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$145 Billion Up for Grabs?

In a sharp disappointment to cigarette manufacturers, the Florida Supreme Court today has decided to hear arguments on a $145 billion class action suit against the firms.

Altria Group (NYSE: MO  ) , R.J. Reynolds (NYSE: RJR  ) , Loews (NYSE: LTR  ) , and Vector Group (NYSE: VGR  ) were all down sharply on the news that the suit, known as the Engle case after the original filer, continues to pose a threat. A Florida appeals court had thrown out the case last year and decertified the class, calling the proceedings that prompted the original verdict "hopelessly tainted," and further noted that the state of Florida's participation in the $200 billion-plus Master Settlement Agreement precluded the awarding of punitive damages against tobacco companies in the state's courts.

There have been multiple cases in the past decade that have tried to create similar classes to the Engle one, based on "light" cigarette smokers, and each has failed. It would thus seem somewhat unlikely that the Supreme Court of Florida will restore class action status on Engle. Still, the only way to guarantee a positive outcome in a lawsuit is to not be sued -- and certainly with $145 billion on the line, "unlikely" isn't going to be much comfort to the tobacco companies or their investors.

Should the Supreme Court rule against the class, it does not in any way mean that the threat of lawsuits has disappeared for the tobacco companies. The ruling allows each plaintiff to individually sue, though, a loss in each case would not nearly be as devastating as a $145 billion judgment from Engle. The tobacco companies note that such a ruling would put them out of business.

We're going to see a great deal of jockeying over the next five months leading up to the October hearing at the Florida Supreme Court. Investors must know that this suit is one of a long line of cases that will continue to dog these companies. The MSA provides some cover, but one should never discount the possibility of one of these rulings eventually going against them in a big, big way.

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Bill Mann owns shares of R.J. Reynolds.

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10/25/2016 4:00 PM
MO $64.71 Down -0.24 -0.37%
Altria Group CAPS Rating: ****
VGR $20.67 Down -0.26 -1.24%
Vector Group CAPS Rating: ***