                     UNITED STATES DISTRICT COURT
                     FOR THE DISTRICT OF COLUMBIA



UNITED STATES OF AMERICA,

            Plaintiff,

     and

TOBACCO-FREE KIDS ACTION FUND,
et al.,

            Plaintiff-Intervenors:

     v.                                Civil Action No. 99-2496(GK)

PHILIP MORRIS USA INC., et al.,:

            Defendants,

     and

ITG BRANDS, LLC, COMMONWEALTH
BRANDS, INC., AND
COMMONWEALTH-ALTADIS, INC.,

            Post-Judgment Parties:
            Regarding Remedies.


                           MEMORANDUM OPINION

I.   INTRODUCTION

     Defendants     R.J.   Reynolds   Tobacco   Company   ("RJRT")   and

Lorillard     Tobacco      Company     ("Lorillard")      (collectively,

"Defendants") 1 seek to sell and transfer certain cigarette brands


1 Of course, Lorillard and RJRT are not the only Defendant tobacco
companies in this case; however, Defendants Altria Group Inc. and
Philip Morris U.S.A., Inc. have indicated that they do not oppose
the Motion.
and businesses to ITG Brands, LLC ("ITG"), which is not a party to

this case. Under     ~   20 of this Court's Final Judgment and Remedial

Order ("Order# 1015") entered on August 17, 2006, a non-defendant

may acquire cigarette brands and businesses from Defendants only

if it first "submits itself to the jurisdiction of the Court" and

"applies     for   and   obtains"     an        Order    "subjecting   it    to   the

provisions" of Order # 1015.

     On April      30,   2015,    Defendants and ITG filed an Unopposed

Motion for an Order Authorizing Transfer of Certain Cigarette

Brands and Businesses to ITG Brands LLC, Pursuant to Order # 1015,

Paragraph 2 O ("the Motion")         [Dkt. No.          6142] . Defendants and ITG

have also submitted a lengthy Proposed Order                   [Dkt. No.    6142-1],

which sets forth how Order # 1015 will apply to ITG and its U.S.

affiliates    (Commonwealth Brands,             Inc.    and Commonwealth-Altadis,

Inc.) , 2 and allocates certain burdens among Defendants and the

Acquiring     Companies.     As     the     Motion's        title   suggests,     the

Government and Plaintiff-Intervenors do not oppose the Motion or

the terms of the Proposed Order.

     On May 19,      2015,   the Court held a Hearing to discuss the

Motion and Proposed Order with counsel for all Parties and the




2  The Court refers to ITG,     Commonwealth Brands, Inc.  and
Commonwealth-Altadis collectively as the "Acquiring Companies"
throughout.
                                          -2-
Acquiring Companies.           Motion Hearing Transcript          ("Tr.")    3: 1-4: 22

May 19, 2015. Upon consideration of the Unopposed Motion, counsel's

representations at the Hearing, and the entire record herein, and

for the reasons stated below,                the Unopposed Motion for an Order

Authorizing Transfer shall be granted.

II.     BACKGROUND

        A.     ITG Brands, LLC

        ITG was formed in 1986 under the name Lignum-2, Inc. It is a

Texas        limited    liability     company      with     headquarters     in    Fort

Lauderdale,       Florida.      ITG's    ultimate    parent     company,     Imperial

Tobacco Group PLC, is a United Kingdom company and is the fourth-

largest tobacco company in the world.                ITG is not a defendant in

this case.       Neither ITG nor its U.S.            affiliates have ever been

covered by Order # 1015.             ITG currently owns only one cigarette

brand sold in the United States called "Rave."

        If the proposed sales and transfers occur,                   ITG will be the

third-largest cigarette company in the United States, with brands

comprising       just   over    seven percent       of    the   domestic    cigarette

market.       Following    the      transaction,      ITG    plans     to   move    its

headquarters       from Florida         to   facilities     currently operated by

Lorillard in Greensboro, North Carolina.




