COMMONWEALTH OF KENTUCKY EX REL., GREGORY D. STUMBO, ATTORNEY GENERAL v. PHILIP MORRIS, USA; R. J. REYNOLDS TOBACCO COMPANY; LORILLARD TOBACCO COMPANY; COMMONWEALTH BRANDS, INC.; LIGGETT GROUP LLC; SHERMAN 1400 BROADWAY N.Y.C., INC.; KING MAKER MARKETING, INC.; JAPAN TOBACCO INTERNATIONAL USA, INC.; KRETEK INTERNATIONAL, INC.; P. T. DJARUM; LIBERTY BRANDS, LLC; VIBO CORPORATION, D/B/A GENERAL TOBACCO; SANTA FE NATURAL TOBACCO COMPANY, INC.; VON EICKEN GROUP; FARMERS TOBACCO CO. OF CYNTHIANA, INC.; AND TOP TOBACCO, L.P.
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RENDERED: NOVEMBER 2, 2007; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2006-CA-001425-MR
COMMONWEALTH OF KENTUCKY
EX REL., GREGORY D. STUMBO,
ATTORNEY GENERAL
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER L. CRITTENDEN, JUDGE
ACTION NO. 98-CI-01579
PHILIP MORRIS, USA; R. J. REYNOLDS
TOBACCO COMPANY; LORILLARD
TOBACCO COMPANY;
COMMONWEALTH BRANDS, INC.;
LIGGETT GROUP LLC; SHERMAN 1400
BROADWAY N.Y.C., INC.; KING MAKER
MARKETING, INC.; JAPAN TOBACCO
INTERNATIONAL USA, INC.; KRETEK
INTERNATIONAL, INC.; P. T. DJARUM;
LIBERTY BRANDS, LLC; VIBO
CORPORATION, D/B/A GENERAL
TOBACCO; SANTA FE NATURAL
TOBACCO COMPANY, INC.; VON EICKEN
GROUP; FARMERS TOBACCO CO. OF
CYNTHIANA, INC.; AND TOP TOBACCO,
L.P.
OPINION AND ORDER
DISMISSING
** ** ** ** **
APPELLEES
BEFORE: LAMBERT, TAYLOR, and WINE, JUDGES.
LAMBERT, JUDGE: The Commonwealth of Kentucky appeals from an Order of the
Franklin Circuit Court compelling arbitration and staying its Motion for Declaratory
Judgment. For the reasons set forth herein, we dismiss this appeal.
In November 1998, the Attorneys General of forty-six states and six
territories (hereinafter “the Settling States”), including Appellant, the Commonwealth of
Kentucky, and the four major domestic tobacco companies ─ Philip Morris, R.J.
Reynolds, Brown & Williamson,1 and Lorillard (hereinafter the “Original Participating
Manufacturers” or “OPMs”) ─ signed the Tobacco Master Settlement Agreement
(hereinafter the “MSA”) ending nationwide litigation by those Attorneys General seeking
compensation for their respective state costs for smoking-related illnesses. In return for a
release by the Settling States, the OPMs promised, inter alia: (1) to make certain
settlement payments to the Settling States, including annual payments in perpetuity; (2)
to fund a national foundation devoted to educating the public about the dangers of
tobacco use; and (3) to adhere to restrictions on their advertising, marketing, and other
practices. The Franklin Circuit Court approved the MSA in 1998 and entered a Consent
Decree in the civil action from which this appeal emanates. See Arnold v.
Commonwealth, ex rel., Chandler, 62 S.W.3d 366 (Ky. 2001).
The MSA authorizes other tobacco product manufacturers to adopt and to
participate in the MSA. These “Subsequent Participating Manufacturers” or “SPMs”
1
Brown & Williamson and R.J. Reynolds have merged and operate under the name Reynolds
American International.
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agreed to make similar annual settlement payments to the Settling States and to adhere to
the same restrictions on their advertising, marketing, and other practices as the OPMs.
