british american tobacco p.l.c. annual report 2008 - Notes on the accounts: Note 30

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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, 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.

Indemnity

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. 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 US on or prior to 30 July 2004; and
   
• RJRT agreed to indemnify B&W and each of its associates (other than Reynolds American 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.

US litigation

The total number of US product liability cases pending at 31 December 2008 involving B&W and/or other Group companies was approximately 3,251 (2007: approximately 3,323). At 31 December 2008, UK-based Group companies have been named as co-defendants in 6 of those cases (2007: 6). In 2008, no US cases were tried against B&W. No US cases involving the UK-based Group companies were tried in 2008. No product liability case in which a UK-based Group company is a defendant is currently scheduled for trial in 2009.

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. The cases fall into 4 broad categories:

a) Medical reimbursement cases

These civil actions seek to recover amounts spent by government entities and other third party providers on health care and welfare costs claimed to result from illnesses associated with smoking. Although B&W continues to be a defendant in health care 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 5 US territories executed the Master Settlement Agreement (MSA), which settled recoupment 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 4 states that had reached separate settlements of their recoupment 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 tobacco manufacturers in subsequent suits brought by the states’ political subdivisions.

At 31 December 2008, a reimbursement suit was pending against B&W by an Indian tribe in Indian tribal court in South Dakota, and another reimbursement case (City of St. Louis) was pending against B&W and a UK-based company. In City of St. Louis, plaintiffs consist of more than 60 public and non-profit hospitals in Missouri seeking reimbursement of past and future alleged smoking related health care costs. Summary judgment motions are pending and discovery remains ongoing. A trial date for this case has been set for 11 January 2010.

b) Class actions

At 31 December 2008, B&W was named as a defendant in some 10 (2007: 12) 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. Even if the classes are or remain certified and the possibility of class-based liability is eventually established, it is likely that individual trials will still be necessary to resolve any actual claims. Class-action suits have been filed in a number of US state and federal courts against individual cigarette manufacturers and their parent corporations, alleging that the use of terms such as ‘lights’ and ‘ultralights’ constitutes unfair and deceptive trade practices.

A 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 defendants’ practices with respect to the marketing, advertising, promotion and sale of ‘light’ cigarettes, and seeks billions of dollars in economic damages. The district court granted plaintiffs’ motion for class certification on 25 September 2006. On 3 April 2008, the Schwab class was decertified by the Second Circuit Court of Appeals. The mandate returning the case to the district court was issued on 29 May 2008.

Other types of class-action suits assert claims on behalf of classes of individuals who claim to be addicted, injured, or at greater risk of injury by the use of tobacco or exposure to environmental tobacco smoke, or the legal survivors of such persons.

In Engle (Florida), filed on 5 May 1994, a jury rendered a punitive damages verdict in favour of the Florida class against all defendants, with US$17.6 billion in punitive damages assessed against B&W. After various post-trial and appellate proceedings, the Florida Supreme Court, among other things, affirmed an intermediate appellate court’s decision to decertify the class, vacated the jury’s punitive damages award and permitted putative Engle class members to file individual lawsuits against the Engle defendants within 1 year of the Court’s decision (subsequently extended to 11 January 2008). As of 31 December 2008, B&W has been served individually in approximately 54 Engle progeny cases pending in Florida courts. These cases include approximately 110 plaintiffs.

In the first trial of an individual Engle class member (Lukacs), the jury, on 11 June 2002, awarded plaintiff US$37.5 million in compensatory damages (B&W’s share: US$8.4 million). After post-trial proceedings, on 12 November 2008, the trial court entered judgment for plaintiff in the amount of US$24,835,000 (plus interest), for which defendants were jointly and severally liable. Defendants filed an appeal from the judgment on 1 December 2008.

