Opinion ID: 171009
Heading Depth: 2
Heading Rank: 1

Heading: Master Settlement Agreement

Text: In November 1998, forty-six states, including Kansas and Oklahoma, as well as the District of Columbia, Puerto Rico, and the territorial governments of Guam, the Virgin Islands, American Samoa, and the Northern Marianas (collectively the settling states), entered into the MSA with the four major tobacco companies (original participating manufacturers, or OPMs). [2] In that agreement, the settling states released past, pending, and future claims they had, or might have, against the OPMs seeking recovery for Medicaid and other public health expenses incurred in the treatment of smoking-induced illnesses. Robin Miller, supra, at 460. In return, the OPMs agreed to restrict their advertising, sponsorship, lobbying, and litigation activities, particularly as those activities targeted youth; to disband three specific Tobacco-Related Organizations, and to restrict their creation and participation in trade associations; generally to make available to the public documents the OPMs had disclosed during the discovery phase of their litigation with the settling states; and to create and fund the National Public Education Foundation, dedicated to reducing youth smoking and preventing diseases associated with smoking. Each OPM acknowledged that its decision to join the MSA was voluntary, and further acknowledge[d] that it understands that certain provisions of this Agreement may require it to act or refrain from acting in a manner that could otherwise give rise to state or federal constitutional challenges and that, by voluntarily consenting to this Agreement, it (and ... any trade associations formed or controlled by any Participating Manufacturer)[ ] waives for purposes of performance of this Agreement any and all claims that the provisions of this Agreement violate the state or federal constitutions. The OPMs further agreed to make annual payments to the settling states in perpetuity. The MSA sets forth specific amounts that the OPMs have agreed to pay the settling states each year. Those annual amounts are subject to a number of adjustments. The OPMs each pay a portion of the total annual payment according to each OPM's Relative Market Share for the preceding year. [3] The OPMs pay these annual amounts to an escrow agent who disburses the payments among the settling states according to each state's allocable share. The MSA's Exhibit A sets forth a specific value representing each state's allocable share. Kansas' allocable share is 0.8336712%, meaning each year Kansas receives approximately .83% of the total annual payments that the participating manufacturers make under the MSA. Similarly, Oklahoma, with an allocable share of 1.0361370%, receives just over one percent of the annual payments made by participating manufacturers. Each state's allocable share does not change from year to year, and thus the distribution of the annual payments according to each state's allocable share is not dependent on sales volumes within each state, Miller, supra, at 464. Rather, it represents a preset agreement among the settling states on how the MSA payments will be divided among them. Cigarette manufacturers other than the OPMs can also join the MSA. Such a manufacturer is referred to as a subsequently participating manufacturer (SPM). To join, an SPM must agree to abide by the MSA's restrictions on advertising, marketing, lobbying, and litigation. In return, the settling states will release relevant claims that the states have, or might have, against that SPM. Approximately forty SPMs have now joined the MSA. See Miller, supra, at 462. As an incentive to join the MSA, the agreement provides that, if an SPM joined within ninety days following the MSA's Execution Date, that SPM is exempt (exempt SPM) from making annual payments to the settling states unless the SPM increases its share of the national cigarette market beyond its 1998 market share, or beyond 125% of that SPM's 1997 market share. If the exempt SPM's market share in a given year increases beyond those relevant historic limits, the MSA requires that the exempt SPM make annual payments to the settling states, similar to those made by the OPMs, but based only upon the SPM's sales representing the exempt SPM's market share increase. SPMs joining the MSA after this ninety-day exempt period must, instead, make annual payments based upon all of the SPM's national cigarette sales for a given year. In addition to its annual payment obligations, in order to join the MSA now, a non-exempt SPM must, within a reasonable time after signing the MSA, pay the amount it would have been obligated to pay under the MSA during the time between the MSA's effective date and the date on which the SPM joined the agreement. Both exempt and non-exempt SPMs' annual payment obligations under the MSA are calculated on the basis of the percentage of the four original participating manufacturers' total domestic market share represented by the SPM[s'] domestic market share.... In other words, the denominator in the calculation is the total OPM market share, not the total OPM and SPM market share. Miller, supra, at 465-66. Furthermore, the parties agree that the amount the SPMs pay per cigarette is roughly the same as the per-cigarette amount that the OPMs pay under the MSA. To the extent the amount differs, the OPMs pay slightly more than the SPMs on a per cigarette basis. One of Xcaliber's primary complaints is that its direct competitors are the exempt SPMs which, like Xcaliber, sell cheaper discount brand cigarettes. As the MSA is designed, these exempt SPMs have a distinct pricing advantage as compared to all other cigarette manufacturers, including the OPMs, the non-exempt SPMs, and the NPMs. The exempt SPMs will not have to make any annual payments on cigarette sales in a given year until they exceed their protected market share. Xcaliber, as well as OPMs, non-exempt SPMs, and the other NPMs, on the other hand, will have to make annual payments calculated under the MSA for all of their cigarette sales during a given year, although the NPM payments will be in the nature of annual escrow payments, which they may be able to retrieve in twenty-five years. Xcaliber further complains that, because it did not go into business until 2001, which was after the ninety-day period provided for an exempt SPM to join the MSA, Xcaliber never had the opportunity to join the MSA as an exempt SPM. (KT & G, on the other hand, was in business at the time the MSA was executed and so did have an opportunity to join as a non-exempt SPM, but chose not to do so.) Xcaliber and KT & G can still join the MSA, but only as non-exempt SPMs who will have to make annual payments based upon all of their national cigarette sales. In addition, they would have to make back payments representing the amounts they would have had to pay under the MSA in the preceding years. Xcaliber and KT & G further contend that, even if they decided to join the MSA now, the manufacturers who are already participating in the MSA could veto Xcaliber's and KT & G's participation. The states, on the other hand, assert that the participating manufacturers do not hold any such veto power.