Reports that Matter

United States v. Philip Morris USA Inc.: Amended Final Opinion

The Master Settlement Agreement

Section 92 of 129

The Master Settlement Agreement

  1. Provisions of the MSA 4044. On November 23, 1998, Philip Morris, R.J. Reynolds, Brown & Williamson, and

Lorillard (the "Original Participating Manufacturers" or "OPMs") and Liggett entered into the Master Settlement Agreement ("MSA") with fifty-two jurisdictions, including forty-six states and the District of Columbia, thereby ending the lawsuits brought by the states' Attorneys General against the tobacco industry. Keane TT, 1/19/05, 10537:2-18; (no bates) (JD 045158). Prior to signing the MSA, various Defendant cigarette manufacturers entered into separate settlements with four of the states that had filed lawsuits against them where trial was about to start or had started: Mississippi, Florida, Texas, and Minnesota. Comprehensive Settlement Agreement and Release, In re: Moore ex rel Miss. Tobacco Litig., (no bates) (JD 064832); Settlement Agreement, Florida v. Am. Tobacco Co., C.A. No. 95-1466 AH (Fla. Cir. Ct. Aug. 25, 1997) (280801139/1155), (no bates) (JD 012500); Comprehensive Settlement and Release, Texas v. Am. Tobacco Co., No. 5- 96CV-91 (E.D. Tex. Jan. 16, 1998), (no bates) (JD 012504); Settlement Agreement and Stipulation for Entry of Consent Judgment, Minnesota v. Philip Morris, Inc., No. C1-94-8565 (Dist. Ct. Ramsey Cty., May 8, 1998) (106035397/5425), (no bates) (JD 012501). Each of the settlement agreements with these four states provided much of the same injunctive and related relief as the MSA. The MSA resulted in the dismissal of more than forty state lawsuits pending against the Defendants and others. Szymanczyk WD, 12:12-18; Brandt TT, 9/27/04, 674:6-675:18 (noting that forty suits are pending).

  1. The MSA required its approval and the entry of a Consent Decree and Final Judgment embodying various injunctive and other provisions by the court before which each settling state's lawsuit was pending. (no bates) (JD 045158 at § XIII(b) and Ex. L); (no bates) (JD 040017);
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Szymanczyk WD, 103:9-18; Myers TT, 5/18/05, 21623:1-11.

  1. The signatory cigarette manufacturers, including many of the Defendants in this case, are individually bound by all provisions of the MSA. (no bates) (JD 045158). Some of its most significant provisions are set forth herein.

  2. The MSA states:

(a) Prohibition on Youth Targeting. No Participating Manufacturer may take any action, directly or indirectly, to target Youth within any Settling State in the advertising, promotion or marketing of Tobacco Products, or take any action the primary purpose of which is to initiate, maintain or increase the incidence of Youth smoking within any Settling State.

(no bates) (JD 045158 at § 111(a)).

  1. The MSA states:

(r) Prohibition on Material Misrepresentations. No Participating Manufacturer may make any material misrepresentation of fact regarding the health consequences of using any Tobacco Product, including any tobacco additives, filters, paper or other ingredients. Nothing in this subsection shall limit the exercise of any First Amendment right or the assertion of any defense or position in any judicial, legislative or regulatory forum.

(no bates) (JD 045158 at § III(r)).

  1. The MSA states:

(q) Prohibition on Agreements to Suppress Research. No Participating Manufacturer may enter into any contract, combination or conspiracy with any other Tobacco Product Manufacturer that has the purpose or effect of: (1) limiting competition in the production or distribution of information about health hazards or other consequences of the use of their products; (2) limiting or suppressing research into smoking

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and health; or (3) limiting or suppressing research into the marketing or development of new products. . . .

(no bates) (JD045158 at §III(q)).

  1. The MSA prohibits the Original Participating Manufacturers and their lobbyists from opposing new state or local tobacco-control legislation, and specifically prohibits them from lobbying against measures to enhance the enforcement of laws that prohibit the sale of tobacco products to youth. (no bates) (JD 045158 at § III(m), ¶¶ 29-32).

