In a major victory for the tobacco giant, the Illinois Supreme Court Thursday reversed a $10.1 billion verdict against Philip Morris USA, with instructions to dismiss the class action.
The ruling in the case, in which Philip Morris, unit of Altria Group Inc (MO), was accused of defrauding customers into thinking "light" cigarettes were safer than regular smokes, sent Altria shares up more than 5 percent.
The deeply divided Illinois Supreme Court ruled that the Federal Trade Commission specifically allowed companies to characterize their cigarettes as "light" and "low tar," so Philip Morris did not improperly mislead customers about the health impact of its cigarettes.
The 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 executes plans to spin its Kraft Foods Inc. (KFT) unit from its tobacco businesses.
"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.
The initial $10.1 billion judgment 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.
The company said it obeyed federal law when it labeled its cigarettes with the Surgeon General's warning against tobacco products, and charged the $10.1 billion judgment was arbitrary and excessive.
Had the court disagreed, Philip Morris would have had to pay about twice its annual operating income. The verdict also could have lead to more lawsuits alleging fraud that would have focused on a company's marketing rather than the plaintiff's health.
Unlike many other high-profile cigarette lawsuits, this case did not accuse Philip Morris of harming customers' health. Attorneys representing 1.1 million light cigarette smokers argued the company knew when it introduced light cigarettes in 1971 that they were no healthier. The attorneys said the company hid the information, including that the cigarettes had a more toxic kind of tar.
Reuters and the Associated Press contributed to this report.