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Ellis & Winters wins $424 million for tobacco farmers; case draws historic crowd to N.C. Supreme Court

Oct 24, 2005 | Raleigh, NC

A picture may be worth a thousand words, but a sentence with one hundred words is worth more than $400 million for the nation's tobacco farmers.

Raleigh law firm Ellis & Winters led the legal team that prevailed in a complex case involving 300,000 tobacco farmers along with officials, lawyers, commissioners of agriculture and attorneys general from 14 grower states, farm bureaus, a major bank, and three of the biggest U.S. tobacco companies.

The case revolved around whether the three tobacco companies Philip Morris USA Inc., R.J. Reynolds Tobacco Co., and Lorillard Tobacco Co. were required to make a promised payment to a trust fund for farmers in 2004, when Congress passed a buyout of the federal tobacco quota system. Complex language in the trust fund agreement sparked litigation over whether payments would cease upon passage or upon actual payment of a "governmental obligation" that would offset money paid into the trust.

"In my view the whole case turns on one of the most convoluted sentences you'll ever see," said Tom Blue, the partner who designed and wrote Ellis & Winters' argument. "It's just complex and very difficult to work your way through."

Ellis & Winters represented JPMorgan Chase Bank, the trustee responsible for distributing money to farmers, and led teams of attorneys from the 14 grower states.

Partner Dick Ellis argued the case. "Our job was to make it simple, which, thanks to Tom, we were able to do," he said.

The case drew a crowd of historic proportions to the N.C. Supreme Court hearing in May, said Dick Ellis, public information officer for the N.C. Administrative Office of the Courts, which includes the N.C. Supreme Court. Ellis is not related to Dick Ellis of Ellis & Winters.

The courts' Ellis said he believed the tobacco case was the second-largest ever heard before the N.C. Supreme Court, surpassed in audience size only by a redistricting case last year. Court officials expected 200 to 300 people to attend the tobacco hearing in the Supreme Court's temporary quarters, the old Senate chambers in the state Capitol building, and printed three sets of tickets to direct audience members to available seating in different parts of the building.

One set of tickets allowed about 40 audience members primarily lawyers and staff -- access to the Senate chambers, where the court sat. Another set of tickets allowed access to the gallery; many farmers, including some who drove from several hours away, sat there. A third set of tickets accommodated overflow crowds across the Rotunda, in the old House chambers, where closed-circuit television provided a bird's-eye view of the action in the courtroom.

Security also was increased for the case, which took about an hour and 20 minutes for the court to hear. In addition to farmers and lawyers, the audience included state officials such as attorneys general and at least one lieutenant governor.

"We normally have 15 people in the courtroom and all of a sudden we had 200, so we had to step up our security just a little," said the courts' Ellis. "We asked the state capital police to help us."

The case involved funding of the National Tobacco Settlement Trust, set up to aid farmers in the wake of the 1998 Master Settlement Agreement, under which tobacco companies agreed to pay billions to resolve health care litigation brought by 46 states. The MSA called for the tobacco companies to compensate farmers, who would lose revenue due to a decrease in the amount of tobacco they would be permitted to grow under the federal quota system. The result was the Phase II Trust, funded each year by the three major tobacco companies and disbursed to farmers at the end of each year.

Language in the trust agreement indicated that should a new law impose a "governmental obligation" ranging from excise taxes to a full tobacco quota buyout on the tobacco companies that would benefit farmers, contributions to the trust fund would be offset accordingly.

The case centered around a dispute over what, exactly, constituted the beginning of a "governmental obligation" and whether such an obligation took effect at the time of passage or when the money was actually paid. The tobacco companies argued that they should not be required to make their fourth-quarter 2004 payment of $106 million and should be refunded the $318 million they already had paid to the trust in 2004.

The trust had worked without interruption for the first five years, through 2003. In October 2004, President Bush signed the Fair and Equitable Tobacco Reform Act, which ended the price control and quota system for U.S. tobacco that had been in effect since the Depression. The end of the quota system was to take effect with the 2005 tobacco crop.

The issue in the case was whether the 2004 Phase II payment should be made to farmers. The tobacco companies contended that under the trust agreement, they were entitled to stop paying when the president signed FETRA into law, although they wouldn't be responsible for payments under the new law until 2005. In addition, they argued that they were entitled to a refund of all their contributions -- $318 million previously made during 2004.

The farmers, trustee JPMorgan Chase Bank and other parties disagreed.

"We claimed on behalf of the trustee and the tobacco farmers that the offset didn't apply until 2005, the year the tobacco companies started paying," Blue said. "There was no dispute about what the trust agreement said, only about what it meant.

"We argued to the court that the whole purpose of the Phase II Trust was to offset the adverse economic consequences that everyone knew were coming to the tobacco farmers," he added.

The case first went to the North Carolina Business Court, where Judge Ben Tennille agreed with the tobacco companies that the offset applied as soon as President Bush signed the bill; Ellis & Winters argued that the offset did not apply until the companies actually had to start paying for it.

Knowing that the loss of the Phase II Trust money for 2004 would be a hardship to the affected farmers, Ellis & Winters petitioned the N.C. Supreme Court to take the unusual step of accepting the appeal directly, bypassing the Court of Appeals, and to take it quickly.

"We wanted the Supreme Court to take it directly because we wanted to move as fast as we could to get this question resolved," said Dick Ellis of Ellis & Winters. "It would've gone to the Court of Appeals and could've taken a couple of years. We wanted the N.C. Supreme Court to take it early, and they agreed to do that."

Ellis & Winters' Matt Sawchak wrote the petition asking the Supreme Court to take the matter directly and quickly. "He has used his considerable appellate expertise along the way to help us out," Blue said.

Ellis & Winters filed their notice of appeal the same day as the original judgment Dec. 23, 2004 -- and the Supreme Court granted the petition to take the case directly in January. Briefs were filed over the next several weeks, and the Supreme Court heard the case on May 16. The court issued its decision on Aug. 19 and sent the case back to the Business Court. This month, the Business Court has issued orders releasing the $318 million already paid and requiring the tobacco companies to make that final payment -- $106 million by November 2.

Blue hopes farmers will receive the full amount of the 2004 trust money very soon.

"We don't really know how many of these farmers still produce tobacco," he said. "The buyout completely changes the tobacco-producing economy. It gives the farmers who can't compete an opportunity to retire or transition to something else, but it's going to completely change what had been a heavily regulated industry."

Pete Burgess, who describes himself as "basically retired" but still helps his son operate the family's tobacco farm in Vance County, said farmers had been expecting the Phase II money and many had designated it for growing expenses such as fertilizer.

"When that money wasn't available, (farmers) had to scramble to find other means of financing," he said, adding that he doesn't know if he will continue tobacco farming. "This has been a break-even year for most of the people in this area. It was such a tough year with weather and lack of rain that some might not have broken even.

"What's really bugging the farmers right now is why this money has not been paid when it was promised and why the companies are dragging their feet," he added. "But I think it's coming."