State v. Philip Morris, Inc., 41679.

CourtUnited States State Supreme Court of Idaho
Writing for the CourtHORTON, Justice.
Citation354 P.3d 187,158 Idaho 874
Decision Date23 July 2015
Docket NumberNo. 41679.,41679.
PartiesSTATE of Idaho, Plaintiff–Appellant, v. PHILIP MORRIS, INC., R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, Inc., Commonwealth Brands, Inc., Compania Industrial de Tabacos Monte Paz, S.A., Daughters & Ryan, Inc., House of Prince A/S, Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc., Kretek International, Inc., Liggett Group LLC, Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Scandinavian Tobacco Group Lane Ltd., Sherman 1400 Broadway N.Y.C., Inc., Top Tobacco, L.P., and Von Eicken Group, foreign corporations, Defendants–Respondents, and RJR Nabisco Holdings Corp., RJR Nabisco, Inc., American Tobacco Co., Inc., Brown & Williamson Tobacco Corp., Liggett & Myers, Inc., United States Tobacco Co., B.A.T. Industries, PLC, British American Tobacco Co., Ltd., The Council for Tobacco Research—U.S.A., Inc., and Tobacco Institute, Inc., foreign corporations, Defendants.

158 Idaho 874
354 P.3d 187

STATE of Idaho, Plaintiff–Appellant
v.
PHILIP MORRIS, INC., R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, Inc., Commonwealth Brands, Inc., Compania Industrial de Tabacos Monte Paz, S.A., Daughters & Ryan, Inc., House of Prince A/S, Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc., Kretek International, Inc., Liggett Group LLC, Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Scandinavian Tobacco Group Lane Ltd., Sherman 1400 Broadway N.Y.C., Inc., Top Tobacco, L.P., and Von Eicken Group, foreign corporations, Defendants–Respondents
and
RJR Nabisco Holdings Corp., RJR Nabisco, Inc., American Tobacco Co., Inc., Brown & Williamson Tobacco Corp., Liggett & Myers, Inc., United States Tobacco Co., B.A.T. Industries, PLC, British American Tobacco Co., Ltd., The Council for Tobacco Research—U.S.A., Inc., and Tobacco Institute, Inc., foreign corporations, Defendants.

No. 41679.

Supreme Court of Idaho, Boise, January 2015 Term.

July 23, 2015.


354 P.3d 188

Hon. Lawrence G. Wasden, Attorney General, Boise, for appellant. Michael Gilmore argued.

Brassey Crawford & Howell, PLLC, Boise and Jones Day, Washington, D.C., for respondent R.J. Reynolds Tobacco Company. Peter J. Biersteker argued.

Evans Keane LLP, Boise, for respondent Philip Morris USA, Inc.

Andersen Banducci, PLLC, for respondent Lorillard Tobacco Company.

Varin Wardwell Thomas & Kunkel, LLC, Boise and Baker & Hostetler, LLP, Washington D.C., for respondents Commonwealth Brands, Inc., Compania Industrial de Tobacos Monte Paz, S.A., Daughters & Ryan, Inc., House of Prince A/S, Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc., Kretek International, Inc., Liggett Group LLC, Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Scandinavian Tobacco Group Lane Ltd., Sherman 1400 Broadway N.Y.C., Inc., Top Tobacco, L.P., Von Eicken Group.Robert J. Brookhiser argued.

SUBSTITUTE OPINION

THE COURT'S PRIOR OPINION DATED JUNE 22, 2015 IS HEREBY WITHDRAWN.

HORTON, Justice.

158 Idaho 875

The State of Idaho appeals the judgment entered by the district court denying the State's motion to vacate portions of a Stipulated Partial Settlement and Award entered by an arbitration panel. This case arises out of the 1998 Tobacco Master Settlement Agreement, wherein certain cigarette manufacturers entered into an agreement with the State to pay damages for the cost of treating smoking-related illnesses. A dispute arose between the parties as to the amount owed in 2003 and the district court entered an order compelling arbitration. The arbitration panel entered a Stipulated Partial Settlement and Award in March of 2013. In June of 2013, the State moved the district court to vacate, modify, or correct the award. The district court concluded the State did not have standing to move to vacate or modify the award. The State appealed. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

In the 1990s, litigation arose between the states and tobacco companies regarding responsibility for the costs of treating tobacco-related illness. On November 23, 1998, Idaho

158 Idaho 876
354 P.3d 189

and fifty-one other states and territories (MSA States) entered into the Master Settlement Agreement (MSA) with various tobacco companies in the United States (the Participating Manufacturers). Under the MSA, the MSA States released their claims against these major domestic cigarette manufacturers. In return, the Participating Manufacturers agreed to make annual payments to the MSA States and to abide by cigarette marketing and advertising restrictions. Since the signing of the MSA, additional cigarette manufacturers, known as Subsequent Participating Manufacturers, have signed onto the MSA. For purposes of this appeal, the Participating Manufacturers and Subsequent Participating Manufacturers will be collectively referred to as the PMs.

