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<div style="font-family: 'Times New Roman',Times,serif"> <div align="left"
style="font-size: 10pt; margin-top: 12pt"><b>12. Legal Proceedings</b>
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt"><b>Tobacco-Related
Product Liability Litigation</b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          As
of July 27, 2009, approximately 6,875 product liability cases are
pending against cigarette manufacturers in the United States. Lorillard Tobacco
is a defendant in approximately 5,925 of these cases. Lorillard, Inc. is a
co-defendant in approximately 710 cases. Approximately 3,200 of these lawsuits
are <i>Engle </i>Progeny Cases, described below, in which the
claims of approximately 8,625 individual plaintiffs are asserted. </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The
pending product liability cases are composed of the following types of cases:
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          <i>Conventional
Product Liability Cases</i>. Conventional Product Liability Cases are
brought by individuals who allege cancer or other health effects caused by
smoking cigarettes, by using smokeless tobacco products, by addiction to tobacco,
or by exposure to environmental tobacco smoke. As of July 27, 2009,
approximately 155 cases are pending against cigarette manufacturers, including
approximately 35 cases against Lorillard Tobacco. Lorillard, Inc. is a co-defendant
in four cases. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          <i>Engle
Progeny Cases</i>. <i>Engle </i>Progeny Cases are brought
by individuals who purport to be members of the decertified <i>Engle
</i>class. These cases are pending in a number of Florida courts. Lorillard
Tobacco is a defendant in approximately 3,200 <i>Engle </i>Progeny
Cases. Lorillard, Inc. is a co-defendant in approximately 700 cases. Many
of the cases have been filed on behalf of multiple class members, and approximately
8,625 individual smokers are asserting claims in the pending cases. </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          <i>West
Virginia Individual Personal Injury Cases</i>. West Virginia Individual
Personal Injury Cases are brought by individuals who allege cancer or other
health effects caused by smoking cigarettes, by using smokeless tobacco products,
or by addiction to cigarette smoking. The cases are pending in a single West
Virginia court and have been consolidated for trial. Lorillard Tobacco is
a defendant in approximately 55 of the 730 pending cases that are part of
this proceeding. Lorillard, Inc. is not a defendant in any of these cases.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          <i>Flight
Attendant Cases</i>. Flight Attendant Cases are brought by non-smoking
flight attendants alleging injury from exposure to environmental smoke in
the cabins of aircraft. Plaintiffs in these cases may not seek punitive damages
for injuries that arose prior to January 15, 1997. Lorillard Tobacco
is a defendant in each of the approximately 2,625 pending Flight Attendant
Cases. Lorillard, Inc. is not a defendant in any of these cases. The time
for filing Flight Attendant Cases expired during 2000 and no additional cases
in this category may be filed. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <i>Class Action
Cases</i>. Class Action Cases are purported to be brought on
behalf of large numbers of individuals for damages allegedly caused by smoking.
Nine of these cases are pending against Lorillard Tobacco. Lorillard, Inc.
is a co-defendant in two of these nine cases. Two of the nine cases assert
claims on behalf of purchasers of “light” cigarettes.
Lorillard, Inc. is not a defendant in either of these cases. Neither Lorillard
Tobacco nor Lorillard, Inc. is a defendant in the approximately 30 additional
“lights” class actions that are pending against other
cigarette manufacturers. </div> <!-- Folio --> <!-- /Folio
--> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times
New Roman',Times,serif"> <div align="left" style="font-size: 10pt; margin-top:
6pt">          <i>Reimbursement
Cases</i>. Reimbursement Cases are brought by or on behalf of entities
who seek reimbursement of expenses incurred in providing health care to individuals
who allegedly were injured by smoking. Plaintiffs in these cases have included
the U.S. federal government, U.S. state and local governments, foreign governmental
entities, hospitals or hospital districts, American Indian tribes, labor unions,
private companies and private citizens. Four such cases are pending against
Lorillard Tobacco and other cigarette manufacturers in the United States and
one such case is pending in Israel. Lorillard, Inc. is a co-defendant in two
of the cases pending in the United States. Plaintiffs in the case in Israel
have attempted to assert claims against Lorillard, Inc. </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          Included
in this category is the suit filed by the federal government, <i>United
States of America v. Philip Morris USA</i>, <i>Inc.</i>,
<i>et al.</i>, that sought return of profits and injunctive relief.
In August 2006, the trial court issued its verdict and granted injunctive
relief. The verdict did not award monetary damages. During May 2009,
the verdict was largely affirmed by an appellate court. See “—Reimbursement
Cases” below. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <i>Filter
Cases</i>. In addition to the above, Filter Cases are brought by individuals,
including former employees of Lorillard Tobacco, who seek damages resulting
from their alleged exposure to asbestos fibers that were incorporated into
filter material used in one brand of cigarettes manufactured by Lorillard
Tobacco for a limited period of time ending more than 50 years ago.
