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US: Tobacco Makers Lose Key Ruling on Latest Suits

by David Cay Johnston and Melanie Warner The New York Times
September 26th, 2006

In a legal blow to the tobacco industry, a federal judge in Brooklyn ruled yesterday that people who smoked light cigarettes that were often promoted as a safer alternative to regular cigarettes can press their fraud claim as a class-action suit.

Judge Jack B. Weinstein of Federal District Court in Brooklyn found "substantial evidence" that the manufacturers knew that light cigarettes were at least as dangerous as regular cigarettes.

The decision, coming at a time when the tobacco industry felt it was on a legal winning streak, raises the possibility that so-called lights cases will become a major threat to the companies and expose them to potentially significant damages.

The case, first filed in 2004, is against Philip Morris USA, R. J. Reynolds Tobacco, British American Tobacco, Liggett Group, Brown & Williamson and Lorillard Tobacco. It differs from many previous tobacco lawsuits in that it does not claim that smokers suffered personal injury. Instead, the case — called the Schwab case after the lead plaintiff, Barbara Schwab — claims that the industry defrauded consumers beginning as early as 1971, when Philip Morris began selling Marlboro Lights, the first light cigarette.

Because some 45 percent of smokers currently smoke light cigarettes, potentially vast numbers of people nationwide could be involved.

Michael D. Hausfeld, a partner at Cohen, Milstein, Hausfeld & Toll who is representing the plaintiffs, has said that the class could reach tens of millions of people and involve damages of up to $200 billion. The racketeering law being cited would allow any damage award to be tripled.

Investors yesterday drove down the price of tobacco stocks.

But before the case can proceed to a jury trial, the class-action ruling would have to be upheld by the United States Court of Appeals for the Second Circuit. Some litigation experts expressed strong doubt that it would survive such an appeal.

William S. Ohlemeyer, associate general counsel of Altria, whose Philip Morris division makes half the nation’s cigarettes, said "the judge is wrong on the law and wrong on the facts."

Mr. Ohlemeyer said that the government, not tobacco companies, promoted the idea that lights were a safer alternative cigarette.

He added that Supreme Court decisions and court rules prohibit treating fraud cases as class actions because each individual claim of reliance on false statements must be proved.

Still, yesterday’s ruling is a setback to what tobacco companies have previously described as an "improving legal environment" for the industry.

Tobacco companies in recent months had won a string of victories. In July, the Florida Supreme Court upheld a decision to toss out a $145 billion judgment in a class-action suit. In December, the Illinois Supreme Court threw out a similar $10 billion judgment against Philip Morris.

Then last month, Judge Gladys Kessler of Federal District Court for the District of Columbia issued a scathing decision in the Department of Justice’s landmark racketeering lawsuit. She concluded that the tobacco industry had engaged in a 40-year conspiracy to defraud smokers about the health dangers of tobacco, including deceptions about lights and low-tar cigarettes.

But while Judge Kessler ordered tobacco companies to stop labeling cigarettes as "low tar" or "light" to convey that they were less hazardous than full-flavor cigarettes, she said an earlier ruling prevented her from awarding what could have amounted to $10 billion in damages.

Yesterday’s ruling also throws uncertainty into long-running plans by Altria, the parent company of Philip Morris, to separate its Kraft Foods unit from its domestic and foreign tobacco businesses. After several decisions favorable to tobacco companies within the last year, investors had driven up the price of Altria’s shares in anticipation that it would spin off Kraft in the coming months.

Shares of Altria fell 6.4 percent yesterday to $77.06.

David Adelman, a tobacco analyst at Morgan Stanley, said in a conference call with investors that Judge Weinstein’s ruling would probably delay a restructuring. He said he expects that if tobacco companies are successful in their efforts to get a review of Judge Weinstein’s decision before the trial begins, which could be as early as January, a Kraft spin-off could take place by the end of the first quarter of 2007.

Mr. Adelman said that based on past rulings and what he called the "conservative" nature of the Second Circuit appeals court, he expected such a review to be granted. If it is not, the Schwab case will proceed to a jury trial.

