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.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
HOUSE OF REPRESENTATIVES                H.B. NO.1227       
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   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
 
19 imposed on the State by cigarette smoking be borne by tobacco
 

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

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

 
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 1 and consists of or contains:
 
 2      (1)  Any roll of tobacco wrapped in paper or in any
 
 3           substance not containing tobacco;
 
 4      (2)  Tobacco, in any form, that is functional in the
 
 5           product, which, because of its appearance, the type of
 
 6           tobacco used in the filler, or its packaging and
 
 7           labeling, is likely to be offered to, or purchased by,
 
 8           consumers as a cigarette; or
 
 9      (3)  Any roll of tobacco wrapped in any substance containing
 
10           tobacco which, because of its appearance, the type of
 
11           tobacco used in the filler, or its packaging and
 
12           labeling, is likely to be offered to, or purchased by,
 
13           consumers as a cigarette described in paragraph (1).
 
14 The term "cigarette" includes "roll-your-own" (i.e., any tobacco
 
15 which, because of its appearance, type, packaging, or labeling is
 
16 suitable for use and likely to be offered to, or purchased by,
 
17 consumers as tobacco for making cigarettes).  For purposes of
 
18 this definition, 0.09 ounces of "roll-your-own" tobacco shall
 
19 constitute one individual "cigarette".
 
20      "Master settlement agreement" means the settlement agreement
 
21 (and related documents) entered into on November 23, 1998, by the
 
22 State and leading United States tobacco product manufacturers.
 
23      "Qualified escrow fund" means an escrow arrangement with a
 

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

 
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 1           as a result of the provisions of section II(mm) of the
 
 2           master settlement agreement and that pays the taxes
 
 3           specified in section II(z) of the master settlement
 
 4           agreement; provided that the manufacturer of those
 
 5           cigarettes does not market or advertise those
 
 6           cigarettes in the United States;
 
 7      (2)  Is the first purchaser anywhere for resale in the
 
 8           United States of cigarettes manufactured anywhere that
 
 9           the manufacturer does not intend to be sold in the
 
10           United States; or
 
11      (3)  Becomes a successor of an entity described in paragraph
 
12           (1) or (2).
 
13      The term "tobacco product manufacturer" shall not include an
 
14 affiliate of a tobacco product manufacturer unless the affiliate
 
15 itself falls within any of paragraphs (1) to (3).
 
16      "Units sold" means the number of individual cigarettes sold
 
17 in the State by the applicable tobacco product manufacturer
 
18 (whether directly or through a distributor, retailer, or similar
 
19 intermediary or intermediaries) during the year in question, as
 
20 measured by excise taxes collected by the State on packs (or
 
21 "roll-your-own" tobacco containers) under chapter 245.  The
 
22 department of the attorney general, with the advice of the
 
23 department of taxation, shall adopt such rules under chapter 91
 

 
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 1 as are necessary to ascertain the amount of state excise tax paid
 
 2 on the cigarettes of the tobacco product manufacturer for each
 
 3 year.
 
 4      663-  Requirements.(a)  Any tobacco product
 
 5 manufacturer selling cigarettes to consumers within the State
 
 6 (whether directly or through a distributor, retailer, or similar
 
 7 intermediary or intermediaries) after the effective date of this
 
 8 part shall do one of the following:
 
 9      (1)  Become a participating manufacturer (as that term is
 
10           defined in section II(jj) of the master settlement
 
11           agreement) and generally perform its financial
 
12           obligations under the master settlement agreement; or
 
13      (2)  Place into a qualified escrow fund by April 15 of the
 
14           year following the year in question the following
 
15           amounts (as those amounts are adjusted for inflation):
 
16           (A)  For 1999:  $.0094241 per unit sold after the
 
17                effective date of this part;
 
18           (B)  For 2000:  $.0104712 per unit sold after the
 
19                effective date of this part;
 
20           (C)  For each of 2001 and 2002:  $.0136125 per unit
 
21                sold after the effective date of this part;
 
22           (D)  For each of 2003 through 2006:  $.0167539 per unit
 
23                sold after the effective date of this part;
 

 
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 1           (E)  For 2007 and each year thereafter:  $.0188482 per
 
 2                unit sold after the effective date of this part.
 
