State v. Philip Morris Usa, Inc.

• Decision Date: 07 October 2008
• Docket Number: No. COA07-409.,COA07-409.
• Citation: 666 S.E.2d 783
• Court: North Carolina Court of Appeals
• Parties: STATE of North Carolina, Plaintiff, v. PHILIP MORRIS USA, INC.; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco Company, Individually and as successor by merger to The American Tobacco Company; and Lorillard Tobacco Company, Defendants.

666 S.E.2d 783

STATE of North Carolina, Plaintiff, v. PHILIP MORRIS USA, INC.; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco Company, Individually and as successor by merger to The American Tobacco Company; and Lorillard Tobacco Company, Defendants.

No. COA07-409.

Court of Appeals of North Carolina.

October 7, 2008.

Appeal by plaintiff from order entered 4 December 2006 by Judge Ben F. Tennille in Wake County Superior Court. Heard in the Court of Appeals 13 November 2007.

Attorney General Roy Cooper, by Special Deputy Attorneys General Buren R. Shields, III and Melissa L. Trippe, for plaintiff-appellant.

Manning, Fulton & Skinner, P.A., by Michael T. Medford, Raleigh and Winston & Strawn, LLP, by Thomas J. Frederick, Chicago, IL, for defendant-appellee Philip Morris USA, Inc.

Womble Carlyle Sandridge & Rice, PLLC, by Burley B. Mitchell, Jr. and W. David Edwards, Winston-Salem, and Kirkland & Ellis LLP, by Stephen R. Patton, Chicago, IL and Douglas G. Smith, for defendant-appellee R.J. Reynolds Tobacco Company.

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by Jim W. Phillips, Jr., Greensboro and Weil, Gotshal & Manges LLP, by Penny Reid, New York, NY, for defendant-appellee Lorillard Tobacco Company.

Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., by Clifton L. Brinson, Raleigh and Howrey, LLP, by Robert J. Brookhiser and Elizabeth B. McCallum, Washington, DC, for defendants-appellees Subsequent Participating Manufacturers.

GEER, Judge.

This appeal arises out of the Master Settlement Agreement ("MSA") entered into by most of the states and various tobacco manufacturers to resolve tobacco-related litigation. The State appeals from the Business Court's order compelling arbitration, arguing that the order is barred by sovereign immunity, interferes with prosecutorial discretion, and is inconsistent with the MSA. Forty-seven other jurisdictions have already addressed identical litigation brought by other governments and unanimously have concluded that the issues must be arbitrated.¹ While those opinions are not binding on us, we are in agreement with the reasoning in those decisions and see no basis for distinguishing the North Carolina litigation. We, therefore, affirm the Business Court's order compelling arbitration.

Facts

After decades of litigation between private consumers and cigarette manufacturers, the attorneys general in all 50 states initiated public causes of action against tobacco manufacturers. In 1998, 46 states (including North Carolina), the District of Columbia, Puerto Rico, and five U.S. Territories (collectively "the settling states") entered into the MSA with Philip Morris USA, Inc., R.J. Reynolds Tobacco Company, and Lorillard Tobacco Company, the original participating manufacturers (the "OPMs"). Since the execution of the agreement, more than 40 other manufacturers (identified as subsequent participating manufacturers or "SPMs") have joined the agreement. Together, the OPMs and SPMs are referred to as participating manufacturers (or "PMs").

Under the MSA, the PMs agreed to make annual payments to the settling states as compensation for smoking-related medical costs. The MSA requires the PMs, on 15 April of every year, to each make a single payment into an escrow account in an amount calculated annually by an independent auditor based on a formula set out in the MSA. The auditor allocates the annual settlement payment among the settling states in accordance with the MSA. The annual national payment is, however, subject to several adjustments, including the one at issue in this case: the non-participating manufacturers (the "NPMs") adjustment.

The NPM adjustment reduces the PMs' annual payment obligations as compensation for their losing market share to tobacco companies not subject to the MSA. In order to receive the adjustment, (1) the PM must have experienced a "Market Share Loss,"² and (2) an economic consulting firm must determine "that the disadvantages experienced as a result of the provisions of [the MSA] were a significant factor contributing to the Market Share Loss." (Internal quotation marks omitted.) If a PM meets these two requirements, then the PM may be entitled to reduce its payment for that year.

A state may avoid its share of the NPM adjustment by demonstrating that, during the year at issue, it "diligently enforced" a "Qualifying Statute," defined as a statute as set out in the MSA that imposes an escrow obligation on NPMs that is roughly equivalent to the payments the NPMs would pay if they had signed the MSA ("the escrow statute"). If a state makes the required showing, its share of the adjustment is reallocated to other settling states that did not diligently enforce a qualifying statute.

