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General Tobacco files lawsuit over '98 settlement
MSA hurts newcomers, it says, and asks for $1 billion in damages
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Published: October 29, 2008
General Tobacco Co. is aiming at the landmark 1998 Master Settlement Agreement between the U.S. tobacco industry and state attorneys general in a lawsuit that the company says could determine its fate.
The lawsuit was filed yesterday 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.
General accuses the attorneys general of violating its constitutional rights under the 14th Amendment and the Sherman Antitrust Act.
General, a discount-tobacco manufacturer that moved from Miami to Mayodan last year, said that it is pursuing damages of more than $1 billion from competitors that include R.J. Reynolds Tobacco Co., Philip Morris USA and Lorillard Tobacco Co.
Reynolds said it could not comment because it has yet to be served with the lawsuit.
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 structure for the MSA created an impossible business environment for future competitors, especially small players such as General Tobacco," said Ronald Denman, the executive vice president of General. "All we are asking for is a level playing field for everyone."
General is also pursuing a preliminary injunction to avoid the terms of the agreement.
Without the injunction, Denman said, 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.
"A manufacturer that wishes to sell in all of the markets is required to join the MSA because a substantial majority of cigarette retailers and distributors refuse to purchase or sell non-participating manufacturers' brands," General said in its lawsuit.
An injunction also would prevent the attorneys general from seizing $36 million in escrowed funds.
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 company said in the lawsuit.
General was founded in 1997 and is the sixth-largest tobacco manufacturer in the United States, with $300 million in sales in 2007.
The company began production in Mayodan in March as part of a move to be closer to the heart of the U.S. tobacco industry.
General has 110 local employees. The company has pledged to create at least 200 jobs by 2010 as part of becoming eligible for up to $3 million in performance-based local incentives.
The lawsuit comes a day after Dustin McDaniel, the attorney general of Arkansas, sent General a letter notifying the company that 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 for 2008 toward the agreement.
McDaniel said that the letter serves as a 30-day notice that one or more of the attorneys general "may bring an action to enforce the provisions of the MSA and the terms of the adherence agreement against General Tobacco."
General said it had been negotiating for more than two years to reduce its settlement-agreement payments. It said that the attorneys general abruptly broke off the talks Monday.
General claims that the 46 states "fraudulently induced" the company to join the agreement.
General claims that its competitors conspired with the states to set up the agreement so that newer tobacco companies, such as General, would have to pay the states substantially more than some older competitors pay. Those competitors include those that joined the agreement within days of it being completed.
General claims that, because of that arrangement, some competitors, such as Liggett Group LLC and Commonwealth Brands Inc., are able to sell their cigarettes at prices below what General can.
General said it does not "seek to destroy the MSA. General Tobacco supports the public-health goals, including the elimination of marketing to youth, of the MSA."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
General Tobacco Co.
•FOUNDED: 1997.
• BASED: Mayodan.
• PRESIDENT: Vidal Suriel.
• EMPLOYEES: 110, with plans to expand to 200 in 2010.
• BRANDS: GT One, Bronco, Silver, Vaquero Little Cigars and 32 Degrees.
• 2007 SALES: $300 million.
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