Opinion
No. X02 CV 96-0148414S
February 21, 2008
MEMORANDUM OF DECISION ON MOTION TO COMPEL ARBITRATION
This case is now before the Court on the Motion of the Original Participating Manufacturers to Compel Arbitration and to Deny or, in the Alternative, to Stay Motion for Declaratory and/or Enforcement Order ("Motion"), which was filed with this Court on or about October 13, 2006. As the title of the Motion suggests, the movants — defendants Philip Morris USA, Inc. ("Philip Morris"), R. J. Reynolds Tobacco Company ("RJR") and Lorillard Tobacco Company ("Lorillard") — are all Original Participating Manufacturers ("OPMs") under the Master Tobacco Settlement Agreement ("MSA") between themselves and 52 "Settling States," including the plaintiff State of Connecticut (the "State"), pursuant to which this case went to judgment by Consent Decree on or about November 23, 1998. Notwithstanding its title, the Motion was briefed and argued by all parties, including several Subsequent Participating Manufacturers ("SPMs") which later joined in it, solely as an application to compel arbitration under General Statutes § 52-410, Sections 2 and 4 of the Federal Arbitration Act, 9 U.S.C. §§ 2 and 4, and MSA § XI(c). Accordingly, the Court will confine its legal analysis to that claim.
Under MSA § II(qq), the term
"Settling State" means any State that signs this Agreement on or before the MSA Execution Date. Provided, however, that the term "Settling State" shall not include (1) the States of Mississippi, Florida, Texas and Minnesota; and (2) any State as to which this Agreement has been terminated.
As used in the foregoing definition and throughout the MSA, the term "State" means "any state of the United States, the District of Columbia, Guam, the Virgin Islands, American Samoa, and the Northern Marianas." id., § II(rr); and the designated "MSA Execution Date" is November 23, 1998. Id., § II(aa).
The SPMs which have joined in this Motion are Commonwealth Brands, Inc., ("Commonwealth"), Compania Industrial de Tabacos Monte Paz, SA, Daughters Ryan, Inc., Farmers Tobacco Company of Cynthiana, Inc., House of Prince A/S, Japan Tobacco International U.S.A., Inc., King Maker Marketing, Inc. ("King Maker"), Kretek International, Inc., Liberty Brands, LLC, Liggett Group, LLC, Peter Stokkebye International A/S, P.T. Djarum, Santa Fe Natural Tobacco Company, Inc., Sherman's 1400 Broadway N.Y.C., Inc. "Sherman's"), Top Tobacco, L.P., Vibo Corporation d/b/a General Tobacco, Virginia Carolina Corporation, Inc., and Von Eicken Group.
At all times relevant to this case, Section 52-410 has provided in relevant part as follows:
(a) A party to a written agreement for arbitration claiming the neglect or refusal of another to proceed with an arbitration thereunder may make application to the superior court for the judicial district in which one of the parties resides or, in a controversy concerning land, for the judicial district in which the land is situated or, when the court is not in session, to any judge thereof for an order directing the parties to proceed with the arbitration in compliance with their agreement. The application shall be by writ of summons and complaint, served in the manner provided by law.
At all times relevant to this case, 9 U.S.C. §§ 2 and 4 have provided as follows:
9 U.S.C. § 2. Validity, Irrevocability, and Enforcement of Agreements to Arbitrate. A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
***
9 U.S.C. § 4. Failure to Arbitrate Under Agreement; Petition to United States Court Having Jurisdiction for Order to Compel Arbitration; Notice and Service Thereof; Hearing and Determination. A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. Five days notice in writing of such application shall be served upon the party in default. Service thereof shall be made in the manner provided by the Federal Rules of Civil Procedure. The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed. If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof. If no jury trial be demanded by the party alleged to be in default, or if the matter in dispute is within admiralty jurisdiction, the court shall hear and determine such issue. Where such an issue is raised, the party alleged to be in default may, except in cases of admiralty, on or before the return day of the notice of application, demand a jury trial of such issue, and upon such demand the court shall make an order referring the issue or issues to a jury in the manner provided by the Federal Rules of Civil Procedure, or may specially call a jury for that purpose. If the jury find that no agreement in writing for arbitration was made or that there is no default in proceeding thereunder, the proceeding shall be dismissed. If the jury find that an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.
MSA § XI(c) provides as follows:
( c) 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 XI(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 Ill 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.
I. FACTUAL AND PROCEDURAL BACKGROUND
The dispute which the OPMs here seek to arbitrate concerns the longstanding claim by the State that during all of 2003, it diligently enforced General Statutes § 4-28 et seq., the so-called "Qualifying Statute" it enacted in the year 2000 to meet the requirements of MSA § IX(d)(2)(E). The State enacted its Qualifying Statute to make itself eligible for an exemption from any reduction in its Allocated Payments from the OPMs' and SPMs (collectively, the "PMs") for any year as to which the Independent Auditor applies a Non-Participating Manufacturers' Adjustment ("NPM Adjustment") to reduce the aggregate amount of the PMs' Annual Payments under the MSA, and correspondingly to reduce the aggregate amount of all Allocated Payments to the Settling States for that year. The exemption at issue was established by MSA § IX(d)(2)(B), which provides as follows:
Connecticut's Qualifying Statute, now codified at General Statutes § 4-28h et seq. ("the Qualifying Statute"), was enacted as part of Public Act 00-208, substantially in the form of the Model Statute set forth in MSA, Exhibit T. Having first become effective on July 1, 2000, it has remained in full force and effect ever since. The Qualifying Statute requires each NPM whose cigarettes are sold in Connecticut to establish and annually fund an escrow account in an amount determined by its annual sales volume in Connecticut.
The exemption at issue was established by MSA § IX(d)(2)(B), which straightforwardly provides that:
A Settling State's Allocated Payment shall not be subject to an NPM Adjustment (I) if such Settling State continuously had a Qualifying Statute (as defined in subsection (2)(E) below) 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[.]
The operation of the payment provisions of the MSA and the role of the Independent Auditor in calculating and determining the amounts of all payments thereunder in light, inter alia, of all applicable adjustments to those payments, including the NPM Adjustment, is fully described in this Court's August 3, 2005 Memorandum of Decision on Petition to Compel Arbitration. State v. Philip Morris, Inc., No. X02 CV 96-0148414S, 2005 WL 2081763 (Conn.Super.Ct. Aug. 3, 2005) (hereafter " Connecticut I").
A Settling State's Allocated Payment shall not be subject to an NPM Adjustment: (I) if such Settling State continuously had a Qualifying Statute (as defined in subsection (2)(E) below) 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[.] under the MSA were reduced by applying the to them.
The MSA strongly encourages all Settling States to do what is necessary to qualify for this exemption in every year for which payments are due to them under the MSA by reallocating the entire burden of absorbing any reduction in the aggregate amount of all Allocated Payments to the Settling States for any year for which an NPM Adjustment is applied to reduce the aggregate amount of the PMs' Annual Payments, to those States that fail to qualify for the exemption. A State obviously fails to qualify for the exemption either by not enacting a proper Qualifying Statute in the first place, by not keeping its Qualifying Statute continuously in force and effect during the entire year for which an exemption is sought, or by not diligently enforcing its Qualifying Statute during that entire year.
