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 The two cigarette makers, which are in talks for a
multi-billion-dollar deal, face thousands of suits, but the impact
has not been as dramatic as was expected a decade ago, and trials
have given investors an idea of what the companies will pay.
Antismoking campaigns have also made it more difficult for smokers
and government enforcers to argue that companies were deceitful.
Supporting the Lorillard-Reynolds deal is "a new mood of optimism
within U.S. Big Tobacco on the litigation landscape," UK-based
analysts at the investment firm Jefferies Group said in a note on
June 30, adding that the situation still looked risky.
Lawsuits complicate what a company is worth, increasing chances an
acquiring company will overpay in a deal. Tobacco companies that
have an idea what they are apt to pay smokers who have sued may be
seen as better investments.
A deal between Reynolds and Lorillard, the No. 2 and No. 3 U.S.
players, would reshape one of the world's biggest and most
profitable tobacco markets. Lorillard makes Newport, the top U.S.
menthol cigarette, and leading e-cigarette blu.
The brighter legal picture dates to 2006, when the Florida Supreme
Court set aside an eye-popping $145 billion verdict against the
biggest tobacco companies. The ruling in Engle v. Liggett Group left
smokers to pursue cases one at a time, alleging that companies
concealed the dangers of smoking.
Since 2011, Reynolds has won roughly half the 100 cases that went to
trial as part of what has become known as the Engle litigation and
other smoking-related cases, the company said in a securities filing
in April. Lorillard said it has won about a quarter of its
Engle-related trials.
No new Engle-related cases were permitted in Florida after January
2008, and few class action suits have been brought in other states.
'COMFORTABLE' WITH LIABILITY
Based on Reynolds' securities filings, Jefferies Group estimated
aggregate liabilities from the Engle cases at $25 billion or less
for the whole U.S. tobacco industry, and called it a "small number"
relative to the industry's worth.
"If you're a U.S. tobacco investor, you're probably comfortable with
this, and it's in the stock price to some extent," said Jefferies
equity analyst Martin Deboo.
RBC Capital Markets said in a note in May that the U.S. tobacco
industry was ripe for consolidation based in part on a "stable
litigation environment."
Neither Reynolds nor Lorillard has offered a public estimate of its
future liability. The companies did not respond to requests on
Friday to elaborate on that and its impact on a merger.
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The majority of U.S. lawsuits against tobacco companies are in
Florida, where a jury in 2000 awarded smokers the $145 billion in
punitive damages. The state's high court later said the smokers
could not sue as a group but could use findings from the Engle class
action about the dangers of smoking.
Through the first quarter of 2014, Reynolds said in a securities
filing that it faced 5,000 Engle suits, down from 7,700 in December
2009. The ones that did not go to trial were settled or dismissed.
Lorillard said it faced 4,000 as of this year. Some suits target
multiple companies.
DECLINE OF THE DECEPTION DEFENSE
When juries find against the tobacco defendants, the awards to
smokers can be substantial. Lorillard paid $79 million last year to
resolve one suit from the family of a longtime smoker who died of
lung cancer.
Liggett Group, a unit of Vector Group Ltd, said last year it would
pay $110 million to settle 4,900 suits.
The Florida cases may represent the "last big chunk" of smoking
cases, said Sergio Campos, a professor at the University of Miami
School of Law.
But the mix of courtroom wins and losses has eased fears that
litigation could force the companies out of business. Tobacco
education has improved since litigation started decades ago, making
it difficult for plaintiffs to claim they could not have known about
cigarettes' addictive and disease-causing properties, he said.
"At some point, you get your hands around (the litigation), you know
it won't metastasize or grow anymore, and it frees you up to explore
this kind of deal," Campos said.
(Additional reporting by Martinne Geller in London; Editing by Ted
Botha, Jilian Mincer and Prudence Crowther)
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