IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Commonwealth of Pennsylvania :
By Kathleen G. Kane, Attorney General, :
Appellant :
:
v. : No. 2422 C.D. 2014
: Argued: October 6, 2015
Philip Morris, Inc.; RJ Reynolds :
Tobacco Company; Brown & :
Williamson Tobacco Corporation; :
B.A.T. Industries, PLC; The American :
Tobacco Company, Inc.; C/O Brown & :
Williamson Tobacco Corporation; :
Lorillard Tobacco Company; Liggett :
Group, Inc.; United States Tobacco :
Company; The Tobacco Institute, Inc.; :
The Council For Tobacco Research :
U.S.A., Inc.; Smokeless Tobacco :
Council, Inc., and Hill & Knowlton, :
Inc. :
BEFORE: HONORABLE DAN PELLEGRINI, President Judge
HONORABLE ROBERT SIMPSON, Judge
HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge
OPINION
BY JUDGE SIMPSON FILED: November 18, 2015
In this tobacco litigation appeal, the Commonwealth asks whether the
Court of Common Pleas of Philadelphia County1 (trial court) erred by denying its
motion to compel single-state arbitration to determine whether it diligently
enforced its qualifying statute in 2004 and by granting the motion to compel
1
The Honorable Patricia A. McInerney presided.
multistate arbitration filed by the participating tobacco manufacturers (PMs)2 to the
1998 Master Settlement Agreement (MSA). The Commonwealth contends the
MSA does not provide for multistate arbitration to decide its diligence because
Pennsylvania is not on the same side as other states, and such a reading undermines
the Commonwealth’s sovereign rights. PMs assert the Commonwealth’s appeal of
the trial court’s interlocutory orders should be quashed for lack of jurisdiction.
Upon determining we have jurisdiction over the Commonwealth’s appeal, we
affirm.
I. Background
In 1998, 52 states and territories (Settling States), including
Pennsylvania, entered into the MSA with PMs. The MSA settled litigation against
the tobacco industry for recovery of the Settling States’ tobacco-related health-care
costs.3 The tobacco manufacturers that did not participate in the MSA are known
as nonparticipating manufacturers (NPMs).
2
PMs comprise two groups of tobacco manufacturers: Original Participating
Manufacturers (OPMs) and Subsequent Participating Manufacturers (SPMs). OPMs were the
original tobacco companies to settle the claims filed against them by the states and enter the
MSA; SPMs, which were not named in the original suit, entered the MSA at a later date. OPMs
include Philip Morris USA, Inc., R.J. Reynolds Tobacco Company, and Lorillard Tobacco
Company. SPMs participating in this appeal include Liggett Group LLC, Brown & Williamson
Tobacco Corporation, and C/O Brown & Williamson Tobacco Corporation. OPMs and SPMs
filed separate briefs.
3
The history of the tobacco litigation and details of the MSA agreement were discussed
in depth in Commonwealth ex rel. Kane v. Philip Morris USA, Inc., 114 A.3d 37 (Pa. Cmwlth.
2015) (en banc).
2
Pursuant to the MSA, PMs agreed, among other things, to make
substantial annual payments to the Settling States in perpetuity in exchange for
release from civil liability. PMs do not make the payments directly to the Settling
States; rather, PMs make a single, aggregate payment (MSA Payment) to an
Independent Auditor in an amount calculated and determined by the Auditor. The
Auditor then allocates the MSA Payment among the Settling States by making
individual annual payments (Allocated Payment) in an amount based on each
State’s pre-set allocable share.
The annual MSA Payment is subject to a downward adjustment
known as the NPM Adjustment, which provides the MSA Payment may be
lowered by a percentage if it is determined PMs lost market share to NPMs as a
result of PMs’ compliance with the MSA. The NPM Adjustment is divided among
all of the Settling States, according to each State’s allocable share, in each year
where the NPM Adjustment applies, unless the State meets the diligence exception.
Section IX(d)(2)(A) of the MSA.
Under the diligence exception, Settling States may avoid the NPM
Adjustment if, during the year at issue, they “diligently enforced” a “qualifying
statute,” which “effectively and fully neutralizes the cost disadvantages that [PMs]
experience vis-à-vis [NPMs] within such Settling State as a result of the provisions
of [the MSA].” Sections IX(d)(2)(B), (E) of the MSA. Pennsylvania’s qualifying
statute is the Tobacco Settlement Agreement Act (TSAA).4
4
Act of June 22, 2000, P.L. 394, No. 54, as amended, 35 P.S. §§5671-5675.
3
Thus, a diligent State is spared an NPM Adjustment which reduces its
Allocated Payment. In contrast, a non-diligent State receives a larger downward
NPM Adjustment, and thus a smaller Allocated Payment, under the MSA’s
Reallocation Provision. Specifically, the amount of the NPM Adjustment that
would have otherwise applied to that diligent Settling State’s Allocated Payment is
“reallocated among all [non-diligent] Settling States pro rata in proportion to their
respective Allocable Shares ....” Section IX(d)(2)(C) of the MSA. As the number
of non-diligent States decrease, the reallocation share of the NPM Adjustment
increases, and vice versa. A non-diligent State’s potential NPM Adjustment is
capped at the amount of its MSA Payment.
The parties further agreed that “[a]ny dispute, controversy or claim
arising out of or relating to calculations performed by, or any determinations made
by, the Independent Auditor,” including NPM adjustments, “shall be submitted to
binding arbitration.” Section XI(c) of the MSA. The arbitration panel shall be
comprised of three neutral arbitrators. Id. “Each of the two sides to the dispute
shall select one arbitrator. The two arbitrators so selected shall select the third
arbitrator.” Id.
Despite the enactment of qualifying statutes by all Settling States,
PMs experienced market share loss attributable to their compliance with the MSA.
The NPM Adjustments for 1999-2002 were resolved by settlement as to all
Settling States, but the NPM Adjustment for 2003 (and subsequent years) was not.
This case pertains to the NPM Adjustment dispute for 2004.
4
By way of further background, the 2003 dispute went to arbitration.
Before arbitration commenced, Pennsylvania and other Settling States disputed
whether the determination of a State’s diligent enforcement was subject to
arbitration. The Commonwealth filed a motion in the trial court seeking a
declaration that it diligently enforced its qualifying statute in 2003, and that the
Independent Auditor properly determined the 2003 NPM Adjustment should not be
applied. In response, PMs filed a motion to compel arbitration, which the trial
court (the Honorable William J. Manfredi) granted. Reproduced Record (R.R.) at
191a. Judge Manfredi concluded the MSA provided for arbitration, and it
explained Pennsylvania, along with the other Settling States, were compelled to
join in the selection of a single arbitrator.
With the courts of every Settling State (but Montana) similarly
ordering arbitration of the 2003 NPM Adjustment dispute, PMs and most of the
Settling States, including Pennsylvania, entered an Agreement Regarding
Arbitration (ARA). The parties agreed to multistate arbitration for the 2003 NPM
Adjustment dispute. As part of the ARA, PMs agreed to reduce the liability of
Settling States determined non-diligent, by 20%. The ARA did not address
arbitration terms for future years.
