With enemies like the Campaign for Tobacco-Free Kids, American Cancer Society, and American Medical Association, Philip Morris - the nation's largest cigarette manufacturer - doesn't need friends. Its enemies are about to do it the biggest favor imaginable: to solidify its financial well-being by taking care of, once and for all, the significant liability threat that is hanging over the company.
According to a new report issued by Zacks financial analysts, the chief obstacle to Philip Morris' financial stability is the continuing litigation threat - especially, the threat of large punitive damage awards. "Zacks senior consumer industry analyst Steven Ralston, CFA is keeping the shares of cigarette manufacturer Altria Group, Inc. a Sell, especially as its price has crept up in recent weeks. Here are some of the reasons why: Altria Group is the leading domestic tobacco company. The company generates significant cash flow and has a high dividend yield. However, the company is engaged in numerous tobacco liability suits. Several large punitive damage awards have been upheld by appellate courts, especially the $50-million judgment paid out in the Boeken case after the U.S. Supreme Court refused to hear the case. ... The stock has maintained a low P/E due to tobacco-related litigation issues, and has been pressured down to a single digit P/E during times of court case losses."
The Rest of the Story
The FDA tobacco legislation being promoted by the Campaign for Tobacco-Free Kids, American Cancer Society, American Heart Association, American Lung Association, American Medical Association, and many other health and anti-smoking groups would end, once and for all, the significant litigation threat that hangs over Philip Morris and its financial well-being.
While the legislation itself does not directly affect litigation, its effect would be to definitively end the litigation threat by virtually destroying the possibility of large punitive damage awards in pending and future legal cases against the company. Philip Morris could successfully (and correctly) argue that there is no need for punitive damages because the FDA now has full jurisdiction over the company's marketing practices, the sale of cigarettes, and even the ingredients, components, and design of the cigarette. Thus, there is no need to award huge punitive damages to deter future fraudulent activity.
I have testified before many of the juries in these cases, and I can tell you that this argument will be very compelling. Philip Morris tried to use this type of argument with the Engle jury, but it didn't work because expert witnesses like me testified that the Master Settlement Agreement didn't actually regulate the companies or effectively deter future fraudulent actions. In contrast, it would be all too easy to convince jurors that granting the FDA jurisdiction over the manufacture, sale, safety, and marketing of tobacco products is sufficient to prevent future legal violations.
The companies will be able to successfully use the argument that they are already regulated to stave off injunctive relief and substantial punitive damages in litigation by appealing to jurors' perceptions that the problem is "taken care of." The highly exaggerated claims of the positive public health impacts of this legislation that the health organizations are making are only contributing to this perception.
Moreover, the FDA tobacco legislation would bail out Philip Morris from what I feel is the most threatening potential litigation to the industry in the future and the one about which I believe the industry is most concerned -- claims related to potentially reduced exposure products (PREPS). Ultimately, I argue, as bad as people think the status quo might be, the FDA legislation would be far worse.
It is the status quo -- specifically, the absence of FDA regulation of tobacco products -- that is actually the limiting factor in the inability or reluctance of tobacco companies to proceed wholeheartedly with the development, introduction, and marketing of PREPS.
This is because of the fear that cigarette companies might face litigation based on claims that they made misleading or unproven health claims about these potentially reduced exposure products. Because it would take years of epidemiologic research after the introduction of these products to provide any meaningful evidence that there is a health benefit from these products compared to existing cigarettes, it is virtually impossible for the cigarette companies to make any health claims regarding PREPS without facing the risk of litigation based on a claim that they are making misleading or unproven health claims.
After all, if they can't prove a health claim until they market and study a cigarette for 10-20 years, and they can't market a PREP until they can prove the health claims, then they are in a complete bind.
But the FDA legislation would bail them out. How? By regulating the introduction and marketing of PREPS, including the conditions regarding the cigarette companies' ability to make various types of health claims, the proposed FDA legislation would preempt any claims against the industry related to PREPS, and would therefore effectively provide immunity for them, allowing them to proceed with the widespread introduction of PREPS into the market, both nationally and internationally.
In essence, not only is the Campaign for Tobacco-Free Kids working to open up global markets to the introduction of a new cigarette innovation that kills people, but does so by making them think they are protecting their health, but it is also working to take away the legal rights of American citizens to hold corporations accountable for damages suffered as a result of using their products.
With "enemies" like the Campaign for Tobacco-Free Kids, the major cigarette companies do not really need friends - the Campaign is doing their bidding for them in the halls of Congress.
And the result of that bidding, if successful, would be the global expansion of the cigarette market, the third major cigarette product innovation by the industry in the past half a century, the provision of immunity to cigarette companies to introduce and market a broad new class of deadly products with no fear of liability, the widespread introduction and sanctioning by the government of unproven and undocumented health claims that are sure to mislead millions of smokers, and ultimately, needless deaths due to the undermining of public health efforts to encourage smoking cessation, emphasize the deadly effects of cigarette smoking, and ensure that the public is not led to believe that there is any safe cigarette.
The real question is why would these health groups want to do such a favor for Philip Morris?
Perhaps it's because they feel, subconsciously, that they will be getting something in return.