Master Settlement Agreement 'Pwc Audit Report' by uwg12118


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									                                                                            United States Court of Appeals
                                                                                     Fifth Circuit
                                                                                   F I L E D
                                            In the                                September 1, 2006
                      United States Court of Appeals                           Charles R. Fulbruge III
                                  for the Fifth Circuit                                Clerk

                                         m 05-40671

                                      STATE OF TEXAS,



                         AMERICAN TOBACCO CO., ETC.; ET AL.,


                          BROWN & WILLIAMSON TOBACCO CO.,



                         Appeals from the United States District Court
                              for the Eastern District of Texas
                                       m 5:96-CV-91

Before SMITH and STEWART, Circuit Judges,             The issue before this Court involves the
  and HANEN,* District Judge.                      proper interpretation of the settlement agree-
                                                   ment between the State of Texas and five large
ANDREW S. HANEN, District Judge:                   cigarette manufacturers. Specifically, this
                                                   Court must determine whether Brown &
                                                   Williamson Tobacco Corporation n/k/a Brown
                                                   & Williamson Holding, Inc. (“B&W”)
   *                                               breached its obligations under the settlement
    District Judge of the Southern District of
                                                   agreement by failing to report cigarettes that
Texas, sitting by designation.
B&W manufactured for Star Tobacco &                         diction over the parties and subject matter of
Pharmaceuticals (“Star”) as its own for the pur-            the settlement for the purposes of implement-
pose of calculating B&W’s annual payments to                ing and enforcing the agreement.
Texas. As a consequence of B&W’s alleged
underreporting, the State claims it was deprived                Since the parties executed the original
of approximately $16,420,252 in settlement                  “Comprehensive Settlement Agreement and
payments between the years 1999 and 2002.                   Release” (“Original Agreement”), they have
For the reasons stated below, we affirm.                    amended it twice.2 On July 24, 1998, the par-
                                                            ties entered into the Stipulation of Amendment
I. FACTUAL BACKGROUND                                       to Settlement Agreement and for Entry of
                                                            Consent Decree (“1998 Amendment”), and on
   On March 28, 1996, the State of Texas sued               June 8, 2001, the parties entered into the
several major tobacco companies seeking reim-               Agreement to Amendment to Settlement
bursement for various smoking-related health                Agreement (“2001 Amendment”).
care expenditures. Almost two years later, on
January 16, 1998, Texas entered into a settle-                  The 1998 Amendment reflects Texas’ ex-
ment agreement with B&W, Philip Morris, Inc.,               ercise of its rights under the Original Agree-
R.J. Reynolds Tobacco Co., Lorillard Tobacco                ment’s “Most Favored Nation” provision to
Co., and United States Tobacco Co. (collec-                 adopt the more favorable terms of the settle-
tivelyreferred to as the “Settling Defendants”).1           ment agreement reached between the Settling
The settlement agreement, which was approved                Defendants and the State of Minnesota on
by the district court on January 22, 1998,                  May 8, 1998. The Original Agreement tied the
released the tobacco companies from all past                formula for calculating the annual payments to
and future claims arising out of the use of, or             the “respective share of sales of cigarettes by
exposure to, their tobacco products. In return,             unit for consumption in the United States.”
the tobacco companies agreed to make annual                 Apparently, some of the Settling Defendants
payments to Texas and to comply with certain                began marketing cigarettes in “two for one” or
restrictions, including various marketing restric-          “buy two get one free” promotions. “Free”
tions. The parties also agreed that the United              cigarettes given as part of such promotions
States District Court for the Eastern District of           would likely be excluded from the annual
Texas, Texarkana Division, would retain juris-              payment calculations of the Original Agree-
                                                            ment because they would not have been con-
                                                            sidered cigarettes “sold.” Perhaps recognizing
      Texas was the third state to reach a major set-       the potential decrease in the amount of the
tlement agreement with the major tobacco compa-             settlement payments presented by these pro-
nies. The Settling Defendants initially settled with        motions, the settlement agreement reached
Mississippi, then followed in order by Florida, Tex-
                                                            between the State of Minnesota and the Set-
as, and Minnesota. The Settling Defendants finally
settled with the remaining forty-six (46) states, the
                                                            tling Defendants tied the Settling Defendants’
District of Columbia, and the five (5) U.S. Territo-        annual payment obligations to shipped ciga-
ries through the Master Settlement Agreement.
Texas attempted to introduce the Master Settlement
Agreement into evidence in the court below; how-                The Original Agreement along with the two
ever, the district court sustained B&W’s objection          amendments are collectively referred to as the
thereto and Texas has not appealed that ruling.             “Texas Settlement Agreement.”

