Arkansas Supreme Court - February 1,2007 Page 1 of 5

IN THE SUPREME COURT IN THEFILED OFFICE OF THE STATE OF NORTI-I DAKOTA CLERK OF SUPREME COIJRT

State of North Dakota ex. rel. Wayne Stetlehjem, Attonley General, FEB 8 2007 Plaintiff anti Appellee, STATE OF NORTH DAKOTA VS.

Philip Morris, Incorporated, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, R.J. Reynolds Tobacco Company, Liggett Group, Inc., United States Tobacco Manufacturing Company, hic., and United States Tobacco Sales and Marketing Company, Tnc., Defendants and Appellants

Supreme Court Nos. 20060207 & 200602 13 Cass Court No. 09-98-C-03788

APPEAL FROM TI-IE OPINION AND ORDER DATED AND ENTERED JULY 18,2006

RULE 28(G) SUPPLERIENTAI, ADDENDUhl OF DEFENDANTS-APPELLANTS OIUGINAL PARTICIPATING MANUFACTURERS

Patrick J. Ward, #03626 Lawrence Bender, #03908 Lawrence King, #04997 PEARCE & DURICK 3 14 E. Thayer Avenue ZUGER KIRMIS gL SMITH P.O. Box 400 P.O. Box 1695 Bismarck, ND 58502-0400 Bismark. ND 58502-1695 Telephone: (701) 223-2890 Telephone: (70 1) 223-27 1 1 Atlonley for R.J. Reylrolds Tobacco Co. and Lorillard Tobacco Co. Thonlas J. Frederick (admitted pro hnc vice) Stephen R. Patton (admitted pro hac vice) WINSTON & STRAWN LLP KIRKLAND & ELLIS LLP 35 West Wacker Drive 200 East Randolph Drive Chicago, Illinois 60601 Chicago, IL 60601 Telephone: (3 12) 558-5600 Telephone: (3 12) 86 1-2000 Attorneys for Philip Morris USA IHC. Attorney for R..J. Reytrolds Tobacco Co.

Gayle E. Rosenstein (admitted pro /lac vice) WEIL. GOTSHAL & MANGES LLP 767 Fifth Avenue New York, NY 101 53-01 19 Telephone: (2 12) 3 10-8868

Atlortley for Lorillard Tobacco Co. TABLE OF CONTENTS OF RULE 28(G) ADDENDURI

Tab 26 Alaskcz v. Philip Mon-is USA, No. IJU-97-915 CI (Alaska Super. Ct. Feb. 5, 2007)

Tab 27iirizona v. Attlerican Tobacco Co., Itzc., No. CV 1996-014769 (Ariz. Super. Ct. Jan. 24,2007)

Tab 28 iirkcrrrsas v The Americali Tobacco Co., 61c.. No. IJ 1 997-2982 (Ark. Cir. Ct. Nov. 29, 2006)

Tab 29 Arkatisas v. American Tobacco Co., I~Ic.,NO. 07- 17 (Ark. Sup. Ct. Feb. 1.2007)

Tab 30 111 re Tobacco Cases II, No. D049428, (Cal. App. Dec. 5,2006)

Tab 3 1 Delaware v. Philip Morris USA. Irlc., 2006 WL3690892 @el. Ch. Dec. 12,2006)

Tab 32 hfatyland v. Plrilip Morris. Itzc., No. 961 220 17lCL2 1 1487. (Md. Cir. Ct. Jan. 19,2007)

Tab 33 Missorlri v. Tlze America11 Tobacco Contpaiiy, Orc., No. 22972-01465 (Mo. 22d. Jud. Cir. Jan. 22,2007)

Tab 34 North Carolitrn v. Philip 124orris USA, blc., 2006 WL3490937, (N.C. Super. Ct. Dec. 4,2006)

Tab 35 OFclnhor?ln v. R.J. Heyi~oldsTohcrcco Co., No. CJ-96-1499, (Okla. Dist. Ct. Jan. 30,2007)

Tab 36 Pennsylvanic~v. Philip Morris, IIZC.,No. 2443, (Pa. Ct. Corn. P1. Dec. 12, 2006)

Tab 37 Solitlt Dakota v. RJ Reytiolds Tobacco Co., No. 243 1 1 (S.D. Sup. Ct. Jan. 5,2007)

Tab 38 Teizrzessee v. Brorvtz & CVillianlsorl Tobacco Corp., No. 98-3776-1, (Tenn. Ch. Dec. 7,2006)

Tab 39 Utah v. R.J. Reytlolds Tobacco Co.. No. 296-CV-0829, @U Dcc. 15,2006)

Tab 40 Wyonlirlg v. PIlilip ~Vlor-risUSA, No. 26718. (Wyo. 2d Jud. Dist. Jan. 8,2007) FEB-06-2007 TUE 10: 50 An AK SUPERIOR COURT FAX NO, 907 463 5016

IN TIIE SUPEIUO12 COURT FOR THE STATE OF ALASKA FIIZST JlTDICIAL DISTRICT AT JUNEAU

*lI.IE STAW. 01: ALASKA, )

Plnintiff, 1 1 VS.

I'l-11 Ll P MORliIS 1NCORPORATED; ) R.J. REYNOLDS TOBACCO CO.; ) AMBItICAN TOBACCO CO.,MC.; ) RKOWN C% WIL1,IAMSON 'I'OBACCO) CORP.; 1.EGG~I"I'RL MYGRS, INC.; ) JaOKILLAItD TODACCO CO., INC.; ) IlNl'rl?D S'I'tl'l'HS TOBACCO 1 COMI'ANY; 1J.A.l'. INDUSTRIES, ) RECE~VED P .I ..C.; 13 Rl'I'IS I.1 AMERICAN j FER 9.5 2007 TODACCO COMI'ANY, LTD.; . : 1 .-j. >d peg- I11 Ll,ct KNO WI,TON, TNC.: THE ) COIJNCIT, 1:OK 'I'OBACCO ) ?ATTON BGGGS LLP lI13SI!AKCH - U.S.A., TNC; and j TOI3ACCO 1NS'I'I'l'U'TE. INC., 1 Foreign corpnralions, 1 ) Dcfcridn~\ts. 1SU-97-915 CI

ORDER COMPE1,LING AlU3ITRATTON

The n~attcrbefore the court aiscs out of a lawsuit brougllt by nurncrous government

cnlitics against ttlc major tobacco producers to rccoup hea1t.h-care costs assaciated with

tobacco usc. 'C'llc lawsuit rcsulted in n written settlclllcnt agrcement, called the Tobacco

, Liligalion Mi~stcrSeltlc~ncnt Agrccn~ent (the "Agreement" or "MSA"), bctwcen 46 stales, the

Alrrvio Coirrl .Syrlen~ Pc7g.2 I

SOA v. Philip Morris ct 31.: 1JU-97-915 C1: Onler CompcUinl; Arbitration P FEB-06-2007 TUE 10:50 AM AK SUPERIOR COURT FAX NO. 907 463 5016

Dist~*ictof Colun~bia,Pucrto llico, and Four U.S. territories (collectively the "Statcs'~or

"Scltling Statcs") and Philip Monis USA Inc., RJ. Rcynolds Tobacco Company, 1,orillard

'l'obacco Company, and 13rown & Willialnson Tobacco Corporation, collectively tho Origiilal

Participc\litlg Manufacturers ("oPMs").' Approximately 40 additional, smallcr, tobacco

conipanics, Subscqucn~Participating Manufactures ("SPMs"), voluntarily joined the

scttlcment and agreed to bc bound by its provisions.2 All lhosc cornpanics and the Statc of

Alaska arc now before thc court on thc Tobacco Companies' Motion to Co~npelArbitration.

I. SACKGROUND

Thc Sctrle~nentAgreement sets forth rights and responsibilities 01th~parties. Thc

Agrccrncnl rcslricts the 'Tobacco Companies' morkcting rights and requires thc 'l'obacco

Coinpanics to ~nakcannual lumpsum payments to Uie sliltes, An independent auditor (thc

LLa~~dit~r")cal allatcs the annual payrncnt and allocates it amo~lgthe Plaintiffs. The

calculntion bcgins with an ngrccd upoil annual payment set forth in the Agrccmcnt ($8.0

1)illion for 2006), Thc auditor allocntes payl~lcntsto individual Tobacco Companies baed 011

a nlukct share calculated using Lhe company's percentage sharc of the total numbor of

cigarcltes sold stio ion ally. 'l'tiis payrncnt amount is subject to certain adjustments. Onc such

adjustment is dosigncd to compenqatc thc Tobacco Conlpanics for any market sharc loss

--- I In 20W,l3rown & Willianlson Tobacco Corpontioll colnbinud with R.J. Reynolds Tobacco.

SOA V. Plbilip Morris ct of; 1JU-37-915 CI; Ordcr Conlpclli~lgArbimlion ;EB-06-2007 TUE 10: 51 AM AK SUPERIOR COURT FAX NO. 907 463 5016

Tobacco colnponies that did not parlicipnte in the settlement arc not subject to he

Ayrcc~lmnt. Tl~ccorupwics no1 n part of the agreement ncd not co~nplywith lnarkeiing

li~oitalioosimposed on tllc l'obacco Cornpanics or make thc paynle~ltsunder tho agreement-

The payjncnls lo the states are equivalenl Lo $4.40 per carton for each carton of cigareltes sold

by thc tobacco colilpanies who arc bound by the ngeemcnt. Potentially, Ihe Agrccment

creates a co~npctitiveadvantage I'or the nonparticipating tobacco companies.

Anticipating this potcntial outcome, the Agrccment requircs application of n

"Nonparticipating M'mufach~reradju stlncnl" (the "NPM adjustment") if (1) 1hc Tobacco

Con-lpnnics suffer a "n~arkctshare loss" 2nd (2) an iildcpcndcnt firm of cconomic consultants

(thc "l~iml") finds that tllc Sclllenlcnt Agreemen1 was a "significtu~tfactor" contributirlg to

Ulsl ~nnrkctshnrc loss. This delerinination by the Firm is final and non-appealable, If the

nrljusl~nenliq~plics, tllcn the auditor calculates the adjustmen1 on a nationwide basis utilizing

;\ procedure sct forth in the Ag~.ecnicnt.

Tllc adjustment reduccs the annual pay~ncntsto a stale ulllcss the state had a

"Qunliljlit~g~talutc"~ in full force and efkt during the entire calcndar year irnlncdiately

prccedirlg heywr in which the subject pay~ncntis due. The statc must also have diligently

cI~forccdtl~e provisions ofthat statute. If Ihc Plaintiff meets these qualifications, the WM

-- 1'hu court rcrcrs to OIJMs and SPMs together as the "'i'obr~ccoCompanies" or thc "Psriicipadng Manuficturcs." See MSA 5 IX(d)(lXE) (defining n "Qualirying Stntutc" as "a Ser~lingStatc's statute, ~rgulation,luw and/or mle (iippli~lhlceverywhere thc Sctlling State has authority lo Icglsliite) that effcclivcly and fully ncutnlizcs Ihc cost

SOA v. Pliilip Morris el nl.: 1 JU-97-915 CI: Ordcr Colapelling Arbilr~don FEB-06-2007 TUE 10: 51 AM AK SUPERIOR COURT FAX NO. 907 463 5016 P, 04/12

ndjus[nlcnl docs not reduco that Slnle's an~iualrcccipts. A "Qualifying Statute" mquircs the

slnnll tob~~~ocon~pa~ics that are not a par1 of tl~cagreement to also pay the $4.40 pcr carton II of cigurcttcs and the statc inust vigorol~slypursue those small coinpanics who do not comply. In an ntlcmpl to prevent I'uturc litigation, thc Agreement contains n limited arbitration

clausc, ITowcvcr, in most cir~u~tanccs,the court rctains jurisdiction. Differing I1 intcrprctations and applications of thc arbitrution provision rcsultcd in this dispute. II 'Ihc prcscnt disp~~tcconccrns the auditor's decision not to apply an NPM adjustmcllt to I1 the 'l'obscco ConlpLulies'April 17, 2006 annual payments. The Firm fourld that under the (1 Nl'M adjustment provision tho tobacco colnpanies in UIO agreement had suffcred n inarkct II share loss in 2003 and that thc Ageemcnt was a "significant factor" contributing to that loss. in scsponsc to that findings and in anticipation of tlic 2006 payment, thc Tobacco

Companies rcqucstcd tllc audilor apply nn onset to their 2006 payment based upon the 2003

Nl'M adjuslmcnt. Thc ni~litorelcctcd not to apply the NPM adjushent, Thc auditor

nckno\.vledged tt~ntin 2003 some Plrti~~tiffsfailed to diligentIy cnforce (heir qualifying

stalt~lcs,but still dctcrnlined that thc Tobacco Companies wcre not entitled to thc adjustment,

Thc auditor said this conclusion was rcqilired becausc no final determination had been made

rcganling cach slate's diligent cnforccmcot. 'The auditor clcctcd to "presume" djligcnt

-. ---.-- .- - disodvnn~agcshat t11c D~rticipntingMaaufi~cturcn: c~erience vfs-A-vis Nan-ParticipatingMouufacturcrs within such

1 SOA v. 19Riliphlovis et al.; !JU-97-915CI; Order Co~t'olnpcllingArbilmiion FEB-06-2007 TUE 10:51 AM AK SUPERIOR COURT FAX NO. 907 463 5016

On April 10,2006, Ule Tobacco Companies timcly served notice that thcy disputed the

:tttdilor's fin:~lcalculation. On April 17,2006, the Agreement payment date, thc Tobacco

Compaaics paid hccalculated amounts. Thc disputed amounts werc paid into an cscrow

I account. 'Lh clarify the issuc, some states filed actions in (heir statc courts seeking a

cieclnralio~~that they Iucl diligcnlly enforced their qualifjring statutes. In responsc, the

Tobacco Coinpanics filed motions requesting thc state courts order atbibation. '1'0 date, somc

11 33 slatc couns hwc nllcd on the issuo. All bul OIIC state court has granted tile Tobacco Companies' molio~ito conlye1 arbitration.

011 Octobcr 3 1,2006, the companies filed, with this court, a motion to enforcc the

I( nrbilr~tion~~rovisiolu; of the Agrccmcllt and compol arbitration. Thc State of Alaska (the II "Stalea') filed an opposition rccogr~izingtwo issucs: (1) the appropriatcncss of arbitrating thc II nuditor's application of the prcsuniption ol'diligcnt cnforcernent; and (2) the appropriatcncss 1 oPdctr.nnining diligcnt enforcement through arbilrali~n.~Tlic state did not oppose II arbilrr~tionregarding the aurlitor's dctcr~ninationto apply a prcsuinption of diligcnt cn~orccmcnt.klowcvcr, the state contcnds that the diligent e~~forccrncntdeter~nination falls

ootsidu the scopc of thc arbitration provision and the court should makc this detenl~ination.' II On Janunry 3 1,2007, this court listcncd to oral argument in this mattcr. Counsel I'or thc 'l'obncco Cornpanics reaffirlned argomcnts poscd in thcir supporting memorandum that:

I/ . r- Settling Shto ns a rtsult of the provisions oflhis Apeement.").

Akc7.tko Crozrr~S)Ir~em rage s

SOA v. Pltilip Morrf~ct a!.: 1nJ-97-315CI; Ordcr Conipclling Arbiintion

I I FEB-06-2007 TUE 10:52 AH AK SUPERIOR COURT FW NO, 907 463 5016

(1) thc plain langirngo of Lhe Agrccmellt rcquires arbitration of tho NPM dispute; (2) thc

slnrctmc ol'tl~cAgreement and the nationwide payrncnt provisions compel arbitration; and

(3) wllcrc questions exist as to tlie arbitrability oCa dispute, Alaska law favors arbitration. .

Counsel fix tllc state nrgtlcd that the decisions of whethcr the state diligently enforced ik

qualifying siatutc falls wilhil~tl~c jurisdiction of the court not an arbitration body.

If. REI.,ISVANT PROVISION OF THE SETTLEMENT AGREEMENT

Subsection VII (a) of [he Agrcclr~enroutlincs the jurisdiction of the court:

rach Participating M~znnlLclurcrand each Settling State acknowlcdgc that the Court: (1) has jurisdiction over .the subjcct matter of the action iclcntificd in Exhibit 1) in such Settling Slate and over each IJarticipaling Manufacturer; (2) shall retain cxclusivc jurisdiction for the purposes of iniplemeiiting and enlbrcing this Agreement and the Consent Dccrce as to such Scltling Stale; and (3) except as provided in s~ibscctionsIX(d), XT(c) and XVII(d) and Exllihit 0, shall bc the only court to which disputes under this Agrccmcnt or tile Consent Dccrcc are presented as to such Settling State.

Subscction IX(d) oullincs NPM acljushllent calculation and allocation procedures.

Spccificillly, IX(d)(l)(A) sets forth the calculation PI-occdure,IX(d)(l)(C) delineates when

thc NI'M acuusl~ncntwill apply:

011 01. bcforc E'cbruary 2 oC each ycar following n year in wl~ici~there was a Markct Share loss grcatcr than zero, a nationally recognized

-7-m- ' State's Yarlial Opposidon to Motion to Conlpcl Arbilration nt 2-3. Id.

SOA v. Philip Mods ct nl.; 1111-37-915 CI; Ordcr Compelling Arbirntioll FEB-06-2007 TUE 10: 52 AM AK SUPERIOR COURT FAX NO, 907 463 5016

iinn of cconomic consuliants (the "Firm") sllall determjnc whether thc disadvantages eqcricnced as a result of the provisions of this Agrccmcnt werc a significant faclor contributing to the Markct Sharc Loss for thc year in yucstion. If tho Firnl dctermines that the clisadvnnlagcs expericnccd as a rcsult of the provisions OF this A~rcc~ncnlwcrc a significant fixlor coritributiiig to the Market Share 1,oss for 111c year in question, thc NPM adjustment described in subscction iX(cl)(l) sl~allapply. If the Pinn dctermines that the tlisndvantagcs cxpcrienccd as a rcsult of Qlc provisions of [his Agrccmcnt wcrc not a significanl fdctor contributing to the Markct Share 1,oss for the ycar in queslion, the NPM adjustment . . . shall not apply. . , , Tllc determination OF thc Firm with rcspeci to this issuc shall be conclusive and binding upon all parties, and shall bc final and non-appcalabIc.

Subscclion IX(d)(2) discusses allocation among Scttling States of the NPM

(A) 'She NPM adjuslmcnt sct fordl in subscction (d)(l) shall apply to tl~cAllocaled Paynients of All Settling Statcs, except as sct forlh below, (B) A Seltling Statc's Allocatcd Payment Shall not be subjcct to an NI'M adjustmenl; (i) if such Settling Slate wntinuously had a Q~lnlilj.ing Stat~~tc(as dcfincd in subsection (2)(E) below) in full force and effect during the entirc calendar year immediately preceding thc ycar in which the payment in question is duc, and diligcrltly crlforccd thc provisioi~sof such statute during such entire calendar ymr; . , . (C) The alggregatc amount of lhc NPM adjuslinents that would havc tpplicd to the Allocatcd 13-'ay~nenlsof tliosc Settling States that are not subjecl to an NPM acljusitl-tcnt pursuant to subsection (2)@) shall be reallocated anlong all other Settling States pro rata in proporlion to their respcctivc Allocablc WShares . . . and such other Sct lling States' Allocalcd Paynicnts shall be furthcr reduced accordingly.

Subscction XI(c) discusscs procedures for the resolution of disputes:

SOA V. Philip Moms ct nl.: 1J1l-97-915 CI; Older Compelling Arbitntion FEB-06-2007 TUE 10:52 AM AK SUPERIOR COURT FAX NO. 907 463 5016

Any disputc, conlrovcrsy or clai~rlarising out of or relating to calculations perfonncd by, or any detcrminalions made by, the Independci~t auditor (including, without limitation, my dispute concc~.ningIhc ope ratio^^ or npplicalion of any of thc adjustrncnts, rcductio~ls, offsets, carry-forwards and allocations described in siibscction IX(j) or subscctior~XI(i)) shall be subinittcd to binding arbitration bcforc a pancl of rhrce ncutral nrbitrators, each of whom shall bc a l'onncr Article 111 fcdernl judgc. . . . The arbitration shall bc govcrncd by the U~iitcdStates Pcdcral Arbitration Act.

IX(i) sets forth thc scquc.ncc For applying clllocations, offsets, reductions

and ncljustmc.nts to tho base pnyrnenls due From tho Tobacco Companies, Included

in IX(j), as thc sixth step, is thc NI'M adjustment. IX(i) applies-theNPM

I DISCUSSION

Tflc disputc before thc court arises out of the interpretation and application of the

Agrcemc~~t'sjurisiiiclion and arbitration provisior~s. 'l'o resolve this dispute the court musl

dctcnlu'nc: the scope of tho court's jc~risdictionns established in scction VII(a) of thc

Urlder Alaska law, arbitration is "csscntinlly a creaturc of contract, a contract in which

the partics lhenisclvcs charter a privalc tribunal for the resolution of (heir disputes."6 Thus, n

q~icstionof conlract intcrpretalion confronts the court. Thc goal of contract intcrpretalion is

1 ---I.- - .- - 1 M!~njG.palityof Anchor!%q.uJ:pnk Coluccio Oony?L,-Cp<.826 P.2d 316,322 (Alaska 1932) (quoling M,~inskiv. Goldcn I -VnllckI.\lgi;ic Aw'n, 509 P.2d 280,283 (Alaska 1973) (quoting storii~Medical Grow v. Hplth lnsunncc Plannf 1 Sr.7rcr New Yo&, I82 N.E.2d 85, 87 (1982)).

SOA v. IebilipMorris ct al.: IlU-t17-915 CI; Ordcr Compolli~rgArbimlion I. FEB-06-2007 TUE 10:52 AH AK SUPERIOR COURT FAX NO. 907 463 5016

Lo givc efkct to tlic rcnsonnblc cxpectntion of the prlrtics.7 In interpreting n contract, Alaska

courts consider disputcd lmguagc in its cantcxt in the contract as a whole and look to he

purposes oflhe contract, the circumstances surrouncling its formation, and the case law on

similar co~itractualprovisions. 6

Undcr the Agrecmcut, the court lias jurisdiction ovcr the subjcct matter of thc original

nciion and over cach Tobacco ~om~ai~.~ln addilion, thc court "retain[s] exclusive

jurisdiction for [he ~LI~~OSCSof implementing and enforcing [the Agreement] and the Conscnt

Ilccrec" with rcgatd to Alaska and, will1 limitcd exception, '[is] the only court to which

disputes rlncler [lhc Agrccmont] or thc Consent Decree [concerning Alaska] arc presentcd."'O

hrrsunnt to seclion XI(c) of (he Agrccmcnt, which sets forth the relevant limitation on thc

co~rrt'sjurisdiction, rhc resolution of disputcs ''arising out of or relating to calculation

performed by, or any detcrminalions niadc by, the Indepcndcnt auditor (including, without

li~llitalion,any dispute concerning thc operation or application of any of the adjustments,

reductions, offsets, carry-forwards and c?llocationsdescribed in subscction E(j)or subscction

Xl(i)) , . . shall bc submilted to binding arbitralion," Section lX(j) illcludcs the NPM

ucljustmcnt.

Cnsev v. Sfina'En.crgy,.!n_c, E P.3d 379.383 (Alska 2004) (citillg !&&on Com. v. St~te,40 P3d 786,793 (Alaska ' 200 1 )I. "dI i;ithg Zt~clscl!,~f~.\J~~iv.of Alaska. Fa$?;~,nk\ 794 P2d 932.934 (Alaska 1990)).

I ' MSA 4 VIl(a). 1 'Old.

SOA V. Philip Morris ct a(.; IJU-97-315Cl; Ordcr Cornpcllirlg Arbi~alion u FEB-06-2007 TUE 10:53 AM AK SUPERIOR COURT FAX NO. 907 (163 5016 P. 10/12

'I'he Tobacco Conlpanics clispute the auditor's fslilurc to apply tllc NPM adjustment to

thcir 2003 pc~y~lcnt.The auditor dicl not subjcct the Tobacco Companics' payment to the

NI'M nclj~istmcntbecause 1110 auditor prcsunlcd that hePlaintiff$ had diligently enforccd their

quaIiCying sintutcs. Specifically, the Tobacco Companics dispute the auditor's diligcnt

cn[brccmctlt dcterlninalion and claim l11;rl this cletennination is arbitratablc under section

Xl(c). Thc state docs not oppose arbitration regadi~~gthe auditor's determination to apply a

prcsuinp~ioi~ofdiligcnt cnlbrccmcnt. Ilowever, the state contends that the diligcnt

enforcement dctcrn~inationihIls outsidc the scope of thc arbitration provision and thc court

lnlcrpreting tllc language of sectio~~XI(c), in n nlanncr consistent tvith thc

rcquircn~t;nlsof contract inlerprctation nuder Alnska Law, and applying this intcrprctzt'Ion to

the fiwt pnttcrn, thc court concluclcs tllnt this dispule demands arbitration. A decision to

prcsulne diligcnt c~~forcemenlconstitutcs n "deter~ninntion"made by the Arbitrator. This

determillation conccrilcd the "opcratio~land application" of the NPM adjushncnt, an

adjust~naltexpressly includcd it1 section XI(c) via its reference to section IXCj). Under the

Agrccnlcnt, disputes "arising out of or related to" such a deternlinalion arc explicitly inlendcd

Tor nrbitratiorl and are not within thc scope of the court's jurisdiction. Further, in disputes

rcgnrding thc propriety of (zrbitri~~ion,tl~c Alaska Supreme Court has made clear that public

policy of Alaska strol~glyfavors arbitration.

SOA V. i'hilip Morris ct (11.; 1JU-97-915 C1; Ordcr Uolnpclli~r&Arbilralion FEB-06-2007 TUE 10:53 AM AK SUPERIOR COURT FAX NO. 907 463 5016 P, 11/12

Tl~ecourt grants the Tobacco Companies' joint motion to compcl arbitration of the

dislmtc regarding thc auditor's determination to apply a presumption of diligent enforcement

and for dctel~ninationof whcther Alsskn diligently cnforced its Qudiljing Statute,

Dated this 5th day of Fcbniary, 2007, at Juncau, Alaska.

- Lnrry R. Wceks Supcrior Court Judge

CT!IVl'[l~ICATION0x2 SERVICE 1ccrlil'y 11131 1 served thc following parties on thc b day of & ,2007:

Chris l'oag Atlorncy Gcncral Co~urt130s

Jnlncs Sloclzcr I,n~)cI'owcH 301 W,Northc~-n Lights Blvd, Stc 301 Anchorngc, AK 99503

Jarncs Lcik 1'el.kin.s Coic 1029 \V. 'L'hird Avc, Stc 300 Ancl ioragc, A K 9950 1 pcq~a~Sefdahdy l'nllon Roggs 60 1 W. I7ilih Avc., Stc 700 Anchorage, AK 9950 1

SOA v, Philip Morris e~ ol.: 1 JU-97-915CI: Ordcr Comprlling Arl~i!ntio~l /- FEB-06-2007 TUE 10: 53 AM AK SUPERIOR COURT FAX NO. 907 463 5016

a Memorandum - 'lo Chds Poag, SOAJAGO; James Sloctzcr, Ime Powcll; James LeiPcrkins Coie; Douglas Scdd~cly,l'atlon Roggs

.I I:roal: Tncy Vcr Velde ,Asst to Judge Wcclrs

Re: Scrvicc on out of shLc allol~~~ysi?ssocinicd with your firms L

'1110 co~ulhas scrvccl thosc partics listed above. Irirms that have formed associations with non-rcsidcnt ottonicys shnll scrve R copy of all orders on those non-resident anomeys.

