Will Tobacco Get A Refund from The States?

The New York Court of Appeals on Thursday ruled tobacco companies who are part of the 1998 agreement that settled tobacco litigation with most states can go to arbitration to try to reduce their settlement payments. The $246 billion Master Settlement Agreement required tobacco companies to make annual payments to the states and also placed restrictions on how cigarettes are marketed but, if the tobacco companies that signed the agreement lose market share because of those restrictions, they are entitled to a refund of payments.

"It's clearly spelled out in the Master Settlement Agreement that a dispute over a payment, which this is, should be resolved through binding arbitration," said David Howard, a spokesman for R.J. Reynolds who has spearheaded tobacco's fight for reimbursement. Altria had no comment.

Thursday's ruling, which is in line with decisions by other state courts, means the tobacco companies can now try to reduce their 2003 payments through arbitration.

An auditor previously found in March 2004 that the companies who signed the settlement lost market share in 2003 and determined restrictions from the agreement were "a significant factor contributing to this loss".

Among the companies that signed the master Settlement Agreement are Altria (MO) and Reynolds American (RAI) although neither was part of Thursday's litigation.

One of two things will end up happening. Either the states will have to fork over hundreds of millions of dollars back to tobacco companies, monies that they just do not have or, the Master Settlement will be redone to both assure market share for it's signers, and further insulate the industry from future litigation. The second is the most likely scenario as states are pitifully dependent on the tobacco monies and simple to not have the fiscal ability to part with it. Assuring market share gives growth back to the signers and a more ironclad agreement cements their stranglehold on the industry.

Altria is letting today's plaintiffs, Commonwealth Brands, King Maker Marketing and Sherman and do it's dirty work while it plays good corporate citizen by supporting the FDA's potential regulation of cigarettes. The best part is? They are not only willing to do it but they are winning. Altria can rides their coat tails, avoid the legal expenses associated with it, and reap the rewards.

I simply cannot remember a time in which the litigation environment surrounding tobacco was this good.