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How the MSA and Escrow
Provisions Work:
The “Big 4” tobacco companies (PM, RJR, B&W, Lorillard) were sued for fraudulent advertising. The settlement resulting from that lawsuit is the Master Settlement Agreement (MSA). Knowing it would be unconstitutional to force all tobacco manufacturers to join the settlement when they weren’t party to this tobacco litigation, Attorneys General and lawyers from the “Big 4” tobacco companies offered other manufacturers two options:
| Option 1 – |
Sign on to the MSA and be immune from any future lawsuits for fraud and deceit. Joining within 60 days after the enactment of the MSA allowed the manufacturer to receive a permanent exemption equal to 125% of the companies’ 1997 market share or 100% of their 1998 share; OR |
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| Option 2 – |
Decline to join the MSA, receive no immunity from prosecution, and establish an escrow account in each state that the company does business. (This was the sensible option for companies that only sold in a couple of states.) Although money is paid into escrow based on all cartons sold in that state, the company is required to leave in what would have been that state’s share if the company were a participant in the MSA. (This is based on KY’s 1.76% of cartons sold in any of the 46 participating states.) Escrow monies do not go to the state unless the company is sued and a judgment is rendered; otherwise they remain in the escrow account for 25 years. |
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| OPM – |
Original participating manufacturers “Big 4 / PM, RJR, B&W, Lorillard”. Their payments into the MSA vary from year-to-year based on various adjustments, but generally range from $2.50-$3.00 per carton. These payments are tax deductible resulting in a much less net cost. They are immune from any future lawsuits for the same or similar reasons. |
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| SPM(e) – |
Subsequent participating manufacturer that joined in the first 60 days received a permanent exemption (typically 125% of their 1997 market share). For 2002 sales, the average payment by an SPM with an exemption was $1.57 per carton. These payments are tax deductible. Companies are immune from future lawsuits.
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| SPM – |
Subsequent participating manufacturer that joined after the grandfather window closed. These manufacturers negotiated different deals, but in 2002 they paid ±$3.09 per carton. These payments are tax deductible. Companies are immune from future lawsuits. |
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| NPM – |
Nonparticipating manufacturer agrees to establish an escrow account in each state where that company conducts business. These escrow monies are not tax deductible, and the company actually pays taxes while it is being held for 25 years. |
History of the Master Settlement Agreement (“MSA”):
In the late 1990s, in order to head off the multiplying law suits against their respective companies, Big Tobacco negotiated settlements with each of the 50 states; the majority of states (46) executed the same settlement, known as the Master Settlement Agreement (“MSA”). (For a list of the 46 participating MSA states, as well as all cited material referred to in this text, please download the PDF file “website references and index”).
The MSA required Big Tobacco to make payments of a percentage of their sales, directly to the state governments, as overseen by the states’ Attorney General, of whom all are members of the National Association of Attorneys’ General (“NAAG”). In exchange for these direct payments of a percentage of Big Tobacco’s sales, each state agreed to prohibit future tobacco related health suits.1 In addition to the payment requirements of Big Tobacco, the MSA set forth payment requirements for small business independent tobacco companies, the NPMs, even though these businesses were entirely excluded from the MSA negotiations.2
The reasoning provided by the attorneys general and the governors for entering into the MSA was the financial benefit each state was to receive (a percentage of Big Tobacco’s sales), which was originally intended to address state health care costs for tobacco-related medical care. In addition to these substantial payments, the states also received a concession from Big Tobacco to cease certain advertising practices as well as create and fund certain anti-smoking campaigns and organizations.3
Big Tobacco’s and the MSA -- What Went Wrong (the Free Market):
After the execution of the MSA however, with the anti-smoking campaigns fully funded and in operation, Big Tobacco almost immediately sought not only recoup the money which was to be paid to the participating states, but attempted to increase its profits, by substantially and nearly immediately raising the price-per-pack of their cigarettes.4
However, the overall effect of these price increases was not what Big Tobacco foresaw or what the partners to the MSA – the state governments desired. The average consumer didn’t appreciate the skyrocketing prices which Big Tobacco had foisted upon them, and began to look elsewhere for more reasonable prices. Such reasonably priced products were and are readily available through numerous imported products as well as several independent, small NPMs across the country.
As Big Tobacco prices rapidly increased, more and more consumers sought refuge from these exorbitant prices and turned to local, independent small businesses – either NPMs, or the companies who marketed NPM products. This operation of the free market system of supply and demand, saw the increase in NPM sales steadily increased as Big Tobaccos’ sales of their overpriced product steadily decreased, the result being explicitly acknowledged and addressed in a the NAAG “Confidential” Memo of September 12th, 2003, to Attorneys’ General regarding the upswing in NPM sales -- and the directly related downturn in Big Tobacco sales:
Increasing sales by NPMs will sharply reduce the next scheduled payments to all States under the MSA and under the four separate state agreements. States should prepare for receiving lower payments than previously anticipated[. . .] These payments are net of reductions totaling about $2.5 billion caused by the Volume Adjustment applicable to all agreements. One of the principal contributors to this revenue loss is the accelerating increase in sales of cigarettes by NPMs.
In order to halt and reverse this decline of market share to the NPMs, through the substantial leverage and influence upon your elected officials, many of whom personally negotiated and/or approved and entered into the MSA, whose pay-offs have substantially declined (by more than ten percent (10%) over the last two years), your government now seek to tilt the playing field even further in favor of Big Tobacco by direct intervention in the free market, in order to raise Big Tobacco sales, as well as the directly-related annual percentage pay-out to each participating state, at the direct expense of the independent small business NPMs, some of whom may be your neighbor, friend or family member.
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