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Arbitration: States Must Arbitrate Tobacco Settlement Dispute (Web)

New York 's Appellate Division, First Department has joined a Connecticut trial court in ruling that states must arbitrate a dispute arising out of the multistate tobacco Master Settlement Agreement ("MSA").

In State of New York v. Phillip Morris Inc., 2006 WL 871154 (N.Y. A. D. 1st Dept. April 6, 2006)(available at, the Appellate Division agreed with State of Connecticut. v. Phillip Morris Inc., 2005 WL 2081763 (Conn. Super. 2005) and referred the parties' dispute to the arbitration.

The MSA's dispute resolution clause 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.

A dispute arose as to whether an adjustment calculation made by an independent auditor in the matter was proper, because according to the states, a nonarbitrable finding was required as a condition precedent to the calculation being performed, and such finding had not been made.

The Appellate Division dismissed the state's arguments. Citing New York State cases--notwithstanding the clause's designation of the FAA as governing the arbitration--the court found that the terms "arising out of" and "relating to" were broad and encompassed any matter relating to the independent auditor's calculations.

The court also looked to the need for uniformity in the application of the MSA, stating:

We note, as did the Connecticut Superior Court when it addressed this identical issue on a motion to compel arbitration in that state, that there is a compelling logic to having these disputes handled by a single arbitration panel of three federal judges, rather than numerous state and territorial courts. It saves all parties to the agreement from having to relitigate the Independent Auditor's determinations "on multiple occasions, with potentially conflicting decisions by multiple tribunals."   . . . The chaos that can result from numerous tribunals addressing identical issues with varying results is underscored by the fact that the Connecticut court reached the opposite conclusion from that of the [trial] court here. . . . [E]ach governmental signatory has its own self-interest at stake in the outcome of this issue, which is necessarily in conflict with every other state. Such a result defeats the whole purpose of having a Master Settlement Agreement. The mechanism of submitting disputes involving the decisions of the Independent Auditor to a neutral panel of competent 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, obviates this problem and ensures fairness for all parties to the MSA.  To hold otherwise is contrary to both the spirit and the plain language of the Master Settlement Agreement.
(Citation omitted.)

 --Helena Tavares Erickson, CPR Senior Vice President