                                             -3-
       B.      The Proposed Transaction

       The     details    of        the    proposed         transaction    are     extremely

complicated,      as the facts presented in the Parties'                         submissions

demonstrate. The essential facts are as follows. ITG will acquire

several      cigarette     brands          currently        manufactured    by     RJRT    and

Lorillard,      along with associated intellectual property and the

inventory      and    assets        necessary         to   manufacture    and     sell   those

brands. ITG will acquire at least three RJRT brands: Winston, Kool,

and Salem. A fourth brand, Doral, will be transferred to ITG if

the    other    three     brands          do    not     meet   particular       market-share

thresholds. ITG will also acquire one Lorillard brand: Maverick.

Defendants and ITG refer to all of these brands collectively as

the "Acquired Brands.          11
                                     In addition to the Acquired Brands,                   ITG

will   acquire       Lorillard' s         manufacturing        facility    in Greensboro,

North Carolina and certain other assets.

       In a transaction separate from but related to the transfers

to ITG, RJRT and Lorillard's corporate families plan to merge. In

July 2014,       RJRT's    indirect            parent      company,    Reynolds    American,

Inc., entered into an agreement with Lorillard's parent company,

Lorillard,      Inc.,    under which Lorillard,                 Inc.   will merge into a

subsidiary of Reynolds American, Inc.

       On April 7,       2015,       the Parties provided the Court with the

merger's details by filing a Notice of Transaction [Dkt. No. 6141].

                                                -4-
•


    Because Lorillard and RJRT were already Defendants in this case,

    they were not required to seek the Court's approval of the merger.

            The merger transaction will result in RJRT taking on four

    Lorillard brands: Newport, Old Gold, Kent, and True. Tr. 5:12-18.

    Transfer of the Greensboro facility from Lorillard to ITG will

    occur       immediately      before    Lorillard,      Inc.   merges    with    the

    designated Reynolds American, Inc. subsidiary.

            Preliminary approval of the proposed transfers,                sales,   and

    related merger has been given by the Federal Trade Commission

    ("FTC"). The approval will allow two companies, Altria and RJRT to

    control more than 80% of the $100 billion U.S.                  tobacco market.

    Altria has an estimated 47% share of that market and RJRT will

    control 34% of the market following its merger with Lorillard,

    Inc.        See    Brent   Kendall    and   Tripp   Mickle,   Reynolds-Lorillard

    Tobacco Merger Gets FTC Clearance, The Wall Street Journal, May

    26, 2015, http://www.wsj.com/articles/reynolds-lorillard-tobacco-

    merger-gets-ftc-clearance-1432679612.

           C.     The Court's Review

           Order# 1015 limits Defendants' ability to sell or·transfer

    elements      of     their   tobacco    businesses.     Order    #   1015   ~   20.

    Paragraph 20 provides:3

    3 The Court here omits language relating to sales and transfers to
    acquirors and transferees who will use the sold or transferred
    items exclusively outside of the United States.
                                                -5-
     No Defendant shall sell or otherwise transfer or permit
     the sale or transfer of any of its cigarette brands,
     brand names, cigarette product formulas or cigarette
     businesses . . . to any person or entity unless (1) such
     person or entity is already a Defendant subject to this
     Final Judgment and Remedial Order, or (2) prior to the
     sale or acquisition, such person or entity (a) submits
     to the jurisdiction of this Court; and (b) applies for
     and obtains an Order from this Court subjecting such
     person or entity to the provisions of this Final Judgment
     and Remedial Order as of the date of the sale or
     transfer. No such Order will be entered, and no sale or
     transfer of any Defendant's cigarette brands, brand
     names,   cigarette    product   formulas   or   cigarette
     businesses         shall be allowed, unless this Court
     first determines that such person or entity has the
     capacity to comply with the obligations contained in
     this Final Judgment and Remedial Order. The sale or
     transfer by a Defendant of any of its cigarette brands,
     brand names, cigarette product formulas or cigarette
     businesses shall not relieve that Defendant from its
     joint and several liability under this Final Judgment
     and Remedial Order.

