Opinion ID: 1601400
Heading Depth: 3
Heading Rank: 3

Heading: The structure of the agreement requires arbitration of the diligent-enforcement dispute

Text: 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 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 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, 838 N.Y.S.2d 460, 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 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 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]