The Florida Supreme Court's Big Tobacco Decision: Why Neither Side Can Be Very Happy

On July 6, the Florida Supreme Court issued its long-awaited decision in Engle v. Liggett Group. Its opinion could not have pleased either side.

On one level, Big Tobacco was a big winner: The court overturned a $145 billion punitive damages jury verdict rendered in 2000.

But the rest of the decision was a bit murkier: For instance, it remains unclear if Big Tobacco must pay the plaintiffs a separate $710 million it promised them in 2001, when the appeals process first began.

Background: The Class Action Decision, and the Trial's Phases I and II

To understand the decision, some background is necessary. In 1994, the Engle case was filed, as a nationwide class action by smokers against the tobacco industry.

Big Tobacco argued that each smoker's case should be tried individually, on the ground the factual issues - Why did a given plaintiff begin to smoke? Why did that plaintiff get sick? -- were too complex and various for a class action. But the trial court disagreed, certifying the class action to proceed, under Florida law, as to 700,000 Florida smokers (though also declining to certify a nationwide class action).

In Phase I of the multiphase trial, the jury determined classwide issues -- such as whether cigarettes can cause the diseases at issue, whether cigarettes were defectively designed, and whether the defendants misrepresented the risks of smoking - in the plaintiffs' favor.

In Phase II, the jury determined how much, if any, each of three sample class members should receive in compensatory damages. In addition, it determined how much the class as a whole would receive in punitive damages - settling on a figure of $145 billion.

(In Phase III, which never occurred, the jury would have figured out compensatory damages for the other class members, and assigned each a proportionate share of the total $145 billion punitive damages award.)

The Bargain the Parties Struck Over the Appeal Bond

After Phase II, the defendants were permitted to appeal - and given the whopping verdict, they urgently wanted to.

However, there was a wrinkle. Under Florida law, the plaintiffs could demand that the defendants post an "appeals bond" equal to the award amount in dispute before filing their appeal. The point of an appeals bond is simple: Since an appeal prevents the prevailing party in a lawsuit from collecting their judgment, the bond guarantees that the losing party will still be able to pay if they lose their appeal.

The tobacco companies, however, could not post a $145 billion bond. So they had to figure out how to appeal without one.

Friends of the tobacco industry introduced a bill in the Florida legislature that would have limited the size of appeals bonds to $100 million. But the lawyers for the class in Engle, Stanley and Susan Rosenblatt, threatened to challenge its constitutionality if it were enacted.

Accordingly, the lawyers for the tobacco industry offered the Rosenblatts a trade: Promise not to challenge the law, and we'll put $710 million into an escrow account - and pay it to the class at the end of the appeals process regardless of whether it won or lost the appeals. The Rosenblatts accepted; the money was deposited into an escrow account in 2001; and it has been sitting there ever since.

And now, the decision on appeal has come down.

Why the Court Rejected the $145 Billion Jury Verdict

Here's what the Florida Supreme Court decision held:

Most of the Phase I jury's conclusions - regarding, for example, general causation and product defect -- can stand (in legal terms, they continue to be "res judicata"), because some issues in this case were properly resolved on a classwide basis. .

What was done in Phase II, however, cannot stand - for two basic reasons.

First, punitive damages in a class action have to be reasonably related to compensatory damages. So there can be no award of class-wide punitive damages without an award of class-wide compensatory damages to judge it against. Phase II only had compensatory damages awards for a meager three sample plaintiffs, so its punitive damages award was invalid.

Second, getting a new, valid punitive damages judgment here cannot be as simple as just going back and telling a jury to calculate class-wide compensatory damages this time. Due to individualized facts -- raising individual issues of causation, plaintiff fault and damages -- each smoker's case must be heard individually. Thus, the court decertified the class going forward -- and gave the class members a year to refile their suits individually.

Who Really Won, and Who Really Lost, Here?

So who should be celebrating - and who should be upset? It's unclear, for no one is quite sure who won or lost.

The holding regarding Phase I is arguably a loss for Big Tobacco. Individual plaintiffs have had to spend a lot of time and money proving Phase I's issues individually in other states. Yet here, the Court allowed these issues to be determined on a class-wide basis.

On the other hand, Big Tobacco's loss on this point is mitigated by the fact that it wasn't going to win these issues anyway, if the recent past is any guide. Today, Big Tobacco wins its cases (when it does win) by arguing that individual smokers were comparatively at fault for smoking, or that their illnesses were caused by something other than smoking. So it may be that Big Tobacco has only been fast-forwarded to the phase of the proceedings where it might actually win. And it's been advantageously allowed to litigate in this phase on a case-by-case basis, which also will be time-consuming and expensive for the plaintiffs.

Surely the plaintiffs are very unhappy that they lost their huge punitive damages verdict. But that loss may at least be mitigated if the get the $719 million in escrow - which, remember, was supposed to go to them after the appeal, regardless of outcome. But will they get the money?

What Happens to A Contract When One Party Disappears?

Remember, the parties to the contract were Big Tobacco and the plaintiff class. After the Florida Supreme Court decision, however, the class no longer exists--the Court decertified it, though only on a going-forward basis.

Since the class existed when the contract was made in 1999, the contract was valid. But with the class decertified, who can collect?

The Court almost certainly did not mean to decertify the class with respect to this contract. But its opinion did not expressly exempt the conflict from its forward-looking decertification, and the disbursement of the $719 million was to take place in the future.

Perhaps the Court could clarify its opinion to make clear its intention that the class continue on as a party to the contract (though not as a party to the lawsuit).

The Persisting Problem: Who, Exactly, Gets the $719 Million?

Even if the Court does issue this kind of clarification, a practical problem remains: How can the Court disburse the money in the escrow to the members of the class of smokers in Florida?

After all, the contract was for the benefit of the actual members of the class--not anyone who claimed to belong once they heard $710 million was being given out. Accordingly, the defendants would have every right to demand that some minitrial-like mechanism be developed to determine who really belongs in the class.

In the end, the money might revert back to the state of Florida. Or maybe the court should maintain the escrow until the last of the thousands of former class members completes his or her minitrial on the merits of the case, and then distribute the money to those individuals. But that could happen ten or fifteen years from now.

Finally, What About the Lawyers?

And what about the lawyers - the Rosenblatts? Might they too have to wait a decade to get compensated?

Not necessarily. A court could order that they receive some compensation for the work they have done up to now.

The Rosenblatts are now in an odd situation. Since they no longer have their one big "class" client, it is unclear who actually is obliged to pay the Rosenblatts for having fought Engle to the bitter end. The thousands of individual ex-class members who are expected to file suits within the year-long window created by the Court are not the Rosenblatts' clients anymore.

So it would be fitting if the Court took a small portion of the amount in escrow and awarded the Rosenblatts reasonable attorneys fees for making sure, on behalf of the then-class, that the jury's verdicts on so many of the issues in Phase I survived the appeal.