SMOKING AND HEALTH LITIGATION
[ALTRIA]
The following lists the consolidated individual smoking and health
cases as well as smoking and health
class actions pending against PM
USA and, in some cases, Altria Group, Inc. and/or its other
subsidiaries and affiliates, as of May 1, 2009, and describes certain
developments in these cases since February 27, 2009.
Consolidated Individual Smoking and Health Cases
In re: Tobacco Litigation (Individual Personal Injury cases),
Circuit Court, Ohio County, West Virginia, consolidated January 11,
2000.
In West Virginia, all smoking and health cases in state court alleging
personal injury have been transferred to the State's Mass Litigation
Panel. The transferred cases include individual cases and putative
class
actions. All individual cases filed in or transferred to the
court by September 13, 2000 were consolidated for pretrial proceedings
and trial. John Middleton Co. and U.S. Smokeless Tobacco Company were
named as defendants in this action but they, along with other
non-cigarette manufacturers, have been severed from this case.
Currently pending are 728 civil actions (of which 414 are actions
against PM USA). In December 2005, the West Virginia Supreme Court of
Appeals ruled that the United States Constitution does not preclude a
trial in two phases in this case. Issues related to defendants'
conduct, plaintiffs' entitlement to punitive damages and a punitive
damages multiplier, if any, would be determined in the first phase. The
second phase would consist of individual trials to determine liability,
if any, and compensatory damages. In May 2007, the trial court denied
defendants' motion to vacate the trial court's trial plan based on the
United States Supreme Court's decision in
Williams v. Philip Morris
. In November 2007, the West Virginia Supreme Court of Appeals denied
defendants' renewed motion for review of the trial plan. In December
2007, defendants filed a petition for
writ of certiorari
with the United States Supreme Court, which was denied in February
2008. The first phase of the trial is scheduled for February 1, 2010.
Flight Attendant Litigation
The settlement agreement entered into in 1997 in the case of
Broin, et al. v. Philip Morris Companies Inc., et al.
, which was brought by flight attendants seeking damages for personal
injuries allegedly caused by environmental tobacco smoke, allows
members of the
Broin
class to file individual lawsuits seeking compensatory damages, but
prohibits them from seeking punitive damages. In October 2000, the
trial court ruled that the flight attendants will not be required to
prove the substantive liability elements of their claims for
negligence, strict liability and breach of implied warranty in order to
recover damages, if any, other than establishing that the plaintiffs'
alleged injuries were caused by their exposure to environmental tobacco
smoke and, if so, the amount of compensatory damages to
-1-
Exhibit 99.1
be awarded. Defendants' initial appeal of this ruling was dismissed as
premature. Defendants appealed the October 2000 rulings in connection
with their appeal of the adverse jury verdict in the
French
case. In December 2004, the Florida Third District Court of Appeal
affirmed the judgment awarding plaintiff in the
French
case (
Lorillard Tobacco Co. v. French
) $500,000, and directed the trial court to hold defendants jointly and
severally liable. Defendants' motion for rehearing was denied in April
2005. In December 2005, after exhausting all appeals, PM USA paid
$328,759 (including interest of $78,259) as its share of the judgment
amount and interest in
French
and, although plaintiffs may still contest the amount, in August 2007,
PM USA paid $229,293.11 (including interest of $7,380.48) representing
its share of attorneys' fees. PM USA, in March 2008, paid additional
attorneys' fees of $4,700. PM USA has a remaining reserve for
French
of approximately $437,000. In November 2007, a jury found in favor of
the defendants in a case brought by a flight attendant. As of May 1,
2009, 2,620 cases were pending in the Circuit Court of Dade County,
Florida against PM USA and three other cigarette manufacturers.
Domestic
Class Actions
Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court,
Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994.
See Note 13.
Contingencies,
for a discussion of this case and the
Engle
-progeny litigation.
Scott, et al. v. The American Tobacco Company, et al., Civil
District Court, Orleans Parish, Louisiana, filed May 24, 1996.
See Note 13.
Contingencies,
for a discussion of this case.
Young, et al. v. The American Tobacco Company, et al., Civil
District Court, Orleans Parish, Louisiana, filed November 12, 1997.
Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha
County, West Virginia, filed February 27, 1998.
Cypret, et al. v. The American Tobacco Company, et al., Circuit
Court, Jackson County, Missouri, filed December 22, 1998.
Simms, et al. v. Philip Morris Incorporated, et al., United States
District Court, District of Columbia, filed May 23, 2001
. In May 2004, plaintiffs filed a motion for reconsideration of the
court's 2003 ruling that denied their motion for class certification.
In September 2004, plaintiffs renewed their motion for reconsideration.
This motion was denied by the court in December 2006.
Caronia, et al. v. Philip Morris USA, Inc., United States District
Court, Eastern District of New York, filed January 13, 2006.
See Note 13.
Contingencies
, for a discussion of this case.
Donovan, et al. v. Philip Morris, United States District Court,
District of Massachusetts, filed March 2, 2007.
See Note 13.
Contingencies
, for a discussion of this case.
Peoples, et al. v. Reynolds America, Inc. et al., United States
District Court, Northern District, Georgia, filed November 17, 2008.
See Note 13.
Contingencies,
for a discussion of this case.
HEALTH CARE COST RECOVERY LITIGATION
The following lists the health care cost recovery actions pending
against PM USA and, in some cases, Altria Group, Inc. and/or its other
subsidiaries and affiliates as of May 1, 2009 and describes certain
developments in these cases since February 27, 2009.
As discussed in Note 13.
Contingencies,
in 1998, PM USA and certain other United States tobacco product
manufacturers entered into a Master Settlement Agreement (the "MSA")
settling the health care cost recovery claims of 46 states, the
District of Columbia, the Commonwealth of Puerto Rico, Guam, the United
States Virgin Islands, American Samoa and the Northern Marianas.
Settlement agreements settling similar claims had previously been
entered into with the states of Mississippi, Florida, Texas and
Minnesota. PM USA believes that some or all of the claims in certain of
the health care cost recovery actions listed below are released in
whole or in part by the MSA, or that recovery in any such actions
should be subject to the offset provisions of the MSA.
-2-
Exhibit 99.1
City of St. Louis Case
City of St. Louis, et al. v. American Tobacco, et al., Circuit
Court, City of St. Louis, Missouri, filed November 23, 1998
. In November 2001, the court granted in part and denied in part
defendants' motion to dismiss and dismissed three of plaintiffs' eleven
claims. In June 2005, the court granted in part defendants' motion for
summary judgment limiting plaintiffs' claims for past compensatory
damages to those that accrued after November 16, 1993, five years prior
to the filing of the suit. The trial is scheduled to begin in June 2010.
Department of Justice Case
The United States of America v. Philip Morris Incorporated, et al.,
United States District Court, District of Columbia, filed September 22,
1999
. See Note 13.
Contingencies
,
for a discussion of this case.
International Cases
Kupat Holim Clalit v. Philip Morris USA, et al., Jerusalem District
Court, Israel, filed September 28, 1998
. Defendants' motion to dismiss the case was denied by the district
court. In June 2004, defendants filed a motion with the Israel Supreme
Court for leave to appeal. The appeal was heard by the Supreme Court in
March 2005, and the parties are awaiting the court's decision.
Her Majesty the Queen in Right of British Columbia v. Imperial
Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver
Registry, Canada, filed January 24, 2001
. In June 2003, the trial court granted defendants' motion to dismiss
the case, and plaintiff appealed. In May 2004, the appellate court
reversed the trial court's decision. Defendants appealed. In September
2005, the Supreme Court of Canada ruled that the legislation permitting
the lawsuit is constitutional, and, as a result, the case will proceed
before the trial court. On September 15, 2006, the British Columbia
Court of Appeal rejected PM USA's motion seeking dismissal from the
case on jurisdictional grounds. In April 2007, the Supreme Court of
Canada denied PM USA's motion seeking leave to appeal. At the request
of the parties, the trial date tentatively scheduled for September 2010
has been cancelled. No new trial date has been set.
Her Majesty the Queen in Right of the Province of New Brunswick v.
Rothmans, Inc. et al., Court of the Queen's Bench, New Brunswick,
Fredericton, Canada, filed March 13, 2008.
The complaint alleges deceit and misrepresentation, failure to warn,
marketing to minors, negligent design and manufacture, conspiracy and
concerted actions and seeks reimbursement for past, present and future
healthcare costs of individuals with tobacco-related injuries.
See Note 13.
Contingencies
,
for a discussion of the Distribution Agreement between Altria Group,
Inc. and PMI, which provides for indemnities for certain liabilities
concerning tobacco products.
Medicare Secondary Payer Act Case
National Committee to Preserve Social Security and Medicare, et al.
v. Philip Morris USA, et al., United States District Court, Eastern
District, New York filed May 20, 2008.
This action was brought under the Medicare as Secondary Payer statute
and purports to be brought on behalf of Medicare to recover an
unspecified amount of damages equal to double the amount paid by
Medicare for smoking-related health care services provided from May 21,
2002 to the present. In July 2008, defendants filed a motion to dismiss
plaintiffs' claims and plaintiffs filed a motion for partial summary
judgment. On March 5, 2009, the court granted defendant's motion to
dismiss. Plaintiffs filed a motion seeking reconsideration of the March
5 order. On April 24, 2009, the court denied plaintiffs' motion for
reconsideration.
"LIGHTS/ULTRA LIGHTS" CASES
The following lists the "Lights/Ultra Lights" cases pending against
Altria Group, Inc. and/or its various subsidiaries and others as of May
1, 2009, and describes certain developments since February 27, 2009.
Cleary, et al. v. Philip Morris Incorporated, et al., United States
District Court, Northern District, Illinois, filed June 3, 1998.
In April 2006, defendants' motion to dismiss a nuisance claim was
granted. In July 2006, plaintiffs filed a motion for class
certification. In March 2009, plaintiffs amended their complaint to
assert claims on behalf
-3-
Exhibit 99.1
of an additional sub-class of smokers of "Lights" cigarettes. On March
13, 2009, the case was removed to federal court. In April 2009,
plaintiffs filed a motion to remand the case to state court.
Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris
Incorporated, Superior Court, Suffolk County, Massachusetts, filed
November 24, 1998
. In October 2001, the court granted plaintiffs' motion for class
certification, and defendants appealed. In May 2003, the single Justice
sitting on behalf of the Massachusetts Court of Appeals decertified the
class. In August 2004, Massachusetts' highest court affirmed the trial
court's ruling and reinstated the class certification order. In August
2006, the trial court denied PM USA's motion for summary judgment and
granted plaintiffs' motion for summary judgment on the defenses of
federal preemption and a state law exemption to Massachusetts' consumer
protection statute. On motion of the parties, the trial court reported
its decision to deny summary judgment to the appeals court for review,
and stayed further proceedings pending completion of the appellate
review. Motions for direct appellate review by the Massachusetts
Supreme Judicial Court were granted in April 2007. In December 2008,
subsequent to the United States Supreme Court's decision in
Good, et al. v. Altria Group, Inc., et al.
("
Good
"), the Massachusetts Supreme Judicial Court issued an order requesting
that the parties advise the court within 30 days whether the
Good
decision is dispositive of federal preemption issues pending on appeal.
In January 2009, PM USA notified the Massachusetts Supreme Judicial
Court that
Good
is dispositive of the federal preemption issues on appeal, but
requested further briefing on the state law statutory exemption issue.
In February 2009, with the permission of the Supreme Judicial Court,
the parties submitted briefs on the impact of
Good
on the state exemption issue. On March 16, 2009, the Massachusetts
Supreme Judicial Court affirmed the order that denied summary judgment
to PM USA and granted plaintiffs' cross-motion.
Marrone v. Philip Morris Companies, Inc., et al., Court of Common
Pleas, Medina County, Ohio, filed November 8, 1999.
Price, et al v. Philip Morris Inc., Circuit Court, Third Judicial
Circuit, Madison County, Illinois, filed February 10, 2000.
Craft, et al. v. Philip Morris Companies Inc., et al., Circuit
Court, City of St. Louis, Missouri, filed February 15, 2000
. In December 2003, the trial court granted plaintiffs' motion for
class certification. In September 2004, the court granted in part and
denied in part PM USA's motion for reconsideration. In August 2005, the
Missouri Court of Appeals affirmed the trial court's class
certification order. The court has set a trial date of January 11,
2011, which could be advanced to June 2010.
Hines, et al. v. Philip Morris Companies Inc., et al., Circuit
Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed
February 23, 2001
. In February 2002, the court granted plaintiffs' motion for class
certification, and defendants appealed. In December 2003, a Florida
District Court of Appeal decertified the class. In March 2004,
plaintiffs filed a motion for rehearing,
en banc
review or certification to the Florida Supreme Court. In December 2004,
the Florida Supreme Court stayed further proceedings pending the
resolution of the
Engle
case discussed in Note 13.
Contingencies
. In January 2008, the Florida Supreme Court rejected plaintiffs'
petition for further review.
Phillips v. Philip Morris Companies, Inc., et. al., Court of Common
Pleas, Medina County, Ohio, filed May 4, 2001.
Moore, et al. v. Philip Morris Incorporated, et al., Circuit Court,
Marshall County, West Virginia, filed September 17, 2001.
Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth
Judicial District Court, Minnesota, filed November 28, 2001
. In April 2005, the Minnesota Supreme Court denied defendants'
petition for interlocutory review of the trial court's class
certification order. Plaintiffs filed a motion for partial summary
judgment in February 2009 claiming collateral estoppel from the
findings in the case brought by the Department of Justice (above). The
court has set a trial date of October 25, 2010.
Tremblay, et al. v. Philip Morris Incorporated, Superior Court,
Rockingham County, New Hampshire, filed March 29, 2002.
The case has been consolidated with another "Lights/Ultra Lights" case
and has been informally stayed.
-4-
Exhibit 99.1
Pearson v. Philip Morris Incorporated, et al., Circuit Court,
Multnomah County, Oregon, filed November 20, 2002
. In October 2005, plaintiffs' motion for class certification on behalf
of all purchasers of
Marlboro Lights
in Oregon was denied. In addition, PM USA's motion for summary judgment
with respect to reliance "from the time that plaintiff learned of the
alleged fraud and continued to purchase Lights" cigarettes was granted.
In November 2005, plaintiffs filed a motion with the trial court to
have its order denying class certification certified for interlocutory
appellate review. In March 2006, plaintiffs petitioned the Oregon Court
of Appeals to review the trial court's order denying plaintiffs' motion
for class certification. In October 2006, the Oregon Court of Appeals
denied plaintiffs' petition for review. In February 2007, PM USA filed
a motion for summary judgment based on federal preemption and the
Oregon statutory exemption. In September 2007, the district court
granted PM USA's motion for summary judgment based on express
preemption under the Federal Cigarette Labeling and Advertising Act,
and plaintiffs appealed this dismissal and the March 2006 class
certification denial to the Oregon Court of Appeals. In February 2008,
the parties filed a joint motion to hold the appeal in abeyance pending
the United States Supreme Court's decision in
Good
, which motion was denied.
Virden v. Altria Group, Inc., et al., Circuit Court, Hancock County,
West Virginia, filed March 28, 2003.
Stern, et al. v. Philip Morris USA, Inc., et al., Superior Court,
Middlesex County, New Jersey, filed April 4, 2003.
In March 2006, the court granted PM USA's motion to strike plaintiffs'
class certification motion, and plaintiffs filed a motion for
reconsideration. A renewed motion for class certification was denied in
November 2007.
Arnold, et al. v. Philip Morris USA Inc., Circuit Court, Madison
County, Illinois, filed May 5, 2003.
Watson, et al. v. Altria Group, Inc., et al., Circuit Court, Pulaski
County, Arkansas, filed May 29, 2003.
In January 2006, the court stayed all activity in the case pending the
resolution of plaintiffs' petition for
writ of certiorari
filed with the United States Supreme Court. In June 2007, the United
States Supreme Court reversed the lower court rulings that denied
plaintiffs' motion to have the case heard in a state, as opposed to
federal, trial court. The Supreme Court rejected defendants' contention
that the case must be tried in federal court under the "federal
officer" statute. The case was remanded to the state trial court in
Arkansas.
Holmes, et al. v. Philip Morris USA Inc., et al., Superior Court,
New Castle County, Delaware, filed August 18, 2003.
In June 2006, PM USA filed a motion for summary judgment on preemption
and consumer protection statutory exemption grounds. PM USA later
withdrew this motion, but on April 22, 2009, PM USA filed a renewed
motion for summary judgment on consumer protection statutory exemption
grounds.
El-Roy, et al. v. Philip Morris Incorporated, et al., District Court
of Tel-Aviv/Jaffa, Israel, filed January 18, 2004.
Hearings on plaintiffs' motion for class certification were held in
November and December 2008.
Schwab, et al. v. Philip Morris USA Inc., et al., United States
District Court, Eastern District of New York, filed May 11, 2004
. See Note 13.
Contingencies,
for a discussion of this case.
Miner, et al. v. Altria Group, Inc., et al., Circuit Court, Franklin
County, Arkansas, filed December 29, 2004.
In December 2005, plaintiffs moved for certification of a class
composed of individuals who purchased
Marlboro Lights
or
Cambridge Lights
brands in Arizona, California, Colorado and Michigan. PM USA's motion
for summary judgment is pending. After the motion was filed, plaintiffs
moved to voluntarily dismiss the case without prejudice, which PM USA
opposed. The court then stayed the action pending the United States
Supreme Court's ruling on plaintiffs' petition for
writ of certiorari
in
Watson,
described above. In July 2007, the case was remanded to a state trial
court in Arkansas. In August 2007, plaintiffs renewed their motion for
class certification. In October 2007, the court denied PM USA's motion
to dismiss the case on procedural grounds and the court entered a case
management order.
Mulford, et al. v. Altria Group, Inc., et al., United States
District Court, New Mexico, filed June 9, 2005
. On March 16, 2007, the federal district court granted in part PM
USA's motion for summary judgment, ruling that plaintiffs' claims of
fraudulent concealment, failure to warn and warning neutralization are
expressly preempted by the Federal Cigarette Labeling and Advertising
Act. The court otherwise denied PM USA's motion for summary judgment on
express preemption under the Federal Cigarette Labeling and Advertising
Act, implied federal preemption and the statutory exemption from
liability under the New Mexico Unfair Practices Act, with respect to
-5-
Exhibit 99.1
plaintiffs' claims that PM USA made false statements about "Lights"
cigarettes on its packages. On March 30, 2007, PM USA filed a motion
for reconsideration of the part of the court's order denying PM USA's
motion for summary judgment. In March 2007, the federal district court
denied plaintiffs' amended motion for class certification. In June
2007, plaintiffs renewed their motion for class certification, which
motion was denied by the federal district court on March 30, 2009, with
leave to file a new motion for class certification.
Good, et al. v. Altria Group, Inc., et al., United States District
Court, Maine, filed August 15, 2005.
