Ruling May Aid Cigarette Makers
Monday’s Supreme Court ruling seeking to rein in large punitive damage awards could strengthen the hand of cigarette makers as they struggle against a rising tide of mega-verdicts.
The court’s reasoning for overturning a $145-million verdict against State Farm insurance could help cigarette makers in at least two ways. While stating that damage awards should not be limited by “a simple mathematical formula,” the court majority said that to pass constitutional muster, punitive damages should rarely exceed compensatory damages by more than a “single-digit ratio,” or 9 to 1. Nine punitive damage awards against cigarette makers are being appealed, and the ratio is exceeded in all but one case.
The court also said defendants should be assessed punitive damages for specific harm to the plaintiff -- and “not for being an unsavory individual or business” who may be guilty of misconduct outside the state in which the case was tried. Tobacco companies have long complained that plaintiffs improperly have been allowed to present evidence of “fraud on the market” without specifically tying such conduct to the plaintiffs’ decision to smoke.
The decision means tobacco companies “should be given a little more due process,” said Daniel Donahue, senior vice president and deputy general counsel of R.J. Reynolds Tobacco Co.
“The general focus, I think, was clearly pro-defendant,” said David Adelman, a tobacco analyst and managing director at Morgan Stanley.
But other experts took a different view, and cautioned against seeing the decision “as Christmas in April to the tobacco companies,” as John Coffee, a Columbia University law professor, put it.
The court drew a distinction between punitive damages for economic harm, as in the State Farm suit, and tobacco or other cases of serious physical injury, Coffee said.
“I still think there will be 100-to-1[punitive to compensatory damages] cases where we have people dying a horrible death,” he said.
Martin Feldman, a tobacco analyst with Merrill Lynch, also said the court appeared to deliberately leave “a cavity in its restriction on ratio of punitive damages ... where physical injury is involve.... That can’t be good for tobacco’s defenses.”
Richard Daynard, a law professor who heads the Boston-based Tobacco Products Liability Project, said the court affirmed that “reprehensibility” of conduct is still the most important determinant of punitive damages. “The tobacco industry is the poster boy of reprehensibility,” Daynard said.
Cigarette makers Philip Morris USA and R.J. Reynolds are appealing seven punitive damage awards to individual smokers who suffered lung cancer or other illnesses. The awards are between $15.2 million and $151.2 million, with the ratio of punitive to compensatory ranging from about 12 to 593 times. Four of the cases are in California, two in Oregon and one in Kansas.
The State Farm decision has no direct bearing on the hottest battle in the smoking wars involving a $10.1-billion verdict against Philip Morris in an Illinois class-action case in which the company was found guilty of deceiving smokers of low-tar cigarettes into thinking they were safer than other brands. The March 21 award included $7.1 billion in compensatory and $3 billion in punitive damages, a ratio within guidelines suggested by the court.
Overshadowing the case’s legal issues is Philip Morris’ fight against a court order to post a $12-billion bond to pursue an appeal in the case. The company is asking the judge to lower the bond and lobbying Illinois lawmakers to impose an appeal bond cap, as 16 other states have done.
The industry also is appealing a $144.8-billion punitive damages verdict issued in 2000 in a Florida class-action case. According to Adelman, the State Farm decision shows “this is not a court that would accept the [Florida] verdict” even if Florida appeals courts do.
