Indiana Attorney General Greg Zoeller says the state will receive $217 million over the next two years from major tobacco companies. The payout ends a long-running dispute over how much the companies would pay to reimburse the health costs of smoking-related diseases.

June 26, 2014

News Release

Indianapolis, Ind. — The State of Indiana has reached a settlement of a long-running dispute with major tobacco companies over the amounts they must pay the State to reimburse the health costs of smoking-related diseases. The agreement means Indiana ultimately will recoup a significant amount it lost after last year’s tobacco arbitration panel opinion, and will be able to restore funding that could have been cut from tobacco-cessation and other programs. Over this year and next year combined, Indiana will now receive a net amount of approximately $217 million in tobacco settlement money. In the near term, the new agreement sufficiently funds programs determined by the Legislature that are dependent on tobacco sales. The agreement also avoids multiple rounds of additional lengthy arbitration disputes in coming years, and provides some budget certainty through stable annual payments of between $124 million and $133 million through the next biennium budget cycle. After that, annual payments should stabilize in the $115 million to $110 million range.

In the settlement, the State of Indiana maintains and does not concede its legal position regarding the arbitration ruling: that the State’s enforcement of the original 1998 Master Settlement Agreement terms against tobacco companies was indeed “diligent,” and the arbitration panel’s opinion last fall that the State was not diligent was incorrect. More importantly, the annual flow of settlement payments from the major tobacco companies and other related payments to the State of Indiana will continue at levels the State was accustomed to, with net amounts sufficient to fund the budget needs of tobacco-related healthcare programs. Tobacco companies still must make annual payments to reimburse the State for the health care costs of cigarette smoking-related diseases such as lung cancer, emphysema and heart disease that the companies acknowledge their products cause.

In an appeal filed in Marion County Superior Civil Court, the State challenged last fall’s arbitration panel ruling that cut the amount of tobacco money Indiana received in 2014 basd on 2003 enforcement efforts, 11 years earlier. This new settlement means a court hearing scheduled next month in that appeal will not take place. The agreement also sets into motion a revamped process where future disputes between tobacco companies and the State over payment amounts potentially could be arbitrated on a more timely basis, rather than the 11-year look-back that created a litigation burden in the recent arbitration.

“Nobody gets everything they want in a lawsuit settlement, but Indiana’s recovering this amount and preserving future payments at the end of this process is a better outcome than if we had not appealed and not entered into settlement talks with the tobacco defendants. By clawing back a larger amount of money from Big Tobacco, we will provide the Legislature some certainty going into the next budget cycle and continue to fund the health programs near-term that depend on this money,” Indiana Attorney General Greg Zoeller said. As state government’s lawyer, the Attorney General’s Office represents Indiana in tobacco litigation.

State Senator Luke Kenley, Chairman of the Senate Appropriations Committee, noted that the settlement negotiated by the Attorney General will provide the certainty needed to meet ongoing obligations of the State to fund a wide variety of healthcare-related programs. “Current and future programs targeted to address smoking-related illnesses and costs are funded by these settlement proceeds; and it’s important to stabilize that source of revenue and provide some predictability so that taxpayers aren’t asked to make up the difference. This approach will meet current needs,” Kenley, R-Noblesville, said.

Long-running dispute resolved This new settlement arises from a long-running dispute lingering from the original 1998 Master Settlement Agreement or MSA between 46 state governments and the major tobacco companies. To resolve lawsuits brought by states, those companies, the “participating manufacturers,” agreed in 1998 to pay the states $206

billion over 25 years to reimburse the health-care costs of smoking-related diseases their cigarettes cause. In exchange, the states had an enforcement role over non-participating manufacturers concerning amounts they paid into escrow. Since 1999, Indiana received between $125 million and $150 million in MSA payments each April that have been used for smoking cessation and other programs, based on General Assembly appropriations in biennial budget legislation. Non-participating manufacturers paid into an escrow fund based on their sales.

The 1998 Master Settlement Agreement did not end the legal dispute, however; the participating tobacco manufacturers continued to relitigate the issue of how much they should pay states relative to their nonparticipating competitors. Triggering an extremely complicated and lengthy legal process called arbitration, a group of tobacco companies in September 2013 persuaded a panel of three arbitrators to reduce their payments to Indiana and five other states for April 2014, claiming those states did not “diligently” enforce the agreement terms from 11 years earlier. The amount of the reduction was based on a complicated formula that includes each state’s market share of tobacco sales.

The Indiana Attorney General’s Office strenuously objected to the arbitration panel’s opinion that would cut Indiana’s funding, noting the panel exceeded its authority when it created a new legal definition of “diligent enforcement” after the fact and then imposed it retroactively. Indiana filed an appeal in court called a “motion to vacate,” arguing the arbitration panel’s opinion was procedurally flawed and factually incorrect. Other states also appealed. With some states already settling, the Attorney General’s Office weighed the uncertainty of an outcome in court against the likelihood of enduring many more years of complex, time-consuming arbitration against the major tobacco companies. After consultation with the administration and Legislature, the Attorney General’s Office concluded it was the best interest of state government and taxpayers to bring finality to the dispute over the 2003 payment year – as well as over the subsequent payment years in dispute from 2004 to 2014 – and through negotiation secure a significant amount of funding that will fully satisfy previous budget appropriation decisions. The agreement was signed today. Indiana becomes the 24th U.S. state or territory to join in a settlement of the arbitration dispute.

Funding to stabilize The agreement means that Indiana’s 2014 payment will increase to $93 million. The participating manufacturers have historically exercised an option to deposit into escrow a portion of disputed funds which serve as a type of contingency fund to cover disputed amounts – the upshot being that through offsets and credits, Indiana will receive a net total of approximately $217 million this year and next year, in three disbursements:

– $68 million already paid in April 2014

– plus another $24.8 million adjustment to cover the 2003 loss payable counted toward 2014 that will be paid this year

– $124 million for 2015 itself.

The new settlement also will compress and resolve remaining payment disputes for the 2004 through 2014 sales years that otherwise could have taken several more years for arbitration panels to work through.

Preliminary estimates are that the payments will stabilize, and that in the later years, Indiana will typically receive between $110 million and $115 million each

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