In a case filed on 24 May 1996 by a class of Louisiana smokers (Scott) in Louisiana state court against several US cigarette manufacturers (including B&W), the jury, on 28 July 2003, returned a verdict in defendants’ favour on a medical monitoring claim, but made findings against defendants with respect to claims relating to fraud, conspiracy, marketing to minors and smoking cessation. On 21 May 2004, the jury returned a verdict in the amount of US$591 million on the class’s claim for a smoking cessation programme. On 7 February 2007, an intermediate appellate court, among other things, affirmed class certification and upheld the smoking cessation programme for certain smokers who began smoking before 1988, but reduced the US$591 million jury award by US$312 million and rejected any award of prejudgment interest. On 21 July 2008, the trial court entered judgment in the case, finding that defendants were jointly and severally liable for funding the cost of a court-supervised smoking cessation programme, and ordering defendants to deposit approximately US$264 million together with interest from 30 June 2004 into a trust for the funding of the programme. On 15 December 2008, the trial court entered an order permitting defendants to take a suspensive appeal, thereby staying enforcement of the judgment pending the resolution of defendants’ appeal.

A class action complaint (Cleary) was filed in state court in Chicago, Illinois on 3 June 1998 against several defendants, including B&W, B.A.T Industries p.l.c. (Industries) and British American Tobacco (Investments) Limited (Investments). Industries was dismissed on jurisdictional grounds by an intermediate appellate court on 17 March 2000. The second amended complaint, filed on 8 April 2005, alleges, among other things, that defendants fraudulently concealed facts regarding the addictive nature of nicotine and that certain US defendants marketed tobacco products to underage consumers, and seeks, among other remedies, disgorgement of profits. On 11 July 2006, plaintiffs filed a renewed motion for class certification, which remains pending. The case is currently in class certification discovery.

c) Individual cases

Approximately 3,238 cases were pending against B&W at 31 December 2008 (2007: approximately 3,307) 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 environmental tobacco smoke (ETS). Of these cases, approximately: (a) 2,620 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) 490 of the individual cases against B&W are cases brought in consolidated proceedings in West Virginia; (c) 54 are Engle progeny cases that have been served upon B&W, and (d) 74 are cases filed by other individuals.

There are 3 verdicts against B&W that remained subject to appeal in 2008:

In December 2003 and January 2004, a New York state court jury (Frankson) awarded an individual plaintiff compensatory and punative damages against B&W and 2 industry organisations. After post-trial and appellate proceedings, the trial court entered judgment on 26 June 2007 in the amounts of US$175,000 in compensatory damages and US$5 million in punitive damages. Defendants subsequently appealed from the judgment to an intermediate appellate court. Appellate oral argument was heard on 26 January 2009. A decision remains pending.

In February 2005, a Missouri state court jury (Smith) awarded an individual plaintiff US$500,000 in compensatory damages and US$20 million in punitive damages against B&W. On 16 December 2008, an intermediate Missouri appellate court affirmed the compensatory damages award, but remanded the case for a new trial on issues relating to punitive damages. B&W filed a motion for rehearing on 31 December 2008, which was denied on 27 January 2009.

On 18 March 2005, a New York state court jury (Rose) awarded an individual plaintiff US$1.7 million in compensatory damages against B&W. On 10 April 2008, an intermediate state appellate court reversed the judgment and ordered that the case be dismissed. On 16 December 2008, the New York Court of Appeals affirmed the intermediate appellate court’s ruling. Plaintiff filed a motion to reargue to the Court of Appeals on 14 January 2009, and defendants filed a response on 9 February 2009. A decision on this motion remains pending.

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 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 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 and Imasco 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 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 and other compensation under various legal and equitable theories. 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.

