Lawsuits challenging the tobacco industry remain small in threat, but loom large in the public’s eye. This was the prevailing view of various analysts and industry representatives who attended the recent annual meeting of the Tobacco Merchant’s Association.
While analysts often disagree on the direction of markets, they substantially agreed that the current spate of legal challenges, including the Department of Justice and Freedom Holdings cases, are unlikely to succeed.
The Department of Justice suit against the tobacco industry has been reduced to conspiracy charges under federal racketeering statutes, which present a formidable hurdle for federal prosecutors to overcome. According to conference participants, the recent refusal by the presiding federal judge to eliminate “disgorgement” of past “illegally gotten gains” is unlikely to be upheld upon review.
The Freedom Holdings case, a challenge to New York’s legislation for the Master Settlement Agreement (MSA), is also ultimately expected to fail. Joe Ressler, Pennsylvania’s Assistant Attorney General, noted that the MSA was a broader agreement reached between the major tobacco companies and the states than is portrayed by the plaintiffs in the Freedom Holdings Case. The MSA was, at its heart, an attempt to restrict tobacco marketing activities, support public health initiatives and reimburse participating states and territories for previously expended public health monies related to tobacco use.
Plaintiffs in Freedom Holdings have accused New York State of using the MSA to create a cartel made up of the tobacco industry’s biggest players for the purpose of discouraging price competition from smaller manufacturers. Industry representatives at the conference averred that the MSA has actually had the opposite effect. In fact, the “Big Four” tobacco companies now account for an estimated 85% of sales, down from 97% at the time the MSA was signed.
Subsequent to the conference, Judge Alvin Hellerstein appeared to make the same point during a hearing June 2 on the case.
Judge Hellerstein said it would be difficult to find that New York statutes, written to implement the 1999 MSA, have caused small tobacco companies to suffer irreparable damages.
We believe the evidence strongly supports New York’s position in this case and the state and MSA should be vindicated by the time the trial and all appeals are concluded.
Beyond legal wrangling, a number of topics of interest specific to industry players were covered. Further thoughts from the conference included:
Federal regulation of the tobacco industry (favored by some, but not all tobacco producers) is not likely until after the November election.
The market share of the “Big Four” tobacco companies has stabilized over the last year, even as the total market for cigarettes has decreased.
Continuing state efforts to step up enforcement of the MSA will ultimately succeed, despite attempts by non-compliant manufacturers to challenge it in court.
Cigarette makers are undervalued by Wall Street as a group because of ongoing litigation.
Our final observation from this year’s conference is that despite ongoing difficulties, the tobacco industry continues to generate strong cash flow and has remained committed to its obligations under the MSA. Market size and relative shipment volumes of various manufacturers will remain the most significant factor for tobacco settlement bond credit quality.