Atlanta Court Ruling Another Sign Tobacco Lawsuits Subsiding

A little-noticed ruling by three federal judges may have tipped the scales in favor of the tobacco industry’s bid to put decades of smoker lawsuits behind it.

The appeals court panel in Atlanta said individual smokers, already blocked from suing as a group, must each prove the cigarettes they used were defective, rather than relying on an earlier jury’s findings. That decision adds time, expense and uncertainty to their cases.

Reynolds American Inc. and Altria Group Inc.’s Philip Morris unit, plagued for years by thousands of lawsuits, had already whittled down claims, especially in Florida, where they’ve lost more million-dollar verdicts than in the rest of the U.S. combined. Now they’re trying to use the April federal court ruling to weaken state court cases there, dragging out suits even longer in a war of attrition against aging smokers.

The U.S. Court of Appeals decision is the latest evidence that a massive threat to the industry has subsided, said University of Michigan law professor Erik Gordon. Tobacco companies reached a $100 million settlement of 400 federal court suits in February and face dwindling ranks of smokers who can claim they didn’t fully know the risks of cigarettes.

“If you look the big picture, the worst of it is behind them,” Gordon said. “The tobacco industry has survived.”

Philip Gorham, an analyst at Morningstar, agreed. “Tobacco litigation in the U.S. is at a stage where it is very manageable for the tobacco firms,” he said.

Corner Turned

U.S. tobacco companies have turned the corner in other ways, too. While the number of cigarettes sold is declining as more people quit smoking, manufacturers have been able to raise prices, leading to modest revenue gains.

Reynolds and Lorillard Inc. have pushed away from discount cigarettes to focus on more profitable brands, including Camel and Newport. Sales volume declines have slowed, helped most recently by low gas prices that leave cash in smokers’ pockets.

The companies have sought to combat declining smoking rates and boost profitability by consolidating. Reynolds announced its $25 billion acquisition of Lorillard last July, a deal that will combine the nation’s second- and third-largest cigarette makers. The merged firm will hold an estimated 34 percent market share and become a larger rival to Altria, which owns the Marlboro brand and holds an estimated 47 percent share. The stronger position will provide more leverage to raise prices and cut costs.

Florida Lawsuit

The Florida cases, a drag on the companies for years, stem from a class action filed in 1994. The smokers were allowed to sue the industry as a group and won a $145 billion punitive damages verdict in 2000 against Altria, Reynolds and other cigarette makers.

The Florida Supreme Court set aside that record verdict in 2006 and threw out the class action, telling thousands of smokers and their survivors to sue individually for disease and death.

As part of that case, known as the Engle decision, the court gave former members of the class one year to file individual claims and provided a shortcut at trial. It allowed them to rely on the first jury’s findings, including that the companies sold defective products and concealed the dangers of smoking, that nicotine is addictive and that cigarettes cause disease.

The lawsuits rolled in, rising to about 5,000 in state courts and 4,400 in federal court. Altria and Reynolds still face more than 3,000 claims in state courts. Following the dismissal of hundreds of claims, and this year’s settlement of 400 more, only a handful of federal lawsuits in Florida remain.

Trial Scorecard

Both companies have been hit with multiple million-dollar jury verdicts during the past five years. Reynolds has paid $214.7 million in 29 judgments, the company said in a regulatory filing. Verdicts totaling $293.5 million are on appeal. Altria said in a regulatory filing that, as of April 20, it had lost 41 of the so-called Engle cases that reached juries, while winning 36.

The $100 million settlement of 400 Engle cases by Altria, Reynolds and Lorillard in February marked the first time the major cigarette makers agreed to pay money directly to smokers to resolve claims of death and disease caused by their products. The average recovery under the settlement, after attorneys’ fees, is lower than many of the verdicts that have been delivered in Florida courts.

Tobacco Victory

The Atlanta appeals court decision last month moved the needle in favor tobacco of companies by making it harder for those individual smokers to sue.

The decision overturned an $875,000 judgment against Reynolds and Altria won by the widower of a 58-year-old woman who died of lung cancer more than 20 years ago. The trial judge told the jury that the plaintiff, Earl Graham, didn’t have to prove cigarettes were defective or the companies were negligent.

The appeals court ruled that findings by the original Engle jury that all cigarettes are defective and that all cigarette makers were negligent in selling them can’t be applied in individual suits. That would amount to a ban on cigarettes, an authority only granted to the U.S. Congress, according to the appeals court.

The decision “calls into question the underpinnings of all Engle litigation,” David Howard, a Reynolds spokesman, said in an e-mail. He declined to comment further. Brian May, an Altria spokesman, declined to comment.

“This doesn’t knock the plaintiffs out of the box, but they’ll have to do more work,” Gordon, the law professor said. “They have to show what the tobacco company did that was negligent or intentional.”

For weak cases, he said, “It’s a knockout blow.”

Long Shot

Graham’s lawyers have asked for a rehearing by the full court in Atlanta.

That’s a long shot, said University of Miami law professor Sergio Campos. The decision is likely to be applied to state court cases, he said.

“Federal law trumps state law even in state courts,” he said.

Reynolds has already cited the decision in two Florida state cases, including its appeal of a $3.5 million judgment to the son of a dead smoker.

Plaintiffs’ lawyers are fighting use of the Graham decision in state courts and don’t see it as a turning point.

“I don’t see any change in the state litigation,” as a result of the Graham decision, said Alex Alvarez, a Coral Gables lawyer who has tried 19 Engle cases since 2008, winning at least 14 verdicts, the largest of which, $46.5 million, came last month against Reynolds American.

The real difficulty for smokers and their families, many of whom were born in the 1930s, is the passage of time, Alvarez said. Florida courts are able to try as many as 50 cases a year, he estimated.

“These people are getting old,” Alvarez said. “A lot of these cases are dying on the vine.”

The case is Graham v. R.J. Reynolds Tobacco Co., 13-14590, U.S. Court of Appeals for the 11th Circuit (Atlanta).

–With assistance from Duane D. Stanford in Atlanta.

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