The Oregon Legislature’s 2023 regular session kicked off with a bang for the tobacco industry when House Bill 2128 (HB2128) was introduced at the request of Attorney General Ellen Rosenblum who also happens to the be president-elect of the National Association of Attorneys General. If passed, HB2128 would replace Oregon’s escrow deposit system, applicable to tobacco product manufacturers that are nonparticipating manufacturers (NPMs) under the Master Settlement Agreement (MSA), with an equity assessment. While HB2128 was only recently introduced and has a number of hurdles to overcome before it becomes law, we are not aware of any other state that has made a similar proposal to retroactively change escrow deposit systems for NPMs. Thus, HB2128 is worth monitoring, not only for its potential impact to Oregon NPMs, but also to see whether similar legislation will be introduced in other states.
On November 23, 1998, 46 states (the “settling states”), including Oregon, and the four largest domestic tobacco manufacturers (original participating manufacturers (OPMs)) settled years-long tobacco litigation by executing the MSA, which applies only to cigarettes and roll-your-own tobacco products. By signing the MSA, OPMs agreed to, among other things, make annual payments to the settling states in perpetuity. The MSA also allows additional tobacco manufacturers to join the MSA by agreeing to the MSA provisions. Tobacco manufacturers that joined after November 1998 are referred to as subsequent participating manufacturers (SPMs). Collectively, OPMs and SPMs are referred to as participating manufacturers (PMs).
A number of manufacturers chose not to sign the MSA. These manufacturers are referred to as nonparticipating manufacturers or NPMs. To avoid adjustments to MSA payments made by PMs, however, the MSA requires all settling states to enact and enforce statutes (escrow statutes) that require NPMs to make payments into qualified escrow fund accounts (escrow accounts) based on their cigarette sales in the settling states. After 25 years, any money in an NPM’s escrow accounts that has not been used to satisfy a court judgment or settlement related to past and present smoking-related claims made by a state (or released party under the MSA) must be released to the NPM pursuant to the escrow statutes. As a settling state and to mitigate the risk of MSA payment adjustments, Oregon enacted an escrow statute. See Or. Stat. § 323.806.
Since 1998, NPMs have deposited millions into escrow accounts for the benefit of Oregon and other states under the escrow statutes. While the settling states each enacted their own versions of the escrow statutes, they all more or less track the model statute that was proposed as part of the MSA.
HB2128’s Key Provisions
HB2128 seeks to make significant changes to Oregon’s escrow statute and would require NPMs, in lieu of making escrow payments, to instead make direct payments to Oregon, which are referred to as “equity assessments.” Oregon has stated that the policy behind HB2128 is to:
- Prevent NPMs from deriving profits and then becoming judgment proof;
- Require NPMs to assume health care costs imposed on Oregon by cigarette smoking;
- Increase the retail prices of cigarettes sold by NPMs, which would reduce smoking rates consistent with Oregon’s policy of discouraging youth smoking; and
- Serve as partial compensation for the financial burdens imposed on Oregon by cigarette smoking.
Consistent with this policy, NPMs would no longer make payments into escrow accounts. Rather, NPMs would be required to make direct payments to Oregon in the form of an equity assessment on cigarettes sold in Oregon. Importantly, the equity assessment would be retroactive to October 23, 1999. The equity assessment payment would be calculated based on the same calculation used to determine how much NPMs must contribute to escrow accounts under current law.
For sales years that occurred prior to the effective date of HB2128, the attorney general would be required to provide written notice of the amount of an NPM’s equity assessment liability, which could include assessments for one or more sales years, and the NPM would be required to remit the assessed amount to Oregon within 30 days of the notice date.
For sales years that occur after the effective date of HB2128, each NPM would be required to annually certify to the attorney general that the NPM complies with the law by remitting the required equity assessment to Oregon by April 15 of the year following the sales year at issue in lieu of making an escrow payment.
HB2128 would also allow the attorney general to bring a civil action on behalf of Oregon against any NPM that fails to remit the equity assessment to recover the equity assessment plus reasonable attorneys’ fees, costs, and expenses incurred in prosecuting the action and any appeal.
In addition, HB2128 would authorize a court to impose a civil penalty upon an NPM for not paying the equity assessment in an amount not to exceed 5% of the amount improperly withheld per day of the violation and not to exceed 100% of the original amount improperly withheld. For NPMs found by a court to have engaged in a knowing violation of the law, the court could impose a civil penalty upon the NPM in an amount not to exceed 15% of the amount improperly withheld per day of the violation and not to exceed 300% of the original amount improperly withheld. Finally, in the case of a second knowing violation, the NPM could be prohibited from selling cigarettes in Oregon for a period not to exceed two years.
HB2128’s Potential Impact
If passed, HB2128 would result in a significant change for NPMs that have been making escrow payments under current Oregon law for years, with the expectation that the funds in their escrow accounts would be released, beginning as early as 2025, assuming there are no successful state claims or settlements.
While HB2128 includes provisions that appear to allow the funds in NPM escrow accounts to revert to NPMs after 25 years, the amendments essentially only allow the funds in escrow accounts to be released to offset the retroactively imposed equity assessments (or to pay any litigation claim brought by Oregon). Because the retroactive equity assessments would be equal to the previously paid escrow, the net effect is that NPMs would not receive any of their previously escrowed funds.
While HB2128 is the first bill of its kind that we have seen, we believe that other states may attempt to enact similar legislation in an effort to generate millions in revenue by retroactively laying claim to NPMs’ escrow payments that have been made over the last almost 25 years. That said, some states, in lieu of passing similar legislation, could attempt to obtain the funds in NPMs’ escrow accounts by initiating litigation related to past and present smoking-related claims and then by seeking to settle such claims with payment made from NPMs’ escrow accounts.
In sum, it remains to be seen whether HB2128 will survive the legislative process, become the start of a state legislation trend, or be one part of an overall strategy for states to lay claim to the funds in NPMs’ escrow accounts, effectively preventing the funds from being released to NPMs in accordance with current law.