Here’s What it Takes to Make Big Tobacco Smile

In 1998, the four largest U.S. tobacco companies, Altria Group’s (NYSE:MO) Philip Morris, Reynolds American’s (NYSE:RAI) R.J. Reynolds, British American Tobacco’s Brown & Williamson, and Lorillard (NYSE:LO), made an agreement known as the Master Settlement Agreement with the attorney generals of 46 states. This pact settled a series of Medicaid lawsuits brought in the early-to-mid-1990s by these states to recover their tobacco-related health-care costs. As a result, the original signatories agreed to restrict advertising and lobbying, disband tobacco-related organizations, and make annual payments to the settling states. It was these payments that caused controversy.

On Monday, the cigarette manufacturers announced that they had reached an agreement with nineteen states to resolve long-standing disputes related to the Non-Participating Manufacturer adjustment provisions in the original agreement.

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At the time the agreement was signed, the “originally settling parties,” or OPMs, controlled 97 percent of the domestic market for cigarettes. Given the terms of the agreement, these manufacturers were worried that non-participating manufacturers would be able to grow their market shares and be free of the stigma that the settlement brought. The settling states were also concerned about this possibility, and so the Non-Participating Manufacturer adjustment provisions were added. These terms would lower the annual payment for OPMs, which was a percentage of sales made in each participating state, if the original signatories lost market share to the non-participating manufacturers in that state.

The agreement reached on Monday resolved disputes over these payment adjustments. As R.J. Reynolds stated in a press release it “sets forth a sliding scale of financial recovery for R.J. Reynolds and the other Participating Manufacturers” by receiving credits for future payments.

“The company is able to receive significant value for injury its brands have suffered in the marketplace at the hands of manufacturers who are not subject to the obligations of the MSA,” said the company’s executive vice president Martin L. Holton III in a statement.

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