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<b><font style="font-family: 'Times New Roman', Times">18.  </font></b>
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<b><font style="font-family: 'Times New Roman', Times">Legal
Contingencies</font></b>
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<b>Tobacco Related Product Liability Litigation</b>
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As of February 22, 2010, approximately 11,235 product
liability cases are pending against cigarette manufacturers in
the United States. Lorillard Tobacco is a defendant in
approximately 10,275 of these cases. Lorillard, Inc. is a
co-defendant in approximately 710 cases. Approximately 7,600 of
these lawsuits are <i>Engle </i>Progeny Cases, described below,
which include approximately 4,400 <i>Engle </i>Progeny claims
initially asserted in a small number of multi-plaintiff actions
that were severed into separate lawsuits by one Florida federal
court during 2009.
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The pending product liability cases are composed of the types of
cases listed below. Pending cases are those in which the
Lorillard, Inc. or Lorillard Tobacco have been joined to the
litigation by either receipt of service of process, or execution
of a waiver thereof, and no final, non-appealable judgment has
been entered.
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<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 February 22, 2010,
approximately 140 cases are pending against cigarette
manufacturers, including approximately 30 cases against
Lorillard Tobacco. Lorillard, Inc. is a co-defendant in three
cases.
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<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 7,600 <i>Engle </i>Progeny Cases. Lorillard, Inc.
is a co-defendant in approximately 700 cases. Some of the cases
have been filed on behalf of multiple class members. The time
period for filing <i>Engle </i>Progeny Cases expired in January
2008 and no additional cases may be filed.
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<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 50 of the 700 pending cases that are part of this
proceeding. Lorillard, Inc. is not a defendant in any of these
cases. The first phase of an anticipated three-phase trial of
these consolidated cases is scheduled to begin on June 1,
2010.
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<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 2,600
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.
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<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. Eight of
these cases are pending against Lorillard Tobacco. Lorillard,
Inc. is a co-defendant in two of these eight cases. One of the
eight cases asserts claims on behalf of purchasers of
“light” cigarettes. Lorillard, Inc. is not a defendant
in this case. Neither Lorillard Tobacco nor Lorillard, Inc. is a
defendant in the approximately 40 additional “lights”
class actions that are pending against other cigarette
manufacturers.
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<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.
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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. In May 2009, the verdict was
largely affirmed by an appellate court. In February 2010, the
parties petitioned the U.S. Supreme Court to review the
case. See “— Reimbursement Cases” below.
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<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 31 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.
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In addition, Lorillard Tobacco and Lorillard, Inc. were 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. That
matter was dismissed during February 2010 but the deadline for
plaintiff to pursue an appeal had not expired as of
February 22, 2010.
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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.
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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.
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<b><i><font style="font-family: 'Times New Roman', Times">Conventional
Product Liability Cases</font></i></b>
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As of February 22, 2010, approximately 140 cases are
pending against cigarette manufacturers in the United States.
Lorillard Tobacco is a defendant in approximately 30 of these
cases. Lorillard, Inc. is a co-defendant in three of the pending
cases.
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Since January 1, 2008, verdicts have been returned in three
cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a
defendant in any of these trials. Juries found in favor of the
plaintiffs in each of these three trials. In one of the trials,
the jury awarded actual damages. The two other cases were
re-trials ordered by appellate courts in which juries were
permitted to consider only the amount of punitive damages to
award. Both of these trials resulted in punitive damages
verdicts that awarded the plaintiffs $1.5 million in one of
the cases and $13.8 million in the other Appeals are
pending in two of the matters. In the third case, the deadline
for the defendant to pursue an appeal had not expired as of
February 22, 2010. 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 eleven individual cases
in recent years. Punitive damages were paid to the smokers in
five of the eleven cases. Neither Lorillard Tobacco nor
Lorillard, Inc. was a party to these eleven matters.
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As of February 22, 2010, trial was not underway in any of
the Conventional Product Liability Cases. Some cases are
scheduled for trial in 2010, including some in which Lorillard
Tobacco is a defendant. Trial dates are subject to change.
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<b><i><font style="font-family: 'Times New Roman', Times">Engle
Progeny Cases</font></i></b>
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In 2006, the Florida Supreme Court issued a ruling in a case
that had been 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, the case of <i>Engle v. R.J. Reynolds Tobacco
Co.</i>, <i>et al. </i>During a three-phase trial, a Florida
jury awarded actual damages to three individuals and
approximately $145 billion in punitive damages to the
certified class. In its 2006 decision, 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 Florida Supreme Court also
reinstated the actual damages awards to two of the three
individuals whose claims were heard during the one phase of the
<i>Engle </i>trial. These two awards totaled $7 million,
and both verdicts were paid in February 2008. Lorillard
Tobacco’s payment to these two individuals, including
interest, totaled approximately $3 million.