Lorillard Tobacco is a defendant in 33 such cases, including two cases in
which Lorillard, Inc. is a co-defendant. Lorillard, Inc. is also a defendant
in an additional Filter Case, in which Lorillard Tobacco is not a defendant.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          In
addition, Lorillard Tobacco and Lorillard, Inc. are named as defendants in
one case in which it is alleged that a fire caused by a Lorillard cigarette
led to an individual’s death. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          Plaintiffs
assert a broad range of legal theories in these cases, including, among others,
theories of negligence, fraud, misrepresentation, strict liability, breach
of warranty, enterprise liability (including claims asserted under the federal
Racketeering Influenced and Corrupt Organizations Act (“RICO”)),
civil conspiracy, intentional infliction of harm, injunctive relief, indemnity,
restitution, unjust enrichment, public nuisance, claims based on antitrust
laws and state consumer protection acts, and claims based on failure to warn
of the harmful or addictive nature of tobacco products. </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          Plaintiffs
in most of the cases seek unspecified amounts of compensatory damages and
punitive damages, although some seek damages ranging into the billions of
dollars. Plaintiffs in some of the cases seek treble damages, statutory damages,
disgorgement of profits, equitable and injunctive relief, and medical monitoring,
among other damages. </div> <div align="left" style="font-size: 10pt;
margin-top: 6pt">          <b><i>Conventional
Product Liability Cases</i></b> </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          As
of July 2009, approximately 155 cases are pending against cigarette
manufacturers in the United States. Lorillard Tobacco is a defendant in approximately
35 of these cases. Lorillard, Inc. is a co-defendant in four of the pending
cases. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          Since
January 1, 2007, verdicts have been returned in three cases. Neither
Lorillard Tobacco nor Lorillard, Inc. was a defendant in any of these trials.
A defense verdict was returned in one of the trials, and a jury found in favor
of the plaintiffs and awarded damages in the other two trials. The defendants
in the latter cases are pursuing appeals. In rulings addressing cases tried
in earlier years, some appellate courts have reversed verdicts returned in
favor of the plaintiffs while other judgments that awarded damages to smokers
have been affirmed on appeal. Manufacturers have exhausted their appeals and
have been required to pay damages to plaintiffs in ten individual cases in
recent years. Punitive damages were paid to the smokers in four of the ten
cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to these
ten matters. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          As
of July 27, 2009, trial was underway in two Conventional Product
Liability Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant
in these cases. Some of the cases pending against cigarette manufacturers
are scheduled for trial in 2009. Neither Lorillard Tobacco nor Lorillard,
Inc. is a defendant in those cases. Trial dates are subject to change. </div>
<!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK
--> <div style="font-family: 'Times New Roman',Times,serif"> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          <b><i>Engle
Progeny Cases</i></b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          Plaintiffs
are individuals who allege they or their decedents are former members of <i>Engle</i>,
a class action case that was pending in Florida. The 2006 ruling by the Florida
Supreme Court that ordered decertification of the <i>Engle </i>class
also permitted former class members to file individual actions, including
claims for punitive damages. The court further held that these individuals
are entitled to rely on a number of the jury’s findings in favor
of the plaintiffs in the first phase of the <i>Engle </i>trial.
The time period for filing <i>Engle </i>Progeny Cases expired
in January 2008 and no additional cases may be filed. During 2009,
the Florida Supreme Court rejected a petition that sought to extend the time
for purported class members to file an additional lawsuit. </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          Lorillard
Tobacco is a defendant in approximately 3,200 cases filed by individuals who
allege they or their decedents were members of the <i>Engle </i>class.
Lorillard, Inc. is a co-defendant in approximately 700 of the pending cases.
Some of the suits are on behalf of multiple plaintiffs. Claims have been asserted
by or on behalf of the estates of approximately 8,625 former class members
in these 3,200 cases. In some cases, spouses of alleged former class members
have also brought derivative claims. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          The
<i>Engle </i>Progeny Cases are pending in various Florida state
and federal courts. Some of these courts have issued rulings that address
whether these individuals are entitled to rely on a number of the jury’s
findings in favor of the plaintiffs in the first phase of the <i>Engle
</i>trial. Some of these decisions have led to pending petitions for
appeal. The U.S. Court of Appeals for the Eleventh Circuit agreed to review
trial court rulings determining how courts should apply the Florida Supreme
Court’s ruling regarding the <i>Engle </i>jury’s
first phase verdict. </div> <div align="left" style="font-size: 10pt;
margin-top: 6pt">          Lorillard
Tobacco is a defendant in several <i>Engle </i>Progeny Cases that
have been placed on courts’ 2009 trial calendars or in which specific
2009 trial dates have been set. Lorillard, Inc. is a defendant in some of
these cases. Trial schedules are subject to change and it is not possible
to predict how many of the cases pending against Lorillard Tobacco or Lorillard,
Inc. will be tried during 2009. It also is not possible to predict whether
some courts will implement procedures that consolidate multiple <i>Engle
</i>Progeny Cases for trial. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          As
of July 27, 2009, trial was underway in two <i>Engle </i>Progeny
Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in these
cases. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          Verdicts
have been returned in seven <i>Engle </i>Progeny Cases since the
Florida Supreme Court issued its 2006 ruling that permitted members of the
<i>Engle </i>class to bring individual lawsuits. Neither Lorillard
Tobacco nor Lorillard, Inc. was a defendant in these seven trials. In two
of the seven trials, juries awarded actual damages and punitive damages. The
punitive damages awards were $5 million in one of the cases and $25 million
in the other. In two other trials, juries awarded only actual damages. In
the three other trials, juries found in favor of the defendants that the plaintiffs
were not former <i>Engle </i>class members. As of July 27,
2009, appeals were on file in four of the cases,<u></u> while
the defendant’s post-trial motion had not been ruled on in the fifth
case. In the two remaining cases, plaintiffs chose not to appeal the verdicts
for the defendants.<u></u> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          In
a case tried prior to the Florida Supreme Court’s 2006 decision
permitting members of the <i>Engle </i>class to bring individual
lawsuits, one Florida court allowed the plaintiff to rely at trial on certain
of the <i>Engle </i>jury’s findings. That trial resulted
in a verdict for the plaintiffs in which they were awarded approximately $25 million
in actual damages. Neither Lorillard Tobacco nor Lorillard, Inc. was a party
to this case. The defendants in this case are pursuing an appeal of the judgment,
which was not entered until 2008. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          In
June 2009, Florida amended the security requirements for a stay of
execution of any judgment during the pendency of appeal in <i>Engle
</i>Progeny Cases. The amended statute provides for the amount of security
for individual <i>Engle </i>Progeny Cases to vary within prescribed
limits based on the number of adverse judgments that are pending on appeal
at a given time. The required security decreases as the number of appeals
increases to ensure that the total security posted or deposited does not exceed
$200 million in the aggregate. This amended statute applies to all
judgments entered on or after June 16, 2009 and expires on December 31,
2012. </div> <!-- Folio --> <!-- /Folio --> </div>
<!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">          <b><i>West
Virginia Individual Personal Injury Cases</i></b> </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The
proceeding known as “West Virginia Individual Personal Injury Cases”
consolidates for trial in a single West Virginia court a number of cases that
have been filed against cigarette manufacturers, including Lorillard Tobacco.
The order that consolidated the cases, among other things, permitted only
those cases filed by September 2000 to participate in the consolidated
trial. As a result, no additional cases may be part of this proceeding. </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Approximately
1,250 cases became part of this proceeding, and Lorillard Tobacco was named
in all but a few of them. Lorillard, Inc. is not a defendant in any of these
cases. More than 500 of the cases have been dismissed in their entirety. Lorillard
Tobacco has been dismissed from approximately 650 additional cases because
those plaintiffs did not submit evidence that they had smoked a Lorillard
Tobacco product. These 650 additional cases remain pending against other cigarette
manufacturers and some or all the dismissals of Lorillard Tobacco could be
contested in subsequent appeals noticed by the plaintiffs. </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          Approximately
730 cases are pending. Lorillard Tobacco is a defendant in approximately 55
of the pending cases. The court has entered a trial plan that calls for a
multi-phase trial. The first phase of trial is scheduled to begin on February 1,
2010. Trial dates are subject to change. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          <b><i>Flight
Attendant Cases</i></b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          Approximately
2,625 Flight Attendant Cases are pending. Lorillard Tobacco and three other
cigarette manufacturers are the defendants in each of these matters. Lorillard,
Inc. is not a defendant in any of these cases. These suits were filed as a
result of a settlement agreement by the parties, including Lorillard Tobacco,
in <i>Broin v. Philip Morris Companies</i>, <i>Inc.</i>,
<i>et al.</i> (Circuit Court, Miami-Dade County, Florida, filed
October 31, 1991), a class action brought on behalf of flight attendants
claiming injury as a result of exposure to environmental tobacco smoke. The
settlement agreement, among other things, permitted the plaintiff class members
to file these individual suits. These individuals may not seek punitive damages
for injuries that arose prior to January 15, 1997. The period for
filing Flight Attendant Cases expired during 2000 and no additional cases
in this category may be filed. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          The
judges that have presided over the cases that have been tried have relied
upon an order entered during October 2000 by the Circuit Court of
Miami-Dade County, Florida. The October 2000 order has been construed
by these judges as holding that the flight attendants are not required to
prove the substantive liability elements of their claims for negligence, strict
liability and breach of implied warranty in order to recover damages. The
court further ruled that the trials of these suits are to address whether
the plaintiffs’ alleged injuries were caused by their exposure to
environmental tobacco smoke and, if so, the amount of damages to be awarded.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          Lorillard
Tobacco was a defendant in each of the eight flight attendant cases in which
verdicts have been returned. Defendants have prevailed in seven of the eight
trials. In one of the seven cases in which a defense verdict was returned,
the court granted plaintiff’s motion for a new trial and, following
appeal, the case has been returned to the trial court for a second trial.
The six remaining cases in which defense verdicts were returned are concluded.