Brett Itlgcnuan, Thomas Frcdcrick and JRIIICSMalhias associated with James Lcik Elimbctt~McCallum and Robert Brookhjscr associated with Douglas Scrdahcly Gnylc Iioscnslcin and Elli Lcibens~cinassociated with Ja~ncsStocker. iMichael K. Jeanes, Clerk of Court *** Electronically Filed *** 0 1/26/2007 8:00 AM SUPERIOR COURT OF ARIZONA MARICOPA COUNTY

CV 1996-0 14769

CLERK OF THE COURT EIONORABLE TIMOTHY J. RYAN B. Navarro Deputy

STATE OF ARIZONA, et al. MICHAEL L PARRISH

AMERICAN TOBACCO CO INC, et al. PAUL F ECKSTEIN

WILLIAM J MALEDON REBEK4H W FRANCIS SANFORD J GERMAINE HOLLY E LOISEAU WEIL GOTSHAL & MANGES LLP 1300 EYE ST NW STE 900 WASKINGTON DC 20005 THOMAS J FREDERICK WINSTON & STRAWN LLP 35 W WACKER DR CI IICAGO IL 6060 1 MATTHEW M WAWRZYN KIRKLAND & ELLIS LLP 200 E RANDOLPH DR CHICAGO IL 60601 ELIZABETH B MACCALLUM HOWREY LLP 1299 PENNSYLVANIA AVE NW WASHWGTON DC 20004-2402 PENNY P REID WEIL GOTSI-IAL & MANGES LLP 767 FIFTH AVE NEW YORK NY 10153 KENNETH L CHEFWOF FIELLER EI-IRMAN LLP 17 17 RHODE ISLAND AVE NW Docket Code 0 1 9 Foml VOOOA Page 1 SUPERIOR COURT OF ARIZONA MARICOPA COUNTY

0 1/24/2007

WASHINGTON DC 20036-300 1

UNDER ADVISEAIENT RULING

The Court has taken Defendants Philip Moms, Inc.'s, R.J. Reynolds Tobacco Company's and Lorillard Tobacco Company's Application and Motion of the Original Participating Manufacturers to Enforce the Arbitration Provisions of the Master Settlement Agreement and Compel Arbitration. The Court has considered the memoranda of the parties filed in connection with the Original Participating Manufacturers' .Motion to Compel Arbitration, as well as the oral arguments of counsel. The parties agree that at least a portion of this dispute, i.e., the Auditor's application of the 2003 NPM Adjustment is subject to arbitration. The parties do not agree that the diligent enforcement provisions should likewise be subject to binding arbitrn t' on.

The parties also disagree as to the propriety of this Court's consideration of other rulings of other jurisdictions. The Court notes that, at one time, Arizona thought it appropriate to file an amicus brief in New York with the intention ofaffecting the outcome. By the same token. the Court is not persuaded that its findings should be swayed by the fact that every other jurisdiction, except North Dakota, has compelled arbitration. The Court rnust be mindhl of the reality that the other jurisdictions are dealing with the identical Master Settlement Agreement.

As to the correct interpretation of the factual background of the Master Settlenlent Agreement and the subsequent dispute leading up to the Manufacturer's Motion to Compel Arbitration, the Court adopts the findings set forth in Connectictct v. Phil@ Morris, hzc. A.2d ,279 Conn. 785,788-792, WL250.5900 (2006), filed as Exhibit E accompanying the Defendants' nlotion. This is not done under some theory of stare decisis. but with such an excellent recitation of the facts so succinctly stated, there is no reason to reinvent the wheel.

Arizona strongly favors arbitration as a matter of public policy. S?zorvbergerv. Yoring, 24 Ariz. App. 177,536 P.2d 1069 (1975). Rocz v. Drexel Bunzllanl Lanrhert Itzc., 154 Ariz. 462, 743 P.2d 971 (App. 1987). The enormity of the settlement process, covering the vast number of different jurisdictions expanding beyond the lower forty eight states, likewise suggests arbitration as the appropriate vehicle for dispute resolution.

The terms of Section XI (c) of the Master Settlement Agreement are clear and unanlbiguous, and the decision to accept the State's presumption of diligent enforcemer~t Docket Code 0 19 Form VOOOA Page 2 SUPERIOR COURT 01: ARIZONA MARICOPA couNm

~lecessarilyaffected Independent Auditor's calculatiorl of the NPM adjustment. That, in turn, necessarily makes the dispute before this Court an issue to be arbitrated. For those reasons,

IT IS ORDERED granting the motion in its entirety.

The parties had intimated that appellate review was likely. regardless of the Court's ruling. Accordingly, on the Court's ommotion.

IT IS FURTIIER ORDERED staying this matter from proceeding to arbitration until February 23,2007, in order for the parties to have adequate time to consider andor prepare for special action review.

Docket Code 0 19 Form VOOOA Page 3 i :.. . . . 3.. .. .% .- . ... i::. ;:: ::: IN COURT OF COUNTY,ARKANSAS :.. . m cmm PULASKI i :. ' FiLEO ::. 17- 13MSiON j:. .i. :...... :.. . '2056 NOV 29 AH 10: 09 ;... - .-.j. STATEOFARKANSAS lJLAWmT . .. PAT O'BRIEN :.;.- CIRCUIT-COUNTY CLERK .: ... VS. NO. U1997-2982 .: .:.. . .: ... . :.:. i B. THE AMEFUCAN TOBACCO CO., INC., :....:. : -. ....;3 ET AL. DIEI;ENDANTS :::...- :i :<.:: ... . .:Z. . i: 0,mW !..-..; :!I .>. jz Now on this 21* day ofNovmba, 2006, cows oa to be heard the Motion of the

.'<' ftr PWforDeclaratory Order, Or@d Participating Manufkiwa's Motion to f 5..-. . Def- &. -.. i:;; CMnpel Mdratioq Subsequerd Participating 1-tr's Joinda in Motion to Compel .C *. ....:>. . ;i :._ . <... Arbiuafton, and the court, &w having reviewed the p1PRAinPfi hmein and heard the argumenrs of -....>..L. : :: . ..5. . : .. -.. -. i .: counasl, fulds as fbllows: 2.:,: i :i . .4 :;. .... : 1 .:. 1. Tbe State of Arkansas 46dLg a finding that it has diligently eaforud Act 1165 of 1999 : .: .i 'I. .>.:., .A >.:... :: ...... : during calender year 2003. Tbt State argues the sole qdonof diligence is not subject to ..:,.iz;..,.<:,. th6 Master ScttIemmt Agreemcnr (MSA) f.ubitdon clause. MSA 4 XI (c). ... ., ... . .:- . . 2. Defendants f3led a Motion to CowAhitration on the hueof the indepdal i5 .: -. ...:: j ::. :-- Auditor's &anbation not to apply an NPM won-Participating Manufiacturer) downward i: ?- ..:-.. . 1%: adjustma to the OPM's (Original F'articipatkrg ldamhtwer's) annual MSA payment for 44 - -.-.. . , ..-. - . . ...I . . 2006. Midam argue tbe decision of the indegeadexxt Auditor to deprive than of tbe

downward adjustmeat in their payment falls squarely withing the arbittation clause of XI (c) of .. . 4 the MSA

3. The Master Senlanerd Agreemat, 9x1 (c) provides in pertinent part "[alny dispute,

controversy or claim wisbg out of m reLating to calcuiatiom perfbrmcd by, or any determinations

made by. the independent Audiitor (ihlding, without limitation, any dispute concerning the operation or sppkaion of arry of rbe sdjwatts, reduction, offsets, carry-forward and docatiom darcribod in subsect;onw) or subsection Ma)ahall be submitted to bioding arbitration.. "

4. Sdxwtion IXQ) ofthe MSA dab with the "Order of Applidw of Allocations,

Ofkts, Reductions and Adjustmems" and generalty sets forth the calculations of payments due under tbe agtmmnr. Pursuant to paragraph "Sixth"of Subsection Wj),"[t]he NPM Adjustment

&dl be applied to the results ofckuse "FiAh* pursuant to subsection IX(dX1) and (d)(2)".

Subseaion (dX1) and (dX2) chcribe the calculations of the NPM Adjustment fbr OPMs aad tbt allocation among the states of the NPM Adjmmmt for OPMs. Subdon(dX2) provides for rbe non-applicabiiity of the NPM Adjustment to awes that ''diligently" enforce a qu.alifj.ing statute, and fir the redlocation of that amount among other states which are then eligible for an

NPM Adjustmew

5. Tbe MSA should be irderpreted dergaed rules of cmtract canstruction calling for tcnns to be constmd using theit phh, ordinary and common meaning unless it appears fiom thc terms of the contract i~lfthat a Werent meaning is intord#l. Cionsomitted.

6. The disjwte at issue clearly falls within tbe provisions of the arbitration clime of the

MSA The Mure of the hkpedmt Auditor to apply the NPM Adjustment because the State of

Arksnsas had in effect a qualifyiag aamte is JRarfy one of the MSA $XT(c) disputes, co~ltrovmiesor claims dating to calculations paformed by or determimiom made by the independent Auditor that is abject to atbirration

7. &ugh other states' dedirions on this issue are not binding on this court, it cannot be igmtbd that 22 of23 atafes have mIed in favor of arbitration. The decisions of these other 22 states art very Mve the ra.w&g appasdStI&&y 8hdaf h of the 0pinb~ f: .. i. c

II) '. . . , . :. . . <.~. r :j ...3. :. ..,...... provided this court. The weight of these other decisions is too great to ignore. .:i... . :i. :...... * l ;: i; 8. Uniformity of dtsW be urhmxd with me pand of arbitrators making a 2.. '?.-. :...- . c .. .. :-: decision versus 50 or more stare courts making paaMly diverse decisions. This issue is not one ! .' i - .: -... i., .. - : resaved to the various states. Arbitration is favod under thae c5mmsmms and is rcqukd .., ... 1': by the cxpresd terms ofthe MSA

9. For the reasons statbd above, the. State's Motion for Duhatory Order irr htreby

i2. 1. denied and-thismatter is stayed pcading ahitdon The Ddfendant's Motion to Compd 9.) i; i' f i. Monb granted .. I:: r i' Tr IS SO ORDERED. 1

Date: /(-29*d Proceedings of the Arkansas Supreme Court - February 1,2007 Page 1 of 5

ARKANSAS SUPREME COURT

Opinions delivered 1;ebruary 1, 2007 . -- . - -. .. .------

Download ZIP file containing today's published PDF files. Download ZIP file containing today's unpublished PDF files.

TOM GLAZE. JUSTICE:

06-565. Brenda VanWagner v. Wal-Mart Stores, Inc., from Workers' Compensation Commission. Commission Reversed; Court of Appeals Affirmed. Special Justices Brent Standridge and Joseph P. hilazzanti, 111, join. Corbin and Danielson, JJ., not participating. (PUBLISHED) pa]

DONALD L. CORBIN. JUSTICE:

CR06-842. Artie Jackson v. State of Arkansas. from Pulaski Circuit, Fourth Division. Affirmed. Imber, J., not participating. (PUBLISHED) [m]

ANNABELLE CLINTON IMBER. JUSTICE:

CK06-253. State of Arkansas v. Roshonda Smith, from Pulaski Circuit, Fifth Division. Reversed and Remanded. (PUBLISHED) [m]

LM GUNTER. JUSTICE:

CR06-581. State of Arkansas v. Broderick Antoine Burnett, from Monroe Circuit. Reverscd and Remanded. (PUBLISHED) [ED-F]

PAUL E. DANIELSON. JUSTICE:

CR06-774. Corcy S. Wright v. State of Arkansas, from Lafayette Circuit. Affirmed. (PUBLISHED) [PDFI

PER CURIAM OPINION:

CRO(>-1 88. Roberto D. Cabral a/Wa Roberto Daco Cabral v. State of Arkansas, from Benton Circuit. Affirmed. (UNPUBLISHED) [PE]

PER CURIAh.1 ORDERS

REVIEW GRANTED: Petition for review was granted today in the following case.

CK07-7. Christopher Charles Yarbrough v. State of Arkansas, from Crawford Circuit. Proceedings of the Arkansas Supreme Court - February I, 2007 Page 2 of 5

07- 17. State of Arkansas v. Honorable Mackie M. Pierce. from Pulaski Circuit, Seventeenth Division. Petition for writ of certiorari is denied. Glaze, Brown, and Gunter, JJ., would take as a case. COURT OF APPEAL - FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

THE PEOPLE ex rel. BILL LOCKYER, as DO49428 ATTORNEY GENEM, (JCCP No. 4041) Petitioner,

'ME SUPERIOR COURT OF SAN DIEGO COUNTY,

Respondent;

PHILIP MOWS INC. et al.,

Real Parties in Interest.

THE COURT:

The petition for writ of mandate and request for stay have been read and considered by Presiding Justice McConnell and Associate Justices Haller and McDonald.

The petition is denied.

HALLER, Acting P. J.

Copies to: Ail partics Page 2 of 7

Not Reported in A.2d Page 1 Not Reported in A.2d. 2006 WL 3690892 (Del.Ch.) (Cite as: Not Reported in A2d)

C arbitration of a dispute with the State of Delaware. Briefs and Other Related Documents The issue before the coilrt is whether the settlement State v. Philip Morris USA, Inc.Del.Ch.,2006.0nly agreement signed by the companies and the State the WestIaw citation is currently available. requires arbitration of a dispute challenging a UNPUBLISHED OPINION. CHECK COURT determination that the tobacco companies are not RULES BEFORE CITING. entitled to a downward adjustment of the payment Court of Chancery of Delaware. due from them in 2006. Because the settlement STATE of Delaware. Plaintiff, agreement has a broad arbitration clause. the plain v. language of which covers the dispute in question, PHILIP MORRIS USA, INC., et al., Defendants. the court will grant the motion to compel arbitration. No. Civ.A.2088-N.

Submitted Oct. 26,2006. 1. Decided Dec. 12. 2006. A. The Master Settlenzelrt Agreen~ent

Ralph K. Durstein In, Thomas E. Brown, State of Delaware Department of Justice. Wilmington, This case arises out of tlic blaster Settlement Delaware, for the Plaintiff. Agreement ("MSA") between nearly all the states. A. Gilchrist Sparks. 111. R. Judson Scaggs, Jr., several territories. and numerous tobacco Kevin Coen, Morris. Nichols, Arsht & Turuiell companies. The MSA is the result of the lawsuits LL,P, Wilmington. Delaware: Alexander Sliaknes, brought by various jurisdictions over the health care James Mathias, Bren Ingerman, DLA Piper. New costs associated with tobacco use. The York. New York; Thomas J. Frederick. Kevin J. comprehensive document contains numerous Narko, Luke A. Palese, Winston & Stram. LLP, provisions and. in detail, provides for the Chicago, Illinois, for Original Participating calculation of payments to be made by the tobacco Manufachtrer, Philip Morris USA Inc. conipanies to the states. Bonnie Glantz Fatell, Blank Rome. LLP, Wilmington, Delaware; Marjorie Press Lindblorn, Peter Bellacosa. Kirkland & Ellis LLP, New York, D. The Parties New York: Penny P. Reid, Idit Froim, Weil. Gotshal & Manges LLP, New York. New York. for The parties to this suit are the State of Delaware. Original Participating Manufacturers. R .J. tobacco companies which are the Original Reynolds Tobacco Company and Lorillard Tobacco Participating Manufactures ("OPMs"). and the Cotnpany. tobacco companies which arc the Subsequent blichael D. Goldrnan. John E. James. Potter Participating Manufactures ("SPMs"). All are Anderson & Corroon, LLP, Wilmington, Delaware: parties to the MSA. When the initial settlement was Robert J. Brookhiser, Elizabeth B. McCallum, reached with the states, only the four largest Howrcy LLP, Washington, D.C., for Certain tobacco co~~~panies(the OPMs) participated and Subsequent Participating Manufacturers. signed the MSA. After the signing of the agreement, as permitted by the MSA, other tobacco companies A4EhlORANDUM OPINION AND ORDER joined in the settlement and signed the MSA LAMB, Vice Chancellor. (collectively, the SPMs). *I Numerous tobacco companies move to compel

8 2007 Thomson/West. No Claim to Orig. U.S. Govt. Works. Page 3 of 7

Not Reportecl in A.2d Page 2 Not Reported in A2d, 2006 WL 3690892 (Del.Ch.) (Cite as: Not Iieported in A.2d)

C. 7fieIIfSA's Puy~netrtProvisions FN3 Only if the Firm tletermines that the MSA was a significant factor contributing to the Market Share The MSA specifies a mechanism for determining Loss can the NPhI Adjustment apply to reduce the the Participating Manufacturers' annual payment amount of the payments required for the year. This obligations. In the case of the OPM's for example. determination is final and not appealable. their 2005 aggregate payment obligation was $8.0 billion, subject to various adjustnients. Each OI'M's payment obligation is calculated based on its relative share of nationwide cigarette sales by all

0~~s.~'The MSA also provides that an " *2 The NPM adjustment inquiry then turns to the Independent Auditor shall calculate and detemline efforts of individual states to discourage sales of the amounts of all payments owed pursuant to this cigarettes by NI'bls through enactment and Agreement, the adjusbnents, reductions antl offsets enforcement of appropriate laws. If the Settling thereto...." m2 State has enacted a Qualifying Statute (as defined in the MSA) and diligently enforces it, the NPbl Adjustment does not apply to that sta~e.~If a FNI. hiSA $ IX(c). The payment Settling State so qualifies. the NPM Adjustment is obligations of SPMs are spelled out in reallocated among all other Settling States, on a pro MSA 5 IX(i) and are subject to similar rata basis. Only tllose states that have not complied adjustments. including the Non-Settling with the requirement of diligently enforcing a Manufacturer adjustment at issue here. Qualifying Statute stand to lose any funds.FNS Thus. those states that have not complied bear the FN2. MSA 5 XI(a). full burden of the adjustment, potentially leaving norlcomplying states without any payment from the D. The NPM Adjusrt~rent n~anuhcturers in that year. Understandably, therefore, the stakes are high for the individual Non-Settling hlanufacturers ("NSMs") are Settling States, when the Fiml determines that the non-signatory tobacco conlpanies which are not MSA was a significant factor contributing to the bound by the MSA. Part of the MSA contemplates Market Share Loss in a given year. that the NSMs may gain market share as a result of the competitive advantage achicved by the lower costs from not paying the settlen~entamounts antl FN4. MSA 5 IX(d)(2)(A-B). Delaware has from avoiding the marketing restrictions agreed to passed a Qualifying Statute. See 29 Del. C. by the settling companies. This is addressed in the $6080 ef seq. MSA through a Non-Participating Manufacturer Adjustment ("NF'M Adjustment") provision. FN5. ?VISA5 IX(d)(2) (providing that the NPM Adjustment shall apply to the The NPM Adjustment works as follows. The allocated paynlcrtts to all Settling States, Independent Auditor calculates, on a nationwide except that a state is not subject to the basis. the aggregate market share of die NPM Adjustment "if such Settling State Participating Manufacturers with a baseline year of continuously had a Qualifying Statute ... 1997. If that market share decreases by more than and diligently enforced the provisions of 2%. a "Market Share Loss" exists. For each year in such statute during the entire calendar year" which there is a Market Share Loss, the MSA 1. provides that "a nationally recognized finn of economic consultants (the 'Firnl') shall detemune E. The Arbitrcition Provision Of The b!SA whether the disadvantages experienced as a result of the WSA] were a significant factor contributing to This court retained jurisdiction for purposes of the Market Share Loss for thc year in question." implementing and enforcing the hlSA. The MSA's "

Q 2007 ThomsonIWest. No Claim to Orig. U.S. Govt. Works. Page 4 of 7

Not Reported in A.2d Page 3 Not Reported in A.2d. 2006 WL 3690892 @el.Ch.) (Cite as: Not Reportetl in .l.Zd)

Resolution of Disputes" section, however, requires same day. the State of Delaware filed this action. arbitration of "[alny dispute. controversy or claim seeking declaratory and injunctive relief. The arising out of or relating to calculations performed Participating Manufacturers responded by moving by, or any determinations made by, the Independent to compel arbitration. Auditor (including, without limitation. any dispute concerning the operation or application of any of the adjustments, reductions, offsets, carry-fonvards G. Other State Co~rrtDecisions and allocations described in subsection R(j) or subsection XI(i) shall be submitted to binding *3 Twenty-three other courts have addressed this arbitration ... governed by the United States Federal same issue in their respective states. Twenty-hvo of Arbitration Act).'' Subsection 1x6) includes those courts have compelled arbitration. The the NPM Adjustment and subsection XI(i) covers " vast majority of the decisions issued by those courts Miscalculated or Disputed Payments." rely on the plain language of the arbitration clause. cor~cludingthe clause covers the dispute over the deternlination of the NPM Adjustment. These FN6. MSA $ XI(c). decisions, although persuasive authority, are not binding on this court. Nevertheless, after F. Tl~eHistoty of ~l~eQlr~errt Dispute conducting its own independent analysis of the issue presented, this court agrees with the ovenvhelming The present dispute arose when the Independent number of its sister courts-arbitration is required. Auditor refused to apply an NPM Adjustment to the manufacturers' April 17. 2006 annual payments. The Firm found that the MSA was a "significant FN8. The only state that did not compel factor" conmbuting to the manufacturers' Market arbitration is North Dakota. State of North Share Loss for 2003. The manufacturers then askcd Dakotrz v. Phill+ Morris, IIIC.,File No. that the Independent Auditor apply the 2003 NPM 09-98-C-03778 pist. Ct. County of Cass. Adjustment to offset their payments due under the N.D. July 18,2003). MSA in 2006. The Settling States. Delaware included, argued in a brief that the Independent Auditor should refuse to apply the adjustment because (i) all the states adopted a qualifying Thc manufacturers assert that the plain language of statute, and (ii) the Independent Auditor should " the MSA requires arbitration. First, they argue that presume" diligent enforcement of these laws. The the present dispute is a direct challenge to the Independent Auditor adopted thc states' position Independent Auditor's "calculations" and " and determined not to reduce the April 2006 determinations" within the meaning of the MSA's payment on account of the NPM Adjustment. This arbitration clause. That is, when the Independent determination was consistent with its actions in Auditor decided to presume diligent enforcement previous years, and reflected the Independent and. therefore, to not apply the hTM Adjustment, Auditor's understanding that any dispute about its that was a "calculation" or "determination" within determination "is to be submitted to binding the language of the arbitration provision of the arbitration in accordance with subsection XI(c) of MSA. the MSA." M7 Next, the manufacturers argue that even if the decision is not a calculation or determination, the FN7. See OPM Opening Br. Exs. D. E, F. dispute should be arbitrated because it arises out of or relates to a determination or calculation made by On April 21, 2006, the manufacturers notified the the Independent Auditor. Supplementing their Attorney General of Delaware of their intent to primary plain language argument, the parties arbitrate the 2006 NPhI Adjustnlent dispute. The moving to compel arbitration point out that to

0 2007 'T'hon~son/Wesl.No Claim to Orig. U.S. Govt. Works. Page 5 of 7

Not Reported in A.2d Page 4 Not Reported in A.2d. 2006 WL 3690892 (Del.Ch.) (Cite as: Not Reported in A.2d) permit the cases to proceed outside arbitration the dispute in question is \\lthin the scope of that would lead to "chaos." since individual state courts All doubts should be resolved in could apply different standards leading to favor of arbitrati~n.~'~Furthermore, there is a " potentially conflicting The MSA liberal federal policy favoring arbitration reco,pizes this risk. they contend, and requires agreements." This public policy in favor of arbitration of disputes over the NPM Adjustment. arbitration is mirrored in Delaware This Finally, the manufacturers argue that if there are any court follows public policy, but not to the detriment doubts concerning the scope of arbitrable disputes, of the contractual provisions agreed to by the this court should resolve them in favor of arbitration.

N9. OPM Opening Br. at 23. FN12. I-lolvsam v. Dean IVitter Reynollis, Iltc., 537 U.S. 79, 123 (2002) cited in 'Ihe State of Delaware responds that the MSA is Janles & Jackson, LLC v. Willie Galy, silent as to who should determine the issue of LLC, 906 A.2d 76, 78-79 (De1.2006). diligent enforcement arid that the MSA is clear that this court has retained jurisdiction to resolve FN13. Pa$ Holding AB v. A4irror Image continuing disputes.M10 The State fkther Internet, hlc., 817 A.2d 149, 155 contends that the North Dakota decision correctly (De1.2002): interpreted the MSA by concluding diligent First. the court must determine whether the enforcement does not arise out of or relate to " arbitration clause is broad or narrow in calculations performed by or determinations made scope. Second. the court must apply the by. the Independent Auditor." Buttressing relevant scope of the provision to the this argument. the State cites the Independent asserted legal claim to determine whether Auditor who expressly said that it was neither the claim falls within he scope of the qualified nor charged with the responsibility to contractual provisions that require determine whether individual states had diligently arbitration. If the court is evaluating a enforced the Qualifying Statutes. Finally, the State narrow arbitration clause. it will ask if the argues that the Independent Autlitor's decision to cause of action pursued in court directly presume enforcement was not a "deterrnination" relates to a right in the contract. If the within the meaning of the MSA arbitration arbitration clause is broad in scope. the provision. court will defer to arbitration on any issues that touch on contract rights or contract performance. FNIO. State of Delaware Answering Br. 19-23. FN14. SBC Interactive, Inc. v. Corporate Media farmers, 714 A.2d 758, 761 FNl I. State of North Dakota, File No. (De1.1998) ("Any doubt as to arbitrability 09-98-C-03778, Mem. Op. at 6-7. is to be resolved in favor of arbitration.").

Ill. FN15. Holtsan~,537 U.S. at 123.

Delaware law and federal law recognize that " FN 16. SBC blteractive, 7 14 -4.2d. at 761. arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute FN17. In some circumstances, not present which he has not agreed so to submit." R'"Z Thus, here, the threshold issue of arbitrability is this court's role is to determine whether there is a itself properly determined by the arbitrator, valid and enforceable arbitration agreement not the court. Cj: Jarner & Juckson. 906 between the parties. and then to determine whether A.2d 80 (holding that when the parties

0 2007 Thomson/West. No Clainl to Orig. U.S. Govt. Works. Page 6 of 7

Not Reported in A.2d Page 5 Not Reported in A.2d, 2006 WL 3690892 (Del.Ch.) (Cite as: Not Reported in .4.2d)

reference the American Arbitration dispute, controversy, or claim arising out Association Rules they have agreed to of or in connection with" is broad in submit the threshold issue of arbitrability scope): Elf Atochenr N. America v. Jaffari to the arbitrator absent contrary intent). hc., 727 A.2d 286. 295 Qle1.1999) The MSA does not incorporate the AAA (holding that "in connection with" or sinlilar rules. III any event, the parties language requires claims related to the did not raise this issue. agreement be sent to arbitration).

