SUMMARY OF THE ATTORNEYS GENERAL
MASTER TOBACCO SETTLEMENT AGREEMENT

March 1999

Joy Johnson Wilson
National Conference of State Legislators
Director, AFI Health Committee

TABLE OF CONTENTS

PREFACE

INTRODUCTION

THE TOBACCO SETTLEMENT AT A GLANCE

FREQUENTLY ASKED QUESTIONS

SUMMARY OF THE MASTER SETTLEMENT AGREEMENT
bullet Effective Dates 

State Specific Finality Date
Final Approval Date
Settlement Termination Date
bullet Master Settlement Agreement (MSA) Execution Date

bullet Marketing and Advertising Restrictions 

General Advertising and Marketing Restrictions
Restrictions on Outdoor Advertising
bullet Restrictions on Brand Name Sponsorships
bullet Youth Access Restrictions  bullet Smoking Cessation and Prevention 
The National Public Education Fund
bullet The National Foundation and the National Public Education Fund
bullet Enforcement/Consent Decrees 
Court Jurisdiction for Implementation and Enforcement
Implementation and Enforcement Coordination by NAAG
State Antitrust/Consumer Protection Enforcement Fund
bullet State Specific Finality
bullet Corporate Culture and Compliance, Lobbying Restrictions 
Corporate Compliance
Disbands Tobacco Trade Associations
Regulation and Oversight of New Tobacco Trade Associations
Lobbying Restrictions and Restrictions on Trade Associations
bullet Requires a Corporate Commitment to Reduce Youth Access and Consumption
bullet Attorneys' Fees 
Requires Industry to Pay Outside Attorneys' Fees
bullet Requires Industry to Reimburse States for Attorneys' Fees
bullet Civil Liability Restrictions 
bullet Suits pending by Political Subdivisions of States (MSA - Exhibit N)
bullet Public Disclosure 
Public Access to Tobacco Documents
Website for Industry Documents
bullet Disclosure Regarding Product
bullet Trust Fund Expenditures 
Up-front Payments ($12.742 billion)
Annual Payments ($183.177 billion)
Strategic Contribution Fund ($8.61 billion)
National Foundation ($250 million over 10 years)
National Public Education Fund ($1.45 billion over the next 5 years)
Attorney General Enforcement Fund ($50 million - one-time payment in 1999)
Payments to the National Association of Attorneys General ($1.5 million/10 years)
bullet General Provisions
bullet Payment Adjustments, Reductions and Offsets 
Inflation Adjustment Percentage
Volume Adjustment
Non-Settling States Adjustment
Previously Settled States Adjustment
Offset for Miscalculated or Disputed Payments
Non-Participating Manufacturers Adjustment
Federal Legislation Offset
Litigation Releasing Parties Offset
bullet Order of Application Offsets, Reductions and Adjustments
bullet Agriculture and Rural Community Assistance  bullet Smokeless Tobacco Settlement  bullet Most Favored Nation Provisions  bullet Appendix A - Model Consent Decree (MSA - Exhibit L)  bullet Appendix B - Model Statute (MSA - Exhibit T)  bullet Appendix C - Calculating the Inflation Adjustment Percentage  bullet Appendix D - Calculating the Non-Participating Manufacturers Adjustment  bullet Appendix E - Total Payments to Each State Through 2025  bullet Appendix F - Statutory and Regulatory Basis for Medicaid Recoupment


 

PREFACE

This summary was first published December 8, 1998, shortly after the states and the tobacco manufacturers reached an agreement. After consultation with the National Association of Attorneys General, a few errors were identified. These errors have been corrected in this second, and final, revised and updated summary. In addition, I have added additional detail in some areas to improve clarity and have added new information where it is available. I would call your attention to the section on Agricultural and Rural Community Assistance, where I have included a brief description of the agreement between the tobacco producing states and the participating tobacco manufacturers. Finally, based on e-mail and phone calls NCSL has received over the last several weeks, I have added some questions to the "Frequently Asked Questions" section of the summary. Below is an errata list for your information.

Errata 
bullet In the initial summary American Samoa and Commonwealth Tobacco were not included as parties to the settlement agreement. 
bullet In "The Tobacco Settlement at a Glance" in the subsection, "Financial Provisions," the initial summary included $1.5 billion for the National Associations of Attorneys General and that number should have been $1.5 million. The correct number appeared elsewhere in the document. 
bullet In "Youth Access Restrictions" the initial summary stated that tobacco manufacturers were prohibited from opposing state legislation that bans the manufacture and sale of cigarette packs containing fewer than 20 cigarettes after January 22, 1999. The correct date is November 23, 1998. 
bullet With respect to attorneys fees, the initial summary had the liquidated fee agreements will be paid over a four-year period. The payments will be paid over a five-year period. Also, states may seek reimbursement of their out-of-pocket costs after trial court approval of the settlement and consent decree. The initial summary indicated that states would not be permitted to seek reimbursement until after the state had attained state specific finality. 
bullet In sections addressing the model state statute, the initial summary erroneously stated that states that enacted "qualifying statutes" would enjoy the protection of the 65 percent cap. This is not the case. The sections on the model state statute have been revised to clarify the purpose of the statute and how it relates to the non-participating manufacturers adjustment.
bullet In the section on "Most Favored Nation Provisions", the word "before" has been replaced with "after".
ACKNOWLEDGEMENTS

I would like to personally thank Lynne Ross, Deputy Director of the National Association of Attorneys General and Laurie Loveland, Solicitor General in the North Dakota Attorney General’s office for their assistance in this effort. Finally, I would like to thank Steven Lewis, Policy Associate to the Health Committee at NCSL for his assistance with the substance of the summary and for making the summary available on the NCSL website.

Joy Johnson Wilson
Federal Affairs Counsel
Director, Health Committee
National Conference of State Legislatures
March 12, 1999


 
INTRODUCTION

 On November 23, 1998 the Attorneys General and other representatives of 46 states. Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, Guam and the District of Columbia signed an agreement with the five largest tobacco manufacturers (Brown & Williamson Tobacco corporation, Lorillard Tobacco Company, Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Commonwealth Tobacco, and Liggett & Myers), ending a four-year legal battle between the states and the industry that began in 1994 when Mississippi became the first state to file suit. Four states (Florida, Minnesota, Mississippi and Texas) had previously settled with tobacco manufacturers for $40 billion. The Liggett Group, the last tobacco manufacturer to sign on, was released from previous settlements it had reached with a number of states and will not have to contribute to the settlement fund unless the its sales rise more than 25 percent over current levels. This will be highly unlikely since immediately after signing the settlement agreement the company sold three of its major brands, representing 14 percent of its sales, to Phillip Morris Incorporated.

The agreement settles all antitrust, consumer protection, common law negligence, statutory, common law and equitable claims for monetary, restitutionary, equitable and injunctive relief alleged by any of the settling states with respect to the year of payment or earlier years and cannot be modified in any way unless all the parties agree to the modification. The signing of the settlement agreement is just the beginning of the rest of this story about tobacco, youth access and health.

Over the next 25 years, states will receive over $206 billion from the settlement, but funds will not be available to states until June 2000. Under the provisions of the agreement, states must begin implementation of the settlement agreement immediately. States that had suits pending were required to begin actions to settle the suits and to get the consent decree implementing the settlement agreement filed by December 11, 1998. The other states were required to file the necessary paperwork by December 23, 1998. This begins the process of obtaining State Specific Finality, the trigger for access to the state funds. Over the next several months, state courts will be reviewing the consent decrees and addressing any challenges to the implementation of the settlement agreement in the state. The most immediate task for state legislatures is the consideration and enactment of the "model statute" included in the settlement agreement. This model statute is designed to provide a level playing field between participating and non-participating tobacco manufacturers. Failure to enact the model statute will result in a significant reduction in a state's allotment. In addition, state legislatures will most certainly discuss how and where to spend the tobacco settlement funds. Finally, the tobacco settlement leaves plenty of room for additional state legislation regarding youth access and environmental smoking. The settlement establishes eight areas of state legislation/regulation that the industry is prohibited from lobbying against. 

Federal legislation is not required to implement the settlement agreement, however; federal legislation is needed to prevent the federal government from staking claim to more than half of the state's tobacco settlement dollars. The U.S. Department of Health and Human Services (HHS) believes that it is authorized and obligated, under existing Medicaid law, Section 1903(d) of the Social Security Act (See Appendix F for additional detail), to collect its share of any settlement funds attributable to Medicaid. Under this provision, recoveries made on behalf of Medicaid clients are shared with the federal government based on the federal Medicaid match in the state. In November 1997, HHS voluntarily suspended recoupment activities pending the outcome of federal tobacco legislation. At this writing, that suspension is still in force, but could be revoked at any time. Successfully resolving this issue will clearly be a major priority in Washington, D.C. for state governments.


The Tobacco Settlement at a Glance

Public Health/Youth Access

Prohibits youth targeting in advertising, marketing and promotions by: 
bullet Banning cartoon characters in advertising; 
bullet Restricting brand-name sponsorships of events with significant youth audiences; 
bullet Banning outdoor advertising; 
bullet Banning youth access to free samples; and 
bullet Setting minimum cigarette package size at 20 (sunsets 12/31/01).
Creates a National Foundation ($250 million over next 10 years) and a Public Education Fund ($1.45 billion between 2000-2003).

Changing Corporate Culture
bullet Requires the industry to make a commitment to reducing youth access and consumption. 
bullet Disband tobacco trade associations. 
bullet Restricts industry lobbying. 
bullet Opens industry records and research to the public.
Enforcement
bullet Provides court jurisdiction for implementation and enforcement. 
bullet Establishes a state enforcement fund ($50 million one-time payment).
Attorney Fees (Funded separately from the $206 billion in payments to states)
bullet Requires the industry to reimburse states for attorney fees (reimbursement will be based on the market rate in each state). 
bullet Requires the industry to pay for outside counsel hired by the states. 
bullet The settlement agreements does not effect contracts states have with outside counsel, but permits states to seek reimbursement from the settlement if the state has paid the fees of an outside counsel and the outside counsel fails to pursue either a liquidated fee agreement or arbitration, through the settlement. 
bullet Outside counsel can either negotiate a liquidated fee agreement or go through arbitration. 
bullet The liquidated fee agreements will be paid from a $1.25 billion pool over a four-year period. 
bullet The industry will pay whatever the arbiters award, but payments will be subject to a $500 million per year cash flow cap.
Financial Provisions
bullet States will receive over $206 billion over 25 years. 
bullet Up-front payments - $12.742 billion. 
bullet Annual Payments, beginning April 15, 2000 - $183.177 billion through 2025. 
bullet Strategic Contribution Fund, 2008-2017 - $8.61 billion. 
bullet National Foundation ($250 million over next 10 years). 
bullet Public Education Fund (at least $1.45 billion 2000-2003). 
bullet State Enforcement Fund ($50 million, one-time payment). 
bullet National Association of Attorneys General ($1.5 billion over next 10 years).
Source: National Association of Attorneys General


