IN THE COURT OF APPEALS

OF THE STATE OF NEW MEXICO

STATE OF NEW MEXICO, ex. rel.

HECTOR H. BALDERAS, ATTORNEY GENERAL
OF THE STATE OF NEW MEXICO,

Plaintiff-Appellant,

v. No. A-1-CA-36199

PHILIP MORRIS, USA, INC. et al.,

Defendants-Appellees.

STATE OF NEW MEXICO’S REPLY BRIEF

Oral Argument is Requested

Hector H. Balderas Robert M. Loeb*

New Mexico Attorney General
Ari Biernoff
Assistant Attorney General
P.O. Drawer 1508
Santa Fe, NM 87504-1508
(505) 490-4058 Telephone
(505) 490-4881 Facsimile
abiernoff@nmag.gov
Orrick, Herrington & Sutcliffe LLP
1152 15th Street NW
Washington, DC 20005
(202) 339-8475 Telephone
(202) 339-8500 Facsimile
rloeb@orrick.com
Elizabeth R. Moulton*
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, CA 94025
(650) 614-7679 Telephone
(650) 614-7401 Facsimile
emoulton@orrick.com
*Pro Hac Vice Admission Pending

Attorneys for Appellant State of New Mexico

 TABLE OF CONTENTS

Page
TABLE OF AUTHORITIES .................................................................................. iii
INTRODUCTION ....................................................................................................1
ARGUMENT ............................................................................................................4
I. New Mexico Cannot Be Compelled To Participate In A Manner
Of Arbitration To Which It Did Not Consent. .....................................4
A. American Tobacco did not speak to a four-arbitrator,
dual-panel structure inconsistent with the terms of the
MSA. ..........................................................................................4
B. The Tobacco Companies cannot hide from the material
deviation from the MSA’s terms. ..............................................6
C. The “Stipulation” between the Tobacco Companies and
other States does not alter New Mexico’s rights under the
MSA. ........................................................................................11
II. The Law Of The Case Doctrine Does Not Support The District
Court’s Ruling Because The Relevant Facts And Law Have
Changed Since American Tobacco. ...................................................13
A. The 2014 NPM Arbitration is not a nationwide, uniform
arbitration. ................................................................................13
B. Stolt-Nielsen requires affirmative consent to any form of
multiparty arbitration. ..............................................................17
CONCLUSION .......................................................................................................19
CERTIFICATE OF SERVICE
Statement of Compliance with Type-Volume Limitations: The body of
the following brief exceeds the 15-page limit set forth in Rule 12-318(F)(2)
NMRA. As required by Rule 12-318(G) NMRA, we certify that this brief complies
with Rule 12-318(F)(3) NMRA, in that the brief is proportionately spaced and the
body of the brief contains 4,227 words. This brief was prepared and the word count
determined using Microsoft Word 2010.

ii
 TABLE OF AUTHORITIES

Page(s)
New Mexico Cases
Amerind Risk Mgmt. Corp. v. Blackfeet Housing,
No. 16 CV 1093, 2017 WL 4712211 (D.N.M. Oct. 17, 2017) .............................. 5
State of N.M. ex rel. King v. Am. Tobacco Co., Inc.,
2008-NMCA-142, 145 N.M. 134 ..................................................1, 13, 14, 16, 17

Cases From Other Jurisdictions

Americo Life, Inc. v. Myer,
440 S.W.3d 18 (Tex. 2014)....................................................................................5
Maryland v. Philip Morris, Inc.,
123 A.3d 660 (Md. Ct. Spec. App. 2015) ............................................................. 6

Pennsylvania ex rel. Kane v. Philip Morris, Inc.,

128 A.3d 334 (Pa. Commw. Ct. 2015) ................................................................. 6

State ex rel. Greitens v. Am. Tobacco Co., Inc.,

509 S.W.3d 726 (Mo. 2017) ................................................................6, 10, 12, 13
Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,
559 U.S. 662 (2010) ...............................................................................3, 4, 17, 18
Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ.,
489 U.S. 468 (1989) ...............................................................................................2

