Vice Squad
Friday, January 23, 2004
Tobacco Settlement and Non-Participating Companies

The settlement between 46 state attorneys general and Big Tobacco in 1998 raised the cost of manufacturing cigarettes -- for those who were part of the settlement -- while also promising boatloads of money to the states. What about tobacco companies that did not sign the settlement? Well, states enacted legislation that would raise their costs, too, so that they would not achieve a competitive advantage. The deal had a loophole, however, for small manufacturers that did not have a sales presence in more than a few states. This loophole is beginning to hurt Big Tobacco and its partners, the states, so there are efforts afoot to close it. Those efforts have already been successful in 19 states.

Details can be found in this excellent Kansas City Star story, prepared by an AP writer. The story interviews the owner of Poison, Inc., maker of cigarette brands such as Grim Reaper. Here's a sample that refers to the loophole:

"State laws enacted to enforce the settlement also required cigarette companies to pay money into escrow accounts. Those payments -- about $3.90 per carton this year -- would be used to pay any future claims made against smaller manufacturers, and would also ensure those companies couldn't undercut the Big Four on price.

Those escrow funds were to be paid back after 25 years. But the way the law was written, companies that didn't join the settlement and only do business in a few states could get back most of that money almost immediately.

As a result, Poison can sell Grim Reapers for as little as $1.49 a pack in North Carolina -- about half the price of the Big Four's premium brands."

Vice Squad mentioned the circumvention of the settlement two weeks ago. Update, January 24: Overlawyered comments on this story, too, and rightly points out that the term "loophole" is used rather creatively here.

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