30 Contingent liabilities and financial commitments
The Group is subject to contingencies pursuant to requirements that it complies with relevant laws, regulations and standards. Failure to comply could result in restrictions in operations, damages, fines, increased tax, increased cost of compliance, interest charges, reputational damage, or other sanctions. These matters are inherently difficult to quantify.
In cases where the Group has an obligation as a result of a past event existing at the balance sheet date, it is probable that an outflow of economic resources will be required to settle the obligation and the amount of the obligation can be reliably estimated, a provision would be recognised based on best estimates and management judgment.
There are, however, contingent liabilities in respect of litigation, taxes in some countries and guarantees for which no provisions were made.
The Group has exposures in respect of the payment or recovery of a number of taxes. The Group is and has been subject to a number of tax audits covering amongst others, excise tax, value added taxes, sales taxes, corporate taxes, withholding taxes and payroll taxes.
The estimated costs of known tax obligations have been provided in these accounts in accordance with the Group’s accounting policies. In some countries, tax law requires that full or part payment of disputed tax assessments be made pending resolution of the dispute. To the extent that such payments exceed the estimated obligation, they would not be recognised as an expense. In some cases disputes are proceeding to litigation.
While the amounts that may be payable or receivable could be material to the results or cash flows of the Group in the period in which they are recognised, the Board does not expect these amounts to have a material effect on the Group’s financial condition.
Product liability litigation
Group companies, notably Brown & Williamson Holdings, Inc. (formerly Brown & Williamson Tobacco Corporation) (B&W) as well as other leading cigarette manufacturers, are defendants, principally in the United States, in a number of product liability cases. In a number of these cases, the amounts of compensatory and punitive damages sought are significant.
In 2004, B&W completed the combination of the assets, liabilities and operations of its US tobacco business with R.J. Reynolds Tobacco Company (RJRT), a wholly-owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc., pursuant to which Reynolds American Inc. was formed (the Business Combination). As part of the Business Combination, B&W contributed to RJRT all of the assets and liabilities of its US cigarette and tobacco business, subject to specified exceptions, in exchange for a 42 per cent equity ownership interest in Reynolds American Inc. As a result of the Business Combination:
- B&W discontinued the active conduct of any tobacco business in the United States;
- B&W contributed to RJRT all of its assets other than the capital stock of certain subsidiaries engaged in non-US businesses and other limited categories of assets;
- RJRT assumed all liabilities of B&W (except liabilities to the extent relating to businesses and assets not contributed by B&W to RJRT and other limited categories of liabilities) and contributed subsidiaries or otherwise to the extent related to B&W’s tobacco business as conducted in the United States on or prior to 30 July 2004; and
- RJRT agreed to indemnify B&W and each of its associates (other than Reynolds American Inc. and its subsidiaries) against, among other matters, all losses, liabilities, damages, expenses, judgments, attorneys’ fees, etc., to the extent relating to or arising from such assumed liabilities or the assets contributed by B&W to RJRT (the RJRT Indemnification).
The scope of the RJRT Indemnification includes all expenses and contingent liabilities in connection with litigation to the extent relating to or arising from B&W’s US tobacco business as conducted on or prior to 30 July 2004, including smoking and health tobacco litigation, whether the litigation is commenced before or after 30 July 2004 (the Tobacco Litigation).
Pursuant to the terms of the RJRT Indemnification, RJRT is liable for any possible judgments, the posting of appeal bonds or security, and all other expenses of and responsibility for managing the defence of the Tobacco Litigation. RJRT has assumed control of the defence of the Tobacco Litigation involving B&W, to which RJRT is also a party in most (but not all) of the same cases. Accordingly, RJRT uses or plans to use the same law firm or firms to represent both B&W and RJRT in any single or similar case (except in certain limited circumstances) as RJRT’s interests are typically aligned with B&W’s interests, as RJRT has substantial experience in managing recognised external legal counsel in defending the Tobacco Litigation, and external counsel have independent professional responsibilities to represent the interests of B&W. In addition, in accordance with the terms of the RJRT Indemnification, associates of B&W have retained control of the defence in certain Tobacco Litigation cases with respect to which such associates are entitled to indemnification.
Included in the US litigation section below are all significant cases where B&W and/or a UK company is named as a defendant and all cases where RJRT is named as a defendant as a successor to B&W (the RJRT Successor Cases). The RJRT Successor Cases are covered by the indemnity explained above. Of the RJRT Successor Cases, the section below includes details of all cases where there has been an adverse judgment and also notes favourable judgments.
The total number of US product liability cases pending at 31 December 2010 naming B&W was approximately 9,458 (2009: approximately 9,991). Of these, 6,303 cases are RJRT Successor Cases. For all of these cases, British American Tobacco Group companies have the protection of the indemnity above. British American Tobacco (Investments) Limited (Investments) has been served as a co-defendant in five of those cases (2009: six). No other UK based Group company has been served as a co-defendant in any US product liability case pending as at 31 December 2010. In 2010, there were no US product liability cases tried to verdict against B&W. No product liability case in which a UK-based Group company is a defendant was tried in 2010, and one case in which a UK-based Group company is a defendant started trial in January 2011 (City of St. Louis – see below). Since many of these pending cases seek unspecified damages, it is not possible to quantify the total amounts being claimed, but the aggregate amounts involved in such litigation are significant, possibly totalling in the billions of US dollars. The cases fall into four broad categories:
(a) Medical reimbursement cases
These civil actions seek to recover amounts spent by government entities and other third party providers on healthcare and welfare costs claimed to result from illnesses associated with smoking. Although B&W continues to be a defendant in healthcare cost recovery cases involving plaintiffs such as hospitals and Native American tribes (see below), the vast majority of such cases have been dismissed on legal grounds.
Further, on 23 November 1998, the major US cigarette manufacturers (including B&W and RJRT) and the attorneys general of 46 US states and five US territories executed the Master Settlement Agreement (MSA), which settled medical reimbursement lawsuits that had been brought by these states and territories. Under the terms of the MSA, the settling cigarette manufacturers agreed, among other things, to pay approximately US$246 billion to the settling states and territories (and to four states that reached separate settlements of their medical reimbursement actions) over 25 years, and agreed to various restrictions on US tobacco advertising and marketing. The MSA includes a credit for any amounts paid by participating manufacturers in subsequent suits brought by the states’ political subdivisions.
At 31 December 2010, three US medical reimbursement suits were pending against B&W (2009: two). One of these suits was brought by an Indian tribe in the Indian Tribal Court in South Dakota. Another reimbursement suit (City of St. Louis) is pending against B&W, Investments and several other defendants in the state court in Missouri. In City of St. Louis, the plaintiffs, approximately 40 public and non-profit hospitals in Missouri, are seeking reimbursement of past and future alleged smoking-related healthcare costs. On 26 October 2007, the plaintiffs filed a motion requesting the court to give collateral estoppel effect to the factual findings in the US Department of Justice case, which motion was denied on 2 June 2010. On 1 December 2009, certain defendants, including B&W and Investments, filed additional motions for summary judgment. In a series of orders issued from April 2010 through October 2010, the court granted summary judgment as to the plaintiffs’ claims for fraudulent misrepresentation, negligent misrepresentation, failure to warn (whether sounding in strict liability or negligence) and improper marketing, and entered judgment in favour of the defendants, including B&W and Investments, on these claims. The court also dismissed the plaintiffs’ claims for prejudgment interest, future damages, and damages allegedly arising out of exposure to environmental tobacco smoke (ETS), thus reducing the damages claims from the US$2 billion originally sought to approximately US$600 million. The claims remaining for trial are product defect (whether sounding in strict liability or negligence), restitution, civil conspiracy, aiding and abetting and punitive damages. The trial of this case began on 31 January 2011, and is expected to last approximately four to six months.