With regard to the current 2004 NPM Adjustment dispute, in June
2014, the Commonwealth filed a motion to compel single-state arbitration to
determine its diligence for 2004 in the trial court. PMs responded by filing a
motion to compel multistate arbitration. The parties briefed and argued their
respective motions. Ultimately, the trial court denied the Commonwealth’s motion
5
and granted PMs’ motion. The trial court later issued an opinion detailing why all
issues related to the 2004 NPM Adjustment dispute must be decided in one
multistate arbitration proceeding.
The Commonwealth filed an application to certify the orders for
interlocutory appeal by permission, which the trial court denied. The
Commonwealth also timely filed a notice of appeal from both orders, asserting
appellate jurisdiction under Rules 311(a)(8) and 313 of the Pennsylvania Rules of
Appellate Procedure. This Court directed the parties to address the appealability of
the trial court’s orders in their principal briefs on the merits. Commonwealth Ct.
Order, 4/17/15, at 1.
II. Issues
On appeal,5 the Commonwealth asserts this Court has jurisdiction to
hear its interlocutory appeal as of right pursuant to Pa. R.A.P. 311(a)(8) and
Section 7320(a)(1) of the Uniform Arbitration Act (UAA),
42 Pa. C.S. §7320(a)(1), because the trial court denied its motion to compel
arbitration. The Commonwealth also maintains the trial court’s orders are
appealable as collateral orders under Pa. R.A.P. 313.
In turn, PMs argue the appeal should be quashed for lack of
jurisdiction because the appeals are interlocutory and do not qualify for any
5
With regard to jurisdictional questions and other questions of law, our standard of
review is de novo, and our scope of review is plenary. Mercury Trucking, Inc. v. Pa. Pub. Util.
Comm'n, 55 A.3d 1056 (Pa. 2012); Philip Morris.
6
exception. According to PMs, the trial court’s orders do not: (1) deny an arbitral
resolution of the parties’ dispute, but merely resolve the manner of arbitration by
compelling multistate arbitration; or (2) meet the definition of a collateral order.
With regard to the merits, the Commonwealth contends the dispute
over whether Pennsylvania diligently enforced the provisions of its qualifying
statute must be arbitrated in a single-state proceeding with the Commonwealth on
one side and the PMs on the other. In this dispute, the Commonwealth maintains it
is not on the same side as other Settling States in challenging their own diligent
enforcement. The Commonwealth further claims that compelling multistate
arbitration of this dispute is contrary to numerous MSA provisions designed to
respect the sovereignty of the Commonwealth.
III. Discussion
A. Jurisdiction
1. Contentions
Before reaching the merits, we first address the issue of the Court’s
jurisdiction to hear the Commonwealth’s appeal. The Commonwealth asserts that
denials of motions to compel arbitration are immediately appealable as of right
under Pa. R.A.P. 311(a)(8) and Section 7320(a)(1) of the UAA. Because the trial
court denied the Commonwealth’s motion to compel single-state arbitration, the
Commonwealth contends the order is plainly subject to immediate appeal as of
right.
In addition, the Commonwealth asserts both orders are properly
subject to appeal as collateral orders under Pa. R.A.P. 313. Under Rule 313 an
order is collateral if: (1) the order is separable from and collateral to the main cause
7
of action; (2) the right involved is too important to be denied review; and, (3) the
question presented is such that, if review is postponed until final judgment in the
case, the claim will be irreparably lost.
In this regard, the Commonwealth contends the order directing
multistate arbitration is collateral to the broader action itself. According to the
Commonwealth, the main cause of action is the original suit against PMs for
tobacco-related healthcare costs, which the parties settled in the MSA. This action
arises from the terms of the MSA and the Commonwealth’s diligence
responsibilities. The dispute of whether the arbitration should be a single-state
proceeding between Pennsylvania and PMs plainly raises a collateral and separate
question from the underlying merits of the main case.
Next, the Commonwealth maintains the denial of its right to single-
state arbitration raises important issues warranting immediate review. Although
multiple Settling States joined the MSA, the agreement recognized that each State
would maintain its own separate rights. Under the MSA, each State designates its
own state court, which will be responsible for interpreting and enforcing the MSA
in regard to disputes with that State. And each of those state courts is to look to its
own state law. All of this was done out of recognition that each State is a
sovereign entity and no State would allow itself to be subject to the courts or the
law of a sister State. By ordering the Commonwealth to participate in multistate
arbitration, the Commonwealth will be forced to forfeit many of its sovereign
rights, including the independent selection of an arbitrator and negotiation of
arbitration terms as these would be joint decisions made with sister States.
8
Arbitrators presiding over a multistate proceeding will apply generic legal
principles as opposed to Pennsylvania law.
Finally, the Commonwealth asserts this appeal is its only meaningful
opportunity to challenge the trial court’s orders. A similar arbitration for the 2003
NPM Adjustment lasted almost half a decade. If this Court declines review, the
Commonwealth would be forced to arbitrate the 2004 issue through to its
completion, spending hundreds of hours and millions of dollars in the process, only
to try to reargue this point years later. In the meantime, the Commonwealth would
have lost its sovereign right to arbitrate this issue separately. Thus, appeal of this
collateral issue is necessary now.
PMs respond the Commonwealth’s appeal must be quashed for lack of
appellate jurisdiction. An appeal may be taken as of right from an order denying
an application to compel arbitration. However, there is no corresponding statutory
authority that permits a party to appeal an order that compels arbitration. Although
the trial court denied the Commonwealth’s motion, it granted PMs’ motion. In so
doing, the trial court compelled the parties to arbitrate in a multistate proceeding.
The end result is the Commonwealth must participate in arbitration. An
interlocutory ruling that resolves merely the manner of arbitrating a dispute is not
immediately appealable under Rule 311(a)(8). Thus, the orders are clearly
interlocutory and not immediately appealable.
Moreover, PMs maintain the trial court’s orders are not appealable as
collateral orders under Pa. R.A.P. 313 because they do not satisfy the Rule’s three
9
conditions, which are stringent. First, PMs contend the orders are not separable
from and collateral to the main cause of action. Contrary to the Commonwealth’s
assertions, the main cause of action is not the original suit brought against OPMs
17 years ago, which was settled by the MSA and court-approved consent decree.
The settlement and consent decree extinguished all underlying claims. The trial
court’s jurisdiction at this point concerns only actions to enforce and apply the
MSA. Indeed, that is the only jurisdiction the trial court has ever had over most of
the SPMs, that were never parties to the original litigation, but that joined the MSA
after settlement. The issue of whether the MSA requires single-state or multistate
arbitration is not collateral to the main action, it is the main action.
Second, PMs argue the right involved is not too important. To meet
this test, the issue must involve deeply rooted public policy concerns, and it must
affect someone other than the parties to the case themselves. The question here
concerns merely the manner of arbitrating a dispute under the parties’ contract. It
affects only the immediate litigants. Moreover, the question involved – the manner
of arbitrating disputes under the MSA – is not a serious and unsettled question, and
it does not impact public policy. Indeed, both this Court and the Supreme Court
declined to hear an interlocutory appeal of the Judge Manfredi’s 2006 order
compelling the Commonwealth to arbitrate rather than litigate the 2003 NPM
Adjustment dispute – an issue far more important than the manner in which
arbitration is conducted.
