2. Tobacco MasterSettlement Agreement
Introduction
The Tobacco Master Settlement Agreement (MSA) is an agreement that was
reached in 1998 between the Attorney Generals of forty-six states, the District of
Columbia, four United States territories and the four largest tobacco companies: Philip
Morris, RJ Reynolds, Brown & Williamson, and Lorillard. The agreement sets guidelines
regarding advertising, marketing and promotion of tobacco products. The agreement
settled lawsuits by states to recover costs accrued from smoking related illnesses. The
agreement authorizes other tobacco companies to join the settlement as well. Since 1998,
over forty other companies have joined and participated in the settlement agreement. The
settlement is worth $206 billion over the first twenty-five years, which is given to states
in annual payments.
The Tobacco Master Settlement Agreement has affected states by increasing their
revenue and budgets, decreased overall cigarette consumption and changed the operations
of the tobacco industry when compared to years before the agreement.
I have organized my paper into six sections- Introduction, Internship Experience,
Historical Background, Effect on States’ Revenue and Budgets, Effect on Cigarette
Consumption and Effect on the Tobacco Industry. I find this best compliments the flow
of information in my research paper.
Internship Experience
This past semester, I interned at the South Carolina Office of the Attorney
General in the civil litigation and tobacco departments. As a political science major, I
have taken a number of classes dealing with the relationship of law and government. I
3. was interested to experience this first hand and wanted to gain insight in the legal field, as
I am contemplating law school. While I did not know what to expect interning in the
tobacco department, I learned more and more about the tobacco industry each day. I
especially learned a great deal about the Master Settlement Agreement, which I had never
heard of before, but affected a great part of my daily work in the office. I began pulling
the files of participating and non-participating tobacco companies to ensure they were in
compliance with the Master Settlement Agreement. I helped the Assistant Attorney
Generals in the tobacco department correspond with tobacco companies as well. I
reviewed and filed tobacco companies’ escrow account statements and contacted the
banks of which companies we did not have a proof of deposit on file. After learning more
about the Master Settlement Agreement and assisting the attorneys, I realized what an
impact the Master Settlement Agreement has on the state as well as the industry. I have
found most individuals do not know or fully understand the agreement and recognized
how it would be an interesting topic for a research paper.
Historical Background
Before the Master Settlement Agreement, individuals began suing manufacturers
for tobacco consumption related illnesses. Beginning in the mid-1950s until 1994, over
800 claims were brought against tobacco companies for damages related to tobacco use.
Tobacco companies avoided compensating individuals by claiming contributory
negligence and individual responsibility. However, tobacco companies’ luck began to
change in 1994 when Mississippi was the first of many states to bring lawsuits against
large tobacco companies. Attorney generals argued on behalf of the state that tobacco
companies violated consumer protection and anti-trust laws. States claimed that tobacco
4. use, specifically cigarettes, caused harmful health problems, which cost state health care
systems millions of dollars. In 1997, Mississippi, along with three other states, reached a
settlement with the large tobacco companies to repay the states’ costs for smoking related
health care. After these successful settlements, other states noticed and began bringing
lawsuits against the major tobacco companies hoping for similar success. The four major
tobacco companies, looking to avoid more costly settlements, lobbied Congress for a
legislative settlement. Their attempts to pass a “global settlement agreement” between all
state attorney generals and the companies failed. Instead in 1998, the forty-six other
states reached an agreement with the major tobacco companies as well and changed the
way tobacco is promoted and marketed in the United States. Participating manufacturers
are tobacco producers that are a part of the Master Settlement Agreement. Non-
participating manufacturers are those that have declined to join the settlement agreement.
