Wednesday, 16 December 2015

A decision from bankruptcy court

Ah, I was asleep at the switch.

And so I missed the decision issued earlier this month by Justice Frank Newbould of the Ontario Superior Court of Justice regarding a proposed settlement between two of the tobacco companies found liable in the Blais-Létourneau class actions and the remnants of an insurance company which had once issued them with policies for $100 million in "excess liability".

During the hearing in Toronto last month, there were some pretty big guns lined up against the proposal that the estate of Reliance Insurance provide the companies with $19 million to close the books on any claims the companies might make as a result of the Quebec class actions or other pending lawsuits. Virtually all of the provinces were on hand to ask Justice Newbould to ensure that their right to make claims would not be snuffed out.

Justice Newbould agreed with the lawyers representing the provincial lawsuits that governments were not restricted by the terms of the federal Winding Up and Restructuring Act,  and that this reason alone was enough to block the proposed settlement between Reliance and Imperial Tobacco and Rothmans, Benson and Hedges.  The deal did not go through.

And would it otherwise have done? Would the companies have been able to take a windfall profit of $19 million without making any payment to those whose injuries triggered the claim?

Justice Newbould made clear that this is a messy area that was not clarified enough for him to have made a decision. Perhaps next time..

Wednesday, 9 December 2015

Justice Schrager firmly declines the invitation to reconsider.

There is a much-valued colleague with whom I occasionally enter into a friendly bet on the outcome of various tobacco-related events. The stakes are never higher than the pleasure of being right, which is a good thing given how rarely I win.

This fall we began to negotiate a wager on whether New Year's would be celebrated with either Rothmans, Benson and Hedges or Imperial Tobacco making the security deposit required of them in the Quebec Class Actions.

On October 27th, Justice Mark Schrager had required that the two companies make the first of a series of quarterly payments towards a safekeeping of $758 million by years end.

This is an important milestone. However provisional, these would be the first payments made by a tobacco company in Canada in connection with the harms they caused to smokers.

But we never finalized a wager on whether it would come to pass before Imperial Tobacco took steps that seemed to change the odds.

Imperial Tobacco asks to defer its payments

On November 25th, Imperial Tobacco filed a motion with Justice Schrager, asking that the first payment towards its security deposit be partially deferred.

In their "motion for directions on the schedule to furnish security", they reported that they will not have enough money to make the $108 million payment required of them as they have a previous obligation to pay $100 million as a final payment related to a different (non-tobacco) lawsuit. They money is owed to another subsidiary of British American Tobacco.

They ask permission to reduce their initial payment to $8 million, and to extend the payment period by three months until September 2017.

Otherwise, they say, they will be in a pickle. "If the present motion is not granted, ITL will be placed in the untenable situation of having to choose between defaulting on the Flintkote Loan and/or other financial obligations, or not being able to comply with the Security Order as presently constituted." Defaulting on their security would make them at risk of having their appeal tossed out, they point out.

In a politely worded way, they point the finger at Justice Schrager for this potential embarrassment. "[Justice Schrager] omitted to take into account the mandatory $100,000,000 Flintkote Loan payment due days earlier [than the end of December 2015] and the taxes payable on earnings." 

Would you have wagered that Justice Schrager would amend the payment schedule as they requested? That he would have considered the deferral an acceptable compromise to the companies' acceptance of an only modestly-altered schedule?

If so, like me, you would have been wrong.

Motion dismissed.

In his response, issued this afternoon, Justice Schrager gives Imperial Tobacco a flat and unhappy sounding "no". To these eyes, he seemed a little pissed at having even been asked to enter into what he calls a "disguised appeal".

He scoffs at the company's argument that it has no money, and that it can't make arrangements with the head-office to whom the Flintkote debt is due. He repeats his criticism about British American Tobacco reaping the benefits of cigarette sales in Canada while refusing responsibility for the consequences.

"Petitioner's motion is artfully drafted to suggest that sufficient funds are not available to pay both the Flintkote loan instalment and the security. However, there is no assertion of inability to pay per se. No current financial statements or an affidavit of a financial officer are produced. Moreover, there is no mention of the position of Petitioner's parent and related companies on the subject of helping to fund the security." ...

"In all of the circumstances of this matter, it is impossible to conveniently ignore the benefit of earnings received over the years and the position asserted by Petitioner's parent that it would not commit to fund a final judgment." 

Even if he wanted to re-consider the schedule, he did not have the right to do so. "The doctrine of functus officio applies and I would be without power to correct it."

Even if he had the right to reconsider, he would not want to: "There is no error in my previous judgement requiring correction."

Nothing up their sleeve?

One of the wrinkles in this development is that the request by ITL for a deferral is very different than the approach they signalled immediately after after the Security Order was issued.

On October 28th, BAT told investors that 

"ITCAN believes the Order for Security is unprecedented and unjustified and intends to review its options to apply for leave to appeal this decision to the Supreme Court of Canada and to seek, in the interim, a Stay of the Order."

Trouble is, an appeal to the Supreme Court is not a quick process, Certainly not quick enough to prevent millions - maybe hundreds of millions - from being put into security.

If steps have been taken to seek a Stay of the Order, as presented to investors, I have not heard of them.

So, tell me, please. Is it a safe bet that the money will be posted by Imperial Tobacco by the end of December?

Friday, 13 November 2015

The Court of Appeal keeps Riordan in the game, but suggests restraint

Last week, two of the defendant tobacco companies in the Quebec class actions asked the Court of Appeal to block any further involvement of Justice Brian J. Riordan in the case until the higher courts had weighed in on his judgment.

My colleague who observed the hearing on November 5, conjectured that the unexpected delay in their ruling meant the three judges were not agreed on how to respond. But today Justices Bich, Savard and Schrager gave every appearance of agreement in their unanimous ruling. They spoke together in rejecting the companies' request.

Or did they just employ another style of split decision? At the same time that they rejected the request, their comments while doing so effectively gave the companies most of the outcome they were seeking.

A request for a suspension of any lower court action

In their motion for a "Stay of First Instance Proceedings" Rothmans, Benson and Hedges and Imperial Tobacco had asked the Court to "suspend all proceedings before the Superior Court of Quebec in [the tobacco class actions] until final judgment to be rendered by the Court of Appeal."

As explained in today's ruling, this request was triggered when Justice Riordan and the the plaintiffs tried to set up a case management meeting to discuss some hanging threads.
* The plaintiffs, wanted to do some advance work in identifying the 100,000 eligible claimants, such as gaining access to the province's cancer registry.
* The plaintiffs wanted to be able to present their view that the companies had been guilty of "abuse of procedure" in the scorched-earth style of their defence.

Neither of these two issues found favour with these two defendants. (JTI-Macdonald did not participate in the request for a suspension). Their view was that all these threads should be considered cut after the Court of Appeal struck down the provisional execution element in Justice Riordan's ruling,

"Abuse of Process as a strategy"

In the decade and a half it took before they were able to present their final written arguments, the plaintiffs had gathered examples of conduct by the tobacco companies which they considered went beyond those of acceptable practice in Quebec. They detailed these in the final pages of their brief, hoping to get a ruling from Justice Riordan that validated their concerns about abuse of process.

But Justice Riordan refused permission to present these issues during closing arguments last fall. Not because he felt they were not a valid issue for concern, but because he did not want to derail the final steps of the trial. He left open the possibility that he would consider this issue after he had ruled on the main substance of their claim.

Technically, the complaints were linked to a request for provisional execution (which can be granted on the basis of abuse of process). But even without this connection - and after provisional execution has been taken permanently off the table by the Court of Appeal -  the plaintiffs still want to be able to air their grievances with how the companies ran their case.

Getting a ruling about the infamous scorched-earth litigation tactics of the companies would not only feel good, it might help prevent this industry or others from trying it again.

The companies strongly want to avoid such a review. Last week's request would have had the effect of at least postponing this review, and they also want Justice Riordan to recuse himself from any such process. (Cited in para 12 of today's ruling)

Not what you asked for, but what you wanted

The Court of Appeal ruled today it would not agree to imposing a suspension on lower court proceedings during the appeal. They said the circumstances were too iffy ("nous nageons dans les hypothèses") for them to wade in. Their was no clear vision of what it was that they were being asked to prevent.

