Missouri, the last remaining state in which nonparticipating manufacturers (“NPMs”) can obtain allocable share releases from their escrow payments, has again introduced legislation to repeal the release mechanism. The bill, House Bill 1242, was introduced on January 8, 2014 and has been referred to and is pending before the House Budget Committee.
The allocable share repeal has been introduced in Missouri in prior years and continues to be a heavily debated issue. It was narrowly defeated in 2002 and 2006. In 2011, 2012 and 2013, a coalition of small wholesalers and retailers defeated the attempted repeal of the release provision.
After Missouri and the 45 other settling states became parties to the Master Settlement Agreement (“MSA”), the Missouri Legislature enacted the “model statute,” which set forth the Allocable Share Release (“ASR”). Since then, every other state has repealed the ASR.
The major tobacco companies have relied on Missouri’s failure to repeal the ASR provision to withhold settlement payments under the MSA. Legislators may be more receptive to Missouri’s bill this year in light of the federal arbitration panel’s September 2013 decision regarding the on-going payment dispute involving the 2003 payments made by the participating manufacturers (“PMs”) pursuant to the MSA. The three-judge panel was tasked with deciding whether the Settling States “diligently enforced” their escrow statute. For the states that did not do so, the panel ruled in favor of the PMs.
Missouri was among the states where the arbitration panel ruled in favor of PMs, meaning Missouri will receive a negative adjustment for its 2003 payments. As a result of the ruling, Missouri will forfeit over half the amount – $69 million – that it anticipated receiving this year. In 2002, distributors reported that 432 million NPM cigarette sales in Missouri, but the state’s records indicate that escrow was deposited on 102 million sticks. The panel recognized that this collection rate of 24 percent was the lowest among all the states whose enforcement efforts were reviewed.
Although the panel’s decision on the 2003 disputed payments was the first ruling, disputes on payments for subsequent years remain undecided. The Missouri legislature may repeal the ASR and close the so-called “loophole.” We will report back once the Missouri legislature votes on the bill.
For questions and/or comments, please contact Bryan Haynes, Troutman Sanders tobacco practice partner, at 804.697.1420 or by email.