The present dispute. defined most narrowly as the State advocates. is over the determination of *4 An analysis of this dispute begins with the MSA diligent enforcement of the Qualifying Statutes. itself. The MSA provides that it is to be governed Conceptualized as the nianufacturers advocate, the by the Federal Arbitration Act and the choice of law dispute is a broader dispute over both the NPM is the law of the individual Settling States. Under Adjustment generally and the determination by the Delaware law. a contract that is unambiguous on its Independent Auditor that the adjustment should not face is enforced without resort to extrinsic evidence. apply because of a presumption of diligent "I8 Consistent with this principle, the court looks enforcement. In either case, the dispute is one " to the provision of the lMSA governing arbitration. concerning the operation or application" of the NPM Adjustment under the second part of the Resolution of Disputes section of the MS.4. Thus, FNlS. Lrrsk v. Elliott, 1999 WL 644739, at the court need not conclude that a determination *4 (Del. Ch. Aug. 13, 1999) (''Where the was made by the Independent Auditor in refusing to provisions of a contract are plain and apply the adjustment. Although it seems clear that unan~biguous. the Court will look only to there was a determination made and, therefore. the the four corners of the document to present dispute arises out of or relates to that determine what the parties intended. determination, it is unnecessary to conclude as Evidence extrinsic to the document is much, as the broad language of the second part of generally inadmissible.") (citation omitted). tile provision clearly enconlpasses the present dispute when read in conjunction with the "arising The Resolution of Disputes section of the MSA is a out of' or "relating to" language of the first part. The dispute concerns the operation or application of broad arbitration clause that requires arbitration of " [alny dispute. controversy or claini arising out of or the NPM Adjustment that the Independent Auditor relating to calculations performed by. or calculated and is, therefore, subject to arbitration. determinations inade by. the Independent Auditor." " The only court to conclude othenvise. the North Further it requires arbitration of disputes. Dakota District Court for the County of Cass. did including without limitation, ... [those] concerning not follow this approach. Instead, it concluded that the operation or application of any of the the issue of diligent enforcement was nor a adjustments." M'O Such a broad arbitration detem~inationmade by the Independent Auditor. FN'' clause-broad at least in the context of the limited The North Dakota court found that diligent subject matter it addresses-undoubtedly enforcement was a matter of local law, best encompasses the present dispute.M2' addressed in the courts. not by arbitration. Furlhermore, that court held that the dispute did not arise out of or relate to or concern any aspect of the FN 19. MSA 5 XI(c). arbitration provision in the hISA. This court disagrees and adopts, instead, the majority position that the plain language of the MSA clearly encompasses the present dispute. N21. Pa@, 817 A.2d at 155 (holding that an arbitmtion clause covering "any

O 2007 ThomsonjWest. No Claim to Orig. U.S. Govt. Works. Page 7 of 7

Not Reported in A2d Page 6 Not Reported in A.2d. 2006 WL 3690892 (Del.Ch.) (Cite as: Not Kcportetl i11 A.2d)

FN22. Sfare of Nortlz Dnkora, File No. 09-98-C-03778, Mem. Op. at 6-7. For the foregoing reasons, the motions to compel Examining the MSA in its entirety supports the arbitration and to dismiss are GRANTED. Thus. the conclusion that the plain language of the Resolutiorl parties are ordered to arbitrate the issues raised in of Disputes section of the MSA requires arbitration the complaint, and the complaint is DISMISSED of the present dispute. The MSA specifically witliout prejudice to the right of the State of excludes from this court's jurisdiction section IX(d). Delaware to contest the arbitration. All parties shall the section that covers the NPM Adjustment. ant1 bear their own costs. section Xl(c), the arbitration provision.M23 Likewise. while the MSA clearly provide. that the IT IS SO ORDERED. individual states retain jurisdiction over implementation and enforcement of the MSA, that Del.Ch.,2006. same section expressly limits such jurisdiction "as State v. Philip Monis USA. lnc. provided in subsectior~sIX(d). Xl(c) and XVIl(d)." Not Reported in A.2d. 2006 WL 3690892 @el.Ch.) FN24 Briefs and Other Related Documents (Back to top)

FN23. MSA g VIl(c). 2006 WL 23881 15 (Trial Motion. Memorandum and Affidavit) Defendant Original Participating FN24. MSA 5 VII(a). hlanufacturers' Motion to Compel Arbitration and to Dismiss or. in the Alternative, Stay the State's *5 The proper fon~ni for disputes is bifurcated Complaint for Declaratory Judgment and for within the MSA. Certain disputes, such as disputes Enforcement Order (Jul. 10,2006) concerning the Independent Auditor and any 2006 WL 1222378 (Trial Pleading) Complaint for adjustments, are subject to the arbitration provision. Declaratory Judgment and for Enforcement Order For cemin other disputes jurisdiction is reserved in under the Master Settlement Agreement and the state courts. The only logical conclusion drawn Consent Decree (Apr. 2 1,2006) from this division is that the parties to the h.1SA-the Settling States and the Participating END OF DOCUMENT Manufacturers-intentionally carved out disputes over the adjushnents from this court's jurisdiction, making them subject to arbitration.

While not strictly necessary to this opinion. as the dispute is clearly covered by the plain language of the MSA, the court notes that pernutting individual state courts to determine not only whether their state diligently enforced the statute. but also the standard by which that determination is made. would almost certainly lead to inconsistency and the likely evisceration of the NPkI Adjustment, as each state acted to protect its share of the payments. The parties to the MSA clearly recognized this risk and provided for arbitration of disputes concerning the operation or application of the adjustments to guarantee uniformity. impartiality, and fairness.

0 2007 7'11on1sonIWcst. No Claim to Orig. U.S. Govt. Works. STATE OF RIARYLAND * IN THE Plaintiff * CIRCUIT COURT

* FOR

PIIILIP MORRIS, INC., et al. * BALTIklOKE CITY Defendant * CASE NO. 961 22017lCL211487

OPINION

Slcbrnitted October 5, 2006 Decided January 19,2007

I. The Master Settlement Ameement

The State of Maryland brought this action seeking a declaratory order to enforce the

Master Settlement Agreement of 1998 ("MSA"). The Participating Manufacturers ("PMs") oppose such an order and moved to compel arbitration of the dispute. A hearing on the issues was held October 5, 2006.

The present dispute flows out of a 1996 lawsuit instituted by the State of Maryland against the major domestic tobacco companies in an effort to recover damages associated with the public cost of treating smoking-related illnesses. At the time most states were filing analogous lawsuits to the one brought in Maryland. In November 1998 the Attorneys General of forty-six states (including Maryland) and six territories (the "Settling States") entered into a global settlement agreement, the MSA, with the four major domestic tobacco companies

(Original Participating Manufacturers or "oPMs").' This Court approved the MSA on

December 1, 1998, but the agreement also authorized other tobacco product manufacturers to

' The four major domestic tobacco companies being Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation. and Lorillard Tobacco Company, but in 2004 Brown & Williamson merged into R.J. Reynolds. join in the agreetnent after that time and over forty additional conlpanies have joined the MSA

("Subsequent Participating Manufacturers" or "SPMs").

The MSA imposes certain restrictions on the marketing, promotion, and packaging of cigarettes and also requircs an annual payme~ltby the PMs to the Settling States in perpetuity.

The PMs make one lump sum payment annually, the amount of this payment and each Settling

State's share is determined by an independent auditor ("Independent Auditor"); Maryland receives 2.26% of the payment (subject to any adjustments). One such adjustment to the payment, the NPM Adjustment, is at issue here.

At the time of the settlement the OPMs were concerned their business would suffer in the rnarket because other tobacco companies not joining the MSA ("Non-Participating

Manufacturers" or "NPMs") would not be restricted in the same way as the PMs. The MSA attempted to resolve this issue by offering the PMs a downward adjustment to the payment if two conditions involving the NPMs are met. First, the PMs must experience a Market Share Loss of

2.4% or rnore in the year, and secondly the MSA must be deemed to be a "Significant Factor" in the loss. When these two conditions are met, the PMs arc entitled to a downward adjustment by the Independent Auditor. However, no adjustment will be made if each Settling State has a

Qualifying Statute in effect and diligently enforces it during the year. Maryland has an appropriate Qualifying Statute under the MSA that requires NPMs to pay money into an escrow account, which is intended to level the playing field for the PMs and prepare for future public health costs that may be attributable to the tobacco products of the NPMs. 11. The Present Dispute

The PMs believe they are entitled to an NPM Adjustment for the year 2003 and therefore have placed some of the 2006 payment into an escrow account for disputed payments where the

Settling States cannot reach it. In 2003 the PMs did lose market share sufficient for the adjustment to be applied, and on March 1, 2006 the MSA was deemed to be a substantial factor in the 2003 loss. The Independent Auditor did not apply the NPM Adjustment, however, because diligent enforcement by the states was presumed. The issue now before the Court is whether the MSA rcquires the question of diligent enforcement to be arbitrated as opposed to litigated in this Court. The Court is not alone in examining the issue; the tobacco companies have filed motions nationwide seeking to compel arbitration of this dispute. At present, twenty- eight of the twenty-nine state courts that have decided the case have ordered the dispute to arbitration.* While clearly not binding on this court, those decisions cast a noticeable shadow on the issue.

111. Analysis

In determining the scope of any arbitration provision, the starting point is a consideration of two competing aims. The Redenlptorists v. Coztlthard Services, Inc. 145 Md.App. 1 16, 150

(2002). In Maryland, there is a strong public policy in favor of arbitration so any doubts should be resolved in favor of arbitration. Id. ar 150-51. At the same time an arbitration agreement is like any contract, and "a party cannot be required to submit any dispute to arbitration that it has not agreed to submit." Cheek v. United Healthcare of Mid-A~lar~tic.Inc., 378 Md. 139 (2003).

The State of Maryland contends that it has never agreed to arbitrate the issue of diligent

North Dakota denied the OPMs Motion to Compel Arbitration. Norrh Dakoru rp. Philip Morris. Inc., No. 09-98-C- 03778 (N.D. Dist. Ct. July 18, 2006) enforcement and as such it is an issue to be properly decided by this court, while the PMs believe this issue falls within the four comers of the MSA's arbitration clause relating to the Independent

Auditor's work.

There is no dispute that this Court has exclusive jurisdiction for the purposcs of implementing and enforcing the MSA, §VII(a)(2), and subject to just a few exceptions, this

Court is the only court to which disputes under the agreement may be brought. §VII(a)(3).

However, one of these listed exceptions is $XI(c), a provision entitled Resolution of Disputes that is found within a main section entitled CALCULATION AND DISBURSEMENT OF

PAYMENTS. MSA §XI(c) reads:

In Pvlaryland, the meaning of contractual language is to be objectively interpreted and when the language is unambiguous, it must be given its plain meaning. Della Ratfa v. Larkin,

382 Md. 553 (2004). The PMs argue that the Independent Auditor made a determination by choosing not to apply an NPM Adjustment for 2003, and a plain reading of the section includes as arbitrable, claims or disputes arising out of calculalions or determinations made by the

Independent Auditor. The State acknowledges the Independent Auditor did not apply an NPM

Adjustnlent for 2003 but contends that is not the kind of determination contemplated by the

MSA's arbitration clause. The State argues that a factual determination with regard to diligent enforcement is necessary prior to making an NPh.1 Adjustment, and that the Independent Auditor is not responsible for deciding such an issue. It points out that "diligent enforcement" is not a calculation and is absent from the list of calculations assigned to the Independent Auditor in

MSA $XI(a). The State advances its position by quoting the Independent Auditor on the issue,

"The Independent Auditor is not charged with the responsibility under the MSA of making a determination regarding this issue. More Importantly, the Independent Auditor is not qualified to make the legal determination as to whether any particular Settling State has 'diligently enforced' its Qualifying Statute." Notice ofPrelinzinary Ccilc~rlutionsforthe Tobacco Litigation

Masler Settienlent Agreeme)lt,from Price Warer1~ortseCooper.sto all parties, March 7,2006.

The State's contention that the Independent Auditor is assigned solely to the task of mechanical number crunching seems logical, but is clearly in conflict with the language of the agreement itself. The State's argument would read the words "any determinations made by the auditor" out of the MSA's arbitration clause. If the parties intended for the Independent Auditor to be confined to performing calculations, then the agreement should read as such. Additionally, when the State notes that "diligent enforcement" is not listed as a task assigned to the

Independent Auditor, it casts away much of the language of $XI(a). That section reads, "an

Independent Auditor shall calculate and determine the amount of all payments owed pursuant to this Agreement, the adjustments, reductions and offsets thereto." The NPM Adjustment is indeed one of the adjustments to the annual payment and therefore in the purview of the

Independent Auditor. While the opinion of PriceWaterhouseCoopers may be helpful to interpret ambiguous contract language, it cannot affect the outcome in a case where the language of the contract is clear. "[Cllear and unambiguous language of an agreement will not give way to what the parties thought that the agreement meant." General Motors Acceptance Corp. v. Daniels, 303

Md. 254 (1985).

Both the State and the tobacco companies devoted significant portions of their briefs addressing whether the arbitration clause should be characterized as broad or narrow. The State contends the arbitration clause is narrow because it applies only to a specified portion of the agreement while the tobacco companies note that traditionally the phrase "arising out of or relating to" signifies a broad arbitration clause. In resolving this case it is not necessary to categorize the arbitration clause as either broad or narrow. The arbitration clause applies specifically to disputes with regard to a determination made by the Independent Auditor, which is the kind of dispute that exists here. This creates a basis on which to compel arbitration without parsing the phrase "arising out of or relating to."

Additionally. the State advances its position on the ground that arbitration will be logistically burdensome and never-ending. It notes all the Settling States as well as the tobacco companies will need to present evidence on the issue of diligent enforcement to the Independent

Auditor, which is likely to be followed by re-presenting it to an arbitration panel on an annual basis. First, this argument cannot defeat the MSA's directive to arbitrate disputes regarding the determinations of the Independent Auditor, because of the controlling nature of contract language. Second, the State has offered no explanation as to how litigation in individual states throughout the nation will be more effective or less repetitive. In fact each MSA court would still need to hear testimony from both sides with respect to the issue of diligent enforcement every year in which there is a dispute.

Finally, two additional theories advanced in opposition by the State of Maryland need to be quickly addressed. The State argues that the market share loss in Maryland for 2003 was not large enough to trigger an NPM Adjustment. While this contention is creative, it has no basis within the MSA. The application of the NPM Adjustment requires only that the national market share for the PMs drop below 97.6% it does not call for any state-by-state analysis of market share loss (this information is more appropriate tG be considered by someonc determining if

Maryland did in fact diligently enforce its Escrow Statute). The second, and seemingly more persuasive argument is that a 2003 NPM Adjustment cannot be subject to arbitration due to the settlement agreement signed that year. Settlemenr Agreement Between R.J. Reynolds Tobacco

Conlparzy and rlte Sertlitzg Srates with Respect to Potential NPM Adjusrmenrs, June 18, 2003.

The State contends that an NPM Adjustment for 2003 must be based on sales from 2002 and that the PMs expressly released any claims they had regarding cigarettes sold or shipped in 2002 in 7

6. However, the 2003 settlement agreement 18reserves the PM's right to seek an NPlM

Adjustment for the year 2003. Therefore neither of these arguments by the State can succeed.

IV. Conclusion

The language of the MSA is clear in its directive to submit a dispute such as this one to arbitration. The contract language compels arbitration even without considering the existing state opinions that conclude the same. The State's argument based on logistics and impracticality is unpersuasive and fails to overcome the controlling language of the MSA. STATE OF MARYLAND * IN THE Plain tiff * CIRCUIT COUII'I' v. * FOR

PHILIP kIOKRIS, INC., et al. * BALTIlLlORE CITY Defendant * CASE NO. 96122017lCL211487

ORDER COIIlPELLING ARRITMTION

It is this day of 007, ORDERED that arbitration be compelled in the above captioned case. STATE OF MARYLAND * IN THE Plaintiff f CIRCUI'T COURT

* FOR

PHILIP lblORRIS, INC., et al. * BALTIMORE CITY Defendant + CASE NO. 961 2201 71CL211487

ORDER DENYING DECLARATORY ORDER

Upon consideration of the State of Maryland's Motion for a Declaratory Order; It is on ,.--7 this flday of :>&- 2007, the motion in thc above captioned case is hereby / 1-

/ / /:. ., - .* ...' $---- i.v" - .-.~-.,L*GER-W;-.- BROWN - /A .>..--. ------' - - Baltimore City Ciir"it Con>

MISSOURI CIRCUIT COURT MARIAN0 V. FAVA~ TWENTY-SECOND JUDICm CIRCUIT ClRcuVDEpUn CLERK CIEBL( (City of St. Louis)

STATE OF MISSOURI ex rel. 1 JEREMIAH W. (JAY) NIXON, 1 1 Plaintiff, 1 Cause No. 22972-01465 VS 1 Division No. 19 THE AMERICAN TOBACCO COMPANY, ) INC., et al., 1 1 Defendants. 1

ORDER

Before the Court is Defendants' Motion to Compel Arbitration and to Dismiss, or, in the Alternative, Stay the State's Motion for Declaratory Order. The Court now rules as follows. This matter arises from a Master Settlement Agreement (MSA) entered into in November 1998 between the State of Missouri (State) and 45 other "Settling States," and Defendants, in settlement of litigation brought by the states for past and future costs related to the treatment of tobacco-related illnesses. State alleged wrongful conduct on the part of the defendant tobacco companies in connection with the marketing and sale of their tobacco products to Missouri citizens. The MSA requires, among other things, that Participating Manufacturers cease certain marketing and distribution activities, fund anti-smoking media campaigns, stop lobbying the Missouri legislature regarding measures contrary to the terms of the MSA, and make annual payments to the State, based on their nationwide cigarette sales, to compensate the State for health care costs incurred in treating illnesses caused by tobacco use.

The MSA was approved by the Court in arch 1999. Under the MSA, State is subject to reductions in its

payments based on the application of a non-participating

manufacturers' (NPM) adjustment. his adjustment does not apply if it is determined by the Independent Auditor that the State of Missouri diligently enforces a "qualifying statute."' Since the parties entered into the MSA, the participating manufacturers have sought a reduction of their payments under the Agreement on the ground that the Settling States have not diligently enforced their respective statutes. With regard to the calendar years

1999 to 2002, the issue of NPM adjustments has been settled. However, in April 2006 the Independent Auditor refused to apply the NPM adjustment, indicating that diligent enforcement is "presumed." The original participating manufacturers (OPMs) disputed the Independent Auditor's calculation and requested

arbitration of the dispute pursuant to § XI(c) of the MSA. State

seeks a declaratory order construing the term "diligently enforced" under Missouri law, so as to establish the standard to be applied to the determination of the future dispute, which State notes, is not before this Court. Defendants contend that the dispute in its entirety, including the term "diligently enforced," is subject to

' A qualifying statute is defined in the MSA 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-a-vis Non-Participating Manufacturers within such Settling State as a result of the provisions of this Agreement." arbitration under S XI(c) of the MSA, which appears in a section addressing the calculation and disbursement of payments. The arbitration clause provides as follows:

(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 111 federal judge. ... The arbitration shall be governed by the United States Federal Arbitration Act. Defendants submit that this provision covers "any" dispute involving the determination of the Independent Auditor; that the issue of NPM adjustments is explicitly within the scope of arbitrable disputes; that, insofar as other Settling States have been engaged in similar disputes regarding NPM adjustments, multiple judicial challenges would lead to inconsistent results and undermine the unitary payment system under the MSA; and that there is a presumption in favor of arbitration. In addition, Defendants refer to court orders of other Settling States in which similar motions to compel arbitration on matters regarding the NPM adjustment have been granted. State contends that, under the MSA, the Court retained jurisdiction to construe and enforce the terms of the MSA and to declare the meaning, under Missouri law, of any disputed term contained therein. State seeks a declaration of the term "diligently enforced" for future use in any subsequent dispute as to whether the State diligently enforced the Qualifying Statute and is thereby immune from a reduction or elimination of payments under the MSA.

The enforcement provisions of the MSA, set forth in § VII, state in relevant part as follows: (a) Jurisdiction. Each Participating Manufacturer and each Settling State acknowledge that the Court: (1) has jurisdiction over the subject matter of the action identified in Exhibit D in such Settling State and over each Participating Manufacturer; (2) shall retain exclusive jurisdiction for the purposes of implementing and enforcing this Agreement and the Consent Decree as to such Settling State; and (3) except as provided in subsections IX(d), XI(c) and XVII(d) and Exhibit 0, shall be the only court to which disputes under this Agreement or the Consent Decree are presented as to such Settling State. ...

(c) Enforcement of this Aqreement. Except as provided in subsections IX(d), XI(c) and XVII(d) and Exhibit 0, any Settling State or Participating Manufacturer may bring an action in the Court to enforce the terms of this Agreement (or for a declaration construing any such term ("Declaratory Order")) with respect to disputes, alleged violations or alleged breaches within such Settling State. Subsection IX(d) refers to the NPM adjustment, including the exclusion for diligent enforcement of the Qualifying Statute; subsection XI(c) contains the dispute resolution provisions applicable to the calculation and disbursement of payments; and subsection XVII(d) addresses the payment of attorneys' fees.

Exhibit 0 refers to the State Fee Payment Agreement.

Subsection § XI(a) (1) of the MSA sets forth the duties of the Independent Auditor as follows: Beginning with payments due in the year 2000, an Independent Auditor shall calculate and determine the amount of all payments owed pursuant to this agreement, the adjustments, reductions and offsets thereto (and all resulting carry- forwards, if any), the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the participating manufacturers and among the Settling States, and shall perform a11 other calculations in connection with the foregoing (including, but not limited to, determining market share, relative market share, base aggregate participating market share and actual aggregate participating market share). The Independent Auditor shall promptly collect all information necessary to make such calculations and determinations. State maintains that the arbitration clause is limited to disputes "related to calculations and determinations" made by the

Independent Auditor and distinguishes the cases cited by Defendants as involving the factual question of whether the state at issue diligently enforced its escrow statues, not the court's declaration as to the standard meaning of the term "diligently enforced." State submits that such a declaration is a matter of a pure legal construction of the term, "in order to ensure that the proper standard is applied to any subsequent diligent enforcement proceedings in the future" and that mandatory arbitration would undermine the Court's jurisdiction to construe and enforce the terms of the MSA with regard to payments. A court must stay a suit on the basis of an arbitration clause after a party moves for such relief and after the court determines that the issue is arbitrable under the agreement.

McIntosh v. Tenet Health Systems Hos~.,48 S.W.3d 85 (Mo-App.

E.D. 2001). Arbitration is strictly a matter of contract, and a party can be compelled to arbitrate only when it has agreed to do so. Greenwood v. Sherfield, 895 S.W.2d 169, 174 (Mo.App. 1995). The party resisting arbitration bears the burden of showing that there is no agreement to arbitrate and that the arbitration act is not triggered. State ex rel. PaineWebber, Inc. v. Voorhees, 891 S.W.2d 126, 128 (Mo. i995). If the court finds that the dispute is subject to arbitration by the terms of the agreement, the court must stay the matter for arbitration, without addressing the merits of the underlying dispute. Local 781 Int'l

Ass'n v. Citv of Independence, 996 S.W.2d 112 (Mo.App. W.D.

