THE MULTISTATE MASTER SETTLEMENT AGREEMENT
AND THE FUTURE OF STATE AND LOCAL TOBACCO CONTROL:

An Analysis of Selected Topics and Provisions of the Multistate Master Settlement Agreement of November 23, 1998

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Prepared by: The Tobacco Control Resource Center, Inc., at Northeastern University School of Law

Edited by: Graham Kelder and Patricia Davidson

Commissioned by: The American Cancer Society

Funded by: The American Cancer Society

March 24, 1999

Contributors

Richard A. Daynard, J.D., Ph.D., is Professor of Law at Northeastern University, President of the Tobacco Control Resource Center, Chairman of the Tobacco Products Liability Project, Editor-in-Chief of the Tobacco Products Litigation Reporter, and Principal Investigator of the National Cancer Institute's "Legal Interventions to Reduce Tobacco Use." He is the author of numerous articles on tobacco control and tobacco litigation. He appears almost daily in the media discussing these issues.

Peter Enrich, J.D., is Professor of Law and Associate Dean at Northeastern University School of Law. Professor Enrich drafted Question One, the ballot initiative which funded the Massachusetts Tobacco Control Program and wrote much of the American Cancer Society's brief in support of Question One before the Massachusetts Supreme Judicial Court. Professor Enrich is an expert in state and local government law. He has published extensively, including several tobacco-related articles and papers. Professor Enrich co-authored (along with Ms. Davidson) "Local and State Regulation of Tobacco: The Effects of the Proposed National Settlement," 35 Harvard Journal on Legislation 87 (Winter 1998), and several of the TCRC Working Papers analyzing portions of the June 20, 1997 proposed tobacco settlement pertaining to state and local regulatory power.

Wendy Parmet, J.D., is Professor of Law at Northeastern University School of Law Professor Parmet has published extensively in the field of public health law, including co-authorship of articles on disability law and its application to Environmental Tobacco Smoke (ETS) [e.g., Wendy E. Parmet, Mark A. Gottlieb and Richard A. Daynard, "Accommodating Vulnerabilities to Environmental Tobacco Smoke: A Prism for understanding the ADA," 12 Journal of Law and Health 1 (1997-1998)]. Professor Parmet also authored two of the TCRC Working Papers analyzing selected provisions of the June 20, 1997 proposed tobacco settlement.

Graham Kelder, J.D., has written articles on tobacco control and tobacco litigation for the Stanford Law and Policy Review, Trial Magazine, the Journal of Social Issues, the Journal of the American Medical Women's Association. He is the co-author of An Action Plan to Protect the Health of Massachusetts Citizens and Their Children: Using Tobacco Settlement Funds to Reduce the Health and Economic Costs of Tobacco-Related Disease in the Commonwealth. He wrote two Working Papers analyzing the Hatch and McCain bills codifying the June 20, 1997 proposed national tobacco settlement. He has presented lectures at numerous tobacco control conferences across the United States. Mr. Kelder has also been quoted numerous times discussing tobacco issues in both domestic and foreign publications ranging from the American Bar Association Journal to the New York Times. He has appeared several times on National Public Radio.

Patricia Davidson, J.D. has published articles on tobacco control and litigation in Wisconsin Women's Law Journal, Harvard Journal on Legislation, and Cornell Journal of Law and Policy. Ms. Davidson also manages a team of attorneys and law professors who drafted a nine-part series of Working Papers analyzing the June 20, 1997 proposed national tobacco settlement and related legislation. She has presented workshops on tobacco advertising and state and local tobacco control to national and local audiences.

Mark Gottlieb, J.D., is a staff attorney at TCRC and co-author of Accommodating Vulnerabilities to Environmental Tobacco Smoke: A Prism for Understanding The ADA, 12 Journal of Law and Health 1 (1997), dealing with the application of the Americans with Disabilities Act to ETS.

Laura Hermer, J.D., is the co-author of An Action Plan to Protect the Health of Massachusetts Citizens and Their Children: Using Tobacco Settlement Funds to Reduce the Health and Economic Costs of Tobacco-Related Disease in the Commonwealth.

Robert Kline, J.D., is a staff attorney at TCRC and an authority on tobacco advertising issues. He has written a manual discussing legal theories that nonsmoking residents of multiple occupancy buildings may employ when affected by ETS from neighboring units. Mr. Kline is also the Director of the Tobacco Control Legal Clinic at Northeastern University School of Law. He has presented lectures at tobacco control forums across the country.

Table of Contents

EXECUTIVE SUMMARY

INTRODUCTION

PART ONE: CONSENTING OR OBJECTING TO THE MULTISTATE MASTER SETTLEMENT AGREEMENT

CHAPTER 1: Historical Background

CHAPTER 2: Consent Decrees or Judgments

CHAPTER 3: The Effect of Appeals on States That Have Consented to the Multistate Master Settlement Agreement

CHAPTER 4: The Non-Participating Manufacturer Adjustment, Qualifying Statutes, and the Model Statute in Exhibit T Of the MSA

CHAPTER 5: The Preclusive Effect of the MSA on Future Actions By State and Local Governments Against Participating Manufacturers

PART TWO: THE EFFECT OF SELECTED PROVISIONS OF THE MULTISTATE MASTER SETTLEMENT AGREEMENT

CHAPTER 6: Advertising Restrictions

CHAPTER 7: Youth Access Restrictions

CHAPTER 8: Lobbying Restrictions

CHAPTER 9: The National Foundation

PART THREE: SECURING SETTLEMENT FUNDS FOR STATE AND LOCAL TOBACCO CONTROL

CHAPTER 10: Securing Settlement Funds for State And Local Tobacco Control

Executive Summary

By Laura Hermer

E1: Historical Background

In 1994 and 1995, Mississippi, Minnesota, West Virginia and Florida filed lawsuits in state court against the tobacco industry to secure reimbursement from it for health care expenditures for ailments arising from tobacco use. They were shortly joined in their endeavor by 41 other states and two jurisdictions. A group of state attorneys general presented a tobacco settlement proposal - which purported to settle all pending class action lawsuits against the tobacco industry and all pending actions against the industry brought by states and other governmental entities - to the American public on June 20, 1997.

Because the settlement proposal needed to bind all 50 states, it had to be drafted and enacted in the form of the Congressional legislation in order to give it the force of law.¹ A number of bills - including the bipartisan effort sponsored by Senators McCain, Gorton, Breaux and Hollings - were introduced for this purpose of "convert[ing] into legislation the $ 368.5-billion national tobacco settlement announced in June."²

Many people involved in America's Multibillion-Dollar Tobacco War had high hopes for the McCain Committee bill. Senate Majority Leader Trent Lott (R-MS) had gone to McCain earlier in 1998 and asked him to craft a bill in the Commerce Committee that embodied the tobacco settlement.³ The McCain Committee bill, while not perfect in the eyes of most analysts, was stronger than the June 20^th Agreement in most respects.⁴ Among other things, the McCain Committee bill would have:

· required the tobacco industry to pay $516 billion (as compared to the June 20^th Agreement's $368.5 billion) over 25 years to help states and the federal government bear the medical costs of smoking-related illness;

· raised cigarette taxes by $1.10 per pack over five years;

· preserved the Food and Drug Administration's ability to regulate the tobacco industry in ways that the June 20^th Agreement did not;

and

· drastically reduced cigarette marketing, advertising and promotion.⁵

On April 8, 1998 - nine days after the Commerce Committee endorsed the preliminary version of the McCain Committee bill - Steven Goldstone, RJR Nabisco's CEO, angrily announced that his company was withdrawing its support of the Congressional process for developing comprehensive tobacco legislation. Blaming Congress for failing to stick to the terms of the June 20^th Agreement, Mr. Goldstone, speaking to the National Press Club in Washington, DC, declared his company's intention not to sign the consent decrees to "voluntarily" limit advertising that were part of the McCain Committee bill. Philip Morris, Brown and Williamson, U.S. Tobacco, and Lorillard made similar announcements shortly after Mr. Goldstone's speech.⁶ In the end, tobacco industry brinkmanship - when paired with a huge, industry-sponsored advertising campaign that painted the McCain Committee bill as a big "tax-and-spend" proposal - worked, and the bill died.⁷

During this time, four states - Minnesota, Mississippi, Florida and Texas - achieved individual settlements with the tobacco industry, yielding total payments of at least $35.3 billion over the next 25 years, with certain payments continuing annually thereafter in Mississippi, Florida and Texas. After the last of these settlements and after they managed to kill the McCain bill on June 17, 1998, the nation's largest tobacco companies⁸ began secretly trying to negotiate a multibillion-dollar settlement of the dozens of state lawsuits pending against the industry.⁹ The talks fell apart on several occasions. On the last weekend in August, frustrated with what he called foot-dragging by the tobacco industry, Massachusetts Attorney General Scott Harshbarger pulled out of negotiations between nine states and cigarette makers trying to reach an out-of-court national tobacco settlement. Harshbarger said he decided to walk away and focus instead on winning a potential multibillion-dollar settlement for Massachusetts in state court.¹⁰ Massachusetts' withdrawal was significant because Harshbarger's court case is considered among the strongest of those set for trial.¹¹

By early October, the Washington Post reported that the eight-state negotiating team and two of the nation's leading tobacco companies had made significant progress toward fashioning a multibillion-dollar settlement of dozens of lawsuits against the tobacco industry.¹² The meetings with lawyers from several states - including California, Colorado, New York and Washington -resulted in a deal to settle all 37 pending state cases¹³ and quiet potential claims in the remaining states.

