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Tobacco Tales, Ctd

As reported in the Wall St. Journal [$$$] RJR Reynolds and Lorillard Tobacco have now formally withheld over $750 million that the states' AG's claim is due as part of the cartel (whoops, I mean settlement) agreement signed between the tobacco manufacturers and the states.

RJR believes it doesn't have to pay the money because of a provision in the deal that allows cigarette makers to pay less if they have lost market share to smaller companies that weren't part of the settlement.

An economic-consulting firm concluded last month that the agreement, which set marketing limits on the companies and required payments to states, was a "significant factor" contributing to the loss of market share, which has fallen from 99% to 92% since the agreement was inked.

The states' attorneys general say the companies would be entitled to a reduction only if states didn't adequately enforce laws requiring cigarette makers outside the settlement to put money in escrow for future legal obligations. The AG's have behaved like good cartel (sorry, settlement) enforcers, trying to force non-settling (in most cases startup) firms to deposit the equivalent of the arranged per-pack settlement award as an interest-free advance against possible liability. But firms that market entirely in-state are apparently immune from this interstate pact, so the AG's enforcement of the arrangement has been forcibly limited. So a court battle looms about the proper interpretation of the agreement.

Philip Morris has not yet withheld any money from the states (the withheld money must be deposited into a "Disputed Payments Account", so it doesn't help the tobacconists' cash flow), and when it does, the stuff will really hit the fan.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.