State v. Phillip Morris, Inc.

• Decision Date: 12 September 2006
• Docket Number: No. 17548.,17548.
• Citation: 279 Conn. 785,905 A.2d 42
• Court: Connecticut Supreme Court
• Parties: STATE of Connecticut v. PHILIP MORRIS, INC., et al.

Page 42

905 A.2d 42

279 Conn. 785

STATE of Connecticut v. PHILIP MORRIS, INC., et al.

No. 17548.

Supreme Court of Connecticut.

Argued May 19, 2006.

Decided September 12, 2006.

Joseph Rubin, associate attorney general, with whom were Robert W. Clark, assistant attorney general, and, on the brief, Richard Blumenthal, attorney general, for the appellant (plaintiff).

Robert J. Brookhiser, pro hac vice, with whom were John F. Conway and Elizabeth B. McCallum, pro hac vice, for the appellees (defendant Commonwealth Brands, Inc., et al.).

Stephen R. Patton, pro hac vice, with whom were James H. Rotondo and, on the brief, R. Cornelius Danaher, Jr., Alexander Shaknes, pro hac vice, Douglas G. Smith, pro hac vice, Victoria Wood Chavey, Hartford, and Ben A. Solnit, New Haven, for R.J. Reynolds Tobacco Company et al. as amici curiae.

Brett DeLange, pro hac vice, filed a brief for the state of Alabama et al. as amici curiae.

VERTEFEUILLE, ZARELLA, MIANO, THIM and MACK, Js.

VERTEFEUILLE, J.

The sole issue presented in this appeal is whether the current dispute between the defendants Commonwealth Brands, Inc., King Maker Marketing, Inc., and Sherman 1400 Broadway N.Y.C., Inc. (petitioners), and the plaintiff, the state of Connecticut (state), is subject to arbitration under the arbitration provision of the tobacco litigation master settlement agreement (agreement) to which the petitioners and the state are parties. The state appeals from the judgment of the trial court granting the petitioners' petition to compel arbitration. The state claims that the trial court improperly granted the petition to compel arbitration because the dispute between the parties is not subject to the agreement's arbitration provision. We disagree, and, accordingly, we affirm the judgment of the trial court.

The record reveals the following pertinent factual and procedural history. In 1996, the state brought an action against the major American tobacco companies and other related entities alleging that they were engaged in wrongful advertising and marketing of cigarettes and other tobacco products in Connecticut.¹ Thirty-nine other states initiated similar actions in their own courts. In 1998, the civil action initiated by the state was settled, without an admission of liability, when the Superior Court approved a consent decree that the parties submitted to it pursuant to the agreement. Equivalent settlements were reached in the similar actions pending in other states' courts. Under the agreement, the state and fifty-one other governmental entities (collectively, the settling states) agreed to dismiss the pending actions and release all past and future claims in return for the agreement of the four major tobacco manufacturers, Philip Morris, Inc., R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, and Brown and Williamson Tobacco Corporation (collectively, the original participating manufacturers), to: (1) restrict the manner in which they market and advertise tobacco products; and (2) make substantial annual payments to the settling states.

As an incentive for additional tobacco manufacturers to join in the settlement, the agreement provides that such other manufacturers may agree to abide by the agreement in the future, and, in return, the settling states will release all past and future claims against them. The agreement refers to the manufacturers who agree to abide by it at some point after the agreement had been executed as "`subsequent participating manufacturers.'" The petitioners in the present case are subsequent participating manufacturers. Under the agreement, the subsequent participating manufacturers, like the original participating manufacturers, must make annual payments to the settling states.

