January 15, 2005
By Stephanie Stoughton
The Associated Press
RICHMOND, Va. – Little Tobacco is preparing to fight Big Tobacco in Virginia and other states considering legislation that could sap the small manufacturers’ sales.
The dispute emerged from a landmark national settlement that required Philip Morris USA and other industry giants to pay $206 billion to settle lawsuits by the states over health care costs.
Major tobacco companies and the National Association of Attorneys General say a loophole gives an unfair price advantage to smaller manufacturers operating outside the 1998 agreement. But the smaller companies counter that the states are unfairly seeking to punish them for the larger companies’ past behavior – and perhaps snuff them out for good.
In recent years, Little Tobacco’s squeaks of protests barely registered as statehouse after statehouse passed legislation to close the loophole – an amendment that has forced many small cigarette makers to bump up their prices.
To keep smaller manufacturers from getting a price advantage, the states passed statutes requiring that they deposit money into escrow – currently about $3.90 per carton – in each state where they did business.
But the statutes also allowed the little guys to quickly recover a portion of their escrowed money if the amount they paid to a particular state exceeded what they would have paid had they joined the settlement. That meant that companies that concentrated their sales in states like Wyoming and Idaho – which receive tiny shares of MSA payments – could recoup much of their escrow funds and then outprice the major tobacco firms.
The nonparticipating manufacturers were able to increase their market share from less than 1 percent before the settlement to more than 8 percent in 2003, according to a report by PricewaterhouseCoopers.
Alarmed by the trend, the national attorneys association in the fall of 2003 urged the states to target nonparticipating manufacturers’ sales by adopting several measures, including the amendment that closed the so-called loophole in the escrow statute.
So far, the amendment has passed in 37 states.
In New York, U.S. District Judge Alvin Hellerstein in the fall issued a preliminary injunction against the state’s enforcement of the measure.
In his opinion, Hellerstein said the resulting escrow payments put up barriers to competition.