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State ex rel. Greitens v. American Tobacco Co.

Supreme Court of Missouri, En Banc

February 14, 2017

STATE ex rel. ERIC GREITENS, Appellant/Cross-Respondent,
v.
AMERICAN TOBACCO CO., et al., Respondents/Cross-Appellants, and COMMONWEALTH BRANDS, INC., et al., Appellants.

         APPEAL FROM THE CIRCUIT COURT OF THE CITY OF ST. LOUIS The Honorable Jimmie M. Edwards, Judge

          Mary R. Russell, Judge

         This case concerns disputes between Missouri and certain tobacco companies arising out of the Master Settlement Agreement ("MSA"). Tobacco manufacturers that participated in the MSA ("PMs"), Missouri, and other states arbitrated a dispute arising out of the MSA. One dispute concerned the application of the Non-Participating Manufacturer Adjustment ("NPM Adjustment"), a provision in the MSA that reduces the amount the PMs must pay to states that failed to diligently enforce certain legislation during a relevant year. During the arbitration proceedings, more than 20 states and the PMs entered into a partial settlement agreement. Missouri and other states did not join the settlement. The arbitration panel ("the Panel") issued a Stipulated Partial Settlement and Award ("Award"), which gave effect to the partial settlement and directed how the NPM Adjustment would be allocated among non-settling states in light of the settlement.

         The Panel ultimately found that Missouri was not diligent in enforcing its legislative enactment and, consequently, the NPM Adjustment applied to reduce Missouri's payment from the PMs for the year in question.

         Missouri filed motions with the Circuit Court of the City of St. Louis seeking relief from the Panel's decisions.[1] Missouri asked for vacatur or modification of the Panel's Award, arguing the Award improperly amended the MSA in a manner that materially and adversely impacted Missouri's legal interests under the contract. Missouri also moved to compel the PMs to engage in a single-state arbitration with Missouri over another dispute regarding application of the NPM Adjustment in a subsequent year. The trial court overruled Missouri's motion to compel single-state arbitration, but modified the Award as requested by Missouri.

         Missouri appeals from the trial court's judgment overruling its motion to compel single-state arbitration, arguing the MSA does not contain any provisions indicating that the parties agreed to arbitrate their disputes in a nationwide or multistate forum. This Court disagrees and finds that the text and structure of the MSA demonstrate the parties intended to arbitrate disputes relating to the NPM Adjustment in a multistate arbitration proceeding. Because the dispute for which Missouri sought to compel single-state arbitration concerns the NPM Adjustment dispute, the trial court correctly refused to compel single-state arbitration.

         In their cross-appeal, the PMs argue that the trial court erred in modifying the Panel's Award because the Panel interpreted the parties' contract and, under the applicable standard of review, courts of this state are not permitted to review the merits of the Panel's interpretation. If the Panel's Award had interpreted ambiguous provisions of the MSA, the PMs would be correct. However, this Court finds that the relevant terms of the MSA were unambiguous and that the Panel exceeded its powers by amending those terms without the consent of Missouri and other states that were materially and negatively affected by the amendment. As a result, the Panel's Award was appropriately modified so that it no longer affects Missouri's contractual rights and expectations under the MSA.

         The judgment of the trial court is affirmed.

         Factual Background

         In 1998, 52 U.S. states and territories[2] entered into the MSA with the PMs.[3]Under the MSA, the states released the PMs from tobacco-related consumer protection and product liability lawsuits in return for the PMs' agreement to limit certain advertising and legislative activities and to make annual payments to the states in perpetuity. Non-participating manufacturers ("NPMs") are tobacco companies that did not agree to the MSA.

         The PMs' annual MSA payments are subject to a number of adjustments, which must be calculated by an Independent Auditor ("Auditor"). Once the Auditor calculates the amount the PMs are required to pay the states under the MSA for a given year, the PMs make payments to an escrow agent, who then apportions and distributes the funds to the states according to their contractually negotiated "allocable shares."[4]

         One of the adjustments to the PMs' annual payments is the NPM Adjustment. To ensure the PMs did not lose market share to the NPMs, the drafters of the MSA included the NPM Adjustment, which reduces the amount the PMs must pay the states if: (1) the PMs' share of the national market for cigarettes decreases by two percentage points as compared to pre-MSA levels and (2) the MSA was a "significant factor" contributing to the national market share loss. If the Auditor concludes these conditions are met in a payment year, the NPM Adjustment amount may be deducted from every state's MSA payment on a pro rata basis according to the state's allocable share. A state may avoid having its MSA payment reduced, however, by showing that it enacted and "diligently enforced" legislation (referred to as a "qualifying statute") requiring the NPMs to escrow funds on a per-cigarette basis that is roughly equivalent to the PMs' per-cigarette payment under the MSA.[5] The allocable shares of the NPM Adjustment of "diligent" states are then "reallocated" among the remaining, "non-diligent" states on a pro rata basis.

