updated 3/28/2006 3:10:37 PM ET 2006-03-28T20:10:37

States and tobacco companies appear headed toward a legal showdown over more than $1 billion the states say is owed under a 1998 agreement.

State attorneys general released the findings Tuesday of a study by an independent economic firm that found the major cigarette companies have lost market share to smaller companies that were not part of the settlement with 46 states.

The analysis by the Brattle Group found that the settlement, which set marketing restrictions on the companies and required payments to states, was a “significant factor” contributing to the loss of market share for the large companies.

That finding is one of several determinations that would be necessary for the tobacco companies to reduce their annual payments to states under the agreement.

This year’s payment of $6.5 billion is due April 17. The tobacco companies contend they should be able to reduce that by about $1.2 billion.

“We urge the companies to make their full payment on April 17,” Idaho’s attorney general, Lawrence Wasden said, in a telephone interview, “We believe that the states have good evidence to show that they have diligently enforced.”

Wasden said the companies would be entitled to a reduction only if states did not adequately enforce laws requiring cigarette makers outside the settlement to put money in escrow for future legal obligations.

The states have threatened to take legal action if the companies try to reduce their payments.

The big cigarette manufacturers say the issue should go to arbitration and that they should pay less until that process is over.

“We think it’s clear that not all states were diligently enforcing the statutes,” said Charles Blixt, general counsel for R.J. Reynolds Tobacco Co. He said that was why companies that were not part of the settlement grew as they did.

There is a lag in annual payments to the states. The money owed this year actually deals with the companies’ loss of market share in 2003. That year, the companies saw their share of the market drop to about 92 percent. Before the settlement, they had about 99 percent of the market.lo

Blixt said R.J. Reynolds had not decided whether it would pay in full when it pays the states next month.

“We’re evaluating all of our options, and we’ll make that decision by the middle of April,” he said.

Wasden, co-chairman of the tobacco committee for the National Association of Attorneys General, said there are two possible outcomes.

“One of them is litigation,” he said. “The other possibility is a negotiated answer.”

The two sides are in talks.

So far the tobacco companies have paid more than $41 billion to the states under the settlement agreement.

The manufactures who initially signed that deal and contribute virtually all the money are R.J. Reynolds, Philip Morris Cos. Inc. and Lorillard Tobacco Co.

Philip Morris declined to comment Tuesday; calls to Lorillard were not immediately returned. The three companies are coordinating on legal strategy.

The settlement has been credited with helping to reduce smoking rates. States have relied on the money for public health and education programs and other needs. For example, states and local governments that have had budget problems have issued billions in bonds backed by upcoming settlement payments.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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