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Likely ruling a blow to General Tobacco
Company expected to lose its suit for $1 billion damages
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Published: December 12, 2008
General Tobacco Co.'s legal challenge to the landmark 1998 Master Settlement Agreement appears to have been dealt two major blows this week.
The lawsuit was filed Oct. 28 in U.S. District Court in Louisville, Ky., against 52 attorneys general of the United States and its territories and 19 U.S. and foreign tobacco companies. Judge Jennifer Coffman said that the court would be issuing a memorandum opinion and order granting the request of the defendants to have the claims against them dismissed. A spokeswoman for the court said yesterday that the order could be made public as early as today.
"Since we have no order, we cannot be certain what occurred," Melisa Chantres, a spokeswoman for General, said yesterday.
General is a discount-tobacco manufacturer that moved from Miami to Mayodan last year. It began production in March with a work force made up of some former employees of R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. General has 95 local employees. It pledged to create at least 200 jobs by 2010 as part of becoming eligible for up to $3 million in performance-based local incentives.
However, the company cut 31 jobs in November because of slowing sales.
The settlement agreement is a comprehensive accord formed with the attorneys general of 46 states, including North Carolina, and five territories that fundamentally changed how tobacco is marketed, advertised and promoted.
The company accuses the attorneys general of violating its constitutional rights under the 14th Amendment and the Sherman Antitrust Act. General is pursuing damages of more than $1 billion from competitors that include Reynolds, Lorillard and Philip Morris USA.
General said in its lawsuit that not being able to sell its cigarette products in the states that participate in the MSA would "destroy General Tobacco's business and drive General Tobacco into bankruptcy."
"The structure for the MSA created an impossible business environment for future competitors, especially small players such as General Tobacco," Ronald Denman, the executive vice president of General, said on Oct. 28. "All we are asking for is a level playing field for everyone."
"Lawsuits making similar claims to General Tobacco have been made since 1998, and courts have uniformly rejected those claims," David Howard, a Reynolds spokesman, said on Nov. 17.
Competitive issues connected to the MSA led another Triad cigarette-maker to file for Chapter 11 bankruptcy protection in April 2007.
Cutting Edge Enterprises Inc., based in Mocksville, filed shortly after it was sued by several state attorneys general. The company was accused of engaging in a series of corporate transactions with the objective of avoiding MSA payments and circumventing the marketing and advertising restrictions aimed largely at preventing youth smoking.
Coffman's order also canceled hearings on General's motion for a preliminary injunction. An injunction would have prevented the attorneys general from seizing $36 million in escrowed funds.
Denman said that without the injunction, the attorneys general could delist General's brands from a list of government-approved tobacco products. Companies that are not on the list have difficulty getting their products onto market.
Analysts said they were not surprised by the judge's decision to dismiss the lawsuit.
"This case was doomed from the start -- David vs. Goliath gone awry," said Charles Norton, the portfolio manager of the Vice Fund, a mutual fund that specializes in gaming, alcohol, tobacco and defense-industry stocks.
"All domestic tobacco companies are likely going to be faced with the volume headwinds of increase federal and state excise taxes in 2009," Norton said. "Smaller manufacturers in particular will struggle as increasing regulatory costs emerge over the coming years once Food and Drug Administration legislation is enacted."
The General lawsuit was filed a day after Dustin McDaniel, the attorney general of Arkansas, sent General a letter notifying the company it had failed to make full payment on its settlement-agreement obligations. The letter was sent on the behalf of 41 states, including North Carolina, and the U.S. Virgin Islands.
General said on Oct. 16 that it made a payment of $27 million toward the agreement for this year. The company said it has paid more than $470 million since joining the agreement in 2004, as well as put $36 million into escrowed accounts.
By comparison, Reynolds paid $2.25 billion toward the agreement for 2008.
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
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