The Tobacco MSA with New York is the particular version of the Tobacco MSA that was signed in New York City, was enabled by means of legislation in New York State, and has been interpreted since then in New York State courts.
In 1997, the State, City, and the counties of New York filed suit against the country's major cigarette manufacturers.[1] The action sought to recover damages related to the costs borne by these various political units of treating smoking-related illnesses and to impose restrictions on the cigarette manufacturers' sales, marketing, advertising, and disclosure practices. Similar actions were brought by 45 other states. These lawsuits were settled by execution of the MSA in November 1998. The settlement of the New York lawsuit was approved by the Supreme Court of New York in a consent decree signed on December 23, 1998.[2]
The MSA was initially executed by the four dominant (alleged to account for 98% of cigarette sales at the time) cigarette manufacturers, Philip Morris, Lorillard Tobacco, Brown & Williamson, and R.J. Reynolds (the "Original Participating Manufacturers, or "OPMs"), and by forty-six states (including New York), the District of Columbia, Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands (the "Settling States"). Thirty-three additional, and smaller, tobacco companies (the "Subsequent Participating Manufacturers" ("SPMs"), or, together with the OPMs, the "Participating Manufacturers ("PMs")) became parties to the MSA.
In general, the MSA imposes numerous restrictions and requirements in connection with the PMs' sales, marketing, advertising, lobbying, research, education, and disclosure practices.[3] It also requires annual payments by the OPMs to the Settling States,[4] and releases the PMs from future claims by the Settling States.[5] Any non-participating cigarette manufacturer ("Non-Participating Manufacturer," or "NPM") may become a SPM by signing the MSA and making the payments that would have been due had it been a signatory as of the MSA execution date.[6]
The OPMs' overall annual payment obligation is specified in the MSA: The nationwide base payments begin at $4.5 billion for the year 2000 and gradually increase to $9 billion in the year 2018 and each year thereafter.[7] This obligation is allocated among the OPMs in accordance with their relative market shares.[8] Annual payments to the Settling States are to be adjusted according to changes in the overall volume of cigarette sales.[9] A significant reduction in sales will therefore lead to a reduction in payments and state revenue.
In addition to the link between overall cigarette sales and payments to the Settling States noted above, there are provisions for changes in the payments required of particular companies due to changes in their market share. One such provision applies to market share losses by any OPM to other PMs. In general, an OPM losing market share pays less to the states; an OPM gaining market share pays more.[10] Future payment obligations of SPMs—those arising after the initial payment made upon joining the MSA—occur only if a particular manufacturer's market share rises above the greater of (i) 100% of its 1998 market share, or (ii) 125% of its 1997 market share. Any future payments owed by SPMs are at a rate approximately equal to that paid by the OPMs.[11]
Another provision governs the reduction of payments where market share is lost by an OPM to NPMs. This decrease is styled by the MSA as the "Non-Participating Manufacturer Adjustment" (the "NPM Adjustment") and reduces required payments if there are any losses of market share experienced by the OPMs as a result of "disadvantages" arising out of the MSA.[12] One of the contemplated "disadvantages" is price competition from NPMs. Because the NPM Adjustment trebles the decrease in payment obligations when an OPM loses more than 2% due to a "disadvantage,"[13] the loss of revenue to the Settling States from an NPM Adjustment is potentially substantial. If the OPM's market share loss exceeds 16⅔%, the decrease in payment obligations is somewhat less than the treble reduction for losses between 2% and 16⅔%.[14]
Under the MSA, the Settling States do not have to sit idly by while their MSA tobacco revenue is reduced over time by competition from NPMs. A Settling State can immunize itself from downward NPM Adjustments by enacting and "diligently enforcing" a form "Escrow Statute"[15] requiring any NPM either:
(i) to join the MSA (becoming a SPM and making future settlement payments accordingly with respect to any increased market share), or
(ii) on a regular basis to place into a 25-year rolling escrow account funds alleged to be greater than the amount such manufacturer would pay were it a SPM under the MSA.All of the Settling States have enacted Escrow Statutes.
