WRIGHT, J.
This appeal arises from a Master Settlement Agreement ("MSA") between appellees, who are numerous cigarette manufacturers (the "Participating Manufacturers" or "PMs"),
During the arbitration of the 2003 NPM Adjustment dispute, the PMs reached a settlement ("Term Sheet" agreement) with 22 states (the "Term Sheet States") before it was determined whether those states were diligent or non-diligent. Maryland and the other "Non-Term Sheet States" were also offered the settlement, but declined to join. In light of this partial settlement, the arbitrators (a "Panel" of three former federal judges) were tasked with resolving how the 2003 NPM Adjustment should be allocated to any Non-Term Sheet States who were found non-diligent. On March 12, 2013, the Panel interpreted the MSA's language and concluded that the NPM Adjustment should be allocated post-settlement pursuant to the "pro rata" method of judgment reduction.
After holding individual evidentiary hearings for the Non-Term Sheet States, whose diligence for 2003 was still contested, the Panel concluded that Maryland and five other Non-Term Sheet States were non-diligent and thus subject to the 2003 NPM Adjustment. On September 11, 2013, after assessing Maryland's enforcement record for 2003, the Panel found that Maryland lacked "a culture of compliance" and that its efforts "fell short of its efforts in earlier years."
Maryland filed motions in the Circuit Court for Baltimore City to vacate the Panel's awards for the 2003 NPM Adjustment that adopted the pro rata judgment-reduction method and that found Maryland to be non-diligent. On November 12, 2013, Maryland also filed a motion to compel the PMs to arbitrate Maryland's diligence for 2004 in a state-specific arbitration, rather than as part of a multi-state arbitration of
We have rephrased Maryland's questions as follows:
For the reasons that follow, we answer only the first question in the affirmative, and reverse the circuit court's judgment regarding that issue. Accordingly, we remand the case for further proceedings not inconsistent with this opinion.
In 1998, Maryland and the 51 other Settling States entered the MSA, thus settling their claims for "wrongful marketing and advertising of cigarettes, as well as damages based upon the costs of treating smoking-related illnesses," against three major cigarette manufacturers—Philip Morris USA, Inc., R.J. Reynolds Tobacco Co., and Lorillard Tobacco Co. (collectively, "Original Participating Manufacturers" or "OPMs"). State v. Philip Morris Inc., 179 Md.App. 140, 142-43, 944 A.2d 1167 (2008). Since then, more than forty subsequent participating manufacturers ("SPMs") have joined the MSA. Id. at 145 n. 2, 944 A.2d 1167. In exchange for the dismissal of "any pending action and [a] release [of] all past and future claims" against them, the PMs agreed "to restrict the manner in which they market and advertise tobacco products and . . . to make a substantial annual payment to be allocated among the settling states." Id. at 145, 944 A.2d 1167.
Pursuant to the MSA, the PMs do not make the annual payment ("MSA Payment") directly to the Settling States. Id. Rather, each PM is "required to make a single, nationwide annual payment into an escrow account on or before April 15" of each year, the exact amount of which is calculated annually by an "Independent Auditor . . . pursuant to a comprehensive formula contained within the MSA." Id. at 145-46, 944 A.2d 1167. "The calculation
The NPM Adjustment, governed by Section IX(d) of the MSA, is a payment reduction designed to address the PMs' concern that "they would incur a competitive disadvantage to the non-participating manufacturers [("NPMs")], who were not subject to the MSA's strict marketing restrictions and payment obligations." Id. at 146-47, 944 A.2d 1167. Each year, PMs "may be eligible to take a NPM Adjustment if (1) the independent auditor determines that, during the year in question, the participating manufacturers collectively lose more than two percent of their pre-MSA market share to non-participating manufacturers and (2) an economic consulting firm determines that the MSA was a `significant factor' contributing to that loss." Id. at 147, 944 A.2d 1167 (citing MSA § IX(d)(1)). If these conditions are satisfied, then the PMs are entitled to the NPM Adjustment on their annual payment as to all Settling States, subject to one exception—the "diligence exception." See MSA § IX(d)(2).
Pursuant to the diligence exception, "[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 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." MSA § IX(d)(2)(B). The MSA defines a "Qualifying Statute" as a "statute, regulation, law and/or rule . . . that effectively and fully neutralizes the cost disadvantages that the [PMs] experience vis-à-vis [NPMs] within such Settling State as a result of [the MSA]." MSA § IX(d)(2)(E). "Maryland enacted the model `qualifying statute' contained in Exhibit T to the MSA, which is codified as Maryland's Escrow Act [Md. Code (1992, 2010 Repl. Vol.), § 16-401 et seq. of the Business Regulation Article]." Philip Morris Inc., 179 Md.App. at 147, 944 A.2d 1167. It requires all NPMs to:
Id. at 148, 944 A.2d 1167 (internal citations omitted). "[I]f a state has a `qualifying statute' in full force and effect and diligently enforces that statute, the auditor must reallocate that state's share of the NPM Adjustment among the other states that do not qualify, `pro rata in proportion to their respective Allocable Shares.'" Id. at 147, 944 A.2d 1167 (quoting MSA § IX(d)(2)(C) ("Reallocation Provision")).
