AG sues tobacco companies for $7 million shortfall

By Steve Korris | Apr 27, 2006

Darrell McGraw

CHARLESTON - Cigarette makers R. J. Reynolds and Lorillard withheld $755 million from their April 17 payments to states under the national tobacco settlement.

They withheld about $7 million that West Virginia would have received.

Reynolds cut its payments by almost a third, from $2.016 billion to $1.369 billion. It put the difference, $647 million, in an escrow account.

Lorillard cut its payments by almost a sixth, from $658 million to $550 million. It put the difference, $108 million, in an escrow account.

Industry leader Philip Morris paid in full, at $3.4 billion, but declared it would recover some of that through the same adjustment Reynolds and Lorillard invoked.

States swiftly began suing all three. West Virginia Attorney General Darrell McGraw sued them in Kanawha County circuit court.

Senior assistant attorney general John Dalporto stated in a press release that several weeks of intense negotiations produced no agreement on the payments.

Companies have paid states about $47 billion in eight years under the agreement. They paid states almost $6 billion this year.

The agreement has no expiration date.

Philip Morris, Reynolds and Lorillard signed the deal in 1998 to settle fraud complaints, demands for Medicaid reimbursement and other claims.

States agreed to pass model laws stifling competition from small companies that would gain a price advantage by staying out of the agreement.

The laws required outsiders to put about as much into escrow accounts as they would send to states if they signed the deal.

The agreement provided that if states failed to enforce the laws and big companies lost market share to little ones, big companies could adjust their payments to states.

In April 2005, the big companies asked for analysis of market shares behind payments they made in 2004 on sales from 2003.

The big companies and the states jointly hired a consultant, who found this March that the big companies lost market share because of the agreement.

According to the big companies, the loss of market share yields an automatic adjustment unless states prove they diligently enforced the laws.

The big companies argue that the agreement requires arbitration of any dispute over diligent enforcement, rather than litigation in courts of every state.

The National Association of Attorneys General, which manages the settlement for states, argues that the dispute is not subject to arbitration.

"The states all believe that they have diligently enforced their model statutes and that they ultimately will receive the money in dispute," declared the association's tobacco committee chairs, Tom Miller of Iowa and Lawrence Wasden of Idaho.

West Virginia has diligently enforced the laws, according to Dalporto.

His press release stated that McGraw sued companies that did not comply with the laws and obtained judgments or settlements in each suit.

West Virginia has collected nearly $200,000 in penalties, Dalporto stated.

He added that the Tax Department has confiscated contraband cigarettes and imposed penalties on wholesalers and distributors.

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