State v. Philip Morris Incorporated

• Decision Date: 23 April 2009
• Docket Number: 250N.
• Citation: 61 A.D.3d 575,877 N.Y.S.2d 291,2009 NY Slip Op 03105
• Parties: STATE OF NEW YORK et al., Plaintiffs, v. PHILIP MORRIS INCORPORATED et al., Respondents, and CAROLINA TOBACCO COMPANY et al., Appellants, et al., Defendants.
• Court: New York Supreme Court — Appellate Division

61 A.D.3d 575

877 N.Y.S.2d 291

2009 NY Slip Op 03105

STATE OF NEW YORK et al., Plaintiffs, v. PHILIP MORRIS INCORPORATED et al., Respondents, and CAROLINA TOBACCO COMPANY et al., Appellants, et al., Defendants.

250N.

Appellate Division of the Supreme Court of New York, First Department.

Decided April 23, 2009.

Appeal from order, Supreme Court, New York County (Charles E. Ramos, J.), entered January 22, 2008, which, to the extent appealed from, granted motions to compel arbitration, unanimously dismissed, without costs.

This declaratory judgment action was commenced by the State against numerous cigarette manufacturers and relates to the tobacco settlement reached between, among others, the State and certain cigarette manufacturers. In another appeal concerning the settlement, the Court of Appeals provided the following narrative regarding the settlement:

"In 1998, the Attorneys General of 46 states (including New York) and five island territories and the Corporation Counsel of the District of Columbia signed a Master Settlement Agreement (MSA) with counsel for the largest tobacco manufacturers in the United States. The MSA was approved, as to New York State, by Supreme Court. The claims brought against the tobacco manufacturers included wrongful marketing and advertising of cigarettes and other tobacco products. Various states sought damages based on the costs of treating smoking-related illnesses. In exchange for a release of liability, the tobacco manufacturers agreed to make annual payments, to be allocated among the Settling States. They also agreed to extensive marketing and advertising restrictions. The Original Participating Manufacturers, as they are known, were later joined by more than 40 smaller tobacco companies, referred to as the Subsequent Participating Manufacturers (SPMs)....

"Not all U.S. tobacco manufacturers have joined the MSA. In order to neutralize cost disadvantages suffered by the Participating Manufacturers (PMs) relative to Non-Participating Manufacturers (NPMs), the MSA provides the Settling States with a strong incentive to enact statutes requiring NPMs to make annual payments toward the costs of treating smoking-related illnesses equivalent to those made by the PMs. The MSA sets out a Model Statute, which, if appropriately enacted, `shall constitute a Qualifying Statute.' If a Settling State fails to enact, or does not diligently enforce, a Qualifying Statute, PM payments to that state may be subject to the Non-Participating Manufacturer adjustment (NPM adjustment).

"In brief, NPM adjustment can be applied to reduce PM payments to a Settling State if (1) PMs collectively lost market share to NPMs in the preceding year and (2) disadvantages resulting from the MSA were a `significant factor' contributing to that loss. But payment to a Settling State is not subject to the NPM adjustment `if such Settling State continuously had a Qualifying Statute ... in full force and effect during the entire calendar year immediately preceding the year in which the payment in question is due, and diligently enforced the provisions of such statute during such entire calendar year.'

"Settling States that have diligently enforced their respective Qualifying Statutes are not subject to the NPM adjustment; instead, the adjustment is to be reallocated pro rata among Settling States that are subject to the NPM adjustment, reducing the payments they receive. A decision regarding one Settling State's enforcement of its Qualifying Statute could therefore potentially affect the calculation of amounts due to all other Settling States" (State of New York v Philip Morris Inc., 8 NY3d 574, 577-578 [2007] [footnotes omitted]).

New York State's "qualifying statute" is codified in article 13-G of the Public Health Law. Pursuant to the statute, NPMs selling cigarettes in New York must make annual escrow deposits. The amount of money a particular NPM must deposit annually is based on the number of "units sold" by that manufacturer. "Units sold," in turn, is determined by the amount of excise tax collected by the State on packs of the manufacturer's products. The State, however, has maintained a policy, both before and after the State entered into the MSA, that cigarettes sold on tribal lands within the State are exempt from taxation. Because of both the manner in which "units sold" is calculated and the State's policy regarding cigarettes sold on tribal lands, NPMs who sell cigarettes on tribal lands are not required to make annual escrow deposits.

PMs complained to the State that it "does not diligently enforce" the qualifying statute as required by the MSA because of the State's policy regarding cigarettes sold on tribal lands. The PMs believe that the State is required under the MSA to collect escrow deposits on sales of cigarettes on tribal lands,...