Tuesday, March 28, 2006

Arbitrator Rules that Big Tobacco Market Share Reductions are Due to MSA; Paves Way for Reduction in Payments to States

An independent economics firm hired under the terms of the Master Settlement Agreement (MSA) today released its conclusion that the reduction in market share of the participating manufacturers in the 1998 contract between 46 states and the major tobacco companies was attributable to requirements on those manufacturers imposed by the MSA.

This ruling opens the door to the companies withholding approximately $1.2 billion of payments scheduled to be made to the states under the MSA - an action that could throw state budgets into turmoil since it was not anticipated or accounted for in state budget preparations.

Under a little-noticed adjustment provision, hidden in the fine print of the MSA, the participating tobacco companies may reduce their payments to the states if market shares of their brands (compared to those of non-participating manufacturers) fall below a certain level and an independent economic board finds that these market share declines are attributable to requirements on the participating manufacturers posed by the MSA. The reduction in payments is to be borne by those states which have failed to enact and diligently enforce statutes which require payments from non-participating manufacturers.

The market share of the participating manufacturers fell below the threshold that triggers invocation of the non-participating manufacturers' (NPM) adjustment provision two years ago. Now that the independent economics firm hired under the provisions of the MSA has decided that the loss of market share by the major manufacturers was indeed significantly attributable to the MSA, the only thing necessary for the companies to reduce the scheduled payments is to show that the states (or certain states) have not been diligent in their efforts to enforce the requisite requirements "placed" by the MSA on non-participating manufacturers.

Although the states are apparently prepared to argue that they have indeed diligently enforced the requirements and have threatened to file litigation if their expected payments are reduced, the loss of these revenues will still throw their budgets into turmoil, as it would take successful litigation (which could take a long time) for them to retrieve the revenues should the companies decide to withhold the $1.2 billion.

For this reason, there is speculation that a "settlement" will be negotiated between the Attorneys General and major tobacco companies to resolve this issue.

The Rest of the Story

I have already provided a detailed commentary on this issue. Here, I will just reinforce how much these events demonstrate that the MSA is basically a protection racket by which the states and major tobacco companies have partnered to protect tobacco company profits from competition by smaller non-participating manufacturers, who would otherwise have a potential advantage by virtue of their not signing the MSA and therefore not being subject to financial burdens imposed by the agreement.

In the negotiations, which are in progress (according to the Associated Press article), the tobacco companies appear to be in the driver's seat, as they can hold the threat of economic devastation to some states over all the states in an attempt to extract an even more advantageous contract that more firmly seals the partnership between these companies and the states.

Based on the way the Attorneys General failed dismally in their original negotiation of the MSA, my money is on the tobacco companies to walk away on the big end of the stick in this round of negotiations. The Master Settlement Agreement Settlement will be firmly in the best interests of the major tobacco companies. If I were Bonnie Herzog, I would be suggesting to my clients: "Buy!"

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