Lights

Companies regulated by federal statute do not deserve special protection from lawsuits filed in state court, the U.S. Supreme Court ruled Monday in a case involving two women's efforts to sue a cigarette manufacturer in Pulaski County. The unanimous decision ends a four-year battle over where the lawsuit by Lisa Watson and Loretta Lawson should be decided: the Pulaski County Courthouse before Circuit Judge Timothy Fox or the federal courts building in downtown Little Rock before U.S. District Judge G. Thomas Eisele.

Philip Morris Cos. claimed that the 2003 classaction lawsuit over "light" cigarettes belonged in federal court. The cigarette maker argued that by complying with federal regulations for making and marketing cigarettes, the company acts on behalf of the government and therefore deserves the protections afforded to federal employees. Eisele and the 8th U.S. Circuit Court of Appeals have agreed.

But in a unanimous decision written by Justice Stephen Breyer, the nation's highest court rejected those findings, ruling that state court is the appropriate venue. Philip Morris, now a division of Altria Group Inc ., does not acquire the standing of a representative of a federal agency just because a federal agency requires its products to be tested, the court ruled. The nine justices heard oral arguments in the case in April.

"A highly regulated firm cannot find a statutory basis for removal [from state court] in the fact of federal regulation alone," Breyer wrote in the 14-page decision released Monday. "A private firm's compliance (or noncompliance) with federal laws, rules and regulations does not by itself fall within the scope of the statutory phrase `acting under' a federal `official.' And that is so even if the regulation is highly detailed and even if the private firm's activities are heavily supervised and monitored." The decision reaches beyond tobacco litigation, says tobacco opponent Edward Sweda, senior attorney for the Tobacco Products Liability Project at Northeastern University in Boston who has been following the case closely. He said plaintiffs in state cases forced to try their claims in federal court are at a disadvantage because federal judges are not as familiar with state statutes as state judges, he said. Plaintiffs who lose in federal court also have fewer avenues of appeal than they would in state court, he said.

"It absolutely would have decimated the ability of consumers all over the country to use their state consumer-protection statutes to seek relief if they have been victims of ... improper conduct by a large corporation, because invariably any large corporations would have been regulated by the federal government," he said. "Today's unanimous opinion is terrific news for the Arkansas plaintiffs ... since it has reversed the 8th Circuit's overbroad and historically inaccurate opinion." Breyer acknowledged the impact of the decision in Monday's ruling, noting that if the cigarette maker was successful, other private companies could bypass state courts.

"A contrary determination would expand the scope of the statute considerably, potentially bringing within its scope state-court actions filed against private firms in many highly regulated industries," he wrote, specifically referring to pesticide manufacturers.

Plaintiffs attorneys Marcus Bozeman and Darrin Williams of Little Rock say they had been optimistic the justices would take their side, even after losing in lower courts.

"Although we did not expect it, we are very happy with it," Bozeman said.

Having spent four years arguing where the case should be tried, the attorneys were particularly gratified by the unanimous nature of the high court's decision.

"If there was anything surprising by this ruling, it was 9-0," Williams said, noting the attorneys general from 30 states, including Arkansas , supported the lawyers' efforts to get a hearing before the Supreme Court. "Every member of the Supreme Court agrees with our position, which I think is very telling. Only a very, very small number of cases are ever granted [a hearing], and of those ... a minor number of cases are cited 9-0." Altria, in its news release, shrugged off the decision, saying the ruling does not reflect the merits of the case.

"We have compelling defenses to the Watson claim that have been advanced in state courts," said William S. Ohlemeyer, Philip Morris USA vice president and associate general counsel, saying the decision will have minimal effect on similar lawsuits involving "light" cigarettes or any other class-actions filed against the company.

Lawson, who smoked about a pack of Marlboro Lights a day for seven years, filed suit in April 2003, claiming the company violated the Arkansas Deceptive Trade Practices Act in marketing its Marlboro Lights and Cambridge Lights, claiming the cigarettes were more dangerous than the company advertised. Watson, who smoked about 1 1/2-half packs of Marlboro Lights daily for about six years joined the lawsuit two weeks later.

Philip Morris had the case transferred to federal court in July 2003, claiming that since the company tested and marketed its cigarette "Lights" under the Federal Trade Commission's "direct and comprehensive control," a federal court should hear the case. The company argued that the regulatory scrutiny should earn the company the protection of the "Federal Officer Removal Act," which was designed to protect federal officials from potentially hostile state courts.