The agreement provides that an independent auditor² will "calculate and determine the amounts of all payments owed pursuant to this [a]greement, the adjustments, reductions and offsets thereto . . . the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the [p]articipating [m]anufacturers³ and among the [s]ettling [s]tates . . . ." The agreement sets forth a detailed procedure by which the independent auditor is to calculate the annual payments due all settling states. In particular, the agreement directs the independent auditor, on the basis of a strict timetable, to request information that it needs to calculate the annual payments from the parties to the agreement, to deliver preliminary calculations to the parties to the agreement, and, finally, to deliver a final payment calculation that explains any changes from the preliminary calculations. In addition, the agreement provides a detailed set of rules to be followed by the independent auditor in calculating the annual payments. Specifically, the agreement directs the independent auditor to take a base amount owed by the participating manufacturers and apply various adjustments, offsets and reductions. In performing this calculation, the independent auditor is to apply these adjustments, offsets and reductions sequentially over thirteen steps. If any given step does not apply, the total from the prior step is then carried forward to the next step.

The sixth step in the process is a downward adjustment to the annual payment that is to be applied if the participating manufacturers lose market share, in the calendar year for which the payment is being calculated, to manufacturers that did not participate in the agreement.⁴ The agreement conditions the application of this nonparticipating manufacturer adjustment on a determination by a nationally recognized firm of economic consultants that the disadvantages caused by the agreement's provisions were a significant factor in the loss of market share.

The agreement also provides, however, that each settling state can avoid individually the application of the downward nonparticipating manufacturer adjustment if it has enacted a "qualifying statute" that is in full force and effect during the calendar year on which the payment is based and the state diligently enforced the statute during that calendar year. A qualifying statute is defined as a "statute, regulation, law and/or rule . . . that effectively and fully neutralizes the cost disadvantages that the [p]articipating [m]anufacturers experience vis-a-vis [nonparticipating manufacturers] with such [s]ettling [s]tate as a result of the provision of this [a]greement." The agreement contains a model qualifying statute that has been in substantial form enacted by all of the settling states, including Connecticut.⁵ If a settling state is exempt from the nonparticipating manufacturer adjustment, that portion of the adjustment that would have been applied to reduce the annual payment to that particular state is reallocated pro rata to the nonexempt settling states.

The root of the dispute that underlies the petition to compel arbitration in the present case is the independent auditor's calculation of the participating manufacturers' annual payments for the 2003 calendar year. In response to the independent auditor's request for information that it needed in order to calculate the annual payments for 2003, the petitioners sent a letter to the independent auditor requesting that it recognize a substantial nonparticipating manufacturer adjustment for that year. In their letter, the petitioners took issue with the independent auditor's failure to apply such an adjustment in the prior year because, in part, the settling states had represented that they had enacted qualifying statutes. The petitioners claimed that the independent auditor should not assume that just because a settling state enacted a qualifying statute, it was enforcing diligently that statute, and that, even if every settling state were enforcing diligently the qualifying statute, the nonparticipating manufacturer adjustment should apply nonetheless.

The settling states responded to the petitioners' letter to the independent auditor with a letter of their own, in which they argued that the nonparticipating manufacturer adjustment should not be applied until a significant factor determination had been made and that, even if such a determination has been made in favor of the participating manufacturers, the independent auditor should presume, in the absence of substantial evidence to the contrary, that state officials were enforcing the qualifying statute. In addition, the settling states rejected the petitioners' claim that the agreement allows a nonparticipating manufacturer adjustment to be applied even if every settling state were enforcing diligently its qualifying statute.⁶

After receiving the letters from the petitioners and the settling states, the independent auditor released its preliminary calculations of the 2003 annual payments. In arriving at the annual payments due under the agreement, the independent auditor did not apply a nonparticipating manufacturer adjustment to reduce the participating manufacturers' annual payments because the national association of attorneys general informed the auditor that all settling states had enacted qualifying statutes and represented that these statutes were in full force and effect since their effective date. The independent auditor did not make an explicit finding regarding whether the settling states diligently enforced the qualifying statute during 2003.

Subsequently, one of the petitioners, Commonwealth Brands, Inc., submitted a formal notice of dispute pursuant to § XI(d)(3) of the agreement, in which it disputed, inter alia, the independent auditor's failure to apply a nonparticipating manufacturer adjustment to its 2003 annual payment. After the independent auditor sought and received additional information and argument from the parties regarding the disputed issue, it issued its final calculation of the 2003 annual payments, in which it treated the adjustment the same way as it had in its preliminary calculations. In...