New York enacted its Escrow Statute on November 27, 1999.[16] The Statute provides that any tobacco product manufacturer selling cigarettes directly or indirectly to consumers within New York shall either become a PM under the MSA,[17] or make escrow payments.[18] Specifically, the statute requires that NPMs who sell cigarettes through a distributor, retailer, or similar intermediary place a per-pack fee into an escrow account that may be recovered by the NPM after twenty years if no obligation to the states has been incurred. The statute thus imposes a per-pack fee on NPM-manufactured cigarettes that adds to the resale price of the product. Although this fee does not expressly require the product to be sold at a particular price, the cost to NPMs of complying with the Escrow Statute is alleged to be higher than the cost to PMs of complying with the MSA.[19]
Effective December 28, 2001, New York passed the Contraband Statutes. In Governor Pataki's words, this legislation was needed to "bolster the State's ability to diligently enforce" the Escrow Statute, and thus to "help protect the State from further [NPM] adjustments." To be sold lawfully in New York, cigarette packages need to bear a tax stamp affixed by a New York State cigarette tax stamp agent. The Contraband Statutes add the requirements of the Escrow Statute to the "gatekeeper" functions already played by tax stamp agents. The Statutes label as contraband any cigarettes made by manufacturers that do not comply with the Escrow Statute. The effect alleged is to impose something analogous to an in rem liability on the cigarettes themselves, rendering them subject to seizure and forfeiture, in contrast to the in personam liability imposed on NPMs by the Escrow Statutes. Twenty-four of the Settling States have passed Contraband Statutes.
The particulars of the Statutes are as follows. Section 480-b requires cigarette manufacturers to certify annually, to the New York State Commissioner of Taxation and Finance, the Attorney General of the State of New York, and the cigarette tax stamp agents (according to appellants, usually wholesalers 6 responsible for affixing New York State cigarette tax stamps on such manufacturer's cigarettes), that such manufacturer is either: (a) a PM making payments under the MSA (i.e. satisfying Section 1399-pp(1) of the Escrow Statute) or (b) in compliance with the escrow requirements of Section 1399-pp(2) of the Escrow Statute.[20] Section 480-b also prohibits New York State cigarette tax stamp agents from affixing tax stamps to cigarettes if the relevant manufacturer has not provided the required certification or if the tax stamp agent has been notified by the Commissioner of Public Health that such manufacturer is in violation of the Escrow Statute.[21] Section 1846 provides for seizure and forfeiture of any cigarettes that are unstamped or have been stamped in violation of Section 480-b.[22] Section 481, subdiv. 1(c) authorizes imposition of civil penalties upon any manufacturer or agent violating Section 480-b.[23]
The contents of this article have been adapted from a public domain document, Freedom Holdings Inc. v. Spitzer, 357 F.3d 205 (2nd Cir. 2004).
Any tobacco product manufacturer selling cigarettes to consumers within the state (whether directly or through a distributor, retailer or similar intermediary or intermediaries) after the effective date of this article shall do one of the following:
1. become a participating manufacturer (as that term is defined in section II(jj) of the master settlement agreement) and generally perform its financial obligations under the master settlement agreement; or
2. (a) place into a qualified escrow fund by April fifteenth of the year following the year in question the following amounts (as such amounts are adjusted for inflation):
(i) 1999: $ . 0094241 per unit sold after the effective date of this section;
(ii) 2000: $ . 0104712 per unit sold;
(iii) for each of 2001 and 2002: $ . 0136125 per unit sold;
(iv) for each of 2003 through 2006: $ . 0167539 per unit sold;
(v) for each of 2007 and each year thereafter: $ . 0188482 per unit sold.
(b) a tobacco product manufacturer that places funds into escrow pursuant to paragraph (a) shall receive the interest or other appreciation on such funds as earned. Such funds themselves shall be released from escrow only under the following circumstances:
(i) to pay a judgment or settlement on any released claim brought against such tobacco product manufacturer by the state or any releasing party located or residing in the state. Funds shall be released from escrow under this subparagraph: (A) in the order in which they were placed into escrow and (B) only to the extent and at the time necessary to make payments required under such judgment or settlement;
(ii) to the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the state's allocable share of the total payments that such manufacturer would have been required to make in that year under the master settlement agreement (as determined pursuant to section IX(i)(2) of the master settlement agreement, and before any of the adjustments or offsets described in section IX(i)(3) of that agreement other than the inflation adjustment) had it been a participating manufacturer, the excess shall be released from escrow and revert to such tobacco product manufacturer; or
(iii) to the extent not released from escrow under subparagraph (i) or (ii) of this paragraph, funds shall be released from escrow and revert to such tobacco product manufacturer twenty-five years after the date on which they were placed into escrow.N.Y. Pub. Health Law § 1399-pp (2002).
