Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

People v. Lorillard Tobacco Co.

March 30, 2007

THE PEOPLE OF THE STATE OF ILLINOIS, PLAINTIFF-APPELLANT,
v.
LORILLARD TOBACCO COMPANY; PHILIP MORRIS USA INC.; R.J. REYNOLDS TOBACCO COMPANY, INC.; COMMONWEALTH BRANDS, INC., DAUGHTERS AND RYAN, INC.; FARMERS TOBACCO COMPANY OF CYNTHIANA, INC.; HOUSE OF PRINCE A/S; JAPAN TOBACCO INTERNATIONAL U.S.A., INC.; KING MAKER MARKETING, INC.; KRETEK INTERNATIONAL, INC.; LIBERTY BRANDS, LLC; LIGGETT GROUP LLC; P.T. DJARUM; PETER STOKKEBYE TOBAKSFABRIK A/S; SANTA FE NATURAL TOBACCO COMPANY, INC.; SHERMAN 1400 BROADWAY N.Y.C., INC.; TOP TOBACCO, L.P.; VIBO CORPORATION, D/B/A GENERAL TOBACCO; VIRGINIA CAROLINA CORPORATION, INC.; AND VON EICKEN GROUP, DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County Honorable Dennis J. Burke, Judge Presiding.

The opinion of the court was delivered by: Justice Gallagher

The State of Illinois (Illinois) filed this interlocutory appeal, pursuant to Supreme Court Rule 307(a)(1) (188 Ill. 2d R. 307(a)(1)), from an order of the circuit court of Cook County, which, among other things, compelled arbitration of the instant dispute between the parties. We affirm and remand.

BACKGROUND

Several years ago, Illinois, as well as other states and jurisdictions, filed suit against several tobacco manufacturers based upon alleged wrongdoing in the marketing and advertising of their cigarettes. Illinois alleged, inter alia, that the manufacturers had defrauded the public by concealing evidence of smoking's adverse health effects and by affirmatively misleading the public with medical research reports. Illinois sought to recover the billions it had spent on health care for its residents with smoking-related illnesses.

On November 23, 1998, the defendant tobacco manufacturers entered into a Master Settlement Agreement (MSA) with 46 states,*fn1 including Illinois, as well as the District of Columbia, Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, and Guam. Although not all states, these settling entities are referred to as Settling States in the MSA. The Settling States agreed to dismiss their lawsuits and release past and future claims in exchange for annual payments from the tobacco manufacturers, as well as several other concessions, including marketing and advertising restrictions. The instant case involves the annual payment due for the calendar year 2003.

Originally, only the four largest tobacco companies, defendants Philip Morris, Inc. (Philip Morris), R.J. Reynolds Tobacco Co., Inc. (Reynolds), Lorillard Tobacco Co., Inc. (Lorillard), and a fourth company, Brown & Williamson, entered into the MSA. In 2004, Brown & Williamson merged with defendant Reynolds. As the first tobacco companies to enter into the MSA, Philip Morris, Reynolds, and Lorillard became known as "original participating manufacturers" (OPMs). The MSA permitted other tobacco companies to join into the settlement in order to avoid future litigation. Many did so and became known as "subsequent participating manufacturers" (SPMs). The remaining defendants in this case, Commonwealth Brands, Inc.; Daughters and Ryan, Inc.; Farmers Tobacco Co. of Cynthiana, Inc.; House of Prince A/S; Japan Tobacco International U.S.A., Inc.; King Maker Marketing, Inc.; Kretek International, Inc.; Liberty Brands, LLC; Liggett Group LLC; P.T. Djarum; Peter Stokkebye Tobaksfabrik A/S; Santa Fe Natural Tobacco Co., Inc.; Sherman 1400 Broadway N.Y.C., Inc.; Top Tobacco, L.P.; Vibo Corporation, d/b/a General Tobacco; Virginia Carolina Corp., Inc.; and von Eicken Group are SPMs. Collectively, the OPMs and SPMs are referred to as participating manufacturers (PMS). Those tobacco companies that did not enter into the settlement are known as non-participating manufacturers (NPMs).

