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NAAGazette

The ABCs of the Tobacco Master Settlement Agreement

Peter Levin, Project Director and Chief Counsel, Tobacco Project

Peter Levin, Project Director and Chief Counsel, Tobacco Project

The NAAG Tobacco Project coordinates and supports state enforcement, implementation and defense of the 1998 tobacco Master Settlement Agreement (MSA) and related state legislation. The project also serves as liaison on MSA matters between the states and (1) the tobacco company signatories to the MSA (called “Participating Manufacturers”), (2) the public health community, (3) the financial community and (4) various federal agencies that regulate and tax tobacco products.

The MSA settled state litigation against the four major tobacco companies for health care costs and other damages imposed upon the states by cigarette smoking. The payment provisions of the MSA were designed to compensate the states in part for the billions dollars in health care costs associated with treating tobacco-related diseases under state Medicaid programs. To date, states have received more than $50 billion in settlement payments. For a copy of the MSA and its related documents, visit http://www.naag.org/settlement_docs.php.

State signatories to the MSA include 46 states (all but Mississippi, Minnesota, Florida, and Texas, which settled separately with the major tobacco companies), the District of Columbia, Puerto Rico and four territories. Participating Manufacturers include the four (now three) major tobacco companies originally sued and about 45 smaller tobacco companies.[1] Tobacco companies that elect not to sign the MSA are referred to as Non-Participating Manufacturers.

Acronym Glossary

CSA – Cigarette Stamping Agent
DOR – Department of Revenue
IA – Independent Auditor
MSA – Master Settlement Agreement
OAG – Office of Attorney General
PWC – PricewaterhouseCoopers
TES – Tobacco Enforcement Section
TPM – Tobacco Product Manufacturer

The MSA has succeeded in its fundamental objective of reducing cigarette smoking in the United States, the level of which has declined at an unprecedented rate since the MSA was executed. Youth smoking has declined even more. Cigarette consumption in the United States is currently at its lowest level since 1951 and per capita consumption has not been this low since the 1930s. This decline is even more impressive because the United States population has more than doubled since 1951. The MSA has made an important contribution to these results.

The MSA’s basic elements consist of a release of state claims against the Participating Manufacturers in exchange for the Participating Manufacturers agreeing (1) to pay the states annually and in perpetuity billions of dollars; (2) to restrict permanently their advertising, promotion, and marketing of cigarettes; and (3) to contribute $1.5 billion to establish what has become the American Legacy Foundation, an entity dedicated to counter-advertising and public education against cigarette smoking. In helping the states retain their benefit of the agreement, the Tobacco Project counsels on legal and strategic matters, and engages in litigation, negotiation, and legislative efforts with or on behalf of the states. In simplest terms, the Tobacco Project’s work breaks down into three major areas: (1) protecting MSA payments to the states; (2) enforcing the MSA’s restrictions on the advertising, promotion and marketing of cigarettes; and (3) defending the MSA against legal challenges.

Much of the project’s energy currently is directed toward helping the states resolve disputes over the Non-Participating Manufacturers’ payment adjustment for the years 2003-2006. This adjustment is intended to motivate the states to act to offset the significant cost and marketing advantages Non-Participating Manufacturers have over Participating Manufacturers since the Non-Participating Manufacturers are not subject to the MSA’s payment provisions or marketing restrictions. Were the Non-Participating Manufacturers able to exploit such advantages unfairly, the MSA’s objectives would be subverted.

Accordingly, if certain conditions are met in any year, the states’ MSA payments are reduced by the amount of the Non-Participating Manufacturers’ adjustment. Those potential adjustments for 2003-2006 total approximately $3.6 billion. The states and the Participating Manufacturers, however, are currently litigating whether the conditions necessary to trigger the Non-Participating Manufacturers’ adjustment for any one of these years have been met.

Last month, NAAG hosted the third Triennial Conference in Seattle, Washington, to discuss issues related to the MSA’s goal of reducing underage tobacco use and preventing youth access to tobacco products. Under the MSA, NAAG must convene one major national conference every three years for the states that signed onto the MSA, the directors of the American Legacy Foundation and three individuals representing each participating manufacturer. Public health advocates are also invited.

The purpose of the conference is to evaluate the success of the MSA and coordinate efforts by Attorneys General and the Participating Manufacturers to continue to reduce youth smoking. This year’s meeting focused on proposed federal tobacco legislation, tobacco in the retail environment, smokeless tobacco, trends in youth smoking and the American Legacy Foundation’s recent initiatives.


[1] The three major tobacco companies that were the original participating manufacturers are Lorillard, Philip Morris and RJ Reynolds. View a complete listing of participating manufacturers. For information on non-participating manufacturers, contact NAAG’s Tobacco Project.

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MSA Glossary

Allocable Share – A Settling State’s percentage as listed in MSA Exhibit A. These percentages were developed by using factors such as population, smoking rates and medical costs borne by the State in question.

Allocated Payment – A Settling State’s Allocable Share of the aggregate MSA payments made by Participating Manufacturers in a given year.

Cigarette – Any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (a) any roll of tobacco wrapped in paper or a substance that doesn’t contain tobacco, or (b) tobacco in any form, including any roll of tobacco wrapped in a substance containing tobacco, that is likely to be offered to, or purchased by consumers as a cigarette. “Cigarette” includes RYO (“roll your own”).

Independent Auditor (IA) – The major, nationally recognized, certified public accounting firm that calculates and determines all payments due under the MSA.

Market Share – A tobacco product manufacturer’s percentage of the total number of individual cigarettes sold in the fifty states, the District of Columbia and Puerto Rico during the applicable calendar year, as measured by federal excise taxes collected and corresponding Puerto Rican taxes collected.

Market Share Loss – The difference between the Participating Manufacturer’s aggregate market share (a) in 1997 and (b) the year in question less two percent.

Non-Participating Manufacturer (NPM) – Any tobacco product manufacturer that is not a Participating Manufacturer.

Original Participating Manufacturer (OPM) – Companies sued that were original MSA signatories, i.e. Philip Morris, RJR, & Lorillard.

Participating Manufacturer (PM) – A tobacco product manufacturer that signs the MSA.

Qualifying Statute – A Settling State’s statute that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating Manufacturers within such Settling State as a result of the MSA provisions.

Settling State – Any state that signs the MSA.

State – Any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern Mariana Islands.

Subsequent Participating Manufacturer – A company that signed the MSA subsequent to its signing by Original Participating Manufacturers.

Tobacco Product Manufacturer – means an entity that directly (and not exclusively through any affiliate) manufactures cigarettes anywhere that such manufacturer intends to be sold in the states.

Units sold – The number of individual cigarettes sold in a Settling State by a tobacco product manufacturer (whether directly or through a distributor, retailer, or similar intermediary or intermediaries) during year, 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.