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

Heading: Escrow statutes

Text: The MSA includes a model escrow (or qualifying) act and provides strong incentives for settling states to adopt it. See Miller, supra, at 466-67. [A] Qualifying Statute ... is one that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-a-vis Nonparticipating Manufacturers within the state. Id. at 467 (quotation omitted). The MSA encouraged settling states to adopt the model escrow act by providing that a settling state's allocated payment that is, the portion of the annual MSA payment that a particular state receives in a given yearcould be reduced by applying a non-participating manufacturers (NPM) adjustment. That adjustment lowers a state's allocated share of the annual MSA payment if the OPMs lose market share to NPMs and if a nationally recognized firm of economic consultants determines that the MSA was a significant factor contributing to the Market Share Loss for the year in question. The NPM adjustment does not apply to any state that has enacted and has in full force and effect a qualifying or model escrow statute. All settling states, including Kansas and Oklahoma, adopted the model escrow act. Kan. Stat. §§ 50-6a01 through 50-6a03; Okla. Stat. tit. 37, §§ 600.21 through 600.23, see Miller, supra, at 467. The escrow statute is premised on the legislative finding that, in light of the MSA settling the states' claims against the major cigarette manufacturers, [i]t would be contrary to the policy of the State if tobacco product manufacturers who determine not to enter into such a settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the State will have an eventual source of recovery from them if they are proven to have acted culpably. It is thus in the interest of the State to require that such manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such manufacturers from deriving large, short-term profits and then becoming judgment-proof before liability may arise. See Kan. Stat. § 50-6a01(f); Okla. Stat. tit. 37, § 600.21(D). In light of that, the model escrow statute requires an NPM selling cigarettes in a given state to do one of two things: 1) join the MSA, agreeing to become a participating manufacturer (as that term is defined in section II(jj) of the [MSA]) and generally perform its financial obligations under the [MSA], or 2) make similar annual payments into the state's escrow fund. See also Kan. Stat. § 50-6a03; Okla. Stat. tit. 37, § 600.23(A). An NPM's annual escrow payments in a particular state are calculated by multiplying a per-cigarette amount, established by the state's legislature and set forth in the statute, by the number of cigarettes the NPM sold in that state in the year for which payment is being made. [4] See also Kan. Stat. § 50-6a03(b)(1); Okla. Stat. tit. 37, § 600.23(A)(2). The parties agree that this per-cigarette amount is roughly equivalent to the per-cigarette amount the MSA requires from OPMs and SPMs for sales which are not exempt. To the extent it differs, the OPMs pay slightly more than the SPMs, which pay slightly more than the NPMs. The NPMs' escrowed funds will be released only upon three occurrences: Such funds themselves shall be released from escrow only under the following circumstances (A) to pay a judgment or settlement on any released claim brought against such tobacco product manufacturer by the State or any releasing party located or residing in the State. Funds shall be released from escrow under this subparagraph (i) in the order in which they were placed into escrow and (ii) only to the extent and at the time necessary to make payments required under such judgment or settlement; (B) to the extent that a tobacco product manufacturer 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] (as determined pursuant to section IX(i)(2) of the [MSA], and before any of the adjustments or offsets described in section IX(i)(3) of that Agreement other than the Inflation Adjustment) had it been a participating manufacturer, the excess shall be released from escrow and revert back to such tobacco product manufacturer; or (C) to the extent not released from escrow under subparagraphs (A) or (B)... funds shall be released from escrow and revert back to such tobacco product manufacturer twenty-five years after the date on which they were placed into escrow. See also Kan. Stat. § 50-6a03(b)(2); Okla. Stat. tit. 37, 600.23(B). The NPM earns interest on the funds it pays into the escrow fund. See Kan. Stat. § 50-6a03(b)(2); Okla. Stat. tit. 37, § 600.23(B). An NPM must annually certify to the state that it is in compliance with the escrow statute. See Kan. Stat. § 50-6a03(b)(3); Okla. Stat. tit. 37, § 600.23(E) (after amendment). The NPM faces civil penalties if it fails to make the required escrow payments. See Kan. Stat. § 50-6a03(b)(3); Okla. Stat. tit. 37, § 600.23(E) (after amendment).