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Reynolds American : gains win in payment dispute gains partial win in dispute over MSA payments

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12/07/2017 | 10:32am CET

R.J. Reynolds Tobacco Co. received a partial, but pivotal, legal victory last week in its fight against making millions of dollars in annual Master Settlement Agreement payments to Florida on traditional cigarette brands that it no longer owns.

Andre Broussard, a chancellor in the Court of Chancery in Delaware, ruled Nov. 30 that ITG Brands LLC - the current owner of the brands - has not met its obligation "to use its reasonable best efforts to reach an agreement with Florida" on assuming responsibility for the MSA payments.

The state of Florida is pursuing legal action to make either Reynolds or ITG responsible for payments on the Kool, Maverick, Salem and Winston cigarette brands.

The landmark MSA was reached in November 1998 between the top U.S. tobacco manufacturers and 46 state attorneys general. The manufacturers agreed to pay $206 billion over 20 years to those states to help pay for health-care expenses related to smoking. The payment amounts are based primarily on cigarette sales and market share.

The Kool, Maverick, Salem and Winston brands represented in 2016 about 8 percent of the U.S. market share for traditional cigarettes.

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

Reynolds argues that its MSA obligations on the brands ended with the closing of the Lorillard deal and the simultaneous sale of the brands to ITG parent company Imperial Brands Plc for $7.1 billion. The Reynolds-Imperial deal included language that called on ITG to use its "reasonable best efforts" to reach an MSA settlement with Florida.

ITG's legal argument is that because it didn't reach an MSA agreement with Florida before the closing of the Reynolds-Lorillard deal, the payment obligation remains with Reynolds.

In January 2017, Florida Attorney General Pam Bondi filed an enforcement action against both Reynolds and ITG.

Bondi's motion asks for a court order requiring payments of $48 million to Florida from one or both manufacturers from June 2015 to the filing of her motion.

She also project payments of $30 million for 2017 and annually thereafter.

"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," Bondi said in a statement accompanying her motion.

"Reynolds has refused to include the sales of these cigarette brands when making annual payments to Florida, despite not having been released from its payment obligations," Bondi said.

"ITG has similarly refused to make any payment to Florida even after agreeing with Reynolds to assume the payment obligations for these iconic brands."

The manufacturers' dispute on who is responsible has gone on two different legal paths.

Reynolds is participating in the lawsuit filed by Bondi in Florida Circuit Court for Palm Beach County. Reynolds said this week that a trial is set to begin Dec. 18. The lawsuit is separate from Bondi's enforcement action.

For its part, ITG chose to go to the Court of Chancery in Delaware, an often-used venue to settle corporation clashes.

"I find that Reynolds' interpretation is supported by the plain language of the asset purchase agreement, and that ITG Brands' interpretation is not," Broussard, a chancellor of the court, said in his ruling.

He said ITG "continues to receive the benefit of the sales to which those payments relate."

ITG said in a statement this week that the chancellor "ruled on a narrow technical issue which does not settle the underlying dispute. This was simply an interim ruling."

Reynolds said it had no comment on the ruling.

Bondi's enforcement action would require Reynolds and ITG "to provide the necessary information to accurately calculate the amounts owed pursuant to reporting requirements under the settlement agreement."

"The exact same cigarette brands continue to be sold to Floridians, thus imposing the very public health-care expenditures that the settlement payments are intended to compensate," Bondi said.

[email protected] 336-727-7376 @rcraverWSJ

© © Copyright 2017, Winston-Salem Journal, Winston-Salem, NC, source Newspapers

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Debra Ann Crew President, Chief Executive Officer & Director
McDara P. Folan Secretary, Director, SVP & General Counsel
Martin L. Holton Director & Chief communications officer
Lisa J. Caldwell Chief Human Resources Officer & Executive VP
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