And third, PMs contend the claim will not be irreparably lost if not
immediately addressed. The Commonwealth admits it would have an opportunity,
10
after multistate arbitration, “to try to reargue” its single-state position. Appellee
OPMs’ Br. at 22 (quoting Appellant’s Br. at 4). The temporary, but ultimately
redressable, deprivation of a right is the opposite of an irreparable loss.
In reply, the Commonwealth reasserts that the trial court denied its
motion to compel single-state arbitration. A straightforward application of Section
7320(a)(1) of the UAA and Pa. R.A.P. 311(a)(8) gives this Court jurisdiction. In
addition, the Commonwealth responds it meets the three-part test for appeal of a
collateral order. According to the Commonwealth, PMs never clearly explain what
they think is the main cause of action. Regardless of whether the main cause of
action is the underlying merits of the Commonwealth’s pre-settlement claims, the
enforcement of the MSA as a whole, or the 2004 NPM Adjustment dispute, this
appeal regarding the nature of the arbitration forum concerns a separate and
collateral issue. As the issue implicates the Commonwealth’s sovereign rights, it is
too important to be denied review. Finally, the Commonwealth asserts litigating a
multistate arbitration is extremely expensive. Although the Commonwealth could
later challenge the arbitrator’s ruling, the time and money spent arbitrating in the
interim would be irreparably lost.
2. Analysis
a) Appeal of Interlocutory Orders as of Right
Rule 311(a)(8) of the Pennsylvania Rules of Appellate Procedure
governs interlocutory appeals as of right. It provides an appeal may be taken as of
right from an order which is made immediately appealable by another statute or
general rule. Pa. R.A.P. 311(a)(8). The statutory authorization is found in the
UAA. Specifically, Section 7320 of the UAA provides:
11
(a) General rule.--An appeal may be taken from:
(1) A court order denying an application to compel
arbitration made under section 7304 (relating to
proceedings to compel or stay arbitration).
(2) A court order granting an application to stay
arbitration made under section 7304(b).
(3) A court order confirming or denying confirmation of
an award.
(4) A court order modifying or correcting an award.
(5) A court order vacating an award without directing a
rehearing.
(6) A final judgment or decree of a court entered
pursuant to the provisions of this subchapter.
42 Pa. C.S. §7320 (emphasis added). The UAA provides no corollary for an
immediate appeal from an order compelling arbitration. Id.; Maleski v. Mutual
Fire, Marine & Inland Ins. Co., 633 A.2d 1143 (Pa. 1993).
It is well-settled that an order compelling arbitration is not a final,
appealable order. Maleski; Rosy v. Nat'l Grange Mut. Ins. Co., 771 A.2d 60 (Pa.
Super. 2001). When a trial court compels arbitration, the action is stayed pending
arbitration, and the trial court retains jurisdiction and supervision over the
arbitration. Maleski. The trial court does not address the merits of the parties’
claims but merely transfers their dispute to another forum in accordance with the
arbitration provision of the underlying contract. Fastuca v. L.W. Molnar &
Assocs., 950 A.2d 980 (Pa. Super. 2008), aff'd, 10 A.3d 1230 (Pa. 2011).
Consequently, an appellate court lacks jurisdiction to determine the merits.
Maleski.
12
As the Supreme Court explained, an order compelling arbitration is
not appealable because “the parties are not forced ‘out of court.’” Id. at 1145
(quoting Gardner v. Prudential Ins. Co., 481 A.2d 654, 655 (Pa. Super. 1984)).
“[A]n order compelling arbitration forces the parties into, rather than out of, court.”
Id.; accord Rosy.
Here, the trial court entered two orders: one denying the
Commonwealth’s motion to compel single-state arbitration, the other granting
PMs’ motion to compel multistate arbitration. Although the trial court technically
denied the Commonwealth’s motion, it did not force the parties out of court. See
Maleski. The trial court’s orders merely directed the manner of arbitration. The
end result is the matter is headed to arbitration. Thus, the trial court’s orders did
not trigger the right of appeal under Pa. R.A.P. 311(a)(8) and Section 7320 of the
UAA.
b) Collateral Orders
Next, we examine whether the trial court’s orders are appealable as
collateral orders. Pursuant to Rule 313(a) of the Pennsylvania Rules of Appellate
Procedure, “[a]n appeal may be taken as of right from a collateral order of an
administrative agency or lower court.” Rule 313(b) defines a “collateral order” as
one that is “[(1)] separable from and collateral to the main cause of action [(2)]
where the right involved is too important to be denied review and [(3)] the question
presented is such that if review is postponed until final judgment in the case, the
claim will be irreparably lost.” Pa. R.A.P. 313(b) (clause numbers added).
13
The collateral order doctrine must be narrowly construed, and all three
prongs must be met before collateral appellate review is allowed. Rae v. Pa.
Funeral Dirs. Ass'n, 977 A.2d 1121 (Pa. 2009); Mortg. Elec. Registration Sys., Inc.
v. Malehorn, 16 A.3d 1138 (Pa. Super. 2011). “Narrow application prevents the
collateral order rule from subsuming the fundamental general precept that only
final orders are appealable and from causing litigation to be interrupted and
delayed by piecemeal review of trial court decisions.” Brophy v. Phila. Gas Works
& Phila. Facilities Mgmt. Corp., 921 A.2d 80, 87 (Pa. Cmwlth. 2007). If “an order
satisfies Rule 313's three-pronged test,” we “may exercise appellate jurisdiction
where the order is not final.” Rae, 977 A.2d at 1125.
In determining whether an order is separable from and collateral to the
main cause of action, the Court must first decide whether review of the order
implicates the merits of the main cause of action. Commonwealth v. Wright, 78
A.3d 1070 (Pa. 2013). In other words, we examine “whether the issues appealed
can be addressed without analysis of the underlying claims on the merits.”
Brophy, 921 A.2d at 87. Where review of the order in question does not implicate
or affect the merits of the underlying dispute, it is separable from and collateral to
the main cause of action. Wright; see, e.g., Miravich v. Twp. of Exeter
(Pa. Cmwlth., No. 2066 C.D. 2013, filed July 24, 2014), 2014 WL 3697542 (the
main cause of action was review of a preliminary subdivision plan but the issue of
which tribunal should do so was separable therefrom).6
6
Section 414 of this Court's Internal Operating Procedures authorizes the citation of
unreported panel decisions issued after January 15, 2008, for their persuasive value, but not as
binding precedent. 210 Pa. Code §69.414.
14
As for the second prong, “[a]n issue is important if the interests that
would potentially go unprotected without immediate appellate review of that issue
are significant relative to the efficiency interests sought to be advanced by the final
judgment rule.” Geniviva v. Frisk, 725 A.2d 1209, 1213 (Pa. 1999) (quoting In re
Ford Motor Co., 110 F.3d 954, 959 (3d Cir. 1997)). “[I]t is not sufficient that the
issue be important to the particular parties. Rather[,] it must involve rights deeply
rooted in public policy going beyond the particular litigation at hand.” Id. at 1214.
