IN THE CIRCUIT COURT OF THEFIFTEENTH JUDICIAL
CIRCUIT,
IN AND FOR PALM BEACHCOUNTY, FLORIDA

THE STATE OF FLORIDA, et al.,

Plaintiffs,

v.
THE AMERICAN TOBACCO
COMPANY, etal.,
Defendants.

Civil Action No.
95-1466 AH

SETTLEMENT AGREEMENT

This Settlement Agreement is made as of this25th day of August, 1997, by and among the undersigned, and isintended to settle and resolve with finality all present andfuture civil claims against all parties to this litigationrelating to the subject matter of this litigation, which havebeen or could have been asserted by any of the parties hereto.

WHEREAS, the State of Florida commenced thisaction in February, 1995, asserting various claims for monetaryand injunctive relief on behalf of the State of Florida againsttobacco manufacturers and other defendants;

WHEREAS, Defendants have contested the claimsin Florida’s complaint and amended complaints and Plaintiffshave contested the claims in Defendants’ counter and crossclaims against the Florida Department of Corrections and denyeach and every one of the Defendants’ allegations;

WHEREAS, the State of Florida has, through itsGovernor, the Honorable Lawton M. Chiles, Jr. and its AttorneyGeneral, the Honorable Robert A. Butterworth, had a leadershiprole among the various states in maintaining civil litigationagainst the tobacco industry and in seeking to forge anunprecedented national resolution of the principal issues andcontroversies associated with the manufacture, marketing and saleof tobacco products in the United States;

WHEREAS, through the efforts of the State ofFlorida and others a June 20, 1997 Memorandum of Understandingand attached Proposed Resolution ("ProposedResolution") has been agreed to by members of the tobaccoindustry, state attorneys general, private litigants andrepresentatives of public health groups which would provide forunprecedented and comprehensive regulation of the tobaccoindustry while preserving the right of individuals to assertclaims for compensation;

WHEREAS, the Proposed Resolution contemplatesaction by the United States Congress and the President to enactand sign a new federal law with respect to the tobacco industry,which action the tobacco industry has agreed to support and whichwill require study and analysis by Congress and the President;

WHEREAS, jury selection in this actioncommenced on August 1, 1997, and trial of the action isanticipated to last several months and a continuance of suchtrial could prejudice the State of Florida. The State of Floridaand the undersigned defendants have agreed to settleindependently the litigation commenced by the State of Floridapursuant to financial terms comparable to the ProposedResolution, which terms will achieve for Florida immediately thefinancial benefits it would receive pursuant to the nationalProposed Resolution, should it become law;

NOW THEREFORE, it is hereby agreed as follows:

I. GENERAL PROVISIONS

A. JURISDICTION

The Settling Defendants and Plaintiffsacknowledge that this Court has jurisdiction over the subjectmatter of this action and over each of the parties to thisSettlement Agreement. Jurisdiction is retained by the Court forthe purposes of enabling any party to this Settlement Agreementto apply to the Court at any time for further orders anddirections as may be necessary and appropriate to implement orenforce this Settlement Agreement, and the parties hereto agreeto present any disputes under this Settlement Agreement to thisCourt.

Notwithstanding the dismissal of claimsprovided for herein, the parties hereto agree that the Court willretain jurisdiction over the State of Florida’s claims fornon-economic injunctive relief provided by the ProposedResolution. The parties hereto jointly request the Court to set atrial date for the first Monday in August, 1998, or such laterdate as the Court may direct, said trial to proceed only if theProposed Resolution or a substantially equivalent federal programhas not been enacted. If the Proposed Resolution or asubstantially equivalent federal program is not enacted by June1, 1998, the parties may, with the Court’s permission,commence any appropriate pre-trial proceedings relevant to thetrial of such issues. If the Proposed Resolution or asubstantially equivalent federal program is enacted, anyremaining claims shall be dismissed with prejudice.