         A dispute arose over the NPM Adjustment for the 2003 MSA Payment. The Auditor determined that the two preliminary conditions for application of the NPM Adjustment were satisfied in 2003 but declined to apply the adjustment because the states' diligence had not yet been determined. The Auditor sent the dispute to binding arbitration in accordance with the arbitration clause of the MSA. Missouri and other affected states refused to arbitrate and filed declaratory judgment actions in their respective state courts for a determination regarding the meaning of the term "diligently enforced" as used in the NPM Adjustment provisions of the MSA. The PMs moved to compel arbitration in these actions under the arbitration clause of the MSA, which provides that any dispute, controversy, or claim "arising out of or relating to" any calculations or determinations made by the Auditor "shall be submitted to binding arbitration." MSA § XI(c). Because the 2003 NPM Adjustment dispute arose out of and related to calculations or determinations made by the Auditor for the PMs' 2003 MSA payments, the trial court ordered Missouri to arbitrate its challenge to the application of the NPM Adjustment to the 2003 MSA Payment.

         Missouri and 50 other states ultimately agreed to collectively arbitrate the 2003 NPM Adjustment dispute with the PMs pursuant to the Agreement Regarding Arbitration ("ARA").[6] The PMs incentivized the states to join the multistate arbitration by offering a liability reduction of 20 percent for any state ultimately found not diligent and agreeing to release certain funds held in a disputed payments account.

         At the initiation of the multistate arbitration, all states claimed they had diligently enforced their qualifying statutes, yet the PMs originally contested the diligence of every state. Before the Panel heard arguments regarding the diligence of individual states, however, the PMs issued a "no-contest" determination as to 16 states ("no-contest states").

         The Panel then held diligence hearings for the remaining contested states, starting with Missouri. At the outset of its hearing, Missouri sought to reserve the opportunity to challenge the diligence of any remaining contested states should the PMs decide to stop contesting the diligence of any state later in the arbitration proceedings. The Panel agreed that Missouri would be given that opportunity should the situation arise. At the diligence hearing, Missouri and the PMs introduced evidence regarding Missouri's attempts to enforce its qualifying statute in 2003 and presented fact witnesses who discussed the intended meaning of the term "diligently enforced" as used in the MSA.

         As the Panel proceeded with the state-specific diligence hearings, the PMs and 22 states ("Term Sheet States") reached an agreement to settle disputes regarding the NPM Adjustment for 2003 and subsequent years (the "Term Sheet Settlement").[7] Only two of the Term Sheet States were no-contest states.

         Missouri and other non-Term Sheet States objected to the settlement, arguing that it negatively affected their rights under the MSA. Despite those objections, the Panel entered its Award giving effect to the Term Sheet Settlement. Because the NPM Adjustment provisions of the MSA were silent as to how the Panel should proceed after a partial settlement, the Panel applied a common law pro rata judgement reduction method to the NPM Adjustment, reducing the available NPM Adjustment amount by the aggregated shares of the Term Sheet States. The Panel determined that the non-Term Sheet States would not be prejudiced by the Term Sheet Settlement if the NPM Adjustment was reduced according to this judgment reduction scheme. The Panel's order then directed the Auditor to treat Term Sheet States as "not subject to" the NPM Adjustment for purposes of the allocation and reallocation provisions of the MSA. The diligence of contested Term Sheet States was never determined by the Panel.

         The Panel then issued its final awards determining the diligence of the 15 contested, non-Term Sheet States. It concluded that Missouri and five other states had not been diligent in enforcing their qualifying statutes, while the remaining states were diligent. As a result, Missouri and the other states found not diligent bore their own allocated share of the NPM Adjustment as well as the shares reallocated from the no-contest states (excluding the two no-contest states that agreed to the Term Sheet Settlement) and the nine contested states found diligent by the Panel. Missouri's MSA payment for 2003 was reduced by an additional $50 million due to its liability for the reallocated shares of the NPM Adjustment from the no-contest states and the states found diligent by the Panel.