OPMs and SPMs are collectively the “Participating Manufacturers” or “PMs.” To date,
approximately $41 billion has been paid to the Settling States pursuant to the MSA, with
the Commonwealth of Kentucky receiving 1.7611586% of each payment.
The provisions of the MSA pertinent to this appeal are in §§ VII(a) and (c)
and § XI(c), in which “MSA Courts” for each state were established to have exclusive
jurisdiction over MSA disputes within each Settling State. Sections VII(a) and (c), the
jurisdictional provisions, read in pertinent part as follows:
(a)
Jurisdiction. Each Participating Manufacturer and
each Settling State acknowledge that the Court: (1) has
jurisdiction over the subject matter of the action
identified in Exhibit D in such Settling State and over
each Participating Manufacturer; (2) shall retain
exclusive jurisdiction for the purposes of implementing
and enforcing this Agreement and the Consent Decree
as to such Settling State; and (3) except as provided in
subsections IX(d), XI(c) and XVII(d) and Exhibit O,
shall be the only court to which disputes under this
Agreement or the Consent Decree are presented as to
such Settling State. . . .
(c)
Enforcement of this Agreement.
(1) Except as provided in subsections IX(d), XI(c),
XVII(d) and Exhibit O, any Settling State or
Participating Manufacturer may bring an action in the
Court to enforce the terms of this Agreement (or for a
declaration construing any such term (“Declaratory
Order”)) with respect to disputes, alleged violations or
alleged breaches within such Settling State.
-3-
The MSA Court for Kentucky is the Franklin Circuit Court. The MSA thus
makes a comprehensive acknowledgment of jurisdiction in the Franklin Circuit Court,
stating only specific limited exceptions. One of those is the exception set forth in §
XI(c), which states:
Resolution of Disputes: 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.
Under the terms of the MSA, annual payments of PMs are subject to
adjustments. For example, an “Inflation Adjustment” upward is applied annually for
inflation, and a “Volume Adjustment” downward is applied based upon the amount that
annual sales fall below sales in the base year of 1997. Addressed in this appeal is the
“NPM Adjustment.” The “NPM Adjustment” potentially is a significant downward
adjustment crafted to adjust for any market share loss of PMs to “Non-Participating
Manufacturers” or “NPMs” as a result of the MSA.
At the time the MSA was negotiated, there was concern that NPMs would
use their competitive advantages to increase their cigarette sales and accumulate shortterm profits without providing security for future damages under the MSA. Therefore,
each State was encouraged to enact a “Qualifying Statute,” which was designed to
-4-
“effectively and fully neutralize[] the cost disadvantages that the [PMs] experience vis-àvis [NPMs] within such Settling States as a result of the [MSA].” § IX(d)(2)(E). These
statutes impose escrow obligations on NPMs in amounts roughly comparable to the PMs'
MSA payment obligations. If any Settling State does not enact and diligently enforce its
Qualifying Statute, and certain other conditions precedent are not met, then the State's
annual MSA payments will be substantially reduced or potentially eliminated by an NPM
Adjustment.
The MSA contains a Model Escrow Statute which the parties agreed
constituted a Qualifying Statute. MSA § IX(d)(2)(E). Subsequent to signing the MSA,
the Commonwealth of Kentucky adopted the Escrow Statute as KRS 131.600-602 and
has since continued to have it in full force and effect. Pursuant to this statue, NPMs
doing business in Kentucky must name the Commonwealth of Kentucky as a beneficiary
to the escrow account. Id.
The potential NPM Adjustment for calendar year 2003 ─ the only year at
issue here ─ totals over $1.2 billion for all Settling States. This adjustment could
substantially reduce the payment that otherwise was due in April 2006 by an approximate
$20.1 million NPM Adjustment for Kentucky, which is Kentucky's allocable share of the
potential $1.2 billion NPM Adjustment.
-5-
There are two requirements to calculate the 2003 NPM Adjustment to the
2003 Annual Payment. § IX(d)(1).2 First, the Independent Auditor selected under the
MSA must determine that a “Market Share Loss” occurred for the PMs during 2003.