Generally, the implication of due process concerns is too important to be denied
review. See Commonwealth v. Sabula, 46 A.3d 1287 (Pa. Super. 2012); see also
Miravich (holding a party’s due process right to have the case heard before a
tribunal having jurisdiction over the matter satisfied the second prong).
Finally, with regard to the third prong of the analysis, we ask
“whether a right is ‘adequately vindicable’ or ‘effectively reviewable.’” Geniviva,
725 A.2d at 1213 (quoting Digital Equip. Corp. v. Desktop Direct, Inc., 511 U.S.
863, 878-79 (1994)). This question “cannot be answered without a judgment about
the value interests that would be lost through rigorous application of a final
judgment requirement.” Id. For instance, the substantial cost a party would incur
in defending a claim may equate to an irreparable loss of a right to avoid the
burden entirely. See Pridgen v. Parker Hannifin Corp., 905 A.2d 422 (Pa. 2006);
Yorty v. PJM Interconnection, L.L.C., 79 A.3d 655 (Pa. Super. 2013).
As discussed above, an order compelling arbitration is generally not
appealable as an interlocutory order under Pa. R.A.P. 311(a)(8) and Section 7320
of the UAA. However, such an order may be appealable as a collateral order in
15
limited circumstances. See, e.g., Gilyard v. Redev. Auth. of Phila., 780 A.2d 793
(Pa. Cmwlth. 2001); U.S. Auto. Assoc. v. Shears, 692 A.2d 161 (Pa. Super. 1997)
(en banc) (USAA).
In USAA, our Superior Court found an order compelling arbitration
appealable as a collateral order under Rule 313. There, an automobile insurer for a
car registered in another state sought a declaratory judgment that the policy
provided no uninsured motorist (UM) benefits for a pedestrian injured by the
insured’s stolen car in Pennsylvania. The pedestrian moved to compel arbitration
of the dispute. The trial court determined the failure to provide coverage was
actionable as a tort, and it compelled arbitration of the dispute.
On appeal, the Superior Court determined that “without question, the
order to compel arbitration [was] collateral to the main cause of action - the
declaratory judgment action ....” Id. at 163. Further, “the question of whether a
court may order an out-of-state insurer to submit to arbitration on a newly-created
tort [was] an important one.” Id. Finally, the Court decided that “going forward
with the arbitration will result in the loss of appellate review, which means that
[insurer’s] claim under the declaratory judgment action will be irreparably lost.”
Id. Thus, the Superior Court concluded the order was appealable even though it
was interlocutory. Id.
Similarly, in Gilyard, we determined an appeal from a trial court order
remanding an eminent domain matter to an arbitrator was appealable as a collateral
order. The statute required that all appeals from the board of viewers be heard
16
only by a trial court, not by arbitration. The trial court’s remand order would have
mooted the statutory provision barring arbitration. Thus, we concluded the right
involved was too important to be denied review, and the claim would have been
irreparably lost.
Notwithstanding, unless all three prongs are met, we may not exercise
appellate jurisdiction. Rae; Mortg. Elec.; Rosy. For example, in Rosy, passengers
injured in a collision petitioned to compel the insurer of the vehicle in which they
were riding to arbitrate their claims. The Court determined an order compelling
arbitration was not an order separable from and collateral to the main cause of
action. Unlike in USAA, Rosy did not involve a new cause of action, and the
issues did not have wide-reaching impact that would otherwise evade review.
Unlike in Gilyard, the order compelling arbitration in Rosy did not have the
significant effect of mooting a statutory provision barring arbitration. Thus, the
Court quashed the appeal because the order to arbitrate did not meet the collateral
order test. Rosy.
Here, we conclude the Commonwealth satisfies the collateral order
test. First, with regard to separability, the main cause of action is the resolution of
the 2004 NPM Adjustment dispute under the terms of the MSA. The main cause
of action is not, as advanced by the Commonwealth, the underlying merits of the
Commonwealth’s 1997 claims against the OPMs. This is because the parties
settled the 1997 claims by entering into the MSA.
17
The 2004 NPM Adjustment dispute is essentially the same as the 2003
NPM Adjustment dispute, in which the parties agreed:
[T]here is a dispute between the Settling States and the
[PMs] regarding whether under the [MSA] the [PMs] are
entitled to a 2003 NPM Adjustment, including whether
the Settling States diligently enforced [q]ualifying
[s]tatutes during 2003 such that the 2003 NPM
Adjustment does not apply to their Allocated Payments
or to the corresponding MSA payments made by the
[SPMs].
R.R. at 200a (ARA). The trial court correctly identified the issue in the order
granting PMs’ motion to compel multistate arbitration as “whether [PMs] are
entitled to a 2004 NPM Adjustment, including the Commonwealth’s claim that it
diligently enforced its [q]ualifying [s]tatute in 2004.” Tr. Ct. Order, 11/25/14.
The trial court’s orders, specifying that Pennsylvania must participate
in multistate arbitration with other Settling States, can be separated from the main
cause of action. Significantly, the determination of this appeal regarding the
proper arbitration forum does not have the potential to decide any issues in the
substantive merits of the case, such as diligent enforcement. In other words, the
issue regarding the manner of arbitration may be addressed without any analysis of
the main cause of action.
As for the second prong, this appeal concerns whether and to what
extent the Commonwealth surrendered its sovereign rights to take part in litigation
over the NPM Adjustment dispute. The Commonwealth’s inherent sovereign
power to exercise jurisdiction over MSA disputes is implicated in this appeal. At
18
stake is the Commonwealth’s ability to proceed in single-state arbitration pursuant
to state law, including the independent selection of its own arbitrator and
negotiation of the arbitration terms. This implicates the Commonwealth’s due
process right to have the matter heard before the tribunal having jurisdiction. See
Miravich. By declining review at this juncture, the Commonwealth would be
forced to participate in multistate arbitration before it could reassert its right to
single-state arbitration. The issue is important not only to the parties of the MSA,
but to the public at large because the sovereign power in our government belongs
to the people. See Commonwealth ex rel. Attorney Gen., to Use of Sch. Dist. of
Patton v. Barnett, 48 A. 976 (Pa. 1901). Thus, the Commonwealth’s sovereign
rights implicate broad public policy interests requiring immediate resolution.
Finally, with regard to the third prong of the analysis, the
Commonwealth concedes it will have an opportunity, after multistate arbitration, to
reargue its single-state position. Appellant’s Br. at 4. Ordinarily, the temporary,
but ultimately redressable, deprivation of a right does not constitute an irreparable
loss. However, if this Court declines immediate review, the Commonwealth will
be forced to proceed in relatively more complex, expensive arbitration through to
its completion. In the process, it will exhaust substantial resources, and its right to
avoid the enhanced burden will be lost. See Pridgen. Should the Commonwealth
ultimately prevail on this issue in a later appeal, the victory will be hollow as it will
have already arbitrated its diligence in a multistate proceeding.
