The Illinois Supreme Court on Thursday reversed a $10.1 billion verdict against Philip Morris USA, ordering a lower court to dismiss the case in which the company was accused of defrauding customers into thinking "light" cigarettes were safer than regular ones.
The much-anticipated ruling sent shares of Philip Morris parent Altria Group Inc. up more than 4 percent to a new all-time high and could help clear the way for Altria to spin-off its Kraft Foods Inc. unit from its tobacco units.
In a 4-to-2 opinion, the court found that U.S. Federal Trade Commission rulings specifically authorised tobacco companies to characterise their products as "light" or "low tar and nicotine."
Writing for the majority, Justice Rita Garman said the ruling was specifically based on a section in the Illinois Consumer Fraud Act that exempts a company from being punished for behaviour allowed by a specific regulatory body. She said the ruling did not address whether the case should have been barred by federal law.
"We share the concerns expressed by plaintiffs ... about the devastating health affects of smoking and in particular, the scourge of smoking among young people," Garman wrote.
But those seeking to change the conduct of tobacco companies will need to appeal to the Illinois legislature for changes in the Consumer Fraud Act; the FTC for changes in labelling regulations of the U.S. Congress, she said.
Garman's ruling in Illinois did not address whether the case should have been certified as a class action.
The status of this case has been closely watched not just because of the size of the ruling, but because it is one of the legal hurdles management has said need to be cleared before it could spin off Kraft.
"Even though this was a well-anticipated reversal ... the market still has reacted positively to the ruling in pushing up tobacco stocks because this removes yet another legal impediment to the survival of the industry," said Tim Ghriskey, chief investment officer for Solaris Asset Management.
Altria shares rose $3.57 at $77.30 on Thursday on the New York Stock Exchange. The Dow Jones tobacco index was up 4.4 percent.
Some Altria shareholders hope the ruling could presage how courts in other states will treat similar lawsuits.
"I think it will expedite the spin-off of Kraft and for the industry it provides some clarification as to how future decisions will be rendered," Fred Burke, fund manager at Johnson Lemon Asset Management in Washington, D.C., who owns shares of Altria.
The Illinois case helped spawn the filing of "lights" lawsuits in other states. One being particularly watched is in New York, where U.S. District Judge Jack Weinstein is expected to decide early next year whether to certify a similar lawsuit as a class action.
Altria said in a statement that it was "gratified" by the ruling. An attorney for the plaintiffs could not immediately be reached for comment.
The initial $10.1 billion judgement in the class-action case was handed down against Philip Morris by a trial court judge in March 2003. The Supreme Court took the unusual step of bypassing the appellate court and hearing the case on appeal directly from the trial court.
Oral arguments were heard by the Supreme Court in November 2004. Philip Morris had argued that the case should never have been certified as a class but should have required each individual smoker to prove their case separately.
(Additional reporting by Emily Kaiser and Jessica Wohl in Chicago and Mark McSherry in New York)
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