On April 19, 2006, claiming that it had diligently enforced its Qualifying Statute throughout 2003, the State moved this Court for a judicial determination on that issue despite the pendency, at that time, of its appeal from this Court's earlier decision granting the petition of three SPMs to compel arbitration of an essentially identical dispute that had previously arisen between themselves and the State. State v. Philip Morris Inc., No. X02 CV 96-014841S 2005 WL 2081763 (Conn.Super.Ct. Aug. 3, 2005) (hereafter " Connecticut I"). In Connecticut I, the underlying dispute before this Court concerned the refusal of PricewaterhouseCoopers LLP — the Independent Auditor jointly selected by the original signatories to the MSA to calculate and determine the amounts of all payments due thereunder — to apply an NPM Adjustment for 2003 to the Annual Payments for that year which would become due from the petitioners and all other PMs in April 2004. The Independent Auditor had decided not to apply the requested NPM Adjustment based upon the presumption, urged upon it by the Settling States, that each State had diligently enforced its own Qualifying Statute throughout 2003. Because of the distinct potential for overlap between the issues raised in the State's pending appeal from this Court's decision in Connecticut I and its recently filed motion for a judicial determination on the diligent enforcement issue, the parties agreed that all proceedings on the State's motion should be stayed until its pending appeal was finally decided.
The SPMs which brought the Petition to Compel Arbitration which this Court granted in Connecticut I were Commonwealth, King Maker and Sherman's.
The operation of the payment provisions of the MSA, and the role of the Independent Auditor in calculating and determining the amounts of such payments, is fully described in this Court's Memorandum of Decision on Petition to Compel Arbitration.
In the weeks immediately preceding the filing of the State's motion for a judicial determination, the parties were busy communicating with the Independent Auditor about its calculation of the PMs' Annual Payments under the MSA for 2005, which would become due from all PMs on April 17, 2006. In early March, after a nationally recognized economic consulting firm (the "Firm") hired by the parties pursuant to MSA § IX(d)(1)(c) finally determined that disadvantages experienced by the PMs in complying with the MSA had been a "significant factor" contributing to the PMs' Market Share Loss to Non-Participating Manufacturers in 2003, the OPMs renewed their earlier request that the Independent Auditor apply an NPM Adjustment for that year. They proposed, more specifically, that an NPM Adjustment for 2003 be applied as an offset to their Annual Payments which would become due on April 17, 2006. In response to this proposal, the Settling States urged the Independent Auditor to reject the OPMs' request to apply an NPM Adjustment for 2003 on the same basis upon which it had previously rejected that request, to wit: that since each Settling State had enacted a Qualifying Statute which remained continuously in full force and effect and could be presumed to have been diligently enforced throughout 2003, no NPM Adjustment should be applied to reduce the aggregate amount of the PMs' Annual Payments for that year. March 6, 2006 Settling Letter ("[N]othing the Firm has done or may do requires or authorizes the Independent Auditor to alter its established and entirely correct treatment of any potential 2003 NPM Adjustment.") (Ex. 28 to OPMs' Original Supporting Memorandum).
On March 7, 2006, the Independent Auditor issued its preliminary calculations of the PMs' Annual Payments for 2005, would become due on April 17, 2006. In those preliminary calculations, the Independent Auditor expressly refused to apply an NPM Adjustment for 2003 as an offset to the PMs' Annual Payments due on April 17, 2006. March 7, 2006 Notice of Preliminary Calculations at 5 (Ex. 29 to OPMs' Original Supporting Memorandum). The Independent Auditor later reaffirmed this preliminary determination in its March 29, 2006 final calculation of the PMs' 2005 Annual Payments, wherein it expressly stated that it would not change its "current approach to application of the NPM . . . Adjustment." March 29, 2006 Notice of Final Calculation (Ex. 30 to OPMs' Original Supporting Memorandum). Accordingly, having once again decided not to apply an NPM Adjustment for 2003 based upon the presumption that each Settling State had diligently enforced its Qualifying Statute throughout that year, the Independent Auditor advised the parties "that the[ir] dispute [on this issue] is to be submitted to binding arbitration in accordance with subsection XI(c) of the MSA." New York v. Philip Morris, Inc., 813 N.Y.S.2d 71, 74 (App.Div. 2006) (hereinafter New York).
On April 10, 2006, the OPMs served timely notice that they disputed the Independent Auditor's final calculation. Thereafter, on April 20, 2006 — three days after fully paying the amounts calculated by the Independent Auditor and one day after the State filed its motion for a judicial determination on the diligent enforcement issue — the OPMs requested the State to submit their dispute on diligent enforcement to arbitration under MSA § XI(c). On April 27, 2006, the State refused the OPMs' request for arbitration, declaring that, although it "had a Qualifying Statute . . . in full force and effect throughout 2003 and diligently enforced that statute[. . .] it underst[ood] that some Participating Manufacturers may dispute [its] diligent enforcement of its Qualifying Statute and any corresponding exemption from any NPM Adjustment for 2003. Accordingly, Connecticut has initiated proceedings in its MSA Court for a judicial determination of this dispute and appropriate relief. Because the determination of whether Connecticut diligently enforced its Qualifying Statute is the central dispute between Connecticut and the Participating Manufacturers and is clearly a judicial determination properly before Connecticut's MSA Court, Connecticut respectfully declines your invitation to initiate arbitration proceedings." (Ex. 38 to OPMs' Original Supporting Memorandum, p. 2.)
On September 12, 2006, the Connecticut Supreme Court affirmed this Court's decision in Connecticut I by issuing its decision in State v. Philip Morris, Inc., 279 Conn. 785, 905 A.2d 42 (2006) (hereinafter " Connecticut II]"). One month later, the movants filed the instant Motion to compel the State to arbitrate their dispute on the diligent enforcement issue as part of the broader dispute between themselves and the State concerning the Independent Auditor's determination not to apply an NPM Adjustment for 2003.
II. THE PARTIES' CONFLICTING CLAIMS
As authority for their claim of arbitrability, the OPMs rely principally upon the Supreme Court's affirmance in Connecticut II of this Court's earlier decision in Connecticut I, which granted the petition by several SPMs to compel the State to arbitrate a dispute concerning the prior refusal of the Independent Auditor to apply an NPM Adjustment for 2003 to the Annual Payments due from them in April 2004. They claim that that decision is controlling as to the arbitrability of the present dispute because the only stated basis for the Independent Auditor's original decision not to apply the NPM Adjustment for 2003 to the PMs' Annual Payments due in April 2004 is identical to the only stated basis for its later refusal to apply the same Adjustment, for that same year, as an offset to the Annual Payments due from them in April 2006. That reason, to reiterate, was the presumption that each Settling State, including Connecticut, had diligently enforced its Qualifying Statute throughout 2003. The OPMs insist that since the former dispute was ruled arbitrable in Connecticut II, the latter dispute must likewise be ruled arbitrable at this time under the controlling authority of that decision,
The petitioners were Commonwealth Brands, Inc. ("Commonwealth"), King Maker Marketing, Inc. ("King Maker"), and Sherman 1400 Broadway N.Y.C., Inc. ("Sherman").
Secondly, the PMs argue that even if Connecticut II is somehow not controlling on the issue here presented for decision — whether the parties' dispute concerning the State's diligent enforcement of its Qualifying Statute throughout 2003 is arbitrable — that dispute is nonetheless arbitrable under the MSA in light both of the plain language of its broadly worded arbitration clause, as applied to its payment provisions, and of the presumption of arbitrabiity under that broad arbitration clause arising under General Statutes § 52-410 and Sections 2 and 4 of the Federal Arbitration Act, 9 U.S.C. §§ 2, 4.
Third and finally, the PMs note that their analysis of this issue is consistent with that of the highest court of every State that has thus far been called upon to decide it.
