| Contingent liabilities and financial commitments | 31 Contingent Liabilities and Financial Commitments
1. The Group is subject to contingencies pursuant to requirements that it complies with relevant laws, regulations and standards.
2. Failure to comply could result in restrictions in operations, damages, fines, increased tax, increased cost of compliance, interest charges, reputational damage or other sanctions. These matters are inherently difficult to quantify. In cases where the Group has an obligation as a result of a past event existing at the balance sheet date, if it is probable that an outflow of economic resources will be required to settle the obligation and if the amount of the obligation can be reliably estimated, a provision will be recognised based on best estimates and management judgement.
3. There are, however, contingent liabilities in respect of litigation, taxes in some countries and guarantees for which no provisions have been made. General Litigation Overview
4. There are a number of legal and regulatory actions, proceedings and claims against Group companies related to tobacco and New Category products that are pending in a number of jurisdictions. These proceedings include, among other things, claims for personal injury (both individual claims and class actions) and claims for economic loss arising from the treatment of smoking- and health-related diseases (such as medical recoupment claims brought by local governments).
5. The plaintiffs in these cases seek recovery on a variety of legal theories, including negligence, strict liability in tort, design defect, failure to warn, fraud, misrepresentation, violations of unfair and deceptive trade practices statutes, conspiracy, public nuisance, medical monitoring and violations of competition and antitrust laws. The plaintiffs seek various forms of relief, including compensatory and, where available, punitive damages, treble or multiple damages and statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, attorneys’ fees, and injunctive and other equitable relief.
6. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even hundreds of billions of sterling.
7. With the exception of the Engle Engle
8. Group companies generally do not settle claims. However, Group companies may enter into settlement discussions in some cases, if they believe it is in their best interests to do so. Exceptions to this general approach include, but are not limited to, actions taken pursuant to ‘offer of judgment’ statutes and Filter Cases, as defined below. An ‘offer of judgment,’ if rejected by the plaintiff, preserves the Group’s right to recover attorneys’ fees under certain statutes in the event of a verdict favourable to the Group. Such offers are sometimes made through court-ordered mediations. Other settlements by Group companies include the State Settlement Agreements (as defined in paragraph 41 below), the funding by various tobacco companies of a US$5.2 billion (approximately £3.8 billion) trust fund contemplated by the Master Settlement Agreement (as described in paragraph 41 below) to benefit tobacco growers, the original Broin Engle
9. Although the Group intends to defend all pending cases vigorously, and believes that the Group’s companies have valid bases for appeals of adverse verdicts and valid defences to all actions, and that an outflow of resources related to any individual case is not considered probable, litigation is subject to many uncertainties, and, generally, it is not possible to predict the outcome of any particular litigation pending against Group companies, or to reasonably estimate the amount or range of any possible loss. Furthermore, a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking have received wide media attention. These developments may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation. Therefore, the Group does not provide estimates of the financial effect of the contingent liabilities represented by such litigation, as such estimates are not practicable.
10. The following table lists the categories of the tobacco-related actions pending against Group companies as of 31 December 2021 and the increase or decrease from the number of cases pending against Group companies as of 31 December 2020. Details of the quantum of past judgments awarded against Group companies, the majority of which are under appeal, are also identified along with any settlements reached during the relevant period. Given the volume and more active nature of the Engle
Case Type Case Numbers as at 31 December 2021 Case Numbers as at 31 December 2020 (note 1) Change in Number Increase/(decrease)
U.S. tobacco-related actions
Medical reimbursement cases (note 2) 2 2 No change
Class actions (note 3) 20 20 No change
Individual smoking and health cases (note 4) 222 189 33
Engle 1,071 1,400 (329 )
Broin 1,200 1,227 (27 )
Filter Cases (note 7) 46 48 (2 )
State Settlement Agreements – Enforcement and Validity (note 8) 2 4 (2 )
Non-U.S. tobacco-related actions
Medical reimbursement cases 19 19 No change
Class actions (note 9) 12 12 No change