19
For these reasons, we conclude the trial court’s orders are collateral
orders under Pa. R.A.P. 313. Thus, this Court has appellate jurisdiction over the
Commonwealth’s appeal.
B. Multistate or Single-State Arbitration
1. Contentions
Turning to the merits of the appeal, the Commonwealth argues the
MSA does not provide for multistate arbitration to decide its diligence.7
Agreements to arbitrate must be strictly construed. Relying on Stolt-Nielsen S.A.
v. AnimalFeeds International Corp., 599 U.S. 662 (2010), the Commonwealth
argues it cannot be compelled to submit to multistate arbitration without a clear
statement in the agreement expressly authorizing multistate, consolidation or class
arbitration. There is no contractual basis in the MSA for multistate arbitration. In
fact, the Commonwealth asserts, PMs implicitly recognized there was no right to
compel multistate arbitration when they agreed to reduce the liability of States
found non-diligent to entice them to sign the ARA for the 2003 dispute.
Specifically, Section XI(c) of the MSA requires arbitration between
“two sides to the dispute.” According to the Commonwealth, the only dispute at
issue is whether the Commonwealth diligently enforced its qualifying statute in
2004. As to that dispute, there are only two sides: PMs and the Commonwealth.
The trial court erred in determining the dispute was between PMs on one side and
all Settling States on the other.
7
The Commonwealth no longer challenges that disputes related to the NPM Adjustment,
including the Commonwealth’s defense of diligent enforcement of its qualifying statue, are
subject to arbitration.
20
The Commonwealth maintains it is not on the same side as the other
Settling States for purposes of its diligence determination. The MSA’s reallocation
scheme pits state against state. This is because the more states that are found non-
diligent, the lesser the share of the NPM Adjustment for non-diligent States.
Conversely, the more states found diligent, the greater the burden for those found
non-diligent. As a result of this reallocation scheme, the Commonwealth’s
interests are directly opposed to the interests of the other States. Thus, the Settling
States are not on the “same side.”
PMs counter the simple text of the MSA’s arbitration provision and
the interconnectedness of the Settling States based on the MSA’s reallocation of
the NPM Adjustment demand multistate arbitration. As the trial court aptly
recognized, the dispute is whether PMs are entitled to an NPM Adjustment for
2004, regardless of whether a particular state diligently enforced its qualifying
statute during that year.
PMs explain, just as in 2003, the Independent Auditor refused to
apply the NPM Adjustment for 2004 based on the Settling States’ objections.
Indeed, all Settling States asked the Auditor to deny the NPM Adjustment for
2004. Thus, the core dispute is whether the Auditor should have reduced PMs’
MSA Payment for 2004. This dispute is more than whether a particular State can
successfully claim it diligently enforced its qualifying statute in 2004, which is
merely a subsidiary issue to the main dispute.
21
The main dispute that triggered the MSA’s arbitration provision is
whether PMs are entitled to an NPM Adjustment for 2004. This is clearly a
multistate dispute, and all Settling States are all on the same side with PMs on the
other side. This dispute necessarily embraces all subsidiary issues, including
whether a particular State diligently enforced its qualifying statute. Although
Settling States may have competing interests in the diligent enforcement issue,
they are squarely aligned on the overarching main issue.
As for the Commonwealth’s position that each State should have its
own separate diligence arbitration, PMs maintain this would produce an absurdly
complicated process for resolving all issues on the NPM Adjustment dispute. Such
a divided process would hinder resolution of common issues, such as discovery
procedures, the effect of bankruptcy of certain PMs, or the proper determination of
interest on NPM Adjustment amounts.
Moreover, PMs assert, the application of the diligent enforcement
defense affects all other States. Separate resolution of diligent enforcement
disputes would be fraught with inequitable and inconsistent results and would
likely result in the development of 52 sets of payment rules. States, affected by
another State’s diligent enforcement arbitration would have the right to intervene.
Intervention “would lead to an absurd result of a large number of separate
arbitrations, and separate arbitration panels, being required to resolve a single
year’s NPM Adjustment dispute that involves all of the same parties and same
issues.” Appellee OPM’s Br. at 32 (quoting Tr. Ct., Slip Op., 2/23/15, at 26.).
22
According to PMs, the bottom line is that the 2004 NPM Adjustment
is in dispute, regardless of the particular subsidiary issues that may arise out of or
relate to it. This calls for multistate arbitration of the entire dispute, not piecemeal
arbitration of its subparts. The reason is simple: a nationwide proceeding would
permit all parties to attend and fully and effectively participate; a single set of
discovery procedures would govern; and, common issues would be determined,
with participation of all parties. A multistate arbitration ensures fairness for all
parties. To hold otherwise is contrary to both the spirit and plain language of the
MSA.
Finally, contrary to the Commonwealth’s assertions, PMs maintain
they did not implicitly recognize there was no right to compel multistate diligence
arbitration. PMs concede they offered a financial incentive to the States to sign the
ARA for the sole purpose of moving the process along as many states, including
Pennsylvania fought arbitration.
The Commonwealth replies the only relevant dispute at this time is
whether it diligently enforced its qualifying statute. In this regard, the
Commonwealth does not share a “side” with any other Settling State. The general
dispute over whether PMs are entitled to a NPM Adjustment for 2004 was already
determined. What remains is whether the 2004 NPM Adjustment can be taken out
of the Commonwealth’s Allocated Payment, which depends on the
Commonwealth’s diligence.
23
The Commonwealth adds PMs’ concerns regarding single-state
arbitration are significantly overstated. Twenty-four Settling States settled their
diligence claims for 2004, and 17 others agreed to participate in multistate
arbitration. Only a handful of states, including Pennsylvania, seek single-state
arbitration.
2. Analysis
“[A]rbitration agreements are to be strictly construed and not
extended by implication.” Highmark Inc. v. Hosp. Service Ass'n of N.E. Pa., 785
A.2d 93, 98 (Pa. Super. 2001). In construing the language of an arbitration
provision, courts rely on the rules of contract construction. Quiles v. Fin. Exch.
Co., 879 A.2d 281 (Pa. Super. 2005); Highmark. Courts must adopt “an
interpretation that gives paramount importance to the intent of the parties and
ascribes the most reasonable, probable, and natural conduct to the parties.” Quiles,
879 A.2d at 287 (quoting Highmark, 785 A.2d at 98). “[T]he ultimate goal is to
ascertain and give effect to the intent of the parties as reasonably manifested by the
language of their written agreement.” Id. (citation omitted). Mindful of these
principles, we examine the MSA’s arbitration provision.
Section XI(c) of the MSA provides, with emphasis added:
Any dispute, controversy or claim arising out of or
relating to calculations performed by, or any
determinations made by, the Independent Auditor
(including, without limitation, any dispute concerning the
operation or application of any of the adjustments,
reductions, offsets, carry-forwards and allocations
described in subsection IX(j) or subsection XI(i)) shall be
submitted to binding arbitration before a panel of three
24
neutral arbitrators, each of whom shall be a former
Article III federal judge. ....
