AG Files In State Court To Enforce Tobacco Settlement

April 19, 2006

Attorney General Steve Rowe today filed court papers against the nation's major tobacco companies asking the Kennebec County Superior Court to find that Maine diligently enforced the laws it passed under the 1998 tobacco settlement agreement and that it is entitled to its full annual payment of approximately $50 million. Some tobacco companies withheld approximately 18% of payments due and disbursed to the states this week. Maine received almost $44.5 million from the companies this week.

The companies claim that their withholding is based on the so-called Non-Participating Manufacturers (NPM) adjustment and last month's determination by an economic firm that the settlement agreement was a significant factor in the 2003 loss in market share experienced by cigarette manufacturers that joined the settlement agreement. The State contends that it is entitled to its full annual payment because it has diligently enforced laws requiring cigarette manufacturers that did not participate in the settlement to pay into escrow accounts.

Attorney General Rowe said, "The story of Maine's work on the tobacco settlement is a true success story, and we're anxious to tell the court about it and get our share of the money back. Maine has an impeccable record of upholding our end of the settlement agreement. Our enforcement has been more than diligent; it has been dogged and determined. In addition, the Maine Legislature responsibly allocated the money for health purposes, and Maine schools and communities have created strong partnerships that will have lasting public health benefits for Maine people."

Maine's success in tobacco prevention efforts was cited in today's court filing, authored by Assistant Attorneys General Peter LaFond and Christopher Taub: "Each year, the American Lung Association (the "ALA") evaluates each state on its efforts to protect the public from the hazards of tobacco products. In 2005, Maine became the first state ever to receive straight "As" in all of the ALA's categories."

Background info on the Non-Participating Manufacturer (NPM) Adjustment:

Under the Master Settlement Agreement (MSA) reached in 1998 between states and the "participating manufacturers" (now principally Philip Morris USA, Reynolds American, and Lorillard, plus many smaller companies), the participating manufacturers are required to make annual payments to the states in perpetuity. But payments are potentially subject to certain adjustments that can increase or decrease total payments, including the "NPM Adjustment."

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. That is the provision under which Reynolds and Lorillard are withholding a share of their payments, and others (including Philip Morris USA) are disputing their payment amounts even though they paid in full.

However, the MSA also provides that no state's payment may be reduced if the state is found to have "diligently enforced" a state statute that requires other companies that did not sign the agreement (NPMs) to make payments as well. NPM payments go into an escrow account, based on tobacco sales, in approximately the same amount per cigarette as the payments required of participating manufacturers.

The rationale for state statutes requiring escrow payments by non-participating manufacturers is that companies who sell tobacco products but are not part of the MSA may not be around when the harmful health effects of their tobacco products appear. The funds in escrow would be available to meet potential legal obligations the companies could face later. (If there is no legal action or settlement or judgment against an NPM after 25 years, the escrow funds could be returned to the company.)