Richard Ieyoub, Attorney General, State of La v. Philip Morris, USA, Inc.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

CA 08-33 consolidated with CW 08-150 and CW 08-164

RICHARD IEYOUB, ATTORNEY GENERAL, STATE OF LA

VERSUS

PHILIP MORRIS, USA, INC., ET AL.

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APPEAL FROM THE
FOURTEENTH JUDICIAL DISTRICT COURT
PARISH OF CALCASIEU, NO. 1998-6473
HONORABLE DAVID KENT SAVOIE, DISTRICT JUDGE

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MARC T. AMY
JUDGE

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Court composed of Marc T. Amy, Billy Howard Ezell, and J. David Painter, Judges.

REVERSED. MOTION GRANTED. WRITS DISMISSED.

Terry Christovich Gay
Christovich & Kearney, LLP
602 Poydras Street, Suite 2300
New Orleans, LA 70130-6078
(504) 593-4214
COUNSEL FOR SECONDARY DEFENDANTS/APPELLANTS:
Farmers Tobacco Company of Cynthiana, Inc.
Vibo Corporation

James R. Nieset
Plauche, Smith, & Nieset
Post Office Drawer 1705
Lake Charles, LA 70602
(337) 436-0522
COUNSEL FOR DEFENDANT/APPELLANT:
R. J. Reynolds Tobacco Company

Stephen R. Patton
Kirkland & Ellis, LLP
200 East Randolph Drive
Chicago, IL 60601-6638
(312) 861-2000
COUNSEL FOR DEFENDANT/APPLICANT:
R. J. Reynolds Tobacco Company

Jerome Doak
Jones Day
2727 North Harwood Street
Dallas, TX 75201
COUNSEL FOR DEFENDANT/APPLICANT:
R. J. Reynolds Tobacco Company

R. Dale Burton
Womble Caryle Sandridge & Rice
1201 W. Peachtree Street
Atlanta, GA 30309
COUNSEL FOR DEFENDANT/APPLICANT:
R. J. Reynolds Tobacco Company

Thomas McKim
R. J. Reynolds Tobacco Company
401 N. Main Street
Winston-Salem, NC 27102
COUNSEL FOR DEFENDANT/APPLICANT:
R. J. Reynolds Tobacco Company

Phillip A. Wittmann
Stone, Pigman, Walther, Wittman, LLC
546 Carondelet Street
New Orleans, LA 70130
(504) 581-3200
COUNSEL FOR DEFENDANTS/APPELLANTS:
R. J. Reynolds Tobacco Company
Lorillard Tobacco Company

Gayle Rosenstein
Idit Froim
Weil, Gotshal & Manges, LLP
767 Fifth Avenue
New York, NY 10153-0119
(212) 310-8000
COUNSEL FOR DEFENDANT/APPLICANT:
Lorillard Tobacco Company

2

Ronald S. Milstein
Brian McGinn
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27404-0529
COUNSEL FOR DEFENDANT/APPLICANT:
Lorillard Tobacco Company

Charles C. Foti, Jr.
Attorney General
Post Office Box 94005
Baton Rouge, LA 70804
(225) 326-6000
COUNSEL FOR PLAINTIFF/RESPONDENT:
Richard P. Ieyoub, Attorney General

David G. Sanders
Patricia Hill Wilton
Gol S. Hannaman
Angelique D. Freel
Stacie L. DeBlieux
Assistant Attorneys General
Post Office Box 94005
Baton Rouge, LA 70804-9005
(225) 326-6300
COUNSEL FOR PLAINTIFF/APPELLEE:
Richard P. Ieyoub, Attorney General

Louisiana Department of Justice
Litigation Division
Post Office Box 94005
Baton Rouge, LA 70804-9005
(225) 326-6300
COUNSEL FOR PLAINTIFF/RESPONDENT:
Richard P. Ieyoub, Attorney General

Martin A. Stern
Jeffrey E. Richardson
Ann Koppel
Adams & Reese, LLP
701 Poydras Street, Suite 4500
New Orleans, LA 70139
(504) 581-3234
COUNSEL FOR DEFENDANT/APPELLANT:
Philip Morris, USA, Inc.

Carl S. Nadler
Heller Ehrman, LLP
1717 Rhode Island Avenue, NW
Washington, DC 20036
COUNSEL FOR DEFENDANT/APPLICANT:
Philip Morris, USA, Inc.

3

Thomas J. Frederick
Winston & Strawn, LLP
335 W. Wacker Drive
Chicago, IL 60601-9703
(212) 558-5600
COUNSEL FOR DEFENDANT/APPLICANT:
Philip Morris, USA, Inc.

