Voting Day: The Ayes Have it.

Yesterday three separate private meetings were held among the creditors of Canada's insolvent tobacco companies (BAT-Imperial Tobacco, PMI-Rothmans, Benson and Hedges and JTI-Macdonald). The sole purpose of these meetings was to decide whether the plan of arrangement (settlement) that had been drafted by the mediators in the long-going negotiations was acceptable to the provincial governments and private plaintiffs.

Comments during the October 31 hearing made it no surprise that the plan was approved. Late in the afternoon, the results were confirmed by the Quebec class action and on Saturday the monitors for Rothmans, Benson & Hedges reported that the result for that no one voted against the deal.

The agreement to this settlement by all of the Canadian provinces was quickly panned by health agencies. The groups are disappointed that provincial governments failed to insist on the inclusion of measures aimed at reducing tobacco use or the resulting diseases.

In a joint press release, Action on Smoking & Health, the Quebec Coalition for Tobacco Control, Physicians for a Smoke-Free Canada said that provincial governments had thrown the public interest under the bus, and squandered a unique opportunity to change Big Tobacco’s profitable addiction and disease business model. They called for the provinces to move quickly to counterbalance the flaws in this agreement by introducing new and bold laws to accelerate declines in smoking and prevent addiction to new industry products. 

The Heart and Stroke Foundation raised concerns about the research focus of the cy-pres foundation, which will receive $1 billion from the settlement. Heart and Stroke wants to see the mandate expanded to include prevention and public awareness activities aimed at helping people quit smoking.

The Canadian Cancer Society called for the amendment to be amended before the court reviews it in late January. They want to see 'smoking-reduction measures and the release of confidential industry documents, similar to what was achieved in the United States decades ago.'

injunctive relief -

 On Monday a small wave of documents were uploaded on the website of one of the auditing firms which are acting as monitors for the tobacco industry's Canadian insolvency proceedings. 

Two lawfirms were seeking an urgent decision by Justice Morawetz to close down an attempt by a third firm to recruit clients among the injured smokers who will be eligible for compensation, should the settlement plan with tobacco companies come into effect.

One of the firms seeking injunctive relief was the Quebec firm, Trudel, Johnston, Lespérance, which has for decades managed class action suit of Quebec smokers with lung cancer, throat cancer and serious emphyzema who were diagnosed before March 12, 2012. The other is the Halifax firm, Wagners, which was appointed by the court to represent similarly-injured smokers who were not part of the Quebec Class action. (These injured smokers are across Canada and were diagnosed with the same diseases in the four years before March 9, 2019.

In recent weeks, the Actis Law Group encouraged potential claimants to register with them, suggesting that they would take a contingency fee cut of any payments. This raised the ire of the firms mandated to represent those claimants, especially because the administration of the compensation plan has been designed to avoid the need for lawyers (or lawyers' fees!).

Justice Morawetz granted the request for injunctive relief today. He ordered Actis to remove those sections of their website, to stop soliciting any clients and to provide the names of those who had signed up with them. This injunction will be in effect until the settlement is approved (or not) in a sanction order. 

One week to the first survival test for Canada's proposed tobacco settlement.

Next Thursday, December 12th, is the day the proposed settlement agreement between the three large tobacco companies and those suing them will be put to its first survival test.

On that day, a secret vote will be held among the companies' creditors to decide whether or not the proposal drafted by the Hon. Warren Winkler is an acceptable resolution to their claims. 

In insolvency proceedings, it is usually the companies which draft the proposal to their creditors. In this case, the task was assigned to Mr. Winkler after the negotiations he had mediated between the companies and their creditors had dragged on for more than four years with no obvious result. 

Just over a year ago he and the participating accounting firms (monitors) were assigned the task of putting pen to paper.  Their suggested text was made public on October 17 this year, and on Halloween it was decided that it should be put to a vote. 

The settlement proposal will only survive the vote if it receives a double majority of votes in favour. It must be approved by more than 50% of the eligible voters AND ALSO be supported by those holding at least two-thirds of the companies' debts. 

As shown in the settlement plan (below), the effect of this requirement is that some creditors have more voting power than others.  

To succeed, those representing some injured Canadian smokers must vote in favour, because they hold 64% of the eligible votes (186,003 of  289,906). A second class of injured smokers in Quebec hold just over one-third of the votes (186,003). Tobacco producers have just over 1% of the votes, but the provinces and other parties have only one vote each.

No other party has enough power to block the vote on their own. The two claimants with the largest claims (Quebec and Ontario) each hold about one-fifth of the value of the proposed compensation: it would take both of these provinces rejecting the settlement before it would collapse. Most of the provinces, including Ontario, have indicated that they will vote in favour.

The results of the vote will be provided to the court on Friday the 13th of December. In the likely case that the vote is in favour, details of the court review of the settlement will be made clear the following week, with a flurry of other preparations for the hearing now scheduled to take place at the end of January. 

It would be a whole different ball game if the vote went against:  the parties would be back to where they have been since March 2019.

Survival test #2 

The next survival test for the settlement agreement will take place at the Sanction hearing, which is scheduled for January 29 to 31. During this 3 day hearing, Justice Morawetz  will consider whether the agreement/plan of arrangement is fair and reasonable, how much the class action lawyers should be paid and other issues. 

If he decides against the deal, then the parties are back to where they have been since March 2019. 

Survival tests #3 and ... ? 

A thumbs up or thumbs down from Justice Morawetz may not be the end of the road because his decisions are subject to appeal. The companies and other parties could try to contest any rulings and/or take other actions to block its implementation. 

Already we know that two of the companies object to some portions of the plan. The decision to assign the drafting of the plan of arrangement to the mediator is  legal novelty - and legal novelties involving rich and unhappy litigants often end up before the Supreme Court.

Other actions may also be available to the companies, should they wish to pull the rug out from under the plan if it makes it past the first hurdles:

* The proposal is drafted in ways which require Japan Tobacco to stop using fancy corporate footwork to make it look like it loses money in Canada. With a small market share and the prospect of only operating at 15% of net revenues, its headquarters may prefer to pull up stakes and abandon the Canadian market. 