In the single trial decided for the plaintiff, <i>French v. Philip Morris
Incorporated</i>, <i>et al.</i>, the jury awarded $5.5 million
in damages. The court, however, reduced this award to $500,000. This verdict,
as reduced by the trial court, was affirmed on appeal and the defendants have
paid the award. Lorillard Tobacco’s share of the judgment in this
matter, including interest, was approximately $60,000. In addition, Lorillard
Tobacco has paid its share of the attorneys’ fees, costs and post-judgment
interest awarded to the plaintiff’s counsel in this matter. During
2009, a Florida appellate court denied Lorillard Tobacco’s appeal
from an order granting interest on an award of attorneys’ fees Lorillard
Tobacco had previously paid. As a result of this ruling, Lorillard Tobacco
was ordered to pay approximately $315,000. Pursuant to an agreement with the
other defendants in this matter, Lorillard Tobacco paid approximately $28,000
and the other defendants paid the remainder.<u></u> </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          As
of July 27, 2009, none of the flight attendant cases are scheduled
for trial. Trial dates are subject to change. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          <b><i>Class Action
Cases</i></b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          Lorillard
Tobacco is a defendant in nine pending cases. Lorillard, Inc. is a co-defendant
in two of these cases. In most of the pending cases, plaintiffs seek class
certification on behalf of groups of cigarette smokers, or the estates of
deceased cigarette smokers, who reside in the state in which the case was
filed. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          Cigarette
manufacturers, including Lorillard Tobacco and Lorillard, Inc., have defeated
motions for class certification in a total of 36 cases, 13 of which were in
state court and 23 of which were in federal court. Motions for class certification
have also been ruled upon in some of the “lights” cases
or in other class actions to which neither Lorillard Tobacco nor Lorillard,
Inc. was a party. In some of these cases, courts have denied class certification
to the plaintiffs, while classes have been certified in other matters. </div>
<!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK
--> <div style="font-family: 'Times New Roman',Times,serif"> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          <b><i>The
Scott Case</i></b><i>. </i>In one of the class actions
pending against Lorillard Tobacco, <i>Scott v. The American Tobacco
Company</i>, <i>et al. </i>(District Court, Orleans Parish,
Louisiana, filed May 24, 1996), the members of the class have been
awarded damages. The defendants, including Lorillard Tobacco, have noticed
an appeal from this award to the Louisiana Court of Appeal, Fourth Circuit,
and argument has been scheduled for September 1, 2009. The appeal
is from the amended final judgment entered by the District Court in July 2008
that ordered defendants to pay approximately $264 million to fund a court-supervised
cessation program for the members of the certified class. The amended final
judgment also awards post-judgment judicial interest that will continue to
accrue from June 2004 until the judgment either is paid or is reversed
on appeal. As of July 27, 2009, judicial interest totaled approximately
$100 million. Lorillard, Inc., which was a party to the case in the
past, is no longer a defendant in <i>Scott</i>. </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          During
1997, <i>Scott </i>was certified a class action on behalf of certain
cigarette smokers resident in the State of Louisiana who desire to participate
in medical monitoring or smoking cessation programs and who began smoking
prior to September 1, 1988, or who began smoking prior to May 24,
1996 and allege that defendants undermined compliance with the warnings on
cigarette packages. </div> <div align="left" style="font-size: 10pt;
margin-top: 6pt">          Trial
in <i>Scott </i>was heard in two phases. At the conclusion of
the first phase in July 2003, the jury rejected medical monitoring,
the primary relief requested by plaintiffs, and returned sufficient findings
in favor of the class to proceed to a Phase II trial on plaintiffs’
request for a statewide smoking cessation program. Phase II of the trial,
which concluded during May 2004, resulted in an award of $591 million
to fund cessation programs for Louisiana smokers. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          In
February 2007, the Louisiana Court of Appeal reduced the amount of
the award by approximately $328 million; struck an award of prejudgment
interest, which totaled approximately $440 million as of December 31,
2006; and limited class membership to individuals who began smoking by September 1,
1988, and whose claims accrued by September 1, 1988. In January 2008,
the Louisiana Supreme Court denied plaintiffs’ and defendants’
separate petitions for review. The U.S. Supreme Court denied defendants’
request that it review the case in May 2008. The case was returned
to the trial court, which subsequently entered the amended final judgment.
The defendants, including Lorillard Tobacco, have appealed the amended final
judgment. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          Should
the amended final judgment be sustained on appeal, Lorillard Tobacco’s
share of that judgment, including the award of post-judgment interest, has
not been determined. In the fourth quarter of 2007, Lorillard, Inc. recorded
a pretax provision of approximately $66 million for this matter which
was included in selling, general and administrative expenses on the consolidated
statements of income and in other liabilities on the consolidated balance
sheets. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          The
parties filed a stipulation in the trial court agreeing that an article of
Louisiana law required that the amount of the bond for the appeal be set at
$50 million for all defendants collectively. The parties further
agreed that the plaintiffs have full reservations of rights to contest in
the trial court the sufficiency of the bond on any grounds. Defendants collectively
posted a surety bond in the amount of $50 million, of which Lorillard
Tobacco secured 25%, or $12.5 million. While Lorillard Tobacco believes the
limitation on the appeal bond amount is valid as required by Louisiana law,
in the event of a successful challenge the amount of the appeal bond could
be set as high as 150% of the judgment and judicial interest combined. If
such an event occurred, Lorillard Tobacco’s share of the appeal
bond has not been determined. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <b><i>The
Engle Case</i></b><i>. </i>The case of <i>Engle
v. R.J. Reynolds Tobacco Co.</i>, <i>et al. </i>(Circuit
Court, Miami-Dade County, Florida, filed May 5, 1994), was certified
as a class action on behalf of Florida residents, and survivors of Florida
residents, who were injured or died from medical conditions allegedly caused
by addiction to smoking. During 1999 and 2000, a jury returned verdicts that,
among other things, awarded the certified class $145 billion in punitive
damages, including $16.3 billion against Lorillard Tobacco. During
2006, the Florida Supreme Court vacated the punitive damages award, determined
that the case could not proceed further as a class action and ordered decertification
of the class. The trial court entered orders during 2008 that formally decertified
the class. During July 2008, plaintiff voluntarily dismissed the
case and <i>Engle </i>is no longer pending. </div> <!--
Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div
style="font-family: 'Times New Roman',Times,serif"> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          The
Florida Supreme Court’s 2006 decision also reinstated awards of
actual damages to two of the three individuals whose claims were heard during
the second phase of the <i>Engle </i>trial. One individual was
awarded $3 million and the second was awarded $4 million.
