R.J. Reynolds and Lorillard have paid their full share due under the Master Settlement Agreement (MSA) this year, bringing the total combined payments of the three top cigarette makers to $6.8 billion in 2006.
The move by Reynolds and Lorillard follow Philip Morris’s payment last week of $3.4 billion, its full obligation.
Both RJR and Lorillard placed an additional combined $755 million (11%) in escrow, as allowed by an MSA arbitrator’s report. That report indicated manufacturers could have reduced their payments this year by as much as 18%. A provision in the MSA, known as the “Non-Participating Manufacturer’s Adjustment” (NPM), allows tobacco companies to withhold part of their annual payment if it can be proved that the agreement itself caused loss of market share. The companies must also prove, on a state-by-state basis, that states did not diligently enforce the MSA. The escrowed funds will be released to the states or tobacco companies once the adequacy of each state’s enforcement action is determined.
At this point, the manufacturers and states have yet to reach agreement on how state enforcement action is measured. As a result, many states have gone to court to seek release of funds recently escrowed. Manufacturers believe resolution should come from the arbitration process. Since this is the first time since the MSA’s inception that the NPM adjustment has been contested, it is not yet clear how this issue will be ultimately resolved.
We expect the states and tobacco manufacturers to continue to cooperate in enforcing the MSA, and for an eventual joint resolution of disputes such as this one to occur. Both sides have much at stake, and the MSA provides mechanisms for differences, like this one, to be settled.