cigarettes-ruling

The Delaware Court of Chancery on Thursday blocked an attempt by tobacco company ITG Brands to extricate itself from a dispute over $30 million in annual settlement payments owed to the state of Florida after the company acquired four popular brands of cigarettes from R.J. Reynolds Tobacco Co.

Chancellor Andre G. Bouchard ruled in a 31-page memorandum opinion that ITG’s contractual obligation that it make “reasonable best efforts” to reach an agreement with Florida did not end with the closing of the 2015 deal with Reynolds, which added Winston, Salem, Kool and Maverick cigarettes to ITG’s portfolio for $7.1 billion.

Bouchard’s ruling did not address whether ITG had fulfilled those duties in the Sunshine State. However, it is likely to bolster Reynolds prospects in Florida, where the state is suing to recover payments it says it is owed for cigarette sales under a two-decade-old settlement agreement with major tobacco manufacturers.

In 1997, Reynolds and other cigarette-makers settled a landmark 1995 lawsuit with Florida for misleading the public about the health risks associated with smoking, requiring an initial amount of $750 million followed by annual payments based on their volume of tobacco sales in the state. That agreement came along with three others before the tobacco manufacturers finally reached a master settlement with the remaining 46 states in 1998.

When ITG bought Reynolds’ cigarette brands in 2015, the company automatically assumed liability under the terms of the master settlement, which requires transferees to take on the obligations of its predecessor. However, the prior settlements included no such provision and Florida has since been fighting to recover settlement funds from both companies.

ITG said in court documents that it is making payments to the three other states—Minnesota Mississippi and Texas—either under the terms of settlements or state statute.

Florida, meanwhile, sued Reynolds in the Florida Circuit Court for Palm Beach County. The state said it is owed approximately $45 million on sales of Winston, Salem, Kool and Maverick brand cigarettes since the deal’s closing, plus an estimated $30 million per year going forward, based on current revenues. Earlier this year, Florida filed a motion to join ITG as a defendant in the case.

ITG responded by following its Delaware lawsuit earlier this year, seeking to prevent Reynolds from pursuing any claims in Florida based on an exclusive forum provision in the companies’ asset purchase agreement, which is governed by Delaware law.

In May, ITG asked Bouchard to rule that any obligation it had to join the Florida settlement had expired at the closing of its deal with Reynolds. The issue was not expected to be raised in the Florida case.

Bouchard’s decision turned on the last four words of a key provision in the asset purchase agreement, which requires ITG to use its “reasonable best efforts” to reach agreements with the states outside of the master settlement “on the same basis as the settling defendants prior to the closing.”

ITG argued that the phrase limited its obligation to only the time leading up to the deal’s closing. Reynolds, on the other hand, said it defined ITG’s duties as the same that it had carried out with the states “prior to the closing” and imposed no end-date on ITG’s obligation to reach an agreement.

On Thursday, Bouchard said that only Reynolds’ interpretation was reasonable under the plain language of the contract.

“When ITG Brands assumes the obligations of the settling defendants, it will step into the shoes that Reynolds Tobacco occupied prior to the closing,” he wrote. “Thus, the phrase ‘prior to the closing’ is a time reference that adds precision to the nature of the obligations that ITG Brands agreed to use its reasonable best efforts to assume with each of the previously settled states.”

Peter J. Biersteker, an attorney for Reynolds said he was “gratified” by the ruling and believed it was the correct result.

An attorney for ITG was not immediately available to comment on Thursday.

The Delaware case is captioned ITG Brands v. Reynolds.