1999). There is no contention that the MSA is ambiguous, and the terms of the MSA, read as a whole according to their plain, ordinary and usual meanings, may be used to determine the intention of the parties. Dunn Industrial GrouD, Inc. v. Citv of Sucrar Creek, 112 S.W.3d 421, 428 (Mo. 2003). Under the FAA, which applies to the arbitration clause at issue here, there is a liberal policy favoring arbitration agreements, regardless of whether the clause is broad, covering all disputes arising from an arbitration contract, or narrow, limited to certain types of disputes.' Id. at 427-28. A motion to compel arbitration of a dispute should be granted unless the court is positively assured that the arbitration clause is not susceptible of an interpretation that covers the dispute, and any doubts should be resolved in favor of arbitration. Id. at 429. Most other state courts that have addressed motions to compel arbitration arising from similar underlying disputes regarding the Independent Auditor's determination of the NPM adjustment have concluded that the issue is arbitrable.' State relies on an exception, in which a North Dakota court denied a motion to compel arbitration, reasoning that under § VII(a), the

llowever, in those cases in which the arbitration clause is broad, "only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail." Dunn Industrial GrOuD, 112 S.W.3d at 429. These states include Connecticut, New York, New Hampshire, Kentucb, Massachusetts, Idaho, Vermont, Colorado, Hawaii, Nevada, Illinois, Virginia, Iowa, California, Nebraska, Oregon, Ohio, District of Columbia, Michigan. Washington, South Dakota, and Maine. court retained jurisdiction to decide the issue of diligent enforcement.' In reaching its conclusion, the court stated that an "implicit exclusion" in the MSA's arbitration clause removed from its scope any disputes that do not arise out of or relate to calculations performed by, or any determinations made by, the Independent Auditor. The court further stated that the Independent Auditor's presumption of diligent enforcement was not a "determination,"as the latter term is commonly understood. State contends that the Court has previously asserted its jurisdiction to implement and enforce the agreement. In the example provided, the dispute involved the conduct of a subsequent participating manufacturer in reporting its sales figures to the Independent Auditor, not the decision of the Independent Auditor. The matter brought before the Court for determination was therefore not within the scope of the arbitration agreement. Moreover, State's request for a declaration as to the meaning of "diligently enforced" is specifically excluded from the jurisdictional provisions set forth in § VII(a) and (c) of the MSA. Subsection XI(j) of the MSA sets forth the method of calculation of payments due under the Agreement. The sixth step of the method outlined in this subsection is the application of the NPM adjustment pursuant to S IX(d) . Subsection IX(d) (2) provides that a Settling State's payment is not subject to an NPM adjustment if that state's qualifying statute was in effect and

' State of North Dakota ex rel. Stenehiem v. Philip Morris. 09-98-C-03778 (D.C. N.D. July 18, 2006). was diligently enforced. It is clear from the language of the MSA that the method of calculation subject to arbitration in

§ XI(j) relates to and specifically refers to the application, or

exclusion from application, of the NPM adjustment in § IX(d). State suggests that a separate determination of the "diligently enforced" standard contemplated by the MSA is not within the scope of the arbitration clause. There is no indication that the term "diligently enforced" appears anywhere but in connection with the qualifying statute referred to in

5 IX(d) and referred to in § XI(j) . The Court agrees with the majority of courts that have considered the issue of arbitration of disputes surrounding the NPM adjustment and believes that the question of whether the qualifying statute is being diligently enforced arises out of and relates to calculations and determinations of the Independent Auditor. ORDER WHEREFORE, IT IS ORDERED that Defendants' Motion to Compel Arbitration is hereby granted as follows. The parties are ordered to submit their dispute to arbitration as provided for in

§ XI(c) of the MSA. SO ORDERED:

QQ QQ M. Edwards, Judge

Dated: 5 22 , ZOO7

cc: All counsel of record Page 2 of 20

Not Reported in S.E.2d Page 1 Not Reported in S.E.2d, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Rcportcd in S.E.2d)

H 111 and Melissa L. Trippe for Plaintiff State of Briefs and Other Related Documents North Carolina. State v. Philip Morris USA, Manning. Fulton 23 Skinner, P.A. by Michael T. Inc.N.C.Super.,2006.Only the Westlaw citation is Medford and Judson A. Welborn; DLA Piper currently available. Rudnick Gray Cary U.S. LLP by Charles Wayne: UNPUBLISHED OPINION. CHECK COURT Winston & Strawn LLP by Thomas J. Frederick for RULES BEFORE CITING. Defendant Philip Moms USA, Inc. Superior Court of North Carolina,Wake County, Womble Carlyle Sandridge 23 Rice. PLLC by Business Court. Burley B. Mitchell, Jr., Thomas D. Schroeder, and STATE of North Carolina, Plaintiff. W. David Edwards; Kirkland & Ellis LLP by V. Stephen R. Patton for Defendant R.J. Reynolds PHILIP MORRIS USA. INC.; R.J. Reynolds Tobacco Company. 'Tobacco Company: Brown & Williamson Tobacco Brooks Pierce McLendon Humphrey & Leonard, Company. Individually and as successor by merger LLP by Jim W. Phillips. Jr. and Andrew J. Haile; to The American Tobacco Company; and Lorillard Well, Gotshal & Manges LLP by Penny Reid and Tobacco Company, Defendants. Idit Froim for Defendant Lorillard Tobacco NO.98 CVS 13377-1. Company. Smith. Antlerson, Dlounf Dorsett, Mitchell & Dec. 4,2006. Jernigan, L.L.P. by Mark A. Ash; Hou~eyLLP by Robert J. Brookhiser and Elizabeth B. hlcCallum for Intervenors Commonwealth Brands. Inc., { I) This case arises under the Master Settlement Liggett Group LLC. Sherman's 1400 Broadway Agreement, to tvhich Plaintiff State of North N.Y.C.. Ltd., Farmer's Tobacco Co. of Cynthiana, Carolina and the Defendant tobacco companies are Inc., Japan Tobacco International U.S.A.. Inc., King parties. This matter comes before the Court on Maker Marketing, Inc., Kretek International, Inc., Defendants' Motion to Compel Arbitration and to Liberty Brands. LLC, P.T. Djamm, Santa Fe Dismiss or. in the Alternative, Stay this Litigation. Natural Tobacco Company, Top Tobacco. L.P ., { 2) After considering the briefs and oral Vector Tobacco. Inc., Vibo Corporation dlWa arguments, the Court GRANTS Defendants' Motion General Tobacco, Van Eicken Group, Cornpania to Compel Arbitration on the grounds that: (1) the Industrial cle TabacosMonte Paz, SA, Daughters & present dispute between the State of North Carolina Ryan, Lnc., Mouse of Prince A/S, Peter Stokkebye and the tobacco companies is arbitrable under the Tobaksfabrik A/S. and Virginia Carolina plain language of the Master Settlement Agreement, Corporation, Inc. (Subsequent Participating (2) the courts of North Carolina and the United Manufacturers). States have established a strong presumption in favor of arbitration, and (3) arbitration is the most ORDER ON DEFENDANTS' MOTION TO fair and practical vehicle for resolution of payment COMPEL ARBITRA TION disputes under the unitary payment structure set TENNILLE, Judge. forth in the Master Settlement Agreement. All litigation on Plaintiffs Motion for Declaratory Order is hereby stayed pending arbitration of the payment dispute. FACTUAL AND PROCEDURAL BACKGROUND

Office of the Attorney General by Duren R. Shields, A.

Q 2007 Thornson/iVest. No Claim to Orig. U.S. Govt. Works. Page 3 of 20

Not Reported in S.E.2d Page 2 Not Reported in S.E.2d, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reportecl in S.E.2d)

THE PARTIES there were approximately 8 13 claims brought against tobacco companies by private citizens in state courts across the country. Arthur B. LaFrance, Tobacco Litigatiotl: Stnoke, Mirrors and Public *1 { 3) Defendant Pliilip Morris USA, Inc. ("Philip Policy, 26 Am. J.L. & Med. 187. 190 (2000). The Moms") is a corporation organized and existing private plaintiffs asserted claims for negligent under the laws of the Commonwealth of Virginia manufacture, negligent advertising, fraud, and with its principal place of business in Richmond, violation of various state consumer protection Virginia. Philip h,lorris is a subsidiary of Altria statutes. Id. at 19 1. Group. Znc. { 8) For forty years. the tobacco companies enjoyed { 4) Defendant R.J. Reynolds Tobacco Company (" great success in these private lawsuits. Id. Professor R.J.Reynolds") (individually and as successor to LaFrance reports that only two plaintiffs ever R.J. Reynolds Tobacco Company and Brown & prevailed. and both of those decisions were later Willianlso~i Tobacco Company ("Brown & reversed on appeal. Id. at 190. By the late 1990s, Williamson")) is a corporation organized and the failure of private litigation gave rise to a new existing under the laws of the State of New Jersey strategy. In 1997 the attorneys general of all fifty with its principal place of business in states began asse~~ingpublic causes of action Winston-Salenl, North Carolina. R.J. Reynolds is an against the tobacco companies. Id. at 195. While indirect wholly owned subsidiary of Reynolds armed with theories similar to those of the American. Inc. unsuccessful private plaintiffs. the states also brought claims for consumer fraud, racketeering, { 5) Defendant Lorillard Tobacco Company (" and reimbursement of Medicaid funds expended on Lorillard") is 3 corporation organized and existing smoking related illnesses. Id. under the laws of dlc State of Delaware with its principal place of business in Greensboro. North { 9) The tobacco companies settled their disputes Carolina. with Florida, Mississippi. Texas, and Minnesota on an individual, state-by-state basis. Id. In 1998 the { 6) Defendants manufacture. advertise, promote, remaining forty-six states. along with the District of and sell cigarettes and other tobacco products. Colun~bia, Puerto Rico, and five U .S. temtories (collectively "Settling States") entered into a Master Settlement Agreement ("IvlSA") with the four largcst tobacco manufacturers-Philip bloms, R.J. Reynolds. Brown Sr Williamson m;NI, and Lorillard. TOBACCO LITIGATION IN THE UNITED (Pl.'s Mot. Declaratory Order 1 1.) These STATES companies comprise a group known as the original participating manufacturers ("OPMs"). The MSA permits other tobacco companies to join and agree { 7) On September 30, 1950, British to its terms. To date, more than forty of these epiclemiologists Richard Doll and A. Bradford IIill subsequent participating manufacturers ("SPMs") published an article in the British Medical JOI~I~JN~have signed on to the agreement. (Id. q 2.) linking smoking to lung cancer and heart disease. Together. the OPMs and SPMs are known as " See Richard Doll & A. Bradford Hill. Smoking and Participating Manufacturers." C~~rcitlomaof the Lung: Prelittrinary Report, 2 Brit. bled. J. 739 (1950). By the mid-1950s, private citizens in the United States began to sue the FNI. Brown & Williamson combined its companies responsible for manufacturing and U.S. operations with R.J. Reynolds in 2004. marketing tobacco cigarettes for damages related to the effects of smoking. Between 1954 and 1994, *2 { 10) Under the MSA, the Settling States

O 2007 ThomsonIWest. No Claim to Orig. U.S. Govt. Works. Page 4 of 20

Not Reported in S.E.2d Page 3 Not Reported in S.EZd. 2006 WL 3490937 O\I.C.Super.) (Cite as: Not Reported in S.E.2d) rclcased the Participating Manufacturers from past, to apply. two conditions must be met. First, the present, and future claims based on the harmful ma~lufacturermust suffer a "market share loss." Id. $ health effects of smoking. In return, the IX(d)(l)(A). A market share loss occurs if the Participating Manufacturers promised to (1) make Participating Manufacturer's share of the U.S. perpetual paynients to the states as compensation cigarette market declines froni one year to the next. for smoking-related medical costs, (2) fund the See id. $ IX(d)(l)(B)(i)-(iii). Second, an economic American Legacy Foundation. an antismoking consulting firm must determine that "the advocacy group, and (3) adhere to certain disadvantages experiericed as a result of the restrictions on advertising, marketing, and other provisions of [the MSA] werc a significant factor practices. (Id. 7 I.) contniuting to the Market Share Loss." Id. 4 IX(d)(I)(C). If these hvo requirements are met, a { 11) The State of North Carolina entered into the participating manufacturer may be entitled to reduce MSA along with the other Settling States on its payment for a particular year. Novcmber 16. 1998. ( 14) However. there arc ways for Settling States to avoid a reduction in payments due to the NPM Adjustment. Under section LX(d)(Z)(B), the NPM Adjustment will not apply if the Senling State had a THE PRESENT DISPUTE "Qualifymg Statute" in place for the entire year preceding the time when the payment became due and "diligelitly enforced" the provisions of that statute. A Qualifying Statute "effectively and fully neutralizes the cost disadvantages that the THE NON-PARTICLPATMG MANUFACTURER Participating Manufacturers experience vis-i-vk ADJUSTh4ENT Non-Participating Manufacturers." Id. $ IX(d)(2)(B).

{ 15) North Carolina's Qualifying Statute is { 12) On April 15 of each year, the MSA directs codified at N.C. Gemstat. $4 66-290 and 66-291. the Participating Manufacturers to cach makc a Section 66-29 1 requires any tobacco manufacturer single payment into an escrow account. MSA selling cigarettes within the State to either join the IX(c)(l). That payment is then divided among the blSA or pay a certain amount of money into escrow settling states. according to each state's "allocable based on the l~umberof product units sold in North share." Id. $ 1I(f). The amount of the payment is Carolina. N.C. Gen.Stat. 4 66-291(a) (2005). calculated by an "Independent Auditor." Id. 4 XI(a)(l). The Indepc~ident Auditor must be "a *3 { 16) Thc NPM adjustment is a recognition by major, nationally recognized, certified public the drafters of the MSA that the payments and other accounting firm." Id. 4 XI(b). The current obligations incurred by the Participating Independent Auditor is PricewaterliouseCoopers. ivlanufacturers is likely to put them at a competitive (Defs.' blem. Supp. Mot. Compel Arbitration 6.) disadvantage relative to those manufacturers who did not join the agreement. It thus attempts to level { 13) The Participating Manufacturers' annual the playing field by reducing a Participating payments are subject to several adjustments. MSA $ hlanufacturer's payn~entobligations for any year in IX(c)(2). One of these adjustments is called the which it can be proven that market share was Non-Participating Manufacturer ('WPM") actually lost to Non-Participating Manufacturers. Adjustment. The NPM Adjustment allows for a Without such an adjustment, there would be a potential reduction in the amount owed by the strong incentive not to participate in the MSA. Participating Manufach~rers to the Settling States under the MSA. In order for the NPM Adjustment

Q 2007 ThomsonnVest. No Claim to Orig. U.S. Govt. Works. Page 5 of 20

Not Reported in S.E.2d Page 4 Not Reported in S.E.2d. 2006 WL 3490937 (-N.C.Super.) (Cite as: Not Reported in S.E.Zd)

2. undisputed amount renders a Participating blanufacturer liable for interest on that amount. Id. 5 THE ARBITRATION CLAUSE AND THE ROLE Xl(d)(7). Amounts deposited into the Disputed OF THE INDEPENDENT AUDITOR Payments Account are not subject to this penalty. Id Ei XI(d)(8). { 17) The drafters of the hlSA were sophisticated parties who wisely foresaw conflict between the Settling States and the Participating Manufacturers over the amount of payments and adjustments. DISPUTE OVER THE 2003 NPM ADJUSTMENT Section XI(c) thus requires: [Alny dispute, controversy or claim arising out of or relating to calculations performed by, or any { 20) The dispute currently before the Court determinations made by, the Independent Auditor involves the annual payment that became due on (including, without limitation, any dispute April 17, 2006. Pursuant to the NPM Adjustment concerning the operation or application of any of provisions discilssed above, the economic the adjustments. reductions, oKsets, carry-fonvards consulting firm concluded that the MSA was a " and allocations described in subsection IXCj) or significant factor" contributing to the Participating subsection Xi(i)) shall be submitted to binding Manufacturers' 2003 lMarket Share Loss. (Defs.' arbitration before a panel of three neutral Mem. Supp. 11.) Thus, the Participating arbitrators, each of whom shall be a former Article Manufacturers were entitled to the NPM I11 federal judge. Adjustment unless North Carolina had a Qualifying Statute in effect and diligently enforced that statute hISA 5 XI(c). The parties further agreed that "[tlhe for the year preceding the payment due date. See arbitration shall be governed by the United States MSA IX(d)(2)(B). Armed with these Federal Arbitration Act." Id. detcrnluiation~sby the economic consulting firm, the OPMs requested that the Independent Auditor apply { 18) Every year. the Independent Auditor collecls the NPM Adjustment to the payments due on April information from the parties upon which to base its 17. 2006. (Defs.' Mem. Supp. 11.) The Settling calculations of the amount owed by the States. understandably averse to any reduction in Participating Mariufach~rersand the amount to be the amount owed them, urged the Independent allocated to each Settling State. Id. 3 XI(d)(l). The Auditor to reject the OPMs' request. (Id.) Independent Auditor then issues a preliminary calculation. Id. $ XI(d)(2). If a Participating *4 { 21) In its notice of final calculation issued on Manufacturer or Settling State disagrees with "any March 29, 2006, the Independent Auditor stated aspect" of the preliminary calculations, it may senrc that it "would not modify its current approach to the notice of its objections upon the other parties. Id. 5 application of the NPlM Settlement Adjustment ." XI(d)(3). The Independent Auditor reviews the Letter from Theodore F. Martens. Independent objections and issues a "Final Calculation," which Auditor to the Master Settlement Agreement, to must include an explanation of any changes made to Notice Parties (Mar. 29, 2006) (Defs .' Mem. Supp. the Prelinunary Calculation. Id. 5 XI(d)(4). The Ex. J at 5). The Independent Auditor's "current parties may then serve notice of any objections they approach" to the NPM Adjustment is memorialized have to the Final Calculation. Id. 5 XI(d)(6). in its notice of preliminary calculation issued on March 5. 2004. In early 2004, the Independent { 19) The Participating Manufacturers are obligated Auditor requested information from the National to remit any portion of their total payment that is Association of Attorneys General ("NAAG") not in dispute. Id. $ XI(d)(7). Any disputed amount regarding Qualifying Statutes in the Settling States. is to be deposited into a "Disputed Paynients In response. the NAAG infonilcd the Independent Account." Id. 5 XI(d)(8). Failure to pay the Auditor that all the Settling States had enacted

Q 2007 'fiomson/\.Ycst. No Claim to Orig. U.S. Govt. Works. Page 6 of 20

Not Reported in S.E.2d Page 5 Not Reported in S.E.2d. 2006 WL 3490937 O\I.C.Super.) (Cite as: Not Reported in S.E.2d)

Model Statutes Fh'2 which they represented to have motion asks the Court to Order the parties to been in full force and effect. Based on this arbitrate the dispute regarding the NPlM Adjustment information. the Independent Auditor concluded in accordance with the MSA's arbitration provision that "no possible NPM adjustment is allocated to and North Carolina and federal law. (Defs.' Mot. PMs." Letter from Theodore F. hiartens. Compel Arbitration 5.) Independent Auditor to the Master Settlement Agreement, to Notice Parties (Mar. 5, 2004) (Defs.' { 25) By Joinder dated May 15. 2006, the SPMs Mem. Supp. Ex. K at 2 n. 1). The Independent joined the OPMs' Motion to Compel Arbitration. Auditor, having found that each Settling State had a (SPMs' Joinder in OPMs' Mot. Compel Arbitration Qualifying Statute in force. effectively presumetl 6.) The NPhl Adjustment for the SPMs is set forth that each Settling State had diligently enforced that separately from the provisions applicable to the statute as required by section IX(d)(2)(B) of the OPMs. See MSA 5 LY(d)(J). However, the issues MSA. relevant here will not be affected by these slight differences.

FN2. One of the exhibits to the MSA is a " Model Statute." MSA Ex. T. The Participating Manufacturers and Settling States agreed that if the Model Statute was MOTION TO COlMPEL ARBlTRATION enacted "without modification or addition," it would constitute a Qualifying Statute for purposes of determining the applicability *5 The issue before the Court is one of contract of tlie NPM Adjustment. MSA 9 interpretation. Based on (1) the plain language of IX(d)(Z)(E). the parties' agreement. (2) public policy favoring arbitration, and (3) considerations of fairness and { 22) Tile OPMs served notice that they objected to practicality. the Court grants Defendants' Motion to the Independent Auditor's Final Calculation on Compel Arbitration. April 10, 2006, and requested that North Carolina and other Settling States arbitrate the dispute over the applicability of the NPhf Adjustment. (Defs.' Mem. Supp. 10-1 1.) On May 1, 2006, North Carolina refksed to enter into arbitration PLAIN LANGUAGE proceedings. (Id.)

{ 23) On April 20, 2006, North Carolina filed a { 26) The MSA is a contract behveen the Settling Motion for Declaratory Order, moving this Court to States and the Participating Manufacturers. The declare that (1) North Carolina had a Qualifying guidelines this Court must follow in interpreting this Statute in effect during 2003 and diligently enforced or any other contract are well known. "The heart of the stahlte during that year, (2) North Carolina is a contract is the intention of the parties, which is not subject to the NPM Adjustment for 2003, and ascertained by the subject matter of the contract, the (3) the Participating Manufacturers may not language used, the purpose sought, and the situation witllhold payments or deposit them into the of tlie parties at the time.'' Pike v. IVachovia Bank & Disputed Payments Account based on the Tmt Co.. 274 N.C. 1. 11. 161 S.E.2d 453. 462 applicability of the NPM Adjustment for 2003. (1 968); see also 2 E. Allan Famsworth, Farns~vorth (Pl.'s Mot. Declaratory Order 1.) on Conrracts 9 7.10 (2d ed. 1998) ("The overarching principle of contract interpretation is { 24) On &,lay 15, 2006, the OPMs responded with that the court is free to look to all the relevant a Motion to Con~pelArbitration and to Dismiss or, circun~stancessurrounding the transaction.") If the in the Alternative, Stay this Litigation. The OPMs' terms of a contract are unambiguous, the Court will

0 2007 ThomsonIWest. No Claim to Orig. U.S. Govt. Works. Page 7 of 20

Not Reported in S.E.2d Page 6 Not Reported in S.E.Zd, 2006 IVL 3490937 (N.C.Super.i (Cite as: Not Reported in S.E.2d) dctemine their legal effect and enforce the operation or application or any of the adjustments ... agreement as \winen by the parties. See, e.g., described in subsection IXQ)." MSA $ XI(c). Cflurch v. Hancock, 261 N.C. 764: 766. 136 S.E.2d Subsection IXG) describes how payments are to be 8 1, 83 (1 964). calculated. First, a "base amount" is determined. Then, various adjustments are applied to the base { 27) Although the Court is free to look beyond the anlount in the order in which they appear in language of the agreement, the words chosen by the subsection 1x6). The NPhl Adjustment is the sixth parties after carehl negotiation are most helpful in step in thc process. MSA $ 1x6). The NPM ascertaining their intentions. At issue here is Adjustment is clearly an adjustment "described in whether the parties' dispute over the applicability of subsection IXCj)." and "any dispute" concerning the the NPM Adjustment falls within the arbitration NPM Adjustment is subject to arbitration under clause. The arbitration clause is found in section XI section XI(c). of the MSA, which deals with "calculation and disbursement of payments." Section XI(c), entitled " *6 { 30) The language of section Xl(c)'s arbitration resolution of disputes," states as follows: clause is very broad. 1t not only encompasses "any" [Alny dispute. controversy or claun arising out of or dispute over the Independent Auditor's calculations relating to calculatiolls performed by. or any or determinations, it also includes disputes "arising determinations made by, the Independent Auditor out of or relating to" those calculations. The law (including, without limitation, any disputc directs this Court to ascertain the intentions of concerning the operation or application of any of contracting parties based in part upon the language the adjustments, reductions, offsets, carry-forwards used in the contract. It is difficult to conceive of and allocatiorls described in subsection 1x6) or broader language than that used in section XI(c). subsection XI(i)) shall be submitted to binding The parties' words reveal an intention to subject a arbitration before a panel of three neutral wide category of controversies to binding arbitrators. each of whom shall be a former Article arbitration. Faced with similar language in other 111 federal judge .... The arbitration shall be contracts, thc fcderal courts have reached the same governed by the United States Federal Arbitration conclusion. In Collins & AiXman Prodzrcts Co. v. Act. Blcilding Systems, Inc., 58 F.3d 16 (2d Cir. 1995), the United States Court of Appeals for the Second MSA $ X(c). Circuit examined an agreement which submitted to arbitration "any claim or controversy arising out of { 28) This matter involves a decision by the or relating to the agreement." 58 F.3d at 20. The Independent Auditor not to apply the NPM court found that this was "the paradigm of a broad Adjustment because it found that North Carolina [arbitration] clause." Id. In 1997. the Eighth Circuit (and all other Settling States) had a QualifLing considered- an '.arising out of or relating to" Stahlte in effect and effectively presumed that the arbitration clause and found it to be "the broadest statute had been diligently enforced during the year language the parties could reasonably use to subject preceding the payment due date. The Participating their disputes to that form of settlement, including Manufacturers are directly disputing a collateral disputes that related to the agreement determination made by thc Independent kuditor not containing the clause." Fleet Tire. Sen: of N. Little to apply the NPhi Adjustment. This controversy Rock v. Oliver Rubber Co., 118 F.3d 619, 62 1 (8th thus falls squarely within the language of the Cir. 1997). arbitration clausc. ( 3 1) Here, the parties to the MSA used the { 29) Further support for this conclusion can be broadest language they possibly could, and this found in the language of the parenthetical phrase, Court will enforce the terms of the agreement as which gives examples of the types of disputes plainly written by the parties. See Cl~lrrch,261 N.C. covered by the arbitration clause. Arbitrable at 766, 136 S.E.2d at 83 ("Where the terms are disputes include "any dispute concerning the plain and explicit the court will determine the legal

Q 2007 Thon~son/West.No Claim to Orig. U.S. Govt. Works. Page 8 of 20

Not Reported in S.E.2d Page 7 Not Reported in S.E2d, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reported in S.E.2d) effect of a contract and enforce it as written by the Arbitration and found that the presumphon parties."). of diligent enforcement was not a " determination" made by the Independent { 32) The State asserts that it did not agree to Auditor. See Stare ex rel. S~enehjem v. arbitrate the issue of "diligent enforcement." M3 Philip Morris, Inc., No. 09-98-C-03778 (Pl.'s Resp. Defs.' Mot. Conlpel Arbitration 6.) (N.D.Dist.Ct. July 18, 2006) (order Citing Sloatl Firtancial Group, Irtc. v. Becket~, 159 denying motion to cotnpel arbitration). N.C.App. 470, 583 S.E.2d 325 (2003), the State This Court believes the broad language of argues that the present dispute does not concern a section XI(c), which includes not only determination made by the Independent Auditor, direct challenges to the Independent but rather presents the issue of whether North Auditofs determinations. but also disputes Carolina diligently enforced its Qualifying Statute. "arising out of or related to" those (Pl.'s Resp. at 10.) According to the State, only this determinations, mitigates against the result Court may properly decide whether "diligent reached by Judge Marquart in North enforcement" has occurred. (Id.) Dakota. As stated above, the Independent Auditor determined that it would not apply the NPM Adjustment. The current dispute FN3. See supra '1] 14-15. If North over diligent enforcement is clearly " Carolina "diligently enforced" its related to" this determination. Qualifying Statute, then the Participating Manufacturers are not entitled to the NPM Adjustment. PUBLIC POLICY IN FAVOR OF ARBITRATION { 33) The events leading up to this dispute and the language of the MSA make the State's argument unpersuasive. The issues of diligent enforcement '7 { 34) The language of the agreement discussed and the applicability of the NPM Adjustment are in the preceding section must also be read in light of inextricably linked. Here, the only barrier to the relevant public policy considerations. This Court application of the NPM Adjustment is whether the has noted that caution is warranted whenever " State diligently enforced its Qualifying Statute. As public policy" conles into play. See CNC/'ccess, noted above, the Independent Auditor found that all I. v. Scruggs, 2006 NCBC 20 7 52 Settling States liad Qualifying Stahites in place and O\I.C.Super.Ct. Nov. 15, 2006), then refused to alter its stance on the applicability of http://w\~v.ncbusinesscourt.net/opinions/2006N the NPM Adjustment, effectively presuming that CBC% 2020.htm. But here there is a clear policy at each Settling State "diligently enforced" its statute. both the state and federal levels in favor of See supra 7 17. The State cannot escape the simple arbitration. fact that this presumption of diligent enforcement was a determination on the part of the Independent { 35) This Court has previously recognized North Auditor and is therefore subject to arbitration under Carolina's "strong public policy favoring resolution section XI(c). At the very least. the Independent of disputes through arbitration." Polo Ralph Lauren Auditor's presumption of diligent enforcement is " Corp. v. Gulf Itis. Co., 2001 NCBC 3 7 11, related to" its determinatio~~not to apply the NPM (N.C.Super.Ct. Jan. 31, 200 1). Adjustment. M4 http:Nw\w.ncbusinesscourt.net/opinions/ 2001N CBC3 .htm (quoting Srtiirh v. Young Moving & Storoge, Inc., 141 N.C.App. 468, 470-71. 540 FN4. The State has submitted subsequently S.E.2d 383, 385 (2000)). The Supreme Court decided authority from the North Dakota summarized the policy as follows: "Any doubt MSA court, which denied the Participating concerning the scope of arbitrable issues shouId be Manufacturers' hlotion to Compel resolved in favor of arbitration, whether the

0 2007 Tho~nsonNest.No Claim to Orig. U.S. Govt. Works. Page 9 of 20

Not Reportetl in S.E.2d Page 8 Not Reported in S.E.2d. 2006 WL 3490937 (N.C.Super.j (Cite as: Not Iicportetl in S.E.2d) problem at hand is the construction of the contract U.S. at 582-83. For a complete list of language itself or an allegation of waiver, delay, or decisions entered by other state courts on a like defense to arbitrability." Cyclome Roofing Co. Defendants' Motion to Compel Arbitration, v. LaFave Co., 312 N.C. 224, 229. 321 S.E.2d 872, see Appendices A and B. 876 ( 1984).

