Florida court tosses out $145 bln tobacco verdict

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Court snuffs $145 billion tobacco verdict

Florida Supreme Court says sum is 'clearly excessive'

Last Update: 6:36 PM ET Jul 6, 2006

CHICAGO (MarketWatch) -- The Florida Supreme Court on Thursday threw out a $145 billion punitive-damage award against cigarette makers, stripping the case of its class-action status but leaving open the door for damage claims by individuals.

The $145 billion punitive-damages award 'is excessive as a matter of law.'

— Florida Supreme Court

The decision pushed up shares of tobacco stocks by removing a major legal-risk facing the industry and its investors, and could help speed up Altria Group's spin-off of Kraft. But it does not get the companies off the hook entirely.

"We unanimously conclude that the punitive damages award is excessive as a matter of law," the court said.

However, the court also held in the case, Engle et al. v. Liggett et al., that compensatory damage awards to two plaintiffs totaling about $7 million should be reinstated, making it less than a complete victory for the industry.

The court let stand some findings of liability but concluded that the causes of individual harm and the apportionment of fault for it among the defendants "are highly individualized and do not lend themselves to class-action treatment."

Roots of the case

The case dates back to 2000, when a Miami jury slapped the tobacco industry with the $145 billion punitive-damages verdict on behalf of a class of sick smokers and the estates of dead ones. The suit accused tobacco companies of misleading the public about the dangers of smoking.

Three years later, Florida's Third District Court of Appeal set aside the decision and decertified the class. The state's high court agreed to hear the plaintiffs' appeal in 2004 and heard oral arguments in November of that year.

On Thursday, the high court said that the trial court erred in letting the jury determine a lump-sum punitive damage amount before it determined the amount of total compensatory damages for the entire class. "As a matter of law, the punitive damages award violates due process because there is no way to evaluate the reasonableness of the punitive damages award without the amount of compensatory damages having been fixed," the court said.

In addition, the amount awarded "is also clearly excessive because it would bankrupt some of the defendants."

The news sent shares of No. 1 tobacco company Altria (MO :

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, , ) up 6% to $77.76, while Reynolds American (RAI :

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, , ) hit a new high at $120.99 at one point and closed at $118.95, a 4% gain. Further down the industry food-chain, Carolina Group (CG :

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, , ) was up 5.5% at $53.99 and Vector (VGR :

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, , ) added 1.6% to $16.64.

U.S.-traded shares of foreign firms were also on the rise as British American Tobacco (BTI :

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, , ) added 3,2% to $52.39 while Gallaher Group (GLH :

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Shares of Kraft Foods Inc. (KFT :

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, , ) , which is majority owned by Altria, slipped 2.5% to $30.37 in afternoon trading.

Winning ways

Thursday's ruling follows a slam-dunk win scored by Altria unit Philip Morris USA in December, when the Illinois Supreme Court overturned a $10 billion damages verdict in the Price case -- more commonly known as the "lights" case. That case had charged the maker of Marlboro with defrauding consumers by marketing low-tar cigarettes as being less harmful than regular ones. See full story.

A spokesman for R.J. Reynolds Tobacco said the company "is pleased that the court unanimously found the $145 billion punitive damages award violated due process and was excessive as a matter of law."

He added that the company is still reviewing other aspects of the ruling but that "but this was certainly a critical issue in the case."

In a conference call with reporters the associate general counsel of Altria's Philip Morris USA said the court "did in large part what we asked them do."

However, William Ohlemeyer said the company disagrees with the court's conclusion that some issues decided by the trial jury may be considered as resolved for any potential future cases filed by former class members.

"In decertifying the class, the court made it clear that former class members can now proceed only in individual trials, in which each individual plaintiff will have to prove liability on the part of the defendants including, among other things, that their use of a company's cigarettes caused their illness and that the company's conduct prevented them from making an informed choice to smoke," he said.

He added that the company's lawyers will decide after more analysis of the opinion "on which issues to seek further appellate review. There are still some issues that remain undecided."

Asked for an estimate of how much it cost the company to defend the action, Ohlemeyer did not have an exact figure but said it was easily greater than $10 million.

Combined with the dismissal of the Price case and the removal of potential disgorgement damages from a Justice Department suit against the industry make "this decision of great importance for the global sector," wrote Michael Smith of J.P. Morgan in a note to investors.

"This decision removes any material legal impediment to Altria spinning off its 88% stake in Kraft and its 100% ownership of Philip Morris International," he added.

Even if a final decision in the Justice Department case is delayed beyond the fourth quarter, "Altria could still spin off Kraft before year end, due to the very limited finance risk associated with [it]," Smith said.

However, noted Edward Sweda, senior attorney for the Tobacco Products Liability Project, the industry's victory is far from total. The court, in reinstating compensatory damages thrown out in the "mean-spirited" appellate court ruling, has "is inviting the Florida plaintiff's bar to get onto the playing field" with potentially thousands of individual suits under a "streamlined process," he said.