The State opposes the instant Motion on several grounds. It claims, in the first instance, that neither this Court's ruling in Connecticut I nor the Supreme Court's affirmance of it in Connecticut II is controlling on the precise issue here presented for decision. On this score, it argues that "the sole issue presented and decided" in Connecticut I and Connecticut II "was whether the Independent Auditor's preliminary decision not to apply the 2003 NPM Adjustment to the PMs' 2004 Annual Payments was arbitrable." State's Memorandum in Opposition (12/8/06), p. 10 (emphasis in original). According to the State, the present issue is completely different from that decided in Connecticut I and Connecticut II, for it does not arise from or relate to any calculation or determination that the Independent Auditor has ever made or will ever be required to make.
Along the same lines, the State next claims that its dispute with the PMs as to whether it diligently enforced its Qualifying Statute throughout 2003 is not a direct challenge to the Independent Auditor's decision not to apply an NPM Adjustment to their Annual Payments which became due on April 17, 2006. Instead, it claims that all the Independent Auditor has decided with respect to such Annual Payments is that "the PMs are not entitled to such an adjustment on an interim basis when no trier of fact has determined whether any Settling State failed to diligently enforce its Qualifying Statute in 2003." State's Memorandum in Opposition (12/8/06), p. 12 (emphasis added). According to the State, the Independent Auditor has no right or responsibility under the MSA to make the ultimate diligent enforcement determination, and thus any claim or dispute concerning that issue is not arbitrable under MSA § XI(c).
Thirdly, the State contends that even if a genuine dispute as to the diligent enforcement of its Qualifying Statute is subject to arbitration in a proper case under the MSA, the PMs cannot compel it to arbitrate that issue on the record before this Court because they have not claimed, and cannot in good faith allege, that it failed to diligently enforce its Qualifying Statute in 2003. This Court, it insists, must not compel it to arbitrate this completely meritless dispute, for to do so would contravene the spirit of the parties' Agreement. State's Memorandum in Opposition (12/8/06), pp. 12-15.
Fourthly, the State contends that the context and language of the MSA clearly show that the issue of diligent enforcement must be decided in and for each Settling State by its own MSA Court, not by a nationwide arbitration panel. Id. at 15-27. In this regard, it claims, more particularly, that the issue of diligent enforcement is a purely local issue arising solely within each Settling State, and thus that it must logically be decided, separately for each State, on the basis of its own laws and in light of its own enforcement mechanisms and resources.
Finally, the State contends that the movants and all other PMs waived their right to seek an NPM Adjustment for 2003 by entering into a separate June 2003 Agreement, in which they released all Settling States, including Connecticut, from any and all claims they then had or might ever have under Section IX(d) of the MSA, including its NPM Adjustment provisions, with respect to cigarettes shipped or sold from 1999 through 2002. Claiming that any NPM Adjustment for 2003 must necessarily be based upon the PMs' sales or shipments of cigarettes during 2002, the State insists that the movants have waived their right to seek an NPM Adjustment for 2003. State's Memorandum in Opposition (12/8/06), pp. 28-31.
For the following reasons, the Court concludes that the parties' present dispute is arbitrable under MSA § XI(c), and thus that the instant Motion must be GRANTED.
III. LEGAL ANALYSIS A. THE CONTROLLING EFFECT OF THE SUPREME COURT'S AFFIRMANCE OF CONNECTICUT I IN CONNECTICUT II 1. THIS COURT'S HOLDING IN CONNECTICUT IIn Connecticut I, this Court ruled that the dispute between the petitioning SPMs and the State as to whether an NPM Adjustment should be applied to reduce the amounts of the SPMs' Annual Payments for 2003 was arbitrable under MSA § XI(c). In reaching this conclusion, the Court first considered and rejected the State's argument that that dispute was not arbitrable under MSA § XI(c) because it did not "aris[e] out of or relat[e] to calculations performed by, or any determinations made by, the Independent Auditor," as provided therein.
The State had argued, more specifically, that the MSA established two preconditions to the application of an NPM Adjustment which had not been met for the year 2003, to wit: (1) a determination by a nationally recognized economic consulting firm (the "Firm") that the PMs' compliance with the terms of the MSA has been "a significant factor" in producing their Market Share Loss to Non-Participating Manufacturers in that year; and (2) a determination by this Court that the State had not "diligently enforced" its Qualifying Statute during that entire year. The State had claimed that, in the absence of those two threshold determinations, which the Independent Auditor assertedly had no competence or authority to make on its own, any dispute as to the Independent Auditor's failure to apply an NPM Adjustment for 2003 was not arbitrable under MSA § XI(c) because it did not "aris[e] out of or relat[e] to any calculations . . . or determinations by the Independent Auditor" which the Independent Auditor was authorized to make. Id.
This Court rejected the foregoing argument for several reasons, which the Supreme Court summarized as follows in Connecticut II:
Specifically, the trial court noted that § XI(c) of the agreement 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 [i]ndependent [a]uditor . . . 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) . . . shall be submitted to binding arbitration . . ." The trial court reasoned that, because one of the adjustments in § IX(j) of the agreement is the nonparticipating manufacturer adjustment, "any dispute concerning the operation or application" of that adjustment is arbitrable under the agreement. The trial court concluded that the underlying dispute is arbitrable because it concerns both the operation and application of the nonparticipating manufacturer adjustment. The trial court rejected the state's claim that the underlying dispute was not arbitrable because the arbitration provision limits the scope of arbitrable disputes to those that arise out of or relate to determinations that the independent auditor was empowered to make and that the independent auditor was not empowered to make a determination regarding the applicability of the nonparticipating manufacturer adjustment. The trial court reasoned that, even if we were to assume that the state's interpretation of the agreement was correct, the language and structure of the agreement make it abundantly clear that the independent auditor was, in fact, empowered to determine the applicability of the nonparticipating manufacturer adjustment. Finally, the trial court observed that the agreement's referral of a dispute of this kind to binding arbitration is a wise policy decision because "it was one particularly effective way of ensuring . . . that all disputes, controversies and claims concerning the calculation and determination of payments under this massive, vitally important settlement agreement, be resolved under one clear set of rules that apply with equal force to every settling state . . . If interpretations of such rules were left exclusively to the courts of the individual settling states . . . fifty-two different sets of payment rules might emerge . . .
Connecticut II, supra, 279 Conn. at 793-94 (emphasis added).
2. THE SUPREME COURT'S HOLDING IN CONNECTICUT II
In its appeal from this Court's ruling in Connecticut I, the State asserted that this Court had "improperly granted the [SPMs'] petition because the underlying dispute does not fall within the agreement's narrow arbitration provision." Id. at 794. On this score, the Supreme Court noted, the State's claims before it were as follows:
The state asserts that the arbitration provision in § XI(c) of the agreement is limited to the review of "`calculations' and `determinations' that are actually committed to, and actually made by, the [i]ndependent [a]uditor in the first instance." The state further contends that the question of whether the nonparticipating manufacturer adjustment should have been applied to the petitioners' 2003 annual payments is itself comprised, in part, of two predicate determinations: the significant factor determination and the determination of whether a settling state is enforcing diligently its qualifying statute. The state claims that, because both of these predicate determinations are outside the scope of the independent auditor's authority and these determinations have not been made by the appropriate body, the question of whether the nonparticipating manufacturer adjustment applies is not yet arbitrable. The state contends that a contrary interpretation would lead to absurd results because if a dispute could be arbitrable despite the independent auditor's lack of authority to make the underlying determination or calculation, then any dispute would be arbitrable under the agreement by simply asking the independent auditor to "determine" something.
Id, at 795-96.