     In order to comply with the          strictures of       Order # 1015,

Defendants and the Acquiring Companies have jointly submitted a

Memorandum   of   Points   and   Authorities    [Dkt.   No.    6143],   which

confirms ITG and its U.S. affiliates'          submission to the Court's

jurisdiction and sets forth ITG's capacity to comply with Order

# 1015. Defendants and the Acquiring Companies have also filed a

Proposed Order that would subject the Acquiring Companies to this

Court's jurisdiction,      as well as modify and apply the terms of

Order # 1015 to the Acquiring Companies as of the date of the sales

and transfers.



                                    -6-
III. ANALYSIS

       Upon receipt of the Unopposed Motion,               the Court convened a

hearing   to    discuss     and    fully understand       the   substance        of   the

Proposed Order. On May 19, 2015, a hearing on the record was held

with    all    Parties      represented.      Counsel     for      Defendants,        the

Acquiring      Parties, 4    the   Government,      and    Plaintiff-Intervenors

assured the Court in the strongest terms that this Order would not

in any possible way diminish the effectiveness of the injunctive

relief originally entered in Order# 1015. E.g., Tr. 24:5-14 ("The

Court: The defendants have said very clearly today that the motion

will in no way limit or exclude any other protection contained in

Order [#] 1015. Does the government agree with that statement? Mr.

Crane-Hirsch:      Yes,     Your Honor.                 [T] here    are   some    minor

rewordings     to adjust      for a   transition of ownership.             The major

elements of the permanent injunction are absolutely in place, and

the only changes are intended to just adjust logistic issues that

arise as a natural part of the transaction.").

       The Court asked ITG's counsel whether "the new arrangement in

any way   [would],    if this motion       [were]    granted[,]       eliminate any

requirement that is contained in [Order#] 1015[.]" Tr. 16:1-5. To



4 Counsel for ITG also appeared on behalf of Commonwealth Brands,
Inc. and Commonwealth-Altadis,    Inc., but did not represent
Imperial Tobacco Group, the three companies' U. K. -based parent
company. Motion Hearing Transcript ("Tr.") 3:21-25, May 19, 2015.
                                        -7-
which counsel responded,            "No. It will not, and,          in fact,   it will

extend -- other than publication of the corrective statements, it

will extend the provisions of [Order #] 1015 in most instances not

only to the          [A]cquired [B]rands .              but to ITG['s]     Rave brand

and Commonweal th Brands'               existing []   USA Gold and other brands."

Tr . 16 : 6 - 12 .

         ITG's counsel explained that in crafting the Proposed Order

"the ultimate goal                       was to .       . set up a structure that

allowed [this]         Court" to have jurisdiction over "the entire U.S.

tobacco business" of ITG and its U.S. affiliates. 5 Tr. 12:4-10. "A

second and important goal was                         to make sure that not only

    [would]   the .          'thou shall not' provisions of           [Order # 1015]

apply to [ITG's]         tobacco business in the United States .                    . but

also that [there] would not be a diminution in the kind of exposure

to corrective statements that consumers would get." Tr. 12:11-17.

         Thus,    Acquiring Companies will be subject to the terms of

Order# 1015 except for provisions specifically identified by ITG's

counsel.         Paragraph    16   of     the    Proposed   Order   will   exempt    the

Acquiring Companies from paying the Government's litigation costs

arising from this case. Tr. 16:25-17:4.




5 Imperial Tobacco Group, the U.K.-based parent company of ITG and
its U.S. affiliates, will not become a party to Order # 1015. Tr.
11:12-14.
                                                -8-
         Additionally,        Provisions         of     Order       #     1015   limiting    the

transfer of         cigarette       brands will          not       apply   to    the Acquiring

Companies'         existing    brands          (i.e.,     brands         that    ITG   and    its

affiliates already own and are not acquiring from Defendants) .

Tr. 17:7-15; Proposed Order                ~   20. However, ITG would be bound by

Order # 1015 if,           at some point in the future,                     it took steps to

sell or transfer to a non-party the Winston, Salem, Kool, Doral,

or Maverick brands            that    it       plans    to     acquire      from Defendants.

Tr. 18:9-16.

