Judge Slashes Philip Morris’ Appeal Bond
An Illinois judge on Monday reduced Philip Morris USA’s appeal bond in a landmark class-action case, and the cigarette maker announced that it would meet today’s deadline to make $2.6 billion in settlement payments to states.
Last month, Madison County Circuit Judge Nicholas G. Byron ordered the tobacco giant to post a bond of $12 billion to guarantee that a damage award of $10.1 billion, plus interest, will be paid if the company fails in its appeal.
Instead, Byron ruled Monday, Philip Morris would be allowed to deposit $6.8 billion in guarantees, though the amount of the verdict remains unchanged.
Philip Morris had said it could not put up $12 billion and pay its annual April 15 installment to the states from a 1998 tobacco settlement -- a warning that prompted state attorneys general to threaten suits against Philip Morris and to ask Byron to consider lowering the bond.
California, which gets 13% of the settlement, is to receive $331 million today. The money will be divided among the state treasury, California’s counties and its largest cities.
Monday’s ruling defused weeks of legal threats and counter-threats since Byron issued his verdict March 21 in the first consumer fraud case to focus on the marketing of low-tar cigarettes.
Philip Morris officials called the $6.8-billion guarantee “onerous” but a welcome alternative to the $12 billion. The company had unsuccessfully lobbied Illinois lawmakers to pass an appeal bond cap of $25 million to $100 million, as 16 other states have done.
Steve Tillery, lead attorney for the class of about 1.1 million smokers, announced that he would appeal, saying the order fails to ensure that his clients would be paid in full if higher courts reject Philip Morris’ appeal.
Last month’s verdict and the $12-billion appeal bond -- the largest ever imposed by a U.S. court -- sent shock waves through financial markets, stirring bankruptcy talk and intense legal and political maneuvering that overshadowed the issues in the case.
Credit-rating firms lowered debt ratings on Altria Group Inc., Philip Morris’ corporate parent, and Altria’s Kraft Foods subsidiary, and also dropped ratings on $18 billion in state bonds backed by future tobacco settlement payments.
On April 3, California, which had planned to sell $2.3 billion worth of tobacco bonds to reduce a giant budget shortfall, joined several other states in putting its bond sale on hold, citing the reaction of financial markets to the Illinois case. State Treasurer Phil Angelides said in a statement late Monday that it was too early to tell if or when “it is appropriate for the state to attempt to reenter the market with the sale of tobacco securitization bonds.”
By underscoring the industry’s vulnerability to multibillion-dollar lawsuits, the Illinois case created anxieties on Wall Street that will not be dispelled by Monday’s ruling. The Philip Morris verdict was particularly sobering for two of its smaller competitors -- R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp. -- which also face class-action suits over the marketing of “light” cigarettes in Madison County. Other “lights” cases against Philip Morris have been granted class-action status in Florida and Massachusetts, and class certification rulings are pending against the three companies in several other states.
In his verdict, Byron ordered Philip Morris to pay $7.1 billion in compensatory damages to Illinois smokers of Marlboro Lights and Cambridge Lights cigarettes -- essentially to reimburse them for years of buying cigarettes that he ruled had not delivered on a promise of lower health risks.
Philip Morris contended that the suit should not have been a class action in the first place because smokers differ widely in their reasons for choosing brands. The company also said it never stated the cigarettes were safer, and used the same health warnings as with all other brands.
Business groups have blasted Madison County as a uniquely pro-plaintiff, anti-corporate venue, where judges are prone to rubber-stamp petitions for class certification.
But in a news conference late Monday, lead plaintiffs’ attorney Tillery suggested that Judge Byron had caved in to “incredible pressure” to reduce the burden on Philip Morris -- even though, he said, the company clearly had “sufficient financial strength to bond this case.”
“There’s been constant threats by Philip Morris that they’re going to ... go bankrupt,” Tillery complained. “They’ve threatened not to make their payments to the state attorneys general ... in essence, threatening a lot of innocent people.”
Tillery said Byron disclosed Friday that he had received death threats and that “the FBI is investigating and has determined that one of them came from a Philip Morris shareholder.”
Byron could not be reached, and an FBI agent in Springfield, Ill., declined to comment. John Mulderig, associate general counsel with Altria, said that the judge mentioned threats at Friday’s hearing but “made no association between Philip Morris and any threats.”
George Zelcs, another plaintiffs lawyer, confirmed Tillery’s account of the judge’s statement, saying, “I will assure you that that was said.”
According to Tillery, Philip Morris lawyers revealed in hearings Friday and Monday that the company has decided to remove the words “lowered tar” from packages of Marlboro Lights. “For me, that’s consolation,” Tillery said. “I feel good about that.”
A Philip Morris spokesman confirmed that the words “lowered tar” and “low tar” will be removed from the company’s brands but said the decision to do that was made prior to the trial.
The appeal guarantee will include a note for an internal company loan of $6 billion made last year by Philip Morris to its parent, Altria. The note will be deposited in a court-supervised escrow account that will also receive Altria’s interest payments of $420 million a year through the period of the appeal.
Under Byron’s order, Philip Morris will deposit an additional $800 million in interest-bearing funds in the escrow account. The funds would be released to the plaintiffs if the verdict were upheld and Philip Morris defaulted on the judgment. The money will go back to the company, less administrative costs, if its appeal succeeds
Shares of Altria, which jumped more than 4% earlier in the day in anticipation of the judge’s order, fell soon after the order was handed down, closing up 89 cents at $31.48 on the New York Stock Exchange.
