State ex rel. Stenehjem v. Philip Morris

• Decision Date: 07 June 2007
• Docket Number: No. 20060207.,No. 20060213.,20060207.,20060213.
• Court: North Dakota Supreme Court
• Parties: STATE of North Dakota, ex rel. Wayne STENEHJEM, Attorney General, Plaintiff and Appellee v. PHILIP MORRIS, INCORPORATED, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, R.J. Reynolds Tobacco Company, Liggett Group Inc., United States Tobacco Manufacturing Company Inc., and United States Tobacco Sales and Marketing Company Inc., Defendants Philip Morris, Incorporated, Lorillard Tobacco Company, and R.J. Reynolds Tobacco Company, Defendants and Appellants State of North Dakota, ex rel. Wayne Stenehjem, Attorney General, Plaintiff and Appellee v. Philip Morris, Incorporated, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, R.J. Reynolds Tobacco Company, Liggett Group Inc., United States Tobacco Manufacturing Company Inc., and United States Tobacco Sales and Marketing Company Inc., Defendants Commonwealth Brands, Inc., Daughters & Ryan, Inc., Farmers Tobacco Company of Cynthiana, Inc., House of Prince A/S Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc., Kreteck International, Inc., Liberty Brands, LLC, Liggett Group LLC, Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Sherman's 1400 Broadway N.Y.C., Inc., Top Tobacco, L.P., Vibo Corporation d/b/a General Tobacco, Virginia Carolina Corporation, Inc., and Von Eicken Group, Appellants.

732 N.W.2d 720

2007 ND 90

STATE of North Dakota, ex rel. Wayne STENEHJEM, Attorney General, Plaintiff and Appellee v. PHILIP MORRIS, INCORPORATED, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, R.J. Reynolds Tobacco Company, Liggett Group Inc., United States Tobacco Manufacturing Company Inc., and United States Tobacco Sales and Marketing Company Inc., Defendants Philip Morris, Incorporated, Lorillard Tobacco Company, and R.J. Reynolds Tobacco Company, Defendants and Appellants State of North Dakota, ex rel. Wayne Stenehjem, Attorney General, Plaintiff and Appellee v. Philip Morris, Incorporated, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, R.J. Reynolds Tobacco Company, Liggett Group Inc., United States Tobacco Manufacturing Company Inc., and United States Tobacco Sales and Marketing Company Inc., Defendants

Commonwealth Brands, Inc., Daughters & Ryan, Inc., Farmers Tobacco Company of Cynthiana, Inc., House of Prince A/S Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc., Kreteck International, Inc., Liberty Brands, LLC, Liggett Group LLC, Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe

Natural Tobacco Company, Inc., Sherman's 1400 Broadway N.Y.C., Inc., Top Tobacco, L.P., Vibo Corporation d/b/a General Tobacco, Virginia Carolina Corporation, Inc., and Von Eicken Group, Appellants.

No. 20060207.

No. 20060213.

Supreme Court of North Dakota.

June 7, 2007.

Todd Adam Sattler, Assistant Attorney General, Office of Attorney General, Bismarck, N.D., for plaintiff and appellee.

Stephen R. Patton (argued on behalf of Original Participating Manufacturers), Kirkland & Ellis LLP, Chicago, Ill., and Lawrence Bender (appeared), Pearce & Durick, Bismarck, N.D., for defendant and appellant R.J. Reynolds Tobacco Company.

Patrick J. Ward (appeared) and Lawrence E. King (appeared), Zuger Kirmis & Smith, Bismarck, N.D., for defendants Philip Morris, Incorporated and Brown & Williamson Tobacco Corporation; and Thomas J. Frederick (appeared), Winston & Strawn, Chicago, Ill., for defendant and appellant Philip Morris, Incorporated.

Gayle E. Rosenstein (on brief), Weil, Gotshal & Manges LLP, Shores, Cal., for defendant and appellant Lorillard Tobacco Company.

Robert J. Brookhiser (argued on behalf of Subsequent Participating Manufacturers) and Elizabeth B. McCallum (on brief), Howrey LLP, Washington, DC, and Gary R. Wolberg (appeared), Fleck, Mather & Strutz, Bismarck, N.D., for appellants Commonwealth Brands, Inc., Daughters & Ryan, Inc., Farmers Tobacco Company of Cynthiana, Inc., House of Prince A/S Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc., Kreteck International, Inc., Liberty Brands, LLC, Liggett Group LLC, Peter Stokkebye Tobaksfabrik A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Sherman's 1400 Broadway N.Y.C., Inc., Top Tobacco, L.P., Vibo Corporation d/b/a General Tobacco, Virginia Carolina Corporation, Inc., and Von Eicken Group.

SANDSTROM, Justice.

