People v. Lorillard Tobacco Company

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State: Illinois

Court: 1st District Appellate

Docket No: 1-06-2326 Rel

Case Date: 03/30/2007

Preview:FIFTH DIVISION March 30, 2007

No. 1-06-2326 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.

JUSTICE GALLAGHER delivered the opinion of the court: 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.

1-06-2326 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,1 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

1

The tobacco companies and four states, Florida, Minnesota, Mississippi, and Texas,

entered into separate individual settlement agreements. 2

1-06-2326 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 nonparticipating 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.

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1-06-2326 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

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