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Arbitration Panel Decides MSA “Diligent Enforcement” Disputes

As a result of the Master Settlement Agreement (“MSA”), each year every participating manufacturer (“PM”) is required to make an annual payment that is based on the number of cigarettes it sells nationwide.  This payment obligation does not apply to non-signatories to the MSA, known as non-participating manufacturers (“NPMs”).  In an effort to equalize the impact on the PMs, the MSA contains a provision requiring each Settling State to enact a statute to collect escrow from the NPMs, thereby imposing similar financial obligations on NPMs.

The MSA requires the Settling States to “diligently enforce” the escrow statute.  Pursuant to the NPM Adjustment set forth in the MSA, the PMs can contest whether a state has diligently enforced its escrow statute in the collection of escrow from NPMs for a particular year.  The PMs must show two things to lodge a successful challenge.  First, a PM must show that it suffered a “market share loss” for the year in question.  Second, it must be determined that the MSA provisions were a “significant factor” for the loss in market share for the given year.  If successful, the PMs would receive a credit for the year in question.  The MSA contains a clause providing that disputes arising out of the calculations of payments shall be settled by arbitration.

On September 11, 2013, a three-member federal arbitration panel issued a ruling on the on-going payment dispute involving the 2003 payments made by the PMs pursuant to the MSA.  The recently settled dispute began in 2010 when 17 PMs sought a credit from 52 states and territories for their market share losses to the NPMs.  Earlier this week when the arbitration panel issued its decision, three PMs and 15 states remained parities to the dispute.

The arbitration panel ruled in favor of nine states – New York, Iowa, Ohio, Washington, Colorado Illinois, Oregon, North Dakota and Maine.  That means that the PMs do not receive an adjustment for their 2003 payments made to these states.  The arbitration panel ruled in favor of PMs in six states – Indiana, Missouri, Pennsylvania, Maryland, Kentucky and New Mexico, and these states will receive a negative adjustment for 2003 payments.

For questions and/or comments, please contact Bryan Haynes, at 804.697.1420 or by email.