rettes. Texas and the Settling Defendants                        MSA, Inc. is an independent third party that
thereafter entered into the 1998 Amendment,                   has been collecting information related to
which changed the annual payment provisions                   tobacco companies’ shipments to wholesalers
by tying the annual payment calculations to the               for over thirty years.6 As part of its Cigarette
“number of cigarettes shipped for domestic                    Research Audit (“CRA”) program, MSA, Inc.
consumption.” See 1998 Am., at Appx. A                        collects and reports information from cigarette
(emphasis added).3                                            manufacturers concerning shipments to their
                                                              wholesalers and distributors. These reports
   In late 1999, B&W entered into a Cigarette                 are sometimes referred to as “Shipments to
Manufacturing Agreement with Star, an inde-                   Wholesale.” The agreement between MSA,
pendent tobacco company that was primarily                    Inc. and B&W is such that B&W only reports
engaged in developing reduced-risk tobacco                    the cigarettes it ships through its own distribu-
products. B&W manufactured, sold, and                         tion system. Therefore, B&W did not include
shipped to Star per Star’s specifications and                 the contract-manufactured cigarettes in the
requirements over 7.5 billion cigarettes between              shipment information it reported to MSA, Inc.
late 1999 and December 21, 2002 (“contract-                   The MSA, Inc. reports are used by B&W and
manufactured cigarettes”). B&W was paid                       other cigarette manufacturers to analyze and
approximately one cent for each contract-                     monitor their respective sales and market
manufactured cigarette, which resulted in                     shares. MSA, Inc. does not examine or verify
B&W’s making approximately $4 per thousand                    the accuracy of the information that B&W
cigarettes.4 Although B&W shipped the con-                    provides.7
tract-manufactured cigarettes to Star, who then
shipped them through its own distribution sys-                   On May 27, 2004, over one year after
tem for consumption, B&W did not include                      B&W had stopped manufacturing cigarettes
those cigarettes in its annual payment calcula-               for Star, the State of Texas filed a Verified
tions to Texas.5 Instead, B&W based its annual                Motion to Enforce the Settlement Agreement,
payment calculations on the shipment infor-                   For an Accounting, and For a Preliminary In-
mation that it reported to Management Science                 junction claiming that B&W breached the
Associates, Inc. (“MSA, Inc.”).                               agreement by failing to report as its own, and
                                                              make settlement payments with respect to, the
                                                              contract-manufactured cigarettes. B&W de-
     The 2001 Amendment clarified terms with re-              nied the allegations claiming that it was not
spect to the net operating profit provision of Appen-         required to include the contract-manufactured
dix A and is not material to the issues presented by
this appeal.
   4                                                             6
     According to the district court, B&W’s gross                  MSA, Inc. operates pursuant to various con-
margin on its own cigarettes is 10 to 12 times                tractual agreements it has with private industry.
greater.                                                      Texas is not a party to any of those contracts.
   5                                                             7
    The district court found that the shipping costs               The parties agree that even though MSA, Inc.
associated with the contract-manufactured cigarettes          collects cigarette shipment information as part of
were paid for by Star, risk of loss transferred to Star       its Cigarette Research Audit program, MSA, Inc.
when the cigarettes left B&W’s facilities, and all the        does not “audit” the shipment information, at least
taxes on these cigarettes were paid by Star.                  not in the classic financial sense of the term.

