State v. Philip Morris

• Decision Date: 27 March 2008
• Docket Number: No. 2844, Sept. Term, 2006.,2844, Sept. Term, 2006.
• Citation: 944 A.2d 1167,179 Md. App. 140
• Parties: STATE of Maryland v. PHILIP MORRIS INCORPORATED et al.
• Court: Court of Special Appeals of Maryland

944 A.2d 1167

179 Md. App. 140

STATE of Maryland v. PHILIP MORRIS INCORPORATED et al.

No. 2844, Sept. Term, 2006.

Court of Special Appeals of Maryland.

March 27, 2008.

Joshua N. Auerbach (Steven M. Sullivan, Douglas F. Gansler, Attorney General, on the brief), Baltimore, MD, for Appellant.

Robert Brookhiser (Elizabeth B. McCallum, Howrey, L.L.P., on the brief), Washington, D.C., (Deborah L. Robinson, Robinson, Woolson, P.A., Robert T. Franklin, Franklin & Prokopik, P.C., on the brief), Baltimore, MD, for Appellee.

Panel: DAVIS, ADKINS and CHARLES E. MOYLAN, JR. (Retired, Specially Assigned), JJ.

DAVIS, J.

This case involves a dispute between appellant, the State of Maryland, and appellees, Philip Morris USA, Inc., R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. (collectively, the original participating manufacturers) and more than forty small tobacco manufacturers (collectively, the subsequent participating manufacturers). In 1998, the original participating manufacturers and the State, along with fifty-one other states and territories (collectively, the settling states), signed the Master Settlement Agreement (MSA). The MSA resolved the settling states' claims of wrongful marketing and advertising of cigarettes, as well as damages based upon the costs of treating smoking-related illnesses. In exchange for a release of liability, the original participating manufacturers¹ and subsequent participating manufacturers, who later joined the MSA, agreed to make annual payments that would be allocated among the settling states.

In March 2006, the independent auditor, responsible for determining the annual MSA payments, refused appellees' request to reduce their payments for the 2003 calendar year. When the dispute continued, appellees requested arbitration pursuant to § XI(c) of the MSA. The State refused appellees' demand and, on May 18, 2006, it sought declaratory relief from the Circuit Court for Baltimore City (Brown, J.), confirming that the independent auditor acted properly by not reducing the MSA payment. The original participating manufacturers responded on July 14, 2006, by filing a Motion to Compel Arbitration. Thereafter, the subsequent participating manufacturers joined the original participating manufacturers' motion.

During the October 5, 2006 motions' hearing, the parties argued, based upon the language and structure of the MSA, whether the present dispute was subject to arbitration or the exclusive jurisdiction of the Circuit Court for Baltimore City. In a written opinion, the court found that the arbitration provision was "clear" and applicable and rejected the State's arguments, opining that they were "clearly in conflict with" the language of the MSA. Accordingly, on January 19, 2007, the Circuit Court for Baltimore City ordered that arbitration be compelled and denied the State's Motion for Declaratory Order. The State, thereafter, filed a timely notice of appeal, in which it presents the following questions for our review:

1. Under the 1998 Master Settlement Agreement between the State of Maryland and participating tobacco manufacturers, is the issue of whether the State was "diligent" in its enforcement of Maryland*s escrow statute against non-participating manufacturers (NPMs) (a) an issue within the Circuit Court for Baltimore City*s "exclusive jurisdiction" to implement and enforce the MSA, or instead (b) an issue subject to arbitration because it is a dispute "arising out of or relating to calculations performed by, or ... determinations made by" the accounting firm responsible for calculating the amount that the participating tobacco manufacturers owe the State under the MSA?

2. Do a series of 2003 agreements, subsequent to the Master Settlement Agreement, between the State and the original participating tobacco manufacturers, resolving the issue of the State*s "diligent enforcement" of its NPM escrow statute with respect to 1999-2002 tobacco sales, render non-arbitrable the present dispute concerning the State*s diligence in calendar year 2003, because the State*s enforcement activities in calendar year 2003 necessarily applied only to 1999-2002 tobacco sales?

