Court ends tobacco company payments in Md., Pa.

AP News
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Posted: Nov 06, 2009 10:19 PM

North Carolina's highest court ruled Friday that three cigarette companies no longer have to make payments to tobacco farmers in Maryland and Pennsylvania under a decade-old settlement.

The state Supreme Court determined that Philip Morris USA, R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. may stop making payments to those growers under the 1999 agreement, which stemmed from the $206 billion national tobacco settlement with the states a year earlier.

The so-called "Phase II" agreement with tobacco-growing states required tobacco companies to give $5.15 billion through 2010 to growers and quota owners expected to be hurt through reduced leaf demand brought on by the 1998 settlement.

But the 1999 agreement said those payments would essentially be replaced with a Big Tobacco-funded buyout for quota owners and holders that Congress approved in 2004.

Attorneys for Pennsylvania and Maryland argued the states were entitled to keep receiving Phase II payments because farmers in those states didn't participate in the quota system.

The two states were successful in receiving a 2007 trial court ruling that the tobacco companies had to continue the Phase II payments to the two states totaling $22 million. Growers in the states already had received nearly $25 million before the quota buyout, according to Friday's opinion.

That lower court decision was later rejected in a split decision by the state Court of Appeals. The state's highest court ruled in favor of the tobacco companies, saying the two states had entered the 1999 agreement knowing full well their payments could end as a result of a quota buyout.

"The states knew they were treated differently as a result of their choice to not participate in the federal price control and quota system and knew that they may not be covered by any federal buyout legislation targeting that system," Justice Paul Newby wrote for the majority in the 5-2 decision.

Pennsylvania and Maryland also weren't entitled to a modification of the Phase II agreement because a federal buyout was an "anticipated circumstance for which the parties created a plan," Newby said.

Philip Morris USA spokesman Jack Marshall said the company was pleased with the decision and believed the Supreme Court "correctly interpreted the terms of the grower trust agreement."

The Maryland Department of Agriculture said its farmers would have stood to receive $13 million more from the Phase II agreement and Pennsylvania farmers $9 million.

Maryland Agriculture Secretary Buddy Hance said he was disappointed in the decision "in favor of the large tobacco companies and allowing them to back out of their agreement, thereby inflicting a huge economic loss to Maryland tobacco growers."

In the dissenting opinion, Justice Patricia Timmons-Goodson wrote the majority on the court disregarded language in the 1999 agreement that would treat states differently.

The parties didn't intend that a buyout "compensating some Grower States' tobacco farmers could cut off trust payments to tobacco farmers in other Grower States that receive no benefit from that governmental obligation," she wrote.

Tobacco companies had paid $2.7 billion through the 1999 agreement at the time they began paying shares to fund the 2004 buyout agreement, the opinion said.

The case was tried in North Carolina state courts because the original 1999 agreement was entered there.