Phil Law Weblog

Canada’s tobacco industry faced more challenges on Friday, with the news of a class-action lawsuit in Quebec and a possible downgrade of Rothmans, Benson & Hedges Inc.’s credit rating.

The Supreme Court of Canada struck a blow against cigarette makers Thursday with a ruling that paves the way for possible recovery of public health-care costs dating back 50 years.

On Friday, two legal firms announced that a class-action suit has been filed in Quebec claiming $17.8 billion from the industry, on behalf of about 1.78 million Quebecers addicted to nicotine. Meanwhile, Dominion Bond Rating Service said it is reviewing Rothmans credit rating “with negative implications,” because the Supreme Court’s decision allows British Columbia, and possibly other provinces, to sue the firm and its competitors for smoking-related health costs.

The 9-0 Supreme Court judgment upholds provincial legislation that allows British Columbia to seek damages to cover public health-care costs dating back five decades, as well as future costs for maladies linked to tobacco. After the decision, Ontario’s Health Promotion Minister Jim Watson said the province is also considering going after tobacco companies for health-care costs.

If all of the provinces follow suit, observers say the tobacco industry could be facing damages of about $80 billion. In a note to clients early Friday, Blackmont Capital analyst David Hartley said shares of Rothmans Inc. (TSX:ROC - news) had already dipped 11 per cent in three days, and he expects them to fall further.

Hartley said that when similar legal actions occured in the United States in the late 1990s - one of which led to a $246 billion US settlement over 25 years - tobacco stocks plunged by as much as 25 per cent in two days, and 40 per cent in six months.

In an interview Friday, Don McCarty, vice-president legal of Imperial Tobacco Canada Ltd., called the launch of the Quebec class action suit at the same time as the Supreme Court ruling an “attempt at theatrics.” However, he did not downplay the potential financial impact on the tobacco industry.

Imperial’s liability insurance would only cover an “insignificant” portion of any legal judgements, he said. Industry settlement was reached seven years ago, “cigarettes were a buck a pack,” he said.

McCarty said that Imperial will not choose to settle the suits. “They want anywhere between $10-to-80 billion. After taxes, the three companies made maybe $500 million. Where do they think we’re going to get the money from?”

He said the industry paid $9 billion in taxes last year. “They already have their settlement.” McCarty is looking to rally support from the other so-called “sin” industries, saying British Columbia has carved “a dangerous path” by assuming it can take on an industry “by passing a special law allowing it to sue them.

In a note to clients, analyst Marc Marzollo of Merrill Lynch said “it should be noted that (the Supreme Court) ruling was procedural in nature; it endorsed the legislation but did not pass judgment on the merits of the claim.

“Clearly, in our opinion, the B.C. case is about recovery of costs and trying to reduce the impact of smoking on B.C. society as opposed to bankrupting the industry participants….And we would point out that there does need to be a viable tobacco industry in Canada for the 20 percent of Canadians that either choose to smoke or are unable to quit.” Marzollo said he believes that a settlement will ultimately be more likely than a verdict in the case.

Source

Filed under Class Action

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