In other words, to incentivize the Settling States to be diligent, the MSA provides that the non-diligent States are collectively responsible for the total available NPM Adjustment, including what would
In the present appeal, the primary dispute concerns the NPM Adjustment for 2003. Although the PMs were entitled to take an NPM Adjustment that year, the Independent Auditor decided not to apply it because the Settling States' diligence in enforcing their respective Qualifying Statutes had not yet been determined. See Philip Morris Inc., 179 Md.App. at 148-49, 944 A.2d 1167 ("[T]he participating manufacturers requested that the auditor apply the 2003 NPM Adjustment to their April 2006 payments. Maryland and the other settling states, however, urged the auditor to deny the NPM Adjustment on the ground that the settling states `diligently enforced' their qualifying statutes."). Therefore, the PMs requested arbitration pursuant to MSA § XI(c), id. at 143, 944 A.2d 1167, which states:
On May 18, 2006, Maryland asked the Circuit Court for Baltimore City "for declaratory relief, declaring that the auditor properly determined not to reduce the participating manufacturers' MSA payments to reflect a NPM Adjustment." Philip Morris Inc., 179 Md.App. at 149, 944 A.2d 1167 (footnote omitted). After hearing arguments on October 5, 2006, the circuit court issued an order on January 19, 2007, compelling arbitration, and we affirmed that decision on March 27, 2008. Id. at 150, 167, 944 A.2d 1167.
In December, 2008, the PMs entered into an Agreement Regarding Arbitration ("ARA") with almost every Settling State, including Maryland. According to the ARA, "[t]he 2003 NPM Adjustment shall be resolved through [a nationwide arbitration] pursuant to Section XI(c) of the MSA" in order to determine:
The Panel
By order dated May 23, 2011, the Panel added that "although the conditions to application of the NPM Adjustment under section IX(d)(1) had been met, without the diligent enforcement determination, there was no `Available NPM Adjustment for the Auditor to apply and there would be no Available NPM Adjustment unless and until the diligent enforcement determination was made.'" Thus, according to the Panel, the Independent Auditor could not apply the 2003 NPM Adjustment and properly declined to do so.
Then, in an order dated July 1, 2011, the Panel concluded, in pertinent part:
In that order, the Panel noted that "[b]ecause a state bears the burden of proof when its claim of diligent enforcement [] is not challenged does not mean that there must be a hearing when the claim is unchallenged." Rather, "the burden to prove diligent [] enforcement comes into play only when a state's contested claim is required to [be] resolved."
On or about November 3, 2011, the PMs filed a notice of their intent to contest the diligence of 35 Settling States, including Maryland. Thereafter, the Panel scheduled individual evidentiary hearings for each of those 35 Settling States. A hearing devoted to Maryland's enforcement evidence took place from 8:30 a.m. to 5:00 p.m. on October 22-23, 2012, and from 8:30 a.m. to 3:30 p.m. on October 24, 2012. During that time, Maryland presented the testimony of two lay witnesses, one document summary witness, and three expert witnesses. Meanwhile, the PMs had three expert witnesses testify on their behalf.
On or about December 17, 2012, before the Panel had finished all of the state-specific hearings, the PMs and 19 of the Settling States "agreed to a Term Sheet for settlement" that purported to "resolve[] the 2003-12 NPM Adjustments as to the signatory States and revise[] the NPM Adjustment provision as to those States for the years following 2012." All of the remaining Settling States were invited to join the settlement, and three more did. Maryland declined the invitation.
The 22 total Term Sheet States had an aggregate allocable share of approximately 46% of the NPM Adjustment. Of those 22 states, the PMs had contested the diligence of 20. The Term Sheet, which was to become binding "upon the Panel's approval," did not address the MSA's Reallocation Provision—in particular, its effect on the reallocation of the 2003 NPM Adjustment among the Non-Term Sheet States.
In January 2013, the PMs and Term Sheet States filed a Proposed Stipulated Partial Award with the Panel, presenting alternatives for "how the 2003 NPM Adjustment will be allocated among the [Non-Term Sheet] States in light of the settlement." On February 22, 2013, many of the Non-Term Sheet States, including Maryland, filed a brief in opposition to the Proposed Stipulated Partial Award. In pertinent part, they argued that "the reallocation provisions of the proposed award are contrary to the MSA, adversely affect the majority states, and are not remedied by the proposed set-offs." Particularly, they urged:
(Footnote omitted).
After hearing argument on the issues surrounding the Proposed Stipulated Partial Award, the Panel issued a Stipulated Partial Settlement and Award ("Partial
Turning to the merits, the Panel concluded, in pertinent part:
(Internal citations omitted).
Addressing the Non-Term Sheet States' objections, the Panel stated that the Partial Settlement Award and the Term Sheet "do not legally prejudice or adversely affect the [Non-Term Sheet] States." It continued:
(Internal citation omitted).
