June 15, 2010 - The cigarette industry is facing a novel new claim for compensation over its 1990s smuggling spree, which has already led to heavy civil and criminal penalties against four tobacco companies.
Farmers have filed $150-million in class-action lawsuits, alleging that the [tobacco] firms paid them the lower, export price for tobacco that was initially sent to the United States, but then smuggled back — tax-free — for the Canadian market. They say they should have received the higher, domestic price for that tobacco, and are demanding the companies now pay them the difference, plus other damages.
Canada - tobacco firms settle cigarette smuggling case..;
Canada Tobacco Firms Smuggling Settlement Too Low.., 9/17/2008;
Canada tobacco firms admit aiding smuggling.., 7/31/2008;
The smuggling operation has been decried as a corporate plot that undermined anti-smoking efforts by flooding the country with cheap cigarettes. The lawsuit, though, is about farmers getting what they are owed — not profiting from the episode, said Harvey Strosberg, the Windsor, Ont., lawyer handling the case.
Eric Gagnon, a spokesman for Imperial Tobacco, one of the three companies being sued, said he could not comment on detailed allegations in the case because it is before the courts. He said the company will vigorously defend itself, though, and chided growers for even launching legal action. “The lawsuit is clearly a cash grab attempt by an industry that is having difficult times, mainly due to illegal tobacco in Ontario,” said Mr. Gagnon. “It might be of more benefit for the growers to put their efforts towards requesting that governments put an end to the illegal-tobacco trade ... instead of engaging in long and costly litigation.”
The illegal trade he was referring to is a new type of contraband cigarettes — mostly produced on aboriginal reserves in Canada and the United States — that has swamped the country in recent years. (Canada, Ontario and Quebec - illegal cigarettes greater than 40% of consumption..)
In the 1990s, millions of cigarettes from a different source were smuggled into Canada and sold tax free on the black market. It turned out the industry was deeply involved. The federal government laid charges in the mid-2000s against the four major tobacco companies, alleging they deliberately “exported” product to the United States, knowing it would be secreted back across the border, and saving billions in taxes.
Imperial and Rothmans, Benson and Hedges settled the case in 2008, paying a total of $300-million in fines after pleading guilty to a violation of the Excise Act. They also agreed to hand over more than $500-million to resolve civil cases filed by the governments. JTI-Macdonald and R.J. Reynolds reached similar settlements this April.
The farmers’ suit stems from the two-price system they worked under until recently. In 1986, for instance, growers were paid $1.84 per pound for tobacco to be sold domestically, and $1.11 for tobacco used in products destined for export, according to their statement of claim.
As the smuggling operation picked up steam, the percentage of tobacco the companies bought for export soared four-fold from 3% in 1986 to 14% in 1993, the document indicates. Since the firms knew the tobacco would end up back in Canada, they should have paid growers the domestic price, the suit charges.
Imperial, though, has given legal notice that it believes the farmers’ claims are covered under the $350-million civil settlement it reached with federal and provincial governments in 2008. Imperial says it will withhold some payments under that deal until the farmers’ class action is resolved.
The Ontario government has responded with its own court application, arguing the 2008 settlement did not apply to the farmers or their marketing board.
Reference: Cigarette industry hit with novel claim for compensation, Tom Blackwell (tblackwell@nationalpost.com), National Post, 6/14/2010.
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