Here’s a Surprise from Reynolds American’s Q3 Report

Shares of Star Scientific (NASDAQ:STSI) fell 6 percent on Tuesday after Reynolds American’s (NYSE:RAI) patent dispute settlement was found to be smaller than expected.

Tuesday morning, Reynolds released third quarter earnings. The report showed that the company took a $5 million charge against operating income in the second quarter that was related to “other tobacco-related litigation.” However, the company did not specify that the payment was a settlement of a patent infringement dispute with Star Scientific.

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The Virginia-based company, which researches tobacco curing methods that would prevent the formation of carcinogens in tobacco smoke, initiated the lawsuit against Reynolds in 2009. Star Scientific first accused Reynolds American, the country’s second largest tobacco company, of infringing on several of its tobacco curing patents during the 2001 and 2002 growing seasons. The case traversed multiple courts, until it reached the Supreme Court. There Reynolds attempted to invalidate Star’s patents. However, the case was ultimately dismissed, and according to documents filed with the U.S. Securities and Exchange Commission, Reynolds paid $5 million to Star Scientific as part of a confidential settlement agreement in September.

An excerpt from the filing reads: “On September 26, 2012, RJR Tobacco paid Star $5 million pursuant to a confidential settlement agreement resolving Star I and Star II. RJR Tobacco withdrew its Supreme Court petition in Star I on September 21, 2012, and Star I and Star II were dismissed with prejudice on September 24, 2012.”

According to The Street, much of Star Scientic’s $430 million market capitalization was tied to analysts’ expectations that Reynolds would be forced to pay a much larger settlement as well as royalties on future tobacco sales. Therefore, following the revelation, shares of Star Scientific declined 20 cents to $3.12.

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