Title: State of Alabama, by and through Governor Bob Riley and Attorney ( 325 ) General Troy King v. Lorillard Tobacco Company, Inc., et al.

State: alabama

Issuer: Alabama Supreme Court

Document:

REL: 3/28/08 
 
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334) 229-
0649), of any typographical or other errors, in order that corrections may be made before
the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
OCTOBER TERM, 2007-2008
____________________
1060988, 1060989, and  1060990
____________________
State of Alabama, by and through Governor Bob Riley and
Attorney General Troy King
v.
Lorillard Tobacco Company, Inc., et al.
Appeals from Montgomery Circuit Court 
(CV-98-2941, CV-98-2940, and CV-96-1508)
SEE, Justice.
The State of Alabama ("the State") appeals from an order
of the Montgomery Circuit Court compelling arbitration and
denying the State's motion for a declaratory order in an
underlying 
action 
involving 
tobacco-product 
manufacturers. 
 
We
1060988, 1060989, 1060990
R.J. Reynolds Tobacco Company, Inc., and Brown &
1
Williamson Tobacco Corporation merged in 2004.  Therefore, the
original PMs now consist of Phillip Morris USA, Inc., R.J.
Reynolds Tobacco Company, Inc., and Lorillard Tobacco Company,
Inc.
On November 19, 1998, the circuit court consolidated the
2
three tobacco-related cases from which these appeals are
taken.  Specifically, State of Alabama et al. v. American
Tobacco Co. et al., (CV-98-2940); Blaylock et al. v. American
Tobacco Co. et al. (CV-96-1508); and State of Alabama v.
Philip Morris Inc., et al. (CV-98-2941).  This Court
subsequently assigned those actions the following case numbers
on appeal: Supreme Court case no. 1060988 (CV-98-2941); case
2
affirm in part, reverse in part, and remand.
Facts and Procedural History
 In 1998, the State and 45 other states, the District of
Columbia, Puerto Rico, the Virgin Islands, American Somoa, the
Northern Mariana Islands, and Guam (collectively "the settling
states") entered into a master settlement agreement ("the
agreement") with  Philip Morris USA, Inc., R.J. Reynolds
Tobacco Company, Inc., Lorillard Tobacco Company, Inc., and
Brown & Williamson Tobacco Corporation.  These four tobacco-
product manufacturers are referred to in the agreement as the
original participating manufacturers ("original PMs").   The
1
agreement arose out of lawsuits filed by the settling states
seeking to recover health-care costs for smoking-related
illnesses.   Under the terms of the agreement, the settling
2
1060988, 1060989, 1060990
no. 1060989 (CV-98-2940); and case no. 1060990 (CV-96-1508).
These appeals have been consolidated for the purposes of
writing one opinion.
3
states agreed to dismiss the lawsuits and to release the
tobacco-product manufacturers from all future claims.  In
return, the tobacco-product manufacturers agreed to abide by
specific advertising and marketing restrictions and to make
annual 
payments 
based 
upon 
each 
tobacco-product 
manufacturer's
nationwide cigarette sales.
The 
agreement 
allowed 
other 
tobacco-product 
manufacturers
to join in the agreement and thereby to avoid future
litigation.  Nearly 40 smaller manufacturers did so.  These
tobacco-product manufacturers became known as the subsequent
participating manufacturers ("subsequent PMs").  The original
PMs and the subsequent PMs are collectively referred to as the
participating manufacturers ("PMs").  The tobacco-product
manufacturers that chose not to enter into the agreement are
referred to as the nonparticipating manufacturers.
The agreement requires each PM to make an annual lump-sum
payment into an escrow account.  The balance of that account
is then distributed among the settling states based upon their
predetermined allocable shares.  The payment obligation of
1060988, 1060989, 1060990
The agreement provides that the auditor "shall be a
3
major, 
nationally 
recognized, 
certified 
public 
accounting 
firm
jointly selected by agreement of the Original Participating
Manufacturers and those Attorneys General of the Settling
States who are members of the [National Association of
Attorneys General] executive committee." § XI(b).  The current
auditor is PricewaterhouseCoopers, LLP. 
4
each PM is determined by an independent auditor, as defined in
the agreement ("the auditor").   The agreement provides that
3
the auditor "shall calculate and determine the amount of all
payments owed pursuant to this Agreement, the adjustments,
reductions and offsets thereto ..., [and] the allocation of
such payments, adjustments, reductions, offsets and carry-
forwards ..., and shall perform all other calculations in
connection with the foregoing." § XI(a)(1).  In determining
the payment obligation of each PM, the auditor begins with an
annual aggregate base payment obligation enumerated in the
agreement for all PMs for each particular year.  The auditor
then apportions the aggregate base payment among the PMs based
upon each PM's national market share of tobacco products.  If
the auditor determines that the amount of the aggregate base
payment is subject to any reductions, adjustments, or offsets
listed in the agreement, the payment obligation of each PM is
reduced accordingly.
1060988, 1060989, 1060990
5
The nonparticipating-manufacturer adjustment is one of
the adjustments included in the agreement.  The drafters of
the 
agreement 
acknowledged 
that 
the 
nonparticipating
manufacturers could receive an economic advantage from not
being subject to the payment obligations and marketing
restrictions in the agreement, and that, as a result, the PMs
could suffer a loss in market share to the nonparticipating
manufacturers.  The nonparticipating-manufacturer adjustment
entitles the PMs to an adjustment of the aggregate base
payment if the aggregate market share of the PMs during the
year for which the payment is being calculated was more than
two percentage points below their 1997 market share and if a
nationally recognized firm of economic consultants ("the
firm") "determines that the disadvantages experienced as a
result of the provisions of this Agreement were a significant
factor contributing to the Market Share Loss for the year in
question." § IX(d)(1)(C).