Private contractors have successfully argued to have their state cases transferred from state to federal court, but Breyer's ruling made a clear distinction between businesses when they work for the federal government and when they are regulated by the government.

"The private contractor ... is helping the government to produce an item that it needs," the justice wrote. "The assistance that private contractors provide federal officers goes beyond simple compliance with the law and helps officers fulfill other basic governmental tasks."

EXCERPTS from The Business Journal of the Greater Triad Area [North Carolina: Greensboro, Winston-Salem], June 12, 2007, headlined, "Analyst: Supreme Court ruling will make defense harder in cigarette 'lights' cases", writer not given.

But some legal experts said the ruling -- which forbids the company from moving a lawsuit filed in an Arkansas state court to federal court -- takes away one avenue that the company could use to defend itself in similar cases.

The lawsuit, Watson v. Philip Morris, was filed by consumers who smoked Marlboro Lights and Cambridge Lights. The suit claimed that Henrico County-based Philip Morris violated the Arkansas Deceptive Trade Practices Act by fraudulently marketing "light" cigarettes as having less tar and nicotine.

Tobacco companies and other defendants sued in class-action cases see the federal court system as a more desirable place for such lawsuits because of the potential for large damages awards from state court juries.

The ruling "may mean that more cases will stay in state court, which is a less favorable venue for the company," said Carl Tobias, a law professor at the University of Richmond .

Philip Morris, a part of Altria Group Inc., said it could move the case to federal court in Little Rock , Ark. , because the company was regulated by the Federal Trade Commission.

The Supreme Court said the fact that a federal agency directs a company's activities does not permit moving the case to federal court.

"Overall, this ruling does make it easier for plaintiff attorneys to bring these cases and keep them in state court and try to get them to trial," said Edward L. Sweda Jr., senior attorney for the Tobacco Products Liability Project at Northeastern University.

The court ruled unanimously that Philip Morris, the big US cigarette maker, could not transfer a classaction lawsuit alleging deceptive marketing of light cigarettes from the Arkansas state court, where it was filed, to federal court. US companies often prefer to fight class-action lawsuits in federal court, which they see as fairer to corporate defendants.

Philip Morris argued that the case should be shifted to federal court because the Federal Trade Commission, the US consumer watchdog, closely supervises testing of cigarettes.

“We can find nothing that warrants treating the FTC/Philip Morris relationship as distinct from the usual regulator/regulated relationship,” Justice Stephen Breyer wrote for the court. Ruling the other way could have let companies in a wide range of highly regulated industries escape from state courts, against the wishes of Congress, he wrote.

The ruling could affect all “lights” cases alleging deceptive marketing, including those involving other tobacco companies. Smokers have filed similar suits in 20 states.

The plaintiffs who brought the case said Philip Morris engaged in unfair business practices in marketing its lights brands. The case centered on a federal law that says a “person acting under a federal officer” can shift lawsuits to federal court. Philip Morris argued that the tobacco companies were “acting under a federal officer” by testing cigarettes for tar and nicotine.

If that argument had been accepted, it would have “severely damaged the ability of consumers harmed by corporate fraud to achieve a remedy in state court”, said Edward Sweda, senior attorney for the Tobacco Products Liability Project at Northeastern University School of Law.

The decision reverses a lower court ruling that would have taken the case -- a lawsuit charging deceptive marketing practices of "light" cigarettes -- out of Arkansas state courts because the products are regulated by the federal government.

Philip Morris, a unit of Altria Group, had argued that the Federal Trade Commission was a "federal officer" and because there was an agreement in place for uniform standards and tests on light smokes with it, the case qualified for federal court under a "removal statute."

"The fact that a federal agency directs, supervises and monitors a company's activities in considerable detail does not bring that company within [the scope of the removal statute]," he said.

A contrary determination, he continued "would expand the statute's scope considerably, potentially bringing within it state-court actions filed against private firms in many highly regulated industries. Nothing in the statute's language, history or purpose indicates a congressional intent to do so."

The case, Watson et al v. Philip Morris charged that the company violated state laws against unfair and deceptive business practices, specifically with its advertisements and packaging on light brands. The suit alleged that the company manipulated cigarette design and used other techniques that caused its cigarettes to register lower levels of tar and nicotine on an industry standard test than smokers would actually get.