E2: Consent Decrees or Judgments

A consent decree is generally defined as

A decree entered in an equity suit on consent of both parties; it is not properly a judicial sentence, but is in the nature of a solemn contract or agreement of the parties made under the sanction of the court, and in effect an admission by them that the decree is a just determination of their rights . . . .¹⁴

The MSA requires that each settling state seek entry of an order of dismissal of claims in the relevant court, dismissing with prejudice all claims against the Participating Manufacturers and other parties. It also requires each settling state to provide to the relevant court a copy of the MSA and a consent decree for entry conforming to the model consent decree attached to the MSA as Exhibit L. Again, this consent decree will contain the terms of the agreement between the settling state in question and the tobacco industry participants in the agreement. [MSA XIII].

Both the consent decree filed in each state and the MSA have great bearing on the enforcement of the provisions of the MSA. According to the MSA, the parties to the agreement may "apply to the Court¹⁵ to enforce the terms of the Consent Decree (or for a declaration construing any such term) with respect to alleged violations within such Settling State." [MSA Section VII(b)]. In the event that the Court determines that any Participating Manufacturer or Settling State has violated the Consent Decree within such Settling State, "the party that initiated the proceedings may request any and all relief available within such Settling State pursuant to the Consent Decree."¹⁶ [MSA Section VII(b)]. This arrangement is likely to lead to conflicting interpretations of the MSA as Courts settle conflicts within their respective states, in which case the Attorneys General, NAAG and the Participating Manufacturers are to confer together and use their "best efforts to coordinate and resolve" discrepancies which are not "exclusively local." [MSA VII(f)].

E3: The Effect of Appeals on States That Have Consented to the Multistate Master Settlement Agreement

Final approval of the MSA will occur on the sooner of two events: either (1) 80% of both the number of settling states must reach, individually, "State-Specific Finality" and those settling states must have aggregate allocable shares (as set forth in Exhibit A of the MSA) of at least 80% of the total allocable shares assigned to all settling states, or (2) June 30, 2000 must pass. [MSA II(u)]. "State-Specific Finality" occurs in an individual state when the MSA and consent decree has been approved and entered in the relevant court, the relevant court also makes an entry dismissing all relevant claims against the Participating Manufacturers, and either the time for appeal has expired or any appeal made has been dismissed, and the approval of the consent decree has been made final. [MSA II(ss)].

To date, no challenges to the approval of the MSA have been successful. Trial courts have been granting approval of the MSA. Several appeals, some filed by parties who fear that certain language in the MSA may threaten their rights to sue the participating tobacco manufacturers, are, however, pending.¹⁷ One relevant question is whether the Attorney General in each of the states in question had the power to release political subdivisions of the state or other entities from potential claims against the industry. While certain individuals and organizations¹⁸ have sought to intervene in the states' cases in order to challenge the MSA or persuade the presiding judge to delay any decision on approving a settlement until fairness hearings could be held, forty-one of the forty-six signing states had approved the MSA by February 4, 1999.¹⁹

The pending and any future appeals could take some time to be decided, but most observers are of the opinion that state-specific finality and approval of the MSA will be reached in every state allowing the provisions of the agreement to go into effect. Until that occurs, however, nothing is truly settled.

E4: The Non-Participating Manufacturer Adjustment, Qualifying Statutes, and the Model Statute in Exhibit T of the MSA

The purpose of the Master Settlement Agreement's Non-Participating Manufacturer (NPM) Adjustment provisions is to prevent competitors of the Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard tobacco companies - the Original Participating Manufacturers (OPMs) of the MSA - from gaining market share at their expense. The NPM Adjustment is triggered by at least a 2% drop in the combined market share of all Participating Manufacturers below what their combined share was in 1997. [MSA IX(d)(1)(B)(i)]. Furthermore, the trigger does not apply unless an independent economic research firm concludes that "the disadvantages experienced as a result of this Agreement were a significant factor contributing to the Market Share Loss for the year in question." [MSA IX(d)(1)(C)].

If this NPM trigger is ever pulled, the MSA provides, according to a particular formula, for up to a 100% reduction in state tobacco settlement payments (the NPM Adjustment) if the states do not pass "Qualifying Statutes." [MSA IX(d)(2)]. The MSA defines a "Qualifying Statute" as "a Settling State's statute, regulation, law and/or rule (applicable everywhere the Settling State has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating Manufacturers within such Settling State as a result of the provisions of this Agreement." [MSA IX(d)(2)(E)].

More likely than not, a state could collect all of the money due it under the MSA without ever passing any special legislation. But there is a small chance that, at some point in the future, the "Non-Participating Manufacturer (NPM) Adjustment" [MSA IX(d)] could kick in. If and when that happens, any state that has not passed what the MSA refers to as a "Qualifying Statute" could see its settlement payments reduced or even totally eliminated.

The effect of the MSA's NPM Adjustment provisions is to put tobacco control on this year's legislative agenda in most of the 46 states that have signed the MSA. This could be very good for tobacco control. There are many useful tobacco control measures that have been languishing in every state's legislature. Although the "Model Statute" safe harbor does not apply if it is introduced in combination with any other legislative or regulatory proposal, there is no such restriction on other safe harbor (in which the independent economic research firm certifies that a statute meets the requirements for a "Qualifying Statute). Tobacco control proponents could (a) argue to their legislature that, if legislation designed to protect the OPMs' market share is to be enacted, it should also enact some real tobacco control legislation, and (b) get a legislative leader or committee to submit the proposed package to the economic research firm appointed under the MSA.

E5: The Preclusive Effect of the MSA on Future Actions by State and Local Governments Against Participating Manufacturers

As with any settlement agreement in any litigation, one effect of the Master Settlement Agreement is to bring an end to the lawsuits from which it arises. The Master Settlement Agreement, however, goes far beyond the ordinary preclusion provisions. Its broadly worded preclusion provisions [MSA XII] restrict the abilities of the settling states and, to a substantial extent, their subdivisions to bring future claims. The claims potentially precluded include not only suits for past conduct covered in the settled cases, but also ones brought for a broad range of future conduct by not only the tobacco companies but also a wide array of other tobacco-related entities, including some claims against tobacco retailers and distributors.

Not all claims are precluded, however. The MSA expressly preserves the right of states to bring any criminal actions that may be warranted. The settlement has no bearing on any such criminal proceedings, whether grounded in federal, state, or local law [MSA XII(a)(7)]. The MSA also makes an express exception for state suits concerning tax liabilities or liabilities under any licensing fee provisions [MSA II(nn)(1)]. Finally, the MSA does not preclude the states from going to court to enforce the commitments undertaken by the tobacco companies in the settlement agreement and the associated consent decrees.

Drawing on this relationship, the Attorneys General, in the settlement agreement, give up not only their states' rights to pursue further legal actions against the tobacco companies and related businesses and individuals, but also the rights of the states' agencies and subdivisions as well [MSA II(pp)]. Under the language of the MSA, the range of claims that are precluded for these governmental subdivisions is precisely the same as the range of claims precluded for the states [MSA XII(a)(1),(3),(4)]. Whether and to what extent state Attorneys General have the authority to preclude such claims on the part of state subdivisions, and particularly on the part of municipalities, is a matter of state law, and the scope of the authority likely varies from state to state. However, even in those cases where municipalities or other governmental subdivisions may still have the authority to bring tobacco-related lawsuits, the MSA contains provisions that will undermine their viability and their impact.

E6: Advertising Restrictions

The MSA requires the discontinuation of certain types of outdoor advertising, most notably billboards and certain other forms of outdoor advertising (not including "Brand Name Sponsorships", discussed below), effective April 23, 1999. [MSA II(ii)(1) & (2), III(d)]. With regard to billboards, if there is any time left on the lease of a Participating Manufacturer after it has to take a billboard down, the state Attorney General may choose to use the space available (at the cost of the state) for the remainder of that lease term for counter-advertising "intended to discourage the use of Tobacco Products by youth and their exposure to secondhand smoke." [MSA III(d)(3)].

However, certain advertisements, signs and placards located in or at the site of adult-only facilities²⁰ [MSAII(ii)(2)], outside of tobacco product manufacturing facilities [MSA II(ii)], and either outside or inside retail establishments that sell tobacco products [MSA II(ii)] are expressly excluded from the advertising prohibitions. Thus, for example, notwithstanding the billboard advertisement restrictions, tobacco products retailers may post tobacco placards of up to 14 square feet outside their establishments.

Beginning May 22 1999, Participating Manufacturers cannot use cartoons - defined as exaggerated or anthropomorphized depictions or depictions of entities with superhuman powers [MSA II(l)] - in advertising, promoting, packaging, or labeling of tobacco products. [MSA III(b)]. Thus, for example, the MSA specifically prohibits Joe Camel as a cartoon, [MSA III(b)] but it does not cover the standard camel logo or drawings of a camel because such images do not exaggerate, or attribute human or superhuman qualities to the camel. It also does not prohibit continued use of the Marlboro Man or other human characters, as well as any drawing or depiction that was used as a Participating Manufacturer's logo in any state on July 1, 1998.