In another recoupment suit (National Committee to Preserve Social Security & Medicare), the plaintiffs, two taxpayer advocacy groups and a Medicare recipient diagnosed with lung cancer, alleged that the defendants (including B&W) are liable for the payment of Medicare beneficiaries’ medical costs for diseases attributable to smoking, pursuant to the Medicare as Secondary Payer Statute (MSP). On 5 March 2009, the district court in the Eastern District of New York issued an order granting the defendants’ motion to dismiss the plaintiffs’ complaint in its entirety, and denying the plaintiffs’ cross motion for summary judgment. The district court ruled that MSP plaintiffs can only recover Medicare funds where an alleged tortfeasor’s liability has been established prior to the plaintiffs’ seeking relief under the MSP, and that the plaintiffs in National Committee had failed to establish such liability. The plaintiffs filed a notice of appeal to the US Court of Appeals for the Second Circuit on 20 May 2009. On 4 February 2010, the defendants filed a motion to dismiss the appeal. On 23 June 2010, the Second Circuit denied the defendants’ motion to dismiss the appeal. On 8 October 2010, a summary order was entered by the Second Circuit that vacated the judgment of the district court and remanded the case with instructions to dismiss the complaint for lack of subject matter jurisdiction. On 22 December 2010, the district court entered an order of dismissal for lack of subject matter jurisdiction and directed the Clerk of Court to enter judgment in accordance with the instructions from the Second Circuit. The Clerk of Court entered judgment in defendants’ favour on 23 December 2010.
(b) Class actions
At 31 December 2010, B&W was named as a defendant in eight (2009: eight) separate actions attempting to assert claims on behalf of classes of persons allegedly injured or financially impacted through smoking or where classes of tobacco claimants have been certified. If the classes are or remain certified and the possibility of class-based liability is eventually established, it is likely that individual trials will be necessary to resolve any claims by individual plaintiffs. Class action suits have been filed in a number of states against individual cigarette manufacturers and their parent corporations, alleging that the use of the terms ‘lights’ and ‘ultralights’ constitutes unfair and deceptive trade practices.
The Schwab class-action complaint (Schwab) was filed in the US District Court for the Eastern District of New York on 11 May 2004 against several defendants, including B&W and certain UK-based Group companies. The complaint challenges the defendants’ practices with respect to the marketing, advertising, promotion and sale of ‘light’ cigarettes. After six years of litigation, including before appellate courts, the parties on 13 July 2010 filed a stipulation of dismissal.
The Cleary class action complaint was filed in the state court in Chicago, Illinois on 3 June 1998 against several defendants, including B&W, B.A.T Industries p.l.c. (Industries) and Investments. Industries was dismissed on jurisdictional grounds by an intermediate appellate court on 17 March 2000. The Third Amended Complaint, filed on 3 March 2009, alleged that all defendants fraudulently concealed facts regarding the addictive nature of nicotine, that certain US defendants (but not Investments) marketed tobacco products to underage consumers, and that defendant Philip Morris fraudulently marketed Marlboro Lights cigarettes. The plaintiffs sought disgorgement of profits. The case was removed to the federal district court on 13 March 2009, and the federal district court denied the plaintiffs’ motion to remand the case back to the state court via order dated 1 July 2009. On 1 February 2010, the court granted summary judgment dismissing the plaintiffs’ fraudulent concealment claim, and permitted the plaintiffs to reinstate that claim via a new plaintiff. The court also granted summary judgment dismissing the plaintiffs’ youth marketing claims and permitted the Marlboro Lights claim to proceed against defendant Philip Morris. On 22 February 2010, the court denied the plaintiffs’ motion for class certification of all three putative classes, but granted the plaintiffs leave to reinstate the certification motion as to the putative class alleging the fraudulent concealment claim if the plaintiffs identified a new plaintiff to represent that putative class. On 18 April 2010, the plaintiffs filed a motion for leave to file a Fourth Amended Complaint, which was granted on 22 April 2010. The Fourth Amended Complaint alleged that all defendants fraudulently concealed facts regarding the addictive nature of nicotine, and that defendant Philip Morris fraudulently marketed Marlboro Lights cigarettes. The plaintiffs sought disgorgement of profits. On 7 May 2010, the defendants filed a motion to dismiss the plaintiffs’ Fourth Amended Complaint, which motion was granted on 22 June 2010. On 20 August 2010, the plaintiffs filed a notice of appeal in the US Court of Appeals for the Seventh Circuit. Briefing on the plaintiffs’ appeal commenced in December 2010 and is expected to conclude in February 2011.
In a medical monitoring class action brought on behalf of Louisiana smokers (Scott) the jury returned a verdict on 28 July 2003 in favour of the defendants on the plaintiffs’ claim for medical monitoring and found that cigarettes were not defectively designed. However, the jury also made certain findings against the defendants on claims relating to fraud, conspiracy, marketing to minors and smoking cessation. Notwithstanding these findings, this portion of the trial did not determine liability as to any individual class member or class representative. On 21 May 2004, the jury returned a verdict in the amount of US$591 million, requiring the defendants to fund a cessation programme to help eligible class members stop smoking. On 29 September 2004, the defendants posted a US$50 million bond, pursuant to legislation that limits the amount of the bond to US$50 million collectively for MSA signatories, and noticed their appeal. RJRT posted US$25 million (the portions for RJRT and B&W) towards the bond. On 7 February 2007, the Louisiana Court of Appeals upheld the class certification and found the defendants responsible for funding smoking cessation for eligible class members. The appellate court also ruled, however, that no class member who began smoking after 1 September 1988 could receive any relief, and that only those smokers whose claims accrued on or before 1 September 1988 would be eligible for the smoking cessation programme. In addition, the appellate court rejected the award of prejudgment interest, and struck eight of the twelve components of the smoking cessation programme. The defendants’ application to the Louisiana Supreme Court for a writ of certiorari was denied on 7 January 2008. The defendants’ petition to the US Supreme Court for a writ of certiorari was denied on 10 June 2008. On 21 July 2008, the trial court entered an amended judgment in the case. The court found that the defendants are jointly and severally liable for funding the cost of a court-supervised smoking cessation program and ordered the defendants to deposit approximately US$263 million together with interest from 30 June 2004, into a trust for the funding of the programme. On 23 April 2010, the Louisiana Court of Appeals amended but largely affirmed the trial court’s amended judgment. Pursuant to the judgment, the defendants are required to deposit US$242 million with the court, with interest from 21 July 2008 until paid. In September 2010, the defendants’ application for writ of certiorari or review by the Supreme Court of Louisiana along with the defendants’ motion to stay execution of the judgment was denied. On 24 September 2010, the US Supreme Court granted the defendants’ motion to stay the judgment pending the US Supreme Court’s disposition of the defendants’ petition for a writ of certiorari, which was filed on 2 December 2010.
Black is a ‘lights’ class action filed in November 2000 in the Circuit Court, City of St. Louis, Missouri. B&W removed the case to the US District Court for the Eastern District of Missouri on 23 September 2005. On 25 October 2005, the plaintiffs filed a motion to remand, which was granted on 17 March 2006. On 16 April 2008, the court stayed the case pending US Supreme Court review in Good v. Altria Group, Inc. A nominal trial date of 10 January 2011 was scheduled, but trial did not proceed at that time. No new date has been set.
Brown is a case filed in June 1997 in the Superior Court, San Diego County, California. On 11 April 2001, the court granted in part the plaintiffs’ motion for certification of a class composed of residents of California who smoked at least one of the defendants’ cigarettes from 10 June 1993 through 23 April 2001, and who were exposed to the defendants’ marketing and advertising activities in California. The plaintiffs seek to recover restitution, disgorgement of profits and other equitable relief under the California Business and Professions Code. Certification was granted as to the plaintiffs’ claims that the defendants violated the section of the California Business and Professions Code pertaining to unfair competition. The court, however, refused to certify the class under the California Legal Remedies Act and on the plaintiffs’ common law claims. On 7 March 2005, the court granted the defendants’ motion to decertify the class. On 5 September 2006, the California Court of Appeal affirmed the judge’s order decertifying the class. On 1 November 2006, the plaintiffs’ petition for review with the California Supreme Court was granted. On 18 May 2009, the California Supreme Court reversed the decision issued by the trial court and affirmed by the California Court of Appeal that decertified the class to the extent that it was based upon the conclusion that all class members were required to demonstrate standing, and remanded the case to the trial court for further proceedings regarding whether the class representatives have, or can demonstrate, standing. On 10 March 2010, the California Superior Court found that the plaintiffs’ ‘lights’ claims were not pre-empted by the Federal Cigarette Labelling and Advertising Act, rendered the court’s 30 September 2004 ruling on the issue no longer viable, and denied the defendants’ second motion for summary judgment. The plaintiffs filed a tenth amended complaint on 10 September 2010. Certain defendants, including RJRT and B&W, filed answers to the tenth amended complaint on 12 October 2010. Trial is scheduled to begin on 6 May 2011.
