british american tobacco p.l.c. annual report 2008 - Notes on the accounts: 30 of 31

ANNUAL REPORT 2009

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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, 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.

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 2009 involving B&W and/or other Group companies was approximately 3,203 (2008: 3,251). These case numbers do not include any cases where RJRT is sued as successor to B&W. At 31 December 2009, UK-based Group companies have been served as co-defendants in six of those cases (2008: six). In 2009, only one case (Lincoln Smith, see below) was tried against B&W. No product liability case in which a UK-based Group company is a defendant was tried in 2009, and no case in which a UK-based Group company is a defendant is currently scheduled for trial in 2010. Four cases naming B&W are currently scheduled for trial in 2010. These four cases include the consolidated proceedings in West Virginia (see below), and three individual smoking and health cases, which are pending in Maryland state court, Missouri state court, and the US District Court for the Central District of California.

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 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 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.

At 31 December 2009, two US medical reimbursement suits were pending against B&W. One of these suits was brought by an Indian tribe in an Indian tribal court in South Dakota. The other reimbursement case (City of St. Louis) is pending against B&W, British American Tobacco (Investments) Limited (Investments) and several other defendants in state court in Missouri. In City of St. Louis, plaintiffs consist of more than 50 public and non-profit hospitals in Missouri and seek reimbursement of past and future alleged smoking-related health care costs. Plaintiffs have previously filed a motion requesting the court to give collateral estoppel effect to the factual findings of the US Department of Justice case to which certain defendants (including B&W and Investments) filed a memorandum in opposition. This motion remains pending. On 30 June 2009, the court denied defendants’ motion for summary judgment based on the plaintiffs’ failure to link alleged wrongful conduct to alleged damages. Defendants’ motion for reconsideration of the court’s 30 June 2009 order remains pending. A provisional trial date is set for 10 January 2011.

(b) Class-actions

At 31 December 2009, B&W has been named as a defendant in eight (2008: 10) 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 US state and federal courts against individual cigarette manufacturers and their parent corporations, alleging that the use of terms ‘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 the 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, in a unanimous ruling, the Schwab class was decertified by the US Court of Appeals for the Second Circuit. The Court of Appeals issued the mandate officially returning the case to the district court on 29 May 2008. Defendants have until 5 March 2010 to answer the plaintiffs’ Second Amended Complaint.

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 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, alleges 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. Plaintiffs seek disgorgement of profits. The case was removed to federal court on 13 March 2009, and plaintiffs’ motion to remand the case back to state court was denied on 1 July 2009. On 15 July 2009, plaintiffs filed a motion for class certification. On 30 October 2009, Investments, along with other defendants, filed motions for summary judgment. On 1 February 2010, the court issued an order that granted summary judgment dismissing plaintiffs’ fraudulent concealment of addiction claim, and permitted plaintiffs 45 days (or until 18 March 2010) to seek to reinstate that claim if plaintiffs can identify a new plaintiff to represent the putative class asserting that claim. The court further granted summary judgment dismissing plaintiffs’ youth marketing claims and permitted the Marlboro Lights claim to proceed against defendant Philip Morris at this time. To date, the court has not issued any decision on the class certification motion.

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 (approximately £10.9 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 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 1 October 2007, the United States Supreme Court denied defendants’ request for certiorari review of the Florida Supreme Court’s decision. As of 31 December 2009, B&W has been named in approximately 53 Engle progeny cases in both state and federal courts in Florida. These cases include approximately 109 plaintiffs.

In the first trial of an individual Engle class member (Lukacs), the jury, on 11 June 2002, awarded plaintiff US$37.5 million (approximately £23.2 million) in compensatory damages (B&W’s share: US$8.4 million (approximately £5.2 million)). After post-trial proceedings, on 12 November 2008, the trial court entered judgment for plaintiff in the amount of US$24,835,000 (approximately £15.4 million) (plus interest), for which defendants were jointly and severally liable. Defendants filed an appeal from the judgment on 1 December 2008 and B&W served their moving brief on 5 June 2009. On 19 March 2009, pursuant to its indemnification of B&W, RJRT posted a bond (approximately US$15.2 million (approximately £9.4 million)). Oral argument has been scheduled for 1 March 2010.

