August 5 2009
DA 07-0299
IN THE SUPREME COURT OF THE STATE OF MONTANA
2009 MT 261
STATE OF MONTANA, ex rel. STEVE BULLOCK,
Plaintiff and Appellant,
v.
PHILIP MORRIS, INC., et al.,
Defendants and Appellees.
APPEAL FROM: District Court of the First Judicial District, In and For the County of Lewis and Clark, Cause No. CDV 1997-306 Honorable Thomas C. Honzel, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
David R. Paoli, John A. Kutzman, Paoli, Latino & Kutzman, P.C., Missoula, Montana
For Appellee Philip Morris USA Inc.:
J. Daniel Hoven, Sara S. Berg, Browning, Kaleczyc, Berry & Hoven, P.C., Helena, Montana
For Appellees R.J. Reynolds Tobacco Company and Lorillard Tobacco Company:
William Evan Jones, Lawrence F. Daly, Charles E. Hansberry, Garlington, Lohn & Robinson, PLLP, Missoula, Montana
For Appellees Certain Subsequent Participating Manufacturers:
Sean M. Morris, Worden Thane P.C., Missoula, Montana
Robert J. Brookhiser, Elizabeth B. McCallum, Howrey LLP, Washington, D.C. Submitted on Briefs: December 19, 2007
Decided: August 5, 2009
Filed:
__________________________________________ Clerk
2 Justice James C. Nelson delivered the Opinion of the Court.
¶1 The State of Montana appeals from an order entered by the First Judicial District
Court, Lewis and Clark County, granting the motion of Philip Morris USA Inc., R.J.
Reynolds Tobacco Company, and Lorillard Tobacco Company to compel arbitration. We
reverse and remand for further proceedings.
BACKGROUND
¶2 This appeal arises out of litigation that began in 1997, when the State sued the
nation’s largest tobacco manufacturers for the public health costs caused by the industry’s
alleged ongoing misrepresentations to consumers about the risks of smoking. Other
states and territories filed similar litigation. In 1998, four of the tobacco manufacturers
(Philip Morris, R.J. Reynolds, Lorillard, and Brown & Williamson Tobacco Corp.1)
entered into a Master Settlement Agreement (MSA) with 46 states (including Montana2),
the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa,
and the Northern Mariana Islands. These four defendants are referred to in the MSA as
“original participating manufacturers” (OPMs), and the states, territories, and District of
Columbia are referred to as the “Settling States.” The MSA permits other tobacco
companies to join the settlement in order to avoid future litigation, and the companies
which have done so are designated “subsequent participating manufacturers” (SPMs). A
number of SPMs have intervened in the present suit. Finally, the original participating
manufacturers and the subsequent participating manufacturers are known collectively as
1 Brown & Williamson merged with R.J. Reynolds in 2004. 2 The tobacco companies and four states (Florida, Minnesota, Mississippi, and Texas) entered into individual settlement agreements.
3 “participating manufacturers” (PMs), while the tobacco companies that are not
signatories to the MSA are known as “non-participating manufacturers” (NPMs).
¶3 In exchange for the Settling States’ release of all claims, the PMs agreed to certain
marketing restrictions and to make annual payments to the Settling States “for the
advancement of public health” and “the implementation of important tobacco-related
public health measures.” The PMs do not make payments directly to individual Settling
States; rather, each PM is required to make a single, nationwide payment into an escrow
account, and the amounts are then allocated among the Settling States. Each PM’s
individual contribution to the account is based on its market share. Likewise, each
Settling State receives an “allocable share” of the sum of all payments made by the PMs
in the year in question. Montana’s allocable share is 0.4247591%. The State received
$24.8 million in MSA funds in 2006; $25.8 million in 2007; and $34.6 million in 2008.
¶4 The MSA assigns several responsibilities to an “Independent Auditor,” which is
defined as “a major, nationally recognized, certified public accounting firm.”3
Specifically, the Independent Auditor
shall calculate and determine the amount of all payments owed pursuant to [the MSA], the adjustments, reductions and offsets thereto (and all resulting carry-forwards, if any), the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the Participating Manufacturers and among the Settling States, and shall perform all other calculations in connection with the foregoing . . . .
