State must arbitrate with tobacco companies

Jennifer Nelson
January 1, 2008
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States involved in a settlement agreement with certain tobacco companies to recover health care costs for smoking-related illnesses must participate in a single, national arbitration panel when arbitrating issues, ruled the Indiana Court of Appeals today.

In State of Indiana, ex rel., Stephen R. Carter, Attorney General of Indiana v. Philip Morris Tobacco Company, et al., No. 49A02-0706-CV-494, the state appealed the trial court order requiring Indiana to arbitrate with Philip Morris and other tobacco companies the decision of the independent auditor to not apply a particular adjustment for 2003 regarding a master settlement agreement.

In the late 1990s, certain states - including Indiana - created a master settlement agreement (MSA) with certain tobacco companies in order for the states to receive health care costs for smoking-related illnesses developed by the states' residents. Other tobacco companies later became parties to the agreement. All of the participating manufacturers (PMs) were required to make substantial annual payments based upon certain data and calculations set forth in the MSA.

An independent auditor is required to calculate the amount of all payments owed under the MSA and also determines any applicable adjustments or reductions.

In 2003, the independent auditor did not apply a non-participating manufacturers (NPM) adjustment to the PMs' payments. The NPM adjustment potentially reduces the annual payment of the PMs in compensation for their market share loss to NPMs.

The settling states agreed with the auditor's final calculations for 2003, but the PMs moved the trial court to compel arbitration of the matter. The trial court held a hearing and determined the matter should be arbitrated per the MSA. The state filed a motion to correct error, which the trial court denied.

Indiana appealed, arguing the trial court erred when it ordered the state to participate in arbitration pursuant to the MSA; also, the state believed the trial court erred when it ordered arbitration by a single, national arbitration panel.

The arbitration clause in the MSA states any dispute, controversy, or claim arising out of or relating to calculations made by the independent auditor shall be submitted to binding arbitration before a panel of three, neutral arbitrators. The state argued that this issue is not arbitrational because the state had enforced a qualifying statute, which allowed for the denial of the NPM adjustment, and the enforcement of the qualifying statute is not arbitrational.

Senior Judge George Hoffman Jr. wrote in the opinion that under the MSA, the NPM adjustment is an arbitration issue because the NPM adjustment is a calculation determined by the independent auditor. The dispute between the settling states and the tobacco companies arose out of the auditor's calculation, which must be arbitrated per the MSA. In fact, the independent auditor is charged with making the determination of the state's diligent enforcement of its qualifying statute because it is a part of the NPM adjustment determination.

In regards to the state claim that the trial court erred in ordering it to arbitrate the issue by a single, national panel instead of a panel of three, neutral arbitrators, the state cited the arbitration clause in the MSA that stated each of the two sides of the dispute select an arbitrator, and those two arbitrators then pick the third one.

Senior Judge Hoffman wrote the language and the structure of the MSA require that the dispute must be submitted to a single, national arbitration panel, expressly providing "each of the two sides to the dispute shall select one arbitrator." The two sides in the dispute are the settling states - not just Indiana - and the PMs.

"If the parties had meant for each Settling State to have its own arbitrator or arbitration panel, this sub-section of the MSA would not have specified a panel of only three arbitrators, which clearly indicates a national arbitration," he wrote.

Also, the MSA is an agreement of nationwide concern with national effect and structure. The language as well as the structure of the MSA requires disputes such as this to be determined by a single, national arbitration panel, Senior Judge Hoffman wrote.

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  1. If a class action suit or other manner of retribution is possible, count me in. I have email and voicemail from the man. He colluded with opposing counsel, I am certain. My case was damaged so severely it nearly lost me everything and I am still paying dearly.

  2. There's probably a lot of blame that can be cast around for Indiana Tech's abysmal bar passage rate this last February. The folks who decided that Indiana, a state with roughly 16,000 to 18,000 attorneys, needs a fifth law school need to question the motives that drove their support of this project. Others, who have been "strong supporters" of the law school, should likewise ask themselves why they believe this institution should be supported. Is it because it fills some real need in the state? Or is it, instead, nothing more than a resume builder for those who teach there part-time? And others who make excuses for the students' poor performance, especially those who offer nothing more than conspiracy theories to back up their claims--who are they helping? What evidence do they have to support their posturing? Ultimately, though, like most everything in life, whether one succeeds or fails is entirely within one's own hands. At least one student from Indiana Tech proved this when he/she took and passed the February bar. A second Indiana Tech student proved this when they took the bar in another state and passed. As for the remaining 9 who took the bar and didn't pass (apparently, one of the students successfully appealed his/her original score), it's now up to them (and nobody else) to ensure that they pass on their second attempt. These folks should feel no shame; many currently successful practicing attorneys failed the bar exam on their first try. These same attorneys picked themselves up, dusted themselves off, and got back to the rigorous study needed to ensure they would pass on their second go 'round. This is what the Indiana Tech students who didn't pass the first time need to do. Of course, none of this answers such questions as whether Indiana Tech should be accredited by the ABA, whether the school should keep its doors open, or, most importantly, whether it should have even opened its doors in the first place. Those who promoted the idea of a fifth law school in Indiana need to do a lot of soul-searching regarding their decisions. These same people should never be allowed, again, to have a say about the future of legal education in this state or anywhere else. Indiana already has four law schools. That's probably one more than it really needs. But it's more than enough.

  3. This man Steve Hubbard goes on any online post or forum he can find and tries to push his company. He said court reporters would be obsolete a few years ago, yet here we are. How does he have time to search out every single post about court reporters and even spy in private court reporting forums if his company is so successful???? Dude, get a life. And back to what this post was about, I agree that some national firms cause a huge problem.

  4. rensselaer imdiana is doing same thing to children from the judge to attorney and dfs staff they need to be investigated as well

  5. Sex offenders are victims twice, once when they are molested as kids, and again when they repeat the behavior, you never see money spent on helping them do you. That's why this circle continues