An attorney for ITG Brands LLC told Delaware's Supreme Court on Wednesday that a Chancery Court ruling in April effectively rewrote contract terms, which resulted in the tobacco company's liability for more than $251 million in payments to Florida that ITG never agreed to assume under a settlement covering acquired cigarette brand liabilities.
Gregory G. Garre of Latham & Watkins LLP, counsel for ITG, told the five-member appellate court that Vice Chancellor Lori W. Will's decision on liabilities under the 1997 settlement with Florida granted R.J. Reynolds Tobacco Co. "an enormous windfall" by failing to factor in its savings from related profit adjustments.
Under the original agreement, Garre argued, ITG was not to assume Florida settlement liabilities if it was unable to settle with the state on the relevant acquired brands after reasonable best efforts.
"Can you tell me why your interpretation makes sense?" Chief Justice Collins J. Seitz Jr. asked. "I know we're very technical about reading contracts in Delaware, but tell me why your interpretation makes sense."
Garre said the terms figured in a larger, $27 billion sale of brands, with details showing that Reynolds "knew the difference between making ITG liable regardless of best efforts and only if they used best efforts."
"Last, Reynolds still secured substantial relief under the state settlement agreement," Garre said, including releases for all state of Florida claims, "which was viewed at the time as an enterprise-threatening liability. ITG doesn't get the benefit of that agreement."
Justice Karen L. Valihura asked Garre "wasn't the big picture here that once ITG owned the acquired brands, ITG would be responsible for liability arising from its ownership of the brands?"
Garre said the agreement included a number of provisions and involved disputes with four states over tobacco settlements.
Even if the justices don't find that some terms unambiguously require a decision in ITG's favor, Garre said, "the very least the court should hold is that this agreement is susceptible to different interpretations."
The Florida liabilities stem from a series of settlements in the 1990s in which tobacco companies agreed to make annual payments to states to compensate for public healthcare expenses tied to smoking. The multimillion-dollar annual payments are calculated based on each company's market share.
When ITG bought the four brands from Reynolds, it successfully took over settlement obligations in most other states but couldn't reach a deal with Florida.
Florida sued Reynolds in January 2017 for overdue payments. ITG then sued Reynolds in Delaware after Reynolds sought to have a Florida court determine ITG's obligations under the asset purchase agreement.
Noel J. Francisco of Jones Day, counsel for Reynolds American Inc. and R.J. Reynolds Tobacco Co., told the justices that the asset purchase agreement indemnity provisions "provided that they're required to reimburse us for what we actually paid to Florida."
Francisco added: "It is undisputed that had the Florida judgment not been entered, we would be $276 million richer than what we paid."
Reynolds' position would give it a $155 million incentive not to join the settlement agreement, Francisco said. "Why on earth would we give a $155 million incentive when the whole purpose of the RBE is to try to get them to join that agreement?" Francisco asked.
"In order to make the merger possible, it had to sell the required brands and had to reach an agreement with ITG on those brands. It had every incentive to reach an agreement," Garre said, and the one with ITG to use reasonable best efforts.
When Vice Chancellor Will took on the case, Garre said, the court for the first time held that a key provision of the agreement compelled a reading in favor of Reynolds.
Vice Chancellor Will found in October 2023 that ITG must indemnify Reynolds for more than $231.5 million in postsale payments that Reynolds made to Florida for the four brands under a 1997 settlement related to cigarette advertising.
"These are respected courts, respected jurists, and they have reached different conclusions," Garre said. "No court today has adopted the position that was advanced before this court. At the bare minimum the court should hold that the contract is reasonably susceptible to different interpretations and remand."
The justices said they would take the arguments under advisement.
ITG Brands LLC is represented by Stephen C. Norman and Tyler J. Leavengood of Potter Anderson & Corroon LLP, Gregory G. Garre, Margaret A. Upshaw and Sakina J. Haji of Latham & Watkins LLP, and Elizabeth B. McCallum, Thomas E. Hogan, Evan Mannering and Carey Busen of BakerHostetler.
Reynolds American Inc. and R.J. Reynolds Tobacco Co. are represented by Rudolf Koch, Robert L. Burns, Matthew D. Perri and Sandy Xu of Richards Layton & Finger PA, and Noel J. Francisco, C. Kevin Marshall, Ethan D. Beck and Katrina L.S. Caseldine of Jones Day,
The case is ITG Brands LLC v. Reynolds American Inc. et al., case number 204-2025, in the Supreme Court of Delaware.
The case under appeal is ITG Brands LLC v. Reynolds American Inc. et al., case number 2017-0129, in the Court of Chancery of the State of Delaware.
Deal Summary
