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 -.