Howard is a ’lights‘ class action filed in February 2000 in the Circuit Court, Madison County, Illinois. A judge certified a class on 18 December 2001. On 6 June 2003, the trial judge issued an order staying all proceedings pending resolution of Price v. Philip Morris, Inc., a ‘lights’ class action against Philip Morris, Inc. in the Illinois state court. The plaintiffs appealed this stay order to the Illinois Fifth District Court of Appeals, which affirmed the Circuit Court’s stay order on 19 August 2005. There is currently no activity in the case.
Jones is a case filed in December 1998 in the Circuit Court, Jackson County, Missouri. The defendants removed the case to the US District Court for the Western District of Missouri on 16 February 1999. The action was brought by tobacco product users and purchasers on behalf of all similarly situated Missouri consumers. The plaintiffs allege that their use of the defendants’ tobacco products has caused them to become addicted to nicotine. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. The case was remanded to the Circuit Court on 17 February 1999. There has been limited activity in this case.
Parsons is a case filed in February 1998 in the Circuit Court, Ohio County, West Virginia. The plaintiff sued asbestos manufacturers, US cigarette manufacturers, including B&W, among other defendants, seeking to recover US$1 million in compensatory and punitive damages individually and an unspecified amount for the class in both compensatory and punitive damages. The class was brought on behalf of persons who allegedly have personal injury claims arising from their exposure to respirable asbestos fibres and cigarette smoke. The case has been stayed pending a final resolution of the plaintiffs’ motion to refer tobacco litigation to the judicial panel on multidistrict litigation filed in In Re: Tobacco Litigation in the Supreme Court of Appeals of West Virginia. On 26 December 2000, three defendants, Nitral Liquidators, Inc., Desseaux Corporation of North American and Armstrong World Industries, filed bankruptcy petitions in the US Bankruptcy Court for the District of Delaware. Pursuant to the Bankruptcy Code, Parsons is automatically stayed with respect to all defendants.
Young is a case filed in November 1997 in the Circuit Court, Orleans Parish, Louisiana. The plaintiffs brought an ETS class action on behalf of all residents of Louisiana who, though not themselves cigarette smokers, have been exposed to second-hand smoke from cigarettes which were manufactured by the defendants, and who allegedly suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. On 13 October 2004, the trial court stayed this case pending the outcome of appellate review in the Scott class action in Louisiana (discussed above).
In Engle (a case in Florida), a jury awarded a total of US$12.7 million to three class representatives, and in a later stage of the three-phase trial procedure adopted in this case, a jury assessed US$17.6 billion in punitive damages against B&W. On 21 May 2003, the intermediate appellate court reversed the trial court’s judgment and remanded the case to the trial court with instructions to de-certify the class. On 16 July 2003, the plaintiffs filed a motion for rehearing which was denied on 22 September 2003. On 12 May 2004, the Florida Supreme Court agreed to review this case and, on 6 July 2006, it upheld the intermediate appellate court’s decision to decertify the class and vacated the jury’s punitive damages verdict. Further, the Florida Supreme Court permitted the judgments entered for two of the three Engle class representatives to stand, but dismissed the judgment entered in favour of the third Engle class representative. Finally, the Florida Supreme Court has permitted putative Engle class members to file individual lawsuits against the Engle defendants within one year of the court’s decision (subsequently extended to 11 January 2008). The court’s order precludes defendants from litigating certain issues of liability against the putative Engle class members in these individual actions. On 7 August 2006, the defendants filed a motion for rehearing before the Florida Supreme Court, which was granted in part and denied in part, on 21 December 2006. The Florida Supreme Court’s 21 December 2006 ruling did not amend any of the earlier decisions’ major holdings, which included decertifying the class, vacating the punitive damages judgment, and permitting individual members of the former class to file separate suits. Instead, the ruling addressed the claims on which the Engle jury’s phase one verdict will be applicable to the individual lawsuits that were permitted to stand. On 1 October 2007, the United States Supreme Court denied the defendants’ request for certiorari review of the Florida Supreme Court’s decision.
As at 31 December 2010, B&W have been served in approximately 49 Engle progeny cases in both state and federal courts in Florida. These cases include approximately 105 plaintiffs. RJRT as a successor to B&W are named in approximately 6,286 Engle progeny cases. The plaintiffs’ counsel included multiple plaintiffs in most of the cases filed, so case totals have increased over the past year as Florida courts ordered cases originally filed as multi-plaintiff actions to be severed.
In the first ‘phase three’ trial of an individual Engle class member (Lukacs), the jury awarded the plaintiff US$37.5 million in compensatory damages (B&W’s share: US$8.4 million) on 11 June 2002. On 1 April 2003, the jury award was reduced to US$25.1 million (B&W’s share: US$5.6 million) but no final judgment was entered into because the trial court postponed the entry of final judgment until the Engle appeal was fully resolved. The trial court, on 14 August 2008, issued an order entering judgment for the plaintiff that awarded US$24.8 million to the plaintiff (plus interest), for which the defendants would be jointly and severally liable. On 17 October 2008, the plaintiff withdrew her request for punitive damages. On 12 November 2008, the trial court entered final judgment. On 1 December 2008, the defendants filed a notice of appeal. On 17 March 2010, the Third District Court of Appeal affirmed the ruling of the trial court. The defendants’ motion for rehearing and petition for rehearing en banc was denied on 18 May, 2010. RJRT expensed and paid the final judgment in the amount of approximately US$15.2 million on 18 June 2010.
As at 31 December 2010, there have been 10 additional phase three Engle trials naming RJRT as successor to B&W, which proceeded to verdict. Of these ten trials, three resulted in the plaintiffs’ verdicts (Douglas, Putney, Grossman). In Douglas, the jury awarded US$5 million in compensatory damages against all defendants on 10 March 2010, allocating US$250,000 of the award to RJRT. The defendants filed notice of appeal on 28 June 2010. On 29 June 2010, RJRT posted a supersedeas bond in the amount of US$250,000. In Putney, the jury awarded US$15,086,688 in compensatory damages and US$5 million in punitive damages on 26 April 2010, allocating US$4,526,000 in compensatory damages and US$2.5 million in punitive damages to RJRT. The defendants filed a notice of appeal on 30 August 2010, and the plaintiff filed a notice of cross appeal on 31 August 2010. On 20 December 2010, RJRT posted a supersedeas bond in the amount of US$2,372,765. In Grossman, the jury awarded US$1,934,727 in compensatory damages on 29 April 2010, allocating US$483,682 to RJRT. The defendants filed a notice of appeal on 14 July 2010. The plaintiff filed a notice of cross appeal on 19 July 2010. On 19 July 2010, RJRT posted a supersedeas bond in the amount of US$483,682.
In June 2009, the Florida legislature amended its existing bond cap statute by adding a US$200 million bond cap that applies to all phase three Engle cases in the aggregate, and establishes individual bond caps for individual cases in amounts that vary depending on the number of judgments in effect at a given time. In the absence of further legislative action, this bond cap will remain in effect until 31 December 2012.