In May 2006, the federal trial court granted PM USA's motion for
summary judgment on the grounds that plaintiffs' claims are preempted
by the Federal Cigarette Labeling and Advertising Act and dismissed the
case. In June 2006, plaintiffs appealed to the United States Court of
Appeals for the First Circuit. In August 2007, the United States Court
of Appeals for the First Circuit vacated the district court's grant of
PM USA's motion for summary judgment in the
Good
case on federal preemption grounds and remanded the case to district
court. The district court stayed proceedings pending the ruling of the
United States Supreme Court on defendants' petition for a
writ of certiorari
, which was granted in January 2008. The United States Supreme Court
heard oral argument in October 2008. In December 2008, the United
States Supreme Court ruled that plaintiffs' claims are not barred by
federal preemption. Although the Supreme Court rejected the argument
that the FTC's actions were so extensive with respect to the
descriptors that the state law claims were barred as a matter of
federal law, the Supreme Court's decision was limited: it did not
address the ultimate merits of plaintiffs' claim, the viability of the
action as a
class action,
or other state law issues. In February 2009, the United States Court of
Appeals for the First Circuit remanded
Good
to the district court for further proceedings. Stays entered in various
"Lights" cases pending
Good
have been lifted.
Tang v. Philip Morris USA, Inc., United States District Court,
Eastern District, New York, filed December 17, 2008.
Goins, et al. v. Philip Morris USA Inc. et al., United States
District Court, Northern District, Illinois, filed December 23, 2008
. The case was removed to federal court. On February 23, 2009,
defendants moved to dismiss the complaint.
Tyrer, et al. v. Philip Morris USA Inc. et al., United States
District Court, Southern District, California, filed January 14, 2009.
Salazar v. Philip Morris USA Inc. et al., United States District
Court, Southern District, Texas, filed February 5, 2009.
Boyd, et al. v. Phillip Morris USA Inc. et al., United States
District Court, Southern District, Florida, filed February 10, 2009.
Fray v. Philip Morris USA Inc. et al., United States District Court,
Colorado, filed February 17, 2009.
Domaingue, et al. v. Philip Morris USA Inc. et al., United States
District Court, Eastern District, New York, filed March 19, 2009.
CERTAIN OTHER TOBACCO-RELATED ACTIONS
The following lists certain other tobacco-related litigation pending
against Altria Group, Inc. and/or its various subsidiaries and others
as of May 1, 2009, and describes certain developments since February
27, 2009.
Tobacco Price Cases
Smith, et al. v. Philip Morris Companies Inc., et al., District
Court, Seward County, Kansas, filed February 9, 2000.
In November 2001, the court granted plaintiffs' motion for class
certification. The case is pending; there is no trial date.
Romero, et al. v. Philip Morris Companies Inc., et al., First
Judicial District Court, Rio Arriba County, New Mexico, filed April 10,
2000
. Plaintiffs' motion for class certification was granted in April 2003.
In February 2008, the New Mexico Court of Appeals affirmed the class
certification decision. In June 2006, defendants' motion for
-6-
Exhibit 99.1
summary judgment was granted and the case was dismissed. Plaintiffs
appealed the trial court's grant of summary judgment. In November 2008,
the New Mexico Court of Appeals reversed the summary judgment decision.
On February 27, 2009, the New Mexico Supreme Court granted the petition
for
writ of certiorari
filed by PM USA and other defendants.
Cases under the California Business and Professions Code
Brown, et al. v. The American Tobacco Company, Inc., et al.,
Superior Court, San Diego County, California, filed June 10, 1997.
In April 2001, the court granted in part plaintiffs' motion for class
certification and certified a class comprised of residents of
California who smoked at least one of defendants' cigarettes between
June 1993 and April 2001 and who were exposed to defendants' marketing
and advertising activities in California. Certification was granted as
to plaintiffs' claims that defendants violated California Business and
Professions Code Sections 17200 and 17500 pursuant to which plaintiffs
allege that class members are entitled to reimbursement of the costs of
cigarettes purchased during the class period and injunctive relief
barring activities allegedly in violation of the Business and
Professions Code. In September 2004, the trial court granted
defendants' motion for summary judgment as to plaintiffs' claims
attacking defendants' cigarette advertising and promotion and denied
defendants' motion for summary judgment on plaintiffs' claims based on
allegedly false affirmative statements. Plaintiffs' motion for
rehearing was denied. In November 2004, defendants filed a motion to
decertify the class based on a recent change in California law, which,
in two July 2006 opinions, the California Supreme Court ruled
applicable to pending cases. In March 2005, the court granted
defendants' motion. In April 2005, the court denied plaintiffs' motion
for reconsideration of the order that decertified the class. In May
2005, plaintiffs appealed. In September 2006, the California Court of
Appeal, Fourth Appellate District, affirmed the trial court's order
decertifying the class. In November 2006, the California Supreme Court
accepted review of the appellate court's decision. The California
Supreme Court heard the appeal on March 3, 2009.
Gurevitch, et al. v. Philip Morris USA Inc., et al., Superior Court,
Los Angeles County, California, filed May 20, 2004
. See Note 13.
Contingencies
,
for a discussion of this case.
Reynolds v. Philip Morris USA Inc., United States District Court,
Southern District, California, filed September 20, 2005
. See Note 13.
Contingencies
,
for a discussion of this case.
MSA-Related Cases
As discussed further in Note 13.
Contingencies,
PM USA is a defendant in one case filed in California by an
MSA-participating manufacturer that is not an original participating
manufacturer. The action seeks declaratory relief under the MSA. As
further discussed in Note 13.
Contingencies,
there are other cases in a number of states in which plaintiffs have
challenged the MSA and/or legislation implementing it, but PM USA is
not a defendant in these cases.
Possible Adjustments in MSA Payments for 2003, 2004, 2005, 2006 and 2007
See Note 13.
Contingencies,
for a description of these proceedings.
Ignition Propensity Cases
Sarro v. Philip Morris USA Inc., United States District Court,
Massachusetts, filed December 20, 2007
. Plaintiff contends that a
Marlboro
cigarette caused a fire that led to an individual's death. Plaintiff
seeks $250,000 for property damage and an unspecified amount in damages
for wrongful death. PM USA's motion to dismiss the case is pending.
Walker, et al. v. Philip Morris USA, Inc., et al., United States
District Court, Western District, Kentucky, filed February 1, 2008
. Plaintiffs are the representatives and heirs of nine of the ten
individuals who died in a house fire allegedly caused by a
Marlboro Lights
cigarette. Plaintiffs seek unspecified amounts in actual damages,
punitive damages and interest. In addition to PM USA, the defendants
named in the complaint include Altria Group, Inc. In February 2009, the
court, upon motion of the defendants, dismissed plaintiffs' claims.
Plaintiffs filed a notice of appeal on March 2, 2009.
-7-
Exhibit 99.1
Green v. PM USA, et al., Circuit Court, Colbert County, Alabama,
filed April 7, 2009.
Plaintiff is the representative of the estate of an individual whose
death was caused by a fire allegedly arising from a cigarette.
Hallmark v. PM USA, et al., Circuit Court, Colbert County, Alabama,
filed April 7, 2009.
Plaintiff is the representative of the estate of an individual whose
death was caused by a fire allegedly arising from a cigarette.
UST LITIGATION
The following lists certain actions pending against UST and/or its
subsidiaries as of May 1, 2009.
Vassallo v. United States Tobacco Co., et al., Circuit Court of the
Judicial District, Miami-Dade County, Florida, filed November 12, 2002.
In re Massachusetts Smokeless Tobacco Litigation, Superior Court of
Massachusetts, Suffolk County, filed January 23, 2003.
On April 29, 2009, USSTC entered into a settlement agreement to resolve
this
class action.
The agreement remains subject to court approval.
Smokeless Tobacco Cases I--IV, Superior Court, State of California,
San Francisco, filed March 25, 2003.
On February 23, 2009, the California Court of Appeal dismissed the
appeal of an individual class member who had objected to the
class action
settlement.
LaChance, et al. v. United States Tobacco Company, et al., Superior
Court of New Hampshire, Strafford County, filed November 4, 2003.
On April 2, 2009, the New Hampshire Supreme Court affirmed the order of
the trial court approving the
class action settlement.
Hill, et al. v. U.S. Smokeless Tobacco Company, Connecticut Superior
Court, filed March 7, 2005.
Hunt v. United States Tobacco Co., et al., Court of Common Pleas,
Philadelphia County, Pennsylvania, Civil Trial Division, filed February
23, 2006
. On April 6, 2009, plaintiff filed a stipulation of dismissal with
prejudice.
[REYNOLDS AMERICAN]
Litigation Affecting the Cigarette Industry
Overview
Introduction.
In connection with the B&W business combination, RJR Tobacco agreed
to indemnify B&W and its affiliates against, among other things,
certain litigation liabilities, costs and expenses incurred by B&W
or its affiliates arising out of the U.S. cigarette and tobacco
business of B&W. Accordingly, the cases discussed below include
cases brought solely against RJR Tobacco and its affiliates, including
RAI and RJR; cases brought against both RJR Tobacco, its affiliates and
B&W; and cases brought solely against B&W and assumed by RJR
Tobacco in the B&W business combination. During the fourth quarter
of 2008, 14 tobacco-related cases were served against RJR Tobacco or
its affiliates or indemnitees. On December 31, 2008, there were 3,953
cases, including 687 individual smoker cases pending in West Virginia
state court as a consolidated action and 3,094
Engle
Progeny Cases, involving 8,851 individual plaintiffs, pending in the
United States against RJR Tobacco or its affiliates or indemnitees, as
compared with 1,399 total cases on December 31, 2007, and 1,237 on
December 31, 2006, pending in the United States against RJR Tobacco or
its affiliates or indemnitees. As of February 6, 2009, 198
tobacco-related cases were pending against RJR Tobacco or its
affiliates or indemnitees: 194 in the United States; one in Puerto
Rico; two in Canada; and one in Israel. Of the 194 total U.S. cases, 25
cases are pending against B&W that are not also pending against RJR
Tobacco. The U.S. case number does not include the 2,620
Broin II
or the 3,156
Engle
Progeny Cases, as discussed below, pending as of February 6,
93
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2009. The following table lists the number of U.S. tobacco-related
cases by state that were pending against RJR Tobacco or its affiliates
or indemnitees as of February 6, 2009, exclusive of the
Broin
II and
Engle
Progeny Cases:
| |
|
Number of
|
|
| State |
|
U.S. Cases |
|
| New York |
|
|
24 |
|
| Florida |
|
|
22 |
|
| Missouri |
|
|
20 |
|
| Louisiana |
|
|
17 |
|
| California |
|
|
13 |
|
| Mississippi |
|
|
10 |
|
| Maryland |
|
|
7 |
|
| Illinois |
|
|
6 |
|
| West Virginia |
|
|
6 |
* |
| Connecticut |
|
|
4 |
|
| Ohio |
|
|
4 |
|
| Georgia |
|
|
4 |
|
| Pennsylvania |
|
|
3 |
|
| Kentucky |
|
|
3 |
|
| District of Columbia |
|
|
3 |
|
| Delaware |
|
|
2 |
|
| Washington |
|
|
2 |
|
| Alabama |
|
|
2 |
|
| Kansas |
|
|
2 |
|
| Minnesota |
|
|
2 |
|
| New Mexico |
|
|
2 |
|
| North Carolina |
|
|
2 |
|
| South Dakota |
|
|
2 |
|
| Tennessee |
|
|
2 |
|
| Vermont |
|
|
2 |
|
| Wisconsin |
|
|
2 |
|
| New Jersey |
|
|
2 |
|
| Maine |
|
|
1 |
|
| Arizona |
|
|
1 |
|
| Michigan |
|
|
1 |
|
| Oregon |
|
|
1 |
|
| South Carolina |
|
|
1 |
|
| Alaska |
|
|
1 |
|
| Arkansas |
|
|
1 |
|
| Colorado |
|
|
1 |
|
| Hawaii |
|
|
1 |
|
| Idaho |
|
|
1 |
|
| Indiana |
|
|
1 |
|
| Iowa |
|
|
1 |
|
| Mariana Islands |
|
|
1 |
|
| Massachusetts |
|
|
1 |
|
| Montana |
|
|
1 |
|
| Nebraska |
|
|
1 |
|
| Nevada |
|
|
1 |
|
| New Hampshire |
|
|
1 |
|
| North Dakota |
|
|
1 |
|
| Oklahoma |
|
|
1 |
|
| Rhode Island |
|
|
1 |
|
| Utah |
|
|
1 |
|
| Virginia |
|
|
1 |
|
| Wyoming |
|
|
1 |
|
| Total |
|
|
194 |
** |
| * |
|
Includes as one case the 687 cases
pending as a consolidated action in re: Tobacco Litigation Personal
Injury Cases, described below. |
| ** |
|
Of the 194 pending U.S. cases, 29
are pending in federal court, 164 in state court and 1 in tribal court. |
The following table lists the categories of the U.S. tobacco-related
cases pending against RJR Tobacco or its affiliates or indemnitees as
of February 6, 2009, compared with the number of cases pending against
RJR Tobacco, its affiliates or indemnitees as of October 10, 2008, as
reported in RAI's Quarterly Report on Form 10-Q for the
94
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
fiscal quarter ended September 30, 2008, filed with the SEC on October
24, 2008, and a cross-reference to the discussion of each case type.
| |
|
|
|
|
Change in
|
|
|
|
|
| |
|
|
|
|
Number of
|
|
|
|
|
| |
|
RJR Tobacco's
|
|
|
Cases Since
|
|
|
|
|
| |
|
Case Numbers as
|
|
|
October 10, 2008
|
|
|
Page
|
|
| Case Type |
|
of February 6, 2009 |
|
|
Increase/(Decrease) |
|
|
Reference |
|
| Individual Smoking and Health |
|
|
102 |
|
|
|
(36 |
) |
|
|
106 |
|
| West Virginia IPIC (Number of
Plaintiffs)* |
|
|
1(687 |
) |
|
|
-- |
|
|
|
107 |
|
| Engle Progeny (Number of
Plaintiffs)** |
|
|
3,156 (8,808 |
) |
|
|
846 |
|
|
|
108 |
|
| Broin II |
|
|
2,620 |
|
|
|
No Change |
|
|
|
108 |
|
| Class-Action |
|
|
15 |
|
|
|
No Change |
|
|
|
108 |
|
| Health-Care Cost Recovery |
|
|
4 |
|
|
|
No Change |
|
|
|
115 |
|
| MSA-Enforcement and Validity |
|
|
60 |
|
|
|
No Change |
|
|
|
119 |
|
| Antitrust |
|
|
2 |
|
|
|
No Change |
|
|
|
122 |
|
| Other Litigation |
|
|
10 |
|
|
|
(1 |
) |
|
|
122 |
|
| * |
|
Beginning with this report, the
West Virginia Individual Personal Injury Cases have been separated from
the Individual Smoking and Health cases for reporting purposes. |
| ** |
|
The Engle Progeny Cases have been
separated from the Individual Smoking and Health cases for reporting
purposes. Plaintiffs' counsel are attempting to include multiple
plaintiffs in most of the cases filed. The increase in the number of
cases includes new cases served and new cases filed by severed
plaintiffs. |
Four pending cases against RJR Tobacco and B&W have attracted
significant attention: the Florida state court
class-action case,
Engle v. R. J. Reynolds Tobacco Co
., the Louisiana state court
class-action case,
Scott v. American Tobacco Co.,
the federal RICO case brought by the U.S. Department of Justice, and
the federal lights
class action
Schwab [McLaughlin] v. Philip Morris USA, Inc.
In 2000, a jury in
Engle
rendered a punitive damages verdict in favor of the "Florida class" of
approximately $145 billion against all defendants. On July 6, 2006, the
Florida Supreme Court, among other things, affirmed an appellate
court's reversal of the punitive damages award, decertified the class
going forward, preserved several class-wide findings from the trial,
including that nicotine is addictive and cigarettes are defectively
designed, and authorized class members to avail themselves of these
findings in individual lawsuits under certain conditions. After
subsequent motions were resolved, the Florida Supreme Court issued its
mandate on January 11, 2007, thus beginning a one-year period in which
former class members were permitted to file individual lawsuits. On
October 1, 2007, the U.S. Supreme Court denied the defendants' petition
for writ of certiorari. As of February 6, 2009, RJR Tobacco had been
served in 3,156
Engle
Progeny Cases in both state and federal courts in Florida. These cases
include approximately 8,808 plaintiffs. The number of cases will likely
change due to individual plaintiffs being severed from multi-plaintiff
cases. In 2004, a jury in
Scott
returned a verdict in favor of the "Louisiana class" for $591 million
to establish a state-wide smoking cessation program. In 2007, the
Louisiana Court of Appeals upheld class certification, significantly
reduced the scope of recovery, and remanded the case for further
proceedings. The Louisiana and U.S. Supreme Courts denied the
defendants' applications for writ of certiorari. In July 2008, the
trial court entered an amended judgment in favor of the class for
approximately $263 million plus interest from June 30, 2004. On
December 15, 2008, the trial court signed the order for appeal of the
amended judgment. The briefing schedule with the Court of Appeals has
not been set. In the U.S. Department of Justice case, brought in 1999
in the U.S. District Court for the District of Columbia, the government
sought, among other forms of relief, the disgorgement of profits
pursuant to the civil provisions of RICO. The U.S. Court of Appeals for
the District of Columbia ruled in 2005 that disgorgement is not an
available remedy in the case. The bench trial ended in June 2005, and
the court, in August 2006, issued its ruling, among other
95
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
things, finding certain defendants, including RJR Tobacco and B&W,
liable for the RICO claims, imposing no direct financial penalties on
the defendants, but ordering the defendants to make certain "corrective
communications" in a variety of media and enjoining the defendants from
using certain brand descriptors. Both sides have appealed to the U.S.
Court of Appeals for the District of Columbia, and the trial court's
order has been stayed pending the appeal. Oral argument occurred on
October 14, 2008. A decision is pending. In September 2006, the U.S.
District Court for the Eastern District of New York in
Schwab
certified a nation-wide class of "lights" smokers. On November 16,
2006, the U.S. Court of Appeals for the Second Circuit granted the
defendants' motions to stay the district court proceedings and for
review of the class certification ruling. On April 3, 2008, the Second
Circuit decertified the class. The case was returned to the trial court
for further proceedings. For a detailed description of these cases, see
"--
Class-Action
Suits -- Engle Case," "--
Class Action Suits -- Medical
Monitoring and Smoking Cessation Cases," "-- Health-Care Cost Recovery
Cases -- Department of Justice Case" and ''--
Class-Action Suits -- 'Lights'
Cases" below. In November 1998, the major U.S. cigarette manufacturers,
including RJR Tobacco and B&W, entered into the MSA with 46 U.S.
states and certain U.S. territories and possessions. These cigarette
manufacturers previously settled four other cases, brought on behalf of
Mississippi, Florida, Texas and Minnesota, by separate agreements with
each state. The MSA, including the four other state settlement
agreements:
| |
* |
settled all health-care cost
recovery actions brought by, or on behalf of, the settling
jurisdictions; |
| |
* |
released the major U.S. cigarette
manufacturers from various additional present and potential future
claims; |
| |
* |
imposed future payment obligations
in perpetuity on RJR Tobacco, B&W and other major U.S. cigarette
manufacturers; and |
| |
* |
placed significant restrictions on
their ability to market and sell cigarettes. |
The aggregate cash payments made by RJR Tobacco under the MSA were $2.8
billion, $2.6 billion and $2.6 billion in 2008, 2007 and 2006,
respectively. RJR Tobacco estimates its payments will be approximately
$2.7 billion in 2009 and between approximately $2.4 million-$2.6
billion each year thereafter. These payments are subject to adjustments
for, among other things, the volume of cigarettes sold by RJR Tobacco,
RJR Tobacco's market share and inflation. See "-- Health-Care Cost
Recovery Cases -- MSA" below for a detailed discussion of the MSA,
including RJR Tobacco's monetary obligations under these agreements.