On September 11, 2013, the Panel issued diligence rulings for the remaining 15 Non-Term Sheet States whose diligence had been contested by the PMs ("Final Awards"). The Panel determined that six
In its Final Award for Maryland, the Panel began its analysis with "common" findings and conclusions for all States, including the general standard and specific factors that it had used to objectively assess the diligence of each contested State. The Panel explained that it had interpreted "diligent enforcement" to mean "an ongoing and intentional consideration of the requirements of a Settling State's Qualifying Statute, and a significant attempt by the Settling State to meet those requirements, taking into account a Settling State's competing laws and policies that may conflict with its MSA contractual obligations." "In order to objectively assess a Settling State's diligent enforcement in light of that definition," the Panel also considered a list of eight factors:
Applying these factors "objectively" to assess Maryland's diligent enforcement, the Panel concluded that "Maryland failed to meet its burden of proof." According to the Panel, "Maryland did not exhibit a culture of compliance" for most of 2003, and its "efforts in 2003 actually fell short of its efforts in earlier years." As such, it ruled that Maryland was "subject to an NPM Adjustment pursuant to Section IX(d)(2)(B) of the [MSA]."
On March 26, 2013, following the Panel's issuance of the Partial Settlement Award but prior to its issuance of the Final Awards, Maryland filed a "Petition to Vacate Arbitration Award" in its MSA court, the Circuit Court for Baltimore City. In its petition, Maryland argued that the Partial Settlement Award "vastly exceed[ed] the scope of the Panel's power under the MSA, purport[ed] to alter the terms of the MSA without the concurrence of Maryland and other states, and fail[ed] to adhere to clear and undisputed contractual language." Acknowledging that "the full implications of the Partial [Settlement] Award [would] not be known until the arbitration is fully concluded," Maryland requested that the circuit court "enter an order setting the briefing and hearing schedule [as proposed by Maryland], or, in the alternative vacating the Partial [Settlement] Award without further argument."
On November 12, 2013, Maryland filed a "Motion to Compel a Maryland-Specific Arbitration on the Issue of Whether Maryland Diligently Enforced during 2004." In that request, Maryland averred that "[t]he MSA entitles the State to its own arbitration of the dispute over whether it diligently enforced" its Qualifying Statute in 2004. Furthermore, Maryland argued that "[a] State-specific arbitration would advance the fairness, efficiency, and other purposes of arbitration, while the only alternative to an individual arbitration, a multi-state arbitration, would defeat those same purposes."
Soon thereafter, on November 18, 2013, Maryland filed a "Petition to Vacate Arbitration Award Finding that [Maryland] Did Not Diligently Enforce its Qualifying Statute During 2003." In that petition, Maryland contended that "[t]he Panel's Final Award must be vacated because the
Following a hearing on the motions on February 19, 2014, the circuit court entered a memorandum opinion and order on July 28, 2014, denying all three of Maryland's petitions. In reviewing the Panel's decisions, the court applied the vacatur standards of the FAA, which provide that "a reviewing court shall vacate an arbitration award, if the arbitrators exceeded their powers due to an error in their construction of the agreement; or the arbitrators were guilty of misconduct or misbehavior by which the rights of any party have been prejudiced."
With regard to the Panel's issuance of the Partial Settlement Award, the circuit court found:
(Internal citations and footnotes omitted) (emphasis in original).
With regard to its denial of Maryland's request for a state-specific arbitration, the circuit court concluded that "the only reasonable interpretation of the MSA is that nationwide arbitration is required." The court explained that, under the text of the MSA's arbitration provision, the "two sides to the dispute" are "the MSA States in opposition to the downward adjustment, and the PMs." The circuit court also stated that "[t]he only way for the payment structure to remain `nationwide and unitary,' as intended, is for the arbitration itself to be nationwide and unitary, since the diligence determinations made at the arbitration are directly tied to the reallocation provision." (Citing Philip Morris, Inc., 179 Md.App. at 162, 944 A.2d 1167) (footnote omitted).
Finally, with regard to the Panel's Final Award, the circuit court found that the Panel did not "refuse[] to hear pertinent and material evidence," as Maryland alleged, because "Maryland never requested the Panel to consider the comparative non-diligence of the contested `term sheet states,'" nor did Maryland make "any substantive argument to the Panel that the Panel needed to consider the enforcement record of the `term sheet states' when making diligence determinations for the non-settling states." The court also noted
Additional facts will be included as they become relevant to our discussion, below.
At the outset, we must determine the applicable standard of review in a case such as this, where the Panel issued an award in an arbitration governed by the United States Federal Arbitration Act ("FAA")—as mandated by the MSA—but directed aggrieved parties to appeal to their respective state courts.
Maryland contends that "the standard of review is governed by Maryland law and is de novo." Although Maryland acknowledges that this Court may rely on decisions interpreting the FAA because the Maryland Uniform Arbitration Act ("MUAA") is the FAA's state analogue, Maryland maintains that we are not bound by the federal procedural provisions of the FAA. Instead, Maryland avers that this Court must look to the pertinent state law relating to arbitration agreements to determine whether the circuit court erred in denying the relief sought.