Frequently Asked Questions
bullet Who are the parties to the Tobacco Settlement? The parties to the settlement include 46 states (Florida, Minnesota, Mississippi, and Texas had previously settled with the tobacco manufacturers), Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam, the Northern Mariana Islands and the District of Columbia, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Commonwealth Tobacco, and Liggett & Myers.
bullet What is the effective date of the tobacco settlement? The parties signed the Master Settlement Agreement (MSA) on Monday, November 23, 1998, the Master Settlement Agreement Execution Date. States that sued the tobacco manufacturers were required to go to state court and file a motion for the approval of the settlement agreement by December 11, 1998. States that had not filed a suit, were required to go to state court to file suit and to make a motion to approve the settlement agreement by December 23, 1998. The effective dates for the non-economic provisions of the MSA vary, but many are related to the MSA Execution date (e.g. 60 days after the MSA Execution date). There are two important effective dates related to the economic provisions of the MSA: the state specific finality date and the final approval date. The state specific finality date is the date when a state court gives final approval to the settlement and the consent decree. Final approval occurs when the state court has approved the settlement agreement and the consent decree in the state and either: (1) the appeal time from that approval has expired without an appeal; or (2) if there is an appeal, all appeals have been completed, resulting in the settlement and the consent decree being approved. The final approval date for the MSA is the earlier of June 30, 2000 or the date when 80 percent of the states have obtained state specific finality and those states represent 80 percent of the payments. 
bullet When do the settlement funds become available to the states? No funds can be dispersed to the states until final approval is attained. If the requisite number of states have not reached state specific finality before June 30, 2000, the funds will become available to all states that have reached state specific finality on June 30, 2000. If a state fails to obtain state specific finality by December 31, 2001, its participation in the settlement is terminated.
bullet I understand that tobacco manufacturers will begin making payments in December 1998. Where will these funds go if they are not available to states until June 30, 2000? The payments made by the tobacco manufacturers will be deposited into an escrow account. When a state obtains state specific finality, the funds that are to be allotted to that state will be moved from the general escrow account into a state specific escrow account, where the funds will accrue interest and will become available to the state on the final approval date.
bullet What must states do to attain State Specific Finality? A state court must approve the settlement. This includes approval of the consent decree. In addition, all opportunities for appeal of the approval must have expired, so that the court’s approval is final. 
bullet What will state legislatures need to do to implement the tobacco settlement agreement? State legislatures are encouraged, but are not required, to enact the model statute included in the Master Settlement Agreement (See question #7), regarding the treatment of non-participating manufacturers, before the state begins receiving its allotment from the settlement. In addition, if there is any question about the legislative appropriation of the settlement funds, legislatures may want to enact laws to clarify the treatment of the funds under state law. The settlement agreement is silent on that issue. Finally, the legislature should probably review the state’s consent decree, the document that implements the settlement agreement in the state.
bullet What is the purpose of the model statute included in the Master Settlement Agreement? The model statute creates a reserve fund for non-participating manufacturers to pay future claims, establishing a level playing field between participating and non-participating manufacturers. The model act (See Appendix B-NCSL Summary of the Tobacco Settlement) must be enacted by states exactly as it is drafted in the MSA (Exhibit T) and as a stand-alone piece of legislation or the state must alternatively enact a "qualifying statute," as determined by a firm jointly retained by the settling states and the original participating manufacturers. The ruling of the firm is final. A "qualifying statute" is defined in the MSA as a settling state’s statute, regulation, law and/or rule (applicable everywhere the state has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the participating manufacturers experience (as opposed to the non-participating manufacturers) as a result of the MSA.
bullet What happens if my state fails to enact the model statute? Under the MSA, if in any year the total aggregate market share of the participating manufacturers decreases more than 2 percent and an economic consulting firm determines that the provisions of the MSA were a significant factor contributing to the market share loss, payments to states may be reduced based on that loss. This reduction in state payments is called the non-participating manufacturers (NPM) adjustment (See Appendix D for details). This analysis is done annually. A state’s enactment of the model statute is significant because if there is an NPM adjustment in any year, a state’s payment will not be reduced at all if that state has passed and has in force the model statute. Payments to the states that do not have a model statute or qualifying statute in full force and effect will be reduced to cover the entire NPM adjustment. This could result in a state losing its entire payment for that year. If a state enacted the model statute, but the statute is overturned or invalidated by a court action, the state would pay no more than 65 percent of its payment toward the NPM adjustment in that year. If a state has enacted a "qualifying statute" as opposed to the model act in the MSA, and the qualifying statute is struck down by a court, the state will not enjoy any of the protections afforded states that enact the model act. In other words, those states would be subject to the full NPM adjustment in that year and would not enjoy the benefits of the 65 percent cap.
bullet When the Final Approval Date arrives and the funds become available to the states, who controls the funds? The Master Settlement Agreement is silent on the matter; therefore the general belief is that the funds will be appropriated according to state law. 
bullet How are the amounts each state will receive determined? Are the state allotments listed in the Master Settlement Agreement the actual amounts each state will receive? The state allotments were established by a formula developed by the Attorneys General. These allotments are subject to a number of adjustments, reductions and offsets. In addition, the federal government is laying claim to more than half the settlement dollars. The exact amount a state will receive is the net of the listed allocation minus any adjustments, reductions and offsets and may also be subject to recoupment of any settlement funds attributable to Medicaid.
bullet What is the basis of the federal claim on state tobacco settlement funds? The U.S. Department of Health and Human Services (DHHS) contends that existing Medicaid law (Section 1903(d) of the Social Security Act) compels it to recover its share (federal Medicaid matching percentage) of third party payments, collected by states on behalf of Medicaid clients, and argues further that state tobacco settlement funds are third-party recoveries under the provisions of the Medicaid statute (See Appendix F for additional details). DHHS has "recouped" some funds from states that reached an earlier settlement agreement with the Liggett Group, but temporarily suspended the collection of state tobacco settlement funds pending comprehensive federal tobacco legislation. An amendment to the Medicaid statute that would exempt tobacco settlement funds from recoupment must be enacted to prevent the seizure of state tobacco settlement funds when they become available to states in 2000.
bullet How would the federal government recoup the tobacco settlement funds from the states? States are required by law to report Medicaid-related recoveries on a Quarterly Statement of Expenditures for the Medical Assistance Program, the HCFA-64 form. Line 9E of the HCFA-64 Summary Sheet is reserved for "special collections." This is the line were the U.S. Department of Health and Human Services maintains states should report state tobacco settlement funds (attributable to the Medicaid program). The state’s federal matching percentage would be applied to the amount on line 9E and that amount would be deducted from the state’s quarterly Medicaid allotment. It is important to note that the recouped funds would be automatically deducted from the state’s Medicaid allotment and would not come directly from a state’s tobacco settlement payment.
bullet Have any bills been introduced in Congress that would prohibit the federal government from recouping state tobacco settlement funds? Yes. Representative Michael Bilirakis (D-Florida) introduced H.R. 351 on January 19, 1999; and Senators Kay Bailey Hutchison (R-Texas) and Bob Graham (D-Florida) introduced S. 346 on February 3, 1999. These bills would exempt state tobacco settlement funds from the third party liability provisions under Medicaid, and would place no restrictions on how states use their tobacco settlement funds. Other bills have been introduced, but would condition the prohibition on federal recoupment with spending restrictions on use of state tobacco settlement funds.
bullet Does the Master Settlement Agreement restrict or earmark the settlement funds? No. States will determine how the funds will be spent. 
bullet If the federal government adopts an excise tax on tobacco products, will my state receive less money from the tobacco settlement? Maybe. Under the provisions of the settlement, if the federal government, prior to November 30, 2002, requires participating manufacturers to pay a tax or fee on tobacco products, and uses the proceeds to provide either unrestricted funds to states or funds earmarked for health care or tobacco-related health care, these funds may be subtracted from the state allotment on a dollar-for-dollar basis. The federal legislation offset would not apply if: (1) the funds were earmarked for assistance to tobacco growers or impacted communities; or (2) grant conditions that would require states to take some significant actions or to provide matching funds were placed on the federal funds and a state chose not to participate in the grant program.
bullet Aside from determining funding priorities and enactment of the model statute, are there other legislative actions related to the tobacco settlement state legislators might consider? Yes. The settlement agreement prohibits the sale and manufacture of cigarettes in packages of less than 20 cigarettes. This prohibition sunsets December 31, 2001. The settlement agreement also prohibits tobacco manufacturers from opposing state legislation prohibiting the sale and manufacture of these small cigarette packages. If a state wants to continue the ban, considered a key provision to discourage youth access to cigarettes, state legislation would be required. In addition, the settlement agreement identifies areas of state legislation, law and administrative rule related to youth access to tobacco products, that the tobacco industry is prohibited from opposing. That list provides a starting point for considering future legislation. Finally, there is a wide range of youth access issues that are not addressed in the settlement agreement that could be the subject of state legislative initiatives.

SUMMARY OF THE MASTER SETTLEMENT AGREEMENT

(The primary source of the information in this summary is the Master Settlement Agreement, as posted to the website of the National Association of Attorneys General at http://www.naag.org/settle.htm)
 
 

EFFECTIVE DATES
bullet Master Settlement Agreement (MSA) Execution Date 
bullet The date when the Attorneys General and the tobacco manufacturers sign the Master Settlement Agreement (MSA). 
bullet The MSA was signed by representatives of 46 states, Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, Guam, the District of Columbia, the Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Commonwealth Tobacco, and Liggett & Myers, on November 23, 1998. 
bullet Various provisions of the settlement are triggered by this date. 
bullet State Specific Finality Date 
bullet State specific finality occurs when a state court approves the settlement and the consent decree. This must be a final approval. All the time available to appeal the court’s decision must have expired, or alternatively, if approval of the settlement is appealed, state specific finality cannot be attained until a final decision regarding approval of the settlement has been rendered. 
bullet When state specific finality is attained, the state becomes vested and funds deposited in the MSA escrow account can be transferred to a special account established specifically for the state, within the MSA escrow account. 
bullet The first steps towards state specific finality occurred in December 1998, when the states that had suits pending against the industry filed papers to settle the suits by December 11, 1998. States that did not sue the industry filed papers seeking approval of the MSA by December 23, 1998. 
bullet Final Approval Date 
bullet The tobacco settlement funds will become available to all states that have attained state specific finality on the final approval date. This date is the earlier of June 30, 2000, or the date when 80 percent of the settling states attain state specific finality and states with 80 percent of the state’s financial allocation attain state specific finality. 
bullet No money will be dispersed to the states until the Final Approval date
bullet After June 30, 2000, whether or not 80 percent of the states have attained State Specific Finality and regardless of the percentage of the total allotment these states represent, funds will be available to disperse to a state as soon as state specific finality is attained
bullet Settlement Termination Date 
bullet If a state fails to attain state specific finality by December 31, 2001, the MSA with respect to that state will be terminated and the state will become a non-settling state.
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MARKETING AND ADVERTISING RESTRICTIONS
bullet Restrictions on Brand Name Sponsorships 
bullet Prohibits brand name sponsorship of concerts, events with a significant youth audience, or of team sports (football, basketball, baseball, hockey or soccer). 
bullet Prohibits sponsorship of events where the paid participants or contestants are underage. 
bullet Limits tobacco companies to one brand name sponsorship per year, after current contracts (in effect as of August 1, 1998) expire or after three years, whichever comes first. 
bullet Provides a special exception to the prohibition of the sponsorship of concerts for the Brown and Williamson Company by permitting it to sponsor either the GPC country music festival or the Kool jazz festival (formerly both were annual events). The agreement also permits the company to sponsor one other brand name event that was part of a contract in existence prior to August 1, 1998 for a period not to exceed three years.

