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.
