An article by the Troutman Sanders Tobacco practice appears in the February issue of Smokeshop Magazine. The article, titled “Pennsylvania’s Legal Battle Over MSA Payments Keeps Twisting” discusses the ongoing battle between Pennsylvania and major tobacco manufacturers regarding disputed 2003 Master Settlement Agreement (“MSA”) escrow payments.
As we have discussed in previous posts, in 2013 an arbitration panel ruled that six states did not “diligently enforce” escrow obligations under the MSA, Pennsylvania included. However, before the arbitration panel came to their decision, twenty-two of the states in question reached a settlement with the participating tobacco companies, in which the manufacturers released the disputed payments from 2003-2012 to the states, and in exchange, the states agreed to provide credits to the manufacturers totaling $1.65 billion. Pennsylvania was not among these settling states.
As a part of their ruling, the panel ruled that the six “non diligent” states would bear the responsibility for the “full adjustment” of the disputed participating manufacturers’ 2003 payments. Pennsylvania would stand to lose over $240 million.
The Commonwealth of Pennsylvania filed a motion in the Pennsylvania Court of Common Pleas asking the court to modify or vacate the panel’s ruling. The Court of Common Pleas reached their decision in April 2014. Although the Court upheld the arbitration panel’s verdict that Pennsylvania did not diligently enforce the escrow statute, it did overturn the panel’s decision to allocate the full responsibility for the adjustment among the six states, calling the conclusion “irrational” under the terms of the MSA. This would reduce Pennsylvania’s payment obligation by $120 million.
Consequently, in October 2014 Phillip Morris, R.J. Reynolds, and Lorillard filed an appeal to the Commonwealth Court of Pennsylvania, stating that the trial court “significantly exceeded the strict limits on its authority to interfere with the [arbitration] panel’s contract interpretation, and it also fundamentally misconstrued the MSA.”
The full text of the article can be found here.
After this issue of Smokeshop went to print, Law360 published an article regarding this matter discussing a recent brief of the Pennsylvania’s Office of Attorney General, which was filed on December 29, 2014. In the brief, Pennsylvania states that “The commonwealth does not object to the [other states’] right to enter into a side agreement, but that side agreement cannot affect the commonwealth’s right to its payment under the MSA, (…) The MSA is very clear on that point: side agreements regarding MSA payments must be signed by every party ‘affected by’ the agreement.”
The case is scheduled for oral arguments in early February – stay tuned for updates.