bullet Allows corporate sponsorship of athletic, musical, cultural, artistic or social events as long as the corporate name does not include the brand name of a domestic tobacco product. 
bullet Bans the use of tobacco brand names for stadiums and arenas. 
bullet Limits the duration and restricts the placement of advertising for sponsored events. 
bullet General Advertising and Marketing Restrictions 
bullet Bans use of cartoon characters, but not human subjects (e.g. the Marlboro Man), in the advertising, promotion, packaging or labeling of tobacco products, effective May 22, 1999. 
bullet Bans payments to promote tobacco products in movies, television shows, theater productions or live performances, videos and video games. 
bullet Bans distribution and sale of non-tobacco merchandise with brand-name logos (caps, T-shirts, backpacks, etc.), effective July 1, 1999. 
bullet Prohibits tobacco companies from authorizing third parties to use or advertise brand names. 
bullet Requires tobacco companies to designate a contact in each state that will respond to Attorney General complaints of prohibited third party activity. 
bullet Exempts licensing agreements or contract in existence as of July 1, 1998, but does not permit the licensing agreements or contracts to be extended. 
bullet Bans future cigarette brands from being named after recognized non-tobacco brand or trade names (e.g. Harley Davidson, Yves Saint Laurent, Cartier) or nationally recognized sports teams, entertainment groups or individual celebrities. 
bullet Restrictions on Outdoor Advertising 
bullet Bans all transit and outdoor advertising, including: billboards, signs and placards larger than a poster in arenas, stadiums, shopping malls, and video game arcades. [Note: Poster-sized signs and placards can be placed in arenas, stadiums, shopping malls and video game arcades, but must conform to the overall agreement regarding the targeting of advertising to children.] 
bullet Tobacco billboards and transit ads must be removed by April 22, 1999. 
bullet Allows states to substitute, at industry expense and for the duration of billboard lease periods, alternative advertising which discourages youth smoking. 
bullet Bans tobacco companies from entering into agreements that would prohibit advertising discouraging tobacco use. 
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YOUTH ACCESS RESTRICTIONS
bullet After November 23, 1998: 
bullet Free samples cannot be distributed except in a facility or enclosed area where the operator ensures no underage individuals are present. 
bullet No gifts can be offered to youth in exchange for the purchase of tobacco products, coupons or proofs of purchase. 
bullet Gifts cannot be distributed through the mail without proof of age (legible driver's license certified to be valid by the gift recipient).  bullet Prohibits the manufacture of cigarettes in packages of less than 20 (January 22,1999 - December 31, 2001) and prohibits the distribution and sale of cigarettes in packages of less that 20 (April 22, 1999 - December 31, 2001). These provisions sunset, December 31, 2001. After this date, if state legislation prohibiting these practices is not enacted, the tobacco manufacturers may resume the manufacture, distribution and sale of cigarettes in packages of less than 20 cigarettes
bullet After January 22,1999, tobacco companies are prohibited from opposing state legislation that bans the manufacture and sale of cigarette packs containing fewer than 20 cigarettes. 
bullet Prohibits new challenges by the industry against the enforceability or constitutionality of state and local tobacco control laws, ordinances, and rules enacted prior to June 1, 1998 bullet Specifies that states do not waive any criminal liability based on federal, state, or local law. Top

SMOKING CESSATION & PREVENTION
bullet The National Foundation and the National Public Education Fund 
bullet The tobacco industry will contribute $25 million annually for ten years to support a charitable foundation, established by the Executive Committee of the National Association of Attorneys General (NAAG), that will support the study of programs to reduce teen smoking and substance abuse and the prevention of diseases associated with tobacco use. 
bullet Tobacco industry payments for the Foundation into the Master Settlement Agreement escrow account begin March 31, 1999, and funds can be allocated to the Foundation when at least one state has attained State Specific Finality. 
bullet An eleven-member board of directors will govern the foundation. NAAG, the National Conference of State Legislatures (NCSL) and the National Governors' Association (NGA) will each appoint two directors from their membership and the six directors will select the final five members. One of the five directors must have expertise in public health issues; the remaining four must have expertise in public health, medicine or child psychology. 
bullet The Foundation will formally affiliate with an educational or medical institution selected by the board of directors. 
bullet The foundation will: 
bullet Carry out a sustained, nationwide advertising and education program to counter youth tobacco use and educate consumers about the cause and prevention of diseases associated with tobacco use. 
bullet Develop, disseminate and test the effectiveness of: (1) counter advertising campaigns; (2) model classroom educational programs, including programs targeting at-risk population; and (3) criteria for effective cessation programs. 
bullet Commission studies, fund research and publish reports on factors that influence youth smoking and substance abuse. 
bullet Develop targeted training and information programs for parents. 
bullet Maintain a library of foundation studies, reports and publications. 
bullet Track and monitor youth smoking and substance abuse with a focus on reasons for increases or failures to decrease tobacco and substance use rates. 
bullet The foundation is prohibited from engaging in political or lobbying activities.  bullet A severance clause is included in the Master Settlement Agreement for settling states that are prohibited by state law from entering into the foundation portion of the agreement.  bullet The National Public Education Fund 
bullet The industry will contribute $1.45 billion over the next five years to support the National Public Education Fund, established to carry out a national, sustained advertising and education program to counter youth tobacco use and to educate consumers about tobacco-related diseases. 
bullet As long as the participating tobacco manufacturers represent 99.05 percent of the market, the industry will continue to contribute $300 million annually to the National Public Education Fund. 
bullet The fund may make grants to states and political subdivisions to carry out the fund's purposes. 
bullet Grants from the fund will be made by the National Foundation. 
bullet Outside contributions can be made to the foundation and specifically to the education fund.
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ENFORCEMENT/CONSENT DECREES

State Specific Finality
bullet State specific finality occurs when a state court approves the settlement and the consent decree. This must be a final approval. All the time available to appeal the court’s decision must have expired, or alternatively, if approval of the settlement is appealed, state specific finality cannot be attained until a final decision regarding approval of the settlement has been rendered. The consent decree will effectively implement the provisions of the settlement in the state. Legal challenges to the consent decree in a state are possible. (See Attachment A for a copy of the draft consent decree included as Exhibit L in the Master Settlement Agreement.) 
bullet State Specific Finality cannot be attained until the time for appeal or to seek review of or permission to appeal the court's approval has expired. If a review or appeal is initiated, state specific finality cannot be attained until the approval of the MSA and consent decree have been affirmed by the court to which the appeal can be taken and is no longer subject to further appeal. The court’s approval of the settlement and the consent decree must be a final approval. 
bullet When state specific finality is attained, the state becomes vested and funds deposited in the MSA escrow account can be transferred to a special account, within the MSA escrow account, established specifically for the state. 
Court Jurisdiction for Implementation and Enforcement
bullet Settling states or tobacco companies may apply to the court to enforce or interpret the terms of the agreement, although before applying to the court, a party must give the other parties and NAAG 30-days notice (unless the Attorney General determines there is a public health of safety concern requiring faster action). 
bullet If the court issues an enforcement order enforcing the agreement and a party violates that order, the court may order monetary, civil contempt or criminal sanctions to enforce compliance with the enforcement order. 
bullet Key public health provisions of the MSA agreement are included in consent decrees to be filed in each state. 
bullet Settling states or tobacco companies may apply to the court to enforce the terms of the consent decree. 
bullet A settling state may not seek to enforce the consent decree of another settling state. 
bullet A state is not required to give any prior notice before sending an order to enforce a consent decree from the court, except that a 10-day notice is required if the claimed violation involves targeting youth or making material misrepresentations about tobacco products (unless the Attorney General determines there is a public health or safety concern requiring faster action), or the party has committed a substantially similar violation previously. 
bullet If the court finds the consent decree has been violated, the court may award any relief available under the consent decree or the law in the state. 
bullet State Attorneys General may access company documents, records and personnel to enforce the agreement. 
Implementation and Enforcement Coordination by NAAG
bullet NAAG will: 
bullet Receive $150,000 annually from December 31, 1998 through December 31, 2007 to coordinate and to facilitate the implementation and enforcement of the agreement on behalf of the attorneys general and the settling states. 
bullet Monitor potential conflicting court interpretations involving the settlement. 
bullet Convene two meetings each year and one national conference every three years to evaluate the success of the settlement and to coordinate the Attorneys General efforts. 
bullet Assist states with inspection and discovery activities that are conducted to enforce the settlement. 
State Antitrust/Consumer Protection Enforcement Fund
bullet The purpose of the Fund is to: 
bullet Enforce and implement the terms of the MSA, by partial payment of the monetary costs of the Independent Auditor as contemplated by the agreement. 
bullet Provide monetary assistance to the various states’ attorneys general, including funds to: (1) investigate and/or litigate suspected violations of the Agreement and/or Consent Decree; (2) investigate and/or litigate suspected violations of state and/or federal antitrust or consumer protection laws with respect to the manufacture, use, marketing and sales of tobacco products; and (3) enforce the "qualifying statute." 
bullet On March 31, 1999, the industry is directed to pay $50 million to support the fund. Top

