TOBACCO ARBITRATION – FREQUENTLY ASKED QUESTIONS
1. What is the Master Settlement Agreement?
A. In the mid-1990s, attorneys general of various states filed lawsuits against the major tobacco companies to recover the Medicaid costs of smoking-related illnesses and ultimately reduce youth smoking. The consolidated litigation culminated in November 1998, when 46 states reached the Master Settlement Agreement or MSA with the four largest tobacco companies. (At the time Indiana was represented by then-Attorney General Jeffrey Modisett.)
Since then, more than 40 other tobacco companies have signed on to the agreement. States agreed to drop their legal claims against the companies. In exchange for not being sued, tobacco companies agreed to pay the states about $206 billion over 25 years. They also agreed to substantial changes in their cigarette advertising and marketing, including a ban on targeting children through ads. Tobacco companies at last acknowledged that the product they manufacture and sell to consumers – cigarettes – causes lung cancer, emphysema and other diseases.
2. How much money does Indiana receive?
A. Since the first payment in April 1999, the State of Indiana has received more than $1.9 billion in settlement payments from tobacco companies, in annual installments of between $125 million and $150 million, depending on sales volume from each manufacturer in each year.
3. What is happening to the money Indiana will receive next year?
A. An arbitration panel hearing a complicated legal dispute over how much tobacco manufacturers owe has ruled that nine states are entitled to additional funds. The panel reduced the companies’ payments to six other states by a total of approximately $452 million, including Missouri, Kentucky, Maryland, New Mexico, Pennsylvania, and Indiana.
Once various offsets are factored in, it is estimated that Indiana will receive approximately $68.4 million in settlement money in April 2014, a considerable sum but down from the $131.2 million Indiana could have received in 2014 had the panel not ruled against the State. This is a one-time reduction of $62.8 million in the amount Indiana will receive from tobacco companies in April 2014. Indiana will not have to pay money to the tobacco companies.
4. Why has the amount changed?
A. The tobacco manufacturers who participated in the original settlement, the PMs, challenged the amounts they owed the states relative to non-participating manufacturers or NPMs (those who didn’t join the original settlement) relating to accounting of funds that the NPMs paid into escrow. The 1998 MSA allowed the participating tobacco companies to trigger an arbitration process to challenge the NPM escrow enforcement by states.
After several years of hearings and review, the arbitration panel recently concluded that based on the “diligence” of enforcement of the qualifying statute by the states, some states are entitled to more money and some states are entitled to less.
The term “diligent enforcement” was never defined in the original 1998 MSA. The arbitration panel in its recent ruling created a new enforcement definition and applied this new standard retroactively to states for actions taken more than a decade ago. Indiana disagreed strongly with the arbitration panel’s implementing a new definition of enforcement that did not exist at the time.
5. What is “arbitration”?
A. Arbitration is a form of alternative dispute resolution in complicated legal cases where the parties agree to submit the dispute to a third party to decide. The tobacco arbitration was heard by a panel of three retired federal judges who recently issued their ruling.
6. Did Indiana fail to do anything that resulted in this ruling?
A. The State of Indiana’s legal position is that indeed it “diligently enforced” the terms of the 1998 MSA settlement, regarding whether nonparticipating manufacturers paid their escrow payments based on 2003 sales relative to their participating competitors as the settlement required, and using the information available at that time. The NPMs make these payments to a third-party escrow agent, not to the State, but the issue is the accounting of such payments. Enforcement of these escrow requirements is very technical and labor intensive. The State presented detailed evidence of its enforcement efforts that occurred in 2003, as did other states. Unfortunately, the arbitration panel ruled against Indiana using a retroactive standard, a decision the State strongly disagrees with.
For example, the arbitration ruling took issue with Indiana in 2003 not using the actual MSA settlement payments directly for enforcement purposes. Indiana used its payments for public health and anti-smoking efforts that year and the enforcement was funded through other sources in the state budget.
7. Is the State appealing this decision?
A. Yes. The State, represented by the Attorney General’s Office, has filed a type of appeal called a “motion to vacate.” The State asks the court that has jurisdiction over the appeal to vacate the arbitration ruling or modify the amount Indiana will receive. One option would be to more fairly reallocate and redistribute the questioned amounts among 26 states, not six. If Indiana succeeds, then it would get back a larger portion of the annual tobacco payment that would otherwise be reduced. The court is not likely to decide the appeal until sometime in 2014.