Even if the nonparticipating-manufacturer-adjustment
requirements are satisfied and the PMs' payments are therefore
due to be reduced, the agreement provides that the allocated
payment to a settling state nonetheless may be exempt from
1060988, 1060989, 1060990
The State has enacted such a statute.  See § 6-12A-1 et
4
seq., Ala. Code 1975.  A qualifying statute must impose
payment 
obligations 
on 
the 
nonparticipating 
manufacturers, 
who
are not subject to the annual payment obligations in the
agreement.  Alabama's qualifying statute requires each
nonparticipating 
manufacturer 
to 
establish 
a 
"qualified 
escrow
fund" to be available to pay any judgment or settlement on any
released claim brought against such manufacturer by the State
or any releasing party located or residing in the State and to
make scheduled deposits into the escrow fund based upon each
nonparticipating manufacturer's cigarette sales in the State
for the preceding calendar year.  See § 6-12A-3(a)(3)b.1. and
2., and d.1., Ala. Code 1975.  
6
such reduction "if such 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 such entire calendar year."
§ IX(d)(2)(B).   If a settling state qualifies for this
4
exemption from a reduction in payment, that state's share of
the nonparticipating-manufacturer adjustment is reallocated
pro rata among the nonexempt states in proportion to the
nonexempt states’ allocable shares.
The agreement further provides that, "except as provided
in subsections IX(d), XI(c), and XVII(d)," the state court
that 
approved 
the 
agreement 
"shall 
retain 
exclusive
jurisdiction for the purposes of implementing and enforcing
1060988, 1060989, 1060990
7
this Agreement and ... shall be the only court to which
disputes under this Agreement ... are presented as to such
Settling State." § VII(a).  That court for the State is the
Montgomery Circuit Court.  One of the exceptions to a state
court's exclusive jurisdiction under the agreement is the
arbitration provision, namely § XI(c), which 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, 
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
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."
The auditor has refused to apply the nonparticipating-
manufacturer adjustment to the PMs' annual payments for 2006.
In 2004, while calculating the payment each PM owed for 2003,
the auditor determined that the PMs had suffered an adequate
market-share loss as compared to their 1997 market share.
Thus, the matter was referred to the firm to determine whether
the agreement was a significant factor contributing to the
1060988, 1060989, 1060990
8
PMs'  market-share loss.   In March 2006, the firm determined
that the economic obligations and marketing restrictions of
the agreement were a significant factor that contributed to
the PMs' market-share loss for 2003.  The original PMs,
therefore, asked the auditor to apply the nonparticipating-
manufacturer adjustment to the 2006 payments to the settling
states.  The auditor declined to do so because the auditor, at
the settling states' request, presumed that each settling
state had enacted and was diligently enforcing a qualifying
statute.  In a March 7, 2006, letter to the PMs and the
settling states, the auditor specifically noted that "[t]he
Independent Auditor is not charged with the responsibility
under the Agreement of making a determination regarding this
issue ... [and] is not qualified to make the legal
determination as to whether any particular Settling State has
'diligently enforced' its Qualifying Statute."  The auditor
further noted that the auditor would continue to employ the
same method in calculating the PMs annual payment amount until
this dispute was resolved by the parties or by a trier of
fact.  The original PMs paid the full amounts calculated by
the 
auditor, 
without 
the 
nonparticipating-manufacturer
1060988, 1060989, 1060990
The agreement is the result of lawsuits originally filed
5
by the State against the tobacco-product manufacturers, which
resulted 
in 
both 
sides 
entering 
into 
the 
agreement.
Therefore, the State was not "made a defendant in any court of
law or equity" (Art. I, § 14, Ala. Const. 1901), and sovereign
immunity is not implicated, even though the original PMs moved
to compel the State to arbitrate. 
9
adjustment, despite the fact that the original PMs maintained
that the auditor should have applied the adjustment.  However,
R.J. Reynolds Tobacco Company, Inc., and Lorillard Tobacco
Company, 
Inc., 
placed 
the 
sum 
constituting 
the
nonparticipating-manufacturer adjustment into the "Disputed
Payment Account," as provided in §§ XI(d)(7) and (8) of the
agreement.
On October 30, 2006, the original PMs moved the
Montgomery Circuit Court to compel the State to arbitrate the
auditor's 
decision 
not 
to 
apply 
a 
nonparticipating-
manufacturer adjustment.   The subsequent PMs joined that
5
motion.  The State opposed the motion to compel arbitration as
to the question whether it had diligently enforced its
qualifying statute, but it agreed to participate in the
national arbitration as to the question whether the auditor
should 
have 
applied 
a 
nonparticipating-manufacturer 
adjustment
to the payments for the 2006 calendar year.  The State
1060988, 1060989, 1060990
Section VII(c) provides:
6
"Except as provided in subsections IX(d), XI(c),
XVII(d) ... 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." 
10
alternatively 
argued 
that 
if 
the 
diligent-enforcement 
question
is subject to arbitration, then the arbitration should be a
local proceeding involving only the State and the PMs.  The
State subsequently notified the original PMs that it intended
to seek a declaratory order pursuant to § VII(c) of the
agreement,  interpreting specific provisions of the agreement,
6
including the term "diligent enforcement."  