With regard to the targeting of youth, the MSA expressly forbids the Participating Manufacturers from engaging in two different types of conduct. "No Participating Manufacturer may take any action, directly or indirectly, to target Youth within any Settling State in the advertising, promotion or marketing of Tobacco Products, or take any action the primary purpose of which is to initiate, maintain or increase the incidence of youth smoking within any Settling State." [MSA III(a) (emphasis added)].

The MSA also imposes restrictions on product placement and endorsements. Participating Manufacturers may not give anything of value to any person or entity to "use, display, make reference to or use as a prop" any tobacco product or package or advertisement, or any other item with a tobacco brand name "in any motion picture, television show, theatrical production or other live performance, live or recorded performance of music, commercial film or video, or video game ("Media")". [MSA III(e)]. However, the limit on payment for media placement does not include media viewed only in an adult-only facility, media not intended for distribution or display to the public, or "instructional" media concerning "non-conventional" cigarettes "viewed only by or provided only to smokers who are Adults," among other media [MSA III(e)].

Beginning July 1, 1999 Participating Manufacturers and others licensed by the Participating Manufacturers may no longer market, distribute, offer, sell, or license any apparel or merchandise bearing a tobacco product brand name. [MSA III(f)]. This prohibition expressly includes catalogues and direct mail strategies. However, the ban excludes such merchandise if its sole purpose is to advertise tobacco products, or if it is used in an adult-only facility and is not distributed to the general public. Furthermore, the ban does not require Participating Manufacturers to breach or terminate contracts with third parties in existence as of June 20, 1997, or to retrieve items already being marketed or distributed. [MSA III(f)-(f)(2)].

Among other provisions, the MSA also puts certain restrictions on "Brand-Name Sponsorships," which are excluded from the outdoor advertising bans mentioned above. A "Brand Name Sponsorship" is "an athletic, musical, artistic, or other social or cultural event" for which payment of any kind is made to include the brand name as either 1) the name of the event, or 2) to identify, advertise, or promote the event, an entrant, participant or team in the event. [MSA II(j)]. With some exceptions, Participating Manufactures are limited to sponsoring one "Brand Name Sponsorship" per year. [MSA III(c)(2)(A)]. The time is calculated from the date of the initial sponsorship. Such sponsorships may not include concerts, events in which the intended audience is comprised of a significant percentage of youth, events in which any paid participants or contestants are youth, or any athletic event between opposing teams in any football, basketball, baseball, soccer or hockey league. [MSA III(c)(1)]. The "Brand Name Sponsorship" provisions are complex, and include a number of exceptions, some of which are related to other types of restrictions such as those concerning product placement and brand name apparel.

E7: Youth Access Provisions

The Multistate Master Settlement Agreement (MSA) expressly states that both the settling states and the Participating Manufacturers are "committed to reducing underage tobacco use by discouraging such use and by preventing Youth access to Tobacco Products." [MSA I]. The funds which the settling states will receive from the settlement are the most important component with regard to putting that commitment into practice, as the funds can be used in part for the purpose of reducing youth access to and desire for tobacco products.

Substantive provisions in the MSA itself, however, do little towards that end. The MSA places certain restrictions on the provision of manufacturer gifts [MSA III(h)] and free samples [MSA III(g)] to persons who are "Underage," prohibits participating manufacturers from marketing packs containing fewer than 20 cigarettes or less than 0.60 ounces of loose tobacco until the year 2001 [MSA III(k)], and contains an express commitment by Participating Manufacturers to assist in the reduction of tobacco use by youth. [MSA III(l)(1)]. The provisions concerning manufacturer gifts and free samples, however, may only apply in those states which have criminalized the purchase or possession of tobacco products by youths. Outside of such states, only the time-limited pack size requirement and the stated commitment of the Participating Manufacturers to reduce the use of tobacco products by youth remain. Finally and most notably, the MSA includes no provisions regulating or prohibiting self-service displays of tobacco products, point-of-sale advertising or tobacco products vending machines, nor does it contain any "lookback" provisions which could cause tobacco products manufacturers to have to pay states extra money if the percentage of youth using tobacco products by certain dates does not drop below a target percentage.

States and municipalities that are interested in restricting youth access to tobacco products can fill in the substantial gaps left in the MSA by enacting restrictions and/or bans on self-service displays, point-of-sale advertising, tobacco products vending machine siting and minimum pack size. They could also adopt tobacco retailer licensing or permitting requirements. Moreover, those legislative bodies that have not criminalized youth possession of tobacco products might consider adopting restrictions on tobacco product sampling and the provision of manufacturer gifts, rather than attempting to rely on the provisions of the MSA.

E8: State and Local Lobbying Restrictions

The MSA does not prohibit tobacco companies from opposing proposed state or local laws or administrative rules which are intended to limit youth access to and consumption of tobacco products. Rather, it prohibits only Participating Manufacturer opposition to:

1. Limitations on Youth access to vending machines.

2. Inclusion of cigars within the definition of tobacco products.

3. Enhancement of enforcement efforts to identify and prosecute violations of laws prohibiting retail sales to Youth.

4. Encouraging or supporting use of technology to increase effectiveness of age-of-purchase laws, such as, without limitation, the use of programmable scanners, scanners to read drivers' licenses, or use of other age/ID data banks.

5. Limitations on promotional programs for non-tobacco goods using tobacco using tobacco products as prizes or give-aways.

6. Enforcement of access restrictions through penalties on Youth for possession or use.

7. Limitations on tobacco product advertising in or on school facilities, or wearing of tobacco logo merchandise in or on school property.

8. Limitations on non-tobacco products which are designed to look like tobacco products, such as bubble gum cigars, candy cigarettes, etc. [MSA Exhibit F]

Moreover, the MSA expressly permits Participating Manufacturers to: (1) challenge the enforcement of, or attempt to obtain declaratory or injunctive relief from, any such legislation or rule on any grounds; (2) oppose state or local legislative proposals or administrative rules introduced prior to the time of State-Specific Finality; (3) either oppose or cause to be opposed excise or income tax provisions or user fees or other payments relating to Tobacco Products or Tobacco Product Manufacturers; or (4) oppose or cause to be opposed any state or local legislative proposal or administrative rule not included among the prohibited subjects listed above. [MSA III(m)(1)].

The MSA also prohibits lobbyists²¹ from supporting or opposing state, federal, or local laws or actions without express authorization of the companies, "except where such advance express authorization is not reasonably practicable." [MSA III(m)(2)(A)]. Such support or opposition can, however, go forward after the lobbyists secure the necessary permission from the tobacco companies after making certain written certifications to the companies regarding their activities. The lobbyists must also, of course, comply with all laws and regulations relating to disclosure of financial contributions [MSA III(m)(2)(B)].

Among its other lobbying-related provisions, the MSA restricts Participating Manufacturers from supporting or causing to be supported any diversion of the settlement proceeds to any other than tobacco- or health-related uses. However, it leaves the tobacco industry free to pursue its favorite tactic of diverting monies from tobacco-related uses to other health-related uses. It dissolves the Council for Tobacco Research-USA and the Tobacco Institute, Inc. [MSA III(o)(1) and (2)]. The MSA also states that Participating Manufacturers²² "may not reconstitute CTR or its function in any form." [MSA III (o) (5)]. Participating Manufacturer may, however, form or participate in new tobacco-related trade associations, subject to the above restrictions. [MSA III(p)(1)].

E9: The National Foundation

The National Foundation will be a non-profit entity established by the executive committee of the National Association of Attorneys General (NAAG) [MSA VI(d)], and the National Public Education Fund ("NPEF") will be the Foundation's grant-making arm. [MSA Sections VI(a) and (c)]. The Foundation's basic programmatic charge is twofold. First, it will support both the study of - and programs to - reduce youth use of tobacco products²³ and youth substance abuse. [MSA VI(a)]. Second, the Foundation will support the study of - and educational programs to - prevent diseases associated with tobacco product use.

The Foundation will be run by a board of directors selected according to a given set of criteria. Both the Foundation and the NPEF will be funded by separate payments from Participating Manufacturers. An escrow agent will disburse the industry base payments to the Foundation when State-Specific finality²⁴ occurs in at least one Settling State [MSA VI(b)], a requirement that has already been satisfied, and the initial $250 million (March 31, 1999) industry payment to be credited to the NPEF will also be disbursed by the escrow agent to the Foundation upon the happening of the same event. [MSA VI(c)]. Subsequent industry payments, however, will be disbursed by the escrow agent to the Foundation "only when State-Specific Finality has occurred in Settling States having aggregate Allocable shares equal to at least 80% of the total aggregate Allocable Shares..." [MSA Section VI(c)(3)]. The MSA does not include a timetable for the NPEF grant process or the actual distribution of grant funds to successful applicants for grant funds. It also includes no timetable for the establishment of the Foundation.

