Opinion ID: 1601400
Heading Depth: 3
Heading Rank: 1

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

Text: `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 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., 179 Md.App. 140, 944 A.2d 1167, 1177 (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, 838 N.Y.S.2d 460, 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 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 505, 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 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 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 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 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 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, 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 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 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.