For Immediate Release
Media Contact: Bob Cooper
(208) 334-4112

Date: April 25, 2006

State of Idaho Files Action to Ensure Full Tobacco Payments

(Boise) - Attorney General Lawrence Wasden filed a motion in Fourth District Court in Ada County today aimed at obtaining and ensuring full payment by all the companies that are part of the tobacco Master Settlement Agreement (MSA).

Tobacco companies made their annual payment to the states on Monday, April 17, 2006, as required by the Master Settlement Agreement reached in 1998 between the states and tobacco companies. R.J. Reynolds, Lorillard and several smaller companies deposited a portion of their payments into a disputed-payment account. Other companies made full payment but also assert they are entitled to adjustments to pay less.

“Idaho is entitled to full payment under the agreement,” Attorney General Wasden said. “We have taken this legal action to ensure that Idaho receives the money the tobacco companies owe the state.”

Wasden 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 that are not parties to the MSA to pay into escrow accounts. “Idaho has diligently enforced our statute, and we are asking the court to find that we have done so,” Wasden said. “We will then ask the court to order the companies that paid into a disputed-payments account to transfer those funds to the State of Idaho. We will also ask the court to dismiss claims made by other companies that they are entitled to reduce their payments.”

R.J. Reynolds and Lorillard placed approximately $755 million of their 2003 payment into a disputed-payments account. Approximately $2.8 million of the $23 million due to Idaho was placed in the disputed-payment accounts. Philip Morris USA made its full payment -- but has claimed it is entitled to a reduced payment. 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 more than $47 billion since 1998. Idaho has received $172 million in MSA payments since 1998.

Attorney General Wasden said that if the lawsuits are successful and enforcement orders are entered, the state would receive its full payment plus interest.

The Non-Participating Manufacturer or “NPM” 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 more than 40 smaller companies), the Participating Manufacturers are required to make annual payments to the states in perpetuity. 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 are withholding a share of their payments, and others (including Philip Morris USA) are disputing their payment amounts even though they paid in full. However, the MSA also provides that no state’s payment may be reduced if the state has “diligently enforced” a state law that requires companies that did not sign the agreement (Non-Participating Manufacturers, or NPMs) to make payments as well. NPM payments are based on sales. They go into an escrow account in approximately the same amount per cigarette as the payments required of Participating Manufacturers.

“There should be no NPM adjustment at all,” Wasden said. “We have diligently enforced our statute, and our motion and supporting documentation filed today will show that to be the case. When these issues are finally adjudicated, we believe the companies will be denied an NPM adjustment and the State of Idaho will receive the full payments due, plus interest on the funds in the disputed-payment accounts.”

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 in business in 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 more than $5.7 billion this time in MSA payments,” Wasden 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.”

Wasden 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. Youth smoking rates have also shown a dramatic decline since the MSA’s enactment.

Wasden 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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