Justice Riordan is thus under no order to suspend his involvement. But the plaintiffs and the judge received some heavy advice to hold their horses on the two issues that had been proposed for discussion at the management conference.

The plaintiffs were told that advance work on identifying potential claimants was not on, as it fell into the realm of "execution of judgment" that was suspended during an Appeal. (para 25) They were also told that they should take the question of abuse of process off the table until after the Appeal was heard, as it would not be possible to consider any individual actions by the companies without also looking at the overall context bound up in the appeal. (para 32).

The advice to Justice Riordan, albeit couched in softened and hypothetical language, was that he should refuse to hear the plaintiffs on this question in order to avoid 'potentially conflicting rulings and a waste of judicial time'. (free translation, para 33).

So the judges say they turned the companies down. But to these eyes, by getting most of what they wanted, it looks like the companies won.

Friday, 6 November 2015

Tobacco companies seek to bench Justice Riordan

It would appear that it is not enough for the the tobacco companies who came out on the losing side of Justice Riordan's decision to take their complaints about his ruling to the Appeal Court. On November 5 they were back at the higher court to ask it to put a stop to any future involvement by Justice Riordan in the case until their appeal is finally resolved.

What triggered their demand was an email they had received from the judge on August 13 2015, in which he reminded all parties that he had not received the information he had ordered be sent to him within 60 days of his judgment. The order is in paragraph 1247 of his judgment.
ORDERS the Plaintiffs to submit to the Court within sixty (60) days of the date of the present judgment, with copy to the Companies, a detailed proposal for the distribution of all amounts awarded herein, both with respect to punitive damages and to moral damages for Blais Class Members, including provisions for the publication of notices, for time limits to file claims, for adjudication mechanisms and any other relevant issues, as well as with respect to the treatment of any amounts resulting from provisional execution.
The final phrase (marked in bold) was rendered inoperative by the Court of Appeal's rejection of provisional execution, but the Judge was anxious to get on with the first part of his order and finalize a distribution plan of monies to the class members, victims of cancer and emphysema.

There followed some back-and-forth correspondence between the lawyers and Judge Riordan.  Predictably, the plaintiffs' lawyers wanted to proceed with case management in Judge Riordan's court and the tobacco company lawyers did not.

The plaintiffs'  lawyers proposed preliminary work on a distribution plan for monies awarded and revisiting the question of abuse of process as agenda items for a case management conference.

And that brings us to the request the companies put to the Appeal Court this Thursday for an order suspending all proceedings in the lower court until final judgment is rendered, an event that will be years away. 

Industry:  A threat to their rights to appeal

Uncharacteristically, the court hearing started an hour late at 12:15 PM.  Judges Marie-France Bich, Manon Savard and Mark Schrager had to finish dealing with other cases before them the same morning.  When proceedings finally got underway, lawyer Simon Potter explained that any action in Justice Brian Riordan's court on the case would jeopardize their appeal.

Deborah Glendinning  for Imperial Tobacco focussed her attention on the suggestion that the question of abuse of process might once again be discussed.  According to her, not only was their no abuse of process, any further discussion of it in Superior Court would also threaten the appeal process. (Her colleague, Eric Préfontaine, played his usual back-up role, offering various precedents to support the arguments of his colleagues.)

Once again, the third company (JTI-Macdonald) was not involved in this procedural appeal. This makes the third court hearing in a row in which they have not been a participant. Hmmmm...

Smokers: Getting a head start on a big administrative task

In a brief presentation, Philippe Trudel acknowledged that most, but not all, issues were under appeal. But he felt there were still some areas of legitimate discussion and some preliminary work that could usefully be done in Superior Court.

He pointed out that identifying 100,000 potential class members was a big job and that doing some preliminary work through the lower court would save time later on.  However, Philippe Trudel lamented that, not only were the tobacco companies seeking to stop this work, they were seeking to stop all work by the Superior Court on tobacco.  The tobacco companies wanted to block even a case management meeting to discuss what could and what could not be done by the Superior Court while the tobacco case was under appeal.

Not an easy decision?

The judges frequently interrupted the lawyers seeking clarification of the relevant sections of the Civil Code of Procedure (Articles 999, 1030, 1042, 1043). Seeking clarification, however, is not the same as getting it.

The conflicting views between the parties of how the rules should be applied is not as surprising, perhaps, as the judges' shifting signals on how straightforward their decision was. There was some thought they would render judgment right after the hearing. However, after a short recess, they came back to the bench and said judgment would be delayed until the following morning (Friday). But when Friday morning came, their decision was delayed once again. Possibly next week.

Monday, 2 November 2015

"Winding up" in Toronto

If you are among those, like myself, who ever thought that insurance companies were too savvy to sell liability insurance to tobacco companies, then today's hearing at an Ontario Superior Court might offer you a few surprises.

Justice Frank Newbould who handles files on the commercial list of that Court was today on the receiving end of arguments why he should - or should not - accept a deal that had been reached between two tobacco companies facing dozens of lawsuits in Canada and an Insurance company that was willing to buy peace instead of defending its right to deny those claims.

Strongly objecting to this "settlement" were lawyers representing the Blais-Létourneau class members as well as lawyers representing Ontario and six other provinces whose lawsuits are in play.

The background:
Winding up Reliance in Canada

In 2001, the U.S. parent of Reliance Insurance went bankrupt and its Canadian branch had its assets put under third party management (in compliance with the federal Winding Up and Restructuring Act, WURA).

In the intervening years, the Liquidator (KPMG) has been paying off the thousands of claims of former policy holders and trying to resolve all outstanding business in Canada. Only when things are truly wound up will it be able to return the money left over to its American corporate parents.

Among the policy holders were Rothmans, Benson and Hedges and Imperial Tobacco Canada Ltd. Each company had each purchased liability insurance from this company between the late 1980s and the end of the century, with a maximum coverage of about $100 million. (Policies were purchased from another 34 other insurers - the list is appended to the end of this blog)

These policies, we were told, contain exclusion for coverage for diseases that result from tobacco consumption, but it is not clearcut (according to all sides except the insurance company) that these exclusions would apply to some of the wrongdoings for which the companies are being held liable (i.e. conspiracy, failure to warn).

This spring, shortly before (RBH) and shortly after (ITL) Justice Riordan's ruling against them, the two companies informed the KPMG Liquidator that they had Potential Occurring Claims.

Insurance company lawyers and tobacco industry lawyers settled down to talk and soon cut a deal. The "settlement agreement" they reached was made public mid-August (including in the Canada Gazette).
  • Reliance agreed to pay $9 million to RBH and $10 million to ITL. This represents about about 10 cents on the dollar of the maximum insured claim. 
  • RBH and ITL would receive the money whether or not they ever paid any money in damages. They could do with the money they wished.
  • The tobacco companies would relinquish any other future claims against Reliance.
  • Neither party had to yield any ground. Reliance did not admit that the "tobacco exception" in the policies did not cover all of the wrongdoings committed by the companies and the companies did not admit that the claim was related to any wrongdoing. 
  • The settlement also stipulated that the future claims of all other parties related to the companies' actions would be erased. This included members of the Quebec class actions and also those behind the other 22 (RBH) and 26 (ITL)identified claims against the companies. 
Not surprisingly, the prospect of litigation leading to a payout to tobacco companies while smokers and the governments that pay their medical bills get nothing raised a few hackles among the many who are battling these companies in court.

Those hackles were expressed today before Justice Newbould, whose approval was needed before these contentious settlements could become a done-deal.

A crotchety hearing

I am not sure if it was ironic or fitting that the hearing took place in a court room that was refashioned out of the former headquarters of an insurance company. Certainly the Canada Life Building is a beautiful spot to spend a day.

The large eighth-floor courtroom was full, but not crowded. Fourteen lawyers sat (gowned) in front of the bar. On the right hand side sat the team for KPMG, silently supported by lawyers representing Reliance USA, ITL and RBH. On the left were lawyers representing the Quebec Class Actions, the Ontario Government and the Consortium of provinces working together.