New Mexico Statutes

N.M.S.A. 1978 § 44-7A-12 (2001) ............................................................................ 6

Federal Statutes
9 U.S.C. § 5 ................................................................................................................6

Other Authorities
Altria Group, Inc., Quarterly Report (Form 10-Q) (Oct. 24, 2013) ........................15

iii
Amended Order Re: PMs’ Mot. to Compel at 1, In Re: 2004 NPM
Adjustment Proceedings, JAMS No. 1260003649 (April 18, 2017),
https://www.scribd.com/book/372462611/4-18-17-Arbitration-
Panel-ruling ..........................................................................................................11

Amended Order Re: Prod. of Withheld NAAG Documents at 1, In Re:

2004 NPM Adjustment Proceedings, JAMS No. 1260003649 (Jan.
2, 2018), https://www.scribd.com/book/372462301/1-2-18-
Arbitration-Panel-ruling .......................................................................................10

Order Re: Impact of the 2003 Term Sheet and N.Y. Settlements, In
Re: 2004 NPM Adjustment Proceedings, JAMS No. 1260003649
(May 25, 2017), https://www.scribd.com/book/372462508/5-25-17-
Arbitration-Panel-ruling .......................................................................................11
Philip Morris USA, Philip Morris USA Makes Master Settlement
Agreement Payment, BUSINESS WIRE (April 15, 2013),
https://www.businesswire.com/news/home/20130415006532/en/Phi
lip-Morris-USA-Master-Settlement-Agreement-Payment ..................................15
NPM Adjustment Settlement Agreement,
https://oag.ca.gov/sites/all/files/agweb/pdfs/tobacco/npm-
adjustment-settlement-agreement.pdf ..................................................................16

iv
 INTRODUCTION

In American Tobacco, this Court held that New Mexico is bound by the “plain

language of the MSA” to participate in a nationwide arbitration proceeding, before

a three-judge panel, selected under the terms of the MSA. State of N.M. ex rel. King

v. Am. Tobacco Co., Inc., 2008-NMCA-142, ¶¶ 17, 19, 145 N.M. 134. That is a two-

way street. New Mexico’s primary argument in this appeal is that the Tobacco

Companies are likewise bound. American Tobacco says there can be a nationwide

arbitration of the annual NPM dispute, but only if the arbitration panel conforms

with MSA Section XI(c). In the words of the Tobacco Companies’ Answering Brief,

Section XI(c) requires “a single arbitration panel of three federal judges,” with one

judge selected by the State, one judge selected by the Tobacco Companies, and a

third judge selected by the other two judges. [AB22] (quoting Am. Tobacco Co.,

2008-NMCA-142, ¶ 19); see also MSA § XI(c).

The parties followed that structure when resolving their dispute over the 2003

NPM Adjustment. But for the 2004 NPM Adjustment, the Tobacco Companies are

not seeking to compel New Mexico to submit to “a single arbitration panel of three

federal judges.” Instead, for 2004 the Tobacco Companies invented a different

arbitration structure: Four arbitrators, half of them selected by the Tobacco

Companies, sometimes sit together and sometimes sit in interlocking panels of three.

[RP 4745-4746]
 Eighteen states entered into a side deal agreeing to arbitrate under that extra-

contractual process, and in doing so waived their rights to challenge any ultimate

award based on the process failing to comply with the method for selecting

arbitrators set out in MSA Section XI(c). [RP 4745-4746 at ¶ 9] New Mexico did

not sign off on this side agreement. Thus, under the terms of MSA Section XVIII(j),

it cannot be bound to this significantly different model of arbitration.

The question here is whether New Mexico can be compelled to arbitrate in

any proceeding the Companies contrive, however distant from the actual provisions

of the MSA.1 In their answering brief, the Tobacco Companies argue that American

Tobacco somehow compels the State’s participation in this jerry-rigged arbitration.

[AB18-23] American Tobacco, however, stands for just the opposite. The State’s

contractual duty to participate in an arbitration is limited by the terms of the MSA.

