1998 Tobacco Master Settlement Agreement
The Tobacco Master Settlement Agreement (MSA) is an agreement entered into in November 1998, originally between the four largest U.S. tobacco companies and the Attorneys General of 46 states. The states settled their Medicaid lawsuits against the tobacco industry for recovery of their tobacco-related health care costs, and also exempted the companies from private tort liability regarding harm caused by tobacco use. In exchange, the companies agreed to curtail or cease certain tobacco marketing practices, as well as to pay, in perpetuity, various annual payments to the states to compensate them for some of the medical costs of caring for persons with smoking-related illnesses. The money also funded the foundation of a new anti-smoking advocacy group called the American Legacy Foundation, that is responsible for such campaigns as The Truth. The settlement also dissolved the tobacco industry groups Tobacco Institute, the Center for Indoor Air Research, and the Council for Tobacco Research. In the MSA, the Original Participating Manufacturers (OPMs) agreed to pay a minimum of $206 billion over the first 25 years of the agreement.
The OPMs agreed to several broad categories of conditions:
- to restrict their advertising, sponsorship, lobbying, and litigation activities, particularly as those activities targeted youth;
- to disband three specific "Tobacco-Related Organizations," and to restrict their creation and participation in trade associations;
- generally to make available to the public documents the OPMs had disclosed during the discovery phase of their litigation with the settling states;
- to create and fund the National Public Education Foundation, dedicated to reducing youth smoking and preventing diseases associated with smoking.
- to make annual payments to the settling states in perpetuity.
- Up-front payments - $12.742 billion.
- Annual Payments, beginning April 15, 2000 - $183.177 billion through 2025.
- Strategic Contribution Fund, 2008-2017 - $8.61 billion.
- National Foundation ($250 million over 10 years).
- Public Education Fund (at least $1.45 billion 2000-2003).
- State Enforcement Fund ($50 million, one-time payment).
- National Association of Attorneys General ($1.5 billion over next 10 years).
Payments by the Participating Manufacturers (PMs)The amount of money that the PMs are required to annually contribute to the states varies according to several factors. All payments are based primarily on the number of cigarettes sold.
For the OPMs, the payments are determined in accordance with their relative market share as of 1997. The payment amount of a particular OPM is also dictated by the "Volume Adjustment," which compares the number of cigarettes sold in each payment year to the number of cigarettes sold in 1997. If the number of cigarettes sold by an OPM in a given year is less than the number it sold in 1997, the Volume Adjustment allows that OPM to reduce its payment to the settling states. In other words, a reduction in the amount of cigarettes sold by the OPMs results in the settling states receiving less money.
The MSA sets forth specific amounts that the OPMs have agreed to pay the settling states each year. Those annual amounts are subject to a number of adjustments. The OPMs each pay a portion of the total annual payment according to each OPM's "Relative Market Share" for the preceding year.
For the SPMs, the payments are determined by their relative market share as compared to other SPMs. For the SPMs that joined the MSA within 90 days of its execution, the annual payments are determined by the number of cigarettes an SPM sells beyond the "grandfathered" volumeâ€”calculated as the higher of either the individual SPM's market share in 1998 (the year the MSA was executed) or 125% of the SPM's market share in 1997. If an SPM's sales volume or market share declines below the grandfathered amount, then it is not required to make any payments to the settling states. SPMs that failed to join the MSA within 90 days of its execution do not receive the benefit of any grandfathered amount.
Allocable shareEach state receives a payment equal to its "Allocable Share," a percentage of the funds held in escrow that has been agreed upon by the settling states and memorialized in the MSA. This "Allocable Share" (as measured by a percentage of the total funds in escrow) does not vary according to how many cigarettes are sold in a particular state in a given year.
During the drafting of the MSA, the OPMs and the settling states contemplated that many of the smaller tobacco companies would choose not to join the MSA. This failure to join posed a potential problem for both the OPMs and the settling states. The OPMs worried that the NPMs, both because they would not be bound by the advertising and other restrictions in the MSA and because they would not be required to make payments to the settling states, would be able to charge lower prices for their cigarettes and thus increase their market share.