CORPORATE CULTURE AND COMPLIANCE, LOBBYING RESTRICTIONS

Requires a Corporate Commitment to Reduce Youth Access and Consumption
bullet Beginning May 22, 1999, companies must: 
bullet Develop and regularly communicate corporate principles that commit to complying with the Master Settlement Agreement and to reducing youth smoking. 
bullet Designate an executive level manager to identify ways to reduce youth access and consumption of tobacco. 
bullet Encourage employees to identify additional methods to reduce youth access and youth consumption.
bullet For the purpose of enforcing the Master Settlement Agreement, antitrust staff for any settling state may inspect and copy all non-privileged, non-work-product records and interview association directors, officer, and employees.  Corporate Compliance
bullet Prohibits Agreements to Suppress Research 
bullet Prohibits a participating manufacturer from entering into a contract or other arrangement that is designed to or has the effect of: (1) limiting competition in the production or distribution of information about the health hazards or other consequences of the use of tobacco products; (2) limiting or suppressing research into smoking and health; and (3) limiting or suppressing research into the marketing or development of new products.
bullet Prohibits Material Misrepresentations 
bullet Prohibits a participating manufacturer from making any material misrepresentation of fact regarding the health consequences of using any tobacco product.
Disbands Tobacco Trade Associations
bullet Disbands the Council for Tobacco Research, the Tobacco Institute, and the Council for Indoor Air Research. 
bullet Requires all records of these organizations that relate to any lawsuit to be preserved. 
Regulation and Oversight of New Tobacco Trade Associations
bullet The by-laws of any new industry trade association must provide that: (1) the association officers will be appointed by the board; and (2) the officers be employees of the association and cannot be employed by a member company. 
bullet The association’s legal counsel must be independent and cannot serve as counsel to member companies. 
bullet Minutes of board of director meetings will be prepared and maintained for at least five years. 
Lobbying Restrictions and Restrictions on Trade Associations
bullet Imposes Restrictions on Lobbyists 
bullet After a state has attained state specific finality, tobacco companies will be prohibited from opposing certain kinds of state or local legislation, laws or administrative rules (listed below and found in Exhibit F of the Master Settlement Agreement) that are intended to limit youth access to and consumption off tobacco products.
bullet Protected Legislation, Laws, Administrative Rules (Exhibit F)
Legislation, Laws or Administrative Rules that:
bullet Limit youth access to vending machines. 
bullet Include cigars within the definition of tobacco products. 
bullet Enhance enforcement efforts to identify and prosecute violations of laws prohibiting retail sales to youth. 
bullet Encourage or support the use of technology to increase the effectiveness of age-of-purchase laws (e.g. the use of programmable scanners, scanners to read drivers' licenses, or use of other age/ID data banks). 
bullet Limit promotional programs for non-tobacco goods using tobacco products as prizes or give-aways. 
bullet Enforce access restrictions through penalties on youth for possession or use. 
bullet Limit tobacco product advertising in or on school facilities, or the wearing of tobacco logo merchandise in or on school property. 
bullet Limit non-tobacco products that are designed to look like tobacco products, such as bubble gum cigars, candy cigarettes etc.
bullet Tobacco companies must require their lobbyists to certify, in writing, that they have reviewed and will fully comply with settlement terms including disclosure of financial contributions regarding lobbying activities and new corporate culture principles. 
bullet Requires companies to disclose lobbying costs to the state Attorney General in states without laws regarding financial disclosure of lobbying expenses. 
bullet Prohibits lobbyists from supporting or opposing state, federal or local laws or actions without the authorization of the companies. 
bullet After November 23,1998, tobacco companies are prohibited from opposing state legislation that bans the manufacture and sale of cigarette packs containing fewer than 20 cigarettes. 
bullet Prohibits the industry from lobbying for the diversion of settlement money to non-tobacco or non-health related uses. 
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ATTORNEYS' FEES

(Funds for payment of attorney fees are in addition to the $206 billion in payments to states)

Requires Industry to Reimburse States for Attorneys Fees
bullet Requires the tobacco companies to state and local governments for all reasonable costs (costs and expenses for which the industry would reimburse their own counsel and agents) and expenses and in-house attorney fees associated with the tobacco industry litigation. 
bullet Reimbursement will be at the market rate for hourly fees in each state 
bullet Reimbursement will occur after a state obtains State Specific Finality.
bullet Establishes a $150 million cap for amounts paid to the settling states, subject to reasonable verification by any requesting company.  Requires Industry to Pay Outside Attorney Fees
bullet The industry will pay outside attorney fees after a state has obtained State Specific Finality. 
bullet The MSA has no effect on contracts states have made with outside counsel. 
bullet Two payment methods are available - liquidated fee agreement and arbitration. 
bullet If a state pays outside counsel and the outside counsel fails to negotiate a liquidated fee agreement or to seek arbitration as provided for under the MSA, the state may seek payment through the same methods as outside counsel.
bullet Liquidated Fee Agreement (MSA – Exhibit O) 
bullet The Master Settlement Agreement "Exhibit O" is a model state fee payment agreement. 
bullet Outside counsel may negotiate a liquidated fee agreement with the industry, and if accepted, would be paid from a $1.25 billion pool of money from the tobacco industry over a four-year period. 
bullet No payments will be made after the fourth calendar quarter of 2003. 
bullet If the outside counsel rejects the liquidated fee process or cannot agree to an offer, they can go through arbitration. 
bullet Arbitration (MSA – Exhibit O, Appendix to Exhibit O) 
bullet A three-member arbitration panel will be established with two permanent members and a member from the state represented by the outside counsel. 
bullet The protocol of panel proceedings is the Appendix to Exhibit O of the MSA. 
bullet The tobacco manufacturers pay for the arbitration panel’s time and expenses. 
bullet Tobacco manufacturers can contest fee award requests. 
bullet The industry will pay whatever fee arbiters award, but the timing of the payment will be subject to a $500-million-per-year cash flow cap.
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CIVIL LIABILITY RESTRICTIONS
bullet Prohibits new challenges by the industry against the enforceability or constitutionality of state and local tobacco control laws, ordinances, and rules enacted prior to June 1, 1998
bullet Requires the industry to dismiss, without fees, all claims against participating states. 
bullet Requires the industry to dismiss pending legal challenges related to underage smoking and environmental tobacco smoke laws. 
bullet Specifies that states expressly do not waive any criminal liability based on federal, state, or local law. 
bullet Settles states’ Attorneys General suits, however; individuals will continue to be able to sue. 
bullet In general, if a suit by a political subdivision of a state is successful, the state’s allotment will be reduced by the amount of the award or settlement. (See "Litigating Releasing Parties Offset" in the section called "Payment Adjustments, Reductions and Offsets.") 
bullet Settling states cannot waive or release any claims on behalf of Indian tribes. 
bullet Suits Pending by Political Subdivisions of States (MSA - Exhibit N) 
bullet City of New York, et al. v. The Tobacco Institute, Inc. et al., Supreme Court of the State of New York, County of New York, Index No. 406225/96 
bullet County of Erie v. The Tobacco Institute, Inc. et al., Supreme Court of the State of New York, County of Erie, Index No. I 1997/359 
bullet County of Los Angeles v. R.J. Reynolds Tobacco Co. et al., San Diego Superior Court, No. 707651 
bullet The People v. Philip Morris, Inc. et al., San Francisco Superior Court, No. 980864 
bullet County of Cook v. Philip Morris, Inc. et al., Circuit Court of Cook County, Ill., No. 97-L-4550
Note: California and New York have agreed to share the proceeds of their settlement funds with their counties. The county suits in those states will be included in the state consent decree implementing the tobacco settlement.
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PUBLIC DISCLOSURE

Disclosure Regarding Product
bullet Prohibits the industry from making any material misrepresentations regarding the health consequences of smoking. 
bullet Prohibits manufacturers from jointly contracting or conspiring to: 
bullet Limit information about the health hazards from the use of their products: 
bullet Limit or suppress research into smoking and health; and 
bullet Limit or suppress research into the marketing or development of new products. 
Public Access to Tobacco Documents
bullet Effective November 23, 1998, tobacco companies will release documents that are under protective orders in state lawsuits and that have no privilege of trade-secret claim. 
bullet Settling states may seek court-approved public release of any documents that have been subject to an order or filing, prior to August 17, 1998, denying privilege, work product or trade secret protection. The industry can contest the action. 
Website for Industry Documents
bullet Requires tobacco manufacturers to open, at their expense, a Website that includes all documents produced in state and other smoking and health-related lawsuits. 
bullet Requires the industry to maintain the site for ten years (through June 30, 2010) in a user-friendly and searchable format (requires an index and other features to improve searchable access). 
bullet Requires the industry to add, at its expense, all documents produced in future civil actions involving smoking and health cases. 
bullet Oversized or multi-media records will not be placed on the Website, but will be made available to the public through the Minnesota depository. 
bullet The industry will provide the National Association of Attorneys General with up to $100,000 for a computer consultant to review and make recommendations regarding the industry's Website plans. 
bullet The National Association of Attorneys General’s consultant can seek input from settling state officials, public health officials and other users of the Website. 
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TRUST FUND EXPENDITURES

General Provisions
bullet Tobacco manufacturers will pay $206 billion over the next 25 years to states in "up-front" and annual payments. Allotments to states will be made based on formulas agreed to by the Attorneys General. 
bullet Payments made by tobacco companies (annual payments, strategic contribution fund, and up-front payments) will be adjusted annually in a number of ways. (See "Payment Adjustments, Reductions, and Offsets" for details.) 
bullet No money will be dispersed to the states until "final approval" is reached. (See "Effective Dates" for detail) 
Up-front Payments ($12.742 billion)
bullet Tobacco companies will pay $2.4 billion annually between 1998 and 2003. A three percent inflation factor is included in the amounts for years 2000 – 2003 (e.g. $2.4 billion (1998) increased by three percent is $2.472 billion (1999)). The funds will be allocated as follows: 
bullet $2.4 billion in 1998; 
bullet $2.472 billion in 2000; 
bullet $2.546 billion in 2001; 
bullet $2.623 billion in 2002; and 
bullet $2.7 billion in 2003.
bullet The following adjustments, reductions and offsets apply to payments starting in 2000: volume adjustment; non-settling states' reduction; miscalculated and disputed claims offset. (See " Payment Adjustments, Reductions and Offsets" for detail.)  Annual Payments ( $183.177 billion)
bullet If all states participate in the settlement, annual payments will "ramp-up" beginning with a $4.5 billion payment on April 15, 2000. The April 15th annual payments will be as follows: 
bullet $4.5 billion in 2000; 
bullet $5 billion in 2001; 
bullet $6.5 billion in each of 2002 and 2003; 
bullet $8 billion in each year 2004-2007; 
bullet $8.139 billion in annually in 2008-2017 (plus $861 million annually during the same period to the strategic fund); and 
bullet $9 billion in 2018 and thereafter.
bullet The following adjustments, reductions and offsets apply to payments starting in 2000: inflation adjustment; volume adjustment; previously settled states reduction (applies to each annual payment below $8 billion); non-settling states reduction; non-participating manufacturers adjustment; miscalculated and disputed claims offset; federal legislation offset; and the litigation releasing parties offset. (See " Payment Adjustments, Reductions and Offsets" for detail.)  bullet The $183.177 billion figure reflects payments after the "previously settled states reduction" is applied.  Strategic Contribution Fund ($8.61 billion)
bullet On April 15, 2008 and on April 15 each year through 2017, the companies will pay $861 million into a strategic contribution fund. 
bullet Money from the fund will be allocated to states based on a strategic contribution formula developed by the Attorneys General. The allocation formula will reflect the contribution made by states toward resolution of the state lawsuits against tobacco companies. 
bullet The formula is to be developed by June 1999.
bullet The following adjustments, reductions and offsets apply to payments starting in 2000: inflation adjustment; volume adjustment; non-participating manufacturers adjustment; miscalculated and disputed claims offset; federal legislation offset; and the litigation releasing parties offset. (See " Payment Adjustments, Reductions and Offsets" for detail.)  National Foundation ($250 million over 10 years)
bullet See "Smoking Cessation and Prevention" for details. 
National Public Education Fund ($1.45 billion over the next five years)
bullet See "Smoking Cessation and Prevention" for details. 
Attorney General Enforcement Fund ($50 million – one time payment in 1999)
bullet See "State Antitrust/Consumer Protection Enforcement fund" in "Enforcement/Consent Decrees" for details. 
Payments to the National Association of Attorneys General ($1.5 million over 10 years)
bullet See "Implementation and Enforcement Coordination by NAAG" in "Enforcement/Consent Decrees" for details.
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PAYMENT ADJUSTMENTS, REDUCTIONS AND OFFSETS

