Smoke'em if you got'em...
Philip Morris Wins Reversal of $10.1 Bln Damage Award (Update6)
Dec. 15 (Bloomberg) -- Altria Group Inc.'s Philip Morris USA doesn't have to
pay a $10.1 billion damage award to smokers of ``light'' cigarettes who accused
the company of misleading them about health risks, the Illinois Supreme Court
ruled.
Shares rose $4.45 to $78.18 or 6 percent at 10:49 a.m. in New York Stock
Exchange composite trading.
The Springfield, Illinois-based court reversed a decision by a lower court
judge who said Philip Morris ``intended to deceive consumers'' into believing
its Marlboro Lights and Cambridge Lights were safer than regular brands. The
court found that Illinois law didn't permit the suit because the U.S. Federal
Trade Commission had authorized cigarette makers to characterize their products
as ``light'' or ``low tar.''
The decision today removes an obstacle to Altria's plan to break up the
company to make the company more valuable. It may doom similar suits in
Illinois filed against Reynolds American Inc.'s R.J. Reynolds Tobacco Co. and
other cigarette makers. Philip Morris, the world's biggest cigarette maker,
called the 2003 verdict ``staggering,'' saying it would bankrupt the company.
``It lifts the burden of litigation fears from the share price,'' said Thomas
Russo, a partner at Lancaster, Pennsylvania- based Gardner Russo & Gardner, who
manages more than $2 billion, including 3.8 million Altria shares, his largest
holding as of Sept. 30.
Tobacco Shares Rise
Shares of Reynolds American Inc., the Winston-Salem, North Carolina-based
parent of No. 2 U.S. cigarette maker R.J. Reynolds Tobacco Co., rose as much as
5.7 percent. Shares of Carolina Group, a tobacco tracking stock of Loews Corp.,
which owns third- largest Lorillard Tobacco Co. in Greensboro, North Carolina,
climbed as much as 7.1 percent.
``This win is very helpful on the litigation scene,'' said David Dreman, who
oversees $15 billion at Dreman Value Management in Jersey City, New Jersey,
including 14.6 million Altria shares and 3.1 Reynolds American shares as of
Sept. 30. ``This is a case that a lot of other states were watching.''
The $10.1 billion verdict, had it been upheld, would have been more than
Altria's $9.4 billion in net income last year.
The Illinois high court found that the state Consumer Fraud Act exempts
conduct ``specifically authorized'' by any regulatory body of the United
States, such as the FTC.
Break-up Plan
``Philip Morris USA is gratified by today's Illinois Supreme Court decision
in the Price case,'' company spokeswoman Lisa Gonzalez said in an e-mailed
statement. ``The company will have no further comment on today's decision.''
Altria Chief Executive Officer Louis Camilleri, 50, said last month that
separating the company's tobacco and food businesses hinged on the company's
prevailing in the Illinois case, in a smokers' class action in Florida and in
the U.S. Department of Justice's racketeering suit in Washington against
cigarette manufacturers. The Florida suit, known as the Engle case, involves an
appeal of a $145 billion punitive-damages verdict.
``The timing of a breakup becomes more visible with the Price case going in
Altria's favor,'' said Russo. ``Assuming all these cases are resolved, I
suspect there will be a spin-off of Kraft in 2006.''
Important Win
Keith Patriquin, an analyst at Loomis Sayles & Co. in Boston, which manages
about $70 billion, including 506,000 Altria shares as of Sept. 30, said the
Illinois win was significant even though the Engle and U.S. racketeering suits
need to be resolved.
``They really wanted to shut this one down because it had gotten so far,'' he
said.
The Illinois suit is known as the Price case, after Sharon Price, a Cambridge
Lights smoker who was a representative of the smokers at the trial.
Aside from Northfield, Illinois-based Kraft Foods Inc., 86 percent owned by
Altria, other company units include Philip Morris International in Lausanne,
Switzerland. Philip Morris USA is based in Richmond, Virginia. Camilleri said
Altria might be broken up into two or three companies.
Lower profits at Kraft in eight of the past nine quarters have hurt earnings
of Altria, which gets two-thirds of its revenue from tobacco. Kraft, the
largest U.S. foodmaker with brands including Oreo cookies and Cracker Barrel
cheese, reduced its 2005 profit forecast in October.
The Illinois suit was brought on behalf of an estimated 1.1 million smokers
who purchased Marlboro Lights or Cambridge Lights in Illinois between 1971,
when the company introduced ``light'' or low-tar cigarettes, and 2001.
The smokers sought economic damages from Altria for selling a product that
was not as advertised. Unlike the Florida case, no personal injury claims were
involved.
The Trial Judge
After a trial in Edwardsville, Illinois, Judge Nicholas Byron, who presided
over the light-cigarette case without a jury, ruled in March 2003 that Philip
Morris's deceptive marketing violated state consumer protection laws. He
awarded $10.1 billion, including $3 billion in punitive damages and $1.8
billion in attorney fees.
Light cigarettes accounted for 85 percent of the U.S. cigarette market in
2003, the most recent year for which figures are available, according to the
Federal Trade Commission. That figure is up from about half the market in 1984.
The case is: Price v. Philip Morris Inc., No. 96238, Supreme Court of
Illinois.
To contact the reporter on the story: Bob Van Voris at [EMAIL PROTECTED] in
New York.
Last Updated: December 15, 2005 10:50 EST
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