In response, the PMs argue that the circuit court correctly applied "the FAA's extremely narrow judicial-review standards," and that Maryland's claim that a de novo standard applies is "both waived and wrong." First, the PMs contend that "Maryland waived [its] argument by not raising it below." Specifically, the PMs note that Maryland "repeatedly acknowledged that the MSA requires application of the FAA" through its opening and subsequent briefs, and its post-hearing submission. Second, relying on the MSA, the PMs aver that "the FAA will `govern' MSA arbitrations" and, thus, the circuit court acted properly in applying the vacatur standards of the FAA. Third, the PMs argue that "to the extent . . . that Maryland law would authorize broader judicial review in this case, it would be preempted by the FAA." (Emphasis in original). Lastly, the PMs contend that "the Maryland standard of review is equally or nearly as narrow as the FAA standard," and its application would not, therefore, lead to a different result.
We agree with Maryland that judicial review of the arbitrator's decision in this case is governed by Maryland law. We explain and address each of the PMs' contentions.
The PMs first argue that Maryland waived its present claim by not raising it in the circuit court, but they cite no authority to support their position that the applicable standard of review can be waived. Indeed, although no Maryland court has ruled on this matter, several federal courts have stated that "a party cannot `waive' the proper standard of review by failing to argue it." Brown v. Smith, 551 F.3d 424, 428 n. 2 (6th Cir. 2008) (citations omitted); see also Ward v. Stephens, 777 F.3d 250, 257 n. 3 (5th Cir. 2015) ("A party cannot waive, concede, or abandon the applicable standard of review.") (Citations omitted), petition for cert. filed, U.S. No. 14-10033 (June 2, 2015); Gardner v. Galetka, 568 F.3d 862, 879 (10th Cir.2009) (holding that "the standard of review under AEDPA cannot be
Next, citing the MSA, the PMs argue that judicial review of the Panel's decision is governed by the FAA. In advancing this argument, the PMs correctly note that, pursuant to MSA § XI(c), NPM Adjustment disputes are subject to an "arbitration [that] `shall be governed by the [FAA].'" (Emphasis added). But, they fail to acknowledge that the MSA does not mandate that judicial review of such an arbitration award would be governed by the FAA as well. Rather MSA § XVIII(n), entitled "Governing Law," provides that the MSA "shall be governed by the laws of the relevant Settling State, without regard to conflict of law rules of such Settling State." See also MSA § VII(a) (stating that the MSA Court retains exclusive jurisdiction); and MSA § II(p) (defining "Court" as the "respective court in each Settling State").
Alternatively, the PMs contend that "the FAA standard would govern under constitutional preemption principles" because applying a broader state law review standard "would undercut the FAA's national policy favoring arbitration with just [a] limited review" and "would thwart the FAA's primary purpose of ensuring that private agreements to arbitrate are enforced according to their terms." (Citations omitted). Contrary to the PMs' contention, however, the Maryland Court of Appeals has repeatedly stated that "our procedural rules are not preempted by national policy favoring arbitration[.]" Addison v. Lochearn Nursing Home, LLC, 411 Md. 251, 287, 983 A.2d 138 (2009) (citing Wells v. Chevy Chase Bank, F.S.B., 363 Md. 232, 242, 768 A.2d 620 (2001) ("we conclude that Maryland procedural law . . . is not preempted by the FAA")); accord Walther v. Sovereign Bank, 386 Md. 412, 423, 872 A.2d 735 (2005) ("In enforcing . . . the FAA, however, state courts are not bound by the federal procedural provisions of the FAA . . . but may generally apply their own procedures.").
Therefore, in order for the PMs to prevail on their argument, it must be evident that application of the Maryland standard of review would not only serve to frustrate the underlying goals of the FAA, but would also result in a failure to carry out the arbitration provision of the MSA as the parties had intended. Application of the Maryland standard of review does neither. As the PMs recognize in their briefs and as we shall further explain below, "[t]he Maryland arbitration statute is virtually identical in substance to the FAA," and would also promote the goal of enforcing arbitration agreements. (Citation omitted). See Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 590, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008) ("The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable."). And, with regard to the terms of the parties' agreement to arbitrate, we have already explained that application of Maryland law would not violate any MSA provision governing post-arbitration judicial review.
Having determined that Maryland standard of review applies in reviewing the Panel's decisions, we direct our attention to the applicable statute governing the vacation of an arbitration award, Md. Code (1973, 2013 Repl. Vol.), § 3-224(b) of the Courts and Judicial Proceedings Article ("CJP"), which provides:
The court shall vacate an award if:
Here, Maryland's issues with the Panel's decisions are rooted in CJP § 3-224(b)(3) and (4).