In calculating the PMs’ annual payments, the Independent Auditor takes the base amount
owed by the PMs for the calendar year and then applies a series of adjustments,
3 The parties selected PricewaterhouseCoopers as the Independent Auditor.
4 reductions, and offsets. Of relevance to this case is the Non-Participating Manufacturer
Adjustment (NPM Adjustment). The parties to the MSA recognized that the marketing
restrictions and payment obligations imposed on PMs could give NPMs a competitive
advantage and cause the PMs to lose market share to the NPMs. Moreover, they
recognized that a transfer of market share to the NPMs would undermine the purposes of
the MSA. Thus, the NPM Adjustment serves to level the playing field by reducing the
PMs’ annual payment obligations if it is determined that (1) the PMs collectively lost
more than two percent of their pre-MSA (i.e., 1997) aggregate market share to NPMs
during the year in question and (2) “the disadvantages experienced as a result of the
provisions of [the MSA] were a significant factor contributing to” this loss.
¶5 The NPM Adjustment typically applies to the allocated payment for each Settling
State; however, a Settling State can avoid the NPM Adjustment if it “continuously had a
Qualifying Statute . . . in full force and effect during the entire calendar year immediately
preceding the year in which the payment in question is due, and diligently enforced the
provisions of such statute during such entire calendar year.” A “Qualifying Statute” is a
statute, regulation, law, or rule that “effectively and fully neutralizes the cost
disadvantages that the Participating Manufacturers experience vis-à-vis Non-Participating
Manufacturers within such Settling State as a result of the provisions of [the MSA].” If a
Settling State meets these requirements, then the NPM Adjustment is inapplicable to that
Settling State and is reallocated among the other Settling States on a pro rata basis.
¶6 The present litigation concerns the PMs’ annual payments for 2006. The PMs had
lost the requisite percentage of market share in 2003, and an economic consulting firm
5 had determined that the disadvantages imposed by the MSA were a “significant factor”
contributing to that loss. Thus, the PMs asked the Independent Auditor to offset their
2006 payments by the amount of the 2003 NPM Adjustment. In response, the Settling
States contended that they each had enacted Qualifying Statutes which were in full force
and effect in 2003 and that the Independent Auditor should presume, in the absence of
substantial evidence to the contrary, that state officials had “diligently enforced” those
statutes. The PMs, however, argued that the Independent Auditor must “presume just the
opposite,” i.e., that the statutes had not been diligently enforced.
¶7 The Independent Auditor declined to apply the NPM Adjustment to the PMs’ 2006
payments. Noting the parties’ dispute over whether the Settling States continuously had
Qualifying Statutes “in full force and effect” and whether they “diligently enforced” the
provisions of such statutes, the Independent Auditor explained that it was “not charged
with the responsibility under the MSA of making a determination regarding this issue.”
Moreover, the Independent Auditor stated that it was “not qualified to make the legal
determination as to whether any particular Settling State has ‘diligently enforced’ its
Qualifying Statute.” Thus, the Independent Auditor concluded that “[u]ntil 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 application of the NPM Settlement
Adjustment.” In effect, the Independent Auditor presumed that the Settling States had
diligently enforced their Qualifying Statutes.
¶8 On April 10, 2006, the OPMs served notice that they disputed the Independent
Auditor’s final calculations. Nevertheless, the OPMs paid the full amounts calculated by
6 the Independent Auditor, though R.J. Reynolds and Lorillard paid the sums attributable to
the disputed amount into the Disputed Payments Account provided for in the MSA.
¶9 The State then commenced the instant action on May 8, 2006, by filing a motion
for declaratory order. The State alleged that Montana had enacted a Qualifying Statute
(§§ 16-11-401 to -404, MCA) in 1999 when the Legislature adopted the Model Statute
set forth in Exhibit T of the MSA. The State further alleged that the provisions of
§§ 16-11-401 to -404, MCA, were continuously in full force and effect during 2003 and
that the State had diligently enforced these provisions during that year. The State relied
on the presumption contained in § 26-1-602(15), MCA (“[o]fficial duty has been
regularly performed”) and also listed certain actions it had taken to enforce §§ 16-11-401
to -404, MCA. The State asked the District Court to enter an order declaring that
Montana diligently enforced the provisions of §§ 16-11-401 to -404, MCA, during 2003.