Both individuals informed the court that they would not seek punitive damages.
These verdicts were paid during February 2008. Lorillard Tobacco’s
payment was approximately $3 million for the verdicts and the interest
that accrued since November 2000. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          <b><i>Other
Class Action Cases</i></b>. In one of the cases pending
against Lorillard Tobacco, <i>Brown v. The American Tobacco Company</i>,
<i>Inc.</i>, <i>et al. </i>(Superior Court, San Diego
County, California, filed June 10, 1997), the court initially certified the
case as a class action but it subsequently granted defendants’ motion
for class decertification. During 2009, the California Supreme Court vacated
the class decertification order. Should this ruling not be modified in response
to defendants’ pending petition for reconsideration, <i>Brown
</i>will be returned to the trial court for further activity. While
it is not possible to predict future activity in <i>Brown</i>,
a new class certification order could be entered. The class previously certified
in <i>Brown </i>was composed of residents of California who smoked
at least one of defendants’ cigarettes between June 10,
1993 and April 23, 2001 and who were exposed to defendants’
marketing and advertising activities in California. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          “<b><i>Lights”
Class Actions</i></b><i>. </i>Cigarette manufacturers
are defendants in another group of approximately 30 cases in which plaintiffs’
claims are based on the allegedly fraudulent marketing of “light”
or “ultra-light” cigarettes. Classes have been certified
in some of these matters. In one of the pending “lights”
cases, <i>Good v. Altria Group</i>, <i>Inc.</i>, <i>et
al.</i>, the U.S. Supreme Court ruled that neither the Federal Cigarette
Labeling and Advertising Act nor the Federal Trade Commission’s
regulation of cigarettes’ tar and nicotine disclosures preempts
(or bars) some of plaintiffs’ claims. Lorillard Tobacco is a defendant
in one class action in which plaintiffs claims are limited to purchasers of
“light” cigarettes, <i>Schwab v. Philip Morris USA</i>,
<i>Inc.</i>, <i>et al</i>., which is discussed below.
In another case, <i>Cleary v. Philip Morris Incorporated, et al.</i>,
plaintiffs were permitted to amend their complaint in an existing class action
in order to assert claims on behalf of a subclass of individuals who purchased
“light” cigarettes from the defendants, including Lorillard
Tobacco. During 2009, the court dismissed the “light”
cigarettes claims asserted against Lorillard Tobacco. As of July 27,
2009, the deadline for plaintiffs to appeal this ruling had not expired. Lorillard,
Inc. is not a party to any of the purported “lights” class
actions. A petition has been filed with the Judicial Panel on Multidistrict
Litigation that proposes the transfer and consolidation of “lights”
class actions in federal courts into a specially constituted court for pretrial
proceedings. The eleven cases identified by the plaintiffs include the <i>Cleary</i>
and <i>Schwab </i>cases that are pending against Lorillard Tobacco.
The Judicial Panel is scheduled to hear argument of this application on July 30,
2009.<u></u> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <b><i>The
Schwab Case</i></b><i>. </i>In the case of <i>Schwab
v. Philip Morris USA</i>, <i>Inc.</i>, <i>et al. </i>(U.S.
District Court, Eastern District, New York, filed May 11, 2004),
plaintiffs base their claims on defendants’ alleged violations of
the RICO statute in the manufacture, marketing and sale of “light”
cigarettes. Plaintiffs estimated damages to the class in the hundreds of billions
of dollars. Any damages awarded to the plaintiffs based on defendants’
violation of the RICO statute would be trebled. In September 2006,
the court granted plaintiffs’ motion for class certification and
certified a nationwide class action on behalf of purchasers of “light”
cigarettes. In March 2008, the Second Circuit Court of Appeals reversed
the class certification order and ruled that the case may not proceed as a
class action. <i>Schwab </i>has been returned to the U.S. District
Court for the Eastern District of New York for further proceedings, but the
future activity in this matter, if any, is not known. Lorillard, Inc. is not
a party to this case. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <b><i>Reimbursement
Cases</i></b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          Lorillard
Tobacco is a defendant in the four Reimbursement Cases that are pending in
the U.S. and it has been named as a party to a case in Israel. Lorillard,
Inc. is a co-defendant in two of the four cases pending in the U.S. Plaintiffs
in the case in Israel have attempted to assert claims against Lorillard, Inc.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          <b><i>U.S.
