Thursday, December 15, 2005

Illinois Supreme Court Overturns $12 Billion Award Against Philip Morris

In a decision announced moments ago, the Illinois Supreme Court has overturned a $10.1 billion punitive damages award against Philip Morris in a class action lawsuit based on the claim that the company violated state consumer protection laws by fraudulently portraying "light" cigarettes as being a safer alternative to regular cigarettes. An additional $2 billion had been awarded in attorneys' fees.

The Court, in overturning the decision, forced the lower court (in Madison County) to dismiss the case against Philip Morris.

While the specific legal reasoning for the Court's decision is not yet available, an article in the Wall Street Jounral online suggests that the Court ruled that Philip Morris did not, in fact, defraud consumers by marketing Marlboro Lights and that the Federal Trade Commission, through two consent orders, specifically allowed companies to characterize their products as "light" or "low tar."

The Rest of the Story

There is no question that this is a major victory for Philip Morris and its parent Altria, not only because it saves the company $10.1 billion, but also because it helps put a damper on a host of other "lights" lawsuits that rely on a similar legal argument, and because it may well help deter a host of similar lawsuits from being filed in the future. It is certainly going to be more difficult, if not impossible, to convince attorneys to file additional "lights" lawsuits in the face of this state Supreme Court decision, since the prospect of success is significantly dimmer.

Since, as I have argued, there is little merit behind the Department of Justice's request for monetary remedies in the government's lawsuit against the tobacco companies, the only substantial legal threat that remains for Altria to deal with before it can proceed with its planned breakup, in my opinion, is the Engle case (the Florida class action lawsuit on behalf of smokers which resulted in a $145 billion punitive damages verdict, overturned by the Appeals Court, but awaiting final disposition by the Florida Supreme Court). A decision in that case could be released any Thursday, although some recent filings in that case suggest that perhaps a decision may not come out until next year.

Although I have been unable to obtain a copy of the Court decision, it is possible that one of the consent orders to which the Court is referring is American Tobacco Co., FTC Docket No. C-3547 (Jan. 3, 1994), a consent order settling allegations that advertisements misrepresented the relative amount of tar that smokers of Carlton cigarettes would take in. Since that consent order presumably related to the potential deception of smokers into thinking that Carlton "light" or "low-tar" cigarettes would be safer to consumers, the issuance of that order, in the opinion of the Illinois Supreme Court, may have met the criteria for an exemption in the Illinois consumer protection statutes, which exempts conduct that is "specifically authorized by laws administered by any regulatory body or officer acting under statutory authority of this state or the U.S."

UPDATE (Thursday, December 15; 11:50 am): The text of the Illinois Supreme Court's decision has now been released. It turns out that the Court relied upon the entire history of the FTC's regulation of the tar and nicotine levels in cigarettes and of claims made by cigarette companies about these levels. As part of this history, there were two consent orders in which the FTC specifically permitted certain "low-tar" and "light" claims and set out conditions under which these claims could be made.

One of these was indeed American Tobacco Co., FTC Docket No. C-3547 in 1994. According to the Court: "The agreed order provided, further, that 'presentation of the tar and/or nicotine ratings of any of respondent’s brands of cigarettes and the tar and/or nicotine ratings of any other brand (with or without an express or implied representation that respondent’s brand is ‘low,’ ‘lower,’ or ‘lowest’ in tar and/or nicotine) shall not be deemed' to violate the ban on numerical comparisons. American Tobacco, 119 F.T.C. at 11."

Another relevant consent order was issued in 1971 and involved a complaint against American Brands for implying in its advertising that certain cigarettes were low-tar: "The dispute between the FTC and American Brands was resolved in 1971, with the entry of a consent order that required American Brands to cease and desist from: Stating in advertising that any cigarette manufactured by it, or the smoke therefrom is low or lower in ‘tar’ by use of the words ‘low,’ ‘lower,’ or ‘reduced’ or like qualifying terms, unless the statement is accompanied by a clear and conspicuous disclosure of: 1. The ‘tar’ and nicotine content in milligrams of the smoke produced by the advertised cigarette; and 2. If the ‘tar’ content of the advertised brand is compared to that of another brand or brands of cigarette, (a) the ‘tar’ and nicotine content in milligrams of the smoke produced by that brand or those brands of cigarette, and (b) the ‘tar’ and nicotine content in milligrams of the lowest yield domestic cigarette.” American Brands, 79 F.T.C. at 225."

The basis of the Court's decision, then, is that the legal claim against Philip Morris does not hold because of the exemption in the state's consumer protection statute which exempts actions "specifically authorized by laws administered by any regulatory body or officer acting under statutory authority of this State or the United States."

The Court ruled that "It is undisputed that the FTC acts under federal statutory authority to administer federal laws regarding the labeling and advertising of cigarettes" and that "If the FTC has specifically authorized the use of the terms “lights” and “lowered tar and nicotine” by PMUSA in its labeling and advertising, PMUSA may not be held liable under the Consumer Fraud Act, even if the terms might be deemed false, deceptive, or misleading."

The Court concluded that: "the FTC could, and did, specifically authorize all United States tobacco companies to utilize the words “low,” “lower,” “reduced” or like qualifying terms, such as “light,” so long as the descriptive terms are accompanied by a clear and conspicuous disclosure of the “tar” and nicotine content in milligrams of the smoke produced by the advertised cigarette." For this reason, it ruled that the plaintiff's claim was barred under Illinois state consumer protection law.

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