunity
never extends to the consequences of government acts that
result from immunized petitioning. See 751 F.2d at 1504.
Such a rule would weaken Noerr-Pennington, the Fifth Cir-
cuit held: “First Amendment petitioning privileges would
indeed be hollow if upon achieving a petitioned-for end the
petitioner were then subjected to antitrust liability for his suc-
cess.” Id. at 1505. The Fifth Circuit distinguished Cantor
because, in that case, the private actor (not the government)
13224 SANDERS v. BROWN
had independently created the restraint. See id. at 1504. The
Fifth Circuit therefore held that Noerr-Pennington immunity
extends to restraints that are created by the government in
response to private-party petitions, as long as those restraints
are “not simply government approval of private conduct.” Id.;
see also Bonollo Rubbish Removal, Inc. v. Town of Franklin,
886 F. Supp. 955, 965 (D. Mass. 1995) (“A Noerr-Pennington
doctrine which shielded a private party in its attempt to secure
a benefit from the government but left the party open to suit
if the benefit was actually received would not serve the inter-
ests of free speech and open access to government that the
Noerr and Pennington Courts intended to protect.”).
[7] For our part, we have followed Allied Tube and explic-
itly held that Noerr-Pennington immunity protects a private
party from liability not only for the petition, but also for any
injuries that result “directly” from valid government action
taken on the petitioner’s behalf. Sessions Tank Liners, Inc. v.
Joor Mfg., Inc., 17 F.3d 295, 299 (9th Cir. 1994). This rule
is dispositive of Sanders’s case, to the extent the injury he
alleges — supracompetitive cigarette prices — resulted
directly from the action of the State of California, that is, from
“the MSA and the Attorney General’s enforcement of the
escrow statute and contraband statute.” Although subsequent
agreements by the plaintiffs to engage in the “operation of an
output cartel” might not be immune from liability under this
rule, Sanders’s complaint does not allege any such subsequent
agreement in restraint of trade. Therefore, because Sanders’s
complaint is based on injuries caused directly by government
action, Noerr-Pennington immunity shields the tobacco
defendants from liability for the alleged supracompetitive
price increases.9 Since Sanders’s claim against the tobacco
9
The Second Circuit in Freedom Holdings found that the MSA imple-
menting statutes were not themselves protected by Noerr-Pennington
immunity because “the immunity for advocacy cannot sensibly protect the
resultant anticompetitive legislation from being held to be preempted as in
conflict with the Sherman Act. Otherwise, all such legislation would be
immune.” 357 F.3d at 233. This holding may be correct, but the defen-
dants here do not claim that Noerr-Pennington immunity protects the
implementing statutes from preemption.
SANDERS v. BROWN 13225
defendants is predicated on these price increases, his claim
against the tobacco defendants must fail.
2. State action immunity
The State of California, for its part, argues that state action
immunity, or “Parker immunity,” protects it from liability
both for entering into the MSA and for enacting the imple-
menting statutes. We agree.
[8] The Parker immunity doctrine protects most state laws
and actions from antitrust liability. The doctrine originated in
Parker v. Brown, 317 U.S. 341, 350-52 (1943). In Parker, the
Court dismissed a Sherman Act challenge to a California law
that restricted competition among raisin manufacturers. The
Court held that nothing in the Sherman Act suggests its pur-
pose is “to restrain a state or its officers or agents from activi-
ties directed by its legislature.” Id. at 350-51. Thus, even a
state law that would violate the Sherman Act is immune from
attack on antitrust grounds. See id. The only exception to this
rule is a state law that attempts to “give immunity to those
who violate the Sherman Act by authorizing them to violate
it, or by declaring that their action is lawful.” Id. at 351.
The Supreme Court has never specified what conduct com-
prises a state action that is “directed” by the state legislature
and is therefore immune. In post-Parker cases, however, the
Supreme Court has articulated some general tests to help
decide whether a particular action qualifies for Parker immu-
nity. A threshold question, therefore, is whether a court-
approved settlement like the MSA may be protected by Par-
ker immunity. The next question is whether the MSA scheme
in particular meets the Supreme Court criteria for Parker
immunity.
[9] The answer to the first question is clear under our
court’s precedents. If a government entity enters into a settle-
ment like the MSA, the settlement is a “state action” that may
13226 SANDERS v. BROWN
be protected by Parker immunity. We have held that Parker
covers not only state legislation, but also the acts of courts
and executive-branch officials. See Charley’s Taxi Radio Dis-
patch Corp. v. SIDA of Hawaii, Inc., 810 F.2d 869, 876 (9th
Cir. 1987); Deak-Perera Hawaii, Inc. v. Dept. of Transporta-
tion, 745 F.2d 1281, 1283 (9th Cir. 1984). The MSA in partic-
ular seems to involve several state actions. To begin with, the
lawsuits against the tobacco defendants were initially filed by
the states. Even though private tobacco companies initiated
the settlement negotiations, the California attorney general
ultimately approved the MSA, and the state court approved
the settlement in a consent decree and final judgment. The
MSA thus fits the basic definition of “state action” for Parker
purposes.
