REPORT TITLE:
Tobacco Liability


DESCRIPTION:
Requires tobacco manufacturers that do not participate in the
master settlement agreement with the State to deposit funds into
an escrow fund to pay judgments or settlements on claims brought
against the manufacturer.  Specifies how funds may be released
from escrow.  Allows for civil actions by the attorney general.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           612
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO TOBACCO LIABILITY.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Findings and purpose.  (a)  Cigarette smoking
 
 2 presents serious public health concerns to the State and to the
 
 3 citizens of the State.  The United States Surgeon General has
 
 4 determined that smoking causes lung cancer, heart disease, and
 
 5 other serious diseases, and that there are hundreds of thousands
 
 6 of tobacco-related deaths in the United States each year.  These
 
 7 diseases most often do not appear until many years after the
 
 8 person in question begins smoking.
 
 9      (b)  Cigarette smoking also presents serious financial
 
10 concerns for the State.  Under certain health-care programs, the
 
11 State may have a legal obligation to provide medical assistance
 
12 to eligible persons for health conditions associated with
 
13 cigarette smoking, and those persons may have a legal entitlement
 
14 to receive that medical assistance.  Under these programs, the
 
15 State pays millions of dollars each year to provide medical
 
16 assistance for these persons for health conditions associated
 
17 with cigarette smoking.
 
18      (c)  It is the policy of the State that financial burdens
 

 
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 1 imposed on the State by cigarette smoking be borne by tobacco
 
 2 product manufacturers rather than by the State to the extent that
 
 3 the manufacturers either determine to enter into a settlement
 
 4 with the State or are found culpable by the courts.
 
 5      (d)  On November 23, 1998, leading United States tobacco
 
 6 product manufacturers entered into a settlement agreement,
 
 7 entitled the "master settlement agreement", with the State.  The
 
 8 master settlement agreement obligates these manufacturers, in
 
 9 return for a release of past, present, and certain future claims
 
10 against them as described therein, to pay substantial sums to the
 
11 State (tied in part to their volume of sales); to fund a national
 
12 foundation devoted to the interests of public health; and to make
 
13 substantial changes in their advertising and marketing practices
 
14 and corporate culture, with the intention of reducing underage
 
15 smoking.
 
16      (e)  It would be contrary to the policy of the State if
 
17 tobacco product manufacturers who determine not to enter into
 
18 such a settlement could use a resulting cost advantage to derive
 
19 large, short-term profits in the years before liability may arise
 
20 without ensuring that the State will have an eventual source of
 
21 recovery from them if they are proven to have acted culpably.  It
 
22 is thus in the interest of the State to require that those
 

 
 
 
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 1 manufacturers establish a reserve fund to guarantee a source of
 
 2 compensation and to prevent those manufacturers from deriving
 
 3 large, short-term profits and then becoming judgment-proof before
 
 4 liability may arise.
 
 5      SECTION 2.  Chapter 663, Hawaii Revised Statutes, is amended
 
 6 by adding a new part to be appropriately designated and to read
 
 7 as follows:
 
 8                 "PART    . TOBACCO LIABILITY ACT
 
 9      §663-  Definitions.  As used in this part:
 
10      "Adjusted for inflation" means increased in accordance with
 
11 the formula for inflation adjustment set forth in exhibit C to
 
12 the master settlement agreement.
 
13      "Affiliate" means a person who directly or indirectly owns
 
14 or controls, is owned or controlled by, or is under common
 
15 ownership or control with, another person.  Solely for purposes
 
16 of this definition, the terms "owns", "is owned", and "ownership"
 
17 means ownership of an equity interest, or the equivalent thereof,
 
18 of ten per cent or more, and the term "person" means an
 
19 individual, partnership, committee, limited liability
 
20 corporation, association, corporation, or any other organization
 
21 or group of persons.
 
22      "Allocable share" means allocable share as that term is
 

 
 
 
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                                     S.B. NO.           612
                                                        
                                                        

 
 1 defined in the master settlement agreement.
 
 2      "Cigarette" means any product that contains nicotine, is
 
 3 intended to be burned or heated under ordinary conditions of use,
 
 4 and consists of or contains:
 
 5      (1)  Any roll of tobacco wrapped in paper or in any
 
 6           substance not containing tobacco;
 
 7      (2)  Tobacco, in any form, that is functional in the
 
 8           product, which, because of its appearance, the type of
 
 9           tobacco used in the filler, or its packaging and
 
10           labeling, is likely to be offered to, or purchased by,
 
11           consumers as a cigarette; or
 
12      (3)  Any roll of tobacco wrapped in any substance containing
 
13           tobacco which, because of its appearance, the type of
 
14           tobacco used in the filler, or its packaging and
 
15           labeling, is likely to be offered to, or purchased by,
 
16           consumers as a cigarette described in paragraph (1).
 
