Tobacco, States Tussle Over MSA Payments

AG lawsuits fly as negotiations go south

WASHINGTON -- The battle over money the tobacco industry owes states under the 1998 Master Settlement Agreement (MSA) intensified Tuesday after talks to resolve the dispute fizzled, said the Associated Press. The MSA was reached among 46 states, the District of Columbia, Puerto Rico and four U.S. territories and the major tobacco companies. It imposes substantial restrictions on the marketing, advertising and conduct of the participating tobacco companies.

A spokesperson for R.J. Reynolds Tobacco Co., part of Reynolds American Inc., said Tuesday that [image-nocss] the weeks-long negotiations between the states and tobacco companies had broken down. We had tried to work hard with the states to resolve this very difficult matter and are disappointed an agreement couldn't be reached, said David Howard.

California Attorney General Bill Lockyer filed suit Tuesday to recoup more money from the companies. We were, and remain, entitled to full payment, Lockyer said in a statement. Attorneys general in Massachusetts, New Jersey and Ohio also filed lawsuits against the industry Tuesday.

Officials in New York and Connecticut said they, and other states, would probably take similar steps. We're continuing to review our options, but certainly a lawsuit looks likely this week, Connecticut Attorney General Richard Blumenthal said in an AP interview.

On Monday, R.J. Reynolds and Lorillard Tobacco Co. said they had put more than $750 million aside rather than hand it over to the states. R.J. Reynolds paid the states about $1.4 billion but withheld $647 million, putting it in an escrow account until the dispute is resolved. Lorillard paid the states a little more than $550 million and put another $108 million aside until the issue is resolved.

Philip Morris USA said earlier this month it had made all of its $3.4 billion payment, but that it believes the sum should be reduced. Spokesperson Michael Neese said his company, part of New York-based Altria Group Inc., is still trying to work with the states to resolve the issue.

The tobacco companies say the disputed amountroughly $1.2 billion in totalis money they should get to keep because of a provision in the settlement that allows the cigarette makers to pay less if they have lost market share to smaller companies that were not part of the settlement. An economic consulting firm concluded last month that the agreement, which set restrictions on cigarette advertising, promotion and marketing, was a significant factor contributing to the loss of market share for companies that settled.

There is a lag in annual payments to the states. The money owed this year actually deals with the companies' loss of market share in 2003. That year, the companies saw their share of the market drop to about 92%. Before the settlement, they had about 99% of the market.

The states' attorneys general say the companies would be entitled to a reduction only if states did not adequately enforce laws requiring cigarette makers outside the settlement to put money in escrow for future legal obligations.

The tobacco companies contend the issue should go to arbitration, in which a three-judge panel would weigh in on the matter. The states prefer to handle the matter in state courts.

R.J. Reynolds said in a statement that it is disappointed with the decision by some states to initiate court proceedings regarding a dispute over recent MSA payments. We tried very hard to work with the states to reach a negotiated settlement of this difficult matter, but an agreement could not be reached, said Charles Blixt, executive vice president and general counsel for R.J. Reynolds. We are disappointed that some of the states have decided to seek legal action when it is clearly spelled out in the MSA that disputes over payments should be resolved through binding arbitration.

The MSA provides that the independent determination is final and a credit is due. The states disagree. As a result, and following the process specified in the MSA, a portion of R.J. Reynolds' payment was deposited into a disputed payments account. The approximately $647 million deposited into this special escrow account will remain there pending final resolution of application of the credit.

We are following the process that all parties understood and agreed to when they signed the MSA in 1998, Blixt added. Additionally, state courts in New York and Connecticut have already ruled that these matters should indeed be arbitrated, not litigated. The states that will ultimately bear the impact of the reduction in their payments are those who have not fulfilled their MSA obligations. Which states those are, if any, will be the issue before the arbitration panel.

R.J. Reynolds affiliated companies have made more than $16 billion in settlement payments to the states since the agreement was signed in 1998, the company said.

Click here to read Lockyer's full statement.

Click here to read the Statement of Attorney General Tom Miller (Iowa) and Attorney General Lawrence Wasden (Idaho), Tobacco Committee Co-Chairs, National Association of Attorneys General.