(c) Individual cases
Approximately 3,161 cases were pending against B&W at 31 December 2010 (2009: 3,191) filed by or on behalf of individuals in which it is contended that diseases or deaths have been caused by cigarette smoking or by exposure to ETS. Of these cases, approximately: (a) 2,590 are ETS cases brought by flight attendants who were members of a class action (Broin) that was settled on terms that allow compensatory but not punitive damages claims by class members; (b) 429 of the individual cases against B&W are cases brought in consolidated proceedings in West Virginia, where the first phase of the trial is scheduled to begin on 17 October 2011; (c) 49 are Engle progeny cases that have been filed directly against B&W, and (d) 93 are cases filed by other individuals (76 of which name B&W and 17 of which name RJRT as successor to B&W). As mentioned above there are a further 6,286 Engle progeny cases which name RJRT as successor to B&W. These cases are subject to the indemnity set out above and are not detailed here.
There were three individual cases that resulted in verdicts against B&W and which remained on appeal during 2010 (not including Lukacs, see above):
In December 2003, a New York jury (Frankson) awarded US$350,000 in compensatory damages against B&W and two industry organisations. In January 2004, the same jury awarded US$20 million in punitive damages. On 22 June 2004, the trial judge granted a new trial unless the parties agreed to an increase in compensatory damages to US$500,000 and a decrease in punitive damages to US$5 million, of which US$4 million would be awarded against B&W. The plaintiff agreed to a decrease in punitive damages, but B&W has not agreed to an increase in compensatory damages. On 25 January 2005, B&W appealed to an intermediate New York State appellate court. Oral argument was heard on 8 May 2006. The appellate court affirmed the judgment on 5 July 2006, except insofar as it dismissed the plaintiff’s design defect claims. B&W filed a motion for leave to reargue, or in the alternative, for leave to appeal to the New York Court of Appeals, on 3 August 2006. The intermediate appellate court denied this motion on 5 October 2006. On 8 December 2006, the trial judge granted the plaintiff’s application for entry of judgment in the amounts of US$5 million in punitive damages and US$175,000 in compensatory damages. The trial court also granted the plaintiff’s motion to vacate that part of the 2004 order granting a new trial unless the parties agreed to an increase in compensatory damages to US$500,000. RJRT posted a bond in the approximate amount of US$8.018 million on 3 July 2007. B&W appealed from final judgment on 3 July 2007 to an intermediate New York State appellate court. Oral argument was heard on 28 January 2009. On 29 September 2009, the appellate court issued a decision modifying the final judgment by deleting the award of punitive damages, and remanding the case to the trial court for a new trial on the issue of punitive damages. On 22 December 2009, the plaintiff requested an extension of time to move for leave to appeal to the New York Court of Appeals, and for leave to reargue the case to the appellate court. On 15 January 2010, the appellate court denied the plaintiff’s motion for additional time to seek leave to appeal to the New York Court of Appeals, but granted the plaintiff more time to file a motion for leave to reargue to the appellate court. The plaintiff’s motion for leave to reargue was denied by the appellate court on 12 March 2010. As at 31 December 2010, no date has been set for a new trial on the issue of punitive damages.
On 1 February 2005, a Missouri jury (Lincoln Smith) awarded US$500,000 in compensatory damages against B&W and then, on 2 February 2005, awarded US$20 million in punitive damages, also against B&W. On 1 June 2005, B&W filed its notice of appeal. Oral argument was heard on 31 August 2006. On 31 July 2007, an intermediate Missouri appellate court affirmed the compensatory damages award, but it reversed the punitive damages award, reasoning that the plaintiffs failed to produce sufficient evidence to justify the verdict. The majority of the court would have remanded the case for a second trial, limited to punitive damages, but a dissenting judge transferred the case to the Missouri Supreme Court, as permitted by Missouri law. Oral argument was heard by the Missouri Supreme Court on 13 February 2008. On 31 July 2008, the Missouri Supreme Court transferred the case back to the intermediate appellate court for further proceedings. In a decision entered on 16 December 2008, the intermediate appellate court again upheld the award of compensatory damages and reversed the jury’s award of US$20 million in punitive damages, sending the case back to the trial court for a new trial on punitive damages. Following a new trial, on 20 August 2009, a Missouri jury returned a verdict awarding US$1.5 million in punitive damages against B&W. On 24 September 2009, B&W filed a motion for a new trial and a motion for judgment notwithstanding the verdict. On the same date, the plaintiffs filed a motion for additur, asking the court to increase the amount of punitive damages from US$1.5 million to US$20 million, and a motion to vacate, modify or set aside judgment, or in the alternative, for a new trial. On 21 December 2009, the court denied the plaintiffs’ and B&W’s post-trial motions. On 30 December 2009, B&W filed a notice of appeal. On 31 December 2009, the plaintiffs filed a notice of appeal. Both appeals remain pending.
On 18 March 2005, a New York jury (Rose) awarded US$1.7 million in compensatory damages against B&W. On 18 August 2005, B&W filed its notice of appeal. RJRT posted a bond in the approximate amount of US$2.058 million on 7 February 2006. Oral argument on this appeal was heard on 12 December 2006 by an intermediate New York appellate court. On 10 April 2008, the appellate court reversed the judgment in the plaintiff’s favour and ordered that the case be dismissed. On 8 May 2008, the plaintiff filed a notice of appeal to New York’s Court of Appeals. On 16 December 2008, the New York Court of Appeals affirmed the decision of the appellate court dismissing the plaintiff’s complaint. On 14 January 2009, the plaintiff filed a motion seeking leave to reargue the 16 December 2008 decision and order of the New York Court of Appeals, which was denied by an order dated 26 March 2009. The plaintiff filed a petition for a writ of certiorari in the US Supreme Court in June 2009, which was denied on 5 October 2009.
(d) Other claims
The Flintkote Company (Flintkote), a US asbestos production and sales company, was included in the acquisition of Genstar Corporation by Imasco Limited’s subsidiary, Imasco Enterprises, Inc., in 1986 and became a Group subsidiary following the restructuring of Imasco Limited (now Imperial Tobacco Canada Limited (Imperial), the Group’s operating company in Canada) in 2000. Soon after this acquisition, and as part of the acquisition plan, Genstar Corporation began to sell most of its assets, including the non-asbestos related operations and subsidiaries of Flintkote. The liquidation of Flintkote assets produced cash proceeds and, having obtained advice from the law firm of Sullivan & Cromwell LLP and other advice that sufficient assets would remain to satisfy liabilities, Flintkote authorised the payment of a dividend of US$170.2 million in 1986 and a further dividend of US$355 million in 1987. In 2003, Imperial’s subsidiary, Genstar Pacific Corporation, divested Flintkote and then, in 2004, Flintkote filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware. In 2006, Flintkote, representatives of both the present and future asbestos claimants, and individual asbestos claimants were permitted by the bankruptcy court to file a complaint against Imperial and numerous other defendants including Sullivan & Cromwell LLP, for the recovery of the dividends, plus interest, and other compensation under various legal and equitable theories, including seeking a determination that Imperial is Flintkote’s ‘alter ego’ and is responsible for all of Flintkote’s asbestos tort liabilities. Sullivan & Cromwell LLP and Imperial have since filed cross complaints against each other. The parties are presently engaged in case management discussions to establish the scope and manner of discovery in this case. Although the Flintkote litigation is at a preliminary stage, the judge has stated an intention to determine several discrete issues for resolution in a series of bifurcated bench trials in an effort to simplify or clarify the determinative issues in the litigation. The first issue is whether Flintkote’s claim for malpractice against Sullivan & Cromwell LLP is time barred. On 31 January 2011, the court entered a preliminary ruling stating that the complaint was time barred and that Sullivan & Cromwell LLP is entitled to dismissal. The second issue involves an enquiry into the two dividends and the circumstances surrounding them, including issues involving fraudulent conveyance. Certain legal issues regarding fraudulent conveyance were briefed and, at hearings held on 22 December 2010 and 2 February 2011, the court further refined the list of issues involving fraudulent conveyance. In addition, two other issues have emerged: (1) whether Flintkote or certain asbestos tort claimants are able to pursue ‘alter ego’ claims against Imperial, and (2) whether Flintkote should be judicially estopped from asserting certain fraudulent conveyance remedies in light of prior inconsistent statements it made during the course of the litigation. While it is expected that bench trials on all of these issues will occur in 2011, it is unclear when the court might rule on the issues.