* The plan contains nothing to resolve the tension between Philip Morris and British American Tobacco on how to apportion payments between them. Subsequent lawsuits between them on this dispute could cause further delays.

  

The road from the vote to the Sanction Hearing

This week parties agreed on a timetable for the next steps in deciding the outcome of the proposed tobacco settlement. 

At the end of January, Justice Morawetz will hear arguments in favour or against the fairness and reasonableness of the settlement (the Sanction), the fees that will be paid to some lawyers, and other issues. As the timetable pasted below indicates, there are a few stations of the cross before that blessing will be decided.

Tobacco CCAA Proceedings: Litigation Timeline to Sanction Hearing 

Thurs., Dec. 12 

• Meetings of Affected Creditors 

Fri., Dec. 13 

• Notice of Motion for Sanction Protocol Orders filed 
• Monitors’ Reports for Sanction Protocol Orders and reporting on voting results from the Meetings 

Mon., Dec. 16 

• Responding Records to Motion for Sanction Protocol Orders, if any 

Wed., Dec. 18 

• Factum of the Monitors for Sanction Protocol Motion  

Thurs, Dec. 19 

• Responding Factums to Sanction Protocol Motion, if any 

Fri., Dec. 20 

• Reply Factum of the Monitors, if necessary Mon., Dec. 23 Sanction Protocol Hearing 

Mon., Jan. 13 

• Each Class Counsel files a notice of motion and supporting materials for fee approval (to be heard at the end of the Sanction Hearing) 

Wed., Jan. 15 

• Notices of Motion for Stay Extensions (to be heard on the last day of the Sanction Hearing) 
• Notice of motion for Plan Sanction Orders, CCAA Plan Administrators’ Orders and Monitors’ (and Counsel) Fee Approval 
• Monitors’ Reports re: Plan Sanction Orders, CCAA Plan Administrators’ Orders, and Monitors’ (and Counsel) Fee Approval 

Thurs., Jan. 16 

• Responding Records to Class Counsel fees 

Mon., Jan. 20 

• Responding Records to Motion for Sanction Orders, CCAA Plan Administrators’ Orders, and Monitors’ (and Counsel) Fee Approval 
•  Responding Records to Motion for Stay Extension 

Wed., Jan. 22 

• Factum for Plan Sanction Order, CCAA Plan Administrators’ Order, and Monitors’ (and Counsel) Fee Approval 
• Factums for Stay Extension Orders 
• Monitors’ Reports re: Stay Extensions 
• Factums in support of Class Counsel fees 

Fri., Jan. 24 

• Responding Factums for Motion for Plan Sanction Orders, CCAA Plan Administrators’ Orders, and Monitors’ (and Counsel) Fee Approval 
• Responding Factums for Motion for Class Counsel fees 
• Responding Factums for Motion for Stay Extension 

Mon., Jan. 27 

• Reply Factum of the Monitors for Plan Sanction Orders, CCAA Plan Administrators’ Orders, and Monitors’ (and Counsel) Fee Approval, if necessary 
• Reply Factum of Class Counsel re Fee Approval, if necessary 
• Reply Factums for Stay Extension Orders, if necessary 

Wed.-Fri., Jan. 29-31 

• Sanction/Fee Approval/Stay Extension/Ancillary Relief Hearing

The tobacco settlement will cost Ottawa $5 billion in lost tax revenue (and much more in health impact)

 The federal government seemingly had a very minor role in the mediation between tobacco companies and the provincial governments that were suing them to recovery health care costs. That may prove to be a problem. 

The proposed plan that has emerged from these discussions - and that will be subject to a creditors' vote on December 12 - suggests that the federal (and national) interests may have been compromised by this deal that was brokered in secret over the past 5 years. 

This post identifies the financial downsides to the federal government from this deal. A future post will look at the public health implications.

Next year, Revenue Canada is set to issue $1.8+ billion in settlement-related tax refunds (and will lose $150 million per year for the subsequent 20 years)

Over the past 5+ years, the companies have been required to preserve all of their income and to set it aside to resolve their debts. The $12.5 billion that has been amassed so far will be used to provide upfront damage payments to class actions and provinces. Over the next 20 or so years, the remaining $20 billion of the damages promised will be paid in annual installments.

The cash reserve was built from the after-tax income of the tobacco companies. Now that this "income" is being converted into "damages", the corporate income tax of the companies will be reassessed and the income tax paid in those years will be refunded. This expectation is clearly identified in the settlement, and is several times referred to as "Tax Refund Cash Payment".

Based on a federal corporate income tax rate of 15%, the amount refunded by the federal government for the upfront damage payments of $12.45 billion will be in the order of $1.8 billion. The cost to the federal treasury for the remaining $20 billion will be $3 billion: with an annual loss of $150 million if the repayment rate follows that forecast by the plan. The total cost to the federal treasury will thus be around $4.8 billion.

Corporate income tax paid to provinces will also be refundable. Because their tax rates are lower, the refund will be smaller. Presuming a provincial corporate income tax rate of 10%, this will reduce the real value of the settlement payments to the provinces by 10%, or $2.47 billion.

From the perspective of Canadian citizens - who are implicated in the finances of both federal and provincial governments - the true value of the settlement payments is diluted by the impact on both provincial and federal corporate income tax revenues. 

The true value to the collective public purse of the provincial settlements is thus reduced by these tax implications from $24.725 billion to $18.54 billion. Once payments to outside counsel, discussed here earlier, are also factored in, the true value falls by a further $1.77 billion, to $16.77 billion.  Lost income taxes and legal fees thus reduce the societal value of the settlement by one-third.

Revenue Canada is owed hundreds of millions - the Plan does not provide for repayment 

When Imperial Tobacco applied for creditor protection in March 2019, it identified a debt to Canada Customs and Revenue Agency of more than $500 million.  When the vote is taken on December 12, this debt to the government of Canada is reduced (without explanation) to $333,535,110.  There is no provision in the proposed plan for this amount to be repaid to the federal government. Justice Morawetz commented on this during the hearing on October 31st, noting that there may be other provisions in law which apply to amounts owing to government.

If this debt is not repaid, the federal government will be out of pocket by more than a decade's value of the yet-to-be-implemented Tobacco Cost Recovery Framework. 