cigarettes in the annual payment calculations.             whether the Texas Settlement Agreement is
On June 24, 2004, by agreement of the parties,             ambiguous, the court based its ruling in part
the United States District Court for the Eastern           on the parties’ course of performance.9 The
District of Texas, Texarkana Division, heard               district court found that since its inception, all
argument and received evidence on whether                  of the annual payments due under the Texas
B&W breached the agreement, and on whether                 Settlement Agreement have been based on
Texas was entitled to an accounting.8                      MSA, Inc.’s “Shipments to Wholesale” re-
                                                           ports. It also found that this practice and
    On March 28, 2005, the district court issued           course of performance was explicitly recog-
its Final Judgment in favor of B&W along with              nized by the parties in 2002 when the State
its Findings of Facts and Conclusions of Law.              and the Settling Defendants entered into an
The court ruled that “under well-settled indus-            engagement letter with PriceWaterhouseCoop-
try practice,” the contract-manufactured ciga-             er (“PWC”). PWC was engaged to collect
rettes “were not B&W’s cigarette shipments,                “shipment volume data” from each Settling
they were not shipped to B&W’s wholesalers,                Defendant and, based on that data, to calculate
and they were properly excluded from B&W’s                 the payments due under the Texas Settlement
shipments reported to MSA, Inc. or the calcula-            Agreement. The engagement letter specifically
tion of B&W’s payments under the Texas Set-                stated:
tlement Agreement.” Opinion, at 3. Further-
more, the district court ruled that the words                 By January 15 of each year, request and
“cigarettes shipped for domestic consumption”                 collect from each Settling Defendant ship-
means those cigarettes shipped for domestic                   ment volume data for the entire preceding
consumption as reported by MSA, Inc. Id.                      calendar year. Seek and obtain written
at 23.                                                        confirmation of such shipment volume data
                                                              from [MSA, Inc.], and notify each State
   Even though the court did not rule as to                   and each Settling Defendant if there exists
                                                              a discrepancy between the volume data col-
                                                              lected from the Settling Defendants and the
     By agreement, the district court deferred con-           confirmation obtained from [MSA, Inc.].
sideration of Texas’ motion for an injunction. The
injunction issue involved B&W’s proposed business
combination with R.J. Reynolds Tobacco Co. The                  While the court did not expressly find that the
State claimed it would result in an assignment of          Texas Settlement Agreement is unambiguous, it
B&W’s rights and obligations under the Texas               stated that it based its ruling in part on “the plain
Settlement Agreement without the State’s consent in        language of the Settlement Agreement.” Opinion,
violation of Section 2 of the agreement. The issue         at 22. Due to the fact that the trial court used
was rendered moot prior to the trial court’s ruling        language normally associated with the interpreta-
by the fact that B&W supplied the State with copies        tion of an unambiguous contract, but then also re-
of the agreements affecting the business combina-          lied on course of performance evidence, which is
tion, which included provisions specifying that            used only in interpreting ambiguous contracts, this
B&W would not assign its rights and obligations as         Court is not certain whether the trial court consid-
part of the combination. The parties to the business       ered the settlement agreement to be ambiguous.
combination also entered into an amendment rein-           Ultimately, since ambiguity is a question of law, it
forcing that position. Thus, the injunction issue is       is immaterial to the ultimate resolution of this
not material to this appeal.                               appeal.

Id. at 13. The court found that the letter re-              11. These amounts are referred to as the
flected the parties’ recognition that the “ship-            “Applicable Base Payments.” According to
ment volume data” PWC was engaged to col-                   the State’s witness Gary Wilson, the Applica-
lect would be based on the Settling Defendants’             ble Base Payments are subject to two adjust-
shipments as reported to MSA, Inc. Id. Thus,                ments. The first adjustment takes into account
the court concluded that the letter reflected the           inflation by increasing the dollar amount in the
parties’ course of performance and their under-             applicable year by the greater of three percent
standing that the annual payments to Texas                  or the consumer price index. The second
have always been based on shipments as re-                  involves volume adjustment formulas set out in
ported to MSA, Inc. Id. at 14.                              Appendix A of the 1998 Amendment.11