Subsection IX(j) specifically addresses application of the NPM Adjustment. When
such a dispute arises, “[e]ach of the two sides to the dispute shall select one
arbitrator. The two arbitrators so selected shall select the third arbitrator.” Section
XI(c) of the MSA (emphasis added).
In addition, Section IX(d)(2) of the MSA provides:
The NPM Adjustment ... shall apply to the Allocated
Payments of all Settling States, except ... [a] Settling
State’s Allocated Payment shall not be subject to an
NPM Adjustment ... if such Settling State continuously
had a [q]ualifying [s]tatute ... in full force and effect
during the entire calendar year immediately preceding the
year in which the payment in question is due, and
diligently enforced the provisions of such statute during
such entire calendar year ....
Settling States retain jurisdiction for purposes of implementing and
enforcing the MSA. See Sections II(p), VII(a), XVIII(n) & Ex. D of the MSA.
For example, Section II(p) defines the “court” as “the respective court in each
Settling State ....” In Section VII(a), the parties agreed the court shall have
jurisdiction for the purposes of implementing and enforcing the MSA. Section
XVIII(n) provides the MSA “shall be governed by the laws of the relevant Settling
State, without regard to the conflict of law rules of such Settling State.” Finally,
the parties agreed state-court jurisdiction extended to the subject matters asserted
in each Settling State’s originating lawsuits identified in Exhibit D to the MSA.
Section VII(a) & Ex. D of the MSA.
25
However, these provisions do not affect the arbitration of certain
disputes. The MSA specifically excepts arbitral disputes, namely disputes relating
to the Independent Auditor’s calculations or determinations regarding the NPM
Adjustment, from state-court litigation. Section VII(a) of the MSA (state-court
litigation of MSA disputes is required “except as provided in ... §XI(c) ....”).
Moreover, the issue of whether the NPM Adjustment disputes must be
arbitrated was previously settled in connection with the 2003 dispute. Thus, in
2006, the Commonwealth filed an action in the trial court seeking a declaration
that it diligently enforced its qualifying statute in 2003, and it was entitled to its
full allocable share of the MSA Payment for that year. PMs responded by filing a
motion to compel arbitration, arguing the question of diligence was subject to
arbitration per the terms of the MSA and should be resolved by a uniform set of
rules. Judge Manfredi agreed. He determined the dispute was subject to
arbitration under the MSA because it concerned the operation and application of
the NPM Adjustment. He therefore granted PMs’ motion and dismissed the
Commonwealth’s motion.
In reaching his conclusion, Judge Manfredi relied on the terms of the
MSA, which he observed were the result of “lengthy negotiations between
sophisticated parties.” R.R. at 197a. He opined:
[W]hether there was diligent enforcement of the
[q]ualifying [s]tatute is a dispute which the courts of the
various settling states, generally, and this court, in
particular, are most qualified to address. In an arbitration
proceeding under the MSA, as many as 52 separate
‘Settling States’, with competing interests, will be
compelled to join in the selection of a single arbitrator, to
26
sit with an arbitrator selected by the PMs, who share a
unity of interest, and a third arbitrator selected by the first
two. Moreover, the issue of ‘diligence’ in enforcement of
the [q]ualifying [s]tatute is very much a local one. The
vagaries of population size and distribution, geography,
market penetration by NPMs, to name but a few factors,
must be taken into account in determining whether a state
has been diligent. Simply put: that which constitutes
diligence in our sister state of North Dakota will
assuredly be far different from diligence in our neighbor
New York.
That being said, the court reluctantly finds that the
scale nonetheless tips in favor of arbitration. As noted,
these were highly sophisticated parties, with the
assistance and counsel of armies of highly paid lawyers.
Under the circumstances presented, the hereinbefore
cited legal authorities compel the court to leave the
parties to their bargain, however, flawed and ill
conceived it may be. ....
R.R. at 198a (emphasis added). Although Judge Manfredi questioned the wisdom
of multistate arbitration, he nevertheless determined that is how the parties agreed
to resolve NPM Adjustment disputes. Although Judge Manfredi’s comments
regarding the multistate arbitration are non-binding dicta, his interpretation of the
MSA is nevertheless persuasive.
Here, as in 2003, the 2004 dispute arises out of the determinations
made by the Independent Auditor regarding that year’s NPM Adjustment. More
particularly, the dispute arose when the Independent Auditor refused to apply the
NPM Adjustment at the request of the Settling States. Section XI(c) of the MSA,
which mandates arbitration, clearly extends to “[a]ny dispute, controversy or claim
arising out of or relating to ... any determinations made by, the Independent
Auditor,” including the NPM Adjustment.
27
As to the NPM Adjustment dispute, there are “two sides” to the
dispute. On one side, PMs contend they are entitled to an NPM Adjustment; on the
other side, the Settling States oppose application of the NPM Adjustment.
The Commonwealth concedes two preconditions for application of the
NPM Adjustment were met for 2004 -- the PMs lost market share and the losses
were attributable to market disadvantages as a result of the MSA. According to the
Commonwealth, all that remains to be determined is whether a particular Settling
State diligently enforced its qualifying statute, which it argues is a state-specific
determination. In this regard, the Commonwealth claims it is not on the same side
as the other Settling States. It argues the Independent Auditor’s post-diligence
calculation of the NPM Adjustment is not a significant part of the dispute because
the mathematical formula is set forth in the MSA.
The Commonwealth’s argument is not persuasive. The diligence
dispute is just one part of the overall NPM Adjustment dispute. See
Commonwealth ex rel. Kane v. Philip Morris USA, Inc., 114 A.3d 37 (Pa. Cmwlth.
2015) (en banc) (explaining operation of diligence exception to NPM Adjustment
and the MSA’s Reallocation Provision). The MSA’s arbitration provision is
broadly written to encompass any controversy arising out of or related to the
Independent Auditor’s determination and calculation of the NPM Adjustment.
Section XI(c) of the MSA. By its own terms, the clause must be read broadly to
include all claims related to such determinations and calculations. Whether a
particular State diligently enforced its qualifying statute arises from and relates to
the Independent Auditor’s NPM Adjustment determination that PMs are entitled to
28
an NPM Adjustment and the calculation as to how much. All of the Settling States
that did not settle the 2004 NPM Adjustment dispute share the same interest in
upholding the Independent Auditor’s refusal to apply the 2004 NPM Adjustment.
Although we recognize that some Settling States may have competing
interests as a result of the Reallocation Provision, this does not alter the fact that
the non-settling Settling States are squarely aligned on the same side of the dispute
over the Independent Auditor’s determination and calculation of the 2004 NPM
Adjustment. Intertwined within this dispute is each Settling State’s diligent
enforcement.
Moreover, the structure of the MSA supports the interpretation that
the diligence issue cannot be treated as a separate, stand-alone dispute.