Order of Application Offsets, Reductions and Adjustments
bullet Inflation Adjustment 
bullet Volume Adjustment 
bullet Previously Settled States Reduction 
bullet Non-Settling States Reduction 
bullet Non-Participating Manufacturer's Adjustment 
bullet Offset for Miscalculated or Disputed Payments 
bullet Federal Tobacco Legislation Offset 
bullet Litigating Releasing Parties Offset 
Inflation Adjustment Percentage
bullet The settlement payments will be subject to an annual inflation adjustment. The Inflation Adjustment Percentage applicable to payments due in the year 2000 will be equal to the greater of 3% or the Consumer Price Index Percentage (CPI%). [See "Definitions" below, there is an important difference between the Consumer Price Index (CPI) and the CPI%]. The Inflation Adjustment Percentage applicable to payments due in any year after 2000 shall be calculated by applying each year the greater of 3% or the CPI% on the Inflation Adjustment Percentage applicable to payments due in the prior year. (Inflation formula is set forth and described in "Exhibit C" of the MSA.) 
bullet Definitions 
bullet "Consumer Price Index" - The Consumer Price Index for All Urban Consumers as published by the Bureau of Labor Statistics of the U.S. Department of Labor (or other similar measures agreed to by the Settling States and the Participating Manufacturers). 
bullet The " Consumer Price Index Percentage (CPI%)" - The total percent change in the Consumer Price Index during the calendar year immediately preceding the year in which the payment in question is due 
bullet For example, if the Consumer Price Index for December 1999 (as released in January 2000) is 2% higher than the Consumer Price Index for December 1998 (as released in January 1999), then the CPI% with respect to a payment due in 2000 would be 2%. The Inflation Adjustment Percentage applicable in the year 2000 would be 3%. Continuing the example, if the CPI% with respect to a payment due in 2001 is 6%, then the Inflation Adjustment Percentage applicable in 2001 would be 9.1800000% (an additional 6% applied on the 3% Inflation Adjustment Percentage applicable in 2000), and if the CPI% with respect to a payment due in 2002 is 4%, then the Inflation Adjustment Percentage applicable in 2002 would be 13.5472000% (an additional 4% applied on the 9.1800000% Inflation Adjustment Percentage applicable in 2001). (See "Appendix C" for additional illustration of how the Inflation Adjustment Percentage is calculated. Also see "Exhibit C" of the MSA.)
Volume Adjustment
bullet An adjustment to settlement payments applied to reflect increases or decreases in tobacco manufacturers operating income from the sales of cigarettes in the United States, Puerto Rico and the District of Columbia. (The volume adjustment formula is established in "Exhibit E" of the MSA.) 
Non –Settling States Reduction
bullet Reduces the amounts the tobacco manufacturers must pay by the combined payments due to non-settling states. This reduction does not reduce payments to settling states in any way. The manufacturers are not required to make a payment if the state is a non-settling state 15 days before the payment is due. 
bullet Currently all states are either participating states or are previously settled states. However, should a state fail to obtain state specific finality, it would become a non-settling state. 
Previously Settled States Adjustment
bullet A reduction determined by multiplying the applicable settlement payment by 12.4500000%, in the case of payments due in or prior to 2007; 12.2373756%, in the case of payments due after 2007 but before 2018; and 11.0666667%, in the case of payments due in or after 2018. 
bullet The previously settled states are Florida, Minnesota, Mississippi, and Texas. 
Offset for Miscalculated or Disputed Payments
bullet In cases where a manufacturer makes an underpayment or overpayment, the independent auditor, if notified within four years of the payment due date, is to promptly determine what payment is due to the manufacturer in the case of an overpayment or to the escrow account in cases of underpayment. 
bullet Disputed payments are deposited in a separate account within the escrow account for disputed payments. When final resolution has been reached regarding a disputed payment, the independent auditor directs the funds be deposited in the appropriate account. 
Non-Participating Manufacturers Adjustment
bullet An adjustment to payments made by Participating Manufacturers to address market share losses attributable to the provisions in the MSA
bullet On or before February 2nd of each year when the market share loss exceeds zero, a nationally recognized firm of economic consultants will determine whether the provisions of the MSA played a significant role in the market loss. If the firm determines that the provisions of the MSA were a significant contributing factor to the market loss, the Non-participating Manufacturer Adjustment would be applied. 
bullet If the aggregate market share of companies participating in the agreement declines by greater than two percent, their annual payment is reduced by three percent for each percent lost over the two percent threshold. 
bullet If the market share exceeds 16 2/3 percent, a more complicated formula established in the MSA is used to determine the adjustment. (See "Appendix D") for detail.)
bullet States are encouraged to pass the model statute (See "Appendix B"), provided in the Master Settlement Agreement (Exhibit T). This model law creates a reserve fund from which non-participating manufacturers can pay future claims, establishing a more level playing field between participating and non-participating manufacturers. 
bullet The model act must be enacted by states exactly as it is drafted in the MSA and as a stand-alone piece of legislation or the state must enact a "qualifying statute," as determined by a firm jointly retained by the settling states and the original participating manufacturers. The ruling of the firm is final. 
bullet A "qualifying statute" is defined in the MSA as a settling state’s statute, regulation, law and/or rule (applicable everywhere the state has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the participating manufacturers (as opposed to the non-participating manufacturers) experience as a result of the MSA. 
bullet A state’s enactment of the model statute is significant because if there is an NPM adjustment in any year, a state’s payment will not be reduced at all if that state has passed and has in force the model statute. Payments to the states that do not have a model statute or qualifying statute in full force and effect will be reduced to cover the entire NPM adjustment. This could result in a state losing its entire payment for that year. 
bullet If a state enacted the model statute, but the statute is overturned or invalidated by a court action, the state would pay no more than 65 percent of its payment toward the NPM adjustment in that year. 
bullet If a state has enacted a "qualifying statute" as opposed to the model act in the MSA, and the qualifying statute is struck down by a court, the state will not enjoy any of the protections afforded states that enact the model act. In other words, those states would be subject to the full NPM adjustment in that year and would not enjoy the benefits of the 65 percent cap.
Federal Legislation Offset
bullet If new federal tobacco related legislation, that requires participating tobacco companies to make payments (settlement payment, tax or any other means) to the federal government, is enacted on or before November 30, 2002, and some portion of that money is sent to the settling states either in unrestricted funds or in grants restricted to any form of health care or tobacco-related health care, those payments may be offset, dollar for dollar, from the annual payments to states
bullet The federal legislation will not be imposed if: 
bullet The federal funds to states were restricted to assistance to tobacco growers or communities dependent on the production of tobacco or tobacco products, no reductions would be taken. 
bullet The federal legislation required states to take significant actions or to provide state matching funds and the state chose not to participate in the program.
Litigation Releasing Parties Offset
bullet In the event a "releasing party" in a settling state pursues a claim against a participating manufacturer and receives a monetary judgement; the funds will be an offset on the affected settling state's payment. A "releasing party" is defined as a Settling State and any of its past, present and future agents, officials acting in their official capacities, legal representatives, agencies, departments, commissions and divisions. In addition, it includes, to the full extent of the power of the state attorney general, to release past, present and future claims of the following: 
bullet any Settling State’s subdivisions (political or otherwise, including, but not limited to, municipalities, counties, parishes, villages, unincorporated districts and hospital districts), public entities, public instrumentalities and public educational institutions; and 
bullet persons or entities acting in a parens patriae, sovereign, quasi-sovereign, private attorney general, qui tam, taxpayer, or any other capacity, whether or not any of them participated in the settlement: 
bullet to the extent that they are seeking relief on behalf of or generally applicable to the general public in a Settling State or the people of the State, as opposed solely to private or individual relief for separate and distinct injuries; or 
bullet to the extent that they (as opposed to an individual) are seeking recovery of health-care expenses (other than premium or capitation payments for the benefit of present or retired state employees) paid or reimbursed, directly or indirectly, by a settling state.
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AGRICULTURE AND RURAL COMMUNITY ASSISTANCE
bullet The Master Settlement Agreement does not include specific provisions for tobacco growers and impacted communities, but does call for participating manufacturers, tobacco growers and state officials from tobacco producing states to continue a dialogue and to report on progress by December 23, 1998. 
bullet On January 21, 1999, a tentative agreement to provide $5.15 billion over twelve years in a trust fund to assist growers and impacted communities, was reached between the participating manufacturers and fourteen tobacco-producing states. 
bullet On Thursday, February 4, 1999, the 14 tobacco producing states (North Carolina, Kentucky, Tennessee, South Carolina, Virginia, Georgia, Ohio, Indiana, Florida, Missouri, West Virginia, Alabama, Maryland, and Pennsylvania) tentatively agreed on a formula for the distribution of the $5.15 billion trust fund. Under the tentative agreement, the states would use the quota system used by the U.S. Department of Agriculture (USDA).

PROPOSED STATE ALLOTMENTS
TRUST FUND FOR FARMERS AND IMPACTED COMMUNITIES

 
State
% of Trust
Dollars (in millions)
North Carolina
38.34
1,974.51
Kentucky
29.97
1,543.45
Tennessee
7.65
393.97
South Carolina
7.01
361.01
Virginia
6.65
342.47
Georgia
5.91
304.36
Ohio
1.37
70.50
Indiana
1.17
60.25
Florida
1.16
59.70
Missouri
0.43
22.10
West Virginia
0.28
14.40
Alabama
0.05
2.57
Maryland
TBA
TBA
Pennsylvania
TBA
TBA
bullet Maryland and Pennsylvania do not participate in the U.S. Department of Agriculture’s quota program. It is expected that the 12 other states participating in the trust will give part of their money back to the trust to be distributed to the two states.
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SMOKELESS TOBACCO SETTLEMENT
bullet The Attorneys General reached a separate agreement with U.S Tobacco regarding smokeless tobacco products. U.S. Tobacco represents 58 percent of the smokeless tobacco market. The non-economic provisions of the settlement are similar to those established in the tobacco settlement agreement. The economic are very different and establish payments to the National Foundation, but do not provide any additional funds to state governments. Over a span of 10 years, participating smokeless tobacco manufacturers will pay up to $400 million into the National Public Education Fund.