17 The term "cigarette" includes "roll-your-own" (i.e., any tobacco
 
18 which, because of its appearance, type, packaging, or labeling is
 
19 suitable for use and likely to be offered to, or purchased by,
 
20 consumers as tobacco for making cigarettes).  For purposes of
 
21 this definition, 0.09 ounces of "roll-your-own" tobacco shall
 
22 constitute one individual "cigarette".
 

 
 
 
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 1      "Master settlement agreement" means the settlement agreement
 
 2 (and related documents) entered into on November 23, 1998, by the
 
 3 State and leading United States tobacco product manufacturers.
 
 4      "Qualified escrow fund" means an escrow arrangement with a
 
 5 federally or state chartered financial institution having no
 
 6 affiliation with any tobacco product manufacturer and having
 
 7 assets of at least $1,000,000,000, where such an arrangement
 
 8 requires that the financial institution hold the escrowed funds'
 
 9 principal for the benefit of releasing parties and prohibits the
 
10 tobacco product manufacturer placing the funds into escrow from
 
11 using, accessing, or directing the use of the funds' principal
 
12 except as consistent with section    -2(b).
 
13      "Released claims" means released claims as that term is
 
14 defined in the master settlement agreement.
 
15      "Releasing parties" means releasing parties as that term is
 
16 defined in the master settlement agreement.
 
17      "Tobacco product manufacturer" means an entity that after
 
18 the date of enactment of this part directly (and not exclusively
 
19 through any affiliate):
 
20      (1)  Manufactures cigarettes anywhere that the manufacturer
 
21           intends to be sold in the United States, including
 
22           cigarettes intended to be sold in the United States
 

 
 
 
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 1           through an importer (except where the importer is an
 
 2           original participating manufacturer as that term is
 
 3           defined in the master settlement agreement) that will
 
 4           be responsible for the payments under the master
 
 5           settlement agreement with respect to those cigarettes
 
 6           as a result of the provisions of section II(mm) of the
 
 7           master settlement agreement and that pays the taxes
 
 8           specified in section II(z) of the master settlement
 
 9           agreement; provided that the manufacturer of those
 
10           cigarettes does not market or advertise those
 
11           cigarettes in the United States;
 
12      (2)  Is the first purchaser anywhere for resale in the
 
13           United States of cigarettes manufactured anywhere that
 
14           the manufacturer does not intend to be sold in the
 
15           United States; or
 
16      (3)  Becomes a successor of an entity described in paragraph
 
17           (1) or (2).
 
18      The term "tobacco product manufacturer" shall not include an
 
19 affiliate of a tobacco product manufacturer unless the affiliate
 
20 itself falls within any of paragraphs (1) to (3).
 
21      "Units sold" means the number of individual cigarettes sold
 
22 in the State by the applicable tobacco product manufacturer
 

 
 
 
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                                     S.B. NO.           612
                                                        
                                                        

 
 1 (whether directly or through a distributor, retailer, or similar
 
 2 intermediary or intermediaries) during the year in question, as
 
 3 measured by excise taxes collected by the State on packs (or
 
 4 "roll-your-own" tobacco containers) under chapter 245.  The
 
 5 department of the attorney general, with the advice of the
 
 6 department of taxation, shall adopt such rules under chapter 91
 
 7 as are necessary to ascertain the amount of state excise tax paid
 
 8 on the cigarettes of the tobacco product manufacturer for each
 
 9 year.
 
10      §663-  Requirements.(a)  Any tobacco product
 
11 manufacturer selling cigarettes to consumers within the State
 
12 (whether directly or through a distributor, retailer, or similar
 
13 intermediary or intermediaries) after the effective date of this
 
14 part shall do one of the following:
 
15      (1)  Become a participating manufacturer (as that term is
 
16           defined in section II(jj) of the master settlement
 
17           agreement) and generally perform its financial
 
18           obligations under the master settlement agreement; or
 
19      (2)  Place into a qualified escrow fund by April 15 of the
 
20           year following the year in question the following
 
21           amounts (as those amounts are adjusted for inflation):
 
22           (A)  For 1999:  $.0094241 per unit sold after the
 

 
 
 
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                                     S.B. NO.           612
                                                        
                                                        

 
 1                effective date of this part;
 
 2           (B)  For 2000:  $.0104712 per unit sold after the
 
 3                effective date of this part;
 
 4           (C)  For each of 2001 and 2002:  $.0136125 per unit
 
 5                sold after the effective date of this part;
 
 6           (D)  For each of 2003 through 2006:  $.0167539 per unit
 
 7                sold after the effective date of this part;
 
 8           (E)  For 2007 and each year thereafter:  $.0188482 per
 
 9                unit sold after the effective date of this part.
 