RJR Tobacco records the allocation of settlement charges as products
are shipped.
Scheduled Trials.
Trial schedules are subject to change, and many cases are dismissed
before trial. It is likely, however, that RJR Tobacco and other
cigarette manufacturers will face an increased number of trials in 2009
compared to recent years. The following table lists the trial schedule,
as of February 6, 2009, for RJR Tobacco or its affiliates and
indemnitees through December 31, 2009.
| Trial Date |
|
Case Name/Type |
|
Defendant(s) |
|
Jurisdiction |
| October 6, 2008 [ONGOING] |
|
Vermont v. R. J. Reynolds Tobacco
Co. [MSA Enforcement (Eclipse)] |
|
RJR Tobacco |
|
Superior Court Chittenden County
(Burlington, VT) |
| March 9, 2009 |
|
Gelep v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Pinellas County (St.
Petersburg, FL) |
| April 13, 2009 |
|
Kalyvas v. Philip Morris USA, Inc..
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Hillsborough County
(Tampa, FL) |
| April 14, 2009 |
|
Levine v. R.J. Reynolds Tobacco Co.
[Individual] |
|
RJR Tobacco |
|
Circuit Court
Palm Beach County
(West Palm Beach, FL) |
96
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Trial Date |
|
Case Name/Type |
|
Defendant(s) |
|
Jurisdiction |
| April 27, 2009 |
|
Abbott v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Barbanell v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Bronstein v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Cohen v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Dawson v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Kaplan v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Lapidus-Carlson v. R.J. Reynolds
Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Marrazzo v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Morrissette-Stege v. R.J. Reynolds
Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Palmieri v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Rohr v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Tucci v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| April 27, 2009 |
|
Walsh v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| May 11, 2009 |
|
Martin v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Escambia County
(Pensacola, FL) |
| June 1, 2009 |
|
Allen v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Hillsborough County
(Tampa, FL) |
| June 29, 2009 |
|
Budnick v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
97
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Trial Date |
|
Case Name/Type |
|
Defendant(s) |
|
Jurisdiction |
| June 29, 2009 |
|
Greene v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Grossman v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Naugle v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Buonomo v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Calloway v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Goldthorpe v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Hatziyannakis v. R.J. Reynolds
Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County
(Ft. Lauderdale, FL) |
| June 29, 2009 |
|
Putney v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Stephens v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| June 29, 2009 |
|
Talenfeld v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| July 6, 2009 |
|
Hargroves v. R.J. Reynolds Tobacco
Co. [ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Broward County (Ft.
Lauderdale, FL) |
| July 13, 2009 |
|
Blanche v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Charlotte County
(Punta Gorda, FL) |
| July 13, 2009 |
|
Bell v. Brown & Williamson
Tobacco Corp.
[Individual] |
|
RJR Tobacco, B&W |
|
Circuit Court Jackson County
(Independence, MO) |
| August 3, 2009 |
|
Long v. R.J. Reynolds Tobacco Co. [
Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Hillsborough County
(Tampa, FL) |
| August 3, 2009 |
|
Woods v. R.J. Reynolds Tobacco Co.
[Individual] |
|
RJR Tobacco, B&W |
|
U.S. District Court Southern
District (Jackson, MS) |
| August 5, 2009 |
|
Coley v. 3M Company.
[Other] |
|
RJR Tobacco |
|
Superior Court
New Castle County (Wilmington, DE) |
98
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Trial Date |
|
Case Name/Type |
|
Defendant(s) |
|
Jurisdiction |
| October 5, 2009 |
|
Willis v. R.J. Reynolds Tobacco Co.
[ Engle Progeny] |
|
RJR Tobacco |
|
Circuit Court Manatee County
(Bradenton, FL) |
| October 19, 2009 |
|
Nuzum v. Brown & Williamson
Tobacco Corp.
[Individual] |
|
RJR Tobacco, B&W |
|
Circuit Court Jackson County (Kansas
City, MO) |
| November 17, 2009 |
|
Grisham v. Philip Morris Inc.
[Individual], |
|
B&W |
|
U.S. District Court Central District
(Los Angeles, CA) |
Trial Results.
From January 1, 1999 through February 6, 2009, 54 smoking and health
and health-care cost recovery cases in which RJR Tobacco or B&W
were defendants were tried. Verdicts in favor of RJR Tobacco, B&W
and, in some cases, RJR Tobacco, B&W and other defendants, were
returned in 37 cases, including four mistrials, tried in Florida (11),
New York (4), Missouri (4), Tennessee (3), Mississippi (2), California
(2), West Virginia (2), Ohio (2), Connecticut (1), Louisiana (1), New
Jersey (1), Pennsylvania (1), South Carolina (1), Texas (1) and
Washington (1). Additionally, from January 1, 1999 through February 6,
2009, 23 smoking and health cases in which RJR Tobacco, B&W, or
their respective affiliates were not defendants were tried. Verdicts
were returned in favor of the defendants in 14 cases, including two
mistrials, tried in Florida (6), California (3), New Hampshire (1), New
York (1), Pennsylvania (1), Rhode Island (1) and Tennessee (1).
Verdicts in favor of the plaintiffs were returned in nine cases tried
in California (4), Florida (2), Oregon (2) and Illinois (1). No smoking
and health or health-care cost recovery cases in which RJR Tobacco was
a defendant were tried in 2008. The following chart reflects the
verdicts and post-trial developments in the smoking and health cases
that have been tried and remain pending as of February 6, 2009, in
which verdicts have been returned in favor of the plaintiffs and
against RJR Tobacco or B&W, or both. 99
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| July 7, 1999-Phase I April 7,
2000-Phase II July 14, 2000-Phase III |
|
Engle v. R. J. Reynolds Tobacco
Co. [Class Action] |
|
Circuit Court, Miami-Dade County
(Miami, FL) |
|
$12.7 million compensatory damages
against all the defendants; $145 billion punitive damages against all
the defendants, of which approximately $36.3 billion and $17.6 billion
was assigned to RJR Tobacco and B&W, respectively. |
|
On May 21, 2003, Florida's Third
District Court of Appeal reversed the trial court and remanded the case
to the Miami-Dade County Circuit Court with instructions to decertify
the class. The Florida Supreme Court on July 6, 2006, affirmed the
dismissal of the punitive damages award and decertified, on a
going-forward basis, the class. The court preserved a number of
classwide findings from Phase I of the Engle trial, and authorized
class members to avail themselves of those findings in individual
lawsuits, provided they commence those lawsuits within one year of the
date the court's decision becomes final. In addition, the court
reinstated compensatory damage verdicts in favor of two plaintiffs in
the amounts of $2.85 million and $4.023 million, respectively. In the
third quarter of 2007, the U.S. Supreme Court denied the defendants'
petition for writ of certiorari and petition for rehearing. As a
result, on February 8, 2008, RJR Tobacco paid approximately $5.9
million relating to the damages verdicts mentioned above, which amount
was determined using the total amount of the verdicts together with
accrued interest beginning November 7, 2000. |
100
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| June 11, 2002 |
|
Lukacs v. R. J. Reynolds Tobacco Co.
[ Engle class member] |
|
Circuit Court, Miami-Dade County
(Miami, FL) |
|
$500,000 economic damages, $24.5
million non-economic damages and $12.5 million loss of consortium
damages against Philip Morris, B&W and Liggett, of which B&W
was assigned 22.5% of liability. Final judgment was entered in the
amount of $24.8 million plus interest applicable at the yearly
statutory rates from July 11, 2002. RJR Tobacco was dismissed from the
case in May 2002, prior to trial. |
|
Judge reduced damages to $25.125
million of which B&W's share is approximately $6 million. On
January 2, 2007, the defendants moved to set aside the June 11, 2002,
verdict and to dismiss the plaintiffs' punitive damages claim. On
January 3, 2007, the plaintiffs filed a motion for entry of judgment,
which the court deferred until the U.S. Supreme Court completed review
of Engle and after further submissions by the parties. On January 28,
2008, the defendants filed a submission asking the court to set aside
the verdict and to dismiss the case. The court granted the plaintiff's
motion for entry of judgment on August 14, 2008. Pursuant to that
verdict, the plaintiff will recover the sum of $24.8 million plus
interest at the yearly statutory rates from July 11, 2002. On October
30, 2008, the defendants' motion for reconsideration of or, in the
alternative, to alter or amend the order on the plaintiff's motion for
entry of judgment was denied. On November 12, 2008, the court entered
the final judgment. On December 1, 2008, the defendants filed a notice
of appeal. Briefing is underway. |
101
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| December 18, 2003 |
|
Frankson v. Brown & Williamson
Tobacco Corp.
[Individual] |
|
Supreme Court, Kings County
(Brooklyn, NY) |
|
$350,000 compensatory damages; 50%
fault assigned to B&W and two industry organizations; $20 million
in punitive damages, of which $6 million was assigned to B&W, $2
million to a predecessor company and $12 million to two industry
organizations. |
|
On January 21, 2005, the plaintiff
stipulated to the court's reduction in the amount of punitive damages
from $20 million to $5 million, apportioned as follows: $0 to American
Tobacco; $4 million to B&W; $500,000 to the Council for Tobacco
Research and $500,000 to the Tobacco Institute. On June 26, 2007, final
judgment was entered in the amount of approximately $6.8 million,
including interest and costs. The defendants filed a notice of appeal
on July 3, 2007. Oral argument occurred on January 26, 2009. A decision
is pending. Pursuant to its agreement to indemnify B&W, RJR Tobacco
posted a supersedeas bond in the amount of $8.018 million on July 5,
2007. |
102
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| May 21, 2004 |
|
Scott v. American Tobacco Co.
[Class Action] |
|
District Court, Orleans Parish
(New Orleans, LA) |
|
$591 million against RJR Tobacco,
B&W, Philip Morris, Lorillard, and the Tobacco Institute, jointly
and severally, for a smoking cessation program. |
|
On September 29, 2004, the
defendants posted a $50 million bond and noticed their appeal to the
Louisiana Court of Appeal. RJR Tobacco posted $25 million toward the
bond. On February 7, 2007, the Louisiana Court of Appeal limited the
size of the class, and rejected the award of pre-judgment interest and
most of the specific components of the smoking cessation program.
However, the court upheld the class certification and found the
defendants responsible for funding smoking cessation for eligible class
members. On July 21, 2008, the trial court entered an amended judgment
in the case. The court found that the defendants are jointly and
severally liable for funding the cost of a court-supervised smoking
cessation program and ordered the defendants to deposit approximately
$263 million, together with interest from June 30, 2004, into a trust
for the funding of the program. The court also stated that it would
favorably consider a motion to return to defendants a portion of unused
funds at the close of each program year in the event the monies
allocated for the preceding program year were not fully expended
because of a reduction in class size or the underutilization by the
remaining plaintiffs. |
103
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| |
|
|
|
|
|
|
|
On August 27, 2008, the court denied
the defendants' request for permission to pursue an appeal. On
September 9, 2008, the defendants filed an emergency application for
writ of mandamus or supervisory writ with request for stay and
expedited consideration. The same day, the Louisiana Court of Appeals
stayed all proceedings pending further order of the court. On November
17, 2008, the Court of Appeals granted the defendants' writ and ordered
the trial court to sign the order for appeal. On December 10, 2008, the
plaintiffs' application for supervisory writs of certiorari and or
review from the November 17, 2008 ruling was denied by the Louisiana
Supreme Court On December 15, 2008, the trial court judge signed an
order granting the defendants an appeal from the amended judgment. A
briefing schedule has not been set. |
| February 2, 2005 |
|
Smith v. Brown & Williamson
Tobacco Corp.
[Individual] |
|
Circuit Court, Jackson County
(Independence, MO) |
|
$2 million in compensatory damages
which was reduced to $500,000 because of jury's findings that the
plaintiff was 75% at fault; $20 million in punitive damages. |
|
On June 1, 2005, B&W filed its
notice of appeal. On July 31, 2007, the Missouri Court of Appeals
affirmed the compensatory damages award but ordered a new trial on
punitive damages. The Missouri Supreme Court accepted transfer of the
case from the court of appeals, but on July 31, 2008, retransferred the
case to the Missouri Court of Appeals. On December 16, 2008, the
Missouri Court of Appeals issued an opinion that affirmed in part,
reversed in part and remanded the case for further proceedings on the
issue of punitive damages. On |
104
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| |
|
|
|
|
|
|
|
January 27, 2009, the Court of
Appeals denied the defendants' motion for rehearing. |
| March 18, 2005 |
|
Rose v. Brown & Williamson
Tobacco Corp.
[Individual] |
|
Supreme Court, New York County
(Manhattan, NY) |
|
RJR Tobacco found not liable; $3.42
million in compensatory damages against B&W and Philip Morris, of
which $1.71 million was assigned to B&W; $17 million in punitive
damages against Philip Morris only. |
|
On August 18, 2005, B&W filed
its notice of appeal. Pursuant to its agreement to indemnify B&W,
RJR Tobacco posted a supersedeas bond in the amount of $2.058 million
on February 7, 2006. On April 10, 2008, the New York Supreme Court,
Appellate Division reversed the judgment in the plaintiffs' favor and
ordered that the case be dismissed. On May 8, 2008, the plaintiffs
filed a notice of appeal. On December 16, 2008, the New York Court of
Appeals affirmed the intermediate appellate court's order. The
plaintiffs filed a motion for leave to reargue on January 14, 2009. |
| August 17, 2006 |
|
United States v. Philip Morris USA,
Inc. [Governmental Health-Care Cost Recovery] |
|
U.S. District Court, District of
Columbia (Washington, DC) |
|
RJR Tobacco and B&W were found
liable for civil RICO claims; were enjoined from using certain brand
descriptors and from making certain misrepresentations; and were
ordered to make corrective communications on five subjects, including
smoking and health and addiction, to reimburse the U.S. Department of
Justice appropriate costs associated with the lawsuit, and to maintain
document web sites. |
|
On September 11, 2006, RJR Tobacco
and B&W filed their notices of appeal. On October 16, 2006, the
government filed its notice of appeal. The court of appeals granted the
defendants' motion to stay the district court's order on October 31,
2006. Oral argument occurred on October 14, 2008. A decision is pending. |
105
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| Date of Verdict |
|
Case Name/Type |
|
Jurisdiction |
|
Verdict |
|
Post-Trial Status |
| May 2, 2007 |
|
Whiteley v. R. J. Reynolds Tobacco
Co. [Individual] |
|
Superior Court, San Francisco
County, (San Francisco, CA) |
|
$2.46 million in compensatory
damages jointly against RJR Tobacco and Philip Morris; $250,000
punitive damages against RJR Tobacco only. |
|
On September 5, 2007, the court
denied RJR Tobacco's motion for judgment notwithstanding the verdict
or, in the alternative, for a new trial. RJR Tobacco filed its notice
of appeal on October 3, 2007. Briefing is complete. Oral argument has
not been scheduled. RJR Tobacco has deposited with the court
approximately $2.6 million in U.S. Treasury bills in lieu of a
supersedeas bond to stay enforcement of the judgment pending appeal. |
Individual Smoking and Health Cases
As of February 6, 2009, 102 individual cases were pending in the United
States against RJR Tobacco, B&W, as its indemnitee, or both. This
category of cases includes smoking and health cases alleging personal
injury brought by or on behalf of individual plaintiffs, but does not
include the
Broin II, Engle
Progeny Cases or West Virginia IPIC Cases discussed below. A total of
99 of the individual cases are brought by or on behalf of individual
smokers or their survivors, while the remaining three cases are brought
by or on behalf of individuals or their survivors alleging personal
injury as a result of exposure to ETS. Below is a description of the
individual smoking and health cases against RJR Tobacco or B&W, or
both, which went to trial or were decided during the period from
January 1, 2008, to December 31, 2008, or remained on appeal as of
December 31, 2008.
In Whiteley v.
R. J. Reynolds Tobacco Co., the retrial of
Whiteley v. Raybestos-Manhattan,
a case filed in April 1999 in Superior Court, San Francisco County,
California and originally tried in 2000, the jury awarded the plaintiff
$2.46 million in compensatory damages jointly against RJR Tobacco and
Philip Morris on May 2, 2007, and returned a punitive damages verdict
award of $250,000 against RJR Tobacco on May 9, 2007. RJR Tobacco's
motion for judgment notwithstanding the verdict or, in the alternative,
for a new trial was denied on September 5, 2007. RJR Tobacco has
appealed. Briefing is complete. Oral argument has not been scheduled.
RJR Tobacco deposited with the court approximately $2.6 million in U.S.
Treasury bills in lieu of supersedeas bond to stay enforcement of the
judgment pending appeal. On August 15, 2003, a jury returned a verdict
in favor of B&W in
Eiser v. Brown & Williamson Tobacco Corp.
, a case filed in March 1999 in the Court of Common Pleas, Philadelphia
County, Pennsylvania. The plaintiff, Lois Eiser, sought compensatory
and punitive damages in an amount in excess of $50,000, together with
interest, costs and attorneys' fees in this wrongful death action
against B&W. On January 19, 2006, the Superior Court of
Pennsylvania affirmed the verdict. On September 22, 2006, the
Pennsylvania Supreme Court granted the plaintiff's petition to appeal,
and on December 28, 2007, remanded the case to the Superior Court for
further review. Briefing is complete. A decision is pending. On
December 18, 2003, in
Frankson v. Brown & Williamson Tobacco Corp.,
a case filed in August 2000 in Supreme Court, Kings County, New York, a
jury awarded $350,000 in compensatory damages against B&W and two
former tobacco industry organizations, the Tobacco Institute and the
Council for Tobacco Research, in an action brought against the major
U.S. cigarette manufacturers, including RJR Tobacco, who was dismissed
prior to trial, 106
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and B&W, seeking $270 million in compensatory damages, unspecified
punitive damages, attorneys' fees, costs and disbursements. Other
manufacturers were dismissed before trial. The plaintiff, Gladys
Frankson, alleged that Mr. Frankson became addicted to nicotine, was
unable to cease smoking, developed lung cancer and died as a result.
