INTRODUCED BY Senator Escutia

FEBRUARY 25, 1999

An act to add Article 3 (commencing with Section 104555) to Chapter 1 of Part 3 of Division 103 of the Health and Safety Code, relating to the tobacco manufacturers' master settlement agreement , and declaring the urgency thereof, to take effect immediately .

LEGISLATIVE COUNSEL'S DIGEST

SB 822, as amended, Escutia. Tobacco product settlement.

Existing law provides for various programs for the reduction in the inappropriate use of cigarettes and tobacco products.

Under existing law, certain tobacco product manufacturers have entered into an agreement with the federal government and participating states regarding the allocation of funds on the basis of tobacco products sold within each state.

This bill would specify that any tobacco product manufacturer selling cigarettes to consumers within the state shall either become a participating manufacturer under the terms of the settlement agreement entered into by the states and certain tobacco manufacturers and perform its financial obligations under the settlement , or place an amount of funds , calculated on the basis of units of tobacco products sold , into an escrow fund , and . The bill specifies that the funds in the escrow fund shall be used to pay a judgment or settlement on any released claim against the tobacco product manufacturer by the state or be released to the tobacco product manufacturer in certain circumstances. The bill would authorize the Attorney General to bring a civil action on behalf of the state against any tobacco product manufacturer that fails to place the funds into escrow, and would specify penalties for any knowing violation of the requirement to place the funds into escrow.

This bill would declare that it is to take effect immediately as an urgency statute.

Vote: 2/3 majority . Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

SECTION 1. Article 3 (commencing with Section 104555) is added to Chapter 1 of Part 3 of Division 103 of the Health and Safety Code, to read:

Article 3. Master Settlement Agreement

104555. The Legislature finds and declares all of the following:

(a) Cigarette smoking presents serious public health concerns to the state and to the citizens of the state. The Surgeon General has determined that smoking causes lung cancer, heart disease, and other serious diseases, and that there are hundreds of thousands of tobacco-related deaths in the United States each year. These diseases most often do not appear until many years after the person in question begins smoking.

(b) Cigarette smoking also presents serious financial concerns for the state. Under certain health care programs, the state may have a legal obligation to provide medical assistance to eligible persons for health conditions associated with cigarette smoking, and those persons may have a legal entitlement to receive such medical assistance.

(c) Under these programs, the state pays millions of dollars each year to provide medical assistance for these persons for health conditions associated with cigarette smoking.

(d) It is the policy of the state that financial burdens imposed on the state by cigarette smoking be borne by tobacco product manufacturers rather than by the state to the extent that those manufacturers either determine to enter into a settlement with the state or are found culpable by the courts.

(e) On November 23, 1998, leading United States tobacco product manufacturers entered into a settlement agreement, entitled the Master Settlement Agreement, with the state. The Master Settlement Agreement obligates these manufacturers, in return for a release of past, present, and certain future claims against them as described therein, to pay substantial sums to the state (tied in part to their volume of sales); to fund a national foundation devoted to the interests of public health; and to make substantial changes in their advertising and marketing practices and corporate culture, with the intention of reducing underage smoking.

(f) It would be contrary to the policy of the state if tobacco product manufacturers who determine not to enter into the settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the state will have an eventual source of recovery from them if they are proved to have acted culpably. It is thus in the interest of the state to require that these manufacturers establish a reserve fund to guarantee a source of compensation and to prevent the those manufacturers from deriving large, short-term profits and then becoming judgment proof before liability may arise.

104556. The definitions contained in this section shall govern the construction of this title unless the context requires otherwise article .

(a) "Adjusted for inflation" means increased in accordance with the formula for inflation adjustment set forth in Exhibit C to the Master Settlement Agreement.

(b) "Affiliate" means a person who directly or indirectly owns or controls, is owned or controlled by, or is under common ownership or control with, another person. Solely for purposes of this definition, the terms "owns," "is owned," and "ownership" mean ownership of an equity interest, or the equivalent thereof, of 10 percent or more, and the term "person" means an individual, partnership, committee, association, corporation, or any other organization or group of persons.

(c) "Allocable share" means allocable share as that term is defined in the Master Settlement Agreement.

(d) "Cigarette" means any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (1) any roll of tobacco wrapped in paper or in any substance not containing tobacco; or (2) tobacco, in any form, that is functional in the product, which because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or (3) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in this section. "Cigarette" also includes "roll-your-own" tobacco, including meaning any tobacco which, because of its appearance, type, packaging, or labeling is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes. For purposes of this definition of "cigarette," 0.09 ounces of "roll-your-own" tobacco shall constitute one individual "cigarette."

(e) "Master Settlement Agreement" means the settlement agreement and related documents entered into on November 23, 1998, by the state and leading United States tobacco product manufacturers.

(f) "Qualified escrow fund" means an escrow arrangement with a federally or state chartered financial institution having no affiliation with any tobacco product manufacturer and having assets of at least one billion dollars ($1,000,000,000) where the arrangement requires that the financial institution hold the escrowed funds' principal for the benefit of releasing parties and prohibits the tobacco product manufacturer placing the funds into escrow from using, accessing, or directing the use of the funds' principal except as consistent with subparagraphs (B) and (C) of paragraph (2) of subdivision (b) of Section 104557.

(g) "Released claims" means released claims as that term is defined in the Master Settlement Agreement.

(h) "Releasing parties" means releasing parties as that term is defined in the Master Settlement Agreement.

