N.Y. top court sides with tobacco on arbitration

CHICAGO, June 7 (Reuters) - The New York Court of Appeals on Thursday ruled that tobacco companies that are part of the 1998 agreement that settled tobacco litigation with most states can go to arbitration to try to reduce their settlement payments, according to a court document.

The ruling, which is in line with decisions by most other state courts, means the tobacco companies that are part of the 1998 Master Settlement Agreement can try to reduce their 2003 payments through arbitration.

The $246 billion Master Settlement Agreement requires tobacco companies to make annual payments to the states and also places strict limits on how those companies market cigarettes.

But the payments can be reduced if the tobacco companies that signed the agreement lose market share to other cigarette makers because of restrictions in the agreement.

An independent auditor found that the companies that signed the settlement did lose market share in 2003 and assumed that restrictions from the agreement were "a significant factor contributing to this loss," according to the top court's ruling.

But the auditor did not reduce the payments, accepting an argument by the states that they had diligently tried to collect payments from tobacco companies that did not sign the agreement.

Tobacco companies that sought arbitration argued that the auditor could not presume the states were diligently enforcing statutes geared toward collecting payments from the nonsignees.

Among the companies that signed the master Settlement Agreement are Altria Group Inc.'s (MO.N) Philip Morris USA and Reynolds American Inc's. (RAI.N) R.J. Reynolds Tobacco Cos. unit.

"It's clearly spelled out in the Master Settlement Agreement that a dispute over a payment, which this is, should be resolved through binding arbitration," said David Howard, a spokesman for R.J. Reynolds..

The ruling did not quantify the payments in dispute. A spokesman for the New York Attorney General's office could not be reached for comment.

((Reporting by Brad Dorfman, editing by Gary Hill; Reuters Messaging: bradley.dorfman.reuters.com@reuters.net; 312-408-8133)) Keywords: TOBACCO RULING/

(C) Reuters 2007. All rights reserved. Republication or redistribution ofReuters content, including by caching, framing or similar means, is expresslyprohibited without the prior written consent of Reuters. Reuters and the Reuterssphere logo are registered trademarks and trademarks of the Reuters group ofcompanies around the world.nN07269839