RJR Still Disputes MSA Obligation

Source from:  Winston-Salem (NC) Journal 04/17/2009

R.J. Reynolds Tobacco Co. continued yesterday its dispute over annual payment obligations to the Master Settlement Agreement by withholding 19 percent of the amount due from 2008. But instead of placing the $406.5 million in a special escrow account, as it has since 2003, Reynolds kept the money as permitted by the agreement. The company's total payment obligation was $2.14 billion, of which it paid $1.73 billion, according to David Howard, a company spokesman. Retaining the $406.5 million "gives us more working capital for business purposes," Howard said. Yesterday was the annual filing deadline for participants in the landmark agreement. Philip Morris USA said it made a payment of $4 billion, while General Tobacco Co. of Mayodan said it made a $73.9 million payment. The agreement, reached in 1998, sets marketing limits on the companies and requires payments to states. Reynolds and other major tobacco manufacturers say that a provision in the agreement allows cigarette-makers to pay less if they have lost market share to smaller companies that weren't part of the deal. An independent economic-consulting company has ruled that the agreement was a "significant factor" contributing to the loss of market share for all the major manufacturers in 2003 through 2006. Martin Holton III, the general counsel for R.J. Reynolds, has said that the company believes that the payment disputes "should be resolved through binding arbitration before a single panel of three former federal judges." Howard said that such an arbitration hearing on the disputed 2003 escrow money is expected to be held later this year. The states agreed to the arbitration in exchange for Reynolds releasing $431 million from the escrow account that represented the disputed amount for 2005. The company has about $1.2 billion in escrow accounts for 2003, 2004 and 2006. Reynolds has made about $22.3 billion in MSA payments since the agreement was signed. By comparison, Philip Morris said it has paid more than $47 billion to the states through the MSA and prior agreements. Smaller cigarette-makers emerged because of the settlement and have sold cigarettes for less than the bigger cigarette-makers, grabbing significant market share. The states passed laws aimed at reducing the smaller companies' competitive advantage by forcing them to put money into escrow in case they are sued by the states. At issue in the dispute between the states and the big companies is whether the states "diligently" enforce the law. Most states have wanted their own state courts to decide the market-share dispute. In February, General and a majority of participating states in the landmark agreement, including North Carolina, reached an agreement that may give the manufacturer a better chance at weathering its financial crunch. The forbearance agreement enables General to pursue a lawsuit in California without fear of attorneys general enforcing payments related to past MSA obligations. In the lawsuit filed in December, General is requesting that a conditional agreement it has reached with the participating states in November 2007 not apply to other manufacturers. Enditem