04/10/2019 11:59 EDT | Updated 04/10/2019 12:00 EDT

Sick And Dying Smokers In Quebec Class-Action Lawsuit May Not See A Dime

During CCAA protection, the Quebec consumers represented by the class-action cannot try to collect any money

Luis Diaz Devesa via Getty Images

Today, it's well-known that smoking can cause serious injury to health. There are graphic images of diseased lungs on cigarette packages to drive the point home.

That wasn't the case decades ago. Many people started smoking, and became addicted to nicotine, when they had no idea of how harmful it could be.

The cigarette companies became aware that it was harmful in the early 1950s. They were legally liable due to failing to warn consumers that their product was dangerous. Indeed, they tried to discredit the scientists who were warning of the danger.

Those were the findings of a judge in a Quebec class-action trial, concluded in 2015 after 250 days of hearings and dozens of expert witnesses. The group was awarded $15 billion in damages. That sounds like a lot of money, but only allows up to $100,000 for each person with lung cancer — hardly a huge amount for such a severe condition.

Litigation of this type proceeds slowly, and it has been going on for many years.

In March of 2019, the Quebec Court of Appeal confirmed that decision. Within days of the Quebec ruling, the three major Canadian cigarette manufacturers came before an Ontario judge and obtained protection under the Companies' Creditors Arrangement Act (CCAA).

The CCAA is aimed at helping insolvent companies reorganize their affairs to avert full-fledged bankruptcy. During CCAA protection, the Quebec consumers represented by the class-action cannot try to collect any money.

The Canadian cigarette companies are fully-owned subsidiaries of global giants. Unfortunately for the plaintiffs, the Canadian companies don't have much money in the bank — certainly, nothing close to $15 billion.

Litigation of this type proceeds slowly, and it has been going on for many years. The Quebec case is the first one that went to trial, but there are claims like it in other provinces. Not only are consumer groups suing through class-actions, but provincial governments are suing to recoup the health care costs caused by smoking related illnesses.

Canada stands out in this field because of special legislation. It was pioneered by British Columbia in its Tobacco Damages and Health Care Costs Recovery Act, originating in 1997. It reduces the usual standard of legal proof, allowing damages to be proven by statistical sampling, and applies retroactively. The cigarette companies thought this was unfair, but they lost a challenge at the Supreme Court of Canada in 2005.

Aware of the risk that they would lose, the cigarette companies have for many years tried to make themselves judgment-proof. They have been sending their profits abroad through dividends, interest and royalties to their parent companies. As a result, even though they are quite profitable in Canada, they have very little money here to pay damages.

The lawyers for the Quebec class action were understandably outraged that a single judge in Ontario could block their access to money awarded them by five judges of the Quebec Court of Appeal.

The Quebec class now has the assistance of Harvey Chaiton, a leading Toronto insolvency lawyer. In their court filing responding to the CCAA protection, they described it as an unconscionable move to "game the system" and alleged that the companies "presented false and inaccurate reasons for claiming the urgent need" for CCAA protection without notice to the plaintiffs.

The CCAA is a powerful statute. But beyond that, the fact remains that there is not enough money in the pockets of the Canadian companies to pay damages. That would depend on cooperation from their richer parent companies.

The negotiations in this process will be a complex game of chicken.

The money flowing out of the Canadian companies would be enough to pay $15 billion to the Quebec consumers on the instalment plan. That assumes that they do not declare bankruptcy in the end.

The Quebec class action was only against the three Canadian subsidiaries. All the other cases include the foreign parent companies, which have deeper pockets.

The foreign parents are separate corporations that did not sell cigarettes in Canada. Making them liable requires "piercing the corporate veil." A court may do that if there is proof that they dominated the decision making of their Canadian subsidiaries. The Ontario Government in its court filing alleges that in the 1950s it was the international companies that began a conspiracy to prevent consumers "from acquiring knowledge of the harmful and addictive properties of cigarettes."

The negotiations in this process will be a complex game of chicken. Canadian governments probably do not want the big international brands to leave the Canadian market. That would leave even more of the market to contraband no-name cigarettes, which already represent a big problem of tax evasion. Canadian governments certainly do not want to take ownership of the companies and be responsible for operating them.

A hearing on extending the CCAA protection was held on April 4 and 5 before Justice McEwan at the Superior Court in Toronto. It saw other provincial parties supporting the extension of the stay, observing that parties outside Quebec also have claims that need to be settled. The judge approved an extension of the CCAA protection until the end of June, when there will be a new hearing.

The Quebec class plaintiffs got some comfort, as the new extension of the CCAA protection prohibits the companies from making any dividend, interest or royalty payments to their parent companies. If the process drags on a long time, a pot of money will start to accumulate in Canada to make a part payment on the damage claims.

This is provided as general information, and should not be considered legal advice for your particular case. Peter Spiro is a Toronto lawyer who provides unbundled legal advisory services for self-represented clients,

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