In November, Pennsylvania Attorney General Kathleen G. Kane asked Common Pleas Court in Philadelphia to overturn that arbitration decision.
Thursday's ruling by Judge Patricia McInerney took with one hand and gave with the other.
McInerney denied the state's motion to vacate the arbitrators' decision. But she granted the financial relief that the state had requested.
The ruling hinges on the formula for assessing how much to penalize various states for alleged lack of diligence in collecting taxes.
Because the arbitration decision was modified, Kane's office said in a news release, the full $335 million payment will be reduced by about $60 million instead of about $180 million.
"While we were not able to win the entire amount," Kane said in a statement, "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."
Adrian King, Kane's chief deputy, stressed that the figures are estimates, subject to further auditing.
Practitioners hailed the development.
"This has tremendous implications for public health in Pennsylvania," said Frank T. Leone, director of the Comprehensive Smoking Treatment Program at Penn Presbyterian Medical Center in Philadelphia.
Donald F. Schwarz, commissioner of the Philadelphia Department of Public Health, said, "The big question is what the commonwealth will do with that money in the current year vs. future years. If the governor decides he is going to put it in his rainy-day fund, that won't be good for public health this year."
Schwarz said that Philadelphia has had to make "substantial cuts to our tobacco-prevention work. We hope they'll be restored as soon as possible."
A spokesman for Gov. Corbett could not be reached for comment Thursday night.
In its lawsuit, the state argued that the arbitration panel failed to follow a common set of standards in defining diligence.
For instance, the lawsuit said, Pennsylvania had an identical tax-collection rate to that of Ohio, which the panel found was diligent. In another instance, the panel penalized Pennsylvania for not taxing roll-your-own tobacco, while at the same time finding that Oregon had no obligation to do so.
Like other states, Pennsylvania gets its award payment based on the volume of tobacco sales. While other states have used the money for a variety of programs and budget items, Pennsylvania mandates that the funds be used exclusively for health care.
Among the outside lawyers brought in to represent the state was Robert Loeb of Orrick, Herrington & Sutcliffe, with major offices in New York and San Francisco.
The tobacco industry tried "to claw back every red cent" from the settlement fund, said Loeb. "One of their tactics was to enter into side agreements with some states and then seek to transfer the liability of those states onto the remaining states, such as Pennsylvania."
Arbitrators let the companies "get away with that," he said. "Today, the court flatly rejected this tactic."
Inquirer staff writer Don Sapatkin contributed to this article.