Tobacco company voices gripe with master settlement

John O'Brien Jun. 16, 2010, 7:00am

CINCINNATI (Legal Newsline) - General Tobacco is arguing to a federal appeals court that it was unfairly shut out of the 1998 Tobacco Master Settlement Agreement.

General Tobacco says the payment structure of the settlement, which allows tobacco companies to do business in 46 states and the District of Columbia in exchange for annual payments, discriminates against companies that were not around when it was signed.

General Tobacco allegedly owes the states $284 million and faces delisting. The company, which filed its brief May 18 with the U.S. Court of Appeals for the Sixth Circuit, is challenging three portions of the payment structure. They are:

-Grandfathered subsequent participating manufacturers, companies that did not originally sign the MSA but were grandfathered into it, do not have to make any back payments for cigarette sales prior to joining the MSA;

-Grandfathered SPMs receive a market-share exemption only available to companies that were in business in 1998 and signed the MSA during a set signing period. SPMs only pay states for cigarette sales after they reach their market share from 1998 or 1997, while companies like General Tobacco must pay for every cigarette sale; and

-General Tobacco must make advanced quarterly escrow deposits for its annual payments even though payments aren't due until April.

"This Quarterly Escrow Deposit Requirement harshly impacted General Tobacco's working capital," attorneys for the company wrote.

"For example, General Tobacco in 2008 paid at least $36 million into escrow while its principal competitors were not required to make any such quarterly escrow payments and consequently enjoyed superior working capital opportunities."

General Tobacco claims its competitors are able to sell their products at a much lower cost because of all these reasons.

"Because of this unfair pricing advantage, General Tobacco has suffered a dramatic and significant loss of market share since joining the MSA, has incurred substantial operating losses of tens of millions of dollars during this period, and has been forced to close its business operations," attorneys wrote.

The MSA has an estimated worth of $246 billion over its first 25 years.

The state attorneys general are also named in General Tobacco's lawsuit. They withheld information necessary to General Tobacco's full understanding of its payment obligations prior to the company joining the MSA in 2004, it is alleged.

General Tobacco said it requested specific information about the market-share exemption but was denied.

The company's claims were all dismissed at the trial level.

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