Federal judge tosses suit against tobacco settlement

John O'Brien Jan. 6, 2009, 6:11pm

LOUISVILLE, Ky. (Legal Newsline) - The landmark 1998 agreement between the tobacco industry and 52 state attorneys general has survived a challenge from one of its participating parties that argued it could not compete with larger companies under its terms.

U.S. District Judge Jennifer Coffman on Tuesday dismissed the case, which was filed by North Carolina-based General Tobacco in October. She said the company waived its right to challenge the agreement on Constitutional issues when it entered into the agreement.

The company had claimed yearly payments made to the states kept the tobacco market from being competitive, assuring the biggest companies could easily keep their spots on top.

"Accepting as true all of the plaintiff's allegations, no fact emerges that changes the voluntary, intelligent, and knowing nature of the plaintiff's waiver," Coffman wrote.

"Any misrepresentations by the states as to how diligently states were enforcing their Escrow Statutes or the impact of the (Limited Most-Favored Nation) clause have no relevance to the plaintiff's understanding of what rights it was giving up by signing on to the MSA."

General Tobacco also named 19 tobacco companies as defendants and was seeking more than $1 billion in damages.

"The MSA, however, subjects General Tobacco to adverse discriminatory financial treatment in comparison to certain other tobacco product manufacturers," says the complaint, filed Oct. 28 in federal court in Louisville.

"As discussed below, the companies with preferential treatment have a much less average per-carton MSA payment than does Plaintiff. Indeed, many of these favored companies pay the Settling States next to nothing."

And because of that, the "preferred" companies can gain a pricing advantage that harms both new market entrants and consumers forced to pay prices that are results of a noncompetitive market, the suit continues.

General Tobacco said it supports the public health goals of the MSA but feels the agreement has flaws in its structure.

The MSA requires any tobacco company wishing to do business in the participating areas to make a yearly payment. It has an estimated worth of $250 billion over its first 25 years.

Some groups have been critical that private firms with ties to the attorneys general at the time were hired to represent the states and made approximately $14 billion.

Only Minnesota, Florida, Texas and Mississippi did not join in the MSA, each reaching their own agreements.

The first four tobacco companies to sign were the four largest in America -- Philip Morris USA, R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corp., and Lorillard Tobacco Company. They are referred to as Original Participating Manufacturers.

The rest of the more than 40 companies that have signed are classified as Subsequent Participating Manufacturers. Those that joined during a 90-day preferential signing period have been "grandfathered" into the agreement.

General Tobacco says the per-carton payments to the states are much less for OPMs and grandfathered SPMs than for non-grandfathered SPMs.

"This disparity of treatment under the MSA exists through no fault of Plaintiff, which has never had any opportunity to join the MSA on terms comparable to those offered to SPMs that joined the MSA during the Preferential Signing Period," the complaint says.

The lawsuit was prompted by two years of failed negotiations to resolve General Tobacco's concerns. The company says it still made the necessary payments in good faith that things would change.

On Oct. 27, Arkansas Attorney General Dustin McDaniel sent General Tobacco notice of the group of attorneys' general possible intent to file an action against the company in 30 days.

Three aspects of the MSA are troubling General Tobacco:

-Grandfathered SPMs are the only group that do not make payments for cigarette sales made prior to joining the MSA.

"Thus, the grandfathered SPMs, which built their respective grandfathered market shares before joining the MSA -- during the period through 1998 when, according to the Settling States' claims, the alleged tortious and wrongful conduct in the tobacco industry occurred -- have zero monetary obligation to the Settling States for sales during that period," the complaint says.;

-A grandfathered SPM never makes a yearly payment that exceeds 125 percent of its market share in 1997, a deal only made available during the Preferential Signing Period.

"Thus, whereas grandfathered SPMs have not had to make any going-forward payment to the Settling States on cigarette sales each year that do not exceed their grandfathered market shares, the non-grandfathered SPMs such as General Tobacco have been required by the Settling States to make an MSA payment for every carton sold," the complaint says.

"As a result, General Tobacco has paid the Settling States not only hundreds of millions of dollars that grandfathered SPMs never had to pay for cigarette sales prior to joining the MSA, but also additional hundreds of millions of dollars in payments not required of the grandfathered SPMs for cigarette sales made after becoming MSA members."; and

-General Tobacco says it is one of the few manufacturers in the MSA that is required to make quarterly deposits into an escrow account for its annual payment for cigarette sales.

"This purported requirement, which is not imposed on the OPMs or grandfathered SPMs, negatively impacts General Tobacco's working capital on a recurring basis. As noted, General Tobacco in 2008 has already had to pay $36 million into escrow while the OPMs and grandfathered SPMs have not been required to make any such payment," the complaint says.

From Legal Newsline: Reach John O'Brien by e-mail at john@legalnewsline.com.

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