In Wisconsin, the authorities have identified potentially responsible parties (PRPs) to fund the clean up of the Fox River, Wisconsin. The pollution was caused by the alleged discharges of toxic material from paper mills operating close to the river. The cost of the clean up work has been estimated to be in the order of US$600 million. Among the PRPs are NCR Corporation (NCR) and Appleton Papers Inc. (Appleton) who may be liable for a proportion of the clean up costs. 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, but Industries has never been required to pay any sums in this regard because Appleton and the AWA Entities have paid any sums demanded to date, and the authorities have not identified Industries or BATUS as PRPs. It is believed that all future environmental liabilities will continue to be met directly by Appleton and the AWA Entities by self-funding or insurance cover and no demand will be made upon Industries. However, the risk for Industries in respect of the Fox River clean up is that Appleton and the AWA Entities will exhaust insurance policies beyond that which Industries believes Appleton and the AWA Entities are entitled to under the demerger agreement, potentially leaving Industries with no insurance to call on should it be called on to contribute. There is currently a tolling agreement in place with regard to the differing interpretations of the provisions of the demerger agreement in this regard, which preserves the parties’ rights to litigate the issue even though the limitation period has expired. Given the likelihood that the case will not be resolved for some time, Appleton, the AWA Entities, Industries and BATUS have agreed to extend the tolling agreement until 31 December 2009.

UK-based Group companies

At 31 December 2008, Industries was a defendant in the US in 1 class action, the Schwab case mentioned previously. In that case, Industries was substituted for British American Tobacco p.l.c. as a defendant. Investments had been served in 1 reimbursement case (City of St. Louis), the Department of Justice case (see below), 1 anti-trust case (Daric Smith, see below), 2 class actions (Cleary and Schwab) and 2 individual actions (Eiser and Perry).

Conduct-based claims

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 B&W, Industries and Investments. Industries was dismissed for lack of personal jurisdiction on 28 September 2000. The Government sought, among other relief, the disgorgement of US$280 billion in past profits pursuant to the federal Racketeer Influenced and Corrupt Organisations Act (RICO) statute. On 4 February 2005, the DC Circuit Court of Appeals ruled that the Government could not claim disgorgement of profits under RICO. On 17 August 2006, the district court issued its final judgment 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. Investments’ compliance with the court-ordered remedies may result in potentially significant financial exposure. Defendants, including B&W and Investments, filed notices of appeal to the DC Circuit Court of Appeals on 11 September 2006, and thereafter obtained a stay of the district court’s judgment. Appellate briefing has been completed and oral argument took place on 14 October 2008. A decision remains pending.

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 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. Discovery is continuing.

Product liability outside the United States

At 31 December 2008, active claims against the Group’s companies existed in 18 (2007: 18) markets outside the US but the only markets with more than 5 active claims were Argentina, Brazil, Canada, Chile, Italy, Nigeria, and the Republic of Ireland. There has been new litigation in Bulgaria and Israel, where class actions have been filed, and in Russia where the Ministry of Health commenced a consumer protection claim. In 2008, judgments in favour of the defence were rendered in individual smoking and health cases in Finland, the Netherlands and Chile. The following is a description of the major developments since the last report in cases pending outside the United States that fall into 4 broad categories:

a) Medical reimbursement cases
 

Argentina
ATLA (Argentine Tort Law Association) in June 2007 instigated a lawsuit stating damages and medical recoupment claims as against Nobleza-Piccardo S.A.I.C.y F. (Nobleza Piccardo). ATLA sought to have certain public entities joined as plaintiffs. On 23 December 2008, the court allowed intervention by the national government and declined to accept in full certain defences asserting legal invalidity of the claims. Nobleza Piccardo will appeal this ruling.

Brazil
The São Paulo State Public Prosecutor instigated a lawsuit in July 2007 comprising product liability, ETS and medical recoupment claims. On 7 October 2008, Souza Cruz S.A. (Souza Cruz) filed an objection to a motion to intervene as an additional plaintiff by ACTbr, a private anti-tobacco group. On 17 October 2008, the court issued an order to plaintiffs to respond to certain of defendants’ procedural requests, as well as certain defences and objections.

