ANALYSTS: TOBACCO LEGAL CHALLENGES UNLIKELY TO
SUCCEED
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.
06/04/2004
About Dr. Abrams
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