The Canadian tobacco litigation: Imperial Tobacco, Rothmans, Benson & Hedges and JTI-Macdonald under creditor protection

A recent decision of the Quebec Court of Appeal in class-actions lawsuit against Canada’s major tobacco distributors has forced each of the major players in the Canadian tobacco industry to seek creditor protection under the Companies’ Creditors Arrangement Act (the “CCAA”).

Imperial Tobacco, Rothmans, Benson & Hedges and JTI-Macdonald (the “Tobacco Distributors”) are the three largest tobacco distributors in Canada offering a range of tobacco-based products under multiple trademarks. They make up the majority of legal Canadian tobacco industry sales. Each of these distributors is indirectly owned by a large, international parent corporation.

All ten provincial governments have filed “Medicaid” lawsuits against the Tobacco Distributors and their parents, jointly and severally, asserting claims in excess of C$500bn, plus interest and costs. There are also many ongoing class action lawsuits against the Tobacco Distributors, advanced on behalf of various subgroups of Canadians over the years, most of which allege joint and several liability. While tobacco-related lawsuits have been ongoing across the country, a major blow to the Tobacco Distributors was recently delivered by the Quebec Court of Appeal.

In 1998, two class action lawsuits were filed against the Tobacco Distributors in the Quebec Superior Court seeking over C$20bn in compensatory and punitive damages to 100,000 Quebec victims, of lung and throat cancer and emphysema caused by consumption of cigarettes between 1950 and 1998. On February 21, 2005, both cases were granted certification. The trial was concluded in 2014 and, on May 27, 2015, Judge Brian Riordan of the Quebec Superior Court ordered the Tobacco Distributors to pay C$15.6bn in moral and punitive damages. The Tobacco Distributors appealed the Judgment to the Quebec Court of Appeal. On March 1, 2019, the Quebec Court of Appeal upheld the trial judgment, with minor modifications, in a unanimous decision.

Following the decision by the Quebec Court of Appeal, the total individual liability for Imperial Tobacco, Rothmans, Benson & Hedges, and JTI-MacDonald stand at C$9.15bn, C$2.71bn, and C$2bn respectively, with interest and additional indemnity for moral damages and punitive damages. However, the exposure of each Tobacco Distributor can be up to the value of the judgement due to joint and several liability in the event the other Tobacco Distributors are unable to satisfy their allocated portion of the damages. The total liability owing under the judgement exceeds each of the Tobacco Distributors’ assets by billions, though each of the Tobacco Distributors have healthy operating businesses.

On March 8, 12 and 22, 2019, JTI Macdonald, Imperial Tobacco and Rothmans, Benson & Hedges were respectively granted protection under the CCAA by initial orders issued by Ontario Superior Court of Justice, among other things, issuing a general stay of proceedings, which not only suspended any monies payable by the Tobacco Distributors to class-action plaintiffs following the Quebec Court of Appeal decision, but also suspended all other lawsuits against the Tobacco Distributors.

As part of the CCAA proceedings, the Ontario Superior Court of Justice appointed a claimant coordinator to coordinate the complex tobacco-related claims and serve as liaison between all of the parties involved across the three CCAA proceedings. The claimant coordinator’s role was later extended to act as the Court-appointed mediator in the proceedings.

The CCAA process could result in a comprehensive resolution between the Tobacco Distributors and not only the Quebec class-action plaintiffs but also the plaintiffs in the provincial and other lawsuits against the Tobacco Distributors. Precedent for a settlement of similar lawsuits can be found in the United States. In the 1990s, Philip Morris USA and its rivals entered a settlement that forced them to make annual payments to 46 states in perpetuity, including US$206bn over the first 25 years. In the alternative, the Ontario Superior Court of Justice could lift the stay of proceedings to allow the Tobacco Distributors to appeal the judgement by the Quebec Court of Appeal before the Supreme Court of Canada to give the Tobacco Distributors a final chance for rebuttal. According to a spokesperson for Imperial Tobacco Canada, the company intends to challenge the judgement.

The legal challenges have so far had little impact on the market capitalization of the publicly listed parent companies. According to analysts, the impact on value has been muted because the cases are likely to drag on for some time. In addition, the Tobacco Distributors only generate a small percentage of the earnings for any of their parent companies. In contrast to the Quebec class actions, the “Medicaid” lawsuits by the ten provincial governments against the Tobacco Distributors pose a bigger threat by naming parent companies as co-defendants, though progress in the provincial litigation has been slow. For example, British Columbia filed its claim 18 years ago. Insolvency practitioners in Canada will likely be following and dealing with the tobacco litigation for years to come, unless the proceedings of the Tobacco Distributors under the CCAA lead to a comprehensive resolution.