Appellate Court in Pennsylvania Affirms Commonwealth's $126 Million Victory Over Big Tobacco

April.13.2015

When an arbitration panel of three former federal judges ruled in favor of the big Tobacco companies, allowing those companies to reduce by $126 million the annual payment owed to the Commonwealth of Pennsylvania under the 1998 Tobacco Master Settlement Agreement (“MSA”), the Commonwealth brought in the appellate team from Orrick, Herrington & Sutcliffe to turn that ruling around. The Orrick team, led by partner Bob Loeb, convinced the Court of Common Pleas that the arbitration panel had exceeded its powers, and now after briefing and an en banc oral argument, the Commonwealth Court has affirmed. The Pennsylvania appellate ruling is the first on this important MSA issue, which is also pending is several other states. The ruling increased the payment to Pennsylvania by $126 million (funds used in part for cancer research, health care and smoking cessation programs), and it should help prevent future similar reductions of the payments owed to Pennsylvania and to other states as well.

The MSA requires the tobacco companies to make annual payments to compensate the states for tobacco-related health care costs they anticipated incurring due to the harmful effects of cigarette smoking. The annual payment owed to Pennsylvania was over $370 million. There can be a reduction in the annual payment, called the NPM Adjustment, for loss of market share to tobacco companies that did not sign the MSA, if it is shown that a state was not diligent in enforcing certain laws against the nonparticipating companies. But if a state manages to avoid incurring a NPM Adjustment to its annual payment by showing it “diligently” enforced the relevant laws, its share of the overall NPM Adjustment is shifted the remaining states and can reduce their annual payments.

During an arbitration to decide the states’ diligence, some 20 states facing such reductions of their annual payments entered into a side deal with the tobacco companies where they gave up a significant percentage of their annual payments. The tobacco companies then argued to the arbitration panel that part of the NPM Adjustment responsibilities borne by the settling states should be shifted onto the remaining states that did not prove their diligence for that fiscal year. The arbitration panel agreed, allowing an additional $126 million reduction to the Pennsylvania payment, as well as multimillion dollar reductions to the payments owed to New Mexico, Indiana, Maryland, Kentucky and Missouri.

The en banc Commonwealth Court affirmed the trial court’s decision and held that panel had overstepped. The Court recognized that review of an arbitration panel’s contract interpretation is highly deferential under both state and federal law. What is not allowed, the Court explained, is adopting a reading the contract that is not rationally derived from the agreement. The Court held that the panel’s ruling “did not draw its essence from the MSA because the panel departed from the MSA’s clear and unambiguous language regarding reallocation.” “By fashioning its own award that deviated from the contract terms, the panel did not enforce the terms of the MSA. Rather, the panel fashioned a new contract for the parties under the guise of contract interpretation.” The Court thus concluded that, under any standard of review, “the arbitration panel exceeded its powers.”

The appeal was handled by Bob Loeb and Alec Orenstein from Orrick, together with Tad Berger, Paul Jarabeck, Joel Ressler and Sharon Rogers from the Pennsylvania Office of the Attorney General. The Orrick team representing Pennsylvania also includes Jonathan Guy, Kathleen Orr and Aaron Rubin.

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Robert Loeb Partner

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The breadth and depth of Bob's appellate experience, and his consistent track record of success in high-stakes matters, are why clients, including top tech and energy companies, trust him with their most important cases.

The National Law Journal’s Litigator of the Week column recently recognized Bob’s appellate major wins in energy and product liability cases for Broadreach Power and Johnson & Johnson. Bob’s recent victories also include Fifth Circuit wins for energy clients Cheniere and Eni. In the Cheniere-Midship case, Bob obtained an emergency stay from the court of appeals of the regulating agency proceedings and, then after oral argument, achieved a full victory. And for Eni, Bob convinced the Fifth Circuit to vacate a $300M judgment against Eni in a dispute with another energy company. These types of big wins in the most challenging cases show why both Chambers and Legal 500 rank Bob among the Country’s top appellate advocates.

Bob has argued before the Supreme Court multiple times (including a 9-0 victory regarding application of the Fourth Amendment to rental cars), and has filed hundreds of briefs in the Supreme Court. He has also handled cases in highest state courts in California, New York, Maine, Kentucky and New Jersey.

Before joining Orrick, Bob served as one of the leaders of an elite appellate group at the Department of Justice. There, in addition to major national security, commercial, and administrative law, Bob supervised bankruptcy appeals. At Orrick, Bob has continued to handle big ticket bankruptcy matters, such as a billion-dollar dispute over whether DHL’s claim was discharged by United’s bankruptcy, appeals from the City of Stockton bankruptcy confirmation, and a Ninth Circuit matter involving the interplay of the Takings Clause and bankruptcy law.

Bob’s recent work includes matters for Johnson & Johnson, Avon, Microsoft, Eni, Cheniere Energy, Freeport LNG, Broadreach Power, LS Power, Exxon, Medidata, Renco, MSC Cruise Line, Golden 1 Credit Union, Credit Suisse, TravelCenters of America, Gannett, and the City of Stockton.