Application of the diligent enforcement defense for any Settling State affects all
other Settling States. As we recently explained in Philip Morris with regard to the
Reallocation Provision of the MSA, “as the number of diligent states increase, the
burden on non-diligent states increases. This is because an increase in the number
of diligent states means that there is more adjustment reallocated among a smaller
group.” Id. at 44. Although Section IX(d)(2) provides the mathematical formula,
the Independent Auditor cannot calculate the NPM Adjustment without knowing
the diligence determinations of all Settling States. Because Settling States have an
interest in the diligence determinations of other States, the issue of diligence as it
relates to the calculation of the NPM Adjustment is a multistate concern, not just a
State-specific issue. As the trial court aptly observed, “because of the
interconnectedness of the State’s diligent enforcement determinations, a single
29
decision maker has the best chances of producing consistent awards” for all
interested states. Tr. Ct., Slip Op., at 25. Indeed, other courts grappling with this
very issue have reached this same conclusion.8
Although we recognize the challenges presented by multistate
arbitration, we believe greater complications would occur by allowing fragmented
single-state arbitration. As the trial court noted, allowing each Settling State to
have its own diligence separately arbitrated would produce “an absurdly
complicated process for resolving all the issues that NPM Adjustments present.”
Tr. Ct., Slip Op., at 25.
More particularly, the process would entail separate proceedings
before separate arbitration panels in various locations, at varying speeds, to
determine each State’s diligence for the purpose of calculating the NPM
Adjustment. “And, because ... every State has an interest in the decision on
8
See Indiana, ex rel. Carter v. Philip Morris Tobacco Co., 879 N.E.2d 1212 (Ind. Ct.
App. 2008) (holding this nationwide effect creates the need for a single decision-maker to apply
a single set of rules equally to each Settling State); Maryland v. Philip Morris Inc., 944 A.2d
1167, 1180 (Md. Ct. Spec. App. 2008) (reallocation makes having a single decision-maker
vitally important); New Mexico ex rel. King v. Am. Tobacco Co., 194 P.3d 749 (N.M. Ct. App.
2008) (finding a compelling logic to having the disputes handled by a single arbitration panel,
guided by one clearly articulated set of rules, where all parties can fully and effectively
participate); New York v. Philip Morris Inc., 869 N.E.2d 636 (N.Y. 2007) (a single panel can be
guided by one clearly articulated set of rules that apply universally in a process where all parties
can fully and effectively participate); but cf. Missouri v. Am. Tobacco Co. (Mo. Ct. App., No.
ED 101542, filed September 22, 2015) 2015 WL 5576135 (nationwide arbitration was not
intended by the parties in drafting the MSA); Montana ex rel. Bullock v. Philip Morris, Inc., 217
P.3d 475 (Mont. 2009) (PMs capable of negotiating a nationwide forum requirement, but no such
language appears in the MSA).
30
diligence for every other State, each of ... [the non-settling] States would need to
be able to intervene in every other State’s proceeding ... to protect itself.” Id. at 26
(internal quotation and citation omitted). “This would lead to an absurd result of a
large number of separate arbitrations, and separate arbitration panels, being
required to resolve a single year’s NPM Adjustment dispute that involves all of the
same parties and issues.” Id. The obvious disadvantage of separate, parallel
proceedings is the risk of inconsistent results.9 Such complications can be readily
avoided by a nationwide arbitration involving all interested parties, as envisioned
by the MSA. Submitting the dispute to a single nationwide arbitration panel,
chosen by the Settling States and PMs, and guided by a uniform set of rules,
affords all interested parties the opportunity to be heard on a level playing field.
Nevertheless, relying on Stolt-Nielsen, the Commonwealth maintains
it cannot be compelled to submit to multistate arbitration without express
authorization in the MSA. In Stolt-Nielsen, petitioners challenged the submission
of their antitrust claims to class arbitration. The parties’ arbitration clause was
silent with respect to class arbitration. The parties stipulated there was no
agreement authorizing class proceedings. Because of the stipulation, an intention
to authorize class arbitration could not be inferred from the arbitration agreement.
As a result, the U.S. Supreme Court determined the parties’ agreement did not
9
See Alabama ex rel. Riley v. Lorillard Tobacco Co., 1 So.3d 1, 14 (Ala. 2008)
(“conducting 52 separate arbitration proceedings would likely be fraught with the same type of
inequitable and inconsistent results that would arise were the individual state courts to resolve
this dispute.”); Connecticut v. Philip Morris, Inc., 905 A.2d 42, 47 (Conn. 2006) (“If
interpretations of such rules were left exclusively to the courts of the individual settling states ...
fifty-two different sets of payment rules might emerge ....”).
31
require class arbitration. Id. Without agreement, the parties could not be
compelled to submit their dispute to class arbitration. Id.; see Oxford Health Plans
LLC v. Sutter, __ U.S. __, 133 S.Ct. 2064 (2013).
However, the Commonwealth’s reliance on Stolt-Nielsen is
misplaced. Significantly, there is no stipulation that the MSA precludes multistate
arbitration. Although the MSA does not expressly specify multistate arbitration, a
reasonable interpretation of the MSA is that the same arbitration panel selected to
determine the parties’ NPM Adjustment dispute will determine all issues related
thereto, including the Settling States’ diligent enforcement. Unlike in Stolt-
Nielsen, the parties’ intention to resolve all issues relating to and arising from the
NPM Adjustment dispute by multistate arbitration can be inferred from the MSA.
Moreover, this case does not involve a class action arbitration as in
Stolt-Nielsen. In a class action, a tribunal adjudicates the rights of absent or
unnamed parties based on evidence common to the class. See id. There are no
absent or unnamed parties because each Settling State participates as a party.
In the same way, the Commonwealth argues it cannot be compelled to
participate in “consolidated” arbitration without its express consent. However, we
are not dealing with a court-ordered consolidation of multiple, separate
arbitrations. Rather, the trial court compelled the Commonwealth to participate in
the single, nationwide arbitration of the 2004 NPM Adjustment dispute and all
issues related to and arising therefrom. Tr. Ct., Slip Op., at 29. More particularly,
32
the trial court ordered “the Commonwealth to participate in a single arbitration,
under a single contract, regarding a single dispute.” Id. at 28.
Even if the trial court’s opinion could be viewed as consolidating
“separate” arbitrations, arbitrations may be consolidated where the parties agreed
to do so. See Certain Underwriters at Lloyd's v. Century Indem. Co. (E.D.Pa., No.
CIV.A.05-2809, filed August 1, 2005) 2005 WL 1941652. Such agreements may
be express or implied. Id.; see Children’s Hosp. of Phila. v. Am. Arbitration
Ass’n, 331 A.2d 848 (Pa. Super. 1974) (consent implied where multiple contracts
contained identical arbitration clauses and the two arbitrations involved the
allocation of a potentially shared responsibility). In this case, all parties to the
MSA agreed to the arbitration of the NPM Adjustment disputes. The MSA evinces
an intention that one nationwide arbitration panel will resolve such disputes.
Finally, with regard to the Commonwealth’s argument that the ARA
and multistate arbitration process used for the 2003 NPM Adjustment dispute did
not set the precedent for disputes arising thereafter, we agree. The ARA dealt with
the manner of arbitration for 2003 only. The parties agreed to multistate
arbitration, and they did not fully litigate the manner of arbitration. Although the
ARA does not direct the manner of arbitration for 2004 or beyond, the MSA does.
