DALLAS - A U.S. District judge yesterday said it could be difficult to find that NewYork statutes written to implement the 1998 Master Settlement Agreement have causedsmall tobacco companies to suffer irreparable damage because they have enjoyed anincrease in market share in recent years.
U.S. District Judge Alvin Hellerstein made the comment during oral arguments in ahearing on a preliminary injunction motion by Freedom Holdings, which is suing New Yorkofficials, including Attorney General Eliot Spitzer. The company wants to prohibit thestate's enforcement of escrow and contraband statutes written to complement the MSA.
Under that agreement, major tobacco companies will pay 46 states $205 billion over aperiod of no less than 25 years as compensation for the cost of caring for indigentsmokers with health-related illnesses. In order to comply with that agreement, statesapproved statutes requiring tobacco companies that did not sign the MSA to pay intoescrow funds, which ostensibly would pay for damages in the event those companies areever sued.
Companies that do not pay into the escrow funds run afoul of additional MSA laws calledcontraband statutes that make it illegal for companies that do not make either MSA orescrow payments to sell tobacco products.
David Dobbins, a lawyer with the firm Patterson Belknap Webb & Tyler who is representingthe plaintiffs, disagreed with Hellerstein's comment. He said that escrow statutes havecreated a competitive disadvantage for non-participating manufacturers - companies thathave not signed the MSA - because escrow payments are not tax-deductible. That leads tohigher profits among major cigarette companies, which can write off MSA payments. Andsuch a scenario creates an illegal cartel, violating antitrust laws.
"The history of the cartel demolishes the myth," said New York assistant attorneygeneral Avi Schick. He added that according evidence in the case, market share for NPM'shas risen from 0.37% in 1991 to 8.09% in 2003, while market share for major tobaccocompanies has fallen off.
"I take it from this that it's hard to believe that an adverse impact has beenexperienced by the NPM's," said Hellerstein.
The plaintiffs must prove that they have suffered irreparable damage because of theescrow and contraband statutes and that there is some likelihood that they will prevailin the lawsuit.
The judge didn't appear to give any indication as to what he would ultimately decide,according to Donald Lipkin, a managing director with Bear, Stearns & Co., who was at thehearing.
"He seemed to be weighing both sides very carefully," Lipkin said.
A ruling is expected in coming weeks.
A successful ruling for Freedom Holdings could significantly impede MSA payments tostates - payments that back nearly $22 billion tobacco revenue bonds sold by issuers in19 states.
"The MSA has a provision to handle a scenario in which the escrow statutes are deemedinvalid, unenforceable, or unconstitutional," said Leonard Violi, a lawyer with the NewYork City firm Windels Marx Lane & Mittendorf, who has represented small tobaccocompanies in antitrust lawsuits.
In that case, major tobacco companies could lower their MSA payments to states by up to66%, depending on the amount of market share lost to small NPM's.
Robert Levy, a senior fellow of constitutional studies at the Cato Institute, said thequestion to ask the court is not how much market share small tobacco companies havegained since the MSA was signed.
"The question is, how much more would they have gained if not for the model statutes?"he said.
Meanwhile, a lawsuit against the tobacco industry by the U.S. Justice Department gainedadditional ground this week, just two weeks after a federal judge ruled that the federalgovernment could seek damages totaling $289 billion.
U.S. District Judge Gladys Kessler on Monday ordered British American Tobacco Co. toturn over the so-called "Foyle memorandum." That memo allegedly constitutes a corporateoutline for destroying records that could prove the company kept hidden health risksassociated with tobacco products.
Andrew Foyle, a British attorney who represents both BATCo and its Australiansubsidiary, W.D. & H.O. Wills, wrote that long-sought document in 1990.
The federal government is seeking disgorgement of the profits of defendants in thelawsuit under the 1970 Racketeer Influenced and Corrupt Organizations Act.
Richard Levie, a special master in the lawsuit appointed by Kessler, said earlier thisyear that BAT's alleged policy of routing research documents through lawyers ordestroying them, represents a prima-facie case of fraud.
Although the Foyle memo has, to date, been kept under wraps, another letter written in1990, this one by another attorney representing the company, Brian Wilson, indicatedthat documents could be destroyed for space considerations and to eliminate "enormousman-hours and other overheads involved in sifting through superfluous documents in orderto locate records actually required in . . . litigation."
In a memorandum outlining her reasons for the order, Kessler assailed the company.
"BATCo's actions in the course of its dogged fight against release of the Foylememorandum constitute inexcusable conduct. It was only by pure accident ... that thegovernment even learned of the existence of the Foyle memorandum," Kessler wrote.
BATCo officials were unhappy with the verdict, which they say violates attorney-clientprivilege.
"We don't agree with [Judge Kessler's] decision and are considering appealing," said AnnTradigo, a press officer in the company's London office.
Philip Morris USA and its parent company Altria Inc., R.J. Reynolds Tobacco Co.,Lorillard Tobacco, Carolina Group, Brown & Williamson, and Liggett Group are the othercorporate defendants in the federal lawsuit.
If the U.S. government prevails in its case, some tobacco analysts predict that such alarge verdict could slow payments to states under the terms of the 1998 MasterSettlement Agreement. Payments from the MSA - $205 billion over a period of no less than25 years - back nearly $22 billion of outstanding tobacco revenue bonds sold by issuersin 19 states.
"The core of this lawsuit is racketeering," said Edward Sweda, a senior attorney withthe Tobacco Products Liability Project at Northeastern University School of Law inBoston. "Forestalling discovery and destroying evidence to maintain market sharecertainly exceeds the bounds of proper conduct."
Other analysts say the MSA was written with the understanding that another major courtdecision, such as the one sought by the Justice Department, was possible.
The U.S. Department of Justice lawsuit originally filed in 1999 "is the big one thatpeople are watching right now," said Richard Larkin, a municipal analyst with J.B.Hanauer & Co. "The tobacco bond market really took a hit after the disgorgement ruling,which was on the heels of the filing of the preliminary injunction request by FreedomHoldings. I think we'll see the market sneak back - but closer to the trial for the DOJcase on Sept. 13, I think we'll see the market come to a standstill again."
The judge set a final filing deadline of June 29 on the question of the preliminaryinjunction. At that time, he said he would either rule, or schedule another hearing.