B. APPLICABILITY

This Settlement Agreement shall be binding uponall Settling Defendants and their successors and assigns in themanner expressly provided for herein and shall inure to theirbenefit and to that of their respective directors, officers,employees, attorneys, representatives, insurers, suppliers,distributors, agents and of any of their present or formerparents, subsidiaries, affiliates, divisions, or otherorganizational units of any kind. This Settlement Agreement shallbe binding on and inure to the benefit of the State of Florida,the named Plaintiffs, their administrators, representatives,employees, officers, agents, legal representatives; all Agencies,Departments, Commissions, and Divisions of the State; allsubdivisions, public entities, public corporations,instrumentalities, and educational institutions over which theState has control; and their predecessors, successors andassigns.

C. VOLUNTARY AGREEMENT OF PARTIES

Settling Defendants understand and acknowledgethat certain provisions of this Settlement Agreement imposecertain requirements on them that could give rise to challengesunder federal and State constitutions if the State of Floridaunilaterally imposed them. The parties hereto acknowledge andagree that this Settlement Agreement is voluntarily entered intoby all parties hereto as the result of arms length negotiationsduring which all parties were represented by counsel. None of theparties hereto will seek to void this Settlement Agreement basedon any constitutional challenge to the provisions containedherein.

D. DEFINITIONS

1. "Plaintiffs" meanscollectively the Plaintiffs, State of Florida, Lawton M. Chiles,Jr., individually and as Governor of the State of Florida, theDepartment of Business and Professional Regulation, the Agencyfor Health Care Administration and the Department of LegalAffairs.

2. "State" or "Stateof Florida" means collectively the Plaintiffs, State ofFlorida, Lawton M. Chiles, Jr., individually and as Governor ofthe State of Florida, the Department of Business and ProfessionalRegulation, the Agency for Health Care Administration, and theDepartment of Legal Affairs, all of its officers acting in theirofficial capacities and any other department, subdivision oragency of the State, regardless of whether a named Plaintiff.

3. "Settling Defendants" meansthose Defendants in this Action that are signatories to thisSettlement Agreement.

4. "Non-Settling Defendants"means those Defendants that are not signatories to thisSettlement Agreement.

5. "Market Share" means, foreach year, a Settling Defendant’s respective share of salesof cigarettes for consumption in the United States.

6. "Tobacco Products" shall bedefined in the same manner as in the Food and Drug AdministrationRule and shall include Roll-Your-Own, Little Cigars and Fine Cut.

7. "Billboards" includesbillboards, as well as all signs and placards in arenas andstadia, whether open-air or enclosed. "Billboards"does not include: (1) any advertisements placed on or outside thepremises of retail establishments licensed to sell TobaccoProducts or any retail point-of-sale; and (2) billboards oradvertisements in connection with the sponsorship by the SettlingDefendants of any entertainment, sporting or similar event, suchas NASCAR, that appears in the State of Florida as part of anational or multi-state tour.

8. "Transit Advertisements"means advertising on private or public vehicles and alladvertisements placed at, on or within any bus stop, taxi stand,waiting area, train station, airport or any similar location.

9. "Final Approval" means thedate on which all of the following shall have occurred:

a. The Settlement Agreement is approved by theCourt;

b. Entry is made of an order of dismissal ofclaims or a final judgment as provided herein; and

c. The time for appeal or to seek permission toappeal from the Court’s approval as described in (a) hereof,and entry of such final judgment or order of dismissal asdescribed in (b) hereof has expired or if appealed, the appealhas been dismissed or the approval and judgment or order havebeen affirmed by the court of last resort to which such appealhas been taken and such affirmance has become no longer subjectto further appeal or review.