In early 2004, the independent auditor requested information from the National Association of Attorneys General ("NAAG") regarding qualifying statutes in the settling states. The NAAG informed the auditor that all of the settling states had enacted model statutes that they represented to have been in full force and effect. Based on this information, the auditor concluded that "no possible NPM adjustment is allocated to PMs." As the Business Court explained, the independent auditor, "having found that each Settling State had a Qualifying Statute in force, effectively presumed that each Settling State had diligently enforced that statute as required" by the MSA.

The current dispute involves the annual payment that was due on 17 April 2006. Pursuant to the NPM adjustment provisions, the economic consulting firm concluded that the MSA was a significant factor contributing to the PMs' 2003 market share loss. The OPMs, therefore, requested that the independent auditor apply the NPM adjustment to the payments due on 17 April 2006. The auditor, however, indicated that it "would not modify its current approach to the application of the NPM Settlement Adjustment" and would continue to presume that the statutes had been diligently enforced.

The OPMs formally objected to the independent auditor's final calculation on 10 April 2006 and requested that North Carolina and the other settling states arbitrate the dispute over the NPM adjustment. North Carolina refused to enter into arbitration, as did the other settling states. On 20 April 2006, the State filed a Motion for Declaratory Order requesting that the Business Court (1) construe the MSA term "diligent enforcement," (2) find and declare that North Carolina had diligently enforced its qualifying statute, (3) find that North Carolina is not subject to an NPM adjustment for 2003, and (4) require the OPMs and SPMs to make the escrow payment into a disputed payments account or seek an offset of any payments made. On 15 May 2006, the OPMs filed a "Motion to Compel Arbitration and to Dismiss or, in the Alternative, Stay This Litigation." The SPMs moved to intervene on 6 June 2006, and the Business Court granted the motion to intervene over the State's objection on 25 July 2006.

On 4 December 2006, the Business Court granted the PMs' motion to compel arbitration, directed that the parties submit their dispute to the arbitration panel as provided in the MSA, and stayed further litigation pending arbitration. The State appealed to this Court.

Discussion

As an initial matter, we note that this appeal is from an order compelling arbitration. Generally, our courts have held that such orders are not immediately appealable. See, e.g., Laws v. Horizon Hous., Inc., 137 N.C.App. 770, 771, 529 S.E.2d 695, 696 (2000) (holding that no immediate right of appeal exists from an order compelling arbitration); Bluffs, Inc. v. Wysocki, 68 N.C.App. 284, 286, 314 S.E.2d 291, 293 (1984) (holding "there is no right of appeal from an order compelling arbitration").

The State does not argue otherwise, but contends that appellate jurisdiction exists because the order compelling arbitration denied its claim of sovereign immunity and, therefore, affects a substantial right under N.C. Gen.Stat. §§ 1-277(a) and 7A-27(d) (2007). See Moore v. N.C. Coop. Extension Serv., 146 N.C.App. 89, 92, 552 S.E.2d 662, 664, appeal dismissed and disc. review denied, 354 N.C. 574, 559 S.E.2d 180 (2001); RPR & Assocs. v. State, 139 N.C.App. 525, 527, 534 S.E.2d 247, 250 (2000) ("[T]he denial of a motion to dismiss based upon the defense of sovereign immunity affects a substantial right and is thus immediately appealable."), aff'd per curiam, 353 N.C. 362, 543 S.E.2d 480 (2001). As discussed in further detail below, we disagree with the State's contention that the Business Court's ruling implicates the State's sovereign immunity. The State has, however, also filed a petition for writ of certiorari. We exercise our discretion under N.C.R.App. P. 21 to grant the petition and review the merits of this appeal.

I

We first address the State's contention that sovereign immunity bars any order compelling the State to arbitrate the question whether North Carolina "diligently enforced" its escrow statute. Sovereign immunity is a common law doctrine that prohibits a lawsuit against the State of North Carolina "unless it consents to be sued or upon its waiver of immunity." Guthrie v. N.C. State Ports Auth., 307 N.C. 522, 534, 299 S.E.2d 618, 625 (1983). Under this doctrine, "`[i]t is for the General Assembly to determine when and under what circumstances the State may be sued.'" Id. (emphasis omitted) (quoting Great Am. Ins. Co. v. Gold, 254 N.C. 168, 173, 118 S.E.2d 792, 795 (1961), overruled on other grounds by Smith v. State, 289 N.C. 303, 222 S.E.2d 412 (1976)).

In this case, however, the State was not sued, but rather brought suit against the OPMs. It then chose to settle the litigation pursuant to the MSA, which included among its terms an arbitration provision. The State does not appear to be arguing that no authority to enter into the MSA existed. Indeed, such an argument could result in forfeiture of hundreds of millions of dollars.

Nor can ...