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 (approximately £366 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 1 September 1988, but reduced the US$591 million jury award by US$312 million (approximately £193.2 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$263 million (approximately £162.9 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. Oral arguments occurred on 1 September 2009 and a decision remains pending.

(c) Individual cases

Approximately 3,191 cases were pending against B&W at 31 December 2009 (2008: 3,238) 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) 2,595 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) 476 of the individual cases against B&W are cases brought in consolidated proceedings in West Virginia; (c) 53 are Engle progeny cases; and (d) 67 are cases filed by other individuals.

There are three verdicts against B&W that remained subject to appeal in 2009:

In December 2003 and January 2004, a New York state court jury (Frankson) awarded an individual plaintiff compensatory and punitive damages against B&W and two industry organisations. After post-trial and appellate proceedings, a final judgment was entered by the clerk of court on 26 June 2007 in the amounts of US$175,000 (approximately £100,000) in compensatory damages and US$5 million (approximately £3.1 million) in punitive damages. RJRT posted a bond in the approximate amount of US$8.018 million (approximately £5 million) on 3 July 2007. Defendants subsequently appealed from the judgment to an intermediate appellate court and appellate oral argument was heard on 26 January 2009. On 29 September 2009, the appellate court issued a decision modifying the final judgment by deleting the punitive damages award and remanding the case to the trial court on the issue of punitive damages. On 22 December 2009, plaintiff filed a motion for an extension of time to seek leave to reargue the appeal, or in the alternative, to take a further appeal to the New York Court of Appeals. On 15 January 2010, the intermediate appellate court denied plaintiff’s motion seeking an extension to file a motion for leave to appeal to the New York Court of Appeals, and granted plaintiff’s motion seeking an extension to file a motion for leave to reargue the appeal. Plaintiff filed a motion to reargue on 27 January 2010, which remains pending.

In February 2005, a Missouri state court jury (Smith) awarded the family of a deceased smoker US$500,000 (approximately £300,000) in compensatory damages and US$20 million (approximately £12.4 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. Following a new trial, on 20 August 2009, a Missouri jury returned a verdict awarding US$1.5 million (approximately £900,000) 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 and the plaintiffs filed a motion to increase the punitive damages to US$20 million (approximately £12.4 million) and to vacate, modify or set aside judgment or alternatively for a new trial. These motions were denied on 21 December 2009. On 30 December 2009, B&W filed a notice of appeal to the intermediate Missouri appellate court. Plaintiffs filed a notice of appeal to the same court on 31 December 2009. Those appeals have been consolidated and remain pending.

On 18 March 2005, a New York jury (Rose) awarded an individual plaintiff US$1.7 million (approximately £1.1 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, which was denied on 26 March 2009. In June 2009, plaintiff filed a petition for a writ of certiorari in the US Supreme Court, 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 (Genstar) by Imasco Limited in 1986 and became a Group subsidiary following the restructuring of Imasco Limited (now Imperial Tobacco Canada Limited (ITCAN), 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 (approximately £105.4 million) in 1986 and a further dividend of US$355 million (approximately £219.8 million) in 1987. In 2003, ITCAN 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 ITCAN 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 ITCAN 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 litigation is at a preliminary stage, the judge has stated an intention to consider two discrete issues for potential early resolution either through evidentiary hearings or trial in an effort to simplify or clarify determinative issues. The first issue the judge is considering in separate proceedings is whether Flinkote’s claim for malpractice against Sullivan & Cromwell LLP is time barred. This will include consideration as to whether Sullivan & Cromwell LLP’s representation of Flintkote was continuous and the scope of this enquiry may require findings of fact impacting upon ITCAN’s involvement in this first issue. The second issue involves an enquiry into the two dividends and whether they were fraudulently transferred. Until these preliminary issues have been resolved, it is difficult to estimate when the remaining issues will be heard.

