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MONEY FOR NOTHING: Why Tobacco Companies Must Pay Even If They Win In Court

Wednesday, May. 23, 2001

On May 7, Philip Morris and two other tobacco companies agreed to pay $710 million to a Florida court in the event that they are successful in defending themselves against a class action lawsuit brought five years ago by 500,000 Florida smokers.

Yes, you read that right. Usually defendants pay to settle lawsuits, because they fear losing. How can it be that in this lawsuit the defendants are offering to pay if they win? The answer tells a lot about how this nation's recent experimentation with class action lawsuits against the tobacco industry has spun out of control.

Bifurcating the Florida Class Action

Last July, a jury returned a historic punitive damage award of $164 billion against the tobacco industry in a lawsuit that was as peculiar as it was spectacular. The class action, called

Engle after the Florida pediatrician who is one of the named plaintiffs, was brought on behalf of all of Florida's smokers.

Both the United States and the Florida Supreme Courts have made it clear that issues of individual causation cannot be tried in a class action. As a result, the lawyers in Engle, Stanley and Susan Rosenblatt, asked the judge to impose a two-part structure on the case (in legal parlance, to bifurcate it). The judge agreed.

Second, if enough of the common issues were decided against Big Tobacco, the court and the parties would then design a schedule that would allow causation questions — the question of whether Big Tobacco "caused" harm to any and each of the 500,000 class member — to be tried separately, one by one.

Bifurcation as a Settlement Tool

Of course, the judge cannot have had any intention of overseeing half-a-million mini-trials on causation, nor can the Rosenblatts have had any intention of lawyering them. Instead, the judge and the plaintiffs' lawyers must all have been gambling that once the common issues had been evaluated by a jury in the first phase of the case, Big Tobacco would be begging to settle.

To understand this calculation, it is important to know what the two major "common issues" the jury would settle were to be: Did Big Tobacco act wrongfully? And, if so, what should the dollar amount for the pool of punitive damages be? (This pool would be shared among a subset of the 500,000 class members: those who could prove that they were in fact defrauded by cigarette advertising and/or were harmed by the defective design of cigarettes.)

This potentially huge money pool — which turned out, in fact, to total $164 billion — must have been instrumental in the Rosenblatts' likely calculation that a "common issues" verdict would ensure a big settlement from Big Tobacco.

Why? Big Tobacco, like many defendants in products liability suits, likes to look to the appellate courts to get them off the hook if the jury returned a big punitive damage award. But in Florida, this avenue of escape would be closed off.

There, as in many states, a defendant has to post a bond in order to appeal a trial court judgement. And, as the Rosenblatts must have anticipated, the amount returned by the jury last year is so large it is unbondable — that is, no bond company will put up that much money for an appeal.

Florida Legislation Intervenes

So why didn't Big Tobacco settle or declare bankruptcy? Why has the stock price of Philip Morris instead doubled? One reason is that the Florida legislature came to Big Tobacco's rescue.

About a month before the jury returned its punitive damage verdict, the Republicans and Democrats in Tallahassee joined together in a rare show of unity and passed a law that would—surprise, surprise—cap the bond required of any defendant at $100 million. So after their jury came back with the $164 billion punitive damage award, each of the five tobacco companies put up the required $100 million and filed their appeals.

its widespread popularity among Florida's politicians, the bond cap statute was not entirely kosher from a constitutional point of view.

The suspicious timing of the statute's promulgation and the fact that it affected the rights of parties who already were in litigation before it was passed led the Rosenblatts to warn darkly that a judge just might strike it down. The reason? The separation of powers limits how much the legislative branch of government can interfere with the judicial branch.

Despite this warning, though, the Rosenblatts didn't want to bankrupt Big Tobacco (that would yield them nothing); they wanted to bargain with it. So the Rosenblatts did nothing, biding their time. That is, until this month.

The Bond Agreement

The document signed on May 7 is a remarkable legal instrument. It is an agreement among the plaintiffs and three of the five defendants (Philip Morris, Lorillard, and Liggett), and it seems to be an attempt to increase these defendants' bond beyond the $100 million per company, to about $1.3 billion in total (with Philip Morris putting up the lion's share).

In exchange for this increased security, the plaintiffs promise in the agreement that they will not challenge the constitutionality of the statutory bond cap (as applied to just these three defendants). In other words, the plaintiffs seem to be saying that a $1.6 billion bond makes them feel secure in a way that a $300 million bond did not.

That makes sense as far as it goes: The plaintiffs get a larger bond, but give up a major argument they might otherwise have made, which would, if successful, have made it too expensive for Big Tobacco to mount an appeal. But the agreement also contains an interesting additional clause.

A Win-Win Scenario for Plaintiffs?