The Montgomery Circuit Court held that the plain language
of the arbitration clause in the agreement requires the
parties to submit to arbitration the question of the State's
diligent enforcement of its qualifying statute and that the
arbitration proceeding should be national in scale.  The
Montgomery Circuit Court also denied the State's request for
a declaratory order.  The State appeals.
Standard of Review
"'We review the trial court's grant or denial of a motion
1060988, 1060989, 1060990
11
to compel arbitration de novo.'" Paragon Ltd., Inc. v. Boles,
[Ms. 1061255, December 21, 2007] ___ So. 2d ___, ___ (Ala.
2007) (quoting Title Max of Birmingham, Inc. v. Edwards, [Ms.
1051140, May 18, 2007] ___ So. 2d ___, ___ (Ala. 2007)).
Analysis
Both the State and the PMs agree that the agreement
contains a valid arbitration clause.  They disagree as to the
scope of the arbitration clause as it pertains to the question
of the State's diligent enforcement of its qualifying statute.
Therefore, this Court must determine whether the arbitration
clause encompasses the parties' dispute over the State's
diligent enforcement of its qualifying statute.
A. The Arbitrability of the Diligent-Enforcement Issue
It is well established that "'the interpretation of an
arbitration agreement within the scope of the [Federal
Arbitration Act]' is governed by 'general state-law principles
of contract interpretation.'" Orkin Exterminating Co. v.
Larkin, 857 So. 2d 97, 103 (Ala. 2003) (quoting Volt Info.
Sciences, Inc. v. Board of Trustees of Leland Stanford Junior
Univ., 489 U.S. 468, 475 (1989)).  "'When a court construes a
contract, "the clear and plain meaning of the terms of the
1060988, 1060989, 1060990
12
contract are to be given effect, and the parties are presumed
to have intended what the terms clearly state."'"  H & S
Homes, L.L.C. v. Shaner, 940 So. 2d 981, 988 (Ala. 2006)
(quoting Polaris Sales, Inc. v. Heritage Imports, Inc., 879
So. 2d 1129, 1133 (Ala. 2003), quoting in turn Strickland v.
Rahaim, 549 So. 2d 58, 60 (Ala. 1989)).  "'"[I]n applying
general state-law principles of contract interpretation to the
interpretation of an arbitration agreement within the scope of
the [Federal Arbitration] Act, due regard must be given to the
federal policy favoring arbitration, and ambiguities as to the
scope of the arbitration clause itself resolved in favor of
arbitration."'"  Title Max of Birmingham, ___ So. 2d at ___
(quoting Homes of Legend, Inc. v. McCollough, 776 So. 2d 741,
745 (Ala. 2000), quoting in turn Volt Info. Sciences, Inc.,
489 U.S. at 475-76)).
The State argues that the diligent-enforcement question
is not subject to arbitration because, it argues, any
questions concerning the diligent enforcement of the State's
qualifying statute should be decided by the Montgomery Circuit
Court, which, under § VII, retains exclusive jurisdiction over
the implementation and enforcement of the agreement.  The
1060988, 1060989, 1060990
13
State further argues that this Court should hold that the
Montgomery 
Circuit 
Court 
should 
decide 
the 
diligent-
enforcement question because, it argues, the provision that
gives the Montgomery Circuit Court jurisdiction over the
implementation and enforcement of the agreement precedes, and
is inconsistent with, the arbitration clause.  It is well
established that "'the duty to arbitrate is a contractual
obligation and that a party cannot be required to submit to
arbitration any dispute that he did not agree to submit.'" UBS
Fin. Servs., Inc. v. Johnson, 943 So. 2d 118, 121 (Ala. 2006)
(quoting Capital Inv. Group, Inc. v. Woodson, 694 So. 2d 1268,
1270 (Ala. 1997)).  "The language of the contract entered into
by the parties determines whether a particular dispute should
be submitted to arbitration under the contract." Capital Inv.
Group, 694 So. 2d at 1270 (citing Blount Int'l, Ltd. v. James
River-Pennington, Inc., 618 So. 2d 1344 (Ala. 1993)).  In
construing an arbitration agreement, a court must construe the
contract "as a whole; detached words or clauses standing alone
are not controlling on the question of interpretation, each
being viewed in relation to the agreement as an entity." Karl
Storz Endoscopy-America, Inc. v. Integrated Med. Sys., Inc.,
1060988, 1060989, 1060990
14
808 So. 2d 999, 1012 (Ala. 2001) (quoting Cedars-Sinai Med.
Ctr. v. State Board of Equalization, 162 Cal. App. 3d 1182,
1188, 208 Cal. Rptr. 837, 840 (1984)).  "Additionally, this
Court will interpret the terms of a contract to give 'effect
to all terms used.'" Medical Servs., LLC v. GMW & Co., 969 So.
2d 158, 162 (Ala. 2006) (quoting Sullivan, Long & Hagerty v.
Southern Elec. Generating Co., 667 So. 2d 722, 725 (Ala.
1995)). 
