CHAPTER 136 HOUSE BILL No. 2568* An  Act concerning tobacco; relating to the master settlement agreement; concerning payment of moneys into escrow; concerning enforcement. Be it enacted by the Legislature of the State of Kansas:

      Section  1. (a) Cigarette smoking presents serious public health con-
cerns to the state and to the citizens of the state. The surgeon general
has determined that smoking causes lung cancer, heart disease and other
serious diseases, and that there are hundreds of thousands of tobacco-
related deaths in the United States each year. These diseases most often
do not appear until many years after the person in question begins smok-
ing.

      (b) Cigarette smoking also presents serious financial concerns for the
state. Under certain health-care programs, the state may have a legal
obligation to provide medical assistance to eligible persons for health con-
ditions associated with cigarette smoking, and those persons may have a
legal entitlement to receive such medical assistance.

      (c) Under these programs, the state pays millions of dollars each year
to provide medical assistance for these persons for health conditions as-
sociated with cigarette smoking.

      (d) It is the policy of the state that financial burdens imposed on the
state by cigarette smoking be borne by tobacco product manufacturers
rather than by the state to the extent that such manufacturers either
determine to enter into a settlement with the state or are found culpable
by the courts.

      (e) On November 23, 1998, leading United States tobacco product
manufacturers entered into a settlement agreement, entitled the ``master
settlement agreement,'' with the state. The master settlement agreement
obligates these manufacturers, in return for a release of past, present and
certain future claims against them as described therein, to pay substantial
sums to the state (tied in part to their volume of sales); to fund a national
foundation devoted to the interests of public health; and to make sub-
stantial changes in their advertising and marketing practices and corpo-
rate culture, with the intention of reducing underage smoking.

      (f) It would be contrary to the policy of the state if tobacco product
manufacturers who determine not to enter into such a settlement could
use a resulting cost advantage to derive large, short-term profits in the
years before liability may arise without ensuring that the state will have
an eventual source of recovery from them if they are proven to have acted
culpably. It is thus in the interest of the state to require that such man-
ufacturers establish a reserve fund to guarantee a source of compensation
and to prevent such manufacturers from deriving large, short-term profits
and then becoming judgment-proof before liability may arise.

      Sec.  2. As used in this act:

      (a) ``Adjusted for inflation'' means increased in accordance with the
formula for inflation adjustment set forth in exhibit C to the master set-
tlement agreement.

      (b) ``Affiliate'' means a person who directly or indirectly owns or con-
trols, is owned or controlled by, or is under common ownership or control
with, another person. Solely for purposes of this definition, the terms
``owns,'' ``is owned'' and ``ownership'' mean ownership of an equity inter-
est, or the equivalent thereof, of 10% or more, and the term ``person''
means an individual, partnership, committee, association, corporation or
any other organization or group of persons.

      (c) ``Allocable share'' means allocable share as that term is defined in
the master settlement agreement.

      (d) ``Cigarette'' means any product that contains nicotine, is intended
to be burned or heated under ordinary conditions of use and consists of
or contains (1) any roll of tobacco wrapped in paper or in any substance
not containing tobacco; or (2) tobacco, in any form, that is functional in
the product, which, because of its appearance, the type of tobacco used
in the filler, or its packaging and labeling, is likely to be offered to, or
purchased by, consumers as a cigarette; or (3) any roll of tobacco wrapped
in any substance containing tobacco which, because of its appearance, the
type of tobacco used in the filler, or its packaging and labeling, is likely
to be offered to, or purchased by, consumers as a cigarette described in
clause (1) of this subsection (d). The term ``cigarette'' includes ``roll-your-
own'' (i.e., any tobacco which, because of its appearance, type, packaging
or labeling is suitable for use and likely to be offered to, or purchased by,
consumers as tobacco for making cigarettes). For purposes of this defi-
nition of ``cigarette,'' 0.09 ounces of ``roll-your-own'' tobacco shall con-
stitute one individual ``cigarette.''

      (e) ``Master settlement agreement'' means the settlement agreement
(and related documents) entered into on November 23, 1998, by the state
and leading United States tobacco product manufacturers.

      (f) ``Qualified escrow fund'' means an escrow arrangement with a fed-
erally or state chartered financial institution having no affiliation with any
tobacco product manufacturer and having assets of at least
$1,000,000,000 where such arrangement requires that such financial in-
stitution hold the escrowed funds' principal for the benefit of releasing
parties and prohibits the tobacco product manufacturer placing the funds
into escrow from using, accessing or directing the use of the funds' prin-
cipal except as consistent with subsection (b)(2) of section 3 and amend-
ments thereto.

      (g) ``Released claims'' means released claims as that term is defined
in the master settlement agreement.

      (h) ``Releasing parties'' means releasing parties as that term is defined
in the master settlement agreement.

