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Commonwealth v. Philip Morris USA, Inc.

Commonwealth Court of Pennsylvania

April 10, 2015

Commonwealth of Pennsylvania by Kathleen G. Kane, in her official Capacity as Attorney General of the Commonwealth of Pennsylvania
v.
Philip Morris USA, Inc., R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, Liggett Group LLC, Commonwealth Brands, Inc., Daughters and Ryan, Inc., Farmer's Tobacco Company of Cynthiana, Inc., House of Prince A/S, Sherman 1400 Broadway N.Y.C. Inc., King Maker Marketing, Inc., Top Tobacco, L.P., Japan Tobacco International U.S.A., Inc., Kretek International, Inc., Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Von Eicken Group. Appeal of: R.J. Reynolds Tobacco Company, Philip Morris USA, Inc. and Lorillard Tobacco Company; Commonwealth of Pennsylvania by Kathleen G. Kane, in her official Capacity as Attorney General of the Commonwealth of Pennsylvania
v.
Philip Morris USA, Inc., R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, Liggett Group Inc., Commonwealth Brands, Inc., Daughters and Ryan, Inc., Farmers Tobacco Company of Cynthiana, Inc., House of Prince A/S, Sherman 1400 Broadway N.Y.C. Inc., King Maker Marketing, Inc., Top Tobacco, L.P., Japan Tobacco International U.S.A., Inc., Kretek International, Inc., Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Von Eicken Group. Appeal of: Commonwealth Brands, Inc., Daughters and Ryan, Inc., House of Prince A/S, Liggett Group Inc., Sherman 1400 Broadway N.Y.C. Inc., King Maker Marketing, Inc., Top Tobacco, L.P., Japan Tobacco International U.S.A., Inc., Kretek International, Inc., Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Von Eicken Group, and Farmers Tobacco Company of Cynthiana, Inc

Argued: February 11, 2015.

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Appealed from No. April Term, 1997, No. 2443. Common Pleas Court of the County of Philadelphia. McInerney, J.

Peter J. Biersteker, Washington, DC, Robert J. Brookhiser, Washington, DC, Elizabeth B. McCallum, Washington, DC, and J. Kurt Straub, Philadelphia, for appellants.

Jonathan P. Guy and Robert Loeb, Washington, DC, and Joel M. Ressler, Chief Deputy Attorney General, Harrisburg, for appellee.

BEFORE: HONORABLE DAN PELLEGRINI, President Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE MARY HANNAH LEAVITT, Judge, HONORABLE P. KEVIN BROBSON, Judge, HONORABLE ANNE E. COVEY, Judge. OPINION BY JUDGE SIMPSON. Judges Leadbetter and Cohn Jubelirer did not participate in the decision in this case.

OPINION

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ROBERT SIMPSON, Judge.

In this appeal, Appellants, who are the participating tobacco manufacturers (PMs)[1] to the 1998 Master Settlement Agreement (MSA), ask whether the Court of Common Pleas of Philadelphia County[2] (trial court) erred by modifying an arbitration panel's award. PMs assert the trial court: applied the wrong standard of review; exceeded the strict limits on its authority under any standard of review; and,

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improperly interfered with the panel's rational contract interpretation. We affirm.

I. Background

A. MSA

In 1998, 52 states and territories (Settling States), including Pennsylvania, entered the MSA with PMs. The MSA settled litigation against the tobacco industry for recovery of the Settling States' tobacco-related health-care costs. The tobacco manufacturers that did not participate in the MSA are known as nonparticipating manufacturers (NPMs).

1. MSA Payment

Pursuant to the MSA, PMs agreed, among other things, to make annual payments to the Settling States in perpetuity in a base amount that totals billions of dollars every year in exchange for release from civil liability. PMs do not make the payments directly to the Settling States; rather, PMs make a single, aggregate payment (MSA Payment) to an independent auditor in an amount calculated and determined by the auditor. The auditor then allocates the MSA Payment among the Settling States by making a single, annual payment (Allocated Payment) in an amount based on the States' pre-set " allocable share" percentage. Pennsylvania's allocable share of every MSA Payment is 5.75%. The MSA Payment for 2003 is approximately $6.435 billion; Pennsylvania's Allocated Payment is approximately $370 million.

2. NPM Adjustment

The annual MSA Payment is subject to a downward adjustment known as the NPM Adjustment if it is determined that PMs lost market share to the NPMs as a result of PMs' compliance with the MSA. The NPM Adjustment is divided among all of the Settling States, according to each State's allocable share, in each year where the NPM Adjustment applies. Section IX(d)(1) of the MSA. The NPM Adjustment " shall apply to the Allocated Payments of all Settling States" unless the State meets the diligence exception. Section IX(d)(2)(A) of the MSA. A non-diligent State's potential NPM Adjustment is capped at the amount of its Allocated Payment.

3. Diligence Exception

The MSA provides an exception to the NPM Adjustment. Specifically, Settling States may avoid the NPM Adjustment if, during the year at issue, they " diligently enforced" a " qualifying statute," which " effectively and fully neutralizes the cost disadvantages that [PMs] experience vis-à-vis [NPMs] within such Settling State as a result of the provisions of [the MSA]." Sections IX(d)(2)(B), (E) of the MSA. Settling States are not required to enact or diligently enforce a qualifying statute, but if they want the benefit of the " diligence exception," they must do both. The exception gives states an incentive to protect the market dominance of PMs, because otherwise the states will receive fewer funds. If the Settling State satisfies the diligence exception requirement, its Allocated Payment is not subject to reduction.

The trial court and some of the parties refer to application of the diligence exception to the NPM Adjustment as the " first tier" adjustment. The final arbitration awards ...


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