States, tobacco fight over where to fight
Arbitrators should decide, companies say
R.J. Reynolds Tobacco Co. and other major tobacco companies have won several early victories in their legal fight with the states over where a settlement-payment dispute should be heard.
The tobacco companies want a panel of three former federal judges to hear the case, but states across the country, including North Carolina, have filed court papers to have their own state courts decide the issue.
The stakes are huge for both sides. The companies want to reduce their payments from the 1998 Master Settlement Agreement because of market-share losses, and the states want the payments to stay the same.
"It's clearly spelled out in the MSA," David Howard, a spokesman for Reynolds, said this week. "A dispute over a payment, which this is, should be resolved through binding arbitration."
For payments to be cut, an independent auditor must decide that there was a market-share loss by the big tobacco companies and that the settlement was a major factor in that loss. The reduction the tobacco companies want would apply to payments made for 2003.
Small cigarette-makers emerged because of the settlement and have sold cigarettes for less than the big cigarette-makers, grabbing significant market share. The states passed laws aimed at reducing the small companies' competitive advantage by forcing them to put money into escrow in case they are sued by the states. At issue in the dispute between the states and the big companies is whether or not the states "diligently" enforced the law.
North Carolina said in a court filing that the "'diligent enforcement' section does not contain an arbitration clause" and that the issue should be decided in state court.
The tobacco companies argued in court papers that "the MSA's mandatory arbitration clause broadly requires" that disputes over how much money they have to pay is subject to arbitration.
State court judges in New Hampshire, Kentucky, Massachusetts, Connecticut, and most recently Idaho, have ruled that the dispute should go to arbitration, Howard said.
"The Court finds that arbitration of this dispute is mandatory," Darla Williamson, a state court judge in Idaho, wrote in a ruling last week. "First the plain language of the MSA requires arbitration.
"Second, the structure, logistics, and intent of the MSA, including its presumption in favor of arbitration, compel the same result."
Howard said that 36 states have filed court papers against the major tobacco companies. A New York judge ruled in favor of that state's attorney general, but that decision was overturned by an appellate court, he said.
In April, Reynolds paid $1.4 billion to the states and put an additional $647 million into a "disputed-payments" account.
Lorillard Tobacco Co. also withheld part of its payment. Philip Morris USA Inc., the largest U.S. cigarette-maker, paid in full but claims that the amount it paid should be reduced.
No decision has been made in the North Carolina case, said Noelle Talley, a spokeswoman for the N.C. Attorney General's Office. She declined to comment on the recent courtroom losses in other states.
According to the attorney general's office, North Carolina received $135 million this year as part of its share of the payments but should have received $153 million.
Carl Tobias, a professor at the University of Richmond School of Law, said that the state attorneys general might receive somewhat better treatment before a state judge, who might be more sympathetic to the state's cause compared with arbitration before a panel of former federal judges.
Tobias said that for the tobacco companies, having one panel of judges decide the issue makes sense because it is expensive and it could be unwieldy having the case heard in so many different jurisdictions.
