As mentioned in a previous blog post, on September 11, 2013, a three-member federal arbitration panel decided the on-going dispute among three participating manufacturers (“PMs”) and 15 states involving the 2003 payment obligations under the Master Settlement Agreement (“MSA”).
New Mexico is one of the states in which the arbitrators ruled in favor of the PMs, resulting in the state receiving a negative adjustment under the non-participating manufacturer (“NPM”) Adjustment. The arbitration panel concluded that “the MSA’s first condition for application of the 2003 NPM Adjustment was satisfied: the PMs had suffered a ‘Market Share Loss’ for 2003.” In particular, the independent auditor calculated approximately an 8 percent market-share shift from the PMs to the NPMs from 1997-2003. New Mexico did not dispute the auditor’s finding that the PMs suffered a market share loss in 2003.
Rather, New Mexico (and the other states) only disputed whether a “significant factor” for the PMs’ loss in market share was attributable to the MSA’s provisions. In determining whether New Mexico diligently enforced its escrow statute and satisfied the second step of the NPM Adjustment, the arbitration panel assessed New Mexico’s diligent enforcement efforts in light of eight factors. These factors include: (1) collection rate; (2) lawsuits filed; (3) gathering reliable data; (4) resources allocated to enforcement; (5) preventing non-compliant NPMs from future sales; (6) legislation enacted; (7) actions sort of legislation; and (8) efforts to be aware of NAAG and other states’ enforcement efforts. Not all of the factors are given equal weight in assessing whether a state diligently enforced its escrow statute, and the arbitration panel discussed certain factors more than others when evaluating New Mexico’s enforcement efforts.
In discussing New Mexico’s collection rate, the arbitration panel recognized that while it is a significant factor, a state’s collection rate must be viewed in context because “[t]here are Settling States that had only a moderate collection rate but were found to have diligently enforced.” Although the arbitration panel found that New Mexico’s collection rate was fairly high, it relied on the remaining factors in support of its decision that New Mexico did not diligently enforce its escrow statute.
The arbitration panel found that New Mexico did not initiate any lawsuits against non-compliant NPMs in 2002 or 2003. The evidence demonstrated that New Mexico did not have in place methods for gathering reliable data and distributors were only provided with information upon request. New Mexico did not have a dedicated budget or personnel for escrow enforcement. The arbitration panel concluded that New Mexico’s lack of enforcement efforts resulted in an increase in non-compliant NPM sales. The arbitration panel recognized that New Mexico enacted complementary legislation that took effect in 2003, but the legislation was not initially available on the Attorney General’s website and distributors did not receive direct notice of the legislation. Additionally, the arbitration panel found that New Mexico did not take actions short of legislation – such as “seizures, injunctions, settlement efforts, or regulations that might have served as a supplemental tool for enforcement.” Finally, the arbitration panel concluded that New Mexico did not take steps to learn what other states were doing for enforcement efforts.