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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. Too many attorneys take their position as a license to intimidate and threaten non attorneys in person and by mail. Did find it ironic that a reader moved to comment twice on this article could not complete a paragraph without resorting to insulting name calling (rethuglican) as a substitute for reasoned discussion. Some people will never get the point this action should have made.

  2. People have heard of Magna Carta, and not the Provisions of Oxford & Westminster. Not that anybody really cares. Today, it might be considered ethnic or racial bias to talk about the "Anglo Saxon common law." I don't even see the word English in the blurb above. Anyhow speaking of Edward I-- he was famously intolerant of diversity himself viz the Edict of Expulsion 1290. So all he did too like making parliament a permanent institution-- that all must be discredited. 100 years from now such commemorations will be in the dustbin of history.

  3. Oops, I meant discipline, not disciple. Interesting that those words share such a close relationship. We attorneys are to be disciples of the law, being disciplined to serve the law and its source, the constitutions. Do that, and the goals of Magna Carta are advanced. Do that not and Magna Carta is usurped. Do that not and you should be disciplined. Do that and you should be counted a good disciple. My experiences, once again, do not reveal a process that is adhering to the due process ideals of Magna Carta. Just the opposite, in fact. Braveheart's dying rebel (for a great cause) yell comes to mind.

  4. It is not a sign of the times that many Ind licensed attorneys (I am not) would fear writing what I wrote below, even if they had experiences to back it up. Let's take a minute to thank God for the brave Baron's who risked death by torture to tell the government that it was in the wrong. Today is a career ruination that whistleblowers risk. That is often brought on by denial of licenses or disciple for those who dare speak truth to power. Magna Carta says truth rules power, power too often claims that truth matters not, only Power. Fight such power for the good of our constitutional republics. If we lose them we have only bureaucratic tyranny to pass onto our children. Government attorneys, of all lawyers, should best realize this and work to see our patrimony preserved. I am now a government attorney (once again) in Kansas, and respecting the rule of law is my passion, first and foremost.

  5. I have dealt with more than a few I-465 moat-protected government attorneys and even judges who just cannot seem to wrap their heads around the core of this 800 year old document. I guess monarchial privileges and powers corrupt still ..... from an academic website on this fantastic "treaty" between the King and the people ... "Enduring Principles of Liberty Magna Carta was written by a group of 13th-century barons to protect their rights and property against a tyrannical king. There are two principles expressed in Magna Carta that resonate to this day: "No freeman shall be taken, imprisoned, disseised, outlawed, banished, or in any way destroyed, nor will We proceed against or prosecute him, except by the lawful judgment of his peers or by the law of the land." "To no one will We sell, to no one will We deny or delay, right or justice." Inspiration for Americans During the American Revolution, Magna Carta served to inspire and justify action in liberty’s defense. The colonists believed they were entitled to the same rights as Englishmen, rights guaranteed in Magna Carta. They embedded those rights into the laws of their states and later into the Constitution and Bill of Rights. The Fifth Amendment to the Constitution ("no person shall . . . be deprived of life, liberty, or property, without due process of law.") is a direct descendent of Magna Carta's guarantee of proceedings according to the "law of the land." http://www.archives.gov/exhibits/featured_documents/magna_carta/

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