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 Government’s most recent published estimate of the cost of the clean up work is US$700 million (approximately £433.5 million), although other reports have suggested that the costs are increasing. 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 2005. 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. In 2005, Appleton sued those insurance carriers that remained solvent that had issued the insurance policies to BATUS in the late 1970s and 1980s for a declaratory judgment that the policies provided coverage for Appleton’s liability for the Fox River clean up. In 2008, Appleton prevailed in its suit and the court issued a ruling that the insurance policies provided coverage for the Fox River clean up. Further, the court held that Appleton was entitled to select from among the insurance policies an individual policy year and work its way through the policies in that year collecting coverage. Once that year is exhausted, Appleton may select additional policy years, one at a time, and proceed through those years in the same manner. In total, the insurance policies provide general coverage of US$1,052,300,000. This amount is subject to reduction to reflect insolvent insurance carriers within the BATUS insurance programme. The insurance carriers have appealed the trial court’s ruling. The ultimate amount of insurance available will depend on whether the trial court’s rulings concerning which policies are triggered and how losses may be allocated are disturbed or modified on appeal. If the ruling stands on appeal, 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. NCR has recently advised Industries that it believes that it is entitled to call upon Industries for contribution if necessary, while also reaffirming its intent to look to Appleton and the AWA entities in the first instance. If, however, Appleton and the AWA entities are unable to meet their obligations, NCR may look to Industries for contribution. There is a risk 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. There is a tolling agreement in place between Appleton, the AWA Entities, Industries and BATUS relating to the demerger agreement, which runs to 31 December 2011 and preserves the parties’ rights to litigate the issue.

In a separate federal action in Wisconsin, Appleton and NCR sought a contribution towards the contamination clean up costs from various other companies that also operated along the Fox River. On 17 December 2009, the judge dismissed the lawsuit on the basis that Appleton and NCR were responsible for at least 98 per cent of the contamination and that attributing the remaining 2 per cent amongst other companies was not worthwhile. Appleton and NCR are therefore liable for the clean up costs in full. This could potentially increase the amount of insurance sought by Appleton and therefore increases the risk of Appleton exhausting the insurance policies beyond its entitlement. It is open for Appleton and NCR to appeal the 17 December 2009 decision.

UK-based Group companies

At 31 December 2009, Industries was a defendant in the US in one class-action, the Schwab case mentioned previously. In that case, Industries was substituted for the Company as a defendant. Investments had been served in one reimbursement case (City of St. Louis), the Department of Justice case (see below), one anti-trust case (Daric Smith, see below), two class actions (Cleary and Schwab) and two 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 (approximately £173.4 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. On 31 October 2006, the Court of Appeals granted defendants’ motion to stay enforcement of the judgment pending the outcome of the appeal. On 22 May 2009, a three-judge appellate panel unanimously affirmed the district court’s RICO liability judgment against several defendants, including Investments, and among other things remanded for further factual findings and clarification as to whether liability should be imposed against B&W. 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 a rehearing to consider the panel’s decision was filed on 31 July 2009 and was denied on 22 September 2009 by the Court of Appeals. Following this, the parties are in a position to file petitions for certiorari with the US Supreme Court. On 11 December 2009, the Court of Appeals entered an order continuing the effective stay of the district court’s injunctive remedies pending the US Supreme Court’s final disposition of the case.

In the Daric Smith case, filed on 7 February 2000, 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 of documents continues with Investments challenging the scope of discovery to which the plaintiff is entitled.

Product liability outside the United States

At 31 December 2009, active claims against the Group’s companies existed in 22 (2008: 18) markets outside the US but the only markets with more than five active claims were Argentina, Brazil, Canada, Chile, Italy, Nigeria, and the Republic of Ireland. There has been new litigation in Brazil (individual claims), Italy (individual claims) and Canada (Ontario recoupment claim and class-action claims). In 2009, judgments in favour of the defence were rendered in Russia. Significant developments outside the United States fall into four broad categories:

(a) Medical reimbursement cases

Argentina
ATLA (Argentine Tort Law Association) in June 2007 instigated a lawsuit seeking damages and medical recoupment claims 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. On 2 October 2009, Nobleza Piccardo filed a substantive defence, supplementing its earlier preliminary defences on lack of jurisdiction, lack of standing to sue and the statute of limitations. On 23 December 2009, the civil court issued an order declining to exercise jurisdiction over the case as a result of the national Government’s intervention. The case will now be referred to the contentious administrative court.