Individual smoking and health cases (note 10) 52 68 (16 ) (Note 1) This includes cases to which the Reynolds American Inc. (Reynolds American) group companies were a party at such date. (Note 2) This category of cases includes the Department of Justice action. See note 31, paragraphs 20-24. (Note 3) See note 31, paragraphs 25-38. (Note 4) This category of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought by or on behalf of individual plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty and violations of state deceptive trade practices or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’ fees and costs and punitive damages. Out of the 222 active individual smoking and health cases, six judgments have been returned in the plaintiffs’ favour, awarding damages totalling approximately US$150.1 million (approximately £110.8 million), which are pending post-trial in trial courts or on appeal. For a further description of these cases, see note 31, paragraphs 39-40. (Note 5) In July 1998, trial began in Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle (Note 6) Broin v. Philip Morris, Inc. Broin, Broin Broin Broin (Note 7) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their alleged exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a predecessor to Lorillard Tobacco for a limited period of time ending more than 50 years ago. Since 1 January 2019, Lorillard Tobacco and RJRT have paid, or have reached agreement to pay, a total of approximately US$25.9 million (approximately £19.1 million) in settlements to resolve 102 Filter Cases. See note 17 to paragraph 40. (Note 8) Group companies’ expenses and payments under the State Settlement Agreements for 2021 amounted to approximately US$3.4 billion (approximately £2.5 billion) in respect of settlement expenses and US$3.7 billion (approximately £2.7 billion) in respect of settlement cash payments. See note 31, paragraph 43. The pending cases referred to above relate to the enforcement, validity or interpretation of the State Settlement Agreements in which RJRT, B&W or Lorillard Tobacco is a party. See note 31, paragraphs 41-54. (Note 9) Outside the United States, there are 12 class actions being brought against Group companies as of 31 December 2021. These include class actions in the following jurisdictions: Canada (11) and Venezuela (1). For a description of the Group companies’ class actions, see note 31, paragraphs 70-81. Pursuant to the judgment in 2015 in the two Quebec class actions, the plaintiffs were awarded damages and interest in the amount of CAD$15.6 billion, most of which were on a joint and several basis (approximately £9.1 billion), of which the Group companies’ share was CAD$10.4 billion (approximately £6.1 billion). On 1 March 2019, the Quebec Court of Appeal handed down a judgment which largely upheld and endorsed the lower court’s previous decision in the Quebec Class Actions, as further described below. The share of the judgment for Imperial Tobacco Canada Limited (Imperial), the Group’s operating company in Canada, was reduced to approximately CAD$9.2 billion (approximately £5.4 billion). For a further description of the Quebec Class Actions, see paragraph 76. All of the class actions in Canada are currently stayed pursuant to a court order. See paragraph 58. (Note 10) As at 31 December 2021, the jurisdictions with the most active individual cases against Group companies were, in descending order: Brazil (23), Italy (11), Canada (5), Argentina (5), Chile (4) and Ireland (2). There were a further two jurisdictions with one active case only. Out of these 52 cases, one case in Argentina ( Baldassare
11. Certain terms and phrases used in this note 31 may require some explanation.
a. ‘Judgment’ or ‘final judgment’ refers to the final decision of the court resolving the dispute and determining the rights and obligations of the parties. At the trial court level, for example, a final judgment generally is entered by the court after a jury verdict and after post-verdict motions have been decided. In most cases, the losing party can appeal a verdict only after a final judgment has been entered by the trial court.
b. ‘Damages’ refers to the amount of money sought by a plaintiff in a complaint, or awarded to a party by a jury or, in some cases, by a judge. ‘Compensatory damages’ are awarded to compensate the prevailing party for actual losses suffered, if liability is proved. In cases in which there is a finding that a defendant has acted wilfully, maliciously or fraudulently, generally based on a higher burden of proof than is required for a finding of liability for compensatory damages, a plaintiff also may be awarded ‘punitive damages’. Although damages may be awarded at the trial court stage, a losing party may be protected from paying any damages until all appellate avenues have been exhausted by posting a supersedeas bond. The amount of such a bond is governed by the law of the relevant jurisdiction and generally is set at the amount of damages plus some measure of statutory interest, modified at the discretion of the appropriate court or subject to limits set by a court or statute.
c. ‘Settlement’ refers to certain types of cases in which cigarette manufacturers, including RJRT, B&W and Lorillard Tobacco, have agreed to resolve disputes with certain plaintiffs without resolving the cases through trial.
d. All sums set out in note 31 have been converted to GBP and US$ using the following end closing rates: GBP 1 to US$ 1.3545, GBP 1 to CAD$ 1.7109, GBP 1 to EURO 1.1910, GBP 1 to BRL 7.5443 U.S. Tobacco Litigation
12. Group companies, notably RJRT (individually and as successor by merger to Lorillard Tobacco) and B&W as well as other leading cigarette manufacturers, are defendants in a number of product liability cases. In a number of these cases, the amounts of compensatory and punitive damages sought are significant.
