Calif. award seen giving pause to tobacco strategists
NEW YORK, March 27 (Reuters) - Tobacco companies may have to rethink their defense strategy in future cases after a landmark trial in which a California jury awarded $20 million in punitive damages to a plaintiff who started smoking after warning labels w
``One of the most worrying aspects about this is that the industry put on a very strong defense and failed,'' said Martin Feldman of Salomon Smith Barney told Reuters on Monday, referring to the second loss in a California courtroom for cigarette makers in less than a year.
``This will come as a serious blow to tobacco industry,'' Feldman said, even though the punitive award was much less than the $115 million that plaintiff lawyers had requested.
Last week, the jury ordered the defendants -- Philip Morris Cos. Inc.and R.J. Reynolds Tobacco Holdings Inc., the two largest U.S. tobacco companies -- to pay $1.7 million in compensatory damages to Leslie Whiteley, a 40-year-old mother of four who is dying of cancer.
While the case was unprecedented, tobacco shares dropped only modestly after the news of the punitive award. Philip Morris stock was down 1/8 to 19-11/16 in afternoon activity on the New York Stock Exchange while shares of R.J. Reynolds were off 1/8 to 17.
The industry had been expected to fare better in the San Francisco case because Whiteley began smoking in 1972, some three years after health warnings became mandatory in the United States. That makes her the first plaintiff in an individual sick-smoker trial who started smoking after warning labels went on packs.
Defense attorneys also presented evidence that Whiteley had smoked marijuana and did not rely on advertising to start smoking -- all aspects of the case that analysts said played into the hands of the cigarette makers.
Even so, the jurors appeared swayed more by evidence of the industry's overall conduct of being less than forthcoming about the dangers of smoking than the defense's argument that Whiteley was a risk-taker who was warned about the hazards of smoking.
In compensatory stage, the jury found the cigarette makers acted with malice, knew about the health hazards of smoking and deliberately misled the public about the dangers. It also found that the two companies committed fraud.
``The industry has to rethink things and figure out -- by talking to jurors -- why it lost, retool its strategy and make incremental changes until they get it right (in California),'' said David Adelman, an analyst at Morgan Stanley Dean Witter.
``But I still take a lot of comfort that the case is newsworthy because it's so surprising. Most people I've talked to are very surprised that a jury would award a smoker money. That mentality is very helpful to cigarette makers and that's why they've won most cases.''
Prior to the Whiteley verdict, juries rendered six successive individual case verdicts in favor of the tobacco industry. Both Philip Morris and RJR have said they plan to appeal the Whiteley ruling.
``That can change modestly, but the industry has to make sure that loosing doesn't become the norm,'' he said.
To be sure, Monday's verdict marks the second loss in a row for the industry in California, known for its tough antismoking regulations. A sick smoker named Patricia Henley was awarded $50 million in punitive damages last year in San Francisco -- an amount that was later reduced to $25 million, plus $1 million in compensatory damages.
``While it is not as high as the initial $50 million awarded in (last's year's) Henley case, it is not dissimilar to the amount the judge reduced it to last year, and it suggests that the tobacco industry has made precious little progress in improving its litigation strategy,'' Feldman said.
Now that the Whitely verdict is in, all eyes on the industry are focusing on Miami, where the trial of a class-action sick-smokers lawsuit known as the Engle case is set to go into deliberations next week.
``We continue to expect tobacco stocks to face downside pressure in the next few weeks considering the upcoming Engle trial verdict,'' Bonnie Herzog of Credit Suisse First Boston said.