In the alternative, the State asked the District Court to determine that the PMs “have
released, waived, or are estopped to assert any claim that Montana did not diligently
enforce the Model Statute with regard to the 2003 escrow payment.” The State alleged
that the court had jurisdiction under § VII(a)(2) of the MSA, which provides that each
individual state court retains exclusive jurisdiction for the purposes of “implementing and
enforcing” the MSA and the Consent Decree as to such Settling State.
¶10 The OPMs responded with a motion to compel arbitration (which the intervening
SPMs joined). They relied on § XI(c) of the MSA, 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
7 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. . . .
The OPMs argued that the parties’ dispute was one “arising out of or relating to
calculations performed by, or . . . determinations made by, the Independent Auditor.”
The OPMs also asserted that the parties’ dispute concerned the “application” of an
adjustment “described in subsection IX(j)” (namely, the NPM Adjustment). The OPMs
next argued that allowing Settling States to challenge the Independent Auditor’s
determinations in their respective state courts would “wreak havoc” on the MSA’s
payment system. Lastly, the OPMs contended that the law favors arbitration when a
contract contains an arbitration clause.
¶11 In response, the State emphasized that it sought a ruling only with respect to its
own diligent enforcement efforts and that it was not asking the District Court to calculate
any payments or adjustments. The State also pointed out that the arbitration provision
applies only to “calculations performed by” and “determinations made by” the
Independent Auditor, and the State argued that the Independent Auditor is, by definition,
an accounting firm which is not vested by the MSA with responsibility for evaluating the
exercise of prosecutorial discretion by the various state attorneys general to determine
whether their respective Qualifying Statutes have been diligently enforced.
¶12 The District Court agreed with the State that the MSA does not define “diligent
enforcement,” does not outline the standard by which a Settling State meets this
requirement, and does not expressly charge the Independent Auditor with the duty of
8 determining whether a Settling State has “diligently enforced” its Qualifying Statute.
Nevertheless, the court concluded that the parties’ dispute “concerning the Auditor’s
determination not to apply the 2003 NPM Adjustment” was a matter for arbitration. The
court first observed that the issue of whether “diligent enforcement” has occurred is
“necessarily linked” to whether the NPM Adjustment applies. The court then reasoned
that although the Independent Auditor did not explicitly determine that the Settling States
were diligently enforcing their Qualifying Statutes, the Independent Auditor “presumed”
that they were. In the District Court’s view, this “presumption of ‘diligent enforcement’
is essentially a determination and, under Section IX(c), MSA, this determination is a
matter for arbitration.” The State now appeals.
ISSUE
¶13 The sole issue on appeal is whether the District Court erred in granting the PMs’
motion to compel arbitration.
STANDARD OF REVIEW
¶14 This Court reviews a district court’s order granting a motion to compel arbitration
de novo. Martz v. Beneficial Montana, 2006 MT 94, ¶ 10, 332 Mont. 93, 135 P.3d 790.
DISCUSSION
¶15 Arbitration is a matter of contract, and a party cannot be required to submit to
arbitration a dispute which it has not agreed so to submit. AT&T Technologies v.
Communications Workers of America, 475 U.S. 643, 648, 106 S. Ct. 1415, 1418 (1986);
accord Willems v. U.S. Bancorp Piper Jaffray, 2005 MT 37, ¶ 13, 326 Mont. 103, 107
P.3d 465. Moreover, unless the parties “clearly and unmistakably” provide otherwise, the
9 question of whether the parties agreed to arbitrate is to be decided by the court, not the
arbitrator. AT&T Technologies, 475 U.S. at 649, 106 S. Ct. at 1418; cf. Kingston v.
Ameritrade, 2000 MT 269, ¶ 13, 302 Mont. 90, 12 P.3d 929 (“[A] district court may not
order arbitration if there is a substantial and bona fide dispute over whether there exists
an agreement to arbitrate.” (citing § 27-5-115, MCA)). Thus, the first task of a court
asked to compel arbitration of a dispute is to determine whether the parties agreed to
arbitrate that dispute. Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614, 626,
105 S. Ct. 3346, 3353 (1985); cf. Willems, ¶ 13 (“When a district court is asked to compel
arbitration of a dispute, the threshold inquiry is whether the parties agreed to arbitrate.”).