Ottawa will help pay for the continued smoking that is built into the settlement

The federal government provides a significant portion of the health care costs for which the provincial governments sought recovery. Yet there is no indication that the any of the payments made by tobacco companies to the provinces will be shared with federal government, or that Ottawa will be off the hook for its share of the escalating health care costs caused by smoking.

Economist Glenn Harrison was engaged to calculate the costs to provincial health care systems resulting from tobacco use, with separate calculations for tobacco use by people who became addicted before 1996. His report, included as appendix "G" in the proposed plan, provides these estimates for each province in graphical form. 

Mr. Harrison's estimate for Ontario, shown above, suggests that the cost of treating smoking-caused diseases will continue to rise for the next quarter century: with an estimated annual cost of $6 billion in 2030 and $7 billion in 2040. The situation is similar in all provinces. 

Because of the Canada Health Transfer, Ottawa is a stakeholder in provincial health care systems, and is affected by the provisions in the proposed plan to impose a covenant on companies that they will maintain their business practices to ensure the continued sale of cigarettes.

As a creditor of Imperial Tobacco, the government of Canada will have 1 vote on December 12th on the version of the plan that would apply to that company.  For the reasons outlined above, there is every financial reason for it to say "no".

“The precarious state of this restructuring”

It seemed a foregone conclusion that at today's hearing, Ontario Chief Justice Geoffrey Morawetz would agree to allow a vote on the proposed plan to resolve the lawsuits against Canada's insolvent tobacco companies. After all, December 12th had been set as a day for the vote some weeks ago and the vast majority of the vast number of parties involved wanted this to take plus.

Indeed, by early afternoon, the judge indicated he would be issuing: a) Meeting Orders; (b) claim procedures orders and (c) an extension of the litigation stay to January 31, 2025.

The vote will take place on December 12th. Approval requires the support of half of the creditors and two-thirds of the amount owed. These amounts have been calculated in a way that ensures that representatives of both individuals and provinces will have to support the plan for it to move forward for review by Justice Morawetz at the 'Sanction' hearing. 

Although it was seemingly a relatively simple set of questions (can the proposed plan go to a vote, and what rules will guide that process), it came after a long debate and supported by a ton of paperwork. (The documents filed in connection with this question are listed at the end of this post.) 

It took until the early afternoon before the clear majority got the green light they wanted. The delay came despite the clear enthusiasm of the mediator (Hon. Winkler expressed through a lawyer) for the plan he drafted. It came despite the approval voiced by the provincial governments and injured smokers to whom the companies are indebted. It came despite repeated reminders from the bench and the bar that today's issue was only the procedural issue of whether or not to move to this next step. It came despite assurances that the ingredients of the plan would be reviewed at a future "sanctions" hearing. 

The delay came because two of the companies are unhappy with the amount of money they will have to spend.

"Jointly and severally" hurts Philip Morris's subsidiary 

Rothmans, Benson and Hedges is unhappy because the plan proposes that compensation will be paid as a share of each company's profits. For the first 5 years, each company will pay 85%, dropping by 5% in each subsequent five year periods. A company that is not profitable will pay nothing. A company that is more profitable will pay more. All companies will pay until the total compensation is satisfied.

Rothmans does not sell as many cigarettes today as Imperial Tobacco, and it did not sell as many in the years when the wrongful actions that are the subject of the suit took place. (The proposed embeds an end date for wrong doing - "legal breach" - as March 1996). Moreover, Justice Riordan found that Imperial Tobacco behaved worst of the three companies -- and ordered it to pay two-thirds of the penalty. (Ruling, para 1013)

RBH would appear to want the "allocation issue" to be resolved in a way which reduces the likelihood of it paying more than the others. An allocation agreement among the companies remains one unresolved element of the proposed plan. From today's representation, RBH seems to feel it is on the back foot of the negotiations. The comments today from ITL's representative suggest there is not even agreement on the scope of the disagreement - their counsel suggested that only for $175 million of the $32.5 billion deal was that company prepared to make adjustments.

Japan Tobacco wants royalty payments to get priority 

The decision of Japan Tobacco to organize its ownership of Canadian subsidiaries in ways that avoided taxes and reduced its litigation exposure has been gone over a few times over the past 10 years. (It was first reported here in 2013).

Today two Japan Tobacco subsidiaries tried to convince Justice Morawetz that the failure of the proposed plan to give its inter-company payments the status of secured creditors was reason to not proceed with the vote. 

A particular bug-bear was the drafting of the plan by a third party. JTIM's Responding Factum speaks disparagingly of the process: "unprecedented" "beyond reasonable".  It suggests that assigning the task of drafting to court officials -- creating a "creditor drive-by restructuring" is improper and would not survive appeals.

Given the improbability of putting a spoke in the wheels at this point, the lengthy elaboration of the perceived injustice this will cause sounded like a tactic in a different strategy. With more negotiations to come, as their counsel put it, they hoped to "soften the views of those across the table from us who might think they can do this [impose a plan that the company does not agree with].

The judge gave them the cold eye and asked them to signal where they would take their concerns if they were not satisfied. "What is your endgame?" he asked them. "Everyone knows the decision tree that is going forward in the weeks ahead."

The question was left unanswered. Withdraw from Canada?  Sell out to GRE?  Exhaust appeals? It's not clear how these options would play out or affect the ability of Quebec claimants to finally receive compensation.

The Social Stakeholders

The hearing was book-ended with submissions from two of Canada's largest health charities.

The hearing opened with a request from the Heart and Stroke Foundation to have the hearing postponed by three weeks.  It takes a special kind of moxie to walk into a Zoom meeting with 50 lawyers bedecked in court dress and suggest that they take the rest of the day off, but James Bunting did it seemingly without embarrassment. (To date Heart and Stroke has not issued any comment on the proposed settlement plan). The request was turned down flat. 

At the end of the day, the Canadian Cancer Society proposed a series of amendments they would like to see to the plan. Their five suggestions were: (1) expanding the scope of the foundation to consider different forms of research related to tobacco use; (2) making public the documents exchanged under discovery; (3) including some (unspecified) promotional restrictions; (4) rewording the covenants so that the companies are no longer obliged to continue past practices; and (5) including measures to prevent smoking, given that future smokers will, through their purchases, paying compensation for claims.