Although the room was equipped with plentiful video screens, there was nothing up-to-date in the way the hearing was managed. Thick cerlox-bound factums and books of authorities were hauled out, fumbled through, misplaced, sought and traded.

It was not only the paperwork which lent a clunkiness to the day. The presentations were far from fluid. Some lawyers were told to speed up, others told to slow down. Between these admonishments, long silences would stretch as Justice Newbould reviewed the material presented to him. Stop and go. Go and stop.

This judge did not make it easy for the lawyers to put their case, frequently directing them away from their speaking notes and towards his specific areas of concern. This was especially true for the lawyer representing KPMG (Mr. Graham Smith) and the Ontario government (Mr. Bill Manuel). Whether his grumpiness towards these men, and his apparent difficulty in following their arguments, was sincere or strategic is hard to guess.

In fits and starts by the end of the day four sides had made their case. Judge Newbould was left with three competing suggestions for what he should do.

The Liquidator's view:
a decision in the interests of efficiency

The background to the settlement and the Liquidator's recommendation was initially laid out in the reports filed on August 14 and available on the web-site that houses filings on this case.

Today, Mr. Smith filled in some of the missing pieces. He said it would be in the best interests of everyone legitimately concerned for the settlements to be approved so that the insurance company could avoid lengthy litigation and the winding up could be more quickly completed.

As a result of notifying the provinces and class action suits of the proposed settlement, he was aware of their concerns, but he was not sympathetic to them and he did not think they were well placed. The Ontario insurance law gave them no basis to have their claims considered. Nor was the Crown given any special consideration in cases like these. The Quebec law was irrelevant since the policies ha been sold and bought within Ontario.

Once these legally irrelevant considerations were dispensed with, then the settlement still reflected the best fit of those whose interests were protected under the law. He asked the judge to approve the settlement agreements as they had been negotiated -- and to keep under seal all of the supporting documentation from the companies.

The Quebec Class Actions:
give us the money instead

There were no familiar faces speaking on behalf of Quebec Smokers. A new counsel - Mr. Mark Meland - had been hired to represent the concerns of the Blais-Létourneau classes in this issue.

Mr. Meland offered the judge several reasons to hesitate before making a pronouncement on the settlements. He identified two areas where the law was too complex and proper evidence was needed before it could be said that the proposal from the Liquidator could be considered fair. These were 'Choice of law' - whether Quebec law applied and 'Coverage' - whether the policies covered the class action claims.

He suggested that there was a fix in the works by pointing out that years of silence had been followed by a quickie settlement.

He appealed to the inherent injustice of the situation. It was because of the Class Action suits that the companies were making claims. yet the victims were being deprived of any process in the proceedings. "The companies are receiving a windfall of $19 million and the victims are receiving zero." "Is that fair and reasonable? Or even permissible.?"

Having raised the "complex" issues about Choice of Law and Coverage, he did not encourage the judge to resolve them. The solution he proposed was that instead of giving the $19 million to ITL and RBH, it should be handed over to the victims in the Quebec class actions.

The government claims:
the settlement can't touch our rights to make future claims

The governments of Ontario and six other provinces offered a third option offered to the judge.

On behalf of Ontario, Mr. Bill Manuel said he did not oppose the settlement reached between the insurer and the companies, but he would not accept that it would bind or restrict the government of Ontario. For him, "the sole issue is Crown immunity. The (WURA) act does not bind the crown."

He felt that the exclusion clauses in the insurance policies were unlikely to cover the claims by the governments, given that these claims were newly invented after the policies had been in place. The government was using a "statutory cause of action", therefor the policies would have covered any damages.

The government claims could not be extinguished by the settlement. If and when they got a judgment, they wanted the right to make their own claim on the assets of Reliance.

And, if push came to shove, it would be the government claims which would take precedence over the U.S. owners. A claim by the government would even have bumping rights over the Quebec class action claim, he said. "The crown has a higher priority than other creditors". (This seemed to be news to Justice Newbould, who asked at least twice for clarification).

These points were supported by Jeff Leon, who spoke on behalf of the other provinces participating in this hearing. He supported the view that the Insurance company should have sought a separate declaration from the court about the jurisdictional issues and the extent of the coverage, a process which would have gathered the evidence needed for such a decision.

And if Reliance were completely wound up before the provincial cases were heard? It seemed less of a concern that the money might be gone than that the court would establish a precedent for such a settlement "We take our chances. If the assets are gone, they are gone." ... "You are being asked to put the Court's imprimatur on the settlement and to decide a whole bunch of issue that you cant decide based on this record."

The last words?

Even the fun of bankruptcy court could not keep me in Toronto for another day. The short hearing scheduled for Tuesday morning, when the Liquidator replies to the concerns raised about the settlement, will go unreported here.

And an interesting footnote

Justice Newbould once represented the third defendant in the Blais-Létourneau case: JTI-Macdonald.

Recommended reading and a Montreal historical footnote

In an unsuccessful search on Legacy for copies of insurance policies in Canada, I came across versions of a readable history of insurance and tobacco companies

For many years, it would seem, tobacco companies bought insurance, but didn't make claims. They didn't want the risk of insurance company lawyers interfering in their litigation strategies and they didn't want disputes with insurance companies to result in document disclosure that might support more claims against them. 

All that changed in Montreal in 1996, when Imperial Tobacco filed a case against American Home Insurance ad the Commercial Union Company seeking coverage for defense costs and potential damages associated with the Caputo case.
In its coverage cases Imperial Tobacco, a subsidiary of Imasco Limited,24, alleges that American Home issued several excess umbrella liability policies to Imasco and that Commercial Union issued comprehensive general liability policies to Imasco. Imperial Tobacco contends it is covered by the policies issued by American Home and Commercial Union for any defense costs and any amounts awarded in a judgment or settlement which Imperial Tobacco may incur from third-party liabilities such as those alleged by the Caputo plaintiffs. Neither American Home nor Commercial Union has assumed the defense or acknowledged a duty to indemnify Imperial Tobacco, Imperial Tobacco claims it has had to pay in excess of $1,000,000 in defense costs in Caputo.
It was this act by Imperial Tobacco that triggered a reflection within the insurance industry about their vulnerability to successful lawsuits.

This might explain the eagerness of Reliance Insurance to put an end to future claims. It might also explain why lawyers representing insurance companies were a constant presence in Justice Riordan's court when RBH or ITL were presenting their case.

List of insurance companies who have sold policies to RBH and ITL, as reported by the Liquidator in Reliance:

ACE MI Insurance
Affiliated FM Insurance Company
AIG Commercial Insurance Company of
AllState Insurance Company of Canada
American Home Assurance Company,
American Re-Insurance Company
Canadian Indemnity
Chards Insurance Company of Canada
Cigna Insurance Company of Canada
Continental Insurance Company
General Accident Assurance Company
Guardian Insurance Company of Canada
Hartford Fire Insurance Company
Home of New York
INA Insurance Company of Canada
Intact Financial Corporation
Kansa General Insurance Company
La Nordique Compagnie D'Assurance Du Canada
Liberty Mutual Insurance Company
Lloyd's of London Toronto Office
Markel Insurance Company of Canada
New Hampshire Insurance Company
Northbridge Insurance
Northumberland General Insurance Company
Royal & Sun Alliance Insurance Company of Canada
Royal Insurance Company of Canada
Scottish & York Insurance Company Limited
Sun Alliance Insurance
The Commonwealth Insurance Company
The Continental Insurance Company of Canada
The Halifax Insurance Company
United States Fire Insurance Company
Zurich Canada
Zurich Insurance Company

Tuesday, 27 October 2015

Appeal Court orders security payment of almost $1 billion

Three months ago, the tobacco companies celebrated an early win at the Quebec Appeal Court when that body struck down a requirement for them to make an up-front payment to the smokers they had injured before they had exhausted their appeals of the ruling against them in the Montreal Tobacco Trials.

It now looks like that celebration may have been shortlived.

