Those Smoking $$$

I expect there was an audible and collective sigh of relief from the management of tobacco manufacturer RJR-MacDonald Co. and their insurers when a New York district court recently dismissed the Canadian federal government’s US$1 billion lawsuit. The lawsuit was filed on grounds of cross-border cigarette smuggling and lost tax revenue.

Justice Minister Anne McLellan launched the suit against the tobacco giant in the U.S. earlier this year under that country’s Racketeering Influenced and Corrupt Organizations Act (RICO). This followed on the heels of several other foreign government filings against the cigarette manufacturers in the U.S., all of which were dismissed on grounds that the claims did not have legal jurisdiction within the U.S. In the Canadian government case, the New York court ruled that the U.S. courts were not responsible for enforcing foreign tax matters. McLellan’s office is reviewing its options in pursuing its action against RJR-MacDonald (with the legal billing clock continuing to tick with over $4 million in costs already incurred). However, legal opinion suggests the only option open to the Canadian government is to re-file in a Canadian court.

For the tobacco companies and their insurers, the dismissal by the New York court of the case holds two positive elements. Firstly, the Canadian court system is considerably more conservative in rulings regarding punitive damages, observes Bill Blakeney, senior partner of Blakeney Henneberry Baksh. Secondly, the Canadian government’s decision to file the lawsuit in the U.S. and under the RICO legislation appears to have been motivated by big dollar signs. Under RICO, if the court had ruled in favor of the plaintiff, then it would have been obliged to award triple the amount of proven damages, leaving the Canadian taxman with potentially US$3 billion in “lucky money”. With the U.S. and RICO doors shut on Canadian actions against the tobacco companies, future settlements are likely to be substantially less.

All of which should make insurers happy. Several experts within the Canadian insurance industry have identified tobacco liability exposures to be the biggest threat facing the industry since the asbestosis claims of the 1980s. A number of Canadian insurers have already engaged in legal discussions with tobacco clients over whether liability coverage of policies extends to include the damages being awarded by the courts. At least one of the major cigarette companies in the U.S. is in the process of suing its insurers for recovery in this regard.

The dismissal of the Canadian government’s case against RJR-MacDonald does not mean that the legal worries of tobacco companies operating in Canada are over. A Florida jury, which has been sitting for just over two years, recently awarded US$144 billion in punitive damages in a class action lawsuit filed against the five big tobacco companies. The case in question is regarded as “historical”, partly due to the amount awarded, but it is also the only successful class action so far to have been brought against the tobacco industry. Although the tobacco companies have indicated their intention to appeal the verdict on grounds that the size of the award would bankrupt the industry (a final settlement of around US$20 billion is expected), it does raise several concerns. Firstly, similar to the asbestosis settlements, there is a fear that rulings applied by the U.S. courts will eventually flow into the Canadian system, and secondly, if the tobacco companies are forced into a difficult financial position, they may be inclined to test their legal claim against insurers.

And, specific to Canada, Blakeney points to a recent Ontario Court of Appeal decision in Spasic versus Imperial Tobacco Ltd. The action was launched by Mirjana Spasic who later died in 1998 from lung cancer, although the claim has been continued by her estate. The lawsuit alleged that “the defendants negligently and deceitfully manufactured defective and dangerous devices — cigarettes — and participated in a conspiracy to deceive the public about their defects and dangers”, and “the defendants intentionally destroyed evidence of the inherent dangers of cigarettes”.

Although the tobacco company was successful in having the allegations struck as they did not disclose “a reasonable cause of action”, the Court of Appeal allowed the plaintiff to plead “spoliation”, specifically that the tobacco companies had withheld and destroyed evidence of the harmful effects of cigarettes.

The decision allowing the claim was based on the Supreme Court of Canada ruling in Hunt versus Carey Canada Inc., where the plaintiff alleged that a manufacturer had withheld or destroyed evidence of the harmful effects of asbestosis. As such, Blakeney comments, “this landmark decision will open new avenues of attack on tobacco companies and provide plaintiff’s counsel with the right to present evidence from internal industry reports and studies to demonstrate what the industry knew about the long-term effects of smoking on their customers’ health”. Clearly, the tobacco wars are far from over.