Report shows big tobacco, AGs at odds

By Steve Korris | Jun 30, 2006

CHARLESTON -- Big tobacco companies and state attorneys general do not trust each other any more.

CHARLESTON -- Big tobacco companies and state attorneys general do not trust each other any more.

Their 1998 agreement has dissolved into a bunch of disagreements, according to a report that a consultant for both sides prepared.

Cigarette makers and attorneys general cannot even agree on a definition of the most important word in the agreement.

The feud became public in March, when cigarette makers announced that findings of the Brattle Group, of San Francisco, would allow them to reduce payments to states.

The Brattle Group found that companies in the agreement lost shares of the cigarette market to companies outside the agreement.

That finding alone did not allow adjustment of payments. Companies qualified for adjustment because the Brattle Group found that the agreement was a "significant factor" in the loss of market shares.

The report remained confidential until June, when a judge ordered its public release.

West Virginia Attorney General Darrell McGraw and attorney generals of 45 other states signed the agreement. Four states had signed separate agreements. McGraw has claimed credit as a leader of negotiations that led to the agreement.

The National Association of Attorneys General released the report after smearing Wite-Out over sections its members wished to keep secret.

No amount of whitewashing could hide the suspicions between the parties or the difficulties the Brattle Group encountered in trying to satisfy both sides.

Before the Brattle Group could decide if the agreement was a significant factor in the loss of market shares, someone had to define significant.

States defined it as major, substantial or important. Cigarette makers defined it as more than negligible.

The Brattle Group wriggled out of the jam by breaking a grammar school rule that forbids defining a word by using the word.

It declared that a significant factor was one that has "significant explanatory power."

To measure the impact of the agreement the Brattle Group needed to paint a picture of a world without the agreement. Here again, the partners took different views.

They hired professors who crafted a "but for world" with elaborate equations. Again the consultants could not bring themselves to choose one over another.

They wrote, "…there are many degrees of freedom that can and do cause differences…"

They wrote, "…the Firm views the results from each of the datasets as being of considerable importance."

Falling back on the obvious they wrote that, "…the Firm generally views more data over a longer time period to be preferable to fewer data over a shorter time period."

The Brattle Group also danced around the question of whether companies outside the agreement have evaded laws that aimed at canceling any competitive advantage that they would otherwise gain by staying out of the agreement.

States argued that evasion by nonparticipating manufacturers was a result not of the agreement but of deliberate decisions to break laws.

Cigarette makers argued for direct impact. The Brattle Group agreed but refused to add evasion to their equations on the grounds that they had already implicitly included it.

At the creepiest point in the report, the consultants quoted an argument of the states that cigarette makers could deliberately lose market share in order to qualify for adjustments.

The parties also disagreed over which side should carry the burden of persuasion.

States recommended placing the burden on companies because error against states would bring greater consequences than error against companies.

The Brattle Group wriggled out by declaring that neither side carried the burden.

Near the end of the 164-page report, as the consultants combine the models of But For World, the Wite-Out flowed freely.

Paragraph 312, which took up all of page 136, has disappeared.

Paragraph 314 has disappeared.

Paragraph 316 says only, "The Firm proceeds with additional systems estimates –"

Paragraphs 317 through 319 have disappeared.

Paragraph 320 ends with the words, "In addition –"

Figure 18 has disappeared.

Paragraph 323 says only, "Results for the –"

Table 8 and Figure 19 have disappeared.

Paragraph 343 declares that Table 12 sets forth the most relevant results, but the first three lines of Table 12 have disappeared.

The consultants concluded that companies which stayed out of the agreement held 7.95 percent of the market and that they had realized three and a half to four percentage points by staying out.

They wrote, "A reasonable economist would view a factor that explained 3.5 to 4.0 percentage points of a 7.95 percent impact as having significant explanatory powers."

On tax day, April 15, some companies reduced payments to states on 2005 sales in light of the report. Others paid in full but reserved the right to seek refunds.

In May, the National Association of Attorneys General asked the United States Supreme Court to intervene in the payment dispute. The Court has received initial briefs.

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