Federal Government Action</i></b>. In August 2006, the
U.S. District Court for the District of Columbia issued its final judgment
and remedial order in the federal government’s reimbursement suit
(<i>United States of America v. Philip Morris USA</i>, <i>Inc.</i>,
<i>et al</i>., U.S. District Court, District of Columbia, filed
September 22, 1999). The verdict concluded a bench trial that began
in September 2004. Lorillard Tobacco, other cigarette manufacturers, two parent
companies and two trade associations are defendants in this action. Lorillard,
Inc. is not a party to this case. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          In
its 2006 verdict, the court determined that the defendants, including Lorillard
Tobacco, violated certain provisions of the RICO statute, that there was a
likelihood of present and future RICO violations, and that equitable relief
was warranted. The government was not awarded monetary damages. The equitable
relief included permanent injunctions that prohibit the defendants, including
Lorillard Tobacco, from engaging in any act of racketeering, as defined under
RICO; from making any material false or deceptive statements concerning cigarettes;
from making any express or implied statement about health on cigarette packaging
or promotional materials (these prohibitions include a ban on using such descriptors
as “low tar,” “light,” “ultra-light,”
“mild” or “natural”); and from making
any statements that “low tar,” “light,”
“ultra-light,” “mild” or “natural”
or low-nicotine cigarettes may result in a reduced risk of disease. The final
judgment and remedial order also requires the defendants, including Lorillard
Tobacco, to make corrective statements on their websites, in certain media,
in point-of-sale advertisements, and on cigarette package “inserts”
concerning: the health effects of smoking; the addictiveness of smoking; that
there are no significant health benefits to be gained by smoking “low
tar,” “light,” “ultra-light,”
“mild” or “natural” cigarettes; that
cigarette design has been manipulated to ensure optimum nicotine delivery
to smokers; and that there are adverse effects from exposure to secondhand
smoke. If the final judgment and remedial order are not modified or vacated
on appeal, the costs to Lorillard Tobacco for compliance could exceed $10 million.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          Following
trial, the defendants, the government and several intervenors noticed appeals
to the Circuit Court of Appeals for the District of Columbia. In May 2009,
a three judge panel upheld substantially all of the District Court’s
final judgment and remedial order. The deadline for the parties or the intervenors
to ask the Court of Appeals to reconsider its decision is July 31,
2009. Defendants received a stay of the judgment and remedial order from the
Court of Appeals that remains in effect while the appeal is pending. </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          While
trial was underway, the Court of Appeals ruled that plaintiff may not seek
to recover profits earned by the defendants. Prior to trial, the government
had claimed that it was entitled to approximately $280 billion from
the defendants for its claim to recover profits earned by the defendants.
In the most recent appeal, recovery of profits was not considered but the
issue may however be considered by the entire Court of Appeals or by the U.S.
Supreme Court, should either party or one or more intervenors in the case
seek to further appeal this decision. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <b><i>Settlement
of State Reimbursement Litigation</i></b> </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          On
November 23, 1998, Lorillard Tobacco, Philip Morris Incorporated,
Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco
Company (the “Original Participating Manufacturers”) entered
into the Master Settlement Agreement (“MSA”) with 46 states,
the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S.
Virgin Islands, American Samoa and the Commonwealth of the Northern Mariana
Islands to settle the asserted and unasserted health care cost recovery and
certain other claims of those states. These settling entities are generally
referred to as the “Settling States.” The Original Participating
Manufacturers had previously settled similar claims brought by Mississippi,
Florida, Texas and Minnesota, which together with the MSA are referred to
as the “State Settlement Agreements.” </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          The
State Settlement Agreements provide that the agreements are not admissions,
concessions or evidence of any liability or wrongdoing on the part of any
party, and were entered into by the Original Participating Manufacturers to
avoid the further expense, inconvenience, burden and uncertainty of litigation.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          Lorillard
recorded pretax charges for its obligations under the State Settlement Agreements
of $307 million and $554 million ($193 million
and $347 million after taxes) for the three months and six months
ended June 30, 2009, respectively, and $293 million and
$550 million ($178 million and $340 million after
taxes) for the three months and six months ended June 30, 2008, respectively.
Lorillard’s portion of ongoing adjusted payments and legal fees
is based on its share of domestic cigarette shipments in the year preceding
that in which the payment is due. Accordingly, Lorillard records its portions
of ongoing settlement payments as part of cost of manufactured products sold
as the related sales occur. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          The
State Settlement Agreements require that the domestic tobacco industry make
annual payments of $9.4 billion, subject to adjustment for several
factors, including inflation, market share and industry volume. In addition,
the domestic tobacco industry is required to pay settling plaintiffs’
attorneys’ fees, subject to an annual cap of $500 million,
as well as an additional amount of up to $125 million in each year
through 2008. These payment obligations are the several and not joint obligations
of each settling defendant. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          The
State Settlement Agreements also include provisions relating to significant
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to tobacco control and under- age use
laws, and other provisions. Lorillard Tobacco and the other Original Participating
Manufacturers have notified the States that they intend to seek an adjustment
in the amount of payments made in 2003 pursuant to a provision in the MSA
that permits such adjustment if the companies can prove that the MSA was a
significant factor in their loss of market share to companies not participating
in the MSA and that the States failed to diligently enforce certain statutes
passed in connection with the MSA. If the Original Participating Manufacturers
are ultimately successful, any adjustment would be reflected as a credit against
future payments by the Original Participating Manufacturers under the agreement.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          From
time to time, lawsuits have been brought against Lorillard Tobacco and other
participating manufacturers to the MSA, or against one or more of the states,
challenging the validity of the MSA on certain grounds, including as a violation
of the antitrust laws. See "—MSA-Related Antitrust Suit”
below. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          In
addition, in connection with the MSA, the Original Participating Manufacturers
entered into an agreement to establish a $5.2 billion trust fund
payable between 1999 and 2010 to compensate the tobacco growing communities
in 14 states (the “Trust”). Payments to the Trust will
no longer be required as a result of an assessment imposed under a new federal
law repealing the federal supply management program for tobacco growers, although
the states of Maryland and Pennsylvania are contending that payments under
the Trust should continue to growers in those states since the new federal
law did not cover them, and the matter is being litigated. Under the new law,
enacted in October 2004, tobacco quota holders and growers will be
compensated with payments totaling $10.1 billion, funded by an assessment
on tobacco manufacturers and importers. Payments to qualifying tobacco quota
holders and growers commenced in 2005. </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          Lorillard
believes that the State Settlement Agreements will materially adversely affect
its cash flows and operating income in future years. The degree of the adverse
impact will depend, among other things, on the rates of decline in domestic
cigarette sales in the premium price and discount price segments, Lorillard’s
share of the domestic premium price and discount price cigarette segments,
and the effect of any resulting cost advantage of manufacturers not subject
to significant payment obligations under the State Settlement Agreements.