In the past, Maryland courts have held that "arbitrators exceed their powers not only when the substance of their award lacks a scintilla of rationality, but also where the award is founded upon a mistaken assertion of jurisdiction." Snyder v. Berliner Const. Co., 79 Md.App. 29, 37, 555 A.2d 523 (1989) (citation & footnote omitted); see also Downey v. Sharp, 428 Md. 249, 258, 51 A.3d 573 (2012) (noting that
By contrast, "factual findings by an arbitrator are virtually immune from challenge and decisions on issues of law are reviewed using a deferential standard on the far side of the spectrum away from a usual, expansive de novo standard." Mandl v. Bailey, 159 Md.App. 64, 92, 858 A.2d 508 (2004) (citations omitted); see also Downey, 428 Md. at 266, 51 A.3d 573 ("reviewing courts generally defer to the arbitrator's findings of fact and applications of law") (citations omitted). As a result, "courts are fairly reluctant to disturb the award of an arbitrator where the award reflects the honest decision of the arbitrator and is the product of a full and fair hearing of the parties." Balt. Teachers Union, Am. Fed'n of Teachers, Local 340, AFL-CIO v. Mayor & City Council of Balt., 108 Md.App. 167, 181, 671 A.2d 80 (1996) (citations omitted).
With regard to the appellate process, the parties do not dispute—and we agree—that this Court's review of the circuit court's decision is de novo, regardless of whether the circuit court disposed of the outstanding motions before it pursuant to the FAA or the MUAA. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) ("when reviewing a district court decision that refuses to vacate, or confirms, an arbitration award," a court of appeals should "accept[] findings of fact that are not `clearly erroneous' but decid[e] questions of law de novo") (internal citations omitted); Delta Queen Steamboat Co. v. Dist. 2 Marine Engineers Beneficial Ass'n, AFL-CIO, 889 F.2d 599, 602 (5th Cir.1989) ("Thus, since this jurisdictional challenge focuses upon whether the award is grounded in the . . . agreement, we will review the [trial] court's decision de novo.") (Citation omitted); Stephen L. Messersmith, Inc., 313 Md. at 664, 547 A.2d 1048 ("the appropriate standard of review when an arbitration award is attacked for lack of jurisdiction . . . is . . . de novo"); Prince George's Cnty., Md. ex rel. Prince George's Cnty. Police Dep't v. Prince Georges Cnty. Police Civilian Employees Ass'n, 219 Md.App. 108, 119, 98 A.3d 1094 (2014) ("A circuit court's decision to grant or deny a petition to vacate or confirm an arbitration award is akin to an order granting or denying a motion for summary judgment. The standard of review is de novo.") (Internal citations omitted), cert. granted, 441 Md. 217, 107 A.3d 1141 (2015). "Therefore, we review that court's disposition for legal error." Montgomery Cnty., Maryland v. Fraternal Order of Police, Montgomery Cnty. Lodge 35, Inc., 427 Md. 561, 572, 50 A.3d 579 (2012) (citation omitted). To that end, we accept any relevant factual findings by the circuit court that are not "clearly erroneous[.]" See First Options of Chicago, Inc., 514 U.S. at 947-48, 115 S.Ct. 1920.
Maryland first argues that "the Panel exceeded its powers when it amended the MSA without Maryland's consent," by ratifying the Term Sheet and by issuing the Partial Settlement Award. According to Maryland, the Partial Settlement Award "impermissibly allowed the contested Term Sheet States to bypass a diligence inquiry and treated them as not
In response, the PMs aver that "the circuit court correctly held that the Panel did not exceed its powers in entering the [Partial] Settlement Award's pro rata judgment-reduction ruling," and its decision "furthered the strong policy in favor of settlements." According to the PMs, the court acted properly in applying the FAA standard and finding that the Panel not only had jurisdiction to interpret the MSA, but also acted in good faith in issuing the Partial Settlement Award.
In its reply brief, Maryland argues that the PMs' argument "begins at the wrong place." We agree. As Maryland stated, in pertinent part:
(Internal citations omitted). Our analysis begins with the MSA.