MOST FAVORED NATION PROVISIONS
bullet If tobacco manufacturers enter into an agreement with better overall terms than are provided in the MSA before October 1, 2000, the more generous benefits would apply to all settling states. 
bullet This provision does not apply if such an agreement is reached after the seating of a jury or after a trial has begun. 
bullet If an agreement with more favorable non-economic terms is entered into on or after October 1, 2000, settling states have the option of availing themselves of the benefits.  bullet If a settling state enters into an agreement with a non-participating manufacturer and the terms are more favorable to the tobacco company, participating companies can benefit, but only within that state.

APPENDIX A - MODEL CONSENT DECREE (MSA - Exhibit L)

EXHIBIT L (Master Settlement Agreement)

MODEL CONSENT DECREE

IN THE [XXXXXX] COURT OF THE STATE OF [XXXXXX]
IN AND FOR THE COUNTY OF [XXXXX]


 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

:
STATE OF [XXXXXXXXXXX], : : Plaintiff, :
v. : :
[XXXXXX XXXXX XXXX], et al., :
: Defendants. :
:

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

CAUSE NO. XXXXXX
 
 

CONSENT DECREE AND FINAL JUDGMENT

WHEREAS, Plaintiff, the State of [name of Settling State], commenced this action on [date], [by and through its Attorney General [name]], pursuant to [her/his/its] common law powers and the provisions of [state and/or federal law];

WHEREAS, the State of [name of Settling State] asserted various claims for monetary, equitable and injunctive relief on behalf of the State of [name of Settling State] against certain tobacco product manufacturers and other defendants;

WHEREAS, Defendants have contested the claims in the State’s complaint [and amended complaints, if any] and denied the State’s allegations [and asserted affirmative defenses];

WHEREAS, the parties desire to resolve this action in a manner which appropriately addresses the State’s public health concerns, while conserving the parties’ resources, as well as those of the Court, which would otherwise be expended in litigating a matter of this magnitude; and

WHEREAS, the Court has made no determination of any violation of law, this Consent Decree and Final Judgment being entered prior to the taking of any testimony and without trial or final adjudication of any issue of fact or law;

NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED, AS FOLLOWS:

I. JURISDICTION AND VENUE

This Court has jurisdiction over the subject matter of this action and over each of the Participating Manufacturers. Venue is proper in this [county/district].

II. DEFINITIONS

The definitions set forth in the Agreement (a copy of which is attached hereto) are incorporated herein by reference.

III. APPLICABILITY

A. This Consent Decree and Final Judgment applies only to the Participating Manufacturers in their corporate capacity acting through their respective successors and assigns, directors, officers, employees, agents, subsidiaries, divisions, or other internal organizational units of any kind or any other entities acting in concert or participation with them. The remedies, penalties and sanctions that may be imposed or assessed in connection with a violation of this Consent Decree and Final Judgment (or any order issued in connection herewith) shall only apply to the Participating Manufacturers, and shall not be imposed or assessed against any employee, officer or director of any Participating Manufacturer, or against any other person or entity as a consequence of such violation, and there shall be no jurisdiction under this Consent Decree and Final Judgment to do so.

B. This Consent Decree and Final Judgment is not intended to and does not vest standing in any third party with respect to the terms hereof. No portion of this Consent Decree and Final Judgment shall provide any rights to, or be enforceable by, any person or entity other than the State of [name of Settling State] or a Released Party. The State of [name of Settling State] may not assign or otherwise convey any right to enforce any provision of this Consent Decree and Final Judgment.

IV. VOLUNTARY ACT OF THE PARTIES

The parties hereto expressly acknowledge and agree that this Consent Decree and Final Judgment is voluntarily entered into as the result of arm’s-length negotiation, and all parties hereto were represented by counsel in deciding to enter into this Consent Decree and Final Judgment.

V. INJUNCTIVE AND OTHER EQUITABLE RELIEF

Each Participating Manufacturer is permanently enjoined from:

A. Taking any action, directly or indirectly, to target Youth within the State of [name of Settling State] in the advertising, promotion or marketing of Tobacco Products, or taking any action the primary purpose of which is to initiate, maintain or increase the incidence of Youth smoking within the State of [name of Settling State].

B. After 180 days after the MSA Execution Date, using or causing to be used within the State of [name of Settling State] any Cartoon in the advertising, promoting, packaging or labeling of Tobacco Products.

C. After 30 days after the MSA Execution Date, making or causing to be made any payment or other consideration to any other person or entity to use, display, make reference to or use as a prop within the State of [name of Settling State] any Tobacco Product, Tobacco Product package, advertisement for a Tobacco Product, or any other item bearing a Brand Name in any Media; provided, however, that the foregoing prohibition shall not apply to (1) Media where the audience or viewers are within an Adult-Only Facility (provided such Media are not visible to persons outside such Adult-Only Facility); (2) Media not intended for distribution or display to the public; (3) instructional Media concerning non-conventional cigarettes viewed only by or provided only to smokers who are Adults; and (4) actions taken by any Participating Manufacturer in connection with a Brand Name Sponsorship permitted pursuant to subsections III(c)(2)(A) and III(c)(2)(B)(i) of the Agreement, and use of a Brand Name to identify a Brand Name Sponsorship permitted by subsection III(c)(2)(B)(ii).

D. Beginning July 1, 1999, marketing, distributing, offering, selling, licensing or causing to be marketed, distributed, offered, sold, or licensed (including, without limitation, by catalogue or direct mail), within the State of [name of Settling State], any apparel or other merchandise (other than Tobacco Products, items the sole function of which is to advertise Tobacco Products, or written or electronic publications) which bears a Brand Name. Provided, however, that nothing in this section shall (1) require any Participating Manufacturer to breach or terminate any licensing agreement or other contract in existence as of June 20, 1997 (this exception shall not apply beyond the current term of any existing contract, without regard to any renewal or option term that may be exercised by such Participating Manufacturer); (2) prohibit the distribution to any Participating Manufacturer’s employee who is not Underage of any item described above that is intended for the personal use of such an employee; (3) require any Participating Manufacturer to retrieve, collect or otherwise recover any item that prior to the MSA Execution Date was marketed, distributed, offered, sold, licensed or caused to be marketed, distributed, offered, sold or licensed by such Participating Manufacturer; (4) apply to coupons or other items used by Adults solely in connection with the purchase of Tobacco Products; (5) apply to apparel or other merchandise used within an Adult-Only Facility that is not distributed (by sale or otherwise) to any member of the general public; or (6) apply to apparel or other merchandise (a) marketed, distributed, offered, sold, or licensed at the site of a Brand Name Sponsorship permitted pursuant to subsection III(c)(2)(A) or III(c)(2)(B)(i) of the Agreement by the person to which the relevant Participating Manufacturer has provided payment in exchange for the use of the relevant Brand Name in the Brand Name Sponsorship or a third-party that does not receive payment from the relevant Participating Manufacturer (or any Affiliate of such Participating Manufacturer) in connection with the marketing, distribution, offer, sale or license of such apparel or other merchandise, or (b) used at the site of a Brand Name Sponsorship permitted pursuant to subsections III(c)(2)(A) or III(c)(2)(B)(i) of the Agreement (during such event) that are not distributed (by sale or otherwise) to any member of the general public.

E. After the MSA Execution Date, distributing or causing to be distributed within the State of [name of Settling State] any free samples of Tobacco Products except in an Adult-Only Facility. For purposes of this Consent Decree and Final Judgment, a "free sample" does not include a Tobacco Product that is provided to an Adult in connection with (1) the purchase, exchange or redemption for proof of purchase of any Tobacco Products (including, but not limited to, a free offer in connection with the purchase of Tobacco Products, such as a "two-for-one" offer), or (2) the conducting of consumer testing or evaluation of Tobacco Products with persons who certify that they are Adults.

F. Using or causing to be used as a brand name of any Tobacco Product pursuant to any agreement requiring the payment of money or other valuable consideration, any nationally recognized or nationally established brand name or trade name of any non-tobacco item or service or any nationally recognized or nationally established sports team, entertainment group or individual celebrity. Provided, however, that the preceding sentence shall not apply to any Tobacco Product brand name in existence as of July 1, 1998. For the purposes of this provision, the term "other valuable consideration" shall not include an agreement between two entities who enter into such agreement for the sole purpose of avoiding infringement claims.

G. After 60 days after the MSA Execution Date and through and including December 31, 2001, manufacturing or causing to be manufactured for sale within the State of [name of Settling State] any pack or other container of Cigarettes containing fewer than 20 Cigarettes (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco); and, after 150 days after the MSA Execution Date and through and including December 31, 2001, selling or distributing within the State of [name of Settling State] any pack or other container of Cigarettes containing fewer than 20 Cigarettes (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco).

H. Entering into any contract, combination or conspiracy with any other Tobacco Product Manufacturer that has the purpose or effect of: (1) limiting competition in the production or distribution of information about health hazards or other consequences of the use of their products; (2) limiting or suppressing research into smoking and health; or (3) limiting or suppressing research into the marketing or development of new products. Provided, however, that nothing in the preceding sentence shall be deemed to (1) require any Participating Manufacturer to produce, distribute or otherwise disclose any information that is subject to any privilege or protection; (2) preclude any Participating Manufacturer from entering into any joint defense or joint legal interest agreement or arrangement (whether or not in writing), or from asserting any privilege pursuant thereto; or (3) impose any affirmative obligation on any Participating Manufacturer to conduct any research.

I. Making any material misrepresentation of fact regarding the health consequences of using any Tobacco Product, including any tobacco additives, filters, paper or other ingredients. Provided, however, that nothing in the preceding sentence shall limit the exercise of any First Amendment right or the assertion of any defense or position in any judicial, legislative or regulatory forum.

VI. MISCELLANEOUS PROVISIONS

A. Jurisdiction of this case is retained by the Court for the purposes of implementing and enforcing the Agreement and this Consent Decree and Final Judgment and enabling the continuing proceedings contemplated herein. Whenever possible, the State of [name of Settling State] and the Participating Manufacturers shall seek to resolve any issue that may exist as to compliance with this Consent Decree and Final Judgment by discussion among the appropriate designees named pursuant to subsection XVIII(m) of the Agreement. The State of [name of Settling State] and/or any Participating Manufacturer may apply to the Court at any time for further orders and directions as may be necessary or appropriate for the implementation and enforcement of this Consent Decree and Final Judgment. Provided, however, that with regard to subsections V(A) and V(I) of this Consent Decree and Final Judgment, the Attorney General shall issue a cease and desist demand to the Participating Manufacturer that the Attorney General believes is in violation of either of such sections at least ten Business Days before the Attorney General applies to the Court for an order to enforce such subsections, unless the Attorney General reasonably determines that either a compelling time-sensitive public health and safety concern requires more immediate action or the Court has previously issued an Enforcement Order to the Participating Manufacturer in question for the same or a substantially similar action or activity. For any claimed violation of this Consent Decree and Final Judgment, in determining whether to seek an order for monetary, civil contempt or criminal sanctions for any claimed violation, the Attorney General shall give good-faith consideration to whether: (1) the Participating Manufacturer that is claimed to have committed the violation has taken appropriate and reasonable steps to cause the claimed violation to be cured, unless that party has been guilty of a pattern of violations of like nature; and (2) a legitimate, good-faith dispute exists as to the meaning of the terms in question of this Consent Decree and Final Judgment. The Court in any case in its discretion may determine not to enter an order for monetary, civil contempt or criminal sanctions.