13. The total number of U.S. tobacco product liability cases pending at 31 December 2021 involving RJRT, B&W and/or Lorillard Tobacco was approximately 2,573. As at 31 December 2021, British American Tobacco (Investments) Limited (Investments) has been served as a co-defendant in one of those cases (2018:1). No other UK-based Group company has been served as a co-defendant in any U.S. tobacco product liability case pending as at 31 December 2021.
14. Since many of these pending cases seek unspecified damages, it is not possible to quantify the total amounts being claimed, but the aggregate amounts involved in such litigation are significant, possibly totalling billions of U.S. dollars. The cases fall into four broad categories: medical reimbursement cases; class actions; individual cases; and other claims.
15. RJRT (individually and as successor by merger to Lorillard Tobacco), American Snuff Co., Santa Fe Natural Tobacco Company, Inc. (SFNTC), R.J. Reynolds Vapor Company (RJR Vapor), Reynolds American, Lorillard Inc., other Reynolds American affiliates and indemnitees, including but not limited to B&W (collectively, the Reynolds Defendants), believe that they have valid defences to the tobacco-related litigation claims against them, as well as valid bases for appeal of adverse verdicts against them. The Reynolds Defendants have, through their counsel, filed pleadings and memoranda in pending tobacco-related litigation that set forth and discuss a number of grounds and defences that they and their counsel believe have a valid basis in law and fact.
16. Scheduled trials. Trial schedules are subject to change, and many cases are dismissed before trial. In the U.S., there are 57 cases, exclusive of Engle Engle
17. Trial results. From 1 January 2019 through 31 December 2021, 53 trials occurred in individual smoking and health, Engle (a) Medical Reimbursement Cases
18. These civil actions seek to recover amounts spent by government entities and other third-party providers on healthcare and welfare costs claimed to result from illnesses associated with smoking.
19. At 31 December 2021, one U.S. medical reimbursement suit ( Crow Creek Sioux Tribe v. American Tobacco Co. U.S. Department of Justice Action
20. On 22 September 1999, the U.S. Department of Justice brought an action in the U.S. District Court for the District of Columbia against various industry members, including RJRT, B&W, Lorillard Tobacco, B.A.T Industries p.l.c. (Industries) and Investments ( United States v. Philip Morris USA Inc.
21. Industries was dismissed for lack of personal jurisdiction on 28 September 2000. In addition, Investments was a defendant at the trial, but intervening changes in controlling law post-trial led to a 28 March 2011 court ruling that the court’s Final Judgment and Remedial Order no longer applied to Investments prospectively, and for this reason, Investments would not have to comply with any of the remaining injunctive remedies being sought by the government. As the government did not appeal the 28 March 2011 ruling, this means that Investments is no longer in the case and is not subject to any injunctive relief that the court is expected to order against the remaining defendants. As the case continued as against RJRT and Lorillard Tobacco with respect to injunctive relief and related matters, the following is noted.
22. The non-jury trial of the RICO portion of the claim began on 21 September 2004 and ended on 9 June 2005. On 17 August 2006, the federal district court issued its Final Judgment and Remedial Order, which found certain defendants, including RJRT, B&W, Lorillard Tobacco and Investments, had violated RICO, but did not impose any direct financial penalties. The district court instead enjoined the defendants from committing future racketeering acts, participating in certain trade organisations, making misrepresentations concerning smoking and health and youth marketing, and using certain brand descriptors such as ‘low tar’, ‘light’, ‘ultra-light’, ‘mild’ and ‘natural’. The district court also ordered the defendants to issue ‘corrective communications’ on five subjects, including smoking and health and addiction, and to comply with further undertakings, including maintaining websites of historical corporate documents and disseminating certain marketing information on a confidential basis to the government. In addition, the district court placed restrictions on the defendants’ ability to dispose of certain assets for use in the United States, unless the transferee agrees to abide by the terms of the district court’s order, and ordered certain defendants to reimburse the U.S. Department of Justice its taxable costs incurred in connection with the case.
23. Defendants, including RJRT, B&W, Lorillard Tobacco and Investments, appealed, and the U.S. government cross-appealed to the DC Circuit. On 22 May 2009, the DC Circuit affirmed the federal district court’s RICO liability judgment, but vacated the order and remanded for further factual findings and clarification as to whether liability should be imposed against B&W, based on changes in the nature of B&W’s business operations (including the extent of B&W’s control over tobacco operations). The court also remanded on three other discrete issues relating to the injunctive remedies, including for the district court ‘to reformulate’ the injunction on the use of low-tar descriptors ‘to exempt foreign activities that have no substantial, direct, and foreseeable domestic effects,’ and for the district court to evaluate whether corrective communications could be required at point-of-sale displays (which requirement the DC Circuit vacated). On 28 June 2010, the U.S. Supreme Court denied the parties’ petitions for further review.
