Introduction

A special five judge panel of the Quebec Court of Appeal has upheld the trial judge’s decision in the largest class action in Canadian history. In Létourneau c. JTI-MacDonald Corp., 2015 QCCS 2382 (CanLII) the trial judge found that the three major tobacco companies who were defendants had failed to inform consumers about the dangers of smoking, thereby causing more of them to become addicted to tobacco and damage their health.

That was after a 250 day trial heard from 2012 to 2014, in response to a claim started in 1998. The award to the plaintiffs, including interest to the time of the 2015 decision, amounted to $15 billion. Additional interest since then would bring it to about $17 billion.

This sounds like a huge amount of money, but there is a large number of people in the Class. It allows for $100,000 per person for those afflicted with lung cancer or throat cancer. As Justice Riordan observed, this amount "is not excessive in the context of life-threatening, and life-ruining, illnesses." (2015 QCCS 2382 at para. 984).

The Court of Appeal Decision

The Court of Appeal upheld the trial judge’s key factual finding needed to establish fault. This is that the tobacco companies were aware of the danger of smoking and becoming addicted to nicotine before this was common knowledge among the general public. In spite of knowing the dangers, they did not warn their customers about it:

… the Court concludes that, throughout the period in question, the appellants failed to inform users and future users of the dangers and risks of smoking. They are therefore, a priori, responsible for the harm caused to the members of the Class by the consequences of the unsafe nature of the product they manufactured. [2019 QCCA 358 at para. 658, my translation]

The tobacco companies have announced that they will seek leave to appeal to the Supreme Court of Canada. Given the magnitude of the award, even a tiny probability of success would be enough to make the costs of an appeal a worthwhile investment for the defendants. That will drag it out for several more years if the SCC agrees to hear the appeal. There are some novel and controversial aspects of the trial judge’s decision, so that is a distinct possibility.

Even if the plaintiffs are ultimately successful in winning their case at the Supreme Court, their ability to recover the money awarded is far from assured. Enforcing a multi-billion dollar judgment may prove to be even more challenging than proving the damages. The tobacco companies have only modest assets in Canada. Rothmans still has a manufacturing plant, but Imperial Tobacco closed all its Canadian manufacturing plants in 2005 and moved production to Mexico.

The Tobacco Defendants Have been Sending their Profits Abroad

The steps that the companies have taken to shield themselves against a possible adverse judgment were revealed in 2015 in an earlier decision of the Court of Appeal. In Imperial Tobacco Canada Ltd. c. Conseil québécois sur le tabac et la santé, 2015 QCCA 1737, the plaintiffs moved successfully to require the defendants to post a deposit of about $1 billion pending the outcome of the appeal. Making such an order is unusual and requires strong reasons in support:

[24] The granting of security is a matter of discretion. It is an exceptional remedy and as such, Respondents must indicate facts upon which I may draw the conclusion that there is a danger that the judgment, if maintained in appeal, may not be susceptible of execution. Clear and precise facts are required; mere hypotheses will not suffice. [2015 QCCA 1737 at para. 24].

The Court of Appeal agreed to this unusual motion because of the financial practices of the tobacco companies. The defendants earn substantial annual profits from selling cigarettes in Canada, but the bulk of these earnings are promptly shifted out of the country in the form of dividends to their parent companies.

The significant value that exists in Canada in the hands of the tobacco companies consists of their marketing networks and their brand names. However, even the rights to use those brand names in Canada are not owned by the Canadian subsidiary. Instead, they may be owned by a foreign affiliate that licenses the brand to the Canadian operating arm. For example, in reference to the defendant JTI-Macdonald Corp. (JTM) it was alleged that:

“it had transferred its trademarks valued at $1.2 billion to an offshore subsidiary in 1999, the year following the institution of proceedings in the Superior Court. The transferee then pledged the trademark to secure an indebtedness. JTM pays substantial royalties to the transferee in consideration of the use by it of the trademark. Its president agreed that the purpose of the transaction was “creditor proofing” and Riordan, J.S.C., also characterized “the tangled web of interconnecting contracts” as a creditor proofing exercise.” [2015 QCCA 1737 at para. 30].

