- The Washington Times - Thursday, August 4, 2005

Small tobacco companies had a chance to get ahead when their larger counterparts reached a settlement with 46 states in 1998 for covering up health problems associated with smoking.

The deal meant companies such as S&M; Brands Inc. of Keysville, Va., would be able to charge lower prices than Big Tobacco, which has to pay more than $200 billion to the states over 25 years.

But when Big Tobacco’s market share began falling, and its payments to the states with it, the states kept a larger portion of the nonparticipating manufacturers’ payments, which had been refunded previously, according to Everett Gee, general counsel at S&M; Brands.

“Over the last few years in particular, the rules applicable to [nonparticipating manufacturers] have become harsher and harsher to the point states are driving NPMs out of business,” Mr. Gee said.

S&M; Brands, which makes Bailey’s Cigarettes, joined a lawsuit filed Tuesday against Louisiana Attorney General Charles Foti, who is in charge of enforcing the agreement, saying the settlement is unconstitutional because it is a deal among states and not approved by Congress.

The company has made “tens of millions” of dollars in payments this year, according to Mr. Gee. As part of the 1998 settlement, the cigarette manufacturers that did not agree to join the settlement had to put payments into an escrow account, which would be returned in 25 years, as to not put the big four companies out of business.

Initially, a large portion of the escrow payments was returned to the small companies, until the large companies began losing market share. The states decided to keep a larger portion of the escrow payments to make up for the loss, Mr. Gee said.

The suit says the attorneys general and big tobacco companies are putting smaller cigarette manufacturers out of business.

“I think in effect it has created a state-sponsored cartel of favorite companies that are signatories. The states’ fortunes are directly tied to the fortunes of the tobacco companies,” Mr. Gee said. “The big tobacco companies took a potentially bankrupting juggernaut of litigation and turned it into a cartel to protect their market share.”

S&M; Brands and the Competitive Enterprise Institute, a D.C. free-market advocacy group that is also a plaintiff, say the settlement favors the four major cigarette manufacturers — RJ Reynolds, Philip Morris, Brown & Williamson and Lorrilard.

S&M; is seeking what it feels is a more equitable situation, Mr. Gee said. Company officials want all tobacco companies to pay an equal flat fee. They also want payments by all manufacturers to have the same tax status. Currently, payments by some producers are tax-deductible while others are not.

CEI hopes to make it mandatory for Congress to sign off on a deal.

“If they get away with it, in the future, if Congress doesn’t regulate you, it won’t matter because state attorneys general could regulate you anyway. It’s an entirely new regulatory burden between state and the federal government,” said Hans Bader, counsel for special projects at CEI.

The Louisiana Attorney General’s Office could not comment yesterday because it had not been served the suit, according to Jennifer Cluck, assistant public information officer.

Each state legislature had to vote to join the settlement and most states debated it in their legislatures, according to James Tierney, the director of the attorney general program at Columbia Law School and the former attorney general of Maine.

Because each state made its own decision whether to join the settlement, the deal does not violate the compact clause of the Constitution, he said.

For the courts to rule in favor of S&M; Brands and its co-petitioners, the U.S. Supreme Court would have to reverse its precedent on compact clause matters, Mr. Tierney said.

“For this to be successful, it would require a lot of people to have been wrong and the court to substantially change its position,” he said.



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