Enforcement of the MSA

¶4056. Compliance with the MSA is monitored and enforced by NAAG and the various individual states' Attorney General offices. (no bates) (JD 045158 at § VII). The MSA, and the consent decrees and final judgments entered pursuant to it, contain provisions under which each state attorney general can seek access to the court in his or her jurisdiction charged with overseeing its enforcement. Id. at § VII(a)-(c).

¶4057. The MSA provides that each year each of the Original Participating Manufacturers (Philip Morris, B&W, RJR, and Lorillard) must pay their respective market share of a lump sum payment to all states for enforcement and monitoring of the MSA.8 The payments continue in perpetuity and are as follows:

¶2000: $4,500,000,000.00

¶2001: $5,000,000,000.00

¶2002 and 2003: $6,500,000,000.00

¶2004-2007: $8,000,000,000.00

¶2008-2017: $8,139,000,000.00

¶2018 and each year thereafter: $9,000,000,000.00 Id. at § IX(c). These payments are not specifically earmarked for any designated use (unlike the payments for the Foundation). Each state has complete discretion on how to spend the funds, and states often spend the funds on matters not related to the effectuation and enforcement of the MSA.

¶The payment is subject to certain adjustments based on changes in the market.

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¶In addition, the MSA provides one $50,000,000.00 bulk payment, by the Original Participating Manufacturers according to their respective market share, to NAAG in order to establish The States' Antitrust/Consumer Protection Tobacco Enforcement Fund which will facilitate and oversee enforcement and implementation of the MSA on a national level. The MSA also provides $150,000 per year until December 31, 2007, for NAAG to administratively coordinate between and amongst the individual states' Attorneys General. Id. at § VIII(a)-(c).

¶4058. The MSA requires that before any enforcement action may begin, a state must "[w]henever possible" first discuss the dispute with the company to determine if it can be resolved informally. Id. at § VII(c)(6), ¶¶ 50-51; § XVIII(m), ¶ 134. If these informal discussions are unsuccessful, the state must then provide thirty days' written notice of its intent to initiate a proceeding. Id. § VII(c)(2), ¶ 50. The thirty day period may be shortened in the event the Attorney General determines that the enforcement matter involves a compelling, time-sensitive public health and safety concern. Id. at § VII(a)-(c). The MSA specifically prohibits any state from "seek[ing] to enforce the terms of the Consent Decree of another Settling State." Id. at § VII(b), (c)(1), ¶ 49.

¶4059. States may seek injunctive relief for violations, as well as contempt and criminal sanctions for failure to comply with any enforcement order. Id. at § III(b)-(c). The states are given broad rights of inspection and discovery of Defendants' documents and representatives whenever they have reasonable cause to believe that a violation has occurred. Id. at § VII(g).

¶4060. The MSA provides that NAAG shall coordinate and facilitate the MSA's implementation and enforcement by the states. Id. at § VIII. Among, other things, NAAG:

-- Assists "in coordinating the inspection and discovery activities referred to in subsections III(p)(3) and VII(g) regarding compliance with this Agreement by the

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Participating Manufacturers and any new tobacco-related trade associations." Id. at § VIII(a)(1).

-- Convenes "at least two meetings per year and one major national conference every three years for the Attorneys General of the Settling States, the directors of the [American Legacy] Foundation and three persons designated by each Participating Manufacturer. The purpose of the meetings and conference is to evaluate the success of this Agreement and coordinate efforts by the Attorneys General and the Participating Manufacturers to continue to reduce Youth smoking." Id. at § VIII(a)(2).

-- Supports and coordinates "the efforts of the Attorneys General of the Settling States in carrying out their responsibilities under this Agreement." Id. at § VIII(a)(3).

¶4061. The Attorneys General monitor marketplace and company activities, make inquires of the companies, and file actions to enforce the MSA in the appropriate state court. Szymanczyk TT, 4/11/05, 18461:1-17; see also (no bates) (JD 045158 at § VIII(c)); Szymanczyk WD, 206:18- 208:12; Myers TT, 5/18/05, 21622:5-21623:11.