The MSA requires the PMS to make annual payments that are intended to help the Settling States achieve "significant funding for the advancement of public health measures" and "the implementation of important tobacco-related public health measures." The PMS do not make payments directly to individual Settling States. Rather, each PM is required to make a single, nationwide payment into an escrow account on April 15 of each year, which is then allocated among the Settling States. The PMS' payment obligation is calculated and determined annually by an "Independent Auditor." The MSA provides that "[t]he Independent Auditor shall be a major, nationally recognized, certified public accounting firm." Currently, the Independent Auditor is PricewaterhouseCoopers.

The MSA contains a comprehensive formula for the Independent Auditor to use in determining the PMS' annual payment obligation. The starting point is the aggregate base payment obligation for all OPMs set forth in the MSA. This amount is then subject to several adjustments. One of these adjustments is the "Non-Participating Manufacturer Adjustment" (NPM Adjustment), which is at issue in the present case.

As noted earlier, NPMs are tobacco companies that have not joined the MSA. Therefore, these NPMs -- unlike their PM competitors -- are not subject to the MSA's marketing restrictions and payment obligations. The drafters of the MSA recognized that the marketing restrictions and payment obligations could put the PMS at a competitive disadvantage relative to the NPMs and potentially cause PMS to lose market share to NPMs. Thus, the NPM adjustment attempts to level the playing field by reducing the annual payment obligations of PMS if, collectively, it is proven that they actually lost market share to NPMs. The threshold question is whether the PMS experienced a collective loss of United States market share of more than 2%, relative to their combined market share in 1997 (the year before the MSA went into effect). Without such a loss, the analysis ends and the PMS are not entitled to an NPM Adjustment. In the instant case, however, the parties do not dispute that the PMS experienced such a loss.

Where the PMS do experience an aggregate market share loss of more than 2%, the next step is for an economic consulting firm (the Firm) to determine "whether the disadvantages experienced as a result of the provisions of [the MSA] were a significant factor contributing to the Market Share Loss." If the PMS experience the requisite aggregate market share loss and the Firm also concludes that the MSA was a "significant factor" contributing to that loss, the MSA provides that the NPM adjustment shall apply.

Even if an NPM Adjustment is otherwise potentially available to PMS, the MSA contains a way for a Settling State to avoid a reduction in payments. Specifically, the MSA provides that "[a] Settling State's Allocated Payment shall not be subject to an NPM Adjustment * * * if such Settling State continuously had a Qualifying Statute * * * 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." (Emphasis added.) MSA §IX(d)(2)(B). The MSA additionally provides that "[t]he aggregate amount of the NPM Adjustments that would have applied to the Allocated Payments of those Settling States that are not subject to an NPM Adjustment * * * shall be reallocated among all other Settling States pro rata in proportion to their respective Allocable Shares * * * and such other Settling States' Allocated Payments shall be further reduced accordingly." MSA §IX(d)(2)(C).

The Present Dispute

The present dispute concerns the Independent Auditor's decision not to apply an NPM Adjustment to the PMS' April 17, 2006, annual payments. This litigation had its origins in early 2004, when certain PMS requested that the Independent Auditor offset the amount of the 2003 NPM Adjustment.*fn2 Certain SPMs did file suit in Connecticut and New York to compel arbitration. The courts in those states ultimately determined that the disputes were arbitrable under the MSA. See State v. Philip Morris Inc., 279 Conn. 785, 905 A.2d 42 (2006); State v. Philip Morris Inc., 30 A.D.3d 26, 32-33, 813 N.Y.S.2d 71, 76 (2006), appeal allowed, 7 N.Y.3d 716, 859 N.E.2d 921, 826 N.Y.S.2d 181 (2006). The dispute regarding the NPM Adjustment continued into 2006 and resulted in this litigation.

Under the MSA, each year, the Independent Auditor collects information from the parties. MSA §XI(d)(1). The Independent Auditor must then issue its "Preliminary Calculation" of the amounts due from the PMS at least 40 days before the April payment date. MSA §XI(d)(2). Specifically, the MSA requires the Independent Auditor to deliver to all the parties "detailed Preliminary Calculations *** of the amount due from each [PM] *** showing all applicable *** adjustments *** and setting forth all the information on which the Independent Auditor relied in preparing such Preliminary Calculations." MSA §XI(d)(2). Any party that disagrees with "any aspect" of the Independent Auditor's Preliminary Calculations may serve notice of its objections upon the other parties. MSA §XI(d)(3). The Independent Auditor reviews any objections and then issues a "Final ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.