Opinion ID: 2353034
Heading Depth: 2
Heading Rank: 1

Heading: The Master Settlement Agreement

Text: Several years ago, New Hampshire, along with other states and jurisdictions, filed suit against a number of tobacco manufacturers, alleging that they were engaging in wrongful advertising and marketing of cigarettes and other tobacco products. See, e.g., Com. v. Philip Morris, Inc., 448 Mass. 836, 864 N.E.2d 505, 507 (2007); State v. Philip Morris, Inc., 279 Conn. 785, 905 A.2d 42, 43 (2006). In November 1998, the Attorneys General of forty-six states, the District of Columbia, the Commonwealth of Puerto Rico and four United States Territories (the Settling States) entered into the Tobacco Master Settlement Agreement (MSA) with four domestic tobacco manufacturers, known as the Original Participating Manufacturers (OPMs). Because two of the manufacturers have merged, the OPMs now are defendants Philip Morris USA, Inc., R.J. Reynolds, Inc., and Lorillard Tobacco Co. Under the MSA, the Settling States agreed to dismiss their lawsuits and to release past and future claims against the OPMs in exchange for annual payments from the OPMs, as well as several other concessions, including marketing and advertising restrictions. Since the execution of the MSA, various other tobacco manufacturers, known as Subsequent Participating Manufacturers (SPMs), have joined the MSA and are subject to the same payment obligations and other restrictions as the OPMs. Collectively, the OPMs and the SPMs are known as Participating Manufacturers (PMs). Those tobacco companies that did not enter into the settlement are known as Non-Participating Manufacturers (NPMs). The annual payments that the MSA requires the PMs to make are intended to help the Settling States achieve significant funding for the advancement of public health and the implementation of important tobacco-related public health measures. Under the MSA, the PMs do not make payments directly to the individual Settling States. Instead, each PM is required to make a single, nationwide payment into an escrow account on April 15th of each year, and the funds are subsequently allocated among the Settling States. The PMs' payment obligations are calculated annually by an Independent Auditor. Currently, the Independent Auditor is the public accounting firm PricewaterhouseCoopers LLP. The MSA contains a comprehensive formula governing how the Independent Auditor calculates the PMs' annual payment obligation. The starting point is for each of the OPMs to pay into the escrow account its relative market share of the base amount for the year at issue as specified in section IX(c)(1) of the MSA. This amount is then subject to several reductions and adjustments. One adjustment is the Non-Participating Manufacturer Adjustment (NPM Adjustment), which is here at issue. As noted above, the NPMs are tobacco manufacturers that have not joined the MSA, and are thus not subject to the MSA's marketing restrictions and payment obligations. The drafters of the MSA acknowledged that marketing restrictions and payment obligations could put the PMs at a competitive disadvantage and potentially cause PMs to lose market share to the NPMs. Thus, the NPM Adjustment attempts to level the marketplace by reducing the annual payment obligations of the PMs if  as a collective group  it is proven that they lost market share to the NPMs. In order for the NPM Adjustment to apply and reduce the annual payment obligations of the PMs, it first must be determined whether the PMs experienced a collective loss of a certain percentage of domestic market share to the NPMs. Next, it must be determined by a nationally recognized economic consulting firm  referred to in the MSA as the Firm  whether the MSA imposed a competitive disadvantage on the PMs and whether that disadvantage was a significant factor in the PMs' loss of market share. If the PMs experience the requisite market share loss and the Firm also concludes that the MSA was a significant factor contributing to that loss, then the NPM Adjustment applies. Even if these two factors are proven and the NPM Adjustment is applicable, the MSA contains a mechanism for a Settling State to avoid a reduction of payments. The MSA provides that: A Settling State's Allocated Payment shall not be subject to an NPM Adjustment . . . if such Settling State continuously had a Qualifying Statute . . . in full force and effect during the entire calendar year immediately preceding the year in which the payment in question is due, and diligently enforced the provisions of such statute during such entire calendar year. . . . MSA § IX(d)(2)(B). New Hampshire has a Qualifying Statute, codified as RSA chapter 541-C (2007). RSA chapter 541-C requires NPMs doing business in New Hampshire to place into a qualified escrow fund by April 15th a certain amount of money based upon the number of individual cigarettes sold in New Hampshire by the NPM during the previous year. See RSA 541-C:3, I(b); see also RSA 541-C:2, VI,:2, X (defining qualified escrow fund and units sold).