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Reynolds American Gets Burned in Tobacco Lawsuit

Source: Wikimedia Commons.

It's a good thing Imperial Tobacco Group (NASDAQOTH: ITYBY  ) had an indemnity clause inserted when it agreed to buy a bunch of cigarette brands from Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO.DL  ) to smooth those companies' merger. Because as of Friday, Reynolds has been ordered to pay $23.6 billion in damages to a Florida widow who sued the tobacco giant after her chain-smoking husband died from cancer.

Of course, it won't matter all that much. Juries love to award ridiculous sums of money in damages to smoking plaintiffs, only to see the tobacco companies usually have those awards dismissed or knocked down to a pittance on appeal. Reynolds called the decision "grossly excessive and impermissible under state and constitutional law" and vowed to appeal the "runaway verdict."

Although it's easy to sympathize with widows of cancer patients, it's hard to argue that smokers continue their habit in ignorance of the risks they are undertaking. Rather than accept responsibility for their health-damaging lifestyle choices, they (or their survivors) instead hold others accountable for their actions.

The cancer victim in this case was alleged to have started smoking at age 13 and died at age 36 from cancer after having smoked up to three packs a day for over two decades. Indeed, his widow's lawyer said the man was smoking on the day he died.

While that's a powerful testament to the addictive nature of nicotine, it's not as though smokers haven't been warned about their dangers for decades. Warning labels have been on cigarette packs since the mid-1960s; public service announcements began outnumbering tobacco ads later in the decade at a rate of three-to-one, until Congress banned tobacco advertising in 1971; and nicotine replacement therapy Nicorette gum was introduced to the global market in 1978. If, as the widow claims, she and her husband were targeted by the tobacco companies as teenagers, there was plenty of opportunity for them to try to quit afterward had they been willing.

Of course, tobacco companies never did themselves any favors by denying smoking was addictive or harmful, even though they had proof to the contrary, and it was such testimony before Congress that prompted the widow to file suit, but laying all the blame for the smoker's condition on the cigarette makers while absolving the individual of any responsibility is simply seeking a winning lottery ticket by reaching into those companies' deep pockets.

The jury awarded the widow and her child $7.3 million in compensatory damages and assigned $9.6 million to another son from a previous relationship. It then walloped Reynolds with over $23 billion in punitive damages.  

While tobacco companies are usually successful in their appeals, that is not always the case. The U.S. Supreme Court in recent months rejected several appeals from the cigarette makers for awards that run into the tens of millions of dollars. Lower courts have also upheld decisions that are valued in the tens of millions of dollars. That's no doubt why Imperial Tobacco insisted on the indemnity clause for buying the Kool, Salem, and Winston tobacco brands, as well as the leading blu eCig electronic brand: It didn't want the baggage that came with the brands. The cancer victim in this case smoked Kool.

Reynolds is buying Lorillard in a $27.4 billion deal that will concentrate the U.S. tobacco market largely into the hands of the merged company and Altria. The two companies will control 90% of the cigarette industry here, with Altria's Marlboro owning about half all by itself.

Imperial Tobacco is paying $7.1 billion for the portfolio of brands, but though protected from product lawsuits like the one Reynolds faced, it still faces risk of a crackdown by the FDA on menthol cigarettes like Kool and Salem. The regulatory agency has toyed with the idea before and may do so again in the future. Imperial may have paid out a princely sum for nothing, a bill that may be larger than what Reynolds American is ultimately required to pay to smoking victims.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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Related Tickers

8/28/2015 4:01 PM
RAI $84.67 Up +0.19 +0.22%
Reynolds American,… CAPS Rating: ****
ITYBY $96.96 Up +0.16 +0.17%
Imperial Tobacco G… CAPS Rating: **
LO.DL $0.00 Down +0.00 +0.00%
Lorillard, Inc. CAPS Rating: ****