{ 36) The federal courts have recognized such a policy in favor of arbitration in the context of the PRACTICALITY, FAIRNESS. AND THE Federal Arbitration Act ("FAA"), 9 U.S.C.S. $4 1- STRUCTURE OF MSA 307 (LEXIS through 2006 legislation). This is relevant to the case at bar because section XI(c) of the MSA states that "[tlhe arbitration shall be { 38) In general. this Court has "exclusive governed by the United States Federal Arbitration jurisdiction for the puIposes of implementing and Act." More than forty years ago. Justice William 0. enforcing" the MSA. MSA $ VII(a). Section XI(c) Douglas nrotc that a n~otionto conlpel arbitration is an exception to this rule, providing that some under the FAA "should not be denied unless it may disputes must be submitted to binding arbitration be said with positive assurance that the arbitration before a panel of three former Article 111 federal clause is not susceptible of an interpretation that judges. Pursuant to the analysis presented above, covers the asserted dispute. Urrited Steel lVorkers o/ the Court has determined that this matter falls Am. 1. Warrior & Glrlf Navigatiorr Co., 363 U.S. within section XI(c) and therefore nust be 574,582-83 (1960). submitted to the arbitration panel.

( 37) As demonstrated above. the arbitration clause *8 { 39) 111 addition to the plain language and in section XI(c) is susceptible of an interpretation public policy justifications, this result is the most that covers the present dispute over diligent practical and fair in terms of the MSA's nationwide enforcement. Moreover, twenty-two of the payment obligations. The Participating hventy-three jurisdictions that have considered this Manufacturers do not make fifty-two separate same matter have decided in favor of arbitration. M5 payments each year. Rather, they make one In a case such as this. where a question has based on their share of the U.S. tobacco market. Id. been raised as to the arbitnbility of a particular $ IX(c)(l). The NPM Adjustment is applied to a dispute, the Court must read the agreement in light Participating Manufacturer's nationwide payment of the strong state and federal policies in favor of obligation. Id. 5 mu). If the type of dispute arbitration. Guided by the directives of the Supreme presented here were not subject to arbitration, it Court of the United States and the Supreme Court would be subject to fifty-two separate of North Carolina, this Court reads section XI(c) of determinations. This raises the possibili& of the MSA to cover the present dispute. conflicting decisions that would frustrate the efforts of the Independent Auditor and render the entire payment process impractical. FN5. To date, the only state court to deny the Participating Manufacturers' Motion to { 40) Furtl~crrnore, a decision by this Court on Compel Arbitration is North Dakota. See whether North Carolina diligently enforced its supra note 4. While the Co~utdoes not Qualifying Statute would have an impact far beyond base its decision on the large number of the borders of this state. If the Independent Auditor state courts that have compelled determines that the NPM Adjustment is to apply in arbitration, the Court believes this statistic a given year, the Participating Manufacturers are persuasively demonstrates that the MSA entitled to reduce their nationwide payment arbitration clause is "susceptible of an obligation. If this Court were to subsequently interpretation that covers the asserted declare that North Carolina has diligently enforced dispute." See United Steehvorkers. 363 its Qualifymg Statute. then payments to North

O 2007 Thomson/West. No Claim to Orig. U.S. Govt. Works. Page 10 of 20

Not Reported in S.E.2tl Page 9 Not Reported in S.E.2d, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reported in S.E.2d)

Carolina could not be reduced. I-lowever, the *9 { 43) The Supreme Court of North Carolina is amount of the nationwide NPM Adjustment would likely to have the final word on this issue. As this remain unchanged and \vould have to be reallocated Court has previously noted. the decision to grant a to other Settling States that did not diligently writ of petition for discretionary review lies enforce their Qualifying Statutes. Each state thus exclusively with the Supreme Court Slare v. Philip has an incentive to have its home courts declare that Morris USA IIIC., 2004 NCBC 9 7 113 n. 31 diligent enforcement has occurred. (N.C.Super.Ct. Dec. 23, 2004), http:lluwv.ncbusinesscourt.net~120945/2004N { 41) This potential conflict is ob\lated by the CBC% 209.htm. rev'd 359 N.C. 763. 618 S.E.2d arbitration panel. Before three former federal 219 (2005). This Court can only express its views judges, no party will have the benefit of a real or that the issues decided here are of "significant imagined home court advantage, and the potential public interest" warranting certification for review influence of state politics and other matters is by the Supreme Court without delay. See N.C. avoided. This Court agrees with Connecticut's Gen.Stat. 5 7A-3 1(a)-@). assessment: [Arbitration] was one particularly effective way of IT IS SO ORDERED. ensuring ... that all disputes. controversies and claims concerning the calculation and determination of payments under this massive, vitally important Appendix A settlement agreement be resolved under one clear set of rules that apply with equal force to every The following jurLsdictions have granted Settling State and are fairly articulated after a Defendants' Motion to Compel Arbitration: process in which all affected such parties can meaningfully participate.

State v. Philip Morris, Inc., No. CV960148414S. 2005 Corn.Super. LEXIS 2067, at '114 (Conn.Super.Ct. Aug. 3, 2005), affd 2006 Corn. LEXIS 322 (Conn. Sept. 12. 2006). As Judge Sheldon further observed, the consequence of not sending this dispute to arbitration would be "fill1 employnient for lawyers but little else." Id. at *114-15.

CONCLUSION

{ 42) Based upon the foregoing, it is hereby ORDERED, ADJUDGED. and DECREED that Defendants' Motion to Compel Arbitration is granted. The parties shall submit their dispute to the arbitration panel as provided in section XI(c) of the MSA. Further litigation on Plaintiffs Motion for Declaratory Order is hereby stayed pending arbitration.

O 2007 'I7lomsonhVest. No Claim to Orig. U.S. Govt. Works. Page 1 1 of 20

Not Reported in S.E.2d Page 10 Not Reported in S.E.Zd, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reported in S.E.2d)

Corinecticut State v. Philip Morris. Inc.. No. CV960 1 4 84148, 2005 C0nn.S uper. LEXIS 2067 (Conn.Su per.Ct. Aug. 3, 2005), aff d, 905 A.2d 42 (Conn. 2006).

0 2007 I'honison~West.No Claim to Orig. U.S. Govt. Works. Page 12 of 20

Not Reported in S.E.2d Page 11 Not Reported in S.E.Zd. 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reported in S.E.2d)

New York State v. Philip hlorris. Inc.. 8 13 N.Y.S.2d 7 1 (N.Y.A pp.Div .2006) (reversing trial court's order denying motion to compel arbitra tion). motion to clarify denied, State v. Philip Moms. Inc., Motion No. M-263 1 P.YAP p.Div. July 13,2006).

O 2007 Thomson~West.No Claim to Orig. U.S. Govt. Works. Page 13 of 20

Not Kcported in S.E.2d Page 12 Not Reported in S.E.2d, 2006 WL 3490937 (-N.C.Super.) (Cite as: Not Reported in S.E.2d)

Ncw State v. Hampshire Philip Morris USA, No. 06-E-132 (N.H.S uper. Ct. June 6, 2006). motion to reconsider denied, State v. Philip Morris USA, No. 06-E- 132 (N.H.Su per.Ct. July 17, 2006). Kentucky Common wealth ex rel. Stumbo v. Brown & Willi amson Tobacco Corp., No. 98-CI- 01 579 (Ky. Cir. Ct. June 13, 2006).

O 2007 ThomsonAVest. No Claim to Orig. U.S. Govt. Works. Page 14 of 20

Not Reported in S.E.2d Page 13 Not Reported in S.E.2d, 2006 WL 3490937 @I.C.Super.) (Cite as: Not Reportetl in S.E.Zd)

Massac Common husetts wealth v. Philip blorris, hc., No. MICV 1995 -07378-F (Mass. Super. Ct. June 20, 2006). Idaho State ex re]. Wasden v. Philip Morris, Inc.. No. cv-OC-97 -03239D (Idaho Dist. Ct. June 30, 2006). motion to reconsider denied, State ex rel. Wasden v. Philip Moms, Inc.. No. cv-OC-97 -03239D (Idaho Dist.Ct. Aug. 2, 2006).

8 2007 ThomsonlWest. No Claim to Orig. U.S. Govt. Works. Page 15 of 20

Not Reported in S.E.2d Page 14 Not Reported in S.E.2d. 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reported in S.E.2d)

Vermont State v. Philip Moms USA, Inc.. No. S 0463-06 CnC (Vt-Sup er.Ct. July 14.2006). Colorado Slate ex rel. Suthers v. R.J. Reynolds Tobacco Co.. No. 97 cv 3432 (Co1o.D ist.Ct. July 19,2006). Hawaii State ex rel. Bennett v. Philip Moms USA. No. 06- 1-0 695-04 KSSA (Haw.C ir.Ct. Aug. 2.2006). Nevada State ex rel. Chanos v. Philip Moms USA, No. CV06- 00929 O\lev.Di st.Ct. Aug. 4, 2006).

O 2007 ThonlsodiVest. No Claim to Orig. U.S. Govt. Works. Page 16 of 20

Not Reported in S.E.2d Page 15 Not Reported in S.E.2d, 2006 WL 3490937 O\I.C.Super.) (Cite as: Not Reported in S.E.2d)

Illinois State v. Philip Morris, Inc. No. 96 L 13146 (I11.Cir.Ct. Aug. 8: 2006). Virginia Common wealth ex rel. McDonnell v. Brown 8.5 8.5 Willi amson Tobacco Corp., No. H J-224 1 (Va.Cir.Ct. Aug. 9, 2006). Iowa State ex rel. Miller v. Philip Morris USA, Inc.. No. CL 71048 (Iowa Dist.Ct. Aug. 16. 2006). California State v. Philip Morris USA, Inc., No. JCCP 404 1 (Cal.Su per.Ct. Aug. 23, 2006).

8 2007 ThornsonlWest. No Claim to Orig. U.S. Govt. Works. Page 17 of 20

Not Reported in S.E.2d Page 16 Not Reported in S.E.2d, 2006 WL 3490937 (N.C.Super.j (Cite as: Not Reported in S.E.2d)

Nebraska State ex rel. Bmning v. R.J. Reynolds Tobacco Co., No. CI 06-1656 (Ncb.Di st.Ct. Aug. 28. 2006). Oregon State v. Philip Moms USA, No. 0604- 03252 (0r.Cir.Ct. Aug. 30, 2006). Ohio State ex rel. Petro v. RJ. Reynolds Tobacco Co., No. 97CVHO 5-51 13 (Ohio Ci.Com.Pl. Sept. 25. 2006). District of District of Columbia Columbia v. Phillip Morris USA, Inc.. No.2006 CA 003176 B (D.C.Su per.Ct. Scpt. 26. 2006).

Q 2007 Tl~omsodWest.No Claim to Orig. U.S. Govt. Works. Page 18 of 20

Not Reported in S.E.2d Page 17 Not Reported in S.E.2d, 2006 WL 3490937 O\I.C.Super.) (Cite :IS: Not Reported in S.E.2d)

Michigan State ex rcl. Cox v. Philip Moms USA, No. 06-539-CZ (Mich-C ir.Ct. Sept. 28.2006). Washington State v. Philip Monis USA, Inc., No. 06-2- 132 62-9SEA (Wash& per.Ct. Sept. 28, 2006). South State v. Dakota R.J. Reynolds Tobacco Co.. No. 06-161 (S.D.C ir.Ct. Oct. 2, 2006). Maine State v. Philip Morris, Inc., No. cv-97- 134 (Me.Sup er.Ct. Oct. 3, 2006).

Appendix L)

*10 The following state has denied Defendants' Motion to Compel Arbitration:

O 2007 Thornson~West.No Claim to Orig. U.S. Govt. Works. Page 19 of 20

Not Reported in S.E.2d Page 18 Not Reported in S.E.2d, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Reportecl in S.E.2cI)

North State ex Dakota rel. Stenehjern v. Philip Morris, Inc.. No. 09-98-C -03778 (N.D.Di st.Ct. July 18,2006). Judgment (Jun. 12, 2006) Original Image of this N.C.Super.,2OO6. Document (PDF) State v. Philip Morris USA, Inc. 2006 WL 1834521 (Trial motion, Memorandum Not Reported in S.E.24 2006 WL 3490937 and Affidavit) North Carolina's Response to (N.C.Super.) Defendants' Motion to Compel Arbitration and to Disnuss or in the Alternative Stay This Litigation Briefs and Other Related Documents (Back to top) (Jun. 7, 2006) Original Image of this Document (PDF) 2006 WL 2881989 (Trial Motion, Memorandum 2006 WL 1834522 (Trial Motion, Memorandum and Affidavit) States' Memorandum in Opposition arid Affidavit) Plaintiffs Motion to Strike N.C. R. to Defendants' Motion to Exclude Evidence of Civ. 12(Q (Jun. 7, 2006) Original Image of this Negotiations or Discussion Underlying the Trust in Document (PDF) Proceedings Before the Court (Aug. 29. 2006) 2006 \VL 1834523 (Trial Motion, Memorandum Original Image of this Document (PDF) and Affidavit) Subsequent Participating 2006 WL 21 803 15 (Trial Motion, Memorantluln Manufacturers' klotion to Intervene Pursuant to and Affidavit) Subsequent Participating N.C. R. Civ. P. 24 (Jun. 6, 2006) Original Image of Manufacturers' Reply in Support of Motion to this Document (PDF) Intervene Pursuant to N.C. R. CIV. P. 24 (Jul. 10, 2006 WL 1834519 (Trial Motion, Menlorandum 2006) Original Image of this Document (PDF) and Affidavit) Brief of the Maryland and 2006 WL 2180313 (Trial Motion, Memorandum Penrisylvania Certification Entities in Opposition to and Affidavit) The State's Responsen in Opposition Settlors' iMotion for Summary Judgment (Jun. 2, to Subsequent Participating Manufacturers' Motion 2006) Original Image of this Document (PDF) to Intervene (Jun. 26, 2006) Original Image of this 2006 \VL 18345 17 (Trial Motion, Memorandum Document (PDT;) and Affidavit) Defendant Original Participating 2006 WL 2180314 (Trial Motion, Memorandi~rn Manufacturers' motion to Compel Arbitration and and Affidavit) Defendant Original Participating to Dismiss or, in the Alternative. Stay This Manufacturers' Reply Brief in Support of their Litigation (May 15. 2006) Original Image of this Motion to Compel Arbitration and to Dismiss or. in Document (PDF) the Alternative. Stay this Litigation (Jun. 20, 2006) 2006 WL 1834518 (Trial Motion, Memorandum Original Image of this Ilocument (PDF) and Affidavit) Defendant Original Participating 2006 WL 218031 1 (Trial Motion, Memorandum Manufacturers' Memorandum in Support of Their and Affidavit) Settlors' Reply Brief in Support of Motion to Cornpel Arbitration and to Dismiss or, in motion for Summary Judgment (Jun. 12. 2006) the Alternative. Stay This Litigation (May 15, 2006) Original Image of this Document with Appendix Original hlage of this Document (PDF) PDF) 2006 IVL 1834520 (Trial Motion, Memorandum 2006 WL 21 803 12 ('l'rial Motion, Memorantlurn and Affidavit) Defendant Original Participating and Affidavit) Maryland and Pennsylvania's Reply Manufacturers' Motion to Compel Arbitration and Brief in Support of Their Motion for Summary to Dismiss or, in the Alternative. Stay This

O 2007 Thomson/West. No Claim to Orig. U.S. Govt. Works. Page 20 of 20

Not Reported in S.E.2d Page 19 Not Reported in S.E.2d, 2006 WL 3490937 (N.C.Super.) (Cite as: Not Heportetl in S.E.24

Litigation (May 15, 2006) Original Image of this Document (PDF) Document (PDF) 2001 iVL 3313432 (Trial Motion, Memorandum 2006 WL 1461906 (Trial Motion, Memorandum and Affidavit) Set~lors'Response Brief @ec. 17, and Affidavit) North Carolina's Brief in Support of 2004) Original Image of this Document (PDF) Motion for Declaratory Order (Apr. 20. 2006) 2004 WL 3313433 (Trial Motion, Memorandum Original Image of this Document (PDF) and Affidavit) Reply of thc Trustee and the 2005 WL 3434769 (Trial Motion, Memorandum Certification Entities to the Opening Brief of the and Affidavit) Response of Tnlstee and Settlors @ec. 17, 2004) Original Image of this Certification Entities to Defendants' Motion for Document (PDF) Expedited Reconsideration of Order Regarding 2004 WL 3313435 (Trial Motion, Memorandum Interest (Nov. 1, 2005) Original Image of this and Affidavit) Trustee's Brief Addressing The Document (PDF) Effective Date Of Tax Offset Adjustments Created 2005 WL 3434768 (Trial Motion, Memorandum By The Fair And Equitable Tobacco Reform Act Of and Affidavit) Brief in Support of Motion for 2004 And Supporting Its 2004 Motion For Specific Expedited Reconsideration of Order Regarding Performance Of The National Tobacco Grower lnterest (Oct. 31, 2005) Original Image of this Settlement Trust Agreement (Dec. 10, 2004) Document (PDF) Original Image of this Document (PDF) 2005 WL 31 1471 1 (Trial Motion, Memoranduu~~ 2004 IVL 3313436 (Trial Motion, Memorandum and Affidavit) Settlors' Reply Brief in Further and Affidavit) Pening Brief for the Settlors (Dee. Support of Motion for Additional Proceedings 10, 2003) Original Image of this Document with Regarding Fourth Quarter Payment for 2004 ant1 Appendix (PDF) Response in Opposition to Motion for Interest, 2004 WL 3313434 (Trial Motion, Memorandum Administrative Costs, and Attorneys' Fees (Oct. 13, and Affidavit) ""Phase 11 Beneficiarics" Amicus 2005) Original Image of this Document (PDF) Curiae Brief (Dec. 2004) Original Image of this = 2005 WL 3 1147 10 (Trial Motion. Memorandum Document (PDF) and Affidavit) Response of Trustee ant1 2003 WL 24045541 (l'rial Motion. Memorandum Certification Entities to Defendants' Filing of and Affidavit) Trustee's Brief in Support Of Motion Motion for Further Proceedings Regarding Fourth For Specific Perfomlance And In Opposition To Quarter Payment for 2004 and Motion for Interest, Motion To Compel Arbitration And Stay Administrative Costs. and Attorneys Fees (Oct. 6. Proceedings (Dec. 1, 2003) Original Image of this 2005) Original Image of this Document with Document (PDF) Appendix (PDF) 2003 WL 24035542 (Trial Motion, Memorandum 2005 WL 2548342 (Trial Pleading) Answer to and Affidavit) Brief in Support of Motion to Statement of Claim of Pennsylvania and Maryland Compel Arbitration and Stay Proceedings and in Certification Entities (Sep. 6. 2005) Original Image Opposition to Motions for Specific Performance of this Document (PDF) (CMPL) (Dcc. 2003) Original hage of this 2005 WL 2239974 (Trial Motion, Memorandum Document (PDF) and Affidavit) Reply Bricf in Support of Motion to Disllliss (Aug. 11, 2005) Original Image of this END OF DOCUMENT Document (PDF) 2005 WL 2239973 (Trial Motion, Memorandum and Affidavit) Brief of I'ennsylvania and Maryland in Opposition to Defendants' Motion to Dismiss (Aug. 1, 2005) Original Image of this Document (PDF) 2005 WL 1688356 (Trial Motion, Memorandum and Affidavit) Brief in Support of Motion to Dismiss, or, in the Alternative, for More Definite Statement (Jun. 9, 2005) Original Image of this

Q 2007 ThomsoniWcst. No Claim to Orig. U.S. Govt. Works. IN THE DISTRICT COURT OF CLEVEI$#&IOF&HF S.S. CLEVELAND COUNTY- - - . - MA}. . STATE OF OKLIOMA FILED, I" hi Office of the Court Clerk JAN^ o 2007 STATE OF OIUAHOMA, et al., 1 ) DOCKET-PAGE-RECORDED Plainti ff(s) , 1 Rhonda Hall, Court Clerk 1 DEPUTY 1 Case No. CJ-96-1499 1 RJ. REYNOLDS TOBACCO CO., 1 et al., ) ) Defendant(s). 1

ORDER Ah?.OPINION ON ORIGINAL PARTICIPATING ~UFACTURERJSAPPLICA TION AND MOTION TO ENFORCE TNEARBITXA TION PRO VXSIONS OF THE MASTER SETTMMENT A GREEMENT

The above and entitled case was argued to thls Court on January the eighth,

2007, following joinder of the subsequent participating manufacturers (SPMs) on the original participating manufacturers(OPh/ls) application and motion to enforce and

compel the arbittation provisions of the Master settlement agreement. Pleadings

reviewed by this Court included the memormdum brief of the original participating

manufacturers; the combined response of the State Of Oklahoma(State), to the

original manufacturer's request to compel arbitration and the joirlder of subsequent

participating manufacturers; and, the oripal participating manufacturers reply in

support of the application to compel nrbitration, The Court being fully advised in the premises Ends as follo~vs:

The OPM's motion to compel and enforce arbitration provisions of the Master settlement agreement is SUSTAINED.

OPINION

Ths dispute concms the annual independent auditor calculation of OPM's payment obligation and the application of the nonparticipating manufacturer's~-PM) adjustment to the OPM's annual payment The determination by the independent auditor of the annual payment presumes application of the diligent enforcement exemptions from the adjustment as to each participating state. The independent auditor calculation result is being challenged by the OPM's as no separate factual determination is made by the independent auditor as to whether or not the quali@ing exemption statutes as to each participating State are being &gently enforced.

Specifically being challenged is the 2003 independent audit calculation that presumes ddigent enforcement and, as alleged by the OPM's, results in a hgher payment than is required by the Master Settlement Agreement as it does not include any nonparticipating manufacture adjustment to the annual payment The result is that each participating State is exempt from any nonparticipating manufacture adjustment because of this &gent enforcement of quahfying statutes presumption. I first Find that this dispute is a direct challenge to the independent auditor's determination as to annual OPM payment. I further Find that determination of "diligent enforcement" exemptions arises out of and relates to the independent auditor's annual calculation and determinations that must be made. The Master Settlement Agreement provides clear language as to the types of disputes subject to arbitration. This is found in subsection E(j)where the Master Settlement Agreement dscusses the arbitr:ibility of the NPM adjustment to include "...\vithout lirmtation, any dispute concerning the operation or application of any of the adjustments...". I find that the Master

Settlement Agreement intended the independent auditing firm to be able to make its determinations based upon a single set of rules applicable to all sethng states which is accommodated by md is consistent with the arbitration provisions and trial Coutt retained jurisdictional provisions found in the Master Settlement Agreement That has not happened as to "diligent enforcement". This is by clear meaning, a dspute concerning the operation or application of any of the adjustments.

I'he Master Settlement Agreement expressly carves out exceptions to the retained jurisdiction of trial Courts as it relates to the nonparticipating manufacturer's adjustment and other payment related disputes found at MSA 5 XT(c). The retained jurischction constrains the tnal Courts to particular disputes that arise within the settling State. Retained jurisdiction is specific jn the MSA to include exceptions.

State by State "diligent enforcement" is not expressly retained by State Courts, however, NPM Adjustment is expressly excepted. MSA 5 VII(c). This Ispute, while it involves a particular set of quahfying statutes found in the state of Oklahoma, is a

3 dispute that affects the pro rata share to be enjoyed by each participating State and the diligent enforcement determination in each state can have adverse effect globally.

The Master Settlement Agreement also allows the OPMs to request reconsideration by the auditing firm, any determination made relating to the NPM Adjustment and

Qualifying Statutes, ''...in light of subsequent events ( including, without limitation, subsequent judicial review, interpretation, modfication and/or disapproval of a settling State's qualif?ying statute, and the manner andlor the effect of the

enforcement of such oualifvin~statute.)". This expressed wording clearly supports

the OPM's position that the independent auditing 6rm was to make determinations concerning the effect of enforcement of qualifying statutes as a part of the caIcuIation process. MSA § IX(d)(Z)(G). It is not a sentence construction that places cWjgent enforcement determination in the ma1 Court It does define the manner and/or effect

of the enforcement of such Quali@ing Statute as an item of calculation considerauon.

The evidence indcates that each participating state's quaMying statutes appear

to be almost identical and therefore subject to a set of global standards determined by

the arbitration panel relating to diligent enforcement, that can easily apply to each

state. A provision to carve out "d&gent enforcement" fact-finding as not arbitrable

as the State urges, would have been specifically expressed in the Master Settlement

Agreement if such was the intent It was not " Diligent enforcement" is an element

of calculation that has not been determined by the independent auchtor and must be

4 factually determined by global arbitration. Reading the language of the Master

Settlement Agxeement in its dear and unambiguous form, "ddigent enforcement"

could only be carved out if you don't consider the determination of diligent

enforcement as ksing out of or relating to the nonparticipating manufacturers

adjustment calculation. Ddtgent enforcement again, drectly affects and thus relates to

each state's allocation.

-The Master Settlement Agreement provides for broad application of the

arbitration provision To htthe scope of the arbitration provision to matters

specifically decided by the auchtor is too restrictive and I find not consistent with the

clear meaning olthe Master Settlement Agreement language within the fout comers

of which, is subjcct to no other interpretation. The Auditor's application of any

NPM Adjustrnei~tnecessarily follows a "ddigent enforcement" determination and

thus directly concerns the operation of and application of the adjusbnent. w Oklahoma law follows the well settled presumption in favor of broad scope in

- arbitration. The "arising out of' language is found to be inclusive language with

compelling authority for tdal Courts to consider this language in the broadest sense Y with any doubts to be resolved in favor of arbitration. Cumminps v. Fe&x

- Ground Packafe Svstems. Inc, 404 F.3d 1258 (10th Cir. 2005); Bruner v.

Zmberline Manor fiinired partners hi^, 2006 OK 90; Shaffer v. leffre-E9 1 5 P.2d II

910,917 (Okl. 2006); Fleminp Cos. V. TruDiscoumt Foods, 977 P.W 367 (Okl. m 5

M I

m App. 1998); R v. Thermo&ne Indusuies, 1996 OK 6; Lo

753 P2d. 1327 (Okl. 1987); Voss v. Cillp-of Oklahoma Ciq, 1980 OK 148; 15 O.S.

802; 12 O.S. Supp. 2005 § 1857(A). Ths arbitration provision is subject to interpretation that would include this dispute and arbitration must be compelled. Js-- IT IS SO ORDERED this 2 7 day of January, 2007.

Chief District Judge V CERTIFICATE OF MAILING

I hereby certify that a true and correct copy of the foregoing was d&vered/rnailed, postage pre-paid, this day of ,2007, to the following.

Ronald L. Walker John C. Niemeyer George D. Davis NEMAYER,ALEXANDER, AUSTIN & WALISWALKER HARRIS & WOWE PHILLIPS Union Plaza, Suite 500 Three Hundred North Walker 3030 N.W. Expressway Oklahoma City, OK 73102-1822 Oklahoma City, OK 731 12-5434

Gayle E. Rosenstein Thomas J. Frederick WELL, GOTSHAL & MANGES Kevin J. Narko 201 Redwood Shores Parkway Luke A. Palese Redwood Shores, CA 94065 WINSTON & STRAWN LLP 35 West Wacker Drive Chicago, IL 60601

Kenneth L. Chemof Stephen Patton Carl S. Nadler Barack Echols H~REw, LLP Andrew Bautista 1717 Rhode Island Avenue, NW IQRKLAND&ELLIS, UP Washington, DC 20036-3001 200 East Randolph Drive Chicago, IL 60601

Drew Edmondson, Attorney General Phillip L. Driskill, Director State of Oklahoma Oklahoma Department of Veterans Office of the Attorney General Affairs 2300 North Lincoln Blvd., Suite 1 12 231 1 North Central Oklahoma City, OK 73105 P.O. Box 53067 Oklahoma City, OI< 731 52-3067 James Crutcher, Commissioner Howard H. Mendrick, Director Oklahoma Department of Health Oklahoma Department of Human 1000 N.E. 1Oth Street Services Oklahoma City, OK 731 17-1239 P.O. Box 25352 Oklahoma City, OI< 73125-0352.