When deciding whether the parties agreed to arbitrate a certain matter, courts generally
should apply ordinary state-law principles that govern the formation of contracts. See
First Options of Chicago v. Kaplan, 514 U.S. 938, 944, 115 S. Ct. 1920, 1924 (1995);
Willems, ¶ 13 (“Because arbitration is a matter of contract, the rules of contract apply.”);
§ 28-3-102, MCA (“A contract is to be interpreted according to the law and usage of the
place where it is to be performed . . . .”). Indeed, the MSA itself states that “[t]his
Agreement (other than the Escrow Agreement) shall be governed by the laws of the
relevant Settling State, without regard to the conflict of law rules of such Settling State.”
¶16 Under Montana law, the construction and interpretation of a contract is a question
of law for the court to decide. Ophus v. Fritz, 2000 MT 251, ¶ 19, 301 Mont. 447, 11
P.3d 1192. “A contract must be so interpreted as to give effect to the mutual intention of
the parties as it existed at the time of contracting, so far as the same is ascertainable and
lawful.” Section 28-3-301, MCA. “When a contract is reduced to writing, the intention
10 of the parties is to be ascertained from the writing alone if possible . . . .” Section
28-3-303, MCA. “The whole of a contract is to be taken together so as to give effect to
every part if reasonably practicable, each clause helping to interpret the other.” Section
28-3-202, MCA. “The language of a contract is to govern its interpretation if the
language is clear and explicit and does not involve an absurdity.” Section 28-3-401,
MCA. “A contract must receive such an interpretation as will make it lawful, operative,
definite, reasonable, and capable of being carried into effect if it can be done without
violating the intention of the parties.” Section 28-3-201, MCA. Laws existing at the time
a contract is formed become part of the contract. Earls v. Chase Bank of Texas, N.A.,
2002 MT 249, ¶ 12, 312 Mont. 147, 59 P.3d 364. If the language of a contract is
unambiguous—i.e., reasonably susceptible to only one construction—the court must
apply the language as written. Mary J. Baker Revoc. Trust v. Cenex Harvest States, 2007
MT 159, ¶ 19, 338 Mont. 41, 164 P.3d 851.
¶17 Again, the MSA’s arbitration provision (§ XI(c)) provides, in relevant part, that
[a]ny 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.
¶18 In applying this provision, we must first identify the parties’ “dispute, controversy
or claim.” The PMs frame the dispute in rather broad and imprecise terms. Specifically,
they assert that the parties’ dispute is over “the Auditor’s determination not to apply the
2003 NPM Adjustment.” As noted, the PMs lost the requisite percentage of market share
11 in 2003, and an economic consulting firm determined that the disadvantages imposed by
the MSA were a “significant factor” contributing to that loss. These facts triggered an
NPM adjustment; however, the MSA states that a Settling State’s allocated payment
“shall not” be subject to an NPM Adjustment if the Settling State continuously had a
Qualifying Statute in full force and effect and diligently enforced the provisions of such
statute. Yet, while the MSA provides comprehensive formulas for determining whether
an NPM Adjustment is triggered, the MSA does not provide such formulas for evaluating
“diligent enforcement” of a Qualifying Statute. Nor does it state what entity is
responsible for conducting that evaluation. The Independent Auditor concluded that it
was neither responsible nor qualified to determine diligent enforcement; and, for that
matter, the parties did not suggest that the Independent Auditor should make this
determination. Rather, the PMs argued that the Independent Auditor should presume that
the Settling States had not diligently enforced Qualifying Statutes, while the Settling
States argued in favor of the opposite presumption. The Independent Auditor ultimately
adopted the Settling States’ approach and presumed diligent enforcement, and that is
what the PMs dispute—i.e., the Independent Auditor’s decision to presume diligent
enforcement rather than presume no diligent enforcement.
¶19 But that is not the dispute here. The State filed the instant action not to challenge
any calculation, determination, or course of action actually performed, made, or chosen
by the Independent Auditor. Rather, the State sought a declaration that Montana had, in
fact, diligently enforced the provisions of §§ 16-11-401 to -404, MCA, during 2003.
Notably, the PMs have not alleged that Montana did not diligently enforce these statutes.