      (i) ``Tobacco product manufacturer'' means an entity that after the
date of enactment of this act directly (and not exclusively through any
affiliate):

      (1) Manufactures cigarettes anywhere that such manufacturer in-
tends to be sold in the United States, including cigarettes intended to be
sold in the United States through an importer except where such importer
is an original participating manufacturer, as that term is defined in the
master settlement agreement, that will be responsible for the payments
under the master settlement agreement with respect to such cigarettes
as a result of the provisions of subsections II(mm) of the master settle-
ment agreement and that pays the taxes specified in subsection II(z) of
the master settlement agreement, and provided that the manufacturer of
such cigarettes does not market or advertise such cigarettes in the United
States);

      (2) is the first purchaser anywhere for resale in the United States of
cigarettes manufactured anywhere that the manufacturer does not intend
to be sold in the United States; or

      (3) becomes a successor of an entity described in paragraph (1) or
(2).

The term ``tobacco product manufacturer'' shall not include an affiliate
of a tobacco product manufacturer unless such affiliate itself falls within
any of parts (1) - (3) of subsection (i) above.

      (j) ``Units sold'' means the number of individual cigarettes sold in the
state by the applicable tobacco product manufacturer (whether directly
or through a distributor, retailer or similar intermediary or intermediar-
ies) during the year in question, as measured by excise taxes collected by
the state on packs (or ``roll-your-own'' tobacco containers) bearing the
excise tax stamp of the state. The department of revenue shall promulgate
such rules and regulations as are necessary to ascertain the amount of
state excise tax paid on the cigarettes of such tobacco product manufac-
turer for each year.

      Sec.  3. Any tobacco product manufacturer selling cigarettes to con-
sumers within the state (whether directly or through a distributor, retailer
or similar intermediary or intermediaries) after the effective date of this
act shall do one of the following:

      (a) Become a participating manufacturer (as that term is defined in
section II(jj) of the master settlement agreement) and generally perform
its financial obligations under the master settlement agreement; or

      (b)  (1) place into a qualified escrow fund by April 15 of the year
following the year in question the following amounts (as such amounts
are adjusted for inflation):

      (A) 1999: $.0094241 per unit sold after the effective date of this act;

      (B) 2000: $.0104712 per unit sold;

      (C) for each of 2001 and 2002: $.0136125 per unit sold;

      (D) for each of 2003 through 2006: $.0167539 per unit sold;

      (E) for each of 2007 and each year thereafter: $0188482 per unit sold.

      (2) A tobacco product manufacturer that places funds into escrow
pursuant to paragraph (1) of subsection (b) shall receive the interest or
other appreciation on such funds as earned. Such funds themselves shall
be released from escrow only under the following circumstances:

      (A) To pay a judgment or settlement on any released claim brought
against such tobacco product manufacturer by the state or any releasing
party located or residing in the state. Funds shall be released from escrow
under this subparagraph (i) in the order in which they were placed into
escrow and (ii) only to the extent and at the time necessary to make
payments required under such judgment or settlement;

      (B) to the extent that a tobacco product manufacturer establishes that
the amount it was required to place into escrow in a particular year was
greater than the state's allocable share of the total payments that such
manufacturer would have been required to make in that year under the
master settlement agreement (as determined pursuant to section IX(i)(2)
of the master settlement agreement, and before any of the adjustments
or offsets described in section IX(i)(3) of that agreement other than the
inflation adjustment) had it been a participating manufacturer, the excess
shall be released from escrow and revert back to such tobacco product
manufacturer; or

      (C) to the extent not released from escrow under subparagraphs (A)
or (B) of paragraph (2) of subsection (b), funds shall be released from
escrow and revert back to such tobacco product manufacturer 25 years
after the date on which they were placed into escrow.

      (3) Each tobacco product manufacturer that elects to place funds into
escrow pursuant to this subsection shall annually certify to the attorney
general that it is in compliance with this subsection. The attorney general
may bring a civil action on behalf of the state against any tobacco product
manufacturer that fails to place into escrow the funds required under this
section. Any tobacco product manufacturer that fails in any year to place
into escrow the funds required under this section shall:

      (A) Be required within 15 days to place such funds into escrow as
shall bring it into compliance with this section. The court, upon a finding
of a violation of this subsection, may impose a civil penalty to be credited
to the state general fund in an amount not to exceed 5% of the amount
improperly withheld from escrow per day of the violation and in a total
amount not to exceed 100% of the original amount improperly withheld
from escrow;

      (B) in the case of a knowing violation, be required within 15 days to
place such funds into escrow as shall bring it into compliance with this
section. The court, upon a finding of a knowing violation of this subsec-
tion, may impose a civil penalty to be paid to the state general fund in an
amount not to exceed 15% of the amount improperly withheld from es-
crow per day of the violation and in a total amount not to exceed 300%
of the original amount improperly withheld from escrow; and

      (C) in the case of a second knowing violation, be prohibited from
selling cigarettes to consumers within the state (whether directly or
through a distributor, retailer or similar intermediary) for a period not to
exceed two years.

      Each failure to make an annual deposit required under this section
shall constitute a separate violation. A tobacco product manufacturer who
is found in violation of this section shall pay, in addition to other amounts
assessed under this section and pursuant to law, the costs and attorney's
fees incurred by the state during a successful presentation under this
paragraph (3).

      Sec.  4. This act shall take effect and be in force from and after its
publication in the Kansas register.

Approved May 6, 1999.
 Published in the Kansas Register May 20, 1999.
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