Phillip L. Drisklll, Director lMike Fogarty, Director Oklahoma Department of Veterans Oklahoma Health Cue Authority A flairs 4545 N. hcoln Blvd., Ste. 124 2311 N. Central Oklahoma City, OI< 73105 P.O. Box 53067 Oklahoma City, OK 731 52-3067

Alan Porter, Secretary American Brands Inc. Neil Witlington, Genaal Counsel c/o corporation Se~ccCompany BAT. Industries, PLC 27 11 Centervllle Road f/k/a The American Tobacco Company Suite 400 Globe House, 4 Temple Place Wilmington, DE 19808 London WC2R 2PG United Kingdom

Stephen Pattor] Thomas J. Frederick Barack Echols Kevin J. Nacko Andrew Bautista Luke A. Palese Kirkland & Ellis, LLP 35 West Wacker Drive 200 East Randolph Drive Chicago, IL 60601 Chicago, IL 60GOl

Kenneth L. Chernof The Brooke Group Limited Carl S. Nadler c/o The Corporation Trust Company Hell= Ehrman, LLP Corporation rust Cent- 1209 Orange Street 1717 Rhode Island Ave., NW Washington, DC 20036-3001 Whngton, DE 1 980 1 Liggett Group, Inc. Paul Taaffe c/o Aaron Marks, Esq. Chairman and Chef Executive Kasowjtz, Benson, Torres & Freidman Hill & Knowlton bc. 1633 Broadway, 22nd Floor 909 Third Avenue New Yo&, NY 10019 New York, NY 10022

Liggett Group, Inc. John Murphy, Esq., Chairman c/o The Corporation ?'rust Company Shook, Hardy & Bacon P.C. Corporation Trust Center 2555 Grand Blvd. 1209 Orange Street Kansas City, MO 64108 Wilmington, DE 19801

Peter Cross, Managing Partner Charlie O7Neill,Managng Partner Jacob, Mcdingec & Finnegan Chadbourne & Puke LLP 1270 Avenue of the Americas 30 Rockefellar Plaza Rockefeller Center New York, NY 10112 New York, NY 10020-1700

John Long Gayle E. Rosenstein Vice President and General Counsel Wed Gotshal & Manges, LLP Liggett Group, Inc. 201 Redwood Shores Parkway 100 Maple Lane Redwood Shores, CA 94065 Mebane, NC 27302-81 60

Hlll& Knowlton, Inc. c/o The Corporation Trust Company Corporation Tmst Center 1209 Orange Street Whngton, Dl3 19801

Chief District Judge u Dec -12 2006 3: 42PM OFF l CE OF PROTHONOTARY No.9504 P. 2/10

IN THE COURT OF COMMON PLEAS FWTJUDICL4L DISTRICT OF PENNSYLVANIA TRIAL DMSION - CML

COMMONWEALTH OF PA APRIL TERM, 1997

VS. NO. 2443 PHILIP MORRIS, INC., ET AL CONTROL #042 1 18,05 1569

ORDER

AND NOW, this / d of f 2006, upon consideration of

Defendants' Motion to Compel Arbitration, the responses in opposition, all matters of record and

in accordance with the Memorandum Opinion being contemporaneously filed with this Order, it

is hereby ORDERED that said Motion is GRANTED. Plaintiffs Motion for Enforcement or

Declaratory Order is DISMISSED without prejudice, as this matter is subject to arbitration in

accordance with the agreement between the parties.

.BY THE COURT: n

hlANFRED1, WILLIAM J., J

COQ~ES~ oQ.~.C.Q-,, w DOCKETED ?URSU~~FT? DEC 1- X 2006 DEC 1.2 2006 Dec .I?. 200E 3 : 43PM OFF l CE OF PROTHONOTARY No.9504 P. 3/10

'JOC#E~ED DEC L 2 2006 IN THE COURT OF COMMON PLEAS I?ELST JUDICIAL DISTRICT OF PENNSYLVANIA K,C&~GH~~ TRIAL, DIVISION - CIWL

COPIES SENT ~U~UANTTOFa. R.C.P. 236@) COMMONWEALTH OF PA APRIL TERM,1997 DEC I 2 2006 VS. Fii;;d~~ of Pa NO. 2443 PHILIP MORRIS, INC., ET AL CONTROL #042118,05 1569

MEMORANDUM OPINION

DECEMBER 102.12006

Before the Court is Defendants' Motion to Compel Arbitration. For the reasons Mly set

forth below, said Motion is granted.

BACKGROUND

This action arises out of the ultimate settlement of a lawsuit brought by numerous

governmental entities against major tobacco producers to recoup health-care costs associated

with tobacco use. The resulting settlement was a product of extensive negotiations and was

memorialized in a written agreement, called the "Master Settlement Agreement" ('WSA''). The

MSA set forth in detail the rights and responsibilities of the parties, including the amounts to be

paid by the tobacco companies and the formulae used to compute the various payments. The

tobacco companies which first signed the MSA are known as Original Participating

ManuEzcturers ("OPMs"). The MSA provided a mechanism for additional companies to join the

settlement, even if they were not part of the original suit. Those companies are referred to in the

. .. ', MSA as "Subsequent Participating Manufacturers" ("sPMS"). Collectively, the entire group of

settling tobacco companies are referred to as the 'TPacipating Manufacturers" ("TMs"). The 52 . . governmental entities are known.k the "settling States", albeit they are not all states. Dee. 12. 2006 3: 43PM OFF l CE OF PROTHONOTA4Y

The MSA provides for each PM to make an annual lump-sum payment and also imposes

certain agreed upon marketing restrictions and other requirements. The payment obligations

under the MSA are calculated annually and allocated among the settling governmental entities.

These payments are subject to several adjustments. One such adjustment is designed to

compensate all PMs for any loss of market share that may be attniutable to the competitive

disadvantage they face, as against companies which are not partics to the MSA, i.e.,

nonparticipating manufacturers ("NPMs"). This adjustment, known as the "NPM Adjustment",

is calculated by a.independent auditor on a nationwide basis, utilizing a procedure set forth in

the MSA.

The term "Independent Auditor" is defined in the MSA. The role of the Independent

Auditor is set forth in 5 XI (a) (1) of the MSA, which provides, in pertinent part, that rhe

"Independent Auditor shall calculate and determine the amount of all payments owed pursuant to

. . , :. [the MSA], the adjustments . . . thereto .. .the allocation of such payments [and] adjustments . ..

among the [PMs] and among the Settling States. .. ." Section IX Cj) provides how the PM's ...... ,. . . . payments should be calculated, including how adwhen the NPM Adjustment should be

applied.' If information necessary to calculate the annual payments is missing, $ M (d) (5) of

MSA explicitly directs the Independent Auditor to calculate the annual payments by employing

an assumption or best estimate for the missing information.

For each year, the Independent Auditor is also required to compare the PM's aggregate

1 The sixth step in the calculation provides that "the WMAdjustment]..-shall be applied to the result. of [the fi step] pursuant to subsections IX (d) (I) and (d) (2) (or, inthe case of paymenk due from the [SPMs], pursuant to subsection I.[dl [4])." (Emphasis added.) Section IX 0) firrther instructs that "[iln the event a particular adjustment, reducrion or ofiet refcmd to in a clause below does not apply to the payment being calculated, the result of the [srep] in question shall be deemed to be equal to the result of the immediately preceding [step]." (Emphasis added) Dec. 12. 2006 3 :13PM OFF! CE OF PROTHONOTARY

market share with their aggregate market share for the base yea. 1997 to determine if there has

been a "Market Share Lass." For each year the Market Share hss is greater than zero, $ IX

CdJ[1 ][C] of MSA provides that "a nationally recoguized firm of economic consultants (the

Firm') shall determine whether the disadvantages experienced as a result of the WSA] were a

significant factor contributing to the Market Share Loss for the year in question" The

determination of the Firm is ha1and non-appealable. Only if the Firm determines that the MSA

was a "significant factor" contributing to the Market Share Loss will the NPM adjustment apply.

The Firm found this to be the case with respect to 2003, the year at issue.

However the inquiry does not end there. Under the MSA, the NPM Adjustment is

reallocated if a "Settling State continuously had a Qualifying Statute. . . in full force and effect

during the entire calendar year immediately preceding the year in which the payment in question

is due, and diligently enforced the provisions of such statute during the entire calendar year."

MSA 4 rX(d)(2). If a Settling State falls within this exception, thm the burden of the NPM

adjustment to the PMs payment is reallocated among the other Settling States on apro rara basis.

The dispute here involves the calculation of the payment due in 2004, and whether an

N?M adjustment, as calculated fiom the 2003 Market Share Loss, should have been applied. In

arriving at the annual payments due under the MSA for the time period at issue, the Independent

Auditor did nor apply the NPM adjustment based on the assumption that all Settling States had

2 The "Qualifying Statute" provides for en€orce~&t and skctions against NPMs. The goal of the Qualifying Statute is to level the playing field between the PMs and the NPMs. Theoretically, diligent enforcement of the Qualifjmg Statute will insure that NPMs do not profit fiom their %lure to settle, at the expense of the settling PMs, who are not only paying money as part of the settlement, but who have also agreed to marketing restrictions and other requirements as part of their settlement. Thus, the QualifLing Statute serves both as incentive for those manufacturers who settle, and as disincentive to those tobacco mufacmers who eschew settlment. Dec. 12. 2006 3:43PM OFF i CE OF PgOTHONOTARY

enacted Qd.&mg Statutes and that all such statutes were in full force and effect since their

effective date. The Independent Auditor did not make an explicit finding regarding whether the

Settling States diligently enforced the Qualifjmg Statute during 2003. The PMs disagreed with

this assumption.3

Thereafter, the Commonwealth filed a Motion for Enforcement or Declaratory Order,

seeking a declaration from the court that it diligently enforced Pennsylvania's Qualifying Statute

during 2003. The PMs filed the instant Motion, arguing that this case should proceed to

arbitration, pursuant to the MSA

DISCUSSION

42 PaC.S.A. $7303, which governs such arbitration matters, states:

A written agreement to subject any existing controversy to arbitration or a provision in a written agreement to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity relating to the validity, enforceability or revocation of any contract.

42 Pa.C.S.A. $ 7303. Judicial inquiry in determining whether a suit must proceed to arbitration

requires a determination as to whether: (1) a valid agreement to arbitrate exists between the

parties and, if so, (2)whether the dispute involved is within the scope of the arbitration

3 In response to the Independent Auditcds request for information, the PMs requested that the Independent Auditor recognize a substantial NPM Adjustment for that yea.. The PMs took issue with the Jndependent Auditor's failure to apply such ELTI adjustment in the prior year based, in part, on the Settling States representation that they had enacted Qualifying Statutes. The PMs rejected the assumption that just because a Settling State enacted a Qualifying Statute, that it was bemg diligently enforced. In response, the Settling States argued that the NPM Adj wentshould not be applied until a significant factor determination had been made and that, even if such a determination has been made in favor of the PMs, the Independent Auditor should presume, in the abscnce of substantial evidcnce to the contrary, that the states were diligently enforcing their QualifLrng Statutes. The hvo sides also disagreed as to whether the NPM Adjustment should be applied even if evcry Settling State was diligcntly enforcing their QuaIifLmg Statutes. After receiving letters fiom both sides, the Independent Auditor released its prelunmary calculations of the 2003 annual payments, as discussed above. Oec. 12. 2006 3:44PM OFFICE OF PROTHONOTARY

provision. Smith v. ~um~rland'ihou~Ltd., 455 Pa Super. 276,284,687 A2d 1167, 1171

(1997); Messa v. State Farm hurance Comoanv, 433 Pa Super. 594,597,641 A.2d 1 167,1168

(1994); PBS Coal, Inc. v. Hardhat Mining. Inc., 429 Pa. Super. 372,376-77, 632 A2d 903,905

The MSA speaks to the issues of jurisdiction and arbitration under the MSA Each

individual state court retains jurisdiction for purposes of implementing and enforcing the MSA.

However, $ X(c) of the MSA, entitled "Resolution of Disputes" (hereinafter, "Arbitration

Provision"), provides:

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, offiets, carry-forwards and allocations described in subsection IX(j) or subsection XI@ shalI be submitted to binding arbitration befbre a panel of three neutral arbitrators, each of whom shall be a former ArticIe III federal judge. Each of the two sides to the dispute shall select one arbitrator. The two arbitrators so selected shall select the third arbitrator. The arbitration shall be governed by the United States Federal Arbitration Act.

Based on the foregoing, it is cIear that the MSA contains a valid agreement to arbitrate.

The court must next determine if the instant dispute falls within the Witration Provision,

It is well-settled that the issue of whether a particular dispute falls within a contractual

arbifration provision is a matter of law for the court to decide. Shadduck v. Christopher J. Kaclik,

Inc.. 713 A.2d 635,637 (Pa. Super. 1998). Pennsylvania law advocates stn'ct construction of

arbitration agreements and dictates that any doubts or ambiguity as to arbitrability be resoIved m

favor of arbitration. Smith v. Cumberland Grow, Ltd., 455 Pa Super. 276,687 A.2d 1167, 1171 ...... *...... (1 997). The fundamental rule in construing a contract is to ascertain and give effect to the

intention of the parties. Lower Frederick towns hi^ v. Clemmer, 5 18 Pa 3 13,543 k2d 502,510

(1988). In order to determine the meaning of the agreement, the court must examine the entire Dec .12 2006 3: 44Pld OFF ICE OF PROTHONOTARY

contract, taking into consideration " . . . the surrounding circumstances, the situation of the

parties when the contract was made, the objects they apparently had in view and the nature of the

subject matter." Hueml v. Mi& Const. Co.. hc., 796 A.2d 350 (Pa. Super. 2002).

As previously stated, "[alny dispute, conh-oversy 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.. .described in subsection 1x6)" are subject to arbitration Subsection E(i)

specifically includes the NPM adjustment. Thus, based on the plain language of the MSA, the

underlying dispute is arbitrable because it concerns both the operation and application of the

NPM Adjustment. The MSA is an extensive and exhaustive agreement that was the result off

lengthy negotiations between sophisticated parties. This court sees no reason to disregard this

language.

The language of the Arbitration Provision supports the conclusion that the parties

intended the Independent Auditor to make the initial determinations regarding the applicability of

the NPM Adjustments. The MSA provides that the Independent Auditor, in calculating the , . ., . . mual payments due, is not only empowered to, but is required to make an initial determination

regarding the applicability of any adjustments, including the NPM Adjustment. The parties

dispute whether the Independent Auditor was warranted in making the assumption that the

Settling States had enacted Qualifying Statutes which they were diligently enforcing. Any

challenge to the propriety of the Independent Auditor's initial determination is an issue that the

MSA expressly reserves for arbitration.

It has been argued that arbitration also makes sense fkom a public policy standpoint. Of Oec .I?. 2006 3 : 41PM OFF 1 CE OF PROTHONOTARY

this the court is not persuaded, To the contrary, whether there was diligent enforcement of the

Qualifying Statute is a dispute wbich the courts of the various settling states, generally, and this

court, in particular, are most qualified to address. In an arbitration proceeding under the MSA, as

many as 52 separate "Settling States", with competing interests, will be compelled to join in the

selection of a single arbitrator, to sit with an arbitrator selected by the PMs, who share a unity of

interest, and a third arbitrator seIected by the attwo. Moreover, the issue of "diligence" in

enforcement of the Qualifying Statute is very much a local one. The vagaries of population size

and distribution, geography, market penelration by NPMs, to name but a few factors, must be

taken into account in determining whether a state has been diligent. Simply put: that which

constitutes diligence in our $ister state of North Dakota will assuredly be far different fiom

diligence in our neighbor New York

That being said, the court reluctantly finds that the scale nonetheless tips in favor of

arbitration. As noted, these we& highly sophisticated parties, with the assistance and counsel of

armies of highly paid lawyers. Under the circumstances presented, the hereinbefore cited legal

authorities compel the court to leave the parties to their bargain, however, flawed and ill-

conceived it may be."

4 Lest therobe any doubt: This court finds it almost inconctivable that a mechanism for d&dgactivity so integral to the agreement - diligence of enforcement of a quatfying statute -upon which question so many millions of dollars hang in the balance, was neither adequately dehcd in the MSA,. . nor the subject of specific, well- Dec. 12. 2006 3 : 44PM OFF ICE OF PROTHONOTARY

CONCLUSION

Based on the foregoing, Defendants' Motion to Compel Arbitration is granted.

An appropriate Order is being entered contemporaneous with this Opinion.

BY THE COURT:

delineated means of ascertainment. I I IN THE SUPREME COURT OF THE

STATE OF SOUTH DAKOTA ****

STATE OF SOUTH DAKOTA, ) Plaintiff and Appellant, ORDER DISMISSING APPEAL

1 R-J. REYNOLDS TOBACCO COMPANY; LORILLARD TOBACCO COMPANY ; PHILLIP MORRIS USA, INC; ANDERSON TOBACCO COMPF-NY LLC; 1 CANARY ISLANDS CIGAR COMPANY; 1 THE CHANCELLOR TOBACCO COMPANY, 1 UH LTD; COMMONWEALTH BRANDS, INC. ; 1 COMPANIA INDUSTRIAL DE TABACOS 1 MONTE PAZ , S .A. ; DAUGHTERS AND RYAN, INC. ; FARMERS TOBACCO COMPANY OF CYNTHLANA, PNC. ; GENERAL TOBACCO (VIBO CORPORATION d/b/a GENERAL 1 TOBACCO); HOUSE OF PRINCE A/S; INTERNATIONAL TOBACCO GROUP (LAS ) VEGAS) , INC. ; JAPAN TOBACCO INTERNATIONAL USA, INC. ; KING MAXER ) MARKETING, INC. ; KONCI G & D ) MANAGEMENT GROUP (USA) INC. ; KRETEK ) INTERNATIONAL; LIBERTY BRANDS, LLC; ) LIGGETT GROUP, INC.; M/S. DKANRBJ INTERNATIONAL, INC.; PACIFIC ) STANFORD MANUFACTURING CORPO~TION; PETER STOKKEBYE TOBARSFABRIK A/S; P .T . DJARUfll; SANTA FE NATURAL 1 TOBACCO COMPANY, LNC SHERMAN'S .; 1 1400 BROADWAY N.Y.C., INC.; 1 TOP TOBACCO, LP; VIRGINIA CAROLINA CORPORATION, INC.; VON EICKEN GROUP; WIND RIVER TOBACCO CO>lPANY, LLC; , 1 Defendants and Appellees. ) II Appellee participating manufactures and certain subsequent participant manufacturers having served and filed a motion to dismis #24311, Order Dismissing Appeal -2-

the appeal taken in the above-eotitled matter, and appellant having

served and filed a response thereto, and.the.Court having considered

the motion and response, now, therefore, it is

ORDERED that the appeal be and it is hereby dismissed.

DATED at Pierre, South Dakota this 5th day of January, 2007

/ VYYIA // avid Gilbertson, Chief Justice

I! (Justice W. .Sabers- .. disqualified.-- - .. )

PARTICIPATING: Chief Justice David Gilbertson and Justices John K. Konenkamp, Steven L. Zinter and Judith K. Meierhenry.

SUPUEN: LLILrCl STATE OF SOUTH DAKU I: PILED JAN - 5 2007 J REc~~vEC

IN TIIE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE z3v- C3.DFc - C''@ TFVENTIETH JUDICI.4L DISTRICT AT NASHVILLE

STtiTE OF TENNESSEE, by and through Paul G. Summers, Attorney General and Reporter of the State of Tennessee,

Plain tiff, 1 QF 1 v. ) Civil Action No. 98-3776-1-

BROW!Y & WILLLkiISON TOBACCO CORPORATION; LIGGETT GROUP INC.; LORILLARD TOBACCO COhIPANY; PHILLP MORRIS INCORPORATED; R.J. REYNOLDS TOBACCO COMPANY; UNITED STATES TOBACCO COMPANY; UNITED STATES TOBACCO IVLLVUFACTUKING COMPANY INC.; and UNITED STATES TOBACCO SALES AND M4RKETING COkIPANY INC.,

Defendants.

ORDER

This matter came before the Court on: (1) the Motion of the State of Tennessee for

Declaratory Order and Enforcement Order Under the Master Settlement Agreement (filed

April 19,2006); (2) Defendants Original Participating Manufacturers' Motion to Compel

Arbitration and to Dismiss or Stay Motion of the State of Tennessee for Declaratory Order and Enforcement Order Under the Master Settlement Agreement (filed September 22; 2006); and (3) Defendants Certain Subsequent Participating Manufacturers' Joinder in Motion to

Compel Arbitration and to Dismiss or Stay Motion of the State of Tennessee for Declaratory

Order and Enforcement Order Under the Master Settlement Agreement (filed September 22, The Court having received extensive briefing on these matters and having conducted

oral argurne~itand considered the exhibits filed by the parties, it is hereby ORDERED that, in

accordance with the ruling delivered by the Court fiom the bench at the conclusion of the

hearing on November 30,2006. the transcript of which ruling is attached hereto and

incorporated herein, the motion to compel arbitration filed by defendants Original

Participating hlanufacturers and the joinder therein filed by defendants Certain Subsequent

Participating Manufacturers is GRANTED. Proceedings on the Motion of the State of

Tennessee for Declaratory Order and Enforcement Order are STAYED pending completion

of the arbitration.

ENTERED this day of December. 2006.

Cp-hancellor Claudia Bonnyrnan

Approved for Entry:

- Linda A. Ross (BPR # 4 1 6 1) Deputy Attorney General Office of the Attorney General P.O. Box 20207 Nashville, TN 37202 (615) 741-1771 Fax: (6 15) 532-1 120 E-mail: [email protected] I hereby certify that a true and exact copy ofthe foregoing document has been sent by first-class mail, postase prepaid, on the 7th day of December , 2006, to the following:

John A. Lucas HUNTON & WaLL4MS 2000 Riverview Tower 900 South Gay Street Knoxville. TN 37902 (865) 549-7750 Atronzey for Philip Morris USA Inc.

James M. Doran, Jr. (Via f~lcsir?tile) Mark Pickrell RIALLER LANSDEN DORTCH & DAVIS Nashville City Center 51 1 Union Street, Suite 2700 Nashville, TN 37219 (61 5) 850-8843 (61 5) 850-8913 Attorneys for R.J. Reynolds Tobacco Conlparzy, ond Lorillard Tob~ccoConlpany

Samuel D. Lipshie BOULT, GUMMING. CONNERS, BERRY PLC 1600 Division Street Suite 700 Nashville, TN 37203 (61 5) 252-2332 Attorney for Comnzon>vealthBrands. Inc. Cornpanin hzdzlstrial de Tabacos Monte Paz, SA, Daughters & Ryan, Inc.. Farmers Tobacco Co. Of Cyntltia~ta,Inc., House of Prince .US, Japan Tobacco hzternational U.S.A., I~zc., King Maker Marketing In c., Kretek hztemational, Inc., Liberty Brands, LLC, Liggett Group LLC, Peter Stokkebye TobaksJhbrik A&, P.T. Djarum, Santa Fe Nattrral Tobacco Conzpany, htc., Slzerman 1400 Broadway N. Y. C., Inc., Top Tobacco, L.P., Vibo Corporation d/b/a General Tobacco, Virginia Carolina Corporation, Inc., And Voti Eicken Group. Kenneth L. Chernof FELLER E- LLP 1717 Rhode Island Avenue. NW Washington, D.C. 20036 (202) 912-2722 Attorney for Plzilip lCrlomk USA, Inc.

Thomas J. Frederick WINSTON & STRA\W LLP 35 W. U7ackerDrive Chicago, Illinois 60601-9703 (312) 558-7497 Attorney for Phil@ Morris USA, hc.

Ednin L. Fountain JONES DAY 5 1 Louisiana Avenue, NW Washinston, D.C. 20001 -21 13 (202) 879-7645 Attorney for R.J. Reynolds Tobacco Comnpany

Gayle Rosenstein Geron Gadd WEIL, GOTSHAL & M.4NGE.S LLP 767 Fifth Avenue New York, N.Y. 10153 (650) 802-3 11 1 (212) 310-8180 .4nomeys for Lorillard Tobacco Company

Robert J. Brookhiser Elizabeth McCallum HOWREY LLP 1299 Pennsylvania Avenue, NTr Washington, D.C. 20004 (202) 383-7336 Attorneys for Certain Subsequent Participating Manufacturer Defendants

Martin J. Smolik, Jr.. President ANDERSON TOBACCO COMPANY 5327 West First Street Greeley, CO 90634 Roberto F. Fleitas. Esq. CANARY ISLAND CIGARS COhIPANY 782 N.W. Lejeune Road, Suite 530 Miami, FL 33 126

Monika Horvathova CHANCELLOR TOBACCO COMPANY, UK,Lrd. 1b -4lpha Business Park Whitehouse Road Ipswich Suffolk 1PlSLT England

Sanjay Patel DHANRkT lMPORTS INC. 1 1731 Sterling Avenue, Suite F Riverside. CA 92503

John S. Chen INTERNATIONAL TOBACCO GROUP (LAS VEGAS) INC. 6340 S. Sandhill Road Suite 8 Las Vegas, NV 89120

Dominic Chy President KONCI G & D MANAGEMENT GROUP (USA) INC. 231 Grand Street, Suite 3F New York, NY 10013

Daisy P. Arce PACIFIC ST-WORD MANUFACTURING CORPORATION 6805 Ayala Avenue Makati City, 1227 Philippines

William Hunter, Jr. WWD FWER TOBACCO COMPANY Stoll, Keenon & Park 2650 AEGON Center 400 West Market Stret Louisville, KY 40202 -.

9-61 r-- IN TRE CHANCERY COURT FOR DAvI%~O~+'~~UN~T~j': I'iNNEsSEE TWENTIETH JUDICIAL DISTRICT AT NASHVILLE

-, I,- Jd.* I-. *. . -.