¶4062. In addition to these informal enforcement actions, the Attorneys General have brought formal enforcement proceedings against particular manufacturers when a practice has violated one of the provisions of the MSA and the informal inquiry process has not resolved their concerns. Szymanczyk WD, 211:21-212:2; Beasley WD, 48:11-62:4. These formal actions have been few in number for a variety of reasons, including the limited resources committed by each state for such litigation. A few examples are detailed below.

¶4063. Three states -- Illinois, New York, and Maryland -- filed actions against Brown & Williamson alleging that its "Kool Mixx" marketing campaign violated the MSA's prohibition against youth targeting. B&W settled the actions on October 5, 2004, two weeks after trial began, agreeing to restrictions on their future Kool Mixx promotions and monetary payments to support youth smoking prevention. (no bates) (US 92037). Susan Ivey, current President and CEO of Reynolds American and Chairman and CEO of RJR, and former CEO of B&W, acknowledged receiving complaints about the "B Kool" ad campaign from Governor Chiles of Florida. Ivey WD, 11:4-12:1. "Brown & Williamson did not change the content of the B Kool campaign as a result of the concerns expressed by NAAG," and Governor Chiles. Smith WD, 32:20-33:8.

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¶4064. The states' Attorneys General have complained to Philip Morris that more than forty types of activities violate the MSA. Dolan TT, 12/8/04, 8010:5-10; (no bates) (JD 041836); (no bates) (JD 050566); (no bates) (JD 053079); (no bates) (JD 046586); (no bates) (JD 055037).

¶4065. Over the years, the Attorneys General's inquiries of Philip Morris have dealt with a number of issues, including:

-- Anti-smoking billboards. Szymanczyk WD, 109:15-16, 109:23-110:1; (no bates) (JD 055043) (examples of antismoking ads posted by Attorneys General).

-- Brand names on third-party billboards. Szymanczyk TT, 4/11/05, 18469:20-23; Szymanczyk WD, 212:8-214:8; (no bates) (JD 045035); (no bates) (JD 042509); (no bates) (JD 042510); (no bates) (JD 045154).

-- Cartoon advertisements. Szymanczyk WD, 214:11-16, 215:6-8; (no bates) (JD 055045); Szymanczyk TT, 4/11/05, 18464:23-18465:3.

-- Coupon promotions. Szymanczyk TT, 4/11/05, 18476:16- 18477:19; (no bates) (JD 041836 at 2077583781/3782, 2077583994/3997); Szymanczyk WD, 216:16-217:21; (no bates) (JD 045791).

-- Magazine advertisements. Szymanczyk WD, 118:6-125:23, 218:2-219:18; (no bates) (JD 041836 at 2077583999/4001,

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2075833781/3782); (no bates) (JD 053086); (no bates) (JD 053107); (no bates) (JD 042590); (no bates) (JD 041075).

-- Brand name merchandise. (no bates) (JD 054552 at 2085607342/7345, 2085319973/9974); (no bates) (JD 053133); (no bates) (JD 054552 at 2086150949/0950, 3000152691/2693, 2086153499/3501); see also (no bates) (JD 055037).

-- Product placement in movies. (no bates) (JD 054552 at 3000152703/2706, 3001022923/2925); see also (no bates) (JD 055037); Beran WD, 11:7-10.

-- Sponsorships. (no bates) (JD 041836 at 2077583781, 2077583985-3992); (no bates) (JD 055037).

¶4066. One notable dispute occurred in 2001. The MSA limited Philip Morris to just one brand name sponsorship in a racing series. Philip Morris used that to sponsor a Marlboro brand race team in the Champion Auto Racing Teams, Inc., otherwise known as "CART" racing league. In 2001, Philip Morris attempted to enter its CART Marlboro brand race cars in the Memorial Day Indianapolis 500, a race in the Indy Racing League. Philip Morris's chairman and CEO, Michael Szymanczyk, admitted that CART and the Indy Racing League are two distinct racing leagues, with two distinct approval organizations. Szymanczyk TT, 4/11/05, 18377:15-19.