    The district court also made findings of fact              One of the main factors taken into consid-
that the State knew about the Cigarette Manu-               eration in the volume adjustment formulas is
facturing Agreement between B&W and Star                    whether “the aggregate number of cigarettes
during the approximately six years prior to                 shipped for domestic consumption by Settling
filing its Motion to Enforce. The court found               Defendants in the Applicable Year…(the ‘Ac-
that the evidence was “undisputed that the                  tual Volume’)” exceeds or is less than “the ag-
State of Texas, including its Attorney General,             gregate number of cigarettes shipped for
were aware of B&W’s contract manufacturing                  domestic consumption by Settling Defendants
agreement with Star from its inception” and                 in 1997 (the ‘Base Volume’).” 1998 Am.,
never claimed that B&W was obligated to make                Appx. A, at (A). The annual payments are
settlement payments with respect to the                     further affected by whether the Settling Defen-
contract-manufactured cigarettes. Id. at 18.                dants’ net operating profits for the applicable
                                                            year exceed each Settling Defendants’ net op-
II.        THE ANNUAL PAYMENT                               erating profits in 1997. Id. at (B)(ii). Once
           CALCULATIONS                                     the adjustments are applied to the Applicable
                                                            Base Payments, the total annual payment owed
    At the heart of this appeal is the interpreta-          to Texas from the Settling Defendants collec-
tion of the provisions in the Texas Settlement              tively is calculated.
Agreement establishing the method for calcu-
lating the Settling Defendants’ annual pay-                     After calculating the total annual payment,
ments. The annual payment calculations are                  it is then necessary to determine each of the
based on each Settling Defendant’s share of                 Settling Defendants’ share, which is based on
7.25% of $4 billion in 1998, $4.5 billion in
1999, $5 billion in 2000, $6.5 billion in 2001,
$6.5 billion in 2002, $8 billion in 2003, and                  10
$8 billion in the years thereafter.10 1998 Am., at               (...continued)
                                                            ing out of domestic cigarette consumption.
                                                                 Both the 1998 and 2001 Amendments contain
     The “share” each Settling Defendant is obli-           an “Appendix A” that are slightly different. Al-
gated to pay is “pro rata in proportion to its Market       though the 2001 Amendment theoretically super-
Share.” The parties agreed that 7.25% reflects              seded the 1998 Amendment, this Court will cite to
Texas’ share of national health care expenses aris-         the 1998 Amendment when discussing the Appen-
                                       (continued...)       dix A calculations.

that defendant’s “Market Share.” “Market                included in the annual payment calculations.
Share” is defined by the 1998 Amendment as:             According to Texas, the agreement requires
                                                        the Settling Defendants to report, and ulti-
   [A] Settling Defendant’s respective share of         mately make settlement payments on, all “cig-
   sales of Cigarettes, by number of individual         arettes shipped for domestic consumption.”
   Cigarettes shipped in the United States for          B&W shipped the contract-manufactured cig-
   domestic consumption, as measured by such            arettes to Star, which were then shipped to
   Settling Defendant’s audited reports of ship-        Star’s distributors and wholesalers for domes-
   ments of Tobacco Products provided to the            tic consumption. Therefore, the State con-
   U.S. Securities and Exchange Commission              cludes that the contract-manufactured ciga-
   (“SEC”) (or, in the case of any Settling De-         rettes were “shipped for domestic consump-
   fendant that does not provide such reports           tion.” It further argues that this interpretation
   to the SEC, audited reports of shipments             complies with the parties’ intent when they
   containing the same shipment information as          entered into the settlement agreement (to
   contained in the reports provided to the             compensate Texas for the medical costs in-
   SEC) (“Shipment Reports”).                           curred by its smoking citizens) by focusing on
                                                        who manufactures the cigarettes rather than
1998 Am., at 5. Thus, the first step is to calcu-       who ultimately distributes them. Indeed, Tex-
late the total amount owed to Texas by taking           as points out that because Star is not a signa-
into account the inflation and volume adjust-           tory to the Texas Settlement Agreement, Tex-
ments, and the second step is to apportion the          as was never compensated for the health care
amount each Settling Defendant is required to           costs associated with the domestic consump-
pay based on its individual market share.               tion of the contract-manufactured cigarettes.
                                                        Had B&W reported those cigarettes as its
    For the first four years of the Texas Settle-       own, Texas claims it would have received an
ment Agreement, the Settling Defendants actu-           additional $16,420,252 in settlement payments
ally performed the annual payment calculations.         for the years 1999 through 2002. Therefore,
Thereafter, PWC performed the calculations              B&W’s failure to report as its own the con-
using data supplied by the Settling Defendants          tract-manufactured cigarettes constitutes a
and confirmed by the MSA, Inc. reports.                 breach of the agreement.
According to the testimony, throughout the life
of the Texas Settlement Agreement, the Ap-                 Texas points out that if the Texas Settle-
pendix A calculations have been based on the            ment Agreement is unambiguous, the district
same shipment numbers as used in the Market             court erred by taking into consideration evi-
Share calculations.                                     dence of the parties’ course of performance.12
                                                        As will be discussed in more detail below, it