The four-judge system improvised by the Tobacco Companies is contrary to what

the MSA provides, and accordingly New Mexico cannot be compelled to participate.

After all, even for a private party arbitration “is a matter of consent, not coercion.”

Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Junior Univ., 489 U.S. 468, 479

1
The Tobacco Companies no longer dispute the appealability of the District Court’s
order following this Court’s denial of the Companies’ motion to dismiss. See [AB8]
For the reasons explained in New Mexico’s Brief in Chief at pages 26-30, New
Mexico’s appeal is timely and proper.

2
(1989). That principle is all the more true when the rights of a sovereign state are at

issue.

Thus, the Tobacco Companies are flatly wrong that American Tobacco or the

MSA compel participation in their chosen four-judge arbitration process. American

Tobacco also does not apply for a second reason. That decision spoke to the

contractual duty to participate in a nationwide arbitration before a single three-judge

panel. Here, not only is the panel selection and conduct at odds with the MSA, the

2004 multiparty arbitration is very far from “nationwide.” Rather, at least 27 States,

including the two largest states, New York and California, are not participating

because of their side settlements with the Tobacco Companies. The 2004 NPM

Arbitration involves only 19 States, those that refused to compromise their

contractual rights to payments under the MSA. The current balkanized state of

affairs is very different from that addressed by this Court a decade ago in American

Tobacco and the rationale employed by this Court in that case does not support an

aggregated arbitration that is not truly nationwide.

Finally, to the extent American Tobacco could be read to support compelling

participation in this arbitration, doing so would be inconsistent with the United

States Supreme Court’s more recent ruling in Stolt-Nielsen S.A. v. AnimalFeeds

International Corp., 559 U.S. 662 (2010), which requires clear consent before

requiring a party to participate in a multiparty arbitration. The Tobacco Companies

3
struggle to distinguish Stolt-Nielsen, but Stolt-Nielsen makes clear that courts must

respect “the contractual nature of arbitration that parties may specify with whom

they choose to arbitrate their disputes.” 559 U.S. at 683. The Court’s rationale bars

parties from being forced into an aggregated arbitration without a clear statement of

consent.

ARGUMENT

I. New Mexico Cannot Be Compelled To Participate In A Manner Of

Arbitration To Which It Did Not Consent.

A. American Tobacco did not speak to a four-arbitrator, dual-panel

structure inconsistent with the terms of the MSA.

The Tobacco Companies contend that New Mexico can be compelled to

participate in the 2004 NPM Arbitration because this Court in American Tobacco

ordered New Mexico to participate in the 2003 NPM Arbitration. [AB20] Contrary

to the Tobacco Companies’ argument, [AB18] the law of the case doctrine does not

answer the primary issue on appeal. Nothing in the holding or reasoning of

American Tobacco supports compelling compliance with an arbitration selection

process and format, like the 2004 multiparty arbitration, that deviates from the terms

of the MSA. And, as discussed in New Mexico’s Brief in Chief, the doctrine cannot

be applied to expand American Tobacco to override the parties’ explicit contractual

agreements. [BIC19-22]

4
 In the 2003 NPM Arbitration, the parties followed MSA Section XI(c)’s

arbitrator selection process, constituting a panel of three judges, with one selected

by each side of the dispute, with a third by the chosen two. [RP 1638] That

contractual provision is very clear that each of the two “sides” – in 2003, the States

on one hand and the Tobacco Companies on the other – are to have equal roles and

influence in panel selection. Now, however, the Tobacco Companies (with no

agreement from New Mexico) have upset the balance struck in the MSA by

contriving a panel composed of four arbitrators, half of them picked by the

Companies.

