Opinion ID: 2974528
Heading Depth: 3
Heading Rank: 2

Heading: Kentucky’s Escrow Statute

Text: As discussed above, Kentucky and the other settling states wanted NPMs to participate in the MSA’s public health provisions or to be otherwise accountable for the harms caused by their products. Section 131.602 of the Kentucky Code, commonly referred to as the Escrow Statute, was part of the complementary legislation designed to address this concern. The Escrow Statute requires “[a]ny tobacco product manufacturer selling cigarettes to consumers within [Kentucky], whether No. 05-6791 Tritent Int’l Corp. et al. v. Commonwealth of Kentucky Page 4 directly or through a distributor, retailer, or similar intermediary or intermediaries,” to do one of the following: (1) join the MSA as an SPM, or (2) deposit into escrow an amount determined by the statute, currently 1.67539 cents per cigarette sold in Kentucky (or approximately 33.5 cents per pack). While the funds are held in escrow, the NPM receives any interest earned on the funds it deposits. As originally enacted, the Escrow Statute provided for the release of the funds under any of the following three circumstances: (a) To pay a judgment or settlement on any released claim brought against such tobacco product manufacturer by Kentucky or any releasing party located or residing in Kentucky. . . . (b) To the extent that [an NPM] establishes that the amount it was required to place into escrow in a particular year was greater than the state’s allocable share of the total payments that such manufacturer would have been required to make in that year under the [MSA] . . . had it been a participating manufacturer, the excess shall be released from escrow and revert back to such [NPM]. (c) To the extent not released from escrow under paragraphs (a) and (b) of this subsection, funds shall be released from escrow and revert back to such [NPM] twenty-five (25) years after the date on which they were placed into escrow. Ky. Rev. Stat. § 131.602 (2)(a-c) (2000). Subsection (2) of the Escrow Statute, as originally drafted, is referred to as the “Allocable Share Release” (ASR) provision. This provision allowed an NPM to receive a refund of all payments in excess of the amount that it would have had to pay to Kentucky had the NPM been a PM. The ASR provision was intended to equalize the payments made under Kentucky’s Escrow Statute and the hypothetical payment that the NPM would have been required to make had it been a PM. For tobacco companies that sold cigarettes on a nationwide scale, the ASR provision served its desired purpose; the escrow obligations and the hypothetical MSA obligations were substantially the same. Not all companies, however, followed this nationwide business model. Some companies followed a regional business model, selling their products only in Kentucky and a few other states. As a result, those companies were able to obtain refunds of most of the money they placed in escrow. A brief hypothetical scenario will help to illuminate the disparity between the two business models. Assume that an NPM operating on a nationwide scale would have been required to pay $100,000 total to the settling states if it had joined the MSA. Because Kentucky’s Allocable Share is approximately 1.68%, Kentucky would have received no more than $1,680 from the NPM in the hypothetical event that the NPM became an SPM. The NPM, pursuant to the ASR provision, would have been entitled to a release of any escrowed funds in excess of the $1,680—meaning that the monetary obligation to Kentucky of an NPM was similar to that of an SPM. Under this business model, of course, the NPM would have had similar escrow obligations in the other settling states. Assume now that the NPM operated only in Kentucky. Regardless of the number of cigarettes sold in Kentucky, the NPM would pay the flat-rate-per-cigarette intended to be equivalent to that paid by an SPM selling the same number of cigarettes nationwide. The difference, though, is that the NPM would still be entitled to a release of all escrowed funds above the 1.68% that it would have had to pay Kentucky under the MSA—even though all of its sales were targeted in Kentucky (meaning that it had no escrow obligations in the other settling states). As a result of this No. 05-6791 Tritent Int’l Corp. et al. v. Commonwealth of Kentucky Page 5 disparity, NPMs operating on a regional level were able to reclaim most of the funds they placed in escrow. This in turn allowed the NPMs to artificially lower their prices, which, according to Kentucky, made the NPMs’ cigarettes more attractive to “price-sensitive youth.” Kentucky also believed that this practice resulted in disproportionate harm because, although the NPMs significantly contributed to cigarette sales in Kentucky, they did not contribute in a proportional manner to the funds held in escrow. As a result of the business practices of various NPMs, Kentucky repealed the ASR provision in 2004. The amended version of the statute now reads as follows: (b) To the extent that [an NPM] establishes that the amount it was required to place into escrow on account of units sold in the state in a particular year was greater than the [MSA] settlement payments, as determined pursuant to section IX(i) of that agreement, including after final determination of all adjustments, that such manufacturer would have been required to make on account of such units sold had it been a participating manufacturer, the excess shall be released from escrow and revert back to such [NPM] . . . . Ky. Rev. Stat. § 131.602(2)(b)(2004). Rather than being based on Kentucky’s Allocable Share (the 1.68% that Kentucky is entitled to under the MSA), the escrow obligation under the amended version (also known as the ASR Repealer) corresponds to the total MSA payment the NPM would have been required to pay had it been an SPM. As a result of the ASR Repealer, every manufacturer whose cigarettes are sold in Kentucky, regardless of where else the cigarettes are sold, is required to assume the same monetary obligation per cigarette that it would have incurred under the MSA, whether or not it actually joined the agreement.