NEW YORK (FORTUNE) -
The Illinois Supreme Court handed Altria's Philip Morris USA unit a major victory Thursday in a statewide class-action case over "Marlboro Lights" and "Cambridge Lights" cigarettes.
The ruling, written by Justice Rita Garman, overturned a $10.1 billion verdict that had threatened to force the company into Chapter 11 when it was first handed down in March 2003. The vote to reverse was 4-2, with one justice not participating.
With the victory, Altria (Research) has cleared the first of three legal hurdles it has said it must dispose of before spinning off its Kraft (Research) unit. The two remaining obstacles are the so-called Engle class-action in Florida-where the Florida Supreme Court is now deciding whether to reinstate a $145 billion punitive damages verdict against the tobacco industry that was thrown out by an intermediate appeals court in 2003, and the Department of Justice's civil Racketeering Influenced and Corrupt Organizations Act case against the tobacco industry.
In the federal case, the government originally sought to force the companies to "disgorge" $280 billion, but lowered its demand to about $14 billion after an appellate court rejected a crucial legal theory in February. U.S. District Judge Gladys Kessler of Washington, D.C. is expected to rule by next spring.
The Illinois case, Price v. Philip Morris USA, is of great national significance because it is one of 41 class actions that have been filed against all the major tobacco companies in 24 states, according to data kept by the Tobacco Products Liability Project. All the cases allege that use of the terms "light" and "low tar" to market cigarettes violates state consumer protection laws by falsely implying that such cigarettes are safer than regular cigarettes.
Without taking issue with the premise of the suits, the Illinois court nevertheless ruled that the Federal Trade Commission had effectively approved the use of the "light" and "low tar" labels and so, therefore, the suit was barred by a provision of Illinois's consumer-protection law that exempts conduct "specifically authorized" by federal law.
The opinion also strongly suggested that the class action should never have been allowed and expressed "grave reservations" about an unusual method of computing damages that had been used by the trial judge. (In such suits, the plaintiffs are not claiming physical injury, but rather monetary injury from having been swindled into buying a product they would not otherwise have purchased. Determining an appropriate sum is difficult, in part because "light" cigarettes cost the same as regular cigarettes.)
Because the Illinois Supreme Court based its ruling on state law, it is unlikely that the U.S. Supreme Court will review it.
Two judges joined a dissenting opinion written by Justice Charles E. Freeman. He protested that the majority's ruling would "send a chill wind over consumer protection," and he speculated that it had been motivated by the desire to "reduce the perception that the Illinois court system serves as a playpen for disingenuous class-action practitioner."
In its annual survey of the nation's worst "judicial hellholes" for corporate defendants, the American Tort Reform Association gave three of the top five berths this year to Illinois's Cook, Madison, and St. Clair counties. (The Price case was filed in Madison County.)
In a one-sentence statement Altria said it was "gratified" by the Price ruling. Stephen Tillery, attorney for lead plaintiff Sharon Price, called the ruling "a tremendous setback to consumers in Illinois."
Richard Daynard, a professor at Northeastern Law School and chairman of the Tobacco Products Liability Project, said the ruling would not end anti-smoking advocates' battles over "light" cigarettes.
"Going into this we had one state supreme court on our side," he said, referring to the Supreme Judicial Court of Massachusetts, which has allowed a "light" class action to go forward. "Now we've got one on each side."
The next state supreme court expected to weigh in is Ohio's; the propriety of a "light" class-action was argued before that court in October. "Light" class-actions have also been certified by lower courts in Missouri and Minnesota.
When the Price verdict first came down, Illinois law barred Philip Morris from appealing without first posting a $12 billion bond. Unable to pay, the company threatened to seek Chapter 11 protection.
After state attorneys general came to the company's aid, the bond requirements were lowered to about $6.8 billion, which the company could meet. (The states now have a stake in keeping the major tobacco companies from going bankrupt, lest they stanch the flow of tobacco revenue-about $246 billion over 25 years-that they stand to collect under settlements of Medicaid reimbursement litigation concluded in 1997 and 1998.)
Subsequently, the tobacco industry and the attorneys generals together persuaded the legislatures of about 25 states to cap their appeal bond requirements, at least when the company appealing is a tobacco company.
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