Japan Tobacco Inc.’s Canadian unit was granted creditor protection by the Ontario Superior Court after a legal defeat over the risks of smoking that threatens the existence of tobacco companies in the country.
The court extended protection late Friday in favor of JTI-Macdonald Corp. after the company argued that the damage award of as much as $1.77 billion exceeds its capacity to pay, Japan Tobacco said in a statement. JTI-Macdonald must make an initial damages deposit of $145 million.
The Canadian units of British American Tobacco Plc, Philip Morris International Inc. and Japan Tobacco were ordered earlier this month to pay damages initially estimated at about $17 billion after losing an appeal of class actions filed by Quebec smokers. The total industry liability was later estimated at $13.5 billion. BAT said this week the ruling would hit its profit and set aside $758 million to cover damages, while Philip Morris cut its 2019 outlook.
The legal defeat in Quebec was the latest blow to global tobacco companies, which have been undergoing a major shift as they try to lower their reliance on traditional cigarettes, seeking a future with alternative products as smoking demand wanes and countries tighten regulations.
Analysts had warned that if Big Tobacco loses the Quebec cases, it could bankrupt the industry in Canada. The case stems from lawsuits originally filed in 1998, and involved the first damages against the industry in Canada. The lawsuits were in favor of smokers seeking damages for addiction and smoking-related diseases, who argued they were never warned of the risks.
JTI-Macdonald said the protection under Canada’s Companies’ Creditors Arrangement Act was its best option allowing it to continue doing business. The company said it will also proceed with an appeal to the Supreme Court of Canada.
“This extraordinary judgment forced JTI-Macdonald Corp. to seek protection under the CCAA to protect 500 Canadian jobs and carry on its business operations with minimal disruption,” the company said in the statement. “We fundamentally disagree with the court decision and are taking all necessary and appropriate measures to defend our lawful business.”
Imperial Tobacco Canada, the Canadian unit of BAT, is assessing its position after the decision on JTI-Macdonald and will have no further comments until the assessment is complete, BAT said in a statement. Phillip Morris didn’t immediately respond to emails seeking comment.
The Canadian Cancer Society objected to granting creditor production to JTI-Macdonald and expects the decision to be contested, Rob Cunningham, senior policy analyst with the organization, said by phone.
“This a tactic by JTI-Macdonald to try and avoid paying out what they are supposed to pay out,” he said. “They are a very successful company that has the capacity to pay.”
While this case poses a risk, the industry faces even bigger headaches in Canada, where the country’s provinces are also suing the tobacco industry to recover health-care costs. Ontario alone is claiming damages of $50 billion.
The federal government may eventually need to step in to negotiate a settlement, because if legal cigarette manufacturers go under, the country would face the risk of a boom in illicit tobacco, according to Citigroup analyst Adam Spielman.
The decision came a week after the U.S. Supreme Court turned away the tobacco industry’s effort to derail lawsuits by thousands of Florida smokers. In that case, the tobacco companies said they face another 2,300 pending suits.