The SPMs, not surprisingly, responded to the State's renewed claims on appeal with the same basic arguments that this Court had found persuasive below. As described by the Supreme Court in Connecticut II, those arguments were as follows:
In response, the petitioners claim that the trial court properly concluded that the underlying dispute was subject to the agreement's arbitration provision. The petitioners contend that, because the underlying dispute is over the independent auditor's determination not to apply the nonparticipating manufacturer adjustment, it falls within the agreement's arbitration provision, which provides that disputes concerning the operation and application of the nonparticipating manufacturer adjustment are arbitrable. The petitioners claim that any doubt as to whether the dispute over the independent auditor's determination not to apply the adjustment is arbitrable is removed by the agreement's use of such broad language to define the scope of the arbitration provision as applying to "`any' disputes `arising out of or relating to'" the independent auditor's determinations and calculations. The petitioners reject the state's claim that the predicate determinations as to whether the nonparticipating manufacturer adjustment applies are limitations or preconditions to arbitration because the agreement's arbitration provision does not contain such limitations. Alternatively, the petitioners contend that, even if the state's interpretation of the arbitration provision were correct, the independent auditor was empowered to determine the applicability of the nonparticipating manufacturer adjustment. Finally, the petitioners argue that the trial court's interpretation of the contractual language is supported by the well settled presumption that any ambiguities are resolved in favor of arbitration and by the need for uniform rules governing the calculations of the participating manufacturers' annual payments.
Id. at 795-97.
After so framing the issues before it, the Supreme Court first determined as follows that it was charged with conducting a plenary review of the parties' intentions in forming their arbitration agreement.
We begin by setting forth the principles that guide our resolution of the present appeal. "[A]rbitration is a creature of contract . . . It is designed to avoid litigation and secure prompt settlement of disputes . . . [A] person can be compelled to arbitrate a dispute only if, to the extent that, and in the manner which, he has agreed so to do . . . No one can be forced to arbitrate a contract dispute who has not previously agreed to do so." (Internal quotation marks omitted.) Nussbaum v. Kimberly Timbers, Ltd., 271 Conn. 65, 72, 856 A.2d 364 (2004). "The issue of whether the parties to a contract have agreed to arbitration is controlled by their intention." A. Dubreuil Sons, Inc. v. Lisbon, 215 Conn. 604, 608, 577 A.2d 709 (1990). The parties' intent is "determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction . . . [T]he intent of the parties is to be ascertained by a fair and reasonable construction of the written words and . . . the language used must be accorded its common, natural, and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract . . . Where the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms." (Internal quotation marks omitted.) Goldberg v. Hartford Fire Ins. Co., 269 Conn. 550, 559, 849 A.2d 368 (2004).
Although the intention of the parties typically is a question of fact, if their intention is set forth clearly and unambiguously, it is a question of law. Levine v. Advest, Inc., 244 Conn. 732, 746-47, 714 A.2d 649 (1998); Pesino v. Atlantic Bank of New York, 244 Conn. 85, 92, 709 A.2d 540 (1998); see also Paine Webber, Inc. v. American Arbitration Assn., 217 Conn. 182, 190, 585 A.2d 654 (1991) (parties' intent is not question of fact "where the contract language is definitive"). Because neither party argues that the language of the agreement's arbitration provision is ambiguous, our review of the parties' intent is plenary. See PSE Consulting, Inc. v. Frank Mercede Sons, Inc., 267 Conn. 279, 290-91, 838 A.2d 135 (2004).
Id. at 796-98. (Footnotes omitted.)
It then went on to uphold this Court's order compelling arbitration in Connecticut I based upon the following review and analysis of the plain language and structure of the parties' arbitration agreement:
As with any question of contract interpretation, we begin with the pertinent language of the agreement. Section VII(a) of the agreement provides in relevant part that the Superior Court, which entered the consent decree, retains "exclusive jurisdiction for the purposes of implementing and enforcing this [a]greement . . . and . . . except as provided in [subsection] XI(c) . . . [it] shall be the only court to which disputes under this [a]greement . . . are presented . . ." (Emphasis added.) Accordingly, § XI(c) establishes an exception to the Superior Court's otherwise exclusive jurisdiction over the agreement's implementation and enforcement. Section XI(c) provides for binding arbitration before a panel of three arbitrators, each of whom shall be a former federal judge, of "[a]ny dispute, controversy or claim arising out of or relating to calculations performed by, or any determinations made by, the [i]ndependent [a]uditor . . . 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). . . ."
Although the agreement thus limits the subject matter of the disputes that are arbitrable, it employs broad language in defining the scope of the disputes that fall within that subject matter. Specifically, the arbitration provision provides that "[a]ny dispute, controversy or claim arising out of or relating to" the independent auditor's calculations and determinations is arbitrable. (Emphasis added.) Section XI(a)(1) of the agreement provides in relevant part that the independent auditor "shall calculate and determine the amount of all payments owed pursuant to this agreement, [and] the adjustments . . . thereto . . ." Pursuant to § XI(a)(1), the independent auditor calculated the annual payments owed by the participating manufacturers for 2003 to the settling states. As we have discussed previously herein, § IX(j) describes the steps that the independent auditor must take in calculating the participating manufacturers' annual payments and the sixth step in that process is the application of the nonparticipating manufacturer adjustment. Thus, the independent auditor, in calculating the annual payments, had to determine whether to apply that adjustment. Accordingly, we conclude that the underlying dispute over the independent auditor's decision not to apply the adjustment falls within the scope of the arbitration provision because it directly involves a determination of the independent auditor. Moreover, this dispute also arises out of or relates to the independent auditor's calculation of the annual payments because its determination not to apply the nonparticipating manufacturer adjustment resulted in it calculating higher annual payments than if it had determined that the adjustment should apply.
Our conclusion that the underlying dispute is arbitrable is buttressed by referring to the specific examples of arbitrable disputes enumerated in § XI(c) of the agreement. Section XI(c) provides that such arbitrable disputes include, without limitation, "any dispute concerning the operation or application of any of the adjustments . . . described in subsection IX(j) . . ." (Emphasis added.) Section IX(j) of the agreement, in its sixth step, describes the nonparticipating manufacturer adjustment. Accordingly, the underlying dispute over whether the independent auditor correctly decided not to apply the adjustment is a dispute concerning the application of the adjustment. Indeed, the state's brief in this court frames the underlying dispute as "whether the . . . [i]ndependent [a]uditor should have applied a [n]onparticipating [m]anufacturer [a]djustment . . . to reduce the . . . [p]etitioners' [a]nnual [p]ayments . . . for 2003 by $30 million." (Emphasis added; internal quotation marks omitted.) Our conclusion that the plain language of the agreement's arbitration provision requires that the underlying dispute be referred to arbitration is further supported by the structure of the payment system created under the agreement. Specifically, the agreement provides that each of the participating manufacturers will make a single annual payment, as calculated by the independent auditor, which is then allocated to the settling states based upon established percentages. Thus, under the agreement, any change in the manner in which a participating manufacturer's annual payment is calculated will impact the amount received by each of the fifty-two settling states. Accordingly, the agreement's broad referral to an arbitration panel of "[a]ny dispute, controversy or claim arising out of" the independent auditor's calculations or determinations reflects the necessity of creating a uniform, nationwide set of rules by which the independent auditor is to calculate the annual payments. Indeed, the trial court aptly stated that, if the interpretation of the rules on calculating annual payments were left up to the courts of each of the settling states, "fifty-two different sets of payment rules might emerge, sowing confusion, depriving [s]ettling [s]tates of mon[eys] needed for smoking cessation and other essential health programs, and causing wave after costly wave of new litigation." We therefore conclude that the trial court properly granted the petitioners' petition to compel arbitration because the underlying dispute falls clearly within the agreement's arbitration provision.