The MSA describes 11 Foundation activities, nine of which are programmatic in nature. [MSA Section VI(f)]: (1) carrying out a nationwide advertising and education program regarding youth use of tobacco products and educating consumers about the causes and prevention of diseases associated with tobacco use [MSA Section VI(f)(1)]; (2) developing and disseminating model advertising and education programs to counter illegal youth use of substances [MSA VI(f)(2)]; (3) developing and disseminating model K-12 classroom education programs and "curriculum ideas" about smoking and substance abuse. [MSA VI(f)(3)]; (4) developing and disseminating criteria for effective cessation programs. [MSA VI(f)(4)]; (5) commissioning studies, funding research and publishing reports about the factors that influence youth smoking and substance abuse [MSA VI(f)(5)]; (6) developing "other innovative youth smoking and substance abuse prevention programs" [MSA VI(f)(6)]; (7) providing targeted training and information for parents [MSA VI(f)(7)]; (8) maintaining a public library which will feature Foundation funded studies, reports and other publications related to the prevention and cause of youth smoking and substance abuse [MSA VI(f)(8)]; (9) tracking and monitoring youth smoking and substance abuse [MSA VI(f)(9)]; (10) "receiving, controlling and managing contributions from other entities to further the purposes described in this Agreement" [MSA VI(f)(10)]; and (11) and receiving, controlling and managing funds paid by tobacco companies under the payment provisions pertaining to the Foundation and NPEF. [MSA VI(f)(11)].

The MSA authorizes (but does not apparently require) the Foundation to make grants from the NPEF to settling states and their political subdivisions. [MSA VI(g)]. No other entities are expressly listed as eligible for NPEF grants. NPEF grants may be made for the purpose of "carry[ing] out sustained advertising and education programs" that counter youth tobacco product use and educate consumers about the cause and prevention of diseases associated with the use of tobacco products. [MSA VI(g)].

While the MSA puts no dollar limits on acceptable grant amounts, there are several limits on Foundation activities and the use of Foundation funds. First, the MSA prohibits the Foundation from engaging in - and the use of Foundation funds for - "any political activities or lobbying, including, but not limited to, support of or opposition to candidates, ballot initiatives, referenda or other similar activities." [MSA VI(h)]. Second, Foundation activities (including the NPEF) must be carried out solely within the states. [MSA VI(h)]. Third, the Foundation must ensure that its programs are culturally and linguistically appropriate. [Id.].

Fourth, and perhaps most importantly, the MSA forbids the use of the NPEF for "any personal attack on or vilification²⁵ of, any person (by name or business affiliation), company, or governmental agency, whether individually or collectively." [MSA Section VI(g) (emphasis added)]. This prohibition, which appears to encompass "personal" attacks or vilification of the tobacco industry (by virtue of the words "company" and "collectively") could censor the most effective of state and local advertising and education campaigns.

E10: Securing Settlement Funds for State and Local Tobacco Control

The best way to effectuate the public health purposes of the Tobacco Settlement - to modify patterns of tobacco use so as to protect the health of the United States' citizens and their children and to reduce or eliminate the future costs attributable to tobacco use - would be to dedicate a substantial portion of the funds generated by the Tobacco Settlement to tobacco control in each Settling State. "Tobacco control" refers to all of the strategies employed by government officials, public health professionals and advocates to reduce youth access to tobacco products and to limit the exposure of non-smokers to environmental tobacco smoke (ETS).

Prior to approaching their state legislature, tobacco control advocates must determine the mechanics of appropriating state settlement funds in their state. Advocates should first find local counsel to help them to determine how the proceeds from the MSA may be allocated in their state. This is a matter determined by each Settling State's state law. The cause of action in each Settling State may also have some bearing on how settlement proceeds may be allocated. Also, note that future legislative sessions may not be absolutely bound in their actions by prior ones in many states. This means that, of course, future sessions of the legislature may amend or repeal prior enactments as they see fit. To see how these issues are being dealt with in Massachusetts, for example, see An Action Plan to Protect the Health of Massachusetts Citizens and Their Children: Using Tobacco Settlement Funds to Reduce the Health and Economic Costs of Tobacco-Related Disease in the Commonwealth at

http://www.tobacco.neu.edu/mtcerl/blueprint.htm.

Second, tobacco control advocates should draft a blueprint that outlines how settlement funds should be used for tobacco control. The settlement blueprint drafted by the Tobacco Control Resource Center for the American Cancer Society (New England Division - Massachusetts), the American Heart Association (New England Affiliate) and the Massachusetts Coalition for a Healthy Future may be found at http://www.tobacco.neu.edu/mtcerl/blueprint.htm.

Introduction

By Graham Kelder

In the following pages, the Tobacco Control Resource Center, Inc. (TCRC) at Northeastern University School of Law in Boston, MA, presents its analysis of selected topics and provisions of the November 23, 1998 Multistate Master Settlement Agreement (MSA). Our analysis focuses on the following key areas:

Historical Background of the MSA
Brief Description of Consent Decrees or Judgments
The Effect of Appeals on States That Have Consented to the MSA
The Non-Participating Manufacturer Adjustment, Qualifying Statutes, and the Model Statute in Exhibit T of the MSA
The Preclusive Effect of the MSA on Future Actions by State and Local Governments Against Participating Manufacturers
Advertising Restrictions
Youth Access Restrictions
Lobbying Restrictions
The National Foundation
Some Brief Advice About Securing Settlement Funds for State and Local Tobacco Control

In an effort to provide a timely report, our analysis is limited to the particular provisions of the MSA identified and discussed in each chapter of this analysis. Thus, there may be provisions of the MSA that we have not reviewed which may affect our interpretations and conclusions.

It is important at the outset to note that the MSA applies only to Participating Manufacturers. According to the MSA, "Participating Manufacturer" means "a Tobacco Product Manufacturer²⁶ that is or becomes a signatory to" the MSA. [MSA II(jj)]. One subset of this group consists of "Original Participating Manufacturers," defined in the MSA as Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated and R.J. Reynolds Tobacco Company, "and the respective successors of each of the foregoing." [MSA II(hh)].²⁷ The second subset of this group consists of Tobacco Product Manufacturers that are not Original Participating Manufacturers. [MSA II(jj)].²⁸ When Tobacco Product Manufacturers that are not Original Participating Manufacturers become Participating Manufacturers, they become bound by the MSA "and the Consent Decree²⁹...in all Settling States in which this Agreement and the Consent Decree binds Original Participating Manufacturers . . . ."³⁰ [MSA II(jj)].

In the case of a Tobacco Product Manufacturer that signs the MSA after the MSA Execution Date, such Tobacco Product Manufacturer, within a reasonable period of time after signing the MSA, must make

any payments (including interest thereon at the Prime Rate) that it would have been obligated to make in the intervening period had it been a signatory as of the MSA Execution Date. [MSA II(jj)].

The MSA makes clear that "Participating Manufacturer" shall also include the successor of a Participating Manufacturer.³¹

As of this writing, most of the Original Participating Manufacturers' competitors have agreed to join the MSA. These include Liggett (which was required to raise its prices only if its market share increased substantially), Japan Tobacco, and Commonwealth Brands.

The MSA is no ordinary civil settlement. The MSA's scope is broad and its ramifications far-reaching. Critical issues of public health will be significantly affected by the MSA's complex provisions for the foreseeable future. As the following partial analysis makes clear, the MSA contains few tangible public health benefits, and does little, therefore, by itself, to reduce the continuing harmful impact of tobacco use on the U.S. economy or the health of its citizens. The devastation wrought by tobacco in this country will be reduced only by the MSA as it operates in conjunction with fully-funded state tobacco control programs fueled (in part) by settlement dollars, the activities of the National Foundation, and the continuing efforts of the national tobacco control community. This fact is acknowledged in the MSA itself. The document states in the "Recitals" section that settling states "have agreed to settle their respective lawsuits and potential claims pursuant to terms which will achieve for the Settling States and their citizens significant funding for the advancement of public health, the implementation of important tobacco-related public health measures, including the enforcement of the mandates and restrictions related to such measures, as well as funding for a national Foundation dedicated to significantly reducing the use of Tobacco Products by Youth . . . ." [MSA I]. Indeed, among the principal potential public health benefits of the Tobacco Settlement are the public health programs to which the funds generated by the settlement may be dedicated.

The best way to effectuate the public health purposes of the Tobacco Settlement - to modify patterns of tobacco use so as to protect the health of the United States' citizens and their children and to reduce or eliminate the future costs attributable to tobacco use - would be to dedicate a substantial portion of the funds generated by the Tobacco Settlement to tobacco control in each Settling State. For these reasons (and others that will be outlined herein), it makes good sense to use a substantial portion of the tobacco company payments generated by the Tobacco Settlement to combat the future harm that will be wrought by tobacco use on the health of America's' citizens and on the well-being of the economy of each Settling State.

