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According to the Connecticut Supreme Court, the arbitration provision in a 1996 cigarette company settlement applies to an independent auditor’s decision whether or not to apply certain payment adjustments.
Connecticut v. Philip Morris, Inc., No. 17548, 2006 WL 2505900 (Conn. Sept. 12, 2006) decided one particular dispute between Connecticut and Commonwealth Brands, Inc., a tobacco company, as part of an ongoing and much larger battle between state governments and cigarette companies. In 1996, Connecticut brought an action against major tobacco companies for wrongful advertising and marketing of cigarettes. The case settled in 1998 by a written agreement applicable to any tobacco company willing to adhere to its terms.
Tobacco companies who were not parties to the original action, but who agreed to be bound by the settlements terms, like Commonwealth Brands, are termed “subsequent participating manufacturers” according to the agreement. An independent auditor assesses settlement payments due from each participating manufacturer. An adjustment is applied to subsequent participating manufacturers, decreasing the payment they owe.
The dispute between the State and Commonwealth Brands arose when the independent auditor failed to apply the subsequent participating manufacturer adjustment to Commonwealth’s payment. Commonwealth moved to compel arbitration according to the terms of the settlement, which specified that “any dispute…arising out of or relating to calculations performed by…the independent auditor…shall be submitted to binding arbitration.” The trial court granted the motion.
On appeal, the State argued that the dispute was not arbitrable because the independent auditor was not empowered to decide whether or not to apply the adjustment, and therefore the dispute was outside the scope of the arbitration provision.
The Court found that deciding whether or not the adjustment applies is within the independent auditor’s authority because the settlement terms describe the steps that the auditor must take to determine payments, and the sixth step of the process includes applying the adjustment for subsequent participating manufacturers.
Before concluding that the dispute was subject to the arbitration provision in the settlement, the Court examined a policy argument in favor of arbitrability. Because tobacco companies from all over the country may agree to be bound by the settlement, a “nationwide set of rules by which the independent auditor is to calculate the annual payments” is necessary. This is best accomplished through arbitration, where all auditor disputes may be decided, rather than courts issuing fifty-two different sets of rules.
The Court held that the auditor’s decision not to apply the adjustment was within the auditor’s power and, therefore, was within the scope of the settlement’s arbitration provision. Accordingly, the dispute proceeded to arbitration.
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