New Mexico agreed to arbitration and waived its sovereign rights only under

certain conditions specified in MSA Section XI(c). [RP 1638] Specifically, the

MSA requires “a panel of three neutral arbitrators” and permits each side to “select

one arbitrator,” not two. Id. (emphasis added); [BIC19] The Tobacco Companies—

one “side” of this dispute—now have selected two arbitrators, retired Judges Birch

and Legg, instead of the one judge on their side as permitted by the MSA. [AB15]

Arbitration selection terms specified by the parties’ contract “are to be strictly

observed,” and failure to follow those conditions divests the arbitrators of

jurisdiction over New Mexico. See Amerind Risk Mgmt. Corp. v. Blackfeet Housing,

No. 16-CV-1093, 2017 WL 4712211, at *4 (D.N.M. Oct. 17, 2017) (quotation

omitted); Americo Life, Inc. v. Myer, 440 S.W.3d 18, 21 (Tex. 2014).

5
 Here, New Mexico’s rejection of the Tobacco Companies’ efforts to compel

this arbitration is fully consistent with both American Tobacco and New Mexico law

that expressly provides that where “the parties to an agreement to arbitrate agree on

a method for appointing an arbitrator, that method must be followed.” NMSA 1978,

§ 44-7A-12(a). The Federal Arbitration Act likewise requires strict adherence to

such agreements. See 9 U.S.C. § 5 (“If in the agreement provision be made for a

method of naming or appointing an arbitrator or arbitrators or an umpire, such

method shall be followed.”).

The Tobacco Companies cite the decisions of other state courts on the 2004

NPM Arbitration. [AB27-28], [AB42-43] But none of those decisions addressed

the issue here: Whether New Mexico consented to a four-arbitrator, dual-panel

multistate arbitration. 2

B. The Tobacco Companies cannot hide from the material deviation

from the MSA’s terms.

The Tobacco Companies argue that their use of four arbitrators, and the

doubling of their representation on the tribunal, is irrelevant because the final award

2
The Missouri Supreme Court refused to address the State of Missouri’s arguments
about the composition of the 2004 NPM panel, finding the argument improperly
raised on reply. See State ex rel. Greitens v. Am. Tobacco Co., Inc., 509 S.W.3d 726
at 745 n.21 (Mo. 2017). Neither the Commonwealth Court of Pennsylvania nor the
Maryland Court of Special Appeals even mentioned the issue. See Pennsylvania ex
rel. Kane v. Philip Morris, Inc., 128 A.3d 334 (Pa. Commw. Ct. 2015); Maryland v.
Philip Morris, Inc., 123 A.3d 660 (Md. Ct. Spec. App. 2015).
6
as to each state will only be signed by three arbitrators, with only one of the two

Tobacco Company-selected arbitrators participating. [AB32] But whether

characterized as a process involving “two arbitration panels for the multi-state

arbitration,” [AB6], or as a four-member “unitary multi-state arbitration

proceeding,” [AB40], the process the Tobacco Companies seek to foist upon New

Mexico is unsupported by, and at odds with, the MSA’s terms.

As discussed above, and in New Mexico’s Brief in Chief [BIC 9, 17] the

selection process set out in the MSA mandates one arbitrator from each side. Under

the logic of the Tobacco Companies, the States could chose 18 arbitrators (one per

participating state), have them sit for “common case hearings” together with the

Tobacco Companies’ arbitrator and the jointly-appointed arbitrator, and then

fragment into subpanels of three for individual state hearings, with each diligence

decision ultimately signed by the three-arbitrator subpanel. That is hardly a three-

member process, with one arbitrator appointed by each side, as the MSA provides.

And while 18 judges may seem unworkable, the difference in what the Tobacco

Companies seek to compel here is only a difference in degree, not in kind.

Moreover, the Tobacco Companies’ assertion that the four arbitrators do not

sit together is untrue. The NPM dispute regarding 2003, and now 2004, follows the

same basic structure. There are two stages. The first stage is the common case,

where the States and Tobacco Companies collectively participate in weeks of

7
evidentiary presentation and arguments on significant threshold issues. Decisions

made in the common case hearing impact all of the participating states. In the 2003

NPM arbitration, each State’s Final Award included of the same 17.5 pages of

background and analysis reflecting decisions made in the common case hearing.

[RP 4695-4701] (New Mexico Final Award), [RP 4085-4179] (other States’ Final

Awards).

