State v. Philip Morris, Inc., 1256, Sept. Term, 2014.

CourtCourt of Special Appeals of Maryland
Writing for the CourtWRIGHT, J.
Citation225 Md.App. 214,123 A.3d 660
PartiesSTATE of Maryland v. PHILIP MORRIS, INC., et al.
Docket NumberNo. 1256, Sept. Term, 2014.,1256, Sept. Term, 2014.
Decision Date02 October 2015

225 Md.App. 214
123 A.3d 660

STATE of Maryland

No. 1256, Sept. Term, 2014.

Court of Special Appeals of Maryland.

Oct. 2, 2015.

123 A.3d 662

Matthew J. Fader (John M. Leovy, Brian E. Frosh, Atty. Gen., Elizabeth F. Harris, Chief Deputy Atty. Gen., on the brief), Baltimore, MD, for appellant.

123 A.3d 663

Hashim M. Mooppan (Peter J. Biersteker, Christopher N. Thatch, Jones Day, Washington, DC, David W. Skeen, Meighan G. Burton, Wright, Constable & Skeen, LLP, Baltimore, MD, Robert J. Brookhiser, Elizabeth B. McCallum, Baker & Hostetler, LLC, Washington, DC), on the briefs, for appellee.

Panel: WRIGHT, REED, JAMES A. KENNEY, III (Retired, Specially Assigned), JJ.*


225 Md.App. 219

I. Introduction

This appeal arises from a Master Settlement Agreement (“MSA”) between appellees, who are numerous cigarette manufacturers (the “Participating Manufacturers” or “PMs”),1 and appellant, the State of Maryland (“Maryland”), along with 51 other states and territories (collectively, the “Settling States”). Specifically, it involves the multi-state arbitration of an MSA dispute over the “Non–Participating Manufacturer Adjustment” (“NPM Adjustment”)—a potential reduction to the annual payment that the PMs make to the Settling States under the MSA, which is allocated among those states who failed to diligently enforce certain obligations under the MSA.

During the arbitration of the 2003 NPM Adjustment dispute, the PMs reached a settlement (“Term Sheet” agreement) with 22 states (the “Term Sheet States”) before it was determined whether those states were diligent or non-diligent. Maryland and the other “Non–Term Sheet States” were also offered the settlement, but declined to join. In light of this partial settlement, the arbitrators (a “Panel” of three former

225 Md.App. 220

federal judges) were tasked with resolving how the 2003 NPM Adjustment should be allocated to any Non–Term Sheet States who were found non-diligent. On March 12, 2013, the Panel interpreted the MSA's language and concluded that the NPM Adjustment should be allocated post-settlement pursuant to the “pro rata” method of judgment reduction.

After holding individual evidentiary hearings for the Non–Term Sheet States, whose diligence for 2003 was still contested, the Panel concluded that Maryland and five other Non–Term Sheet States were non-diligent and thus subject to the 2003 NPM Adjustment. On September 11, 2013, after assessing Maryland's enforcement record for 2003, the Panel found that Maryland lacked “a culture of compliance” and that its efforts “fell short of its efforts in earlier years.”

Maryland filed motions in the Circuit Court for Baltimore City to vacate the Panel's awards for the 2003 NPM Adjustment that adopted the pro rata judgment-reduction method and that found Maryland to be non-diligent. On November 12, 2013, Maryland also filed a motion to compel the PMs to arbitrate Maryland's diligence for 2004 in a state-specific arbitration, rather than as part of a multi-state arbitration of

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the entire 2004 Adjustment dispute. On July 28, 2014, the circuit court denied all three motions, and on August 20, 2014, Maryland noted this appeal.

II. Questions Presented

We have rephrased Maryland's questions as follows:2

225 Md.App. 221
1) Did the circuit court err in refusing to vacate the Panel's award which adopted the pro rata judgment-reduction method in reallocating the 2003 NPM Adjustment only among the non-diligent, Non–Term Sheet States?

2) Did the circuit court err in refusing to vacate the Panel's finding that Maryland was not diligent in 2003?
3) Did the circuit court err in failing to order the PMs to arbitrate Maryland's diligence for 2004 in a state-specific arbitration?

For the reasons that follow, we answer only the first question in the affirmative, and reverse the circuit court's judgment regarding that issue. Accordingly, we remand the case for further proceedings not inconsistent with this opinion.

