Feature Article

On April 19, the State of Ohio sued R.J. Reynolds and Lorillard Tobacco Corp. in order to compel payments due under the 1998 Master Settlement Agreement (MSA). Under the MSA, the cigarette manufacturers had agreed to make annual payments to Ohio and the other states that signed the agreement ("settling states").

This year, R.J. Reynolds and Lorillard withheld approximately $38 million in required payments due to the State of Ohio under the MSA. They also reduced their payments proportionally to the other settling states.

The cigarette companies are claiming that they are entitled to reduce their payments under Section IX of the MSA. According to that section, cigarette companies that signed the MSA may reduce their payments to a state if they meet a three-part test. They must establish that (a) they have lost a certain amount of market share to Non-Participating Manufacturers (NPMs) who were not parties to the agreement, (b) the MSA was a "significant factor" in the loss of market share, and (c) the state did not "diligently enforce" a requirement that NPMs make escrow payments to the state comparable to what they would have had to pay had they been parties to the agreement.

In March, an arbitrator ruled that the parties to the agreement had lost market share to the NPMs and that the MSA had been a "significant factor" to the loss of market share. However, R.J. Reynolds and Lorillard have not shown that Ohio has failed to "diligently enforce" its law with respect to NPMs. If Ohio can show that it has diligently enforced its escrow law, it will recover the withheld funds (with interest). However, it may be months or years until that occurs.

The legislature could pressure R.J. Reynolds and Lorillard to make their full MSA payment by proposing an increase in the state's cigarette tax to make up for the amount withheld. A cigarette tax increase of less than 10 cents per pack would be required to make up the differential. Such action could deter the cigarette companies from making a dispute over the NPM adjustment a yearly affair.

For more information on this case, click here.