In Wisconsin, the authorities have identified potentially responsible parties (PRPs) to fund the clean up of river sediments in the lower Fox River, Wisconsin. The pollution was caused by discharges of PCBs from paper mills and other facilities operating close to the river. The cost of the clean up work has been estimated to be in excess of US$900 million. Among the potentially responsible parties are NCR Corporation (NCR) and Appleton Papers Inc. (Appleton) who are liable for the clean up costs in a large portion of the river under the terms of a consent decree. In 1978, Industries purchased what was then NCR’s Appleton Papers Division from NCR. In 1978, Industries also incorporated a US entity by the name of BATUS, Inc. (BATUS), which in 1980 became the holding company for all of Industries’ US subsidiaries, including Appleton. As the holding company, BATUS obtained insurance policies for itself and its subsidiaries that included coverage for certain environmental liabilities. Industries/BATUS spun off the Appleton business in 1990 to Wiggins Teape Appleton p.l.c. and Wiggins Teape Appleton (Holdings) p.l.c., now known as Arjo Wiggins Appleton Ltd. and Arjo Wiggins US Holdings Ltd. (collectively, the AWA Entities), obtaining full indemnities from AWA Entities for past and future environmental claims. Disputes between NCR, Appleton, the AWA Entities, and Industries as to the indemnities given and received under the purchase agreement in 1978 have been the subject of arbitrations in 1998 and 2006. Under the terms of the arbitration awards, Industries and Appleton/the AWA Entities have an obligation to share the costs of environmental claims with NCR (60:40), but Industries has never been required to pay any sums in this regard because Appleton and the AWA Entities have paid the non NCR (60 per cent) share of the clean up costs to date, and the authorities have not identified Industries or BATUS as PRPs. However, there is a risk for Industries that Appleton and the AWA Entities will exhaust the recoverable insurance policies prior to the completion of the mandated clean up work and that Appleton and the AWA Entities will not have sufficient assets of their own to pay the clean up obligations, leaving Industries with the responsibility to pay the non NCR share of the remaining clean up costs. There is a further risk that the clean up costs for the project will increase beyond current estimates.
UK-based Group companies
Investments has been served in the following US cases pending at 31 December 2010: a medical reimbursement case, City of St. Louis, and Cleary, a class action (see above under medical reimbursement cases and class actions respectively); the US Department of Justice case (see below); an anti-trust case, Daric Smith (see below); and two individual actions, Eiser and Perry, which are currently dormant. No other UK based Group company has been served in a US product liability case pending as at 31 December 2010.
On 22 September 1999, the US Department of Justice brought an action in the US District Court for the District of Columbia against various industry members, including RJRT, B&W, Industries and Investments. Industries was dismissed for lack of personal jurisdiction on 28 September 2000. The government sought to recover federal funds expended in providing healthcare to smokers who have developed diseases and injuries alleged to be smoking-related, and, in addition, sought, pursuant to RICO, disgorgement of profits the government contends were earned as a consequence of a RICO ‘enterprise’. On 28 September 2000, the district court dismissed the portion of the claim which sought recovery of federal funds expended in providing healthcare to smokers who have developed diseases and injuries alleged to be smoking-related. The non-jury trial of the RICO portion of the claim began on 21 September 2004, and ended on 9 June 2005. On 17 November 2004, the US Court of Appeals for the DC Circuit heard an appeal by the defendants against an earlier district court decision that disgorgement of profits is an appropriate remedy for the RICO violations alleged by the government. On 4 February 2005, the DC Circuit allowed the appeal, ruling that the government could not claim disgorgement of profits. On 17 October 2005, the US Supreme Court declined to hear the appeal by the US government in respect of the claim for disgorgement of US$280 billion of past profits from the defendants.
On 17 August 2006, the district court issued its final judgment, consisting of some 1,600 pages of factual findings and legal conclusions. The court found in favour of the government, and against certain defendants, including B&W and Investments. The court also ordered a wide array of injunctive relief, including a ban on the use of ‘lights’ and other similar descriptors. Compliance with the court-ordered remedies may cost RJRT and Investments millions of dollars, although remedial compliance has been stayed over the last several years pending appellate review. In addition, the government is seeking the recovery of roughly US$1.9 million (plus accruable interest) in litigation costs, with RJRT having already paid approximately US$780,000 in costs on behalf of itself and B&W. Investments filed a praecipe with the district court on 28 September 2010 stating that it is not yet obligated to pay costs inasmuch as there has not been final resolution of all appeals in this matter (including the extraterritorial reach, if any, of the RICO statute based on an intervening change in law).
On 10 August 2007, the defendants filed their initial appellate briefs to the Court of Appeals for the DC Circuit. All defendants filed a joint appellate brief, and Investments also filed its own brief which raised the issue of whether Congress intended for RICO to apply to extraterritorial conduct by a foreign defendant. On 19 November 2007, the government filed its opposition and cross-appeal brief, seeking to reinstate certain remedial relief, including its disgorgement claims. On 22 May 2009, a three-judge appellate panel unanimously affirmed the district court’s RICO liability judgment against Investments, Altria, Philip Morris, RJRT and Lorillard, ordered the dismissal of CTR and TI (two defunct US trade associations that were not covered by the district court’s injunctive remedies), and remanded for further factual findings and clarification as to whether liability should be imposed against B&W, based on changes in the nature of B&W’s business operations. The panel also remanded on four discrete issues relating to the remedies, including for the district court “to reformulate” the injunction on the use of low-tar descriptors “to exempt foreign activities that have no substantial, direct, and foreseeable domestic effects”. The government’s cross-appeal seeking disgorgement of past profits and the funding of smoking education and cessation programmes was denied. Investments’ petition for panel rehearing and rehearing en banc were filed on 31 July 2009 and was denied on 22 September 2009 by the DC Circuit.
On 19 February 2010, the defendants and the government filed certiorari petitions with the US Supreme Court. On 28 June 2010, the US Supreme Court declined to grant certiorari on all petitions. On 23 July 2010, Investments filed a petition for rehearing before the US Supreme Court, on the basis of an intervening decision by the High Court that invalidated the “effects” test the district court and DC Circuit both used in concluding that the RICO statute applied to Investments’ foreign conduct. The US Supreme Court denied Investments’ rehearing petition on 3 September 2010.
On 7 July 2010, the DC Circuit issued its remand returning the case to the district court for further proceedings. On 22 December 2010, the district court ordered, among other things, that B&W is no longer a defendant and is therefore not subject to the court’s injunction. On 28 December 2010, the government filed a motion to compel Investments’ compliance with the district court’s 17 August 2006 order. Investments’ opposition to the government’s motion to compel compliance along with Investments’ motion for reconsideration of the liability judgment against it on the basis of an intervening change in controlling law was filed on 21 January 2011.
In the Daric Smith case, purchasers of cigarettes in the State of Kansas brought a class action in the Kansas State Court against B&W, Investments and certain other tobacco companies seeking injunctive relief, treble damages, interest and costs. The allegations are that the defendants participated in a conspiracy to fix or maintain the price of cigarettes sold in the US, including the State of Kansas, in violation of the Kansas Restraint of Trade Act. Following a hearing on 8 December 2008 on the plaintiff’s motion to compel Investments to produce documents, Investments identified relevant documents for discovery and Judge Smith (now retired) issued an order compelling disclosure of all of Investments’ documents without an in camera review. On 15 October 2009, Investments filed a motion for reconsideration of Judge Smith’s order. A decision on this is awaited. Following the appointment of a new judge, in October and November 2010, all defendants moved for summary judgment. Those motions have not yet been fully briefed.
Product liability outside the United States
At 31 December 2010, active claims against the Group’s companies existed in 22 markets outside the US (2009: 22) but the only markets with more than five claims were Argentina, Brazil, Canada, Chile, Italy, Nigeria, and the Republic of Ireland (2009: five). Medical reimbursement actions are being brought in Canada, Argentina, Brazil, Colombia, Israel, Nigeria, Saudi Arabia and Spain.