Effect on States’ Revenues and Budgets
The Master Settlement Agreement (MSA) has set up three types of payments
required by tobacco companies to the states- initial, annual and “strategic contribution”
payments. Initial payments were set up to the pay each of the states upfront for the first
five years of the settlement depending on the amount of cigarettes distributed in the state
during that time (Tobacco Control Legal Consortium). Annual payments are also made to
the each of the states. The settlement agreement states this will happen indefinitely, to
supplement state health care system costs (specifically Medicaid) that will continue to
increase year after year. Amounts paid by the tobacco companies increase every year
accounting for inflation. An independent auditor determines how much money a
participating manufacturer will pay each year as well as how much each state shall
5. receive. Strategic contribution payments are bonus payments to the states, which have
invested time and money into litigation that resulted in the MSA. Tobacco companies
will pay around $10 billion annually for the indefinite future. As of 2015, participating
manufacturers have paid around $105 billion to the states.
The purpose of the Master Settlement Agreement is to decrease youth tobacco
consumption and promote public health. However, there is no true restriction on a state’s
use of funds received from the settlement. State legislators are responsible for seeing how
the money is spent. States have collected enormous amounts of revenue from the
agreement but spend only a small amount on tobacco prevention programs. In 2015,
states will receive $25.6 billion in settlement and tobacco taxes, but only 1.9% will be
used to fund tobacco prevention and control programs (Tobacco Control Legal
Consortium). In today’s times of financial hardship and increasing debt, states have
redirected settlement funds to other projects such as balancing state budgets, reducing
property taxes or funding college scholarships. Only two states, North Dakota and
Alaska, have funded tobacco prevention programs at the Center for Disease Control’s
recommended level (Tobacco Control Legal Consortium). Since the MSA does not
specify how the settlement funds can be used, some states have securitized their future
payments into bonds. This allows state governments to finance capital improvements,
fund health care projects and receive an upfront lump sum of cash rather than waiting
each year for the MSA payments (Tobacco Control Legal Consortium). In 2010, eighteen
states, the District of Columbia and three U.S. territories selected to do this with at least
some of their MSA revenue. Many participating manufacturers also dispute the payments
6. to the state and withhold the payments or place the settlement amount in escrow accounts
pending resolution of the dispute (Tobacco Control Legal Consortium).
There are two public health goals- tobacco control and the economic development
of tobacco dependent communities (Austin 129). State governments are faced with the
issue of investing in tobacco dependent communities (TDC) and repaying tobacco
farmers for lost income after the settlement (Austin 129). Many public health experts
take offense in reimbursing tobacco farmers when the original intent of the settlement
was to promote public health with tobacco control. However, studies have shown even
when public health programs are adequately funded they are not necessarily effective
(Austin 147).
Effect on Cigarette Consumption
As stated previously, one of the goals of the Master Settlement Agreement is to
decrease cigarette consumption, especially in youths, by promoting public health. The
MSA specifically targets advertising and promotion of tobacco products. It sets strict
limitations on who may be targeted as well as where advertisements may be placed. Foe
example, the MSA prohibits or restricts direct and indirect targeting of youth, use of
cartoon characters, billboards and outdoor advertising not in direct proximity to a retail
establishment that sells tobacco products, product placements in entertainment media,
free tobacco product samples (except in adult only facilities), gifts to youth in exchange
for proofs of purchase, branded merchandise and brand name sponsorship (Tobacco
Legal Consortium). The MSA also prohibits actions that are commonly taken to avoid
negative information about tobacco products. For example it prohibits lobbying against
particular kinds of tobacco control legislation and administrative rules, agreements to
7. suppress health-related research and materials misrepresentations about health
consequences of using tobacco (Tobacco Legal Consortium). The settlement agreement
also has created a number of initiatives to promote tobacco prevention and reduce the
tobacco industry’s influence on lawmakers. It created the American Legacy Foundation,
which is a research and educational organization that prevents teen smoking and
encourages smokers to quit (Tobacco Law Consortium). The foundation has produced
“The Truth” campaign which is directed at teens and his been relatively effective
(Tobacco Law Consortium). The settlement agreement has decreased the industry’s
influence by disbanding key tobacco projects including the Tobacco Institute, The
Council for Tobacco Research and The Center for Indoor Air Research (Tobacco law
Consortium). Finally, and perhaps more informative, is the availability of documents that
were presented in the discovery phase of the tobacco litigation as well as documents
produced in discovery phase in all federal or state civil action case regarding smoking
and health (Tobacco Law Consortium).
