Amicus Brief in Fifth Circuit Tobacco Master Settlement Case
On November 23, 1998, the Attorneys General of 46 states signed an agreement settling allegations that the largest four tobacco manufacturers defrauded the states of Medicaid expenses. The Master Settlement Agreement obligates the Majors and other manufacturers who opt in to the MSA to make annual payments totaling $206 billion. Under the MSA‘s terms, PMs‘ payments are calculated on the basis of their current national market shares. The annual payments are then allocated to the settling states. The MSA also prohibits PMs from various tobacco-related lobbying and advertising activity. MSA §§ III(b)-(i); III(m)-(p). The MSA raises the costs of cigarettes by approximately 35 cents per pack.
Structuring damage payments in this way would have created a significant competitive advantage for NPMs, which would have been able to undercut PMs‘ resulting inflated prices. The MSA contemplates this consequence by including several provisions that provide incentives for NPMs to join the settlement, thereby mitigating the competitive consequences of the PMs‘ annual payments to the states. These NPMs are often smaller companies which would stand to gain substantial market share by not joining the MSA. The MSA‘s incentives are accordingly generous.
First, new participants in the settlement which subject themselves to the tax increase within 90 days make zero MSA payments at all on sales at or below a benchmark level, defined as the higher of their 1998 sales or 125 percent of their 1997 sales. MSA § IX(i). To put the magnitude of this subsidy in perspective, a small manufacturer with sales of $100,000 per month would be entitled to a $1.5 million annual tax subsidy. See Jeremy Bulow, Director, Bureau of Econ., Fed. Trade Comm‘n, The State Tobacco Set- tlements and Antitrust (June 25, 2007).