Tobacco fraud case tossed, but smoke's not clear
The Illinois Supreme Court says federal rules allow companies to use labels that might mislead.
Published December 16, 2005
CHARLOTTE, N.C. - The Illinois Supreme Court handed the tobacco industry a huge victory Thursday by tossing out a $10.1-billion fraud judgment against Philip Morris USA over the marketing of its "light" cigarettes.
But while shares of parent company Altria Group Inc. soared to a record on the news, industry critics warned that the Illinois decision does not insulate U.S. cigarette companies from future lawsuits. There are at least 40 similar suits pending against companies like Philip Morris and Reynolds American, any of which could result in awards into the billions of dollars, tobacco opponents said.
"They need to keep their legal teams ready," said Richard Daynard, president of the Tobacco Control Resource Center and a longtime industry foe.
Philip Morris USA, which makes the popular Marlboro brand and controls about half the U.S. cigarette market, issued a statement saying the company was "gratified" by Illinois court's decision.
Investors were openly enthusiastic. Shares of Altria Group rose sharply after the court's ruling and by the end of trading, the share price hit $76.62, up $2.89 or 3.9 percent, on the New York Stock Exchange. That surpassed the stock's previous record of $75.60.
Shares of Reynolds American, No. 2 in the industry to Altria's Philip Morris rose 55 cents to $97.40 on the NYSE. During the day, Reynolds American shares flirted with the $100 barrier.
The Illinois high court's ruling in Price vs. Philip Morris - the so-called "Price Lights" case - addressed whether Philip Morris acted fraudulently when it labeled some cigarettes as "light" or "low tar and nicotine."
By a 4-2 vote, the court found that the U.S. Federal Trade Commission had authorized such characterizations.
"If the FTC has specifically authorized the use of the terms . . . . (Philip Morris) may not be held liable under the Consumer Fraud Act, even if the terms might be deemed false, deceptive or misleading," Justice Rita Garman wrote for the majority.
"I think they (Philip Morris) can take some comfort from this victory," said Carl Tobias, a law professor at the University of Richmond who follows tobacco litigation. "It does seem like this could dissuade individuals from pursuing them vigorously in other states."
However, Mark Gottlieb, executive director of the Tobacco Products Liability Project at Northeastern University, said the lights fight is far from over. He estimated damages from similar suits pending in courts around the country could go as high as "tens of billions of dollars."
But a Citigroup analyst expects other courts to follow the lead of the Illinois Supreme Court.
"(This) ruling will set precedent for other similar "lights' class actions," tobacco analyst Bonnie Herzog wrote in a note to investors after the ruling.
Thursday's ruling was a "slam dunk decision for Philip Morris," she wrote. "The court released the most positive outcome in one of the most highly anticipated rulings in the tobacco industry this year. We expect (Altria's) stock to rally around 10 percent on this news over the next few days."
Herzog also noted that Altria was waiting for the Illinois ruling before moving forward with a plan to spin its Kraft Foods Inc. unit off from its tobacco businesses.
"The Price Lights case has been the biggest hurdle for Altria's board to break up its company and there is no question that it is now much closer to this event," she wrote.
Major cigarette lawsuits are still pending in other states:
In Florida, the state Supreme Court is reviewing a $145-billion punitive damage award in the Engle class action case that was overturned on appeal.
In Oregon, an appeals court is considering a $100-million punitive damage award to the estate of a 53-year-old lung cancer victim.
In New York, lawsuits charge major tobacco companies marketed light cigarettes as being less harmful than regular cigarettes despite knowing they deliver comparable amounts of tar and nicotine.
The Illinois case came to the state's high court from Madison County Judge Nicholas Byron, who in March 2003 ordered the company to pay $10.1-billion - $5-billion in compensatory damages, $3-billion in punitive damages and $2.1-billion in interest.
The cigarette maker argued the case should never have been declared a class-action on behalf of some 1.1-million light cigarette smokers who bought light cigarettes in Illinois.