Meyer G. Koplow
Jeff Wintner
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
COUNSEL FOR DEFENDANT/APPLICANT:
Philip Morris, USA, Inc.

Denise Keane
Philip Morris, USA, Inc.
6601 West Broad Street
Richmond, VA 23230
COUNSEL FOR DEFENDANT/APPLICANT:
Philip Morris, USA, Inc.

Kirk Albert Patrick, III
Heather A. Cross
Donohue Patrick, P.L.L.C.
450 Laurel Street, Suite 1500
Baton Rouge, LA 70801
(225) 214-1908
COUNSEL FOR SECONDARY DEFENDANTS/APPELLANTS:
Von Eicken Group
Liggett Group, LLC
Sherman's 1400 Broadway NYC, Inc.
Santa Fe Natural Tobacco Co., Inc.
Commonwealth Brands, Inc.
Liberty Brands, LLC
Compania Industrial de TabacosMonte-Paz, S.A.
King Maker Marketing, Inc.
Daughters & Ryan, Inc.
Vibo Corporation
House of Prince A/S
Farmers Tobacco Co. of Cynthiana, Inc.
Japan Tobacco International USA, Inc.
Virginia Carolina Corp., Inc.
Top Tobacco, LLP
Kretek International, Inc.
Peter Stokkebye Tobaksfabrik A/S,P.T. Djarum

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Robert J. Brookhiser
Elizabeth B. McCallum
Howrey, LLP
1299 Pennsylvania Avenue, N.W.
Washington, DC 20004
(202) 783-0800
COUNSEL FOR SECONDARY DEFENDANTS/APPELLANTS:
Liggett Group, LLC
House of Prince A/S
P. T. Djarum
Peter Stokkebye Tobaksfabrik A/S
Kretek International, Inc.
Von Eicken Group
Top Tobacco, LLP
Sherman's 1400 Broadway NYC, Inc.
Daughters & Ryan, Inc.
Commonwealth Brands, Inc.
Santa Fe Natural Tobacco Co., Inc.
Japan Tobacco International USA, Inc.
King Maker Marketing, Inc.

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AMY, Judge.

The State of Louisiana and certain tobacco manufacturers entered into a Master

Settlement Agreement as the result of a suit filed by the State seeking damages related

to the use of tobacco products. The manufacturers filed a motion to compel

arbitration after an independent auditor did not apply an adjustment possible under

the agreement in its calculation of the annual payment owed by the manufacturers.

The trial court denied the motion to compel arbitration. For the following reasons,

we reverse and enter judgment granting the motion to compel arbitration.

Factual and Procedural Background

Louisiana, through its Attorney General, filed an action against tobacco

manufacturers in 1998 seeking damages allegedly related to certain business practices

of the manufacturers. Other states filed similar suits in their own courts.

In resolution of the claims, four tobacco manufacturers, the Original

Participating Manufacturers (OPMs) and the various states, including Louisiana,

entered into a Master Settlement Agreement (the MSA), which provided for annual

payments by the OPMs to the settling states. The MSA anticipated that additional

manufacturers, the Subsequent Participating Manufacturers (SPMs), would join the

settlement. The MSA requires annual payments to the states from both sets of the

Participating Manufacturers (PMs).

The MSA further provides for an Independent Auditor to calculate and

determine, according to guidelines provided, the annual payments due from the PMs

to each settling state. Included in the calculation guidelines are a number of possible

adjustments, offsets, and reductions. One such adjustment, the Non-Participating

Manufacturer Adjustment, considers the PMs’ loss of market share to Non-

Participating Manufacturers. In the event that participation in the MSA is a

significant factor in the PMs’ loss of market share, the Independent Auditor is to

reduce the PMs’ payments accordingly. However, in the event that a state diligently

enforces its Qualifying Statute1, the Non-Participating Manufacturer Adjustment is

inapplicable to the payment owed to that state.2

The present cause relates to the availability of the Non-Participating

Manufacturer Adjustment to the 2003 payments. In its 2003 calculations, the

Independent Auditor refused to determine the issue of whether some states diligently

enforced their Qualifying Statute after a finding that it was not qualified to do so and,

accordingly, did not include a Non-Participating Manufacturer Adjustment in the

calculation for the 2003 payment. Thereafter, the PMs requested that the dispute

surrounding diligent enforcement and the adjustment be submitted to arbitration as,

it alleged, the MSA required. The states, including Louisiana, argued that any

determinations regarding diligent enforcement were not covered by the scope of the