Id. at 798-801 (footnotes omitted).
Turning finally to the State's specific argument that the dispute sought to be arbitrated could not be ordered to arbitration under the MSA because two "preconditions to arbitration" had not been satisfied, the Supreme Court flatly rejected that argument for the following reasons:
The state claims that the agreement's arbitration provision must be read to limit arbitrable disputes to those relating to determinations and calculations that are "actually committed to, and actually made by, the [i]ndependent [a]uditor in the first instance." The state claims that the underlying dispute over the independent auditor's failure to apply the nonparticipating manufacturer adjustment therefore is not arbitrable because the independent auditor was not authorized to make this determination. Specifically, the state asserts that the independent auditor could not make the adjustment determination until the proper bodies made two predicate determinations, namely the significant factor determination and whether the qualifying statute was being enforced diligently. In support of this contention, the respondent analogizes the present case to cases from this jurisdiction and other jurisdictions in which either the scope of the arbitration required judicial determination of certain issues prior to referring a dispute to arbitration; see Frager v. Pennsylvania General Ins. Page 803 Co., 155 Conn. 270, 274-77, 231 A.2d 531 (1967) (concluding that determination as to whether automobile involved in accident with plaintiff was "uninsured automobile," as defined in plaintiff's automobile insurance policy, was condition precedent to arbitration because arbitration provision limited to disputes over [1] insured's right to recover damages from owner or operator of "uninsured automobile," and [2] amount of such damages); Eastern Minerals International, Inc. v. Cane Tennessee, Inc., 274 App.Div.2d 262, 266, 713 N.Y.S.2d 29 (2000) (concluding that, because arbitration provision was restricted to dispute over apportionment of any condemnation award, preliminary dispute over whether taking had occurred was preliminary question reserved for judicial resolution); or the contract explicitly conditioned access to arbitration on the satisfaction of certain preconditions. See White v. Kampner, 229 Conn. 465, 473-75, 641 A.2d 1381 (1994) (concluding that contract provision requiring two mandatory negotiating sessions prior to invoking arbitration provision was condition precedent to arbitration); Primavera Laboratories, Inc. v. Avon Products, Inc., 297 App.Div.2d 505, 505-06, 747 N.Y.S.2d 16 (2002) (denying motion to compel arbitration because chosen method of arbitration requires that certain preliminary issues be resolved by court prior to invocation of arbitration). We disagree.
Section XI(c) of the agreement does not refer to any preconditions to arbitration and it does not contain the limitation, urged on us by the state, that only disputes over determinations or calculations "actually committed to, and actually made by, the [i]ndependent [a]uditor in the first instance" are arbitrable. In the absence of such preconditions and limitations, we generally are without authority to read them into the agreement's arbitration provision. See Gary Excavating, Inc. v. North Haven, 164 Conn. 119, 123, 318 A.2d 84 (1972) (noting that, because contract did not state affirmatively that failure to comply with certain procedures barred arbitration, plaintiff did not waive arbitration by failing to comply with those procedures); see also Goldberg v. Hartford Fire Ins. Co., supra, 269 Conn. 559 ("[w]here the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms" [emphasis added; internal quotation marks omitted]); Pesino v. Atlantic Bank of New York, supra, 244 Conn. 94 (acknowledging that this court cannot add new terms to contract even where parties, if made aware of missing term, likely would have added it); Collins v. Sears, Roebuck Co., 164 Conn. 369, 374, 321 A.2d 444 (1973) ("interpretation of a contract must be made in accordance with the terms employed in the instrument and a court cannot by that means disregard the words used by the parties or revise, add to, or create a new agreement"). Accordingly, the state's reliance on cases in which the parties' contract either restricted the scope of the arbitration provision to require judicial resolution of certain issues prior to arbitration or explicitly required that certain conditions be satisfied prior to arbitration is misplaced. See White v. Kampner, supra, 229 Conn. 473-75; Frager v. Pennsylvania General Ins. Co., supra, 155 Conn. 274-77; Primavera Laboratories, Inc. v. Avon Products, Inc., supra, 297 App.Div.2d 505-06; Eastern Minerals International, Inc. v. Cane Tennessee, Inc., supra, 274 App.Div.2d 266.
Despite the lack of express language, the state argues that the scope of the arbitration provision is limited implicitly because interpreting the provision without such a limitation would lead to absurd results as any issue would become arbitrable if the independent auditor made a determination regarding it. We do agree that, under our well settled principles of contract interpretation, the scope of the arbitration provision cannot be stretched to cover a dispute relating to a determination of an issue that is far removed from the independent auditor's role under the agreement because such an interpretation potentially would render the agreement's provision regarding the Superior Court's continuing jurisdiction superfluous. See United Illuminating Co. v. Wisvest-Connecticut, LLC, 259 Conn. 665, 674, 791 A.2d 546 (2002) ("[t]he law of contract interpretation militates against interpreting a contract in a way that renders a provision superfluous"); Waesche v. Redevelopment Agency, 155 Conn. 44, 51, 229 A.2d 352 (1967) (noting that this court will not construe contract's language in manner that "would lead to a patently absurd and inequitable result"). Nonetheless, we are not faced with such a scenario in the present case because the agreement not only authorizes the independent auditor to make the initial determination whether to apply the nonparticipating manufacturer adjustment, it requires the independent auditor to make this determination. The role of the independent auditor is set forth in § XI(a)(1) of the agreement, which provides in relevant part that the "[i]ndependent [a]uditor shall calculate and determine the amount of all payments owed pursuant to this [a]greement, the adjustments . . . thereto . . . the allocation of such payments and adjustments . . . among the [p]articipating [m]anufacturers and among the [s]ettling [s]tates . . ." (Emphasis added.) Section IX(j) provides that "[t]he payments due under this [a]greement shall be calculated as set forth below," and the sixth step in that section provides that "the [nonparticipating manufacturer] adjustment shall be applied to the results of [the fifth step] pursuant to subsections IX(d)(1) and (d)(2) (or, in the case of payments due from the [s]ubsequent [p]articipating [m]anufacturers, pursuant to subsection IX[d]4])." (Emphasis added.) Section IX(j) further instructs that "[i]n the event a particular adjustment, reduction or offset referred to in a clause below does not apply to the payment being calculated, the result of the [step] in question shall be deemed to be equal to the result of the immediately preceding [step]." (Emphasis added.) Accordingly, the agreement requires that the independent auditor calculate the annual payments and, in performing those calculations, the agreement further requires that the independent auditor determine, based on the language of the agreement and the information it has been provided, whether to apply the nonparticipating manufacturer adjustment. Nothing in the agreement allows the independent auditor simply to ignore whether a particular adjustment applies. Indeed, even if information necessary to its calculation of the annual payments is missing, § XI(d)(5) of the agreement explicitly directs the independent auditor to calculate the annual payments by employing an assumption or best estimate for the missing information.
The agreement's instructions to the independent auditor regarding how it is to present its preliminary calculations also reveal that the parties to the agreement envisioned that the independent auditor must make determinations regarding the applicability of adjustments, including the nonparticipating manufacturer adjustment. Specifically, § XI(d)(2) of the agreement requires the independent auditor to deliver to all the parties to the agreement "detailed preliminary calculations . . . of the amount due from each [p]articipating [m]anufacturer . . . showing all applicable . . . adjustments . . . and setting forth all the information on which the [i]ndependent [a]uditor relied in preparing such [p]reliminary [c]alculations . . ." (Emphasis added.) Accordingly, this section provides, yet again, that the independent auditor is tasked, under the agreement, with the responsibility of making determinations as to when a particular adjustment applies.
