Thursday, July 06, 2006

Florida Supreme Court Overturns Engle Punitive Damages Verdict; Huge Victory for Big Tobacco

In an enormous victory for Big Tobacco, the Florida Supreme Court today upheld the Third District Court of Appeal's reversal of a $145 billion punitive damage verdict against the major tobacco companies in the Engle class action trial.

Ruling that "the punitive damages award is excessive as a matter of law," the Court vacated this unprecedented punitive damages award. There were basically three major reasons for the Court's decision:

(1) The punitive damages award was determined prior to the consideration of compensatory damages for the members of the class. Thus, no appellate court could judge the reasonableness of the punitive damages verdict, because one necessary standard set by the United States Supreme Court is the relation between the magnitude of the compensatory and punitive damages.

The Court ruled: "As a matter of law, the punitive damages award violates due process because there is no way to evaluate the reasonableness of the punitive damages award without the amount of compensatory damages having been fixed."

(2) The punitive damages award was grossly excessive because it would have resulted in bankruptcy for some of the defendant companies. This is based on a comparison of the amounts awarded and the financial worth of each company assigned by an Engle class expert.

The Court ruled: "The amount awarded is also clearly excessive because it would bankrupt some of the defendants."

(3) It was improper for the trial court to allow the jury to decide whether plaintiffs were entitled to punitive damages prior to the jury deciding that plaintiffs had established legal causation and reliance (i.e., a finding that the damages of the individual class members were caused by the plaintiff's misconduct and that the class members actually relied upon the misrepresentations of the defendants). In the trial court, entitlement to punitive damages was determined by the jury in Phase I, prior to the jury's consideration of the issues of causation and reliance, which did not occur until Phase II.

The Court ruled that: "the trial court erred in allowing the jury to consider entitlement to punitive damages during the Phase I trial."

Importantly, the Florida Supreme Court also ruled that "problems with the three-phase trial plan negate the continued viability of this class action. We conclude that continued class action treatment for Phase III of the trial plan is not feasible because individualized issues such as legal causation, comparative fault, and damages predominate."

In other words, the Florida Supreme Court has now decertified the class (although it is allowing most of the Phase I determinations, and most of the Phase II compensatory damage awards, to stand).

The Rest of the Story

This is a huge victory for Big Tobacco, not only because the huge punitive damages award was vacated, but also because the class was decertified, meaning that there can be no mass punitive damages award consideration in the future. Each individual class member will now have the opportunity to file an independent claim for damages, but these trials will have to proceed independently, and any punitive damages awarded will have to be related to the compensatory damages in the individual case. It is still possible that punitive damages, and large damages, could be awarded; however, the time course of these awards would likely be gradual, providing financial stability for the companies and avoiding any huge, mass punitive damage award.

Ultimately, what killed the punitive damages award were two recent decisions by the United States Supreme Court which required that a review of punitive damage awards must consider a comparison of the award to the actual compensatory awards (State Farm Mutual Auto. Ins. Co. vs. Campbell [2003] and BMW of North America, Inc. v. Gore [1996]). Absent these decisions, the Florida Supreme Court might well have been guided by its own thoughts on the issue, which are that punitive damages "are to be measured by the enormity of the offense, entirely aside from the measure of compensation for the injured plaintiff" (Arab Termite, 409 So. 2d at 1043).

The Engle jury did in fact find the cigarette companies liable for damages suffered by the three class members (Phase II-A) and so despite going about things in the wrong order, the necessary findings were made to award punitive damages. The excessive amount of the award could potentially have been addressed by requiring the jury to reduce the award to a level below which the defendant companies would become bankrupt. Neither of those aspects of the decision would necessarily have been crippling. They would have perhaps just required that the trial court do things a little differently and it is possible that a reduced (but still very high) punitive damages award could have been entered.

However, the requirement that compensatory damages be determined prior to punitive damages in order to allow appellate courts to judge the reasonableness of the punitive damages claims does cripple the mass punitive damage award.

Interestingly, since the class certification up to this point was upheld by the Supreme Court (overturning the Appeals Court decision), the decertification of the class at this point is of little significance. According to the trial plan, Phase III was to consist, anyway, of individual trials before different juries to determine individual issues of causation and reliance and individual compensatory damage awards, which would then be used to divvy up the punitive damages pot among successful class members.

Under decertification, there will still be individual trials before different juries to determine the issues of causation and reliance, as well as individual compensatory awards, and punitive damages may still be awarded, although it will be a separate determination in each trial.

The big difference is that while under the original trial plan, punitive damages were assessed in one lump sum, now those damages will be determined on a case-by-case basis, shielding the tobacco companies from any large single hit. It also shields the companies from having to post any bonds to secure the punitive damage awards.

Individual cases may still proceed, and because most of the general Phase I issues (such as the findings that smoking causes certain diseases, that nicotine is addictive, that cigarettes were defective and unreasonably dangerous, that the defendants concealed information regarding the health effects and addictive nature of their products, that the companies conspired to misrepresent information on the health effects of cigarettes, and that the companies were negligent) do not have to be re-heard, these cases can be streamlined. They will need focus only on issues of whether the tobacco companies are liable to that particular plaintiff, and if so, the amount of the damages.

Nevertheless, processing thousands of individual claims is going to take a huge amount of time. Any awards will obviously be much smaller than the $145 billion, and will be spaced out over time, providing the tobacco companies with the ability to allocate the necessary funds to be available if they are unsuccessful in these cases.

Interestingly, some media outlets seem to be mis-reading the Court's decision. For example, CNN reported that "In the 79-page decision, the justices agreed with the appeals court ruling that the case should not have been certified as a class-action on behalf of hundreds of thousands of sick Florida smokers. Tobacco lawyers had said the individual cases were so different they could not be lumped fairly into a single class."

Actually, the justices did not agree with the appeals court ruling. They ruled that the appeals court itself had already certified the class and that it was improper for an appellate court panel to decertify a class the appeals court had already certified, absent any manifest injustice. The Florida Supreme Court found no such manifest injustice, and overturned the appellate court's decertification of the class.

It is also interesting to note that the Florida Supreme Court did not buy the argument that the claims brought by Engle plaintiffs were barred by the state's settlement with the tobacco industry. The Court ruled that claims by private interests against a company cannot be barred by a settlement of litigation between the state and a company. Only claims by the state, which is a party to the agreement, can be barred by such an agreement.

Finally, perhaps the most interesting aspect of this story is the way in which the story was framed by the Tobacco Control Resource Center. The Center called the decision a huge blow to Big Tobacco: "The Florida Supreme Court Dealt the Cigarette Industry a Devastating Blow by Upholding General Liability on Behalf of Injured and Deceased Florida Smokers and Paving the Way for Tens of Thousands of Streamlined Cases Dealing only with Individual Causation and Punitive Damages to be Filed Within a Year."

I appreciate the fact that the Center is trying to find a silver lining in a dark cloud, but calling the ruling a devastating blow to the cigarette industry seems like telling your kid it's a good thing that his ice cream scoop fell out of his cone.

While it is true that thousands of streamlined cases can now be filed, the time required to process these cases is such that any awards will likely be well-spaced out. This provides the companies with financial predictability. This is essentially why class action lawsuits are more of a threat to the industry than individual lawsuits.

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