Then, at the second stage of the proceedings, the arbitration panel holds

further hearings as to each state that is party to the arbitration. The panel hears

evidence as to how that particular state was diligent in enforcing its NPM statute.

Again, witnesses are called and arguments are made to the panel. The state-specific

analysis tacked on to the end of New Mexico’s 2003 NPM Final Award spans only

two and half pages. [RP 4703-4706]

In the 2003 NPM arbitration process, both stage one and two were conducted

before the same three former federal judges, selected under the carefully balanced

process provided by the MSA—one by each side, and the third by the other two.

[RP 4693-4694]

The 2004 NPM arbitration process operates very differently. The Stipulation

(not signed by New Mexico) setting out the procedures used in the 2004 NPM

Arbitration requires that “Members of both Panels shall attend the common case

hearing, as well as all hearings on pre-hearing motions, discovery disputes, and any

8
other disputed issues, to the extent that such hearings involve issues common to all

or several States.” [RP 4745-4746 at ¶ 4] This is not merely a procedural change

in the arbitration process. During the crucial common case, four members hear the

witnesses together, discuss the evidence and argument together and deliberate

together. All of that with half of the judges selected by the Tobacco Companies.

Even if disputed issues are decided by subsets of three (as the Stipulation

contemplates in paragraph 4), there can be little doubt this process is a fundamental

shift from the balance struck in the MSA.

And that the four will sit together is now established fact. Stage one, the

common case, was already held and took place before four arbitrators, half of them

selected by the Tobacco Companies. [RP 4756] (Companies’ acknowledging that

the four arbitrators “are hearing common issues together”); [RP 4713] (referring to

common case hearings regarding the Case Management Order and “units sold”

issue). During the proceedings below, the Tobacco Companies conceded that all

four arbitrators “definitely … are going to be working together,” and that the four

would sit as “one decision-maker, as much as possible, to decide the issues common

to all the states.” [Tr. 11, 12]

Indeed, at all of the common case hearings, all four arbitrators sitting together

heard and reviewed every State’s witnesses and arguments—even if the arbitrator

would not be participating in the individual state’s diligence hearing.

9
 The District Court did not address the common case and the self-evident role

that the four-arbitrator panel will play in the ultimate determination of each state’s

diligence. The common case is significantly longer and more evidence-intensive

than individual state hearings, and is the forum where many important legal disputes

are decided. Experience from the 2003 NPM Arbitration teaches that issues crucial

to the NPM adjustment are decided at the common case hearing. In the 2003 NPM

Arbitration the (single panel of three) arbitrators engaged in a “lengthy, as well as

complex and significant,” pre-hearing process addressing issues like the burden of

proof, governing law, and the rules of evidence, before turning to State-specific

diligence hearings. [RP 4694-4701] So too in the 2004 NPM Arbitration. See

Greitens, 509 S.W.3d at 743 n.18 (acknowledging 2004 NPM arbitration panel will

need to decide preliminary matters including burden of proof).

Judge Pro, the Chair of the 2004 NPM arbitration, has already issued several

orders “jointly on behalf of the ‘Birch’ and ‘Legg’ Panels.” See Amended Order

Re: Prod. of Withheld NAAG Documents at 1, In Re: 2004 NPM

Adjustment Proceedings, JAMS No. 1260003649 (Jan. 2, 2018),

https://www.scribd.com/book/372462301/1-2-18-Arbitration-Panel-ruling. These

orders confirm that the decision of “the Panels” on important substantive (issues like

the impact of the Term Sheet and New York settlements on the remaining states, the

production of privileged materials, and compelled production of the States’

10
witnesses) is the joint product of the four judges sitting together. See id.; Order

Re: Impact of the 2003 Term Sheet and N.Y. Settlements, In Re: 2004 NPM

Adjustment Proceedings, JAMS No. 1260003649 (May 25, 2017),

https://www.scribd.com/book/372462508/5-25-17-Arbitration-Panel-ruling;

Amended Order Re: PMs’ Mot. to Compel at 1, In Re: 2004 NPM Adjustment

Proceedings, JAMS No. 1260003649 (April 18, 2017),

https://www.scribd.com/book/372462611/4-18-17-Arbitration-Panel-ruling

(“Acting on behalf of the Panels …”).