12 In any event, the dispute in the present case, as framed in the State’s motion, is whether
Montana diligently enforced a Qualifying Statute. We reject the PMs’ attempts to
repackage the dispute in this case as something it clearly is not.
¶20 The second question is whether this dispute is one “arising out of or relating to
calculations performed by, or any determinations made by, the Independent Auditor.”
We agree with the State that it is not. The Independent Auditor neither “calculated” nor
“determined” whether Montana diligently enforced a Qualifying Statute. Rather, the
Independent Auditor simply presumed that Montana did so, and we cannot agree that this
constitutes a “determination” as contemplated by the MSA. To “presume” is “to suppose
to be true without proof.” Merriam-Webster’s Collegiate Dictionary 923 (10th ed.,
Merriam-Webster 1997). To “determine,” by contrast, involves something more
affirmative, such as “to find out or come to a decision about by investigation, reasoning,
or calculation.” Merriam-Webster’s Collegiate Dictionary 315. Here, the Independent
Auditor refused to conduct any “investigation, reasoning, or calculation” regarding
whether the Settling States had diligently enforced their Qualifying Statutes. In this
connection, it is important to bear in mind that the Independent Auditor is defined in the
MSA as “a major, nationally recognized, certified public accounting firm,” whose duties
are to calculate and determine the amounts of payments, to collect all information
necessary to make such calculations and determinations, and to allocate such payments.
The PMs point to nothing in the MSA supporting their contention that the parties
intended for the Independent Auditor to interpret statutes and evaluate whether the
prosecutorial activities of the state attorneys general amount to “diligent enforcement” of
13 those statutes. As the Independent Auditor itself stated, it is “not qualified” to make this
determination.
¶21 We also agree with the State that the question of whether Montana diligently
enforced a Qualifying Statute in 2003 does not “arise out of or relate to” any calculations
or determinations that the Independent Auditor actually “performed” or “made.” To be
sure, the State’s motion for declaratory order followed from the Independent Auditor’s
finding that the PMs lost the requisite percentage of market share in 2003 and from the
economists’ subsequent determination that the disadvantages imposed by the MSA were
a significant factor contributing to that loss. But the State’s motion in no way “arises out
of or relates to” the Independent Auditor’s market-share analysis. Indeed, that analysis
has not been challenged. Rather, the State’s motion relates to an issue (diligent
enforcement) that the Independent Auditor explicitly refused to determine, and it is clear
from the language of the arbitration provision that the parties intended to arbitrate only
those disputes which arise out of or relate to calculations or determinations that the
Independent Auditor actually “performed” or “made.”
¶22 The PMs point to the parenthetical in the arbitration provision, emphasized here:
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.
14 The PMs contend that subsection IX(j) describes the NPM Adjustment and that the
language of the parenthetical, therefore, mandates that all disputes “concerning” the
“application” of an NPM Adjustment must be arbitrated.
¶23 Again, we disagree. As noted, “[t]he whole of a contract is to be taken together so
as to give effect to every part if reasonably practicable, each clause helping to interpret
the other.” Section 28-3-202, MCA. Moreover, “[w]here there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to all.”
Section 1-4-101, MCA. Reading the parenthetical as the PMs urge, such that any dispute
concerning the application of an NPM Adjustment must be arbitrated, would effectively
nullify the limiting words “calculations performed by, or any determinations made by”
the Independent Auditor. When the arbitration provision is read as a whole, it is clear
that the parties intended to arbitrate only those disputes which involve calculations
performed or determinations made by the Independent Auditor. The situations identified
in the parenthetical are not “in addition to” those which come before the parenthetical.
Rather, the parenthetical, which begins with the word “including,” simply lists examples
and affirms that any calculations or determinations actually performed or made by the
Independent Auditor regarding “any of the adjustments, reductions, offsets, carry-
forwards and allocations described in subsection IX(j)” are to be submitted to arbitration.
In this regard, it is important to note that while subsection IX(j) does mention the NPM
Adjustment, it makes no mention of “diligent enforcement” or the Settling States’
exemption from the NPM Adjustment.
