HOLDING BIG TOBACCO ACCOUNTABLE

In 1998 the states reached a 25-year, $246 billion dollar deal with Brown & Williamson, R.J. Reynolds, Lorillard, and Phillip Morris—the country’s largest tobacco companies. After the Master Settlement, other manufacturers joined the settlement.

Since the time of the settlement, the tobacco manufacturers have sometimes tried to duck their obligations, entering into complex financial transactions designed in part to shift the responsibilities to other companies. In 2004, R.J. Reynolds had acquired Brown & Williamson and in 2014 it acquired Lorillard. To address potential antitrust concerns, in 2015 Reynolds sold four cigarette brands—Kool, Winston, Salem and Maverick—to Imperial Tobacco Group,or “ITG.” The ITG transaction required ITG to used “best efforts” to become a party to the state settlements. After the closing on the acquisition, ITG reached agreement with the state of Mississippi but did not join the separate agreements with Texas, Florida, or Minnesota.

After the sale, neither ITG nor Reynolds offered to pay the proportional obligation assumed by the retail sales of the four brands. Reynolds took the position that, due to the sale of the transferred brands to ITG, it was no longer required to pay the State of Minnesota under the Minnesota settlement agreement, that the brands were no longer part of Reynolds’ market share and that ITG, the new owner of these brands, had agreed to use “reasonable best efforts” to become part of the Minnesota settlement.

Reynolds argued that the Minnesota settlement, different than the national settlement, did not contain a “transfer of brands” provision. The transfer-of-brands provision prohibited original participating manufacturers from selling or transferring certain assets, including cigarette brands, to any person or entity, unless the person or entity was another original participating manufacturer or assumed the obligations of an original participating manufacturer prior to the transaction.

Because of the “transfer of brands” provision, ITG assumed responsibility to all the states which participated in the national settlement—including all payment obligations relating to the sales volume of the brands it acquired.

Reynolds and ITG, however, refused to make further payment to the three states that had separate agreements with arguably no “transfer of brands” provisions: Texas, Florida, and Minnesota. Reynolds claimed that the transferred brands were no longer part of their market share for purposes of calculating payments under the settlement. ITG similarly refused payment, claiming that it never signed the settlement agreement and, under the asset purchase agreement of the four brands, it never assumed responsibility for the market share assumed by the four brands.

On March 26, 2018, Attorney General Swanson filed a lawsuit against the two companies demanding that they make the settlement payments represented by the market share of the four brands. The litigation ensued over the next three years. Philip Morris, which stood to pay a higher share if the four brands were not included in the overall calculation of the settlement payment, joined the litigation, and claimed that both Reynolds and ITG were obligated under the settlement agreement.

In March of 2021, the parties agreed to resolve the matter with both Reynolds and ITG being responsible for the market share assumed by the four brands.

The tobacco settlements disappointed many health advocates to the extent state legislatures took the settlement money for their general funds to pave roads, renovate sewers and the like, instead of using the money to repair the harms caused by tobacco usage.

Learning from this bitter lesson, Attorney General Swanson made sure that her $890 million billion settlement with 3M over PFAS contamination was held in trust to bring clean water to affected residents, rather than being diverted to the state general fund.

References:

In Re Matters Involving the Minnesota Tobacco Settlement. Ramsey County District Court, File # 62-CV-18-1912; File # 62-CV-18-1878.
Hyatt, Kim, “Where does all Minnesota’s tobacco tax revenue go?” Star Tribune, December 8, 2019, page B5.
Howatt, Glenn, “Big Tobacco refuses to pay state,” Star Tribune, February 18, 2019, page 1A.
Van Berkel, Jessie, “State has $279M invested in tobacco,” Star Tribune, August 4, 2019, p. A1.