Hanging by a thread?

There was much that was said - in words and in silences - that suggests that the participants in this process are far from certain of the outcome. Justice Morawetz acknowledged that the time would come when he would have to assess the fairness and reasonableness of the proposed plan to the parties (although he hinted that a priority was to protect creditors, not companies).

What happens if the wheels fall off this bus?  If, to use the parlance of today's hearings, the 'unsolved' issues do not become 'solved' by the Sanction hearing anticipated for January?

JTI's counsel laid out the three normal options for the provinces and other creditors at the December vote:

• Vote in favour of a plan
• Vote against and liquidate the company in bankruptcy
• Convince a court to appoint a receiver so they can run it themselves

At at the end of a hearing where the plan was described as "precarious" and "unresolved" there was a clear impression that the conclusion of the process is far from certain. Back up plans have certainly been developed, but they are being held close to the chest.

But, as JTI's lawyer pointed out, if the wheels fall off this proposal, two other options remain for the provinces and the other creditors.

Related documents:

JTI Macdonald

• Responding Factum - TM Receiver - October 29, 2024.pdf
• Motion Record of the Applicant to Strike Affidavit of Andre Lesperance - October 29, 2024.pdf
• Responding Factum of the Applicant - October 29, 2024.pdf
• Joint Factum - Mediator and Monitors - October 28, 2024.pdf
• Joint Book of Authorities - Mediator & Monitors - Volume 1 of 2 - October 28, 2024.pdf
• Joint Book of Authorities - Mediator & Monitors - Volume 2 of 2 - October 28, 2024.pdf
• Affidavit of André Lespérance (QCAPs) in response to JTIM objection - October 28, 2024.pdf
• Motion Record of the Applicant re Amendment to Representative Counsel Order - October 24, 2024.pdf
• Responding Motion Record of JTI-Macdonald Corp -October 24, 2024.pdf
• Motion Record of the Monitor re Claims Procedure Order and Meeting Order returnable October 31, 2024

RBH

• Joint Reply Factum of the Mediator & Imperial & RBH Monitors - 30 Oct 2024
• Supplemental Joint Book of Authorities - 30 Oct 2024
• RBH Submissions Regarding Claims Procedure Order and Meeting Order - 29 Oct 2024
• Joint Book of Authorities of the Court-Appointed Mediator & Monitors (Part 1 of 2) - 28 Oct 2024
• Joint Book of Authorities of the Court-Appointed Mediator & Monitors (Part 2 of 2) - 28 Oct 2024
• Joint Factum of the Court-Appointed Mediator & Monitors - 28 Oct 2024 –
• Motion Record of Monitor of RBH - 17 Oct 2024

Imperial

• Joint Oral Compendium of (i) the Court-Appointed Mediator, (ii) FTI Consulting Canada Inc., in its capacity as court-appointed Monitor of Imperial Tobacco Canada Limited and Imperial Tobacco Company Limited, and (iii) Ernst & Young Inc. in its capacity as court-appointed Monitor of Rothmans, Benson & Hedges Inc., in connection with the motions returnable October 31, 2024
• Joint Reply Factum of the Mediator & Imperial & RBH Monitors (October 30)
• Factum of the Applicants, Imperial Tobacco Canada Limited and Imperial Tobacco Company Limited, for the motion returnable October 31, 2024 (October 29 2024)
• Joint Factum of the Court-Appointed Mediator & Monitors October 28, 2024
• Imperial Tobacco - Monitor's Twenty-First Report (Claims Procedure Order) October 25, 2024
• Imperial Tobacco - Monitor's Twentieth Report (Meeting Order) October 25, 2024
• Motion Record of FTI Consulting Canada Inc., in Its Capacity As Monitor of Imperial Tobacco Canada Limited and Imperial Tobacco Company Limited (Motion for Claims Procedure Order and Meeting Order Returnable October 31, 2024) October 17, 2024

New documents provide additional detail on settlement

Tomorrow morning the dozens of parties involved in Canada's long-running tobacco industry insolvency saga will appear (virtually) before Chief Justice Morawetz. The hearing is scheduled for 9:00 a.m. and can be viewed in real time on Youtube.

The materials to be considered at the meeting have amassed over the past few months. Left over from the postponed hearing in September are motions for an extension of the litigation stay by each company and the reports of their monitors. More recent additions are the proposed plan of arrangement that has garnered significant attention and concern, a motion by JTI-Macdonald expressing its disagreement with the proposed plan, additional monitor's reports for each company - and more! 

These documents are available on the monitor's websites: EY for Rothmans, Benson and Hedges, FTI for Imperial Tobacco and Deloitte for JTI-Macdonald. 

A bumpy road ahead?

Today's addition to this pile is a Joint Factum of the Court-Appointed Mediator and Monitors. This document outlines the process by which the proposed plan will be subject to a vote on December 12th. It also anticipates concerns or objections about the proposed plan, and offers legal arguments to support the unusual way in which the plan emerged. The level of detail in this legal instruction from one former chief justice (Warren Winkler was Chief Justice of Ontario from 2007 to 2013) to his successor (Geoffrey Morawetz was appointed Chief Justice of Ontario in 2019) suggests that the former may feel that the deal he brokered is not a slam dunk.

Further context and explanation is provided in the monitor's reports filed this week for Imperial Tobacco,  JTIM  and RBH. 

For the first time in this process, these reports identify some sticking points or lack of agreement. They note that only 10 of the 13 provinces and territories support the plan, although the identify of those with reservations is not provided. ("Amongst the Provinces and Territories, ten of the thirteen jurisdictions, support the CCAA Plans.") 

The reports also note continuing disagreement among the companies regarding who pays how much. ("The issue of allocation of the Global Settlement Amount as between the Tobacco Companies in the three CCAA Proceedings remains unresolved.")

Not doomed to fail (or guaranteed to be found fair and reasonable).

