Tobacco Master Settlement Agreement
[1]: 25 In exchange, the companies agreed to curtail or cease certain tobacco marketing practices, as well as to pay, in perpetuity, various annual payments to the states to compensate them for some of the medical costs of caring for persons with smoking-related illnesses.
[2] In 1954 the British Doctors Study confirmed the suggestion, based on which the government issued advice that smoking and lung cancer rates were related.
By the mid-1950s, individuals in the United States began to sue the companies responsible for manufacturing and marketing cigarettes for damages related to the effects of smoking.
[5] As scientific evidence mounted in the 1980s, tobacco companies claimed contributory negligence as they asserted adverse health effects were previously unknown or lacked substantial credibility.
In the mid-1990s, more than 40 states commenced litigation against the tobacco industry, seeking monetary, equitable, and injunctive relief under various consumer-protection and antitrust laws.
Importantly, the defenses of personal responsibility that were so effective for the tobacco industry in suits by private individuals were inapplicable to the causes of action alleged by the states.
Faced with the prospect of defending multiple actions nationwide, the Majors sought a congressional remedy, primarily in the form of a national legislative settlement.
The settlement included a payment by the companies of $365.5 billion, agreement to possible Food and Drug Administration regulation under certain circumstances, and stronger warning labels and restrictions on advertising.
[17] SPMs joining the Master Settlement Agreement after this ninety-day exempt period must, instead, make annual payments based upon all of the SPM's national cigarette sales for a given year.
[17] The addition of the Subsequent Participating Manufacturers meant that nearly all of the cigarette producers in the domestic market had signed the Multistate Settlement Agreement.
If an SPM's sales volume or market share declines below the grandfathered amount, then it is not required to make any payments to the settling states.
The OPMs worried that the NPMs, both because they would not be bound by the advertising and other restrictions in the MSA and because they would not be required to make payments to the settling states, would be able to charge lower prices for their cigarettes and thus increase their market share.
As a result of these twin concerns, the OPMs and the settling states sought to have the MSA provide these other tobacco companies with incentives to join the agreement.
Most of the settling states have also voluntarily adopted "complementary" legislation to provide additional enforcement tools to compel compliance with the Model Statute.
In other words, the original allocable share release provision created an unintended loophole: it only operated as intended if the NPMs distributed their products nationally.
One commentator further explains that the calculations under the [originally enacted escrow] statutes were based on an assumption that a nonparticipating manufacturer sold cigarettes nationally.
When this was the case, the statutes functioned as intended, permitting the NPM to obtain a refund of excess amounts placed in escrow in each state.
In a memo dated September 12, 2003, Attorney General William H. Sorrell of Vermont, Chairman of the NAAG Tobacco Project, underscored the urgency of "all States taking steps to deal with the proliferation of NPM sales, including enactment of complementary legislation and allocable share legislation and consideration of other measures designed to serve the interests of the States in avoiding reductions in tobacco settlement payments."
[45] The model Contraband Statute imposes a criminal penalty on wholesalers who sell cigarettes made by NPMs who are not duly registered in the state and making full escrow payments.
[50] State governments have used the settlement money to fill budget holes, build golf courses or even subsidize the tobacco industry.
Then, beginning in 1994, led by Florida, states across the country sued big tobacco to recover public outlays for medical expenses due to smoking.
By changing the law to guarantee they would win in court, the states extorted a quarter-trillion-dollar settlement, which was passed along in higher cigarette prices.
[57]The argument the Master Settlement Agreement created a cartel of the major U.S. cigarette makers, allowing them to charge "supracompetitive" prices for their product, was rejected by the U.S. Court of Appeals for the Ninth Circuit in 2007.
[58] The appellate court concluded that the Plaintiffs had not alleged sufficient facts to show that the MSA and two related state laws violated the federal Sherman Act.
In many cases the bonds permit state and local governments to transfer the risk of declines in future master settlement agreement payments to bondholders.
In some cases, however, the bonds are backed by secondary pledges of state or local revenues, which creates what some see as a perverse incentive to support the tobacco industry, on whom they are now dependent for future payments against this debt.
[61] More recently, financial analysts began raising concerns that the rapid growth of the electronic cigarette market is accelerating the decline of $97 billion outstanding in tobacco bonds.
[64] Lawmakers in several states proposed measures to tax e-cigarettes like traditional tobacco products to offset the decline in TMSA revenue.
[65] Under the "Qualifying Act," non-signatory tobacco companies (also known as "Non-Participating Manufacturers," or "NPMs") have to pay a portion of their revenues into an escrow account.
Each NPM's payment is based on market share, and is roughly the same per-cigarette cost as the amount that OPMs must pay to abide by the MSA.
