State v. Am. Tobacco Co.
| Decision Date | 22 September 2015 |
| Docket Number | No. ED 101542,ED 101542 |
| Citation | 534 S.W.3d 840 |
| Parties | STATE of Missouri, Appellant/Cross–Respondent, v. AMERICAN TOBACCO CO., et al., Respondents/Cross–Appellants. |
| Court | Missouri Court of Appeals |
The State of Missouri ("Missouri") appeals from the trial court's Amended Order and Judgment denying Missouri's motion to vacate the Non-Diligence Award and confirming the Final Award entered in the 2003 Non-Participating Manufacturers' ("NPMs") Adjustment Arbitration. Missouri also appeals from the trial court's judgment denying Missouri's motion to compel a single-state arbitration between only it and the Participating Manufacturers ("PMs") of cigarettes and other tobacco products, which entered into a Master Settlement Agreement ("MSA") with Missouri and fifty-one other States and U.S. Territories ("States"), to determine whether Missouri diligently enforced its "Qualifying Statute" in 2004. The PMs cross-appeal from the trial court's modification of the Settlement Award, ordering the Independent Auditor ("IA") to treat the twenty Signatory States whose diligence was contested, but not required to be proven, as non-diligent when calculating the NPMs' Adjustment applicable to the amount owed to Missouri for 2003. We reverse.
This case began in 1997—approximately eighteen years ago—when Missouri filed suit against several tobacco companies for health care costs and other damages imposed upon the state by cigarette smoking. State ex rel. Nixon v. American Tobacco Co., Inc., 34 S.W.3d 122, 125 (Mo. banc 2000); "ABCs of the Tobacco Master Settlement Agreement," www.naag.org/ publications/naagazette/volume_1_number_2; Master Settlement Agreement, http:// www.naag.org/assets/redesign/files/msa-tobacco/MSA.pdf. Around the same time, more than forty states commenced similar litigation, asserting various consumer protection claims for monetary, equitable, and injunctive relief against certain tobacco product manufacturers and others as defendants. "ABCs of the Tobacco Master Settlement Agreement," www.naag.org/ publications/naagazette/volume_1_number_2; Master Settlement Agreement, http:// www.naag.org/assets/redesign/files/msa-tobacco/MSA.pdf.
In November 1998, more than forty states and territories ("States") reached a "landmark agreement," known as the MSA, with four major manufacturers in the cigarette industry, known as the "original" Participating Manufacturers ("OPMs").1 Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 533, 121 S.Ct. 2404, 150 L.Ed.2d 532 (2001). Since 1998, more than forty "subsequent" Participating Manufacturers ("SPMs") have joined the MSA under similar terms as the OPMs.2 (Collectively, OPMs and SPMs are referred to as "PMs"). The MSA was approved by the circuit court in March 1999.
In the MSA, the "Signatory States"3 settled their consumer protection claims against the tobacco companies in exchange for monetary payments and permanent injunctive relief, designed to reduce cigarette smoking in the U.S. and compensate, in part, for the health care costs associated with treating tobacco-related diseases under state Medicaid programs. "ABCs of the Tobacco Master Settlement Agreement," http://www.naag.org/publications/ naagazette/volume_1_number_2/the_abcs_of_the_tobacco_master_settlement_agreement.php. In exchange for the States' release of their claims against the PMs, the MSA requires PMs to permanently restrict targeting youth through their advertising, marketing, and promotion of tobacco products, to make annual payment of billions of dollars to the States in perpetuity, and to contribute $1.5 billion to establish what has become the American Legacy Foundation, an entity dedicated to counter-advertising and public education against cigarette smoking. MSA, available at http://www.naag.org/ assets/redesign/files/msa-tobacco/MSA.pdf (hereinafter "MSA").
The MSA sets forth the specific amount all PMs agree to pay the States each year based on their relative market share, subject to a number of adjustments calculated by an Independent Auditor ("IA"). MSA, § IX.4 The adjustment at the center of this dispute is the Non-Participating Manufacturer ("NPM") Adjustment found in Section IX of the MSA, which potentially can reduce the payments to the States. Once the IA calculates all the adjustments, the PMs make their annual payments to an escrow agent, which then apportions the funds to each State according to its previously negotiated "allocable share." MSA, Exhibit A. Missouri's allocable share is 2.2746011%, meaning that each year Missouri receives approximately 2.27% of the total annual payments made by the PMs. MSA, Exhibit A.