(a) Medical reimbursement cases
In August 2007, the São Paulo Public Prosecutors office filed a medical reimbursement claim against Souza Cruz. A similar claim was lodged against Philip Morris. Souza Cruz’s motion to consolidate the two claims was rejected and instead this case was removed to a different lower court. Souza Cruz filed a motion to reconsider the refusal for consolidation and an interlocutory appeal against assignment to the lower court. At the same time, the Public Prosecutor filed a motion challenging the connection between the two cases, which argument the State Court of Appeals accepted in August 2010 and ordered the two cases to progress independently. Souza Cruz subsequently filed a motion for clarification opposing the ruling, which is now pending review with the reporting justice. The lower court proceedings against Souza Cruz are expected to resume in due course.
In Canada there are three statutory actions for recovery of healthcare costs arising from the treatment of smoking and health related diseases. These proceedings name various group companies. Legislation enabling provincial governments to recover the healthcare costs has been enacted in British Columbia, New Brunswick, Ontario and Quebec. Actions have begun against various Group companies in British Columbia, New Brunswick and Ontario. In Quebec, the Group companies are challenging the legislation, and Quebec has not filed its own action. Newfoundland is in the process of referring legislation to the Newfoundland Court of Appeals. Similar legislation has also been passed and is also being considered by other Canadian provinces.
The government of British Columbia brought a claim pursuant to the provisions of the Tobacco Damages and Health Care Costs Recovery Act 2000 (the Recovery Act) against domestic and foreign ‘manufacturers’ seeking to recover the plaintiff’s costs of healthcare benefits. Imperial, Investments, Industries and other former Rothmans Group companies are named as defendants. The constitutionality of the Recovery Act was challenged by certain defendants and, on 5 June 2003, the British Columbia Supreme Court found the Recovery Act to be beyond the competence of the British Columbia legislature and, accordingly, dismissed the government’s claim. The government appealed the decision to the British Columbia Court of Appeal which, on 20 May 2004, overturned the lower court’s decision and declared the Recovery Act to be constitutionally valid. The defendants appealed to the Supreme Court of Canada in June and the court gave its judgment in September 2005 dismissing the appeals and declaring the Act to be constitutionally valid.
The federal government was enjoined by a Third Party Notice, and presented a Motion to Strike the claim out. The hearing took place during the week of 3 March 2008 and the court found in favour of the federal government. The defendants appealed that decision and the hearing was held during the week of 1 June 2009. On 8 December 2009, the British Columbia Court of Appeal handed down its decision in both this case and the Knight class action. This appeal was granted in part. The Court of Appeal held that it was not “plain and obvious” that the federal government did not owe a duty of care to tobacco manufacturers or consumers when it implemented its tobacco control strategy.
On 8 February 2010, the federal government sought leave to appeal this decision to the Supreme Court of Canada. On 10 March, the defendant filed response materials and a cross appeal. The government of British Columbia sought leave to oppose the defendants’ cross appeal in part. On 20 May, the Supreme Court of Canada granted leave to appeal both in respect of the federal government’s application and the defendants’ conditional cross applications. The appeal is scheduled to be heard on 24 February 2011.
The underlying medical reimbursement action remains at a preliminary case management stage. Damages have not yet been quantified by the plaintiff. Given the Supreme Court application, and a number of other factors including delay on the part of the plaintiff in producing his damages modelling materials, the trial date has been postponed.
Non-Canadian defendants challenged the personal jurisdiction of the British Columbia Court and those motions were heard in the Supreme Court of British Columbia. On 23 June 2005, the court dismissed all defendants’ motions, finding that there is a “real and substantial connection” between British Columbia and the foreign defendants. Subsequently, the defendants were granted leave to appeal that ruling to the Court of Appeal of British Columbia. The appeal was dismissed on 15 September 2006. The defendants filed leave to appeal to the Supreme Court on 10 November 2006, and that application was denied on 5 April 2007.
The government of New Brunswick has brought a medical reimbursement claim against domestic and foreign tobacco “manufacturers”, pursuant to the provisions of the Recovery Act passed in that Province in June 2006. The Company, Investments, Industries, Imperial and Carreras Rothmans Limited (the UK Companies) have all been named as defendants. The government filed a statement of claim on 13 March 2008. The Group defendants were served with the Notice of Action and Statement of Claim on 2 June 2008. A case management conference was held on 8 January 2009 so that other defendants could challenge the use of a contingent fee arrangement (CFA) for the plaintiff’s lawyer. This challenge was refused at first instance. Leave to appeal was granted on limited grounds. These grounds, upon which leave was denied, were appealed directly to the Supreme Court of Canada. On 13 May, 2010, the New Brunswick Court of Appeal dismissed Imperial’s appeal. The Supreme Court of Canada subsequently denied leave on all aspects of the CFA challenge, thus ending this preliminary challenge. The appeal was dismissed and an application to appeal to the Supreme Court was denied on 21 October 2010. The UK Companies have challenged the court’s jurisdiction and in November 2010 all four challenges were refused. Appeals are ongoing. No damages have yet been quantified by the plaintiff.
The government of the Province of Ontario has also filed a C$50 billion medical reimbursement claim against domestic and foreign tobacco “manufacturers”, pursuant to the provisions of the Tobacco Damages and Health Care Costs Recovery Act 2009. The UK Companies have all been named as defendants. Imperial was served on 30 September 2009 and the UK Companies were served on 8 October 2009. A case management judge has been appointed and the jurisdiction motions filed by the UK Companies will be heard first. The hearing is scheduled for April 2011.
British American Tobacco (South America) Limited (BAT South America) was served on 18 July 2008 in a public interest action that has a medical reimbursement component. The case was brought by two Colombian citizens alleging that the defendant violated numerous “collective” interests and rights of the Colombian population. In addition to equitable and injunctive relief being sought, the plaintiffs are seeking 25 per cent of smoking-related healthcare costs since the time that British American Tobacco has been operating in Colombia. Thereafter, the plaintiffs also request that the company contribute US$50 million a year to a fund. BAT South America initially filed preliminary objections to the action, with a view to joining the claim with another class action, the Sandra Florez action (which made substantially similar allegations and sought similar relief). However, as the Florez case was decided in BAT South America’s favour in September 2009, BAT South America will submit a full defence in due course.
In Israel, a medical reimbursement claim was brought against Industries, B&W, Investments and B.A.T (U.K. and Export) Limited (BATUKE), amongst others, by Clalit Health Services. The plaintiff claims damages of NIS 7.6 billion and seeks injunctive relief. On 29 March 2005, B&W, Investments and BATUKE argued for leave to appeal the denial of their application to dismiss the action on the grounds of remoteness and a decision from the Supreme Court on this issue is still awaited.
Health care recoupment actions have also been brought by five Nigerian states (Lagos, Kano, Gombe, Oyo, Ogun) and by the federal government of Nigeria, each seeking the equivalent of billions of US dollars for costs allegedly incurred by the state and federal governments in treating smoking-related illnesses. British American Tobacco (Nigeria) Limited (BAT Nigeria) has been named as a defendant in each of the cases; the Company and Investments have been named as defendants in six of the cases.
As at 31 December 2010, the actions that had been filed by the Attorneys-General of Ondo State and of Ekiti State were voluntarily discontinued by the plaintiffs without prejudice to re-file on 5 October 2009 and 18 June 2009, respectively. The action filed by the Attorney-General of Akwa Ibom State was struck out without prejudice for lack of prosecution on 19 October 2009.