Part One:

Consenting or Objecting to the Multistate Master Settlement Agreement

Chapter One:

Historical Background

By Graham Kelder

In 1994, the attorneys general of four states - Mississippi, Minnesota, West Virginia, and Massachusetts - separately filed innovative lawsuits to secure from the tobacco industry reimbursement for health care expenditures for ailments arising from tobacco use. In early 1995, these states were joined by Florida. By the end of 1996, eighteen states and two other jurisdictions had filed similar legal actions.³² Forty-one states eventually filed such legal actions prior to the release of the Multistate Master Settlement Agreement ("MSA").³³ These are the lawsuits being settled by the MSA.³⁴

On June 20, 1997, a group of state attorneys general presented a tobacco settlement proposal - which purported to settle all pending class action lawsuits against the tobacco industry and all pending actions against the industry brought by states and other governmental entities - to the American public. Because the settlement proposal needed to bind all 50 states, it had to be drafted and enacted in the form of Congressional legislation in order to give it the force of law.³⁵

The first comprehensive bill seeking to codify the national settlement reached by the tobacco industry and state attorneys general on June 20, 1997 was introduced in the Senate on November 5, 1997. The bipartisan bill, introduced by Senate Commerce Committee Chairman John McCain (R-Ariz.) and three co-sponsors - Slade Gorton (R-Wash.), John Breaux (D-La.) and Ernest Hollings (D-S.C.) - was, according to the Los Angeles Times, "seen as merely a starting point for an effort next year to convert into legislation the $ 368.5-billion national tobacco settlement announced in June".³⁶ In the next few months, several other "settlement" bills were filed:

· the Kennedy Bill, filed by Senator Ted Kennedy (D-MA) and two other Senate Democrats;³⁷

· the HEALTHY Kids Act, written by Senator Kent Conrad of North Dakota in his capacity as chairman of the Senate Democratic Task Force on Tobacco;³⁸

· a bill drafted by Senator James Jeffords, a Vermont Republican and chairman of the Senate Labor and Human Relations Committee.³⁹

In March, 1998, the McCain bill became the focus of all settlement-related legislative activity in the Senate. The Commerce Committee endorsed a preliminary version of a substitute bill, S. 1415, on March 30, 1998, by a vote of 19 to 1. On May 1, 1998, the Commerce Committee's version of the bill - S. 1415rs ("the McCain Committee bill") - was reported by Senator McCain to the full Senate (the official short title of S. 1415rs was the "National Tobacco Policy and Youth Smoking Reduction Act"). The McCain Committee bill was further modified on May 18, 1998, when the Floor Manager's Amendment was substituted for the original McCain Committee bill.⁴⁰

Many people involved in America's Multibillion-Dollar Tobacco War had high hopes for the McCain Committee bill. Senate Majority Leader Trent Lott (R-MS) had gone to McCain earlier in 1998 and asked him to craft a bill in the Commerce Committee that embodied the tobacco settlement.⁴¹ The McCain Committee bill, while not perfect in the eyes of most analysts, was stronger than the June 20^th Agreement in most respects.⁴² Among other things, the McCain Committee bill would have:

· required the tobacco industry to pay $516 billion (as compared to the June 20^th Agreement's $368.5 billion) over 25 years to help states and the federal government bear the medical costs of smoking-related illness;

· raised cigarette taxes by $1.10 per pack over five years;

· preserved the Food and Drug Administration's ability to regulate the tobacco industry in ways that the June 20^th Agreement did not; and

· drastically reduced cigarette marketing, advertising and promotion.⁴³

In the end, this tobacco industry brinkmanship - when paired with a huge, industry-sponsored advertising campaign that painted the McCain Committee bill as a big "tax-and-spend" proposal - worked. Emboldened by the industry-sponsored advertising campaign's effect on public opinion, the tobacco industry's Senate allies twisted the McCain Committee bill beyond recognition by adding a series of amendments to it, some of which worsened the bill's impact on public health and some of which were arguably not germane to the bill's real subject matter.⁴⁵ On, June 17, 1998, the bill died after four week's of grueling debate and partisan maneuvering.⁴⁶ Just prior to its death, the bill had been shorn of almost all of its funds for tobacco control, and the tobacco industry had been given a form of "back door" immunity in the form of caps on plaintiffs' attorneys' fees.⁴⁷ The June 20, 1997 deal died with the death of the McCain bill.

Four states achieved individual settlements with the tobacco industry. On July 2, 1997, Mississippi settled its claims so that it would receive at least $3.3 billion over 25 years, with annual payments of at least $135 million continuing in perpetuity. Florida settled its case on August 25, 1997, for at least $11 billion over 25 years, with annual payments of at least $440 million continuing thereafter. On January 16, 1998, Texas settled its claims for at least $14.5 billion over 25 years, with annual payments of at least $580 million continuing thereafter. The Florida and Texas settlements contained public health measures as well. The Mississippi, Florida and Texas settlement agreements also contained a provision, referred to as the "most favored nation" clause, that allow a settling state to incorporate the terms of any later nonfederal settlement agreements that are more favorable.

Minnesota settled its case on May 8, 1998, for $6.5 billion. The industry also agreed to do the following:

· pay about $6.1 billion to Minnesota and $469 million to Blue Cross and Blue Shield (BC/BS) of Minnesota (which was also a plaintiff) over 25 years;

· disband the Council for Tobacco Research;

· not pay for tobacco placement for movies (a provision that obviously extended beyond Minnesota's borders)

· stop offering or selling non-tobacco merchandise, such as jackets, caps and T-shirts, bearing the name or logo of tobacco brands in Minnesota;

· remove all tobacco billboards in Minnesota within six months and eliminate such ads on buses, taxis and bus shelters;

· refrain from opposing in Minnesota certain new laws designed to reduce youth tobacco use and clean indoor air laws that could adversely affect the industry;

· agree to new lobbying disclosure rules for Minnesota;

· release internal indexes to millions of previously secret industry documents, providing a road map to make it much easier for attorneys and researchers to find relevant information;

· maintain at industry expense for 10 years a depository of millions of tobacco documents in Minneapolis and another in Great Britain;

· instruct retailers in Minnesota to move cigarettes behind the counter in order to restrict minors' access to those cigarettes; and

· pay out $440 million in fees to the private attorneys who represented the plaintiffs.⁴⁸

Shortly after Minnesota settled its case and the nation's largest tobacco companies⁴⁹ managed to kill the McCain bill on June 17, 1998,⁵⁰ the tobacco industry began trying to negotiate a multibillion-dollar settlement of the dozens of state lawsuits pending against the industry.⁵¹ According to the New York Times, the secret talks

apparently grew out of a court-ordered effort to mediate a coming smoking-related lawsuit brought by the State of Washington against the tobacco industry. The negotiations then expanded to include other states with pending lawsuits, including New York, California and Colorado.⁵²

Several state attorneys general were very open to the idea of trying to salvage some kind of multi-state tobacco deal, and at the court-ordered mediation negotiations for the State of Washington, which began almost immediately after the death of the McCain bill,

. . . two tobacco industry lawyers, Arthur Golden and Meyer Koplow, and Joe Rice, a lawyer from Charleston, S.C., who represents about 25 states with tobacco lawsuits, met with Ms. Gregoire, the Washington Attorney General, to discuss bringing other states into the talks . . . .⁵³

"The attorneys general have always said that if Plan A didn't work then we would always go with Plan B," said Jeffrey Modisett, the Attorney General of Indiana.⁵⁴

Industry negotiators met with lawyers from several states - including California, Colorado, New York and Washington - in New York in early July to try to craft a deal that could serve as a framework to settle all 37 pending state cases, according to the Washington Post.⁵⁵ The July talks - which involved representatives from Philip Morris Companies Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Inc. - focused immediately on a deal that was much narrower than the June 20, 1997 agreement or the McCain bill. The new deal would not require approval by Congress because it would not include provisions dealing with federal jurisdiction over the nicotine contained in tobacco products. The new deal would also not grant the industry its major wish: the limits on lawsuits brought by class action plaintiffs, insurers or municipalities that became one of the most controversial parts of the original deal and, in a somewhat different form, the defeated Senate measure.⁵⁶

The talks fell apart on several occasions. On the last weekend in August, frustrated with what he called foot-dragging by the tobacco industry, Massachusetts Attorney General Scott Harshbarger pulled out of negotiations between nine states and cigarette makers trying to reach an out-of-court national tobacco settlement. Harshbarger said he decided to walk away and focus instead on winning a potential multibillion-dollar settlement for Massachusetts in state court.⁵⁷ Massachusetts' withdrawal was significant because Harshbarger's court case is considered among the strongest of those set for trial.⁵⁸

By early October, the Washington Post reported that the eight-state negotiating team and two of the nation's leading tobacco companies had made significant progress toward fashioning a multibillion-dollar settlement of dozens of lawsuits against the tobacco industry.⁵⁹ The MSA was released to state attorneys general on Monday, November 16, 1998. State attorneys general had until the following Monday - the MSA's: Execution date: November 23, 1998 - to read the MSA (a document of over 200 pages including appendices) and to decide whether their respective states would become a party to it. [MSA I(aa)].

Chapter Two:

Consent Decrees or Judgments

By Graham Kelder

A consent decree is generally defined as

A decree entered in an equity suit on consent of both parties; it is not properly a judicial sentence, but is in the nature of a solemn contract or agreement of the parties made under the sanction of the court, and in effect an admission by them that the decree is a just determination of their rights . . . .⁶⁰

With the procedural merger of law and equity, most state courts have replaced "decree" with the term "judgment." In such states, one speaks of consent judgments.⁶¹

The Master Settlement Agreement (MSA) defines "Consent Decree" as "a state-specific consent decree as described in subsection XIII(b)(1)(B) of this Agreement." [MSA II(o)].

Section XIII of the MSA states:

(a) Within 10 days after the MSA Execution Date (or, as to any Settling State identified in the Additional States provision of Exhibit D,⁶² concurrently with the filing of its lawsuit), each Settling State and each Participating Manufacturer that is a party in any of the lawsuits identified in Exhibit D shall jointly move for a stay of all proceedings in such Settling State's lawsuit with respect to the Participating Manufacturers and all other Released Parties (except any proceeding seeking public disclosure of documents pursuant to subsection IV(b)). Such stay of a Settling State's lawsuit shall be dissolved upon the earlier of the occurrence of State-Specific Finality or termination of this Agreement with respect to such Settling State pursuant to subsection XVIII(u)(1).