For the reasons that follow, we hold that the question of whether the State was diligent in its enforcement of Maryland's escrow statute against non-participating manufacturers is an issue subject to arbitration and that the series of 2003 settlement agreements between the State and the original participating manufacturers do not render the present dispute non-arbitrable. Accordingly, we affirm the judgment of the Circuit Court for Baltimore City.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Master Settlement Agreement

In 1996, the State brought suit in Baltimore City Circuit Court against the major American tobacco companies, alleging that the companies were engaged in wrongful advertising and marketing of cigarettes. Other states initiated similar actions in their own courts. In November 1998, the attorneys general of forty-six states, including Maryland and six territories, entered into a global agreement known as the MSA to resolve the litigation.

Under the MSA, the settling states agreed to dismiss any pending action and release all past and future claims in exchange for the original participating manufacturers to restrict the manner in which they market and advertise tobacco products and for each original participating manufacturer to make a substantial annual payment to be allocated among the settling states. On December 1, 1998, the Circuit Court for Baltimore City entered a consent decree and final judgment approving the MSA, thereby settling the previous civil action initiated by the State.

As an incentive for additional tobacco manufacturers to join the MSA, the agreement provides that other tobacco manufacturers may voluntarily agree to abide by its provisions in the future and, in return, the settling states would release all past and future claims against them. The MSA refers to the tobacco manufacturers who enter the global agreement after its execution as the "subsequent participating manufacturers."² Under the MSA, the subsequent participating manufacturers, like the original participating manufacturers, make annual payments to the settling states.

The MSA annual payments are used to help the settling states achieve "significant funding for the advancement of public health" and "the implementation of important tobacco-related public health measures." Pursuant to the MSA, the original participating manufacturers and the subsequent participating manufacturers (collectively, the participating manufacturers) do not make annual payments directly to the State or the other individual settling states. Instead, each participating manufacturer is required to make a single, nationwide annual payment into an escrow account on or before April 15.³

The participating manufacturers' payment obligations are calculated annually by an "Independent Auditor"⁴ who shall:

[C]alculate and determine the amount of all payments owed pursuant to [the MSA], the adjustments, reductions and offsets thereto (and all resulting carryforwards if any), the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the Participating Manufacturers and among the Settling States, and shall perform all other calculations in connection with the foregoing.

MSA § XI(a); see MSA § IX(c)(2).

The independent auditor calculates each participating manufacturer's annual payment obligation pursuant to a comprehensive formula contained within the MSA. The calculation begins with each original participating manufacturer paying into an escrow account its relative market share of the base amount for the calendar year. See § IX(c)(1). This amount is then subject to several reductions and adjustments. One adjustment is the "Non-Participating Manufacturer Adjustment" (NPM Adjustment), which is at issue. MSA §§ IX(c)(j), XI(a)(1).

Given the restrictions imposed by the MSA, the participating tobacco manufacturers were concerned that they would incur a competitive disadvantage to the non-participating manufacturers, who were not subject to the MSA's strict marketing restrictions and payment obligations. The NPM Adjustment attempts to level the marketplace by reducing the annual payment obligation of the participating manufacturers if, as a collective group, it is proven that they lost market share to the non-participating manufacturers.

The MSA provides that participating tobacco manufacturers 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. MSA § IX(d)(1).

Even if the two stated conditions are satisfied, thereby making the NPM Adjustment applicable, the MSA contains a mechanism for a settling state to avoid a reduction of payment. The MSA provides:

A Settling State's Allocated Payment shall not be subject to an NPM Adjustment: (i) 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....

MSA § IX(d)(2)(B) (emphasis added). Accordingly, if 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 Adjustment among the other states that do not qualify, "pro rata in proportion to their respective Allocable Shares." MSA § IX(d)(2)(C).

Maryland enacted the model "qualifying statute" contained in Exhibit T to the MSA, which is codified as Maryland's Escrow Act (Chapter 169 of the Acts of ...