10      (b)  A tobacco product manufacturer that places funds into
 
11 escrow pursuant to subsection (a) shall receive the interest or
 
12 other appreciation on those funds as earned.  The funds
 
13 themselves shall be released from escrow only under the following
 
14 circumstances:
 
15      (1)  To pay a judgment or settlement on any released claim
 
16           brought against the tobacco product manufacturer by the
 
17           State or any releasing party located or residing in the
 
18           State.  Funds shall be released from escrow under this
 
19           paragraph:
 
20           (A)  In the order in which they were placed into
 
21                escrow, and;
 
22           (B)  Only to the extent and at the time necessary to
 

 
 
 
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 1                make payments required under the judgment or
 
 2                settlement;
 
 3      (2)  To the extent that a tobacco product manufacturer
 
 4           establishes that the amount it was required to place
 
 5           into escrow in a particular year was greater than the
 
 6           State's allocable share of the total payments that the
 
 7           manufacturer would have been required to make in that
 
 8           year under the master settlement agreement (as
 
 9           determined pursuant to section IX(i)(2) of the master
 
10           settlement agreement and before any of the adjustments
 
11           or offsets described in section IX(i)(3) of that
 
12           agreement other than the inflation adjustment) had it
 
13           been a participating manufacturer, the excess shall be
 
14           released from escrow and revert back to the tobacco
 
15           product manufacturer; or
 
16      (3)  To the extent not released from escrow under paragraph
 
17           (1) or (2), funds shall be released from escrow and
 
18           revert back to the tobacco product manufacturer twenty-
 
19           five years after the date on which they were placed
 
20           into escrow.
 
21      (c)  Each tobacco product manufacturer that elects to place
 
22 funds into escrow pursuant to this section shall annually certify
 

 
 
 
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                                     S.B. NO.           612
                                                        
                                                        

 
 1 to the attorney general that it is in compliance with this
 
 2 section.  The attorney general may bring a civil action on behalf
 
 3 of the State against any tobacco product manufacturer that fails
 
 4 to place into escrow the funds required under this section.  Any
 
 5 tobacco product manufacturer that fails in any year to place into
 
 6 escrow the funds required under this section shall:
 
 7      (1)  Be required within fifteen days to place those funds
 
 8           into escrow as shall bring it into compliance with this
 
 9           section.  The court, upon a finding of a violation of
 
10           this section, may impose a civil penalty to be paid to
 
11           the general fund of the State in an amount not to
 
12           exceed five per cent of the amount improperly withheld
 
13           from escrow per day of the violation and in a total
 
14           amount not to exceed one hundred per cent of the
 
15           original amount improperly withheld from escrow;
 
16      (2)  In the case of a knowing violation, be required within
 
17           fifteen days to place those funds into escrow as shall
 
18           bring it into compliance with this section.  The court,
 
19           upon a finding of a knowing violation of this section,
 
20           may impose a civil penalty to be paid to the general
 
21           fund of the State in an amount not to exceed fifteen
 
22           per cent of the amount improperly withheld from escrow
 

 
 
 
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 1           per day of the violation and in a total amount not to
 
 2           exceed three hundred per cent of the original amount
 
 3           improperly withheld from escrow; and
 
 4      (3)  In the case of a second knowing violation, be
 
 5           prohibited from selling cigarettes to consumers within
 
 6           the State, whether directly or through a distributor,
 
 7           retailer, or similar intermediary, for a period not to
 
 8           exceed two years.
 
 9      (d)  The State shall be awarded its attorneys' fees and
 
10 expenses incurred in prosecuting violations of this part.
 
11      (e)  Each failure to make an annual deposit required under
 
12 this section shall constitute a separate violation."
 
13      SECTION 3.  This Act shall take effect upon its approval.
 
14 
 
15                           INTRODUCED BY:  _______________________