Section 480-b provides in its entirety as follows:
§ 480-b. Prohibition against the stamping of certain cigarettes
1. Every tobacco product manufacturer as defined by section thirteen hundred ninety-nine-oo of the public health law whose cigarettes are sold for consumption in this state shall annually certify under penalty of perjury that, as of the date of such certification, such tobacco product manufacturer: (a) is a participating manufacturer as defined in subdivision one of section thirteen hundred ninety-nine-pp of the public health law; or (b) is in full compliance with subdivision two of section thirteen hundred ninety-nine-pp of the public health law. Such certification shall be executed and delivered to the commissioner, the attorney general and any agent who affixes New York state cigarette tax stamps to cigarettes of such tobacco product manufacturer, no earlier than the sixteenth day of April and no later than the thirtieth day of April of each year, and shall be accompanied by a list setting forth each of the cigarette brands of such tobacco product manufacturer sold for consumption in New York state. Agents shall retain such certifications for a period of five years.
2. An agent may not affix, or cause to be affixed, a New York state cigarette tax stamp to a package of cigarettes if either: (a) the tobacco product manufacturer of such cigarettes has not provided such agent with the certification required by subdivision one of this section; or (b) the commissioner has notified such agent that such tobacco product manufacturer is in violation of section thirteen hundred ninety-nine-pp of the public health law, or has filed a false certification under subdivision one of this section, and such agent has not been notified by the commissioner that such violation has ceased.
3. The commissioner shall prescribe the form of the certification required to be filed pursuant to subdivision one of this section.N.Y. Tax Law § 480-b (2002).
8 Section 1846 provides, in pertinent part, as follows:
§ 1846. Seizure and forfeiture of cigarettes
(a) Whenever a police officer designated in section 1.20 of the criminal procedure law or a peace officer designated in subdivision four of section 2.10 of such law, acting pursuant to his or her special duties, shall discover any cigarettes subject to tax provided by article twenty of this chapter or by chapter thirteen of title eleven of the administrative code of the city of New York, and upon which the tax has not been paid or the stamps not affixed as required by such article or such chapter thirteen, they are hereby authorized and empowered forthwith to seize and take possession of such cigarettes, together with any vending machine or receptacle in which they are held for sale. Such cigarettes, vending machine or receptacle seized by a police officer or such peace officer shall be turned over to the commissioner. Such seized cigarettes, vending machine or receptacle, not including money contained in such vending machine or receptacle, shall be forfeited to the state. . . .
(a-1) Whenever a police officer designated in section 1.20 of the criminal procedure law or a peace officer designated in subdivision four of section 2.10 of such law, acting pursuant to his or her special duties, shall discover any cigarettes which have been stamped in violation of section four hundred eighty-b of this chapter, such officer is hereby authorized and empowered forthwith to seize and take possession of such cigarettes, and such cigarettes shall be subject to a forfeiture action pursuant to the procedures provided for in article thirteen-A of the civil practice law and rules, as if such article specifically provided for forfeiture of cigarettes seized pursuant to this section as a preconviction forfeiture crime. Subdivisions (b), (c) and (d) of this section shall not apply to cigarettes seized pursuant to this subdivision.N.Y. Tax Law § 1846 (2002).
9 Section 481, subdiv. 1(c) provides as follows:
In addition to any other penalties that may be imposed by law, the commissioner may impose a civil penalty not to exceed five thousand dollars against any tobacco product manufacturer or cigarette tax agent who violates the provisions of section four hundred eighty-b of this article, including but not limited to the filing of a false certification, and may seek to suspend or cancel any license which has been issued to such person pursuant to this chapter.