By Daniel Kelley
PHILADELPHIA (Reuters) - A Philadelphia judge on Thursday set aside most of an arbitration ruling that could have cost the state of Pennsylvania some $180 million from a landmark 1998 settlement with the nation's tobacco companies.
The decision restores $120 million of the $180 million in payments from tobacco companies that Pennsylvania was set to lose when a September 2013 arbitration found that it and five other states failed to enforce part of an agreement that was part of the settlement.
Under that agreement, states were required to pass laws to stop companies that had declined to settle from gaining an economic advantage over their competitors.
In a statement hailing the decision by Pennsylvania Court of Common Pleas Judge Patricia McInerney, Pennsylvania Attorney General Kathleen Kane said the ruling showed "what can happen when government works together for the people".
"While we were not able to win the entire amount," Kane said, "we are excited for this victory and what it means for the future of important smoking cessation, medical research and health programs that depend on this money."
A spokesman for the tobacco companies could not immediately be reached for comment on Thursday evening.
Under the 1998 settlement, the nation's four largest tobacco companies promised to pay nearly $200 billion over 25 years to 46 states to settle lawsuits that claimed cigarette-related public health costs.
The major tobacco companies worried that they would have to raise prices on their brands in order to fund the settlement. So the 1998 agreement required states to pass laws that prevented cigarette companies that did not sign the agreement from gaining an unfair economic advantage.
In 2004, after losing market share for previous years, the tobacco companies notified the states' attorneys general that they planned to sue. By 2010, the tobacco companies entered arbitration with all but 15 states, saying they failed to enforce their tobacco laws.
Twenty states settled with the tobacco companies in 2013 rather than risk an arbitration award. Those states received lump sum payments from tobacco companies.
In addition to Pennsylvania, the other states named in the arbitration ruling are Indiana, Kentucky, Missouri, New Mexico, and Maryland. In a report on the arbitration award last year, the National Association of State Budget Officers said that the six states stood to lose a combined $500 million.
The Pennsylvania case could have national ramifications because the arbitration only dealt with 2003. Payments for 2004 to 2012 are still in dispute.
Pennsylvania's lawyers worried that if tobacco companies seek to claw back payments for later years, it could cost the state billions and lead to litigation for other years and involve other states.
(Editing by Dan Whitcomb; Editing by Ken Wills)