By Lizzy McLellan, From The Legal Intelligencer

The Pennsylvania Supreme Court has denied the appeal of a lower court’s ruling that modified a partial settlement agreement between several states and tobacco companies in a way that saved Pennsylvania about $126 million.

The justices denied allocatur Dec. 23 in Commonwealth v. Philip Morris USA.

In April, a five-member en banc panel of the Commonwealth Court unanimously affirmed a trial court’s determination that an arbitration panel had exceeded its authority when it allowed several states and tobacco companies to enter into a partial settlement, modifying the requirements of a master settlement in which the companies agreed to pay the states billions of dollars.

The Commonwealth Court’s ruling affirmed a trial court decision invalidating the partial settlement and affirmed the trial court’s modification of the partial settlement, which reduced Pennsylvania’s financial burden from $242 million to $116 million.

While much of the arguments in the case had focused on the standard of review that the trial court needed to follow, Judge Robert Simpson, who wrote the court’s opinion, said the case came down to an essence test regarding whether the partial settlement derived from the initial global settlement agreement.

“Under any standard of review, the trial court properly modified the partial settlement award because the panel exceeded its authority under the MSA,” Simpson said.

According to Simpson, in 1998, 52 states and territories entered into a “master settlement” to end litigation against the tobacco industry for recovery of health care costs. Not all tobacco companies participated in the settlement, Simpson said.

Under the settlement agreement, the participating companies agreed to make annual payments to an independent auditor who would then allocate the payments to the states. The payment to the auditor in 2003 was $6.4 billion, and Pennsylvania was allocated about $370 million, ­according to Simpson.

Under the master settlement, the payment is subject to an adjustment determined by lost market share the participating tobacco companies suffer due to their ­compliance with the master settlement. However, according to the settlement terms, states are exempt from paying toward the adjustment if, during the year at issue, the state “diligently enforced” a qualified statute that neutralizes the cost disadvantages for the participating companies. The non-diligent states then split the adjustment ­payment, according to Simpson.

Beginning in 2003, disputes arose regarding the payments. In that year, the companies sought a $1.1 billion adjustment that the states rejected.

While some states submitted to arbitration, Pennsylvania, which was eventually determined to be a “non-diligent” state, refused.

In November 2012, the tobacco companies and 19 states reached a partial agreement over the payments from 2003 through 2012. However, because this agreement increased the burden for “non-diligent,” non-settling states, Pennsylvania and other states objected to the partial settlement.

The settling parties filed a proposed stipulated partial award with an arbitration panel. The arbitration panel entered a partial settlement award that included directing the auditor to treat the settling states as “diligent.”

In November 2013, Pennsylvania filed a motion with the trial court to vacate the final award and partial settlement.

The court ultimately found the partial settlement affected Pennsylvania’s rights, and was an unauthorized amendment of the master settlement because it had not been established beforehand that all the settling states were diligent.

The tobacco companies appealed to the Commonwealth Court, and argued the arbitration panel’s decision was rationally derived from the master settlement. The master settlement, the companies argued, had not addressed the adjustment payments pertaining to a partial settlement.

Simpson agreed the master settlement did not address the partial settlement issue, but said the terms that the parties agreed to regarding how adjustment payments would be allocated was unambiguous.

“Under the panel’s ‘interpretation,’ it disregarded these terms and created a new term as to when a settling state would not be responsible for its [non-participating companies’] adjustment—when it settles its diligence contest,” Simpson said. “Since it is unknown whether 20 term sheet states were, in fact, diligent, there was no basis for removing them from the reallocation pool.”

Simpson ultimately held the panel’s ­interpretation deviated from the express ­language of the agreement, and disregarded the intent of the parties over how the adjustment payments would be shared.

For Pennsylvania, payments through 2012 are still yet to be determined.

The Office of Attorney General said in an emailed statement that it is pleased with the court’s decision, “which ensures the commonwealth is treated fairly under the terms of the master settlement agreement.”

Peter Biersteker of Jones Day represented Lorillard Tobacco Co., Philip Morris USA Inc. and R.J. Reynolds Tobacco Co. He did not return a call seeking comment. J. Kurt Straub of Obermayer Rebmann Maxwell & Hippel, who represented several tobacco companies, referred comment to Robert J. Brookhiser and Elizabeth B. McCallum of Baker & Hostetler. Brookhiser did not return a call seeking comment.

Justice J. Michael Eakin did not participate in the decision to deny an appeal.

For more on this story go to: http://www.thelegalintelligencer.com/id=1202745917724/Tobacco-Companies-Appeal-of-Settlement-Changes-Is-Tossed#ixzz3vpuqbcCx