(i) "Tobacco product manufacturer" means an entity that after the date of enactment of this article directly, and not exclusively through any affiliate, to which any of the following apply that :

(1) Manufactures cigarettes anywhere that the manufacturer intends to be sold in the United States, including cigarettes intended to be sold in the United States through an importer, except where the importer is an original participating manufacturer as that term is defined in the Master Settlement Agreement, that will be responsible for the payments under the Master Settlement Agreement with respect to the such cigarettes as a result of the provisions of subsections subsection II(mm) of the Master Settlement Agreement and that pays the taxes specified in subsection II(z) of the Master Settlement Agreement, and provides provided that the manufacturer of the such cigarettes does not market or advertise the such cigarettes in the United States . ; or

(2) The entity is Is the first purchaser anywhere for resale in the United States of cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the United States . ; or

(3) The entity becomes Becomes a successor of an entity described in paragraph (1) or (2).

The term "tobacco product manufacturer" does shall not include an affiliate of a tobacco product manufacturer unless the affiliate itself falls within any of paragraphs (1) to (3) , inclusive of this subdivision .

(j) "Units sold" means the number of individual cigarettes sold in the state by the applicable tobacco product manufacturer, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, during the year in question, as measured by excise taxes collected by the state on packs, or "roll-your-own" tobacco containers, bearing the excise tax stamp of the state. The State Board of Equalization shall adopt any regulations as are necessary to ascertain the amount of state excise tax paid on the cigarettes of the tobacco product manufacturer for each year.

104557. (a) Any tobacco product manufacturer selling cigarettes to consumers within the state, whether directly or through a distributor, retailer or similar intermediary or intermediaries, after the date of enactment of this article shall do one of the following:

(a)

(1) Become a participating manufacturer as that term is defined in Section II(jj) of the Master Settlement Agreement and generally perform its financial obligations under the Master Settlement Agreement . ; or

(b) (1)

(2) Place into a qualified escrow fund by April 15 of the year following the year in question the following amounts, as the such amounts are adjusted for inflation:

(A) For 1999: $0.0094241 per unit sold during that year, after the date of the enactment of this article.

(B) For 2000: $0.0104712 per unit sold after the date of the enactment of this article. during the year in question.

(C) For each of 2001 and 2002: $0.0136125 per unit sold after the date of the enactment of this article. during the year in question.

(D) For each of 2003 through 2006: $0.0167539 per unit sold after the date of the enactment of this article. sold during the year in question.

(E) For each of 2007 and each year thereafter: $0.0188482 per unit sold after the date of the enactment this article during the year in question .

(2)

(b) Any tobacco product manufacturer that places funds into escrow pursuant to paragraph (1) (2) of subdivision (a) shall receive the interest or other appreciation on the funds as earned. The funds, other than the interest or other appreciation, shall be released from escrow only under the following circumstances:

(A)

(1) To pay a judgment or settlement on any released claim brought against the that tobacco product manufacturer by the state or any releasing party located or residing in the state. Funds shall be released from escrow under this subdivision (i) in the order in which they were placed into escrow and (ii) only to the extent and at the time necessary to make payments required under the that judgment or settlement.

(B)

(2) To the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the state's allocable share of the total payments that the manufacturer would have been required to make in that year under the Master Settlement Agreement, as , had it been a participating manufacturer, as such payments are determined pursuant to section IX(i)(2) of the Master Settlement Agreement, and before any of the adjustments or offsets described in section IX(i)(3) of that agreement other than the inflation adjustment, had it been a participating manufacturer, the excess shall be released from escrow and revert back to the such tobacco product manufacturer . ; or

(C)

(c) To the extent not released from escrow under subparagraphs (A) or (B) paragraph (1) or (2) of subdivision (b) , funds shall be released from escrow and revert back to the tobacco product manufacturer 25 years after the date on which they were placed into escrow.

(3)

(d) Each tobacco product manufacturer that elects to place funds into escrow pursuant to this subdivision paragraph (2) of subdivision (a) shall annually certify to the Attorney General that it is in compliance with this subdivision paragraph (2) of subdivision (a), or subdivision (b) . The Attorney General may bring a civil action on behalf of the state against any tobacco product manufacturer that fails to place into escrow the funds required under this section. Any tobacco product manufacturer that fails in any year to place into escrow the funds required under this section shall:

(A)

(1) Be required within 15 days to place the funds into escrow as shall bring it into compliance with this section. The court, upon a finding of a violation of this subdivision paragraph (2) of subdivision (a), or subdivision (b) , may impose a civil penalty to be paid to the General Fund of the state in an amount not to exceed 5 percent of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 100 percent of the original amount improperly withheld from escrow.

(B)

(2) In the case of a knowing violation, be required within 15 days to place the funds into escrow as shall bring it into compliance with this section. The court, upon a finding of a knowing violation of this subdivision paragraph (2) of subdivision (a), or subdivision (b) , may impose a civil penalty to be paid to the General Fund in an amount not to exceed 15 percent of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 300 percent of the original amount improperly withheld from escrow.

(C)

(3) In the case of a second knowing violation, be prohibited from selling cigarettes to consumers within the state, whether directly or through a distributor, retailer, or similar intermediary, for a period not to exceed two years.

(b)

(e) Each failure to make an annual deposit required under this section shall constitute a separate violation.

SEC. 2. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are:

In order to timely implement the Master Settlement Agreement between this state and the tobacco manufacturers during the 1999 calendar year, it is necessary that this act take effect immediately.