States Brace for Threat of Tobacco Suit Bankruptcy
State attorneys general are taking the extraordinary precaution of hiring bankruptcy lawyers out of fear that a colossal damage award in a Florida class action could trigger a tobacco industry bankruptcy and stop the flow of settlement payments to the sta
Tobacco executives at hearingChristine Gregoire, Washington attorney general, said a panel of attorneys general will interview bankruptcy counsel on Tuesday, adding that the states "have every intent of . . . holding [cigarette makers'] feet to the fire" regarding payment obligations under $246 billion in settlements reached in 1998 with the states.
Although the tobacco industry has not said it would seek bankruptcy protection, talk of bankruptcy stems from the threat of a punitive damages award that could reach into the hundreds of billions of dollars in the Engle class-action case, which is nearing a critical phase in Dade County Circuit Court in Miami.
Industry representatives "have clearly stated to us that they are concerned about . . . a large punitive damage award, and what that would mean to them as companies," Gregoire said.
A record-breaking damage award is widely anticipated because jurors in the case already have found cigarette makers guilty of lying to the public about the risks and addictiveness of smoking. Under a trial plan bitterly protested by the industry, the same jury is soon expected to decide whether punitive damages should be assessed in a lump sum to an immense class of current and former Florida smokers, rather than considering their cases one at a time.
Although tobacco officials and Wall Street analysts have said they believe that the industry would have a good chance of prevailing on appeal, the companies would face the immediate problem of posting an appeal bond to cover an award that many think might reach or exceed $100 billion.
Under the law in Florida and many other states, in order to forestall collection of a judgment, the losing party is required to post a bond to cover the full amount of damages plus interest to cover the period of the appeal. Such a bond likely would be raised with some combination of cash and corporate assets pledged as collateral.
Despite their extensive assets and enormous cash flow, the cigarette makers would be stretched to come up with a bond of that magnitude, say industry observers, and that is triggering the bankruptcy buzz.
In some respects, a Chapter 11 filing by tobacco companies would be unique in the annals of business bankruptcies. Other firms that were forced into bankruptcy by product liability litigation--such as makers of asbestos products, breast implants and the Dalkon shield intrauterine device--stopped marketing the products that created their liability. Under any scenario imaginable, tobacco companies would go on making cigarettes for the 48 million Americans who continue to smoke.
Citing a gag order imposed by Engle trial Judge Robert Kaye, spokesmen for the nation's three leading cigarette manufacturers--Philip Morris, R.J. Reynolds, and Brown & Williamson Tobacco Corp.--all declined comment.
Tobacco industry analyst Martin Feldman of SalomonSmithBarney said he did not expect bankruptcy filings but acknowledged the subject was being widely discussed in investment circles. He said the prospect of a huge damage award had so deeply depressed tobacco share prices that it was as if the market anticipated a bankruptcy. Philip Morris, for example, traded at about $20 a share on Friday, down from about $50 at the beginning of 1999; R.J. Reynolds is under $17, versus nearly $30 in July.
The stakes are high for the states too. Although health advocates have bitterly complained that few states have earmarked significant settlement funds for anti-smoking efforts, a host of other new programs--ranging from health care and public works to tax relief--now depend on tobacco payments.
Reflecting Engle-related jitters in tobacco land, the Legislature in Virginia, home to some of Philip Morris' largest plants, recently passed a law seeking to cap at $25 million the bond required for the firm to appeal an out-of-state judgment. Some legal scholars, such as Columbia Law School's John C. Coffee Jr., say the measure is constitutionally dubious.
Now well into its second year of trial, the Engle case, named for Miami physician Howard Engle, seeks damages for a large class of current and former Florida smokers possibly numbering in the hundreds of thousands.
In a landmark verdict in July in the first phase of the case, the six-member jury found that smoking is addictive and the cause of a variety of deadly diseases. Jurors also concluded that cigarette companies "engaged in extreme and outrageous conduct," including lying about the dangers and addictiveness of their products, and thus were generally liable for injuries to smokers.
Closing arguments are set for March 27 in the trial's second phase--the mini-trials of three class representatives who blamed their cancers on smoking.
If, as expected, the jury finds that one or more of the three deserve compensatory damages, the panel will then consider whether to award punitive damages for the entire class.
Cigarette makers are bracing for a vast damage award. Indeed, one industry lawyer recently invoked fears of an award as high as $300 billion while unsuccessfully attempting to persuade a Florida appeals court to lift a gag order on trial participants, saying the industry should be allowed to explain the ramifications to shareholders and employees.
While tobacco officials think they would have a good chance of reversing such a verdict on appeal, the appeal bond problem could conceivably prevent them from reaching that stage, according to legal experts such as Bruce Rogow, a law professor at Nova Southeast Law Center in Ft. Lauderdale, Fla..
"Here, all the pressure is on the defendant," Rogow said.
Rogow and several other Florida attorneys who specialize in appellate practice said Florida law is very clear on what a losing party must do to forestall execution of a judgment while appealing. They said the losing party has to post an appeal bond of 120% of the verdict--meaning, for example, a bond of $120 billion for a $100-billion judgment.
The attorneys all noted that trial judges who have attempted to set appeal bonds at lower levels have been reversed by appellate courts.
On the other hand, the trial judge clearly has the discretion to reduce a punitive damage award, in the process lowering the amount of the appeal bond. Moreover, Miami attorney Joel Eaton noted that in some instances the two sides in a case have reached an agreement on a lower bond and that this is permissible under Florida law.
No litigant has ever been forced to post an appeal bond of the magnitude now considered possible in the Engle case.
However, there is a precedent for a huge appeal bond driving a profitable company into bankruptcy. In the mid-1980s Texaco was ordered to post a $12-billion bond to stay judgment while pursuing its appeal of an $11.1-billion damage award for interfering with Pennzoil's acquisition of part of Getty Oil. Ultimately, Texaco filed for bankruptcy.
More recently, Exxon was able to avoid that situation by obtaining a $6.75-billion letter of credit from a consortium of banks while appealing a $5-billion verdict involving the 1989 Alaskan oil spill.