Court slaps British American Tobacco's Canadian arm with £5.4bn fine

A class-action lawsuit in Canada has ruled that British American Tobacco and two other cigarette makers should pay a combined C$15.6bn (£8.2bn) to smokers in "moral and punitive damages", the largest legal award in Canadian history.

With BATS' wholly owned Canadian subsidiary, Imperial Tobacco Canada, liable for C$10.4bn (£5.47bn) of the total, including a provisional C$1.13bn, the company said there were "strong legal grounds" to challenge the overall judgement and to seek a stay of the provisional order.

Analysts at Nomura calculated that if the full payment was made, "there is the possibility that it bankrupts all of the tobacco majors in the market" but, with BATS shares down only 2.3% by late morning, it seemed City traders and investors were confident the companies would not have to pay the full amount.

Indeed, when giving his judgment, the the judge said he did not want to see the tobacco companies go bankrupt.

Read more: BATS earnings face 7% fall from Canadian lawsuit but full penalty unlikely, says Nomura

"The wider implications of the legal battle are more significant than the billions of dollars in damages awarded to the plaintiffs in this particular instance," said Laith Khalaf, senior analyst at Hargreaves Lansdown. "If this genie gets out of the bottle, it will set a precedent for court cases across the globe against the tobacco industry. The tobacco firms involved are therefore likely to throw the kitchen sink at defending their case."

The legal case, which was first taken to the Quebec courts 17 years ago, sought C$27bn in damages from three Canadian tobacco manufacturers on behalf of two groups of plaintiffs: smokers, who smoked a minimum of 12 'pack-years' and were subsequently diagnosed with lung, throat and laryngeal cancer or emphysema prior to 12 March 2012; and smokers who were addicted to nicotine at the time the proceedings began in September 1998 and remained addicted until at least 21 February 2005.

On Monday, the Quebec Superior Court judge publicly issued a ruling in favour of the plaintiffs, awarding a total of $15.6bn in moral and punitive damages, including interest.

BATS said that it was not a party to the proceeding and is not a party to the judgement, only its Canadian subsidiary, Imperial Tobacco Canada, alongside Philip Morris International's and Japan Tobacco International's Canadian subsidiaries.

This is understand to mean that there would be little impact at the parent company level, Nomura said, with the subsidiaries operating as separate, ring-fenced legal entities.

"There are strong legal grounds with which to challenge both the overall judgement, and to seek a stay of the provisional execution order, which Imperial Tobacco Canada will do within 30 days of the original 27 May ruling," BATS said.

"As such, no payments will be made until the request to stay the provisional execution order has been heard and a judgement made."

Canada is estimated to make up around 7% of BATS’ profit. If the provisional payment is made, the potential impact on reported earnings per share on full-year 2015 numbers, would be around 7% for BATS, around 1.5% for PMI and around 3% for JT, Nomura said.

"It's a big day for victims of tobacco, who have been waiting for about 17 years for this decision. It was a long process — but arrived at the destination and it's a big victory," said Mario Bujold, executive director of the Quebec Council on Tobacco and Health.