NAAG Tobacco Project: 11 Years of MSA Coordination

Patricia Molteni, Tobacco Project Staff Attorney

Patricial Molteni, Tobacco Staff Attorney

What has 52 Attorneys General as clients devoted to regulating the tobacco industry, is involved in dozens of lawsuits against tobacco companies, monitors multi-billion dollar settlement payments and has a staff that uses terms like “PM”, “SPM”, and “NPM”? The answer is the NAAG Tobacco Project.

The Tobacco Project’s responsibilities began 11 years ago with a historic, landmark settlement known as the tobacco Master Settlement Agreement (“MSA”). This 1998 agreement was executed by 52 Attorneys General (46 state Attorneys General, the District of Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa, and the Northern Marianas, collectively called the “Settling States”) and the then four largest tobacco manufacturers in the United States (Philip Morris, Lorillard, Brown & Williamson, and R.J. Reynolds). The other four state Attorneys General entered into separate settlement agreements with the “big four.” The MSA resolved over 40 lawsuits brought by the states against tobacco manufacturers to recover billions of dollars in costs incurred by the states to treat smoking related illnesses. At the heart of this very complex agreement is a simple bargain. The “big four” companies agreed (1) to make multi-billion dollar payments, annually and in perpetuity, to the states and (2) to significantly restrict the way they market and advertise their tobacco products, including a prohibition on the use of cartoons in cigarette advertising or any other method that targets youth. In exchange for these benefits, the states agreed to release the “big four” and any other tobacco company that became a signatory to the MSA, from past and future liability arising from the health care costs caused by smoking. Individual claims against tobacco companies are unaffected by the MSA.

Significantly, the MSA expressly charges NAAG with providing “coordination and facilitation for the implementation and enforcement of this Agreement on behalf of the Attorneys General of the Settling States, including ... support[ing] and coordinat[ing] the efforts of the Attorneys General of the Settling States in carrying out their responsibilities under this Agreement.” MSA, §VIII(a). The Tobacco Project carries out these duties.

Today, about 50 tobacco manufacturers are MSA signatories (called “Participating Manufacturers” or “PMs”) and about an equal number have not signed the MSA (called “Non-Participating Manufacturers” or “NPMs”) but are regulated by the Settling States under state law. This means that the Tobacco Project has 52 Attorney General clients responsible for regulating some 100 tobacco companies. Annually, these companies sell billions of cigarettes in the United States, and these sales generate billions of dollars in liability owed to the states under the MSA and under state law.

Litigation

Tobacco Project staff spends a lot of time helping its clients litigate MSA-related issues. The MSA, unlike many settlement agreements, gives rise to considerable litigation because it is a living document—meaning that it allows for additional tobacco companies to become signatories, it contains on-going payment obligations, and it permanently enjoins PMs from certain advertising practices. For these reasons, and because the MSA was crafted with creative ambiguity and involves so much money -- over $68.3 billion in payments to the states to date—it has provided, and continues to provide, fertile ground for disputes over its interpretation and challenges to its existence. This has created significant litigation responsibilities for the Tobacco Project. Typically, the staff advises and supports the states in this litigation, but, in some instances, we represent them in court.

To date, over 20 lawsuits have been filed challenging the MSA or its related state laws on constitutional or antitrust preemption grounds. States have also filed numerous suits against PMs alleging violations of the MSA’s payment provisions or its marketing restrictions. In all of this litigation, the Project provides the states with expertise on legal and factual issues and on tactics and strategy. Typically, we review legal pleadings and coordinate a consistent legal position, and on occasion we appear as counsel for the states in court. Thus far, no suit challenging the MSA or related state laws has been successful, and most have been resolved in the states’ favor through dispositive motions. Project Attorneys Ilana Knoff and Nathan Doty work closely with states on this litigation, and Bill Lieblich, deputy chief counsel for MSA Public Health Provisions, oversees their work and has primary responsibility for such cases.

Conversely, state suits against PMs alleging MSA violations have been largely successful. We estimate that such lawsuits have resulted in recoveries to states of $277 million they would not otherwise have received.

Bankruptcy

When a tobacco manufacturer files for bankruptcy, NAAG has consistently represented the states in bankruptcy court. To date, eight such companies have filed for bankruptcy protection, and in all of these cases, Karen Cordry, NAAG Bankruptcy counsel and, since 2006, Patricia Molteni, Project attorney, have represented the states in bankruptcy court. In these cases NAAG goals include: (1) preventing the debtors from using bankruptcy law to avoid their MSA or state law payment obligations to the states and (b) to ensure that states can continue to perform their regulatory duties despite the bankruptcy filing. We are proud to say that even after filing for bankruptcy, these debtors have been required to pay states over $83 million for their tobacco sale liabilities and more payments are expected.

MSA Payment Calculations

An independent auditor, PriceWaterhouseCoopers, calculates payments due under the MSA, and how such payments are allocated among PMs and disbursed among Settling States. The Project has primary responsibility for reviewing such calculations and raising any payment issues with the independent auditor. The MSA’s payment provisions are lengthy and complex. The final amount due each year from each PM varies, but it is a function of numerous factors including the number of cigarettes sold by each PM in the previous calendar year, the PM’s cigarette market share in 1997, last year’s inflation rate, and other variables that can adjust payments upward or downward. Project Attorney Michael Hering, deputy chief counsel for MSA Payments, has primary responsibility for these duties and has increased payments to the states each year (by $1.2 million in 2008 alone) as a result of these efforts.

NPM Adjustment Dispute

Currently, the most significant litigation involving our clients is a matter known as the “2003 NPM Adjustment Dispute”. This is an arbitration proceeding involving all states and all PMs. At stake is a potential $1.15 billion reduction in the PMs’ annual payment due in 2004 but based on their 2003 sales. While the current arbitration involves only the potential adjustment based on 2003 cigarette sales, disputes exist over potential NPM Adjustments based on sales in years 2004-2008. Decisions made in the current arbitration proceeding could affect resolution of these other disputes. Taken together, the potential NPM Adjustments for years 2003 through 2008 is $5.3 billion. Although all Project attorneys work with the states to some degree on this litigation, Peter Levin, Project director and chief counsel, has primary responsibility for assisting the states on this matter.

Project Communication

The magnitude of our clients’ regulatory activity creates numerous and challenging coordination responsibilities for the Tobacco Project. To help clients communicate, the Project employs both traditional methods and new technology. Staff organizes at least two in-person meetings each year, and we host multi-state conference calls nearly every day. But most recently, we partnered with an outside company to develop software to provide our clients with a secure, Wiki-type Web site customized for the states’ use. Just like the Wiki that you may have used on the Internet, the NAAG Wiki provides a cyber workspace that allows the states to communicate directly with each other, either en masse or to a specific subgroup, without having to rely on the Project to send their message via group e-mail. It also gives our clients the ability to design their own workspace, to post documents to it, and to organize information in a way that suits them best. It removes NAAG from being an information funnel (or bottleneck) and enables the states to collaborate directly with the Project and each other. The Wiki has been up and running for about six months and, although it continues to evolve, it has greatly improved efficiency of communication and collaboration of ideas. Nathan Doty, a Project staff attorney, has been the point person for the design, implementation, and training of personnel on this system.

The Project has other duties, but the above represent the most pressing matters and consume the most time. In addition to the lawyers mentioned above, the Project also relies on three outstanding paralegals in performing its work; they are Erjona Fatusha, Albert Cahn, and Dan Ngo. Put most simply, the Tobacco Project is dedicated to assisting our Attorney General clients in enforcing the MSA and regulating the tobacco industry.

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