Tobacco companies could move a step closer to reducing their settlement payments to 46 states by billions of dollars when an arbitrator determines what caused them to lose market share.
The next annual payment from Big Tobacco in the landmark 1998 settlement - about $6.5 billion - is due April 15. But several cigarette makers are seeking to reduce that payment by about $1.2 billion due to declining sales.
Much is at stake in the decision, because it could set a precedent for payment reduction demands in subsequent years by the tobacco companies, which through 2005 saw a steady decline in cigarette sales to their lowest level since 1951.
The decision, which may not be announced until Tuesday, could have negative implications for $31.5 billion in bonds backed by tobacco payments sold by states, cities and counties.
The Brattle Group, the arbitrator hired by the state attorneys general and the tobacco companies, is expected to decide whether to affirm an earlier determination that the costs associated with the "Master Settlement Agreement" were a "significant factor" that caused a 2 percent market share loss in 2003 for tobacco firms that participated in it.
But if the states lose, they can be expected to fight back in court. They plan to argue that they diligently enforced statutory requirements to collect escrow payments from companies that did not sign the accord. If they can prove this, tobacco firms would not be entitled to reduce their payments.
Tobacco firms participating in the landmark $206 billion settlement are allowed to reduce their payments if they suffer an annual market share loss of 2 percent versus the base year of 1997.
The accord, aimed at making cigarette makers reimburse states for the billions of dollars they spend treating ailing smokers, raises costs for the participating manufacturers.
Non-signing tobacco companies, often discounters, grabbed 8 percentage points of market share between 1997, the year before the pact was sealed, and 2003, according to a tobacco company official who requested anonymity.
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