Com. v. Philip Morris Inc.

• Decision Date: 23 April 2007
• Docket Number: No. SJC-09889.,SJC-09889.
• Citation: Com. v. Philip Morris Inc., 864 N.E.2d 505, 448 Mass. 836 (Mass. 2007)
• Parties: COMMONWEALTH v. PHILIP MORRIS INCORPORATED & others.<SMALL><SUP>1</SUP></SMALL>
• Court: Supreme Judicial Court of Massachusetts

864 N.E.2d 505

448 Mass. 836

COMMONWEALTH v.PHILIP MORRIS INCORPORATED & others.¹

No. SJC-09889.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued March 8, 2007.

Decided April 23, 2007.

James J. Arguin, Assistant Attorney General, for the Commonwealth.

Robert J. Brookhiser, of the District of Columbia, & Stephen R. Patton, Chicago, Illinois (Patricia A. Hartnett & Thomas E. Peisch, Boston, with them) for Liggett Group LLC & others.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, & CORDY, JJ.

CORDY, J.

This case arises out of a settlement agreement between the defendants, a number of tobacco companies, and the Attorneys-General of the several States.The so-called "Master Settlement Agreement"(settlement agreement) ended a host of lawsuits in which the States sought massive payments from the companies under a range of liability theories.The damages claimed by the States were based on the expense of providing health care to those suffering from smoking-related ailments.While denying liability, the companies accepted (among other things) a scheme of regular payments to the States and extensive restrictions on their advertising in return for the dismissal of all litigation.The settlement also saved the States from having to litigate complicated cases with unpredictable and possibly uneven results.

The settlement agreement provides for an independent auditor to calculate the companies' annual payments to the States in accordance with an agreed formula.Disputes "arising out of" or "relating to" that calculation are referred to an arbitration panel consisting of three former Federal judges.In this case, a dispute arose over the application of a downward payment adjustment meant to compensate the companies for loss of market share caused by the settlement.The downward adjustment does not apply against States who "diligently enforced"statutes which in effect subject tobacco companies not parties to the settlement agreement to the same scheme of payments as companies that are parties to it.On motion by the companies, a judge in the Superior Court ordered arbitration.The Commonwealth appealed, claiming that the instant dispute does not fall under the arbitration provision.We affirm.

1.Settlement agreement.The Commonwealth commenced the underlying action in the Superior Court on December 19, 1995.It was one of many similar actions filed by State Attorneys-General against the tobacco companies.After years of legal proceedings (the details of which are not relevant here) the States and the tobacco companies reached a comprehensive settlement.That settlement, memorialized in the settlement agreement, granted signatory companies a complete release of liability² in exchange for large annual payments.On December 3, 1998, a consent decree entered in the Superior Court.It provided, "The Agreement, [and] the settlement set forth therein ... are hereby approved in all respects, and all claims are hereby dismissed with prejudice as provided therein."The Superior Court retained jurisdiction over the case"for the purposes of implementing and enforcing the Agreement and this Consent Decree and Final Judgment and enabling the continuing proceedings contemplated herein."The order to arbitrate we review here was entered by a Superior Court judge pursuant to that ongoing jurisdiction: "The Commonwealth of Massachusetts and/or any Participating Manufacturer may apply to the Court at any time for further orders and directions as may be necessary or appropriate for the implementation and enforcement of this Consent Decree and Final Judgment."The term "Participating Manufacturer" includes any company subject to the settlement agreement and the consent decree, whether an original or a subsequent signatory.Our discussion here applies to all participating manufacturers; distinctions among them in the settlement agreement are not relevant to our analysis.

