The Original Participating Manufacturers (OPMs) agreed to several broad categories of conditions:
to restrict their advertising, sponsorship, lobbying, and litigation activities, particularly as those activities were seen as targeting youth;
to disband three specific "Tobacco-Related Organizations," and to restrict their creation and participation in trade associations;
generally to make available to the public documents the OPMs had disclosed during the discovery phase of their litigation with the settling states;
to create and fund the National Public Education Foundation, dedicated to reducing youth smoking and preventing diseases associated with smoking.[18]
to make annual payments to the settling states in perpetuity.
A section on enforcement gave jurisdiction to individual state courts to implement and enforce the term, and established a state enforcement fund ($50 million one-time payment). The participating manufacturers also paid the states' Attorney Fees.
Restrictions on youth targeting
Generally, the participating manufacturers agree not to "take any action, directly or indirectly, to target Youth within any Settling State in the advertising, promotion or marketing of Tobacco Products, or take any action the primary purpose of which is to initiate, maintain or increase the incidence of Youth smoking within any Settling State." (§III(a))
The restrictions specified included bans on outdoor billboards, advertising on transit vehicles, as well as restrictions on sports marketing, event sponsorships and promotional products.
Financial provisions
Receipts by the states
States were to receive over $206 billion over 25 years:
Up-front payments - $12.742 billion.
Annual Payments, beginning April 15, 2000 - $183.177 billion through 2025.
Strategic Contribution Fund, 2008-2017 - $8.61 billion.
National Foundation ($250 million over 10 years).
Public Education Fund (at least $1.45 billion 2000-2003).
State Enforcement Fund ($50 million, one-time payment).
National Association of Attorneys General ($1.5 billion over next 10 years).
Payments by the Participating Manufacturers (PMs)
The amount of money that the PMs are required to annually contribute to the states varies according to several factors. All payments are based primarily on the number of cigarettes sold.
For the OPMs (Original Participating Manufacturers), the payments are determined in accordance with their relative market share as of 1997. The payment amount of a particular OPM is also dictated by the "Volume Adjustment," which compares the number of cigarettes sold in each payment year to the number of cigarettes sold in 1997. If the number of cigarettes sold by an OPM in a given year is less than the number it sold in 1997, the Volume Adjustment allows that OPM to reduce its payment to the settling states. In other words, a reduction in the amount of cigarettes sold by the OPMs results in the settling states receiving less money.
The MSA sets forth specific amounts that the OPMs have agreed to pay the settling states each year. Those annual amounts are subject to a number of adjustments. The OPMs each pay a portion of the total annual payment according to each OPM's "Relative Market Share" for the preceding year.[18][19]
For the SPMs (Subsequent Participating Manufacturers), the payments are determined by their relative market share as compared to other SPMs. For the SPMs that joined the MSA within 90 days of its execution, the annual payments are determined by the number of cigarettes an SPM sells beyond the "grandfathered" volume—calculated as the higher of either the individual SPM's market share in 1998 (the year the MSA was executed) or 125% of the SPM's market share in 1997. If an SPM's sales volume or market share declines below the grandfathered amount, then it is not required to make any payments to the settling states. SPMs that failed to join the MSA within 90 days of its execution do not receive the benefit of any grandfathered amount.
Both exempt and non-exempt SPMs' annual payment obligations under the MSA are "calculated on the basis of the percentage of the four original participating manufacturers' total domestic market share represented by the SPM[s'] domestic market share . . . . In other words, the denominator in the calculation is the total OPM market share, not the total OPM and SPM market share."[20] Furthermore, the parties agree that the amount the SPMs pay per cigarette is roughly the same as the per-cigarette amount that the OPMs pay under the MSA. To the extent the amount differs, the OPMs pay slightly more than the SPMs on a per cigarette basis.[17]
Escrow account
The payments from all the PMs are deposited into an escrow account until disbursement to the settling states.