The Tobacco Companies try to avoid this Court’s review of this clear violation

of the MSA by arguing that the District Court’s fact findings on this subject are owed

deference. [AB30-31] But the District Court did not make any fact findings, and

referred to its interpretation of the Stipulation as “a very close case that raises

substantial questions of law.” [2017-07-31 ORD ¶ 4] As the District Court

understood, the question of whether the MSA permits states to be compelled to

arbitrate before such a four-arbitrator panel is a question of interpreting the

arbitration agreement involves “controlling questions of law as to which there is

substantial ground for difference of opinion.” [RP4933]

C. The “Stipulation” between the Tobacco Companies and other

States does not alter New Mexico’s rights under the MSA.

In arguing that New Mexico should be compelled to participate in the four-

arbitrator, dual-panel 2004 NPM Arbitration, the Tobacco Companies flourish their
11
May 13, 2016 Stipulation with 18 other states. 3 [AB30-33] The Tobacco Companies

assert that the Stipulation merely “memorializ[es] the composition and selection of

the arbitration panels” and “is not” a “side agreement.” [AB30-31] But the Tobacco

Companies and 18 States signed the Stipulation because the selection process used

for the 2004 NPM Arbitration is not consistent with MSA Section XI(c).

New Mexico had no obligation to join the Stipulation. And it was wise not

to, as the Stipulation would have required New Mexico to give up substantial rights

under the MSA, including its right to pursue “any and all objections, vacatur

applications or arguments related to or arising from the method or manner of

selection of formation of the arbitration panel for the 2004 NPM Adjustment dispute,

including the two-panel structure set forth in this Stipulation.” [RP 4745-4746 ¶ 9]

The MSA permits this sort of side deal, but “[t]he terms of any such

amendment shall not be enforceable in any Settling State that is not a signatory to

such amendment.” [RP 1683] (MSA § XVIII(j)); [BIC18-19] As New Mexico

never agreed to the Stipulation, New Mexico cannot be bound by it. See Greitens,

509 S.W.3d at 730 (finding 2003 NPM Arbitration panel “exceeded its powers by

amending those terms without the consent of Missouri and other states that were

materially and negatively affected by the amendment.”).

3
The Companies’ Answering Brief at 15 mistakenly suggests the Stipulation was
signed September 30, 2016.
12
 Oddly, the Tobacco Companies argue that, because New Mexico chose not to

sign the Stipulation and arbitrate under the Tobacco Companies’ lopsided dual-panel

structure that is inconsistent with § XI(c), it somehow waived its rights to object.

[AB33-35] That waiver argument is both factually incorrect and logically

backwards.

When the Companies asked the District Court to compel New Mexico to join

the arbitration, the dual-panel structure already was in place. See September 12,

2016 Motion to Compel [RP 4666-4681]; May 13, 2016 stipulation [RP 4745-4746]

Had New Mexico acquiesced to these demands and signed the Stipulation, it would

have waived its rights to object to the lopsided, dual-panel structure. [RP 4745-4746

¶ 9] By lawfully insisting on a process consistent with the MSA, New Mexico

preserved its rights to arbitrate in a MSA-compliant proceeding, not in the modified

forum that the Tobacco Companies engineered.

II. The Law Of The Case Doctrine Does Not Support The District Court’s
Ruling Because The Relevant Facts And Law Have Changed Since
American Tobacco.

A. The 2014 NPM Arbitration is not a nationwide, uniform

arbitration.

In American Tobacco, this Court held that because the “MSA’s payment

structure is nationwide and unitary,” there was “a compelling logic to having these

disputes handled by a single arbitration panel of three federal judges.” 2008-

13
NMCA-142, ¶ 19. This Court cited the perceived efficiency and fairness of having

all states’ NPM adjustments decided in a single nationwide proceeding. Id.