8. Did the State try to settle this dispute when it had the chance?
A. In December of last year, 22 states decided to settle the 2003 payment dispute with the major tobacco companies rather than fight on in continuing arbitration. Indiana concluded the non-monetary terms of the settlement were unfavorable and not in the State’s interest, with potential long-term downsides even worse than losing arbitration. Indiana declined to settle for a smaller amount merely to end the process, preferring instead to argue its case in arbitration.
Since the 2003 arbitration procedures started in 2010, the Attorney General’s Office has provided updates to state and legislative leaders and fiscal analysts on the process, timing and financial risks involved in order to prepare in the budgeting process.
9. Why is there still a legal fight going on at all if the original Big Tobacco lawsuit was settled 15 years ago?
A. The 1998 Master Settlement Agreement between the major tobacco companies and 46 states was the largest lawsuit settlement in U.S. history and was hailed as a landmark case. Unfortunately, the 1998 MSA negotiated by the officials in office at that time did not end tobacco litigation or bring finality to the issue, and seemingly opened the door to more legal disputes by the tobacco companies. The tobacco manufacturers who participated in the original settlement, the PMs, have aggressively litigated the settlement since then, with teams of lawyers waging lengthy and costly legal actions against the states. The recent arbitration decision was the culmination of a prolonged dispute regarding payments made by participating tobacco companies and their non-participating competitors, the NPMs, regarding their 2003 cigarette sales.
10. Is the dispute limited just to payments for one year, 2003?
A. No. This arbitration ruling applied only to the payments for 2003. But the participating tobacco companies are continuing to challenge whether each successive year of escrow payments – 2004 to 2012 – was diligently enforced by states. The legal dispute over the 2003 payments alone took more than a decade to play out, and separate successive rounds of arbitration over enforcement for each of the subsequent years could take many more years to conclude. Indiana is exploring ways to consolidate and compress the process. It should be reiterated that this legal action was initiated and prolonged by one group of tobacco companies that seek to increase their market share relative to a competing group of tobacco companies.
11. Are the tobacco payment Indiana receives securitized?
A. No, unlike some other states that handle their tobacco payments as securitized instruments, Indiana’s are not securitized.
12. Why is the Attorney General’s Office involved?
A. The Attorney General’s Office is the lawyer for state government and represents the State in lawsuits and legal actions, including the tobacco arbitration. Under the 1998 settlement and statutes passed in conjunction with it, the Attorney General’s Office enforces tobacco payment requirements, in conjunction with the Indiana Department of Revenue which gathers information.
13. Does this recent ruling affect Hoosiers who don’t smoke and don’t purchase cigarettes?
A. For Hoosiers who don’t smoke and don’t buy tobacco products, the effect is indirect but real. All taxpayers are affected by the health care costs of tobacco-related diseases suffered by smokers, costs that may be borne by Medicaid or private insurance and ultimately by taxpayers and policyholders. If tobacco companies pay Indiana less next year than they otherwise would, then that’s less money for smoking-cessation programs and other programs funded by MSA money. Antismoking programs have for several years attempted to reduce Indiana’s traditionally high rates of youth cigarette smoking that lead to disease. One concern is that a one-year reduction in funding next year would limit the effectiveness of those antismoking campaigns and smoking-cessation programs down the road, and in turn impede progress against smoking-related diseases.
14. What does the State do to enforce the MSA? How are the amounts the nonparticipating manufacturers pay calculated? And what happens to the money they pay into escrow?
A. The State determines the amounts of each nonparticipating manufacturer’s product that is sold in Indiana through distributor filings. Using the number of individual cigarettes (not packs) sold, the State applies the proper percentages for that year to reach the amount of escrow due. Under Indiana law, NPMs are required to deposit that amount into an escrow account. Following the passage of a law in 2003, the State has maintained a directory of cigarettes that are legal for sale in Indiana. It contains both participating-manufacturer and nonparticipating-manufacturer brands, and distributors know that if an NPM is on the list, then it is compliant with its escrow requirements. Escrow payments remain in an escrow account to satisfy any future judgments against a company but would revert back to the company in 25 years.
The Department of Revenue, Attorney General’s Office and Alcohol & Tobacco Commission have a variety of actions and roles they can undertake including legal, auditing, accounting, clerical and other similar actions that result in nonparticipating manufacturers making payments to an escrow account. The combination and degree of coordination and communication of how these activities are carried out have a large bearing on how successful or “diligent” the enforcement can be.