What is the most logical settlement outcome?
I’ve been trying to envision the most logical settlement outcome that matches up with the facts as we know them, or rather, the facts as I see them. Keep in mind that this is JMHO and speculation but I think it provides plausible explanations for why things have happened the way they did. So, what are those facts?
1) We’ll estimate the worst case outcome for RJR if they lose at trial in Star 2, at $3.9 billion dollars for past damages plus an ongoing $232 million (6 cents per pack) royalty. That is figuring 6 cents per pack for 8 years past damages, plus an additional three years of treble damages. i.e. One year has passed since CAFC ruled on validity and it will take at least two years to litigate Star 2. And if they lose in District Court, RJR would have to post the entire amount with the court as a bond before they would be allowed to appeal.
2) Best case outcome for RJR is that they win again at trial in Star 2 despite the patents being valid, the independent attorney’s testimony that RJR is infringing, and CAFC’s drawing Star a roadmap for how to prove validity.
3) Worst case outcome for Star is that despite the advantages listed in number 2, Star spends millions more on attorney’s fees and loses again in a Garbis court. Although they would probably again receive favorable treatment at CAFC, losing again at the District Court level would not be a good outcome.
4) Best case outcome for Star, not surprisingly, is RJR’s worst case. Star gets a $3.9 billion dollar judgement.
5) RJR wanted this mediation. The attorney’s fees issue was a smokescreen to hide the fact that they wanted to settle. Since every finding at the District Court level other than infringement was overturned by CAFC, RJR knew they were never going to get attorney’s fees. But they did not want to be seen as going hat in hand to Star either.
6) Cigarette labeling of TSNA amounts is happening soon.
7) If plaintiffs in smoker lawsuits get hold of testimony from RJR’s experts saying that they were not infringing on Star’s patents and the evidence of non-infringement is the higher TSNA levels in RJR tobacco for the last 10 years; the costs to RJR will be FAR greater than $3.9 billion.
8) Star has a brand new 20 year patent on a process for producing tobacco with Below Detectable Limit (BDL) TSNAs.
I think number 8 is the key to what we are witnessing now. Star’s new BDL patent was not a part of the lawsuits that were dismissed. RJR needed to be able to save face and they needed to get out from under Star’s valid patents. The compromise is that RJR licenses the BDL patent for the next 20 years and Star agrees not to pursue Star 2. RJR can then brag about licensing Star’s BDL technology to produce the safest tobacco in the world. After all, saving lives and preserving health is THE priority. But in order to make this partnership work, the leadership at these two socially responsible companies had to agree to put the past behind them so they could work together to make safer products available to the tobacco consuming public. Given the hard fought battle that these companies have been engaged in for 10 years, it is a testament to the character of the men involved that they were able to put that aside for the greater good. (To Star and RJR – Feel free to use that exact language in your PRs if you wish. Just do it soon!)
If I were doing the public relations, I would stage a media event where JW and Daniel Delen are smiling, shaking hands, and all excited about the partnership and what it will mean to tobacco consumers. I would do it at about 10 am on a weekday. (Think trading halt.)
This also explains why RJR was willing to drop the Writ. RJR did not want to take a chance (even a small chance) that the SC would take up the case and end up reversing the CAFC validity ruling. Because now RJR wants Star to go after the other BigTs for violating those “valid” patents.
To summarize: Star trades revenue from the old patents for revenue from the new BDL patent and RJR is able to say that they still do not believe they were infringing on the old patents. Star now uses the lessons learned from the RJR battle to pursue the other BigTs; assuming those BigTs do not quickly make a deal with Star similar to the RJR deal.
Misc. Items:
1) Are Star’s smokeless products part of the deal?
2) Will this deal on the BDL patent be exclusive to RJR and not available to the other BigTs?
3) Why the delay in announcing the settlement details?
Ø The final copy of the dismissal with the judge’s signature was just filed today. Is that what they were waiting on?
Ø Or is an effort being made to bring in the other BigTs? It could be that RJR wants this as a competitive advantage and does not want the other BigTs to have it. Or it could be that RJR would prefer that everyone participate so as to level the playing field cost-wise and to raise the public perception of the tobacco industry. Or it could be that exclusivity was not on the table and this point was non-negotiable for Star.
4) HOW MUCH MONEY?
Ø Is it an annual fee?
Ø Is it based on a per pack fee? If so, how much per pack?
Ø Is there an initial lump sum?
5) Does RJR get an equity stake in Star and if so, how much? Also, if an equity stake in Star is part of the deal and it is being offered to the other BigTs; then the other BigTs need to sign on prior to the RJR announcement. This could be a factor in the delay of the settlement announcement and the reason for the gag order.
I cannot wait to see how close my speculation is to the real thing! I don’t think we’ll have long to wait…