II. OBLIGATIONS OF PARTIES

A. NON-MONETARY PROVISIONS

1. Elimination of Billboards and TransitAdvertisements. Settling Defendants agree to discontinueall Billboards and Transit Advertisements of Tobacco Products inthe State of Florida. Settling Defendants agree to exercise theirbest efforts in cooperation with the State of Florida to identifyall Billboards that are located within 1000 feet of any public orprivate school or playground in the State of Florida. SettlingDefendants will remove such Tobacco Product advertisements(leaving the space unused or used for advertising unrelated toTobacco Products) or, at the option of the State of Florida, willallow the State of Florida, at its expense, to substitute for theremaining term of the contract alternative advertising intendedto discourage the use of Tobacco Products by children under theage of 18. Settling Defendants agree to provide the State ofFlorida with a preliminary list of the location of all Billboardsand Stationary Transit Advertisements within 30 days from thedate of execution of this Settlement Agreement, such list to befinalized within an additional 15 days, and to remove allBillboards and Transit Advertisements for Tobacco Products withinthe State of Florida at the earlier of the expiration ofapplicable contracts or 4 months from the date the final list issupplied to the State of Florida. The parties hereto also agreeto cooperate to secure the expedited removal of up to 50Billboards or stationary Transit Advertisements designated by theState of Florida, within 30 days after their designation.

Each Settling Defendant shall provide the Courtand the Attorney General, or his designee, with the name of acontact person to whom Plaintiffs may direct inquiries during thetime such Billboards and Transit Advertisements are beingeliminated, from whom the Plaintiffs may obtain periodic reportsas to the progress of their elimination and who will beresponsible for ensuring that appropriate action is taken toremove any Billboards that have not been timely eliminated.

2. Support of Legislation and Rules.Following Final Approval of this Settlement Agreement, SettlingDefendants agree to support legislative initiatives to enact newlaws and administrative initiatives to promulgate new rulesintended to effectuate the following:

a. The prohibition of the sale of cigarettes invending machines, except in adult-only locations and facilities;

b. The strengthening of civil penalties forsales of Tobacco Products to children under the age of 18,including the suspension or revocation of retail licenses; and

c. The strengthening of civil penalties forpossession of Tobacco Products by children under the age of 18.

3. Document Disclosure. SettlingDefendants and the State of Florida agree to cooperate to securethe expedited review of any decisions issued prior to the date ofthis Settlement Agreement regarding the inapplicability of anyassertion of privilege with respect to documents or othermaterial. The documents covered by this provision are thosedocuments and materials which have been presented to the SpecialMaster, the Honorable R. William Rutter, Jr., and as to which aReport and Recommendation has been issued requiring thedisclosure and production of such documents or materials, forwhatever reason.

B. MONETARY PROVISIONS

1. Initial Payment -- General. Onor before September 15, 1997, Settling Defendants shall, pursuantto a mutually acceptable Escrow Agreement, cause to be paid intoa special escrow account (the "Escrow Account"), forthe benefit of the State of Florida, to be held in escrow pendingFinal Approval, the sum of $550 million; that beingPlaintiffs’ good faith estimate of the portion Florida wouldreceive of the $10 billion payment provided for in Paragraph A onpage 34 of the June 20, 1997 Memorandum of Understanding andattached Proposed Resolution.

2. Initial Payment -- Pilot Program.In support of Florida’s demonstrated commitment to themeaningful and immediate reduction of the use of Tobacco Productsby children under the age of 18, Settling Defendants also agreeto support a pilot program (the "Pilot Program") by theState of Florida, the elements of which shall be aimedspecifically at the reduction of the use of Tobacco Products bypersons under the age of 18 years. Accordingly, on or beforeSeptember 15, 1997, the Settling Defendants shall, pursuant tothe Escrow Agreement, cause to be paid into a second specialescrow account (the "Second Escrow Account"), for thebenefit of the State of Florida, to be held in escrow pendingFinal Approval of this Settlement Agreement, the sum of $200million. The Pilot Program will commence upon Final Approval ofthis Settlement Agreement and last for a 24-month periodfollowing such date. The $200 million amount payable by SettlingDefendants in support of the Pilot Program shall be used onlyafter approval by the Court and at the rate of approximately $100million per 12-month period for general enforcement, media,educational and other programs directed to the underage users orpotential underage users of Tobacco Products, but shall not bedirected against the tobacco companies or any particular tobaccocompany or companies or any particular brand of Tobacco Products.

