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State appeals order that strips $63M in tobacco payments

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The state has appealed an arbitration order reducing its tobacco settlement payments by $63 million next year, saying a three-judge panel exceeded its authority and unfairly judged Indiana’s actions.

Indiana Attorney General Greg Zoeller filed the appeal in Marion Superior Court, roughly three months after the arbitration panel said Indiana had not worked hard enough to collect funds from companies that aren’t part of a 1998 deal between states and cigarette manufacturers.

“Triggered by the tobacco companies themselves, this arbitration process was extremely complex, and the panel’s fundamentally flawed ruling treated Indiana unfairly compared to similar states,” Zoeller said in a prepared statement. “Through this legal action we seek ultimately to restore the tobacco payments to Indiana to more equitable levels.”

Forty-six states, including Indiana, signed what was called a master settlement agreement with four of the largest cigarette manufacturers in the United States. The companies agreed to pay the states roughly $206 billion over 25 years to settle claims regarding smoking-related health care costs and youth smoking.

Since then, another 40 or so tobacco companies have joined the settlement, which requires the companies to make annual payments to states.

The payments vary by state, manufacturer and year, but they are primarily based on the number of cigarettes sold.

The settlement allows companies to reduce the amount they pay to states if they’ve lost market share to cigarette manufacturers that aren’t part of the master agreement. States were to be exempt from the cuts if they enacted – and enforced – laws that imposed obligations on any non-participating companies that sold cigarettes within their borders.

The arbitration panel ruled in September that Indiana and five other states had failed to undertake “diligent enforcement” to collect those payments and, therefore, the participating tobacco companies could reduce what they paid to the states.

For Indiana, that means the 2014 tobacco settlement payment would fall from $131 million to $68 million. And there’s the potential for the state to lose even more. The ruling addressed only claims from payments in 2003; the years 2004 through 2012 remain in dispute.

But Zoeller said in his appeal that the panel unfairly judged Indiana by using a new legal definition created after the fact and imposed retroactively. He said the panel based its ruling on erroneous findings and disregarded Indiana laws.

So he asked a Marion County judge to dismiss the arbitration panel ruling or – in the alternative – to modify the amount the state would lose under the order.

“Fifteen years after signing the Master Settlement Agreement that was intended to bring some closure to the issue, the big tobacco companies continue to wage a legal battle against Indiana and other states to reduce their settlement payment for the consequences of their product on the costs of health care for our citizens,” Zoeller said.

In its appeal, Indiana objects to the arbitration panel’s creating a new definition of “diligent enforcement” after more than a year of hearings were complete and applying it retroactively long after Indiana had finished presenting its case.

Also, the state argues that 20 other states that settled rather than continue with the arbitration process were not held to the newly-created “diligent enforcement” standard Indiana was subjected to.

A hearing date has not yet been scheduled on the state’s appeal.

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