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Cigarette makers, states fight over money

States contend that tobacco companies are withholding more than $700 million that is owed to them this year under a landmark legal settlement.
/ Source: The Associated Press

Tobacco companies put more than $700 million aside Monday rather than hand it over to the states in their battle over how much cigarette makers owe this year under a landmark 1998 settlement.

No. 2 cigarette maker R.J. Reynolds Tobacco Co. paid the states about $1.4 billion but withheld $647 million, putting it in a “disputed payments account,” Reynolds general counsel Charles Blixt said.

Blixt said the company was playing by the rules of the agreement. “This is the mechanism by which we withhold money,” he said.

Blixt said his company believes it does not have to pay the extra $647 million because of a provision in the deal that allows the cigarette makers to pay less if they have lost market share to smaller companies that weren’t part of the settlement.

An economic consulting firm concluded last month that the agreement, which set marketing limits on the companies and required payments to states, was a “significant factor” contributing to the loss of market share.

The states’ attorneys generals say 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 all take the position that when the dispute is finally settled we will be entitled to all the moneys placed into the Disputed Payments Account today, with interest, and we will take all necessary steps to ensure that these disputes are resolved as speedily as possible,” Connecticut Attorney General Richard Blumenthal said in a written statement.

Blixt said the cigarette makers are working together to try to resolve their disagreement with the states.

No. 3 cigarette maker Lorillard Tobacco Corp. is withholding $108 million and putting that in a disputed escrow account, Blixt said. He said Lorillard was paying the states $558 million. The payments were due Monday.

Industry leader Philip Morris USA said earlier this month it had made all of its $3.4 billion payment, but that it too believes the sum eventually should be reduced.

Philip Morris spokesman Michael Neese said the company hoped it could negotiate an agreement with the states. “We’re going to continue to strive for that resolution,” Neese said.

If the negotiations don’t lead to a resolution, Blixt said the issue should go to arbitration, in which a three-judge panel would weigh in on the matter. Blixt said the states would prefer the issue to be handled in state courts.

A spokesman for North Carolina Attorney General Roy Cooper indicated that a court battle could be looming.

“Attorney General Cooper believes that the people of North Carolina are due the full amount under the Master Settlement Agreement, and he will fight in court if necessary to see that full payments are made,” said the spokesman, William McKinney.

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.

“We’re entitled to these adjustments,” Blixt said, adding that states have become too dependent on the tobacco money for budgeting purposes. “States should not be spending money that they’re not certain that they’re going to get.”