What's What

Big Award on Tobacco Is Rejected by Court

By MELANIE WARNER
Published: July 7, 2006
Tobacco companies in the United States won a major legal victory yesterday when the Florida Supreme Court upheld a decision to toss out a $145 billion judgment against them.

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Text of the Opinion (pdf)

The ruling, in what is one of the last remaining personal injury class-action cases against tobacco companies, is a crushing blow to plaintiffs' lawyers, who have pushed for large class-action cases with the potential for multibillion-dollar verdicts. The six-judge Florida court stated that smokers' cases "are highly individualized" and "do not lend themselves to class-action treatment."

Investors applauded the decision, which sharply reduces the possibility of large, bank-breaking awards in tobacco cases. Shares of the two largest companies named in the suit, Altria Group, the parent of Phillip Morris, and Reynolds American, which owns R. J. Reynolds, were up sharply. Altria closed up $4.43, or 6 percent, at $77.76, and Reynolds American closed up $4.59, or 4 percent, at $118.95.

The ruling is perhaps most important for Altria, which is preparing to spin off its Kraft Foods unit. The company has said that the long-running lawsuit, originally led by a Miami Beach pediatrician, Howard A. Engle, who has emphysema, was one of the major litigation hurdles the company needed to clear before it could restructure.

Dawn Schneider, an Altria spokeswoman, said the company would not comment on when a breakup would take place.

Altria consists of Philip Morris USA, Philip Morris International and Kraft Foods, which is 86 percent owned by Altria.

Yesterday's ruling follows another industry-friendly outcome in a large case in Illinois. In December, the Supreme Court of Illinois threw out a $10 billion judgment against Philip Morris USA in a class-action consumer fraud suit that had accused the company of deceiving smokers by marketing its "light" cigarettes as having lower levels of tar and nicotine.

Despite these two victories, analysts say Altria will probably hold off announcing details of a restructuring until after there is a ruling on a civil racketeering case filed by the Department of Justice against Philip Morris and several other large cigarette makers. The government, which originally filed its case in 1999 during the Clinton administration, seeks damages of $14 billion over 10 years as well as fines if youth smoking rates do not decline and government monitoring of company research and development.

A nine-month trial concluded a little more than a year ago and tobacco companies say they are expecting a ruling from Judge Gladys Kessler of Federal District Court in the District of Columbia within the next few months.

Among investors, hopes are high for another tobacco-friendly outcome in the Department of Justice case. Tobacco companies have already won several victories in the case, including a ruling in February 2005 that the government cannot seek financial penalties from tobacco companies for previous wrongdoing, only for future infractions. In response, the Justice Department cut its financial demands from $280 billion to the current $14 billion.

"The D.O.J. case has already been emasculated," said David Adelman, an analyst at Morgan Stanley. "It can't be ignored, but it isn't something that's going to prevent an Altria breakup."

In a research note, a Citigroup analyst, David Driscoll, said a Kraft spin-off could take place two months after the Justice Department case was resolved.

Altria is eager to restructure because it believes it would have greater value as two or three separate units. While sales and earnings at Philip Morris USA and Philip Morris International have been on an upswing, Kraft's business has stagnated in recent years and may be dragging down the value of the tobacco business. Altria's price-to- earnings ratio trails that of Reynolds American, though Philip Morris is the global and domestic market leader in cigarette sales.

Some analysts say an Altria breakup could be good for Kraft, the country's largest maker of packaged food. Mr. Adelman of Morgan Stanley said an independent Kraft could use its stock to make large acquisitions and to help retain and attract talented managers.

In June, the directors of Kraft Foods ousted the chief executive, Roger K. Deromedi, and the company has recently experienced a number of high-level departures.

But it is unclear if a Kraft spinoff would bolster the food company's sluggish stock price. Mr. Driscoll of Citigroup said a Kraft spinoff could drive down Kraft's stock, because Altria shareholders who receive Kraft shares in the deal may sell some of them.

Though it is now much less probable there will be a class-action verdict that could bankrupt a tobacco company, yesterday's decision in the Engle case could open the door to a lot of small cases being filed in Florida by individual smokers.

While the Florida court struck down the $145 billion award, it has upheld two individual damage awards to Florida cancer patients: $2.9 million to Mary Farnan and $4 million to the estate of Angie Della Vecchia, who died in 1999.

The court also supported a part of the jury's original verdict in the Engle case that found that smoking causes a variety of diseases and that tobacco companies concealed information and acted negligently. The ruling means any new case filed in Florida can start with those claims already proved.

"This is going to open up a whole new chapter of cases in Florida where you could see a large number of smaller verdicts," said Matthew L. Myers, president of Campaign for Tobacco-Free Kids, an antitobacco group. Both Altria and R. J. Reynolds say they will probably appeal those portions of the court's ruling.

Charles Blixt, general counsel for R. J. Reynolds, said that even if many of these individual cases do come forward, they do not represent a significant financial threat to tobacco companies. "There's always been the potential for large numbers of individual lawsuits being filed," he said. "I think it's proven that we can defend successfully against those kinds of cases."

Jeremy W. Peters contributed reporting for this article.

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