The enforcement provision of the agreement, § VII(a)(3),
does provide that for the State the Montgomery Circuit Court
"shall be the only court to which disputes under this
Agreement or the Consent Decree are presented."  However, the
Montgomery Circuit Court's broad jurisdictional mandate is
limited by the preceding clause of § VII(a)(3) ("except as
provided in subsection[] ... XI(c)").  Section XI(c) provides
for the arbitration of "[a]ny dispute ... arising out of or
relating to calculations performed by, or any determinations
made by, the Independent Auditor."  Therefore, the Montgomery
Circuit Court retains jurisdiction to determine whether the
State diligently enforced its qualifying statute only if that
question is not subject to the arbitration provision in the
1060988, 1060989, 1060990
The State's argument that the Montgomery Circuit Court
7
retains jurisdiction over the diligent-enforcement issue
because § VII, the enforcement provision, precedes the
arbitration provision in § XI(c) is without merit.  There is
a rule of construction that provides that "if there exists
inconsistency between two clauses of a contract which cannot
be reconciled, the inconsistency must be resolved in favor of
the prior clause, unless an intention to thereafter qualify is
plainly expressed." City of Fairhope v. Town of Daphne, 282
Ala. 51, 58, 208 So. 2d 917, 924 (1968).  The State, however,
does not demonstrate that the enforcement provision and the
arbitration provision of the agreement are inconsistent as to
whether the Montgomery Circuit Court or a panel of arbitrators
will determine the diligent-enforcement question.  Instead,
the State's argument simply demonstrates that the two
provisions are mutually exclusive.  Therefore, depending on
which clause is found to apply, the agreement exclusively
vests in either the Montgomery Circuit Court or a panel of
arbitrators the authority to make the diligent-enforcement
determination.  See Celtic Life Ins. Co. v. McLendon, 814 So.
2d 222, 225 (Ala. 2001) ("[A]s a practical matter, arbitration
and litigation of the same subject matter are mutually
exclusive.").
15
agreement.7
The agreement, § XI(c), provides that "[a]ny 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...) shall be submitted to binding arbitration
...."  The State argues that the dispute over diligent
1060988, 1060989, 1060990
In 
holding 
that 
the 
arbitration 
clause 
compels
8
arbitration of the dispute over diligent enforcement, we note
that our decision is in agreement with the overwhelming
majority of jurisdictions that have addressed this issue.
See, e.g., State v. Philip Morris, Inc., [No. 2844, February
1, 2008]     A.2d    ,      (Md. Ct. Spec. App. 2008) ("After
giving effect to each clause and construing [the agreement] in
its entirety, arbitration is mandatory.");  Commonwealth v.
Philip Morris, Inc., 448 Mass. 836, 844-45, 864 N.E.2d 505,
512 (2007) ("The language of the settlement agreement
arbitration clause thus plainly and unambiguously encompasses
the present dispute."); State v. Philip Morris USA, Inc., 155
N.H. 598, 608, 927  A.2d 503, 512 (2007) ("Thus, a dispute
over diligent enforcement arises out of a determination by the
Independent Auditor whether to apply the [nonparticipating-
manufacturer] Adjustment."); State v. Philip Morris, Inc., 8
N.Y.3d 574, 581-82, 869 N.E.2d 636, 640 (2007) ("We therefore
conclude that the questions whether New York enacted and
diligently enforced a Qualifying Statute and whether it was
correctly 
spared 
the 
[nonparticipating-manufacturer]
16
enforcement 
is 
not 
arbitrable 
because, 
it 
says, 
the
arbitration provision is narrow and extends only to a limited
range of disputes.  However, the PMs contend that the
inclusion in the arbitration provision of the "arising out of
or relating to" language indicates that "the parties intended
to subject to arbitration a broad field of issues having
connection with or referring to the Independent Auditor's
determinations." Original PMs' brief at 24.  We conclude that
the clear and unambiguous language of the arbitration
provision compels arbitration of the dispute over the State's
diligent enforcement of its qualifying statute.8
1060988, 1060989, 1060990
adjustment are arbitrable."); State v. Philip Morris, Inc.,
732 N.W.2d 720, 731 (N.D. 2007) ("We conclude the plain and
unambiguous language of the settlement agreement requires
arbitration of the parties' dispute over application of the
diligent enforcement exemption to the non-participating
manufacturer adjustment ....").  The only contrary case of
which we have been made aware is a Louisiana trial court
opinion that is presently on appeal.  Foti v. Philip Morris
USA, Inc., No. 1998-6473 (La. Dist. Ct. May 31, 2007), appeal
docketed, No. CA 0833 (App. 3d Cir.).
17
i. The broad language of the agreement requires arbitration
of the diligent-enforcement dispute
"'This Court has held [that] where a contract signed by
the parties contains a valid arbitration clause that applies
to claims "arising out of or relating to" the contract, that
clause has a broader application than an arbitration clause
that refers only to claims "arising from" the agreement.'"
Green Tree Fin. Corp. v. Vintson, 753 So. 2d 497, 505 (Ala.
1999) (quoting Reynolds & Reynolds Co. v. King Autos., Inc.,
689 So. 2d 1, 2-3 (Ala. 1996)).  "'This Court has repeatedly
stated "'that the words "relating to" in the arbitration
context are given a broad construction.'"'" Carroll v. W.L.
Petrey Wholesale Co., 941 So. 2d 234, 236 (Ala. 2006) (quoting
Serra Chevrolet, Inc. v. Hock, 891 So. 2d 844, 847 (Ala.
2004), quoting in turn other cases).
For a dispute to relate to the subject matter of the
1060988, 1060989, 1060990
18
arbitration provision, "there must be some legal and logical
nexus" between the dispute and the arbitration provision.