                                                               Texas did not object or argue during the
    Texas argues that the Texas Settlement              bench trial that the course of performance evidence
Agreement is unambiguous and that the 7.5               was inadmissible for the purposes of interpreting
billion cigarettes that B&W manufactured for            the language of the Texas Settlement Agreement.
Star between 1999 and 2002 should have been             The first mention of that argument is in Texas’
                                                        brief to this Court.

also argues that the district court improperly         the Texas Settlement Agreement have been
used the term “Shipment Reports,” which is             based uniformly on shipments to wholesalers
found in the definition of Market Share, to            as reported to MSA, Inc. Therefore, B&W
interpret the phrase “cigarettes shipped for do-       concludes that the parties agreed to use MSA,
mestic consumption,” in Appendix A. 1998               Inc. reports as the basis for determining the
Am., at 5 & Appx. A (A). Texas maintains that          Settling Defendants’ payment obligations
the market share calculations have nothing to          when they incorporated the phrase “audited
do with the State; rather, they provide a “dis-        reports of shipments” into the settlement
pute resolution process” by which the Settling         agreement.
Defendants divide up their individual portions
of the total annual payment owed to Texas.             IV.     STANDARD OF REVIEW

   B&W, on the other hand, argues that the                Whether a contract is ambiguous is a ques-
contract-manufactured cigarettes were properly         tion of law that is reviewed de novo. Stinnett
excluded from the annual payment calculations          v. Colorado Interstate Gas. Co., 227 F.3d
because they were not B&W’s cigarettes and it          247, 254 (5th Cir. 2000). While the interpre-
was not required to report those cigarettes to         tation of an unambiguous contract is a ques-
MSA, Inc. It should be noted that as a subsid-         tion of law that this Court reviews de novo,
iary of a British corporation, B&W does not            the interpretation of an ambiguous contract is
report to the SEC. Therefore, B&W reported             a question of fact that is reviewed for clear
as its shipments under the Texas Settlement            error. Id. See also, Tarrant Distributors
Agreement the same shipments that it reported          Incorporated v. Heublein Incorporated, 127
to MSA, Inc. Pursuant to the agreement be-             F.3d 375 (5th Cir. 1997).
tween MSA, Inc. and B&W, B&W was not re-
quired to report the Star contract-manufactured        V. DISCUSSION
cigarettes as its own. Even though the Texas
Settlement Agreement does not specifically re-            Neither of the parties has argued that the
fer to MSA, Inc., B&W argues that the plain            Texas Settlement Agreement is ambiguous,
language of the Texas Settlement Agreement             and the district court did not expressly find
requires the annual payment calculations to be         that the agreement is ambiguous.13 However,
based on the Settling Defendants “audited”             the evidence presented to the district court
shipment reports, which are, in turn, the MSA,         dealt almost entirely with the parties’ course of
Inc. reports. B&W then argues that if there is
any doubt about how the annual payments are
calculated, such doubt is eliminated by the               13
parties’ course of performance.                              It should be noted that although Texas argues
                                                       that the Texas Settlement Agreement is unambigu-
                                                       ous, it has asserted for the first time on appeal
   According to B&W, the parties’ course of            points of error based on the contingency that this
performance supports their position because            Court determines that an ambiguity exists. It
even the Settling Defendants who report to the         argues that should the agreement be found to be
SEC base their “Form 10K” reports on their             ambiguous, the trial court erred because: (1) it
MSA, Inc. reports. Indeed, according to B&W            deviated from the original intent of the agreement;
and the district court, all payments due under         and (2) it based its ruling on findings of fact which
                                                       were clearly erroneous.