The defendants as a group and the deceased smoker were each found to be
50% at fault. On January 8, 2004, the jury awarded $20 million in
punitive damages, assigning $6 million to B&W, $2 million to
American Tobacco, a predecessor company to B&W, and $6 million to
each of the Council for Tobacco Research and the Tobacco Institute. On
June 22, 2004, the trial judge granted a new trial unless the parties
consented to an increase in compensatory damages to $500,000 and a
decrease in punitive damages to $5 million, of which $4 million would
be assigned to B&W. On January 21, 2005, the plaintiff stipulated
to the reduction in punitive damages. After all post-trial motions, and
appeals therefrom, were denied, judgment was entered in favor of the
plaintiffs for $175,000 in compensatory damages, the original jury
award reduced by 50%, and $5 million in punitive damages, the amount to
which the plaintiff stipulated. On June 26, 2007, final judgment was
entered against the defendants in the amount of approximately $6.8
million, including interest and costs. The defendants filed a notice of
appeal to the Appellate Division, New York Supreme Court, Second
Department on July 3, 2007. Pursuant to its agreement to indemnify
B&W, RJR Tobacco posted a supersedeas bond in the amount of $8.018
million on July 5, 2007. Oral argument occurred on January 26, 2009. A
decision is pending. On February 1, 2005, a jury returned a split
verdict in
Smith v. Brown & Williamson Tobacco Corp.,
a case filed in May 2003 in Circuit Court, Jackson County, Missouri,
finding in favor of B&W on two counts, fraudulent concealment and
conspiracy, and finding in favor of the plaintiff on negligence, which
incorporates failure to warn and product defect claims. The plaintiff,
Lincoln Smith, claimed that the defendant's tobacco products caused
Mrs. Smith's death from lung cancer and sought an unspecified amount of
compensatory and punitive damages. The plaintiff was awarded $2 million
in compensatory damages and $20 million in punitive damages; however,
the jury found the plaintiff to be 75% at fault, and B&W 25% at
fault, and thus the compensatory award was reduced to $500,000. B&W
appealed to the Missouri Court of Appeals and on July 31, 2007, the
court affirmed the compensatory damages and ordered a new trial on
punitive damages. The Missouri Supreme Court agreed to accept transfer
of the case from the Court of Appeals, and on July 31, 2008,
retransferred the case to the Missouri Court of Appeals. On December
16, 2008, the Missouri Court of Appeals issued an opinion that affirmed
in part, reversed in part, and remanded the case for further
proceedings on the issue of punitive damages. On December 30, 2008, the
defendants filed a motion for rehearing, which was denied on January
27, 2009. A new trial on the issue of punitive damages is expected to
occur in 2009. On March 18, 2005, in
Rose v. Brown & Williamson Tobacco Corp.,
a case filed in December 1996 in New York Supreme Court, County of New
York, a jury returned a verdict in favor of RJR Tobacco, but returned a
$3.42 million compensatory damages verdict against B&W and Philip
Morris, of which $1.71 million was assigned to B&W. A punitive
damages verdict of $17 million against Philip Morris only was returned
by the jury on March 28, 2005. The action was brought against the major
U.S. cigarette manufacturers, including RJR Tobacco and B&W,
seeking to recover $15 million in compensatory damages and $35 million
in punitive damages. The plaintiffs, Norma Rose and Leonard Rose,
allege that their use of the defendants' products caused them to become
addicted to nicotine and develop lung cancer, chronic obstructive
pulmonary disease and other smoking related conditions and/or diseases.
Oral argument on B&W's appeal in the Appellate Division, New York
Supreme Court, First Department occurred on December 12, 2006. Pursuant
to its agreement to indemnify B&W, RJR Tobacco posted a supersedeas
bond in the amount of $2.058 million on February 7, 2006. On April 10,
2008, the Appellate Division reversed the judgment in the plaintiffs'
favor and ordered that the case be dismissed. On May 8, 2008, the
plaintiffs filed a notice of appeal. On December 16, 2008, the New York
Court of Appeals affirmed the order. The plaintiffs filed a motion for
leave to reargue on January 14, 2009.
West Virginia IPIC
In West Virginia, there are 729 cases (of which 687 are actions against
RJR Tobacco and/or B&W) pending as a consolidated action,
In re: Tobacco Litigation Personal Injury Cases.
These cases are proposed to be tried in a single proceeding. The West
Virginia Supreme Court of Appeals ruled that the U.S. Constitution does
not preclude a trial
107
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
in multiple phases in this case, and the U.S. Supreme Court declined to
review the issue. The current trial plan provides for a three phase
proceeding, with certain elements of liability and entitlement to
punitive damages being tried in Phase I. Phase II would address the
ratio between any compensatory and punitive damages awarded. Phase III
would address all remaining individual issues including medical and
legal causation and compensatory damages. Trial is scheduled to begin
February 1, 2010.
Engle Progeny Cases
Pursuant to the Florida Supreme Court's July 6, 2006, ruling in
Engle v. R. J. Reynolds Tobacco Co.,
which decertified the class, former class members had one year from
January 11, 2007, in which to file individual lawsuits. In addition,
some individuals who filed suit prior to January 11, 2007, and who
claim they meet the conditions in
Engle,
also are attempting to avail themselves of the
Engle
ruling. Lawsuits by individuals requesting the benefit of the
Engle
ruling, whether filed before or after the January 11, 2007, mandate,
are referred to as the
Engle
Progeny Cases. As of February 6, 2009, RJR Tobacco had been served in
3,156
Engle
Progeny Cases in both state and federal courts in Florida. These cases
include approximately 8,808 plaintiffs. The number of cases will likely
change due to individual plaintiffs being severed from multi-plaintiff
cases. Many of these cases are in active discovery, and several are
expected to be tried in 2009. For further information on the
Engle
case, see "--
Class-Action
Suits --
Engle
Case," below.
Broin II Cases
As of February 6, 2009, there were 2,620 lawsuits pending in Florida
brought by individual flight attendants for personal injury as a result
of illness allegedly caused by exposure to ETS in airplane cabins,
referred to as the
Broin II
cases. In these lawsuits, filed pursuant to the terms of the settlement
of the
Broin v. Philip Morris, Inc.
class
action, discussed below under "--
Class-Action Suits," each
individual flight attendant will be required to prove that he or she
has a disease and that the individual's exposure to ETS in airplane
cabins caused the disease. Punitive damages are not available in these
cases. On October 5, 2000, the
Broin
court entered an order applicable to all
Broin II
cases that the terms of the
Broin
settlement agreement do not require the individual
Broin II
plaintiffs to prove the elements of strict liability, breach of
warranty or negligence. Under this order, there is a rebuttable
presumption in the plaintiffs' favor on those elements, and the
plaintiffs bear the burden of proving that their alleged adverse health
effects actually were caused by exposure to ETS in airplane cabins,
that is, specific causation.
Class-Action
Suits
Overview.
As of February 6, 2009, 15
class-action cases, exclusive of
antitrust
class
actions, were pending in the United States against RJR Tobacco
or its affiliates or indemnitees. In May 1996, in
Castano v. American Tobacco Co.
, the Fifth Circuit Court of Appeals overturned the certification of a
nation-wide class of persons whose claims related to alleged addiction
to tobacco products. Since this ruling by the Fifth Circuit, most
class-action
suits have sought certification of state-wide, rather than nation-wide,
classes.
Class-action
suits based on claims similar to those asserted in
Castano
or claims that class members are at a greater risk of injury or injured
by the use of tobacco or exposure to ETS are pending against RJR
Tobacco and its affiliates and indemnitees in state or federal courts
in California, Illinois, Louisiana, Minnesota, Missouri, New York, West
Virginia and Georgia. All pending
class-action cases are discussed
below. The pending
class-actions against RJR Tobacco
or its affiliates or indemnitees include seven cases alleging that the
use of the term "lights" constitutes unfair and deceptive trade
practices under state law or violates the federal RICO statute. Such
suits are pending in state or federal courts in Illinois, Minnesota,
Missouri and New York and are discussed below under "-- 'Lights'
Cases." Finally, certain third-party payers have filed health-care cost
recovery actions in the form of
class-actions. These cases are
discussed below under "-- Health-Care Cost Recovery Cases."
108
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Few smoker
class-action
complaints have been certified or, if certified, have survived on
appeal. Eighteen federal courts, including two courts of appeals, and
most state courts that have considered the issue have rejected class
certification in such cases. Apart from the
Castano
case discussed above, only two smoker
class actions have been certified
by a federal court --
In re Simon (II) Litigation,
and
Schwab [McLaughlin] v. Philip Morris USA, Inc.
, discussed below under "--
'Lights' Cases,
" both of which were filed in the U.S. District Court for the Eastern
District of New York and ultimately decertified.
Medical Monitoring and Smoking Cessation Cases.
On November 5, 1998, in
Scott v. American Tobacco Co.,
a case filed in May 1996 in District Court, Orleans Parish, Louisiana,
the trial court certified a medical monitoring or smoking cessation
class of Louisiana residents who were smokers on or before May 24,
1996, in an action brought against the major U.S. cigarette
manufacturers, including RJR Tobacco and B&W, seeking to recover an
unspecified amount of compensatory and punitive damages. The plaintiffs
allege that their use of the defendants' products caused them to become
addicted to nicotine. On July 28, 2003, the jury returned a verdict in
favor of the defendants on the plaintiffs' claim for medical monitoring
and found that cigarettes were not defectively designed. However, the
jury also made certain findings against the defendants on claims
relating to fraud, conspiracy, marketing to minors and smoking
cessation. Notwithstanding these findings, this portion of the trial
did not determine liability as to any class member or class
representative. What primarily remained in the case was a class-wide
claim that the defendants pay for a program to help people stop
smoking. On March 31, 2004, phase two of the trial began to address
only the scope and cost of smoking cessation programs. On May 21, 2004,
the jury returned a verdict in the amount of $591 million on the
class's claim for a smoking cessation program. On September 29, 2004,
the defendants posted a $50 million bond, pursuant to legislation that
limits the amount of the bond to $50 million collectively for MSA
signatories, and noticed their appeal. RJR Tobacco posted $25 million,
that is, the portions for RJR Tobacco and B&W, towards the bond. On
February 7, 2007, the Louisiana Court of Appeals upheld the class
certification and found the defendants responsible for funding smoking
cessation for eligible class members. The appellate court also ruled,
however, that the defendants were not liable for any post-1988 claims,
rejected the award of prejudgment interest and struck eight of the 12
components of the smoking cessation program. In particular, the
appellate court ruled that no class member, who began smoking after
September 1, 1988, could receive any relief, and that only those
smokers, whose claims accrued on or before September 1, 1988, would be
eligible for the smoking cessation program. Plaintiffs have expressly
represented to the trial court that none of their claims accrued before
1988 and that the class claims did not accrue until around 1996, when
the case was filed. On March 2, 2007, the defendants' application for
rehearing and clarification was denied. The defendants' application for
writ of certiorari with the Louisiana Supreme Court was denied on
January 7, 2008. The defendants' petition for writ of certiorari with
the U.S. Supreme Court was denied on June 10, 2008. On July 21, 2008,
the trial court entered an amended judgment in the case. The court
found that the defendants are jointly and severally liable for funding
the cost of a court-supervised smoking cessation program and ordered
the defendants to deposit approximately $263 million together with
interest from June 30, 2004, into a trust for the funding of the
program. The court also stated that it would favorably consider a
motion to return to defendants a portion of unused funds at the close
of each program year in the event the monies allocated for the
preceding program year were not fully expended because of a reduction
in class size or underutilization by the remaining plaintiffs. On
August 27, 2008, the court denied the defendants' request for
permission to pursue an appeal. On September 9, 2008, the defendants
filed an emergency application for writ of mandamus or supervisory writ
with request for stay and expedited consideration. The same day, the
Louisiana Court of Appeals stayed all proceedings pending further
orders of the court. On November 17, 2008, the Court of Appeals granted
the defendants' writ and ordered the trial court to sign the order for
appeal. On December 10, 2008, the plaintiffs' application for
supervisory writs of certiorari and or review from the November 17,
2008 ruling was denied by the Louisiana Supreme Court. On December 15,
2008, the trial court judge signed an order granting the defendants an
appeal from the amended judgment. A briefing schedule has not been set.
Peoples v. Reynolds American, Inc.
, filed November 17, 2008 in the U.S. District Court for the Northern
District of Georgia, is a purported RICO
class action on behalf of Georgia
smokers claiming that RAI, Altria and
109
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Lorillard, and/or their affiliates wrongfully influenced the federal
government's National Cancer Institute not to recommend CT scans as a
routine lung cancer screening test for smokers. Plaintiffs claim that
the NCI's failure to endorse the test leads insurers to deny
reimbursement and persuades doctors not to order the tests as a result.
The plaintiffs seek a variety of damages, including alleged
contemplated damages under RICO, punitive damages, attorney's fees,
interest and costs. The defendants have moved to dismiss the case based
on the plaintiffs failure to state a claim meeting the basic
prerequisites of RICO.
Engle Case.
Trial began in July 1998 in
Engle v. R. J. Reynolds Tobacco Co.,
a case filed in May 1994, in Circuit Court, Miami-Dade County, Florida,
in which a class consisting of Florida residents, or their survivors,
alleges diseases or medical conditions caused by their alleged
"addiction" to cigarettes. The action was brought against the major
U.S. cigarette manufacturers, including RJR Tobacco and B&W,
seeking actual damages and punitive damages in excess of $100 billion
each and the creation of a medical fund to compensate individuals for
future health-care costs. On July 7, 1999, the jury found against RJR
Tobacco, B&W and the other cigarette-manufacturer defendants in the
initial phase, which included common issues related to certain elements
of liability, general causation and a potential award of, or
entitlement to, punitive damages. The second phase of the trial, which
consisted of the claims of three of the named class representatives,
began on November 1, 1999. On April 7, 2000, the jury returned a
verdict against all the defendants. It awarded plaintiff Mary Farnan
$2.85 million, the estate of plaintiff Angie Della Vecchia $4.023
million and plaintiff Frank Amodeo $5.831 million. The trial court also
ordered the jury in the second phase of the trial to determine punitive
damages, if any, on a class-wide basis. On July 14, 2000, the jury
returned a punitive damages verdict in favor of the "Florida class" of
approximately $145 billion against all the defendants, with
approximately $36.3 billion and $17.6 billion being assigned to RJR
Tobacco and B&W, respectively. On November 6, 2000, the trial judge
denied all post-trial motions and entered judgment. In November 2000,
RJR Tobacco and B&W posted appeal bonds in the amount of $100
million each and initiated the appeals process. On May 21, 2003,
Florida's Third District Court of Appeal reversed the trial court's
final judgment and remanded the case to the Miami-Dade County Circuit
Court with instructions to decertify the class. The class appealed, and
the Florida Supreme Court accepted the case on May 12, 2004. On July 6,
2006, the court affirmed the dismissal of the punitive damages award
and decertified the class, on a going-forward basis. The court
preserved a number of class-wide findings from Phase I of the trial,
including that cigarettes can cause certain diseases, that nicotine is
addictive and that defendants placed defective and unreasonably
dangerous cigarettes on the market, and authorized former class members
to avail themselves of those findings under certain conditions in
individual lawsuits, provided they commence those lawsuits within one
year of the date the court's decision became final. The court specified
that the class is confined to those Florida citizen residents who
suffered or died from smoking-related illnesses that "manifested"
themselves on or before November 21, 1996, and that were caused by an
addiction to cigarettes. In addition, the court reinstated the
compensatory damages awards of $2.85 million to Mary Farnan and $4.023
million to Angie Della Vecchia, but ruled that the claims of Frank
Amodeo were barred by the statute of limitations. Finally, the court
reversed the Third District Court of Appeal's 2003 ruling that class
counsel's improper statements during trial required reversal. On August
7, 2006, RJR Tobacco and the other defendants filed a rehearing motion
arguing, among other things, that the findings from the
Engle
trial are not sufficiently specific to serve as the basis for further
proceedings and that the Florida Supreme Court's decision denied
defendants due process. On the same day, the plaintiffs also filed a
rehearing motion arguing that some smokers who became sick after
November 21, 1996, and who are therefore not class members, should
nevertheless have the statute of limitations tolled since they may have
refrained from filing suit earlier in the mistaken belief that they were
Engle
class members. On December 21, 2006, the Florida Supreme Court withdrew
its July 6, 2006, decision and issued a revised opinion, in which it
set aside the jury's findings of a conspiracy to misrepresent and
clarified that the
Engle
jury's finding on express warranty were preserved for use by eligible
plaintiffs. The court also denied the plaintiffs' motion and confirmed
that the class was limited to those individuals who developed alleged
smoking-related illnesses that manifested themselves on or
110
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
before November 21, 1996. The court issued its mandate on January 11,
2007, which began the one-year period for former class members to file
individual lawsuits. As of February 6, 2009, 3,156 individual cases
were filed in Florida as a result of the
Engle
decision. These cases include approximately 8,808 plaintiffs. For
further information on the individual cases, see "--
Engle
Progeny Cases" above. On April 17, 2007, RJR Tobacco's motions for
discharge of RJR Tobacco's and B&W's civil supersedeas bonds
related to the punitive damages award were granted. During the second
quarter of 2007, RJR Tobacco received the full amount of the $100
million cash collateral that it had posted. On October 1, 2007, the
defendants' petition for writ of certiorari with the U.S. Supreme Court
was denied. On November 26, 2007, the defendants' petition for
rehearing with the U.S. Supreme Court was denied. As a result, the
verdicts in favor of Mary Farnan and Angie Della Vecchia, mentioned
above, became final. On February 8, 2008, RJR Tobacco paid
approximately $5.9 million relating to the compensatory damages
verdicts mentioned above, which amount was determined using the total
amount of the verdicts together with accrued interest beginning
November 7, 2000. On May 14, 2008, the court entered an order granting
the motion for discharge and return of compensatory damages supersedeas
bond. During the second quarter of 2008, RJR Tobacco received the cash
collateral of $3.8 million that it posted for the compensatory damages
bond. Also on May 14, 2008, plaintiffs Mary Farnan and Ralph Della
Vecchia, as representative of the estate of Angie Della Vecchia, filed
satisfactions of judgment and waived all claims for punitive damages
and acknowledged full payment in satisfaction of the November 7, 2000,
amended final judgment. The same day, the court granted the parties
joint motion to sever moving plaintiffs' claims. Plaintiffs Raymond
Lacey, Michael Matyi and Loren Lowery have filed new cases. Plaintiff
Howard Engle filed a stipulation for dismissal with prejudice, which
the court ordered on July 2, 2008. On January 7, 2009, plaintiff
Marilyn Calhoun's motion for relief from judgment, which sought to
extend the deadline for filing
Engle
Progeny Cases beyond January 11, 2008, was denied by the Florida
Supreme Court. Since the Florida Supreme Court's July 6, 2006 opinion,
no
Engle
Progeny Cases have proceeded to trial against RJR Tobacco or B&W.