While not reversing the decision, the Court today imposed early payments of an equivalent amount on two of the three companies. What the companies won on the provisional execution merry-go-round, they have now lost on the security swings.

(Unlike the provisional execution, the money will not be distributed to class members until the case is finally resolved - but it won't be distributed to the owners and shareholders either.)

The defeat of provisional execution

Justice Riordan thought it was unfair for the victims of the companies' wrong doing to have to wait any longer before receiving some portion of compensation that was owed to them. He was aware that the appeal process could drag on for years, and that many of the victims might not live that long. Besides, as he ruled, "it is high time that the Companies started to pay for their sins."

In his May 27th ruling on the case, he ordered the companies to make a payment of $1.13 billion within 60 days. This amount is roughly equal to their combined yearly income.

The companies rushed to the Appeal Court to have this early payment struck down, arguing that they were unable to finance the payment without becoming insolvent. In support of these claims, they laid bare their current financial situation.

On July 23rd, the Appeal Court agreed to strike down the provisional execution, citing an unwillingness to ever apply such a procedure to a class action.

The judges did, however, give a not-very-subtle hint that they would consider other ways to skin the early payment cat: "This is not to say however that such facts and arguments could not give rise to other recourses or orders."

The subsequent request for security

The lawyers representing Quebec smokers regrouped and returned to the Appeal Court earlier this month to ask for the companies to be told to set some money aside while the appeals were being heard. This security was necessary, they pointed out, because without it the companies would respond to their eventual defeat by filing for bankruptcy and preventing their clients from ever receiving any money.

In the meantime, the companies were trying to make themselves judgment proof by sending all of their money offshore. When the appeals are finished, the Canadian cupboard will be bare.

This, they told Justice Mark Schrager, was a industry's litigation strategy to ensure they would never have to pay. It was put to the judge as a game of "heads I win, tails you lose."

The Court's agreement

Justice Schrager agreed that these concerns were founded. In his ruling issued late today he cited the coin toss analogy: "Sometimes, the vernacular is pointedly apt."

He noted the companies failure to save any money or make other provision to pay victims should Justice Riordan's ruling be upheld. He recalled that the companies had so recently threatened to put themselves into bankruptcy. (Justice Schrager was one of the panel of 3 judges who decided on the provisional execution).

These two behaviours gave him reason to act. These circumstances taken together are a “special reason”. I will order that security be furnished.

And a rejection of the industry's modus operandi

In presenting their case to Justice Schrager, lawyers for the tobacco companies had insisted that it was normal business practice for them to funnel all of their earnings to their off shore owners and to not retain any for future litigation requirements. So, too, they said, was the decision of the parent companies to not bail the Canadian operations out if/when they were faced with court-ordered payments.

This argument got very little sympathy from Justice Schrager.

I do not question [the companies'] right to appeal but neither can I stand idly by while [they] pursue an appeal which will benefit them if they win but which will not operate to their detriment if they lose. Continuing the practice of distributing earnings out-of-jurisdiction at this point is at best disingenuous and at worst, bad faith. 

He did not, however, want to give them an excuse to go into bankruptcy. Rather than require that they change their financial flow or finance a large single payment, he merely ordered them to redirect a significant portion of their earnings for 18 months to a forced-savings account.

The poetry of a security equal to the provisional execution.

The Blais-Létourneau lawyers had asked for $5 billion to be set aside, but Justice Schrager felt this was too much.

Instead, he settled on exactly the same amount that Justice Riordan had identified for provisional execution: $1.131 billion, pro-rated to $984 million for the two companies involved.
  • Imperial Tobacco must provide $758 million in 7 quarterly payments of $108 million between December 2015 and June 2017.
  • Rothmans, Benson and Hedges must provide $226 million in 6 quarterly payments of $37.7 million between December 2015 and March 2017.

The lucky third amigo

Whoever caused Guy Pratte to be so indisposed that he could not argue the case in early October should ask for a reward.

When scheduling the hearing on the securuity, the Blais-Létourneau lawyers were faced with a lengthy delay resulting from Mr. Pratte's (unspecified) inability to attend court. Rather than delay proceedings, they decided to move forward against only two of the companies. They renounced their right to do so later for JTI-Macdonald.

As a result, JTI is off the hook for the $143 million it would otherwise similarly have been expected to provide in security.

Am I the only one who suspects there is an interesting but not-yet-told story behind this?

And there will be more!

There are not one but two court hearings related to this case next week. In Toronto's commercial court, the Blais-Létourneau lawyers will challenge a proposed settlement between the insolvent Reliance Insurance Company and Rothmans, Benson and Hedges, and Imperial Tobacco.

At the Montreal Court of Appeal on November 5th, Simon Potter will present his request that Justice Riordan be told to stop making any further decisions on the case until the appeals are finalized.

Tuesday, 6 October 2015

Trying to keep tobacco profits from fleeing the country

Today's event was another preliminary round in the Appeal Court review of the Blais-Létourneau tobacco trials. Lawyers representing Quebec smokers came asking for an order to force the defendant tobacco companies to stop shipping their money overseas while the appeal is underway.

It has been almost exactly three months since the Court was persuaded by the defendant tobacco companies to overturn the $1 billion provisional execution that Justice Riordan had included as a kicker in his excoriating May 27th ruling against them. With their decision that there was insufficient basis for this unusual pre-paymentm  the prospect of a change in money-flow went up in smoke, as it were.

The panel of 3 judges was not without some sympathy to the class members, and in their ruling hinted at other tactics - "recourses or orders" - that the lawyers representing smokers in these class actions might want to consider. One of the lawyers writing that decision was Justice Mark Schrager.

Today, Justice Schrager was given the chance to explore the different "recourse or order" proposed by the plaintiffs to address their concern that after 17 years of trial, and despite a precedent-setting judgment vindicating their efforts, they might well end up empty-handed if the companies were able to keep their money out of reach. It was to Gordon Kugler that the task of presenting their "Motion to order appellants to furnish security" was assigned.

For the past two  years it has been Mr. Kugler who has stick-handled his team's attempts to prevent the companies from becoming effectively judgment proof.  His first attempt was two years ago before Justice Mongeon, when JTI's corporate reorganization came under scrutiny.

Conspicuous in its absence.

But today, JTI was no-where to be seen.

Before the hearing got underway, Mr. Kugler explained that scheduling conflicts and medical issues on JTI' and his own side would have resulted in an unreasonable delay, had they continued to include JTI in this motion. Instead, he proposed to withdraw (permanently) his request for a order on JTI, and to forego the 13% of the funds they wanted secured.

As head-scratchingly fishy as this sounded (really? with such big legal teams, no one could pinch-hit?), this sudden adjustment passed without much further comment or objection from the other two defendant companies.

For want of its lawyer, JTI was dropped from this aspect of the case. Yet several members of JTI's legal team watched from public benches  as their co-defendants presented reasons why they should be able to continue with the "business as usual" of sending all their money to their foreign owners.

The Plaintiffs:
Money flows to shareholders, but none is saved for victims

Mr. Kugler's arguments today, like the motion, were clear and unornamented.

Since the companies were first facing these lawsuits in the late 1990s, Mr. Kugler said they had reorganized their business and "Shielded themselves from unfavourable judgment by paying money to their offshore owners. In the 17 years since the suits were initiated, they have paid collectively almost 20 billion to their related companies, and they didn't put aside any money to satisfy this judgment."

It is not just that they failed to save before the ruling against them, he pointed out, but "In going forward there is no indication that any money has been or will be put aside."

He cited the positions taken by the companies earlier this summer, and their threats that they would go bankrupt if they were required to come up with $1 billion dollars. By that logic, one should expect that they would seek bankruptcy protection if they ultimately lost their case. The $15+ billion award is growing -- with a mind-boggling $1 million in interest being added every day.

Mr. Kugler suggested that they might elect to bankrupt before the appeal was finished, knowing that the creditor protection act (CCPA) could result in all other proceedings - even the appeals -- being suspended.

As their motion puts it, the companies "brazenly seek to unjustly benefit from the appeals process by putting themselves in a position whereby they will not be obliged to satisfy the judgment if their appeals are maintained and they will be unable to satisfy the judgment if their appeals are dismissed."

