State ex rel. Greitens v. Am. Tobacco Co.

Citation509 S.W.3d 726
Decision Date14 February 2017
Docket NumberNo. SC95422,SC95422
Parties STATE EX REL. Eric GREITENS, Appellant/Cross-Respondent, v. AMERICAN TOBACCO CO., et al., Respondents/Cross-Appellants, and Commonwealth Brands, Inc., et al., Appellants.
CourtUnited States State Supreme Court of Missouri

The state was represented by Emily Ottenson and James P. Emanuel of the attorney general's office in Jefferson City, (573) 751-3321.

R.J. Reynolds and Phillip Morris were represented by Elli Leibenstein and Julia Emfinger of Greenberg Traurig in Chicago, (312) 456-8400; William Ray Price Jr., Jeffery T. McPherson and Thomas B. Weaver of Armstrong Teasdale LLP in St. Louis, (314) 621-5070; Robert F. Murray of Shands, Elbert, Gianoulakis & Giljum LLP in St. Louis, (314) 241-3963; and Peter J. Biersteker and Hashim M. Mooppan of Jones Day in Washington, D.C., (202) 879-3939.

Certain subsequent participating tobacco manufacturers were represented by Jonathan F. Dalton and Angela L. Odlum of Armstrong Teasdale LLP in St. Louis, (314) 621-5070; and Elizabeth B. McCallum and Robert J. Brookhiser Jr. of BakerHostetler LLP in Washington, D.C., (202) 861-1500.

Mary R. Russell, Judge

This case concerns disputes between Missouri and certain tobacco companies arising out of the Master Settlement Agreement ("MSA"). Tobacco manufacturers that participated in the MSA ("PMs"), Missouri, and other states arbitrated a dispute arising out of the MSA. One dispute concerned the application of the Non–Participating Manufacturer Adjustment ("NPM Adjustment"), a provision in the MSA that reduces the amount the PMs must pay to states that failed to diligently enforce certain legislation during a relevant year. During the arbitration proceedings, more than 20 states and the PMs entered into a partial settlement agreement. Missouri and other states did not join the settlement. The arbitration panel ("the Panel") issued a Stipulated Partial Settlement and Award ("Award"), which gave effect to the partial settlement and directed how the NPM Adjustment would be allocated among non-settling states in light of the settlement.

The Panel ultimately found that Missouri was not diligent in enforcing its legislative enactment and, consequently, the NPM Adjustment applied to reduce Missouri's payment from the PMs for the year in question.

Missouri filed motions with the Circuit Court of the City of St. Louis seeking relief from the Panel's decisions.1 Missouri asked for vacatur or modification of the Panel's Award, arguing the Award improperly amended the MSA in a manner that materially and adversely impacted Missouri's legal interests under the contract. Missouri also moved to compel the PMs to engage in a single-state arbitration with Missouri over another dispute regarding application of the NPM Adjustment in a subsequent year. The trial court overruled Missouri's motion to compel single-state arbitration, but modified the Award as requested by Missouri.

Missouri appeals from the trial court's judgment overruling its motion to compel single-state arbitration, arguing the MSA does not contain any provisions indicating that the parties agreed to arbitrate their disputes in a nationwide or multistate forum. This Court disagrees and finds that the text and structure of the MSA demonstrate the parties intended to arbitrate disputes relating to the NPM Adjustment in a multistate arbitration proceeding. Because the dispute for which Missouri sought to compel single-state arbitration concerns the NPM Adjustment dispute, the trial court correctly refused to compel single-state arbitration.

In their cross-appeal, the PMs argue that the trial court erred in modifying the Panel's Award because the Panel interpreted the parties' contract and, under the applicable standard of review, courts of this state are not permitted to review the merits of the Panel's interpretation. If the Panel's Award had interpreted ambiguous provisions of the MSA, the PMs would be correct. However, this Court finds that the relevant terms of the MSA were unambiguous and that the Panel exceeded its powers by amending those terms without the consent of Missouri and other states that were materially and negatively affected by the amendment. As a result, the Panel's Award was appropriately modified so that it no longer affects Missouri's contractual rights and expectations under the MSA.

The judgment of the trial court is affirmed.

Factual Background

In 1998, 52 U.S. states and territories2 entered into the MSA with the PMs.3 Under the MSA, the states released the PMs from tobacco-related consumer protection and product liability lawsuits in return for the PMs' agreement to limit certain advertising and legislative activities and to make annual payments to the states in perpetuity. Non-participating manufacturers ("NPMs") are tobacco companies that did not agree to the MSA.