III. Facts


In 1998, Maryland and the 51 other Settling States entered the MSA, thus settling their claims for “wrongful marketing and advertising of cigarettes, as well as damages based upon the costs of treating smoking-related illnesses,” against three major cigarette manufacturers—Philip Morris USA, Inc., R.J. Reynolds Tobacco Co., and Lorillard Tobacco Co. (collectively, “Original Participating Manufacturers” or “OPMs”). State v. Philip Morris Inc., 179 Md.App. 140, 142–43, 944 A.2d 1167 (2008). Since then, more than forty subsequent participating manufacturers (“SPMs”) have joined the MSA. Id. at 145 n. 2, 944 A.2d 1167. In exchange for the dismissal of “any pending action and [a] release [of] all past and future claims” against them, the PMs agreed “to restrict the manner in which they market and advertise tobacco products and ... to make a

225 Md.App. 222

substantial annual payment to be allocated among the settling states.” Id. at 145, 944 A.2d 1167.

Pursuant to the MSA, the PMs do not make the annual payment (“MSA Payment”) directly to the Settling States. Id. Rather, each PM is “required to make a single, nationwide annual payment into an escrow account on or before April 15” of each year, the exact amount of which is calculated annually by an “Independent Auditor ... pursuant to a comprehensive formula contained within the MSA.” Id. at 145–46, 944 A.2d 1167. “The calculation

123 A.3d 665

begins with each original participating manufacturer paying into an escrow account its relative market share of the base amount for the calendar year.” Id. at 146, 944 A.2d 1167 (citing MSA § IX(c)(1)). That amount is then subject to several reductions and adjustments, including the NPM Adjustment. Id. (citing MSA §§ IX(c)(j), XI(a)(1)). Thereafter, the funds are “allocated among the settling states according to formulae set forth in the MSA.” Id. at 146 n. 3, 944 A.2d 1167. Pursuant to the “allocable shares,” Maryland is entitled to 2.2604570 percent of the PMs' annual payment. Id. (citing MSA § II(f)).

The NPM Adjustment, governed by Section IX(d) of the MSA, is a payment reduction designed to address the PMs' concern that “they would incur a competitive disadvantage to the non-participating manufacturers [ (“NPMs”) ], who were not subject to the MSA's strict marketing restrictions and payment obligations.” Id. at 146–47, 944 A.2d 1167. Each year, PMs “may be eligible to take a NPM Adjustment if (1) the independent auditor determines that, during the year in question, the participating manufacturers collectively lose more than two percent of their pre-MSA market share to non-participating manufacturers and (2) an economic consulting firm determines that the MSA was a ‘significant factor’ contributing to that loss.” Id. at 147, 944 A.2d 1167 (citing MSA § IX(d)(1)). If these conditions are satisfied, then the PMs are entitled to the NPM Adjustment on their annual payment as to all Settling States, subject to one exception—the “diligence exception.” See MSA § IX(d)(2).

225 Md.App. 223

Pursuant to the diligence exception, “[a] Settling State's Allocated Payment shall not be subject to an NPM Adjustment ... if such Settling State continuously had a Qualifying Statute ... in full force and effect during the 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.” MSA § IX(d)(2)(B). The MSA defines a “Qualifying Statute” as a “statute, regulation, law and/or rule ... that effectively and fully neutralizes the cost disadvantages that the [PMs] experience vis-à-vis [NPMs] within such Settling State as a result of [the MSA].” MSA § IX(d)(2)(E). “Maryland enacted the model ‘qualifying statute’ contained in Exhibit T to the MSA, which is codified as Maryland's Escrow Act [Md. Code (1992, 2010 Repl. Vol.), § 16–401 et seq. of the Business Regulation Article ].” Philip Morris Inc., 179 Md.App. at 147, 944 A.2d 1167. It requires all NPMs to:

deposit into escrow a fixed sum per cigarette sold that is slightly less than the per-cigarette cost imposed by the MSA on participating manufacturers. These escrowed funds may ultimately be used to satisfy a judgment that the State may obtain against a non-participating manufacturer. If the funds are not so used within twenty-five years, they are returned to the nonparticipating manufacturer.

Id. at 148, 944 A.2d 1167 (internal citations omitted). “[I]f a state has a ‘qualifying statute’ in full force and effect and diligently enforces that statute, the auditor must reallocate that state's share of the NPM...

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