ARBITRATOR SIDES WITH TOBACCO
COMPANIES IN MSA DISPUTE
A final report issued by an arbitrator yesterday upheld the claim
of major cigarette manufacturers that the Master Settlement Agreement
(MSA) was instrumental in reducing their market share, shifting
cigarette sales to smaller discount producers.
Under the MSA, tobacco manufacturers may potentially withhold a
portion of annual payments to the states as long as it is proven
that such a market share loss was caused by a lack of enforcement
of the MSA by the states. It is estimated that up to $1.2 billion
of the $6.5 billion due to be paid to the states on April 17 could
be affected.
The funds withheld will be placed in an escrow account, pending
final determination. The MSA dispute resolution provisions require
a two-year waiting period, so the arbitrator's report was based
on tobacco shipments for 2003. The specific clause upon which the
dispute was predicated is called the Non-Participating Manufacturer's
(NPM) adjustment.
The dispute now moves into court, where the tobacco manufacturers
will have to prove that the states were not diligent in their efforts
to enforce the MSA pact. In fact, the states have passed subsequent
enforcement legislation tightening up loopholes to reduce the ability
of newer, non-MSA participating manufacturers to sell cigarettes
at lower prices than the manufacturers that signed on to the MSA
and are required to price MSA payments into the price of their cigarettes.
Recent data on cigarette shipments, however, has shown a leveling
off of market share for the so-called "deep discount"
segment of the market. Stronger enforcement actions have also reduced
gray market imports, Internet sales and counterfeiting. The cigarette
manufacturers will now have to prove that these actions were insufficient
to halt their market share slide and that the states could have
done more to protect them.
Over $20 billion in bonds have been issued by states, cities, and
counties backed by proceeds of the MSA payments. If this ruling
is upheld, there may be a slow down in "turbo" payments
designed to allow tobacco settlement bonds to be retired prior to
their actual maturities. But debt service is still expected to be
paid on schedule.
Beyond the eventual resolution of this dispute, both the manufacturers
and states have a great deal at stake in seeing the MSA continue
in force. The MSA is only 8 years old and is a highly complex agreement.
Many observers believe that efforts will occur following this dispute
by both parties to institute better enforcement and reduce areas
of future disagreement.
3/29/06
About Dr. Abrams
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