performance. Indeed, the district court’s Find-             be enforced as it is written.” Purvis Oil Corp.
ings of Fact and Conclusions of Law expressly               v. Hillin, 890 S.W.2d 931, 935 (Tex.
took into consideration the course of perfor-               App.—El Paso 1994, no writ).
mance evidence. Therefore, the Court must
first address whether the Texas Settlement                     If the contract’s meaning is uncertain and
Agreement is ambiguous as a matter of law.14                doubtful, or it is reasonably susceptible to
                                                            more than one meaning, it is ambiguous.
   A. Texas Contract Law                                    Coker, 650 S.W.2d at 393–94 (Tex. 1983).
                                                            Courts interpreting unambiguous contracts are
    The primary concern of a court in construing            confined to the four corners of the document,
a written contract is to ascertain the true inten-          and cannot look to extrinsic evidence to create
tions of the parties as expressed in the instru-            an ambiguity. Sun Oil Co. v. Madeley, 626
ment. Gen. Accident Ins. Co. v. Unity/Water-                S.W.2d 726, 732–33 (Tex. 1982); Unity/Wa-
ford-Fair Oaks, Ltd., 288 F.3d 651, 653 (5th                terford-Fair Oaks, Ltd., 288 F.3d at 657.
Cir. 2002); Forbau v. Aetna Life Ins. Co., 876              “Only after a contract is found to be ambigu-
S.W.2d 132, 133 (Tex. 1994). Under Texas                    ous may parol evidence be admitted for the
law, which the parties agree controls, a contract           purpose of ascertaining the true intentions of
is viewed as of the time it was made and not in             the parties expressed in the contract.” Bur-
light of subsequent events. Ervay, Inc. v.                  lington Northern and Santa Fe Ry. Co. v.
Wood, 373 S.W.2d 380, 384 (Tex. Civ.                        South Plains Switching, Ltd. Co., 174 S.W.3d
App.—Dallas 1963, writ ref’d n.r.e.). “Wheth-               348, 358 (Tex. App.—Fort Worth 2005, no
er a contract is ambiguous is a question of law             pet.); see also, Friendswood Dev. Co. v. Mc-
for the court to decide by looking at the con-              Dade & Co., 926 S.W.2d 280, 283 (Tex.
tract as a whole in light of the circumstances              1996).
present when the contract was entered.” Coker
v. Coker, 650 S.W.2d 391, 394 (Tex. 1983). If                  B. The Ambiguity in the Texas
a written contract is worded such that it can be                  Settlement Agreement
given a definite or certain legal meaning, then it
is not ambiguous. Nat’l Union Fire Ins. Co. of                     1. Appendix A and the
Pittsburgh v. CBI Indus., Inc., 907 S.W.2d                            Definition of Market Share
517, 520 (Tex. 1995). When parties disagree
over the meaning of an unambiguous contract,                   In order to understand the parties’ disagree-
“[t]he intent of the parties must be taken from             ment, it is necessary to understand the nexus
the agreement itself, not from the parties’                 between Appendix A and the definition of
present interpretation, and the agreement must              Market Share. Appendix A ties the overall
                                                            annual payment calculations to “the aggregate
                                                            number of cigarettes shipped for domestic
      A court may conclude that a contract is am-
                                                            consumption.” See 1998 Am., at Appx. A.
biguous even if the parties do not contend it is.           The Market Share calculations are based on
Hewlett-Packard Co. v. Benchmark Electronics,               the “individual Cigarettes shipped in the
Inc., 142 S.W.2d 554, 561 (Tex. App.—Houston                United States for domestic consumption, as
[14th Dist.] 2004, pet. denied); see also J.M. David-       measured by …[Shipment Reports].” Al-
son, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex.             though there are minor differences in the