Based on 2002 sales, the PMs were obligated to pay the States approximately $6.4 billion on April 15, 2003. Of that amount, Missouri's share was approximately $146 million.
Non-Participating Manufacturer Adjustment.
Some tobacco manufacturers elected not to participate in the MSA; these Non-Participating Manufacturers ("NPMs") are not required to make annual payments to the States, nor are they bound by the MSA's advertising restrictions. The NPMs could theoretically price their cigarettes at lower and more competitive rates than the PMs, and thus undermine the MSA's public health goals by shifting market share from the PMs to NPMs. The MSA, however, attempts to ameliorate this cost disparity between PMs and NPMs by giving PMs an "NPM Adjustment," an adjustment which can lower the PMs' payment obligation to the States if two conditions are met:
MSA, §§ IX(d)(1)(A), (B)(iii), (C). If both conditions are met, the NPM Adjustment lowers the PMs' payment obligation that year by three times the percentage of national market share that the PMs lost in excess of the 2% threshold. The NPM Adjustment percentage is deducted from every State's MSA payment on a pro rata basis according to its allocable share. MSA, § IX(d)(2). The NPM Adjustment allows an individual State to avoid losing its allocable share of the NPA Adjustment by enacting and "diligently enforcing" model legislation, also called a "Qualifying Statute."5 States that diligently enforce their Qualifying Statute do not have their annual MSA payments reduced by the NPM Adjustment percentage. Additionally, when a State diligently enforces its Qualifying Statute, the amount that its payment would have been reduced via the NPM Adjustment (had it not diligently enforced its Qualifying Statute) is reallocated among all other States that did not enact and diligently enforce their own model legislation. MSA, §§ IX(d)(2)(B)-(D). Thus, the diligent States' incentive is that the non-diligent States are collectively responsible for the total available adjustment, including what would have been the shares of the diligent States; the fewer the number of non-diligent States, the greater the amount of the adjustment that each non-diligent State must bear. A non-diligent State's total loss from the NPM Adjustment (after reallocation) is capped at the amount of its annual payment from the PMs. MSA, § IX(d)(2)(C).
In 2003, the PMs lost more than two percent of their 1997 national market share to NPMs and the potential NPM Adjustment for the OPMs alone was roughly $1.148 billion. Missouri's original allocable share of the 2003 NPM Adjustment was approximately $26 million. The reallocation process could have cost Missouri up to its full 2003 MSA payment of $146 million if it had been the only State found non-diligent.
The IA determined that no NPM Adjustment should be applied because the States' diligent enforcement had not yet been determined, also indicating that it believed it lacked the authority to decide the diligent enforcement issue. The IA sent the dispute to binding arbitration in accordance with subsection XI(c) of the MSA, which requires that the parties submit to a "binding arbitration" of "[a]ny dispute ... arising out of or relating to... any determinations made by[] the Independent Auditor (including, without limitation, any dispute concerning ... any of the adjustments ... described in subsection IX(j) ...)," one of which is the NPM Adjustment.
When the States refused to arbitrate, Missouri asked the circuit court to enter a declaratory judgment "construing the term `diligently enforced'" under Missouri law, so as to establish the standard to be applied to a determination in the future dispute. Missouri argued that the court retained jurisdiction to construe and enforce terms of the MSA and to declare the meaning, under Missouri law, of any disputed term contained therein.
The PMs, however, filed a motion to compel arbitration. The court cited the following arbitration clause under the MSA's subsection XI(c), which addresses the calculation and disbursement of payment:
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 XI(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.
Thus, on January 22, 2007, the court granted the PMs' motion to compel arbitration and held that "the question of...
To continue reading
Request your trial
-
Latenser v. Tarmac Int'l, Inc.
...a motion to compel arbitration should have been granted is a question of law, which we review de novo. " State v. American Tobacco Co. , 534 S.W.3d 840, 862 (Mo. App. 2015). Our review of the trial court’s interpretation of an arbitration provision is also de novo , as arbitration is contra......