Spitzer Sues To Recover Additional Tobacco Funds

Attorney General Spitzer today announced that a total of $737 million was paid to New York State, New York City and individual counties last week under the tobacco Master Settlement Agreement (MSA).

The amount, however, is approximately $100 million less than due because of the decision by several tobacco companies to withhold funds. In response to this action, the Attorney General has filed suit to recover the amounts withheld.

"The MSA is a court-ordered contract between the parties, in which the tobacco companies agreed to make annual payments to the states, and also to stop certain marketing practices," Spitzer said. "The tobacco companies have withheld funds that they are required to pay under the agreement and I am going to court to get those funds back for the taxpayers."

This is the third time that the Attorney General has challenged tobacco company underpayments in court. Last May, the state sought to recover $43 million that six tobacco companies had improperly withheld from their national payment, of which some $5 million was owed to New York State. The issue was resolved in July, when the companies agreed to transfer the entire $43 million to the states. Another motion was filed in August to recover $13 million that five different companies withheld from their national payment. After the motion was filed, one company agreed to make the payment, three others were ordered to do so, and the fifth company filed for bankruptcy.

This year, the tobacco companies were due to pay the states approximately $6.57 billion, of which New York was to receive about $840 million. However, the companies only paid $5.76 billion (88 percent), which reduced New York’s payment to $737 million - - an underpayment of some $100 million. More than a dozen tobacco companies made their full payments – including Philip Morris, which paid the full $3.4 billion that it owed. Numerous other companies did not pay, however – most notably R.J. Reynolds and Lorillard Tobacco, which withheld $647 million and $109 million, respectively. In total, about $814 million is still owed to the states nationwide.

The tobacco companies have withheld payments this year primarily because they claim they are entitled to a reduction in the amount previously paid in 2004. In particular, the companies allege that certain states, which they have not identified, did not diligently enforce the state laws requiring companies that did not join the MSA to place similar amounts into escrow accounts.

The lawsuit was filed today in State Supreme Court in Manhattan. The litigation is being handled by Assistant Attorneys General Louis Willenken and Kesha Tanabe, under the supervision of Dana Biberman, Chief of the Tobacco Compliance Unit.

Attached are two charts. The first chart shows the MSA payments made to New York in each year since 1999. The second chart shows the allocation of the latest $737 million payment among New York State, New York City and the 57 individual counties.