Although it may seem as though this would decrease cigarette consumption
dramatically, this is not the case. A study was conducted in 2004 using data from the
Center of Disease Control and Prevention’s Behavioral Risk Factor Surveillance System
between 1990-2002. They examined smokers in age groups 18-20 years old, 21-24 , 25-
44 , 45-64 and over 65 years of age. Smoking rates for eighteen to twenty year olds
actually increased 36 percent from 1990-2002 (Sloan 846). Smoking rates for 21-24 year
olds increased 30 percent in the same period (Sloan 846). However, smokers were
influenced by price increases of cigarettes. For a $1 increase in the price of cigarettes, the
probability of smoking would fall 2.5 percentage points for eighteen to twenty year olds
8. and 1 percent for older age groups (Sloan 847). The study suggested that advertising
restrictions are not widely enforced, which would decrease probability of smoking. The
results also showed that other policy variables effected smoking rates across age groups.
For example, smoking rates were higher for twenty one-twenty four year olds when states
allowed vending machine access giving easier access to cigarettes (Sloan 848). However,
clean air laws, which prohibit smoking in restaurants or hospital grounds, did not have an
effect on cigarette consumption. The study concluded the MSA and separate state
settlements did help decrease cigarette consumption in some ways. However, most
occurred through the increase in retail prices for cigarettes. This had a larger effect on
younger smokers, age group of eighteen to twenty, which saw a decrease in smoking of
3.5 percentage points (Sloan 852). For those over twenty-one, there was a 1 to 2-
percentage point decrease (Sloan 852). This is clearly the most effective way in curbing
cigarette consumption especially with young smokers. It makes sense logically as well,
since younger people typically have less income and smaller budgets. Therefore they
would be turned off from an increase in prices. While this is a positive, the decrease in
consumption is not very significant. The settlement agreement has not fulfilled its job of
greatly decreasing tobacco consumption in youth.
Effects on the Tobacco Industry
Even though the MSA imposed restrictions on advertising, results from
investigations in 2000 showed that tobacco companies still were advertising in magazines
targeted to teens. This is in direct violation of the terms of the agreement. The researches
examined expenditures on advertising in magazines (with at least 15% of youth readers)
by tobacco companies (Hamiton ii54). They found that cigarette advertising in magazines
9. with at least 15% youth readership increased dramatically after the settlement agreement
was implemented (Hamilton ii54). However, after much public pressure, the advertising
in youth magazines by tobacco companies dramatically declined (Hamilton ii54). Of
course exact numbers differ from company to company. While the advertising increased
in magazines with at least 15% of youth subscribers, the total amount of magazine
advertising decreased for magazine advertisements overall for three out of four major
companies (Hamilton ii57). This shows how tobacco companies have not followed the
settlement agreement entirely. The study offers two explanations for these mixed results.