Former Chief Justice Winkler's report to the court holds up the draft plan as a document suitable for the vote, but acknowledges that the vote is not the final stage."3. The CCAA Plans are plans of compromise or arrangement. They accordingly reflect difficult, yet necessary compromises by a broad range of diverse stakeholders with the goal of achieving a just and workable result in these staggeringly complex circumstances. Whether the CCAA Plans strike the right balance and are ultimately fair and reasonable, however, is a question for another date...  At this preliminary juncture, the question is simply whether the CCAA Plans are “doomed to fail”.

Private lawyers set to receive $1.74 billion from provinces for tobacco settlement

Among the many secrets which surround the proposed tobacco settlement is how much the legal teams representing the provincial governments will receive. 

Only two provinces have made public the terms of their contracts with the 3 teams of private law firms which have managed the suits. Using these disclosures as the basis of assumptions of the fee rate in other provinces, the total payment to these firms is likely to exceed $1.7 billion. 

The calculations behind this estimate are detailed below and on a downloadable fact sheet.

11 of Canada's 13 jurisdictions have hired lawyers on a contingency fee basis

Ontario and Quebec are the only two Canadian jurisdictions which have used in-house staff to manage their lawsuits against tobacco companies. 

Each of the other 11 jurisdictions is working on a contingency fee basis with private law firms. They have agreed to pay these firms a percentage of any payments that are provided to them as a result of their lawsuits. British Columbia originally engaged a local firm on a fee-for-service basis, but a decade later shifted legal teams. In 2009, after about a decade of effort, B.C.'s payments to outside counsel were reported as being $12 million. 

Three sets of law firms are primarily involved, with additional support during the insolvency process:

• A consortium of three firms represents British Columbia, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Saskatchewan, Northwest Territories, Nunavut and Yukon. 
• Newfoundland and Labrador is represented by a U.S. firm working with a Canadian partner.
• Alberta is represented by a firm based in that province. (Alberta and Newfoundland-Labrador are represented by the same counsel in the CCAA mediation. 

The contracts with private law firms have mostly been kept a secret. 

Only two provinces - New Brunswick and Newfoundland and Labrador - have provided information on the terms of their contracts with these private law firms.  

Details on the New Brunswick arrangement were made public after tobacco companies challenged the contingency fee arrangement in court. The ruling which upheld the arrangement provided information on the percentage that would be paid: 12% after a statement of claim was filed but before trial began; 18% after trial proceedings had begun but before they were concluded; 20% if the trial had been completed and 22% if an appeal stage was involved. 

Details on the Newfoundland contract were made public when the lawsuit was announced, and further details were released as part of a freedom of information (FOI) request. In the first case, the amount was cited as 30%, but was shown in the FOI request as being 25%. 

No other province has pro-actively disclosed the fee, and several have refused to do so when asked under FOI requests. FOI authorities in British Columbia, Alberta, and Saskatchewan have reviewed these refusals, but even when they have directed officials to make the information public, no release has been made.

Applying estimates of contingency fee rates

An estimate of the legal fees in provinces where the contingency agreement has not been made public is only possible if assumptions are made about the rate that will be applied. 

By applying the fee schedule agreed to in New Brunswick the following percentages are derived:

• 18% in New Brunswick, British Columbia,  Saskatchewan, Manitoba, Nova Scotia, Prince Edward Island (where the statements of claim had been filed, but the trial had not been completed, putting the proceedings at stage 2)
•  12% in Nunavut, Northwest Territories and Yukon (where a Statement of Claim was not filed and the lawsuits were at stage 1.)

For one of the two other jurisdictions (Newfoundland), the lowest reported percentage was 25%. There is no information on the Alberta fee schedule, other than it being reported as the "lowest" of the amounts bid.  For the purposes of this estimate, a 10% rate is assumed.

Applying these percentages to each applicable jurisdiction's share of the payments produces a total estimate of $1.74 billion for the 11 provinces and territories. The largest amount would be in British Columbia - $644 million.  

This money will not all be paid at once. The proposed settlement anticipates paying the provinces $6.282 billion upfront with $18.4 billion to be paid over the next decades. As a result, the contingency fees paid to external counsel are likely to be made in stages, with $442 million paid upfront, and $1.3 billion paid in annual installments. 

One wheel wants off the bus

Viewed through a public policy lens, the draft agreement to settle government lawsuits against tobacco companies has had a rough week. (By contrast, the provisions to finally compensate injured smokers have been well received). 

The initial reaction from health groups was harsh. There was no defence or explanation from provincial governments. Stock market analysts gave it a thumbs up. Even a former tobacco industry lawyer mused that "the executives at the three Big Tobacco companies in Canada were collectively patting themselves on the back last week." 

Corporate concerns are now being added to the mix. A week after the public release, Japan Tobacco's Canadian affiliate (JTIM) has said it objects to what is going down.  "JTIM does not agree to the M&M Plan in its current form and cannot support it..."

It would appear that the company objects to provincial governments and injured smokers receiving money from the Canadian operations that the head office think are owed to its corporate relatives. " ... the M&M [Settlement] Plan purports to confiscate approximately $1.6 billion of cash collateral that is subject to JTI-TM’s security and attempts to subordinate JTI-TM’s debt and security to a priority that is below the position proposed for the unsecured creditors being compromised under the M&M Plan."

Their finger is pointed at the mediator, who is accused of going beyond his mandate "to mediate" the development of the proposal and of drafting a proposal that is not agreeable to the company. "This attempts to force the M&M Plan on unwilling participants ... The M&M Plan in its current form, however, is not a consensual CCAA plan."

Throughout this long legal saga, Japan Tobacco has been exposed as using inter-corporate transactions to become judgement proof and/or to minimize taxes.  Concerns about this practice surfaced at an early stage in the CCAA proceedings, when JTI was ordered to stop shipping money back to its overseas owners in the form of royalty payments. JTIM now claims that it is unfairly treated by such a restriction.

JTIM's motion to the court throws up numerous other objections to the settlement - including some potentially time-consuming issues like determining extra-territorial decision-making.

All of this will be grist for the mill of the hearing before Justice Morawetz on Hallowe'en. It seems a long shot that JTIM's objection to the proposal would prevent the vote among creditors now scheduled for December 12th. Less clear is whether the demand for a "consensual" agreement might surface in an appeal to a positive vote.

