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Attorney General Baker Files Suit Against Thirty-One Tobacco Companies

PRESS ADVISORY

Attorney General Baker Files Suit Against Thirty-One Tobacco Companies

May 4, 2006

Attorney General Thurbert Baker filed suit this morning in Fulton County Superior Court against thirty-one of the nation's tobacco companies, charging that they had not complied with the settlement agreement reached between the State of Georgia and the tobacco companies in a 1998 nationwide settlement. The lawsuit contends that the companies illegally withheld at least $19 million in monies owed to Georgia under the settlement agreement, with a threat from some of the companies that future amounts due under the settlement could be withheld. The 1998 settlement agreement reached between 46 states and the nation's major tobacco companies provided for the payment of damages to the participating states for the increased cost of providing healthcare for smokers through government-funded health plans, such as Georgia's Medicaid system. The agreement also placed strict limits on the ability of the tobacco companies to market their products, especially in advertising geared towards or likely to impact minors. Those provisions, which have led to a significant reduction in the incidence of underage smoking, are not at issue in today's litigation.

The controversy concerns a provision of the 1998 settlement agreement that set up a system to ensure that tobacco companies who entered into a settlement agreement with the states were not placed at a competitive disadvantage with companies who did not enter into the MSA agreement with the states to pay for healthcare cost-related damages. The MSA provides that tobacco companies who settle with the states pay approximately $0.40 per pack in damages to the states, which is then divided among the states based on the size of the state's population and the relative costs of healthcare in that particular state. Companies that do not enter into a settlement with the states (known as non-participating manufacturers, or NPMs) are required under state law to instead place an amount equal to $0.40 per pack into an escrow account. If at some time in the future, the NPM's market share becomes a significant enough factor in the market to justify the litigation costs associated with bringing an action based on the healthcare cost damages incurred by the states, the states can bring an action claiming damages against the money held in escrow for that particular NPM.

To ensure that the agreement was enforced against the NPMs, the participating tobacco companies could claim a reduced payment amount if it was found that: 1) the participating tobacco companies had lost market share to the NPMs; 2) the provisions of the MSA were a "significant factor" in that loss of market share; and 3) the states had not diligently enforced their NPM statutes. An independent arbitrator found in March that the tobacco companies had lost market share to the NPMs for calendar year 2003. (The market share loss at issue in the April 2006 payment is for the relative market share of the tobacco companies for calendar year 2003.) That arbitrator also found that, although a major portion of that loss of market share was due to the participating manufacturers raising their prices for reasons outside of the MSA, the MSA did have some impact on the loss of market share by the participating manufacturers. However, no determination has been made against any of the participating states that they have failed to diligently enforce their escrow statutes, which makes the withholding of any funds due under the MSA illegal.

Today's complaint states that certain tobacco companies, most significantly RJ Reynolds Tobacco and Lorillard Tobacco, withheld a significant portion of their April 2006 payment due the states under the 1998 settlement agreement. Instead, those companies placed a portion of the monies payable to the states in a disputed payment account with a 3rd party agent, claiming that they were entitled to reduce the amount payable to the states because of the loss of market share by the major tobacco companies to smaller tobacco companies that did not originally enter nor subsequently enter into the 1998 Master Settlement Agreement (MSA) with the states. Other defendants in the lawsuit, most significantly Phillip Morris USA, paid the full amount due to the states under the MSA, but in doing so those defendants claimed a right to offset future payments owed to the states for the 2003 market share loss. Finally, other, smaller participating manufactures completely withheld monies due in April 2006, failing to even pay those monies into a disputed payment account.

Attorney General Baker, in announcing the litigation, stated that the tobacco companies "had no legal or contractual right to reduce their payments to Georgia." He went on to point out that a large portion of the loss of market share was due to the tobacco companies "raising the price for their cigarettes beyond any price increase rationally related to the payment of damages under the 1998 settlement agreement."

The total amount wrongfully withheld from Georgia for the April 2006 payment was $19,717,189.00. Of that amount, over 81% was payable by RJ Reynolds Tobacco (which includes the amounts due from both the original RJ Reynolds company and Brown & Williamson Tobacco, which merged with RJ Reynolds subsequent to the 1998 MSA). Over 13% of that amount reflected the withholding from Lorillard Tobacco, and the remaining withheld amount was due from the smaller participating manufacturers. The amount wrongfully withheld would have been significantly larger had Phillip Morris USA not made its full payment, as Phillip Morris USA accounted for approximately 52% of the April 2006 payment due under the MSA. Georgia received $141,843,640.97 from the tobacco companies in the April 2006 payment, but Georgia should have received over $160 million if certain tobacco companies had not wrongfully withheld a portion of their payments.

Today's complaint seeks an enforcement order from the Fulton County Superior Court requiring the full payment of all funds, plus interest, owed to Georgia in April 2006. The complaint also seeks a determination from the court that Georgia has diligently enforced its NPM escrow statute, which would prevent Phillip Morris USA and other participating manufacturers from illegally withholding funds in future payments based on the loss of market share in calendar year 2003.

By the end of this week, at least 26 states will have filed suit against the tobacco companies based on the illegal withholding of settlement payments due under the Master Settlement Agreement. Other states are expected to file their lawsuits in the coming weeks.