On June 21, two free-market public policy groups succeeded in wresting from the National Association of Attorneys General (NAAG) details of a secret ruling on the nationwide tobacco settlement.

For nearly three months, NAAG had kept secret a March 27 report by an arbitrator that could lead to reduced payments for the states under the Master Settlement Agreement (MSA), a $246 billion agreement signed in 1998 between 46 states and major tobacco companies.

NAAG claimed the arbitrator’s report, written by the Brattle Group, a private consulting firm specializing in finance and litigation matters, was “privileged and confidential.” The Evergreen Freedom Foundation (EFF) in Olympia, Washington and Competitive Enterprise Institute (CEI) in Washington, DC forced the disclosure.

”State Law Required Disclosure”

The two organizations used Washington State’s public records law to force the state’s attorney general to disclose the report.

“Given that NAAG’s members are public servants, this important report should never have been kept from the public,” said CEI counsel Hans Bader.

“It’s shameful that NAAG tried to keep the report from the public,” agreed Jason Mercier, EFF’s senior budget analyst. “The tobacco settlement is, after all, a public settlement agreement. The report would still be secret if it weren’t for Washington State’s public records law.”

Bob Cooper, communications officer for Idaho Attorney General Lawrence Wasden, declined to comment on the report, insisting it remains “a confidential and privileged report” despite its release. Wasden is co-chair of the NAAG tobacco committee.

”Majors’ Market Share Slipping”

The Brattle report was the result of a squabble that erupted early this year between state attorneys general and the major tobacco companies. The companies argued settlement payments should be reduced because their share of the domestic cigarette market has declined by several percentage points in recent years. The companies and states hired Brattle Group to arbitrate the dispute.

According to the MSA, settlement payments should be reduced if the major tobacco companies can prove two things: That the terms of the settlement, which included annual payments and a host of lobbying, marketing, and advertising restrictions, caused a loss in market share; and that states failed to diligently enforce laws requiring competitors to make special escrow payments to the states.

In 1997, the four leading cigarette makers controlled more than 99 percent of the market. Their share has since slipped to around 92 percent.

The Brattle report concluded the major companies have in fact been harmed by the MSA. According to the report, advertising restrictions in the agreement have been a “significant factor” in reducing manufacturers’ share of the cigarette market. The arbitrator ruled the major companies could withhold as much as $1.2 billion annually from the states. They have been paying about $6 billion annually.

”Payments Put Into Escrow”

In a move that has provoked a spate of state lawsuits, R.J. Reynolds Tobacco Co. (RJR) and Lorillard Tobacco Co., along with some smaller firms, have placed a portion of their 2006 payment–more than $750 million–in escrow. That would allow the companies to keep the money if they prevail, but gives them money set aside for payment if the states win.

Industry leader Philip Morris USA made all of its $3.4 billion payment by the MSA’s April 17 deadline.

The remaining dispute, over diligent enforcement of special escrow payments to be made by the major tobacco companies’ competitors, remains to be decided. The tobacco companies prefer that the dispute be decided by an arbitration panel, rather than federal or state courts. But NAAG contends each state should individually determine whether courts or an arbitrator would decide this dispute.

A lawsuit filed by CEI challenging the constitutionality of the MSA is pending in federal court. The suit alleges the agreement is unconstitutional because it violates the Compact Clause of the Constitution: “No State shall, without the Consent of Congress enter into any Agreement or Compact with another State.” (See “$246 Billion Tobacco Settlement Faces Constitutional Challenge,” Budget & Tax News, October 2005.)

”’Christine Hall is communications director for the Competitive Enterprise Institute. Reach her via email at mailto:chall@cei.org”’

”’For more information … Information on the constitutional challenge to the 1998 Master Settlement Agreement is available online at http://www.ControlAbuseofPower.org The Brattle Group report is available at http://www.effwa.org/pdfs/msa1.pdf”’

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