FRANKFORT, Ky. — Some tobacco companies followed through with their plans to withhold a portion of this year’s Master Settlement Agreement (MSA) funds by placing part of their annual payments into escrow rather than distribute it to participating states.

R.J. Reynolds and Lorillard Tobacco Companies put approximately $755 million into a special account pending a decision regarding the fate of those funds. Philip Morris USA made its full payment, but has also claimed it is entitled to a reduction.

The companies maintain that, per the MSA, “a tobacco company is due a credit against its annual payment if the disadvantages imposed by the MSA were a significant factor in the participating manufacturers losing market share.”

Those participating manufacturers potentially can reduce their payments under the MSA if their market share of tobacco sales falls by a specified amount compared to their market share before the MSA agreement was executed.

An independent economic consulting firm hired by participating states and the tobacco companies made such a determination for 2003, showing the U.S. tobacco companies’ market share fell about 7 percentage points from what it was before the agreement. Funds that are being distributed now are based on 2003 figures.

“We are following the process that all parties understood and agreed to when they signed the MSA in 1998,” said Charles A. Blixt, executive vice president and general counsel for R.J. Reynolds. “We remain committed to the MSA and will continue to live up to both the letter and spirit of the agreement,” he said.

Cigarette manufacturers are contending that states involved in the MSA have not lived up to their word to require escrow payments by nonparticipating tobacco manufacturers as part of the original agreement.

Kentucky’s argument, along with many other states, is that if a state diligently enforces the escrow statute, it is not subject to that provision and a reduction in payment.

On April 19, Kentucky Attorney General Greg Stumbo made good on his promise to file legal action to obtain the remaining MSA funds.

“We are entitled to full payment under the agreement,” said Stumbo. “We filed suit to be sure we receive the money the tobacco companies owe the states. We have diligently enforced our statute, and we are asking the court to find that we have done so. Then we will ask the court to order companies to pay in full.”

The state was due more than $115 million for this year but received just over $102 million.

Stumbo also said that if the lawsuits are successful and orders are entered, the state will receive its full payments plus interest.

Other states have also filed suits, including Connecticut, Massachusetts, New Jersey, Ohio, Tennessee and Washington.

“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 Blixt about the lawsuits. “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 states that will ultimately bear the impact of the reduction in their payments are those who have not fulfilled their MSA obligation, which states those are, if any, will be the issue before the arbitration panel.”

Blixt also said, “State courts in New York and Connecticut have already ruled that these matters should indeed be arbitrated, not litigated.”

The tobacco companies were due to pay a total of $6.5 billion to the 46 participating states by April 17.

“The states collectively received over $5.7 billion this time in MSA payments,” said Stumbo. “But I want to emphasize that the MSA is primarily a public health agreement. It has strong prohibitions on many forms of advertising, promotion and marketing of cigarettes by the participating manufacturers, and it has led to reduced smoking.”

According to information from the Attorney General’s office, “since the MSA was executed in 1998, cigarette sales in the U.S. have dropped by more than 21 percent. The number of cigarettes sold in the U.S. in 2005 was the lowest since 1951 (even though the U.S. population doubled,) and per-capita cigarette consumption in the U.S. is at its lowest level since the 1930s.”

Stumbo also emphasized that “payments now withheld or disputed by the tobacco companies are not related to the overall decline in cigarette sales, but rather are related to allegations that companies outside the MSA had increased their share of the U.S. market at the expense of the MSA companies because of the MSA - and because of the claim that states have not diligently enforced ‘model statutes’ requiring escrow payments.”

Tobacco companies have paid states approximately $47 billion thus far since 1998 with Kentucky getting about $835 million of a total $3.45 billion over a 25 year period. The state’s portion for next year (2006-07) could be even less at $88 million.

This farm news was published in the April 26, 2006 issue of Farm World.