The PMs' annual MSA payments are subject to a number of adjustments, which must be calculated by an Independent Auditor ("Auditor"). Once the Auditor calculates the amount the PMs are required to pay the states under the MSA for a given year, the PMs make payments to an escrow agent, who then apportions and distributes the funds to the states according to their contractually negotiated "allocable shares."4

One of the adjustments to the PMs' annual payments is the NPM Adjustment. To ensure the PMs did not lose market share to the NPMs, the drafters of the MSA included the NPM Adjustment, which reduces the amount the PMs must pay the states if: (1) the PMs' share of the national market for cigarettes decreases by two percentage points as compared to pre–MSA levels and (2) the MSA was a "significant factor" contributing to the national market share loss. If the Auditor concludes these conditions are met in a payment year, the NPM Adjustment amount may be deducted from every state's MSA payment on a pro rata basis according to the state's allocable share. A state may avoid having its MSA payment reduced, however, by showing that it enacted and "diligently enforced" legislation (referred to as a "qualifying statute") requiring the NPMs to escrow funds on a per-cigarette basis that is roughly equivalent to the PMs' per-cigarette payment under the MSA.5 The allocable shares of the NPM Adjustment of "diligent" states are then "reallocated" among the remaining, "non-diligent" states on a pro rata basis.

A dispute arose over the NPM Adjustment for the 2003 MSA Payment. The Auditor determined that the two preliminary conditions for application of the NPM Adjustment were satisfied in 2003 but declined to apply the adjustment because the states' diligence had not yet been determined. The Auditor sent the dispute to binding arbitration in accordance with the arbitration clause of the MSA. Missouri and other affected states refused to arbitrate and filed declaratory judgment actions in their respective state courts for a determination regarding the meaning of the term "diligently enforced" as used in the NPM Adjustment provisions of the MSA. The PMs moved to compel arbitration in these actions under the arbitration clause of the MSA, which provides that any dispute, controversy, or claim "arising out of or relating to" any calculations or determinations made by the Auditor "shall be submitted to binding arbitration." MSA § XI(c). Because the 2003 NPM Adjustment dispute arose out of and related to calculations or determinations made by the Auditor for the PMs' 2003 MSA payments, the trial court ordered Missouri to arbitrate its challenge to the application of the NPM Adjustment to the 2003 MSA Payment.

Missouri and 50 other states ultimately agreed to collectively arbitrate the 2003 NPM Adjustment dispute with the PMs pursuant to the Agreement Regarding Arbitration ("ARA").6 The PMs incentivized the states to join the multistate arbitration by offering a liability reduction of 20 percent for any state ultimately found not diligent and agreeing to release certain funds held in a disputed payments account.

At the initiation of the multistate arbitration, all states claimed they had diligently enforced their qualifying statutes, yet the PMs originally contested the diligence of every state. Before the Panel heard arguments regarding the diligence of individual states, however, the PMs issued a "no-contest" determination as to 16 states ("no-contest states").

The Panel then held diligence hearings for the remaining contested states, starting with Missouri. At the outset of its hearing, Missouri sought to reserve the opportunity to challenge the diligence of any remaining contested states should the PMs decide to stop contesting the diligence of any state later in the arbitration proceedings. The Panel agreed that Missouri would be given that opportunity should the situation arise. At the diligence hearing, Missouri and the PMs introduced evidence regarding Missouri's attempts to enforce its qualifying statute in 2003 and presented fact witnesses who discussed the intended meaning of the term "diligently enforced" as used in the MSA.

As the Panel proceeded with the state-specific diligence hearings, the PMs and 22 states ("Term Sheet States") reached an agreement to settle disputes regarding the NPM Adjustment for 2003 and subsequent years (the "Term Sheet Settlement").7 Only two of the Term Sheet States were no-contest states.

Missouri and other non–Term Sheet States objected to the settlement, arguing that it negatively affected their rights under the MSA. Despite those objections, the Panel entered its Award giving effect to the Term Sheet Settlement. Because the NPM Adjustment provisions of the MSA were silent as to how the Panel should proceed after a partial settlement, the Panel applied a common law pro rata judgement reduction method to the NPM Adjustment, reducing the available NPM Adjustment amount by the aggregated shares of the Term Sheet States. The Panel determined that the non–Term Sheet States would not be prejudiced by the Term Sheet Settlement if the NPM Adjustment was...

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