Section XI of the settlement agreement describes the process by which payments due from the participating manufacturers to the States are calculated.It assigns the task to an independent auditor, who "shall calculate and determine the amount of all payments owed pursuant to [the settlement agreement], the adjustments, reductions and offsets thereto (and all resulting carry-forwards, if any), the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the [participating manufacturers] and the Settling States, and shall perform all other calculations in connection with the foregoing...."³The auditor is to request the information needed to perform the calculations not less than ninety days before the due date, and by forty days before the due date is to submit to the participating manufacturers and the States preliminary calculations of amounts owing and the allocation among the States.The preliminary calculations must include "all applicable offsets, adjustments, reductions and carry-forwards and [set] forth all information on which the Independent Auditor relied in preparing such Preliminary Calculations."The parties then have ten days to submit any objections to the preliminary calculations.The auditor next presents a final calculation fifteen days before the date of payment.The final calculation is to include an explanation for any changes from the preliminary calculation.Under the settlement agreement, the participating manufacturers do not owe specific amounts to the States individually; rather, their payments are calculated as a single amount due.That money is paid into an escrow account from which the States are paid, largely based on an agreed-on allocation.

The formula used to calculate payments due from the participating manufacturers appears in § IX of the settlement agreement.It begins with a base payment amount for the calendar year, to which is applied a series of adjustments and offsets.Among these is the "Non-Participating Manufacturer Adjustment"(NPM adjustment).The NPM adjustment applies in years when a firm of economic consultants selected by the parties"determines that the disadvantages experienced as a result of the provisions of [the settlement agreement] were a significant factor contributing to" a two per cent or greater loss of market share⁴ by participating manufacturers to tobacco companies not subject to the settlement agreement.It therefore acts to compensate the participating manufacturers for the fact that nonparticipating tobacco companies have not taken on the burdens of the settlement agreement, including its extensive advertising restrictions.

States may, however, avoid the application of the NPM adjustment to their respective shares if a so-called "Qualifying Statute" is "in full force and effect during the entire calendar year immediately preceding the year in which the payment in question is due, and [the relevant State] diligently enforced the provisions of such statute during such entire calendar year."A "Qualifying Statute" is one which "effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating Manufacturers within [the relevant State] as a result of the provisions of [the settlement agreement]."⁵The settlement agreement exhibits include a model statute that is deemed to be a "Qualifying Statute."The Legislature enacted, and the Governor approved, the model statute on June 29, 2000.G.L. c. 94E, inserted by St.2000, c. 117, § 2.If a State avoids the NPM adjustment by diligently enforcing a qualifying statute, that State's share of the downward adjustment is reallocated to the States that are subject to the adjustment because of their lack of diligent enforcement.That reallocation is done pro rata, based on the relevant State's allocated share of payments.Because of this reallocation, the decision to apply (or not to apply) the NPM adjustment to one State can affect the calculations of amounts due to all other States.

This reflects a general characteristic of the payments scheme in the settlement agreement: Because the auditor calculates both "all payments owed pursuant to this Agreement" and "the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the Participating Manufacturers and among the Settling States," any of its conclusions with respect to any participating manufacturer or any State potentially affects all of the others.Disputes thus create the potential for complexity and confusion, including the possibility of competing (and conflicting) judgments in a host of State courts.To avoid such difficulty, the parties to the settlement agreement devised a unitary dispute resolution process applicable to the calculation and disbursement of payments.Section XI(c) of the settlement agreement provides:

"Resolution of Disputes.Any dispute, controversy or claim arising out of or relating to calculations performed by, or any determinations made by, the Independent Auditor (including, without limitation, any dispute concerning the operation or application of any of the adjustments, reductions, offsets, carry-forwards and allocations described in subsection IX(j)[Order of Application of Allocations, Offsets, Reductions and Adjustments] or subsection XI(i)[Miscalculated or Disputed Payments] ) shall be submitted to binding arbitration before a panel of three neutral arbitrators, each of whom shall be a former Article III federal judge.Each of the two sides to the dispute shall select one arbitrator.The two arbitrators so selected shall select the third arbitrator.The arbitration shall be governed by the United States Federal Arbitration Act[9 U.S.C. §§ 1 et seq.(2000)]."

The question before us is the applicability of this arbitration provision to the dispute over the NPM adjustment.

2.Present proceedings.On March 7, 2006, the independent auditor distributed to the settlement agreement parties its preliminary calculations for the...