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          <b><i>Filter
Cases</i></b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          In
addition to the above, claims have been brought against Lorillard Tobacco
and Lorillard, Inc. by individuals who seek damages resulting from their alleged
exposure to asbestos fibers that were incorporated into filter material used
in one brand of cigarettes manufactured by Lorillard Tobacco for a limited
period of time ending more than 50 years ago. Lorillard Tobacco is
a defendant in 33 such cases. Lorillard, Inc. is a defendant in three Filter
Cases, including two that also name Lorillard Tobacco. Since January 1,
2007, Lorillard Tobacco has paid, or has reached agreement to pay, a total
of approximately $17.4 million in settlements to finally resolve
approximately 75 claims. The related expense was recorded in selling, general
and administrative expenses on the consolidated statements of income. In the
only such case tried since January 1, 2007, a jury in the District
Court of Bexar County, Texas, returned a verdict for Lorillard Tobacco during
September 2008 in the case of <i>Young v. Lorillard Tobacco
Company</i>. As of July 27, 2009, six of the Filter Cases were
scheduled for trial. Trial dates are subject to change. </div> <div
align="left" style="font-size: 10pt; margin-top: 12pt"><b>Tobacco-Related
Antitrust Cases</b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          <i>Indirect
Purchaser Suits</i>. Approximately 30 antitrust suits were filed in
2000 and 2001 on behalf of putative classes of consumers in various state
courts against cigarette manufacturers, including Lorillard Tobacco. The suits
all alleged that the defendants entered into agreements to fix the wholesale
prices of cigarettes in violation of state antitrust laws which permit indirect
purchasers, such as retailers and consumers, to sue under price fixing or
consumer fraud statutes. More than 20 states permit such suits. Lorillard,
Inc. was not named as a defendant in any of these cases. Lorillard Tobacco
was a defendant in all but one of these indirect purchaser cases. Three indirect
purchaser suits, in New York, Florida and Michigan, thereafter were dismissed
by courts in those states, and the plaintiffs withdrew their appeals. The
actions in all other states, except for New Mexico and Kansas, were voluntarily
dismissed. </div> <div align="left" style="font-size: 10pt; margin-top:
6pt">          In
the Kansas case, the District Court of Seward County certified a class of
Kansas indirect purchasers in 2002. In July 2006, the Court issued
an order confirming that fact discovery was closed, with the exception of
privilege issues that the Court determined, based on a Special Master’s
report, justified further fact discovery. In October 2007, the Court
denied all of the defendants’ privilege claims, and the Kansas Supreme
Court thereafter denied a petition seeking to overturn that ruling. Discovery
currently is ongoing. No date has been set by the Court for dispositive motions
and trial. </div> <!-- Folio --> <!-- /Folio --> </div>
<!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">          A
decision granting class certification in New Mexico was affirmed by the New
Mexico Court of Appeals in February 2005. As ordered by the trial
court, class notice was sent out in October 2005. The New Mexico plaintiffs
were permitted to rely on discovery produced in the Kansas case. In June 2006,
the New Mexico trial court granted summary judgment to all defendants, and
the suit was dismissed. An appeal was filed by the plaintiffs in August 2006.
The New Mexico Court of Appeals affirmed dismissal of all claims against Lorillard
Tobacco in December 2008, although claims against its major competitors
were reinstated. Plaintiff has not sought to reinstate the claims against
Lorillard Tobacco and the time for such action has expired. Accordingly, the
New Mexico suit has now been concluded as against Lorillard Tobacco. </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          <i>MSA-Related
Antitrust Suit. </i>In October 2008, Lorillard Tobacco was
named as a defendant in an action filed in the Western District of Kentucky,
<i>Vibo Corporation, Inc. d/b/a/ General Tobacco v. Conway, et al</i>.
The suit alleges that the named defendants, which include 52 state and territorial
attorneys general and 19 tobacco manufacturers, violated the federal Sherman
Antitrust Act of 1890 (the “Sherman Act”) by entering
into and participating in the MSA. The plaintiff alleges that MSA participants,
like it, that were not in existence when the MSA was executed in 1998 but
subsequently became participants, are unlawfully required to pay significantly
more sums to the states than companies that joined the MSA within 90 days
after its execution. In addition to the Sherman Act claim, plaintiff has raised
a number of constitutional claims against the states. Plaintiff seeks a declaratory
judgment in its favor on all claims, an injunction against the continued enforcement
of the MSA, treble damages against the tobacco manufacturer defendants, including
Lorillard Tobacco and other manufacturer defendants, and damages and injunctive
relief against the states, including contract recession and restitution. In
December 2008, the court dismissed the complaint against all defendants,
including Lorillard Tobacco. The court has not yet entered its final judgment.
