DES MOINES – Iowa Attorney General Tom Miller accuses Philip Morris, USA, R.J. Reynolds Tobacco Co., and 16 other tobacco companies of defrauding Iowa of more than $133 million, according to a lawsuit filed Thursday.

The lawsuit stems from the 1998 Master Settlement Agreement, which requires tobacco manufacturers to pay billions annually to participating states in exchange for the states agreeing not to sue for health-related damages to citizens. The motion, filed in Polk County District Court, alleges that the companies have withheld a portion of their annual payments to Iowa in bad faith and “through a scheme of false claims and feigned ignorance.”

The tobacco companies demand that Iowa must go to arbitration to recover each year’s withheld payment. It has taken years to litigate each dispute, creating a long backlog and a growing amount of withheld payments. Iowa has prevailed in every dispute, most recently in September 2021, but the companies still refused to pay the amount they withheld from Iowa.

“We have fought, and won, these legal battles for years, and there is no end to these disputes in sight,” Miller said. “We now must escalate the matter and force the tobacco companies to pay what they owe the state of Iowa.”

The lawsuit seeks to recover actual and punitive damages, plus attorneys’ fees and other costs. Under Iowa’s False Claims Act, the state seeks three times the amount of actual damages.

MSA brings in millions each year

In the last 24 years, Iowa has received $1.41 billion in payments under the Master Settlement Agreement. The agreement obligates each participating company to make a payment each year, subject to certain adjustments. Under Iowa law, tobacco companies selling in Iowa either must join the MSA or deposit a certain dollar amount per unit sold in an escrow account.

The continuing dispute is over the Non-Participating Manufacturer Adjustment, which allows tobacco companies participating in the Master Settlement Agreement to reduce their annual payments under certain circumstances. Those circumstances include having experienced a loss of market share to non-participating competitors, and showing that a state failed to “diligently enforce” state laws against tobacco companies that did not sign the MSA.

The defendants have repeatedly, and without evidence, alleged that Iowa has not diligently enforced its law. In September 2021, an arbitration panel ruled unanimously that Iowa had indeed “diligently enforced” its state laws.

Iowa has prevailed in arbitration over the withheld amounts for 2003 and 2004, but the victories took years. The 2003 dispute was arbitrated for seven years, and Iowa finally received the withheld portion that payment in 2014. The 2004 dispute was resolved in September 2021 but Iowa has not received the payment of approximately $7 million.

Each time, the arbitration cost the state approximately $3-4 million. The state is currently in arbitration for years 2005-2007.

‘Pay us what they owe us’

“Iowa and other states who signed on the MSA have lived up to their end of the bargain. It’s time tobacco companies do the same,” Miller said. “They should pay us what they owe us.”

The state of Montana filed a similar lawsuit against the tobacco companies in 2020 and reached a $100 million settlement later that year. The former Montana attorney general, Tim Fox, is assisting with Iowa’s lawsuit. In January, the Executive Council of Iowa approved the hiring of outside law firms to assist in the litigation against the tobacco companies.

The defendants in the lawsuit are:

Philip Morris USA; R.J. Reynolds; Commonwealth Brands, Inc.; Farmer’s Tobacco Company of Cynthiana, Inc.; ITG Brands, LLC; Japan Tobacco International USA, Inc.; King Maker Marketing, Inc.; Kretek International, Inc.; Liggett Group, LLC.; Peter Stokkebye Tobaksfabrik A/S; Premier Manufacturing Incorporated; Santa Fe Natural Tobacco Company, Inc.; Scandinavian Tobacco Group Lane Ltd; Sherman 1400 Broadway N.Y.C., Inc.; Tabacalera del Este, S.A. (“TABESA”); Vector Tobacco Inc.; the Von Eicken Group; and Wind River Tobacco Company, LLC.

The 1998 Master Settlement Agreement was a significant public health achievement: It created restrictions on the advertising, marketing and promotion of cigarettes, including a ban on targeting children through advertising.  It also includes prohibitions on outdoor advertising of cigarettes and the advertising of cigarettes in public transit facilities, as well as the use of cigarette brand names on merchandise, and a host of other restrictions.

A recording of a press conference detailing today’s action can be found on the Iowa Attorney General’s Office website.