R.J. Reynolds Tobacco Co. has lost another legal ruling related to responsibility for annual Master Settlement Agreement payments on four traditional cigarette brands.

Reynolds divested Kool, Salem and Winston, while Lorillard Inc. divested Maverick, in order for Reynolds to gain federal regulatory approval of its $29.25 billion purchase of Lorillard in June 2015.

The brands were sold for $7.1 billion to Imperial Brands Plc, which transferred them to U.S. subsidiary ITG of Greensboro. The four brands represent about 7.5% of the U.S. market share for traditional cigarettes.

The 1998 landmark MSA imposed fees on tobacco companies based on their cigarette sales to pay for health-care costs in states.

There has been a legal dispute in Florida, Minnesota and Texas over whether ITG or Reynolds is responsible for making millions of dollars of annual MSA payments on the four brands.

Last week, a Minnesota District Court assigned responsibility to Reynolds and will determine how much the company owes the state. The case, as in Florida and Texas, was brought by the state attorney general.

“The historic tobacco settlement two decades ago set a high standard for holding corporations accountable for harm they’ve done to Minnesota,” said Keith Ellison, Minnesota’s attorney general and a former U.S. House member.

“My office will be aggressive in making sure the people of Minnesota get every dollar they’re owed from the tobacco companies.”

Reynolds could not be immediately reached for comment on the Minnesota legal decision. Reynolds spokesman Michael Shannon said in January its position remains that Imperial purchased the brands and ITG should be making the payments.

ITG cited its policy of not commenting on ongoing litigation.

Disputed payments

The Reynolds-Imperial deal included language that called on ITG to use its “reasonable best efforts” to reach an MSA settlement with Florida.

Imperial has countered that it did not agree to assume the payments, and that it was relieved of payment responsibility since it couldn’t reach an agreement with Florida attorney general Pam Bondi before the closing of the simultaneous purchases.

Both manufacturers have since chosen to not make the disputed MSA payments in the three states.

The first legal action commenced in Florida, where a Circuit Court judge has ruled that Reynolds owes the state $93 million. In Minnesota, Ellison filed his lawsuit against Reynolds and ITG in March 2018.

According to a news release from the Minnesota attorney general’s office, “the court held that Reynolds cannot shirk its obligations to make settlement payments by transferring brands to another manufacturer, and that the plain language of the tobacco settlement requires it to continue to make settlement payments on the sales of brands it assigns to another entity.”

“The court also denied ITG Brands’ motion for summary judgment that it had no obligation to make settlement payments, and directed the state’s case to continue against ITG Brands.”

Other court rulings

On Sept. 23, Reynolds received a partial victory when a state court in Delaware ruled in Reynolds’ favor that ITG is not entitled under their 2015 asset purchase agreement to demand protection from state “equity fee” statutes.

The court ruled that the asset purchase agreement affects only Reynolds’ legal agreement with Florida.

The Delaware court did not rule on whether ITG must indemnify Reynolds for the $93 million judgment in Florida.

“Because the parties each have advanced reasonable interpretations of the asset purchase agreement that could lead to different results on this question, their cross-motions must be denied,” according to the Delaware court.

In November 2017, the Delaware court ruled ITG had not met its obligation “to use its reasonable best efforts to reach an agreement with Florida” on assuming responsibility for the MSA payments.

ITG said following the Delaware court ruling that the chancellor “ruled on a narrow technical issue which does not settle the underlying dispute. This was simply an interim ruling.” Reynolds did not comment on that ruling.

However, Judge Jeffery Gillen of the 15th Florida Circuit Court ruled in December 2017 that Reynolds still has liability obligation for the brands even though ITG is getting the revenue from their sales. Bondi estimates the annual payment is about $30 million.

Bondi said her action “made clear (the state) does not claim that by closing on the asset-purchase agreement Imperial automatically assumed liability for the payments. The sale of major, pre-existing tobacco brands to another company for billions of dollars does not cause the payment obligations to vanish like a puff of smoke.”

Gillen agreed with Bondi and Imperial, ruling that “Reynolds is still obligated to make the payments pursuant to the Florida agreement.”

Gillen said in December 2017 that although the Delaware case has implications for the Florida case, it is up to the Florida legislature to pass legislation making Imperial legally responsible for making the MSA payments on the four brands.

Ken Paxton, Texas’ attorney general, asked in January that a federal court require either Reynolds or ITG to make more than $125 million in payments.

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