Attorney General Gansler Leads National Litigation
Effort Against Tobacco Company

Leading a national effort of State Attorneys General, Attorney General Douglas F. Gansler has filed two civil actions designed to protect the public from the dangers of cigarette smoking and ensure that States receive all the payments they are entitled to under the 1998 tobacco Master Settlement Agreement (MSA). The actions allege that Cutting Edge Enterprises, Inc., has engaged in a series of corporate transactions with the objective of avoiding payments to the State of at least $65.9 million and circumventing the marketing and advertising restrictions aimed largely at preventing youth smoking.

Cutting Edge settled with the States in 2001 to become one of about 40 tobacco company participants in the MSA. Subsequent to signing the MSA until 2005, however, Cutting Edge was effectively defunct; it didn’t sell any cigarettes or make any MSA payments to the States, and in 2002 the Maryland Department of Assessments and Taxation forfeited Cutting Edge’s corporate charter. Then, in 2005, the company’s charter was revived and Calvin Phelps, the owner of Alternative Brands, Inc. (ABI), a very large North Carolina-based tobacco company, orchestrated a series of transactions by which he took ownership and control of Cutting Edge.

According to the documents filed in Baltimore City Circuit Court, Mr. Phelps is attempting to sell cigarettes with one foot in the MSA as Cutting Edge, and another outside the MSA as ABI, even though all his cigarette brands are being made by the ABI factory. Mr. Phelps’ scheme, if not prevented, would allow him to avoid payments of at least $65.9 million to the States, violate with impunity the public health protections of the MSA, and manipulate without the States’ agreement who is a party to the MSA.

“Tobacco companies need to be held responsible for the health costs caused by the sale of their cigarettes in Maryland and across the United States,” said Attorney General Gansler. “These actions will help ensure that parties to the Master Settlement Agreement do not escape that responsibility and will help protect our children from the dangers of smoking.”

Attorney General Gansler’s court actions are twofold: First, he filed a petition under Maryland law seeking to forfeit Cutting Edge’s corporate charter based on its misuse and abuse. Second, General Gansler filed an enforcement action under the MSA alleging several violations of the agreement. In both actions, Maryland is representing the interests of all of the 46 States and the six U.S. territories that are signatories to the MSA.