Finally, the arbitration provision itself supports the view that the parties to the agreement intended the independent auditor to make the initial determinations regarding the applicability of adjustments to the annual payments. Specifically, the arbitration provision provides that a dispute that arises or relates to the agreement, is not only empowered to, but must make an initial determination regarding the applicability of any adjustments, including the nonparticipating manufacturer adjustment. Any challenge as to whether the independent auditor's initial determination was, in fact, correct, under the circumstances, is an issue that the agreement reserves for binding arbitration.
Id. at 802-08. (Footnotes omitted.)
3. APPLICATION OF THE HOLDING IN CONNECTICUT II TO THE CLAIMS PRESENTED ON THE INSTANT MOTION
Notwithstanding the Supreme Court's rejection of its claim in Connecticut II — that its dispute with the SPMs concerning the Independent Auditor's failure to apply the NPM Adjustment to their Annual Payments for 2003 was not arbitrable under MSA § XI(c) because only this Court, not the Independent Auditor, is empowered by the MSA to determine if it diligently enforced its Qualifying Statute in any given year — the State now urges this Court to rule that its present dispute with the OPMs as to whether it diligently enforced its Qualifying Statute in that very same year is not arbitrable under the very same arbitration provision. The essential basis for this argument is the State's assertion that the dispute held arbitrable in Connecticut II is fundamentally different from that which the OPMs now seek to arbitrate. In the earlier case, the State now claims, "the sole issue presented and decided was whether the Independent Auditor's preliminary decision not to apply the 2003 NPM Adjustment to the PMs' 2004 annual payments was arbitrable." State's Memorandum in Opposition, (12/8/06), p. 10. (Emphasis in original.) There, it argues,
[t]he PMs had argued that the Independent Auditor, having determined that a Market Share Loss occurred in 2003, should have preliminarily applied the NPM Adjustment, even though, at that time, there had been no Significant Factor Determination and no determinations regarding Diligent Enforcement. Therefore, it was only this initial determination of the Independent Auditor that was in dispute. See Conn[ecticut] II, 279 Conn. at 807-08 ("Any challenge as to whether the independent auditor's initial determination was, in fact, correct, under the circumstances, is an issue that the agreement reserves for binding arbitration" (emphasis added)).
Memorandum in Opposition, (12/8/06), p. 10.
In the OPMs' instant Motion, by contrast, the State claims that the dispute sought to be arbitrated is the ultimate "question of how State officials exercised their discretion to enforce Connecticut's Qualifying Statute in 2003." Id. That question, it argues, "is a far cry from the question of whether the Independent Auditor should have preliminarily applied an NPM Adjustment to the PMs' 2004 payments as soon as it had determined there was a Market Share Loss, or whether it was correct to defer any application of the Adjustment until Significant Factor and Diligent Enforcement determinations had been made." Id. (emphasis added). So stating, the State goes on to make the same basic arguments here as it previously made in Connecticut I and Connecticut II. It argues, more particularly, that based upon the language, the structure and the logic of the MSA, the exclusive power to decide if the State diligently enforced its Qualifying Statute throughout any year for which an NPM Adjustment may be applied necessarily resides in this Court, not in the Independent Auditor or in any panel of former federal judges convened to arbitrate that issue under MSA § XI(c). For the following reasons, the Court concludes that the State's argument must be rejected.
Initially, the Court concludes that State has seriously misread the true scope and substance of the Supreme Court's ruling in Connecticut II as set forth above. The essential issue in that case, it must be remembered, was whether the parties' dispute concerning the Independent Auditor's determination not to apply an NPM Adjustment for 2003 was arbitrable under MSA § XI(c). The resolution of that issue, in turn, depended upon whether the Independent Auditor was authorized by the MSA to decide, without a judicial determination by the Court, the predicate question whether the State had diligently enforced its Qualifying Statute throughout that year. The State had argued that if the Independent Auditor had no such authority, then the parties' dispute would not be arbitrable under MSA § XI(c). That was so, claimed the State, because the scope of arbitration was impliedly limited by the parties' arbitration agreement to disputes, controversies or claims arising out of or relating to calculations or determinations by the Independent Auditor which the Independent Auditor was duly authorized to make. If it were otherwise, claimed the State, any dispute could be made arbitrable under the MSA, despite the parties' intention to reserve it for this Court, simply by asking the Independent Arbitrator to determine it. Therefore, it argued that the dispute before the Court could not be ruled arbitrable under MSA § XI(c) unless it was first established that the Independent Auditor was authorized by the MSA to determine whether to apply an NPM Adjustment for 2003, and in so doing, inter alia, to determine if the State had diligently enforced its Qualifying Statute throughout that year.
Having been presented with this argument by the State, the Supreme Court expressly addressed it in Connecticut II. Agreeing with the State that no dispute, controversy or claim could be ruled arbitrable under MSA § XI(c) unless it were found to arise out of or relate to calculations or determinations which the Independent Auditor was actually authorized to make, the Supreme Court specifically inquired if the Independent Auditor was in fact authorized to apply the NPM Adjustment when calculating the amounts of the PMs' Annual Payments under the MSA. Upon carefully reviewing the text and the structure of the MSA in the manner described above, the Court unequivocally concluded that it was indeed so authorized, flatly declaring that " the agreement not only authorizes the independent auditor to make the initial determination whether to apply the nonparticipating manufacturer adjustment, it requires the independent auditor to make this determination." Connecticut II, 279 Conn. at 805. (Emphasis added.)
Although the State surely recognizes that the Supreme Court's decision in Connecticut II is binding upon it as to the arbitrability of the dispute there at issue, it has sought to distinguish that dispute from the one which the OPMs now seek to arbitrate. Pointing to the word "initial" in the Supreme Court's foregoing description of the disputed determination it ruled arbitrable in Connecticut II the State argues, more particularly, that that dispute concerned only an "initial determination" of a "preliminary" nature, which the independent Auditor was concededly required to make and use when first calculating the PMs' Annual Payments under the MSA, but, it argues, only "on an interim basis" pending the ultimate determination of that issue by this Court. In the OPMs' Motion, by contrast, the State claims that the dispute sought to be arbitrated concerns not initial determination of the diligent enforcement issue by the Independent Auditor but the ultimate judicial determination of that issue, which it has asked this Court to make. Claiming that ultimate determination as to diligent enforcement is one which only this Court can make, the State urges this Court to rule that the instant dispute is not arbitrable because it does not arise out of or relate to a determination which the Independent Auditor is empowered to make.
There is, in fact, nothing in Connecticut II to suggest that the Supreme Court based its finding of arbitrability as to the dispute there at issue relating, as it was said to, to the Independent Auditor's "initial determination" not to apply an NPM Adjustment to the PMs' Annual Payments for 2003 based upon the presumption that all Settling States had diligently enforced their Qualifying Statutes throughout that year — upon either the "preliminary" nature of that determination or the "interim basis" upon which it is was assertedly made and used pending the ultimate determination of that issue by this Court. Not only did the Court not describe any circumstances in which the Court would make such an ultimate determination, but its decision made it clear in several ways that it has no power to do so. This is clearly true because, except for disputes, claims or controversies that might later arise out of or relate to any calculations or determinations made by the Independent Auditor, all of which were to be resolved by binding arbitration, only the Independent Auditor had the power and responsibility for making all calculations and determinations committed to it under the MSA, both initially and at any later time when they might be reconsidered on the basis of new information that was unavailable when the initial calculations and determination was made.
