Texas Attorney General: Tobacco Company Must Pay State $16 Million for Failing to Honor Settlement

Texas Attorney General Greg Abbott has asked a federal court to order Brown & Williamson Tobacco Corp. to pay Texas an additional $16 million, plus interest, for failing to comply with one of the terms of the state’s 1998 tobacco settlement.

A motion filed in a Texarkana federal court alleges B&W, one of the nation’s largest tobacco companies, failed to report the manufacture and shipment of more than 7.5 billion cigarettes for consumption in the U.S. The action asks the court for an accounting of B&W’s financial obligations owed to the state and a preliminary injunction to enforce the settlement.

“We believe the company deliberately put profits above the health of Texans, and did so in a very secretive way that violates a court order,” said Attorney General Abbott. “We have a legal, good-faith agreement in place that prohibits advertising to children and requires significant payments to Texas. The Legislature has allocated this money for important needs such as offsetting the state’s medical expenses incurred as a result of smoking, children’s cancer research and educational programs. The company must be compelled to comply with this agreement.”

The Attorney General’s motion charts a pattern of concealment over the years by Kentucky-based B&W to avoid reporting the actual market share it commanded. The company skirted its obligation to pay Texas based on cigarettes manufactured and shipped for consumption in the U.S. The company employed a complex network of loans and purchases with another company, Star Scientific Inc., and its wholly owned subsidiary, Star Tobacco and Pharmaceuticals Inc.

“The company used smoke and mirrors to hide billions of cigarettes from the state of Texas,” Abbott added. “To give you a sense of just how much that is, if we lined up all the cigarettes the company tried to hide, they would circle the globe 15 times.

Abbott asked the court to order an accounting of the company’s manufacture and shipment of cigarettes to determine if there are additional violations. The suit contends that in failing to accurately report its dealings with Star, B&W “established a track record of understating its market share to avoid payments to the state.”

Abbott also asked the court to rule that the company violated its agreement with the state in its proposed sale of its U.S. cigarette business to R.J. Reynolds Tobacco Holdings Inc.

As part of this transaction, B&W reportedly agreed to transfer its rights and obligations under the settlement with Texas to a newly formed entity, Reynolds American Inc., without the consent of Texas. The agreement clearly prohibits the assignment of rights and obligations to a new corporate entity “without the express prior written consent” of Texas.