Tobacco Companies Fail To Make Full Payment To Vermont

April 19, 2007 - Vermont Attorney General William H. Sorrell announced that this week, for the second consecutive year, Vermont is receiving from the major domestic tobacco manufacturers about $3 million less than its entitlement under the tobacco Master Settlement Agreement (MSA). Of the three largest tobacco companies, only one, Philip Morris, made its required payment in full. The other two, Reynolds American and Lorillard, along with several smaller companies, collectively withheld from the states more than $700 million of the total $6.75 billion in annual payments owed to the states. Of the payments distributed this week, Vermont received about $24.8 million.

“Vermont uses its annual MSA payments to fund important public health programs, and the tobacco companies have got to stop playing this game with our money,” Sorrell said. “Last year we initiated legal action in the Superior Court to recover the $3 million the companies withheld from the State’s 2006 payment. We are confident that the courts will ultimately find that we have fully discharged our obligations under the MSA, and that Vermont is entitled to its full payment.”

The tobacco companies argue that they can withhold money, or place it into a “disputed payments account,” to compensate for their loss of market share to smaller companies that have not signed the MSA (“Non-Participating Manufacturers” or “NPMs”). The MSA provides, however, that before their payment obligation can be reduced, the manufacturers must demonstrate that states failed to enforce certain state laws requiring escrow payments by the NPMs. Any state that diligently enforced its NPM statutes is entitled to its full MSA payment.

“Vermont has been diligent in enforcing its NPM statutes – no question about it,” Sorrell stated. “We have taken extraordinary measures to pursue any non-participating tobacco company that failed to comply with our laws, no matter how minor the violation.” The State adopted a “zero tolerance” policy, seeking recovery from noncompliant companies whether they owed $3 or $300,000, the Attorney General explained. Vermont has obtained judgments against these companies requiring payment of more than $1 million, including penalties, for violations of the NPM statutes. “We are proud of our work in tobacco enforcement,” Sorrell said.

Vermont’s case for recovery of its full 2006 tobacco payment is pending before the Vermont Supreme Court. The State is appealing a trial court order entered last year, which adopted the tobacco companies’ theory that the matter should be resolved by a specially convened arbitration panel, rather than through the normal judicial process. “The tobacco companies’ arbitration theory is inconsistent with the language of the MSA. The appropriate forum to decide whether we’ve met our legal obligations, under Vermont law, is a Vermont court,” Sorrell stated.

Under the MSA, the tobacco companies are required, in perpetuity, to make payments to the signatory states to compensate for the public health costs caused by cigarettes. The MSA is primarily a public health agreement. It includes strong prohibitions on numerous forms of advertising, promotion and marketing of cigarettes. Since the MSA was executed, cigarette sales in the United States have fallen by more than 21 %. Vermont has used its MSA payments for public health purposes, including a comprehensive tobacco control and cessation program, which has been instrumental in reducing Vermonters’ smoking rates, especially among young people. In Vermont, the rate of smoking among twelfth graders has decreased from 42 % in 1999 to 23 % in 2005, and smoking among kids in grades 8 to 12 has decreased from 31 % in 1999 to 16 % in 2005.

Source: Vermont Attorney General