The MSA includes a model escrow (or qualifying) act and provides strong incentives for settling states to adopt it.[21] "[A] Qualifying Statute . . . is one that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-a-vis Nonparticipating Manufacturers within the state."[22]
The MSA encouraged settling states to adopt the model escrow act by providing that a settling state's allocated payment—that is, the portion of the annual MSA payment that a particular state receives in a given year—could be reduced by applying a non-participating manufacturers ("NPM") adjustment. That adjustment lowers a state's allocated share of the annual MSA payment if the OPMs lose market share to NPMs and if "a nationally recognized firm of economic consultants" determines that the MSA was "a significant factor contributing to the Market Share Loss for the year in question." The NPM adjustment does not apply to any state that has enacted and has in "full force and effect" a "qualifying" or model escrow statute. All settling states have enacted qualifying statutes.[23]
The escrow statute is premised on the legislative finding that, in light of the MSA settling the states' claims against the major cigarette manufacturers, t would be contrary to the policy of the State if tobacco product manufacturers who determine not to enter into such a settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the State will have an eventual source of recovery from them if they are proven to have acted culpably. It is thus in the interest of the State to require that such manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such manufacturers from deriving large, short-term profits and then becoming judgment-proof before liability may arise.[24][25]
In light of that, the model escrow statute requires an NPM selling cigarettes in [*1122] a given state to do one of two things: 1) join the MSA, agreeing to "become a participating manufacturer (as that term is defined in section II(jj) of the [MSA]) and generally perform its financial obligations under the [MSA]," or 2) make similar annual payments into the state's escrow fund.[26] An NPM's annual escrow payments in a particular state are calculated by multiplying a per-cigarette amount, established by the state's legislature and set forth in the statute, by the number of cigarettes the NPM sold in that state in the year for which payment is being made.[27] The parties agree that this per-cigarette amount is roughly equivalent to the per-cigarette amount the MSA requires from OPMs and SPMs for sales which are not exempt. To the extent it differs, the OPMs pay slightly more than the SPMs, which pay slightly more than the NPMs.[28]
The escrow statute specifically requires that the NPM place into a qualified escrow fund by April 15 of the year following the year in question the following amounts (as such amounts are adjusted for inflation)—
(A) 1999: $.0094241 per unit sold after the effective date of this act;
(B) 2000: $.0104712 per unit sold;
(C) for each of 2001 and 2002: $.0136125 per unit sold;
(D) for each of 2003 through 2006: $.0167539 per unit sold;
(E) for each of 2007 and each year thereafter: $.0188482 per unit sold.[29]
Allocable share
Each state receives a payment equal to its "Allocable Share," a percentage of the funds held in escrow that has been agreed upon by the settling states and memorialized in the MSA. This "Allocable Share" (as measured by a percentage of the total funds in escrow) does not vary according to how many cigarettes are sold in a particular state in a given year.
During the drafting of the MSA, the OPMs and the settling states contemplated that many of the smaller tobacco companies would choose not to join the MSA. This failure to join posed a potential problem for both the OPMs and the settling states. The OPMs worried that the NPMs, both because they would not be bound by the advertising and other restrictions in the MSA and because they would not be required to make payments to the settling states, would be able to charge lower prices for their cigarettes and thus increase their market share.
NPMs
Although the settling states' motivation was different from that of the OPMs, these states also were concerned about the effect of the tobacco companies that refused to join the MSA. The settling states worried that the NPMs would be able to regulate their sales so as to stay afloat financially while at the same time being effectively judgment-proof. As a result of these twin concerns, the OPMs and the settling states sought to have the MSA provide these other tobacco companies with incentives to join the agreement.
One such incentive, called the NPM Adjustment, provides that the payments by the PMs to the settling states may be adjusted according to the "NPM Adjustment Percentage." According to this provision, if a nationally recognized firm of economic consultants determines that the PMs have lost market share as a result of compliance with the MSA, the PMs' required payments to the settling states will be reduced to account for the loss. The NPM Adjustment therefore gives the settling states an incentive to protect the market dominance of the PMs, because [*551] otherwise the settling states themselves will receive less funds. The MSA also provides a safe harbor from the NPM Adjustment if a settling state "diligently enforces" the provision of a Model Statute atached to the MSA and enacted by all of the settling states.
Most of the settling states have also voluntarilly adopted "complementary" legislation to provide additional enforcement tools to compel compliance with the Model Statute.