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The Florida Supreme Court’s 2006 ruling also permitted
<i>Engle </i>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. In 2009, the Florida Supreme Court rejected
a petition that sought to extend the time for purported class
members to file an additional lawsuit.
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Lorillard Tobacco is a defendant in approximately 7,600 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. Various courts
have entered orders severing the cases filed by multiple
plaintiffs into separate actions. During 2009, one Florida
federal court entered orders that severed the claims of
approximately 4,400 <i>Engle </i>Progeny plaintiffs, initially
asserted in a small number of multi-plaintiff actions, into
separate lawsuits. In some cases, spouses of alleged former
class members have also brought derivative claims.
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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 is reviewing
trial court rulings determining how courts should apply the
Florida Supreme Court’s ruling regarding the <i>Engle
</i>jury’s first phase verdict. In another case, an
intermediate appellate court denied a plaintiff’s request
to immediately certify an appeal to the Florida Supreme Court.
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<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
Lorillard Tobacco is a defendant in several <i>Engle </i>Progeny
Cases that have been placed on courts’ 2010 trial calendars
or in which specific 2010 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 2010. It also is not possible to predict
whether some courts will implement procedures that consolidate
multiple <i>Engle </i>Progeny Cases for trial. One of the cases
scheduled for trial in 2010 involves the claims of three
plaintiffs.
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As of February 22, 2010, trial was underway in one of the
<i>Engle </i>Progeny Cases.
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Verdicts have been returned in eleven <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. Juries awarded actual damages and punitive damages in
four of the trials. The four punitive damages awards were
$2 million, $5 million, $25 million and
$244 million. In four of the trials, juries’ awards
were limited to 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 February 22, 2010, appeals were on
file in six of the cases in which plaintiffs were awarded
damages, and defendants’ post-trial motions were pending in
two of the cases. Neither Lorillard Tobacco nor Lorillard, Inc.
was a defendant in these eleven trials.
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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.
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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.
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<b><i><font style="font-family: 'Times New Roman', Times">West
Virginia Individual Personal Injury Cases</font></i></b>
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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.
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Approximately 1,250 cases initially were part of this
proceeding, and Lorillard Tobacco was named in all but a few of
them. Lorillard, Inc. has not been 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.
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Approximately 700 cases are pending. Lorillard Tobacco is a
defendant in approximately 50 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 June 1, 2010.
Trial dates are subject to change.
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<b><i><font style="font-family: 'Times New Roman', Times">Flight
Attendant Cases</font></i></b>
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Approximately 2,600 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.
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The judges that have presided over the cases that have been
tried have relied upon an order entered in 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>
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</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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.
</div>
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</div>
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As of February 22, 2010, none of the flight attendant cases
are scheduled for trial. Trial dates are subject to change.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #ffffff">
<b><i><font style="font-family: 'Times New Roman', Times">Class Action
Cases</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
Lorillard Tobacco is a defendant in eight 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>
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</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
<i>The Scott Case.</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. The
court heard the appeal in September 2009, but had not issued a
ruling as of February 22, 2010. 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 February 22, 2010,
judicial interest totaled approximately $107 million.
Lorillard, Inc., which was a party to the case in the past, is
no longer a defendant in <i>Scott</i>.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 in May 2004, resulted in an award of
$591 million to fund cessation programs for Louisiana
smokers.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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, which is classified as restricted cash
within other assets on the consolidated balance sheet. 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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
<i>Other Class Action Cases.</i>  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 and <i>Brown </i>has been returned to the trial court for
further activity. While it is not possible to predict future
developments 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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
<i>“Lights”
Class Actions.  </i>Cigarette manufacturers are
defendants in another group of 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, Inc., et
al.</i>, which is discussed below. In another case,
<i>Cleary v. Philip Morris Incorporated, et al.</i>, a
court allowed plaintiffs to amend their complaint in an existing
class action to assert claims on behalf of a subclass of
individuals who purchased “light” cigarettes from the
defendants, but it subsequently dismissed the “light”
cigarettes claims asserted against Lorillard Tobacco. As of
February 22, 2010, 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.
</div>
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</div>
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Approximately 40 additional purported “lights” class
actions are pending against other cigarette manufacturers.