Post script

André Lespérance is a lawyer representing injured Quebec smokers. He provided a response to the claims made by JTI in an affidavit submitted to the court on October 28. 

The proposed tobacco settlement mandates continued cigarette sales for 20+ years

There are many good reasons to doubt the sincerity of tobacco companies when they say they want to end the sale of combustible cigarettes.   There are no good reason for provincial governments to have included a requirement that they keep selling conventional cigarettes for decades to come.

This post reports on the "covenant" to maintain tobacco sales that is contained in the settlement made public last week. 

The covenants

Under each of the three individualized forms of the settlement, each company has undertaken to "not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability ...  to satisfy its obligations under the CCAA Plan..."

In short, once this settlement agreement is formally approved by the provinces and by the Ontario court overseeing the insolvency, the companies will be obliged to maintain their tobacco trade with the same enthusiasm and marketing tools that are currently in place. 

Two structural elements of the settlement have led to this condition: (1) the deferral of payments to the provinces over a period of decades and (2) the exclusion of "alternative products" from the terms of the settlement.

Deferred payments 

Most of the money paid to the provinces will come in installments that are spread out over many years. Although $6 billion will be paid from the $12.5 billion in savings that were safeguarded during the years of insolvency protection, the remaining $19 billion in provincial payments will be taken as a percentage of the companies future income on tobacco sales. 

For the first 5 years, the companies will provide 85% of their income, but after every 5 year period the proportion steps down by 5% (Year 6 to 10 at 80%, years 11 to 15 at 75%, etc.) 

Included in the settlement document is a chart ("Estimated Upfront Contribution Available") which forecasts the amount that will be paid in the near future. Between now and 2030, the companies forecast providing about $1 billion per year to the provinces. At that rate, their debt to the provinces will not be met until after 2045.

Because of their covenant, for the next 20-plus years the companies have a legal obligation to maintain current efforts to sell tobacco products.

Exclusion of "alternative products"

Payments to the provinces come from tobacco sales, but not from the sale of vaping or heated tobacco products. All "alternative products" are carved out of the CCAA Plan.

To make this exclusion more overt, the companies are required to set up separate companies to manage the sale of these alternative goods. This is largely already the case, in the sense that different corporate structures exist for newer products: for example, Nicoventures is a corporate subsidiary of  BAT. 

“Alternative Product” means (i) any device that produces emissions in the form of an aerosol and is intended to be brought to the mouth for inhalation of the aerosol without burning of (a) a substance; or (b) a mixture of substances; (ii) any substance or mixture of substances, whether or not it contains tobacco or nicotine, that is intended for use with or without those devices to produce emissions in the form of an aerosol without burning; (iii) any non-combustible tobacco (other than smokeless tobacco) or nicotine delivery product; or (iv) any component, part, or accessory of or used in connection with any such device or product referred to above."

The settlement thus provides the companies with an incentive to increase the sales of these newer nicotine products because they can keep all of the revenue. At the same time, they are under an obligation to maintain tobacco sales. The settlement thus puts pressure on the system to increase overall nicotine use. 

Links to each company's proposed agreement and the covenant to maintain tobacco sales. 

Imperial Tobacco:  (British American Tobacco)

ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...

(g) Imperial and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of Imperial to satisfy its obligations under the CCAA Plan including, the ability of Imperial to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period; 

JTI-Macdonald  (Japan Tobacco)

ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...

(g) JTIM and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of JTIM to satisfy its obligations under the CCAA Plan including, the ability of JTIM to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period; 

Rothmans, Benson & Hedges (Philip Morris)

ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...

(g) RBH and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of RBH to satisfy its obligations under the CCAA Plan including, the ability of RBH to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period; 

A closer look at the claims and payments in the proposed settlement

 This post focuses on the amount of compensation that would flow to provincial governments, injured smokers and other parties under the proposed settlement between tobacco companies and those suing for damages.

The figures shown below (and in the downloadable fact sheet) are taken from the version of the settlement that is written with BAT-Imperial Tobacco Canada in mind. 

Two and a half cents on the dollar for provincial governments 

The overall claims of the provinces were not based on their initial court filings, but were established through a bespoke formula provided by a consultant (Dr. Glenn Harrison) and detailed in Schedule "G" to the settlement. The claims of the provinces totalled $944.5 billion, making up 98% of the total claims of $964.1 billion. 

A total of $32.5 billion is provided for in the settlement, representing 3.4% of the total identified claims. Each province will receive 2.6% of the amount of its claim, and the total to be provided to provinces is equal to 76% of the payments. 

Thirty to fifty cents on the dollar for eligible smokers.

Quebec class action victims were awarded $13.7 billion by Quebec courts and will receive $4.12 billion. Ignoring inflation, they will receive 30% of their court award. Their claim represents 1.42% of the total claims and 12.7% of the payments.

The Pan Canadian Claimants (smokers in other parts of Canada) will receive 50% of the calculated equivalent of the amount awarded to Quebec claimants, albeit with different eligibility criteria based on limitation periods. Their claims make up 0.52% of the total claims and 7.8% of the payments

Other payments

Tobacco farmers will receive 51.6% of their claim of $29 million dollars (about 3 hundredths of a percent of the total claims)

A foundation will be created, and $1 billion will be provided for its operations. This represents about 3% of the total compensation.

Health voices condemn the provincial tobacco settlements

Late in the day on Thursday, October 17th, a proposed settlement was made public. This settlement would resolve the lawsuits filed by provincial governments, the class action lawsuits filed on behalf of injured smokers and a few other small claims. 

This post reports on the response to the settlement by public health agencies and leaders. 

The terms of the settlement with the provincial government have been widely criticized for their failure to include measures to reduce smoking or to modify the tobacco trade. The portion of the settlement which resolves class action claims has received widespread support.

Representative extracts of media statements and press releases are shown below. 

----------------------------------

Action on Smoking & Health, Physicians for a Smoke-Free Canada, Quebec Coalition for Tobacco Control: Provincial governments have squandered a unique and historic opportunity to put an end to the tobacco industry
Press release, October 17, 2024.