Under the MSA, on April 15 of each year, in perpetuity, each PM is required to pay its relative market share of an agreed upon amount into an escrow account (MSA Annual Payments). Payments are not made directly to the states; instead, the PMs make payments to an Independent Auditor in an amount determined by the Independent Auditor based on the PMs' relative market share. The Independent Auditor then allocates the payments among the MSA States based on each state's allocable share percentage (Allocable Share); Idaho's Allocable Share is .36%. In 2002, Idaho received approximately $25.2 million as its MSA Annual Payment.

If a PM or a MSA State disputes the final calculation made by the Independent Auditor, the disputed portion of the amount owed by the PMs is placed into the Disputed Payments Account (DPA). Money placed in the DPA is not subject to interest. Funds placed in the DPA are distributed to the appropriate payee once the dispute is finally resolved. Once the dispute is resolved, the Independent Auditor instructs the escrow agent to credit the funds to the appropriate party.

Each MSA Annual Payment is subject to annual adjustments, including an adjustment for inflation and an adjustment for the volume of cigarettes sold. This appeal relates to one annual adjustment, the Non–Participating Manufacturer Adjustment (NPM Adjustment). The NPM Adjustment is intended to account for any gain in market share obtained by those cigarette manufacturers which do not participate in the MSA, referred to as Non–Participating Manufacturers (NPMs). The NPM Adjustment is calculated by the Independent Auditor.

The intent of the NPM adjustment is to correct for the market advantage gained by NPMs resulting from the MSA. See Frank Sloan & Lindsey Chepke, Litigation, Settlement, and the Public Welfare: Lessons from the Master Settlement Agreement, 17 Widener L. Rev. 159, 199 (2011) ; Commw. ex rel. Kane v. Philip Morris USA, Inc., 114 A.3d 37 (Pa.Cmwlth.2015). As a result of their responsibility to make the MSA Annual Payments to the states, the PMs have been required to increase the price of their cigarettes. As the NPMs have no such obligation, the PMs are placed at a competitive disadvantage. In order to compensate for this competitive disparity, the MSA requires that MSA States enact statutes mandating NPMs to make payments into escrow accounts in an amount comparable to that which they would have paid if they had entered into the MSA (Qualifying Statute). Idaho's Qualifying Statute is found at Idaho Code section 39–7803, and requires NPMs to place money into an escrow account based upon the number of “units sold”1 in Idaho each year.

The MSA was structured to provide the MSA States with an incentive to enforce their Qualifying Statutes. This incentive is

158 Idaho 877
354 P.3d 190

the NPM Adjustment, which reduces the PMs' MSA Annual Payment under certain circumstances. First, the market share of the PMs must decline by 2% or more, nationally, as compared to the PMs' market share in 1997. Second, if there is such a decline, an independent economic consultant must determine whether the MSA was a significant contributing factor in the PMs' loss of the market share. If the PMs experience a market share loss, and it is determined that this loss is due to the disadvantages experienced as a result of the MSA, then the NPM Adjustment is available to the PMs for that year.

However, an individual state may avoid the NPM Adjustment, thus receiving the entirety of its MSA Annual Payment, if that state has a Qualifying Statute and diligently enforced the provisions of such statute. As all MSA States have enacted a Qualifying Statute, the only question to be resolved regarding the NPM Adjustment is that of diligent enforcement. Although the MSA Annual Payment of a diligent state is not reduced by the NPM Adjustment, the MSA Annual Payment of a non-diligent state is reduced by the NPM Adjustment in an amount equal to its allocable share of the aggregate NPM Adjustment amount.

As increased incentive for enforcement of the Qualifying Statutes, the NPM Adjustment attributable to those states that have diligently enforced their Qualifying Statutes is reallocated among the non-diligent states. In short, the national burden of the NPM Adjustment is borne by the non-diligent states on a pro rata basis in proportion to their respective Allocable Shares. This creates a two-step reduction in the MSA Annual Payment for non-diligent states: first, a reduction for the non-diligent state's share of the NPM Adjustment; and second, a pro rata share of the reallocated NPM Adjustment.

Despite every MSA State enacting a Qualifying Statute, the PMs experienced a market share loss following the MSA. The NPM Adjustments for the years 1999 through 2002 were resolved by settlement. However, no such agreement was reached by the PMs with the MSA States for 2003.

The Independent Auditor determined that the PMs experienced a market...

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