Supreme Court to hear arguments in tobacco case

CHARLESTON -- State Supreme Court justices are set to hear arguments over whether West Virginia has to participate in mass arbitration with other states over a disputed decrease in money owed the states by a group of tobacco companies.

Kanawha Circuit Judge Irene Berger in 2007 ordered the state to participate in the arbitration, though the state argues it is unnecessary and a waste of tax dollars. The state says the matter should be argued locally.

West Virginia was one of the states that reached a monumental $246 billion settlement with big tobacco in 1998.

The current dispute has to do with the tobacco companies' contention that an independent auditor that calculates the tobacco companies' annual payments to the states incorrectly found that there would be no adjustment in payments based on alleged market share loss by the participating companies in 2003.

The companies also contend that there is no proof that the states receiving the payments have diligently enforced laws meant to level the playing field between participating tobacco companies and smaller companies that did not take part in the settlement.

The companies want these issues hashed out before an arbitration panel consisting of three retired federal judges.

The total potential adjustment is estimated at $1.2 billion, according to the state's Supreme Court brief. That's the amount of money the tobacco companies say they don't owe the states because of lost market share.

Part of the settlement allows for a reduction in the payments if the participating companies were found to have lost market share because they settled with the states, court documents say.

The settlement also says that states had to pass and enforce laws that require smaller tobacco companies that didn't participate in the settlement to put a certain amount of money per cigarette sold into an escrow account should the companies ever be sued over health issues related to smoking.

The big tobacco companies argue that the auditor -- in determining there would be no adjustment in the payments -– merely assumed that the states were enforcing the laws and demanded arbitration to straighten the matter out.

The state contends it is not the auditor's responsibility to make this legal determination.

Nevertheless, the tobacco companies withheld $11 million in settlement money from West Virginia until the matter was settled.

The state in its brief to the Supreme Court argues that the matter could be settled in Kanawha Circuit Court, where it contends jurisdiction lies.

The state says nothing in the settlement order allows for the type of arbitration the tobacco companies are seeking.

But the tobacco companies in their collective brief argue that the language in the settlement order requires this kind of arbitration when there are these kinds of disputes.

"The state's attempts to read limitations into this plain language that (the settlement) does not contain are contrary to established contract law principles and the liberal policy favoring arbitration under federal and state law," the companies contend.

Arguments in this case are first on the Supreme Court's Feb. 24 docket. If justices affirm Berger's ruling, the state will have to participate in the arbitration.

If justices reverse the ruling, the state will get to put on evidence locally that it enforced the law related to the escrow payments.

State Supreme Court case number: 33873