This conclusion is supported, first and foremost, by the plain language of the MSA, which, as quoted by the Court in Connecticut II, unambiguously declares that the Independent Auditor " shall calculate and determine the amount of all payments owed pursuant to this agreement, [and] the adjustments . . . thereto . . ." Connecticut II, supra, 279 Conn. at 806 (emphasis supplied by the Supreme Court). One adjustment which the Independent Auditor must calculate and determine whenever it calculates and determines the amount of the PMs' Annual Payments is the NPM Adjustment. Id. One mandatory step in determining whether to allocate to a State any part of the reduction in aggregate Allocated Payments to all Settling States for any year in which an NPM Adjustment is applied is to determine if that State is exempt from such a reduction because it continuously had in full force and effect and diligently enforced throughout that year a Qualifying Statute, as described above. Therefore, subject only to review and resolution by binding arbitration of any dispute, controversy or claim arising out of or relating to it, any determination by the Independent Auditor as to whether the State diligently enforced its Qualifying Statute in a year for which an NPM Adjustment is applied must necessarily be made by the Independent Arbitrator, as a mandatory part of its mandatory determination whether to apply an NPM Adjustment to the PMs' Annual Payments for that year. So constructed, the MSA leaves no room at all for this Court to decide that issue.
The Supreme Court confirmed the foregoing analysis in the closing paragraph of Connecticut II, where it wrote as follows:
[ T]he arbitration provision itself supports the view that the parties to the agreement intended the independent auditor to make the initial determinations regarding the applicability of adjustments to the annual payments. Specifically, the arbitration provision provides that a dispute that arises or relates to the independent auditor's determinations or calculations is one that concerns the " application of any of the adjustments," including the nonparticipating manufacturer adjustment. (Emphasis added.) In sum, the agreement provides that the independent auditor, in calculating the annual payments due under the agreement, is not only empowered to, but must make an independent determination regarding the applicability of any adjustment,. including the nonparticipating manufacturer adjustment. Any challenge as to whether the independent auditor's initial determination was, in fact, correct, under the circumstances, is an issue that the agreement reserves for binding arbitration.
Id. at 807-08 (emphasis added). Nested in this paragraph are two important conclusions about the manner in which diligent enforcement determinations should be made which tend strongly to undermine the State's oft-repeated position that they must ultimately be made by this Court. The first is that the Independent Auditor must make "an independent determination regarding the applicability of any adjustments to the annual payments, including the N[PM A]djustment." Id. (emphasis added). The second is that "[ a]ny challenge as to whether the Independent Auditor's initial determination was, in fact, correct, under the circumstances, is an issue that the agreement reserves for binding arbitration." Id. (emphasis added). The significance of these conclusions in this context is enormous.
To begin with, by empowering the Independent Auditor to make an "independent determination regarding the applicability of any adjustments to the annual payments," the MSA freed the Independent Auditor from any obligation either to wait for others' input on the issues it must decide in making those determinations or to be bound by such input once it is received. By expressly extending this authorization to the NPM Adjustment, moreover, and thus to the diligent enforcement determination which underlies it, the Court authorized the Independent Auditor to decide that issue on its own, without binding input from anyone, including this Court. Thus, the Independent Auditor's task in deciding the diligent enforcement issue, as with all other issues it must decide in determining whether to apply particular adjustment prescribed by the MSA to the PMs' Annual Payments for any given year, must be to assess the issue for itself, as best it can, in light of the information presented to it. The Independent Auditor cannot properly abdicate that responsibility to anyone, including this Court, even if it has no special competence to decide the issue in question. This approach to determining the applicability of an adjustment or an exemption from it is obviously inconsistent with the State's claim, here and in Connecticut II, that diligent enforcement is an issue as to which this Court must ultimately make a binding judicial determination.
The second conclusion arising from the Supreme Court's closing paragraph in Connecticut II is also inconsistent with the State's position that the diligent enforcement is an issue that must ultimately be decided by this Court. By ruling, as it clearly did, that binding arbitration before a panel of former federal judges is a party's only recourse under the MSA in the event it wishes to "challenge" the correctness of the Independent Auditor's "initial determination" on any issue it is empowered to decide thereunder, necessarily including whether a State diligently enforced its Qualifying Statute throughout any year for which an NPM Adjustment is sought to be applied, the parties, once again, left no room for this Court to play any role at all in resolving that issue. This is true not only because such any such arbitration proceeding would necessarily be triggered by and relate directly to an "initial determination" by the Independent Auditor, which must by definition take place first, but because the results of the arbitration, also by definition, would be binding upon the parties, and thus beyond the power of this Court to set aside.
In sum, although the Independent Auditor's determination of the diligent enforcement issue may fairly be described as an "initial determination" in relation to the only other determination of that issue that is authorized by the MSA — the resolution by binding arbitration, before a panel of former federal judges convened under MSA § XI(c), of any dispute, controversy or claim arising from or relating to that initial determination — that description in no way suggests, much less establishes, that this Court has any power to make such a determination, ultimate or otherwise, on its own. To the contrary, for all of the foregoing reasons, the Court concludes that the Supreme Court, in Connecticut II fully addressed and appropriately rejected the State's argument, presented again here, that diligent enforcement is an issue that must ultimately be resolved by a judicial determination by this Court. Against this background, it is apparent that the Court's decision in Connecticut II is controlling on the issue now before this Court. Both disputes relate directly to determinations by the Independent Auditor which it, not this Court, was empowered by the MSA to make, to wit: whether to apply an NPM Adjustment to the PMs' Annual Payments for 2003. In each, the Independent Auditor determined not to apply the NPM Adjustment based upon the identical presumption, urged upon it by the States, that each State had diligently enforced its Qualifying Statute throughout 2003. Therefore, because no functional distinction can be drawn between the two disputes despite the different years in which they arose, the arbitrability of the latter dispute is plainly controlled by the Supreme Court's ruling as to the former in Connecticut II.
Accordingly, the Court need not reexamine or readdress any of the myriad claims and arguments advanced by the State as to why the logic and structure of the MSA and its payment provisions require a different result. Suffice it to say that those arguments, which the State first advanced but this Court and the Supreme Court rejected in Connecticut I and Connecticut II, are now quite beside the point except to the extent that the Supreme Court's rejection of them undergirds its decision in Connecticut II. On that score, to reiterate, the Supreme Court offered the following observations as to why the parties' dispute must be arbitrated instead of decided by this Court.
Our conclusion that the plain language of the agreement's arbitration provision requires that the underlying dispute be referred to arbitration is further supported by the structure of the payment system created under the agreement. Specifically, the agreement provides that each of the participating manufacturers will make a single annual payment, as calculated by the independent auditor, which is then allocated to the settling states based upon established percentages. Thus, under the agreement, any change in the manner in which a participating manufacturer's annual payment is calculated will impact the amount received by each of the fifty-two settling states. Accordingly, the agreement's broad referral to an arbitration panel of "[a]ny dispute, controversy or claim arising out of" the independent auditor's calculations or determinations reflects the necessity of creating a uniform, nationwide set of rules by which the independent auditor is to calculate the annual payments. Indeed, the trial court aptly stated that, if the interpretation of the rules on calculating annual payments were left up to the courts of each of the settling states, "fifty-two different sets of payment rules might emerge, sowing confusion, depriving [s]ettling [s]tates of mon[eys] needed for smoking cessation and other essential health programs, and causing wave after costly wave of new litigation." We therefore conclude that the trial court properly granted the petitioners' petition to compel arbitration because the underlying dispute falls clearly within the agreement's arbitration provision.
Id. at 800-01.