24. On 22 December 2010, the district court dismissed B&W from the litigation. In November 2012, the trial court entered an order setting forth the text of the corrective statements and directed the parties to engage in discussions with the Special Master to implement them. After various proceedings and appeals, the federal district court in October 2017 ordered RJRT and the other U.S. tobacco company defendants to fund the publishing of compelled public statements in various U.S. media outlets, including in newspapers, on television, on the companies’ websites, and in onserts on cigarette packaging. The compelled public statements in newspapers and on television were completed in 2018 and in package onserts were completed in mid-2020. Also, the compelled public statements now appear on RJRT websites. The district court is considering mandating the display of the compelled public statements at retail point of sale; an evidentiary hearing is scheduled to begin on 13 June 2022. (b) Class Actions
25. At 31 December 2021, RJRT, B&W and Lorillard Tobacco were named as defendants in two separate actions attempting to assert claims on behalf of classes of persons allegedly injured or financially impacted by their smoking, one asserting claims of violation of the Americans With Disabilities Act of 1990, and SFNTC was named in 16 separate cases relating to the use of the words ‘natural,’ ‘100% additive-free,’ or ‘organic’ in Natural American Spirit advertising and promotional materials. If the classes are or remain certified, separate trials may be needed to assess individual plaintiffs’ damages. Among the pending class actions, 16 specified the amount of the claim in the complaint and alleged that the plaintiffs were seeking in excess of US$5 million (approximately £3.7 million) and one that alleged that the plaintiffs were seeking less than US$75,000 (approximately £55,370) per class member plus unspecified punitive damages. No Additive/Natural/Organic Claim Cases
26. A total of 16 pending putative class actions were filed in nine U.S. federal district courts against SFNTC, a subsidiary of Reynolds American, which cases generally allege, in various combinations, violations of state deceptive and unfair trade practice statutes, and claim state common law fraud, negligent misrepresentation, and unjust enrichment based on the use of descriptors such as ‘natural’, ‘organic’ and ‘100% additive-free’ in the marketing, labelling, advertising, and promotion of SFNTC’s Natural American Spirit brand cigarettes. In these actions, the plaintiffs allege that the use of these terms suggests that Natural American Spirit brand cigarettes are less harmful than other cigarettes and, for that reason, violated state consumer protection statutes or amounted to fraud or a negligent or intentional misrepresentation. The actions seek various categories of recovery, including economic damages, injunctive relief (including medical monitoring and cessation programmes), interest, restitution, disgorgement, treble and punitive damages, and attorneys’ fees and costs. In April 2016, in response to a motion by the various plaintiffs, the U.S. Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases for pre-trial purposes before a federal court in New Mexico. On 21 December 2017, that court granted the defendants’ motion to dismiss in part, dismissing a number of claims with prejudice, and denied it in part. The district court conducted a five-day hearing on the motion for class certification and on the motion challenging the admissibility of expert opinion testimony in December 2020. The parties filed post-hearing briefs in January 2021 and filed proposed findings of fact and conclusions of law in February 2021. A decision is pending. Other Putative Class Actions
