Cigarette Settlement Still Smoldering
A brief history of the tobacco Master Settlement Agreement
Although the tobacco Master Settlement Agreement (MSA) was settled more than a decade ago, aspects of it are still the subject of legislation and an initiative petition in Missouri. Senate Bill 629 and provisions in the initiative petition dealing with tobacco taxes both include provisions meant to address the continuing battle between cigarette manufactures that participate in the MSA and those that do not. In order to have a better understanding of the legislation, it is beneficial to know a little bit about the history of the MSA and its evolution through the years.
In the 1950s, medical journals began to link smoking cigarettes to lung cancer and heart disease. Over the next forty years, more than 800 private claims were brought against the tobacco companies in state courts across the country. In the mid-1990s, over 40 states commenced litigation against the tobacco industry seeking damages linked to the negative health aspects of smoking.
The tobacco manufactures began to realize that they were going to have to defend multiple actions across the county. Faced with this prospect, in 1997 they sought to address the issue through a national settlement enacted by congress. While the proposed legislation was being discussed, four states (Mississippi, Florida, Texas, and Minnesota) settled lawsuits with the tobacco industry. In November of 1998, the Attorneys General of 46 states signed the MSA with the four largest tobacco companies in the United States to settle state suits, recovering billions of dollars in costs associated with treating smoking-related illnesses. The four original participating manufacturers (OPMs) were Phillip Morris USA, R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corp. and Lorillard Tobacco Company. In 1997, these four companies controlled more than 97% of the domestic cigarette market. Since 1998, many other tobacco companies have signed the MSA. These manufactures are considered Subsequent Participating Manufacturers (SPMs) and are subject to the provisions of the MSA.
The MSA created a broad array of restrictions on the advertising, marketing and promotion of cigarettes. It prohibits the targeting of youth and the use of cartoons in cigarette advertising. It also includes prohibitions on outdoor advertising of cigarettes, the advertising of cigarettes in public transit facilities, and the use of cigarette brand names on merchandise. It prohibits tobacco brand name sponsorship of concerts and events where the participants are less than 18. Additionally, it prevents tobacco advertising for football, baseball, soccer, or hockey.
In addition to the advertising restrictions, the agreement also includes a call for payments to states totaling $206 billion paid over 25 years. The amount is subject to adjustments for inflation, volume of cigarettes sold in each state, and an adjustment that accounts for the gain of market share by non-participating manufacturer (NPMs). The OPMs and SPMs deposit money into a national escrow account from which payments are distributed to the states. This distribution is based on a state’s “allocable share”. It is a percentage of the funds held in escrow that has been agreed to by the states in the MSA and is meant to reflect each state’s population-weighted smoking prevalence, combined with each state’s relative Medicaid costs, at the time of the settlement. This “allocable share” does not vary based upon the number of cigarettes sold in a state in a given year. Missouri’s allocation is 2.2746011 percent of the total to be paid to the states.
Through 2011, Missouri has received $1,833,893,582 from tobacco settlement receipts. The monies are divided into two funds. Seventy-five percent of the money goes into the Healthy Families Trust Fund and 25 percent goes to the Life Science Research Trust Fund.
Drafters of the MSA also included a provision that required states to adopt model statutory language that would include a per-pack fee on NPMs, to be placed in an escrow account. This provision was meant to protect the market share of the participating manufacturers. Because the NPMs were not subject to the rules and payments included in the MSA, the model legislation was meant to force the NPMs to place in escrow an amount per cigarette similar to the amount being paid by the OPMs and SPMs to account for the price advantage they might have. The model legislation has been passed by all 46 states subject to the MSA. The provisions of the model statute were included in House Bill 814, which was passed in Missouri in 1999. The Missouri version of the model statute can be found in Chapter 196, sections 196.1000 and 196.1003 of the revised statutes.
The NPM statute includes a provision that allows for a refund if the NPM pays into escrow an amount in excess of the state’s allocable share. The refund provision was based on an assumption that a manufacturers product would be sold nationally. However, if a company sells in only a few states, its percentage of sales to a particular state may be higher than the states allocable share, and as a result, a refund could be triggered. In 2002, the National Association of Attorneys General introduced a new model statute to account for this situation. Although the MSA does not require it, legislation addressing this issue has been passed in every state except Missouri. Legislation has been introduced here in the past and again this year (SB 629). Language concerning the issue is also included in the cigarette tax initative petition.
The most recent change in the law impacting the MSA in Missouri was in 2010, when SB 884 was passed. The proposal put in place a provision that requires tobacco manufacturers that sell cigarettes in Missouri to report and certify that they are in compliance with the model statute in sections 196.1000 and 196.1003, RSMo. These provisions can be found in Sections 196.1020 to 196.1035. It also calls for the NPMs to report the number of cigarettes they sell. The Department of Revenue was also directed to provide a list of all certified manufacturers on its website. The list is referred to as the Missouri Tobacco Directory. Only cigarettes from those certified and listed may be sold or possessed in Missouri.