Tobacco Companies Review: Lawsuits In Florida And Uruguay

by Trefis Team
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Philip Morris International
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The last two weeks brought much sorrow to cigarette companies in the U.S. Philip Morris USA (part of the Altria Group (NYSE: MO)) and R.J. Reynolds (part of Reynolds American (NYSE: RAI)) were both asked to pay out damages worth several millions of dollars in two separate Florida cases. Meanwhile, Philip Morris International (NYSE: PM) is dragging the Uruguayan Government to the courts for asking it to cover a greater part of its packs with graphic health warnings. We review these developments in this fortnightly note on tobacco companies.

Philip Morris USA has been asked to pay $24.5 million to claimant Judith Berger [1] while R.J. Reynolds has been asked to pay $28 million to claimant Sheri Hubbird. [2] Both these verdicts were given by courts in Florida. These cases fall under the so called Engle progeny cases.

The Engle Progeny Cases

The Engle case was a watershed case in anti-tobacco litigation. The claimants were smokers in Florida, whose number has been estimated at 300,000. They were awarded damages of $145 billion in 2000. This verdict was, however, reversed. The Florida Supreme Court threw out the class action on ground that it represented too diverse a group of claimants. The claimants were asked to file cases individually. Over 4,000 such cases, now referred to as Engle progeny cases,  were filed with lower level courts in Florida. [3]

One such Engle progeny case had won damages of $23.6 billion against R.J. Reynolds in July this year. Reynolds has since challenged the legality of this verdict, calling it grossly excessive. [4] The approach of big tobacco may be different for this case and the recent ones, since there is an order of magnitude difference in the payouts. However, the companies have reason to be concerned over the trend of more Engle progeny cases being decided in favor of the claimants.

The duration of these cases can be very long, with multiple appeals to higher level courts. Just this week, the Illinois Supreme Court stayed a lower court’s decade old $10 billion verdict against Philip Morris USA. The earlier verdict had found Philip Morris guilty of misleading customers by marketing light and low tar cigarettes as safer than usual cigarettes. The Supreme Court stated that the Federal Trade Commission permitted such branding, and that tobacco companies cannot be tried under state law even if it was found to be misleading. [5]

Trefis has a price estimate of $42.5 per share for Altria Group, compared to a market price of ~$45. Last week, the stock traded within a 1 dollar range and is currently close to its weekly opening price. We expect revenues (net of excise duties) of $17.7 billion in 2014  for Altria, nearly the same as the Reuters consensus estimate of $17.8 billion.

See Our Complete Analysis For Altria

Philip Morris Sues Uruguay

Philip Morris International has dragged the Uruguayan government to court over the size of display of graphic health hazard warnings on cigarette packs. The size of these warnings had been increased to 80% of the pack size. The company claims that this violates its copyright under a Swiss-Uruguayan treaty. The outcome of this case is likely to be closely watched as it could influence similar litigation elsewhere. [6].

We have a $79 price estimate for Philip Morris International, while the market price is $83.7. We estimate revenues (net of excise duty) of $30 billion for the company in 2014, which is the same as the Reuters consensus estimate. The share price dropped by ~$1 per share in trading last week.

See Our Full Analysis For Philip Morris

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Notes:
  1. Judge Upholds Damages Against Philip Morris []
  2. Ferraro Team Says Victim’s Job Was To Smoke, die []
  3. Eleventh Circuit Toughens Up Rule 15 Motions to Amend []
  4. R.J. Reynolds fights $23.6 billion lawsuit []
  5. Illinois High Court To Hear Philip Morris Appeal []
  6. An Uruguayan Lawsuit With International Implications For Philip Morris, Trefis.com []
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