Kenworth of Dothan, Inc. v. Bruner-Wells Trucking, Inc., 745
So. 2d 271, 275 (Ala.  1999).  In this case, there is a "legal
and logical nexus" between the auditor's determination not to
apply the nonparticipating-manufacturer adjustment and the
dispute over the State's diligent enforcement of its
qualifying 
statute, 
because 
diligent 
enforcement 
is
significant only in determining whether the nonparticipating-
manufacturer adjustment applies, and, if so, how the
adjustment is allocated among the settling states. See State
v. Philip Morris, Inc., [No. 2844, February 1, 2008] ___ A.2d
___, ___ (Md. Ct. Spec. App. 2008) ("The diligent enforcement
question ... is an indispensable underlying issue of the
overall [nonparticipating-manufacturer] Adjustment and, thus,
the 
determination 
and 
calculations 
are 
inextricably 
linked.");
State v. Philip Morris, Inc., 8 N.Y.3d 574, 580, 869 N.E.2d
636, 640 (2007) ("By using the expansive words 'any' and
'relating to,' [the agreement] makes explicit that all claims
that have a connection with the Independent Auditor's
calculations and determinations are arbitrable.").  Section
1060988, 1060989, 1060990
19
IX(d)(1) specifies that the PMs shall be entitled to the
nonparticipating-manufacturer adjustment if the PMs suffer a
sufficient market-share loss and the firm determines that the
agreement was a significant factor in that loss.  Once those
two requirements are satisfied, a settling state can avoid the
application of the nonparticipating-manufacturer adjustment
only if it demonstrates that it has enacted and diligently
enforced a qualifying statute. See Commonwealth v. Philip
Morris, Inc., 448 Mass. 836, 847, 864 N.E.2d 502, 513 (2007)
("[B]ecause [the firm] had determined that the [agreement] was
a significant factor in the loss of market share ..., the only
means 
by 
which 
the 
auditor 
could 
have 
denied 
the
[nonparticipating-manufacturer] adjustment for that year was
by affirmatively finding that there was diligent enforcement
by the [settling] States.").  In this case, the auditor
determined that the settling states were exempt from the
nonparticipating-manufacturer adjustment because the auditor
presumed that each settling state had enacted and was
diligently enforcing a qualifying statute.  Thus, there is an
unequivocal 
nexus 
between 
the 
dispute 
over 
diligent
enforcement and the auditor's determination as to whether the
1060988, 1060989, 1060990
20
nonparticipating-manufacturer adjustment applies.  
The State insists that the dispute over diligent
enforcement does not arise out of or relate to a calculation
performed by or a determination made by the auditor because
"the question of whether [the State] diligently enforced its
[qualifying] statute .... can be determined without any
reference whatsoever to any calculation performed by, or any
determination made by, the Auditor." State's brief at 32.
Although a question about diligent enforcement may be resolved
independently of any calculation or determination by the
auditor, a dispute over diligent enforcement, which this case
is, does relate to those calculations and determinations,
because the auditor considers the question of diligent
enforcement only, and necessarily, to determine whether the
nonparticipating-manufacturer adjustment applies.  There are
only two references to diligent enforcement in the agreement,
and both references relate to the allocation of the
nonparticipating-manufacturer adjustment among the settling
states.  See § IX(d)(2)(B) (providing that the settling states
shall 
be 
exempt 
from 
the 
nonparticipating-manufacturer
adjustment if they enact a qualifying statute or the model
1060988, 1060989, 1060990
21
statute and "diligently enforced the provisions of such
statute"); see also State v. Philip Morris USA, Inc., 155 N.H.
598, 608, 927 A.2d 503, 512 (2007) ("While the State has
attempted to rephrase this issue as unrelated to the
[nonparticipating-manufacturer] Adjustment, the Court finds
the argument unavailing.  The parties do not point to, and the
Court is not aware of, any provisions in [the agreement] other
than those regarding the [nonparticipating-manufacturer]
Adjustment, where the diligent enforcement of a Qualifying
Statute has any relevance.").  
The State also contends that the dispute over diligent
enforcement does not relate to a calculation performed by or
a determination made by the auditor because, it says, the
agreement does not authorize the auditor to make a diligent-
enforcement determination.  The State emphasizes that the
auditor is a national accounting firm that is neither
responsible for nor equipped to handle the responsibility of
making the quintessentially legal determination of whether the
State 
had 
diligently 
enforced its qualifying statute.
Regardless, the contention that the auditor is not authorized
to make the determination is contradicted by the plain
1060988, 1060989, 1060990
22
language of the agreement, which provides that the 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 [PMs] and among the
Settling 
States." 
§ 
XI(a)(1). 
 
The 
nonparticipating-
manufacturer adjustment is one of several adjustments the
auditor is directed to "calculate and determine."  In deciding
whether 
to 
apply 
the 
nonparticipating-manufacturer 
adjustment,
the auditor must determine if the settling states qualify for
the diligent-enforcement exemption.  As the Supreme Court of
New Hampshire stated, the agreement "not only authorizes the
[auditor] to make the initial determination of whether to
apply the [nonparticipating-manufacturer] Adjustment to the
PMs' annual payments, but it requires the [auditor] to make
this determination." State v. Philip Morris USA, Inc., 155
N.H.  at 606, 927  A.2d at 510 (emphasis omitted).     
The State further argues that the dispute over diligent
enforcement 
does 
not 
relate 
to 
a 
"calculation" 
or
"determination" by the auditor because, it says, the auditor
1060988, 1060989, 1060990
23
did not actually determine whether the State diligently
enforced its qualifying statute.  The State maintains that the
arbitration provision in the agreement is a mechanism for
"review of calculations or determinations made by the
[auditor]." State's brief at 35.  In support of this argument,
the State points out that the auditor presumed that the State
diligently enforced its qualifying statute, and a presumption,
the State contends, is different from a determination.
