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Court Denies N.Y. State a Separate Arbitration Over Huge Tobacco Settlement
Appeals court also removes Manhattan justice as judge responsible for enforcing compliance with the 1998 settlement
New York Law Journal
May 19, 2008
New York state is not entitled to its own separate arbitration to determine whether it must contribute to a $1.1 billion adjustment that the tobacco industry has won for payments it must make under the 1998 nationwide tobacco settlement, a unanimous appeals court has ruled.
In an unsigned ruling, the Appellate Division, 1st Department, last week reversed a January decision by Manhattan Supreme Court Justice Charles E. Ramos granting the state attorney general's request for a separate arbitration and ordering the tobacco industry to select an arbitrator for the single-state arbitration.
In its four-page decision, the panel also removed Ramos as the judge responsible for enforcing compliance in New York with the 1998 settlement. Ramos has overseen settlement-related issues since 2001.
The attorney general's office did not respond to a request for comment.
At issue is a determination that could affect some, and possibly all, of the roughly $800 million a year New York receives from the settlement, which provides for annual payments from the tobacco industry to 52 states and territories.
The payments, which compensate states for expenditures made for treatment of smoking-related ailments both for their own employees and under their Medicaid programs, have been estimated to total $248 billion over the first 25 years of the settlement.
The pact allows the 45 signatory cigarette makers to receive a reduction in their annual payments for any year in which they can demonstrate that the pact has caused them to lose market share to the 80 manufacturers who operate outside the accord.
The pact has the potential to place the signatories at a competitive disadvantage because they are required to operate under marketing and advertising restrictions. In addition, they are required to contribute to the annual payments made to the states, which nationwide have been running at about $6.2 billion a year.
The first year in which the signers were entitled to claim a reduction in their payments was 2004, based on 2003 cigarette sales data. It was determined that the 40 signatories lost a 6 percent market share because of their participation in the pact. The percentage translated to a $1.1 billion loss nationwide.
But the pact also provides that, before the signers could reduce any state's payment to recoup that loss, they must prove the state had failed to "diligently enforce" statutes it was required to adopt in joining the settlement in order to put the signers and nonsigners on equal footing.
Those statutes require the non-signers to make annual payments in each state, based on market share in that state, that are equivalent to the payments made by those who had joined the pact.
New York adopted such a law in Public Health Law §1399-oo, which resulted in payments by the non-signers of 2 cents per every cigarette sold within the state in 2003, the base year upon which the 2004 adjustment was calculated. In total, New York collected $1.8 million from the non-signers in 2003. That money is to be held in escrow by the state to satisfy any future smoking-related claims asserted against the non-signers.
ENORMOUS FISCAL DOWNSIDE
Resolution of whether New York has diligently enforced its statute has enormous financial repercussions. Should the state be found to be the only one not to have diligently enforced its statute, it would be required to contribute its entire $800 million payment to cover the industry's $1.1 billion adjustment for 2004.
If other states are also found to have failed to diligently enforce their statutes, however, New York's share of the $1.1 billion could be reduced proportionately. Any single state's responsibility for the adjustment must reflect the ratio of its payments for the year in question to the total payments received during that year by all states found not to have diligently enforced their statutes.
The question before Ramos, and subsequently the 1st Department, was whether the issue of New York's diligent enforcement should be decided in a single nationwide arbitration or a separate arbitration involving only New York.
The 1st Department, in State of New York v. Philip Morris, 400361/97, rejected Ramos' conclusion that the question should be decided in a single-state arbitration.
That issue, the panel wrote, had been resolved by the 1st Department in 2006, when a separate panel overturned a different ruling from Ramos. That decision said the court, as opposed to an arbitration panel, should decide diligent enforcement issues.
On the question of a national versus New York-only arbitration, Ramos had accepted the attorney general's argument that a nationwide arbitration was inappropriate because each settling state reflected a separate side of the dispute.
The panel, however, wrote that the court in its earlier ruling had held that the 1998 pact provided for only two sides in the arbitration, the industry and the states collectively. The court's earlier ruling, State v. Philip Morris, AD3d 26, was upheld by the Court of Appeals, 8 NY3d 574 (2007).
Justices Angela M. Mazzarelli, David Friedman, John T. Buckley, John W. Sweeny Jr. and Diane T. Renwick joined in last week's ruling, which also noted that appellate courts in four other states had taken a similar position: Alabama, Connecticut, Indiana and Maryland.
So far, 20 states have agreed to submit diligent enforcement issues to a single arbitration, according to the National Association of Attorneys Generals. The signatories have designated former Judge William G. Bassler of the District of New Jersey as their arbitrator. The 20 states have designated Abner Mikva, a former judge of the U.S. Court of Appeals for the D.C. Circuit, as their arbitrator.
Under the terms of the settlement agreement Mikva and Bassler must select the third member of the arbitration panel, who must also be a former federal judge.
Thirteen states continue to appeal orders requiring that the question of diligent enforcement be decided in arbitration as opposed to by a state judge, according to the attorneys general group.
'CONFLICTING INTERESTS'
In accepting the attorney general's argument that each state is entitled to a separate arbitration, Ramos had found that the states have "conflicting interests." Only those states found to have failed to diligently enforce their statutes can have their payments reduced to cover the adjustment, he noted.
In addition to the two reversals on questions relating to the proper forum for resolution of diligent enforcement, the 1st Department also rebuffed Ramos in 2003 when he sought to examine the propriety of a $625 million award in attorney fees to the six firms that represented New York in litigation that was resolved as a part of the 1998 settlement.
The fee awards were also authorized under an arbitration provision contained in the 1998 pact.
The 1st Department ruled that Ramos was without jurisdiction to scrutinize those awards.