When this Court first visited the question of compelling multi-state arbitration

proceedings, it was faced with a contemplated 2003 NPM Arbitration process

involving virtually every state that signed the MSA. In that process, with the consent

of all parties, a handful of states were excused because the Tobacco Companies had

no factual basis to contest their diligence, but still the process itself was nationwide

in nature. See [BIC11]

Midway through the 2003 NPM Arbitration process, however, the Tobacco

Companies reached a side deal with a group of States, which was later joined by

several more.4 [BIC11-12] (“Term Sheet” States); [RP 3442-3478] That side deal,

now signed by 26 States, resolved the NPM Adjustment exposure for those States

from 2003 fiscal year through fiscal year 2012. [RP 3459] By giving up a

significant portion of the funds owed, those 26 States received the benefit of a large

immediate release of funds by the Tobacco Companies: “The [NPM] settlement

provides the signatory states a release of approximately $2.0 billion from the

4
The initial side deal was with 19 States. It was later joined by 7 more for a total of
26. [AB12-13]
14
disputed payments account (DPA).”5 Later, New York reached its own side deal.

[AB13 n. 5]

Today, at least 27 States have side deals with the Tobacco Companies

regarding their NPM Adjustment responsibilities. And the Tobacco Companies

have vowed to “pursue vigorously the disputed NPM Adjustments for 2004-2012

against” the States that refused to compromise their rights under such a side deal.

See Altria Group, Inc., Quarterly Report (Form 10-Q) at 45 (Oct. 24, 2013).

And that is exactly what we now see in the 2004 NPM Arbitration. It is not a

nationwide arbitration in any sense. At least 27 States are not participating because

of their side settlements, including the two largest states, New York and California.

All that is left for the 2004 NPM Arbitration is the Tobacco Companies vigorously

pursuing the 19 States that to date have refused to fold to the Tobacco Companies’

settlement pressure.

Worse still, the side deal with the 26 States contemplates that the Tobacco

Companies can force those States to appear in the 2004-2010 NPM Arbitrations,

even though they have no financial stake in them, for the purpose of trying to reduce

the MSA payments to those States that refused to sign the side deal. [BIC9]

5
Philip Morris USA, Philip Morris USA Makes Master Settlement Agreement
Payment, BUSINESS WIRE (April 15, 2013), https://www.businesswire.com/news/
home/20130415006532/en/Philip-Morris-USA-Master-Settlement-Agreement-
Payment.
15
(explaining that non-diligent States bear a portion of the diligent States’ NPM

adjustment). The side deal even allows the Tobacco Companies to enter the

arbitrations and argue that the 26 Term Sheet States were diligent—effectively

shifting the burden of proving non-diligence onto the 19 remaining States.6 So,

instead of an arbitration with the States on one “side[] to the dispute” and the

Tobacco Companies on the other, there is now the very real prospect of the Tobacco

Companies arguing on both sides against the 19 remaining states.

When it was a unified forum involving virtually all of the States, nationwide

arbitration could plausibly be viewed as consistent with the MSA arbitration, which

speaks to “two sides” of the arbitration. Am. Tobacco Co., 2008-NMCA-142, ¶ 18.

Today’s 2014 NPM Arbitration is anything but.

The current state of affairs is very different then that addressed by this Court

in American Tobacco. The rationale employed by this Court in American Tobacco

simply does not to support a court order compelling this type of Frankenstein multi-

state proceeding that is neither nationwide nor compliant with the MSA. [BIC22-

24] If the Tobacco Companies want to challenge New Mexico’s diligence in 2004,

that is their right under the MSA, and they may do so through a single-state

arbitration or another form of arbitration that conforms with the terms of the MSA.

6
See NPM Adjustment Settlement Agreement,
https://oag.ca.gov/sites/all/files/agweb/pdfs/tobacco/npm-adjustment-settlement-
agreement.pdf at 99.
16
The Tobacco Companies cannot, however, force New Mexico to engage in an

arbitration process to which it did not agree in the MSA or any side agreement (no

matter how many other states signed off on it).

