Florida Judge Affirms Massive Tobacco Award

Tobacco companies suffered a pair of legal blows Monday when a Florida judge affirmed a massive punitive damage award of nearly $145 billion and the European Union announced a lawsuit accusing three leading manufacturers of complicity in cigarette smuggling.

In an unexpectedly sudden ruling in Miami, Dade County Circuit Judge Robert P. Kaye rejected more than a dozen tobacco industry motions seeking to reverse or modify verdicts in the Engle class-action case--including last July’s record-shattering punitive damage award of $144.8 billion for a class of up to 700,000 Florida smokers.

Tobacco officials, who had expected Kaye to hold a series of hearings on their motions before ruling, said they will immediately appeal the case through the Florida courts, which could take a year or more.

“We remain confident that the Engle verdicts will be reversed and, ultimately, the class action decertified,” said Daniel W. Donahue, deputy general counsel for R.J. Reynolds Tobacco Co., which along with Philip Morris Inc., Brown & Williamson Tobacco Corp., Lorillard Tobacco Co. and Liggett Group Inc., was found liable in the case.

Philip Morris, whose portion of the punitive award is $73.96 billion, announced it will immediately post a $100-million bond to forestall having to pay its share of the judgment while appealing the verdict. Under a Florida law passed last spring--and inspired by the Engle case--each of the firms must post a bond equal to $100 million or one tenth of its net worth, whichever is less, in order to forestall payment during the appeal.

In his 68-page ruling, Kaye said that “at first blush, a $144 BILLION dollar punitive damage award seems so far outside the comprehension of any reasonably thinking person that one would immediately say it is shocking and not in keeping with rational thought.

“However, keep in mind the enormity of the 70 years of behavior and the almost incomprehensible damage that was done to such a huge number of people,” Kaye wrote. “If one really examined the entire record in detail of the decades of abuses committed by the defendants upon an ill-informed and unsuspecting public, one could say it was that concerted behavior on the part of the defendants, over so many years, affecting so many people, that ‘shocks the conscience of the court,’ not the award itself.”

Said Martin Feldman, a tobacco analyst with Salomon Smith Barney, “Judge Kaye has pushed the envelope to the most extreme point the industry has faced in a court of law.”

Meanwhile, the European Union said it had filed suit in federal court in New York to recover unspecified damages from Philip Morris, R.J. Reynolds and Japan Tobacco, for taxes and import duties lost by its 15 member nations due to cigarette smuggling.

In a 188-page complaint filed Friday, the EU charged the companies with racketeering and “involvement in organized crime in pursuit of a massive, ongoing smuggling scheme.”

Philip Morris said Monday it will “vigorously contest.” In a recent interview, Donald Harris, a vice president with Philip Morris International, said the firm “does not condone, facilitate or support the smuggling of cigarettes.”

Reynolds called charges it was involved in smuggling “unsupportable and untrue.” A spokesman for Japan Tobacco, which last year purchased the international operations of R.J. Reynolds, said he hadn’t seen the suit and could not comment.

The suit was the clearest sign to date of growing international anger over cigarette smuggling, which critics say is cheating governments of tax revenues and increasing rates of smoking by keeping supplies of cheap cigarettes on the market.

Some authorities estimate that about 15 billion packs of cigarettes a year--nearly one-third of those in international commerce--get smuggled across national borders without duties or taxes being paid.

The national government of Ecuador and a group of Colombian provincial governments also have filed suits against tobacco multinationals over smuggling activities. And last week the British government announced it would investigate smuggling allegations against British American Tobacco, the world’s second-largest tobacco company, over vigorous objections by the company.

The announcement followed disclosure of hundreds of internal BAT documents suggesting that company officials at the highest levels were aware of smuggling of their brands in Asia, Africa and Latin America, and in fact relied on it to compete with rivals such as Philip Morris, whom they assumed were doing the same.

In the Engle case in Florida, the only class action on behalf of sick smokers ever to go to trial, Kaye’s ruling Monday underscored the failure of a long-shot effort by industry lawyers to remove the case from the state to the federal court system, where many tobacco class actions have been dismissed.

Soon after the punitive verdict, industry lawyers seized an opening, claiming intervention by a union health-care fund raised issues under the federal ERISA law that must be resolved by a federal judge.

Over the weekend, however, U.S. District Judge Ursula Ungaro-Benages in Miami remanded the case back to the state court.

Tobacco lawyers expected that Kaye would hold hearings on the motions they had filed to overturn the Engle verdicts.

But on Monday, Kaye issued his order, saying that based on briefs filed by lawyers on both sides, “the court feels it can rule on the issues without further argument, oral or otherwise.”

Cigarette makers say the $144.8-billion punitive award--more than twice their annual gross sales--would financially destroy them, and violates a Florida law barring a judgment that would bankrupt a company.

They will also argue in their appeals that tobacco suits can’t be aggregated together as class actions, as a number of federal courts have ruled.

Separately, negotiators for plaintiffs attorneys continued talks with cigarette makers Lorillard and Liggett aimed at reaching an $8-billion settlement of punitive damage claims in a dozen tobacco cases in federal court in Brooklyn, N.Y. The cases are before U.S. District Judge Jack Weinstein, known for his flare for crafting settlements of complex mass injury cases.

People close to the talks say that Lorillard would pay $7.5 billion and Liggett $500,000 under the deal that is under consideration.

Such an agreement could be a template for a nationwide settlement of punitive damage claims against cigarette makers, because one of the cases pending before Weinstein is a proposed class action on behalf of all sick smokers in the U.S.

On the surface, at least, such a settlement would appear to be favorable to the industry. Given that Lorillard and Liggett together have less than 10% of the cigarette market, proportional payments by the other companies suggest a total punitive damage fund of roughly $100 billion--less than that awarded by the Engle jury for Florida alone.

However, Philip Morris and R.J. Reynolds have declined to join the settlement talks, saying, among other things, that under Supreme Court rulings they do not believe a nationwide class settlement would hold up.