RJR Tobacco expects that some
Engle
Progeny Cases will proceed to trial against RJR Tobacco and/or B&W
in 2009, with the first case likely to start in March 2009. Prior to
the Florida Supreme Court ruling on July 6, 2006, RJR Tobacco and/or
B&W were named as a defendant(s) in several individual cases filed
by members of the
Engle
class. One such case,
Lukacs v. Philip Morris, Inc.,
a case filed in February 2001, and pending in Circuit Court, Miami-Dade
County, Florida, was tried against Philip Morris, Liggett and B&W,
and resulted in a verdict for the plaintiffs on June 11, 2002, in a
personal injury action brought against the major U.S. cigarette
manufacturers, including RJR Tobacco and B&W, seeking to recover an
unspecified amount in compensatory and punitive damages. The plaintiff,
John Lukacs, alleged that his use of the defendants' brands caused his
development of bladder, throat, oral cavity and tongue cancer. RJR
Tobacco was voluntarily dismissed on May 1, 2002. The Florida state
court jury awarded the plaintiffs a total of $37.5 million in
compensatory damages. The jury assigned 22.5% fault to B&W, 72.5%
fault to the other defendants and 5% fault to plaintiff John Lukacs. On
April 1, 2003, the Miami-Dade County Circuit Court granted in part the
defendants' motion for remittitur and reduced the jury's award to
plaintiff Yolanda Lukacs, on the loss of consortium claim, from $12.5
million to $0.125 million decreasing the total award to $25.125
million. On August 2, 2006, the plaintiff filed a motion for entry of
partial judgment and notice of jury trial on punitive damages. On
January 2, 2007, the defendants asked the court to set aside the jury's
June 11, 2002, verdict for the plaintiffs and to dismiss the
plaintiffs' punitive damages claim. On January 3, 2007, the plaintiffs
filed a motion for entry of judgment, which the court deferred until
the U.S. Supreme Court completed its review of
Engle
and after further submissions by the parties. On January 28, 2008, the
defendants filed a submission asking the court to set aside the verdict
and to dismiss the case. The court granted the plaintiffs' motion for
entry of judgment on August 14, 2008. Pursuant to the verdict rendered,
the plaintiff, Robin Lukacs, as personal representative of the estate
of John and Yolanda Lukacs, will recover the sum of $24.8 million plus
interest applicable at the yearly statutory rates from June 11, 2002.
On October 17, 2008, the plaintiff withdrew her request for punitive
damages. On October 30, 2008, the defendants' motion for
reconsideration of or, in the alternative, to alter or amend the order
on the plaintiffs' motion for entry of judgment was denied. On November
12, 2008, the court entered final judgment. On December 1, 2008, the
defendants filed a notice of appeal. Briefing is underway.
111
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
California Business and Professions Code Cases.
On April 11, 2001, in
Brown v. American Tobacco Co., Inc.,
a case filed in June 1997 in Superior Court, San Diego County,
California, the court granted in part the plaintiffs' motion for
certification of a class composed of residents of California who smoked
at least one of the defendants' cigarettes from June 10, 1993 through
April 23, 2001, and who were exposed to the defendants' marketing and
advertising activities in California. The action was brought against
the major U.S. cigarette manufacturers, including RJR Tobacco and
B&W, seeking to recover restitution, disgorgement of profits and
other equitable relief under California Business and Professions Code
§ 17200 et seq. and § 17500 et seq. Certification was granted
as to the plaintiffs' claims that the defendants violated § 17200
of the California Business and Professions Code pertaining to unfair
competition. The court, however, refused to certify the class under the
California Legal Remedies Act and on the plaintiffs' common law claims.
On March 7, 2005, the court granted the defendants' motion to decertify
the class. On September 5, 2006, the California Court of Appeal
affirmed the judge's order decertifying the class. On November 1, 2006,
the plaintiffs' petition for review with the California Supreme Court
was granted. Briefing is complete. Oral argument is scheduled for March
3, 2009.
"Lights" Cases.
As noted above, "lights"
class-action cases are pending
against RJR Tobacco or B&W in Illinois (2), Missouri (2), Minnesota
(2), and New York (1). The classes in these cases generally seek to
recover $50,000 to $75,000 per class member for compensatory and
punitive damages, injunctive and other forms of relief, and attorneys'
fees and costs from RJR Tobacco and/or B&W. In general, the
plaintiffs allege that RJR Tobacco or B&W made false and misleading
claims that "lights" cigarettes were lower in tar and nicotine and/or
were less hazardous or less mutagenic than other cigarettes. The cases
typically are filed pursuant to state consumer protection and related
statutes. Many of these "lights" cases were stayed pending review of the
Good v. Altria Group, Inc
. case by the U.S. Supreme Court. The U.S. Supreme Court decided that
these claims are not preempted by the Cigarette Labeling Act or by the
Federal Trade Commission's, referred to as FTC, historic regulation of
the industry on December 15, 2008. In light of this decision, it is
likely that one or more of the stayed cases will become active in 2009.
The seminal "lights"
class-action case involved RJR
Tobacco's competitor, Philip Morris, Inc. Trial began in
Price v. Philip Morris, Inc
. in January 2003. In March 2003, the trial judge entered judgment
against Philip Morris in the amount of $7.1 billion in compensatory
damages and $3 billion in punitive damages to the State of Illinois.
Based on Illinois law, the bond required to stay execution of the
judgment was set initially at $12 billion. Philip Morris pursued
various avenues of relief from the $12 billion bond requirement. In
December 2005, the Illinois Supreme Court reversed the lower court's
decision and sent the case back to the trial court with instructions to
dismiss the case. In December 2006, the defendants' motion to dismiss
and for entry of final judgment was granted and the case was dismissed
with prejudice the same day. The plaintiffs' motion to vacate and/or
withhold judgment was dismissed by the court on August 30, 2007. On
December 18, 2008, the plaintiffs filed a petition for relief from
judgment stating that the U.S. Supreme Court's decision in
Good v. Altria Group, Inc
. rejected the basis for the reversal. The trial court denied that
motion on February 4, 2009. In
Turner v. R. J. Reynolds Tobacco Co.,
a case filed in February 2000 in Circuit Court, Madison County,
Illinois, a judge certified a class on November 14, 2001. On June 6,
2003, RJR Tobacco filed a motion to stay the case pending Philip
Morris's appeal of the
Price v. Philip Morris Inc.
case mentioned above, which the judge denied on July 11, 2003. On
October 17, 2003, the Illinois Fifth District Court of Appeals denied
RJR Tobacco's emergency stay/supremacy order request. On November 5,
2003, the Illinois Supreme Court granted RJR Tobacco's motion for a
stay pending the court's final appeal decision in
Price.
On October 11, 2007, the Illinois Fifth District Court of Appeals
dismissed RJR Tobacco's appeal and remanded the case to the circuit
court. There is currently no activity in the case. In
Howard v. Brown & Williamson Tobacco Corp.,
another case filed in February 2000 in Circuit Court, Madison County,
Illinois, a judge certified a class on December 18, 2001. On June 6,
2003, the trial judge issued an order staying all proceedings pending
resolution of the
Price v. Philip Morris, Inc.
case mentioned above. The
112
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
plaintiffs appealed this stay order to the Illinois Fifth District
Court of Appeals, which affirmed the Circuit Court's stay order on
August 19, 2005. There is currently no activity in the case.
Schwab [McLaughlin] v. Philip Morris USA, Inc.
, a nation-wide "lights"
class-action, was filed on May 11,
2004, in the U.S. District Court for the Eastern District of New York,
against RJR Tobacco and B&W, as well as other tobacco
manufacturers. The plaintiffs brought the case pursuant to RICO,
challenging the practices of the defendants in connection with the
manufacturing, marketing, advertising, promotion, distribution and sale
of cigarettes that were labeled as "lights" or "light." On September
25, 2006, the court issued its decision, among other things, granting
class certification. On November 16, 2006, the U.S. Court of Appeals
for the Second Circuit granted the defendants' motions to stay the
district court proceedings and for review of the class certification
ruling. On April 3, 2008, the Second Circuit decertified the class. The
case was returned to the trial court for further proceedings. A
"lights"
class-action
case is pending against each of RJR Tobacco and B&W in Missouri. In
Collora v. R. J. Reynolds Tobacco Co.,
a case filed in May 2000 in Circuit Court, St. Louis County, Missouri,
a judge in St. Louis certified a class on December 31, 2003. On April
9, 2007, the court granted the plaintiffs' motion to reassign
Collora
and the following cases to a single general division:
Craft v. Philip Morris Companies, Inc.
and
Black v. Brown & Williamson Tobacco Corp.,
discussed below. On April 16, 2008, the court stayed the case pending
U.S. Supreme Court review in
Good v. Altria Group, Inc
., a "lights"
class-action
pending against Altria and Philip Morris USA. As a result of the U.S.
Supreme Court's decision in
Good v. Altria Group, Inc
., this case is likely to become active in 2009. In
Black v. Brown & Williamson Tobacco Corp.,
a case filed in November 2000 in Circuit Court, City of St. Louis,
Missouri, B&W removed the case to the U.S. District Court for the
Eastern District of Missouri on September 23, 2005. On October 25,
2005, the plaintiffs filed a motion to remand, which was granted on
March 17, 2006. On April 16, 2008, the court stayed the case pending
U.S. Supreme Court review in
Good v. Altria Group, Inc.
As a result of the U.S. Supreme Court's decision in
Good v. Altria Group, Inc
., this case is likely to become active in 2009. In
Dahl v. R. J. Reynolds Tobacco Co.,
a case filed in April 2003, and pending in District Court, Hennepin
County, Minnesota, a judge dismissed the case on May 11, 2005, ruling
the "lights" claims are preempted by the Federal Cigarette Labeling and
Advertising Act. On July 11, 2005, the plaintiffs appealed to the
Minnesota Court of Appeals for the Fourth Judicial District. During the
pendency of the appeal, RJR Tobacco removed the case to the U.S.
District Court for the District of Minnesota. On February 28, 2007, the
Eighth Circuit remanded the case to the Minnesota Court of Appeals,
which on December 4, 2007, reversed the judgment and remanded the case
to the District Court. On February 27, 2008, RJR Tobacco's motion to
stay its January 3, 2008, petition for review until the completion of
the U.S. Supreme Court review in
Good v. Altria Group, Inc
. was granted. On January 20, 2009, the Minnesota Supreme Court issued
an order vacating the February 27, 2008 order that granted RJR
Tobacco's petition for review. As a result of the U.S. Supreme Court's
decision in
Good v. Altria Group, Inc
., the case is likely to become active in 2009. In
Thompson v. R. J. Reynolds Tobacco Co.,
a case filed in February 2005 in District Court, Hennepin County,
Minnesota, RJR Tobacco removed the case on September 23, 2005 to the
U.S. District Court for the District of Minnesota. On August 7, 2006,
the parties filed a stipulation to stay the case pending resolution of
the appeal in
Dahl v. R. J. Reynolds Tobacco Co.
On October 29, 2007, the U.S. District Court remanded the case to the
District Court for Hennepin County. On February 1, 2008, the court
stayed the case until the completion of the appeal in
Dahl v. R. J. Reynolds Tobacco Co.
and
Good v. Altria Group, Inc
. As a result of the U.S. Supreme Court's decision in
Good v. Altria Group, Inc
., this case is likely to become active in 2009. In the event RJR
Tobacco and its affiliates or indemnitees lose one or more of the
pending "lights"
class-action suits, RJR Tobacco
could face bonding difficulties depending upon the amount of damages
ordered, if any, which could have a material adverse effect on RJR
Tobacco's, and consequently RAI's, results of operations, cash flows or
financial position.
113
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other Class Actions.
In
Cleary v. Philip Morris, Inc.,
a case filed in June 1998, and pending in Circuit Court, Cook County,
Illinois, the plaintiffs filed their motion for class certification on
December 21, 2001, in an action brought against the major U.S.
cigarette manufacturers, including RJR Tobacco and B&W. The case is
brought on behalf of persons who have allegedly been injured by (1) the
defendants' purported conspiracy pursuant to which defendants concealed
material facts regarding the addictive nature of nicotine, (2) the
defendants' alleged acts of targeting its advertising and marketing to
minors, and (3) the defendants' claimed breach of the public right to
defendants' compliance with the laws prohibiting the distribution of
cigarettes to minors. The plaintiffs request that the defendants be
required to disgorge all profits unjustly received through its sale of
cigarettes to plaintiffs and the class, which in no event will be
greater than $75,000 per each class member, inclusive of punitive
damages, interest and costs. On March 27, 2006, the court dismissed
count V, public nuisance, and count VI, unjust enrichment. On July 11,
2006, the plaintiffs filed a motion for class certification. This case
has been virtually dormant; however, class counsel has indicated the
intent to file an amended complaint and renew activity in the case. As
a result, the court has vacated all scheduling orders pending further
action by the plaintiffs and a ruling on their motion to amend.
Young v. American Tobacco Co., Inc.,
a case filed in November 1997 in Circuit Court, Orleans Parish,
Louisiana, is an ETS
class action against U.S.
cigarette manufacturers, including RJR Tobacco and B&W, and parent
companies of U.S. cigarette manufacturers, including RJR, on behalf of
all residents of Louisiana who, though not themselves cigarette
smokers, have been exposed to secondhand smoke from cigarettes which
were manufactured by the defendants, and who allegedly suffered injury
as a result of that exposure. The plaintiffs seek to recover an
unspecified amount of compensatory and punitive damages. On October 13,
2004, the trial court stayed this case pending the outcome of the
appeal in
Scott v. American Tobacco Co., Inc
., discussed above under
"-- Medical Monitoring and Smoking Cessation Cases."
In
Parsons v. A C & S, Inc.,
a case filed in February 1998 in Circuit Court, Ohio County, West
Virginia, the plaintiff sued asbestos manufacturers, U.S. cigarette
manufacturers, including RJR Tobacco and B&W, and parent companies
of U.S. cigarette manufacturers, including RJR, seeking to recover $1
million in compensatory and punitive damages individually and an
unspecified amount for the class in both compensatory and punitive
damages. The class is brought on behalf of persons who allegedly have
personal injury claims arising from their exposure to respirable
asbestos fibers and cigarette smoke. The plaintiffs allege that Mrs.
Parsons' use of tobacco products and exposure to asbestos products
caused her to develop lung cancer and to become addicted to tobacco.
The case has been stayed pending a final resolution of the plaintiffs'
motion to refer tobacco litigation to the judicial panel on
multi-district litigation filed in
In Re: Tobacco Litigation
in the Supreme Court of Appeals of West Virginia. On December 26, 2000,
three defendants, Nitral Liquidators, Inc., Desseaux Corporation of
North American and Armstrong World Industries, filed bankruptcy
petitions in the U.S. Bankruptcy Court for the District of Delaware,
In re Armstrong World Industries, Inc.
Pursuant to section 362(a) of the Bankruptcy Code,
Parsons
is automatically stayed with respect to all defendants. Finally, in
Jones v. American Tobacco Co., Inc.,
a case filed in December 1998 in Circuit Court, Jackson County,
Missouri, the defendants removed the case to the U.S. District Court
for the Western District of Missouri on February 16, 1999. The action
was brought against the major U.S. cigarette manufacturers, including
RJR Tobacco and B&W, and parent companies of U.S. cigarette
manufacturers, including RJR, on behalf of tobacco product users and
purchasers on behalf of all similarly situated Missouri consumers. The
plaintiffs allege that their use of the defendants' tobacco products
has caused them to become addicted to nicotine. The plaintiffs seek to
recover an unspecified amount of compensatory and punitive damages. The
case was remanded to the Circuit Court on February 17, 1999. There has
been limited activity in this case.
Broin Settlement.
RJR Tobacco, B&W and other cigarette manufacturer defendants settled
Broin v. Philip Morris, Inc.
in October 1997. This case had been brought in Florida state court on
behalf of flight attendants alleged to have suffered from diseases or
ailments caused by exposure to ETS in airplane cabins. The settlement
agreement required the participating tobacco companies to pay a total
of $300 million in three annual $100 million installments, allocated
among the companies by market share, to fund research on the early
detection and cure of diseases associated with tobacco smoke. It also
required those companies to pay a total of $49 million for the
114
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
plaintiffs' counsel's fees and expenses. RJR Tobacco's portion of these
payments was approximately $86 million; B&W's portion of these
payments was approximately $57 million. The settlement agreement bars
class members from bringing aggregate claims or obtaining punitive
damages and also bars individual claims to the extent that they are
based on fraud, misrepresentation, conspiracy to commit fraud or
misrepresentation, RICO, suppression, concealment or any other alleged
intentional or willful conduct. The defendants agreed that, in any
individual case brought by a class member, the defendant will bear the
burden of proof with respect to whether ETS can cause certain
specifically enumerated diseases, referred to as "general causation."
With respect to all other issues relating to liability, including
whether an individual plaintiff's disease was caused by his or her
exposure to ETS in airplane cabins, referred to as "specific
causation," the individual plaintiff will have the burden of proof. On
September 7, 1999, the Florida Supreme Court approved the settlement.
The
Broin II
cases, discussed above, arose out of the settlement of this case.
Health-Care Cost Recovery Cases
Health-care cost recovery cases have been brought by a variety of
plaintiffs. Other than certain governmental actions, these cases
largely have been unsuccessful on remoteness grounds, which means that
one who pays an injured person's medical expenses is legally too remote
to maintain an action against the person allegedly responsible for the
injury. As of February 6, 2009, four health-care cost recovery cases
were pending in the United States against RJR Tobacco, B&W, as its
indemnitee, or both, as discussed below after the MSA discussion.
MSA.
In June 1994, the Mississippi attorney general brought an action,
Moore v. American Tobacco Co.
, against various industry members, including RJR Tobacco and B&W.