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. The court has determined that issues of third party standing will be determined at the main hearing. A similar claim was lodged against Philip Morris and Souza Cruz’s motion to consolidate the two claims was rejected, with the case removed to a lower court. Souza Cruz filed a motion to reconsider the refusal for consolidation and an interlocutory appeal against assignment to the lower court. The Public Prosecutor filed a counter motion and the court has ordered the assignment issue to proceed to a final review.

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, Ryesekks Plc, ITCAN 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. Defendants joined the federal Government of Canada pursuant to a Third Party Notice 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 was consolidated with a similar appeal in the Knight case (see below). On 8 December 2009, the British Columbia Court of Appeal handed down its decision in the Medicaid and Knight cases. In the Medicaid case, the appeal was granted in part, with the court holding that it was not plain and obvious that the Federal Government did not owe a duty of care to tobacco manufacturers when it implemented its tobacco control strategy. On 8 February 2010, the Federal Government sought leave to appeal this decision. Non-Canadian defendants, including Investments and Industries, sought to dismiss the underlying Medicaid 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 case is currently scheduled for trial in September 2011 as a target date.

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 Tobacco Damages and Health Care Costs Recovery Act 2000 passed in that Province in June 2006. The Company, Investments, Industries, ITCAN and certain former Rothmans Group companies have been named as defendants. The Government filed a statement of claim on 13 March 2008. The UK-based Group defendants were served with the Notice of Action and Statement of Claim on 2 June 2008. ITCAN was served on 10 April 2008. In November 2009, the UK-based Group defendants filed notices of motion challenging jurisdiction. Plaintiff filed its material in response. These motions are scheduled for hearing in June 2010.

On 29 September 2009, the Government of the Province of Ontario filed a health care recoupment claim against the Company, Investments, Industries, ITCAN and certain former Rothmans Group companies, pursuant to the provisions of the Tobacco Damages and Health Care Costs Recovery Act 2009. The UK-based Group defendants served their notices of motion and supporting evidence challenging jurisdiction on 29 January 2010.

Colombia
British American Tobacco (South America) Limited (BAT South America) was served on 18 July 2008 in Garrido, a public interest action that has a recoupment 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, plaintiffs are seeking 25 per cent of smoking-related health care costs since the time that the Group has been operating in Colombia. BAT South America initially filed preliminary objections to the action with a view to joining the claim to another public interest action brought by Sandra Florez (see below). However, the preliminary objections in Garrido are now moot because the Florez case was decided in BAT South America’s favour in September 2009. BAT South America will submit a full defence in Garrido in due course.

Israel
Clalit, one 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 £1.2 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 (who is disputing service), B&W, B.A.T (U.K. and Export) Limited (BATUKE) and Investments. On 29 March 2005, B&W, Investments and BATUKE sought leave to appeal the denial of their application to strike out the action on the grounds of remoteness and a decision from the Supreme Court on this issue is still awaited. Plaintiff’s motion filed on 30 August 2009 to separate consideration of Clalit from another case (in which no Group company is named) was denied by the Supreme Court.

Nigeria
In 2007, four Nigerian states (Lagos, Kano, Gombe and Oyo) and the Nigerian federal Government 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 were all named as defendants and filed preliminary objections in each of the cases.

On 21 February 2008, the initial Lagos action was voluntarily discontinued by plaintiffs. On 13 March 2008, the Attorney General of Lagos State filed a substantially similar action. British American Tobacco (Nigeria) Limited, the Company and Investments were all served in the new action. On 18 September 2009, the High Court of Lagos State issued a ruling denying the preliminary objections filed by the Company and Investments. On 2 October 2009, the Company and Investments filed notices of appeal from the court’s ruling and filed motions to stay all proceedings pending the resolution of their appeals. The stay motions remain pending before the High Court of Lagos State and are to be argued at the next hearing.