Mr. Kugler was more pithy in describing this strategy to Justice Schrager. The companies would use bankruptcy and appeal courts to play "heads we win, tails you lose."

The remedy he proposed was to use the Quebec Code of Civil Procedure provision that "a judge of the Court of Appeal may, on a motion, for a special reason ...order the appellant to furnish, within the time fixed in the order, security in a specified amount to guarantee in whole or in part the payment of the costs of appeal and the amount of the condemnation, if the judgment is upheld." (Article 497)

Justice Schrager was asked to require the companies to stop sending their profits ($1 billion per year for all 3 companies) to their owners, and instead make quarterly payments of about $217 million into "irrevocable letters of credit".

If the companies win their appeal, they get their money back. If they lose the appeal, or if they put themselves into bankruptcy court, the money would be made available to members of the class.

Business as usual 

Deborah Glendinning presented Imperial Tobacco's explanation as to why there was no exceptional circumstance to justify an order to stop sending their profits overseas. (Eric Préfontaine provided the legal precedents).

The realignment of BAT's operations in Canada had happened in 2000, she said, well before 2005, when the court authorized the class action suits, filed in 1998, to proceed.

She admitted that ITL had made no provision for litigation payments up to this point and confirmed that they had no intention of doing so now. "No provision will be made before final judgment."

This, she said, was the normal way of doing things. To impose a letter of credit on the companies would give a special status to the class action plaints and elevate their interests above others (in a bankruptcy proceeding). 

No new exceptional events justified such a decision. "This is not a case where after a judgment the party undertakes transactions to move assets away from a judgment creditor. To the contrary, all of the evidence before the court is that things are business as usual."

Moreover, such an order would not be a practicable option. "It is a stretch to suggest that somehow a company that wants to remain a going concern can pay all its earnings out either by cash or by letter of credit every quarter. It just cant happen."  

Because her client doesn't have the ability to raise money in the market (it has an agreement with BAT that it will not do so), its "back will be up against the wall" and this, she said, would diminish the appeal rights of the company.

The plaintiffs need the companies to be 'going concerns'

Simon Potter, speaking for Rothmans, Benson and Hedges, continued on the theme that a Court order that required profits to be banked would be both unfair and unrealistic.

In doing so, he made clear some points that have not been raised earlier in the trial.

He said firmly that PMI, his parent company, is "not stepping up to pay this judgment". The parent company that benefitted from cigarette sales would not contribute to paying for the damage.

He warned that the assets of RBH, which were stockpiles of cigarettes, manufacturing equipment and cigarette trademarks, were not the type of asset that could be usefully handed over in lieu of cash to the winners in the lawsuit. No option for the plaintiffs but to keep those assets in production, he suggested.

He identified the realpolitik of a large award. From the outset of the trial, he said, the plaintiffs had known that they would not receive a big cheque at the end. They would have understood that they would "have to rely on the revenues of those companies and come to some kind of arrangements. No one ever thought that 27 billion or 15 billion or 1 billion would be paid the day after a final judgment."  

By keeping on trucking, he suggested, his client was staying in a position that would allow it to begin to make payments later, and this was something that the plaintiffs should appreciate. "The company is a good going concern... The only way they going to get money is to make sure these companies are good going concerns. There are no assets being sold. No conversion of assets. No rendering of RBH less solvent than it was before. No one is making the plaintiffs position worse."

Instead, he said, the plaintiffs should be accepting of business as usual at this time. "The proper protection for them is to hurry along towards the final judgment and to leave the companies as a going concern, without having a run of creditors on them, without signalling to the rest of the world that everyone who shows up should get security."

11 months and counting

Simon Potter confirmed the rumour that the main appeal of Justice Riordan's decision will be heard in September 2016.

Justice Schrager:
Reaction but not ruling

Justice Schrager has possibly the world's most expressive eyebrows.

At several times during the day he shrugged, rolled his eyes and otherwise communicated that he was not buying the arguments he was being given. This happened once or twice with Gordon Kugler, and multiple times with the companies' lawyers.

The judge also showed that he was very familiar with the file. He put his finger on errant figures before counsel could, and challenged their claims and suggestions by quickly pointing to contradictory facts on file.

But he gave very little indication of where he was leaning. Or when he would decide.

Monday, 28 September 2015

Quebec Court of Appeal upholds the constitutionality of Quebec's law to sue tobacco companies

Another season, another important ruling from Quebec's Court of Appeal on tobacco litigation.

Today's ruling comes a little over 3 months since this court hosted a hearing into the constitutionality of the Tobacco-related Damages and Health Care Costs Recovery Act, (TRDA) the law which set the groundwork for the Quebec government's attempt to sue tobacco companies for the costs of treating the diseases caused by their products.

On June 18th, lawyers representing the defendant tobacco companies had tried to convince the Court that this law prevented them from getting a fair trial and that it was inconsistent with those parts of the Quebec Charter of Human Rights and Freedoms which guarantee a "full and equal, public and fair hearing by an independent and impartial tribunal."

(This was the companies' second kick at the can: they failed in their first attempt before Justice Robert Mongeon, who ruled against them in March 2014. )

The trial would be rigged, they told both courts, by a law which set new rules for evidence, and which removed time limitations on seeking redress against these companies.

They did not succeed in persuading this panel of three judges (Manon Savard, Paul Vézina and Geneviève Marcotte).

To the contrary, these judges seemed to have no difficulty agreeing that the law was consistent with the constitution, and that they had not been convinced that their right to a fair hearing had been affected, even if they were deprived of some traditional means of defence.
[86] En bref, la suprématie parlementaire permet au législateur de modifier la loi comme il l’entend, dans la mesure où ces modifications respectent les limites constitutionnelles. Ici, les appelantes n’ont pas démontré en quoi l’élimination de la prescription, ou les autres changements apportés aux règles de preuve et de procédure civile, contreviendraient à leur droit à un procès équitable, même si, de fait, ils les privent de certains de leurs moyens de défense.  
The Appeal Court ruling also reflected on the provisions of the TDRA that directly affect the Blais-Létourneau class action suit by allowing for "proof of causation" to be "established on the sole basis of statistical information".

Justice Riordan relied on this in his judgment against the companies and their comment along the lines that it did not necessarily make his job easy will doubtless trigger some reflection by those who will be back before the Appeal court on the very same issues.
[81] De manière analogue, l’article 15 de la Loi vient remédier à l’inégalité systémique inhérente au droit commun en matière de responsabilité civile, alors que le jugement récent rendu dans le cadre des deux recours collectifs initiés contre les fabricants de produits du tabac illustre bien que la preuve de la causalité à l’aide de renseignements épidémiologiques ou statistiques n’est pas nécessairement aisée.

Is this the end of the road for the companies' attempts to block enabling legislation for lawsuits in Canada?  In theory, the Supreme Court could take another look. But after having substantially reviewed the B.C. law and given it the green light more than a decade ago, my bet is that they will not agree to do so.

And there's more to come!

Although it does not appear on the Court of Appeal rolls for next week, I understand that next Tuesday (October 6), the lawyers representing Quebec smokers in the Blais-Létourneau class action suits will ask that the tobacco companies be required to put some money aside while their appeal is being heard.

Friday, 7 August 2015

A footnote from the federal Tax Court

The no-longer-confidential 2014 financial statement of Imperial Tobacco Canada Ltd  (ITL) that was made public late last month contained an intriguing "note 6" regarding a dispute over a tax bill with the federal and provincial governments that was abandoned by governments last fall.

It involved the treatment of moneys received by ITL from their sister companies, British American Tobacco Australia and British American Tobacco Italy Investments. ITL had been served with an assessment for more taxes in 2010, and its appeal against that demand opened a file with the federal Tax Court.

The registry for the Tax Court is a pleasant walking distance from my home, and I dropped by yesterday afternoon hoping to learn more about this case and why the governments would have dropped their demand for more than $100 million.