STATE OF TENNESSEE, by and --.- - - - through Paul G. Summers, Attorney General and 1 Reporter of the S~ateof 1 Tennessee, 1 1 1 Plaintiff, ) 1 Vs . ) Czse No. 98-3776-1 1 1 BROWN & WILLIAMSON -TOBACCO 1 CORPORATION; LIGGETT GROUP, 1 INC.: LORILLARD TOBACCO 1 COMPANY; PHILIP MORRIS, 1 INCORPORATED; R. J. REYNOLDS ) TOBACCO COMPANY: UNITED 1 STATES TOBACCO COMPANY; 1 UNITED STATES TOBACCO 1 MANUFACTURING COMPANY, INC . ; 1 and UNITED STATES TOBACCO 1 SALES AND MARKETING COMPANY, ) INC., 1 1 1 Defendant. 1

Excerpted Transcript of the Proceedings Before the Ho2orable Claudia Bonnyman Findings of the Court November 30, 2006

Keith R. Lemons, RPR, CRR ACCURATE COURT REPORTING Fall School Business Center 1130 Eighth Avenue South, Suite 400 Nashville, TN 37203 (615) 244-DEPO or 244-3376 APPEARANCES

For the Plaintiff: Linda A. Ross, Esquire Leslie Bridges, Esquire Depu-ty Attorney General Healthcare Division 2nd Floor Cordell Hull Building 425 5th Avenue North Nashville, TN 37202

For the Defendact John A. Lucas, Esquire Philip Morris USA: Hunton & Williams 200 Riverview Tower 900 South Gay Street Knoxville, TN 37902

Thomas J. Frederick Winston & Strawn LLP 35 Wacker Drive Chicago, IL 60601-9703

For Certain Subsequent Samuel D. Lipshie, Esquire Partic ipating Eoult, Cumrnings, Connors & Manuf a cturer Eerry, PLC Defend ants: 1600 Division Street Suite 700 Nashville, TN 37219

Elizabeth McCallum, Esquire Howrey LLP 1299 Pennsylvania Avenue NW Washington, C. C. 20004

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 For R. J. Reynolds James M. Doran, Esquire Tobacco Company and Waller Lansden Dorich & Davis Lorillard Tobacco 2300 Nashville City Center Company: 511 Union Street Nashville,TN 37219

Cecilia A. Silver, Esquire Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 (The above-referenced cause came on io be

heard before the Honorable Claudia Bonnyman, November

30, 2006, beginning at 9:00 a.m. The following Af %C f;dAI--. proc=r-P-- proceedings were had, to-wit:) 3. 6-2 +,-SI-C 6 y-Ac+&/~cr/D/ (Begin E~ce-pi.)& J k~c.A' TL~ "3 - +f-- THE COURT: Please be seated. All right. The

Court, after hearing argument, took a number of hours to -Lr~i; a eLL-1 + - ,ead%ll of the papers that had been filed

and then asked the parties, the lawyers, to reconvene at

4:OO. It is now 4:10, and the Court's now r?ady to

announce its decision.

This matter comes before che Court on the

plaintiff's application and action for declaratory order

under the Master Settlement Agreement and the

defendants' motion to compel arbitration and to stay the

litigation. The Court has reviewed the notions, the

pleadings, the exhibits, the briefs, the entire record.

The matter was argued on 11/30/2006.

The Court grants the defendants' motion to

compel zrbitration and stays the litigation filed by the

Tennessee Attorney General, based upon the following

In 1998, the 46 states, the District of Columbia the Commonwealth of Puerto Rico and four

territories, called the "Settling States," entered into

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 a Mzster Settlement Agreem?nt, the "MSA," with four major tobacco companies which were known 2s the Original

Participating Manufacturers, the "OPMs." Over 40 additional tobacco companies later joined the MSA, znd these companies are referred to as the Subsequent

~articlpacingManufacturers, that is, "SPMs."

Collectively, the tobacco companies are referred to as the Participating Manufacturers, or "PMs."

In return for a release by the Settling Stztes of certain claims against the PMs, the PMs agreed to make certain annual payments to the Settling States to fund educational foundarions devoted to educating the public about the dangers of tobacco use and to adhere to certain restrictions on their adveriising 2nd marketing przctices.

The MSA provides for an amount to be paid by the PMs to the Settling States each year. These payments, in each Settling State's share, "allocable share," is determined by an independent auditor according to the terms of the MSA.

There are a number of adjustmsnts that the independent auditor can take into account in determining each Settling State's share. At dispute in this matter is the Nonparticipating Manufacturer, "MPN," adjustment.

An NPM is a tobacco manufacturer that does not

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 participate in the MSA.

The OPMs were concerned that such NPMs would gain a competitive advantage in the marketplace due to restrictions placed on PMs that did not apply to the

NPMs. To address this concern, the MSA encourages the

NPMs to join the MSA and provide NPM adjustments under certain circumstances which can reduce the amount the

PMs are required to pay to the Settling States each year and which reduce the damage done to the PMs by competicion from the NPMs.

The Settling States require that all NPMs selling cigarettes in the state place a certain amount of money for each cigarette sold into an escrow account.

This requirement is effectuated through a qualifying statute, which all Settling States enacted.

Payments into escrow accounts are not required if the tobacco company joins the MSA as a Subsequent

Participating Manufacturer. To compensate for any unfair advantage that the NPMs might gain over the PMs, because they're not making payments under the MSA, an

NPM adjustment was creared.

In order for the adjustment to apply, the independent auditor must make three determinations:

One, the PM suffered a loss in market share; two, the

PM's participation in the MSA was a significant

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 7

factor -- that is, otherwise known as "significant

factor determination" -- in the loss of market share:

and, thrse, that the Settling Stete at issue did not

have a qualifying statute in full force and sffect or

did not diligently enforce the statute during the year

preceding the year of paynent.

The independent auditor, in calculating the

2004 payment, determined a narkec share loss for 2003.

Tennessee asserts that same of the PMs refused to pzy

the full zmount owing in April of 2006, and reduced

their MSA payments based on an offset from the NPM

zdjustment not yet recognized by the independent

auditor.

On March 1, 2006, a significant factor

determinetion was issued by The Fira, a group of

economic consultants. Pursuant to the MSA, satisfying

the second requirement for a 2003 NPM zdjustment, the

independent auditor did not find that any of the

Settling States had failed to enact or diligently

enforce qualifying statutes.

The third condition to an NPM adjustment

application for 2003 was not found, but the independent

auditor, in examining the diligent enforcement of

qualifying statutes by Settling States, presumed such

enforcement if the state had enacted a qualifying

ACCURPlTE COURT RZPORTING (615) 244-DEPO OR 244-3376 stztute.

The OPMs objected to the finding of presumed -- I'm sorry -- the PMs objected to the finding of presumed diligent enforcement, based on passage of a qualifying statutz. The PMs assert that the entire

issue of diligent enforcement must ba decidcd in

arbitration, because the PMs, in effect, dispute that

any of the states are diligently enforcing their

qualifying statutes and disputes the independent

auditor's decision, to date, that no NPM adjustments are

due.

As the Court stated earlier, the PMs believe

an adjustment should have been made for 2003. The State believes the PMs withheld a portion of the amount due in

2006, depositing the monies in escrow, based upon the

NPM adjustment allegedly due.

The piaintiff then brought this action,

seeking a declaration that it has diligently enforcsd

its qualifying statute during the entire calendar year

of 2003, and an order prohibiting the PMs from

withholding any portion of Tennessee's share due in

April 2006.

The dsfendants then filed a motion to compel

arbitration of this dispute and to either dismiss or

stay litigation.

ACCUMTE COURT REPORTING (615) 244-DEPO OR 244-3376 The decision announced by the Court addressss the issue of whether there is a dispute and whether the dispute arises by ihs work to be done by ths independent auditor. State courts, ger the MSA enforcement provision, have exclusivt jurisdiction for the purposes of implementing and enforcing the MSA, as do such

Settling States, and except as provided in Subsections

IX(d) , XI (cj , and XVII (d), and ~xhibit0, shall be the only court to which disputes under this agreement or the consent decree are presented as to such Settling States. MSA Section VII (a) -- that is MSA Section VII (a). The MSA further provides that enforcement is to be had in state courts, except as provided in

Subsections IX(d), XI (c), VII (d), and Exhibit 0, with respect to dispu~es,alleged violations, or alleged breaches within such Settling State. That's at MSA Section VII (c). Tennessee courts, therefore, have exclusive jurisdiction over the implementation and enforcement of the MSA and consent decree as they relare to the State of Tennessee as a Settling Stat?. The parties, however, have agreed that the courts do not have jurisdiction under the explicit terms of the MSA in those areas covered by Sections IX (d), XI (c), VII (d), and Exhibit 0. Section XI is ~aptioned"Calculations,

ACCUm-TE COURT REPORTING (615) 244-DEPO OR 244-3376 Disbursements, and Disbursements of Payments."

Subsection XI (c) states, "Resolution of disputes: Any dispute or controversy or claim arising out of or relacing to calculations before, by, or any determination made by zhe indepzndent auditor, including, withou; limiraCion, any dispute concerning the operation or application of any adjustments, reductions, offsets, carry-forwards and allocations described in Subsection IX(j) or Subsection XI(j) shall be submitted to binding arbitration before a panel of three mutual (sic) arbitrators, each of whom shall be a former Article 111 federal judge."

Subsection IX is captioned "Payments."

Subsection IX(j) is entitled, "Order of Application of

Allocations, Offsets, Reductions, and Adjustments." It conrains the following: "The NPM adjustment shall be applied to the results of clause fifth, pursuant to

Subsections IX (dl (1) and IX (d)(2) . That ' s MSA Section

IX(j) (6th.)

Subsection IX(d1 contains the calculation provisions for the NPM adjustment. Subsection IX(d)(2) addresses the determination of diligent enforcement of qualifying statutes by Settling States.

The Court also rsviewed Subsection XI (d) (2) of the MSA. That section states: "The preliminary

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 calculations which the independent auditor must deliver to each noticed party are described as" -- in quotes -- "detailed preliminary calculations of the amount due from each participating manufacturer and of such amount allocable to each entity :or whose benefit such payment is to be made, showing all applicable offsets, adjustments, reductions, and carry-forwards, and setting forth all the information on which the independent auditor relied in preparing such preliminary

calculations. "

The Court finds that the language of the MSA provides that disputes related to determinations made by the independent auditor are subject to arbitration if the dispute relates to zn NPM adjustment. The determination of the independent auditor includes the application of the NPM adjustment, which the Court finds means "using" -- which the Court understands to mean

"using the adjustment." This would be a technical or rnzchanical decision.

And Subsection XI (d) (2) states that the independent auditor also decides whether the NPM adjustment is applicable. This is not a mechanical or technical decision, but a substantive decision.

Consequently, the Court finds the independent auditor decides, rightly or wrongly, not just how the NPM

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 fG, 12 adjustment applies, but if it applies.

Diligent enforcement questions are not removed from the independent auditor's decision-making and placed with the Court. Several of the courts based -- several of the courts, finding that arbitration was necesszry, based their dscision on the need for uniformity. And those courts found or assumed or understood there would be one arbitration panel. However, thz language of the MSP does noc point to one arbitration panel for all diligent enforcement decision-making for the 2003 year.

It mzy be that the PMs will choose the same arbitrater for all of its arbitrations regarding diligent enforcement; however, and in the context of having one arbitration panel which will address all of the states1 diligent enforcement and compare all the states' efforts KO diligently enforce the quslifying statutes, it is somewhat disturbing to think that the

PMs, without receiving zny information on he subject, assume that none of the states havs been diligently enforcing the qualifying statutes.

The Court is not aware of language in the MSA and has not been convinced by the arguments and the papers and the record supplied by the defendants in this case that one arbitration panel is contemplated. The

ACCUFLATE COURT REPORTING (615) 244-DEPO OR 244-3376 Court is not -- the Court 2150 cannot undtrstand, and

does not understand that the PMs have decided that they,

that the PMs, will contest and require proof and

arbitration on each and every state's efforts to

diligently enforce its staxute.

Consequently, the idea and ths fear that there

will be 52 arbitrations seems like an unnecessary

conclusion, because several of the other courts have

expressed -- have expressed the finding -- actually made

findings that one arbitration panel will be ussd to

address, globally, all of the diligent enforcement

issues.

This Court -- and given the argument of the

PMs that this has to be done this way, otherwise there

will be chaos, and there must be a standard way of

analyzing all of the different states' compliance --

that is, compliance with a provision that they must

diligently enforce the qualifying statute -- this Court

finds -- probably should make a finding on the matter.

And so to the extent that the Couri should

make a finding on the matter, the Court finds that it

seems wise and efficient to have an arbitration pans1 --

maybe the parties, PMs and the -- would choose one

arbitrator, would hold their arbitrations -- and the

Court doesn't have the power to decide this -- but would

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 kold their arbitrations in the various scates wherz --

states where the PMs have reason to believe that the

statutes have not been diligently enforced.

And, surely, the PMs are not making the global

decision at this point tha~there are no states

diligently enforcing their statutes. And so the idea

that this is going to be a terrible rhing with a whole

lot of -- 52 arbitrations -- seems, really, to have

no -- it hzs no basis in this record that's been

developed so far.

So, Lawyers, if there's no other housekeeping

issue or anything I've forgotten that I should address,

1'11 be glad to hear you.

MR. FREDERICK: Nothing else, Your Honor.

MS. McCALLUM: Nothing from the SPMs, Your I ' Honor.

THE COURT: So we are now adjourned.

I (End Excerpt. )

(Hearing procesdings conciuded at 4:26 p.m.)

RCCUIIATE COURT REPORTING (515) 2 44-DEPO OR 244-3376 STATE OF TENNSSSEE ) 1 COUNTY OF WILLIAMSON)

I, KEITE R. LEMONS, Registered Professional

Reporter and Notzry Public in and for the State of

Tennessee at Largo,

DO HEREBY CERTIFY ih~tthe foregoing proceedings were taken at the time and place set forth in the caption thereof; the witness therein was duly sworn on oath to testify the truth; tho proceedinqs were

stenographically reported by me in shorthand; and the

foregoing proceedings constitute a true and correct

transcript of said proceedings to the best of my ability.

I FURTFER CERTIFY I am not a relative or employee

or attorney or counsel of any of the parties hereto, nor

a relative or employee of such attorney or counsel, nor do I have any interest in the outcome or events of this

action.

IN WITNESS WHEREOF, I have hereunto affixed my

signature this 1st day of December, 2006, at Nashville,

Davidson County, Tennesste.

Notary Public at Large State of Tennessee

My commission expires: June 15, 2009

ACCURATE COURT REPORTING (615) 244-DEPO OR 244-3376 Case 2:96-cv-00829-DB Document 439 Filed 1211512006 Page 1 of 2

FILED U.S DlSTRlCT COURT

BRENT V. MANNING iDOb DEC 15 P 1: 35 MANNING CURTIS BRADSHAW & BFDNAR LLC Third Floor Newhouse Building DISTRICT OF UTAH 10 Exchange Placc BY:.-- Salt Lakc City, Utah 841 11 DEPUTY CLERK Telepbonc: (801) 363-5678 Attorneys for Defendanfs R.J. Reynolds Tobacco Company Lorillard Tohncco Company ALAN L. SULLIVAN SNELL & WILMER LLP Gateway Tower West 15 West South Temple, Suite 1200 Salt Lske City, UT 84101 Telephone: (801) 257-1900 Attorneys for Defendant Plzilip Morris USA,Inc.

JOHN P. ASIITON VanCon Bagley Cornwall& McCarthy 50 South Main Street, Suite 1600 Salt Lake City,UT 841 14-0350 Telephone: (801) 532-3333 Attorneys for Certain Subsequent Pa~iripalinglhnuficturers

IN TIIE UNJT!2D STATES D1STR.I- COURT FOR THE DISTRICT OF UTAH, CENTRAL. DIVISION

'ffIE STATE OF UTAH, a rel. MARK L. ORDER GRANTING PARTICLPATIPI'G SHURTLEFF,in his capacity as AlTORNEY MANUFACTURERS' MOTION TO COMPEL GENERAL OF THE STATE OF UTAH, ARBITRATION AND TO DENY OR, N THE ALTERNATIVE, STAY ALL PROCEEDINGS Plaintiff, ON THE STATE'S MOTION TO ENFORCF, TIIE XfSA - VS - Case No. 2:96CV-0829 RJ. REYNOLDS TOBACCO COhIPANY, el al.. Judge Dee V. Bmson Defendants.

The Court, having reviewed and considered the parties' written and oral arguments, grants Defendant Original Participating Manufacturers' Motion to Compel Arbitration and to a

Case 2:96-cv-00829-DB Document 439 Filed 12115/2006 Page 2 of 2 I

Deny or, in the Alternative, Stay all Proceedings on the State's Motion to Enforce the MSA and

certain Subsequent Participating Manufacturers' Joinder in that Motion. As the Court explained

at the close of the December 8, 2006 henring on the motion, arbitration of the parties' dispute

concerning the 2003 NPM Adjustment, including the issue of the State's diligent enforcement, is

required by the plzb and unambiguous language of the Tobacco Master Settlement Agreement's

arbitration clause, MSA 5 XI(c). Therefore, pursuant to the Federal Arbitration Act, 9 U.S.C. 5

3, the parties' dispute concerning the 2003 NPM Adjustment is hereby stayed in this Court until

such arbitration has been had in accordance with the terms of the MSA.

'--?c, DATED this /;)-day of Be C. ,2006.

BY THE COURT:

.-.--\ Ho9rable Dee Senson

Approved as to Form:

STA'I'E OF UTAH MARK L. SHURTLEFF Utah Attorney General

b&dd5- ense en \ Katharine H. Kinsman Attorneys for Plaintiff Jan 18 2007 9:42pN Clerk of District Court 307-721-2520 - .;

STATE OP WYOMDiG ) IN THE DISTRICT COURT > ss comOF ALBANY ) SECOND JUDICIAL DISTRICT

STATE OF WYOMING, ut. rel.. PATRICK J. CRANq AlTOIENEY GENERN,

Plaintiff,

PEPMORRIS USA, INC., a Virginia corporation;

RJ. REYNOLDS TOBACCO COMPANY, a New Jasey corporation;

LORELARD TOBACCO COMPANY,a Delaware corporation; . . Defendants.

ORDER GRAlVTING MOTION TO COMPEL ARBITRATION '

THIS M4lTER having come before the Court on Defendants' Application and Motion

to Enforce the Arbitration Pzovisions of the Master Settlement Agreement (filed October 27,

2006) and the Subsequent Participating MrmWJoinder in the motion (filed October 30,

2006), the Court having received 111 briefing of thii matter and having conducted oral argument

on Janusrry 3,2007,

IT IS HEREBY ORDERED that the motion to compel arbitmtion is granted, for the

rwsons set for for& in the Comt's Janunry 8,2007 Decision Letter (attached hereto). Further

proceedings in this Court on the motion are stayed pending completion of the mbitration

DATED: this &day of 3anuary. 2007. Jan 18 2007 9:42PM Clerk.of District Court 307-721-2520

THE STATE OF M/YOMING SECOND JUDf CiAL DISTRICT

JEFFREY A. PONNRL amraclJUD6E

KEP(NA K JACKSON COIiRlREFmER TOW RA. KRlCKEN Sw'f-Anow

DECISION LETTER

Douglas J. Moench Thomas J. FredeTick Robin Sessions Cooley WDETON& SI'lzAWN,LLP OFFICEOF ATIIX.N~EYGENEML OF WYO~~ING 35 Vl. Wacker Dr- 123 State Capitol Chicago, IL 60601 Chey me, WY 82002

Eliibotb McCallwn Kim D. Cannon . HOWREYLLP Kate M. Fox 1299 Pennsylvania Ave., NW DAVIS& CANNON Washington, D.C. 20004 P.O. Box 728 Sheridan, WY 8280 1

Michael D. Smith Thomas A. Nicholas, Ill HOLLAND & HART, LLP Hm& APPLEGATE,P.C. P-0. Box 1347 1720 Carey Ave. Cheyenne, WY 8200 1 Cheyenne; WY 82003

Re: St- of Wjwming, tx ad Patrick J. Crank, Atiorney General IS. Philip Morris, USA Albany County Docket No. 26718

Dear Counsel:

The above-entitled matter came before the Court on Original Participating Man@acturers'Application md Motion to Enforce the Arbitration Provisions of the Mmfw SenZement Agreement and to Compel Arbitration, filed w October 27,2006' and argued before the Court on January 3,2007. Having considered the aqpmmts of ?he

' On October 30.2006, adciidod parks filed their Subsepuenr Portiu'panirg Manufackven' Joinder in Wginal Porticrjloling Manu&mrm' AppJicadon and Mohn to Er$om the Arbitration Provisions of he Matte? WIemtnt Agreemat. Jan 18 2007 9:42PM Clerk of District Court 307-721-2520

Douglas J. Mmch Robin Sessions Cooley Tho- J. Frederick EIiAth McCellum KimD.Cannnn Kase M.Fox Micbael D. Smith ThorrPls A Nicholas, KII -2 Jsnwy $2007

.parties and the record herein, and being otherwise filly advised, the Cowl finds and orden as set fdbelow.

FACTS

Some years ago, forty-six stam, the District of Cohunbia, Puerto Rico, and fonr U.S. territories (collectively, the Settling States) sued the country's four largest tobacco manufkchrers, RJ. Reynolds Tobacco Compaoy, Inc. (RJR); LorilJard Tobacco Company, Inc. (Loniard); Philip Manis, Iuc. (Philip Manis); and Brown & Wrlliamsun Tobacco Company (Bm& WW)? conectively refened to as the Original Participating Manukturm (0pMs3),based on their concerns about state payments of health care costs associated with tobacco usage. Quite simply, the Settling States' public health care costs resulting from tobacco-related illnesses were increasing while fbnding fnrm Congress for public health care programs was decreasing-

In the end, the Settling SWand the tobacco .companies setfled the dispute in a complex settlement agreement referred to as the Master Settlement Agreement WA). In Wyoming, the MSA was approved by entry of a Consent lkmze and Final Jtrdgrnenf entered by this Court on Decedm 28,1998.

The MSA released past and future claims by thest Settling States against the PMs for the recovery of the health care costs that the Settling States amiuted to tobacco- related illnesses. Also pursuant to the MSA, the OPMs agreed not to target youth in their tobacco advertising and to cease certain other marketing techniques. Additidly, tk OPMs agreed to pay an annual payment to the SWiStates for tobacco-related health care costs." In exchange, tbe States agreed to continue their efforts to reduce yd tobacco use and to promote public health.

'In 2004, Brown 62 WiQiamsvncambind with R31C

'The OPMs were later jaimd by htyaddhd tobuxo c-a, referred to as '%bapmt Prdciphg MtauClcbma%" or SP=. Together, tbt OPMs and SPMo are J-&YIWI fo aimply as Pareiripating (PMs). 0~~smakcan~l~ymcntiotoanEscr~wAccaost.ThtMSAi~a~unitarypHymevtcrb~ on each PM. That pa- is &en allocated aman@ the Safing Sbtes. Tha PMs' mlpaymca ddigzthn is cddaled and detenrrincd armually an'a donwidc basis by Mc WqauhtAudilnr. Jan 18 2007 9:42PM Clerk of District Court 307-721-2520

Douglas J. Moench Robin Sessions cooley Thornas 5. Rodcrick ~li~ibethMcConm Kim D. Cmm Kate M. Fox Micbacl D. Smith Thomas A. Nicholas, III Page 3 January 8 2007

Under the MSA, an Independent Auditor ctisburses annual payment from each of the PMs to the States. The Auditor is charged with making all calculations and clebmb&ons that are required to determine the amount of payments due under the MSA, including the amount and allocation of any adjustments. The "starting point" for determining any one PM's annual payment obligation is the aggre- payment obligation for all PMs as set farth in the MSA~The Auditor then allocates the annual payments made by all PMs among the Settling States accordiag to "Allocable Sh" previously agreed to by the Stata.

However, the MSA contains a provision whereby, if the Anditor &mines that PMs have suffered a "Market Share Loss," an todependent economic consulting firm then must review whether the MSA was a "significant factor" in causing that Market Sbare ~oss.~If so, then the PMs' meypayments are subject to a Non-Partici-g Manufacturers' Adjustment (the NPM Adjustment), which serves as a CT& against future payments. More specifically, the MSA (at 5 IX(d)) provides for the NPM Adjustment if: (1) PMs' aggregate market share decreased by more than two percentage points as compared to 1997 levels and (2)an independent firm of em&c cunsul.tants finds that the MSA was a "significant fhctoF" contniuting to that market share loss.

The MSA also provides for the following qualifier oa the application of the NPM Adjustment:

A Settling State's Allocated Payment shall not be subject to an NPM Adjustment: (1) if such Settling State continuously had a Qnalifying Statute7'. . . in fun force and effect during the entire calendar year immediately preceding the year m which the payment in question is dm, and diligently enforced the provisions of such Wte during the entire calendar year.

TPt PMs' payment obligutiow are wlcolaad on a ruCionwZe basis ta-axlon MI nationwide sale3 of cm

b Tke Adjustment was incrrrporatcd into the MSA be- P51s were wnccrned tlw thc rum- mho m3m~tmac(wbowcremtapbjecttohMSA)would@rmPnfair~advantage. A~,~~ Adjustment served m ''Ievcl heplayfng field" betweco thw tobsca, oompaniss thaL in the MSA and those thdid not 7~~-ing~~"balaw(fist~cdtively~~~b~disadvanta~that~~~ aptritocc vh4-vis NPM9 within sPch Settling Statc as a redof beMSA." MSA 5 tX(dX2)O. Wyombg's ~Stamwar~m2m. Jan 18 2007 9r42PM Clerk of District Court 307-721-2520

Dwylas i. Mocmh Robin Sessions Wey Thomas J. Fredaick Elizabeth McCallmn I(im D. Cannon Kate M. Fox Mckl D. Smitl~ Thornas A Nicholas, EI Page 4 JHnua~y8,2007

MSA 3 IX(d)(2)(B) (enq>bsia added). So, ifa Settling State diligently enfdits Qualifjbg Statute, its share of the PM annual payment is not reduced by the NPM Adjustment, Instead, that State's share of the NPM Adjustment is reallocated among 0th Settling State6 that either did not have a Qualifying Statute or did not Wgcntly enforce that Qualifying statute?

II. The MSA's Arbitration, Jurisdiction, and Enforcement Provisions l- The MSA specifically addresses jurisdiction and enforcement issues. Section X(c) of ttre MSA, entitled 'Xesohtion of Disputes," provides:

(c) Resolution of Disputes. Any dispute, ~troversyor claim arising oat of or relating to calculations performed by, or determinations made by, the Independent Auditor (including, without limitation, any diqmb concerning the operatio'Il or application of &y of the adj~stments, reductions, ofliets, carry-forwards and allocations desm'bed in subsection IXO or subsection XI(i)) shall be submitted to binding arbitration before a panel of heneutral arbitrators, each of whom shall be a former Article III federal pdge.

MSA 4 X(c) (emphasis added).

With respect to court jurisdiction to consider other MSA-relatrxl disputes, the agreement provides:

Jurisdiction. Each Participating Manufacturer and each Wing State acknowledge[s] that tbe Court: (1) hss jurisdiction over the subjtxt matter of the action . . . in such Settling State and over each Participating Man&-, (2) shall retain exclusive jurisdiction for the pmposes of implementing and enforcing this Agreement and the Consent Decree as to such Settling Statc; and (3) except as provided in subsections M(d), Xl(c) and XM(d) and Exhiiit 0,shall be the onfy comt to which disputed

9 AS a result, a diligent eatbrctmcnt debmhath in my one Sctfling Ststc inpa& thc payments received by ohState when an NPM Adjustment is a~ be. Jan 18 2007 9:43PM Clerk of Ilistrict Court 307-721-2520

Dwglas J. Maench Robin scssims Cooley Thomas J. Fredrrick mbethMECallum Kim D. Cannon Rate M. Fox %hael D. Srnith Thomas A. Nicholas, III Page 5 January 8,2007

under this Agreement or the Consent Decree are presented as to such rc Settling State.