(b) Not later than December 11, 1998 (or, as to any Settling State identified in the Additional States provision of Exhibit D, concurrently with the filing of its lawsuit):

(1) each Settling State that is a party to a lawsuit identified in Exhibit D and each Participating Manufacturer will:

(A) tender this Agreement to the Court in such Settling State for its approval; and

(B) tender to the Court in such Settling State for entry a consent decree conforming to the model consent decree attached hereto as Exhibit L (revisions or changes to such model consent decree shall be limited to the extent required by state procedural requirements to reflect accurately the factual setting of the case in question, but shall not include any substantive revision to the duties or obligations of any Settling State or Participating Manufacturer, except by agreement of all Original Participating Manufacturers); and

(2) each Settling State shall seek entry of an order of dismissal of claims dismissing with prejudice all claims against the Participating Manufacturers and any other Released Party in such Settling State's action identified in Exhibit D. Provided, however, that the Settling State is not required to seek entry of such an order in such Settling State's action against such a Released Party (other than a Participating Manufacturer) unless and until such Released Party has released the Releasing Parties (and delivered to the Attorney General of such Settling State a copy of such release) (which release shall be effective upon the occurrence of State-Specific Finality in such Settling State, and shall recite that in the event this Agreement is terminated with respect to such Settling State pursuant to subsection XVIII(u)(1) the Released Party agrees that the order of dismissal shall be null and void and of no effect) from any and all Claims of such Released Party relating to the prosecution of such action as provided in subsection XII(a)(2). [MSA XIII].

The Consent Decree filed in each state and the MSA have great bearing on the enforcement of the provisions of the MSA. The MSA clearly states that, "[e]xcept as expressly provided in the Consent Decree, any Settling State or Released Party may apply to the Court⁶³ to enforce the terms of the Consent Decree (or for a declaration construing any such term) with respect to alleged violations within such Settling State." [MSA VII(b)]. While a Settling State may not seek to enforce the Consent Decree of another Settling State, nothing contained in the MSA "shall affect the ability of any Settling State to (1) coordinate state enforcement actions or proceedings, or (2) file or join any amicus brief." [MSA VII(b)]. In the event that the Court determines that any Participating Manufacturer or Settling State has violated the Consent Decree within such Settling State, "the party that initiated the proceedings may request any and all relief available within such Settling State pursuant to the Consent Decree."⁶⁴ [MSA VII(b)].

This arrangement is likely to lead to conflicting interpretations of the MSA as Courts settle conflicts within their respective states. The MSA provides a mechanism for resolving such conflicts:

The Attorneys General of the Settling States (through NAAG)⁶⁵ shall monitor potential conflicting interpretations by courts of different States of this Agreement and the Consent Decrees. The Settling States shall use their best efforts, in cooperation with the Participating Manufacturers, to coordinate and resolve the effects of such conflicting interpretations as to matters that are not exclusively local in nature. [MSA Section VII(f)].

This provision will, in all likelihood, have a de minimus effect on the states and the conflicting interpretations that will arise. The Attorneys General, NAAG, and Participating Manufacturers have no power to impose their interpretation of the MSA on individual states or state courts that interpret the MSA differently than NAAG does.

Chapter Three:

The Effect of Appeals on States That Have Consented to the Multistate Master Settlement Agreement

By Mark Gottlieb

3.1: Summary

In several states, individuals or organizations opposed to one or more aspects of the MSA attempted to legally intervene in the settlement. To date, no legal challenge to the MSA has been successful.

3.2: Background

In order for the terms of the MSA to take effect, the MSA must reach final approval. Final approval of the MSA will occur on the sooner of two events: either (1) 80% of both the number of settling states must reach, individually, "State-Specific Finality" and those settling states must have aggregate allocable shares (as set forth in Exhibit A of the MSA) of at least 80% of the total allocable shares assigned to all settling states, or (2) June 30, 2000 must pass. [MSA II(u)]. "State-Specific Finality" occurs in an individual state when the MSA and consent decree has been approved and entered in the relevant court, the relevant court also makes an entry dismissing all relevant claims against the Participating Manufacturers, and either the time for appeal has expired or any appeal made has been dismissed, and the approval of the consent decree has been made final. [MSA II(ss)].

3.3: Q & A

3.3.1: What has been the impact of legal challenges to the approval of the MSA?

To date, no challenges have been successful and trial courts have been granting approval of the MSA, although several appeals are pending. While certain individuals and organizations⁶⁶ have sought to intervene in the states' cases in order to challenge the MSA or persuade the presiding judge to delay any decision on approving a settlement until fairness hearings could be held, forty-one of the forty-six signing states had approved the MSA by February 4, 1999.⁶⁷ However, appeals filed in several of those states⁶⁸ challenging the approval of the MSA and consent decree approving the settlement are still pending.

The November 23, 1998 settlement with the tobacco industry required settling states to submit the MSA and a consent decree to the relevant court with jurisdiction over the lawsuit no later than December 11, 1998 and seek dismissal of the action [MSA XIII(b)].

On November 18, 1998, three Pennsylvania public health activists and several public health organizations filed motions with the court to intervene in that state's litigation against the tobacco industry in the Court of Common Pleas in Philadelphia. A hearing was held on January 8, 1999. It was reported that the health groups and activists seeking to intervene decried the broad and permanent protections from litigation that the tobacco industry would receive from the state.⁶⁹ Moreover, they believed that the breadth of the future claims by the state, political subdivisions (e.g., counties, municipalities, or localities), and others barred by the MSA, were beyond the scope of the Attorney General's powers to agree to and release. [MSA II(nn),(pp)]. Petitioners feared that the right to recover damages from tobacco companies was being taken away illegally and unfairly.

The MSA's definition of "Releasing Parties" (i.e., state governmental entities giving up future claims, including political subdivisions of a state and persons or entities acting in parens patriae or any other governmental or quasi-governmental capacity), is clear in that the Releasing Parties are released by the Attorney General only:

to the full extent of the power of the signatories (i.e., attorneys general) hereto to release past, present and future claims . . . [MSA II(pp)]

Therefore, if the Attorney General never had the power to release certain claims, then those claims were not released by the signing of the MSA. The burden of proof would likely fall on a party described in the MSA as a "Releasing Party" to show that it is not, in fact, released. This could be a significant impediment to future legal actions against tobacco companies by such parties.

On January 13, 1999, Philadelphia Common Pleas Court Judge John W. Herron approved the MSA and the settlement in Pennsylvania without addressing the merits of the petitioners' claims.⁷⁰ The petitioners have filed an appeal that was rejected by Judge Herron, reportedly on the basis that the petitioners' claims were largely theoretical.⁷¹ Allegheny County, Pennsylvania, appealed Judge Herron's decision to deny the county's motion to intervene and filed a separate lawsuit against the tobacco industry for medical cost recovery on March 5, 1999.⁷² A hearing on that appeal was reportedly scheduled for April 14, 1999, in Commonwealth Court.⁷³ These actions by Allegheny County will, at the very least, further delay state-specific finality for Pennsylvania.

While other potential intervenors have petitioned courts deciding motions to enter the consent decree and approve the MSA in several states, none has yet been successful. It appears that the few courts that have yet to issue an order accepting the settlement of their states' litigation and MSA will do so by the end of March of 1999.

Chapter Four:

The Non-Participating Manufacturer Adjustment, Qualifying Statutes, and the Model Statute in Exhibit T of the MSA

By Richard Daynard

4.1: Q & A

4.1.1: Why does the MSA include provisions for a Non-Participating Manufacturers Adjustment?

The purpose of the Master Settlement Agreement's NPM Adjustment provisions is to prevent competitors of the Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard tobacco companies - the Original Participating Manufacturers (OPMs) of the MSA - from gaining market share at their expense. The OPMs knew that they would have to raise prices substantially to pay their financial obligations to the states under the MSA. Their fear was that non-participating manufacturers, which did not have these financial obligations, would be able to undercut their prices, thereby taking substantial market share away from the OPMs.

4.1.2: What, generally, does the NPM Adjustment do?

If the combined market share of all Participating Manufacturers drops at least a certain small percentage below what it was in 1997 in any given settling state, the MSA provides, according to a particular formula, for up to a 100% reduction in state tobacco settlement payments, unless the state in question has passed a "Qualifying Statute." [MSA IX(d)(2)]. This reduction is the NPM Adjustment.

4.1.3: How does the MSA deal with the OPMs' fear of market share loss?

The MSA deals with the OPMs fear of market share loss in two ways. One way is to encourage competitors to join the MSA and agree to make the same per-package payments as the OPMs. The encouragement offered is the release by the AGs of any possible claim similar to those that they brought against the OPMs that the AGs might have against these competitors. Thus, the competitors would lose their competitive price advantage, but would be released from a major source of worry. Apparently, this offer has proved attractive to most of the OPMs' competitors, which have agreed to join the MSA. These include Liggett (which was required to raise its prices only if its market share increased substantially), Japan Tobacco, and Commonwealth Brands.