[10] The second question — whether the MSA scheme
meets all the criteria for Parker immunity — is considerably
more complex. Even though the MSA is probably a state act,
it does not necessarily qualify for Parker immunity from anti-
trust liability. A series of Supreme Court cases holds that any
action in restraint of trade is only immune if it satisfies a two-
part test: The anticompetitive policy not only must be (1)
“clearly articulated and affirmatively expressed as state poli-
cy,” but also must be (2) “actively supervised by the state
itself.” Cal. Retail Liquor Dealers Ass’n. v. Midcal Alumi-
num, Inc. (Midcal), 445 U.S. 97, 105 (1980) (quoting City of
Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 410
(1978) (plurality opinion)) (internal quotation marks omitted);
see also 324 Liquor Corp. v. Duffy, 479 U.S. 335, 343-44
(1987); Patrick v. Burget, 486 U.S. 94, 100 (1988); FTC v.
Ticor Title Ins. Co., 504 U.S. 621, 631 (1992). Other Supreme
Court cases, however, explicitly hold that a state’s own acts
in the antitrust area are always immune; these cases suggest
that the two-part “Midcal test” is only needed to decide
whether private conduct pursuant to a state statute gets Parker
immunity. In other words, a state need not show it “actively
supervises” private parties, as long as the state itself, acting as
sovereign, created the restraint of trade. See Hoover v. Ron-
SANDERS v. BROWN 13227
win, 466 U.S. 558, 568-69 (1984); City of Columbia v. Omni
Outdoor Advertising, Inc., 499 U.S. 365, 377-79 (1991).
It is unclear whether Hoover and Midcal are coexisting
“live” precedents, or whether one overrules the other. It is
possible that the Midcal test is limited, as Hoover suggests, to
cases in which the courts must decide whether private conduct
is actually protected “state action.” The Midcal line of cases,
however, never mentions the Hoover line of cases, even
though they chronologically overlap. Indeed, 324 Liquor,
which was decided after Hoover, explicitly states that the way
a state statute gets Parker immunity is by satisfying the two-
part Midcal test. See 479 U.S. at 343-44. Since 324 Liquor
never mentions Hoover, it is unclear whether the Supreme
Court was saying that even sovereign state acts must meet the
Midcal test (therefore overruling Hoover without saying so)
or merely applying the Midcal test in an appropriate circum-
stance (by analyzing whether private conduct gets Parker
immunity).
Whether the Midcal test applies to the MSA is a critical
question for the present case. The lower courts have split on
whether the MSA should get Parker immunity, chiefly
because some apply Midcal, and some — following the Hoo-
ver precedent — do not. Compare Bedell, 263 F.3d at 259-65
(applying the Midcal test and finding no Parker immunity);
Freedom Holdings, 357 F.3d at 226-32 (same), with PTI, 100
F. Supp. 2d at 1195-96 (citing Hoover, declining to apply
Midcal, and holding that Parker immunity protects defendants
from liability); S & M Brands, 393 F. Supp. 2d at 621-29
(same).
Sanders argues that the Midcal test is appropriate here and
reasons that since California has never “actively supervised”
the tobacco defendants’ price increases, state action immunity
protects none of the defendants from antitrust liability. The
defendants, however, argue that the Midcal test is inappropri-
ate because the MSA and the implementing statutes were
13228 SANDERS v. BROWN
“sovereign acts,” and that under Hoover, the MSA, the Quali-
fying Act and the Contraband Amendment are automatically
immune from suit.
Our circuit precedent indicates that the defendants are cor-
rect. In Deak-Perera Hawaii, we held that a state “acting as
sovereign” is “immune from the federal antitrust laws.” 745
F.2d at 1282 (internal citations and quotation marks omitted).
We distinguished Midcal by noting that “this is not a case of
private parties imposing competitive restraints in conjunction
with state authorities. In such a case the inquiry would be dif-
ferent.” Id. at 1283; see also Charley’s Taxi, 810 F.2d at
875-76 (following Deak-Perera).