MSA § XI(c) provides that "[a]ny dispute, controversy or claim arising out of or relating to calculations performed by, or any determinations made by, the Independent Auditor . . . shall be submitted to binding arbitration before a panel of three neutral arbitrators" in an arbitration governed by the FAA. The Supreme Court
Where the Panel erred, however, was in reallocating the 2003 NPM Adjustment post-settlement without first determining the diligence of certain states. Stated differently, by ratifying the Proposed Stipulated Partial Award and issuing the Partial Settlement Award, the Panel disregarded MSA § IX(d)(2)(B), which provides that "[a] Settling State's Allocated Payment shall not be subject to a NPM Adjustment. . . if such Settling State continuously had a Qualifying Statute . . . and diligently enforced the provisions of such statute during such entire calendar year." (Emphasis added). The Supreme Court has stated that an "arbitrator may not ignore the plain language of the contract." United Paperworkers Int'l Union, AFL-CIO, 484 U.S. at 38, 108 S.Ct. 364 (citation omitted). But, in this case, certain Term Sheet States' Allocated Payments were deemed not subject to an NPM Adjustment even though the Panel never found that such states diligently enforced their respective Qualifying Statutes. As such, the Panel's error did not lie simply in reallocating the 2003 NPM Adjustment and in doing so according to the pro rata method of judgment reduction;
We agree with the Commonwealth Court of Pennsylvania that "[a]lthough the MSA does not address the effect of a partial settlement on the reallocation, it is not ambiguous." Com. ex rel. Kane, 114 A.3d at 62. Indeed, the PMs' main contention is not that the MSA was ambiguous; rather, they argue in large part that the Panel properly issued the Partial Settlement Award because the MSA was silent on how to reallocate the NPM Adjustment "where only some parties settle and consent." We have previously recognized, however, that "[a] contract's silence on a
Likewise, the Panel erred in concluding: "Where multiple parties have a potential shared contractual obligation and some of them settle and some do not, the non-settling parties cannot necessarily block the settlement." Although "[t]he general rule . . . is that a non-settling party does not have standing to object to a settlement between other parties," as the Panel noted, that rule cannot apply in cases such as this, where the settlement (i.e., Term Sheet) went against the provisions of an underlying agreement (i.e., MSA) involving both the settling and non-settling parties (i.e., Term Sheet and Non-Term Sheet States, respectively). By issuing the Partial Settlement Award, the Panel violated MSA § XVIII(j), which governs "Amendment and Waiver," and states:
As Maryland correctly notes, the Panel's Partial Settlement Award "imposed an unauthorized amendment to the MSA by changing the MSA's method for reallocating the NPM Adjustment among states that did not prove their diligence." See Com. ex rel. Kane, 114 A.3d at 63 ("By treating the Term Sheet States as diligent and allowing them to shift their share of the reallocation, the panel departed from the MSA's clear terms and `amended' the MSA without agreement of `all' parties `affected by the amendment.'"). Accordingly, the Panel erred in concluding that the Partial Settlement Award and the Term Sheet "do not legally prejudice or adversely affect" the Non-Term Sheet States. And, we need not engage in speculation as to how much Maryland stands to gain or lose to determine that it and the other non-diligent, Non-Term Sheet States were adversely affected by the Panel's ruling.
The PMs place great weight on the fact that no Settling State contested the diligence of other Settling States. Their argument, however, is flawed because it assumes that a Term Sheet State whose diligence had been contested by another Settling State would have benefited by a diligence determination by the Panel. But, we do not know whether such Term
In sum, the Panel exceeded its powers, in violation of CJP § 3-224(b)(3), when it reallocated the 2003 NPM Adjustment without first determining the diligence of all contested states. Not only did the Panel lack jurisdiction to issue the Partial Settlement Award pursuant to MSA § XVIII(j), its decision lacked rationality in light of MSA § IX(d)(2)(B). In turn, the circuit court erred in affirming the Panel's ruling.
In order to bring the Partial Settlement Award in line with the MSA, we now grant Maryland's request and reverse the circuit court's denial of Maryland's Petition to Vacate Arbitration Award. We remand the case to the circuit court so that it may vacate the Partial Settlement Award and instruct the Independent Auditor to treat the 20 Term Sheet States, whose diligence was contested but not determined,
Next, Maryland argues that "the Panel's Final Award should be vacated because the Panel's refusal to hear material evidence deprived Maryland of a full and fair hearing." Specifically, Maryland avers that in implementing the Partial Settlement Award, the Panel "refus[ed] to allow Maryland and other states to put at issue the diligence of the contested Term Sheet States," but later "considered the evidence regarding all of the states for which it made diligence determinations when the Panel rendered its [diligence] decisions." Acknowledging that it did not advocate comparative diligence determinations nor attempt to introduce evidence regarding the diligence of other states, Maryland contends that "once the Panel [decided] to engage in a comparative analysis, and actually did so in the context of an arbitration governed by the ARA, it was improper—and beyond any legitimate justification—for the Panel to refuse to hear material evidence regarding the contested Term Sheet States." As such, Maryland argues that the circuit court erred failing to vacate the Final Award.
In response, the PMs argue that the circuit court correctly held that the Panel did not commit evidentiary misconduct and properly refused to vacate the Final Award. In making their argument, the PMs emphasize that: (1) "Maryland never requested, and actively opposed, [a] comparative state analysis;" (2) the Panel found Maryland to be non-diligent "based solely on an objective analysis of state-specific circumstances" and "not on a relative analysis that compared [Maryland] against other contested states;" and (3) Maryland fails to demonstrate that any prejudice occurred as a result of the Panel's alleged error. Applying the vacatur standards of the FAA, the PMs assert that the circuit court properly denied Maryland's Petition to Vacate Arbitration Award Finding that [Maryland] Did Not Diligently Enforce its Qualifying Statute During 2003.
Following the motions hearing in this case, the circuit court found that the Panel did not refuse to hear pertinent and material evidence as Maryland alleged. In pertinent part, the court reasoned that Maryland
Although the circuit court erred in applying the FAA's vacatur standards in issuing its ruling, we ultimately reach the same conclusion after applying the Maryland standard of review. Initially, we note that, as we are remanding the case with instructions for the Independent Auditor to consider all contested Term Sheet States as non-diligent, Maryland will already receive part of the relief it seeks when the 2003 NPM Adjustment is reallocated among a larger number of non-diligent states. But, to the extent that Maryland challenges the Panel's finding that Maryland was not diligent in enforcing its Qualifying Statute, we perceive no error on the Panel's part and, accordingly, affirm the circuit court's judgment.