B. This Consent Decree and Final Judgment is not intended to be, and shall not in any event be construed as, or deemed to be, an admission or concession or evidence of (1) any liability or any wrongdoing whatsoever on the part of any Released Party or that any Released Party has engaged in any of the activities barred by this Consent Decree and Final Judgment; or (2) personal jurisdiction over any person or entity other than the Participating Manufacturers. Each Participating Manufacturer specifically disclaims and denies any liability or wrongdoing whatsoever with respect to the claims and allegations asserted against it in this action, and has stipulated to the entry of this Consent Decree and Final Judgment solely to avoid the further expense, inconvenience, burden and risk of litigation.

C. Except as expressly provided otherwise in the Agreement, this Consent Decree and Final Judgment shall not be modified (by this Court, by any other court or by any other means) unless the party seeking modification demonstrates, by clear and convincing evidence, that it will suffer irreparable harm from new and unforeseen conditions. Provided, however, that the provisions of sections III, V, VI and VII of this Consent Decree and Final Judgment shall in no event be subject to modification without the consent of the State of [name of Settling State] and all affected Participating Manufacturers. In the event that any of the sections of this Consent Decree and Final Judgment enumerated in the preceding sentence are modified by this Court, by any other court or by any other means without the consent of the State of [name of Settling State] and all affected Participating Manufacturers, then this Consent Decree and Final Judgment shall be void and of no further effect. Changes in the economic conditions of the parties shall not be grounds for modification. It is intended that the Participating Manufacturers will comply with this Consent Decree and Final Judgment as originally entered, even if the Participating Manufacturers’ obligations hereunder are greater than those imposed under current or future law (unless compliance with this Consent Decree and Final Judgment would violate such law). A change in law that results, directly or indirectly, in more favorable or beneficial treatment of any one or more of the Participating Manufacturers shall not support modification of this Consent Decree and Final Judgment. 

D. In any proceeding which results in a finding that a Participating Manufacturer violated this Consent Decree and Final Judgment, the Participating Manufacturer or Participating Manufacturers found to be in violation shall pay the State’s costs and attorneys’ fees incurred by the State of [name of Settling State] in such proceeding.

E. The remedies in this Consent Decree and Final Judgment are cumulative and in addition to any other remedies the State of [name of Settling State] may have at law or equity, including but not limited to its rights under the Agreement. Nothing herein shall be construed to prevent the State from bringing an action with respect to conduct not released pursuant to the Agreement, even though that conduct may also violate this Consent Decree and Final Judgment. Nothing in this Consent Decree and Final Judgment is intended to create any right for [name of Settling State] to obtain any Cigarette product formula that it would not otherwise have under applicable law.

F. No party shall be considered the drafter of this Consent Decree and Final Judgment for the purpose of any statute, case law or rule of interpretation or construction that would or might cause any provision to be construed against the drafter. Nothing in this Consent Decree and Final Judgment shall be construed as approval by the State of [name of Settling State] of the Participating Manufacturers’ business organizations, operations, acts or practices, and the Participating Manufacturers shall make no representation to the contrary.

G. The settlement negotiations resulting in this Consent Decree and Final Judgment have been undertaken in good faith and for settlement purposes only, and no evidence of negotiations or discussions underlying this Consent Decree and Final Judgment shall be offered or received in evidence in any action or proceeding for any purpose. Neither this Consent Decree and Final Judgment nor any public discussions, public statements or public comments with respect to this Consent Decree and Final Judgment by the State of [name of Settling State] or any Participating Manufacturer or its agents shall be offered or received in evidence in any action or proceeding for any purpose other than in an action or proceeding arising under or relating to this Consent Decree and Final Judgment.

H. All obligations of the Participating Manufacturers pursuant to this Consent Decree and Final Judgment (including, but not limited to, all payment obligations) are, and shall remain, several and not joint.

I. The provisions of this Consent Decree and Final Judgment are applicable only to actions taken (or omitted to be taken) within the States. Provided, however, that the preceding sentence shall not be construed as extending the territorial scope of any provision of this Consent Decree and Final Judgment whose scope is otherwise limited by the terms thereof.

J. Nothing in subsection V(A) or V(I) of this Consent Decree shall create a right to challenge the continuation, after the MSA Execution Date, of any advertising content, claim or slogan (other than use of a Cartoon) that was not unlawful prior to the MSA Execution Date. 

K. If the Agreement terminates in this State for any reason, then this Consent Decree and Final Judgment shall be void and of no further effect.

VII. FINAL DISPOSITION

A. The Agreement, the settlement set forth therein, and the establishment of the escrow provided for therein are hereby approved in all respects, and all claims are hereby dismissed with prejudice as provided therein. 

B. The Court finds that the person[s] signing the Agreement have full and complete authority to enter into the binding and fully effective settlement of this action as set forth in the Agreement. The Court further finds that entering into this settlement is in the best interests of the State of [name of Settling State].

LET JUDGMENT BE ENTERED ACCORDINGLY

DATED this _____ day of ______________, 1998.
 
 

Source: Master Settlement Agreement, National Association of Attorneys General Website (http://www.naag.org/settle.htm)

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APPENDIX B - MODEL STATUTE (MSA - Exhibit T)



MODEL STATUTE - EXHIBIT T


 
 

Section __. Findings and Purpose.

(a) Cigarette smoking presents serious public health concerns to the State and to the citizens of the State. The Surgeon General has determined that smoking causes lung cancer, heart disease and other serious diseases, and that there are hundreds of thousands of tobacco-related deaths in the United States each year. These diseases most often do not appear until many years after the person in question begins smoking.

(b) Cigarette smoking also presents serious financial concerns for the State. Under certain health-care programs, the State may have a legal obligation to provide medical assistance to eligible persons for health conditions associated with cigarette smoking, and those persons may have a legal entitlement to receive such medical assistance.

(c) Under these programs, the State pays millions of dollars each year to provide medical assistance for these persons for health conditions associated with cigarette smoking. 

(d) It is the policy of the State that financial burdens imposed on the State by cigarette smoking be borne by tobacco product manufacturers rather than by the State to the extent that such manufacturers either determine to enter into a settlement with the State or are found culpable by the courts.

(e) On _______, 1998, leading United States tobacco product manufacturers entered into a settlement agreement, entitled the "Master Settlement Agreement," with the State. The Master Settlement Agreement obligates these manufacturers, in return for a release of past, present and certain future claims against them as described therein, to pay substantial sums to the State (tied in part to their volume of sales); to fund a national foundation devoted to the interests of public health; and to make substantial changes in their advertising and marketing practices and corporate culture, with the intention of reducing underage smoking. 

(f) It would be contrary to the policy of the State if tobacco product manufacturers who determine not to enter into such a settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the State will have an eventual source of recovery from them if they are proven to have acted culpably. It is thus in the interest of the State to require that such manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such manufacturers from deriving large, short-term profits and then becoming judgment-proof before liability may arise.

Section __. Definitions. 

(a) "Adjusted for inflation" means increased in accordance with the formula for inflation adjustment set forth in Exhibit C to the Master Settlement Agreement. 

(b) "Affiliate" means a person who directly or indirectly owns or controls, is owned or controlled by, or is under common ownership or control with, another person. Solely for purposes of this definition, the terms "owns," "is owned" and "ownership" mean ownership of an equity interest, or the equivalent thereof, of ten percent or more, and the term "person" means an individual, partnership, committee, association, corporation or any other organization or group of persons.

(c) "Allocable share" means Allocable Share as that term is defined in the Master Settlement Agreement.

(d) "Cigarette" means any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (1) any roll of tobacco wrapped in paper or in any substance not containing tobacco; or (2) tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or (3) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in clause (1) of this definition. The term "cigarette" includes "roll-your-own" (i.e., any tobacco which, because of its appearance, type, packaging, or labeling is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes). For purposes of this definition of "cigarette," 0.09 ounces of "roll-your-own" tobacco shall constitute one individual "cigarette."

(e) "Master Settlement Agreement" means the settlement agreement (and related documents) entered into on _______, 1998 by the State and leading United States tobacco product manufacturers.

(f) "Qualified escrow fund" means an escrow arrangement with a federally or State chartered financial institution having no affiliation with any tobacco product manufacturer and having assets of at least $1,000,000,000 where such arrangement requires that such financial institution hold the escrowed funds’ principal for the benefit of releasing parties and prohibits the tobacco product manufacturer placing the funds into escrow from using, accessing or directing the use of the funds’ principal except as consistent with section ___(b)-(c) of this Act.

(g) "Released claims" means Released Claims as that term is defined in the Master Settlement Agreement.

(h) "Releasing parties" means Releasing Parties as that term is defined in the Master Settlement Agreement.

(i) "Tobacco Product Manufacturer" means an entity that after the date of enactment of this Act directly (and not exclusively through any affiliate):
(1) manufactures cigarettes anywhere that such manufacturer intends to be sold in the United States, including cigarettes intended to be sold in the United States through an importer (except where such importer is an original participating manufacturer (as that term is defined in the Master Settlement Agreement) that will be responsible for the payments under the Master Settlement Agreement with respect to such cigarettes as a result of the provisions of subsections II(mm) of the Master Settlement Agreement and that pays the taxes specified in subsection II(z) of the Master Settlement Agreement, and provided that the manufacturer of such cigarettes does not market or advertise such cigarettes in the United States);

(2) is the first purchaser anywhere for resale in the United States of cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the United States; or

(3) becomes a successor of an entity described in paragraph (1) or (2). 

The term "Tobacco Product Manufacturer" shall not include an affiliate of a tobacco product manufacturer unless such affiliate itself falls within any of (1) - (3) above.

(j) "Units sold" means the number of individual cigarettes sold in the State by the applicable tobacco product manufacturer (whether directly or through a distributor, retailer or similar intermediary or intermediaries) during the year in question, as measured by excise taxes collected by the State on packs (or "roll-your-own" tobacco containers) bearing the excise tax stamp of the State. The [fill in name of responsible state agency] shall promulgate such regulations as are necessary to ascertain the amount of State excise tax paid on the cigarettes of such tobacco product manufacturer for each year.

Section __. Requirements.

Any tobacco product manufacturer selling cigarettes to consumers within the State (whether directly or through a distributor, retailer or similar intermediary or intermediaries) after the date of enactment of this Act shall do one of the following:

(a) become a participating manufacturer (as that term is defined in section II(jj) of the Master Settlement Agreement) and generally perform its financial obligations under the Master Settlement Agreement; or
(b) (1) place into a qualified escrow fund by April 15 of the year following the year in question the following amounts (as such amounts are adjusted for inflation) --
1999: $.0094241 per unit sold after the date of enactment of this Act;

2000: $.0104712 per unit sold after the date of enactment of this Act;

for each of 2001 and 2002: $.0136125 per unit sold after the date of enactment of this Act;

for each of 2003 through 2006: $.0167539 per unit sold after the date of enactment of this Act;

for each of 2007 and each year thereafter: $.0188482 per unit sold after the date of enactment of this Act.

