July 20 2006 - Ruling leaves tobacco money in limbo

NEW YORK (AFX) - A recent Florida Supreme Court decision in a high-profile case against the tobacco industry has left a multi-million-dollar jackpot in limbo.

At issue is a $709 million escrow account formed as part of a highly unusual side agreement struck in 2001 between the plaintiffs and three of the cigarette companies named in the lawsuit, which is known as Engle for its lead plaintiff, pediatrician Howard Engle.

At the time the escrow account was established, the plaintiffs had just emerged victorious from a three-year trial and were awarded $145 billion -- the largest punitive damage award in U.S. history. With legal challenges mounting against the tobacco industry, the three companies -- Altria Group Inc.'s Philip Morris USA, Loews Corp.'s Lorillard Tobacco Co. and Vector Group Ltd.'s Liggett Tobacco Co. -- were feeling vulnerable and agreed to place the millions in escrow to be used for the benefit of the class named in the case -- win or lose.

In exchange, Stanley Rosenblatt, the attorney for the plaintiffs, agreed not to challenge a state bond cap that had been added to the state's books. The bond cap was critical because it allowed the cigarette companies to pursue their appeal of the massive judgment without fully securing it.

Now, however, the tobacco companies may feel they have the upper hand. Instead of backing the trial court's decision, the Florida Supreme Court tossed the potentially bankrupting $145 billion verdict and cleared the way for the smokers to pursue their claims on a case-by-case basis.

In doing so, the court became the latest in a series to have ruled against the use of class actions in smoking cases. In the years since Engle was filed, courts have consistently ruled that there are too many individual issues at stake in these cases to lump the smokers' claims together.

But by breaking up the class, the Florida Supreme Court left many questions unanswered regarding how the funds in the escrow account should be dispersed.

The escrow agreement may have been made "null and void" by the decertification of the class, said Anthony Sebok, a professor at Brooklyn Law School. He said the unusual nature of the agreement makes it difficult to predict how a judge will rule on this matter.

The escrow agreement granted the trial court wide discretion in determining the use of the money. Among the options a judge will have are distributing money to plaintiffs, paying attorney fees or setting up a smoking-cessation program or other public-health fund.

Since the money was intended for the benefit of the class, it is likely the tobacco companies will argue the money should be returned to them because the money cannot be paid to a class that does not exist.

Philip Morris, the nation's largest cigarette maker, put the most into the pot. It placed $500 million in a separate interest-bearing escrow account, according to filings with the Securities and Exchange Commission. Lorillard agreed to pay $200 million, while Liggett contributed $9 million.

"There is no room for the defendants to challenge the guaranteed sum," Rosenblatt said in a written statement.

Sebok expects Rosenblatt will look to the escrow account to collect attorneys fees. He has a "credible claim," Sebok said.

Although the multi-billion-dollar damage award was thrown out by the Florida Supreme Court, Rosenblatt's efforts helped establish a framework for individuals to sue the tobacco companies for their illnesses, Sebok said. As a result of the court's opinion, the smokers will have some advantages at their trial. For example, they won't need to prove that cigarette makers engaged in deceptive practices to hide tobacco's dangers and other findings. These ground rules could make it easier for smokers to pursue their claims against the cigarette makers.

The first claim under the newly created Engle framework was filed last week. It is unclear at this time how many individuals will file similar lawsuits, but they must do so within one year.

Knowing that these lawsuits will be out there, a judge weighing in on the escrow issue could decide to hold on to the money to pay out any claims that arise from this potential stream of individual suits. (Some estimate hundreds of thousands of individual lawsuits could be filed, but it is difficult to estimate what the actual number will be.)

If the judge opts to take this route, the money is likely to be tied up in the escrow account for years.

And even before it comes to this, further appeals of the Engle decision could tie up the funds even longer.

Philip Morris has already said it is reviewing the opinion and weighing further appeals.

"We expect the industry to appeal the Engle ruling, which would have implications for these individual claims," said Bonnie Herzog, an analyst at Citigroup. Herzog doesn't own shares of the tobacco companies she covers, but Citigroup has an investment-banking relationship with Altria. Copyright 2006 Associated Press. All rights reserved. This material may not be

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