McDermott Will & Emery, Chicago, Illinois (
Jeffrey E. Stone of counsel), for petitioners.
Solomon Zauderer Ellenhorn Frischer & Sharp, New York City (
David Ellenhorn of counsel), for respondents.
OPINION OF THE COURT
NICHOLAS FIGUEROA, J. Petitioners, major tobacco and cigarette manufacturers, move for an order pursuant to CPLR 7511 vacating a $1.25 billion arbitration award to respondents as legal fees on the grounds that the majority panel exceeded its authority by compensating respondents for legal work not done in connection with the Davis, Ellis California litigation in which respondents sought damages on behalf of California residents suffering from smoker's related illnesses.
Background
Respondents, part of a nationwide consortium of 56 law firms known as the Castano Group, were attorneys of record in Ellis v R.J. Reynolds Tobacco Co. (the Ellis action), a class action filed in the Superior Court of the State of California, County of San Diego. As part of a master settlement agreement (MSA) in November 23, 1998, tobacco companies agreed to pay $240 billion in settlement of outstanding class actions then pending in 46 states, and certain territories. The State of California's share of this settlement was $25 billion. Pursuant to the MSA, separate and apart from these various settlements, petitioners also agreed to pay reasonable attorneys' fees to private law firms representing the various state attorneys general on a state by state basis, according to a model fee payment agreement. In California, part of the petitioners' commitment to pay legal fees to private attorneys included the Ellis fee payment agreement of September 28, 2000, whereby respondents agreed to dismiss their Ellis action in exchange for an opportunity to submit their application for legal fees to arbitration, even though, as petitioners point out, the Ellis attorneys had not represented the California Attorney General in its suit, nor in its $25 billion negotiated settlement. In accordance with the protocol established in the model fee payment agreement, four days of arbitration hearings were held in New York City from February 26 to March 1, 2001 during which the parties presented evidence on the amount of legal fees payable to Ellis private counsel. Ultimately, the two majority arbitrators awarded respondents $1.25 billion in attorney fees. The primary issue posed by petitioners' motion is whether the majority arbitrators exceeded their power by awarding legal fees to respondents for litigation outside the State of California, going back to 1993. Petitioners' principal challenge to the award is grounded on CPLR 7511 (b) (1) (iii) based on their contention that the majority panel "exceeded [its] power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made." More precisely, petitioners claim that the arbitrators exceeded their authority under section 2 of the fee payment agreement (hereinafter FPA), which expressly limited the scope of their evaluation to legal work done "in connection with" the Ellis action in California, and instead awarded $1.25 billion to the Castano Group for its nationwide litigation efforts in other states.
The Castano Group Suits and The Ellis Action
In 1994 the Castano Group filed a national class action in Federal District Court, Eastern District of Louisiana, based on the novel allegation that tobacco companies had fraudulently concealed the addictive nature of nicotine. The Group also filed similar class action suits in various states. In 1996, however, the Louisiana federal class action was dismissed after being decertified. The Castano Group then filed 25 "baby Castano" class actions in 19 states, including the Ellis action. Also in 1996, Liggett Tobacco reached a settlement with various state attorneys general, and the Castano Group participated in this seminal accord. The "June 20th Accord" followed, being signed in 1997, wherein the major tobacco manufacturers agreed to pay a total of $368 billion to various states to settle pending cases against them. The Castano Group, in recognition of its pending "baby Castano" cases, was the only nongovernmental party permitted a voice in the accord. This accord soon died for want of supportive enactments in the United States Congress. The Ellis action was the last of four California tobacco cases brought by private parties under a California statute authorizing such actions by private attorneys general on behalf of the people of the state (Cal Bus & Prof Code § 17200). In essence, these cases sought the same damages as the California Attorney General's major suit. A total award of $637,500,000 was granted the private attorneys general in the other three cases by an earlier panel. This award was separate from that made to private counsel representing the actual attorney general in its suit.
The Motion to Vacate
The parties acknowledge that section 10 of the FPA outlines the evaluation method the arbitrators were to use. It stated that the panel was authorized to consider all relevant information submitted to them in reaching a fee award that fairly provided for full reasonable compensation of Ellis counsel, and that the panel would not be limited to an hourly rate or lodestar analysis, rather, the panel would take into account the totality of the circumstances. The cornerstone of petitioners' grievance, however, concerns the panel's alleged violation of section 2 of the FPA which governs attorneys' fees. Petitioners claim it restricted the panel's geographical and temporal power to legal work done "in connection with" the Ellis action in California. In its entirety, the clause reads as follows:
"Section 2. Agreement to Pay Fees.
"The Original Participating Manufacturers will pay reasonable attorneys' fees to Ellis Private Counsel for their representation of the plaintiff's
in connection with the [
Ellis]
Action, as provided herein and subject to the Code of Professional Responsibility of the American Bar Association.
Nothing herein shall be construed to require the Original Participating Manufacturers to pay any attorneys' fees other than a Fee Award, as provided herein,
nor shall anything herein require the Original Participating Manufacturers to pay
any Fee Award in connection with any litigation other than the [
Ellis]
Action." (Emphasis added.)