Accordingly, the time for plaintiff to appeal the decision has not yet expired.
</div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Defenses</b>
</div> <div align="left" style="font-size: 10pt; margin-top: 6pt">          Each
of Lorillard Tobacco and Lorillard, Inc. believes that it has valid defenses
to the cases pending against it as well as valid bases for appeal should any
adverse verdicts be returned against either of them. As of July 27,
2009, Lorillard Tobacco was a defendant in approximately 5,925 pending product
liability cases, and Lorillard, Inc. was a co-defendant in approximately 710
of these cases. While Lorillard Tobacco and Lorillard, Inc. intend to defend
vigorously all tobacco products liability litigation, it is not possible to
predict the outcome of any of this litigation. Litigation is subject to many
uncertainties. Plaintiffs have prevailed in several cases, as noted above.
It is possible that one or more of the pending actions could be decided unfavorably
as to Lorillard Tobacco, Lorillard, Inc. or the other defendants. Lorillard
Tobacco and Lorillard, Inc. may enter into discussions in an attempt to settle
particular cases if either believe it is appropriate to do so. </div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Neither
Lorillard Tobacco nor Lorillard, Inc. can predict the outcome of pending litigation.
Some plaintiffs have been awarded damages from cigarette manufacturers at
trial. While some of these awards have been overturned or reduced, other damages
awards have been paid after the manufacturers have exhausted their appeals.
These awards and other litigation activities against cigarette manufacturers
continue to receive media attention. In addition, health issues related to
tobacco products also continue to receive media attention. It is possible,
for example, that the 2006 verdict in <i>United States of America v.
Philip Morris USA</i>, <i>Inc.</i>, <i>et al.</i>,
which made many adverse findings regarding the conduct of the defendants,
including Lorillard Tobacco, could form the basis of allegations by other
plaintiffs or additional judicial findings against cigarette manufacturers.
In addition, the ruling in <i>Good v. Altria Group, Inc.</i>,
<i>et al. </i>could result in further “lights”
litigation. Any such developments could have an adverse effect on the ability
of Lorillard Tobacco or Lorillard, Inc. to prevail in smoking and health litigation
and could influence the filing of new suits against Lorillard Tobacco or Lorillard,
Inc. Lorillard Tobacco and Lorillard, Inc. also cannot predict the type or
extent of litigation that could be brought against either of them, or against
other cigarette manufacturers, in the future. </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          Lorillard
records provisions in the consolidated financial statements for pending litigation
when it determines that an unfavorable outcome is probable and the amount
of loss can be reasonably estimated. Except for the impact of the State Settlement
Agreements and <i>Scott </i>as described above, management is
unable to make a meaningful estimate of the amount or range of loss that could
result from an unfavorable outcome of material pending litigation and, therefore,
no material provision has been made in the consolidated financial statements
for any unfavorable outcome. It is possible that Lorillard’s results
of operations or cash flows in a particular quarterly or annual period or
its financial position could be materially adversely affected by an unfavorable
outcome or settlement of certain pending litigation. </div> <div
align="left" style="font-size: 10pt; margin-top: 12pt"><b>Indemnification
Obligations</b> </div> <div align="left" style="font-size:
10pt; margin-top: 6pt">          In
connection with the Separation Lorillard entered into a separation agreement
with Loews (the “Separation Agreement”) and agreed to
indemnify Loews and its officers, directors, employees and agents against
all costs and expenses arising out of third party claims (including, without
limitation, attorneys’ fees, interest, penalties and costs of investigation
or preparation for defense), judgments, fines, losses, claims, damages, liabilities,
taxes, demands, assessments and amounts paid in settlement based on, arising
out of or resulting from, among other things, Loews’ ownership of
or the operation of Lorillard and its assets and properties, and its operation
or conduct of its businesses at any time prior to or following the Separation
(including with respect to any product liability claims). </div> <div
align="left" style="font-size: 10pt; margin-top: 6pt">          Loews
is a defendant in three pending product liability cases. One of these is a
Reimbursement Case in Israel, while the two other cases are purported Class Action
Cases on file in U.S. courts. Lorillard Tobacco also is a defendant in each
of the three product liability cases in which Loews is involved. Pursuant
to the Separation Agreement, Lorillard will be required to indemnify Loews
for the amount of any losses and any legal or other fees with respect to such
cases. </div> <div align="left" style="font-size: 10pt; margin-top:
12pt"><b>Other Litigation</b> </div> <div align="left"
style="font-size: 10pt; margin-top: 6pt">          Lorillard
is also party to other litigation arising in the ordinary course of business.
The outcome of this other litigation will not, in the opinion of management,
materially affect Lorillard’s results of operations or equity. </div>
</div> </body> </html> <!-- Begin Block
Tagged Note 12 - us-gaap:CommitmentsAndContingenciesDisclosureTextBlock-->
12. Legal Proceedings
Tobacco-Related
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