c) Individual cases
Approximately 3,471 cases were pending against B&W at 31 December 2006 (2005: 3,767) 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: (a) approximately 75 per cent 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) approximately 20 per cent of the individual cases against B&W are cases brought in consolidated proceedings in West Virginia; and (c) only about 5 per cent are cases filed by other individuals.
Of the individual cases that went to trial or were decided or remained on appeal during 2006, several resulted in verdicts against B&W:
In November 2003, a Missouri jury (Thompson) awarded US$210,000 damages against B&W. A notice of appeal was filed on 8 March 2004. Oral argument before the Missouri Court of Appeals was heard on 3 November 2005. The Missouri Court of Appeals affirmed the judgment on all points on 22 August 2006. B&W moved before the Missouri Court of Appeals to transfer this appeal to the Missouri Supreme Court on 6 September 2006. B&W's motion was denied by the Missouri Court of Appeals on 26 September 2006. On 10 October 2006, B&W filed an application with the Missouri Supreme Court for transfer of this action to the Missouri Supreme Court. The Missouri Supreme Court denied B&W's application on 19 December 2006.
In December 2003, a New York jury (Frankson) awarded US$350,000 compensatory damages against B&W and two industry organisations. In January 2004, the same jury awarded US$20 million punitive damages. On 22 June 2004, the trial judge granted a new trial unless the parties agreed to an increase in compensatory damages to US$500,000 and a decrease in punitive damages to US$5 million, of which US$4 million would be assigned to B&W. Plaintiffs agreed to a decrease in punitive damages, but B&W has not agreed to an increase in compensatory damages. On 25 January 2005, B&W appealed to an intermediate New York State appellate court. Oral argument was heard on 8 May 2006. The appellate court affirmed the judgment on 5 July 2006. B&W filed a motion for leave to reargue, or in the alternative, for leave to appeal to the New York Court of Appeals, on 3 August 2006. The intermediate appellate court denied this motion on 5 October 2006. On 8 December 2006, the trial judge granted plaintiff's application for entry of judgment, and granted plaintiff's motion to vacate that part of the 2004 order granting a new trial unless the parties agreed to an increase in compensatory damages to US$500,000. B&W intends to seek further appellate review of the trial court's judgment.
On 1 February 2005, a Missouri jury (Smith) awarded US$500,000 in compensatory damages against B&W and then, on 2 February 2005, awarded US$20 million in punitive damages, also against B&W. On 1 June 2005, B&W filed its notice of appeal. B&W filed its opening appellate brief on 28 April 2006. Oral argument was heard on 31 August 2006 and a decision is awaited.
On 18 March 2005, a New York jury (Rose) awarded US$1.7 million in compensatory damages against B&W. On 18 August 2005, B&W filed its notice of appeal. RJRT posted a bond in the approximate amount of US$2.058 million on 7 February 2006. Oral argument on this appeal was heard on 12 December 2006 by an intermediate New York appellate court, which reserved decision.
d) Other claims
The Flintkote Company (Flintkote), a US asbestos production and sales company, was included in the acquisition of Genstar Corporation by Imasco in 1986 and became a Group subsidiary following the restructuring of Imasco Limited (now Imperial Tobacco Canada Limited (Imperial)) 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 that sufficient assets would remain to satisfy liabilities, Flintkote and Imasco authorised the payment of two dividends. 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, certain representatives of both the present and future asbestos claimants as well as certain individual asbestos claimants were permitted by the bankruptcy court to file a complaint against Imperial and numerous other defendants for the recovery of the dividends and other compensation under various legal theories. The parties are presently engaged in case management discussions to establish the scope and manner of discovery in this case. This litigation is expected to take several years to proceed to trial.
At 31 December 2006, no cases (2005: 1) were pending against B&W on behalf of asbestos companies. In these cases, certain asbestos companies sought reimbursement for costs and judgments paid in litigation brought by third parties against them. These companies claimed that, but for the smoking of the claimants, their damages would have been less. The final asbestos contribution claim (Fibreboard) was voluntarily dismissed by plaintiffs on 28 July 2006.
In Wisconsin, the authorities have identified potentially responsible parties to fund the clean up of the Fox River, Wisconsin. The pollution was caused by discharges of toxic material from paper mills operating close to the river. The cost of the clean up work is currently estimated to be in the order of US$600 million. Among the potentially responsible parties are NCR Corporation and Appleton Papers Inc. who may be liable for a proportion of the clean up costs. B.A.T Industries p.l.c. purchased what was then NCR's Appleton Papers Division from NCR Corporation and spun off this business in 1990, obtaining full indemnities from Appleton Papers Inc. for past and future environmental claims. Disputes between NCR Corporation and B.A.T Industries p.l.c. as to the indemnities given and received under the purchase agreement in 1978 have been the subject of arbitration in 1998 and 2006. Under the terms of the arbitration awards, B.A.T Industries p.l.c. has an obligation to share the costs of environmental claims with NCR Corporation, but has never been required to pay any sums in this regard because Appleton Papers Inc. has paid any sums demanded. It is believed that all future environmental liabilities will continue to be met directly by Appleton Papers Inc. by self-funding or insurance cover and no demand will be made upon B.A.T Industries p.l.c. by NCR Corporation.
