Cigarette Makers May Face Massive Punitive Damages

Tobacco companies suffered a jarring defeat Wednesday in a ruling by a Florida appeals court that raises the likelihood of a multibillion dollar punitive damages award in a landmark class-action case.

The ruling means that the same civil jury that already found cigarette makers guilty of fraud and conspiracy may now award damages in a lump sum to an immense class of sick and deceased Florida smokers numbering in the hundreds of thousands, as opposed to awarding damages to one claimant at a time.

Some analysts said the ruling raises the chance that tobacco companies will push for a settlement, even on harsh terms, to eliminate the threat of damages so huge that they could not afford to post an appeal bond.

Tobacco stocks were clobbered as investors fled in droves on news of the ruling, issued in the first class-action case by smokers ever to go to trial.

Philip Morris, the world’s biggest tobacco company, saw its shares fall $3.75, or more than 12%, to $27. R.J. Reynolds Tobacco Holdings Corp., the second biggest U.S. cigarette maker, and Loews Corp., owner of Lorillard Tobacco, also saw their shares plummet to the lowest levels in more than a year. Reynolds fell $3 to $22.94 and Loews dropped $2.25 to $67.75. All trade on the New York Stock Exchange.

Under a gag order issued by trial Judge Robert Kaye, plaintiff and defense lawyers weren’t commenting on the ruling, which sets the stage for the second phase of the byzantine case to begin Nov. 1 in Miami-Dade County Circuit Court.

In July, after months of testimony and a trove of incriminating documents, the six-member jury ruled that cigarette makers had lied for decades about the risks and addictiveness of smoking and were liable for a host of diseases.

That outcome launched a second trial phase to rule on damages for a small number of class representatives. But Kaye also ruled that jurors in the second phase could establish a single punitive damage award to be later divided among members of the class.

Tobacco executives rejoiced in early September when the appeals court overturned Kaye’s ruling, declaring that damages must be determined on an individual basis. In effect, this meant that apart from general findings favorable to plaintiffs, the industry could maintain the successful strategy of battling claimants one at a time.

But the three-member appeals panel agreed to reconsider, and without saying why, reversed itself on Wednesday.

The ruling means that when the jury reconvenes to decide the claims of three class representatives afflicted with lung and laryngeal cancers, it will also determine whether to punish the industry on behalf of the entire class.

Should jurors award punitive damages, the industry, in order to appeal, might be forced to post a bond covering the full amount of damages plus interest for the period of the appeal. If the award were for many billions of dollars, experts said the companies would probably be unable to afford the bond.

The threat could cause tobacco companies to try to settle by paying damages over a period of years from increased cigarette prices--the model followed in last year’s $246-billion settlement between the industry and state attorneys general.