Illinois court reverses $10 bln Altria verdict

12/15/2005

CHICAGO (Reuters)- The Illinois Supreme Court on Thursday reversed a $10.1 billion verdict against Philip Morris USA, ordering a lower court to dismiss the case in which the company was accused of defrauding customers into thinking “light” cigarettes were safer than regular ones.

The much-anticipated ruling sent shares of Philip Morris parent Altria Group Inc. (MO) up more than 4 percent to a new all-time high and could help clear the way for Altria to spin-off its Kraft Foods Inc. (KFT) unit from its tobacco units.

In a divided opinion, the court found that the U.S. Federal Trade Commission has authorized tobacco companies to characterize their products as “light” or “low tar and nicotine.”

Writing for the majority, Justice Rita Garman said the ruling was specifically based on a section in the Illinois Consumer Fraud Act that exempts a company from being punished for behavior allowed by a specific regulatory body. She said the ruling did not address whether the case should have been barred by federal law.

“We share the concerns expressed by plaintiffs ... about the devastating health affects of smoking and in particular, the scourge of smoking among young people,” Garman wrote.

But those seeking to change the conduct of tobacco companies will need to appeal to the Illinois legislature for changes in the Consumer Fraud Act, the FTC for changes in labeling regulations or the U.S. Congress, she said.

Garman’s ruling in Illinois did not address whether the case should have been certified as a class action. Philip Morris had argued that the case should never have been certified as a class but should have required each individual smoker to prove their case separately.

In a separate opinion, Justice Lloyd Karmeier agreed that the verdict should be overturned, but said the reason should be because the plaintiffs never proved they suffered financial damage.

Justices Charles Freeman and Thomas Kilbride both dissented, with Freeman saying the ruling and a recent ruling overturning a class-action verdict against State Farm Mutual Automobile Insurance Co. will “send a chill wind over consumer protection.”

Stephen Tillery, an attorney for the plaintiffs, said they would decide in the next few days whether to ask the Illinois Supreme Court to rehear the case or appeal the ruling to the U.S. Supreme Court.

He said Garman’s opinion relied on consent decrees entered into by the FTC and specific tobacco companies, rather than more formal orders by the FTC.

“There has never been an order or a rule by the Federal Trade Commission authorizing the word ‘light’ as descriptor,” he said.

Altria said in a brief statement that it was “gratified” by the ruling.

CLEARING THE BAR

The “lights” case has been closely watched not just because of the size of the ruling, but because it is one of the legal hurdles management has said need to be cleared before it could spin off Kraft.

“I think it will expedite the spin-off of Kraft and for the industry it provides some clarification as to how future decisions will be rendered,” said Fred Burke, fund manager at Johnson Lemon Asset Management in Washington, D.C., who owns shares of Altria.

But some attorneys warn that an Illinois ruling does not set legal precedent for courts in other states.

“This is a very good result and I think again the right result, but it is not controlling in any other state court,” said Jamie Wareham, global chairman for litigation practice for Paul Hastings Jonofsky and Walker, a Washington, D.C.,-based law firm.

The Illinois case helped spawn the filing of “lights” lawsuits in other states. One being watched closely is in New York, where U.S. District Judge Jack Weinstein is expected to decide early next year whether to certify a similar lawsuit as a class action.

The initial $10.1 billion judgment in the class-action case was handed down against Philip Morris by a trial court judge in March 2003. The Supreme Court took the unusual step of bypassing the appellate court and hearing the case on appeal directly from the trial court.

Altria shares rose $3.28 at $77.01 on Thursday on the New York Stock Exchange. The Dow Jones tobacco index was up 4 percent.

(Additional reporting by Emily Kaiser and Jessica Wohl in Chicago and Mark McSherry in New York)