On 21 February 2008, the Lagos action was voluntarily discontinued by the plaintiffs. On 13 March 2008, the Lagos Attorney General filed a substantially similar action which was marked as ’qualified‘ under Lagos State’s ’Fast-Track‘ system. The ’Fast-Track‘ system provides for resolution of the dispute within an eight-month time-period after filing. BAT Nigeria, the Company and Investments have all been served in the new action, and have filed preliminary objections. At a hearing on 16 September 2008, because service was yet to be completed on all defendants, the court directed that the case no longer qualified to be heard on the ’Fast Track‘. On 18 September 2009, the court issued a ruling denying the preliminary objections filed by the Company and Investments on the basis that the court was competent to hear the case as it related to those defendants, that the Company and Investments are necessary parties to the action and that the suit therefore was not liable to be struck out as against those defendants. On 2 October 2009, the Company and Investments filed notices of appeal from the entirety of the court’s ruling as it related to their respective objections. On 15 October and 19 October 2009, respectively, the Company and Investments filed motions to stay all proceedings pending the resolution of their appeals, which motion was granted by the High Court on 20 September 2010. On 26 November 2010, the Lagos Attorney General filed a motion for leave to appeal the High Court’s order granting a stay, which motion remains pending before the Court of Appeal.
On 8 July 2008, the High Court of Gombe State issued a ruling on the preliminary objections filed by the Company, Investments and other defendants in the case, setting aside the service on all defendants and striking out the Gombe suit. In its decision, the court held that the writs served on the defendants were invalid, the plaintiff had failed to pay the requisite filing fees, and that based on these filing defects, the court was not competent to assume jurisdiction. The court also stated, however, that the plaintiff, through its statement of claim and affidavit evidence filed in support of its ex parte motion for leave to serve outside the jurisdiction, had satisfied the requirements for service outside the jurisdiction. Although the plaintiff has not appealed from the court’s decision, the plaintiff has filed a renewed action in the High Court of Gombe State. BAT Nigeria, the Company and Investments have filed notices of preliminary objection in the renewed action. On 16 December 2010, the Gombe High Court heard argument on the defendants’ service and jurisdictional objections.
In the Oyo State case the British American Tobacco companies filed preliminary objections. These were partially granted on 22 June 2010 and service was set aside. The issuance of the writ was, however, not set aside and the Company and Investments are appealing this decision based on their jurisdictional objections. As at 31 December 2010, the appeals remain pending, and the plaintiff has not re-served the writ on the British American Tobacco defendants.
In Kano, the preliminary objections filed by the Company and Investments were dismissed on 16 April 2010. The Company and Investments have appealed the decision and sought a stay of proceedings. On 13 May 2010, the plaintiff filed a motion for preliminary injunction which seeks inter alia to prevent the defendants from marketing tobacco products or causing them to be sold to underage purchasers or near any primary or secondary school in Kano State. At a hearing on 8 December 2010 the court heard argument concerning the order in which the stay application, injunction motion, and other pending matters will be heard, and adjourned to 20 January 2011 for ruling. On 20 January 2011, the court ruled that it would first hear Nigeria’s preliminary objections to the court’s jurisdiction, and subsequently would hear the defendants’ stay applications together with the plaintiff’s injunction motion, and adjourned to 22 February 2011 for a hearing on BAT Nigeria’s objections.
In Ogun, preliminary objections were filed by BAT Nigeria, the Company and Investments, but were rejected by the court on 20 May 2010. All three British American Tobacco defendants have filed appeals. On 24 May 2010, the plaintiff filed a motion for preliminary injunction which seeks inter alia to prevent the defendants from marketing tobacco products or causing them to be sold to underage purchasers or near any primary or secondary school in Ogun State. On 15 and 19 October 2010, the Company and Investments, respectively, filed motions in the Court of Appeal for a stay of proceedings pending their appeals. On 21 October 2010, the High Court adjourned proceedings without date pending resolution of the stay motions. As at 31 December 2010, the stay motions remain pending before the Court of Appeal and a hearing is scheduled for 31 March 2011.
In Saudi Arabia, in 2007, there were reports that the Ministry of Health was pursuing a healthcare recoupment action in the Riyadh General Court against a number of distributors and agents. As at 31 December 2010, no Group company has been served with process. The Ministry of Health is reportedly seeking damages of at least 127 billion Saudi riyals. Hearings take place on average every six months.
In addition, a separate medical reimbursement action has reportedly been filed by the King Faisal Specialist Hospital in the Riyadh General Court, naming ‘BAT Company Limited’ as a defendant. As at 31 December 2010, no Group company had been served with process in the action.
In early 2006, the Junta de Andalucia, in Spain, filed a medical reimbursement action against the State and tobacco companies (including BAT Espana S.A.) before the contentious-administrative courts. The State filed preliminary objections to the Junta’s claim, with tobacco companies filing supporting briefs. The court upheld these preliminary objections and dismissed the claim in November 2007. The Junta’s appeal of this ruling to the Supreme Court was dismissed in September 2009. However, in May 2009, the Junta also filed a new contentious-administrative claim following inactivity on their previous claim, which proceedings are still progressing.
Preliminary objections were made in May 2010 and the parties are awaiting the court’s ruling.
(b) Class actions
There are five class actions being brought in Brazil. One is also a medical reimbursement, and is therefore discussed above.
In 1995, the Associação de Defesa da Saúde do Fumante (ADESF) class action was filed against Souza Cruz S.A. (Souza Cruz) and Philip Morris in the São Paulo Lower Civil Court alleging that the defendants are liable to a class of smokers and former smokers for failing to warn of cigarette addiction. The case was stayed in 2004 pending the defendants’ appeal from a decision issued by the lower civil court on 7 April 2004. That lower court decision held that the defendants had not met their burden of proving that cigarette smoking was not addictive or harmful to health, notwithstanding an earlier interlocutory order that the São Paulo Court of Appeals had issued, which directed the trial court to allow more evidence to be taken before rendering its decision. On 12 November 2008, the São Paulo Court of Appeals overturned the lower court’s unfavourable decision of 2004, finding that the lower court had failed to provide the defendants with an opportunity to produce evidence. The case now returns to the lower court for production of evidence and a new judgment. On 19 March 2009, the Lower Civil Court ordered the previous court-appointed medical expert to be replaced and a new advertising expert appointed. The parties have submitted questions to these court-appointed experts who have both delivered their reports. The plaintiff has provided comments on both expert reports. Souza Cruz responded with its comments and submissions from its own experts on 26 November 2010.
The Brazilian Association for the Defense of Consumers’ Health (Saudecon) filed a class action against Souza Cruz in the City of Porto Alegre, Brazil on 3 November 2008. The plaintiff purports to represent all Brazilian smokers whom, it alleges, are unable to quit smoking and lack access to cessation treatments. The plaintiff is seeking an order requiring the named defendants to fund, according to their market share, the purchase of cessation treatments for these smokers over a minimum period of two years. Souza Cruz was served with this complaint on 19 November 2008. On 18 May 2009, the case was dismissed with judgment on the merits. The plaintiffs appealed in August 2009 and Souza Cruz and Philip Morris both responded. The parties are now awaiting judgment from the State Court of Appeal’s 10th Civil Chamber.
A class action was filed against Souza Cruz by the Association of Exploited Consumers of the federal District, requesting a court order to prevent Souza Cruz selling cigarettes in Brazil. In December 2006, the federal District Court of Appeals confirmed a favourable lower court decision which had found the claim groundless and unlawful. The plaintiff appealed that ruling, but on 12 March 2009 the Superior Court affirmed the ruling and rejected the plaintiff’s appeal. The plaintiff appealed again, but on 23 March 2009, in a unanimous decision, the Superior Court rejected the plaintiff’s appeal. An appeal is now pending before the federal Supreme Court.
In 2004, the State of Sergipe instigated a class action seeking compensation for smokers in Sergipe State who purportedly sought to quit smoking. The lower court denied the plaintiffs’ request for early relief and determined ANVISA (a federal government health agency) be ordered to join the case as co-defendants. As ANVISA is a federal agency, the case was removed to the federal court where ANVISA successfully argued that it lacked standing to be sued. The claim against ANVISA was dismissed and the federal court sent the case back to the lower state court for proceedings to continue, however, the action was stayed on 18 December 2009 pending a decision by the Superior Court on which court has jurisdiction. On 26 March 2010 the Superior Court determined that it has jurisdiction of the matter and a decision from the court is now pending.
