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

Heading: Kentucky’s Contraband Statute

Text: The other key piece of complementary legislation is § 131.610 of the Kentucky Code, commonly referred to as the Contraband Statute. This statute requires the Kentucky Department of Revenue to maintain a list of all tobacco companies currently in compliance with either the MSA or the Escrow Statute. The list, known as the “directory,” must be available for public inspection and must contain the names of the complying tobacco manufacturers as well as all of the manufacturers’ “brand families.” Id. Pursuant to § 131.612 of the Kentucky Code, no distributor may affix a Kentucky tax stamp, which is required for lawful cigarette sales, to any cigarette package if the manufacturer of that brand of cigarette is not listed in the directory. Tobacco companies that do not abide by either the MSA or the Escrow Statute are therefore effectively prohibited from selling their cigarettes in Kentucky. 4. The alleged effect of the MSA and complementary legislation Shortly before the MSA was executed, the OPMs controlled approximately 97% of the cigarette market in the United States. By 2000, however, this percentage had decreased to 94.5%. One reason for this change, according to Tritent, is that the OPMs have increased the price per pack of cigarettes in response to the payments required by the MSA. Because many cigarette smokers make their purchasing decisions based on cost, the higher cost of the OPMs’ cigarettes have resulted in a decrease in the OPMs’ market share. The OPMs are now selling less cigarettes, which in turn lessens their payment obligations under the MSA (because the payments are subject to the Volume Adjustment). Because the MSA provides a disincentive for raising market share (in the form of higher payments to the settling states), the NPMs argue that the PMs are not willing to engage in price competition. No. 05-6791 Tritent Int’l Corp. et al. v. Commonwealth of Kentucky Page 6 The NPMs, however, who are not obligated to make MSA payments or to follow the MSA’s advertising restrictions, should hypothetically be able to increase their market share. Such an increase actually occurred prior to the enactment of the ASR Repealer. A report by the National Association of Attorneys General confirmed that the NPMs’ market share greatly increased in the four years subsequent to the execution of the MSA. But the NPM Volume Adjustment reduces the PMs’ payment obligations in the face of such competition by the NPMs. This means that any price competition mounted against the PMs by the NPMs is undermined because the NPMs’ payments are based on the Escrow Statute rather than on the MSA, so that the NPMs do not enjoy a similar reduction. Therefore, any increase in the price per pack of cigarettes manufactured by the PMs is generally realized as additional profit rather than resulting in increased payments to the settling states. The Escrow Statute, according to the NPMs, further reduces the potential for price competition because it requires all tobacco companies selling cigarettes in Kentucky—whether or not they have joined the MSA—to make similar payments to Kentucky. Finally, the Contraband Statute effectively prohibits NPMs from doing business in Kentucky if they do not abide by their obligations under either the MSA or the Escrow Statute. Tritent argues that these two Kentucky statutes collectively result in an anticompetitive scheme.