Nonetheless, Sanders argues that the Midcal line of cases
have overruled Hoover, and that Deak-Perera and Charley’s
Taxi therefore are dead precedents. Sanders points to Ninth
Circuit cases that, like the Midcal line of cases, apply the
Midcal test without considering the Hoover rule that sover-
eign state acts are per se immune. See, e.g., Snake River Val-
ley Elec. Ass’n. v. Pacificorp, 238 F.3d 1189, 1192-95 (9th
Cir. 2001). Even though these cases might be read to shed
some doubt on Hoover’s viability, we conclude that the Hoo-
ver rule survives both logical scrutiny and a semantic parsing
of the Midcal cases.
First, it makes no sense to apply the Midcal test to a sover-
eign state act. Midcal holds that an anticompetitive restraint
is protected under Parker only if the state “actively supervise-
[s]” the anticompetitive conduct. 445 U.S. at 105. Parker,
however, appears to extend immunity from antitrust liability
to all government officers’ acts if those acts are “directed by
[a state’s] legislature.” 317 U.S. at 350-51. If the Midcal test
applied to those government officers’ acts, it would dramati-
cally narrow the scope of immunized acts to those in which
the government took an active role in supervising the market-
place. Rigid pricing schemes in which the state government
itself sets prices for products, and enforces penalties on those
SANDERS v. BROWN 13229
who violated the controls, might be immune from antitrust lia-
bility, but gentler schemes that restrained competition without
engaging in onerous “active supervision” might be illegal.
Such a rule appears to conflict with a key holding of Parker:
that the Sherman Act is not intended to interfere with state
attempts to impose market restraints. See Parker, 317 U.S. at
350-51.
Second, the holding in Hoover is broader than the holdings
in the Midcal line of cases. The Court in Hoover said that
“[t]he starting point in any analysis involving the state-action
doctrine is the reasoning of Parker v. Brown.” 466 U.S. at 567
(emphasis added). Since Parker held that state acts are
immune from antitrust liability, the Hoover Court reasoned,
“[w]here the conduct at issue is in fact that of the state legisla-
ture or supreme court, we need not address the issues of ‘clear
articulation’ and ‘active supervision.’ ” Id. at 569. “Closer
analysis” is only required “when the activity at issue is not
directly that of the legislature or supreme court, but is carried
out by others pursuant to state authorization.” Id. at 568. In
short, Hoover clearly states that the Midcal test does not apply
to sovereign state acts, which are immune from antitrust lia-
bility so long as they avoid preemption by authorizing per se
illegal activities.
Midcal, however, makes no such blanket statements. In that
opinion, the Court was chiefly concerned with how to distin-
guish between a private price-fixing scheme and an immu-
nized state act. Indeed, each of the Midcal line of cases
involved a private body — not a state — making anticompeti-
tive decisions under the aegis of a state regulatory scheme. In
Midcal and 324 Liquor, the Court considered whether state-
authorized pricing schemes for wholesale alcohol, which gave
price-fixing control to private parties, had enough active state
supervision to qualify for Parker immunity. Midcal, 445 U.S.
at 103-06; 324 Liquor, 479 U.S. at 342-45. In Ticor, the Court
examined whether states had given too much leeway to title
search companies to set their own rates. 504 U.S. at 632-40.
13230 SANDERS v. BROWN
And in Patrick v. Burget, the Court analyzed a state-
authorized, but privately-run, medical review board that alleg-
edly restricted competition among doctors. 486 U.S. at 99-
106.
Furthermore, the Supreme Court has repeatedly hinted that
the Midcal test is limited only to situations in which private
bodies operate under state regulatory authority. In Southern
Motor Carriers Rate Conf., Inc. v. United States, 471 U.S. 48
(1985), the Court stated that Midcal’s two-pronged test is “ap-
plicable to private parties’ claims of state action immunity,”
but said nothing about whether the test applied to sovereign
state acts. 471 U.S. at 61. In Ticor, the Court clarified that in
Midcal, “we announced the two-part test applicable to
instances where private parties participate in a price-fixing
regime.” 504 U.S. at 633 (emphasis added).
[11] Hoover therefore controls in cases where the state,
acting as a sovereign, imposes restraints on competition. The
state in such situations is immune from antitrust liability,
regardless of whether the restraint in question would satisfy
the Midcal test.
[12] Since the California attorney general’s act of entering
into the MSA is a sovereign act, as are the legislature’s
actions in enacting the Qualifying Act and Contraband
Amendment, the state is immune from antitrust liability for
these actions, unless the MSA scheme is an attempt to “give
immunity to those who violate the Sherman Act by authoriz-
ing them to violate it, or by declaring that their action is law-
ful.” Parker, 317 U.S. at 351. The MSA and the
implementing statutes authorize no illegal activity, as we dis-
cussed above in analyzing whether the implementing statutes
are preempted. See Part III.A supra. We therefore hold that
Parker immunity protects the state from antitrust liability for
entering into the MSA and for passing the implementing stat-
utes.
