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May 11, 2006

Iowa Asks Court for Order to Ensure Full Tobacco Payments

DES MOINES.   Attorney General Tom Miller filed a motion today in Polk County District Court seeking to ensure full payment by all the tobacco companies that are part of the tobacco Master Settlement Agreement (MSA).

Tobacco companies made their annual payment to the states in April, as required by the Master Settlement Agreement reached in 1998 between the states and tobacco companies -- but R.J. Reynolds and Lorillard and several smaller companies paid a portion of their payments into a disputed-payment account. Other companies, including Philip Morris, made full payment, but also assert they are entitled to adjustments to pay less.

"We are entitled to full payment under the agreement," Miller said. "We filed the enforcement action to be sure we receive the money the tobacco companies owe the states."

Miller said that in order to reduce their payments, MSA tobacco manufacturers must show that states failed to enforce state laws that require other cigarette makers to pay into escrow accounts, even if they aren't a party to the MSA.

"We have diligently enforced our statute, and we are asking the court to find that we have done so," Miller said. "Then we will ask the court to order companies to pay in full who paid into a disputed-payment account, and to dismiss claims of other companies that they are entitled to pay less." The legal action names Reynolds, Lorillard, Philip Morris, and 28 much smaller companies.

Reynolds and Lorillard paid about $755 million of their overall payment into a disputed-payment accounts. Philip Morris USA made its full payment -- but has claimed it is entitled to reduce payments. The states received a total of over $5.7 billion from the companies for the April 17 payment, bringing the total paid under the MSA to over $47 billion since 1998. Iowa's share of payments so far under the MSA is about $406 million, including over $47 million paid in April. For Iowa, about $1.5 million of the money the companies paid into the disputed-payment account in April otherwise would have gone to the State of Iowa.

Miller said that if the legal action is successful and enforcement orders are entered, the state will receive its full payments plus interest. All 46 states that participate in the Master Settlement Agreement are expected to file or already have filed similar legal actions.

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The "NPM" or Non-Participating Manufacturer Adjustment:

Under the Master Settlement Agreement 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 paid a portion into a disputed payment account, and others (including Philip Morris USA) are disputing their payment amounts even though they paid in full.

However, Miller said, 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 (Non-Participating Manufacturers, or 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.

"There should be no NPM adjustment at all," Miller said. "We have diligently enforced our statute, and our lawsuit filed today is designed to show that. We believe the companies that paid into disputed-payment accounts ultimately will be required to make full payment, plus interest, when these issues are finally adjudicated, and other companies also will be denied an NPM adjustment."

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 in, say, 20-25 years, when the harmful health effects of their tobacco products typically might 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.)

Smoking is declining under the Master Settlement Agreement:

"The states collectively received over $5.7 billion this time in MSA payments," Miller said, "but I want to emphasize that the MSA is primarily a public health agreement. It has strong prohibitions on many forms of advertising, promotion and marketing of cigarettes by the participating manufacturers, and it has led to reduced smoking."

Miller noted that since the MSA was executed in 1998, cigarette sales in the U.S. have dropped by more than 21 percent. The number of cigarettes sold in the U.S. in 2005 was the lowest since 1951 (even though the U.S. population doubled), and per-capita cigarette consumption in the U.S. is at its lowest level since the 1930s.

A decline in cigarette sales - one of the goals of the MSA - also results in a reduction in revenues under the MSA. But Miller said the States believe the public health gains resulting from reduced smoking more than compensate for any volume-based reduction in MSA payments.

Miller emphasized that the payments now withheld or disputed by the tobacco companies are not related to the overall decline in cigarette sales, but rather are related to allegations that companies outside the MSA had increased their share of the U.S. market at the expense of the MSA companies because of the MSA - and because states have not diligently enforced "model statutes" requiring escrow payments. Many states are going to court to get a declaration that they in fact have diligently enforced their statutes and are entitled to full payments from all the MSA tobacco companies.


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