(2) A tobacco product manufacturer that places funds into escrow pursuant to paragraph (1) shall receive the interest or other appreciation on such funds as earned. Such funds themselves shall be released from escrow only under the following circumstances --
(A) to pay a judgment or settlement on any released claim brought against such tobacco product manufacturer by the State or any releasing party located or residing in the State. Funds shall be released from escrow under this subparagraph (i) in the order in which they were placed into escrow and (ii) only to the extent and at the time necessary to make payments required under such judgment or settlement; 

(B) to the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the State’s allocable share of the total payments that such manufacturer would have been required to make in that year under the Master Settlement Agreement (as determined pursuant to section IX(i)(2) of the Master Settlement Agreement, and before any of the adjustments or offsets described in section IX(i)(3) of that Agreement other than the Inflation Adjustment) had it been a participating manufacturer, the excess shall be released from escrow and revert back to such tobacco product manufacturer; or 

(C) to the extent not released from escrow under subparagraphs (A) or (B), funds shall be released from escrow and revert back to such tobacco product manufacturer twenty-five years after the date on which they were placed into escrow.

(3) Each tobacco product manufacturer that elects to place funds into escrow pursuant to this subsection shall annually certify to the Attorney General [or other State official] that it is in compliance with this subsection. The Attorney General [or other State official] may bring a civil action on behalf of the State against any tobacco product manufacturer that fails to place into escrow the funds required under this section. Any tobacco product manufacturer that fails in any year to place into escrow the funds required under this section shall --

          1. be required within 15 days to place such funds into escrow as shall bring it into compliance with this section. The court, upon a finding of a violation of this subsection, may impose a civil penalty [to be paid to the general fund of the state] in an amount not to exceed 5 percent of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 100 percent of the original amount improperly withheld from escrow;
(B) in the case of a knowing violation, be required within 15 days to place such funds into escrow as shall bring it into compliance with this section. The court, upon a finding of a knowing violation of this subsection, may impose a civil penalty [to be paid to the general fund of the state] in an amount not to exceed 15 percent of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 300 percent of the original amount improperly withheld from escrow; and

(C) in the case of a second knowing violation, be prohibited from selling cigarettes to consumers within the State (whether directly or through a distributor, retailer or similar intermediary) for a period not to exceed 2 years. 

Each failure to make an annual deposit required under this section shall constitute a separate violation.
 
  Source: Master Settlement Agreement, National Association of Attorneys General Website (http://www.naag.org/settle.htm)

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APPENDIX C - Calculating the Inflation Adjustment Percentages

Payment

Year

Hypothetical CPI%
Percentage to be applied on the Inflation Adjustment Percentage for the prior year (i.e., the greater of 3% or the CPI%)
Inflation Adjustment Percentage
2000
2.4%
3.0%
3.0000000%
2001
2.1%
3.0%
6.0900000%
2002
3.5%
3.5%
9.8031500%
2003
3.5%
3.5%
13.6462603%
2004
4.0%
4.0%
18.1921107%
2005
2.2%
3.0%
21.7378740%
2006
1.6%
3.0%
25.3900102%
Using the hypothetical Inflation Adjustment Percentages set forth the chart above: 
bullet the base payment amount for 2002 of $6,500,000,000 as adjusted for inflation would equal $7,137,204,750; 
bullet the base payment amount for 2004 of $8,000,000,000 as adjusted for inflation would equal $9,455,368,856; 
bullet the base payment amount for 2006 of $8,000,000,000 as adjusted for inflation would equal $10,031,200,816.

Source: Master Settlement Agreement, National Association of Attorneys General Website (http://www.naag.org/settle.htm)

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APPENDIX D - CALCULATING THE NON-PARTICIPATING MANUFACUTERS ADJUSTMENT

The "NPM Adjustment Percentage" shall be calculated as follows:
bullet If the Market Share Loss for the year immediately preceding the year the payment is due is less than or equal to 0 (zero), then there will be no NPM Adjustment. 
bullet If the Market Share Loss for the year immediately preceding the year the payment is due is greater than 0 (zero) and less than or equal to 16 2/3 percentage points, then the NPM Adjustment Percentage will be equal to the product of Market Share Loss (x) and 3 (y). 
bullet If the Market Share Loss for the year immediately preceding the year the payment is due is greater than 16 2/3 percentage points, the NPM Adjustment Percentage will be equal to the sum of 50 percentage points (x) and (y) which is equal to the product of (1) the Variable Multiplier and (2) the result of Market Share Loss minus 16 2/3 percentage points. (See definitions below for additional detail).
Definitions:
bullet "Base Aggregate Participating Manufacturer Market Share" means the result of (x) the sum of the applicable Market Shares (the applicable Market Share to be that for 1997) of all present and former Tobacco Product Manufacturers that were Participating Manufacturers during the entire calendar year immediately preceding the year in which the payment in question is due minus (y) 2 (two) percentage points. 
bullet "Actual Aggregate Participating Manufacturer Market Share" means the sum of the applicable Market Shares of all present and former Tobacco Product Manufacturers that were Participating Manufacturers during the entire calendar year immediately preceding the year in which the payment in question is due (the applicable Market Share to be that for the calendar year immediately preceding the year in which the payment in question is due). 
bullet "Market Share Loss" means the result of (x) the Base Aggregate Participating Manufacturer Market Share minus (y) the Actual Aggregate Participating Manufacturer Market Share. 
bullet "Variable Multiplier" equals 50 divided by the result of (x) the Base Aggregate Participating Manufacturer Market Share minus (y) 16 2/3 percentage points.

Source: Master Settlement Agreement, National Association of Attorneys General Website (http://www.naag.org/settle.htm)

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APPENDIX E – Total Payments to Each State Through 2025

Alabama 
$3,166,302,118.81
Alaska 
$668,903,056.50
Arizona 
$2,887,614,909.02
Arkansas 
$1,622,336,125.69
California 
$25,006,972,510.74
Colorado 
$2,685,773,548.89
Connecticut 
$3,637,303,381.55
Delaware 
$774,798,676.89
D.C. 
$1,189,458,105.56
Florida 
$0.00
Georgia 
$4,808,740,668.60
Hawaii 
$1,179,165,923.07
Idaho 
$711,700,479.23
Illinois 
$9,118,539,559.10
Indiana 
$3,996,355,551.01
Iowa 
$1,703,839,985.56
Kansas 
$1,633,317,646.19
Kentucky 
$3,450,438,586.10
Louisiana 
$4,418,657,915.22
Maine 
$1,507,301,275.81
Maryland 
$4,428,657,383.58
Mass. 
$7,913,114,212.77
Michigan 
$8,526,278,033.60
Minnesota 
$0.00
Mississippi 
$0.00
Missouri 
$4,456,368,286.30
Montana 
$832,182,430.63
Nebraska 
$1,165,683,457.48
Nevada 
$1,194,976,854.76
New Hampshire 
$1,304,689,150.27
New Jersey 
$7,576,167,918.47
New Mexico 
$1,168,438,809.05
New York 
$25,003,202,243.12
North Carolina 
$4,569,381,898.24
North Dakota 
$717,089,369.09
Ohio 
$9,869,422,448.51
Oklahoma 
$2,029,985,862.29
Oregon 
$2,248,476,833.11
Penn. 
$11,259,169,603.46
Rhode Island 
$1,408,469,747.28
South Carolina 
$2,304,693,119.82
South Dakota 
$683,650,008.54
Tennessee 
$4,782,168,127.09
Texas 
$0.00
Utah 
$871,616,513.42
Vermont 
$805,588,329.25
Virginia 
$4,006,037,550.26
Washington 
$4,022,716,266.79
West Virginia 
$1,736,741,427.33
Wisconsin 
$4,059,511,421.32
Wyoming 
$486,553,976.10
American Samoa 
$29,812,995.31
N. Mariana Islands
$16,530,900.80
Guam 
$42,978,803.27
US Virgin Island 
$34,010,102.11
Puerto Rico 
$2,196,791,813.07
Total Payments
$195,918,675,920.00

 

Source: Master Settlement Agreement, National Association of Attorneys General Website (http://www.naag.org/settle.htm)

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APPENDIX F – STATUTORY AND REGULATORY BASIS FOR MEDICAID RECOUPMENT (Health Care Financing Administration’s Interpretation)
bullet Section 1903(d) of the Social Security Act (the statutory basis for the Health Care Financing Administration’s opinion that state tobacco settlement funds, attributable to Medicaid, should be subject to recoupment)
"(2)(A) The Secretary shall then pay to the State, in such installments as he may determine, the amount so estimated, reduced or increased to the extent of any overpayment or underpayment which the Secretary determines was made under this section to such State for any prior quarter and with respect to which adjustment has not already been made under this subsection."

"(2)(B) Expenditures for which payments were made to the State under subsection (a) shall be treated as an overpayment to the extent that the State or local agency administering such plan has been reimbursed for such expenditures b a third party pursuant to the provisions of its plan in compliance with section 1902(a)(25)…"

"(2)(3) The pro rata share to which the Unites States is equitably entitled, as determined by the Secretary, of the net amount recovered during any quarter by the State or any political subdivision thereof with respect to medical assistance furnished under the State plan shall be considered an overpayment to be adjusted under this subsection."
bullet Additional citations of Federal law and regulation used by the federal government to support the recoupment of state tobacco settlement funds
42 U.S. C. 1396a(a)(25)(A) – establishes that it is the State’s responsibility ‘to ascertain the legal liability of third parties…to pay for care and services available under the [State’s Medicaid] plan.’" (Effective 3/31/68)

42 CFR 433.136 – defines ‘third party’ as "any individual, entity or program that is or may be liable to apy all or part of the expenditures for medical assistance furnished under a State plan."

42 CFR 433.140(c) – describes the state obligation as follows: "If the State receives FFP [Federal financial participation] in Medicaid payments for which it receives third party reimbursement, the State must pay the Federal government a portion of the reimbursement determined in accordance with the FMAP [Federal medical assistance percentage] for the State."

Source: Statement of Nancy-Ann Min DeParle, Administrator, Health Care Financing Administration, "Medicaid and Tobacco Settlements," Subcommittee on Health and the Environment, Committee on Commerce, U.S. House of Representatives, December 8, 1998.

Note: The full text of Administrator DeParle’s testimony can be obtained from the Health Care Financing Administration website at http://www.hcfa.gov/testmony/tobac1.htm.

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Return toAFI Health Committee

Committee Contacts
Joy Johnson Wilson, Director
(202) 624-8689
mailto:joy.wilson@ncsl.org

Steven Lewis, Policy Associate
(202) 624-3575
mailto:steven.lewis@ncsl.org

Whitney Mueller, Administrative Assistant
(202) 624-8690
mailto:whitney.mueller@ncsl.org

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