Court Overturns $10 Billion Verdict Against Philip Morris
Friday, December 16, 2005
Philip Morris USA won a legal victory yesterday when the Illinois Supreme Court reversed a $10.1 billion lower-court verdict that held the company, and its parent, Altria Group Inc., liable for allegedly misleading consumers about the risk of developing cancer from smoking its "light" cigarettes.
By a vote of 4 to 2, the court threw out the ruling against the nation's biggest cigarette manufacturer. The court's majority said in a written opinion that Philip Morris did not violate the law because its marketing of low-tar Marlboro and Cambridge cigarettes using the term "light" had the blessing of the Federal Trade Commission.
"We conclude that the FTC could, and did, specifically authorize all United States tobacco companies to utilize the words 'low,' 'lower,' 'reduced' or like qualifying terms such as 'light,' so long as the descriptive terms are accompanied by a clear and conspicuous disclosure of the 'tar' and nicotine content in . . . the smoke produced by the advertised cigarette," the opinion said. To avoid conflict, the state's chief justice did not participate in the case due to a relationship with one of the parties involved.
In a dissenting opinion, one Illinois justice wrote that, "a majority of this court has become increasingly desensitized to the interests of the average Illinois consumer. There is little doubt in my mind that these decisions will send a chill wind over consumer protection."
Wall Street analysts characterized the ruling as a clear legal victory for Altria Group, saying it was the latest in a series in which the company has either triumphed or diminished the legal uncertainty hanging over it by reaching settlements, as it did with the federal government and most states.
"The decision will have more far-reaching implications than just the cases filed in Illinois, as this ruling will set precedent for other similar 'lights' class actions," wrote Bonnie Herzog, an analyst with Citigroup Inc. "We view this decision as a positive for cigarette stocks," added Goldman Sachs analyst Judy Hong.
Altria Group stock closed at $76.62, up $2.89. Its shares traded even higher yesterday -- shooting up more than $4 a share to $78.68 -- before it became clear that the verdict would be appealed to the U.S. Supreme Court and its precedential value might be unclear for other pending class action cases that do not involve the marketing of "light" cigarettes.
Altria Group was guarded in its reaction. "Philip Morris USA is gratified by today's Illinois Supreme Court ruling in the Price case," the company said. Altria declined comment on whether the ruling would enable it to move forward with a long-discussed corporate restructuring to boost shareholder value by spinning off its Kraft Inc. food division.
Stephen Tillery, lead attorney for the more than 1 million plaintiffs in the case, said the grounds for appealing the ruling to the U.S. Supreme Court are strong since the Illinois decision includes matters of federal law, specifically the conduct of the FTC.
He also emphasized that the divided vote by the Illinois Supreme Court -- coupled with substantial differences in legal reasoning among many of the judges who voted in favor of Philip Morris but wrote separate opinions -- decreases the likelihood that the ruling will have a broad-based effect on pending cigarette and tobacco liability cases.
"This is another corporate giant which has once again been pardoned for its abhorrent behavior. Thousands of consumers are left to pay the ultimate price for Philip Morris's conduct," Tillery said.
"We strongly disagree with the court's conclusion that the Federal Trade Commission authorized the use of the words 'lights' or 'lower tar and nicotine.' The Federal Trade Commission has never issued a trade rule, or any other ruling, authorizing the use of those terms," he said.
Tillery also said the use of the term "lights" to market cigarettes has been banned in Brazil, Canada, Israel and the European Union, but not in the United States. "The World Health Organization has recommended that all countries of the world do the same," he said.
Altria's stock has risen significantly in 2005 as the legal liability hanging over the company has diminished and the likelihood that it may make Kraft Foods a separate company has increased. A spinoff would increase the value of the company's giant food business, analysts said, because it would no longer be depressed by exposure to potential liability in tobacco cases.
Among other major pending litigation, Altria is awaiting a verdict in a major Florida class-action suit. In that matter, a lower court granted plaintiffs a headline-grabbing $145 billion victory, only to have an appeals court in the state throw it out. The case is pending before the Florida Supreme Court. One of the issues in this and other long-running tobacco litigation has been whether individual smokers can be grouped together in a class-action suit or must litigate against Philip Morris and other cigarette companies as individuals.