27. Jones v. American Tobacco Co.
28. Young v. American Tobacco Co. Scott v. American Tobacco Co. Engle Class Action and Engle Progeny Cases (Florida)
29. In July 1998, trial began in Engle v. R. J. Reynolds Tobacco Co.
30. In July 2000, the jury in Phase II awarded the class a total of approximately US$145 billion (approximately £107.1 billion) in punitive damages, apportioned US$36.3 billion (approximately £26.8 billion) to RJRT, US$17.6 billion (approximately £13 billion) to B&W, and US$16.3 billion (approximately £12 billion) to Lorillard Tobacco. The three class representatives in the Engle
31. This decision was appealed and ultimately resulted in the Florida Supreme Court in December 2006 decertifying the class and allowing judgments entered for only two of the three Engle Engle Engle Engle
32. During 2015, RJRT and Lorillard Tobacco, together with Philip Morris USA Inc. (PM USA), settled virtually all of the Engle Engle
33. As at 31 December 2021, there were approximately 1,071 Engle Engle
34. 41 trials occurred in Engle
35. The following chart identifies the number of trials in Engle Trials/verdicts/judgments of individual Engle
Total number of trials 41
Number of trials resulting in plaintiffs’ verdicts 21**
Total damages awarded in final judgments against RJRT US$224,990,000 (approximately
£166 million)
Amount of overall damages comprising ‘compensatory damages’ (approximately) US$65,440,000 (of overall
US$224,990,000) (approximately
£48 million of £166 million)
Amount of overall damages comprising ‘punitive damages’ (approximately) US$159,550,000 (of overall
US$224,990,000) (approximately
£118 million of £166 million) ** Of the 21 trials resulting in plaintiffs’ verdicts 1 January 2019 to 31 December 2021 (note 11):
Number of adverse judgments appealed by RJRT 13 (note 12)
Number of adverse judgments, in which RJRT still has time to file an appeal 4
Number of adverse judgments in which an appeal was not, and can no longer be, sought 3
Appeals of individual Engle
Number of adverse judgments appealed by RJRT 15 (note 13) Note 11: Gloger v. R.J. Reynolds Tobacco Co. and Bessent-Dixon v. R.J. Reynolds Tobacco Co Robert Miller v. R.J. Reynolds Tobacco Co. Note 12:
a. 5 appeals remain undecided in the District Courts of Appeal; and
b. 8 appeals were decided and/or closed in the District Court of Appeals. Of these 8 appeals, 4 were affirmed in favour of plaintiff (review of by the Florida Supreme Court has been sought in 3 of the 4 cases), 3 were reversed for a new trial, and 1 was voluntarily dismissed and judgment paid. Note 13:
a. 5 appeals remain undecided in the District Courts of Appeal;
b. 9 appeals were decided and/or closed in the District Courts of Appeal, and 1 appeal was reversed by the Eleventh Circuit. Of these appeals, 5 were affirmed in favour of plaintiff, 3 in which review of Florida Supreme Court was sought, 1 was voluntarily dismissed and judgment paid, 1 in which the Eleventh Circuit reversed the district court’s denial of Defendants’ motion for judgment in accordance with the verdict, and 3 were reversed for a new trial; and
c does not include four cases that were appealed prior to the relevant time period but which remain pending before the Florida Supreme Court.
36. By statute, Florida applies a US$200 million (approximately £147.7 million) bond cap to all Engle Engle Engle Engle
37. In 2021, RJRT or Lorillard Tobacco paid judgments in five Engle
38. In addition, accruals for damages and attorneys’ fees and statutory interest for two cases ( Starr-Blundell v. R. J. Reynolds Tobacco Co. Hardin v. R. J. Reynolds Tobacco Co. (c) Individual Cases
39. As of 31 December 2021, 222 individual cases were pending in the United States against RJRT, B&W and/or Lorillard Tobacco. This category of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought by or on behalf of individual plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty, and violations of state deceptive trade practices or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’ fees and costs, and punitive damages. The category does not include the Engle Broin
40. The following chart identifies the number of individual cases pending as of 31 December 2021 as against the number pending as of 31 December 2020, along with the number of Engle Broin
U.S. U.S. Change in
Case Numbers Case Numbers Number
31 December 31 December Increase/
Case Type 2021 2020 (Decrease)
Individual Smoking and Health Cases (note 14) 222 189 33
Engle 1,071 (1,304) 1,400 (1,725) (329) (421)
Broin 1,200 1,227 (27)
Filter Cases (note 17) 46 48 (2) (Note 14) Out of the 222 pending individual smoking and health cases, six have received adverse verdicts or judgments in the court of first instance or on appeal, and the total amount of those verdicts or judgments is approximately US$150.1 million (approximately £110.8 million). (Note 15) The number of Engle (Note 16) Broin v. Philip Morris, Inc. Broin, Broin Broin (Note 17) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their alleged exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a predecessor to Lorillard Tobacco for a limited period of time ending more than 50 years ago. Pursuant to the terms of a 1952 agreement between P. Lorillard Company and H&V Specialties Co., Inc. (the manufacturer of the filter material), Lorillard Tobacco is required to indemnify Hollingsworth & Vose for legal fees, expenses, judgments and resolutions in cases and claims alleging injury from finished products sold by P. Lorillard Company that contained the filter material. As of 31 December 2021, Lorillard Tobacco and/or Lorillard Inc. was a defendant in 46 Filter Cases. Since 1 January 2019, Lorillard Tobacco and RJRT have paid, or have reached agreement to pay, a total of approximately US$25.9 million (approximately £19.1 million) in settlements to resolve 102 Filter Cases. (d) State Settlement Agreements
41. In November 1998, the major U.S. cigarette manufacturers, including RJRT, B&W and Lorillard Tobacco, entered into the Master Settlement Agreement (MSA) with attorneys general representing 46 U.S. states, the District of Columbia and certain U.S. territories and possessions. These cigarette manufacturers previously settled four other cases, brought on behalf of Mississippi, Florida, Texas and Minnesota, by separate agreements with each state (collectively and with the MSA, the ‘State Settlement Agreements’).
