Big Tobacco Wins Ruling

Arbiter says MSA ad restrictions significant in reducing market share

WASHINGTON -- Tobacco companies including Philip Morris USA and Reynolds American Inc. won an arbiter's ruling that may allow them to reduce by $1.2 billion the $6.5 billion they are scheduled to pay states on April 17 under the 1998 Master Settlement Agreement (MSA), reported Bloomberg News.

The Brattle Group, a consulting firm hired by the states and the cigarette makers, ruled advertising restrictions imposed by the MSA have been a significant factor in reducing manufacturers' market share, according to a statement from the National Association of [image-nocss] Attorneys General (NAAG).

Cigarette makers may use the decision to withhold what they owe states under a provision that allows them to adjust payments based on market share. The companies may also negotiate changes in the settlement with state attorneys general, Citigroup Inc. analyst Bonnie Herzog wrote in a research note cited by Bloomberg. She wrote: Overall, we're not convinced that the participatingmanufacturers will ultimately be successful in recovering the $1.1 billion of lost payments. However, we would not be surprised if this battle leads to some form of another settlement which could result in an even more ironclad partnership between the states and tobacco manufacturers.

The states do not believe that manufacturers should withhold any of the $6.5 billion due to them, the statement said. Tobacco companies still must prove in court that the states have not diligently enforced their statutes requiring escrow payments from producers that are not covered by the settlement.

For the states, the decision could affect a flow of revenue that has been spent on health care programs and antismoking campaigns and to balance budgets. Some states have sold $20 billion of municipal bonds backed by the payments.

Philip Morris USA, R.J. Reynolds Tobacco Co. and Loews' Lorillard Tobacco Co. did not have immediate comments, said Bloomberg. The Cambridge, Mass.-based arbiter's decision affirmed its March 1 preliminary ruling. Ken Wise, a Brattle spokesperson in San Francisco, told Bloomberg that the company will not release or comment on the findings.

Big tobacco companies may pay the $1.2 billion in exchange for state legislatures requiring greater payments from small manufacturers that are not part of the settlement, said Eric Lindblom, director of policy research at the Washington-based Campaign for Tobacco-Free Kids. Higher payments might spur these producers, including makers of discount cigarettes, to raise prices, helping big manufacturers win back smokers who switched to the cheaper brands, Lindblom said.

Under the settlement, states are required to collect sales results from tobacco companies that are not part of the pact and then force those producers to put payments in escrow. Those escrow payments are intended to replace declining payments by manufacturers participating in the settlement.

Iowa Attorney General Tom Miller told reporters March 8 that state attorneys general notified major cigarette makers in letters they may sue the companies over the $1.2 billion in disputed payments.

The big companies may withhold that amount from the $6.5 billion they're scheduled to pay states on April 17, citing a provision that allows them to adjust payments if their collective market share decreases by more than 2 percentage points. That occurred in 2003, starting a two-year waiting period that prevented the companies from seeking the adjustment until now.

Manufacturers have so far paid more than $41 billion in the settlement, Miller said. Other conditions also have to be met before the companies can reduce payments. These include proving that states failed to diligently enforce certain statutes passed after the agreement, he said.

Producers covered by the accord accounted for 91.6% of U.S. market share in 2003, down from 99.6% in 1997, PM USA said on March 8, citing PricewaterhouseCoopers, the settlement fund's auditor.

The settlement, signed by companies including Reynolds American's R.J. Reynolds and Brown & Williamson Tobacco Corp. and Loews's Lorillard, called for them to make payments to 46 states in perpetuity. Mississippi, Florida, Minnesota and Texas had already settled their claims for about $40 billion.

The tobacco makers agreed to restrict advertising and marketing, including a ban on billboards, buses and taxicabs, and merchandise logos. They are also paying for anti-tobacco ads by the American Legacy Foundation, an organization that runs programs to reduce teen smoking.

South Carolina Attorney General Henry McMaster is planning to file a lawsuit April 17 if the state does not get its full $77 million payment from the agreement. The state is expecting the payment to be cut by $14 million if the tobacco companies follow through on threats to reduce payments. The attorney general has gotten approval for $1 million of legal fees to start the legal fight, according to Trey Walker, a spokesperson for McMaster. The attorney general is preparing for a massive lawsuit fighting tobacco companies for full payment,'' said Walker. South Carolina sold $912 million of bonds.

Full text of NAAG statement:

Statement by Iowa Attorney General Tom Miller

and Idaho Attorney General Lawrence Wasden,

Tobacco Committee Co-Chairs, National Association of Attorneys General

On March 27, the Brattle Group, the economic firm designated by the Parties, determined that the MSA was a significant factor contributing to the Market Share Loss of the Participating Manufacturers.

On April 17, 2006, the Participating Manufacturers are obligated to make payments totaling approximately $6.5 billion based on their sales in 2005. The Settling States believe that the Participating Manufacturers should make the April 17 payments in full.

Although the MSA does contain a mechanism, known as a Non-Participating Manufacturer (NPM) adjustment, that could reduce these payments, the requirements of that mechanism have not been met. As a result, the Settling States believe that it would not be appropriate to withhold any portion of the April 17 payment.

In order to obtain the NPM Adjustment, the Participating Manufacturers must still prove to a court that the states have not diligently enforced their statutes providing for NPM escrow payments. The Settling States believe that every State will be found to have diligently enforced its Model Statute in 2003 and thus that no NPM Adjustment should be applied.

The Settling States are engaged in discussions with the major manufacturers to ensure that the Participating Manufacturers make full payment of the amounts due on April 17, and we expect those negotiations to be successful.