Court Slashes $12-Billion Bond for Philip Morris

Philip Morris USA was handed a major victory Tuesday when the Illinois Supreme Court slashed almost in half a $12-billion bond required from the company pending an appeal of a critical verdict.

The state high court also reversed its own earlier ruling and agreed to bypass the state appellate court and hear the appeal of a judge’s $10.1-billion verdict against Philip Morris, which he found to have tricked smokers into thinking “light” cigarettes were safer than regular cigarettes.

The decision not only saves Philip Morris, a unit of Altria Group Inc., from a potential cash crunch, but also could safeguard billions of dollars in payments it owes U.S. states in a massive settlement over the health costs of smokers made sick by tobacco.

“I would say it is probably one of the most favorable tobacco legal developments in the last decade,” said Morgan Stanley analyst David Adelman.

“It granted everything Philip Morris wanted and more,” he said.

The ruling also cheered R.J. Reynolds Tobacco, Philip Morris’ smaller rival. The No. 2 cigarette maker faces trial of a similar “lights” class action later this fall, and in the event of a big loss could be imperiled by a multibillion-dollar appeal bond. RJR is seeking a delay in the trial until the Philip Morris appeal is resolved.

But even if the trial goes forward, Tuesday’s ruling may “bode well for us as well,” said RJR spokesman Seth Moskowitz. “It does show that the Supreme Court recognizes ... the need to be flexible when you have potentially ... bankrupting bonds.”

Altria shares rose 8.7% in after-hours trading after closing Tuesday at $40.46, down 14 cents, on the New York Stock Exchange.

R.J. Reynolds Tobacco Holdings Inc., parent of RJR, slipped 5 cents to $34.19, also on the NYSE.

The ruling on the bond means that Philip Morris will have to post only a $6-billion term note plus $800 million in deposits.

A lower court had earlier said Illinois law required the company to post $12 billion to pursue its appeal, an amount the company said could drive it into bankruptcy, jeopardizing its payments to the states.

“The company ... believes that the Supreme Court’s decision to consider the appeal of the ... verdict without intermediate appellate court review is in the best interest of all parties involved because it expedites the ultimate resolution on the merits,” said William Ohlemeyer, Philip Morris USA vice president and associate general counsel.

Madison County Judge Nicholas Byron later slashed the bond to a $6-billion term note plus several hundred million dollars in deposits, but a state appellate court found that Byron lacked authority to cut the bond.

Plaintiffs argued that Philip Morris marketed “light” cigarettes in a way that suggested to smokers that they carried less health risk than regular cigarettes.

But the company has denied it suggested light cigarettes were less hazardous.

Stephen Tillery, an attorney for the Illinois plaintiffs, has contended that the reduced bond is insufficient to protect the interests of the class. Joy Howell, a spokeswoman for Tillery’s law firm, said, “We look forward to the Illinois Supreme Court review of the evidence that supported the trial court’s judgment.”

Bloomberg News was used in compiling this report.