The second way the MSA deals with the OPMs market share worries is to threaten the states with up-to-100% reductions in tobacco settlement payments (the NPM Adjustment) if they do not pass "Qualifying Statutes." [MSA IX(d)(2)]. The MSA defines a "Qualifying Statute" as "a Settling State's statute, regulation, law and/or rule (applicable everywhere the Settling State has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating Manufacturers within such Settling State as a result of the provisions of this Agreement." [MSA IX(d)(2)(E)].

4.1.4: Why Might the Attorneys General Have Conceded to the Inclusion of an NPM Adjustment?

One conceivable response the negotiating Attorneys General (AGs) could have made to the OPMs' fear might have been to tell them: "Too bad! The MSA is a settlement of some very serious charges against you, the OPMs. If you lose market share to competitors who have not committed similar misdeeds, that's only fair. Maybe your financial pain will serve as a warning to others who might contemplate similar misbehavior." This would have been a fair and totally justified response. But the OPMs would probably have reacted to such a response by refusing to settle for anything like the $206 billion MSA figure, on the theory that if they will face severe financial pain if they settle, they might as well take their chances in court. Thus, the NPM Adjustment provisions are part of the "quid pro quo" for what the states receive under the MSA.

4.1.5: Is the NPM Adjustment likely to kick in?

The NPM Adjustment is triggered by at least a 2% drop in the combined market share of all Participating Manufacturers below what their combined share was in 1997. [MSA IX (d)(1)(B)(i)]. The trigger does not apply unless an independent economic research firm concludes that "the disadvantages experienced as a result of this Agreement were a significant factor contributing to the Market Share Loss for the year in question." [MSA IX (d)(1)(C)].

This trigger seems unlikely ever to be pulled. The offer to join the MSA has been, and is likely to continue to be, more attractive to the OPMs' competitors than the possibility of using their price advantage as non-MSA-participants to compete with them in the marketplace.⁷⁴ If all of the OPMs' significant competitors become participants in the MSA, the combined market share of Participating Manufacturers will almost certainly not fall more than 2% below the 1997 levels.

4.1.6: What happens to a state's tobacco payments if the NPM Adjustment kicks in?

If the NPM Adjustment were to be triggered, states that had passed (and were conscientiously enforcing) "Qualifying Statutes" would be unaffected.

However, the result for those (probably few) states that had not passed "Qualifying Statutes" would be draconian. To start, the total amount by which the tobacco companies would be able to reduce their payment to the states through the NPM adjustment begins at three times the "Market Share Loss." This is defined as the amount by which the prior year's combined market share of all Participating Manufacturers was more than 2% less than the 1997 combined market share. [MSA IX(d)(1)(B)(i)-(iii)]. Once this shortfall reaches 16 2/3%, causing an NPM adjustment of 50% (16 2/3 (the market share loss) multiplied by three - a most unlikely event), a different formula takes effect which continues to raise the NPM adjustment as the shortfall increases, though at a slower rate. [MSA IX(d)(1)(A)(iii)].

But the effect of the NPM Adjustment (were it ever triggered) on states that had not adopted "Qualifying Statutes" would actually be much greater. Since states with "Qualifying Statutes" would not have to pay any part of the NPM Adjustment, their share of this Adjustment would get reallocated to the states that had not adopted such a statute. [MSA IX(d)(2)(D)]. If the majority of states (especially larger states) have such statutes, the remaining states would find their tobacco settlement payments drastically reduced, or even wiped out entirely.

Thus, even though the likelihood of the NPM Adjustment being triggered is small, states should pass "Qualifying Statutes" to avoid even the possibility of such draconian decreases in their tobacco settlement receipts.

4.1.7: What sort of legislation must a state adopt to avoid the possibility of being hurt by an NPM adjustment?

The MSA does not require states to pass a "model statute," or indeed to use any particular form of words, to avoid possible harm from an NPM adjustment. Again, a "Qualifying Statute" is defined by the MSA as "a Settling State's statute, regulation, law and/or rule (applicable everywhere the Settling State has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating Manufacturers within such Settling State as a result of the provisions of this Agreement." [MSA IX (d)(2)(E)].

Since it would be hard for a state legislature to know in advance whether any particular legislative proposal would "effectively and fully neutralize the cost disadvantages," and hence protect the state from a possible NPM Adjustment, the MSA provides two "safe harbors." One is that the state may submit the proposed legislation to the independent economic research firm appointed under the MSA. That firm must evaluate the proposed legislation within 90 days of receiving the request. If that firm concludes that the proposed legislation meets the definition of "Qualifying Statute," its determination is final and binding on all parties. [MSA IX(d)(2)(G)]. So long as the state then makes reasonable efforts to enforce the statute, the tobacco companies cannot use the NPM Adjustment to reduce that state's payments.

The second "safe harbor" for the states is to pass the "Model Statute" set out in Exhibit T to the MSA. The parties to the MSA have agreed that the "Model Statute," "if enacted without modification or addition (except for particularized state procedural or technical requirement) and not in conjunction with any other legislative or regulatory proposal, shall constitute a Qualifying Statute." [MSA IX(d)(2)(E)]. Furthermore, the Participating Manufacturers agree to support the enactment of the "Model Statute," so long is it is not substantially modified or accompanied by another legislative proposal. [MSA IX(d)(2)(E)].

There is, however, one reason why a state might prefer to pass the "Model Statute" without accompanying it with any tobacco control provisions. Under the MSA, if a state passes the "Model Statute" and vigorously defends the statute against legal attacks (e.g., assertions that it violates the federal anti-trust laws) and if the statute is nonetheless invalidated by a court, the state is entitled to retain at least 35% of the payments due under the MSA even if the NPM Adjustment kicks in. [MSA IX(d)(2)(F)]. If, however, it adopts a "Qualifying Statute" other than the unaccompanied "Model Statute," and that statute is invalidated by a court, the state would run the risk of losing all of its payments if the NPM Adjustment provisions kick in. [MSA IX(d)(2)(H).]

4.1.8: What would the "Model Statute" do?

The "Model Statute" requires all cigarette manufacturers selling cigarettes within the settling state to either (a) join the MSA, or (b) place a specified per-pack amount in an escrow fund. The escrow fund allows the manufacturer to receive the interest from the fund, but preserves the principal for 25 years exclusively for the purpose of paying any claim the state may later bring against that manufacturer. The rationale given for this escrow requirement is that cigarette-caused "diseases most often do not appear until many years after the person in question begins smoking," and absent an escrow the non-participating manufacturers could distribute their profits to their shareholders as they receive them, and be left without assets to pay state medical cost reimbursement claims as these arise. [MSA Exhibit T(a)].

Interestingly, the per-pack amount which Exhibit T requires (to equalize the cost disadvantage that Participating Manufacturers would otherwise face) is set at about 20 cents/pack in 1999 and 2000, and tops out at about 37 cents/pack beginning in 2007. Compare the 45 cents/pack price increase which the OPMs imposed in December 1998, ostensibly to pay for their obligations under the MSA.

4.1.9: Would adopting a "Qualifying Statute" be good or bad for tobacco control?

The short answer is that it probably would not matter much for tobacco control purposes. To the extent that a "Qualifying Statute" would discourage cigarette price competition, it might produce some slight reductions in smoking. The effect on teenage smoking would likely be particularly small, since teenagers generally do not smoke the unbranded cigarettes that would likely be the major part of the non-participating manufacturers' business. On the other hand, to the extent that such a statute would help guarantee that the OPMs suffer little adverse financial consequences from the MSA, it would tend to undermine the deterrent and punitive effect of the laws under which the AG's cases were brought.

The effect of the MSA's NPM Adjustment provisions, however, is to put tobacco control on this year's legislative agenda in most of the 46 states that have signed the MSA. This could be very good for tobacco control. There are many useful tobacco control measures that have been languishing in every state's legislature. Although the "Model Statute" safe harbor does not apply if it is introduced in combination with any other legislative or regulatory proposal, there is no such restriction on the other safe harbor (in which the independent economic research firm certifies that a statute meets the requirements for a "Qualifying Statute). Thus, tobacco control proponents could (a) argue to their legislature that, if legislation designed to protect the OPMs' market share is to be enacted, it should also enact some real tobacco control legislation, and (b) get a legislative leader or committee to submit the proposed package to the economic research firm appointed under the MSA. The legislative package could be adopted as soon as the firm approves it as a "Qualifying Statute" - which it would almost certainly do (since the additional tobacco control legislation would not vitiate the cost-neutralizing effects of the "Model Statute").

While the state legislatures' perceived need to adopt "Qualifying Statutes" therefore presents opportunities for tobacco control, there are also hazards. The tobacco industry's friends in the legislature could try to slip unrelated industry protections (e.g. preemption) into legislation purportedly designed just to protect the state's tobacco settlement revenues. Any language inserted in such legislation that does not track the model presented in Exhibit T should be considered suspicious and potentially dangerous. As always, the price of tobacco control is eternal vigilance.

However, the safest course for any state to take, in light of the NPM provisions, is to pass the "Model Statute," rather than any other form of "Qualifying Statute."

Chapter Five:

The Preclusive Effect of the MSA on Future Actions by State and Local Governments Against Participating Manufacturers

By Peter Enrich

5.1: Q & A

5.1.1: To what extent does the MSA affect the ability of state and local governments to bring future lawsuits concerning tobacco products and their effects?