phrasing, a common sense approach dictates             cluded that such reports are based on the same
that both provisions take into account the             information contained in the MSA, Inc. re-
number of cigarettes each Settling Defendant           ports, which are generated pursuant to MSA,
ships for domestic consumption. While Appen-           Inc.’s Cigarette Research Audit program.
dix A takes into account the aggregate number
of cigarettes that the Settling Defendants have           Texas argues that the Appendix A calcula-
collectively shipped for domestic consumption,         tions are completely separate from the Market
the Market Share provision takes into account          Share calculations; therefore, the district court
the individual cigarettes that each Settling           acted improperly when it took the defined term
Defendant ships for domestic consumption.              “Shipment Reports” out of the Market Share
                                                       provision and applied it to the annual payment
    The key difference between the two provi-          calculations provided for in Appendix A.
sions, however, is that Appendix A does not            Texas supports this argument by pointing out
mention “Shipment Reports.” Under the defi-            that the Market Share calculations occur only
nition of Market Share, the “individual Ciga-          after determining the total annual payment
rettes shipped in the United States for domestic       owed Texas by the Settling Defendants collec-
consumption” are measured by “Shipment                 tively. It also points out that the State has
Reports,” which are defined as                         nothing to do with the “dispute resolution
                                                       process” provided by the Market Share provi-
   such Settling Defendant’s audited reports of        sion in apportioning each Settling Defendants’
   shipments of Tobacco Products provided to           annual payment. In essence, Texas argues that
   the [SEC] (or, in the case of any Settling          even though the number of cigarettes shipped
   Defendant that does not provide such re-            for domestic consumption is measured by
   ports to the SEC, audited reports of ship-          Shipment Reports under the Market Share
   ments containing the same shipment infor-           calculations, the “aggregate” number of ciga-
   mation as contained in the reports provided         rettes shipped for domestic consumption under
   to the SEC).                                        Appendix A are not. We find this argument
1998 Am., at 5 (emphasis added). In other
words, Shipment Reports are “audited reports               Contracts are construed in their entirety and
of shipments” that contain the type of shipment        it is the Court’s duty “to consider each part
information that tobacco companies report to,          with every other part so that the effect and
or would report to, the SEC. Thus, at least in         meaning of one part on any other part may be
the Market Share provision, the “individual”           determined.” Smart v. Tower Land & Inv.
number of cigarettes that have been shipped for        Co., 597 S.W.2d 333, 337 (Tex. 1980); see
domestic consumption is determined by Ship-            also Unity/Waterford-Fair Oaks, Ltd., 288
ment Reports. Appendix A, however, is silent           F.3d at 653. “Indeed, courts must be particu-
as to how the “aggregate” number of cigarettes         larly wary of isolating from its surroundings or
shipped for domestic consumption is deter-             considering apart from other provisions a
mined. The district court held that payments           single phrase, sentence, or section of a con-
must be made only for shipments that would be          tract.” State Farm Life Ins. Co. v. Beaston,
included in the audited reports of tobacco             907 S.W.2d 430, 433 (Tex. 1995).
shipments provided to the SEC. It then con-

     Because contracts are read in their entirety,          information.16 Indeed, the MSA, Inc.’s CRA
it is irrelevant that the term “Shipment Reports”           is essentially an honor system since MSA, Inc.
is not mentioned in Appendix A. If taken to its             accepts the information provided to it by each
logical conclusion, Texas essentially asks this             individual cigarette manufacturer without
Court to ignore the fact that Appendix A is                 verifying whether the information is accurate.
silent as to how the number of cigarettes                   PWC, moreover, does not “audit” the ship-
shipped for domestic consumption is deter-                  ment information that the Settling Defendants
mined. It asks this Court, instead, to presume              provide. Rather, it merely compares the MSA,
that the actual number is based solely on the               Inc. numbers to those provided by the Settling
plain language of Appendix A, regardless of the             Defendants, which are essentially the same
description contained in the Market Share                   numbers.
provision. The Texas Settlement Agreement,
however, provides the means of determining                      An ambiguity in a contract can be either
both the aggregate number of cigarettes                     “patent” or “latent.” CBI Indus., Inc., 907
shipped for domestic consumption (under Ap-                 S.W.2d at 520. A patent ambiguity is evident
pendix A) and the individual number of ciga-                on the face of the contract while a latent ambi-
rettes that each Settling Defendant ships for               guity “arises when a contract which is unam-
domestic consumption (under the Market Share                biguous on its face is applied to the subject
provision)—through the use of Shipment Re-                  matter with which it deals and an ambiguity
ports.15                                                    appears by reason of some collateral matter.”
                                                            Id. If a latent ambiguity arises, parol evidence
        2. Audited Reports of Shipments                     is admissible for ascertaining the true inten-
                                                            tions of the parties as expressed in the agree-
   Under the plain language of the Texas Set-               ment. The classic example of a latent ambigu-
tlement Agreement, payments must be made                    ity cited by a variety of authorities is a contract
based on “shipments” of cigarettes that would               that calls for goods to be delivered to the
be included in “audited reports of shipments of
Tobacco Products provided to the [SEC].”
The district court, however, found that all                    16
                                                                  Texas argued that B&W, by its own admis-
settlement payments due under the Texas                     sion, breached the settlement agreement because it
Settlement Agreement since its inception have               acknowledged that it uses the MSA, Inc. reports to
been based on shipments as reported to MSA,                 comply with the agreement and also acknowledged
Inc. Yet it also found that MSA, Inc. shipment              that the MSA, Inc. reports are unaudited. Texas
reports are based on unaudited shipment                     raises the argument and glosses over the fact that
                                                            every single Settling Defendant uses MSA, Inc.
                                                            reports either directly or indirectly to comply with
                                                            the Texas Settlement Agreement. Therefore, none
                                                            of the annual payments that Texas has collected
      While Texas argues that the two provisions are        throughout the life of the Texas Settlement Agree-
completely separate, this Court notes that the trial        ment have been based on “audited” shipment
testimony revealed that the numbers used in the             information. Even when Texas hired PWC to
Appendix A calculations are the same numbers used           perform the annual payment calculations, its
in the Market Share calculations. According to the          instructions were to use the MSA, Inc. information
district court’s findings, those numbers have always        as a check on the information provided by the
been derived from the MSA, Inc. reports.                    Settling Defendants.