This case was brought on behalf of the state to recover state funds
paid for health care and other assistance to state citizens suffering
from diseases and conditions allegedly related to tobacco use. Most
other states, through their attorneys general or other state agencies,
sued RJR Tobacco, B&W and other U.S. cigarette manufacturers based
on similar theories. The cigarette manufacturer defendants, including
RJR Tobacco and B&W, settled the first four of these cases
scheduled for trial -- Mississippi, Florida, Texas and Minnesota -- by
separate agreements with each such state. On November 23, 1998, the
major U.S. cigarette manufacturers, including RJR Tobacco and B&W,
entered into the Master Settlement Agreement with attorneys general
representing the remaining 46 states, the District of Columbia, Puerto
Rico, Guam, the Virgin Islands, American Samoa and the Northern
Marianas. Effective on November 12, 1999, the Master Settlement
Agreement settled all the health-care cost recovery actions brought by,
or on behalf of, the settling jurisdictions and released various
additional present and future claims. In the settling jurisdictions,
the MSA released RJR Tobacco, B&W, and their affiliates and
indemnitees, including RAI, from:
| |
* |
all claims of the settling states
and their respective political subdivisions and other recipients of
state health-care funds, relating to past conduct arising out of the
use, sale, distribution, manufacture, development, advertising,
marketing or health effects of, the exposure to, or research,
statements or warnings about, tobacco products; and |
| |
* |
all monetary claims of the settling
states and their respective political subdivisions and other recipients
of state health-care funds, relating to future conduct arising out of
the use of or exposure to, tobacco products that have been manufactured
in the ordinary course of business. |
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Set forth below are tables depicting the unadjusted tobacco industry
settlement payment schedule and the settlement payment schedule for
RAI's operating subsidiaries under the MSA, including the settlement
agreements with the states of Mississippi, Florida, Texas and
Minnesota, and related information for 2006 and beyond:
Unadjusted Original Participating Manufacturers' Settlement Payment
Schedule
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
| |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
thereafter |
|
| First Four States' Settlements: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mississippi Annual Payment |
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
136 |
|
| Florida Annual Payment |
|
|
440 |
|
|
|
440 |
|
|
|
440 |
|
|
|
440 |
|
|
|
440 |
|
|
|
440 |
|
|
|
440 |
|
| Texas Annual Payment |
|
|
580 |
|
|
|
580 |
|
|
|
580 |
|
|
|
580 |
|
|
|
580 |
|
|
|
580 |
|
|
|
580 |
|
| Minnesota Annual Payment |
|
|
204 |
|
|
|
204 |
|
|
|
204 |
|
|
|
204 |
|
|
|
204 |
|
|
|
204 |
|
|
|
204 |
|
| Remaining States' Settlement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Annual Payments (1) |
|
|
7,004 |
|
|
|
7,004 |
|
|
|
8,004 |
|
|
|
8,004 |
|
|
|
8,004 |
|
|
|
8,004 |
|
|
|
8,004 |
|
| Base Foundation Funding |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
| Growers' Trust (2) |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
295 |
|
|
|
295 |
|
|
|
-- |
|
|
|
-- |
|
| Offset by federal tobacco buyout(2) |
|
|
(500 |
) |
|
|
(500 |
) |
|
|
(500 |
) |
|
|
(295 |
) |
|
|
(295 |
) |
|
|
-- |
|
|
|
-- |
|
| Total |
|
$ |
8,389 |
|
|
$ |
8,389 |
|
|
$ |
9,389 |
|
|
$ |
9,364 |
|
|
$ |
9,364 |
|
|
$ |
9,364 |
|
|
$ |
9,364 |
|
| RAI's Operating
Subsidiaries' Settlement Expenses and Payment Schedule |
| Settlement expenses |
|
$ |
2,611 |
|
|
$ |
2,821 |
|
|
$ |
2,703 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
| Settlement cash payments |
|
$ |
2,631 |
|
|
$ |
2,616 |
|
|
$ |
2,830 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
| Projected settlement expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
>2,550 |
|
|
$ |
>2,400 |
|
|
$ |
>2,400 |
|
|
$ |
>2,450 |
|
| Projected settlement cash payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
>2,650 |
|
|
$ |
>2,550 |
|
|
$ |
>2,400 |
|
|
$ |
>2,400 |
|
| (1) |
|
Subject to adjustments for changes
in sales volume, inflation and other factors. All payments are to be
allocated among the companies on the basis of relative market share. |
| (2) |
|
The Growers' Trust payments
scheduled to expire in 2010 will be offset by obligations resulting
from the federal tobacco buyout legislation, not included in this
table, signed in October 2004. See "-- Tobacco Buyout Legislation and
Related Litigation." |
The MSA also contains provisions restricting the marketing of tobacco
products. Among these provisions are restrictions or prohibitions on
the use of cartoon characters, brand-name sponsorships, apparel and
other merchandise, outdoor and transit advertising, payments for
product placement, free sampling and lobbying. Furthermore, the MSA
required the dissolution of three industry-sponsored research and trade
organizations. The MSA has materially adversely affected RJR Tobacco's
shipment volumes. RAI believes that these settlement obligations may
materially adversely affect the results of operations, cash flows or
financial position of RAI and RJR Tobacco in future periods. The degree
of the adverse impact will depend, among other things, on the rate of
decline in U.S. cigarette sales in the premium and value categories,
RJR Tobacco's share of the domestic premium and value cigarette
categories, and the effect of any resulting cost advantage of
manufacturers not subject to the MSA.
Department of Justice Case.
On September 22, 1999, the U.S. Department of Justice brought an action
against RJR Tobacco, B&W and other tobacco companies in the U.S.
District Court for the District of Columbia. The government initially
sought to recover federal funds expended by the federal government in
providing health care to smokers who developed diseases and injuries
alleged to be smoking-related. In addition, the government sought,
pursuant to the civil provisions of RICO, disgorgement of profits the
government contends were earned as a consequence of a RICO racketeering
"enterprise." In September 2000, the court dismissed the government's
claims asserted under the Medical Care Recovery Act as well as those
under the Medicare Secondary Payer provisions of the Social Security
Act, but did not dismiss the RICO claims. In February 2005, the U.S.
Court of Appeals for the
116
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
District of Columbia ruled that disgorgement is not an available remedy
in this case. The government's petition for writ of certiorari with the
U.S. Supreme Court was denied in October 2005. The non-jury, bench
trial began in September 2004, and closing arguments concluded on June
10, 2005. On August 17, 2006, the court found certain defendants,
including RJR Tobacco and B&W, liable for the RICO claims, but did
not impose any direct financial penalties. The court instead enjoined
the defendants from committing future racketeering acts, participating
in certain trade organizations, making misrepresentations concerning
smoking and health and youth marketing, and using certain brand
descriptors such as "low tar," "light," "ultra light," "mild" and
"natural." The court also ordered defendants to issue "corrective
communications" on five subjects, including smoking and health and
addiction, and to comply with further undertakings, including
maintaining web sites of historical corporate documents and
disseminating certain marketing information on a confidential basis to
the government. In addition, the court placed restrictions on the
ability of the defendants to dispose of certain assets for use in the
United States, unless the transferee agrees to abide by the terms of
the court's order, and ordered the defendants to reimburse the U.S.
Department of Justice its taxable costs incurred in connection with the
case. Certain defendants, including RJR Tobacco, filed notices of
appeal to the U.S. Court of Appeals for the District of Columbia on
September 11, 2006. The government filed its notice of appeal on
October 16, 2006. In addition, the defendants, including RJR Tobacco,
filed joint motions asking the district court to clarify and to stay
its order pending the defendants' appeal. On September 28, 2006, the
district court denied the defendants' motion to stay. On September 29,
2006, the defendants, including RJR Tobacco, filed a motion asking the
court of appeals to stay the district court's order pending the
defendants' appeal. The court granted the motion on October 31, 2006.
On November 28, 2006, the court of appeals stayed the appeals pending
the trial court's ruling on the defendants' motion for clarification.
The defendants' motion for clarification was granted in part and denied
in part on March 16, 2007. The defendants' motion as to the meaning and
applicability of the general injunctive relief of the August 17, 2006
order was denied. The request for clarification as to the scope of the
provisions in the order prohibiting the use of descriptors and
requiring corrective statements at retail point of sale was granted.
The court also ruled that the provisions prohibiting the use of express
or implied health messages or descriptors do apply to the actions of
the defendants taken outside of the United States. Oral argument in the
appeals occurred on October 14, 2008. A decision is pending. The stay
of the district court's order suspends the enforcement of the order
pending the outcome of the defendants' appeal. RJR Tobacco does not
know the timing of an appellate decision or, if the order is affirmed,
the compliance deadlines that will be imposed. If the order is affirmed
without modification, then RJR Tobacco believes that certain provisions
of the order, would have adverse business effects on the marketing of
RJR Tobacco's current product portfolio and that such effects could be
material. Also, if the order is affirmed, then RJR Tobacco would incur
costs in connection with complying with the order, such as the costs of
corrective communications. Given the uncertainty over the timing and
substance of an appellate decision, RJR Tobacco currently is not able
to estimate reasonably the costs of such compliance. Moreover, if the
order were ultimately affirmed and RJR Tobacco were to fail to comply
with the order on a timely basis, then RJR Tobacco could be subject to
substantial monetary fines or penalties.
International Cases.
A number of foreign countries have filed suit against RJR Tobacco,
B&W and other tobacco industry defendants to recover funds for
health-care, medical and other assistance paid by those foreign
governments to their citizens. No such cases currently are pending in
the United States against RJR Tobacco and its affiliates or
indemnitees. Three health-care reimbursement cases are pending against
RJR Tobacco or B&W outside the United States, two in Canada and one
in Israel. Pursuant to the terms of the 1999 sale of RJR Tobacco's
international tobacco business, JTI assumed RJR Tobacco's liability, if
any, in the health-care cost recovery cases brought by foreign
countries.
117
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On November 12, 1998, the government of British Columbia enacted
legislation creating a civil cause of action permitting the government
to recover the costs of health-care benefits incurred for B.C.
residents arising from tobacco-related disease. The government's
subsequent suit against Canadian defendants and foreign defendants,
including RJR Tobacco was dismissed in February 2000, when the B.C.
Supreme Court ruled that the legislation was unconstitutional and set
aside service ex juris against the foreign defendants for that reason.
The government then enacted a revised statute and brought a new action,
filed in January 2001, and pending in Supreme Court, British Columbia.
The plaintiff seeks to recover the present value of the total
expenditure by the government for health-care benefits provided for
insured persons resulting from tobacco-related disease or the risk of
tobacco-related disease, the present value of the estimated total
expenditure by the government for health-care benefits that reasonably
could be expected to be provided for those insured persons resulting
from tobacco-related disease or the risk of tobacco-related disease,
court ordered interest, and costs, or in the alternative, special or
increased costs. The plaintiff alleges that the defendants are liable
under the following theories: defective product, failure to warn, sale
of cigarettes to children and adolescents, strict liability, deceit and
misrepresentation, and violation of trade practice and competition
acts. Trial is scheduled for September 6, 2010. On September 1, 1998,
the General Health Services filed a statement of claim against certain
cigarette manufacturers, including RJR Tobacco and B&W, in the
District Court of Jerusalem, Israel. The plaintiff seeks to recover the
past and future value of the total expenditures for health-care
services provided to residents of Israel resulting from tobacco-related
disease, court ordered interest for past expenditures from date of
filing the statement of claim, increased and/or punitive and/or
exemplary damages and costs. The plaintiff alleges that the defendants
are liable under the following theories: negligence, public nuisance,
fraud, misleading advertisement, defective product, failure to warn,
sale of cigarettes to children and adolescents, strict liability,
deceit, concealment, misrepresentation and conspiracy. In 2002, the
plaintiff obtained leave to serve RJR Tobacco and B&W outside the
jurisdiction. On behalf of RJR Tobacco, JTI filed a motion challenging
the grant of leave, which was denied. JTI appealed the decision to the
Supreme Court of Israel. A hearing occurred on March 28, 2005. A
decision is pending. On March 13, 2008, a case was filed on behalf of
Her Majesty the Queen in Right of the Province of New Brunswick,
Canada, against certain cigarette manufacturers, including RJR Tobacco,
in the Trial Division in the Court of Queen's Bench of New Brunswick.
The plaintiff seeks to recover the present value of total expenditures
by the Province for health care benefits resulting or expecting to
result from tobacco-related diseases or risk of tobacco-related
diseases, costs or special or increased costs. The plaintiff alleges
that the defendants are liable under the following theories: deceit and
misrepresentation, failure to warn, promotion of cigarettes to children
and adolescents, negligent design and manufacture, breaches of other
common law, equitable and statutory duties and obligations and
conspiracy and concerted action in Canada. On June 26, 2008, RJR
Tobacco filed a notice of intent to defend.
Native American Tribe Cases.
As of February 6, 2009, one Native American tribe case was pending
before a tribal court in South Dakota against RJR Tobacco and B&W,
Crow Creek Sioux Tribe v. American Tobacco Co.,
a case filed in September 1997 in Tribal Court, Crow Creek Sioux, South
Dakota. The plaintiffs seek to recover actual and punitive damages,
restitution, funding of a clinical cessation program, funding of a
corrective public education program, and disgorgement of unjust profits
from sales to minors. The plaintiffs claim that the defendants are
liable under the following theories: unlawful marketing and targeting
of minors, contributing to the delinquency of minors, unfair and
deceptive acts or practices, unreasonable restraint of trade and unfair
method of competition, negligence, negligence per se, conspiracy and
restitution of unjust enrichment. The case is dormant.
Hospital Cases.
As of February 6, 2009, one case brought by hospitals was pending
against cigarette manufacturers, including RJR Tobacco and B&W:
City of St. Louis v. American Tobacco Co., Inc.
, filed in November 1998, and pending in the Circuit Court of the City
of St. Louis, Missouri. This case seeks recovery of uncompensated,
unreimbursed health-care costs expended or to be expended by hospitals
on behalf of patients who suffer, or have suffered, from illnesses
allegedly resulting from the use of cigarettes. On June 28, 2005, the
court granted the defendants' motion for summary judgment as to claims
for damages which accrued prior to November 16, 1993. The claims for
damages which accrued after November 16, 1993, are still pending. The
case is in discovery. Trial is scheduled for June 7, 2010. On July 11,
2008, certain defendants, including RJR Tobacco and B&W, filed a
motion for
118
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
summary judgment based on the plaintiffs' lack of proof linking the
defendants' allegedly wrongful conduct with the claimed damages. Oral
argument occurred on November 24, 2008. A decision is pending.
Other Cases.
On May 20, 2008, the National Committee to Preserve Social Security and
Medicare filed a case against the major U.S. cigarette manufacturers,
including RJR Tobacco, in the U.S. District Court for the Eastern
District of New York. The case seeks to recover twice the amount paid
by Medicare for health services provided to Medicare beneficiaries to
treat their diseases attributable to smoking the defendants' cigarettes
from May 21, 2002 to the present, for which treatment the defendants
were "required or responsible to make payment" under the Medicare
Secondary Payer Act. On July 21, 2008, the defendants filed a motion to
dismiss for failure to state a claim for lack of standing. On the same
day, the plaintiffs filed a motion for summary judgment as to liability
under the Federal Rules of Civil Procedure 56(d)(2). Oral argument on
the plaintiffs' motion for partial summary judgment and the defendants'
motion to dismiss occurred on November 20, 2008. A decision is pending.
MSA-Enforcement and Validity
As of February 6, 2009, there were 60 cases concerning the enforcement,
validity or interpretation of the MSA in which RJR Tobacco or B&W
is a party. This number includes those cases, discussed below, relating
to disputed payments under the MSA. On March 28, 2005, the National
Association of Attorneys General, referred to as NAAG, sent a notice,
signed by 40 Attorneys General that one or more of the states intended
to initiate proceedings against RJR Tobacco for violating Section III
(r) of the MSA, the various Consent Decrees implementing the MSA and/or
consumer fraud statutes in various states, all in connection with RJR
Tobacco's advertisements for Eclipse cigarettes. After a June 2005
meeting between representatives of RJR Tobacco and NAAG, the Vermont
Attorney General filed suit in July 2005, in the Vermont Superior
Court, Chittenden County, alleging that certain advertising for the
Eclipse cigarette brand violated both the MSA and the Vermont Consumer
Fraud Statute. The State of Vermont is seeking declaratory, injunctive,
and monetary relief. Trial in this action began on October 6, 2008.
Closing arguments are scheduled for March 11, 2009. On April 13, 2005,
the Mississippi Attorney General notified B&W of its intent to seek
approximately $3.9 million in additional payments under the Mississippi
Settlement Agreement. The Mississippi Attorney General asserts that
B&W failed to report in its net operating profit or its shipments
cigarettes manufactured by B&W under contract for Star Tobacco or
its parent, Star Scientific, Inc. On April 28, 2005, B&W advised
the state that it did not owe the state any money. On August 11, 2005,
the Mississippi Attorney General filed in the Chancery Court of Jackson
County, Mississippi, a Notice of Violation, Motion to Enforce
Settlement Agreement, and Request for an Accounting by Defendant Brown
& Williamson Holdings, Inc., formerly known as Brown &
Williamson Tobacco Corporation. In this filing, Mississippi estimated
that its damages exceeded $5.0 million. This matter is currently in the
discovery phase. On May 17, 2006, the State of Florida filed a motion,
in the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm
Beach County, Florida, to enforce the Settlement Agreement, for an
Accounting by Brown & Williamson Holdings, Inc., and for an Order
of Contempt, raising substantially the same issues as raised by the
Mississippi Attorney General and seeking approximately $12.4 million in
additional payments under the Florida Settlement Agreement, as well as
$17.0 million in interest payments. Discovery in this matter is
underway. On October 28, 2008, Vibo Corporation, Inc. d/b/a General
Tobacco, referred to as General, filed a complaint in the U.S. District
Court for the Western District of Kentucky against RJR Tobacco and
other participating manufacturers, referred to as PMs, under the MSA,
and the Attorney Generals of the 52 states and territories that are
parties to the MSA. General sought, among other things, to enjoin
enforcement of certain provisions of the MSA and an order relieving it
of certain of its payment obligations under the MSA and, in the event
such relief was not granted, rescission of General's 2004 agreement to
join the MSA. General also moved for a preliminary injunction that,
among other things, would have enjoined the states from enforcing
certain of General's payment obligations under the MSA. On November 14,
2008, RJR Tobacco and the other defendants moved to dismiss General's
119
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
complaint. On January 5, 2009, the court issued a memorandum opinion
and order granting the defendants' motions and dismissing General's
lawsuit. On December 11, 2008, General filed a second complaint, for
declaratory relief under the MSA in the California Superior Court for
the County of San Diego against the State of California and RJR Tobacco
and other PMs under the MSA. General's complaint seeks a declaration
that a proposed amendment to its agreement to join the MSA, under which
it would no longer have to make certain MSA payments, did not trigger
the MSA's "most favored nations" provision or require that the settling
states agree to make similar terms available to other PMs. Defendants'
answer or other response is due on February 17, 2009. In December 2007,
nine states (California, Connecticut, Illinois, Maine, Maryland, New
York, Ohio, Pennsylvania and Washington) sued RJR Tobacco claiming that
an advertisement published in a magazine the prior month violated the
MSA's ban on the use of cartoons. The states asserted that the
magazine's content adjacent to a Camel gatefold advertisement included
cartoon images prohibited by the MSA and that certain images used in
the Camel ad itself were prohibited cartoons. In addition, three states
(Connecticut, New York and Maryland) also claimed that a direct mail
piece distributed by RJR Tobacco violated the MSA prohibition against
distributing utilitarian items bearing a tobacco brand name. Each state
sought injunctive relief and punitive monetary sanctions. Seven of the
nine courts have since ruled that the states are not entitled to the
punitive sanctions being sought. (The issue has not been resolved
definitively by the other two courts at this time). Three of these
cases have been ruled upon following bench trials. In two states
(Washington and Maine), RJR Tobacco received complete defense rulings.
In one state (Ohio), the Court agreed that the Camel advertisement did
not use any cartoons, but ruled that the company should have prevented
the use of cartoons in magazine-created content next to the RJR Tobacco
advertisement. No monetary sanctions were awarded; however, the state
has submitted a petition to recover approximately $43,000 in attorneys'
fees and costs. RJR Tobacco has filed a notice of appeal and believes
it has strong bases for the appeal. RJR Tobacco is awaiting rulings by
the courts in two cases. Finally, in
Stewart v. RJR Tobacco,
a
class-action
filed in California state court against the magazine's publisher,
Wenner Media, and RJR Tobacco claiming the mention of bands in the
magazine-created content violated their right of publicity. The
plaintiffs seek compensatory and punitive damages. This case is still
in a preliminary phase.
NPM Adjustment.