Canada
The government of the Province 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 plaintiff’s costs of health care benefits. Investments, Industries, Imperial and certain former Rothmans Group companies are named as defendants. The constitutionality of the Recovery Act was challenged by certain defendants. Ultimately, in September 2005, the Supreme Court of Canada declared the Recovery Act to be constitutionally valid. The defendants joined the federal Government of Canada as a defendant and the federal Government, in turn, filed a motion to strike the claim. The Supreme Court of British Columbia found in favour of the federal Government, dismissing it from the action. Defendants’ subsequent appeal of that order has been consolidated with a similar appeal in the Knight case (see below). The appeals are scheduled to be heard in the week of 1 June 2009. Non-Canadian defendants, including Investments and Industries, sought to dismiss the action on the ground that the British Columbia court lacked personal jurisdiction over them. These motions were subsequently denied, and defendants’ appeal of these decisions was ultimately unsuccessful. The claim is now set down for trial in September 2011.

In another Canadian recoupment case, the government of the Province of New Brunswick has brought a health care recoupment 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 certain former Rothmans Group 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.

Colombia
British American Tobacco (South America) Limited was served on 18 July 2008 in a public interest action that has a recoupment component. The case was brought by 2 Colombian citizens alleging that the defendant violated numerous ‘collective’ interests and rights of the Colombian population. In addition to equitable and injunctive relief, plaintiffs are seeking 25 per cent of smoking-related health care costs since the time that the Group has been operating in Colombia.

Israel
Clalit, 1 of the main health care providers in Israel, filed a recoupment claim on 28 September 1998 in the Tel Aviv District Court against several local and international tobacco companies. Clalit seeks NIS7.6 billion (approximately US$1.9 billion) in damages and injunctive relief. Following a series of procedural negotiations between the parties, the Group companies currently named as defendants in the action are Industries, B&W, B.A.T (U.K. and Export) Limited (BATUKE) and Investments. In 2003, the Group company defendants except for Industries, and others, filed motions to strike the Statement of Claim on the ground that Clalit’s claims are remote and derivative, and therefore cannot be brought as direct claims. On 16 February 2004, the District Court judge issued a consolidated decision denying defendants’ motions. Defendants have appealed this decision to the Supreme Court. The outcome of the Supreme Court ruling on defendants’ appeals is still awaited. Additionally, in 2002, Industries filed a motion to set aside service as improper due to its lack of contacts with the jurisdiction. That motion was denied in or about November 2005, and Industries subsequently filed a motion seeking leave to appeal that decision to the Supreme Court. A decision on Industries’ motion is stayed pending a ruling on the other defendants’ motions to strike.

Nigeria
In 2007, 4 Nigerian states (Lagos, Kano, Gombe and Oyo) and the federal government of Nigeria filed separate health care recoupment actions, 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, the Company and Investments have all been named as defendants, and have filed preliminary objections in each of the pending cases. In 2008, a health care recoupment claim was also filed in Akwa Ibom state. The Company and British American Tobacco (Nigeria) Limited have been served with notices in that action. A health care recoupment claim has reportedly also been filed in Ogun state. No Group companies have been served with that claim.

On 21 February 2008, the initial Lagos action was voluntarily discontinued by plaintiffs and replaced on 13 March 2008 with a substantially similar action. British American Tobacco (Nigeria) Limited, the Company and Investments have all been served in the new action and have filed preliminary objections. On 8 July 2008, the High Court of Gombe State ruled on the preliminary objections filed by the Company, Investments and other defendants in the case, setting aside service on all defendants and striking out the claim. Plaintiff has since filed a renewed action and the court has granted plaintiff’s application for leave to issue and serve a writ of summons outside the jurisdiction. In Kano and Oyo States, proceedings are currently concerned with determining the parties’ preliminary objections to jurisdiction. Matters in the Akwa Ibom and Federal claims stand adjourned for reports on service.