Apart from the compensation to victims or their descendants in Québec and in the rest of Canada, which is the only positive component of this deal, there is little public health benefit to be found in this arrangement. The settlement provides no roadmap aimed at preventing these very same companies from causing more damage by recruiting new victims, including through new enticing nicotine gadgets.

Despite the tobacco industry having its back against the wall, the provinces choose to negotiate themselves a cash windfall without bothering to change the corporate behaviour at the core of the lawsuits. Provinces have deliberately agreed to allow Big Tobacco to maintain its business model extracting profits from addiction and harm in perpetuity. They have shamelessly turned a blind eye to the damage these very same companies will inflict on future generations.

Canadian Cancer Society criticizes proposed tobacco settlement as inadequate
Press release, October 18, 2024

"The approach in the proposed settlement falls massively short and fails to protect the future health of Canadians properly," says Rob Cunningham, lawyer for the Canadian Cancer Society. "How can such an approach possibly be justified when we continue to have millions of Canadians who smoke each year and while tobacco remains the leading cause of cancer death? This settlement fails to support public health efforts to reduce smoking."

The Canadian Lung Association responds to proposed settlement in tobacco lawsuits
Statement, October 18, 2024

We feel that the proposed settlement is not only monetarily insufficient but missing key measures that would prevent the tobacco industry from returning to business as usual.

We urge the government and all parties involved to reconsider this proposed settlement and seek a just outcome that truly addresses the devastating consequences of tobacco-related harm. Canadians have the right to expect a fair and equitable resolution that holds the tobacco industry accountable for its actions and provides adequate compensation for those affected while ensuring that the right supports are in place to protect generations to come.

Campaign for Justice on Tobacco Fraud: Tobacco Settlement Cave In
Press release, October 21, 2024

Tobacco lawyers would argue that the Companies Creditors Arrangement Act exists to ensure the long-term viability of companies that seek protection. We hold that governments ultimately hold all of the cards, legislation, and could have used their muscle in these talks if they had been committed to public health.

"This settlement is an embarrassment," said Mahood. "Other than providing payments to Quebec smokers harmed by the industry and due via a class action court award, the settlement has no redeeming value. It should be abandoned, not the kids who will be harmed by an industry restored to good health."

Michael Chaiton, Senior Scientist, CAMH
City News, October 18, 2024

“The lesson of these lawsuits is that cigarettes … should not be a profitable consumer product and that there are alternatives available, he said."

“Functionally, I think some of the settlement protects the companies to allow them to continue to sell those products in particular, rather than switching over.”

David Hammond, Professor, University of Waterloo
City News, October 18, 2024

"Their business practices essentially haven't changed and won't change," said Hammond.

"The industry still generates billions of profits from cigarettes, and so I think they will continue the practices that have been generating that revenue."

Rob Cunningham, Canadian Cancer Society
CBC News, October 18, 2024

Rob Cunningham, senior policy analyst for the Canadian Cancer Society, says the proposal does not go far enough. He's calling on the provinces to make changes before it's approved.

"This proposed settlement contains nothing to actually reduce smoking," Cunningham said Friday in an interview with CBC News Network.

Cynthia Callard, Physicians for a Smoke-Free Canada
National Post, October 18, 2024

Callard said the provinces could have taken a much different approach to this suit focused on winding down the industry.

“The government had the option to force the companies into bankruptcy and to find an orderly way to wind up down their business and to actually chase out smoking. Instead, they’ve given them carte blanche to operate,” she said.

Callard said she expects the proposed deal will go through. She said while the deal is a disappointment it is also an opportunity for governments to step up and do a better job regulating the industry, both cigarettes and vaping, because they have failed to do so in the past.

“Obviously, the industry did wrong, it hurt people, that’s what they’re settling about. But governments stood back in those years and let the company operate in that inadequately regulated way,” she said.

Provinces, class actions and tobacco companies reach a deal.

This evening a proposed settlement to resolve the many Canadian tobacco lawsuits was made public. The 1437 page draft agreement can be downloaded here. 

The litigation efforts behind this effort have spanned a generation. The first provincial lawsuit was filed by British Columbia in November 1998 and resubmitted in January 2001). During this time, tobacco companies continued to sell cigarettes, governments continued to collect taxes, and smokers continued to die. 

Over the past 66 months, there has been complete secrecy by the provincial governments in their handling of negotiations with tobacco companies. With the proposed settlement now made public, there is an opportunity for legislators and the public to engage in an assessment of the proposal and to offer guidance to government with respect to the next steps in this process.

In evaluating the proposal, Canadians might consider the following questions:

• Will this settlement change the behaviour of the tobacco companies? 
• Does this settlement provide justice to smokers?
• Are there important and relevant issues which are not resolved by this settlement?

Included in the plan

In brief, the plan proposes that the companies will pay a total of $32.5 billion, of which the amount that has been held in reserve during the insolvency process (about $12.5 billion) will be available after the agreement is approved by court. $20 billion will be provided to provincial governments in deferred payments.

* $24.8 billion will be paid to the provinces, including a deferred payment of about $18 billion. This will settle the claims of over $500 billion filed by the provinces since 2001.  Unlike the U.S. agreements, these payments will be made as a percentage of revenue from tobacco sales, starting with a remittance of 85% of net after tax income from tobacco sales. (The companies will keep all of their revenue from vaping or other products). 

* $6.75 billion will be paid to some smokers who have suffered from lung cancer, throat cancer or emphysema. Of this, $4.25 billion will be paid to smokers in Quebec whose claim was upheld by the Quebec courts following a class action suit. $2.5 billion will be paid to injured smokers in other parts of Canada, even though there were no lawsuits resolved for these cases.  Up to $100,000 will be paid to each Quebec victim, and up to $60,000 to each victim in other parts of Canada. Money for these payments will be made available soon after the agreement is approved by court.

* $1 billion will be used to establish a foundation focused on activities to support victims who do not direct compensation. $131 million from the Quebec Class Action will be directed to this fund. These payments will not be deferred.

* Lesser amounts to additional claimants (tobacco farmers, the "Knight" class action", etc). 

Not included in the plan

This agreement contains no admission of liability on the part of the companies. Nor does it include any concessions or undertakings by the industry with respect to the way they market tobacco, nicotine or other products. 