[¶ 1] Philip Morris, Inc., and several other tobacco manufacturers appealed from a district court order denying their motion to compel arbitration of a dispute with the State over the payment of tobacco settlement funds. We conclude the plain and unambiguous language of the parties' settlement agreement requires arbitration of their dispute over application of the diligent enforcement exemption to the agreement's non-participating manufacturer adjustment. We reverse and remand for entry of an order compelling arbitration.

I

[¶ 2] In the mid-1990s, North Dakota and numerous other states sued Philip Morris, Inc., Brown & Williamson Tobacco Corp., R.J. Reynolds Tobacco Co., Inc., and Lorillard Tobacco Co., Inc., alleging that the tobacco companies had conspired for decades to conceal the health risks related to smoking and the addictiveness of nicotine from the American public, and that the companies had intentionally targeted minors through their marketing and promotional efforts. The states sought damages for the cost to the public of treating smoking-related illnesses. On November 23, 1998, North Dakota, 45 other states, the District of Columbia, the Commonwealth of Puerto Rico, and four United States territories entered into a comprehensive "Master Settlement Agreement" with the tobacco companies.

[¶ 3] Under the master settlement agreement, the plaintiffs are referred to as the "Settling State[s]," and the defendant tobacco companies are referred to as the "Original Participating Manufacturers." The settlement agreement allowed other tobacco companies not named as defendants to join the agreement, and those that joined are referred to as "Subsequent Participating Manufacturer[s]." The original and subsequent manufacturers are collectively referred to in the settlement agreement as "Participating Manufacturer[s]," and tobacco companies that did not join the agreement are referred to as "Non-Participating Manufacturer[s]."

[¶ 4] The settlement agreement provided that the settling states would dismiss their lawsuits and release past and future claims against the participating manufacturers in exchange for regular annual payments from the participating manufacturers and extensive restrictions on their marketing, advertising, and lobbying. The participating manufacturers are required to make a single nationwide payment into an escrow account by April 15 of each year, and the payment is then allocated among the settling states in accordance with agreed upon percentages. North Dakota receives 0.3660138 percent of each payment. Of the more than $47 billion dollars paid to the settling states since the agreement became effective, North Dakota has received more than $174 million, which has been deposited in the Tobacco Settlement Trust Fund established under N.D.C.C. § 54-27-25.

[¶ 5] The participating manufacturers' annual payment obligation is determined by an "Independent Auditor," currently PricewaterhouseCoopers, under a detailed formula. An aggregate base payment amount is determined for the calendar year according to a list of yearly payments contained in the settlement agreement, and then various adjustments and offsets are applied. One of the adjustments is the "[Non-Participating Manufacturer] Adjustment." Because non-participating manufacturers are not subject to the settlement agreement's payment obligations and marketing restrictions, the settlement agreement allows a reduction of the participating manufacturers' annual payment obligation if: (1) the participating manufacturers prove they have collectively lost market share of more than two percent to the non-participating manufacturers compared to their combined market share before the settlement agreement went into effect, and (2) an independent firm of economic consultants finds that the settlement agreement was a "significant factor" contributing to that market share loss.

[¶ 6] A settling state, however, may avoid the non-participating manufacturer adjustment under subsection IX(d)(2)(B) of the agreement "if such Settling State continuously had a Qualifying Statute ... in full force and effect during the entire calendar year immediately preceding the year in which the payment in question is due, and diligently enforced the provisions of such statute during such entire calendar year." A "Qualifying Statute" is defined in subsection IX(d)(2)(E) of the agreement as a "Settling State's statute ... that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating Manufacturers within such Settling State as a result of the provisions of this Agreement." North Dakota enacted its qualifying statute in 1999 on the basis of a model statute included as an exhibit in the settlement agreement. See N.D.C.C. ch. 51-25. If a settling state is subject to this "diligent enforcement" exemption, the agreement requires that the independent auditor reallocate that state's share of the non-participating manufacturer adjustment among other settling states that do not qualify for the exemption pro rata in proportion to their respective allocable shares.

[¶ 7] In each settling state, the court that approved the settlement agreement and entered the corresponding consent decree is that state's master settlement agreement court. The December 23, 1998, consent decree gives the District Court of Cass County, East Central Judicial District, jurisdiction over the implementation and enforcement of the settlement agreement. Subsection VII(a) of the agreement provides in relevant part:

(a) Jurisdiction. Each Participating Manufacturer and each Settling State acknowledge that the Court: (1) has jurisdiction over the subject matter of the action identified in Exhibit D in such Settling State and over each Participating Manufacturer; (2) shall retain exclusive jurisdiction for the purposes of implementing and enforcing this Agreement and the Consent Decree as to such Settling State; and (3) except as provided in subsections IX(d), XI(c) and XVII(d) and Exhibit O, shall be the only court to which disputes under this Agreement or the Consent Decree are presented as to such Settling State.

(emphasis added). The relevant exception here, subsection XI(c) of the agreement, provides:

(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...