SJC sends tobacco-money dispute to arbitration panel

The state Supreme Judicial Court ruled yesterday that a dispute over whether two major tobacco companies have shortchanged Massachusetts by some $60 million in settlement payments over the past two years must be resolved by an arbitration panel, rather than by a state judge.

Massachusetts has been receiving $250 million to $350 million annually from the tobacco industry since 1998 as its share of a landmark settlement between nearly all the states and about 40 tobacco companies to settle smoking-related lawsuits.

But R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. contend that auditor's reports released last year and this year suggest that they were assessed too much for 2003 and 2004.

As a result, both companies withheld a portion of settlement payments to all states, including Massachusetts, for 2006 and 2007, and have put the money into escrow until the dispute is resolved.

Yesterday, Harry Pierre, a spokesman for Attorney General Martha Coakley, said the state had argued that the matter should be resolved in state court, but is prepared to present its case before an arbitration panel.

"We remain confident that Massachusetts will prevail on the merits," he said.

Massachusetts is owed about $30 million from last year and another $30 million from this year, according to state officials.

David Howard, a spokesman for R.J. Reynolds, said an arbitration panel of three retired federal judges will determine on a state-by-state basis whether the company is entitled to keep the money it has withheld and put in escrow.

"We're simply following the process that all parties understood and agreed to when they signed the Massachusetts settlement agreement in 1998," Howard said. "We believe it's clearly spelled out how to resolve payment disputes, which this is, and that's through binding arbitration."

Tobacco companies that signed onto the agreement say that since 1998 they have lost market share to other tobacco companies that aren't part of the settlement.

They say the states, including Massachusetts, have failed to aggressively enforce part of the agreement that requires them to impose fees and advertising restrictions on companies that didn't sign on to the agreement.

But in its court filings, Coakley's office said cigarette sales by manufacturers who aren't part of the agreement dropped by $31 million in Massachusetts between 2001 and 2005 and currently account for less than a half-percent of all cigarette sales in the state.

The state said it aggressively enforces its laws against manufacturers who aren't part of the settlement and requires them to pay a fee for each carton of cigarettes sold in Massachusetts.

That money is put into an escrow account for 25 years to pay for any future judgments the government may obtain against those tobacco companies who aren't covered by the 1998 settlement.

Shelley Murphy can be reached at shmurphy@globe.com.