The company shrugged off Monday's decision, saying it does "not negatively affect the ultimate outcome" of the case or similar cases around the country.

"Today's unanimous opinion is terrific news for the Arkansas plaintiffs in the Watson case, since it has reversed an overbroad and historically inaccurate opinion," said Edward Sweda, senior attorney for the Tobacco Products Liability Project.

He said the decision will also "benefit plaintiffs and their attorneys in other 'light' cigarette litigation since Philip Morris' attempt to evade state law simply by virtue of the fact that it is regulated has failed."

The justices unanimously said Arkansas state courts should handle the suit by smokers Lisa Watson and Loretta Lawson, not the federal tribunals that corporate defendants tend to prefer. Philip Morris argued that it could shift the case because the Federal Trade Commission closely supervised testing of the cigarettes.

"We can find nothing that warrants treating the FTC/Philip Morris relationship as distinct from the usual regulator/regulated relationship," Justice Stephen Breyer wrote for the court in Washington.

The ruling, which overturns a lower court decision, may affect several lawsuits against Philip Morris and Reynolds American Inc.'s R.J. Reynolds Tobacco unit, including Missouri and Minnesota cases in which the issue has arisen.

Shares of New York-based Altria were unchanged at $70.30 at 1:43 p.m. in trading on the New York Stock Exchange. Reynolds shares rose 27 cents to $62.80.

Some tobacco investors and analysts had been anticipating a loss at the Supreme Court. During arguments in April, the justices signaled they probably would rule against Philip Morris.

Watson and Lawson accuse Philip Morris, the world's largest tobacco company, of designing its Cambridge Lights and Marlboro Lights brands so they would register artificially low tar and nicotine levels on tests mandated by the U.S. Federal Trade Commission.

"This is a major setback for the industry,'' said Edward L. Sweda Jr., a lawyer at the anti-smoking Tobacco Products Liability Project in Boston . He said company officials and analysts had touted the potential impact of the lower court ruling overturned today by the Supreme Court.

The 8th U.S. Circuit Court of Appeals in St. Louis ruled in 2005 that Philip Morris could move the suit. The Bush administration backed the smokers at the high court.

The issue before the high court concerned a federal statute that says a "person acting under a federal officer" can shift lawsuits to federal court. Philip Morris contended that tobacco companies meet that definition because they are doing the government's bidding by testing cigarettes for tar and nicotine at an industry-financed lab.

Breyer rejected that contention, saying the companies were simply abiding by a government requirement so that they could sell their products.

"We have found no evidence of any delegation of legal authority from the FTC to the industry association to undertake testing on the government agency's behalf," Breyer said.

The ruling, though procedural, may also have substantive implications. The companies are contending that the government's oversight of the testing program shields them from suit over light cigarettes in any court.

The high court didn't directly address that question, though Breyer mentioned the FTC's "detailed rules" about advertising, testing and reporting.

In an investors' note, Morgan Stanley analyst David Adelman said that characterization "should be moderately helpful to the industry's ongoing defense." Adelman rates Altria shares as "overweight."

Sweda, the anti-tobacco lawyer, called that characterization "pure spin and contortion."

The justices unanimously reversed a ruling that allowed Philip Morris to transfer the lawsuit to federal court from the Arkansas state court where it initially was filed.

At issue is a suit filed against Philip Morris by two Arkansas women alleging that the company engaged in unfair business practices in marketing its low-tar Cambridge Lights and Marlboro Lights cigarette brands.

Companies facing class-action lawsuits typically prefer to have those cases litigated in federal courts, where they usually fare better than in state courts.

Philip Morris succeeded in having the case moved to federal court, saying it was appropriate because cigarette advertisements had been regulated by a U.S. agency -- the Federal Trade Commission.

The move was subsequently upheld by a federal appeals court in St. Louis . The U.S. Justice Department told the Supreme Court that the appeals court's ruling should be overturned.

The Supreme Court agreed and reversed the ruling in an opinion written by Justice Stephen Breyer.

Breyer said the fact that a federal regulatory agency directs, supervises and monitors a company's activities in considerable detail does not bring that company under the scope of the law that permits removal to federal court.

Charles Norton, a portfolio manager whose Vice Fund counts Altria as its largest holding, said the ruling was expected and should have no have a big impact on the stock.