15 ¶24 The PMs also contend that arbitration is compelled by the MSA’s “single, unitary
payment structure.” The PMs opine that if “payment-related disputes” are not resolved
through “a single, nationwide arbitration” guided by “one clearly articulated set of rules,”
the result will be “chaos.” Moreover, the PMs argue that because granting one Settling
State an exception to the NPM Adjustment effectively reduces the payments to any
Settling States which do not qualify for this exception (pursuant to the reallocation
provision, see ¶ 5, supra), nationwide arbitration of the “diligent enforcement” issue for
all Settling States is necessary so that each state can participate.
¶25 We are not persuaded. For one thing, our decision must be based on Montana law
and the plain language of the arbitration provision, not on the PMs’ policy arguments. If
the PMs intended for the “diligent enforcement” question to be arbitrated pursuant to
“one clearly articulated set of rules” and with all Settling States present in one nationwide
forum, the PMs certainly were capable of negotiating for this requirement in the MSA.
As it is, no such language and no such rules appear in the MSA. Moreover,
notwithstanding the PMs’ apparent concern that some Settling States might suffer
reductions to their allocated payments, the fact remains that the question of whether
Montana diligently enforced its Qualifying Statute does not depend, in any way, on what
the other Settling States have or have not done. If Montana diligently enforced a
Qualifying Statute, the NPM Adjustment does not apply to it; whether the other Settling
States did the same is immaterial.
¶26 As for the PMs’ desire for “one clearly articulated set of rules,” the PMs’
argument in this regard is undercut by the MSA’s Governing Law provision, which states
16 that “[t]his Agreement . . . shall be governed by the laws of the relevant Settling State,
without regard to the conflict of law rules of such Settling State.” In executing the MSA,
the PMs clearly agreed to the application of various state laws, with the possibility of
differing outcomes on a single issue. In this connection, § VII(f) of the MSA states:
Coordination of Enforcement. The Attorneys General of the Settling States (through NAAG) shall monitor potential conflicting interpretations by courts of different States of this Agreement and the Consent Decrees. The Settling States shall use their best efforts, in cooperation with the Participating Manufacturers, to coordinate and resolve the effects of such conflicting interpretations as to matters that are not exclusively local in nature.
Given this provision, the PMs’ concerns about “chaos” and no uniformity of decisions are
somewhat overstated. Indeed, even if, as the PMs argue, “one clearly articulated set of
rules” is preferable for deciding the “diligent enforcement” issue, this fact does not lead
inevitably to the conclusion that nationwide arbitration is “compelled.” Certainly the
individual state courts are capable of applying uniform rules (should they be
promulgated) in a consistent and evenhanded fashion to their respective Settling States.
¶27 Lastly, the PMs cite (in their briefs and in post-briefing notices of supplemental
authority) a number of cases from other state courts, each of which concluded that the
particular Settling State had agreed to arbitrate the issue of “diligent enforcement.” Of
course, those decisions are not binding on this Court. Moreover, they are of limited
persuasive value given that we are applying Montana law to the particular claims raised
by the State in its motion for declaratory order. And, while many of the decisions cited
by the PMs appear simply to be following suit with the earlier decisions of other state
courts, our independent review of the relevant provisions of the MSA and our application
17 of Montana’s well-settled principles of contract interpretation require us to conclude that
the State of Montana did not agree to arbitrate the question of whether it diligently
enforced a Qualifying Statute.
CONCLUSION
¶28 The District Court erred in granting the PMs’ motion to compel arbitration. We
accordingly reverse the District Court’s order and remand this case for further
proceedings consistent with this Opinion.
¶29 Reversed and remanded.
/S/ JAMES C. NELSON
We Concur:
/S/ PATRICIA O. COTTER /S/ W. WILLIAM LEAPHART /S/ BRIAN MORRIS
Justice Jim Rice, dissenting.
¶30 Courts in 48 states, including the First Judicial District Court for the State of
Montana, have reviewed the issue in this case under their own state law, and have
unanimously concluded that the Master Settlement Agreement (MSA) requires the issue
to be submitted to arbitration. I do not agree with the Court that the uniqueness of
Montana law requires a different conclusion. In my view, the Court has made analytical
18 errors in both the application of the law and in the interpretation of the provisions of the
MSA which has led to an erroneous decision.
¶31 I. Policies Favoring Arbitration.