Both the structure and reasonable interpretation of the MSA require a uniform
determination by a single, nationwide arbitration panel.
33
C. Sovereignty
1. Contentions
Next the Commonwealth maintains the use of a multistate process
undermines its sovereign rights. The MSA contains numerous provisions designed
to protect the sovereign rights of each Settling State. The trial court’s
determination that the MSA requires multistate arbitration is at odds with the
recognition of sovereignty elsewhere in the MSA. The Commonwealth gave up
only narrow slices of its sovereignty. The Court must protect those rights it did not
relinquish.
The Commonwealth reiterates its position that it agreed to arbitrate
certain matters along with other parties only if they were on the same side of the
dispute. The Commonwealth is not on the same side as other Settling States for
purposes of the diligence determination. Consequently, it should not have to
mutually choose one arbitrator with other States as though they were on the same
side.
According to the Commonwealth, multistate arbitration puts the PMs
at an unfair advantage as they will be before the same panel of arbitrators on
multiple occasions, whereas the Commonwealth will be there only once. Further,
use of a multistate arbitration panel creates prejudice in terms of hearing time. In
the 2003 arbitration, each state received only 11 hours to make their diligence case
before the arbitration panel. This was because the use of one arbitration panel to
hear 15 different cases necessitated shorter hearing times.
34
Finally, the Commonwealth asserts, Pennsylvania’s law, TSAA, is
different from other States’ qualifying statutes.10 Instead of focusing on each
State’s laws, efforts and particular circumstances, a multistate arbitration panel is
placed in a situation where comparisons are inherent. It serves little purpose
comparing and contrasting State’s enforcement efforts. Indeed, comparisons are
inappropriate when each State’s diligence is analyzed according to that State’s
particular circumstances. Yet, in multistate arbitration, comparisons between
States are inevitable and inherently unfair.
PMs counter the relevant issue is what Section XI(c) of the MSA
means in the context of a dispute over the Independent Auditor’s determination
regarding the NPM Adjustment. The arbitration provision dictates that NPM
Adjustment disputes and all issues related thereto be decided by arbitration. All
parties, including Pennsylvania, agreed to these terms. Although other provisions
state that the MSA is governed by the laws of the relevant Settling State, the
arbitration for payment-related disputes is not one of them. See Sections VII &
XI(c) of the MSA.
By invoking sovereignty, the Commonwealth disregards the
provisions of the MSA to which it voluntarily agreed, and it argues a different,
special set of rules should apply to it. However, PMs advance, the
Commonwealth’s sovereignty is respected when the courts follow the clear terms
of the MSA and reasonable interpretation of those terms. Moreover, no general
10
The Commonwealth does not explain how the TSAA differs from other States’
qualifying statutes.
35
state sovereignty principle trumps the express language to which the
Commonwealth agreed. Although there may be some difference between States’
qualifying statutes, all are based on the MSA’s model qualifying statute.
Like any other party to a contract, the Commonwealth is bound by
and should be held to its agreement. Multistate arbitration is the only reasonable
interpretation of the MSA based on its plain terms and structure of the MSA.
The Commonwealth replies it is not asking the Court to change the
language of the contract to protect its sovereignty. Rather, it asks this Court to
enforce the plain meaning of “[e]ach side of the two sides to the dispute.” Section
XI(c) of the MSA.
2. Analysis
The MSA recognizes and protects the Settling States’ sovereign rights
in numerous respects. Specifically, under the MSA, each State designates its own
state court, which is responsible for implementing and enforcing the MSA with
regard to disputes within that State. See Sections II(p), VII(a), XVIII(n) & Ex. D
of the MSA. And each of those state courts is to look to its own state law. See id.
The effect is that no Settling State is subject to the courts or the law of a sister
State. Further, Section XVIII(j) of the MSA requires that any amendment to the
MSA must be executed by all States affected by the amendment. See Philip
Morris.
As discussed above, the parties did not agree to resolve all disputes in
state court. The MSA’s arbitration provision dictates that NPM Adjustment
36
disputes, and all issues arising from and related thereto, are to be decided by
arbitration. Section XI(c) of the MSA; see Section VII(a) of the MSA.
Specifically, Section XI(c) of the MSA requires “[a]ny dispute, controversy, or
claim arising out of or relating to” the payment determinations or calculations
“made by ... the Independent Auditor” must be arbitrated, including “any dispute
concerning the operation or application of any of the adjustments.” Section XI(c)
further provides: “Each of the two sides to the dispute shall select one arbitrator.”
Id. As the trial court aptly noted, “it is the plain text of that provision that makes
the nature of the arbitration dependent on the nature of the dispute, not some state-
by-state default.” Tr. Ct., Slip Op., at 34. The nature of the dispute is whether
PMs are entitled to an NPM Adjustment for 2004, not merely one State’s diligent
enforcement defense for that year. Id. As to this dispute, there are two sides –
Settling States on one, PMs on the other. Thus, multistate arbitration is the only
reasonable interpretation of the MSA’s terms.
Contrary to the Commonwealth’s assertions, its sovereign rights are
not undermined by the application of multistate arbitration. The Commonwealth
voluntarily agreed to the terms of the MSA after “lengthy negotiations between
sophisticated parties.” R.R. at 197a. Its sovereignty is respected when the courts
follow the clear terms of the MSA and a reasonable interpretation of them.
IV. Conclusion
In sum, this Court has jurisdiction over the Commonwealth’s appeal
of the trial court’s orders as they are collateral orders. As to the merits of the
Commonwealth’s appeal, we conclude multistate arbitration of the NPM
37
Adjustment dispute, which includes whether the Commonwealth diligently
enforced its qualifying statute, is the only reasonable interpretation of the MSA.
We reject the Commonwealth’s sovereign rights argument because the
Commonwealth willingly agreed to the terms of the MSA and a reasonable
interpretation of them.
Accordingly, we affirm the orders of the trial court compelling the
Commonwealth to participate in multistate arbitration.
ROBERT SIMPSON, Judge
Judges Cohn Jubelirer and McCullough did not participate in the decision in this
case.
38
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Commonwealth of Pennsylvania :
By Kathleen G. Kane, Attorney General, :
Appellant :
:
v. : No. 2422 C.D. 2014
:
Philip Morris, Inc.; RJ Reynolds :
Tobacco Company; Brown & :
Williamson Tobacco Corporation; :
B.A.T. Industries, PLC; The American :
Tobacco Company, Inc.; C/O Brown & :
Williamson Tobacco Corporation; :
Lorillard Tobacco Company; Liggett :
Group, Inc.; United States Tobacco :
Company; The Tobacco Institute, Inc.; :
The Council For Tobacco Research :
U.S.A., Inc.; Smokeless Tobacco :
Council, Inc., and Hill & Knowlton, :
Inc. :
ORDER
AND NOW, this 18th day of November, 2015, the orders of the Court
of Common Pleas of Philadelphia County are AFFIRMED.
ROBERT SIMPSON, Judge