While plaintiffs’ lawyers have been filing such class-action suits against cigarette makers since the early 1990’s, this is the first lights case to be certified as a class action in a federal court. Currently, three other lights cases have received class certification, all in state courts and encompassing fewer numbers of smokers.

Judge Weinstein rejected the defense claim that the case was so "enormous in scope and time and in diverse persons affected" that there was no reasonable and inexpensive way to try the case.

The judge said that a central theme of American justice was that "each right has a remedy" but that it was impractical to try individually the fraud claims of tens of millions of smokers.

The judge took note of past court decisions limiting class-action cases and expressed doubt that litigation has done, or can do, much to reduce the damage done by smoking.

"Nevertheless," Judge Weinstein ruled, "where a cigarette smoker can demonstrate that he or a group of smokers has been damaged by the cigarette industry, the help of the court in resolving the claim and defenses is mandatory."

Judge Weinstein also took note of the agreements the tobacco companies reached with the state governments, suggesting the companies could end up paying damages twice.

"The independent political-economic arrangement" the tobacco companies made with the states "to pay them billions of dollars over many years has not compensated smokers for the individual damages they have allegedly suffered," the judge wrote. He also wrote that widespread "partial acknowledgments" by tobacco companies that cigarettes are dangerous, and their efforts to reduce smoking by children and others "does not negate any liability for past" misconduct.

Judge Weinstein has a history of decisions that favor class actions and proposing novel solutions to settle cases. In an earlier tobacco case, the Second Circuit Court of Appeals overturned his certification of a class.

Professor Geoffrey P. Miller, who teaches class-action litigation at New York University Law School, was among the lawyers who said they expected the Second Circuit Court of Appeals to overturn the class-action certification.

"It is important to remember that it is not a crime per se to lie, nor is it a violation of law to lie," Professor Miller said. Proving fraud requires showing both that the companies lied and that customers relied on those lies, which means that "technically each individual class member has to show reliance on the fraudulent statements," he added.

Victor E. Schwartz, general counsel for the American Tort Reform Association, which seeks major limits on class actions, said that "the flaw in Judge Weinstein’s decision is the idea that there is always a remedy for every alleged injury, which simply is not true."

Trying cases one smoker at a time has resulted in a few victories for smokers, but many more victories for cigarette makers.

Philip J. Hilts, author of the 1996 book "Smoke Screen," which relied on internal cigarette industry documents to show that the companies knew cigarettes were addictive and dangerous but did not alert consumers, said that cigarette makers have good reason to fear a class-action lawsuit.

"With a class action you get higher legal firepower and you get the principle discussed, not that this person quit smoking a while ago or says he smoked more than he did or whatever detail diverts from the principle," Mr. Hilts said.

Cigarette smoke contains thousands of chemicals, some of them known carcinogens. Some lights are advertised as having less nicotine, a highly addictive substance.

Light cigarettes are manufactured differently from regular cigarettes. They have microscopic holes that the companies say dilute the smoke. Medical researchers have found that people draw harder and deeper on lights, often filling their lungs with more toxic material than they would get from regular cigarettes, said Dr. Stanton A. Glantz, a cardiologist at the University of California, San Francisco medical school who is a longtime antagonist of the cigarette makers.

Matthew L. Myers, president of the Campaign for Tobacco-Free Kids, an anti-tobacco group, said he thought the latest ruling could embolden plaintiffs’ lawyers to file new lights cases.

Judge Weinstein and Judge Kessler’s legal decisions have also heightened calls for federal regulation of cigarettes. Senator Frank R. Lautenberg, Democrat of New Jersey, introduced legislation on Sept. 7 that would ban the use of the terms "light’’ and "low tar.’’

While Mr. Lautenberg is one of 28 Democratic and Republican sponsors of another bill that would give the Food and Drug Administration authority to regulate tobacco, Dan Katz, chief counsel for Mr. Lautenberg, said that this new bill is needed as a more immediate stop-gap measure.





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