However, this argument ignores the broad language in the
agreement that encompasses disputes over those issues that are
decided by the auditor and issues that "arise out of or relate
to" calculations performed by or determinations made by the
auditor.  See Commonwealth v. Philip Morris, Inc., 448 Mass.
at 846, 864 N.E.2d at 513 ("Focusing on this language in the
arbitration clause ignores, or at least reduces the force of,
the preceding phrase, which brings under the clause '[a]ny
dispute, controversy, or claim arising out of or relating to'
the auditor's calculations or determinations.").  As we noted
above, the dispute over diligent enforcement relates to the
nonparticipating-manufacturer adjustment because the auditor
declined to apply the adjustment based on a presumption of the
1060988, 1060989, 1060990
24
State's diligent enforcement of its qualifying statute. See §
IX(d)(2)(B) ("A Settling State's Allocated Payment shall not
be 
subject 
to 
[a 
nonparticipating-manufacturer] 
Adjustment 
...
if such Settling State continuously had a Qualifying Statute
... in full force and effect ... and diligently enforced the
provisions of such statute.").  
Even if the arbitration provision of the agreement
extends only to issues actually decided by the auditor, the
dispute over diligent enforcement still would be arbitrable.
When the auditor presumed that the settling states had
diligently enforced their respective qualifying statutes, the
auditor made a determination.  State ex rel. Carter v. Philip
Morris Tobacco Co., 879 N.E.2d 1212, 1218 (Ind. Ct. App. 2008)
("The decision of the Independent Auditor to employ this
presumption [of diligent enforcement of the qualifying
statute] constitutes a determination."); Commonwealth v.
Philip Morris, Inc., 448 Mass. at 847, 864 N.E.2d at 513
("Whether the auditor made this determination [of diligent
enforcement 
of 
the 
qualifying statute] explicitly, or
impliedly, 
or 
by 
employing 
a 
presumption 
makes 
no
difference."); State v. Philip Morris, Inc., 155 N.H. at 606,
1060988, 1060989, 1060990
25
927 A.2d at 510 ("We concur with other appellate courts that
have 
held 
that 
the 
[auditor] 
did, 
in 
fact, 
make 
a
determination regarding diligent enforcement of Qualifying
Statutes.").  Once the PMs satisfied the requirements for the
nonparticipating-manufacturer adjustment, the settling states
could avoid the application of the adjustment only by
affirmatively demonstrating diligent enforcement of their
qualifying statutes.  The fact that the auditor declined to
apply the adjustment necessitates the conclusion that the
auditor made a determination regarding diligent enforcement.
See Commonwealth v. Philip Morris, Inc., 448 Mass. at 847, 864
N.E.2d at 513 (holding that "the only means by which the
auditor 
could 
have 
denied 
the 
[nonparticipating- 
manufacturer]
adjustment for that year was by affirmatively finding that
there was diligent enforcement by the [settling] States.  It
is therefore logically necessary that the auditor did make a
diligent enforcement determination.").
Finally, this Court has stated that "'[c]ourts cannot
make contracts for parties, but must give such contracts as
are 
made 
a 
reasonable 
construction 
and 
enforce 
them
accordingly.'" Lyles v. Pioneer Housing Sys., Inc., 858 So. 2d
1060988, 1060989, 1060990
26
226, 231 (Ala. 2003) (quoting Charles H. McCauley Assocs.,
Inc. v. Snook, 339 So. 2d 1011, 1015 (Ala. 1976)). The State
has agreed to arbitrate the auditor's decision not to apply
the nonparticipating-manufacturer adjustment but insists that
the question of diligent enforcement should be determined by
the Montgomery Circuit Court.  However, if the Montgomery
Circuit Court decided the diligent-enforcement issue, there
would be no reason to arbitrate the auditor's decision not to
apply the nonparticipating-manufacturer adjustment.  The
nonparticipating-manufacturer adjustment and the diligent-
enforcement exemption are so inextricably intertwined that
resolution 
of 
the 
diligent-enforcement dispute by 
the
Montgomery 
Circuit 
Court 
would 
render 
arbitration 
superfluous.
The State's interpretation of the arbitration provision in the
agreement leads to an unreasonable result, because it would
render meaningless any arbitration as it relates to the
nonparticipating-manufacturer adjustment. See Karl Storz
Endoscopy-America, Inc., 808 So. 2d at 1013 (holding that the
argument that nonmaterial breaches are outside the scope of an
arbitration clause was unreasonable because "[w]hether a
breach is material is ordinarily a question for the trier of
1060988, 1060989, 1060990
27
fact").
We, therefore, conclude that the arbitration provision in
the agreement encompasses the dispute regarding diligent
enforcement of the qualifying statute because that dispute
relates to the auditor's determination not to apply the
nonparticipating-manufacturer adjustment.    
ii. The plain and unambiguous language of the agreement
requires arbitration of the diligent-enforcement dispute
      
This Court's conclusion that the arbitration provision in
the agreement encompasses the diligent-enforcement dispute is
further reinforced by the parenthetical clause that enumerates
a list of arbitrable disputes.  Arbitrable disputes are
described as "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)." 
 
The 
use 
of 
the 
phrase 
"including, 
without
limitation," 
indicates 
that 
the 
disputes 
listed 
are
illustrative only and do not constitute an exhaustive list of
arbitrable disputes. See In re Mark Anthony Constr., Inc., 886
F.2d 1101, 1106 (9th Cir. 1989) ("In construing a statute, the
use of a form of the word 'include' is significant, and
1060988, 1060989, 1060990
28
generally thought to imply that terms listed immediately
afterwards are an inexhaustive list of examples, rather than
a bounded set of applicable items.").