Settlement of state health care reimbursement cases
During 2003, agreement was reached on certain disputed MSA payments relating to MSA calculations based on 1999 and 2000 sales. This agreement resulted in a benefit of £27 million which is excluded from the 2003 costs shown in the consolidated audited annual accounts of the Company for the financial year ended 31 December 2004. In other developments, after an Independent Auditor found that the terms of the MSA were a 'significant factor' in market share losses experienced by signatories to the MSA in 2003, several US tobacco companies, including B&W, asserted their rights under the NPM (or Non-Participating Manufacturer) Adjustment provision of the MSA to recover a payment credit or offset - against their April 2006 payment obligations - for MSA payments made in April 2004 in respect of cigarettes shipped or sold in the US in 2003. The amount at stake exceeds US$1 billion. The settling states oppose these MSA payment reduction claims and, in late April 2006, began filing motions in MSA courts across the country seeking enforcement of certain MSA provisions and a declaration of the parties' rights under the NPM Adjustment provision of the MSA. Defendants have opposed these motions, arguing that their NPM Adjustment claims must go instead to arbitration. To date, the overwhelming majority of MSA courts to decide these motions have ruled in defendants' favour.
UK-based Group companies
At 31 December 2006, B.A.T Industries p.l.c. was a defendant in the US in one class action, the Schwab case mentioned previously. In that case, B.A.T Industries p.l.c. was substituted for British American Tobacco p.l.c. as a defendant. In the West Virginia consolidated smoking and health cases, the court so-ordered the parties' stipulation and order dismissing B.A.T Industries p.l.c. from the action, with prejudice, on 12 December 2006. This is a significant decision as B.A.T Industries p.l.c. was previously a defendant in around 1,000 consolidated individual cases in West Virginia. British American Tobacco (Investments) Limited has been dismissed from those West Virginia consolidated smoking and health cases in which it was a defendant. British American Tobacco (Investments) Limited had been served in one reimbursement case (City of St. Louis), the Department of Justice case (see below), two class actions (Cleary and Schwab), and three individual actions.
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 RJRT, B&W, B.A.T Industries p.l.c., and British American Tobacco (Investments) Limited. B.A.T Industries p.l.c. was dismissed for lack of personal jurisdiction on 28 September 2000. The Government sought to recover federal funds expended in providing healthcare to smokers who have developed diseases and injuries alleged to be smoking-related, and, in addition, sought, pursuant to the federal Racketeer Influenced and Corrupt Organisations Act (RICO), disgorgement of profits the Government contends were earned as a consequence of a RICO 'enterprise'. On 28 September 2000, the portion of the claim which sought recovery of federal funds expended in providing healthcare to smokers who have developed diseases and injuries alleged to be smoking-related was dismissed. The bench (non-jury) trial of the RICO portion of the claim began on 21 September 2004, and ended on 9 June 2005. On 17 November 2004, the Washington DC Circuit Court of Appeals heard an appeal by defendants against an earlier District Court decision that disgorgement of profits is an appropriate remedy to the RICO violations alleged by the Government. On 4 February 2005, the Court of Appeals allowed the appeal, ruling that the Government could not claim disgorgement of profits. On 17 October 2005, the US Supreme Court declined to hear the appeal by the US Government in respect of the claim for disgorgement of US$280 billion of past profits from the US tobacco industry. The disgorgement claim was a centrepiece of the Government's claim.
On 17 August 2006, the district court issued its final judgment, consisting of some 1,600 pages of factual findings and legal conclusions. The court found in favour of the Government, and against certain defendants, including B&W and British American Tobacco (Investments) Limited. The court also ordered a wide array of injunctive relief, including a ban on the use of 'lights' and other similar descriptors with effect from 1 January 2007. Compliance with the court-ordered remedies may cost RJRT and British American Tobacco (Investments) Limited millions of dollars. In addition, the Government is seeking the recovery of roughly US$1.9 million in litigation costs. Defendants filed a motion to stay enforcement of the judgment shortly after the judgment was issued. The court denied defendants' stay motion on 28 September 2006. Defendants, including B&W and British American Tobacco (Investments) Limited, filed their notices of appeal to the Washington DC Circuit Court of Appeals on 11 September 2006, and filed an emergency motion to stay the judgment before the same court on 29 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.
Various departments of the Republic of Colombia brought actions against various tobacco companies including B&W and other UK-based Group companies alleging that defendants engaged in cigarette smuggling and money laundering in their territories. Each of these actions sought compensatory, punitive and treble damages. Defendants' motion to dismiss the complaint was granted in 2002 and plaintiffs appealed. The US Court of Appeals for the Second Circuit affirmed the dismissals, and on 9 January 2006, the US Supreme Court denied plaintiffs' petition for a writ of certiorari.
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, British American Tobacco (Investments) Limited and certain other tobacco companies seeking injunctive relief, treble damages, interest and costs. The allegations are that the defendants participated in a conspiracy to fix or maintain the price of cigarettes sold in the US, including the State of Kansas, in violation of the Kansas Restraint of Trade Act. The matter will be defended vigorously.