         Finally,    the    Proposed Order makes minor changes                         to Order

# 1015's document disclosure and disaggregated marketing data and

production      requirements         as    applied        to       the    Acquiring    Parties.

Tr. 18:18-20:9. These last changes reflect the fact that ITG and

its U.S. affiliates were not named as defendants in this case.

         Counsel     for      the    Government              and        Plaintiff-Intervenors

described the many phone calls,                       e-mails,      exchanges of proposed

language, meetings,           40 to 50 multi-party conference calls,                         etc.

that all Parties worked on in order to maintain the full scope of

Order # 1015. Tr. 22:2-24:4. The Court inquired about the effect

of   ~   7 of the Proposed Order, because of its concern as to whether

it limited the Acquiring Companies' duty to publish the corrective

statements. Counsel explained that the paragraph "was intended to

exempt existing brands that were not owned by Defendants and not

                                                -9-
currently subject to Order # 1015 from the corrective statement

obligations." Tr. 14:7-12.

       Counsel were asked directly whether the Proposed Order would

diminish     the     number       of         television        spots    broadcasting      the

corrective    statements.          The       Court     was    strongly    assured by all

parties that that would not be the result of the Proposed Order.

Tr. 7:11-21, 24:15-26:4. RJRT will run the television spots it is

required to run to correct its own previous deception and will

take on the burden of              running the spots necessary to correct

Lorillard's       previous        deception.           Tr.    7:11-21     ("R.J.    Reynolds

Tobacco    will      be    taking        over     Defendant        Lorillard       Tobacco's

obligations under Order                [#]     1015.    And of     particular note        its

obligations       with      respect          to   the        corrective    statements      in

newspapers and on TVs,             the total number of ads will remain the

same regardless of the transaction. We'll be doing Lorillard's TV

ads,   Lorillard' s       newspaper ads.                       So the     total number of

corrective statements will be the same with the transaction or

without the transaction."). Thus, the merger, sales, and transfers

will have no ef feet on the number of television commercials to

which the public will be exposed.

       Additionally,       the Court was concerned that language in the

Proposed    Order,        which    modifies           the    corrective     statements     as

applied to    the Acquired Brands,                    would diminish the           corrective

                                               -10-
statements'      effectiveness.     See Proposed Order       ~   9. However,   the

Government explained that it had consulted with experts in the

area of heal th communications,            who concluded that the language

would not adversely affect the interest or comprehension of the

public. Tr. 26:14-28:3, 29:9-14            (~[w]e   absolutely did consult with

marketing experts on this wording, and they are pleased that it is

as likely to achieve the desired results as the wording for all of

the other statements on all of the other cigarette brands.").

      Finally,     the Parties agree that the Acquiring Parties will

have the capacity to comply with Order# 1015. Tr. 15:19-21, 24:1-

4. The Court has no reason to disagree with that assessment.

IV.   CONCLUSION

      Based upon the         clear and comprehensive        assurances by all

counsel,    as   well   as   the   Court's    own detailed scrutiny of          the

Parties' submissions, the Court concludes that Order # 1015 will

continue to apply as originally intended and the public interest

will not be harmed by granting the Unopposed Motion. Therefore,

for   the   forgoing    reasons,     the    Unopposed    Motion    for   an   Order

Authorizing Transfer of Certain Cigarette Brands and Businesses to

ITG Brands LLC, Pursuant to Order #1015, Paragraph 20 [Dkt. No.




                                       -11-
6142]   shall be granted. An Order shall accompany this Memorandum

Opinion. 6




June 8, 2015



Copies to: attorneys on record via ECF




G After preliminary approval by the FTC on May 26, 2015, the Court
ordered the Parties to submit "Statements as to whether the FTC's
action in any way affects the information and assurances given to
the Court at its May 19, 2015 hearing" [Dkt. No. 6146].        The
Parties filed their Joint Response on June 4, 2015, assuring the
Court that the "FTC action does not in any way affect the
information and assurances given to the Court at the May 19
hearing" [Dkt. No. 6149].
                               -12-
