By Joan Gralla
NEW YORK — An arbitrator ruled that cigarette makers lost market share as a result of a settlement reached with U.S. states, boosting the chances they can reduce the $6.5 billion payment they owe next month, according to a copy of the decision obtained by Reuters on Tuesday.
U.S. states who signed the accord have said they would fight in court if they lost. New York state this month has already won one such court battle, according to The Brattle Group, the arbitrator who wrote the decision.
But the states now are trying to negotiate a settlement, according to the National Association of Attorneys General.
The states argue they met another requirement under the pact because they collected funds from tobacco companies that did not sign it.
Big Tobacco in 1998 agreed to pay states $206 billion to help pay for the costs of treating ailing smokers. Their next payment is due in mid-April, and several cigarette makers want to withhold about $1.2 billion because sales have dropped, partly because prices rose, discounters rushed in and the number of smokers, on a per capita basis, has fallen to levels last seen in the late 1930s.
States and municipalities around the nation have sold nearly $32 billion of bonds backed by the payments from cigarette-makers.
Connecticut Attorney General Richard Blumenthal vowed to force the cigarette makers to pay in full.
“I will stop Big Tobacco from shamelessly shirking its obligations under the settlement agreement,” he said.
David Howard, a spokesman for RJ Reynolds Tobacco Co. Inc.,, which makes Camel cigarettes, said: “Certainly we’re pleased with the ruling confirming the preliminary determination that the disadvantages of the master settlement agreement were a significant factor of our market share loss.”
Altria Group Inc.’s Marlboro-maker Philip Morris spokeswoman Peggy Roberts declined to comment.
The San Francisco-based Brattle Group arbitrators were not available.
Tobacco companies argue that non-signing companies, often discounters, grabbed 8 percentage points of market share between 1997, the year before the pact was sealed, and 2003.
They can cut how much they owe the states if their market share falls more than 2 percent a year because of the accord. Cigarette-makers say that big of a drop occurred in 2003.
The arbitrators noted a New York state court on March 13 disagreed with their preliminary finding that the settlement caused the tobacco firms’ market share to fall by 2 percent.
Calling themselves the “firm,” the arbitrators wrote: “The Court found the effect of the firm’s interpretation related to the two percentage points ‘illogical and unintended’.”
As a result of the court decision, New York state asked for a declaratory judgment in its favor, the arbitrators said.
Their report added: “The firm is not persuaded by the Court’s logic,” explaining they do not agree that under the settlement, the first 2 percent of any market share drop caused by the settlement “were intended to be ignored.”
Iowa Attorney General Tom Miller and Idaho Attorney General Lawrence Wasden, who lead the National Association of Attorneys General’s Tobacco Committee, said they were confident they can negotiate a deal. They said: “The settling states are engaged in discussions with the major manufacturers to ensure that the participating manufacturers make full payments of the amounts due on April 17, and we expect those negotiations to be successful.”
Robert Campagnino, a Prudential Equity Group analyst who follows tobacco companies, said the negotiations were likely to be successful though the ruling could trigger a wave of litigation, as states depend on the tobacco settlement funds.
“A great deal is at stake here, including what has become a cozy relationship between the states and the tobacco industry,” Campagnino said. “Ultimately, we suspect that some sort of negotiated agreement will be the outcome – sort of a settlement of the Settlement.”
He said the decision is unlikely to provide a material benefit to the tobacco companies in the foreseeable future.
(Additional reporting by Brad Dorfman in Chicago and Peter Kaplan in Washington)
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