A.G. Schneiderman Announces $550 Million Settlement With Big Tobacco That Ensures Billions In Future Compensation To New York State, Counties, and NYC Arising Out Of Landmark 1998 Agreement

Settlement Closes Loopholes Tobacco Companies Have Used To Dispute Payments Under 1998 Tobacco Master Settlement Agreement 

Schneiderman: Big Tobacco Must Pay For The Public Costs of Smoking

NEW YORK -- Attorney General Eric T. Schneiderman today announced a settlement agreement releasing $550 million belonging to New Yorkers that has been trapped in an escrow account during a decade-long dispute between the state and the major tobacco companies. The agreement leverages the Attorney General’s recent victory in a related arbitration to unlock these stranded funds, and to permanently address serious issues that have prevented disbursement of funds owed to New Yorkers following the 1998 Tobacco Master Settlement Agreement (MSA), which requires the companies to compensate the 52 states and territories – including New York – for the public-health costs of smoking-related illnesses. Roughly half of these funds will go to New York State, one-quarter to New York City, and one-quarter to counties outside the city.

“Big Tobacco must pay for the damage it has done and continues to inflict on communities across New York State,” Attorney General Schneiderman said. “My office will continue to hold these companies accountable for the burden their addictive, deadly products impose on the taxpayers of this state, and we will act to ensure that the people of New York are compensated for the enormous harms they have suffered. Today’s announcement is long overdue, but sure to be welcomed by communities and municipalities across our state.”

"For too long, New Yorkers have been paying the price for the harm tobacco use has on human health. In New York City, we're aggressively working to ensure New Yorkers know the truth about the damaging effects of tobacco. Meanwhile, big tobacco companies have abused the legal system to avoid giving New Yorkers the money they're owed for the health costs resulting from cigarette smoking. I applaud Attorney General Schneiderman for standing up to big tobacco and making them pay," said Mayor Bill de Blasio

Under the MSA’s dispute-resolution procedures, the tobacco companies have been able to withhold a portion of their approximately $775 million combined annual settlement payments to New York State, New York City, and the counties outside the city for every year since 2003. They have also been able to require multi-year arbitrations of New York’s entitlement to keep the portion of each individual year’s payment that was not withheld. They have done this based on a theory that New York did not diligently enforce a specific tobacco-control statute as required under the MSA.

This process resulted in the escrow of over $700 million in New Yorkers’ money since 2003, and constant uncertainty as to whether any given year’s annual MSA payment will be entirely lost in an arbitration that might not take place for a dozen or more years after the payment was actually made. Even New York’s complete victory in a diligent-enforcement arbitration concerning the 2003 payment (a proceeding that was not completed until 2013), only unlocked the $92 million in withheld funds related to that single year, and provided no assurance that New York’s annual payments from any of the subsequent years would be safe.

Under the new settlement agreement between New York and the companies, 90% of the previously-withheld funds will be released, and future payments will be made according to a set formula, with no disputed withholdings, no drawn-out arbitration proceedings, and no risk that New York will lose one or more of its entire annual MSA payments years after the fact.

The agreement settles all issues concerning past annual payments under the MSA by requiring the companies to release 90% of the escrowed funds, or approximately $550 million. The state, New York City, and the counties outside the city, will receive their portions of these funds as soon as the MSA’s independent auditor is able to make payment, which in no event would be later than April 2016. Roughly half will go to New York State, one-quarter to New York City, and one quarter to counties outside the city. The companies are also required to release New York from any claims to the balance of annual payments for those years, which they might otherwise be able to arbitrate with New York on an ongoing basis over the course of many years.

As to all future MSA annual payments, the companies will receive a discount tied to the total in-state sales volume of cigarettes that are manufactured on Native American reservations and sold untaxed from smoke shops on those reservations to New York consumers. The discount will be for a fixed amount per pack, but with a modifier based on overall volume. The volume information will be determined by a neutral, un-appealable third party. It is expected that in the first several years of implementation, the discount will amount to less than $100 million out of each annual payment of about $775 million. The companies are required to release New York from any other claims to the balance of these future payments as well, meaning that beyond the stipulated discount, New York will not be at risk of losing any of its future annual payments as the result of extended arbitration proceedings.

New York previously declined a settlement, now known as the “term sheet,” which 22 other states accepted in 2012. Under the term sheet, New York would have only have received about half, instead of 90%, of the escrowed withholdings. And not only would New York have remained exposed to the loss of entire future annual payments based on the outcome of diligent-enforcement arbitrations, the term sheet would also have required the state to be tested on additional enforcement measures beyond those required in the MSA.    

The Attorney General is committed to ensuring that tobacco companies meet their obligations to New Yorkers under the MSA without delay or uncertainty. This agreement ensures prompt and reliable payment of already-promised compensation that the state, the counties, and New York City are relying on to offset the financial impact of smoking-related illnesses.

The settlement agreement was negotiated by Assistant Attorney General John Oleske in the Tobacco Compliance Bureau and Bureau Chief Dana Biberman, along with Executive Deputy Attorney General for Social Justice Alvin Bragg and First Deputy for Affirmative Litigation Janet Sabel.

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