On 8 July 2008, the High Court of Gombe State set aside service on all defendants (including the Company, Investments and British American Tobacco (Nigeria) Limited) and struck out the claim. The Attorney General of Gombe State filed and served a renewed action, to which all Group defendants have filed preliminary objections, which remain pending.

In 2008, a health care recoupment claim was filed in the State of Akwa Ibom. The Company and Investments were served with process and filed preliminary objections. British American Tobacco (Nigeria) Limited was not served and, on 21 July 2009, was dismissed from the action. On 19 October 2009, following repeated requests for adjournment by counsel for the Attorney General of the State of Akwa Ibom, the court struck out the claim for want of diligent prosecution.

An action was filed by the Attorney General of Ogun State in 2009. In the Ogun State claim, there has been purported service of the proceedings on the Company, Investments and British American Tobacco (Nigeria) Limited. The companies have each filed preliminary objections. The preliminary objections were heard on 14 December 2009 and a decision is awaited.

In 2009, process was also purportedly served on British American Tobacco (Nigeria) Limited in two health care recoupment claims brought by the Attorneys General of the States of Ondo and Ekiti. British American Tobacco (Nigeria) Limited is the only Group company named as a defendant in these actions. In Ondo, British American Tobacco (Nigeria) Limited filed an application to strike out the claim based on defects in the issuance of the writ. While this application was pending, on 17 June 2009, the Attorney General of Ondo State filed a notice of discontinuance, and on 18 June 2009, the court accordingly struck out the action without prejudice and awarded British American Tobacco (Nigeria) Limited costs. In Ekiti, British American Tobacco (Nigeria) Limited filed preliminary objections. On 5 October 2009, following the service of a 2 October 2009 notice of discontinuance filed by the Attorney General of Ekiti State, the court struck out the claim without prejudice.

Saudi Arabia
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, but no Group company has been served with process. The Ministry of Health is reportedly seeking damages of at least 127 billion Saudi Riyals (approximately £21 billion).

Spain
The Junta de Andalucía, together with the Health Service of Andalucía (hereinafter ‘Junta’) filed, on 20 September 2007, a contentious-administrative claim against the Spanish State and six tobacco companies, including British American Tobacco España, S.A. (BAT España). The Junta seeks the reimbursement of €1,769,964 (approximately £1.6 million) 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, and its appeal was dismissed by a Supreme Court Judgment of 30 September 2009. In the interim however, on 6 May 2009, the Junta filed a new contentious-administrative claim based on the same facts, which proceedings are still progressing.

(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 was returned to the lower court for production of evidence and a new judgment. The matter continues on the issue of sufficiency of court-appointed expert evidence.

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 two years. On 18 May 2009, the case was dismissed with judgment on the merits. Plaintiffs appealed in August 2009 and Souza Cruz responded. Parties are now awaiting judgment.

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. On 12 March 2009, the Superior Court affirmed the ruling and rejected plaintiff’s appeal. Plaintiff issued another appeal which, on 23 March 2009, was unanimously rejected by the Superior Court. An appeal is now pending before the Federal Supreme Court.

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 ANVISA be ordered to join the case as co-defendants. ANVISA is a Federal Agency so 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, but the action was stayed on 18 December 2009 pending a decision by the Superior Court on which court has jurisdiction.

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 £7,700) 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. Plaintiff’s application to appeal was hindered by an expired time period and, on 11 December 2009, the Supreme Court of Cassation held a closed hearing on that issue, and thereafter denied plaintiff’s request for a restoration of the expired time period. This latest decision remains subject to appeal.