         Missouri moved to vacate the Panel's finding that Missouri was not diligent in enforcing its qualifying statute in the Circuit Court of the City of St. Louis, and asked the trial court to modify the Award by treating the Term Sheet States as "non-diligent" for purposes of calculating Missouri's liability for the NPM Adjustment. Missouri also sought an order from the trial court compelling single-state arbitration between Missouri and the PMs on the issue of the application of the 2004 NPM Adjustment to Missouri's 2004 MSA Payment.[8]

         The trial court overruled Missouri's motion to vacate the Panel's final non-diligence determination[9] and its motion to compel single-state arbitration. The trial court did, however, modify the Panel's Award because it found that the Award erroneously violated the procedure for amending the MSA. The MSA prohibits amendments unless they are executed in writing by all states affected by the amendment. The trial court concluded that the Award effectively amended the MSA without the consent of the non-Term Sheet States by releasing the Term Sheet States from the NPM Adjustment allocation and reallocation provisions of the MSA. This amendment adversely affected Missouri and other non-diligent, non-Term Sheet States, according to the trial court, because their liability for the reallocated NPM Adjustment was substantially increased due to the significant reduction in potentially non-diligent states. Consequently, the trial court modified the Award and instructed the Auditor to treat as "non-diligent" the 20 Term Sheet States whose diligence was contested, but not proven, when calculating the NPM Adjustment applicable to Missouri's share of the PMs' MSA payments for 2003.

         Missouri appeals the trial court's decision not to compel single-state arbitration between the PMs and Missouri. The PMs cross-appeal from the trial court's modification of the Panel's Award for the 2003 NPM Adjustment.[10]

         Discussion

         A. Modification of Award

         1. Collateral Estoppel

         As a preliminary matter, Missouri argues that the PMs are collaterally estopped from relitigating the issue of whether the Panel exceeded its powers in entering the Award because appellate courts in Pennsylvania and Maryland have already decided that issue against the PMs. See Maryland v. Philip Morris, Inc., 123 A.3d 660, 680 (Md. Ct. Spec. App. 2015), cert. denied 132 A.3d 195 (Md. 2016), cert. denied sub nom. R.J. Reynolds Tobacco Co. v. Maryland, 137 S.Ct. 295 (2016); Pennsylvania ex rel. Kane v. Philip Morris USA, Inc., 114 A.3d 37 (Pa. Commw. Ct. 2015), appeal denied, 129 A.3d 1244 (Pa. 2015), cert. denied sub nom. R.J. Reynolds Tobacco Co. v. Kane, 137 S.Ct. 292 (2016). Under collateral estoppel, also known as issue preclusion, a court's decision about an issue of fact or law that is necessary to the court's judgment may preclude relitigation of that issue in a lawsuit about a different cause of action involving a party to the first case. Allen v. McCurry, 449 U.S. 90, 94 (1980). The preclusive effect of a judgment is generally determined by laws of the jurisdiction in which the judgment was rendered. Strobehn v. Mason, 397 S.W.3d 487, 494 (Mo. App. 2013) (citing Restatement (2d) of Conflict of Laws § 95 (1971)). Because the decisions on which Missouri relies were issued by courts in Maryland and Pennsylvania, this Court will look to the laws of those states to determine the preclusive effect of those decisions on the present proceedings.

         Missouri's position that two appellate court decisions issued during the pendency of this appeal should collaterally estop the PMs from pursuing this legal issue is untenable. First, as the PMs point out, decisions from other courts about this issue are inconsistent. While Missouri's brief focuses exclusively on the appellate court decisions in Pennsylvania and Maryland holding that the Panel exceeded its powers, an unappealed trial court order from Colorado reached the opposite conclusion. Colorado ex. rel. Suthers, No. 1997CV3432 (Colo. D. Ct. Feb. 11, 2014). When prior decisions on the issue are inconsistent, it would be unfair to apply non-mutual collateral estoppel because doing so would give preclusive effect to decisions that are favorable to the party seeking preclusion while ignoring any unfavorable decisions. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 330 (1979) ("Allowing offensive collateral estoppel may also be unfair to a defendant if the judgment relied upon as a basis for the estoppel is itself inconsistent with one or more previous judgments in favor of the defendant."); see also Garrity v. Md. State Bd. of Plumbing, 135 A.3d 452, 460 (Md. 2016); Office of Disciplinary Counsel v. Kiesewetter, 889 A.2d 47, 52 (Pa. 2005); Bi-State Dev. Agency v. Whelan Sec. Co., 679 S.W.2d 332, 336-37 (Mo. App. 1984).

