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A Manhattan appeals court Tuesday reinstated a $1.3 billion fee award for attorneys who helped to settle tobacco litigation in California, saying the arbitrators who awarded the fee did not exceed their authority and should not have been second-guessed by a state judge. In October 2002, Manhattan Supreme Justice Nicholas Figueroa said the fee award was improperly based on work the attorneys had done in nationwide tobacco litigation, rather than just the litigation to settle claims on behalf of the state of California. However, a unanimous panel of the Appellate Division, 1st Department, found that Justice Figueroa had “improperly interjected” himself into a dispute over the merits of the award. “It is beyond cavil that the scope of judicial review of an arbitration proceeding is extremely limited,” the court wrote in an unsigned opinion, In re Application of Brown & Williamson, 1284N. Going a step further, the court said, “Although our finding that the arbitrators did not exceed their power is dispositive of the issue on appeal, we nevertheless observe that the award is neither irrational nor violative of public policy.” The $1.3 billion fee award, given to a 56-firm consortium known as the Castano Group, was the largest under the 1998 nationwide tobacco settlement that required tobacco companies to pay $206 billion to 46 states. It was the only fee award challenged by the tobacco industry. The Castano Group, taking on the role of a private attorney general under California law, sued the tobacco industry and helped to win $25 billion for the state. The group began suing tobacco companies in 1994 in Louisiana and has sued the industry in 25 states. The $1.3 billion fee was awarded by a panel of three arbitrators in New York, under a procedure established by the 1998 settlement. Because the fee was decided in New York, challenges to it have been heard by New York courts. Two of the arbitrators said that the award would compensate the firms for their work in the California action, “national work product” available for the California action, and “national effort contemporaneous” with the California action, which might have contributed to a resolution. One arbitrator objected, though, saying the fee “shocked the conscience” and amounted to a payout for “years of work done on other cases.” The tobacco companies, led by Brown & Williamson, challenged the ruling, and Figueroa agreed that the arbitrators had exceeded their authority by granting the fee. Figueroa found that the arbitrators were bound by a narrow fee agreement that barred fees “in connection with any litigation other than the Action.” The judge vacated the award as to all the tobacco companies, including Philip Morris, which did not join the other companies in challenging the award. In reversing Figueroa, the 1st Department said that “an arbitration award cannot be vacated if there exists any plausible basis for it.” It also stressed that the arbitrators “took great pains” to evaluate the award and determined that the experience and expertise of the firms had to be considered. In the end, the court said, the tobacco companies’ challenge turned on a single issue: whether the fee agreement Figueroa relied upon “defines the power of the arbitrators to act or whether that section defines the scope, limits or meaning of the Fee Agreement itself.” Although there might have been conflicting evidence as to how the parties understood the phrase “in connection with,” the appeals court wrote, “it was up to the arbitrators to evaluate and determine which of the conflicting interpretations to accept.” The $1.3 billion award represented 5 percent of California’s $25 billion share of the settlement, and, if it stands, will be paid in addition to the settlement. Another group of California attorneys won $637.5 million for their work. The six firms who represented New York in the settlement won $625 million in fees. New York, like California, received $25 billion of the nationwide settlement. Justices Peter Tom, Angela M. Mazzarelli, Richard T. Andrias, David Friedman and George D. Marlow concurred on the ruling. Harvard Law School professor Arthur Miller and David N. Ellenhorn, counsel at Proskauer Rose, represented the Castano Group on appeal. Miller argued before the court. Jeffrey E. Stone, a partner at McDermott, Will & Emery in Chicago, represented the tobacco companies. He was traveling and could not be reached for comment.

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