MADISON - ST. CLAIR RECORD

Cigarette makers R. J. Reynolds and Lorillard withheld $755 million from their April 17 payments to states under the national tobacco settlement.

They withheld about $40 million that Illinois would have received.

Reynolds cut its payments by almost a third, from $2.016 billion to $1.369 billion. It put the difference, $647 million, in an escrow account.

Lorillard cut its payments by almost a sixth, from $658 million to $550 million. It put the difference, $108 million, in an escrow account.

Industry leader Philip Morris paid in full, at $3.4 billion, but declared it would recover some of that through the same adjustment Reynolds and Lorillard invoked.

States swiftly began suing all three. Illinois Attorney General Lisa Madigan sued them in Cook County Circuit Court.

In a press release Madigan warned that the reduction could grow to hundreds of millions in coming years, jeopardizing programs that fight the effects of smoking.

Companies have paid states about $47 billion in eight years under the agreement. They paid states almost $6 billion this year.

The agreement has no expiration date.

Philip Morris, Reynolds and Lorillard signed the deal in 1998 to settle fraud complaints, demands for Medicaid reimbursement and other claims.

States agreed to pass model laws stifling competition from small companies that would gain a price advantage by staying out of the agreement.

The laws required outsiders to put about as much into escrow accounts as they would send to states if they signed the deal.

The agreement provided that if states failed to enforce the laws and big companies lost market share to little ones, big companies could adjust their payments to states.

In April 2005, the big companies asked for analysis of market shares behind payments they made in 2004 on sales from 2003.

The big companies and the states jointly hired a consultant, who found this March that the big companies lost market share because of the agreement.

According to the big companies, the loss of market share yields an automatic adjustment unless states prove they diligently enforced the laws.

The big companies argue that the agreement requires arbitration of any dispute over diligent enforcement, rather than litigation in courts of every state.

The National Association of Attorneys General, which manages the settlement for states, argues that the dispute is not subject to arbitration.

"The states all believe that they have diligently enforced their model statutes and that they ultimately will receive the money in dispute," declared the association's tobacco committee chairs, Tom Miller of Iowa and Lawrence Wasden of Idaho.

They described the settlement as "primarily a public health agreement with strong prohibitions on numerous forms of advertising, promotion and marketing of cigarettes by participating manufacturers."

Madigan's press release called it "first and foremost a public health agreement."

She noted that Illinois has received about $1.9 billion under the agreement.