         Second, applying non-mutual, offensive collateral estoppel in the manner sought by Missouri would deprive the PMs of the opportunity to fully and fairly litigate this issue because of the unique structure of the MSA. Colandrea v. Wilde Lake Cmty. Ass'n, 761 A.2d 899, 909 (Md. 2000) (party against whom preclusion is sought must have had a fair opportunity to litigate the issue); Office of Disciplinary Counsel v. Duffield, 644 A.2d 1186, 1189 (Pa. 1994) (for collateral estoppel to apply, the party must have had a full and fair opportunity to litigate the issue in the prior proceeding); see also James v. Paul, 49 S.W.3d 678, 682 (Mo. banc 2001) (the party against whom collateral estoppel is asserted must have been given a full and fair opportunity to litigate the issue in the prior suit). Under the dispute resolution provisions of the MSA, any non-arbitrable dispute must be litigated in the designated MSA court of each state, even if the dispute concerns issues common to many or all states. The PMs are required to litigate their claims against each state individually, and a decision favorable to the PMs by one court could not bind other states or collaterally estop them from relitigating the same issues against the PMs in their own state courts. Allowing the states, based on one or two favorable decisions, to collaterally estop the PMs nationwide when the PMs have no opportunity to do the same would be manifestly unfair.

         The PMs are not precluded from litigating the issue of whether the Panel exceeded its powers when it entered its Award.

         2. Standard of Review

         This Court will affirm the trial court's judgment unless there is no substantial evidence to support it, it is against the weight of the evidence, or it erroneously declares or applies the law. Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 431 (Mo. banc 2015). Whether the Panel exceeded its power is a legal question subject to de novo review. Behnen v. A.G. Edwards & Sons, Inc., 285 S.W.3d 777, 779 (Mo. App. 2009).

         The parties agree that the Federal Arbitration Act ("FAA"), codified at 9 U.S.C. § 1 et. seq., provides the governing standard for this Court's review of the Panel's Award.[11] Both parties point to Oxford Health Plans LLC v. Sutter as the United States Supreme Court's most recent, controlling statement of the applicable standard of review for this case. 133 S.Ct. 2064 (2013).

         The FAA limits judicial review of arbitration awards to maintain arbitration's ability to provide efficient and streamlined dispute resolution outside of "full-bore" legal proceedings. Id. at 2068. Courts may vacate an arbitrator's award under the FAA "only in very unusual circumstances." Id. Under the FAA, a court may vacate an arbitration award when: (1) the award was "procured by corruption, fraud, or undue means"; (2) the arbitrators demonstrated partiality or corruption; (3) the arbitrators committed misconduct in "refusing to postpone a hearing" or "to hear evidence pertinent and material to the controversy"; (4) "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made"; and (5) a person who was not a party to an arbitration in an administrative context is "adversely affected or aggrieved by the award." 9 U.S.C. § 10(a)(1)-(4), (c).

         Missouri moved for vacatur or modification of the Panel's Award under 9 U.S.C. § 10(a)(4).[12] This statute imposes a high bar to attain the relief Missouri seeks. To show that the Panel "exceed[ed] [its] powers," Missouri must prove that the Panel "act[ed] outside the scope of [its] contractually delegated authority" by issuing an award reflecting the Panel's "own notions of economic justice" rather than "drawing its essence from the contract." Oxford Health, 133 S.Ct. at 2068 (internal quotations and alterations omitted). Under this standard, it is not enough to show that the Panel made even a serious mistake in construing the provisions of the MSA that were subject to binding arbitration. Id. "Because the parties bargained for the arbitrator's construction of [those portions of] their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court's view of its (de)merits." Id. (internal quotations omitted).

         The PMs argue that the trial court impermissibly modified the Award by reviewing the merits of the Panel's interpretation of the MSA under a more lenient "clearly erroneous" standard rather than the FAA standard set out above. The PMs base this argument on the trial court's conclusion that the Panel's use of a common law judgment reduction method to reduce the amount of the NPM Adjustment by the allocable shares of the Term Sheet States was "clearly erroneous as it violates the MSA's procedure for amending the MSA." Despite the trial court's perhaps confusing use of the words "clearly erroneous," the trial court did not apply a clearly erroneous standard of review to the Panel's Award. Prior to this isolated statement on which the PMs solely rely for this argument, the trial court clearly articulated the FAA's standard of review in its judgment before considering the claims raised by the parties. Read in ...


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