  In construing a contract, this Court is guided by the
principle that "'[t]he intention of the parties controls ...
and the intention of the parties is to be derived from the
contract 
itself, 
where 
the 
language 
is 
plain 
and
unambiguous.'" Dunes of GP, L.L.C. v. Bradford, 966 So. 2d
924, 928 (Ala. 2007) (quoting Loerch v. National Bank of
Commerce of Birmingham, 624 So. 2d 552, 553 (Ala. 1993)).
Subsection IX(j), which is included in the list of arbitrable
disputes, establishes the calculation method to be employed by
the 
auditor 
in 
determining 
the 
PMs' 
annual 
payment
obligations.  The sixth clause of § IX(j) specifically states
that "the [nonparticipating-manufacturer] Adjustment shall be
applied to the results of clause 'Fifth' pursuant to
subsections IX(d)(1) and (d)(2)."  Subsection IX(d)(1)
explains how the auditor shall calculate the nonparticipating-
manufacturer adjustment for the original PMs.  Subsection
IX(d)(2)(A) 
provides 
that 
the 
"[nonparticipating-
manufacturer] Adjustment set forth in subsection (d)(1) shall
1060988, 1060989, 1060990
29
apply to the Allocated Payments of all Settling States,"
unless a settling state can satisfy the requirements of
subsection IX(d)(2)(B), which provides that a settling state's
allocated payment will be exempt from the nonparticipating-
manufacturer adjustment if the settling state "had a
Qualifying Statute ... in full force and effect" and
"diligently enforced the provisions of such statute during
such entire calendar year."  The parenthetical list in the
agreement of arbitrable disputes indirectly refers to diligent
enforcement as an arbitrable dispute.  Thus, applying the
plain and unambiguous language of the list of arbitrable
disputes contained in the agreement, we conclude that the
arbitration provision compels arbitration of the diligent-
enforcement issue.    
iii. The structure of the agreement requires arbitration of
the diligent-enforcement dispute
This Court is also persuaded by the argument that the
unitary-payment structure and the method for allocating the
nonparticipating-manufacturer adjustment among the settling
states 
compels 
arbitration 
of 
the 
diligent-enforcement
dispute.  The State contends that one national arbitration
would be a "logistical nightmare" that "involv[es] forty-seven
1060988, 1060989, 1060990
30
companies and fifty-two States and territories, in which every
State defends its own enforcement efforts and points fingers
at other States, taking months, if not years, to complete."
State's brief at 41.  The State also argues that the diligent-
enforcement exemption is a state-separate determination and
that separate proceedings to determine each State's diligent
enforcement of its qualifying statute would not result in
inconsistent or conflicting decisions.  We disagree. 
The agreement requires each PM to make one annual
payment.  After combining the annual payments of all the PMs,
the auditor calculates each setting state's share of the
funds.  In calculating each settling state's share, the
auditor must reduce the payment obligation of each PM if the
auditor determines that the nonparticipating-manufacturer
adjustment applies.  If, however, the auditor determines that
a settling state diligently enforced its qualifying statute or
that a group of settling states diligently enforced their
qualifying statutes, the remaining nonexempt settling states
will be subject to the reallocation provision in subsection
IX(d)(2)(C) of the agreement, which provides that the
adjustment that would have applied to the exempt settling
1060988, 1060989, 1060990
31
states shall be reallocated among the nonexempt settling
states according to each nonexempt state's allocable share.
Because a diligent-enforcement determination as to one
settling state will have an adverse impact on the remaining
nonexempt settling states, it is essential that disputes
regarding diligent enforcement be resolved in a national
arbitration proceeding.  Individual resolution of diligent-
enforcement disputes in 52 separate state courts would involve
the application of different standards in determining what
activities constitute diligent enforcement and could lead to
inconsistent and conflicting determinations on the issue.  A
national arbitration proceeding will ensure that disputes
regarding diligent enforcement are resolved by three neutral
arbitrators "'who are guided by one clearly articulated set of
rules that apply universally in a process where all parties
can fully and effectively participate.'" State v. Philip
Morris, Inc., 8 N.Y.3d at 581, 869 N.E.2d at 640 (quoting
State v. Philip Morris, Inc., 30 A.D.3d 26, 32-33, 813
N.Y.S.2d 71, 76 (N.Y. App. Div. 2006)).
The State also argues that even if the dispute regarding
diligent enforcement is an arbitrable issue, the dispute
1060988, 1060989, 1060990
32
should be resolved in a local proceeding that excludes the
other settling states.  The State maintains that the agreement
does not envision a national arbitration proceeding based on
language in the arbitration provision stating that "[e]ach of
the two sides to the dispute shall select one arbitrator."
The State infers from this language that the agreement does
not contemplate a national arbitration because the settling
states have competing interests as to diligent enforcement.