The next steps

Because this settlement is being negotiated through Canada's insolvency laws, the settlement is not final until the provincial government, class action and other "creditors" of the three companies vote to approve it. That vote is scheduled for December 12, 2024.  Court hearings to formally approve the agreement would be held at a later date.

A claims procedure has been established for injured Quebec smokers, who can submit their claim through the following portal: www.recourstabac.com

Financial Context:

Over the period of these lawsuits:

• 784,000 Canadians have died as a result of tobacco use.
  Under the settlement the companies will pay just over $40,000 for each Canadian killed by their products in the last 24 years. 
• Canadian governments have collected $166.6 billion in tobacco taxes ($98.7 billion by provincial and $68.9 by the federal government. 
  Under the settlement, the companies will pay the equivalent of a 20% increase in the tobacco taxes they collected from smokers over the past 24 years. 
• Over 666 billion cigarettes (33 billion standard packages) have been legally sold 
  Under the agreement, the companies will pay the equivalent of $1 for each package of cigarettes sold over the past 24 years. 
• Industry revenue from cigarette sales has exceeded $72 billion.
  Under the agreement, the companies will pay about 40% of their cigarette revenue over the past 24 years.

Is December 12th an actual deadline??

 As anticipated, Justice Morawetz agreed with the proposal that the current stay on tobacco litigation be extended by an additional month before he heard a request from Canada's three large tobacco companies for an even longer delay. 

His endorsement of the idea to push the hearing from October 1st to October 31st was released last night and made public this morning on the monitor's websites. 

This time, his agreement comes with a kicker: he expects there to be a votable plan by year's end. "The court has every expectation that matters will progress such that meetings of creditors can take place on or before December 12, 2024."

As always on this file, stay tuned!

A last minute cancellation ....

 Turns out that Justice Morawetz will no longer be asked to grant Canada's tobacco companies with a further six month suspension of the lawsuits against them. The hearing that had been scheduled for October 1st has been adjourned.

Instead of asking for a six month stay, the companies are being granted a one-month extension. This is being done without any hearing or public viewing of the decision-making. 

The next day on which day the parties to this long-standing insolvency case will assemble again before the judge is now set for Hallowe'en. 

This decision was made quasi-public when the monitor's reports were circulated to the hundred or more individuals whose names appear on the service list and who receive official documents. The monitor's reports are dated on Friday September 27th, but the first one was not made public until just over 24 hours before the scheduled hearing.

The reports give no explanation for the change -- but each carries a near-identical text: "The Stay Period is currently set to expire on September 30, 2024. The Applicant is seeking the extension of the Stay Period up to and including March 31, 2025. After discussions, the Monitor, the Applicant and other stakeholders have agreed to extend the Stay Period until October 31, 2024. The Applicant’s motion to extend the Stay Period to March 31, 2025 will be adjourned to October 31, 2024."

Are we nearly there yet?

It's easy to speculate but hard to know what is going on behind the curtain that has veiled discussions between tobacco companies and the Canadian provinces and smokers who are suing them.

Another hearing before the Ontario Court has now been set. On October 1st at 10:00 a.m, Justice Morawetz will hear motions from the companies (BAT-Imperial Tobacco Canada, JTI-Macdonald and PMI-Rothmans, Benson & Hedges) for an additional six months protection from their creditors -- up until March 31, 2025.

JTI request for another 6 month stay extension

An agreement to this request would lengthen their litigation stay to - count 'em - six years. Six years of court-approved "business as usual". Six years of legal protection from lawsuits related to their marketing of vaping and other nicotine products.

It would extend to a decade the delay in compensating those injured Quebec smokers who won a judgment against them in 2015. 

What stands between now and the finish line?

It is tempting to conclude from these notices of motion that the talks really are dragging out -- but it may not be accurate to do so. 

Ontario's Chief Justice Morawetz took over the management of this case in the summer of 2023. Following repeated concerns about faltering discussions, he forced a change on the process.  In September 2023, he assigned the task of drafting an proposed agreement to the three accounting firms which are acting as monitors in the CCAA process. 

There were no complaints about the pace of negotiations when the parties next appeared before him in March. Two months later, there were signals that an agreement was being finalized. In May Manitoba's premier said he expected payments to start flowing in 2024 or early 2025 (he was later criticized for breaking confidentiality on these talks).

JTI's motion filed this week says that there are still some unresolved issues:  "... the Applicant has conveyed to the Court-Appointed Mediator its view on certain key issues that are outstanding and must be resolved to achieve a consensual CCAA plan."

It also identifies some of the remaining work in finalizing a settlement agreement: "the Applicant estimates the parties will require at least six months to complete the remaining steps, including the negotiation of a consensual CCAA plan, the commencement and completion of a claims process, calling one or more creditors’ meetings, obtaining a sanction order, and satisfying all pre-conditions for the implementation of a consensual CCAA plan."

BAT-Imperial Tobacco offers less insight - declining to point to any outstanding issues while trying to protect itself from finger-pointing: "ITCAN affirms its commitment to the Mediation process and its ongoing support of the Mediation objectives. The agenda and timelines for the Mediation are governed by – among other things – the Mediator, the numerous participants (each of whom has unique and often times divergent interests), and the underlying issues in dispute. Accordingly, they are largely beyond the Applicants’ control, and any perceived delays in the process cannot be attributed to ITCAN. To the contrary, the Applicants have acted in good faith, without delay and in accordance with the applicable timelines, throughout the Mediation process. Due to the confidential nature of the Mediation process, however, the Applicants cannot comment further on the nature or extent of the progress to date or what issues remain to be resolved by the parties."

PMI-RBH reports that despite the progress that has been made, there are some major disagreements still under discussion. ".. there are some major remaining issues which RBH views as vital to any consensual global settlement of Tobacco Claims."  It does not suggest that the process will be quick. "At this stage, it is difficult to provide a precise estimate of the remaining time needed for completion of these proceedings. Given the number of parties and steps to be taken and work to be done, RBH anticipates that not less than six months (and perhaps more time) will be required" 

And from the other side? 

Next Tuesday is a deadline for provincial governments and other creditors to file a response to the motions, should they choose to do so. In the past, such documents have shed light on the state of play.