ST. PAUL , Minn. (CN) — Minnesota sued the $7 billion tobacco company that acquired the Kool, Winston, Salem and Maverick brands from the merger of R.J. Reynolds and Lorillard, claiming it is not making multimillion-dollar annual payments required by a settlement agreement.
Minnesota sued ITG Brands LLC in Ramsey County Court on Friday, claiming it promised, but failed to make annual payments on the brands it acquired in 2015 from R.J. Reynolds due to antitrust provisions.
ITG Brands is a subsidiary of Imperial Tobacco Group PLC, which operates under the laws of England and Wales.
Forty-six states, four U.S. territories, the Commonwealth of Puerto Rico joined the settlement with the four major tobacco companies in 1998, after the states consolidated their cases against the Big Four. Minnesota, Florida, Mississippi and Texas held out from the Master Settlement Agreement and settled on their own.
The Master Settlement Agreement, reached on May 8, 1998, required the tobacco manufacturers, including R.J. Reynolds and Lorillard, to make up-front payments and then annual payments to Minnesota, according to the lawsuit.
In the past five years, Minnesota has received nearly $170 million per year from the tobacco manufacturers.
When R.J. Reynolds and Lorillard merged in a $27 billion transaction in June 2015, Reynolds had to sell four of its brands to ITG to secure antitrust clearance.
The transferred brands were valued at about $7 billion.
Minnesota claims that under the asset purchase agreement, ITG assumed Reynolds’ and Lorillard's obligation to make settlement payments related to the transferred brands., and that ITG was also to join the settlements with Minnesota, Florida, Mississippi and Texas.
Minnesota says the calculation is premised on an agreement that the tobacco manufacturers would pay Minnesota an agreed upon pro rata share of a total pool of annual payments made to all states.
According to the complaint, the pro rata share is 2.55 percent and the base amount, since 2003, has been $8 billion. But due to inflation, the base amount for 2016 was adjusted upward to $13.9 billion, Minnesota says.
Though tobacco sales have declined since the agreements were reached, “there has also been an upward profit adjustment because they aggregate net profits of the settling tobacco companies have been higher than they were in 1997, even after adjusting for inflation,” according to the complaint.
But Minnesota says ITG has not made settlement payments to it, and Reynolds also refused to make settlement payments on the transferred brands.
“The exclusion of ITG’s sales and profits on the transferred brands has had two impacts on the calculation of Minnesota's settlement payment,” the complaint states. “First, it has lowered the tobacco sales used in volume adjustment calculation, making the downward volume adjustment larger. Second, it has lowered the profits used in the net profit adjustment, making the upward profit adjustment smaller.”
ITG said in a statement, "We have litigated this same issue in Florida and won. We are not able to offer specific comments on pending litigation, but look forward to vigorously defending our interests in the Minnesota court."
State officials did not respond to a request for comment.
Minnesota claims that ITG has breached its settlement contract and it seeks an order requiring ITG join the settlement agreement as a "Settling Defendant." It also seeks an order that the settlement payments for 2015 through 2017 be recalculated to include ITG's sales and profits on the transferred brands.
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