State v. Philip Morris Inc.

• Decision Date: 07 June 2007
• Docket Number: 72.
• Citation: 869 N.E.2d 636,8 N.Y.3d 574
• Parties: STATE of New York et al., Appellants, v. PHILIP MORRIS INCORPORATED et al., Defendants. Commonwealth Brands, Inc., et al., Nonparty Respondents.
• Court: New York Court of Appeals Court of Appeals

869 N.E.2d 636

8 N.Y.3d 574

STATE of New York et al., Appellants, v. PHILIP MORRIS INCORPORATED et al., Defendants Commonwealth Brands, Inc., et al., Nonparty Respondents.

72.

Court of Appeals of New York.

June 7, 2007.

Andrew M. Cuomo, Attorney General, New York City (Richard Dearing, Barbara D. Underwood and Daniel Smirlock of counsel), for appellants.

Kirkland & Ellis LLP, Chicago, Illinois and New York City (Stephen R. Patton, Peter A. Bellacosa and Douglas G. Smith of counsel), DLA Piper Rudnick Gray Cary U.S. LLP, New York City (Alexander Shaknes of counsel), and Weil, Goshal & Manges LLP (Penny P. Reid of counsel) for Philip Morris Incorporated and others, defendants.

Howrey LLP, Washington, D.C. (Robert J. Brookhiser and Elizabeth B. McCallum of counsel), and Leader & Berkon LLP, New York City (Joseph G. Coleo and Joshua K. Leader of counsel), for nonparty respondents.

OPINION OF THE COURT

PIGOTT, J.

In 1998, the Attorneys General of 46 states (including New York) and five island territories and the Corporation Counsel of the District of Columbia signed a Master Settlement Agreement (MSA) with counsel for the largest tobacco manufacturers in the United States. The MSA was approved, as to New York State, by Supreme Court. The claims brought against the tobacco manufacturers included wrongful marketing and advertising of cigarettes and other tobacco products. Various states sought damages based on the costs of treating smoking-related illnesses. In exchange for a release of liability, the tobacco manufacturers agreed to make annual payments, to be allocated among the Settling States. They also agreed to extensive marketing and advertising restrictions. The Original Participating Manufacturers, as they are known, were later joined by more than 40 smaller tobacco companies, referred to as the Subsequent Participating Manufacturers (SPMs), including movants Commonwealth Brands, Inc. (Commonwealth) King Maker Marketing, Inc. (King Maker), and Sherman 1400 Broadway N.Y.C., Inc. (Sherman).

Lengthy and careful negotiations preceded execution of the MSA.

Not all U.S. tobacco manufacturers have joined the MSA. In order to neutralize cost disadvantages suffered by the Participating Manufacturers (PMs) relative to Non-Participating Manufacturers (NPMs), the MSA provides the Settling States with a strong incentive to enact statutes requiring NPMs to make annual payments toward the costs of treating smoking-related illnesses equivalent to those made by the PMs. The MSA sets out a Model Statute, which, if appropriately enacted, "shall constitute a Qualifying Statute."¹ If a Settling State fails to enact, or does not diligently enforce, a Qualifying Statute, PM payments to that state may be subject to the Non-Participating Manufacturer adjustment (NPM adjustment).

In brief, NPM adjustment can be applied to reduce PM payments to a Settling State if (1) PMs collectively lost market share to NPMs in the preceding year² and (2) disadvantages resulting from the MSA were a "significant factor" contributing to that loss. But payment to a Settling State is not subject to the NPM adjustment

"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."

Settling States that have diligently enforced their respective Qualifying Statutes are not subject to the NPM adjustment; instead, the adjustment is to be reallocated pro rata among Settling States that are subject to the NPM adjustment, reducing the payments they receive. A decision regarding one Settling State's enforcement of its Qualifying Statute could therefore potentially affect the calculation of amounts due to all other Settling States.

The MSA provides that

"an Independent Auditor shall calculate and determine the amount of all payments owed pursuant to [the MSA], 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 among the Settling States, and shall perform all other calculations in connection with the foregoing."

The Independent Auditor "shall be a major, nationally recognized, certified public accounting firm." PricewaterhouseCoopers LLP is currently the Independent Auditor.

The Independent Auditor is responsible for determining whether or not PMs collectively lost market share to NPMs. If there is such a loss, "a nationally recognized firm of economic consultants (the `Firm')" will determine whether disadvantages resulting from the MSA were a significant factor contributing to the loss; its determination is "final and non-appealable." To allow the Independent Auditor to reach a determination about the NPM adjustment before the Firm makes its decision regarding the significant factor condition, the MSA authorizes the Independent Auditor, when information necessary for a determination is missing and not readily available to a party, to "employ an assumption as to the missing information producing the minimum amount that is likely to be due with respect to the payment in question."

The courts that approved the MSA retain jurisdiction to decide disputes about it, as to their respective Settling States, except as otherwise provided. At issue in this case is one of the exceptions, an arbitration provision governing the resolution of disputes about the Independent Auditor's calculations and determinations:

"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."

In March 2004, the Independent Auditor issued preliminary and final notices of calculation for payments due from the PMs for 2003. It determined that the PMs had suffered a market share loss and, employing the "missing information" provision,...