9 N.Y.3d 574 (2007)

An arbitration clause in a Master Settlement Agreement (MSA) that broadly encompasses disputes “relating to” calculations by an independent auditor, including adjustments and offsets, covers disputes about the auditor’s assumptions regarding states’ diligent enforcement of qualifying statutes.

Summary

This case concerns the arbitrability of a dispute arising from the Master Settlement Agreement (MSA) between tobacco manufacturers and several states. The MSA includes an arbitration clause for disputes related to calculations made by an independent auditor. The central issue is whether the auditor’s decision to not apply a Non-Participating Manufacturer (NPM) adjustment, based on the assumption that New York diligently enforced its qualifying statute, falls under the MSA’s arbitration provision. The New York Court of Appeals held that the dispute was arbitrable because the language of the MSA broadly covers any claims “relating to” the Independent Auditor’s calculations, even those involving assumptions about state enforcement.

Facts

In 1998, numerous states, including New York, entered into a Master Settlement Agreement (MSA) with major tobacco manufacturers to resolve claims related to marketing and advertising of tobacco products. The MSA included provisions for annual payments by the manufacturers to the states. To level the playing field between Participating Manufacturers (PMs) and Non-Participating Manufacturers (NPMs), the MSA incentivized states to enact statutes requiring NPMs to make equivalent payments. The MSA provides for a Non-Participating Manufacturer (NPM) adjustment to reduce PM payments to a state if the PMs lost market share to NPMs, and the disadvantages from the MSA were a significant factor in that loss. An Independent Auditor determines the payments, adjustments, and allocations under the MSA.

Procedural History

Commonwealth Brands, Inc., King Maker Marketing, Inc., and Sherman 1400 Broadway N.Y.C., Inc. (the movants), as Subsequent Participating Manufacturers (SPMs), moved in Supreme Court to compel arbitration, disputing the Independent Auditor’s refusal to apply the NPM adjustment. Supreme Court denied the motion. The Appellate Division reversed, ordering arbitration. The New York Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

Issue(s)

Whether a dispute over the Independent Auditor’s decision not to apply the Non-Participating Manufacturer (NPM) adjustment, based on the assumption that New York diligently enforced its qualifying statute, falls within the arbitration clause of the Master Settlement Agreement (MSA).

Holding

Yes, because the arbitration clause in the MSA is broad and encompasses any dispute “relating to” the calculations performed or determinations made by the Independent Auditor, including the application of adjustments and offsets.

Court’s Reasoning

The Court of Appeals based its decision on the plain language of the MSA, which states that “any dispute, controversy or claim arising out of or relating to calculations performed by, or any determinations made by, the Independent Auditor” is subject to arbitration. The court found the use of the terms “any” and “relating to” to be expansive, indicating an intention to include all claims connected with the Independent Auditor’s calculations. The court emphasized the parenthetical clause providing examples of arbitrable disputes, specifically mentioning disputes concerning the operation or application of adjustments, including the NPM adjustment. The court rejected the argument that arbitration was limited to a review of the Independent Auditor’s calculations, stating that the movants’ assertions that the Independent Auditor should not have presumed diligent enforcement constituted claims “relating to” the Independent Auditor’s calculations. The court noted this interpretation aligns with the purpose of arbitration, which is to conserve the time and resources of the courts and the contracting parties. "[T]here is fairness to all parties in a ‘mechanism of submitting disputes involving the decisions of the Independent Auditor to a neutral panel of competent arbitrators, who are guided by one clearly articulated set of rules that apply universally in a process where all parties can fully and effectively participate’" (30 AD3d at 32-33).