Canada
In the Knight class-action brought against ITCAN 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 ITCAN. 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 ITCAN. ITCAN joined the federal Government of Canada pursuant to a Third Party Claim and the federal Government, in turn, filed a motion to strike the claim. The court subsequently dismissed the federal Government from the action. ITCAN appealed that order, and its appeal was consolidated with a similar appeal in the British Columbia recoupment litigation (see above). On 8 December 2009, the British Columbia Court of Appeal handed down its decision in the Medicaid and Knight cases. In the Knight case, the court held that it was not plain and obvious that firstly, the Federal Government did not owe a duty of care to tobacco manufacturers when it implemented its tobacco control strategy and secondly, that it was not plain and obvious that the Federal Government did not owe a duty of care to the members of the class. On 8 February 2010, the Federal Government sought leave to appeal this decision.

A similar ‘lights’ and ‘mild’ class-action claim has been filed in Newfoundland against ITCAN, who 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 ITCAN subsequently received plaintiffs’ notice for leave to appeal. Plaintiff’s application for leave to appeal was heard in November 2009 and a decision is now awaited.

There are currently two class-actions in Quebec against ITCAN. On 21 February 2005, the Quebec Superior Court granted certification. 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. ITCAN is currently in discovery and case management.

In August 2009, the Ragoonanan proposed class action against ITCAN in Ontario was dismissed. It 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. A further appeal was dismissed on 26 August 2009, thus ending the litigation.

In June 2009, four class-actions were filed in Nova Scotia, Manitoba, Saskatchewan and Alberta naming Investments, Industries, Ryesekks Plc, ITCAN and certain former Rothmans Group companies. There are service issues in relation to the UK-based Group companies for Alberta and Manitoba. In Saskatchewan, the UK-based Group companies have served notices of motion challenging jurisdiction and these motions are due to be heard on 11 and 12 March 2010. Proceedings in these four class-actions have also been served on ITCAN.

Colombia
On 2 September 2009, a ‘consumer popular’ (‘acción popular’) action was brought by Sandra Florez against BAT South America. The ruling held that an “acción popular” is not an action for damages and that BAT neither threatened nor violated any “collective right”, but instead acted in accordance with the law without misrepresenting the risks of “light” cigarettes. Plaintiff did not appeal this ruling and the decision is now final.

Israel
In May 2008, nine 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 (Globrands Agencies). 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 £12.8 billion) in monetary damages. In January 2009, the Tel Aviv District Court denied plaintiffs’ motion for a temporary restraining order prohibiting defendants from marketing and selling low-yield products in Israel. On 3 December 2009, Globrands Agencies sought an order from the court requiring the three plaintiffs who smoked British American Tobacco brand cigarettes to deposit NIS200,000 (approximately £33,000) each as a guarantee against trial costs. On 28 December 2009, the judge granted this motion, requiring the three plaintiffs to deposit jointly the amount of NIS100,000 (approximately £16,000) by 19 January 2010. As a result of this decision, the remaining defendants filed similar applications. A pre-trial hearing was scheduled for 20 January 2010, to resolve all outstanding preliminary issues and discuss the schedule for a hearing on class certification. Since the three plaintiffs did not deposit the guarantee, the court ordered, during the pre-trial hearing on 20 January 2010, that the action against Globrands Agencies be dismissed without prejudice. The three plaintiffs that smoked British American Tobacco brand cigarettes are seeking leave to appeal the deposit decision to the Israeli Supreme Court, a motion that remains pending.

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. notified the court of its intention to appear as a third party whose rights may be affected by the proceedings, as provided under the procedural law. A public hearing to determine its status as a third party has yet to be scheduled.

(c) Individual cases

Australia
In 2006, proceedings were instituted by Donald Laurie in the Dust Diseases Tribunal (DDT) against British American Tobacco Australia Services Limited (BATAS), the Commonwealth of Australia and an asbestos manufacturer, alleging tobacco and asbestos-related illness. In November 2009, BATAS sought an order in the New South Wales Court of Appeal for the recusal of the judge appointed to hear the matter, having been unsuccessful at obtaining such relief from the DDT. On 17 December 2009, the Court of Appeal delivered its judgement against BATAS, denying its bid to recuse the trial judge. BATAS has now made an application for special leave to appeal the recusal decision to the High Court of Australia. While BATAS’s appeals have been pending, plaintiff has chosen not to prosecute the underlying claims in the DDT.