According to the agreement, if, after all the appeals are over, the defendants succeed in overturning the punitive damage award, then the $1.6 billion bond is returned. Except for $710 million. That money is never to be returned. Instead, the money is to be allocated by the trial court "for the benefit of the Class."

only about $900 million is a bond, in any conventional sense of the word. $710 million is a side payment to the court that will be given to the class members, even if the United States Supreme Court tells them 9-0 that they never had a case.

Now one has to ask, what is going on here? The Rosenblatts, one imagines, might say the following: It is as American as apple pie to bludgeon your opponent into settlement before they can reach an appellate court, even if that means using the innocuous instrument of the bond requirement as the bludgeon. In this case, though, the defendants stole the bludgeon from the plaintiffs by getting a special law passed just for them, to lower the bond.

Now, the plaintiffs just might be able to get a court to force the defendants to give the bludgeon back (by increasing the bond). So, the plaintiffs are offering a simple trade: for $710 million, the defendants can guarantee that they can get their appeal heard, even though they are unable to provide the usual security for it (the full amount of the jury's verdict).

Or Is It a Lose-Lose Scenario for Plaintiffs?

Fair enough. But one of the things that I find most disturbing about the Rosenblatts' argument is that the plaintiffs may not be around to "benefit" from the $710 million. In fact, they almost certainly will not be.

One of the most important legal points the defendants will raise on appeal, either to the Florida or United States Supreme Court (or both) is that Judge Kaye violated state law and the federal constitution when he certified a class of half a million smokers. There is every reason to believe that the class will be decertified. For a class to survive challenge, the plaintiffs must demonstrate that common issues of fact predominate. Almost every state and federal appeals court that has reviewed class actions in tobacco cases has concluded that the plaintiffs' product liability and fraud claims raise too many individual questions to allow certification for trial.

So, for $710 million, the Rosenblatts may have paved the way for the elimination of their clients (the class) — by allowing an appeal that otherwise might never have been brought, because it could not have been properly bonded.

What happens if the class is, indeed, decertified on appeal? No one really knows. But I have an idea of what may happen.

Florida law has a "common fund doctrine." Under this doctrine, if there are no plaintiffs left, the court can disburse the $710 million for the public benefit, and pay the lawyers who helped obtain the funds for their "public service," despite the fact that their clients get nothing.

I have no idea what the "public benefit" might mean in this context (Medical schools? Anti-smoking ad campaigns? Better voting machines?). But I do know this: The Rosenblatts will probably get paid at the end of Engle, even if their clients lose big.

From this perspective, it is easy to understand why three of the defendants allowed themselves to be talked into buying back the right to appeal the punitive damage award — despite the fact that it was a right that they, at least, in theory already had been given by the Florida legislature. Perhaps the more difficult question is why the remaining two defendants, RJR and Brown & Williams, have refused to join in the May 7th compact.

Consider the agreement from the defendants' perspective: They probably would have been able to defend the bond cap statute in court against a separation of powers challenge, but for $710 million, they don't have to. And if the bond cap statute were stricken, they would have been left with no recourse against the $164 billion tab. Compared to that, $710 million looks cheap.

$710 million used to seem like a lot of money. But after a $206 billion settlement with the states, and a threatened $164 billion punitive damage award in Florida, $710 million is a trivial sum to Big Tobacco. After all, current smokers will pay the bill, in raised tobacco prices. (Being addicted, they have little choice).

From where I sit, as a visiting professor in a German university, I can now see why European lawyers think our tort system is out of control. No one wants to admit it, but tobacco litigation reveals the almost schizophrenic nature of how we approach questions of civil liability.

Let's face it: When juries hear the cases of individual smokers they have overwhelmingly sided with the tobacco companies; despite heartbreaking stories of illness and death, juries have believed smokers knew, and took, the risks.

The only really successful litigation against Big Tobacco, as a result, has come in the form of class actions. These have succeeded because the rules of civil procedure ensure that no tobacco company can ever actually try, or appeal, its case, because risking a loss is too grave, and bonding an appeal too formidable. Although it's hard to cry tears for Big Tobacco, certainly its inability to go to trial and defend itself, and to appeal even with winning arguments, is unfortunate.

The agreement of May 7 in Engle is the most concrete example of how bad things can get when the substantive purpose of tort law is subverted by those who think that the ends justify any means. It seems to me that the Rosenblatts, whose original goal was apparently to sue not to win but to settle, may have taken their strategy to a new level.

Now they seem to be suing not even to settle, but to pocket what is, in my opinion, tantamount to a bribe, and then go home. In the end, it is not the plaintiffs or the defendants for whom I feel concern, but our system.

Anthony J. Sebok, a FindLaw columnist, is a Professor of Law at Brooklyn Law School, where he teaches Torts, among other subjects. Professor Sebok has written several other columns on mass tort litigation, including tobacco litigation, for FindLaw; they can be located in the archive of his columns on the site.

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