Militating against respondents' extraterritorial view is the critical last sentence of section 2 providing, that, "nor shall anything herein require the Original Participating Manufacturers to pay any Fee Award in connection with any litigation other than the [
Ellis] Action." Petitioners claim the majority panel ignored the limiting effect of the second sentence, which barred consideration of "any Fee Award in connection with any litigation other than the [
Ellis] Action." This omission, they claim, resulted in the majority arbitrators exceeding their power by rewriting the FPA to enable them to credit the value of the Castano Group's legal services throughout the United States, despite section 2's express exclusion.
The Majority Panel's Opinion
After acknowledging that neither their 19 prior FPA awards nor the hearing witnesses' testimony provided clear direction on where to draw the line in determining work done in connection with the Ellis action, the majority opinion designated three categories which they would consider compensable: work directly performed within and as part of the Ellis action; national work product specifically available and to be used in the trial of the Ellis action; and national effort contemporaneous with the Ellis action which may reasonably have contributed to the deposition of the case. Generally, the majority's opinion adopted the theory espoused by respondents' hearing witnesses, some of whom emphasized the risk, complexity and prodigious effort involved in respondents' pioneering litigation, which enabled subsequent plaintiffs, aside from the Castano Group, to eventually prevail over the tobacco companies.
Analysis
Preliminarily, it is noted that applicable California law is substantially in accord with New York's to the extent that a resolution of this motion based on the parties' legal arguments presents no conflict. In any event, since the arbitration took place in New York, the court relies on New York's jurisprudence. Generally, both jurisdictions recognize that in order to achieve arbitration's dual purpose of an equitable result and expediency, the arbitrator's award should be given great deference. Finality is the key. Accordingly, CPLR 7501 expressly forbids judicial review of the parties' disputes. Therefore, failure to establish a statutory ground for vacatur under CPLR 7511 requires confirmation of the award (Matter of Granite Worsted Mills [Cowen], 25 NY2d 451). Moreover, in New York there is a strong public policy favoring arbitration, consequently an award is not subject to vacatur "unless the court concludes that it is totally irrational or violative of a strong public policy" and thus in excess of the arbitrator's powers (Hackett v Milbank, Tweed, Hadley & McCloy, 86 NY2d 146, 155; Maross Constr. v Central N.Y. Regional Transp. Auth., 66 NY2d 341). Relative to the issues presented in the instant case concerning an arbitrator's power, the New York cases comprise several major categories. First are those cases where the arbitrator derives his authority from a broad arbitration clause, which is usually an integral part of the parties' collective bargaining or commercial agreement. Where the arbitrator proceeds pursuant to a broad arbitration clause, such as "to decide all disputes arising under the parties agreement," the arbitrator's interpretation of the underlying agreement is plenary and will be given the widest deference, even despite an apparent disregard of the agreement's provisions and relevant evidence (Graniteville Co. v (See Siegel, NY Prac § 600 [3d ed]; Dahlke v X-L-O Automotive Accessories, 40 AD2d 666.) For example, from a reading of the majority's opinion, no one is able to determine how the award was allocated among respondents' 25 class actions, whether it was all, or just some of them. It is undisputed that the panel factored into their award what the petitioners characterized during oral argument as "recycled work." Meaning that legal work, such as depositions, used in the unsuccessful Pennsylvania case, for instance, could be resalvaged and used in the Ellis case in California. The monetary value assigned by the arbitrators to this category of litigation, as well as other categories, is unknown. The overall result, however, is an award for the largest attorney fees, by far, ever granted by an American court. The court must vacate the award because "an award is deemed irrational when the arbitrators give the provisions in dispute a completely irrational construction * * * and in effect [make] a new contract for the parties." (Matter of Wand Elec. [Clinton County Highway Dept.], 245 AD2d 984, 985, citing National Cash Register Co. v Wilson, 8 NY2d 377). The Court of Appeals has held that arbitrators have exceeded their powers within the meaning of CPLR 7511 only if they gave a completely irrational construction to the provisions (of the agreement) in dispute and, in effect made a new contract for the parties in the rendering of the award. (Id. at 383.) Lastly, there is little to be gained by pondering why Philip Morris is not a party to this motion, since it is of no direct consequence to its resolution. The outcome of this motion legally binds all of the original parties to the arbitration, regardless of participation. All of the original participating manufacturers as signatories to the FPA are parties, and are bound by the outcome of the instant motion (Matter of National Cash Register Co. [Wilson], 8 NY2d at 383, supra; cf. Matter of Blamowski [Munson Transp.], 91 NY2d 190, 195; Flum v Goldman Band Concerts, 128 Misc 2d 42; CPLR 7503 [a]). Accordingly, it is ordered that petitioners' motion to vacate the arbitration award is granted, and it is further ordered that this matter be remanded pursuant to CPLR 7511 (d) for a rehearing to determine the amount of legal fees payable to the Ellis action attorneys consistent with the limitations imposed by section 2 as set forth in this opinion.