Saudi Arabia
There are reports that the Saudi Ministry of Health is pursuing a health care recoupment action in the Riyadh General Court against a number of tobacco distributors and agents. At 31 December 2008, no Group company had been served with process. The Ministry of Health is reportedly seeking damages of at least 127 billion Saudi Riyals. In addition, a separate recoupment action has reportedly been filed by the King Faisal Specialist Hospital in the Riyadh General Court, naming ‘BAT Company Limited’ as a defendant. At 31 December 2008, no Group company had been served with process.

Spain
The Junta de Andalucía, together with the Health Service of Andalucía (hereinafter ‘Junta’) filed, on 20 September 2007, a recoupment action against the Spanish State and 6 tobacco companies, including British American Tobacco España, S.A. (BAT España). The Junta seeks the reimbursement of €1,769,964 allegedly spent in health care costs for treating patients with smoking-related diseases. The Court upheld the State’s preliminary objections to the claim and dismissed the claim on 14 November 2007. On 4 March 2008, the Junta filed a notice of its intention to appeal that decision. The Junta’s appeal remains pending. On 23 July 2008, BAT España was served with notice of a new claim by the Junta asserting essentially the same claims as in the prior action.

b) Class actions
 

Brazil
In 1995, a class action was filed by the Association for the Defence of the Health of Smokers (ADESF) against Souza Cruz and other tobacco manufacturers in the São Paulo Lower Civil Court alleging that defendants are liable to a class of smokers and former smokers for failing to warn of cigarette addiction. Plaintiffs seek monetary damages and injunctive relief. The case was stayed in 2004 pending defendants’ appeal from a decision issued by the lower civil court on 7 April 2004. 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 defendants with an opportunity to produce evidence. The case now returns to the lower court for production of evidence and a new judgment.

The Brazilian Association for the Defence of Consumers’ Health (Saudecon) filed a class action against Souza Cruz in the City of Porto Alegre, Brazil on 3 November 2008. Plaintiff purports to represent all Brazilian smokers whom, it alleges, are unable to quit smoking and lack access to cessation treatments. 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 2 years. Souza Cruz filed its Statement of Defence on 26 January 2009.

A consumer association known as ACODE (Association of Exploited Consumers of the Federal District) instigated an action in essence seeking a court order to stop Souza Cruz from marketing cigarettes in Brazil. In December 2006, the 4th Chamber of the Federal District Court of Appeals confirmed a lower court decision that ruled the claim groundless and unlawful. Plaintiff filed an appeal before the Superior Court of Justice which has been pending final review since May 2007.

The State of Sergipe instigated in 2004 a class action seeking compensation for smokers in Sergipe State who purportedly sought to quit smoking. The lower court denied plaintiffs’ request for early relief and determined that all Brazilian tobacco companies and ANVISA be ordered to join the case as co-defendants. Since then all the parties involved have yet to be served process.

Bulgaria
In March 2008, a collective claim was filed in the Sofia City Court of Bulgaria against 21 defendants, including British-American Tobacco Polska S.A., British-American Tobacco (Romania) Trading SRL, and House of Prince A/S. Plaintiff seeks recovery of roughly 17,000 Leva (approximately US$12,000) in damages per class member and injunctive relief. The claim was dismissed twice on procedural deficiencies, but re-instated both times on appeal. On 2 December 2008, the Sofia City Court dismissed the youth advertising claim and required plaintiff to meet various evidentiary and procedural conditions in order to proceed with the claim.

Canada
In the Knight class action in Canada, 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. The British Columbia Court of Appeal affirmed the certification of the class but has limited any potential financial liability to the period from 1997. This is a ‘lights’ class action in which 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. Plaintiff seeks compensation for amounts spent on ‘light and mild’ products and a disgorgement of profits from Imperial. Imperial joined the federal Government of Canada as a defendant and the federal Government, in turn, filed a motion to strike the claim. The court subsequently dismissed the federal Government from the action. Imperial appealed that order, and its appeal has been consolidated with a similar appeal in the British Columbia recoupment litigation (see above). Hearings are scheduled for the week of 1 June 2009.