§ IX(d)(1)(B)(I). This was done in this case. The Independent Auditor also calculated a
potential maximum 2003 NPM Adjustment to the aggregate MSA payments due on April
15, 2004. Id. Thus the first condition to any ultimate application of the 2003 NPM
Adjustment had been met.
Next it has to be shown that the terms and effect of the MSA have been “a
significant factor contributing to the Market Share Loss” for 2003 sales. § IX(d)(1)(C).
Initially, the “Firm” (an economic consulting firm separately selected under the MSA)
made no Significant Factor Determination. On March 27, 2006, however, the Firm made
the Significant Factor Determination, concluding that the MSA was “more likely than
not” a significant factor in the 2003 Market Share Loss. This satisfied the second
condition to the ultimate application of the 2003 NPM Adjustment.
Although every Settling State had a Qualifying Statute in effect in 2003,
there had been no determination as to whether or not any State had diligently enforced its
Qualifying Statute in 2003. In fact, no proceeding seeking to prove that any State had
failed to enforce its Qualifying Statute had commenced anywhere. Thus, the Independent
Auditor observed that, irrespective of what the Firm's Significant Factor Determination
might be:
2
The NPM Adjustment for SPMs is calculated under MSA § IX(d)(4), but the process is
substantially similar.
-6-
NAAG [National Association of Attorneys General] has
responded to the [Independent Auditor's] Information Request
. . . stating that all Settling States have enacted Model Statutes
and represent [the Statutes] to have been in full force and
effect continuously since the indicated effective date;
therefore, no possible NPM Adjustment is allocated to PMs.
The Independent Auditor added that:
The Independent Auditor is not charged with the
responsibility under the MSA of making a determination
regarding this [diligent enforcement] issue. More
importantly, the Independent Auditor is not qualified to make
the legal determination as to whether any particular Settling
State has “diligently enforced” its Qualifying Statute. . . .Until
such time as the parties resolve this issue or the issue is
resolved by a trier of fact, the Independent Auditor will not
modify its current approach to the calculation.
The original issue in this case was whether Kentucky “diligently enforced”
the Qualifying Statute as enacted in KRS 131.600-131.602. Therefore, to establish that it
had complied with the MSA, the Commonwealth moved the Franklin Circuit Court on
April 21, 2006, for a declaratory order that it had diligently enforced KRS 131.600131.602 in 2003 under MSA § VII. Philip Morris, et al., disputed the Commonwealth's
claim of diligent enforcement and filed a Motion to Compel Arbitration and to Dismiss or
Stay the Motion for Declaratory Judgment. In their Motion, Philip Morris, et al., claimed
that the determination of “diligent enforcement” was subject to arbitration under
provisions of the MSA. The Commonwealth objected to arbitration stating that
jurisdiction to enforce the MSA in Kentucky and to decide this issue was vested with the
Franklin Circuit Court.
-7-
The matter was heard on June 8, 2006, and the court entered a ruling
granting the Motion to Compel Arbitration and staying the Motion for Declaration. It
specifically held that the diligence determination “must be made by the arbitration panel
... because it arises out of a determination by the Independent Auditor.” In addition to
relying on the language of the MSA, the court recognized that to permit fifty-two
different State courts rather than a single arbitration panel to address the issue “would
promote chaos.” The court designated the order “final and appealable,” and this appeal
followed.
The issue before this Court is whether an order compelling arbitration is
final and appealable. We have long held that:
[r]esolution of this issue may be had by reference to KRS
Chapter 417, regarding arbitration. KRS 417.050 provides
that arbitration agreements are valid and enforceable. If a
party to an agreement refuses to arbitrate, the Court may
compel arbitration. If the party disputes the existence of said
arbitration agreement, the Court may render summary
findings on that issue. If an agreement is found to exist, the
Court then shall order the parties to arbitrate. KRS 417.050.