MSA 9 VTI(a) (emphis added).

Finally, the MSA also provides:

Enforcement of this Aereernent

Except as provided in subsections wd),XI(@, and XVII(6) and Exhibit 0, my Settling State or Participating Manufactmer may bring an action m the Court to enforce the terms of this Agreement (or for a declaration consfmi;lg any such tenn('Declmt0ry OM')) with respect to disputed, alleged violations or alleged breaches within such Settling State.

MSA 5 mc) (emphasis added).

III. Events Leading to ~oti&to Comoel Arbitration

In 2004,.the Auditor determined that PMs suffered a Market ShLoss for the 2003 sales year. In April 2005,the signscan t fkctor proceeding was initialed by the PMs and the Settling States. Tn March 2006, an economic consulting firm determjned that the MSA was "more likely than not" a significant factor in the PMs' Market Share Loss for 2003 .I0

The MSA provides that "[athe Firm aedthat the disacivanlages experienced as a result of the provisions of this Agreemt were a significant fitctor contributing to the Market Share Loss for the year in question, the NPM Adjustment described in subsection JX(d)(l) shall apply[.]" MSA 9 IX(d)(l)(C). As a result, the PMs urged that the 2003 NPM Adjustment must apply agains!, the April 1,2006 payments given the significant facbr decision. The Stab argued, to tbe contrary, hat the Auditor should continue to presume "diligent enforcement" by each state with a Qualifying Swte, thereby negating any NPM Adjustment.

On Maqh 7,2006,the In-dent Auditor issued its "preliminary calculations" as to the 2006 payments. Therein, the Auditor stated:

Under the MSA, this ~tuminatimis bii Jan 18 2007 9:43PM Clerk of District Court 307-721-2520

Douglas J. Momch Robin Sessions Cooley llxtms I. Frederick EJizabdh McCaJhm Rim D. Cannon ICE& M Fox MiChad D. Smitb Thomas A Nicholas, Ill Pagc 6 Jmuary 8,2007 r The Independent Auditor has received infoamtion request responses from some PWdenying that some Settling States have "continuously had a Qualifytng Statute in full force and effect during the entire calendar year immediately preceding the year in which the payment in qdmis due [1999-200%, and diligently enforced the provisions of such statute during such entire calendar year." Subsection IX(d)(Z)B) of the MSk The Settling States do not agree wid this position. The Independent Auditor is not charged with the responsibility under the MSA of making a determinatim regarding this issue. More importantly, the Zndcpendmt Auditor is not qualified to make the legal determination as to whether any particular Settling State has "diligently enforced" its Qualifying St2ttut~. Additionally, the Independent Auc3tor is aware of certain litigation that is ongoing related to this issue. Until such time as the pdes resolve this issue or the issue is resolved by a trier of fact, the Independent Auditor will not modify its cmntapproach to the calculation.

Notice $Preliminary Calcdations for the Tobacco Lirigation Master Set timent Agreement, at 5 (March 7,2006).

On March 29,2006, the Auditor issued its Notice ofFinal Calcrrhthfbr the Tobucco Litigation Master Settlement Agreemenf SubsectrctronIX(c)(l) Accozarf Pvmem Due April 17, 2006. Thercin, the Arzditor stated:

Additionany, the Independent Auditor bas received disputed from some PMs denying that some Settling States have "continuously had a Quatifying Statute m fall force and effect dufing the entire calendar-year immediately preceding the year in which the payment 'm question is due (1999-2005), and diligently enforced the proem of such statuk during such entire calendar year." , . . Until such heas the parties resolve this issue or the isare is resohed by a trim of fact, the Independent Auditor will not modify its current appmach to the application of the NPM Settlement Adjusmmt

Id at 4-5. Essentially, this decision meant that the Auditor would continue bpreszune that each Settling State had diligently enforced its Qualifying Statute (until such time it was actually determined whether such was the case or not). Jan 18 2007 9:43PM Clerk of District Court 307-721-2520

Doughs J. Mmch Robin S-rnrs Cooley Thomas J. Frcdcaicl Elizabeth MFCdum KimD.cannm Kate M. Fox h4icbel D. Smith ~homasA ~icho~tis,LII page i Janway 8,2007 On April 10,2006,the Phis served notice that they disputed the Auditor's final dculatian based on the Auditor's fZlure to apply the NPM Adjustment. Beginning m April 2006, thirty eight states fled motions (in their individual state courts) for declaratory judgment that they had "diligently enfmed" their Qualifying ~tatutes." In response, the PMs filed motions to compel arbifmtb. On Sept- 13,2006,the PMS requested that Wyoming arbitrate the dispute under MSA $ X(G).On September 21, 2006, Wyoming refused the demand for artritratioa

The issue of arbiMon is now before this Court. Additional fads will be discussed below as necessary.

DISCUSSION

I. Wvomine's Subatantive Rule of Law Reeardin? Arbitration

Wyoming Statute $ 1-36-103 provides that: "A written agreement to submit any existing or future con?mversy to arbitration is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity forthe revocation of the contract." Id The Wyoming Supreme Court favors arbitration, stating &at it "is embedded in the public policy of Wyoming." BCof morning, Corp. v. City of Cheyenne, 843 P.2d 1 190, 11 94 (Wyo. 1992) (internal citations omitted). The court also stated that it will resolve any doubts concerning an arbitration agreement in favor of ditrability. American Nut'[ Bank v. Cheyenne House. A&, 562 P.2d 101 7,1020 (Wyo. 1977).

This Court favm arbitration or other forms of alternative dispute resolution. Stewart Tile Guaranty Co. v. I"-, 2003 RW 3 1, P7,64 P. 3d 739,17 (Wyo. 2003); Simon v. Teton Board ofRealtom, 4 P. 3d 197, 201 (Wyo. 2000). Akematjvt dispute nzsoluti~allows parties to resolve their diffaenoes in a less expensive and more timely manna than traditional A litigation doa. Stewart Tirle Guaranty Company,1 7.

" However. heState of Wyoming did no: We a deckatmy judgment donbased on its nnchbidhg M PM hasindiW~WyorninghasfailcdtodiligcntIyerrf~r~titsQuatifying~~ 3an 18 2007 9;44PM Clerk of District Court 307-721-2520

Douglas 5. Moench Robin !k&ons Cooley Thomas J. liederick Etbbdx McCallum Kirn D. Cannon Kate M. Fox Michael D. Sndtb Thomas A. Nicholas, III Page 8 January 8,2007

When presented with a dispute over arbitrability, the Comt is reminded that the issue is a matter of contract interpretation. T & ~l4Propertie.sv. ZVf;R,661 P.2d 1050, 1044 (Wyo. 1983). Accordingly, this Court must look to the parties' intent wfien interpreting the MSA. Jackson SFnk bank v. Homar, 837 P2d 1083,1089 (Wyo. 1992)-

IX. Dispute With Wyoming

The Stale of Wyoming first argues that, at this point, no PMs have asserted that Wyoming failed to diligently enforce Qualifjing ~tatute.]~Further, Wyoming has not filed a declaratory judgment action nor has it sought any other detwmimtian as to its agent enforcement of its QualLfjing Statute- Qnite simply, the State argues, the arbitration demand is prematme. The State further argues that aibitratian is mapptopriate because there is no "dispute": The Auditor has not made any diligent enfoment detemimtion.

With this last assertion in particular, the Court disagrees. The Auditor has made a detezmination to continue to apply a presumpfion of diligent enforcement when considering the application of the NPM Adjustment The PMs dispute tiis approach .to the NPM Adjustment and its direct impact on the calcuiation (and determination of the mudpaymmts owed by the PMs). This detnminatian resulted in a $1.I billiun mual payment that the PA& assert should be rehded them.

Further, there is a very real dispute as to whether Settling States &e diligently eaforcing their Qudifjrmg Statutes. And, regardless of whether any PMs have asserted that Wyoming, specifically, is one of those states, Wyoming is directly ixpcted by any determinations as to whether other States are diligently enforcing their Qualifying Statutes given the language of the MSA that reallocates the PMs' annual payment based on the NPM Adjustment and taking into corisidmtion diligent enfoxcement of Qualifling ~tatates.'~Additionally, by filing its arbitration demand, the PMs enlisted Wyoming, albeit involuntarily, in this dispute. The same situation has occumd in other states. See, e-g.. Sfate v. PfzilipMorris, Inc., 2005 WL 2081763,35-37(dknn.. Super, 2005).

'' There is no dispute rhst Wyoming had a Quafying Statute m efktat the requln'ttt period of b.

" The Smtc of Wyoming wishes, apparently, t~ *opt our of any abitratioa regarding diLigent enEoroement tfowmr, wben almost ewxy otkr stak that bas con.rht issue will be mcipating m~~sit appears the wiser choice fbr Wyoming to actively in these proceedings so xi to protect its inters& io&~g what appas to be the inmitable rsult ofa naLianwidc "diligem enforccmenz" ik&Wn. Jan I8 2007 9:44PM Clerk of District Court 307-721-2520

Douglas J. Moench Robin Sessions Cooley Thomas I. F&ck ElizabethMcCalhrm Kim D. Carmon Kate M. Fax Micbaei D. Smith Thomas A. Nicholas, III Page 9 January 8,2007

While the Court is sympathetic with much of what the State asserts, the fiict remains that one of the disputed isgues is'whether the Auditor appropriately applied a presumption of diligent enforcaneat. By its very involvement as a Settling State, Wyoming has a stake in this issue and certainly will be impacted by an arbitration decision as to Werthe Auditor should continue to apply this presuruption when determining the impact of the NPM Adjustment. For that reason alone, the arbitdion demand is timely and pertinent'4

III. Arbitration: The Plain Langna~eof the MSA

Wyoming cowts are bound to consider the "plain languagen of an arbitration clause in detezmining whether the dispute slould be arbitrated. See Pandhde Eastem P@e Line Co-v. Smith, 637 P.2d 1010,1024 (Wyo. 1981). "No party is required to arbitrab a dispute unless the parties have bargai~edfa this procedure as a method of ~esolve."Hot SpTing County Sch. Disl. No. I v. Snube Corn Co., 7 15 P.2d 540,547 (Wyo. 1986). See also Am. Natal Bank of Denver v. Cheyem Housing Authurity, 562 P.2d 1017,1020 (Wyo. 1977).

The State of Wyoming argues that the approach dictated by the MSA is to apply to the individual Settling State's coust for a declaration ''construing any such term respecting disputes, alleged violations or alleged breaches[.]" MSA $ VII(C)(I). In short, the State limits the dispute to one of "diligent eaforcemmt" and asserts tbat the issue is not one intenckd for arbitration. However, the diligent enfmentdispute is simply not severable from the ovdlNPM Adjwtment determination. Perstwive authority from sister jurisdictions places &is argument in a different light:

14 ORCcowl appropriately nmunsriPs the situation as follows:

An argument can b@ made bat, basically, [the Indtpendcnt Auditor] appears to bc talring the poaitionthatitcarmotcak~ardctermiaowhctkanNPM Adj~istobcappUed~~n bdqadml -on is d re- to the epplicahility of Section IX(d)(Z)[B). On tbc otk hand, it can be aqwd that [the Audioor] has accepted tht positioa of the Natiod Association of Atromcys Geaeal that thtrr: is a '"legal presumption' .. . ihat public officers. .. are~thfidlydbrcing.. ."statutesin 'fdfixccand e&ctnaudtfndthc budenis onthPMsfo nbotthstprearmptiun. ~ofhDwituc~d,&iscle~r~adispukcxisls between tk pader amder the MSA and that that dispute robbs to [tbe Auditar'~]vzhsal. or inability, far wkstever rcason, to detamine whether tire Phis m entide to rc~civcan NPM A&&mcnt Jan 18 2007 9:44PM Clerk of District Court 307-721-2520

Douglas J. Moench Robm Sasions Cooley Thomns J. Frederick Elizabeih Mc Canurn Kim D. Camon Kate h4.. Fox Michael D. Srnith ~bomasA. ~ichotas,rn Page 10 Jauumy 8,2007

The diligent enforcement of a Qualifying Statute has no apparent relevance to any provision in the MSA her than those regarding the NPM adjustment. A dispute over diligent enforcement arises out of a determination by the Independent Auditm whether to apply the NPM adjustment. The only result of a ruling regarding the State's diligent enforcement of its Qualifying Statute will be to determine whether the CNpW adjustment ought to be applied The application of adjum~nts, inch&ng the NPM Adjustment, is a matter specifically resenred to tbe Independent Auditor and the Independent Auditor determined that it should not apply. A cWlmge to that determination, and the in;tispdle underlying determination of whether the State diligently cnfonxd its Qualifying Statute, belongs before the arbitration panel contemplated by the MSA.

Nao Hampshire v. Phil@ Morris USA, No. 06-E-13,at 6-72 (N.H. Super. Ct. June 5, 2006), reconsideration denied (N.H. Super. Ct July 17,2006). Other states have agreed-

The diligent enforcement detdation is mentianed in the MSA only as part of the NPM Adjushnent mechanism - it serves no other role. Indad, it is inextricably linked with the NPM Adjustment because the diligent enforcement determination necessarily controls the outcome of miy NPM Adjustment . . .

The Independent Auditor in its Final Notice determined tbat it would continue to apply its presumption that the States have diligatly enfd their Qualifying Statutes. In other words, there has, in fact, been detemimtion by the Independent ~uditoras to the diligent enforcement and this dispute arising out of that determimitian must, by the tenns of W MSA, be arbitrated.

Thus, this Motion cannot, as would be convenient to the State, be recast as only de- diligent enforcement

Idaho v. Phil@ Morris, hc.,No. CV OC 97 03239D, at 8-9 (Idaho Dist. CX June 30, 2006) (emphasis added); reconsideration denied (Idaho Did Ct. July 28,2006)

In direct opposition to the State of Wyoming, the PMs argue that this dispute should be arbitrated because it involves a direct challenge to the Auditor's calculations L

Jan 18 2007 9:45PM Clerk of District Court 307-721-2520

Douglas J. MsKnc h 'Robin Sessic~iCoaley . . Thomas 3. Frederick Elizabeth McCallum KbD. Camon Kate M. Fox Michnel D. SITdth Thomas k Nicholas, KII Page 11 Jamnq 8.2007

and determinations. Twenty-eight of the twenty-nine MSA courts that have considered the rnatter thus far have ordered arbi t~ation.'~The State of Connecticut provides an excellent explanation of the situation:

In light of this construction, the parties' underlying dispute clearly appears to be arbitrable under MSA 5 Xl(c) for three reasons. First, the dispute "concerns the . . . application" of the WMAd.justmmt, for it involves a direct challenge to tbe Independent Auditor's determination not to apply the Adjustment to payments owed by the Petitioners and othw Participating Manufacturers to Connecticut and otha Settling Wts for calendar year 2003. Second, the dispute "concerns the operation" of the NPM Adjustment, far it involves a two-part challenge to the methodology by .which the Independent Auditor made its foreguing detenrximtion not to apply that Adjustment to payments owed far 2003:(1) a challenge to the In-dent hdiim's general analytical detambticm that the MSA forbids the application of the NPM Adjustment to payments owed by Participating Manufacturers for any year, throughout which all Settling States had Model Statutes in full force and e*, and (2) a challenge b the Indepndent Auditcx's specific determination m this case that w NPM

" SwA+as v- Am. Tobacn, Ch,Na 01997-2982 (Ark Ctr. Ct Nov. 29,206): h re Tokc0 ha,h'a JCCP 404 1 (CaL Super. Ct Aug. 23,2006); Colotado v. RJ. Reynolds Thccn Ca,No. 97CV3432 (DauerDi& Ct July 19,2006): Connecticut v. Philip Morris, Inc., No. X02CV960148414S, 2005 WL 2081763 (&nn Super. a AU~.3, zoosx QT~NO.sc 17548(~oaa sepf 12,2006); DS~V. PW~MOM USA. IX, NO.MW (DcL a,Dee. 12.20; DLr~riciofCohrmbh v. Philip Morris USA hc.. 2006 CA 003176B @.C Super. CL Sept 26,2006): HMv.Phi@ Morris, USA,No. M-1-0695-04KSSA WW.Cir. Ct Au~3,2006); Idaho v. Phil@ Mom, Inc, No. CV OC 97 03239D (ldabo Dist. Ct Jnne 30,2*, r~~ndenied (rdaha aisL Ct JuIy 28,M06); Illi~v.Php&Morrfok,Na%L13146(CookCotmtya. CLAug.8,~fondv.PMfpM~ USA Inc, No. CL 71048 (Iowa Dist Ct Ang. 16,2006); Kev. Bmm d irrllimnron Tobacw Cbtp., 9%- OI57!3 (Ky. Cis. Ct. June 13,2006): Mdne v. PhUp Mwrio, Iw., No. CV-97-134 (Maine Sup. Ct Oct 3, UH)6); MpxsaJIwe~uv. Phi@ ModI%, No. 9S7378-1 (Msss. Supu. Cr Juac 20,2006): lWch&m v. PkiIip Morris USA. No. 06-539-CZ (Mich. Cu. Ct Sepf. 28,2006); Nebmrh v. RJ. R~oldsTobacco Co., No. CI 06-1655 wh.D~SL ct 28,2006); N& P. PUP MO- m,NO. cvas-0~929 (NW. st. a~qg. 4, NW Hampshire v. Mip Morris UU.No. WE-132 Super. Ct June S,2W& &hn darted (NR Supn. n IUIY 17,2006): EJWYOTL V. phi.+ ~orri~JUG, 813 UYSX 71 (N.Y.A~~D~V.m ~or~hbobha v. PhiUp MLMSUSA. Jnc, No. 98 CVS 14377-4 2006 W1.3409037 (N.C. Srrper. CL Dee. 4.2006): Nrrrlfr Dokoro V. Phiup MoniF. fm,No. 09-98-C-03778(3J.D. Dkt CL hziy 18,2006), na&e ofuppal Ned Jniy 25,2006 Ohb v. RJ- Rqnoldr TobPcca Co., No. 97CVHaS-5114 (OGo Cammoa PI. Sepk 25,2006);Oregon Y. Pkillp Mod Ug,No. oSW-04252 (Or. Cir. Ct Aug. 30,2006); Penmav. P- Mow&, 3ac;No. 2443 (Pa. Ct. Gorp PL Decr 12,2W6):~Dcrkotov.RJ.R~%boccoCo..Na06-161(SD-CL.CtOct2.2006):Term~v. Brmwt & lVHhmmn Tobacco Colp., No. 98-3776-1 (T'enu ULDcf 7,2006); LI& V. RJ. Riymokb Tobaao Co.. NO.296-CV-OtW @. Utah Dee. IS, 2006); Ymonf x Momj USA, ~~,NO- S WjX#CnC (Vt Soper. Ck My 14,2006); Vfav. &am & H'Zimson Tobocca Cprp, No. RJ-2241 (Rihxmi Coir. CL Au& 9, 2906);Washington v. Philip Morris LISA, Ix,No. S2-13262-9SEA (Wash.Super. Ct Sept 28.2006). Jan 18 2007 Sr45PM Clerk of District Court 307-721-2520

bug la^ I. AMW& Robin Sessions Coolcy Tbcmas J. Eredaick Elizabeth McCaUum Kim D. Cannon Ute M. Fox Mk&l D. Smith Thomas A. Ncbolas, IJI Page 12 Jwuary 8.2007

Adjustment could be applied to payments owed by the Pdcipathg Manufactwers to the Se#ling States, including Connecticut, for calendar ycar 2003, based npm NAAG's representation, in resjmnse to the Independent Auditor's annual request for information prior to performing its calculations, that all Setding States bad enacted Model Statutes that were in full force and effect throughout that year. Third, there is no other language in +c clause or the MSA that further narrows or creates exwzptkms to the substantive scope of the clause as writtea or establishes conditions precedent to invoking the right to arbitrate thereunder. [citations omittid].

State v. Philip Morris, hc.,2005 WL 2081763, at 35-37 (Cona Super. 2005).

In the end, this Court employs the dogyof the Idaho court and follows "'the bdcrumbs" to piece together the application of the Mu's arbitration clause to the mntfi&. Ichhu, at 7. Per fhc MSA, Wecourts have "[ebclusive jurisdiction for the purposes of irnplernenhg and enforcing [the MSA] as to such SMkg State . .. except as provided in subsections IX(d), XI(c) and XVIJ(d) and Exhibit 01.r MSA 5 VII(a) (emphasis added). The MSA also provides that enforcement is to be had in State courts "[ejxcept as provided in sabstctions IX(d), M(c), XVII(d) and Exhibit 0 . .. with respect to disputes, alleged violations or allegcd breaches within such Settling State." MSA VII(c) (emphasis added). Clearly, then, Wyoming courts have exclusive jurisdiction over the implementation aad enforcement of the MSA and Consent Decree and Final Judgment, as hey apply to Wyoming as a Settling State. However, the MSA specifically denies jurisdiction to this Court with respect to those areas covered by subsections IX (d), X(c) and XVIl(d) and Exhi'bit 0.

Subsection X(c)of the MSA provides that arbitration is required fa any dispute "arising out of or relating to" calculations or determinations male by the Auditor. See MSA XI(c) (emphasis added). Within that subsection, the MSA specifically notes tbat arbitration would be mandatory for "any disputcs . . . concerning the . . . qp)1'cation of any adjustments .. . described in . . .subsection XI(j)." MSA $ XI(c). Subsection IXCj), entitled "Order of Appli'cation of Allocations, Okts, Reductions and Adjustments," discusses the NPM Adjustment and provides'g fonrmla for calculating that adjustment. T~Isubsection specifically statcs: 'TheNPM adjustment shall be applied to the ds of clause 'Fifth' pursuant to subsections IX(d)(l) and (d)(Z) . .. ." hiSA M(j) (Sixth). Subsection IX(d) contains the calculation pro.visions for the NPM Adjustment itself, and MSA 4 IX(dI(2) specifically addresses the determination of diligent enforcement of Jan 18 2007 9:46PM Clerk of District Court 307-721-2520

Douglas J. Momch Robin %ens Cooley Thorn J. Frederick Elizabeth McCallm Kim D. Cannon Kate M. Fax Michael D. Smith Thomas A. Nicholas, III Page 13 January 8,2007

Qdifjk~gStatutes by Settling statcs.16 This step-by-step analysis leads to the inevitable conclusion that the considerations. . of whether the Auditor appmprhtely applied a presumption and the de-on of diligent enfoment are issues requiring arbitration under the MSA.

Further, the Auditor has rnstde a determination to apply a presumption of diligent enforcerneat. There can be no doubt that the adoption of aprcsumption approach to applying (or not applying) ttre WMAdjustment cuncerns the "operation-or application of any of the adjustments," mcluckg the NPM Adjustment. NSA $IX(j). And, it certainly arises out of or relates to calcnlations or determinations made by the Auditor. The MSA's arbitration clause contains extremely broad language directing that disputes "arising wt of or relating ton detennimtions by tbe Auditor are subject to arbitration. Because this Court is bound by tbe plain language of the parties' agreement, it must enforce the arbitration clause of the MSA.".

"The delermirrrttion of diligent cnforwment is me of thee elements, expressly provided forin the MSA, of the NPM Adjrutment

In reacbimg this crmclnsion, this Corn is ingeneral agremern with the Comf of CO~~DD~Plea% First wicid District of Ponnqylvauia, when it opined-

Whttlzer them was diligent edb-t of the Quelif=yiugStatWc in a disputt which the colntr of the various settling states, genedy, ad ttris court, in partiah, arc anst qpali8ied to oddress In an arbitration procading unda tb MSA, as rnany as 52 separate uSctd~g!bt&, with competiag interests, win be compelled to join in the selection of a single mihabr, to sit with an ahbator rdcctcd by the PMs, who afarr a udy of interrrst, d a third arbihatcu selected by tht first two. Moreover, the issua of '~wcemin crtibrcaxmt of lk QraliSkmre is very mPcb a local om. Tbt vagaries of poputtioo size addiseibrrtiaP, pwy,market pcactratian . byNPMs,tonamc~afear~mmtktrrlcenirdoacco~otin~whctfreradotehas been diiigcd Simply put: tbat which comtitnter ditigcli# in our sistez state ofNorth Dakokr dl dybe fhr diflezcut hmdiligeDct in our nejglhs New Yd.

~~g~tbe~0llrt~~finds~thtscalenoactfkas4~mfn~01of mbitration. b mtui, tbcse were highly sophisticated pads, with thc aasistana aad counsel of armies of highly psid Iswyen. Under the cimumtaaw premmd, the hercinbeibrc cited Iegd sulbaritics compel thz court to Leave the parties to bek bPrgais hcnvevcr, llawtd and ill- conocivcd h myba

Peruu$w'a, at 7. This Comt could not have said it ~lrorrdoqueatly. While the Court betitvcs an ddntion pad is btst suikd to nralcc s decision as to wbtkthe Audh correctly applied the diligent enforcement~it is not bnocivoblc that tho panel will agcc with this CMIlr (aud fhf Shtc ofPcmasylvunia) &at Lht sPCtific ~SSUCof diligentenfoc~isbestIcfttolcdmura.Bethatspitmay,tfiCptiesamrdiubasettlaacat~ that ckorly rquksarbhation adthis Court is not at libaty to CCT& their contmct Tor them Jan 18 2007 9:46PM Clerk af District Court 307-721-2520

Doughs J. Moench Rabm Sessions Cooley Thomas J. Frederick Elizabeth McCaIlum KimD.caIm0 Kate M Fox Michael D. Smith Tbomas A Nicholas, Ill Page 14 January 8,2007

N. The Intentions of the Parties . The State next argues that this Court should cons?me tbe MSA in light of the context m which it was written. See Pokorny v. Salas, 2003 WY 159,fl24,81 P.3d 17 1, 178 wyo. 2003). Indeed, the MSA was devised so as to settle lawsuits between the PMs and the Settling States regadkg youth addiction to tobacco and the increasing healthcare costs related to bbacm. The MSA was reached after long and thoughtfd nsotiatioa, and with a clear aim of settling this dispute (and future disputes) on a national lml whenever possible.

Even with this in mind, the Caurt sees no discrepancy in intethe arbitratio31 clause to apply to the controversies at hand. The Court does not believe a neutral panel of arbitrators would do aything more than apply its skill and expertise in rn attempt to resolve this matter as best it could Certainly a speedy and wsteffective resolution was intended by all entering into the MSA The Court believes the only appropriate route, indeed the only route, under the MSA, is to require arbionto resolve the cunent issues.

CONCLUSION

?%e Original Participat'ng Manufacturers' Application and Motion to Enfarce the Arbitration Provisions of the Marter Settlement Agreement and to Compel Arbitiwlion is granted. The Court would ask Mr. Frederick draft an order m conformity herewith, submit it to other counsel for approval as to form and t~ the Court for signature adentry.