A similar ‘lights’ and ‘mild’ class action claim has been filed in Newfoundland. Imperial has filed a third party notice against the Federal Government. The certification hearing took place in September 2007. Certification was denied on 29 December 2008 and Imperial subsequently received plaintiffs’ notice for leave to appeal.

There are currently 2 class actions in Quebec. On 21 February 2005, the Quebec Superior Court granted certification. The court certified 2 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. Plaintiffs have served a Statement of Claim.

On 12 May 2008, the Ontario Court of Appeal dismissed plaintiffs’ appeal in the Ragoonanan class action. The proposed class action sought to certify as a class “all persons who suffered bodily damage or property damage as a result of fires commenced by cigarettes that did not automatically extinguish upon being dropped or left unattended”. Certification was denied in first instance and leave to appeal was denied in the 12 May 2008 decision. In summary, the court decided that there was no rational relationship between the class definition and the proposed common issues and that a class action was not a preferable procedure.

Israel
In May 2008, 9 smokers of low yield cigarettes filed a class action in Israel, known as Numberg, before the Tel Aviv District Court against various defendants including the Group’s Israeli distributor, Globrands Agencies 2007 Limited. Plaintiffs allege that since December 2004, defendants have fraudulently marketed and sold low yield cigarettes in Israel, in contravention of what they interpret to be an express ban on the sale of such products following the prohibition on the use of ‘lights’ descriptors, by using methods such as marking cigarette packages in a special colour, using descriptors such as ‘slim’ or ‘super slim’, and displaying text that describes the amount of tar and nicotine yields. In addition to injunctive and declaratory relief, plaintiffs seek NIS78.5 billion (approximately US$20.3 billion) in monetary damages.

Venezuela
FEVACU (Venezuelan Federation of Associations of Users and Consumers) instigated a purported class action that was admitted by the court on 22 October 2008 seeking, among other relief, that defendant be required to fund a trust for the treatment of alleged smoking-related diseases. On 19 January 2009, C.A. Cigarrera Bigott Sucs. appeared as a third party whose rights may be affected by the proceedings, as provided under the procedural law.

c) Individual cases
 

Brazil
As of 31 December 2008, there were approximately 310 individual cases that remain pending in Brazil against Souza Cruz in which it is contended that the smokers’ diseases or deaths were caused by cigarette smoking. Since 1995, approximately 530 individual cases have been filed in Brazil against Souza Cruz. Approximately 10 of these cases have resulted in court decisions favourable to plaintiffs in either the civil court or court of appeal, all of which remain on appeal.

Canada
3 individual smoking and health cases have been filed in Canada. Of these, 2 (Battaglia and Landry) have been in abeyance since 2004 and 2003 respectively. The 3rd (Spasic) is active and currently at a preliminary stage. 1 smoking and health case (Stright) has been filed in Nova Scotia but has been in abeyance since 2005.

Chile
On 16 December 2008, the Civil Court of Santiago dismissed an individual smoking and health action filed by Mr Andres Javier Rada Meza against Compania Chilena de Tabacos S.A. (Chiletabacos) and other tobacco manufacturers in 2006. Plaintiff can challenge this decision before the Court of Appeal with 10 days of being notified of the decision. In addition to Rada, there are 8 smoking and health claims pending against Chiletabacos that have not been decided yet.

Finland
On 10 October 2008, following a consolidated trial, the Helsinki District Court dismissed 3 individual smoking and health actions that were brought against British American Tobacco Nordic Oy (BAT Nordic), amongst others, and ordered each plaintiff to pay BAT Nordic costs of €125,000. In December 2008, plaintiffs appealed the District Court’s decisions in their entirety but 1 plaintiff, Lindroos, has subsequently withdrawn her appeal. Briefing of the substantive appeals is ongoing.