¶32 The decision in this case should not be made without consideration of the federal
and state policies favoring arbitration. Although the Court acknowledges in passing that
the manufacturers (OPMs) contend “that the law favors arbitration,” the Court fails to
consider the effect of this argument or the substantial body of law supporting it. The
Court cites U.S. Supreme Court Cases for the standards and law relevant to deciding
arbitration questions, but it ignores the parts of those same cases which concretely
establish an approach strongly favoring arbitration. In Mitsubishi Motors, the U.S.
Supreme Court stated that “any doubts concerning the scope of arbitrable issues should
be resolved in favor of arbitration . . . .” 473 U.S. at 626, 105 S. Ct. at 3353-54
(quotation omitted; emphasis added). In AT & T Technologies, the U.S. Supreme Court
instructed that arbitration “should not be denied unless it may be said with positive
assurance that the arbitration clause is not susceptible of an interpretation that covers the
asserted dispute.” AT & T Technologies, 475 U.S. at 650, 106 S. Ct. at 1419 (quotation
omitted; emphasis added). The fact that 48 jurisdictions, including 20 appellate courts,
have determined that the arbitration clause here is “susceptible of an interpretation that
covers the dispute” should give us pause.
¶33 Our Court has likewise recognized this policy in favor of arbitration. See Vukasin
v. D.A. Davidson & Co., 241 Mont. 126, 785 P.2d 713 (1990); Topolski v. Helena Assn.
of Realtors, Inc., 2000 MT 343, ¶ 9, 303 Mont. 224, 15 P.3d 414. Although the Court
19 cites Kingston, ¶ 13, for the proposition that arbitration may not be ordered “if there is a
substantial and bona fide dispute over whether there exists an agreement to arbitrate,”
that statement should be taken in its context—we held there that the district court erred in
“not fully addressing whether a valid arbitration agreement exists” before looking to the
policy favoring arbitration, which we nonetheless recognized. Kingston, ¶¶ 16, 20. Here,
a valid arbitration agreement indisputably exists, and thus the policy favoring submission
of this particular dispute to that arbitration agreement should be applied, and should form
the backdrop of the interpretational issues raised herein.
¶34 II. Interpreting and Applying the Contract Language.
¶35 The parties dispute the Independent Auditor’s decision to presume “diligent
enforcement” by the State of Montana in determining the amount of the NPM
Adjustment and, consequently, the final payment amount. Section XI(c) of the MSA
states, in pertinent part, as follows:
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.
¶36 I would first dispute the Court’s conclusion about what is incorporated within this
provision. In rejecting the OPMs’ interpretation, the Court states that “it is important to
note that while subsection IX(j) does mention the NPM Adjustment, it makes no mention
of ‘diligent enforcement’ or the Settling States’ exemption from the NPM Adjustment.”
20 Opinion, ¶ 23. This is incorrect. Subsection IX(j) provides that “the NPM Adjustment
shall be applied . . . pursuant to subsections IX(d)(1) and (d)(2),” and, in turn, subsection
IX(d)(2) is the provision which establishes “diligent enforcement” and the Settling
States’ exemption. Contrary to the Court’s view, the arbitration provision incorporates
by reference the very provisions out of which the dispute in this case arises. Thus, the
parenthetical phrase in the arbitration provision, which provides examples “without
limitation” of disputes that should be arbitrated, specifically incorporates the “diligent
enforcement” exception to the NPM Adjustment and the Settling States’ exemption from
the NPM Adjustment, and clearly demonstrates that these are areas in which the
arbitration provision was intended to operate.
¶37 The Court further unduly narrows the scope of the parenthetical phrase. It states
that the phrase “simply lists examples and affirms that any calculations or determinations
actually performed or made” are to be submitted to arbitration. Opinion, ¶ 23. However,
the parenthetical provides examples, not merely of determinations, but of disputes
concerning such determinations (“including, without limitation, any dispute concerning .
. . any of the adjustments”). The Court likewise fails to apply the “arising out of or
relating to” language to this listing of disputes, to which I now turn.
¶38 A critical phrase within the arbitration clause is “arising out of or relating to.”