In January 2009, proceedings were commenced by Terry Gottlieb in the Supreme Court of Victoria against various BAT Group companies and other tobacco companies alleging smoking and passive smoking-related illness. These proceedings were discontinued on 27 October 2009.

In 2001, proceedings were instituted by Rolah Ann McCabe in the Supreme Court of Victoria against BATAS. Findings were made against BATAS in March, April and May 2002 by the trial court. These findings were overturned by the Victorian Court of Appeal in December 2002 and March 2003. An application for special leave to appeal to the High Court of Australia by the McCabe estate was refused in October 2003. Since that time, the case has largely been dormant. As of 19 November 2009, BATAS has been awarded AUS$1,102,378.45 (approximately £600,000) in costs (out of AUS$2,098,693 claimed (approximately £1.2 million)) arising out of the trial and the appeals before the Victorian Court of Appeal.

In November 2006, BATAS commenced proceedings against Slater & Gordon (an Australian plaintiff law firm who represented the plaintiff in the McCabe case (see above)) in a matter relating to the leaking of legal documents to the press and public. British American Tobacco Australia Limited commenced parallel proceedings against Slater & Gordon and Peter Gordon (a partner of the firm) regarding the same matter. In early 2007, Roxanne Cowell (executrix of the McCabe estate) was joined as a defendant in each proceeding. The proceedings are before the Victorian Supreme Court. On 15 December 2009, the respective proceedings against Slater & Gordon and Peter Gordon were resolved in favour of BATAS and British American Tobacco Australia Limited, with costs to be determined after the proceedings against Roxanne Cowell are resolved.

Brazil
As of 31 December 2009, there were approximately 312 (2008: 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 598 individual cases have been filed in Brazil against Souza Cruz. Approximately 16 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
Four individual smoking and health cases have been filed in Canada. Of these, two (Battaglia and Landry) have been in abeyance since 2004 and 2003 respectively. A third (Spasic) is active and currently at a preliminary stage. One smoking and health case (Stright) has been filed in Nova Scotia but had previously been in abeyance since 2005. The parties have been summoned to appear before the court where it is anticipated that the plaintiff will advance its case to avoid the claim being quashed.

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. In March 2009, plaintiff’s appeal period lapsed, making the Civil Court of Santiago’s decision final. There are eight smoking and health claims pending against Chiletabacos that have not been decided yet. The most recent smoking and health claim against Chiletabacos was purportedly served on 15 January 2010 and was brought by the estate of a smoker who allegedly died as a result of lung cancer.

Costa Rica
In February 2006, Mr Jorge Enrique Guerra Ruiz filed a claim against, among others, British American Tobacco Central America S.A. (Costa Rica branch) (BAT Costa Rica), alleging improper use of terms in language other than the official country language (Spanish) on cigarette packs. BAT Costa Rica was cleared of Mr Ruiz’s allegations in October 2009, except for the Consumer Defence Commission’s finding that it was liable to a fine for the use of ‘light’. This decision has been challenged by BAT Costa Rica.

Denmark
In 2003, a claim was filed against House of Prince A/S and Skandinavisk Tobakskompagni A/S claiming €65,000 (approximately £58,000) (plus damages and costs) for damages to health including addiction, arising from allegations of failure to warn, defective design, and product manipulation. The trial has been postponed until at least late 2010.

Finland
On 10 October 2008, following a consolidated trial, the Helsinki District Court dismissed three 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 (approximately £100,000). In December 2008, plaintiffs appealed the District Court’s decisions in their entirety but one plaintiff (Lindroos) has subsequently withdrawn her appeal. Trial of the action before the Court of Appeal began on 31 August 2009 and concluded on 7 December 2009. A decision of the court is expected from the Court of Appeal in May 2010.

