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Pa. court rules state can retain tobacco settlement funds

By Jessica M. Karmasek | Apr 14, 2015

HARRISBURG, Pa. (Legal Newsline) - Pennsylvania can keep nearly $130 million in annual payments from a 1998 Master Settlement Agreement with various tobacco companies, a state appeals court ruled Friday.

The Commonwealth Court, one of two intermediate appellate courts in the state, upheld a ruling by the Philadelphia Court of Common Pleas last year.


Judge Robert “Robin” Simpson, who authored the Commonwealth Court’s 51-page opinion, said the trial court properly modified the award in accordance with the MSA’s express terms and that an arbitration panel that presided over hearings associated with the MSA failed to apply the terms of the contract.

Under the MSA, 46 states settled their Medicaid lawsuits against the tobacco industry for recovery of their tobacco-related health care costs, and exempted the companies from private tort liability regarding harm caused by tobacco use.


In return, the companies agreed to stop certain marketing practices and to make payments to the states to compensate them for some of the medical costs of caring for those with smoking-related illnesses.


Those payments are subject to a series of adjustments, including the Non-Participating Manufacturers’, or NPM, Adjustment, which reduces states’ annual payments if they fail to “diligently enforce” payments required to be made by tobacco companies that did not sign the MSA.


An arbitration panel found that in 2003 Pennsylvania did not “diligently enforce” payments.


The panel’s decision then shifted certain financial obligations of states that entered into a 2013 settlement agreement to Pennsylvania.


The state, in response to the panel’s decision, filed a motion in the common pleas court in the fall of 2013, looking to overturn the ruling.


An appeal of the trial court’s March 2014 ruling in favor of the state led to the Commonwealth Court’s ruling last week.


“Contrary to the panel’s declaration that the Term Sheet and Partial Settlement Award do not materially prejudice or adversely affect Non-Term Sheet States, the panel’s award caused Pennsylvania to bear a much greater portion of the 2003 NPM Adjustment than it should under terms of the MSA,” Simpson wrote Friday.


“Although the panel had jurisdiction over the dispute, it was not authorized to disregard MSA language or fashion a new remedy based on its own notions of economic justice. That is not what the parties bargained for. Rather, the parties bargained for the panel’s construction of the MSA itself, i.e., a rational interpretation of the contract language.


“The panel was obliged to apply the MSA as written without imposing additional terms that modify or limit what the parties expressed.”


Because the panel’s interpretation deviates from the MSA’s express terms and disregards the intent of the parties regarding how the reallocation would be shared, Simpson said the trial court properly determined the award does not draw its essence from the agreement.


“Moreover, the panel’s departure from the contract language itself and the application of a judgment reduction offset constituted an irregularity under common law arbitration,” he wrote for the court. “Under any standard of review, we conclude the respected panel exceeded its powers, warranting modification.


“The trial court’s modification takes into consideration the express terms of the MSA and is rationally derived the MSA. Thus, we affirm the trial court’s modification of the Partial Settlement Award.”


Pennsylvania Attorney General Kathleen Kane said Friday the court ruling prevented a loss of approximately $126 million in annual payments.


“We are very pleased with the Commonwealth Court’s decision, which ensures the terms of the MSA are followed by the arbitration panel and that Pennsylvania is fairly treated under the terms of the agreement,” Kane said in a statement.


“The court’s decision ensures Pennsylvania receives the funding it needs to forward the important goals of smoking cessation, and to invest in medical research and health programs.”


Lawyers from Kane’s office and San Francisco-based law firm Orrick, Herrington & Sutcliffe LLP represented the state.


From Legal Newsline: Reach Jessica Karmasek by email at

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