On what could be the starting line to the final lap of tobacco litigation in Canada, lawyers and spectators gathered before Ontario Chief Justice Geoffrey Morawetz today to present their reasons why he should - or should not - give a thumbs up to the plan drafted by former Ontario Chief Justice Warren Winkler to restructure the debt of the companies.
There were so many lawyers present for the hearing that an adjacent overflow room was set up. Happily for many, in this post-COVID world hybrid sessions are allowed. YouTube indicated that a few hundred people in addition to these eyes on the trial were watching the proceedings remotely.
The arguments that will be presented in the next week have mostly been stated, re-stated and stated again in the voluminous material filed with the court in recent days. Copies of these documents are available on the websites of the firms hired as monitors for each of the three companies involved: Imperial Tobacco Canada (subsidiary of British American Tobacco); Rothmans, Benson & Hedges (subsidiary of Philip Morris International) and JTI-Macdonald (subsidiary of Japan Tobacco). The key documents filed for this hearing are listed in a previous post.
Today - Day 1 - allowed for representations from 4 parties. First to speak were lawyers representing the Mediator and the Monitors. They who spoke in favour of the settlement, urging the judge to adopt their motions to approve (sanction) it and also to approve their plans for hiring the same monitoring firms to administer the plan for the coming decades.
Second and third to speak were lawyers representing companies two companies owned by Japan Tobacco. The fourth and last representations today were made by counsel to Rothmans, Benson and Hedges. All these expressed their opposition to the settlement as written.
Tomorrow Imperial Tobacco will be the last company to make representation, following which claimants will provide their views. The sequencing of presentations and the time allotted to various parties is presented at the end of this post, based on the agenda which can be found here.
A new friend of the court
Immediately after the session opened and before the main show got underway, Justice Morowetz announced that he was appointing retired Quebec judge André Provost to act as an Amicus Curiae and to assist the court in assessing the requests for fees by lawyers representing Quebec plaintiffs and other class actions. (His motion to that effect became public on February 1)
Unprecedented. Unique. Without an alternative.
In advocating for the plan they drafted, the Mediator and Monitors' team recounted some of the back story to the company's use of insolvency following their loss in the Quebec court in March 2019. They gave some details on the mediation efforts that subsequently dragged on until the court intervened with an arbitration approach in October 2023.
Repeatedly the team hit on the idea that this case was "unprecedented", "unique", "complex", and "challenging" - as though trying to pave the way for the court to make unprecedented, unique, complex and challenging decisions to approve it.
For the most part, they spoke glowingly about the mediation activities and the plan they had produced. They described how in order to release the companies from any further Canadian claims they had reached out to the territories to join the provinces in seeking redress, had established a new "Pan Canadian" class of injured smokers not covered by the Quebec class action, and designed a Cy-Pres foundation to provide indirect benefit for the vast majority of injured Canadian smokers whose rights to sue will be eliminated by the settlement.
The impetus for their role in drafting the settlement, they reminded the court, was the "intractable" positions taken by some parties in the summer of 2023.
They were unapologetic as they addressed the criticisms the settlement has received from public health agencies. Their intent for the proposal was to "permit tobacco companies to exit the proceedings and continue to carry on business in Canada." ... "We had no mandate to resolve the societal issues related to smoking and the plans to do not purport to do that."
As they described it, this was a take it or leave it proposition and the only "viable" option for consideration. "There is no alternative."
And as for the objections that were about to be presented by two of the companies involved? The Monitors acknowledged these by way of asking the judge to sort them out if necessary. On the dispute amongst the companies about how to split the bill, the monitors had no position - although the judge was invited to adjudicate them. (Justice Morawetz' observation that he was being asked to 'tiptoe through the tulips' bewildered the Millennial lawyers making this case.)
The written arguments were tabled with the court last week for the Monitors for RBH and Imperial Tobacco and the Monitor for JTI.
Consent is not required.
The Mediator & Monitors team closed their presentation by rebutting the arguments that they knew were coming from two of the companies: that the Court had no right to impose a restructuring plan on a company against its consent.
They argued that it did. They pointed to the criteria laid down for approving CCAA outcomes, saying that they applied in this case: the law was being observed, the process had been properly executed, the outcome should be considered to be fair and reasonable. They said that companies which now argued that they should not be subject to a court-imposed solution had effectively consented to adjudication when they sought insolvency protection through the courts.
From the small number and old age of the cases shown to the judge today in defence of imposing a resolution, it would appear that the judge is being asked to make decisions that have not happened in Canada.
Objections from Japan Tobacco
All of the companies are made up of many separate corporate identities, but Japan Tobacco is the only one in these proceedings to engage as two distinct legal bodies. JTI-Macdonald is the Canadian branch of Japan Tobacco which makes and sells cigarettes and JTI-TM is the Canadian branch of Japan Tobacco which owns the trademarks that appear on those cigarettes. Today lawyers from both related firms took a one-two punch against the draft settlement.
