Threat of $154-Billion Tobacco Award Has Industry on Edge

MIAMI —  The tobacco companies are running scared.

Jurors in a landmark class-action case are scheduled to start deliberations today after dire warnings by defense lawyers that a punitive damages award anywhere near the $154 billion being sought for sick Florida smokers could destroy the domestic tobacco industry.

Grim-faced industry lawyers, who completed their closing statements Thursday, warned that thousands could lose their jobs and American smokers would depend on foreign cigarette makers or opportunistic entrepreneurs who aren’t legally bound to reform their marketing practices as the big U.S. manufacturers are.

Yet for a host of reasons, punitive damages--no matter how large--won’t spell the end of Big Tobacco.

“Regardless of the amount that the jury awards, the tobacco industry will live to fight another day,” said Martin Feldman, an analyst with Salomon Smith Barney.

“Whatever the size of the verdict, it is not going to be the death knell for the tobacco industry in the United States,” said Matt Myers, who heads the National Center for Tobacco Free Kids, an anti-smoking group. “There are 46 million Americans addicted to tobacco now. There will be 46 million Americans addicted to tobacco next week, and either the companies or their successors will be selling them tobacco when the dust settles.”

Besides, Myers said, “what people ought to be talking about is whether a huge punitive damages award is warranted, given the magnitude of what the industry did--and I think the answer is clearly yes.”

Twice already in the two-year trial known as the Engle case, jurors have returned scorching verdicts against the industry, setting the stage for the climactic punitive damages phase. Given the jury’s record and apparent affinity for Stanley Rosenblatt, the plaintiffs’ lawyer, observers say it just might grant the gargantuan amount he seeks.

But it appears that doing so would contradict instructions from Dade County Circuit Judge Robert P. Kaye, who has ruled that any punitive award must be based on current financial resources of the five companies, who claim a combined net worth of about $15 billion. By contrast, Rosenblatt’s call for $154 billion assumes substantial borrowing by the companies or payment of damages from cash flows years into the future.

Thus, Kaye could very well trim the award after the verdict. That would be an ironic turn, as cigarette makers have criticized him as implacably hostile to their side.

Further mitigating the effect of a colossal verdict is the certainty that appeals could easily take two years or longer to resolve. Moreover, not just industry lawyers but some neutral observers believe the companies stand a good chance of getting the Engle case thrown out.

A major issue on appeal will be whether the case should have been granted class-action status to start with. So far, more than 20 state and federal appeals courts have ruled that smoking and health claims should not be resolved through class actions because differences among claimants--as to injuries, smoking history and awareness of the risks--outweigh the similarities.

Another key issue will be the unique trial plan being followed in the Engle case, which has required the jury to decide on punitive damages for the entire class without first knowing who or how many people are members of the class. Typically, claimants in civil cases must win compensatory damages before requests for punitives can be be heard. In Engle, however, compensatory damages have been set for only three class representatives.

“Our belief is that ultimately . . . the U.S. Supreme Court will decertify the class and they [cigarette makers] never will pay a penny of these damages,” said Bill Pecoriello, tobacco analyst with Sanford C. Bernstein & Co.

Meanwhile, the most immediate threat the case had posed--that of posting bond on a giant verdict in order to bring an appeal--appears to have been eliminated by Florida lawmakers, who adopted a law in May that caps the amount of an appeal bond at $100 million. Forestalling payment of a judgment during an appeal normally requires a bond to be posted in the full amount, which prior to passage of the bill had triggered discussion of bankruptcies arising from the Engle case.

However, experts say that eventually one or more tobacco firms could file for bankruptcy, not because of Engle per se, but from the combined weight of that case and many others, including a massive suit against the industry by the Justice Department, a brace of big cases pending in Brooklyn, N.Y., before U.S. District Judge Jack Weinstein, and hundreds of suits by individual smokers nationwide.

Even then, bankruptcy would not stop the manufacture or sale of cigarettes, but put the companies under the protection of the court while they come up with a plan for paying claimants.

“Americans smoke American cigarettes,” Myers said, “and whether it is RJR who sells them or someone else, it will be American cigarettes made in America that Americans will smoke.”