MSA’s arbitration provision. The record discloses that the dispute as to the scope of

the arbitration clause has proceeded through the courts of the various states.3

In October 2006, the OPMs instituted this matter in the Fourteenth Judicial

1
The MSA defines a Qualifying Statute as “a Settling State’s statute, regulation, law and/or
rule . . . 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.”
2
As the MSA requires the Independent Auditor to assess the manufacturers’ payments and
then allocate those payments between the settling states, the inapplicability of the Non-Participating
Manufacturer Adjustment to one state affects the remaining states. Section IX(d)(2)(C) provides:

(C) The aggregate amount of the NPM Adjustments that would have
applied to the Allocated Payments of those Settling States that are not subject to an
NPM Adjustment pursuant to subsection (2)(B) shall be reallocated among all other
Settling States pro rata in proportion to their respective Allocable Shares (the
applicable Allocable Shares being those listed in Exhibit A), and such other Settling
States’ Allocated Payments shall be further reduced accordingly.
3
While we do not rely on foreign jurisprudence in our analysis, the record contains
numerous opinions from courts in various settling states addressing the questions addressed herein.
These courts have uniformly ordered arbitration of the issues raised.

2

District Court4, with the filing of a Motion to Enforce the Arbitration Provisions of

the Master Settlement Agreement and Compel Arbitration. The SPMs joined in the

filing. Following a hearing, the trial court denied the motion to compel arbitration.5

After the denial of the order was reduced to a final judgment, the PMs appealed the

denial of the motion to compel arbitration. They also filed applications for

supervisory writs. This court consolidated the matters for review into this appeal.

Discussion

Scope of the Arbitration Clause

In sum, the question before this court is whether the entire dispute presently

between the parties is subject to the arbitration provision of the MSA. The PMs

assert that both the question of whether Independent Auditor should have applied the

Non-Participating Manufacturer Adjustment and the question of whether the State

did, in fact, diligently enforce its Qualifying Statute should be subject to arbitration.

4
Through Subsection VII(a) of the MSA, the parties acknowledged that the district court that
initially approved and entered the settlement retains “exclusive jurisdiction for the purposes of
implementing and enforcing [the MSA] and the Consent Decree as to such Settling State . . . and .
. . shall be the only court to which disputes under this Agreement or the Consent Decree are
presented as to such Settling State.” In Louisiana, the Fourteenth Judicial District Court entered the
judgment approving of the MSA. However, several exceptions to the acknowledgment of
jurisdiction are listed in the MSA, including the arbitration provision of Subsection XI(c) under
review.
5
The trial court explained in its written reasons for ruling:

This court finds the argument of the State compelling. The dispute between
the parties is based on a lack of a determination made by the Independent Auditor
rather than a determination. While the MSA § [XI](c) states any dispute, controversy
or claim arising out of or relating to calculations performed by, or any determinations
made by, the Independent Auditor, this court does not find that this includes a
diligent enforcement determination. Diligent enforcement of a Settling State’s
Qualifying Statute is a legal issue outside the scope of an Independent Auditor’s
function. Because it is a determination that an Independent Auditor cannot make, the
issue does not fall under the arbitration provision of the MSA. The PMs contend that
arbitration of the parties’ dispute over the 2003 NPM Adjustment is required under
the MSA. The State concedes that the issue of whether the Independent Auditor’s
alleged “presumption” of diligent enforcement is arbitrable. Insofar as this is a
dispute over the diligent enforcement of the Qualifying Statute, the Motion to
Enforce the Arbitration Provisions of the Master Settlement Agreement and Compel
Arbitration is denied.

3

The State concedes that the question of whether the Independent Auditor

correctly denied the application of the Non-Participating Manufacturer Adjustment

should be resolved by the arbitration panel. However, it asserts that the question of

diligent enforcement is a separate and distinct issue that must be tried by the court.

In fact, it questions whether the latter issue is even appropriate for review. Instead,

it contends that, because the Independent Auditor refused to consider diligent

enforcement, it did not make a determination and the arbitration provision of the

MSA is therefore, inapplicable. The trial court agreed with the State’s position in this

regard.

This case is one of contract interpretation, which La.Civ.Code art. 2045 defines

as “the determination of the common intent of the parties.” If the contract’s wording

is “clear and explicit and lead[s] to no absurd consequences, no further interpretation

may be made in search of the parties’ intent.” La.Civ.Code art. 2046. “The words of

a contract must be given their generally prevailing meaning.” La.Civ.Code art. 2047.