3. Annual Payments. OnSeptember 15, 1998, (subject to adjustment for actual marketshare by January 30, 1999), and annually thereafter, on December31st (subject to final adjustment within 30 days), each of theSettling Defendants agrees, severally and not jointly, that itshall cause to be paid into a special account for the benefit ofthe State of Florida (the "Account"), pro ratain proportion equal to its respective Market Share, its share of5.5% of the following amounts (in billions):

Year  thereafter
Amount  $4B  $4.5B  $5B  $6.5B  $6.5B  $8B 

$8B

The payments made to the Account by theSettling Defendants pursuant to the calculation set forth in thisparagraph shall be adjusted upward by the greater of 3% or theConsumer Price Index applied each year on the previous year,beginning with the first annual payment. Such Payments will alsobe decreased or increased, as the case may be, in accordance withdecreases or increases in volume of domestic tobacco productvolume sales as provided in Paragraph B.5 on pages 34-35 of theProposed Resolution. Any payment pursuant to this paragraph thatis due to be paid before Final Approval of this SettlementAgreement shall be paid into the Escrow Account and shall bedisbursed only as provided by the terms of the Escrow Agreement.On September 15, 1998, Settling Defendants shall pay $220 millionwithout any adjustment, that being Settling Defendants’ andthe State’s best estimate of the first such annual payment(in respect of 1998).

4. Use of Funds. The moniesreceived under this Settlement Agreement constitute not onlyreimbursement for Medicaid expenses incurred by the State ofFlorida, but also settlement of all of Florida’s otherclaims, including those for punitive damages, RICO and otherstatutory theories. In consonance with the Proposed Resolution,other than the Pilot Program and legal expense reimbursement, theparties hereto anticipate that funds provided hereunder, onlyafter approval by the Court, will be used for children’shealth care coverage and other health-related services, toreimburse the State of Florida for medical expenses incurred bythe State, for mandated improvements in State enforcement effortsregarding the reduction of sales of Tobacco Products to minors,and to ensure the Proposed Resolution’s performance targets.The funds provided hereby may be used for such purposes as theState match required to draw federal funds to providechildren’s health care coverage and for enhancement ofchildren’s and adolescents’ substance abuse services,substance abuse prevention and intervention and children’smental health services.

5. Adjustments in Event of FederalResolution. In the event that the ProposedResolution is enacted as federal legislation, or if anysubstantially equivalent federal program is enacted, thesettlement provided herein shall remain in place, but the termsof such Proposed Resolution or federal program shall supersedethe provisions of this Settlement Agreement, except for the PilotProgram and to the extent that the parties hereto have otherwiseexpressly agreed. In order to provide the Settling Defendantswith a full credit for all payments made hereunder pursuant toparagraphs II.B.1 and II.B.3 of this Settlement Agreement in theevent of the enactment of the Proposed Resolution orsubstantially equivalent federal program, and to the extent thatthe payments made pursuant to paragraphs II.B.1 and II.B.3 ofthis Settlement Agreement shall differ from the amounts to bereceived by the State of Florida pursuant to such ProposedResolution or substantially equivalent federal program, theparties hereto shall take whatever steps are necessary to ensurethat the principal amount of payments received by the State ofFlorida will be the same as the amounts it would receive pursuantto the Proposed Resolution or substantially equivalent federalprogram.

C. DISMISSAL, WAIVER AND RELEASE OFCLAIMS

1. Dismissal of Plaintiffs’ Claims. Uponapproval of this Settlement Agreement by the Court, Plaintiffsshall dismiss, with prejudice as to Settling Defendants(including their parents and affiliates), and without prejudiceas to other Non-Settling Defendants, all claims in this Action,except to the extent such claims seek non-economic injunctiverelief provided by the Proposed Resolution. In the event anyNon-Settling Defendants agree to comply with the non-economicterms contained in this Settlement Agreement, Plaintiffs shalldismiss with prejudice all claims against any such Non-SettlingDefendants, except to the extent such claims seek non-economicinjunctive relief provided by the Proposed Resolution.