42. These State Settlement Agreements settled all health care cost recovery actions brought by, or on behalf of, the settling jurisdictions; released the defending major U.S. cigarette manufacturers from various additional present and potential future claims; imposed future payment obligations in perpetuity on RJRT, B&W, Lorillard Tobacco and other major U.S. cigarette manufacturers; and placed significant restrictions on their ability to market and sell cigarettes and smokeless tobacco products. In accordance with the MSA, various tobacco companies agreed to fund a US$5.2 billion (approximately £3.8 billion) trust fund to be used to address the possible adverse economic impact of the MSA on tobacco growers.
43. RJRT and SFNTC are subject to the substantial payment obligations under the State Settlement Agreements. Payments under the State Settlement Agreements are subject to various adjustments for, among other things, the volume of cigarettes sold, relative market share, operating profit and inflation. Reynolds American’s operating subsidiaries’ expenses and payments under the State Settlement Agreements for 2018, 2019, 2020 and 2021 and the projected expenses and payments for 2022 and onwards are set forth below (in millions of U.S. dollars)*:
2023 and
2018 2019 2020 2021 2022 thereafter
Settlement expenses $2,741 $2,762 $3,572 $3,420
Settlement cash payments $917 $2,918 $2,848 $3,744
Projected settlement expenses $>3,300 $>3,200
Projected settlement cash payments $>3,100 $>3,200
* Subject to adjustments for changes in sales volume, inflation, operating profit and other factors. Payments are allocated among the companies on the basis of relative market share or other methods.
44. The State Settlement Agreements have materially adversely affected RJRT’s shipment volumes. Reynolds American believes that these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of Reynolds American and RJRT in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in U.S. cigarette sales in the premium and value categories, RJRT’s share of the domestic premium and value cigarette categories, and the effect of any resulting cost advantage of manufacturers not subject to the State Settlement Agreements.
45. In addition, the MSA includes an adjustment that potentially reduces the annual payment obligations of RJRT, Lorillard Tobacco and the other signatories to the MSA, known as ‘Participating Manufacturers’ (PMs). Certain requirements, collectively referred to as the ‘Adjustment Requirements’, must be satisfied before the Non-Participating Manufacturers (NPM) Adjustment for a given year is available: (i) an Independent Auditor must determine that the PMs have experienced a market share loss, beyond a triggering threshold, to those manufacturers that do not participate in the MSA (such non-participating manufacturers being referred to as NPMs); and (ii) in a binding arbitration proceeding, a firm of independent economic consultants must find that the disadvantages of the MSA were a significant factor contributing to the loss of market share. This finding is known as a significant factor determination.
46. When the Adjustment Requirements are satisfied, the MSA provides that the NPM Adjustment applies to reduce the annual payment obligation of the PMs. However, an individual settling state may avoid its share of the NPM Adjustment if it had in place and diligently enforced during the entirety of the relevant year a ‘Qualifying Statute’ that imposes escrow obligations on NPMs that are comparable to what the NPMs would have owed if they had joined the MSA. In such event, the state’s share of the NPM Adjustment is reallocated to other settling states, if any, that did not have in place and diligently enforce a Qualifying Statute.
47. RJRT and Lorillard Tobacco are or were involved in NPM Adjustment proceedings concerning the years 2003 to 2019. In 2012, RJRT, Lorillard Tobacco, and SFNTC entered into an agreement (the Term Sheet) with certain settling states that resolved accrued and potential NPM adjustments for the years 2003 through 2012 and, as a result, RJRT and SFNTC collectively received, or are to receive, more than US$1.1 billion (approximately £812.1 million) in credits that, in substantial part, were applied to MSA payments in 2014 through 2017. After an arbitration panel ruled in September 2013 that six states had not diligently enforced their qualifying statutes in the year 2003, additional states joined the Term Sheet. RJRT executed the NPM Adjustment Settlement Agreement on 25 September 2017 (which incorporated the Term Sheet). Since the NPM Adjustment Settlement Agreement was executed, an additional 10 stat |