As previously mentioned, CJP § 3-224(b)(4) authorizes courts to vacate an arbitral award when the arbitrators "refused to hear evidence material to the controversy . . . as to prejudice substantially the rights of a party." "The party challenging the arbitration award bears the burden of proving the existence of one of the grounds for vacating it." Mandl, supra, 159 Md.App. at 86, 858 A.2d 508 (citations omitted). The question we must address on appeal, then, is whether, on the facts, the Panel "as a matter of law improperly refused to hear evidence material to the parties' controversy, to the substantial prejudice of [Maryland's] rights." Id. at 91-92, 858 A.2d 508 (citing CJP § 3-224(b)(4)).
Citing the ARA and the Panel's July 1, 2011 order regarding burden of proof, Maryland contends that "[t]he Panel's failure to hear the contested Term Sheet States' enforcement records violated the Panel's own prior orders and Maryland's legitimate contract expectations." In particular, Maryland looks to the Panel's statement that "`the reallocation provisions of the MSA do not apply unless and until diligent enforcement determinations are made for those states whose diligence is contested by either the [PMs] or the states,'" (emphasis added by Maryland), as well as the following ARA provision:
ARA § 2(i) (emphasis added by Maryland).
Maryland's reliance on those statements, however, is misplaced because in issuing the Partial Settlement Award, the Panel believed (albeit mistakenly) that diligent enforcement determinations had already been made for all contested states. More importantly, those statements do not provide support for Maryland's assertion that "once the Panel [decided] to engage in a comparative analysis, . . . it was improper. . . for the Panel to refuse to hear material evidence regarding the contested Term Sheet States." Nothing in the record reflects that the parties to the ARA and the Panel agreed to employ a comparative method in determining each state's diligence; nor does Maryland point to any
Overall, Maryland failed to meet its burden of proving that the Panel refused to hear evidence material to the controversy, to the substantial prejudice of Maryland's rights, when the Panel found that Maryland was not diligent in enforcing its Qualifying Statute. We agree with the circuit court that "the Panel's diligence determination focused on the objective standard and assessing diligence that was common to all states, and then applying that standard to each State's individual enforcement for 2003." It was not irrational for the Panel to do so. See Downey, supra, 428 Md. at 258, 51 A.3d 573; Snyder, supra, 79 Md.App. at 37, 555 A.2d 523. As the Panel explained in its Final Award for Maryland, "[i]t is . . . not a useful exercise, or even valid, to compare the decision as to one State against the decision as to another" because the Panel considered the various factors relating to diligence "in the over-all [sic] context of a Settling State's existing policies and circumstances in 2003."
Furthermore, based on the record, there was enough evidence to support the Panel's finding of non-diligence on Maryland's part. Assessing Maryland based on the eight relevant factors, the Panel first noted that Maryland's collection rate of 47% for 2003 was less than its rates in the year before (75.4%) and after (55.3%). Second, the Panel stated that although "[e]scrow was not paid on 68.2 million NPM cigarettes sold in 2002" and "Maryland identified lawsuits as being an important part of the enforcement effort," it "filed only one lawsuit in 2003." Third, with regard to gathering reliable data, the Panel found that Maryland "received little help and insufficient sales data from the Comptroller's Office, which basically was a non-participant in enforcement efforts." Fourth, the Panel determined that "Maryland's enforcement efforts were seriously hampered by lack of sufficient[ly] committed and trained personnel." Fifth, the Panel noted that although Maryland may have been well-positioned for diligent enforcement in 2004, its efforts were "not enough to credit Maryland for an `ongoing and intentional consideration of the requirements of a State's Qualifying Statute.'" Sixth, the Panel recognized that "[a]lthough Maryland passed its Qualifying Statute and Complementary Legislation in a timely manner, it did little to implement it until . . . toward the end of 2003." Seventh, the Panel concluded that Maryland's record in the area of "Actions Short of Legislation" was "extremely poor." For example, "it conducted no desk or field audits," "conducted retail inspections for state excise tax but none for escrow compliance," and "sent notice letters, but only two demand letters were sent to non-compliant NPMs." Lastly, the Panel found "little, if any, information" about the eighth factor, "Efforts to be Aware of NAAG and Other States' Enforcement Efforts." As "factual findings by an arbitrator are virtually immune from challenge," Mandl, 159 Md.App. at 92, 858 A.2d 508, we cannot say that the circuit court erred in refusing to vacate the Panel's finding of non-diligence.