In March 2008, a smoking-related consumer fraud class action was filed in the Sofia City Court of Bulgaria against 21 defendants, including the following British American Tobacco-affiliated companies: British-American Tobacco Polska S.A., British-American Tobacco (Romania) Investments SRL, House of Prince A/S, and Scandinavian Tobacco S.A. On 24 September 2008, the claim was dismissed on procedural grounds, and the plaintiff appealed this ruling. On 11 November 2008, the Court of Appeal granted the plaintiff’s appeal and on 2 December 2008, the Sofia City Court ordered the plaintiff to meet various evidentiary and procedural conditions before proceeding further with this claim. An ex parte hearing took place on 18 November 2010 to allow the plaintiff to present evidence on his ability to bring the claim and on the viability of the claim itself. On 24 November 2010, the Sofia City Court issued an order denying plaintiff the right to proceed with the claim on the grounds that the class members could not be accurately identified and because plaintiff lacked adequate funding to pursue the litigation on behalf of the proposed class. The plaintiff appealed that ruling and on 20 January 2011, the Court of Appeal affirmed the dismissal of the case.
There are 10 class actions being brought in Canada against Group companies.
In the Knight class action, a claim has been brought against Imperial under the Trade Practices Act and the Business Practices and Consumer Protection Act. The claim includes alleged deceptive practices in relation to the use of ‘light’ and ‘mild’ descriptors. The Supreme Court of British Columbia certified a class of all consumers of cigarettes bearing ‘light’ or ‘mild’ descriptors since 1974 manufactured in British Columbia by Imperial. Imperial filed an appeal against the certification which was heard in February 2006. The Appeal Court confirmed the certification of the class but has limited any financial liability, if proved, to the period from 1997. This is a ‘lights’ class action in which the plaintiff alleges that the marketing of light and mild cigarettes is deceptive because it conveys a false and misleading message that those cigarettes are less harmful than regular cigarettes. Although the claim arises from health concerns, it does not seek compensation for personal injury. Instead it seeks compensation for amounts spent on ‘light and mild’ products and a disgorgement of profits from Imperial. The motion of the federal government to strike out the third party notice issued against them by Imperial was heard in February 2006 and was granted but was appealed by Imperial and the appeal was heard in June 2009 in conjunction with the British Columbia medical reimbursement. The Court of Appeal went so far as to say that it was not “plain and obvious” that the federal government did not owe a duty of care to manufacturers or indeed to the class itself. Therefore, the government of Canada faces potential liability to claims of product liability or misrepresentation. The government has appealed this decision and the appeal will be heard on 24 February 2011.
On 9 December 2009, Imperial was served with a class action filed by Ontario tobacco farmers and the Provincial Marketing Board. The plaintiffs allege that, during the timeframe, the companies improperly paid lower prices for tobacco leaf destined for duty-free products, as opposed to the higher domestic leaf price. Imperial deposited the amount owing to the government of Ontario pursuant to the Comprehensive Agreement into an escrow account, as Imperial believes that the Growers’ claim could fall within the definition of a released claim according to the Comprehensive Agreement. In response, the Ontario government filed an action against Imperial, seeking a declaration to the effect that the Growers’ action is valid in its own right, and that it is not a Released Claim. No monetary damages are being claimed against Imperial by the government of Ontario.
On 26 July 2010, Imperial argued its preliminary motion in the Ontario claim. Imperial was successful in its application and the court ordered that the Ontario claim be stayed in favour of the arbitration provisions stipulated in the Comprehensive Agreement and raised by Imperial in its Notice of Arbitration. The Province of Ontario has appealed this decision but no hearing date has been set.
There are currently two class actions in Quebec. On 21 February 2005, the Quebec Superior Court granted certification in two class actions against Imperial and two domestic manufacturers, which have a combined value of C$22 billion plus interest and costs. The court certified two classes, which include residents of Quebec who suffered from lung, throat and laryngeal cancer or emphysema, and residents who were addicted to nicotine at the time the proceedings were filed and who have since remained addicted. In Quebec, there is no right of appeal for a defendant upon certification. The plaintiffs have served a Statement of Claim. Trial in this matter has been set for 17 October 2011 and discovery is currently under way.
In June 2009, four new smoking and health class actions were filed in Nova Scotia, Manitoba, Saskatchewan and Alberta, against Canadian manufacturers and foreign companies, including the UK Companies and Imperial. In June 2010, two further suits were filed in British Columbia. Proceedings in these smoking and health class actions have also been served on Imperial. A jurisdiction motion has been filed in British Columbia. In Saskatchewan, a number of UK companies have been released from the action. In Nova Scotia the proceedings have not progressed. There are service issues in relation to the UK Companies for Alberta and Manitoba.
In May 2008, a ‘lights’ class action was brought in Israel against a number of parties including British American Tobacco’s distributor, which was dismissed on 16 May 2010. The plaintiff’s time to appeal that order has expired.
The Venezuelan Federation of Associations of Users and Consumers filed a class action against the Venezuelan government seeking regulatory controls on tobacco and recovery of medical expenses for future expenses of treating smoking-related illnesses in Venezuela. On 19 January 2009, C.A Cigarrera Bigott Sucs. (Cigarrera Bigott) notified the court of its intention to appear as a third party. The court adjourned a public hearing, initially scheduled for 28 July 2009, where Cigarrera Bigott’s status as a third party would be determined and parties would present evidence and make arguments. On 16 September 2009, the Venezuelan Republic ordered the court to continue the judicial process. A new date has yet to be scheduled by the court.
(c) Individual personal injury claims
Aside from the US there are approximately 353 individual smoking cases pending world-wide as at 31 December 2010 against Group companies that are not detailed here. Over three-quarters of these cases are in Brazil.
At 31 December 2010, there were only five (2009: approximately 634) individual ‘lights’ cases in Italy pending against British American Tobacco Italia S.p.A before the justice of the peace courts. As at 31 October 2010, approximately 4,390 cases had been withdrawn, suspended or resulted in decisions given in favour of British American Tobacco Italia S.p.A. There are 34 smoking and health cases pending before Italian civil courts, filed by or on behalf of individuals in which it is contended that diseases or deaths have been caused by cigarette smoking. There are two labour cases for alleged occupational exposure pending in Italy. There are also seven smoking and health cases and two labour cases on appeal related to the same decision but based on different grounds (Serafini case).
In 2008, three individual smoking and health actions were brought against British American Tobacco Finland Oy, collectively seeking a total of approximately €349,329 plus interest in damages for smoking related diseases. On 10 October 2008, the Helsinki District Court dismissed the plaintiffs’ claims in their entirety. Two of the original plaintiffs have appealed the respective judgments of the District Court. A joint de novo trial of the appeals was heard on 31 August 2009 before the Helsinki Court of Appeal. These appeals were dismissed. A further appeal to the Supreme Court was withdrawn on 9 November 2010. The parties agreed to bear their own costs.
While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, the Group believes that the defences of the Group’s companies to all these various claims are meritorious on both the law and the facts, and a vigorous defence is being made everywhere. If an adverse judgment is entered against any of the Group’s companies in any case, an appeal will be made. Such appeals could require the appellants to post appeal bonds or substitute security in amounts which could in some cases equal or exceed the amount of the judgment. In any event, with regard to US litigation, the Group has the benefit of the RJRT Indemnification. At least in the aggregate, and despite the quality of defences available to the Group, it is not impossible that the Group’s results of operations or cash flows in particular quarterly or annual periods could be materially affected by this and by the final outcome of any particular litigation.
Having regard to all these matters, the Group (i) does not consider it appropriate to make any provision in respect of any pending litigation and (ii) does not believe that the ultimate outcome of this litigation will significantly impair the Group’s financial condition.
Total future minimum lease payments under non-cancellable operating leases comprise leases where payments fall due:
|Within one year||59||71|
|Between one and five years||149||168|
|Beyond five years||122||139|
|Plant and equipment|
|Within one year||26||29|
|Between one and five years||25||33|