The Possibility of Bankruptcy as a Strategy for the Tobacco Companies

Conceivably, the Canadian subsidiaries would be able to pay the damage award on the instalment plan over many years out of their ongoing profits. However, the foreign parent companies might decide that this is not in their best interest. The Canadian operation that is a defendant in this class action might choose to go out of business (e.g., by declaring bankruptcy). The foreign parent company that owns the trademark could set up a new Canadian subsidiary to market the same brands the very next day.

It is true that the Canadian branches have a substantial going concern value to the foreign parents. Shutting them down only to replace them with new operations would entail a substantial cost. However, that cost would probably be much less than paying a judgment of $15 billion on the instalment plan. With accruing interest, that would perhaps require all the profits of these operations for the next 20 years. Therefore, if a judgment of that magnitude was sustained by the Supreme Court, it is more likely that the companies would opt for bankruptcy.

Alternatively, they might use it as a bargaining chip to achieve a considerably lower settlement. Such a settlement that averts bankruptcy might be in the best interest of both the defendants and the plaintiffs.

Possible Action against the Foreign Parent Companies

The combined stock market valuation of the three parent companies of the Canadian tobacco defendants is about US$250 billion.

If bankruptcy of the Canadian subsidiaries occurred, the plaintiffs could attempt to sue the foreign parent companies for the unpaid damages. The dividends that the Canadian subsidiaries have paid to their foreign parents in the last several years could be subject to recapture. Section 96 of the Bankruptcy and Insolvency Act allows payments to related parties to be recovered by creditors if they were made to with the intention to defraud or defeat those creditors.

All three of the tobacco companies are incorporated pursuant to the Canada Business Corporations Act, which potentially exposes their parents to the oppression remedy under that statute. There is a body of jurisprudence suggesting that tort victims may be considered involuntary creditors for the purpose of the oppression remedy. It has been found that a foreign corporation with an affiliate in Canada may be subject to an oppression claim in Canada. I have discussed this in a longer article about similar issues in another case of plaintiffs pursuing damages from a multi-national company, “Reverse-Piercing of the Corporate Veil in Canada.” (forthcoming, Canadian Business Law Journal.)

The largest company among the three defendants is Imperial Tobacco. Its parent company is headquartered in the United Kingdom. The courts of that country have been somewhat sympathetic to claims by foreign parties injured by British companies, as in the decisions in Lubbe v Cape Plc [2000] UKHL 41 and Chandler v Cape plc [2012] EWCA Civ 525. However, as past cases of this type show, that is a very long drawn-out and arduous process, and ultimate success is far from assured.

It should also be noted that the class action was decided pursuant to Quebec's Tobacco-related Damages and Health Care Cost Recovery Act. That statute erased the limitation period for bringing tobacco claims, and eased the rules of evidence, with retroactive effect. (Most of the other provinces have enacted similar legislation.) There is some risk that it could be used to argue for a public policy exception against the enforcement of a Canadian judgement by a foreign court.

Conclusion

It is interesting to reflect on the fact that the case under discussion, to whatever extent it is satisfied, will only pay damages to consumers in Quebec. A number of other class action claims were filed on behalf of consumers in other provinces, but they appear to have become dormant. Provincial governments are also suing the tobacco companies for compensation for health care costs caused by smoking.

If all the claims for damage from smoking just in Canada were validated, it would need a large share of the resources of the global tobacco industry. One reason for this is that the claims for damage are being made decades after the profits were earned. Those profits in the distant past were paid out as dividends to tobacco company shareholders long ago. The current generation of the shareholders of tobacco multinationals bought their shares knowing that there was some risk that they were inheriting liabilities for past damages. They will nevertheless fight hard to try to prevent the risk from materializing.