  2. The MSA contains the following specific prohibitions:

-- use of cartoon characters in tobacco product advertising;

-- use of billboards for tobacco product advertising;

-- tobacco product advertisements in stadiums, arenas and shopping malls;

-- tobacco product brand name sponsorships of concerts; football, basketball, baseball, soccer or hockey games or leagues; or any other event where the intended audience contains a significant percentage of youth or in which any paid participants or contestants are youth;

-- tobacco product advertisements on public or private vehicles;

-- tobacco product advertisements in airports, bus stops, taxi stands, train stations, transportation waiting areas or "any similar location";

-- tobacco product advertisements outside of stores or in store windows that exceed a designated maximum size;

-- so-called "Brand Name Merchandise" -- caps, jackets, bags or similar apparel or consumer merchandise bearing tobacco brand names;

-- payments for product placement -- in other words, payments to another person or entity to "use, display or make reference

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to" any tobacco product in any "motion picture, television show, theatrical production or other live performance, live or recorded performance of music, commercial film or video, or video game";

-- distribution of free samples of tobacco products except in adult-only facilities;

-- an injunction barring the companies from any agreement with each other that "has the purpose or effect" of "limiting or suppressing research into smoking and health";

-- an injunction barring the companies from any agreement with each other that "has the purpose or effect" of "limiting or suppressing research into the marketing and development of new products";

-- an injunction barring the companies from any agreement with each other that "has the purpose or effect" of "limiting competition in the production or distribution of information about health hazards or other consequences of use of Tobacco Products."

(no bates) (JD 045158 at § III).

  1. The MSA requires the permanent dissolution of CTR, TI, and CIAR. In addition, it prohibits the signatory cigarette manufacturers from establishing new industry research organizations like CTR in the future. (no bates) (JD 045158 at § III(o)). The MSA places restrictions on Defendants' formation of or participation in any tobacco-related trade associations, including the requirement that any such association "agree in writing not to act in any manner contrary to any provision" of the MSA, have independent legal counsel, and be subject to specified inspection rights of the States. Id. at § III(p). All other industry-created organizations were disbanded voluntarily and are therefore not subject to the MSA's prohibitions.
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  1. The MSA requires Defendants to promulgate a series of "corporate culture commitments." These include: (a) establishment of corporate principles to comply with the MSA, to reduce youth smoking, and to educate employees and customers about the company's commitment to reduce youth smoking; (b) designation of an executive responsible for identifying methods for reducing youth access to cigarettes and youth smoking incidence; and (c) encouragement of employees to identify additional youth-smoking reduction measures. Id. at § III(l).

  2. The MSA provides that Defendants pay $25,000,000 each year for ten years to fund the establishment of an independent national foundation which researches and designs education programs to reduce youth smoking. The payments for this foundation end March 31, 2008. Id. at § VI(a)-(b). Pursuant to this provision, the National Association of Attorneys General ("NAAG") created the American Legacy Foundation in 1999, which, among other activities, carries out a nationwide advertising and education program to prevent and reduce youth smoking. The MSA also provides that the Foundation will monitor youth smoking and evaluate the effectiveness of various youth smoking prevention programs. The agreement provided the Foundation an additional $300,000,000 per year from 1999 through and including 2003 to fund the education program. Id. at § VI(c), (f).

  3. Defendants are required to establish a series of internet websites making publicly available millions of internal documents, including (a) all documents previously obtained through discovery by state Attorneys General, the Federal Trade Commission and certain other plaintiffs in decades of litigation and investigations and (b) all documents obtained in the future in discovery by any plaintiff in any civil action relating to smoking and health. This provision does not require disclosure of any documents over which Defendants claim protection due to privilege, trade secrecy and confidentiality of proprietary business information. It is due to expire June 30, 2010. Id. at § IV; (no bates) (JD 046586 at 3000155795/5799).

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  1. 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).

  1. 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).

  1. 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.

  2. 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).

  3. 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).

  1. 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, 206:18208:12; Myers TT, 5/18/05, 21622:5-21623:11.

  1. 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.

  1. 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

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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.

  1. 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).

  2. 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.

  1. 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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  1. Several courts have held that RJR violated the MSA. See, e.g., People ex rel. Lockyer v. R.J. Reynolds Tobacco Co.,11 Lorillard did not participate in the second phase of funding for the Brotman/Freedman research. (US 30450). -147- 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).

  2. 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).

  3. 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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  1. 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 Lorillard did not participate in the second phase of funding for the Brotman/Freedman research. (US 30450). -147- 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.

  2. 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).