As with any settlement agreement in any litigation, one effect of the Master Settlement Agreement is to bring an end to the lawsuits from which it arises. In particular, the MSA ends an array of suits brought by the states against the tobacco manufacturers, largely seeking compensation for health care costs incurred by the states in connection with tobacco related diseases. Termination of these suits is, of course, one of the primary benefits that the tobacco company defendants derive from the settlement. As part of the agreement to terminate the existing lawsuits, the settlement agreement expressly precludes the parties from bringing any future lawsuits that seek to reopen the issues that were raised in the settled suits.

The Master Settlement Agreement, however, goes far beyond these ordinary preclusion provisions. Its broadly worded preclusion provisions [MSA XII] restrict the abilities of the settling states to bring future claims, not only for past conduct covered in the settled cases, but also for a broad range of future conduct by the tobacco companies. Moreover, the preclusion provisions apply, not only to future actions against the tobacco companies who are the parties to the settlement, but also to suits against a wide array of other tobacco-related entities, including some claims against tobacco retailers and distributors. In addition, the MSA limits future suits, not only by the settling states, but also by any cities, towns, counties, or other agencies or subdivisions of the states.

5.1.2: To what extent are state suits concerning past wrong-doing precluded by the MSA?

The preclusive effect of the MSA on claims relating to past conduct is sweeping in its breadth. It applies not only to claims or issues actually raised in the settled lawsuits but to virtually any claims or issues that the states might have raised that relate in any way to the production, distribution or use of tobacco products. [MSA II(nn)(1)].⁷⁵ No matter what new information may emerge about past misconduct by the tobacco companies and their associates, and no matter what future costs may be found to be the results of past misconduct, no future state lawsuits can be brought concerning any past actions (or inactions).

This prohibition affects claims, not only against the settling tobacco manufacturers, but also against a wide array of other parties that have participated in the production, marketing, and sale of tobacco products. The release extends to all parent and subsidiary corporations affiliated with the manufacturers, to all of their officers and employees, and to advertising agencies, attorneys, suppliers and other businesses that have participated or assisted in their business activities. [MSA II(oo)].

5.1.3: What about state suits relating to future wrong-doing?

The preclusion of claims relating to future conduct purports to be somewhat narrower, although it, too, applies not only to the tobacco manufacturers but to the full range of related businesses and individuals. Claims for reimbursement of future health care costs linked to tobacco exposure are expressly barred, apparently regardless of what future wrong-doing by the tobacco companies might be the basis for the claim. Beyond these reimbursement claims, the settlement precludes claims relating to future misconduct only if the claims relate to "the use of or exposure to Tobacco Products manufactured in the ordinary course of business." [MSA II(nn) (2)]. How broadly this preclusion will be interpreted is hard to predict, but it, at least, appears intended to protect the tobacco companies from state suits that would hold them liable for harms flowing from the continued operation of their "ordinary" business of manufacturing and selling tobacco products.

While this provision is framed in a way that purports to limit the scope of the preclusion, it nonetheless appears to reach quite broadly, with the result that even newly identified future misconduct by the tobacco companies would not appear to warrant state action to recover for resultant costs, if those costs arose from use of or exposure to tobacco products. Thus, future state claims for medical costs seem likely to be completely off limits, whatever their basis. The extent to which this prohibition also bars, for instance, state actions to recover civil penalties for violations of state laws relating to tobacco manufacture, marketing or sales is less clear, although the MSA's broad definition of "claims" [MSA II(n)] appears problematic in this regard.

5.1.4: How does the MSA affect state suits against retailers and distributors of tobacco products?

The MSA's definition of "Released Parties" includes distributors and retailers of tobacco products [MSA II(oo)], but not all claims against these businesses are barred. In fact, the settlement expressly does not preclude actions against retailers, suppliers or distributors based on their sale or distribution of tobacco products [MSA XII(a)(8)]. Thus, state suits based on illegal retail sales to minors or on other theories that might hold retailers or distributors liable for the harmful effects of the tobacco products they sold appear not to be precluded by the settlement. By contrast, state suits against retailers or distributors resting on improprieties concerning advertising or marketing (rather than sales or distribution) might well be precluded.

Even where state suits against retailers or distributors are not directly precluded, the MSA sets up further obstacles to effective litigation. If the retailer or distributor is able to hold a tobacco manufacturer (or other entity covered by the preclusion provision) accountable for any part of its liability in such a suit, then to that extent the suit is barred, or is paid for out of the existing settlement fund [MSA XII(a)(8)(A)-(B)]. In other words, if a state sues a retailing chain on the basis of its sales practices and the retailing chain is able to argue that the tobacco companies are financially liable to the chain for its damages, then the states agree to forego recovery of those damages, or else to reduce the tobacco companies' settlement payments to offset any liabilities resulting from the lawsuit.

As a result of this provision, it seems likely that, in future actions brought against retailers and distributors, it will become a common strategy for the retailer or distributor to raise a range of arguments for holding the tobacco manufacturers and their affiliates responsible for any wrong-doing, and for the tobacco companies to structure their relations with retailers and distributors in ways that will assist them in making those arguments. The net effect will be to render such suits ineffectual, since they will fail to impose any new liabilities on anyone.

5.1.5: Are there any types of state suits that are not precluded by the MSA?

Yes. The MSA expressly preserves the right of states to bring any criminal actions that may be warranted. The settlement has no bearing on any such criminal proceedings, whether grounded in federal, state, or local law. [MSA XII(a)(7)]. The agreement also makes an express exception for state suits concerning tax liabilities or liabilities under any licensing fee provisions. [MSA II(nn)(1)]. Finally, the agreement does not preclude the states from going to court to enforce the commitments undertaken by the tobacco companies in the settlement agreement and the associated consent decrees.

5.1.6: How does the MSA affect the rights of counties, cities, and other subdivisions of the states?

As a legal matter, counties, cities, and towns, as well as state universities and other governmental entities, are "creatures" of the state. That is to say, they are created by the state and have only those powers granted to them by the state. Drawing on this relationship, the Attorneys General, in the settlement agreement, give up not only their states' rights to pursue further legal actions against the tobacco companies and related businesses and individuals, but also the rights of the states' agencies and subdivisions as well. [MSA II(pp)]. Under the language of the MSA, the range of claims that are precluded for these governmental subdivisions is precisely the same as the range of claims precluded for the states. [MSA XII(a)(1),(3),(4)].

This means that a municipality or a state-created entity (like a state college) is barred from bringing a lawsuit to recover, for example, the costs that it has incurred in providing health care for smokers, even though it has not previously had an opportunity to raise those claims and even though it will receive no compensation for those claims under the settlement. The Attorneys General have released all such claims as part of the quid pro quo for the tobacco companies' financial settlement of the states' own reimbursement claims.

Whether and to what extent state Attorneys General have the authority to preclude such claims on the part of state subdivisions, and particularly on the part of municipalities, is a matter of state law, and the scope of the authority likely varies from state to state. In recognition of this limitation, the MSA makes clear that the scope of the preclusion extends only as far as the signers of the agreement have the power to extend it. [MSA II(pp)]. A municipality considering bringing a suit that may come within the scope of the MSA's preclusion should seek the advice of local counsel as to whether its claims have been effectively barred.

However, even in those cases where municipalities or other governmental subdivisions may still have the authority to bring tobacco-related lawsuits, the MSA contains provisions that will undermine their viability and their impact. Specifically, the settlement stipulates that, if any such suit is brought and is not precluded by the settlement agreement, then any damages that are recovered by the municipality or subdivision will be deducted from the liability of the tobacco companies to the parent state. [MSA XII(b)(2)(A)]. As a result, such a suit, even if successful, would have no financial impact on the tobacco companies; rather, it would simply transfer some portion of the settlement payments from the state to the municipality or subdivision. The effect is to give the states a direct financial interest in deterring any such suits. In fact, the MSA expressly reserves for the states the right to intervene in such suits to protect their own interests against those of the municipality or subdivision. [MSA XII(b)(2)(C)]. These provisions have the likely effect of turning the states into agents of the tobacco companies in efforts to prevent local governments from pursuing tobacco control enforcement actions.

Part Two:

The Effect of Selected Provisions of the Multistate Master Settlement Agreement

Chapter Six:

Advertising Restrictions

By Robert Kline and Patricia Davidson

6.1: Background

Tobacco advertising is one of the leading causes of teen tobacco use. Cigarette advertising strategies lure children and teens into smoking by associating the use of tobacco with adulthood, rebellion against authority and independence.⁷⁶ Although tobacco advertising has little impact on adults, every major tobacco advertising campaign has corresponded to a major increase in smoking among 14- to 17-year-olds.⁷⁷ Camel, Marlboro, and Newport - the three most heavily advertised brands of cigarettes - are smoked by 86 percent of the teenage market.⁷⁸ The industry also makes effective use of ad placements near schools and on promotional items such as caps and T-shirts to enhance tobacco sales by ensuring that the "face" of their particular product is never far from the curious eyes of America's teenagers.⁷⁹

6.2: Q & A

6.2.1: Will outdoor advertising be eliminated under the MSA?

Certain types of outdoor advertising, as defined by the MSA (and described below), must be discontinued under the MSA effective April 23, 1999. [MSA III(d)].

6.2.2: What is included in the term "outdoor advertising" under the MSA?

The term "outdoor advertising" includes billboards [MSA II(ii)(1)], as well as signs and placards in open air or enclosed arenas, stadiums, shopping malls and vid