During 2009, the Judicial Panel on Multidistrict Litigation
consolidated various federal court “lights” class
actions pending against Philip Morris USA or Altria Group and
transferred those cases to the U.S. District Court of
Maine. As of February 22, 2010, 14 cases were part of the
consolidated proceeding. None of the cases pending against
Lorillard Tobacco or Lorillard, Inc. are part of the
consolidated proceeding.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
<i>The Schwab Case.</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 style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #ffffff">
<b><i><font style="font-family: 'Times New Roman', Times">Reimbursement
Cases</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 6pt; font-size: 1pt"> 
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<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
<i>U.S. Federal Government Action.</i>  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>
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</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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
<font style="white-space: nowrap">point-of-sale</font>
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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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. Defendants received a stay of the
judgment and remedial order from the Court of Appeals that
remained in effect while the appeal was pending. In September
2009, the Court of Appeals denied defendants’ rehearing
petitions as well as their motion to vacate those statements in
the appellate ruling that address defendants’ marketing of
“low tar” or “lights” cigarettes, to vacate
those parts of the trial court’s judgment on that issue,
and to remand the case with instructions to deny as moot the
government’s allegations and requested relief regarding
“lights” cigarettes. The Court of Appeals has stayed
its order that formally relinquishes jurisdiction of
defendants’ appeal pending the filing and disposition of
the government’s and the defendants’ petitions for
writ of certiorari to the U.S. Supreme Court. As of
February 22, 2010, the U.S. Supreme Court has not
announced whether it will grant review of any of the petitions
for writ of certiorari that were filed on February 19, 2010
by Lorillard Tobacco, the other defendants, the federal
government and the intervenors.
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<b>
<font style="font-family: 'Times New Roman', Times">
</font>
</b>
</div>
<div style="margin-top: 0pt; font-size: 1pt">
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<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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. Recovery of profits may be considered by the
U.S. Supreme Court in the pending appeal.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #ffffff">
<b><i><font style="font-family: 'Times New Roman', Times">Settlement
of State Reimbursement Litigation</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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.
Lorillard recorded pretax charges for its obligations under the
State Settlement Agreements of $280 million and
$1,128 million for the three and twelve months ended
December 31, 2009, respectively, and $263 million and
$1,117 million for the three and twelve months ended
December 31, 2008, respectively. Lorillard’s portion
of ongoing adjusted settlement 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 adjusted settlement
payments as part of cost of manufactured products sold as the
related sales occur.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 underage 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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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>
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</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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. 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 style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #ffffff">
<b><i><font style="font-family: 'Times New Roman', Times">Filter
Cases</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #ffffff">
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 31 such cases. Lorillard, Inc. is a
defendant in three Filter Cases, including two that also name
Lorillard Tobacco. Since January 1, 2008, Lorillard Tobacco
has paid, or has reached agreement to pay, a total of
approximately $12.9 million in settlements to finally
resolve approximately 60 claims. The related expense was
recorded in selling, general and administrative expenses on the
consolidated statements of income. Since January 1, 2008,
verdicts have been returned in two Filter Cases. During
September 2008, a jury in the District Court of Bexar County,
Texas, returned a verdict for Lorillard Tobacco in the case of
<i>Young v. Lorillard Tobacco Company</i>. Plaintiffs in
the <i>Young </i>case did not pursue an appeal and that matter
is concluded. During January 2010, a jury in the Superior Court
of California, Los Angeles County, returned a verdict for
Lorillard Tobacco in the case of <i>Cox v. Asbestos
Corporation, Ltd., et al. </i>In the case of <i>Cox</i>, the
deadline for plaintiffs to pursue an appeal had not expired as
of February 22, 2010. As of February 22, 2010, ten of
the Filter Cases were scheduled for trial. Trial dates are
subject to change.
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<b><font style="font-family: 'Times New Roman', Times">Tobacco-Related
Antitrust Cases</font></b>
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<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. The New Mexico suit was thereafter
dismissed as to Lorillard Tobacco.
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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.
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<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 entered its final judgment
dismissing the suit on January 6, 2010. The plaintiff filed
a notice of appeal to the federal Court of Appeals for the Sixth
Circuit. To date, no further filings have been made.
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<b><font style="font-family: 'Times New Roman', Times">Defenses</font></b>
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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 February 22, 2010, Lorillard
Tobacco was a defendant in approximately 10,275 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.
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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, 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, including giving collateral
estoppel effect to those adverse findings. In addition, the
ruling in <i>Good v. Altria Group, Inc., 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.
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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.
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<b><font style="font-family: 'Times New Roman', Times">Indemnification
Obligations</font></b>
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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).
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Loews is a defendant in three pending product liability cases.
One of these is a Reimbursement Case in Israel and two 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.
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<b><font style="font-family: 'Times New Roman', Times">Other
Litigation</font></b>
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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.
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