It would appear that I am not the only one to have found this an interesting case -- the 6-inch file is peppered with receipts for copies sent to tax law firms across Canada over the past few years.

Spaghetti ownership and tax deductions

Corporate tax is dizzying enough without ascending to the thin atmosphere of intercorporate transactions, so my grasp of the situation is far from confident. Fortunately, the Revenue department offered a readable summary of events:

  • In late 2001 (shortly after BAT assumed control of ITL), the company purchased almost $500 million in preferred shares of BAT Australia (BATA), for which it received annual payments of 7.6%. This allowed BAT Australia to reduce its taxes in its home country, as the payments to Canada were recognized as a debt under their tax law.
  • ITL in turn borrowed money to pay for these shares, paying almost as much money in interest for the loan and insurance from BAT as it received from BATA. Its net return on the investment was slightly over one tenth of one percent (0.1203%) - representing only $582,144 in additional income.
  • But just as the agreement reduced taxes payable to the Australian government, it also was used to reduce the tax-bill in Canada by about $12 million per year.

  • Canada Revenue smelled a rat and challenged the deduction. "It can reasonably be considered that the principal purpose for the acquisition of the BATA Preferred Shares by ITCAN was to avoid, reduce or defer the payment of tax otherwise payable by ITCAN", it told the court.
  • A similar arrangement was negotiated a couple of years later, after BAT acquired the Italian state-owned tobacco company ETI. This time $880 million was invested with a loan from a BAT company (BATIF), and the return on investment was almost one percent (072%). The tax benefit was three times as large.

The Federal Court of Appeal cements this right to avoid taxes

Most of the documents related to disputes about claims of privilege that ITL wanted to make on documentary evidence behind these transactions.

The only hint about why the case was dropped last winter was reference to a decision of the Federal Court of Appeal regarding a similar dispute with Lehigh Cement which restricted how the government could apply the general-anti-avoidance rules on such investments.

And so BAT is able to reduce its taxes in Canada and Australia by generating a little cross ownerhip amongst its subsidiaries. Will the tax act be amended to remove their right to do so? And when?

Saturday, 1 August 2015

The no-longer confidential financial statements

Although the tobacco companies convinced the Quebec Court of Appeal to relieve them of the obligation to make an advance payment on the money they owe some Quebec smokers, they did not convince the three judges that the financial statements they used when making their arguments should remain a secret.

To be more exact, the two companies that had requested confidentiality (Imperial Tobacco and Rothmans, Benson and Hedges) have now had their current financial statements made available to the public. Earlier this week I made a pleasant day-trip to Montreal and came back with some of these no-longer confidential records, including:

These documents deserve review by someone versed in accounting. Certainly there are a few surprises.

For one, it would appear that last year ITL joined JTI-Macdonald as a money-losing operation. In 2014 it posted a loss of $351 million dollars - JTI's ongoing annual loss of about $7 million is on record as a result of Justice Riordan's ruling.

Further up the balance sheet, both companies have positive and substantial profits on operations, as shown below. But a second surprise in is how much less profitable Imperial Tobacco is than it was historically.

Until about 2004, ITL was required to submit an annual report to the Toronto Security Exchange. At that time, its earnings per cigarette exceeded a dollar per package of 25 cigarettes

Today, their earnings per package, once inflation is taken into consideration, are about half as much. (Sales data below is taken from Euromonitor estimates of manufactured cigarette sales in Canada in 2013, which they say represent over 92% of all tobacco profits)

Profit from operations
Millions of packages of 25 cigarettes sold
Operating profit per package

Why is PMI/RBH so much more profitable than BAT/ITL?  If there has been such a dramatic fall in ITL profits, why has this not been identified in presentations made by BAT to investors? Your guess is as good as mine.* 

Those interested in other strategies used by ITL to reduce taxes will enjoy reading Note 6 on its Financial statement in which it reports on its victory against revenue departments after a prolonged dispute about "controlled foreign affiliate dividend deductions." 

* (My bet is that following the shift in production to Mexico, ITL adopted a transfer pricing strategy to split its profits on Canadian sales between two separate BAT subsidiaries.)

Thursday, 23 July 2015

"No" to provisional execution says the Court of Appeal.

After a nail biting couple of weeks, the Court of Appeal came down late this afternoon with its decision on the question of whether the tobacco companies who have been found responsible for causing lung cancer and heart disease would have to provide some money to their victims before the higher courts could listen to their challenge of the judgment against them.

The Appeal Court agreed to the companies' request to strike down the part of Justice Riordan's ruling that requirement them to make an early "provisional execution" of $1.1309 billion.

The companies, which had previously been working to a June 26 deadline to deposit sums roughly equal to their yearly earnings, can instead continue to ship their profits to their overseas owners. We will never know whether their threats to put the Canadian operations of the multinational companies into insolvency instead of agreeing to a court ordered payment were genuine.

The ruling, issued by Justices Marie-France Bich, Paul Vézina and Mark Schrager, was issued in the early evening - after the stock markets had closed.

In it, the three judges made clear that they had come to no conclusions about the central issues in the condemnation of the companies' behaviour made by Justice Riordan almost two months ago. ("We make no comment whatsoever on the strengths or weaknesses of any of the other parts of the judgment." ) During the hearing on July 9th, they had been presented with an hour-long litany of supposed errors made by Justice Riordan. These allegations of judicial error apparently paid no role in their decision.

The judges also made clear that they are not indifferent to the circumstances of those who are suffering.

[33] We are certainly not without empathy for potential class members who may die of a tobacco related illness prior to receiving any compensation. The judge may have a point that this state of affairs represents serious prejudice measured against the time to bring the case to an end. Unfortunately, the law relating to class actions makes it such that the order of provisional execution is of questionable benefit to potential class member.

The reasons they gave for agreeing to the companies' request included:
  • The prospect of a further delay for appeals is not a legal justification for provisional execution. 
  • They do not think that the appeals should take 6 years to be completed, and noted that the tobacco companies were willing to expedite the process.
  • A further delay in receiving payments will not "aggravate" the injuries received by victims
  • They do not like applying provisional execution to the class action process, and they find little precedent to rely on, ("On a strict legal basis one may wonder whether provisional execution is simply incompatible with class actions...")
  • There is no evidence that an early payment is necessary to help the lawyers representing smokers to see the case through to the final appeals.
  •  If the companies win on appeal, it will be hard to recover payments from those who have received them.
The companies did not get everything they asked for in this round. The judges refused to put a sealing order on the financial statements that they had used to support their claims that they had insufficient funds to satisfy the provisional execution. These financial reports are now public documents -- or will be once someone goes to the court to copy them.

The early payment demanded by Justice Riordan was like icing on the cake of his ruling. For the moment, all that's left is cake!

Friday, 17 July 2015

Calling their own bluff

We still wait for the Court of Appeal to decide whether it will side with the tobacco companies who asked to be liberated from making a $1 billion down payment on the money they owe to Quebec smokers. And the clock is ticking --- there is only a week to go until July 26th, the deadline set by Justice Riordan.

Time waits for no company, it would appear. Philip Morris International was scheduled to report on its Second Quarter results -- an event that would compel it to reveal to investors what had happened in Quebec and what they intended to do about it. Their release went out, as scheduled, yesterday. 

Turns out that they don't seem to intend to force their Canadian subsidiary (Rothmans, Benson and Hedges) into bankruptcy. The parent company will instead absorb the costs of this initial payment - and has warned shareholders that it will cost them $0.09 per share. (Last week they issued quarterly dividends of about ten times that amount). The full text of their comment is posted below.

Last week the Court was told that there was "uncontradicted evidence" that the companies were unable to come up with the money, that they parent operations would not step up and cover the costs and that the three companies would be forced into insolvency.

I guess a lot can happen in a week.

BAT's half-yearly report is due out on July 29, shortly after the payment deadline. JTI is scheduled to issue its results on August 3. 


