STATE v. PHILIP MORRIS, INC., et al., SC 18133

Judicial District of Waterbury


Arbitration; Contracts; Tobacco Litigation; Whether Dispute was Covered by Arbitration Clause in Settlement Agreement. In the 1990's, Connecticut and many other states sued the major American tobacco companies alleging that they were engaged in wrongful advertising and marketing of cigarettes and other tobacco products and seeking to recover costs incurred in treating smoking-related illnesses. The suits were settled by a master settlement agreement (MSA) that significantly restricts the participating manufacturers' advertising and marketing of tobacco products and requires them to make substantial payments to the states each year. The MSA authorizes an independent auditor to calculate the manufacturers' annual payments according to a formula. As not all tobacco manufacturers are parties to the MSA, the MSA ensures that non-participating tobacco manufacturers (NPMs) do not unfairly benefit from the MSA's marketing restrictions and payment obligations by providing for a reduction of the participating manufacturers' payment (the NPM reduction) in any year in which it is shown that, among other things, the participating manufacturers suffered a loss in market share as a result of their participation in the MSA. The MSA provides, however, that a state's payments are not subject to the NPM reduction if a state has enacted and diligently enforced a "qualifying statute" that neutralizes the cost disadvantages experienced by the participating manufacturers in relation to the NPMs. Connecticut has enacted such a qualifying statute, codified at General Statutes 4-28h et seq. When the independent auditor, in calculating the amounts owed by the participating manufacturers for 2003, declined to apply the NPM reduction, some of the participating manufacturers obtained a judgment compelling Connecticut to arbitrate the dispute over the NPM reduction. That judgment was upheld in State v. Philip Morris, Inc., 279 Conn. 785 (2006), in which the Connecticut Supreme Court ruled that the dispute over the independent auditor's decision not to apply the NPM reduction was arbitrable because it fell within the scope of the MSA's arbitration provision. Connecticut subsequently sought a declaration from the trial court that there should be no NPM reduction of Connecticut's payment for 2003 because the state had diligently enforced its qualifying statute in that year. The participating manufacturers, in turn, claimed that the MSA dictates that the independent auditor make determinations as to diligent enforcement and that the auditor had already done so. They asked the court to order Connecticut to arbitrate any disputes concerning the state's diligent enforcement. The trial court granted the motion to compel arbitration, finding that the Supreme Court's decision was controlling in that it established that the independent auditor is to make all initial determinations regarding the applicability of adjustments to the participating manufacturers' annual payments and that any disputes about the auditor's determinations are subject to arbitration. The state appeals, claiming the trial court wrongly construed the Supreme Court's decision as addressing and dispensing with its claim that issues concerning diligent enforcement should be resolved by a court rather than by the independent auditor. The state also contends that diligent enforcement issues are necessarily "state-specific," and that the MSA provides that state-specific issues be resolved by the courts of the settling states.