2. Plaintiffs’ Waiver and Release.On the Final Approval Date, the State of Florida shall releaseand forever discharge all Defendants and their present and formerparents, subsidiaries, divisions, affiliates, officers,directors, employees, representatives, insurers, agents,attorneys and distributors (and the predecessors, heirs,executors, administrators, successors, and assigns of each of theforegoing) (the "Released Parties"), from any and allmanner of civil claims, demands, actions, suits, and causes ofaction, damages whenever incurred, liabilities of any naturewhatsoever, including costs, expenses, penalties andattorneys’ fees ("Claims"), known or unknown,suspected or unsuspected, accrued or unaccrued, whether legal,equitable or statutory, both past, as to any claims that were orcould have been made in this action or any comparable federalaction, and as to the future, as to all Claims directly orindirectly based on, arising out of or in any way related to, inwhole or in part, the use of or exposure to Tobacco Productsmanufactured in the ordinary course of business, that the Stateof Florida (including any of its past, present or future agents,officials acting in their official capacities, legalrepresentatives, agencies, departments, commissions, divisions,subdivisions (political and otherwise), public entities,corporations, instrumentalities, and educational institutions,and whether or not any such person or entity participates in thesettlement), whether directly, indirectly, representatively,derivatively or in any other capacity, ever had, now has orhereafter can, shall or may have (hereinafter, collectively, the"Released Claims"). Notwithstanding any provisionherein, Plaintiffs do not release the claims for non-economicrelief reserved under this Settlement Agreement, and Defendantsretain all defenses thereto.

The State of Florida hereby covenants andagrees that it shall not, hereafter, sue or seek to establishcivil liability against any Released Party based, in whole or inpart, upon any of the Released Claims. The State of Floridaagrees that this covenant and agreement shall be a completedefense to any such civil action or proceeding; provided,however, that those Non-Settling Defendants which are not parentsor affiliates of the Settling Defendants shall be entitled to theforegoing release and covenant not to sue only upon their assentto comply with the non-economic provisions of this SettlementAgreement and the Waiver of Claims.

3. Settling Defendants’ Waiver andDismissal of Claims. Upon Final Approval, SettlingDefendants shall waive any and all claims against any of thePlaintiffs in this action including the State, or against any oftheir officers, employees, agents, counsel, witnesses (fact orexpert), whistle-blowers or contractors, relating to or inconnection with this litigation and shall dismiss, withprejudice, any pending claims or actions against such persons orentities that arise out of this litigation of this lawsuit.

IV. MOST FAVORED NATION

The Settling Defendants agree that if theyenter into any future pre-verdict settlement agreement of otherlitigation brought by a non-federal governmental plaintiff onterms more favorable to such governmental plaintiff than theterms of this Settlement Agreement (after due consideration ofrelevant differences in population or other appropriate factors),the terms of this Settlement Agreement will be revised so thatthe State of Florida will obtain treatment at least as relativelyfavorable as any such non-federal governmental entity.

V. COSTS AND FEES

On or before September 30, 1997, the SettlingDefendants shall cause to be paid to the Attorney General ofFlorida $10 million for the best estimate of costs and expensesattributable to his office and other appropriate state agenciesor entities in connection with this litigation (cost for publicemployees shall be at prevailing market rates); and on or beforeSeptember 30, 1997, the Settling Defendants shall further causeto be paid $12 million to the Plaintiffs’ private counselfor their best estimate of their costs and expenses. Thereafterthe Attorney General’s Office, the appropriate stateentities and Florida’s private counsel shall provide theSettling Defendants with an appropriately documented statement oftheir costs and expenses. The Settling Defendants shall promptlypay the amount of such costs and expenses in excess of the above$22 million, or shall receive a refund or a credit against otherpayments due hereunder if the total of such costs and expensesshall be less than $22 million. Any dispute as to the nature oramount of reimbursable costs and expenses shall be decided withfinality by the persons selected to award fees, as providedbelow.

Settling Defendants agree to pay, separatelyand apart from the above, reasonable attorneys’ fees toprivate counsel. If the Proposed Resolution or substantiallyequivalent federal program is enacted, the amount of such feeswill be set by a panel of independent arbitrators with finality,subject to an appropriate annual cap on all such payments andother conditions. In the absence of any such legislation enactingthe Proposed Resolution or a substantially equivalent federalprogram, attorneys’ fees in connection with this litigationwill be awarded in the same manner (subject to the appropriateannual cap and other conditions) by three independent arbitratorsselected by the parties hereto.