“green house on Pecan Street” when there are,            of extrinsic evidence to determine the parties’
in fact, two or more green houses on Pecan               intent was not error. The only audited ship-
Street. See, e.g., 11 WILLISTON ON CONTRACTS             ment reports, albeit not audited in the classic
§ 33.40 (4th ed.). In the instant case, we have          sense, that are submitted in compliance with
a similar situation, albeit for the opposite rea-        the Texas Settlement Agreement are those
son. Instead of having multiple green houses             generated by MSA, Inc. pursuant to its Ciga-
or, in this instance, “audited” reports, we have         rette Research Audit program. That being the
none.                                                    case, B&W’s use of MSA, Inc. figures was not
                                                         a breach of the Texas Settlement Agreement.
    The classic contractual use of the word
“audit” is to describe a formal examination of
an individual’s or organization’s accounting             VI.     CONCLUSION
records, financial situation, or compliance with
some other set of standards. BLACK’S LAW                    Based upon the foregoing, we find that the
DICTIONARY 140 (8th ed. 2004). Stated differ-            district court’s use of extrinsic facts to inter-
ently, an audit is “[a]n examination into ac-            pret a latent ambiguity was not error. Further,
counts or dealings with money or property by             we find that its findings of fact are supported
proper officers, or persons appointed for that           by the evidence and certainly are not subject to
purpose.” NEW WEBSTER’S DICTIONARY 65                    attack under the clear error standard of re-
(1981). Indeed, in other portions of the Texas           view. Therefore, the State of Texas shall take
Settlement Agreement, when this type of audit            nothing by virtue of its claim of breach of the
is contemplated, the parties have spelled it out         Texas Settlement Agreement. Further, this
in detail. When detailing the manner in which            Court finds that its request for an accounting
net operating profits should be determined for           was appropriately denied.
the volume adjustments, Appendix A specifi-
cally demands data from “financial statements              The judgment of the district court is AF-
prepared in accordance with generally accepted           FIRMED.
accounting principles and audited by a nation-
ally recognized accounting firm.” Yet, when
addressing the data contained in the Shipment
Reports, the Settlement Agreement is com-
pletely lacking in detail. As the trial court
noted, no Settling Defendant has ever provided
audited shipment reports to the SEC, nor does
B&W (who is not required to report to the
SEC) maintain or submit audited reports of its
cigarette shipments for the purposes of comply-
ing with the Texas Settlement Agreement.

   The phrase “audited reports of shipments” as
used in the agreement is a latent ambigu-
ity—one which appears only by reason of a
collateral matter. As such, the trial court’s use


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