Ireland
Fifteen individual smoking and health cases are ongoing in the Republic of Ireland, in which plaintiffs seek compensation for various alleged tobacco-related injuries. The Group defendants involved in these claims are PJ Carroll & Co. Ltd and Rothmans of Pall Mall (Ireland) Ltd, although both Group companies are not named in every action. 1 case, McCormack, was dismissed by judgment perfected on 17 July 2008 but plaintiff has filed a notice of appeal. Dismissal motions in 13 other cases are pending the decision of the Supreme Court in McCormack. The fifteenth case is currently dormant.

Italy
As of 31 December 2008, there were approximately 1,672 (2007: 3,478) individual ‘lights’ cases in Italy pending against British American Tobacco Italia S.p.A. Almost all of the individual ‘lights’ cases filed in Italy are pending before lower level (Justices of the Peace) courts. Because of the type of court involved, the maximum possible recovery in damages is €1,033. In 2007, 2,230 ‘lights’ cases were filed by a single plaintiffs’ counsel in the jurisdiction of Pescopagano. In 2008, all of these claims were withdrawn. As of 31 December 2008, 1,026 (2007: 950) cases (not including the Pescopagano cases) have been suspended or dismissed. There are 38 (2007: 33) individual smoking and health cases pending before Italian Civil Courts, in which it is contended that the smokers’ diseases or deaths were caused by cigarette smoking. There are 3 (2007: 2) labour cases for alleged occupational exposure.

Netherlands
On 17 December 2008, the District Court of Amsterdam dismissed an individual smoking and health action filed in June 2005 by Peter Josef Romer against British American Tobacco The Netherlands B.V. and British American Tobacco Manufacturing B.V. Plaintiff has until 18 March 2009 to appeal the dismissal.

d) Consumer protection litigation
 

Russia
On 8 September 2008, a consumer fraud action was filed in the Savelovsky District Court of Moscow by the Ministry of Health and Social Development in Russia against OJSC British American Tobacco – Yava (Yava) and its retail distributor, CJSC International Tobacco Marketing Services. The claim seeks a declaration from the court that the use of the words ‘light, superlight, and 1mg light’ on cigarette packets of Yava’s low tar cigarettes are misleading and unlawful, and further seeks the removal of these descriptors. In November 2008, the action was dismissed for lack of jurisdiction, but the dismissal was reversed on appeal. Grounds are awaited to determine whether a further appeal can be launched. In the meantime, the case file has been returned to the court of first instance where a hearing on the merits will be scheduled.

Other litigation outside the US

In July 2008, Imperial entered into a plea of guilty to a violation of a single count of section 240(1)(a) of the Canadian Excise Act and paid a fine of Can$200 million. Imperial thereafter obtained full immunity from further prosecution and civil proceedings from the federal and all 10 provincial governments in Canada. Imperial also entered into a 15-year civil agreement with the federal and provincial governments of Canada, under which Imperial, the federal government, the provinces and others will work together on initiatives to fight the growth of illegal tobacco products. The agreement further requires a payment of Can$50 million in 2008 and a percentage of Imperial’s annual net sales revenue going forward for fifteen years up to a maximum of Can$350 million.

Conclusion

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, 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 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.

Guarantees

Performance guarantees given to third parties in respect of Group companies were £1 million (2007: £1 million).

Operating leases

Total future minimum lease payments under non-cancellable operating leases comprise leases where payments fall due:

• Notes on the accounts
• Notes on the accounts: Notes 2-3
• Notes on the accounts: Notes 4-7
• Notes on the accounts: Notes 8-11
• Notes on the accounts: Note 12
• Notes on the accounts: Notes 13-15
• Notes on the accounts: Note 16
• Notes on the accounts: Notes 17-20
• Notes on the accounts: Notes 21-23
• Notes on the accounts: Note 24-25
• Notes on the accounts: Note 26
• Notes on the accounts: Note 27
• Notes on the accounts: Notes 28-29
• Notes on the accounts: Note 30