Reynolds American (RAI) to Challenge $23.6B Punitive Damages Award

Shares of Reynolds American Inc. (RAI) were down -1.80 or -3.07 percent to $56.85 per share in pre-market trading early Monday, after news late Friday that a Florida jury had decided to impose punitive damages of $23.6 billion on R.J. Reynolds Tobacco - a division of Reynolds American - to settle a lawsuit brought by Cynthia Robinson of Pensacola. Reynolds American stock closed at $58.65 per share, up +0.90 or +1.56 percent in Friday's regular trading session.

Winston-Salem, North Carolina based Reynolds American Inc. is the second largest domestic tobacco company. The holding company was formed in January of 2004 and began publicly trading as Reynolds American on the New York Stock Exchange later that year in August. The company was formed by the merger of British American Tobacco (Brown & Williamson) and R.J. Reynolds Tobacco Company under the R.J. Reynolds brand. On July 15th, Reynolds American entered into a definitive agreement to buy Lorillard Inc. LO, the third largest U.S. tobacco company, for $68.88 in cash and stock. The deal is worth approximately $27.4 billion.

Cynthia Robinson, who brought the suit, was widowed in 1996 after her husband, Michael Johnson died of lung cancer at the age of 36. The Florida state court jury had deliberated for 11 hours and originally awarded compensatory damages of $7.3 million to the widow and her son, and another $9.6 million to a son of Johnson's from a previous relationship.

The lawsuit was first filed by Robinson in 2008 over the death of her husband, a hotel shuttle driver. The suit accused R.J. Reynolds of concealing the addictive nature and health risks of their products. Johnson, who smoked as much as three packs per day for over 20 years, began smoking at the age of 13, and finally died of lung cancer in 1996. The case was originally part of a class-action lawsuit against the tobacco companies filed in 1994 and known as the "Eagle Case .

A jury returned a decision in the Eagle case in 2000, favoring the plaintiffs and awarding $145 billion in punitive damages, the largest judgment of its class at the time. However, the award was rejected by the Florida Supreme Court that de-certified the class in 2006, claiming disparity in the group due to the different reasons for smoking of each individual. The court told the plaintiffs that they could file their own individual lawsuits, as in the Robinson case.

The $23.6 billion in punitive damages was awarded after an additional seven hours of deliberations by the same jury. The large settlement award will be challenged by Reynolds. According to legal pundits, the $23.6 billion part of the award will not be upheld due to constitutional guarantees of due process.

According to the U.S. Supreme Court's general guidelines, the ratio of punitive damages to compensatory damages in the same case should not exceed 10 to 1. Nevertheless, according to some legal experts, the precedent established in the decision will still allow for a punitive award exceeding $150 million.

Reynolds American stock is not down significantly in the pre-market, nevertheless, the amount of the award could be a sign of more lawsuits and larger settlement amounts down the road. The legal issues the company (and the entire tobacco industry) faces will weigh on both Reynolds American stock price and may affect the $27.4 billion takeover of Lorillard.

Other News About Reynolds American
UPDATE: Reynold American to Buy Lorillard in $27.4B Deal
Company will pay $68.88 per Lorillard share in cash and stock.
Reynolds, Lorillard, And The Master Settlement Agreement Vs. Anti-Trust Regulators
Reynolds is acquiring the third largest domestic tobacco company for the second time.

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