State v. Philip Morris, Inc., 123 A.3d 660

Background

Maryland and 51 other jurisdictions entered the 1998 Master Settlement Agreement (MSA) with cigarette manufacturers; MSA payments by Participating Manufacturers (PMs) are calculated nationally and allocated to states.
The NPM Adjustment reduces PMs’ nationwide payment if PM market share losses to Non-Participating Manufacturers (NPMs) meet certain criteria; a state that had a Qualifying Statute and "diligently enforced" it in the relevant year is exempt from having its allocable share reduced.
PMs sought to apply the 2003 NPM Adjustment; the Independent Auditor deferred application pending arbitration over whether states had diligently enforced their Qualifying Statutes.
During multi-state arbitration, PMs and 22 states (Term Sheet States) settled (Term Sheet). The arbitration Panel issued a Partial Settlement Award adopting a pro rata judgment-reduction method to reallocate the 2003 NPM Adjustment among Non-Term Sheet States before determining diligence for all contested Term Sheet States.
The Panel later held individual hearings and found Maryland non-diligent for 2003. Maryland moved in state court to vacate the Partial Settlement Award and the diligence award and to compel a Maryland-specific arbitration for 2004; the circuit court denied relief. Maryland appealed.

Issues

Issue	Plaintiff's Argument (Maryland)	Defendant's Argument (PMs)	Held
Whether the Panel exceeded its powers by approving the Term Sheet effect and reallocating the 2003 NPM Adjustment (Partial Settlement Award) before determining diligence for all contested states	The Panel unlawfully altered MSA reallocation procedure and ratified a side agreement without consent of all affected states, thereby amending the MSA and prejudicing Maryland	The Panel had jurisdiction to interpret MSA and lawfully adopted a pro rata reduction; settlements shouldn’t be blocked by non-settling parties and federal arbitration policy supports Panel’s approach	Reversed: Panel exceeded its powers by reallocating before resolving diligence for contested Term Sheet States; Partial Settlement Award vacated as inconsistent with MSA; remanded directing Auditor to treat contested Term Sheet States as non-diligent for 2003
Whether the Panel’s finding that Maryland was non-diligent for 2003 should be vacated for refusal to consider material evidence or procedural unfairness	The Panel refused to hear comparative evidence about contested Term Sheet States and thus denied Maryland a full and fair hearing	The Panel applied an objective, state-specific standard and Maryland never asked for a comparative proceeding; no prejudice shown	Affirmed: No vacatur — Panel did not improperly refuse material evidence; factual findings supported non-diligence determination
Whether Maryland was entitled to a state-specific arbitration for 2004 rather than a multi-state arbitration	Maryland urged a state-specific arbitration would be fairer and allow focused adjudication of Maryland’s enforcement	PMs (and prior precedent) argued MSA requires a single, nationwide arbitration because diligence determinations affect all states and allocation is unitary	Denied: Multi-state (nationwide) arbitration required to preserve uniformity and bind all affected Settling States
Applicable standard of judicial review for vacatur of FAA-governed arbitration awards before state courts	Maryland: Maryland law (MUAA/CJP) governs review and is applied de novo on legal questions	PMs: FAA vacatur standards apply and preempt broader state review	Court: Maryland law applies to vacatur; appellate review of circuit court’s decision is de novo; factual findings not clearly erroneous

Key Cases Cited

United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29 (arbitrator may interpret contract but may not ignore plain language)
Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (state-law routes to review may provide different scope than FAA)
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (appellate review of district court’s confirmation/vacatur of arbitration award: mixed approach to facts and law)
Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (FAA does not preempt state procedural law absent conflict)
Snyder v. Berliner Constr. Co., 79 Md. App. 29 (arbitrators exceed powers when award irrational or founded on lack of jurisdiction)
Mandl v. Bailey, 159 Md. App. 64 (deferential treatment of arbitrator factual findings; vacatur standards)
Downey v. Sharp, 428 Md. 249 (awards showing manifest disregard or irrationality may be overturned)
Com. ex rel. Kane v. Philip Morris USA, Inc., 114 A.3d 37 (Pa. Commw. Ct.) (panel cannot treat settled states as diligent absent diligence determinations)
Philip Morris Inc. v. State, 179 Md. App. 140 (prior Maryland appellate decision recognizing need for nationwide arbitration and explaining MSA allocation structure)