SANDERS v. BROWN 13231
In so holding, we recognize that we disagree with two other
circuits. The Second Circuit in Freedom Holdings and the
Third Circuit in Bedell applied the Midcal analysis and held
that Parker immunity does not protect the state from liability
for entering into the MSA. Freedom Holdings, 357 F.3d at
226-32; Bedell, 263 F.3d at 259-66. As discussed above, how-
ever, we believe the Midcal analysis would only be appropri-
ate if the MSA is not a sovereign act, which we conclude it
is.
We also reject the Bedell Court’s conclusion that the MSA
is not a sovereign state act, but rather resembles a “hybrid
restraint” existing somewhere outside the realm of Par-
ker immunity. Bedell, 263 F.3d at 258. To explain why we
disagree, it is necessary to briefly touch on the concept of a
“hybrid restraint.”
A hybrid restraint is one form of state law that is illegal per
se under the Sherman Act. See Fisher, 475 U.S. at 267-270.
A hybrid restraint exists when the state creates “nonmarket
mechanisms [that] merely enforce private marketing deci-
sions.” Id. at 267-68. In other words, it exists when the state
passes laws that enforce companies’ decisions to collude on
prices, to dictate prices by which other companies must abide,
or to otherwise violate the Sherman Act.
Ninth Circuit and Supreme Court cases provide a few
examples of hybrid restraints. Each of these cases hinged on
a state’s decision to let producers dictate market conditions to
others — for example, by “posting” prices that then became
legally binding on buyers and other producers. See id. at 268-
69 (characterizing as hybrid restraints the price-posting
schemes that had been the subjects of Midcal and of Schweg-
mann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951));
see also 324 Liquor, 479 U.S. at 345 n.8 (noting that a New
York law allowing liquor wholesalers to fix their own prices
could be called a hybrid restraint); Miller, 813 F.2d at
1349-51 (finding a hybrid restraint where a statutory scheme
13232 SANDERS v. BROWN
let wholesalers set prices that retailers were legally bound to
honor).
[13] Such a scheme necessarily involves a delegation of
market power to private parties that is per se illegal under the
Sherman Act. See Miller, 813 F.2d at 1349-51 (citing Fisher,
465 U.S. at 267-68). Otherwise, the hybrid restraint could not
be attacked as facially invalid. As we have already discussed,
the MSA involves no such delegation of per se illegal power
such as the ability to fix prices. See Part III.A supra. We must
therefore conclude that the MSA cannot be classified as a
hybrid restraint.10 Accordingly, we decline to follow the Third
Circuit and instead hold that the state is entitled to Parker
immunity in this case.11
C. State law claims
[14] Sanders also brought claims under California antitrust
law. California courts have held that the Noerr-Pennington
immunity doctrine applies to protect private petitioners of the
government from state-law antitrust liability in exactly the
same way as it protects them from federal antitrust liability.
See Blank v. Kirwan, 703 P.2d 58, 63-65 (Cal. 1985). Since
Noerr-Pennington immunity shields the tobacco defendants
from Sherman Act liability, it also shields them from state
antitrust liability. See PTI, 100 F. Supp. 2d at 1196.
10
The Sixth Circuit, in Tritent, reached a similar conclusion about the
Kentucky version of the MSA scheme. The Sixth Circuit held that the Rice
v. Norman Williams Co., 458 U.S. 654 (1982), preemption analysis “must
precede the analysis under the hybrid-restraint theory.” Tritent, 467 F.3d
at 558. Since the plaintiffs in Tritent had failed to demonstrate preemption,
the Sixth Circuit declined to hold that the Kentucky version of the MSA
scheme was a hybrid restraint. Id.
11
The tobacco defendants argue that they, too, are entitled to Parker
immunity. We need not reach this issue, since we have already held that
they are entitled to immunity under the Noerr-Pennington doctrine.
SANDERS v. BROWN 13233
[15] As for the State of California’s liability under its own
laws, the district court correctly noted that the California leg-
islature could hardly have violated its own statutes by passing
another statute. See Sanders, 365 F. Supp. 2d at 1104-05. Fur-
thermore, the California courts have held that political divi-
sions of the State of California are not subject to the
Cartwright Act, which means that the state cannot be held lia-
ble for entering into the MSA. See Blank, 703 P.2d at 65.
D. Conclusion
[16] Sanders has failed to show that the MSA implement-
ing statutes are per se illegal under the Sherman Act. Sanders
also has failed to show that any of the defendants are liable
under either the Sherman Act or under California antitrust
law. Sanders therefore has failed to state a claim entitling him
to relief, and the district court properly dismissed his lawsuit.
AFFIRMED.