Unholy Alliance

States are embroiled in a nasty squabble with their business partner of seven years: Big Tobacco. <?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />


Major tobacco companies Philip Morris and R. J. Reynolds have accused the states of failing to enforce anti-competitive laws that were instituted as a part of the major tobacco settlement of 1998. Under the terms of the settlement, the companies were given the right to reduce their payments to the states if they could prove two things: that the settlement caused them to lose market share, and that the states failed to “diligently enforce” laws imposing special taxes and regulations on small competitors.


In 2006 alone, Big Tobacco companies gave over $6 billion in settlement payments to the states. That figure could plummet by as much as $1.2 billion following a March 28 ruling by an independent arbiter, which held that major tobacco companies did in fact lose market share due to advertising restrictions imposed by the 1998 deal. Unfortunately, the actual language of the arbiter’s ruling is being withheld from the public.


This is the legacy of the $206-billion backroom deal struck in 1998 between 46 state attorneys general and major tobacco companies. The companies agreed to make annual payments to the states, and the states agreed to protect the companies from the competitive pressure of smaller tobacco companies. Or, as a spokesman for South Carolina’s current attorney general recently put it, states have become obligated to “prop up big tobacco to make sure they sell enough cigarettes to make payments to the states.”


But things didn’t go quite as smoothly as planned. Back in 1997, the four leading cigarette makers controlled over 99 percent of the market. That has since slipped to around 92 percent.


The states insist they’ve done a lot to hurt sales by small, upstart companies that were never even targets of the state-tobacco lawsuits of the 1990s. In fact, states passed laws forcing small companies to make millions of dollars in annual payments to the states in order to “level the playing field.” Vermont Attorney General William Sorrell, then-chairman of the National Association of Attorneys General (NAAG) tobacco task force, in 2003 went so far as to admonish his fellow attorneys general in a “privileged and confidential” memo that “all states have an interest in reducing sales by ‘nonparticipating manufacturers’ in every state” to avoid a loss in settlement payments. But, much to the consternation of the states and the majors, the upstarts were still able to offer their products at a competitive price and gain market share.


Despite the March 28 arbitration ruling, all is not lost for the states. For one thing, it’s unclear how and whether the majors can prove that states failed to diligently enforce the anti-competitive laws. It’s also possible that the states and Big Tobacco could mend their rift and forge an even stronger partnership, as tobacco industry analyst Bonnie Herzog has suggested. In any event, attorneys general have other weapons at their disposal.


New York Senator Chuck Schumer and the state’s notoriously litigious attorney general, Eliot Spitzer, are working on a bill to stop all Internet cigarette sales. The plan, announced early in March, is to force smokers to buy cigarettes locally so that states get a guaranteed revenue stream from both excise taxes and settlement payments. It’s not chump change. In fiscal year 2004, states took in $12 billion in cigarette excise-tax revenue and another $10 billion in tobacco-settlement money and securitized proceeds.


The Schumer-Spitzer bill would prevent consumers from buying cigarettes via U.S. mail, imposing fines of at least $1,000 per offense and possible jail time for anyone violating the ban. The New York duo hopes to build on successful efforts by Spitzer and other attorneys general to bully UPS, FedEx, and DHL into halting cigarette shipments. That leaves the U.S. Mail “the last refuge for online cigarette merchants,” Schumer explained.


And if those efforts fail, it’s not as if there’s a shortage of multi-state attorney-general lawsuits that yield big payouts. Nor is there any shortage of imagination for future lawsuits blaming industries for America’s health ills. Liberal health activists and trial lawyers, close allies of many state attorneys, are suing Kellogg’s and Sponge Bob Squarepants in Massachusetts. And for the past two years, the National Association of Attorneys General has built up its “Youth Access to Alcohol” task force, which includes 28 attorneys general who have been investigating alcohol advertising—once again for the sake of the children. As the bad news about tobacco-settlement payments was unfolding, Maine attorney general Steven Rowe told the New York Times on March 29 that the alcohol industry just isn’t doing enough to keep the under-21 crowd from viewing alcohol ads. But not to worry—we can always count on the government to do something.