State, ex rel. Carter v. Philip Morris

• Decision Date: 01 February 2008
• Docket Number: No. 49A02-0706-CV-494.,49A02-0706-CV-494.
• Citation: 879 N.E.2d 1212
• Parties: STATE of Indiana, ex rel., Stephen R. CARTER, Attorney General of Indiana, Appellant-Plaintiff, v. PHILIP MORRIS TOBACCO COMPANY, et al., Appellees-Defendants.
• Court: Indiana Appellate Court

879 N.E.2d 1212

STATE of Indiana, ex rel., Stephen R. CARTER, Attorney General of Indiana, Appellant-Plaintiff, v. PHILIP MORRIS TOBACCO COMPANY, et al., Appellees-Defendants.

No. 49A02-0706-CV-494.

Court of Appeals of Indiana.

February 1, 2008.

Stephen R. Carter, Attorney General of Indiana, David L. Steiner, Lawrence J. Carcare II, Deputy Attorney General, Indianapolis, IN, Attorneys for Appellant.

David O. Tittle, Kandi H. Kidde, Karl L. Mulvaney, Bingham McHale LLP, Thomas J. Costakis, Greg A. Small, Krieg Devault LLP, Indianapolis, IN, Attorneys for Appellees.

OPINION

HOFFMAN, Senior Judge.

Plaintiff-Appellant State of Indiana appeals the trial court's order compelling it to participate in arbitration with the Defendants-Appellees Philip Morris Tobacco Company USA Inc., R.J. Reynolds Tobacco Company, and Lorillard Tobacco Company.

We affirm.

The State presents two issues for our review, which we restate as:

I. Whether the trial court erred by ordering the State to participate in arbitration pursuant to the Master Settlement Agreement.

II. To the extent that the trial court ordered arbitration by a single, national arbitration panel, whether the trial court erred in so ordering.

This litigation commenced in 1997. In 1998, a Master Settlement Agreement (MSA) was executed by certain tobacco companies, known as Original Participating Manufacturers (OPMs)¹, and certain states, including Indiana (collectively "Settling States"), in order that the states could recover health care costs for smoking-related illnesses experienced by their citizens. Other tobacco companies, known as Subsequent Participating Manufacturers (SPMs), became parties to the MSA, as well. Pursuant to the MSA, the OPMs and SPMs (collectively "PMs") are required to make substantial annual payments based upon certain data and calculations set forth in the MSA. According to the MSA, these annual payments are subject to certain adjustments, reductions and offsets. Also set forth in the MSA is the requirement that an Independent Auditor calculate the amount of all payments owed under the MSA, determine the amount of any applicable adjustments or reductions, and allocate such payments or adjustments.

For the year 2003, the PMs dispute the final calculations of the Independent Auditor, specifically with regard to the Independent Auditor's determination not to apply a particular adjustment for that year. The Settling States agree with the Independent Auditor as to the final calculations for 2003. Maintaining their position, the PMs moved the trial court to compel arbitration of the matter. Following a hearing, the trial court ordered the matter to arbitration. The State filed a motion to correct error, which the trial court denied. The State now appeals.

The State contends that the trial court erred by ordering it to participate in arbitration. We first note that this Court applies a de novo standard of review to a trial court's determination regarding a motion to compel arbitration. HemoCleanse, Inc. v. Philadelphia Indemnity Ins. Co., 831 N.E.2d 259, 262 (Ind.Ct.App.2005), reh'g denied, trans. denied, 855 N.E.2d 1009. Further, we apply ordinary contract principles to determine whether the parties have agreed to arbitrate a dispute. Bielfeldt v. Nims, 805 N.E.2d 415, 418 (Ind.Ct.App.2004), reh'g denied, trans. denied. In interpreting a contract, we give the language of the contract its plain and ordinary meaning. Trustcorp Mortg. Co. v. Metro Mortg. Co., Inc., 867 N.E.2d 203, 213 (Ind.Ct.App.2007), reh'g denied. When construing arbitration agreements, every doubt is to be resolved in favor of arbitration. Sanford v. Castleton Health Care Center, LLC, 813 N.E.2d 411, 416 (Ind.Ct.App.2004), trans. denied. Parties are bound to arbitrate all matters that are not explicitly excluded and that reasonably fit within the language used. Daimler Chrysler Corp. v. Franklin, 814 N.E.2d 281, 285 (Ind.Ct.App.2004). However, arbitration agreements are not to be extended by construction or implication; therefore, parties are bound to arbitrate only those issues that by clear language they have agreed to arbitrate. Id. The court should attempt to determine the intent of the parties at the time the contract was made by examining the language used to express their rights and duties. Id. The trial court's conclusions with regard to the construction of the terms of a written arbitration contract are also reviewed de novo by this Court. Sanford, 813 N.E.2d at 416-17.