In addition to the foregoing, in the event ofthe enactment of the Proposed Resolution or other substantiallyequivalent federal program, the parties hereto contemplate thatthe State of Florida and any other similar state which has madean exceptional contribution to secure the resolution of thesematters may apply to the panel of independent arbitrators forreasonable compensation for its efforts in securing the ProposedResolution, subject to an appropriate separate annual cap on allsuch payments.

VI. MISCELLANEOUS

A. HEADINGS. The headings of theparagraphs and sections of this Settlement Agreement are notbinding and are for reference only and do not limit, expand, orotherwise affect the contents of this Settlement Agreement.

B. NO ADMISSION. This SettlementAgreement and any proceedings taken hereunder are not intendedand shall not in any event be construed as, or deemed to be, anadmission or concession or evidence of any liability or anywrongdoing whatsoever on the part of any party or any ReleasedParty. The parties hereto and Released Parties specificallydisclaim and deny any liability or wrongdoing whatsoever withrespect to the allegations and claims asserted against them inthis action and enter into this Settlement Agreement solely toavoid the further expense, inconvenience, burden and uncertaintyof litigation.

C. NON-ADMISSIBILITY. Thesesettlement negotiations have been undertaken by the parties ingood faith and for settlement purposes only, and neither thisSettlement Agreement nor any evidence of negotiations hereunder,shall be offered or received in evidence in this Action, or anyother action or proceeding, for any purpose other than in anaction or proceeding arising under this Settlement Agreement.

D. AMENDMENT. This SettlementAgreement may be amended only by a writing executed by allsignatories hereto and any provision hereof may be waived only byan instrument in writing executed by the waiving party. Thewaiver by any party of any breach of this Settlement Agreementshall not be deemed to be or construed as a waiver of any otherbreach, whether prior, subsequent, or contemporaneous, of thisSettlement Agreement.

E. COOPERATION. The parties tothis Settlement Agreement and their attorneys agree to use theirbest efforts and to cooperate with each other to cause thisSettlement Agreement to become effective, to obtain all necessaryapprovals, consents and authorizations, if any, and to executeall documents and to take such other action as may be appropriatein connection therewith. The parties hereto may agree, withoutfurther order of the Court, to reasonable extensions of time tocarry out any of the provisions of this Settlement Agreement.

F. GOVERNING LAW. This SettlementAgreement shall be governed by the law of the State of Florida.

G. CONSTRUCTION. None of theparties hereto shall be considered to be the drafter of thisSettlement Agreement or any provision hereof for the purpose ofany statute, case law or rule of interpretation or constructionthat would or might cause any provision to be construed againstthe drafter hereof.

H. INTENDED BENEFICIARIES. ThisAction was brought by the State of Florida, through its Governorand Attorney General, to recover certain monies and to promotethe health and welfare of the people of Florida. No portion ofthis Settlement Agreement shall provide any rights to, or beenforceable by, any person or entity that is not a party heretoor a Released Party.

I. COUNTERPARTS. This SettlementAgreement may be executed in counterparts. Facsimile orphotocopied signatures shall be considered as valid signatures asof the date hereof, although the original signature pages shallthereafter be appended to this Settlement Agreement.

ENTERED INTO THIS 25th DAY OF AUGUST, 1997.

WEST PALM BEACH,

STATE OF FLORIDA

By:

______________________________________________________________________

Lawton M. Chiles, Jr., Robert A. Butterworth,

Governor Attorney General

PHILIP MORRIS INCORPORATED R.J. REYNOLDSTOBACCO COMPANY

By: By:

______________________________________________________________________

BROWN & WILLIAMSON TOBACCO LORILLARDTOBACCO COMPANY

CORPORATION

By: By:

_____________________________________________________________________

UNITED STATES TOBACCO COMPANY

By:

_________________________________


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