The MSA includes an adjustment, referred to as an NPM Adjustment, that
potentially reduces the annual payment obligations of RJR Tobacco and
the other participating manufacturers, with all participating
manufacturers referred to as PMs. Certain requirements must be
satisfied before the NPM Adjustment for a given year is available: (1)
an independent auditor designated under the MSA must determine that the
PMs have experienced a market share loss beyond a triggering threshold
to those manufacturers that do not participate in the MSA, such
non-participating manufacturers referred to as NPMs, and (2) in a
binding arbitration proceeding, a firm of independent economic
consultants must find that the disadvantages of the MSA were a
significant factor contributing to the loss. When these two
requirements are satisfied, the MSA provides that the NPM Adjustment
applies to reduce the annual payment obligation of the PMs. However, an
individual settling state may avoid its share of the NPM Adjustment if
it had in place and diligently enforced during the entirety of the
relevant year a "Qualifying Statute" that imposes escrow obligations on
NPMs that are comparable to what the NPMs would have owed if they had
joined the MSA. In such event, the state's share of the NPM Adjustment
is reallocated to other settling states, if any, that did not have in
place and diligently enforce a Qualifying Statute.
NPM Adjustment Claim for 2003.
For 2003, the MSA independent auditor determined that the PMs suffered
a market share loss sufficient to trigger an NPM Adjustment. In March
2006, the independent economic consulting firm issued a final,
non-appealable determination that the disadvantages of the MSA were "a
significant factor contributing" to the 2003 market share loss. Based
on these determinations, on April 17, 2006, RJR Tobacco placed
approximately $647 million of its MSA payment into a disputed payments
account, in accordance with a procedure established by the MSA. That
amount represented RJR Tobacco's share of the 2003 NPM Adjustment as
calculated by the MSA independent auditor. On March 28, 2007, the
independent auditor issued revised calculations that reduced RJR
Tobacco's share of the NPM Adjustment for 2003 to approximately $615
million. As a result, on April 19, 2007, RJR Tobacco instructed the
independent auditor to release to the settling states approximately $32
million from the disputed payments account.
120
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Following RJR Tobacco's payment of a portion of its 2006 MSA payment
into the disputed payments account, 37 of the settling states filed
legal proceedings in their respective MSA courts seeking declaratory
orders that they diligently enforced their Qualifying Statutes during
2003 and/or orders compelling RJR Tobacco and the other PMs that placed
money in the disputed payments account to pay the disputed amounts to
the settling states. In response, RJR Tobacco and other PMs, pursuant
to the MSA's arbitration provisions, moved to compel arbitration of the
parties' dispute concerning the 2003 NPM Adjustment, including the
States' diligent enforcement claims, before a single, nationwide
arbitration panel of three former federal judges. The settling states
opposed these motions, arguing, among other things, that the issue of
diligent enforcement must be resolved by MSA courts in each of the 52
settling states and territories. As of February 6, 2009, all 48 courts
that had addressed the question whether the dispute concerning the 2003
NPM Adjustment is arbitrable had ruled that arbitration is required
under the MSA. In 42 states, the orders compelling arbitration are
final and/or non-appealable. On December 8, 2008, RJR Tobacco and
certain other PMs entered into an Agreement Regarding Arbitration,
referred to as the Agreement, with 25 of the settling states. The
Agreement establishes October 1, 2009, as the date by which arbitration
begins. To encourage the participation of the settling states, the
Agreement provided certain financial incentives to the signing settling
states, in the form of a potential reduction in the amount of a given
settling state's liability (if any) with respect to the 2003 NPM
Adjustment, as well as the potential for release of a portion of
certain amounts deposited in the disputed payments account by RJR
Tobacco and certain other PMs in connection with the 2005 NPM
Adjustment. Other settling states were given until January 30, 2009, to
sign the Agreement and also receive the benefit of the financial
incentives provided in that agreement. As of January 30, 2009, 45 of
the settling states, representing approximately 90% of the allocable
share of the settling states, had signed the Agreement. By virtue of
the fact that settling states representing allocable share greater than
80% have signed the Agreement, signing states will have their ultimate
liability (if any) with respect to the 2003 NPM Adjustment reduced by
20%, and RJR Tobacco and the other PMs that placed their share of the
disputed 2005 NPM Adjustment into the disputed payments account will,
without releasing or waiving any claims, authorize the release of those
funds to the settling states.
NPM Adjustment Claim for 2004.
During 2006, proceedings were initiated with respect to an NPM
Adjustment for 2004. The MSA independent auditor again determined that
the PMs had suffered a market share loss sufficient to trigger an NPM
Adjustment for 2004. On April 17, 2006, RJR Tobacco and other PMs
initiated the "significant factor" proceeding before the independent
economic consultant called for under the MSA. On February 12, 2007, the
independent economic consulting firm issued a final, non-appealable
determination that the disadvantages of the MSA were "a significant
factor contributing" to the 2004 market share loss. On April 16, 2007,
RJR Tobacco placed approximately $561 million of its 2007 MSA payment
into the disputed payments account. That amount represented RJR
Tobacco's share of the 2004 NPM Adjustment as calculated by the MSA
independent auditor.
NPM Adjustment Claim for 2005.
During 2007, proceedings were initiated with respect to an NPM
Adjustment for 2005. The MSA independent auditor again determined that
the PMs had suffered a market share loss sufficient to trigger an NPM
Adjustment for 2005. On April 18, 2007, RJR Tobacco and other PMs
initiated the "significant factor" proceeding called for under the MSA.
On February 7, 2008, the independent economic consulting firm issued a
final, non-appealable determination that the disadvantages of the MSA
were "a significant factor contributing" to the 2005 market share loss.
On April 15, 2008, RJR Tobacco placed approximately $431 million of its
2008 MSA payment into the disputed payments account. That amount
represented RJR Tobacco's share of the 2005 NPM Adjustment as
calculated by the independent auditor, net of certain slight
adjustments to reflect revised independent auditor calculations of RJR
Tobacco's share of the 2003 and 2004 NPM Adjustments.
NPM Adjustment Claim for 2006.
During 2008, proceedings were initiated with respect to an NPM
Adjustment for 2006. The MSA independent auditor again determined that
the PMs had suffered a market share loss sufficient to trigger an NPM
Adjustment for 2006. On April 29, 2008, RJR Tobacco and other PMs
initiated the
121
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
"significant factor" proceeding called for under the MSA. On October 6,
2008, RJR Tobacco filed its initial briefs and expert reports in
connection with the significant factor proceeding. On February 18,
2009, the independent economic consulting firm issued its preliminary
determination that the disadvantages of the MSA were "a significant
factor contributing" to the 2006 market share loss. The firm is
scheduled to issue a final determination by March 24, 2009. Due to the
uncertainty over the final resolution of the NPM Adjustment claims
asserted by RJR Tobacco, no assurances can be made related to the
amounts, if any, that will be realized.
Antitrust Cases
A number of tobacco wholesalers and consumers have sued U.S. cigarette
manufacturers, including RJR Tobacco and B&W, in federal and state
courts, alleging that cigarette manufacturers combined and conspired to
set the price of cigarettes in violation of antitrust statutes and
various state unfair business practices statutes. In these cases, the
plaintiffs asked the court to certify the lawsuits as
class
actions on behalf of other persons who purchased cigarettes
directly or indirectly from one or more of the defendants. As of
February 6, 2009, all of the federal and state court cases on behalf of
indirect purchasers have been dismissed, except for one state court
case pending in each of Kansas and in New Mexico. In
Smith v. Philip Morris Cos., Inc.,
a case filed in February 2000, and pending in District Court, Seward
County, Kansas, the court granted class certification on November 15,
2001, in an action brought against the major U.S. cigarette
manufacturers, including RJR Tobacco and B&W, and the parent
companies of the major U.S. cigarette manufacturers, including RJR,
seeking to recover an unspecified amount in actual and punitive
damages. The plaintiffs allege that the defendants participated in a
conspiracy to fix or maintain the price of cigarettes sold in the
United States. The parties are currently engaged in discovery. In
Romero v. Philip Morris Cos., Inc.,
a case filed in April 2000 in District Court, Rio Arriba County, New
Mexico, the court granted class certification on May 14, 2003, in an
action brought against the major U.S. cigarette manufacturers,
including RJR Tobacco and B&W, and the parent companies of the
major U.S. cigarette manufacturers, including RJR, seeking to recover
an amount not to exceed $74,000 per class member in actual and punitive
damages, exclusive of interest and costs. The plaintiffs allege that
the defendants conspired to fix, raise, advance and/or stabilize prices
for cigarettes in the State of New Mexico from at least as early as
January 1, 1998, through the present. On June 30, 2006, the court
granted the defendants' motion for summary judgment. On November 18,
2008, the New Mexico Court of Appeals reversed the grant of summary
judgment in favor of RJR Tobacco, B&W and Philip Morris. On January
7, 2009, RJR Tobacco filed a petition of writ of certiorari with the
Supreme Court of the State of New Mexico. RJR Tobacco awaits a ruling
on that petition.
Other Litigation and Developments
By purchase agreement dated May 12, 1999, referred to as the 1999
Purchase Agreement, RJR and RJR Tobacco sold the international tobacco
business to JTI. RJR and RJR Tobacco retained certain liabilities
relating to the activities of Northern Brands, including those relating
to a 1998 guilty plea entered in the U.S. District Court for the
Northern District of New York, as well as an investigation conducted by
the Royal Canadian Mounted Police, referred to as RCMP, for possible
violations of Canadian law related to the activities that led to the
Northern Brands guilty plea and certain conduct by Stanley Smith, a
former executive of RJR-Macdonald, Inc., referred to as RJR-MI, which
led to the termination of his severance agreement. Under its reading of
the indemnification provisions of the 1999 Purchase Agreement, JTI has
requested indemnification for any damages arising out of the matters
described below.
| |
* |
In February 2003, the RCMP filed
criminal charges in the Province of Ontario against, and purported to
serve summonses on, JTI-Macdonald Corp., referred to as JTI-MC,
Northern Brands, R. J. Reynolds Tobacco International, Inc., referred
to as RJR-TI, R. J. Reynolds Tobacco Co., Puerto Rico, referred to as
RJR-PR, and eight individuals associated with RJR-MI and/or RJR-TI
during the period January 1, 1991, through December 31, 1996. The
charges allege fraud and conspiracy to defraud Canada and the Provinces |
122
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| |
|
of Ontario and Quebec in connection
with the purchase, sale, export, import and/or re-export of cigarettes
and/or fine cut tobacco. In October 2003, Northern Brands, RJR-TI and
RJR-PR each challenged both the propriety of the service of the
summonses and the jurisdiction of the court. On February 9, 2004, the
Superior Court of Justice ruled in favor of these companies. The
government filed a notice of appeal from that ruling on February 18,
2004, but did not perfect its appeal until May 8, 2007. At the oral
argument on October 29, 2007, the Court of Appeal announced a unanimous
decision in favor of the companies' position and dismissed the
government's appeal. A final written order dismissing the appeal was
entered by the Court of Appeal on December 3, 2007. |
A preliminary hearing was commenced on April 11, 2005, for the purpose
of determining whether the Canadian prosecutor had sufficient evidence
supporting the criminal charges to justify a trial of the defendants
that had been properly served to date. On May 30, 2007, the court
announced its decision to issue an order committing two of the accused,
JTI-MC and Edward Lang, to stand trial on the charges filed in February
2003 and discharging the other six accused. JTI-MC and Mr. Lang
separately filed papers seeking an order quashing the order committing
them to stand trial, and the government filed papers seeking an order
quashing the order discharging six of the accused. On December 19,
2007, JTI-MC abandoned its effort to have the order committing it to
trial quashed. On February 19, 2008, the Superior Court of Justice in
Ontario denied Mr. Lang's request to quash the order committing him to
trial. The court granted the government's request to quash the order
discharging six individuals and remanded the matter to the preliminary
hearing judge for reconsideration. No appeals were taken from that
decision. The matter is currently being reconsidered by the preliminary
hearing judge. On July 31, 2007, each of the accused companies,
including RJR-TI, RJR-PR and Northern Brands, and each of the seven
accused individuals were given notice that the Canadian prosecutor had
requested the Attorney General of Ontario to consent to the issuance of
preferred indictments against each of them. RJR-TI, RJR-PR and Northern
Brands as well as the other accused filed written submissions with the
Attorney General opposing the issuance of the indictments against them.
On October 31, 2007, the Office of the Attorney General of Ontario
confirmed that the prosecutor's request for preferred indictments
against RJR-TI, RJR-PR and Northern Brands had been denied at that
point in time.
| |
* |
In July 2003, a Statement of Claim
was filed against JTI-MC and others in the Superior Court of Justice,
Ontario, Canada by Leslie and Kathleen Thompson. Mr. Thompson is a
former employee of Northern Brands and JTI-MC's predecessor, RJR-MI.
Mr. and Mrs. Thompson have alleged breach of contract, breach of
fiduciary duty and negligent misrepresentation, among other claims.
They are seeking lost wages and other damages, including punitive
damages, in an aggregate amount exceeding $12 million. |
| |
* |
On September 18, 2003, RJR, RJR
Tobacco, RJR-TI, RJR-PR, and Northern Brands were served with a
Statement of Claim filed in August 2003 by the Attorney General of
Canada in the Superior Court of Justice, Ontario, Canada. Also named as
defendants are JTI and a number of its affiliates. The Statement of
Claim seeks to recover taxes and duties allegedly not paid as a result
of cigarette smuggling and related activities. As filed, the Attorney
General's Statement of Claim seeks to recover $1.5 billion Canadian in
compensatory damages and $50 million Canadian in punitive damages, as
well as equitable and other forms of relief. However, in the Companies'
Creditor Arrangement Act proceeding described below, the Attorney
General amended and increased Canada's claim to $4.3 billion Canadian.
The parties have agreed to a stay of all proceedings pending in the
Superior Court of Justice, subject to notice by one of the parties that
it wishes to terminate the stay. On January 19, 2007, the court ordered
that the case be scheduled for trial no later than December 31, 2008,
subject to further order of the court. On January 15, 2009, the Court
ordered that the deadline for setting the action for trial is January
31, 2011. |
| |
* |
In August 2004, the Quebec Ministry
of Revenue (1) issued a tax assessment, covering the period January 1,
1990, through December 31, 1998, against JTI-MC for alleged unpaid
duties, penalties and interest in an amount of about $1.36 billion
Canadian; (2) issued an order for the immediate payment of that amount;
and (3) obtained an ex parte judgment to enforce the payment of that
amount. On August 24, 2004, JTI-MC applied |
123
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
| |
|
for protection under the Companies'
Creditor Arrangement Act in the Ontario Superior Court of Justice,
Toronto, Canada, referred to as CCAA Proceedings, and the court entered
an order staying the Quebec Ministry of Revenue's proceedings as well
as other claims and proceedings against JTI-MC. The stay has been
extended to July 21, 2009. In November 2004, JTI-MC filed a motion in
the Superior Court, Province of Quebec, District of Montreal, seeking a
declaratory judgment to set aside, annul and declare inoperative the
tax assessment and all ancillary enforcement measures and to require
the Quebec Minister of Revenue to reimburse JTI-MC for funds unduly
appropriated, along with interest and other relief. Pursuant to a
court-imposed deadline, Canada and several Provinces filed Crown claims
against JTI-MC in the CCAA Proceedings in the following amounts:
Canada, $4.3 billion Canadian; Ontario, $1.5 billion Canadian; New
Brunswick, $1.5 billion Canadian; Quebec, $1.4 billion Canadian;
British Columbia, $450 million Canadian; Nova Scotia, $326 million
Canadian; Prince Edward Island, $75 million Canadian and Manitoba, $23
million Canadian. In the CCAA Proceedings, the Canadian federal
government and some of the provincial governments have asserted that
they can make the same tax and related claims against RJR and certain
of its subsidiaries, including RJR Tobacco. To date, none of those
provincial governments have filed and served RJR or any of its
affiliates with a formal Statement of Claim like the Canadian federal
government did in August and September 2003. Discussions regarding
possible agreed-upon procedures for adjudicating and appellate review
of the claims and defenses asserted in the CCAA Proceedings are taking
place. Without waiving any of their rights and defenses, RJR and
certain of its subsidiaries, including RJR Tobacco, may participate in
those proceedings, if procedures are agreed upon, approved by the court
and implemented. |
| |
* |
On November 17, 2004, a Statement
of Claim was filed against JTI-MC in the Supreme Court of British
Columbia by Stanley Smith, a former executive of RJR-MI, for alleged
breach of contract and other legal theories. Mr. Smith is claiming
$840,000 Canadian for salary allegedly owed under his severance
agreement with RJR-MI, as well as other unspecified compensatory and
punitive damages. |
| |
* |
In a letter dated March 31, 2006,
counsel for JTI stated that JTI would be seeking indemnification under
the 1999 Purchase Agreement for any damages it may incur or may have
incurred arising out of a Southern District of New York grand jury
investigation, a now-terminated Eastern District of North Carolina
grand jury investigation, and various actions filed by the European
Community and others in the U.S. District Court for the Eastern
District of New York, referred to as the EDNY, against RJR Tobacco and
certain of its affiliates on November 3, 2000, August 6, 2001, and (as
discussed in greater detail below) October 30, 2002, and against JTI on
January 11, 2002. |
| |
* |
On December 14, 2007, the European
Community and 26 member states entered into a series of agreements with
JTI and/or its subsidiaries regarding, principally, contraband and
counterfeit cigarettes bearing JTI trademarks in the European
Community. Collectively, those agreements resolved, in pertinent part,
all claims that the European Community and member states either had or
might have had prior to December 14, 2007 against JTI and/or its
subsidiaries with respect to any such contraband and counterfeit
cigarettes and claims for which JTI could become the subject of a claim
for indemnity by RJR under the terms of the 1999 Purchase Agreement. In
addition, the European Community and signatory member states agreed to
release RJR and its affiliates from those same claims. |
Although RJR and RJR Tobacco recognize that, under certain
circumstances, they may have indemnification obligations to JTI under
the 1999 Purchase Agreement, RJR and RJR Tobacco disagree with JTI as
to whether the circumstances relating to any of these matters give rise
to any indemnification obligation by RJR and RJR Tobacco. RJR and RJR
Tobacco conveyed their position to JTI, and the parties have agreed to
resolve their differences at a later time. In the interim, RJR and RJR
Tobacco are paying defense costs and expenses in connection with
certain of the Canadian litigation described above. Indemnification to
JTI was $11 million in 2008 and $8 million in 2007. In addition, as of
December 31, 2008, RJR, including its subsidiary RJR Tobacco, had
liabilities of $94 million that were recorded in 1999 in connection
with certain of the indemnification claims asserted by JTI. For further
information on the JTI indemnification claims, see "-- Other
Contingencies" below.
124
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On May 15, 2007, RAI was served with a subpoena issued by the U.S.
