Tobacco Companies Settle With States Over MSA Payments

WASHINGTON, D.C. -- Three major tobacco companies have settled a dispute with 17 states, Washington, D.C. and Puerto Rico over payments required under a 1998 anti-smoking agreement.

Philip Morris USA (PM USA), R.J. Reynolds Tobacco Co. and

The agreement is subject to approval by an arbitration panel. Arbitration will continue with those states that have decided not to join the settlement agreement. The arbitration panel is expected to reach a decision on these states by the end of 2013.

The deal resolves the long-standing dispute related to the Non-Participating Manufacturer (NPM) adjustments of the Master Settlement Agreement (MSA). The states participating in the settlement are Alabama, Arizona, Arkansas, California, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, Virginia, West Virginia and Wyoming.

The agreement also allows additional states to join under certain conditions.

"This agreement resolves disputes with a large group of states on financial terms that are fair to the parties and in a way that we believe will lead to a better method for resolving these issues in the future," said Denise Keane, Altria Group Inc.'s executive vice president and general counsel, speaking on behalf of PM USA. "The agreement includes a mechanism that under certain conditions allows additional states to join, and we hope other states take advantage of that option."

In return for the payments, the manufacturers will receive credits against the joining states' portion of future MSA payments. For the joining states, the settlement is net cash positive and also removes the risk of substantial reductions of MSA revenues for the years in dispute, 2003 to 2012, according to PM USA.

Based on current assumptions, PM USA will receive approximately 28 percent of the credits to the companies that were original participants in the MSA. This percentage mirrors the maximum percentage of NPM adjustments that would be allocated to PM USA if the disputes were arbitrated to conclusion, as the MSA allocates a greater share of recovery to those original participating manufacturers that lost relative market share during the relevant period.

PM USA's credit is estimated to total approximately $450 million, based on the current roster of states. This estimate is subject to change depending on a variety of factors related to the calculation of the credit.

R.J. Reynolds will receive credits estimated at more than $1 billion, according to the company.

"This settlement is a win-win proposition for both the joining states and R.J. Reynolds, and we hope that additional states will choose to participate," said Martin L. Holton III, executive vice president and general counsel for R.J. Reynolds. "The company is able to receive significant value for injury its brands suffered in the marketplace at the hands of manufacturers who are not subject to the obligations of the MSA. At the same time, the settlement will make available a significant amount of money for each state that joins the agreement. Perhaps most importantly, both sides can now move beyond this decade-long series of financial disputes that have distracted attention and consumed many resources for far too long."

For its part, Lorillard expected to receive credits over the next five years of at least $198 million on its outstanding claims, according to the company. The majority of the credits will occur in April 2013, with the remainder over the following four years.

"We are very pleased to have settled this long-standing dispute with the signatory states and believe that it is an equitable resolution for all parties involved," said Ronald S. Milstein, executive vice president and general counsel of Lorillard. "Importantly, today's announcement also puts into place a new method to better determine future adjustments -- providing greater clarity for the states and Lorillard."