However, as noted previously, we conclude that the
agreement requires a national, as opposed to a local,
arbitration proceeding.  The agreement is an agreement between
52 states and territories and numerous PMs; it provides that
the settling states would dismiss all tobacco-related lawsuits
and, as consideration for doing so, would receive annual
monetary compensation from the PMs.  The settling states
represent one side to the agreement; the PMs represent the
other side.  Therefore, the language of the agreement refers
to the collective settling states and the collective PMs, each
choosing an arbitrator.  We also note that conducting 52
separate arbitration proceedings would likely be fraught with
the same type of inequitable and inconsistent results that
1060988, 1060989, 1060990
The State contends that the PMs have not provided any
9
evidence demonstrating that the State has failed to diligently
enforce its qualifying statute.  The State therefore argues
that the PMs have not proved that there is a bona fide
arbitrable dispute as to this issue.  This Court has stated
that a party moving to compel arbitration must produce "some
evidence" tending to establish its claim.  Ryan's Family Steak
Houses, Inc. v. Regelin, 735 So. 2d 454, 457 (Ala. 1999).
However, in cases involving the application of an arbitration
provision, this requirement extends only to the moving party's
"initial burden of producing 'some evidence' that a contract
calling for arbitration exists and that the underlying
transaction involves interstate commerce." Title Max of
Birmingham,     So. 2d at     (citing Polaris Sales, Inc. v.
33
would arise were the individual state courts to resolve this
dispute.  Independent resolution of diligent-enforcement
disputes by local arbitration panels would likely result in
the development of "'fifty-two different sets of payment
rules'" that would unfairly burden some states and benefit
others and result in "'wave after costly wave of new
litigation.'" Connecticut v. Philip Morris, Inc., 279 Conn.
785, 800, 905 A.2d 42, 50 (2006) (quoting trial court). 
We therefore conclude that both the language and the
structure of the agreement compel arbitration of the dispute
regarding the State's diligent enforcement of its qualifying
statute.  We further conclude that the structure and purpose
of the agreement envision a national, as opposed to a local,
arbitration proceeding.9
1060988, 1060989, 1060990
Heritage Imports, Inc., 879 So. 2d 1129, 1132 (Ala. 2003)).
The parties agree that the agreement contains a valid
arbitration clause, and neither party argues that the
agreement does not involve interstate commerce.  Therefore, it
appears that the PMs have met their initial burden.  Moreover,
the merits of the issue regarding the State's diligent
enforcement of the qualifying statute are not before us.
Instead, our review is limited to whether the diligent-
enforcement issue falls within the scope of the arbitration
provision in the agreement.      
34
B. The State's Request for a Declaratory Order 
The State seeks review of the Montgomery Circuit Court's
decision to deny without prejudice the State's request for a
declaratory order.  The agreement allows any settling state or
PM to bring an action in the settling state's respective state
court to obtain "a declaration construing any such term [of
this agreement] with respect to disputes, alleged violations
or alleged breaches within such Settling State." § VII(c)(1).
The State gave the required notice that it intended to move
for a declaratory order to have the Montgomery Circuit Court
construe the term "diligent enforcement" as it is used in the
agreement.  The State argues here that the Montgomery Circuit
Court erred in denying its motion for a declaratory order
because, it argues, the motion was not actually filed and
there was never any briefing or hearing on the issue.  We
agree.
1060988, 1060989, 1060990
The PMs point out that the State's intention to obtain
10
a declaratory order construing the term "diligent enforcement"
would constitute an improper attempt to have the Montgomery
Circuit Court resolve an issue that is the subject of
arbitration. See AT&T Techs., Inc. v. Communication Workers of
America, 475 U.S. 643, 649 (1986) ("[I]n deciding whether the
parties have agreed to submit a particular grievance to
arbitration, a court is not to rule on the potential merits of
the underlying claims."); Karl Storz Endoscopy-America, Inc.,
808 So. 2d at 1013 ("[A] de facto resolution of the merits of
[a] claim" "would render entirely illusory the right to a
resolution through arbitration.").  However, the PMs' argument
addresses the merits of the State's motion.  Because we have
already determined that the Montgomery Circuit Court could not
deny a motion that was never filed, we do not reach this
argument.  
35
This Court has stated that "'"the court can consider only
the issues made by the pleadings, and the judgment may not
extend beyond such issues nor beyond the scope of the relief
demanded."'" Chapman v. Gooden, [Ms. 1051712, June 1, 2007]
___ So. 2d ___, ___ (Ala. 2007) (quoting Central Bank of
Alabama, N.A. v. Ambrose, 435 So. 2d 1203, 1206 (Ala. 1983),
quoting in turn Sylvan Beach, Inc. v. Koch, 140 F.2d 852, 861-
62 (8th Cir. 1944)).  The State had not yet moved for the
declaratory order; therefore, we reverse the circuit court's
decision denying the State's motion for a declaratory order,
and we remand these cases with instructions for the circuit
court to vacate the denial of the State's anticipated motion.10
Conclusion
1060988, 1060989, 1060990
36
For 
the 
foregoing 
reasons, 
we 
conclude 
that 
the
Montgomery Circuit Court correctly held that the arbitration
provision in the agreement encompasses the dispute regarding
diligent enforcement and that that dispute is to be resolved
in a national arbitration proceeding.  We therefore affirm
that portion of the circuit court's judgment.  However,
because the State has not moved for a declaratory order, we
reverse the circuit court's denial of an anticipated motion
and remand this case with instructions for the Montgomery
Circuit Court to vacate its denial.
1060988 –- AFFIRMED IN PART; REVERSED IN PART; AND
REMANDED WITH INSTRUCTIONS.
1060989 –- AFFIRMED IN PART; REVERSED IN PART; AND
REMANDED WITH INSTRUCTIONS.
1060990 –- AFFIRMED IN PART; REVERSED IN PART; AND
REMANDED WITH INSTRUCTIONS.
Cobb, C.J., and Lyons, Woodall, Stuart, Smith, Bolin,
Parker, and Murdock, JJ., concur.