Allocable Share Release Repeal
The original escrow statutes provided that NPM payments would remain in escrow for 25 years, but authorized an early release of any escrow amount which was greater than the allocable share which that state would have received if the NPM had been an SPM.[30] The originally enacted escrow statutes permitted an NPM to obtain a refund of the amount the NPM paid into the escrow fund to the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the State's allocable share of the total payments that such manufacturer would have been required to make in that year under the [MSA] . . . had it been a participating manufacturer.[31] This "Allocable Share Release Provision" was intended to create substantial equivalence between the escrow obligation of NPMs under the escrow statutes and the amounts the NPMs would have paid if they had they joined the MSA.[32]
The settling states agreed to divide the annual MSA payment among themselves according to each state's preset allocable share, rather than according to the volume of sales made in a particular state in a given year.[33] An NPM's payments into a state's escrow fund, on the other hand, were dependent on the number of cigarettes that the NPM sold in that state in a given year. Nevertheless, the originally enacted escrow statute based any refund of those escrowed funds payments on that state's allocable share of the national MSA payment. This refund provision, then, assumed an NPM would sell its cigarettes nationally.[34][35]
If an NPM made the bulk of its sales in a few states, however, it could obtain a refund of those escrow payments in excess of what it would have paid each of those States had it been an SPM. For example, an NPM which made 50 per cent of its sales in Kansas (which has a relatively low allocable share) would obtain a release from its Kansas escrow fund of more than 49 per cent of its full escrow payment. In other words, the original allocable share release provision created an unintended loophole: it only operated as intended if the NPMs distributed their products nationally. In that circumstance, the NPMs' total escrow obligations to all states with similar tobacco statutes approximately totaled the payments those NPMs would have made under the MSA. If an NPM concentrated its sales in a few state with low allocable share percentages, however, the NPM could obtain a refund of much of its escrow payments. Because the Kansas percentage was so low—roughly 0.8 per cent—NPMs concentrated their sales within Kansas and a few other states to receive immediate escrow refunds from those states.
Rather than selling cigarettes nationally, several NPMs instead concentrated their sales in just a few states. Because the originally enacted escrow statute refunded escrow funds to the extent those funds exceeded each state's "allocable share" of the national MSA payment, NPMs were able to obtain refunds of most of the monies they had paid into a state's escrow fund. To illustrate, if an NPM only sold cigarettes in Kansas in 2006, the Kansas escrow statute would require that NPM to pay into the Kansas escrow fund $.0167539 for each cigarette the NPM sold in that state.[36] Pursuant to the refund provision in the originally enacted Kansas escrow statute, however, the NPM could obtain a refund of all but .8336712% of those payments.
One commentator further explains that the calculations under the [originally enacted escrow] statutes were based on an assumption that a nonparticipating manufacturer sold cigarettes nationally. When this was the case, the statutes functioned as intended, permitting the NPM to obtain a refund of excess amounts placed in escrow in each state. However, when an NPM followed a regional sales strategy, as several did, the original escrow statutes allowed the NPM to obtain a refund that was much larger than intended.[37]
To close this loophole, in late 2002, the National Association of Attorneys General ("NAAG") introduced the Allocable Share Release Repealer ("ASR Repealer"), a model statute which eliminated the ASR. In a memo dated September 12, 2003, Attorney General William H. Sorrell of Vermont, Chairman of the NAAG Tobacco Project, underscored the urgency of "all States taking steps to deal with the proliferation of NPM sales, including enactment of complementary legislation and allocable share legislation and consideration of other measures designed to serve the interests of the States in avoiding reductions in tobacco settlement payments." He stressed that "NPM sales anywhere in the country hurt all States," that NPM sales in any state reduce payments to every other State," and that "[a]ll States have an interest in reducing NPM sales in every State."[38]
The "Allocable Share Release Repeal" ("ASR Repeal") revised the originally enacted escrow statute's refund calculation to remove the reference to the enacting state's "allocable share" of the annual MSA payments. HN2The amended statute, therefore, now provides that an NPM will be entitled to a refund[t]o the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow, based on units sold in the state . . . in a particular year, was greater than the [MSA] payments, as determined pursuant to section IX(i) of that agreement including, after final determination of all adjustments, that such manufacturer would have been required to make based on such units sold had it been a participating manufacturer, the excess shall be released from escrow and revert to such tobacco product manufacturer.[39]
Thus, an NPM still has to pay annually into a state's escrow fund an amount calculated by multiplying the number of cigarettes the NPM sells in that state during the year in question by the same per-cigarette amount for that year as set forth in the state's escrow statute. The NPM can obtain a refund to the extent those escrowed funds are greater than the amount that the NPM would have had to pay under the MSA for that same year, based upon that same number of cigarettes sold.
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