B. THE STATE'S REMAINING CLAIMS
Although the foregoing analysis disposes of the State's first, second and fourth arguments in opposition to the OPMs' instant Motion, it does not dispose of the State's third and fifth arguments as to why it should not now be compelled to arbitrate its present dispute with the OPMs. Its third argument, to reiterate, is that the OPMs have not claimed and cannot in good faith basis allege that it failed to diligently enforce its Qualifying Statute throughout 2003. Without such a good-faith basis to demand arbitration, claims the state, the OPMs cannot compel it to submit to arbitration without violating the spirit of the parties' agreement. Its fifth argument is that the OPMs waived any claim they might ever make for the application of an NPM Adjustment for 2003 by entering into a separate June 2003 Agreement, under which they assertedly released all Settling States, including Connecticut, from any claims had or might ever have under Section IX(d) of the MSA, including its NPM Adjustment provisions, with respect to cigarettes shipped or sold from 1999 through 2002. Claiming that any NPM Adjustment for 2003 must necessarily be based upon the PMs' sales or shipments of cigarettes during 2002, the State argues that the movants have waived their right to seek an NPM Adjustment for 2003.
1. THE STATE'S CLAIM OF BAD FAITH
Turning first to the State's suggestion that this Court should deny the OPMs' Motion because they have not claimed and have no good-faith basis for claiming that the State did not diligently enforce its Qualifying Statute throughout 2003, the Court must reject that claim for two reasons. To begin with, there is simply no requirement in the parties' arbitration agreement that conditions the right to arbitrate thereunder upon such allegations or proof. Since arbitration is a creature of contract, it has long and appropriately been held that no party can be required to arbitrate any dispute it has not agreed to arbitrate under the terms of its contract. By the same token, no party entitled by its contract to submit a dispute to arbitration can appropriately be deprived of its right to do so based upon its failure to meet a precondition to arbitration to which it has not agreed. The task of a court in deciding a motion to compel arbitration is to interpret and enforce the parties' agreement as they wrote and agreed to it, not to rewrite that agreement to suit its own notions of equity and good sense. Accordingly, the Court must reject the State's claim that the OPMs should be precluded from compelling it to arbitrate their dispute about diligent enforcement of the State's Qualifying Statute in 2003 on the ground that it has thus far not alleged or offered proof that the State's enforcement efforts in that year were not diligent.
The State, to be sure, has cited authority for the proposition that a court may properly deny a superficially proper motion to compel arbitration when it appears either that the claim is "totally devoid of possible merit on the facts or [that] the evidence of bad faith [is] . . . so patent as to justify . . . refusing to submit [it] to arbitration." See, e.g., Int'l Union of Electrical, Radio and Machine Workers v. General Electric Co., 407 F.2d 253, 259 n. 12 (2d Cir. 1968), cert denied, 395 U.S. 904 (1969) citing Local Union No. 787, Int'l Union of Electrical, Radio and Machine Workers v. Collins Radio Co., 317 F.2d 214, 220 (5th Cir. 1963). The Court does not doubt its inherent power to relieve a party of the burden of submitting to a completely pointless arbitration proceeding in the proper case. It has no confidence, however, that this is such a case, and surely cannot make such a decision without a compelling showing to that effect by the party seeking to avoid the arbitration. It is true, of course, that the OPMs' claim may ultimately prove to be completely frivolous. In that event, the State may invoke appropriate legal remedies to remedy any wrong it has thereby suffered. For the moment, however, it must be left to such remedies, if they prove to be warranted, for it has thus far failed to present a suitable basis for the denial of the OPMs' instant Motion.
2. THE STATE'S CLAIM OF WAIVER
The State's fifth and final argument in opposition to the instant Motion, as previously noted, is that the OPMs waived their rights to seek an NPM Adjustment for 2003 by entering into separate, June 2003 agreements with the Settling States whereby they obtained reductions in their payments for sales made from 1999 through 2002 in exchange for unconditionally releasing each State from all claims they had or might ever have under Section IX(d) of the MSA with respect to cigarettes shipped or sold in that same period, "including any effect such claims may have on future payments under the MSA." State's Memorandum in Opposition, (12/8/06), p. 29. The State asserts that one claim which the OPMs undoubtedly released under their June 2003 agreements is the claim for an NPM Adjustment for 2003, as to which they now seek to compel arbitration. On this score, the State's analysis is as follows:
Because of the timetable according to which NPM escrow deposits are made, any actions the State took to enforce its Qualifying Statute in 2003 would necessarily have pertained to NPM cigarette sales made prior to 2003. Pursuant to Conn. Gen. Stat. § 4-28i(a), each NPM that sells its products in Connecticut must make an annual escrow deposit by April 15th of each year. The amount of that payment is based on the number of cigarettes the NPM sold in Connecticut in the previous year. Thus, NPM escrow deposits made in April 2003 pertained to NPM sales occurring in calendar year 2002. The State could not have taken any enforcement actions with respect to cigarette sales made in 2003 during that same calendar year, because the State did not know until April 2004 whether any NPM would fail to make the required escrow deposit for its 2003 sales. Consequently, information with respect to sales from 1999 through 2002 was the only information on which the State could take legal action to enforce Conn. Gen. Stat. § 4-28h et seq. during calendar year 2003. With their June 2003 agreements, therefore, the PMs waived their right to a 2003 NPM Adjustment.
State's Memorandum in Opposition (12/8/06), p. 30. Because the June 2003 Agreements do not contain arbitration clauses, the State insists that that disputes concerning them cannot be arbitrated under the MSA.
The OPMs respond to this new claim, which was not raised as a defense to the SPMs' petition in Connecticut I or Connecticut II, by contending both that it is incorrect on the merits and, more importantly in this context, that it is unavailable as a basis for denying their instant Motion because, as a defense to the claim sought to be arbitrated, it too is arbitrable under the MSA. In support of the latter argument, the OPMs have produced persuasive authority for the proposition that when a party claims waiver by settlement with respect to an arbitrable claim, the "settlement agreement is an arbitrable subject . . . except under circumstances where the parties expressly exclude the settlement agreement from being arbitrated." Niro v. Fearn Int'l, Inc., 827 F.2d 173, 175 (7th Cir. 1987). The rationale for this rule, as the Niro Court explained, is very simple: "To hold otherwise could eviscerate the usefulness of settlements reached in grievance and arbitration settings, by complicating what should be a relatively simple and cheap procedure. If parties desire that a settlement agreement should not be arbitrable they may so prescribe." Id.
In the present case, it is clear that the parties' June 2003 Agreements settled at least some potential claims or disputes as to which either the OPMs or the State could have sought arbitration under the MSA. This is so because all claims assertedly released under those Agreements related concerned the applicability of adjustments to the PMs' Annual Payments under the MSA, which the Independent Auditor was not only authorized but required to determine. Since the parties certainly knew when they entered into those agreements that the claims thereby settled were arbitrable under MSA § XI(c), they could easily have inserted language in them to exempt disputes thereunder from arbitration had they been of a mind to. Manifestly, they did not. The absence of such language from those Agreements renders disputes about them arbitrable whenever they arise out of or relate to proceedings in which are asserted as defenses to otherwise arbitrable claims.
Against this background, the Court need not discuss the merits of the State's claim of waiver. All disputes about that claim must await the decision of the arbitrators in the arbitration proceeding where those Agreements are relied upon in defense of an otherwise arbitrable claim.
CONCLUSION
For all of the foregoing reasons, the Court hereby ORDERs that the OPMs' Motion to Compel Arbitration is hereby GRANTED this 21st day of February 2008.