The first of these was with respect to how the companies will divide up the pie. While the current text does not seem to immediately disadvantage this company, it is concerned that the uncertainties of the settlement including text that identifies the allocation as being "unresolved" could cause problems in the future. They also object to the language which addresses what happens if a payment is defaulted on.
Their main objection seems to be the way in which the settlement will put a stop to their practice of sheltering Canadian profits from Canadian tax. For many years JTI-Macdonald has lost money on Canadian operations because the royalty payments it makes to JTI-TM cause its balance sheet to produce net losses. The real money made in Canada is sent to Japan Tobacco headquarters in the form of royalty payments instead of dividends from profits. If income tax is paid on those earnings, it is done in Japan (where the Japanese government is the largest shareholder of Japan Tobacco).
This tax-avoidance and "creditor protection" practice was strongly criticized by the Quebec courts. After these concerns were raised early in the CCAA process, the company was told that it could not make trademark payments in order that the profits remain in Canada for the benefit of the company's creditors.
In drafting the settlement, the Mediator and Monitors prevented this company from returning to its old ways of operating a profit-free Canadian business. The plan requires them to pay governments a percentage of their net revenues before the trademark royalty payments are deducted.
The company does not accept this, arguing that its trademark company should be treated as a secured creditor and repaid for the money it was unable to send overseas as royalty payments over the past 5+ years.
In making this case, JTI made two not-very-veiled threats. The first was that it might be prepared to undermine the agreement through transfer pricing. "There is no guarantee of ongoing profit if there is not a consensual plan ... There are 28 different contracts [with affiliated overseas Japan Tobacco suppliers] in place for inter company goods and services.... Each of those companies represents an opportunity in a non-supported plan for a member of the corporate group to increase pricing, to draw profits away from JTIM and into a foreign jurisdiction." (Justice Morawetz mused about similar incentives also existing when consensual plans were in place.)
The second threat was that the company might try to bog down the process by taking any decisions upstairs. The prospect of appeals to higher courts was presented as "delay and uncertainty from leave and appeal."
Written arguments were filed last week for JTI-Macdonald and JTI-TM.
Objections from Rothmans, Benson & Hedges
RBH also maintains that a restructuring plan must be consensual to be legal or workable. Before it will consent to the plan, it wants the allocation to be resolved in ways which reduce its share of the payments.
As they see it, RBH is being asked to pay $7 billion more than the share that would be assigned to them if the bill were divided the way Justice Riordan imposed in his decision. In that ruling, Imperial Tobacco was ordered to pay more because its activities were judged to be more reprehensible than were those of the other companies.
Because RBH had more money on hand at the beginning of the CCAA process and because of some differences in income, the company has paid more than what it considers its fair share into the $12.5 billion that is slated to be distributed in 'upfront payments'.
RBH's has asked the judge to address this by adding a section to the Sanction Order which provides for "true-up" payments between the companies over time. It proposes that the Riordan allocation (67% to ITL, 20% to RBH) be the basis of the payment to the Quebec victims, and that a percentage closer to market share be used for payments to other claimants. This proposal is attached as Schedule A to the Factum they filed this week.
Written arguments were filed last week for Rothmans, Benson and Hedges.
The Zero-Sum Game and the alternatives
In response to requests from JTI and RBH for him to wade in and change the text of the restructuring plan, Justice Morawetz expressed concerns that this was a "zero-sum" game where he would be favouring one party at the expense of another.
These comments prompted push back from lawyers for JTIM and RBH, who disagreed with the notion that the settlement proposal on the table (and the zero-sum choices within that framework) were the only route forward. They identified alternatives other than liquidation to the text before the court.
Alternative approaches they suggested included making a settlement with the Quebec class action, after which they would exit from insolvency. Provincial governments could then pursue their lawsuits in the normal course. Or the companies could return to mediation, possibly with a different mediator. Or they could negotiate individuals plans for each company. "I am not suggesting that they are great options," said RBH counsel, " but it is not true to say that the only alternative is liquidation."
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The Schedule
For 6 business days (January 29 to February 5), the court will sit for 5 hours between 10 and 4:30, taking two pauses and a lunch break, giving a potential 30 hours of hearing time. Another 3 days of court time are reserved for January 11-13, either to deal with remaining issues.
In advance of this hearing, an agenda was posted, allocating an estimated time for the parties, and suggesting the order in which their concerns would be heard. The agenda provides as follows:
On the Sanction Order:
- The Court-Appointed Mediator and Monitors (2 hours)
- Tobacco companies (6 hours)
- Claimants (5 hours)
- Social Stakeholders (TBD)
- Reply submissions (3.5 hours)
On the Stay Extension: 2 hours for the companies and one monitor
On Fee Approvals and other:
- 4 hours for the three cases where fee approvals are required
- 15 minutes for the Quebec government (which opposes the fee approval) and unspecified time for a a new "Court appointed Amicus Curiae".