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. One case (McCormack) was dismissed by judgment perfected on 17 July 2007, but plaintiff has filed a notice of appeal and no date for the appeal has yet been set. 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 2009, there were approximately 226 individual ‘lights’ cases in Italy pending against British American Tobacco Italia S.p.A. (2008: 1,672). Almost 75 per cent of the individual ‘lights’ cases filed in Italy are pending before lower level (Justices of the Peace) courts, with the remainder on appeal. Because of the type of court involved, the maximum possible recovery in damages is €1,033 (approximately £900) (plus legal fees and costs). 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 2009, approximately 1,128 cases (not including the Pescopagano cases) have been suspended or dismissed. There are 38 individual smoking and health cases pending before Italian Civil Courts (including eight cases on appeal, which includes both the seven cases pending before the Court of Appeal and the one case pending before the Supreme Court), in which it is contended that the smokers’ diseases or deaths were caused by cigarette smoking.

Kenya
In October 2002, a plaintiff commenced a smoking and health case against British American Tobacco Kenya Limited. Since November 2007, the parties have been engaged in a dispute over plaintiff’s failure to produce requested discovery.

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 Western Europe Area II B. V. and British American Tobacco Manufacturing B.V. Plaintiff had until 18 March 2009 to appeal the dismissal but failed to do so. Therefore the decision is now final.

Poland
A claim for PLN50,000 (approximately £11,000) was brought by an incarcerated plaintiff and served on British American Tobacco Polska S.A. in March 2009, alleging addiction and unspecified health losses. The plaintiff moved to voluntarily withdraw the claim in November 2009 and a decision from the court regarding costs and discontinuation of proceedings is currently pending.

Sri Lanka
In 2003, a plaintiff filed a smoking and health claim against Ceylon Tobacco Company Limited (CTC). CTC filed preliminary objections which were rejected by the District Court and Court of Appeal. Leave to appeal to the Supreme Court was granted and the appeal will be heard on 11 May 2010.

(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 on 13 January 2009 the dismissal was reversed on appeal. Leave to appeal this decision was refused but the case was remitted to the district court for a hearing on the merits and on 25 March 2009 was dismissed in full. Plaintiff’s appeal, heard on 16 June 2009, upheld the first instance decision and plaintiff had until 16 December 2009 to lodge a further appeal. No appeal was filed.

Other litigation outside the US

Regulatory and Constitutional Challenges

In 2009, there were regulatory and constitutional challenges in Brazil, Canada (Quebec), South Africa, Paraguay, Turkey and Uruguay. In Brazil, a regulatory challenge was brought by Souza Cruz against the National Surveillance Health Agency (ANVISA). This action mainly challenged the legality of the images of new health warnings and sought an injunction to suspend the effects of the resolution that established these images until a final decision is issued on the merit of the case. Although initially granted, the injunction was later disregarded by the Court of Appeal. A first instance decision is pending. In Quebec, ITCAN and other Canadian manufacturers filed a constitutional challenge of the Quebec Medicaid Legislation. The Attorney-General of Quebec has filed a motion to dismiss the challenge and this motion will be heard on 8 to 9 April 2010. In South Africa, in September 2009, a constitutional challenge was commenced by British American Tobacco South Africa (Pty) Ltd against the Ministry of Health. This challenge relates to one to one communications between tobacco manufacturers (together with importers, wholesalers and retailers) and consenting adult tobacco consumers. Further regulatory challenges in Turkey, Paraguay and Uruguay have also been instituted to challenge certain health warning, and tobacco product packaging and labelling requirements.

Canada
On 9 December 2009, ITCAN was served with a class action filed by Ontario tobacco farmers and the Provincial Marketing Board, which alleges that between 1989 and 1994 ITCAN improperly paid lower prices for tobacco leaf destined for duty-free products, as opposed to the higher domestic leaf price.

Russia
In September 2008, a new action was commenced by a minority shareholder of Yava in relation to approval of interested-party transactions. The claim was filed by Branston Holdings Ltd. and its value was 4,362,537,236 roubles (approximately £89.1 million). The claim was filed against British American Tobacco Holdings (Russia) BV, whereas Yava was a third party to the case. We have been informed that Branston has filed an application with the court to withdraw its claims in full. The next hearing is currently planned for 22 April 2010, at which the issue of withdrawal of the claim and consequent termination of the proceedings will be examined by the court.

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 £nil (2008: £1 million).

Operating leases

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