First they suggest that the agreement’s prevention of most outdoor and transit advertising
may have allowed for other advertising expenditures elsewhere (Hamilton ii57). The total
tobacco industry expenditures on outdoor and transit advertisement decreased by $276
million from 1998 to 1999, which could have been reallocated to fund the $119million
increase in magazine and newspapers (Hamilton ii57). A second explanation the study
provides is the language of the agreement regarding youth advertisement. The MSA
broadly prohibits direct and indirect targeting of youth but its language is not specific in
regards to magazine advertising (Hamilton ii57). Tobacco companies defended their
actions by reasoning that most readers were not under the age of eighteen. The bad press
as well as Massachusetts’ program, Campaign for Tobacco Free Kids, helped change
tobacco companies’ advertising in youth reader magazines. For the four companies
combined, significant reductions occurred in magazines with at least 15% youth
subscribers as well as overall advertising in magazines. Philip Morris one of the four
largest tobacco companies, which produces Marlboro along with numerous other brands
of tobacco, led the way in the drastic cut of advertising. They cut their advertising to near
10. zero soon after announcing the plan (Hamilton ii57). This was a great public relations
move by making a public announcement and following through quickly. Two other
companies, Lolliard and Brown & Williamson, significantly reduced advertising on youth
magazines as well as overall magazine advertisement. However, RJ Reynolds, the second
largest tobacco company in the US responsible for the popular brands of Camel and
Newport, made little change in their expenditures. While it is positive that tobacco
companies were forced by public pressure decrease advertising, it should not have come
to that since they were blatantly disregarding the law.
In 2004, researches published another study investigating the effects of the
settlement agreement on the major tobacco companies’ decisions and performances. They
used data from the US Securities and Exchange Commission, stock prices and market
share data, cigarette consumption data and more to find a conclusion. After the Master
Settlement Agreement was passed, domestic cigarette unit sales and exports declined
from 452 billion to 408 billion (Sloan 358). As expected, the large price increases of
cigarette-decreased consumption even more after the MSA was implemented in 2002 to
390 billion (Sloan 358). The study concluded that overall, from 1999 to 2002, the large
participating manufacturers maintained or improved their performance in terms of
investor stock returns and profit from domestic tobacco sales (Sloan 359). Researchers
also found several features of the MSA could be to blame for this increase in profitability.
The MSA may have facilitated collusion in price, which allowed the companies to raise
their prices of cigarettes with less fear of price cutting from competitors (Sloan 359). A
second possibility is due to just the addictive nature of cigarettes which explains the
demand from long time smokers that was not influenced by the increase in price (Sloan
11. 359). Sloan writes that if the Master Settlement Agreement payments were inflicted as
upfront lump sum unanticipated payments, the penalties would have been felt more by
company owners. Instead, excise taxes that generate the payment amounts, are felt more
by consumers than tobacco companies. The study found that cigarette consumption did
decrease, but did not affect the profitability of the tobacco companies. Revenue and
profits from domestic sales still increased after the MSA. The researchers concluded that
the reduction in the overall consumption of cigarettes represented a success of the Master
Settlement Agreement (Hamilton 359). One suggestion the researchers offered for how
the tobacco companies could have still profited is the international market. Globally,
cigarette consumption continues to increase. The four major tobacco companies have lost
market share since the implementation of the MSA. The study concludes that litigation is
important regarding the public’s health and that the intention of the MSA was never to
bankrupt the tobacco industry but decrease tobacco use.
The issue of public health and the influence of the tobacco industry will not disappear
anytime soon. The purpose of the Master Settlement Agreement was to increase public
health by decreasing cigarette consumption, which studies have proven has occurred.
While the Tobacco Master Settlement Agreement has improved the public health, states’
revenue from the settlement should be spent on tobacco prevention programs. This was
part of the intention of the agreement, not to fund college scholarships or decrease taxes.
Unless stricter regulation is passed mandating spending for the allocated funds, this will
not change. Litigation plays an important part of improving public health and can be used
in the future with fast food and sugary drink companies. It is proven that over
consumption of unhealthy food and sugary drinks can lead to obesity, diabetes and heart
12. decease. All of which require long-term expensive healthcare. This is a growing concern
for the public as well as lawmakers with the increasing cost of healthcare associated with
obesity and diabetes. In the future, one can predict a similar lawsuit between soda
companies such as Coke and Pepsi and Attorney Generals across the country. The
Tobacco Master Settlement Agreement has positively affected states’ budgets and
revenues, decreased cigarette consumption but has not been as effective in reducing the
power of the tobacco industry.