Within the context of arbitration, this phrase is interpreted nationally as playing the
important role of signifying the intent to broadly require arbitration concerning the
subject matter specified. In Fleet Tire Serv. of N. Little Rock v. Oliver Rubber Co., 118
F.3d 619, 621 (8th Cir. 1997), the court held that the term “relating to” in an agreement
21 “constitutes the broadest language the parties could reasonably use to subject their
disputes to that form of settlement, including collateral disputes.” See also Collins &
Aikman Prods. Co. v. Building Sys., Inc., 58 F.3d 16, 20 (2d Cir. 1995) (an agreement
requiring arbitration for “‘any claim or controversy arising out of or relating to the
agreement,’ is the paradigm of a broad clause”); Mitsubishi Motors, 473 U.S. at 625, 105
S. Ct. at 3353, n. 13 (“[T]he exclusion of some areas of possible dispute from the scope
of an arbitration clause does not serve to restrict the reach of an otherwise broad clause in
the areas in which it was intended to operate.”). Thus, when interpreting the arbitration
provision, the broad application which the law has given to “arising out of or relating to”
should properly be considered.
¶39 Therefore, based upon a reading of the MSA as a whole, arbitration is required for
(1) any dispute, controversy or claim, (2) arising out of or relating to (3) calculations
performed by, or any determinations made by, the Independent Auditor (4) including,
without limitation, disputes concerning the operation or application of any of the
adjustments, including the NPM Adjustment, diligent enforcement, or the Settling States’
exemption from the NPM Adjustment. Here, the Independent Auditor decided to
presume “diligent enforcement” by the Settling States in determining the NPM
Adjustment and the final payment. This decision resulted in a financial calculation which
is more than one billion dollars different than had the Auditor decided to apply the NPM
Adjustment without presuming “diligent enforcement.” Given the law’s policy favoring
arbitration, and given the MSA’s broad directive to arbitrate matters “relating to”
calculations made by and “any determinations made by” the Auditor, including those
22 “concerning” the operation or application of adjustments, specifically, the NPM
Adjustment, I would conclude that whether Montana diligently enforced its statute, which
impacts the amount of the NPM Adjustment, is a dispute which must be arbitrated under
the MSA.
¶40 I believe the Court has made interpretational errors in reaching the opposite
conclusion, in addition to those discussed above. The Court’s decision hangs on two
propositions which are, in my view, extremely narrow and contrived interpretations of the
MSA. First, the Court concludes that the Auditor did not actually make a
“determination” regarding the NPM Adjustment, but, rather, merely made a
“presumption” about the Adjustment. Distinguishing between dictionary definitions of
“determine” and “presume,” the Court concludes that the Auditor’s action (which
resulted in a billion dollar difference in the final payment calculation) was merely a
presumption which fell outside of the arbitration provision. However, given that all
controversies “related to” the Auditor’s “calculations” or “determinations” are to be
arbitrated, and are to be broadly interpreted, I must disagree with this narrow approach.
¶41 Secondly, the Court reasons that the Auditor, instead of making a calculation,
actually “refused to conduct” any calculation or investigation here, and therefore, this
dispute is not subject to arbitration because the MSA requires arbitration of only those
calculations “that the Independent Auditor actually performed or made.” Opinion, ¶¶ 20,
21. However, the Auditor had the responsibility of applying the NPM Adjustment and to
do so, was forced to make a decision on diligent enforcement. It is undisputed that the
Auditor did not fail to act—it acted by making the decision to presume diligent
23 enforcement. Again, under the policies favoring arbitration, I view the Court’s approach
to be a hyper-technical reading of the MSA.
¶42 The Court’s approach does not truly ask whether the dispute arises out of or
relates to an Auditor’s determination, but, rather, narrowly asks whether a dispute
consists of an Auditor’s determination. The Court offers that the Auditor’s market-share
analysis “has not been challenged.” Opinion, ¶ 21. Here, the Court has made an
assumption that the Auditor is merely a glorified calculator, and that the MSA requires
arbitration only of the Auditor’s numerical calculations. I believe this is a significant
narrowing of the plain language of the arbitration provision. Had the parties intended
arbitration to be limited to the Auditor’s calculations, I suspect the arbitration panel
would have consisted of accountants instead of federal judges. In reality, the Auditor
could not have “calculated” the final payment without making determinations concerning
the NPM Adjustment and diligent enforcement.
¶43 I believe the Court has applied an overly narrow interpretation of the terms of the
MSA and has failed to consider the policies favoring arbitration. I dissent and would
affirm the District Court.
/S/ JIM RICE