Finally, we agree with the circuit court that "[e]ven if some, most or all of the `term sheet states' were less diligent than Maryland, from the facts there is no guarantee that the Panel would have found Maryland to be diligent." As the PMs state in their brief, Maryland "failed to identify adequate evidence that it would have benefited from a comparison to the contested [Term Sheet] States," because the most that Maryland can assert is that "some `evidence . . . suggests that the contested [Term Sheet] States would not have
Finally, Maryland argues that the circuit court erred in denying Maryland's motion to compel state-specific arbitration. First, Maryland contends that pursuant to the plain meaning of the MSA, Maryland, by itself, constitutes a single "side" to the dispute to be submitted to arbitration, "with at least the [PMs], and perhaps other states, on the other side."
In response, the PMs contend that the circuit court acted properly in denying Maryland's motion for a state-specific arbitration. According to the PMs, "this Court in Philip Morris . . . already decided that the MSA requires NPM Adjustment disputes. . . to be arbitrated in a nationwide arbitration." In addition, the PMs argue that "the MSA's text, its structure, and extensive, uniform authority from other [jurisdictions]. . . all confirm the trial court's decision." Lastly, the PMs aver that Maryland's policy argument is "irrelevant and meritless" because it does not explain how "the myriad proceedings necessary to determine the diligence of each of the other 27 States would function more equitably than a nationwide arbitration." We agree with the PMs.
In Philip Morris, Inc., 179 Md.App. at 162-63, 944 A.2d 1167, we determined that the structure of the MSA requires arbitration due, in part, to the "[n]eed for uniformity:"
Although Maryland is correct that this Court's original opinion included language that more definitively supported a requirement that Maryland participate in multi-state arbitration, and that such language was removed pursuant to Maryland's motion to reconsider, the final version of our opinion clearly still contemplated a single, nationwide arbitration.
First, there is no merit to Maryland's argument that, when considering the
Next, in addition to our previous determination that having "a single decision-maker is vitally important" in light of the MSA's "nationwide and unitary" payment structure, id. at 162, 944 A.2d 1167, Maryland's proposed state-specific arbitration would not necessarily advance the public interest. As the PMs point out, "every State would have an interest in the decision on diligence for every other state" and in each state-specific proceeding, "up to 27 other States would need to intervene to protect their interest, which would multiply exponentially the cost, complexity, and burden of resolving the 2004 NPM Adjustment dispute." This would have a tremendous effect on all parties, especially the SPMs, which are smaller companies with more limited resources.
Lastly, our holding is supported by courts in other jurisdictions. See McGraw v. Am. Tobacco Co., 224 W.Va. 211, 681 S.E.2d 96, 112 (2009) ("All courts addressing arguments . . . against the requirement of a single, nationwide arbitration of the diligent enforcement determination have consistently and logically rejected the same. Both the structure and plain meaning of the MSA require a uniform determination of this issue due to the impact the determination relevant to one settling state will have upon all other settling states."); State, ex rel. Carter v. Philip Morris Tobacco Co., 879 N.E.2d 1212, 1220 (Ind.Ct.App.2008) ("Both the language and the structure of the MSA require that the dispute concerning the 2003 NPM Adjustment, including the Settling States' claims of diligent enforcement of their Qualifying Statutes, must be submitted to a single, national arbitration panel."); State ex rel. Riley v. Lorillard Tobacco Co., 1 So.3d 1, 14 (Ala.2008) ("we conclude that the agreement requires a national, as opposed to a local, arbitration proceeding"); State v. Philip Morris USA Inc., 183 Vt. 176, 945 A.2d 887, 894 (2008) ("Other courts addressing this issue, however, have found `compelling logic' in having disputes over diligent enforcement handled by one arbitration panel rather than separate courts in each settling state. . . . We agree.") (Citation omitted); State v. Phillip Morris, Inc., 279 Conn. 785, 905 A.2d 42, 51 n. 12 (2006) (noting that the language of the MSA "envisions that the settling states would select one arbitrator and the participating manufacturers would select one arbitrator") (citation omitted); State of N.M. ex rel. N.M. Attorney Gen. Gary K. King, 145 N.M. 134, 194 P.3d 749, 755 (Ct.App. 2008) (affirming an order "compelling arbitration before a single, nationwide arbitration panel"); State v. Philip Morris Inc., 51 A.D.3d 523, 858 N.Y.S.2d 134 (2008) ("This Court rejected . . . arguments that each Settling State constituted a `side' to the dispute, under section XI (c) of the Master Settlement Agreement, with the right to select its own arbitrator") (citation omitted); People v. Lorillard Tobacco Co., 372 Ill.App.3d 190, 310 Ill.Dec. 222, 865 N.E.2d 546,
For all of the foregoing reasons, we reverse the circuit court's denial of Maryland's Petition to Vacate Arbitration, and affirm its denial of Maryland's Motion to Compel a Maryland-Specific Arbitration on the Issue of Whether Maryland Diligently Enforced during 2004 and Petition to Vacate Arbitration Award Finding that [Maryland] Did Not Diligently Enforce its Qualifying Statute During 2003. We remand the case with instructions to have the Independent Auditor treat all 20 of the contested Term Sheet States as non-diligent when calculating Maryland's 2003 NPM Adjustment liability.
(Emphasis added).