KRS 417.220 states as follows:
Appeals.-(1) An appeal may be taken from:
(a) An order denying an application to compel arbitration
made under KRS 417.060;
(b) An order granting an application to stay arbitration made
under subsection (2) of KRS 417.060;
(c) An order confirming or denying confirmation of an award;
(d) An order modifying or correcting an award;
(e) An order vacating an award without directing a rehearing;
or
-8-
(f) A judgment or decree entered pursuant to the provisions of
this chapter.3
(2) The appeal shall be taken in the manner and to the same
extent as from orders or judgments in a civil action.
It is clear that the list specifically does not include court
orders compelling arbitration. The events from which an
appeal may be had all have one thing in common, namely,
that arbitration has either been denied or has already
occurred.
See Fayette County Farm Bureau Fed'n v. Martin, 758 S.W.2d 713, 713-14 (Ky.App.
1988).
Moreover, the fact that the Circuit Court's Order recites that it is “final and
appealable” does not make it so. Francis v. Crounse Corp., 98 S.W.3d 62, 65 (Ky.App.
2002); Hook v. Hook, 563 S.W.2d 716 (Ky. 1978); Roman Catholic Bishop of Louisville
v. Burden, 168 S.W.3d 414, 415 (Ky.App. 2004). In any event, the Order itself
demonstrates that it is not a final order. It specifically stayed rather than dismissed the
litigation pending completion of the arbitration proceeding, which clearly distinguishes
this case from Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 148
L.Ed.2d 373 (2000), on which the Commonwealth relies. See Id. at 87 n.2. Contrary to
the Commonwealth's contentions, it is not irrevocably deprived of anything by
submission to arbitration. Instead it is protected by the right to appeal any final Circuit
Court judgment resulting from the arbitration.
3
This section obviously refers back to KRS 417.180, which reads:
Judgment or decree on award.-Upon the granting of an order confirming, modifying or
correcting, an award, judgment or decree shall be entered in conformity therewith and be
enforced as any other judgment or decree. Costs of the application and of the proceedings
subsequent thereto, and disbursements may be awarded by the court.
-9-
For the foregoing reasons, the above-styled appeal is hereby dismissed for
failure of appellant to appeal from a final and appealable order.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE PHILIP MORRIS
USA:
Larry C. Deener
Elizabeth A. Deener
Landrum & Shouse LLP
Lexington, Kentucky
David T. Schaefer
Woodward Hobson & Fulton, L.L.P.
Louisville, Kentucky
ORAL ARGUMENT FOR
COMMONWEALTH OF
KENTUCKY:
BRIEF FOR APPELLEES R. J.
REYNOLDS AND LORILLARD
TOBACCO COMPANY:
Larry C. Deener
Landrum & Shouse, LLP
Lexington, Kentucky
Charles S. Cassis
Theresa A. Canaday
Frost Brown Todd LLC
Louisville, Kentucky
ORAL ARGUMENT FOR ORIGINAL
PARTICIPATING MANUFACTURERS:
Steve Patton
Kirkland & Ellis
Chicago, Illinois
- 10 -
BRIEF FOR APPELLEES
COMMONWEALTH BRANDS, INC.;
LIGGETT GROUP LLC; SHERMAN 1400
BROADWAY N.Y.C., INC.; KING
MAKER MARKETING, INC.; JAPAN
TOBACCO INTERNATIONAL USA,
INC.; KRETEK INTERNATIONAL, INC.;
P. T. DJARUM; LIBERTY BRANDS,
LLC; VIBO CORPORATION, D/B/A
GENERAL TOBACCO; SANTA FE
NATURAL TOBACCO COMPANY, INC.;
VON EICKEN GROUP; AND FARMERS
TOBACCO CO. OF CYNTHIANA, INC.:
Robert J. Brookhiser
Elizabeth B. McCallum
Howery LLP
Washington, D.C.
J. Guthrie True
Johnson True & Guarnieri
Frankfort, Kentucky
ORAL ARGUMENT FOR SUBSEQUENT
PARTICIPATING MANUFACTURERS:
Robert J. Brookhiser
Howery LLP
Washington, D.C.
- 11 -
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