Extract from PMI News Release, July 16, 2015
Philip Morris International Inc. (PMI) Reports 2015 Second-Quarter Results;


As of the date of this press release, the Québec Court of Appeal has yet to issue its decision regarding a motion, heard by the court on July 9, 2015, to cancel the order of the Superior Court of the District of Montréal, issued on May 27, 2015, that PMI’s Canadian affiliate, Rothmans, Benson & Hedges Inc. (“RBH”), pay an initial deposit of approximately CAD 246 million into a trust account pending the merits appeal of the Québec class actions judgment.

The trial court had ordered, as part of its judgment, that RBH and the other defendants make initial deposits of a portion of the damages award within 60 days.

Should the Court of Appeal deny the motion for cancellation of the order, PMI expects to incur a pre-tax charge of approximately CAD 246 million (approximately $199 million), or an after-tax charge of $0.09 per share. Depending on developments, this charge would likely be recorded as tobacco litigation-related expenses in the second quarter of 2015. Given that the Court of Appeal's decision has yet to be issued, the Schedules to this press release do not reflect any such charge. In the event of a denial of the motion for cancellation by the court, revised Schedules and any other relevant information will be furnished promptly in a filing with the U.S. Securities and Exchange Commission, to the extent relevant.

The cases are Cécilia Létourneau v. JTI-Macdonald Corp., Imperial Tobacco Canada Ltd., Rothmans, Benson & Hedges Inc.,and Conseil Québécois sur le Tabac et la Santé and Jean-Yves Blais v. JTI-Macdonald Corp., Imperial Tobacco Canada Ltd., Rothmans, Benson & Hedges Inc. (Superior Court of the District of Montréal, Province of Québec).

Thursday, 9 July 2015

The Billion Dollar Question

The first round in the tobacco companies' fight against a $15.6 billion ruling against them took place this morning at the Montreal Court of Appeal.

Salle Mignault
Montreal Appeal Court
The specific issue before today's panel of 3 judges was whether the companies would have to make an early payment of over $1.1 billion of their penalty, even before they had a chance to put their case of why the entire award should be struck down.

Under normal rules, someone who is successfully sued does not have to make any payment until their last appeal has been exhausted. But the Montreal tobacco trials were not called an "exceptional case" by Justice Riordan for nothing, and when making his decision he had added a kicker:
"Finally, the Court orders the provisional execution of the judgment notwithstanding appeal with respect to the initial deposit of one billion dollars of moral damages, plus all punitive damages awarded. The Defendants must deposit these sums in trust with their respective attorneys within sixty days of the date of the judgment. The Court will decide how those amounts are to be disbursed at a later hearing."
With the clock ticking till the money is due, the companies want the Court of Appeal to strike down this order for provisional execution and so today's hearing was added before the summer break.

The justices assigned to the panel were Justice Marie-France Bich, Justice Paul Vézina (who was on the same panel that heard the Constitutional challenge last month), and Justice Mark Schrager (a judge with special expertise in insolvencies). More on tobacco and judges at the end of this post!

It would appear that a fight over a billion dollars can still draw a crowd. But for the addition of a dozen chairs, this morning's session would have been standing room only. It seemed like everyone who had ever been involved in the trial was on hand - and more. There was a global presence - including Philip Morris International's corporate spokesperson, Anne Edwards. The competition for a seat with a view was tough.

Shhh... more secrets

Before the hearing got underway, there were (again) demands by the companies that the financial information that was part of their case should be kept confidential. Happily, the judges decided against going in camera and forcing the overflow crowd to wait in the corridors.

They did, however, impose a non-divulgation order on all of those in the room to not share any of the financial information that was subject to claims of confidentiality. Unhelpfully, they did not specify which information was supposed to be confidential, and which was not!

Some of the numbers bandied about have been in previous judgments and also in Annual Reports. As my ears heard them, the numbers only illustrated the general points, and there is nothing lost in today's story by having some specifics under wraps.

Three tests

In addition to the appropriate use of judicial discretion, it would appear from this morning's presentations that there are three main issues this panel of judges will focus on in their decision.
* Will the provisional execution cause "serious and irreparable" harm to the companies ?
* Are there apparent weaknesses in Justice Riordan's ruling that suggest the eventual appeal will be successful?
*  What is the balance of inconvenience? (Which side comes out worst if the ruling goes against them)

"An abuse of discretion" to give lung cancer victims money before they die 

After the secret stuff had been dispensed with, Simon Potter opened the case for the tobacco companies.

He charged Justice Riordan with having overstepped his authority to exercise his judgment in the case. His decision on provisional execution was "such a grave error of law that it resulted in an abuse of that discretion."

That's a loaded charge, and it triggered some push back from Justices Schrager and Vézina, who expressed at least an understanding of the rationale offered for this decision. Had Justice Riordan not expressed concern that "people were dying"? 

For the next several minutes, Mr. Potter was pulled off his prepared notes. His lawyerly answers to their questions reinforced the view that these companies still do not get the message:

"[Justice Riordan] took it for granted [that they were dying]. But there was no proof. He is probably right that some members of the class are in their last days or weeks or months or years - but there was no evidence brought on that point." 

His insistence on evidence for the obvious did not seem to fit well. He disparaged Justice Riordan's for having estimated with "absolutely ZERO" evidence that the time for the appeals to be exhausted was, optimistically, six years, (He put on the record that the companies are willing to expedite the appeals.)

"Four to six years seems realistic to me [as the time appeals will take]." said Justice Vezina, who also offered comments which would have given comfort to the class members watching the proceedings.

"Of the 100,000 people, some are dying and some are dead. A number will not live to see the end of the appeals.... Can we not give them $10,000 each to make their final years less awful? ( "moins penible").

Their questions clearly took Mr. Potter off his plan, and he was prompted by his colleagues to not overstep his time. (Each side of the argument was given 60 minutes to make their case).

"Serious and irreparable harm" 

The second part of the companies' argument was presented by Mr. Mahmud Jamal (for Imperial Tobacco).

He appealed to the judges' potential concerns with creating new interpretations of the rules. There was no precedent for distributing a provisional execution to a class action despite a forty-year history of class actions.  "The reason is that it is not authorized by the Code of Civil Procedure."

He stressed the "irreparable harm" of "serious magnitude" that would result if the payment were required. 

"The uncontradicted evidence is that all three defendants will be in insolvency..."They will not be able to pay the amounts by the due date... Our submission is that all of the defendants will suffer irreparable harm of such serious magnitude." ... "My client can't pay at all."  

Their appeal rights will be lost

One reason the companies say they cannot borrow money is that those who might be in a position to loan them such large sums (including their own parent companies) are scared off at the prospect that they will not be able to recover the sums. This is not an admission that they will eventually lose, however, but an assessment that it will not be possible to go to people who receive money in advance and get them to pay it back.

By their logic, this means they effectively lose their right to appeal. "The amounts will be unrecoverable for all intents and purposes .. this will render the appeal moot." said Mr. Jamal.

The manifest errors they see in the ruling

It fell to Guy Pratte (JTI Macdonald) to convince the panel that there was good reason to think that when the main appeal was heard it would be decided in favour of the companies.

To do this, he took them through a rapid, and somewhat colourlessly expressed, overview of the many errors he saw in Justice Riordan's ruling. (You can read them in the companies' inscriptions in appeal, available here.)

A reasonable and judicial exercise of discretion, say the plaintiffs

Gordon Kugler, on behalf of Quebec smokers, had the job of giving the panel reasons to leave Justice Riordan's ruling intact. He laid these reasons out one by one, in a steady series of short arguments expressed in the simplest of terms and without any rhetorical flourishes. Nothing theatrical - yet it felt like a scene from a good courtroom drama.

He reminded the panel that Justice Riordan had come to his decision after an extraordinarily long trial, and that having done so was "entitled to his discretion." Moreover, the Appeal Court should not challenge this discretion without considering the whole of the judgment -- something that this hearing was not set up to do. "For them to say he abused his discretion is unjust, unfounded and frankly insulting."

Hollow threats of self-inflicted harm

Mr. Kugler rejected the idea that the companies were losing their right to appeal. The amount in question is a small fraction of the ruling that they are appealing. "It is only 7% of the total award of $15 billion." The bulk of their punishment would not be faced until after their appeals were exhausted.

