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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. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

  2. When I served the State of Kansas as Deputy AG over Consumer Protection & Antitrust for four years, supervising 20 special agents and assistant attorneys general (back before the IBLE denied me the right to practice law in Indiana for not having the right stuff and pretty much crushed my legal career) we had a saying around the office: Resist the lure of the ring!!! It was a take off on Tolkiem, the idea that absolute power (I signed investigative subpoenas as a judge would in many other contexts, no need to show probable cause)could corrupt absolutely. We feared that we would overreach constitutional limits if not reminded, over and over, to be mindful to not do so. Our approach in so challenging one another was Madisonian, as the following quotes from the Father of our Constitution reveal: The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse. We are right to take alarm at the first experiment upon our liberties. I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations. Liberty may be endangered by the abuse of liberty, but also by the abuse of power. All men having power ought to be mistrusted. -- James Madison, Federalist Papers and other sources: http://www.constitution.org/jm/jm_quotes.htm RESIST THE LURE OF THE RING ALL YE WITH POLITICAL OR JUDICIAL POWER!

  3. My dear Mr Smith, I respect your opinions and much enjoy your posts here. We do differ on our view of the benefits and viability of the American Experiment in Ordered Liberty. While I do agree that it could be better, and that your points in criticism are well taken, Utopia does indeed mean nowhere. I think Madison, Jefferson, Adams and company got it about as good as it gets in a fallen post-Enlightenment social order. That said, a constitution only protects the citizens if it is followed. We currently have a bevy of public officials and judicial agents who believe that their subjectivism, their personal ideology, their elitist fears and concerns and cause celebs trump the constitutions of our forefathers. This is most troubling. More to follow in the next post on that subject.

  4. Yep I am not Bryan Brown. Bryan you appear to be a bigger believer in the Constitution than I am. Were I still a big believer then I might be using my real name like you. Personally, I am no longer a fan of secularism. I favor the confessional state. In religious mattes, it seems to me that social diversity is chaos and conflict, while uniformity is order and peace.... secularism has been imposed by America on other nations now by force and that has not exactly worked out very well.... I think the American historical experiment with disestablishmentarianism is withering on the vine before our eyes..... Since I do not know if that is OK for an officially licensed lawyer to say, I keep the nom de plume.

  5. I am compelled to announce that I am not posting under any Smith monikers here. That said, the post below does have a certain ring to it that sounds familiar to me: http://www.catholicnewworld.com/cnwonline/2014/0907/cardinal.aspx

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