"House Bill 503 closes a loophole in the model statutes that costs states a significant amount in MSA payments every year."
- Rep. Harris
"An Act relating to the tobacco product Master Settlement Agreement; and providing for an effective date."
In 1998, 46 states entered into the Master Settlement Agreement (MSA) with leading cigarette manufacturers resolving dozens of lawsuits. The state Attorney Generals realized, however, that the objectives of the agreement could be thwarted by non participating cigarette manufacturers (NPMs). The NPMs are not bound by the marketing and other restrictions contained in the tobacco settlement agreement. Nor are they obligated to make payments to the states in satisfaction of health care cost related claims.
To help ensure that funds would be available to the states to satisfy potential future legal claims, the MSA signatory states enacted legislation called "Model Statutes" because the model form agreed upon was annexed as an exhibit to the MSA. These model state statutes require cigarette and roll your own tobacco manufacturers to either join the MSA or make refundable deposits based on the number of cigarettes sold in the state into a qualified escrow account, which must be established with commercial lending institutions. Enactment and enforcement of the model statutes helps ensure that funds will be available should the state need to bring suit against the NPMs in the future.
House Bill 503 closes a loophole in the model statutes that costs states a significant amount in MSA payments every year. This loophole has enabled some NPMs to avoid making escrow payments under the states' model escrow statutes. A provision of the model escrow statute permits an NPM to obtain a release of funds from escrow "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 …had it been a participating manufacturer under the MSA…." Experience in several states has shown that this provision enables NPMs that concentrate their sales in a single state or a few states to obtain early releases of the great majority of their escrow deposits. This outcome was never contemplated and threatens to undermine the effectiveness of the Model Escrow statutes, Escrow funds so minimized are not adequate to provide security to the states nor do they prevent unfair profit taking.