¶4067. After Washington State Attorney General Christine Gregoire notified Philip Morris that sponsoring Marlboro vehicles in races in two different leagues would violate the MSA, Philip Morris removed the Marlboro brand names from its race cars and uniforms for the 2001 Indianapolis 500, but Marlboro color and images remained. Szymanczyk WD, 131:1-132:10. Following the 2001 season, Philip Morris switched from its CART Marlboro brand sponsorship to its current Indy Racing League Marlboro sponsorship. Szymanczyk TT, 4/11/05, 18380:22-18381:1.

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¶4068. Several courts have held that RJR violated the MSA. See, e.g., People ex rel. Lockyer v. R.J. Reynolds Tobacco Co., 11 Cal. Rptr. 3d 317, 323, 327-28 (Cal. Ct. App. 2004) (discussed supra; finding that RJR did not change its youth magazine placement policies from the 1998 signing of the MSA until the day that it was sued in March 2001, and that RJR's 2001 changes had insignificant effects on youth exposure to its advertising campaigns); State ex rel. Goddard v. R.J. Reynolds Tobacco Co., 75 P.3d 1075 (Ariz. Ct. App. 2003) (holding that RJR violated the MSA by placing cigarette advertisements at auto racetrack year-round); People ex rel. Lockyer v. R.J. Reynolds Tobacco Co., 132 Cal. Rptr. 2d 151 (Cal. Ct. App. 2003) (same; discussed infra); State ex rel. Petro v. R.J. Reynolds Tobacco Co., 820 N.E.2d 910 (Ohio 2004) (discussed infra; finding RJR violated the MSA with promotional tobacco brand name matchbooks).

¶4069. Most recently, on July 26, 2005, the State of Vermont filed a complaint and petition for contempt, alleging that RJR has violated MSA § III(r) which prohibits any participating manufacturer from making "any material misrepresentation of fact regarding the health consequences of using any tobacco product." Complaint, Vermont v. R.J. Reynolds Tobacco Co., No. 744-97 CNC & S-0816-98 (Vt. Superior Ct. filed July 26, 2005).

¶4070. RJR was the only signatory to the MSA which continued to distribute branded matchbooks with cigarette advertisements. Ohio ex rel. Petro v. R.J. Reynolds Tobacco Co., 820 N.E.2d 910, 914 (Ohio 2004). In 1999, several states' Attorneys General alerted RJR that its branded matchbooks violated the MSA's prohibition on tobacco brand merchandise. When informal discussions failed, Ohio moved for a show-cause order in March 2001. After proceedings in the trial court and intermediate appellate court, the Ohio Supreme Court affirmed the trial court on December 30, 2004, holding that RJR had violated the MSA's prohibition on distributing tobacco branded merchandise, and that the MSA intended to prohibit the "subtle yet ubiquitous marketing of tobacco products." Id. at 917.

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¶4071. RJR also faced a lawsuit by the California Attorney General for failing to change its magazine advertising placement policies following execution of the MSA. People, ex rel. Lockyer v. R.J. Reynolds Tobacco Co., 11 Cal. Rptr. 3d 317 (Cal. Ct. App. 2004). On November 4, 1999, state Attorneys General met with RJR and voiced concern about its targeting youth in magazine advertising placement. People ex rel. Lockyer v. R.J. Reynolds Tobacco Co., No. GIC 764118, 2002 WL 1292994, at *4 (Cal. Superior Ct. June 6, 2002). After informal discussions failed to resolve the issue, a complaint was filed in March 2001. The California Court of Appeals affirmed the trial court's decision on March 19, 2004, and denied rehearing on June 9, 2004.

¶4072. While there have been a small number of successful enforcement actions brought by state Attorneys General under the MSA, that fact alone does not demonstrate that the MSA has been or will continue to be adequately enforced. There are significant variations amongst the states in the amount of funding and quality of resources devoted to MSA enforcement. Moreover, enforcement actions are subject to differing and inconsistent rulings, because each jurisdiction applies its own law of contracts to interpret the MSA's terms. Contrast People ex rel. Lockyer v. R.J. Reynolds Tobacco Co., 132 Cal. Rptr. 2d 151 (Cal. Ct. App. 2003) (racetrack ads prohibited), with New York v. R.J. Reynolds Tobacco Co., 761 N.Y.S.2d 596 (N.Y. App. Div. 2003) (racetrack ads allowed).