District Court for the Middle District of North Carolina. The subpoena
seeks documents relating primarily to the business of RJR-TI regarding
the manufacture and sale of Canadian brand cigarettes during the period
1990 through 1996. The subpoena was issued at the request of Canada
pursuant to a Mutual Legal Assistance Treaty between the United States
and Canada. On October 30, 2002, the European Community and ten of its
member states filed a complaint in the EDNY against RJR, RJR Tobacco
and several currently and formerly related companies. The complaint
contains many of the same or similar allegations found in an earlier
complaint, now dismissed, filed in August 2001 and also alleges that
the defendants, together with certain identified and unidentified
persons, engaged in money laundering and other conduct violating civil
RICO and a variety of common laws. The complaint also alleges that the
defendants manufactured cigarettes that were eventually sold in Iraq in
violation of U.S. sanctions. The plaintiffs seek compensatory, punitive
and treble damages among other types of relief. This matter has been
stayed. The European Community and the member states have recently
suggested that they may file similar claims regarding the U.S. tobacco
business of B&W, which was acquired in 2004 in the B&W business
combination. RJR Tobacco was named a defendant in a number of lawsuits
originally filed in various federal courts in 2002 by plaintiffs
alleging descent from persons held in slavery in the United States and
seeking damages from numerous corporate defendants for having allegedly
profited from historic slavery. In October 2002, those actions were
consolidated by the Judicial Panel on Multidistrict Litigation for
pre-trial proceedings in the U.S. District Court for the Northern
District of Illinois. On July 6, 2005, the court dismissed the entire
action on a variety of grounds. On December 13, 2006, the U.S. Court of
Appeals for the Seventh Circuit affirmed dismissal in all respects but
one. It remanded some cases for further proceedings limited to the
claims by some plaintiffs that present-day representations about
historic ties to slavery by some defendants violated state consumer
fraud laws. On October 1, 2007, the U.S. Supreme Court denied
plaintiffs' petition for a writ of certiorari. The plaintiffs in all
but one of the cases either voluntarily dismissed their claims or
otherwise abandoned the litigation. On August 11, 2008, the district
court granted the defendants' motion to dismiss the "remaining
plaintiffs' and terminated the case. However, the motion to dismiss
excluded plaintiffs Timothy and Chester Hurdle, who filed a third
amended complaint on July 31, 2007. No ruling was made on the motion to
dismiss the Hurdle plaintiffs and the plaintiffs named in the third
amended complaint. On May 23, 2001, and July 30, 2002, Star Scientific,
Inc., referred to as Star, filed two patent infringement actions, which
have been consolidated, against RJR Tobacco in the U.S. District Court
for the District of Maryland. Both patents at issue are entitled
"Method of Treating Tobacco to Reduce Nitrosamine Content, and Products
Produced Thereby," and bear U.S. Patent Nos. 6,202,649 and 6,425,401.
The plaintiffs sought: the entry of an injunction restraining RJR
Tobacco from further acts of infringement, inducement of infringement,
or contributory infringement of the patents; an award of damages,
including a reasonable royalty, to compensate for the infringement; an
award of enhanced damages on account that the defendant's conduct was
willful; an award of pre-judgment interest and a further award of
post-judgment interest; an award of reasonable attorneys' fees; and an
order requiring RJR Tobacco to deliver up to the court for destruction
all products manufactured from any process which infringes upon,
directly or indirectly or otherwise, any claim of such patent. RJR
Tobacco filed counterclaims seeking a declaration that the claims of
the two Star patents are invalid, unenforceable and not infringed by
RJR Tobacco. Between January 31 and February 8, 2005, the court held a
first bench trial on RJR Tobacco's affirmative defense and counterclaim
based upon inequitable conduct. Additionally, in response to the
court's invitation, RJR Tobacco filed two summary judgment motions on
January 20, 2005. On January 19, 2007, the court granted RJR Tobacco's
motion for summary judgment of invalidity based on indefiniteness. The
court granted in part and denied in part RJR Tobacco's other summary
judgment motion concerning the effective filing date of the patents in
suit. On June 26, 2007, the court ruled that Star's patents are
unenforceable due to inequitable conduct by Star and its
representatives in the U.S. Patent & Trademark Office. On June 26,
2007, the court also entered final judgment in favor of RJR Tobacco and
against Star, dismissing all of Star's claims with prejudice. On June
27, 2007, Star filed a notice of appeal with the U.S. Court of Appeals
for the Federal Circuit. Oral argument occurred on March 7, 2008.
125
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On August 25, 2008, the Federal Circuit issued a decision reversing the
district court's holdings and remanded the case to the district court
for further proceedings on the issues of validity and infringement. On
September 2, 2008, Star filed a motion for reassignment of the case on
remand to a new trial judge. On September 5, 2008, the Federal Circuit
denied that motion. The Federal Circuit denied RJR Tobacco's combined
petition for panel hearing and rehearing en banc on October 22, 2008.
The district court has scheduled the trial to be held during the period
of April 20 to May 29, 2009. On December 31, 2008, RJR Tobacco
petitioned the U.S. Patent Office to reexamine Star's patents-in-suit.
On January 16, 2009, RJR Tobacco filed a petition for writ of
certiorari to the U.S. Supreme Court. On January 30, 2009, RJR Tobacco
filed summary judgment motions of invalidity based in indefiniteness,
of invalidity based on 35 U.S.C. § 101, of invalidity based on
anticipation and obviousness, and for noninfringement. On February 12,
2009, the U.S. Patent Office issued an order granting request for ex
parte reexamination as to the petition filed on December 31, 2008. A
Civil Investigative Demand, referred to as the CID, was issued by the
FTC to RJR Tobacco on August 23, 2007, to determine whether RJR
Tobacco's advertising and marketing related to the Camel No. 9
cigarette brand may violate the FTC Act. The CID requires RJR Tobacco
to produce documents and answer interrogatories. On January 7, 2008,
RJR Tobacco certified as complete its production of documents to the
FTC. Finally, in the first quarter of 2005, Commonwealth Brands, Inc.,
referred to as Commonwealth, was served with an individual smoking and
health case,
Croft v. Akron Gasket
in Cuyahoga County, Ohio. Commonwealth requested indemnity from RJR
Tobacco pursuant to the Asset Purchase Agreement dated July 24, 1996,
between Commonwealth and B&W, referred to as the 1996 Purchase
Agreement. As a result of the B&W business combination, RJR Tobacco
agreed to indemnify Commonwealth for this claim to the extent, if any,
required by the 1996 Purchase Agreement. The scope of the indemnity
will be at issue and has not been determined.
Smokeless Tobacco Litigation
As of February 6, 2009, Conwood Company, LLC was a defendant in six
actions brought by individual plaintiffs in West Virginia state court
seeking damages in connection with personal injuries allegedly
sustained as a result of the usage of the Conwood companies' smokeless
tobacco products. These actions are pending before the same West
Virginia court as the 687 consolidated individual smoker cases against
RJR Tobacco, B&W, as RJR Tobacco's indemnitee, or both. Pursuant to
the court's December 3, 2001, order, the smokeless tobacco claims and
defendants remain severed. Pursuant to a second amended complaint filed
in September 2006, Conwood Company, LLC is a defendant in
Vassallo v. United States Tobacco Company
, pending in the Eleventh Circuit Court in Miami-Dade County, Florida.
The individual plaintiff alleges that he sustained personal injuries,
including addiction and cancer, as a result of his use of smokeless
tobacco products, allegedly including products manufactured by the
Conwood companies. The plaintiff seeks unspecified compensatory and
consequential damages in an amount greater than $15,000. There is not a
punitive damages demand in this case, though the plaintiff retains the
right to seek leave of court to add such a demand later. Discovery is
underway.
Tobacco Buyout Legislation and Related Litigation
On October 22, 2004, the President signed the Fair and Equitable
Tobacco Reform Act of 2004, referred to as FETRA, eliminating the U.S.
government's tobacco production controls and price support program. The
buyout of tobacco quota holders provided for in FETRA is funded by a
direct quarterly assessment on every tobacco product manufacturer and
importer, on a market-share basis measured on volume to which federal
excise tax is applied. The aggregate cost of the buyout to the industry
is approximately $9.9 billion, including approximately $9.6 billion
payable to quota tobacco holders and growers through industry
assessments over ten years and approximately $290 million for the
liquidation of quota tobacco stock. As a result of the tobacco buyout
legislation, the MSA Phase II obligations established in 1999 will be
continued as scheduled through the end of 2010, but will be offset
against the tobacco quota buyout obligations. RAI's operating
subsidiaries' annual expense under FETRA,
126
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
excluding the tobacco stock liquidation assessment, is estimated to be
approximately $230 million to $260 million. In 2006, a $9 million
favorable adjustment was recorded relating to the tobacco stock
liquidation assessment. Remaining contingent liabilities for
liquidation of quota tobacco stock, if any, will be recorded when an
assessment is made. See note 1 for additional information related to
federal tobacco buyout expenses. RAI's operating subsidiaries will
record the FETRA assessment on a quarterly basis as cost of goods sold.
RAI's operating subsidiaries estimate that their overall share of the
buyout will approximate $2.3 billion to $2.8 billion prior to the
deduction of permitted offsets under the MSA. In addition, future
market pricing could impact the carrying value of inventory, and
adversely affect RJR Tobacco's financial position and results of
operations. As noted above, the MSA Phase II obligations will be offset
against the tobacco quota buyout obligations. Because growers in two
states, Maryland and Pennsylvania, did not participate in the quota
system, they are not eligible for payments under FETRA. Given that the
assessments paid by tobacco product manufacturers and importers under
FETRA would fully offset their MSA Phase II payment obligations, the
growers in Maryland and Pennsylvania would no longer receive payments
under the MSA Phase II program. Thus, the growers in these two states
would not receive payment under either FETRA or the MSA Phase II
program. On December 17, 2004, Maryland and Pennsylvania filed in the
North Carolina Business Court a Motion for Clarification or
Modification of the Trust, that is, the Growers Trust that created the
MSA Phase II obligations. They later supplemented this filing with a
Statement of Claim, filed on June 24, 2005. Maryland and Pennsylvania
contend that they are entitled to relief from the operation of the tax
offset adjustment provision of the Growers Trust and that payments
under the Growers Trust to the growers in their states should continue.
Following discovery, the parties filed cross-motions for summary
judgment on May 5, 2006. On August 17, 2007, the Business Court granted
summary judgment in favor of Maryland and Pennsylvania and denied
summary judgment to the tobacco manufacturers, including RJR Tobacco,
that were the settlors of the Growers Trust. The Business Court ruled
that the Growers Trust, as written and without judicial modification,
requires continuing payments to the Growers Trust for the benefit of
tobacco growers in Maryland and Pennsylvania. RJR Tobacco and the other
tobacco manufacturer/settlors filed their Notice of Appeal on September
14, 2007. On January 14, 2008, RJR Tobacco and the other tobacco
manufacturer/settlors filed a petition seeking direct discretionary
review by the North Carolina Supreme Court. On February 25, 2008, the
North Carolina Supreme Court denied that petition. On August 20, 2008,
oral arguments were held before the North Carolina Court of Appeals. On
December 16, 2008, the North Carolina Court of Appeals, in a 2-1
decision, reversed the Business Court and remanded the case for entry
of judgment in favor of RJR Tobacco and the other tobacco
manufacturers/settlors. On January 20, 2009, Maryland and Pennsylvania
filed an appeal of right based on the dissenting opinion and also filed
a petition for discretionary review on certain additional issues. On
January 30, 2009, RJR Tobacco and the other tobacco
manufacturers/settlors filed a response to the states' petition for
discretionary review. The states' brief to the North Carolina Supreme
Court on the appeal of right is due on February 19, 2009.
ERISA Litigation
On May 13, 2002, in
Tatum v. The R.J.R. Pension Investment Committee of the R. J.
Reynolds Tobacco Company Capital Investment Plan
, an employee of RJR Tobacco filed a
class-action suit in the U.S.
District Court for the Middle District of North Carolina, alleging that
the defendants, RJR, RJR Tobacco, the RJR Employee Benefits Committee
and the RJR Pension Investment Committee, violated the Employee
Retirement Income Security Act of 1974, referred to as ERISA. The
actions about which the plaintiff complains stem from a decision made
in 1999 by RJR Nabisco Holdings Corp., subsequently renamed Nabisco
Group Holdings Corp., referred to as NGH, to spin off RJR, thereby
separating NGH's tobacco business and food business. As part of the
spin-off, the 401(k) plan for the previously related entities had to be
divided into two separate plans for the now separate tobacco and food
businesses. The plaintiff contends that the defendants violated ERISA
by not overriding an amendment to RJR's 401(k) plan requiring that,
prior to February 1, 2000, the stock funds of the companies involved in
the food business, NGH and Nabisco Holdings Corp., referred to as
Nabisco, be eliminated as investment options from RJR's 401(k) plan. In
his complaint, the plaintiff requests, among other things, that the
court require the defendants to pay
127
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
as damages to the RJR 401(k) plan an amount equal to the subsequent
appreciation that was purportedly lost as a result of the liquidation
of the NGH and Nabisco funds. The district court granted the
defendants' motion to dismiss on December 10, 2003. On December 14,
2004, the U.S. Court of Appeals for the Fourth Circuit reversed and
remanded the case for further proceedings. On January 20, 2005, the
defendants filed a second motion to dismiss on other grounds. On March
7, 2007, the court granted the plaintiff leave to file an amended
complaint and denied all pending motions as moot. On April 6, 2007, the
defendants moved to dismiss the amended complaint. On May 31, 2007, the
court granted the motion in part and denied it in part, dismissing all
claims against the RJR Employee Benefits Committee and the RJR Pension
Investment Committee. The remaining defendants, RJR and RJR Tobacco,
filed their answer and affirmative defenses on June 14, 2007. On June
28, 2007, the plaintiff filed a motion to amend the complaint to add as
parties defendant the six members of the RJR Pension Investment
Committee and the RJR Employee Benefits Committee. On March 13, 2008,
the court denied this motion. On November 19, 2007, the plaintiff filed
a motion for class certification, which the court granted on September
29, 2008. Court ordered mediation occurred on July 10, 2008, but no
resolution of the case was reached. On May 29, 2008, the defendants
filed a motion for judgment on the pleadings, which asked the court to
dismiss the claims asserted by class members who voluntarily
transferred their 401(k) investments from the NGH and Nabisco funds
before January 31, 2000. That motion remains outstanding. On September
18, 2008, each of the plaintiffs and the defendants filed motions for
summary judgment. A decision is pending. Finally, on January 9, 2009,
the defendants filed a motion to decertify the class; that motion
remains pending as well.
Employment Litigation
On March 19, 2007, in
Marshall v. R.J. Reynolds Tobacco Co
., the plaintiff filed a collective action complaint against RJR
Tobacco in the U.S. District Court for the Western District of Missouri
alleging violations of the Fair Labor Standards Act, referred to as
FLSA. The allegations include failure to keep accurate records of all
hours worked by RJR Tobacco's employees and failure to pay wages and
overtime compensation to non-exempt retail representatives. The total
number of current or former retail representatives participating is
469, including those who have opted in the
Marshall
case and subsequent lawsuits filed in New York and California as
described below. Two new cases alleging violations of the FLSA and
other state law wage and hour claims were filed in February 2008:
Radcliffe v. R.J. Reynolds Tobacco Co.
, filed on February 14, 2008, in federal court in California, was
served on May 9, 2008; and
Dinino v. R.J. Reynolds Tobacco Co.
, filed on February 29, 2008, in federal court in New York, was served
on April 18, 2008. The
Dinino
and
Radcliffe
matters have been transferred to the Missouri court in conjunction with
the already pending
Marshall
case due to the similarity of issues to be resolved. The plaintiffs in
the
Dinino
and
Radcliffe
matters failed to move for class certification on the state law claims.
On December 22, 2008, RJR Tobacco's motion for partial summary judgment
was granted. The court ruled that the plaintiffs' commutes from their
homes to their first assignment of the day, and their commutes from
their last assignments of the day to their homes, are non-compensable.
On February 5, 2009, the court denied the plaintiffs' motion for
reconsideration on this issue or, in the alternative, plaintiffs'
request for certification for interlocutory appeal. The case is still
in the discovery phase. Mediation was held on February 3, 2009, but the
parties were unable to reach a resolution.
Environmental Matters
RAI and its subsidiaries are subject to federal, state and local
environmental laws and regulations concerning the discharge, storage,
handling and disposal of hazardous or toxic substances. Such laws and
regulations provide for significant fines, penalties and liabilities,
sometimes without regard to whether the owner or operator of the
property knew of, or was responsible for, the release or presence of
hazardous or toxic substances. In addition, third parties may make
claims against owners or operators of properties for personal injuries
and property damage associated with releases of hazardous or toxic
substances. In the past, RJR Tobacco has been named a potentially
128
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
responsible party with third parties under the Comprehensive
Environmental Response, Compensation and Liability Act with respect to
several superfund sites. RAI and its subsidiaries are not aware of any
current environmental matters that are expected to have a material
adverse effect on the business, results of operations or financial
position of RAI or its subsidiaries. Regulations promulgated by the
U.S. Environmental Protection Agency and other governmental agencies
under various statutes have resulted in, and likely will continue to
result in, substantial expenditures for pollution control, waste
treatment, plant modification and similar activities. RAI and its
subsidiaries are engaged in a continuing program to comply with
federal, state and local environmental laws and regulations, and
dependent upon the probability of occurrence and reasonable estimation
of cost, accrue or disclose any material liability. Although it is
difficult to reasonably estimate the portion of capital expenditures or
other costs attributable to compliance with environmental laws and
regulations, RAI does not expect such expenditures or other costs to
have a material adverse effect on the business, results of operations
or financial position of RAI or its subsidiaries.
Other Contingencies
In connection with the sale of the international tobacco business to
JTI, on May 12, 1999, pursuant to the purchase agreement, RJR and RJR
Tobacco agreed to indemnify JTI against:
| |
* |
any liabilities, costs and expenses
arising out of the imposition or assessment of any tax with respect to
the international tobacco business arising prior to the sale, other
than as reflected on the closing balance sheet; |
| |
* |
any liabilities, costs and expenses
that JTI or any of its affiliates, including the acquired entities, may
incur after the sale with respect to any of RJR's or RJR Tobacco's
employee benefit and welfare plans; and |
| |
* |
any liabilities, costs and expenses
incurred by JTI or any of its affiliates arising out of certain
activities of Northern Brands. |
As described above in "-- Litigation Affecting the Cigarette Industry
-- Other Litigation and Developments," RJR Tobacco has received several
claims for indemnification from JTI. Although RJR and RJR Tobacco
recognize that, under certain circumstances, they may have
indemnification obligations to JTI under the 1999 Purchase Agreement,
RJR and RJR Tobacco disagree whether the circumstances described in
such claims give rise to any indemnification obligations by RJR and RJR
Tobacco. RJR and RJR Tobacco have conveyed their position to JTI, and
the parties have agreed to resolve their differences at a later date.
RJR, including its subsidiary RJR Tobacco, have liabilities totaling
$94 million that were recorded in 1999 in connection with these
indemnification claims. RJR Tobacco, Santa Fe, the Conwood companies
and Lane have entered into agreements to indemnify certain distributors
and retailers from liability and related defense costs arising out of
the sale or distribution of their products. Additionally, Santa Fe has
entered into an agreement to indemnify a supplier from liability and
related defense costs arising out of the sale or use of Santa Fe's
products. The cost has been, and is expected to be, insignificant. RJR
Tobacco, Santa Fe, the Conwood companies and Lane believe that the
indemnified claims are substantially similar in nature and extent to
the claims that they are already exposed to by virtue of their having
manufactured those products. Under certain circumstances, any fair
value that results in a liability position of certain interest rate
swaps may require full collateralization with cash or securities. No
swaps were in a liability position as of December 31, 2008. Except as
otherwise noted above, RAI is not able to estimate the maximum
potential amount of future payments, if any, related to these
guarantees and indemnification obligations.