 3      (b)  A tobacco product manufacturer that places funds into
 
 4 escrow pursuant to subsection (a) shall receive the interest or
 
 5 other appreciation on those funds as earned.  The funds
 
 6 themselves shall be released from escrow only under the following
 
 7 circumstances:
 
 8      (1)  To pay a judgment or settlement on any released claim
 
 9           brought against the tobacco product manufacturer by the
 
10           State or any releasing party located or residing in the
 
11           State.  Funds shall be released from escrow under this
 
12           paragraph:
 
13           (A)  In the order in which they were placed into
 
14                escrow, and;
 
15           (B)  Only to the extent and at the time necessary to
 
16                make payments required under the judgment or
 
17                settlement;
 
18      (2)  To the extent that a tobacco product manufacturer
 
19           establishes that the amount it was required to place
 
20           into escrow in a particular year was greater than the
 
21           State's allocable share of the total payments that the
 
22           manufacturer would have been required to make in that
 
23           year under the master settlement agreement (as
 

 
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 1           determined pursuant to section IX(i)(2) of the master
 
 2           settlement agreement and before any of the adjustments
 
 3           or offsets described in section IX(i)(3) of that
 
 4           agreement other than the inflation adjustment) had it
 
 5           been a participating manufacturer, the excess shall be
 
 6           released from escrow and revert back to the tobacco
 
 7           product manufacturer; or
 
 8      (3)  To the extent not released from escrow under paragraph
 
 9           (1) or (2), funds shall be released from escrow and
 
10           revert back to the tobacco product manufacturer twenty-
 
11           five years after the date on which they were placed
 
12           into escrow.
 
13      (c)  Each tobacco product manufacturer that elects to place
 
14 funds into escrow pursuant to this section shall annually certify
 
15 to the attorney general that it is in compliance with this
 
16 section.  The attorney general may bring a civil action on behalf
 
17 of the State against any tobacco product manufacturer that fails
 
18 to place into escrow the funds required under this section.  Any
 
19 tobacco product manufacturer that fails in any year to place into
 
20 escrow the funds required under this section shall:
 
21      (1)  Be required within fifteen days to place those funds
 
22           into escrow as shall bring it into compliance with this
 
23           section.  The court, upon a finding of a violation of
 

 
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 1           this section, may impose a civil penalty to be paid to
 
 2           the general fund of the State in an amount not to
 
 3           exceed five per cent of the amount improperly withheld
 
 4           from escrow per day of the violation and in a total
 
 5           amount not to exceed one hundred per cent of the
 
 6           original amount improperly withheld from escrow;
 
 7      (2)  In the case of a knowing violation, be required within
 
 8           fifteen days to place those funds into escrow as shall
 
 9           bring it into compliance with this section.  The court,
 
10           upon a finding of a knowing violation of this section,
 
11           may impose a civil penalty to be paid to the general
 
12           fund of the State in an amount not to exceed fifteen
 
13           per cent of the amount improperly withheld from escrow
 
14           per day of the violation and in a total amount not to
 
15           exceed three hundred per cent of the original amount
 
16           improperly withheld from escrow; and
 
17      (3)  In the case of a second knowing violation, be
 
18           prohibited from selling cigarettes to consumers within
 
19           the State, whether directly or through a distributor,
 
20           retailer, or similar intermediary, for a period not to
 
21           exceed two years.
 
22      (d)  The State shall be awarded its attorneys' fees and
 
23 expenses incurred in prosecuting violations of this part.
 

 
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 1      (e)  Each failure to make an annual deposit required under
 
 2 this section shall constitute a separate violation."
 
 3      SECTION 3.  This Act shall take effect upon its approval.
 
 4 
 
 5                           INTRODUCED BY:  _______________________