3 Tobacco Firms to Forfeit Funds
In a surprise deal with anti-tobacco lawyers, three tobacco companies Monday agreed to forfeit $709 million even if they succeed in reversing an astronomical damage award in a class-action case in Florida.
The agreement is essentially an insurance policy, guaranteeing the right of the three cigarette makers--Philip Morris Cos., Lorillard and Liggett Group--to appeal last year’s $144.8-billion verdict in the Engle case, even if a controversial cap on the size of appeal bonds is ruled invalid.
R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp. said Monday they are evaluating the agreement. The price could rise significantly if they decide to sign on.
Tobacco foes applauded news of the deal, noting that it involves the industry’s largest payment in smoking and health litigation, apart from the companies’ multi-billion-dollar settlements with the states.
Tobacco shares drooped on the news. On the New York Stock Exchange, Philip Morris slipped $1 to close at $52; Loews Corp., parent of Lorillard, closed down $1.34 at $70.26; Vector Group, parent of Liggett, fell $1.97 to close at $33.52; and R.J. Reynolds was down $1.13 to close at $60.60. American depositary receipts of BAT, parent of B&W;, closed down 40 cents at $16.14.
Though other liability pressures appear to have eased recently, the agreement reflects the continuing threat to Big Tobacco from the Engle verdict, by far the largest in U.S. history.
In the ruling last July, jurors in Miami-Dade Circuit Court ordered the five top cigarette makers to pay punitive damages to an immense class of sick Florida smokers--with awards ranging from $74 billion for industry leader Philip Morris to a low of $790 million for Liggett.
Typically, losers in a court case must post bonds for the full amount of damages, plus interest, in order to appeal. But last spring, with the industry approaching a day of reckoning in the Engle case, Florida Gov. Jeb Bush signed legislation capping appeal bonds at $100 million. Similar protective laws have been adopted in several other states, including last month by West Virginia.
But tobacco foes have denounced the Florida cap as an unconstitutional bailout for the industry. And Engle lawyers Stanley and Susan Rosenblatt, a husband-and-wife team, have threatened to challenge it in court.
In the deal approved Monday, the Rosenblatts agreed that if the caps are overturned, they will still forgo bonding for the full amount of damages. For their part, the three companies agreed to forfeit the $709 million even if they win their Engle appeals.
William S. Ohlemeyer, vice president and associate general counsel for industry leader Philip Morris, said the firm “has acted in the best interests of our shareholders by entering into an agreement that eliminates the uncertainty associated with Florida’s bond-cap legislation. While we believe the Florida bond-cap statute . . . would withstand challenge, the agreement allows Philip Morris USA to proceed with its appeal in an orderly manner and to focus its efforts on reversing the case on its merits.”
Martin Feldman, a tobacco analyst with Salomon Smith Barney, said he understood the companies’ desire for protection during appeals that could go all the way to the U.S. Supreme Court.
“But I think it came at a cost that is higher than I think was necessary,” Feldman said.
Although cigarette makers typically coordinate their litigation strategy, spokesmen for R.J. Reynolds, the second biggest U.S. cigarette maker, and B&W;, number three, said they were completely unaware of the agreement until it was filed Monday in court.
The Rosenblatts said in a written summary of the deal that the two companies are invited to join in.
Under terms of the deal, Philip Morris, Lorillard and Liggett will increase the amount of their appeal bonds from the current amount of $203 million to just over $2 billion--with Philip Morris depositing most of the additional $1.8 billion.
Most of the money will go back to the companies if their appeals are successful. But regardless of the outcome, $709 million will not be refunded--$500 million from Philip Morris, $200 million from Lorillard and $9 million from Liggett, according to the agreement.