The present dispute concerns the Independent Auditor's refusal to apply a particular adjustment to the PMs' payments for 2003. Pursuant to the terms of the MSA, each PM makes an annual payment as determined by the calculations of the Independent Auditor. The Independent Auditor calculates and determines the amount of all payments owed pursuant to the MSA, as well as any adjustments, reductions and offsets thereto and performs all calculations in connection therewith. In order to determine the annual payments of the PMs, the Independent Auditor begins with a base payment amount and then applies any applicable adjustments, reductions and/or offsets. One of the adjustments the Independent Auditor must consider each year is the Non-Participating Manufacturers Adjustment ("NPM Adjustment"). Non-Participating Manufacturers (NPMs) are those cigarette manufacturers that have not joined the MSA and, therefore, are not subject to its restrictions. The NPM Adjustment potentially reduces the annual payment of the PMs in compensation for their market share loss to NPMs. The Independent Auditor did not apply the NPM Adjustment to the payment of the PMs for the year 2003. The State defends the decision of the Independent Auditor and maintains that the NPM Adjustment does not apply. It is this refusal of the Independent Auditor to apply the NPM Adjustment for which the PMs requested arbitration pursuant to the arbitration clause of the MSA. Sub-section XI (c) of the MSA sets forth the arbitration clause as follows:

(c) 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) or subsection XI(i)) 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.

MSA, Appellees' Appendix at 78.

The State avers that this dispute is not subject to arbitration. Specifically, the State maintains that the NPM Adjustment was properly denied for 2003 because the State had in effect and diligently enforced a Qualifying Statute, and, the State posits, the diligent enforcement of a Qualifying Statute is not an arbitrable issue pursuant to the MSA. A Qualifying Statute is a statute or regulation of a Settling State that effectively and fully neutralizes the cost disadvantages that the PMs experience vis-á-vis NPMs in the particular Settling State as a result of the provisions of the MSA.² The relevance of a State's diligent enforcement of a Qualifying Statute to the NPM Adjustment for any particular year is explained in the MSA, which provides, generally, that a Settling State's annual payment from the PMs is not subject to an NPM Adjustment (i.e., a reduction) if the Settling State continuously had a Qualifying Statute in full force and effect during the calendar year immediately preceding the year in which the payment is due, and diligently enforced the provisions of such statute during that calendar year. See Sub-section IX (d)(2)(B) of MSA, Appellees' App. at 58-59. The State of Indiana enacted a Qualifying Statute in 1999, which is codified at Ind.Code § 24-3-3. The State claims that arbitration is not applicable to the issue of its enforcement of its Qualifying Statute because the determination regarding diligent enforcement does not "arise out of calculations performed by or determinations made by" the Independent Auditor as required by the arbitration clause of the MSA.

First, the NPM Adjustment is clearly an arbitrable issue under the MSA. The NPM Adjustment is, simply, an adjustment. The MSA directs that the Independent Auditor shall calculate and determine the amount and allocation of all adjustments to be applied to the annual payments of the PMs. See Sub-section XI (a)(1) of MSA, Appellees' App. at 77. Therefore, the NPM Adjustment is a calculation performed by and/or a determination made by the Independent Auditor. Accordingly, the dispute between the parties regarding the Independent Auditor's refusal to apply the NPM Adjustment for the PMs' 2003 annual payments is a controversy arising out of a calculation performed by or a determination made by the Independent Auditor, as required by the arbitration clause of the MSA.

Furthermore, contrary to the State's argument, the determination of the diligent enforcement of a Qualifying Statute is part and parcel of the determination of the application of the NPM Adjustment made by the Independent Auditor. Sub-section IX (d)(2) provides:

(d) Non-Participating Manufacturer Adjustment

(1) Calculation of NPM Adjustment for Original Participating Manufacturers.

* * * * * *

(2) Allocation among Settling States of NPM Adjustment for Original Participating Manufacturers.

(A) The NPM Adjustment set forth in subsection (d)(1) shall apply to the Allocated Payments of all Settling States, except as set forth below.

(B) A Settling State's Allocated Payment shall not be subject to an NPM

Adjustment: (i) if such Settling State continuously had a Qualifying Statute (as defined in...