B. Stolt-Nielsen requires affirmative consent to any form of

multiparty arbitration.

American Tobacco is not controlling for a final reason. Intervening precedent

from the United States Supreme Court requires this Court to revisit whether the plain

text of the MSA clearly supports the conclusion that New Mexico agreed to a

multiparty arbitration over whether New Mexico diligently enforced its Qualifying

Statute. [BIC24-25] In Stolt-Nielsen, the Supreme Court explained that consent to

class or multiparty arbitration must be clear and explicit on the face of the agreement,

regardless of whatever equitable reasons there might be for implying that the parties

agreed to multiparty arbitration. See 559 U.S. at 672, 675-76 (interpretation of an

arbitration contract must be grounded in the text, not based on “conception[s] of

sound policy” or “policy preference[s]”).

This Court’s prior decision interpreted the phrase “two sides to the dispute”

in MSA Section XI(c) to refer to all of the states on one side and the Tobacco

Companies on the other. Am. Tobacco Co., 2008-NMCA-142, ¶ 18. At best, “sides

to the dispute” is ambiguous. It is not defined the MSA and is not used in any other

sections to refer collectively to all of the Settling States. Nonetheless, finding

nothing in the MSA “preclud[ed] a nationwide arbitration” and deciding that

17
multiparty arbitration was in the interest of “fairness,” this Court mandated

multiparty arbitration for the 2003 NPM adjustment dispute. Id. at ¶ 19.

Under Stolt-Nielson, that is error. See 559 U.S. at 685. Interpreting an

ambiguous arbitration clause that merely fails to preclude multiparty arbitration as

consenting to multiparty arbitration is “fundamentally at war with the foundational

FAA principle that arbitration is a matter of consent,” id. at 684, because consent to

multiparty arbitration cannot be “infer[ed] solely from the fact of the parties’

agreement to arbitrate,” id. at 685. Particularly in light of the impossibility of a truly

nationwide arbitration, as described above, the Court should revisit whether New

Mexico consented to multiparty arbitration with an arbitrary set of States on one

“side[] to the dispute” and the Tobacco Companies on the other.

The Tobacco Companies try to distinguish Stolt-Nielsen on the ground that it

involved a class arbitration “on behalf of absent class members.” [AB40] Tobacco

Companies also assert that New Mexico consented to multi-state arbitration,

whereas the parties in Stolt-Nielson stipulated that there was no agreement regarding

class proceedings. [AB41] But on both points, the key in Stolt-Nielsen was

respecting “the contractual nature of arbitration that parties may specify with whom

they choose to arbitrate their disputes,” 559 U.S. at 683, and protecting the parties

from being forced into an arbitration that was different in kind from that to which

they agreed. That is the same concern here, and it counsels the same result.

18
 CONCLUSION

For the foregoing reasons, the District Court’s judgment should be reversed.

Respectfully submitted,

/s/ Ari Biernoff

Hector H. Balderas
New Mexico Attorney General
Ari Biernoff
Assistant Attorney General
P.O. Drawer 1508
Santa Fe, NM 87504-1508
(505) 490-4058 Telephone
(505) 490-4881 Facsimile
abiernoff@nmag.gov
Robert M. Loeb
Orrick, Herrington & Sutcliffe LLP
1152 15th Street NW
Washington, DC 20005
(202) 339-8475 Telephone
(202) 339-8500 Facsimile
rloeb@orrick.com
Elizabeth R. Moulton
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, CA 94025
(650) 614-7679 Telephone
(650) 614-7401 Facsimile
emoulton@orrick.com

Attorneys for Appellant State of New Mexico

February 26, 2018

19
 CERTIFICATE OF SERVICE

I hereby certify that on February 26, 2018 I filed a true and correct copy of

the foregoing Brief in Chief via the New Mexico Court of Appeals’ Odyssey

Electronic Filing Service, thereby providing service to all counsel of record.

/s/ Ari Biernoff