He said the companies would only go into bankruptcy if they chose to do so. The companies had the capacity to pay, were "hugely profitable" and had turned over billions and billions of dollars to their multinational owners in recent years.

They have earned billions of dollars from operations since 1999. yet not one of the defendants has made a provision, has taken a reserve nor set aside any money to satisfy an eventual judgment in these cases. What they have done is pay virtually all of their earnings to their offshore related companies in the guise of royalties, interest or dividends.

"What colossal nerve to point the finger at this court and say 'if you don't cancel provisional execution you will be responsible for putting them out of business." If the parent companies were not willing to return some money to these "hugely profitable" Canadian subsidiaries, "then that's their business decision. They will do what they want."

Mr. Kugler drew attention to other large legal payments that had been made by the companies to the federal government after faced with smuggling charges and in other litigation. (Another lawsuit against Imperial Tobacco had been settled last December, with a payment roughly the same as that they now say they cannot afford.)

Their capacity to pay had been established as "a finding of fact" in the Blais Létourneau trials. At that time, only one of the companies had argued that they would be unable to make a payment of this size, yet were now changing their story, "This court is not in a position today to overturn that finding of fact." 

A reasonable balance

He expressed the balance of inconvenience argument for his class members in human terms. "There are 100,000 class members. Eighty-five percent will likely be dead within 5 years.... They are suffering from cancer and emphysema which the judge said was caused by numerous faults by [the companies]."

The provisional execution would allow for each member to receive $10,000 - much less than the up to $250,000 that the judgment provided. It was "pure speculation" on the part of the companies that they could not get this money back if they eventually won their appeals, but even if this were the case, "their appeal is maintained up to 93%." "Justice Riordan struck the right balance."

He asked the court to weigh the interests of these victims against the possibly "hollow threat" of bankruptcy.

"If the order of provisional execution is suspended, the Blais class members will die before the process is completed. They will be provided with no benefit even though it took 17 years to litigate to get this judgement."

A different litany

Bruce Johnston offered a counterpoint to the list of judicial errors that had been presented by Guy Pratte. He similarly took the panel through a review of selected sections of Justice Riordan's decision, but focused instead on the faults that the companies had been found guilty of.

As they had with Mr. Pratte, the panel offered no physical or verbal reaction to this presentation.
It was as if they wanted to leave the meat of the appeal untouched - untainted by any reflections on their part.

Spread some light

In a brief address at the end of the plaintiff's allotted hour, Mr. André Lespérance argued against maintaining any confidentiality on the affidavits and evidence that the companies were using as the basis of their claims of hardship. He took the court through decisions in the recent Marcotte bank case, where similar confidential issues had been resolved in a way which avoided unnecessary witholding of information.

The rebuttal

Each of the companies had  few minutes to respond and make their final points. Some were worth noting:

Mr. Potter made a veiled suggestion of the consequences to public order if the cigarette companies became bankrupt and the contraband market became larger. The sale of cigarettes is permitted by law and regulated by government, he said.

It is "highly relevant to the balance of convenience to have this legal market served by legal companies who pay their taxes -- pay the excise taxes and who have obeyed the laws." 

Mr. Jamal tried to explain away why Imperial Tobacco could make a settlement of more than a half billion U.S. dollars in December, but was unable to make the provisional execution a half year later. The decision on Flintkote was "financed by the parent company" as "a final judgment to settle historical claims."

He said it was a "business decision" for BAT to finance the Flintkote (asbestos) case, and that it had made a business decision not to finance the Blais (lung disease) case.

"In this case the company has said it will not finance the provisional execution. It is the right of the company to say it will not finance. It is not for counsel to disagree with business decisions."

Sooner rather than later

Although the Court of Appeal is under pressure to make a ruling soon, we will still have to wait. Justice Bich adjourned with their decision not yet made or shared.

Judges and tobacco lawyers

Mr. Mahmoud Jamal is a new face on the Imperial Tobacco team in this trial (although he has worked on tobacco cases for them in New Brunswick and possibly elsewhere).

One reason for the switch up is that Imperial Tobacco has two fewer Montreal-based lawyers than it did a year ago. Suzanne Côté was elevated to the Supreme Court of Canada last winter, and late last month Silvana Conté became a judge at the Quebec Superior Court.

A third lawyer who has worked for the companies in this case, albeit in a minor role, was also appointed to the bench last month. Marie-Josée Hogue, who is now a judge on Quebec's Court of Appeal, had subbed in for Mr. Potter on at least one occasion during the Blais-Létourneau trials.

Is it an advantage or a disadvantage for the companies to have so many of their own in high places?
This morning's hearing is an example of how it can make a difference.

In checking the court record today I found out that the original panel scheduled for this week included two judges (Chief Justice Nicole Duval Hesler and Justice Robert Mainville) who had to step back from this hearing because of potential conflicts as a result of their connections with tobacco.

This post was backdated to make for consistency in indexing

Monday, 6 July 2015

The Appeals Begin

The deadline for the tobacco companies to file an appeal to Justice Riordan's decision in the Montreal tobacco trials came and went on Friday, June 26. Before it left, each of the three companies had duly filed their separate objections to his ruling.

As far as I know, only one of these documents is easy to access at the moment. It has been made so courtesy of Rothmans, Benson and Hedges web-portal on this case ( As the filings from the other companies become accessible, I will post them here.

Many judicial errors

In its Inscription in Appeal, Rothmans, Benson and Hedges has taken a broad-brush approach to criticizing the judgement. They identified no fewer than 33 specific errors which they say were made by Justice Riordan. His approach to the case was described as one in which he "disregarded the most fundamental limits on his judicial role." 

"The Trial Judge erred in finding that fault, causation and injury had been proven conclusively or at all; erred in awarding collective recovery of moral damages in Blais; erred in awarding punitive damages; erred in granting prescribed claims; and erred in ordering provisional execution. He also made palpable and overriding errors in his factual findings and treatment of the evidence, and fundamentally erred in his understanding of the class action procedure." 

The main themes of their concerns are the same as those which they presented during the main trial: individual harms have to be demonstrated, smokers knew about the risks and should be held responsible for their decisions, the shelter of government approval of package warnings.

(Noteworthy is the role of Philip Morris International in providing media commentary on this trial. Their director of Corporate Affairs Strategy and Planning, Anne Edwards, has provided a number of clips for media use on Among these is their view that the company "cannot be held liable for the government's own mandate.")

Reading RBH's appeal, I could identify no area in which they have adjusted their version of history in response to Justice Riordan's findings of fact. It would appear that the strategy of no concessions, no admissions is still in play.

The Provisional Execution

Each company has also filed a separate motion asking to be liberated from making the a $1.13 billion* payment required by Justice Riordan when he ruled in favour of such a 'provisional execution'.

His ruling required them to deposit this amount within 60 days of his ruling, i.e. by July 26th. With only a 30 day window to resolve this sub-issue, the Appeal Court quickly scheduled a hearing which will take place this Thursday morning, July 9th.

The companies have been ordered to drum up the equivalent of one year's earnings (for Rothmans) with a higher figure for the companies that were found more at fault (Imperial Tobacco and JTI-Macdonald).

I had rather expected them to increase the price of their cigarettes to help make these payments. This, after all, is what happened when all the U.S. companies found themselves on the hook to the U.S states after the Master Settlement Agreement was reached in 1998. There, the price of a package of cigarette increased by about $0.45 - or 20% of the price of a premium brand. 

Wholesale Price Increase in U.S. during and
after Master Settlement Agreement
U.S. Department of Agriculture

A similar tactic in Canada would involve a wholesale price increase of about $0.67* a package (or a little more if the higher price led some Canadians to buy fewer of the companies brands). There are about 30 billion manufactured cigarettes sold in Canada.

If there has been a wholesale price increase, it has not reached the stores in my neighbourhood. Then again, raising prices might conflict with the plea of poverty that will doubtless be spun to the Appeal Court later this week!
(*these numbers were corrected on July 9th)

Another Legacy

Documents from the Blais-Létourneau class action are now available on the incomparable Legacy Document site at the University of California San Francisco.  Search and enjoy!