However, if words are susceptible of different meanings, they “must be interpreted

as having the meaning that best conforms to the object of the contract.” La.Civ.Code

art. 2048. Finally, “[e]ach provision in a contract must be interpreted in light of the

other provisions so that each is given the meaning suggested by the contract as a

whole.” La.Civ.Code art. 2050.

The MSA’s arbitration provision, appearing in Subsection XI(c), states:

(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

4

shall select the third arbitrator. The arbitration shall be governed by the
United States Federal Arbitration Act.

Subsection IX(j), referenced above, addresses “Order of Application of

Allocations, Offsets, Reductions and Adjustments.” The sixth such allocation, offset,

or reduction listed is the Non-Participating Manufacturer Adjustment and instructs

that it “shall be applied to the results of clause “Fifth” pursuant to subsection IX(d)(1)

and (d)(2) (or, in the case of payments due from the Subsequent Participating

Manufacturers, pursuant to subsection IX(d)(4))[.]” Subsection IX(d)(1) sets forth

the Non-Participating Manufacturer Adjustment calculation whereas Subsection

IX(d)(2) contains the diligent enforcement exception.

The arbitration provision is a broad one, including disputes, controversies, or

claims “arising out of or relating to” the Independent Auditor’s calculations and

determinations. In the present matter, the Independent Auditor calculated the annual

payment due and did not include the Non-Participating Manufacturer Adjustment

listed in Subsection IX(j) as urged by the PMs. This action involved an express

determination to refrain from considering the related issue of whether the State

diligently enforced its Qualifying Statute. It was the Independent Auditor’s refusal

to apply the adjustment to its calculations, which the MSA relates to the issue of

diligent enforcement, that created the present dispute, i.e., the present dispute is one

“arising out of or relating to calculations performed by, or any determinations made

by, the Independent Auditor.”

Further, Subsection XI(c) provides, in a nonexclusive list, examples of

arbitrable disputes. Among those listed in its parenthetical are “dispute[s] concerning

the operation or application of any of the adjustments, reductions, offsets, carry-

forwards and allocations described in subsection IX(j)[.]” The Non-Participating

5

Manufacturer Adjustment is listed as the sixth such allocation, offset, reduction or

adjustment in Subsection IX(j). Again, the issue of diligent enforcement is integral

to the operation/application of the Non-Participating Manufacturer Adjustment.

In light of the clear and explicit language of Subsection XI(c), we conclude that

the issue of the application of the Non-Participating Manufacturer Adjustment must

be presented to the arbitration panel provided for therein. The claim regarding

whether the State diligently enforced its Qualifying Statute clearly arises from the

refusal to apply that adjustment. Thus, the arbitration provision anticipates that this

latter claim be referred to the arbitration panel as well. Further, we find no support

for the State’s speculation that an interpretation of the MSA ordering arbitration

would prove more unworkable or cumbersome than separate proceedings in each of

the settling states.

We also observe that the parties agreed that arbitration would be governed by

the United States Federal Arbitration Act, 9 U.S.C. § 1, et seq. Section 2 of which

reflects the favorable treatment afforded arbitration, as it provides:

A written provision in any maritime transaction or a contract
evidencing a transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or transaction, or the
refusal to perform the whole or any part thereof, or an agreement in
writing to submit to arbitration an existing controversy arising out of
such a contract, transaction, or refusal, shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.

As explained by the United States Supreme Court in Moses H. Cone Memorial Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 103 S.Ct. 927 (1983), Section 2 creates a body

of substantive law favoring arbitration and any doubt as to the scope of arbitrable

issues must be resolved in favor of arbitration. See also La.R.S. 9:4201; Aguillard

v. Auction Management Corp., 04-2804, 04-2857 (La. 6/29/05), 908 So.2d 1.

6

Accordingly, we find that the trial court erred in denying the motion to compel

arbitration. We grant the motion, ordering that the issues of whether the Independent

Auditor properly excluded the Non-Participating Manufacturer Adjustment from its

calculation and whether the State diligently enforced its Qualifying Statute proceed

to arbitration as anticipated by the Master Settlement Agreement.

The applications for supervisory writs are rendered moot by this determination.

DECREE

For the foregoing reasons, the judgment of the trial court denying the Motion

to Enforce the Arbitration Provisions of the Master Settlement Agreement and

Compel Arbitration is reversed and judgment is entered granting the motion. The

applications for supervisory writs are rendered moot and are hereby dismissed. All

costs of this proceeding are assigned to the State of Louisiana in the amount of

$15,096.41.

REVERSED. MOTION GRANTED. WRITS DISMISSED.

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