In a decision that participants said is not expected to impact the municipal bond market, a U.S. Appeals Court has thrown out an $800 billion class-action lawsuit against tobacco companies that make "light" cigarettes.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit in New York ruled unanimously Thursday that the smokers could not file suit as a class, since it would be impossible to prove why all of the smokers in the class opted for light cigarettes. Instead, smokers of light cigarettes, who claim companies led them to believe they were safer than regular ones, must pursue legal action individually, the panel said.

"Individualized proof is needed to overcome the possibility that a member of the purported class purchased lights for some other reason than the belief that lights were a healthier alternative," the ruling stated.

While the suit held the potential to severely reduce tobacco company revenues, which in turn could bring into question the stability of bonds backed by tobacco settlement payments, muni market participants were not overly concerned about the ruling.

Sally Acevedo, an analyst for Moody's Investors Service, said that cases challenging the 1998 Master Settlement Agreement, under which participating companies pay 46 states $246 billion over the first 25 years of the agreement, play a much more direct role in affecting ratings.

"In regards to the tobacco settlement bonds that Moody's currently rates, [the ruling] will have no affect on the rating," she said. "Our rating is primarily driven by the litigation risk, that is, lawsuits that could challenge the enforceability of the Master Settlement Agreement."

Small tobacco companies in the past have challenged the MSA, arguing that since they did not agree to the settlement, they should not be required to make payments under it. Several of those suits are still pending in courts nationwide.

Despite its indirect impact, the light cigarette suit gained the attention of some muni market participants in 2006, when U.S. District Judge Jack Weinstein allowed the case to proceed as a class-action suit, a move that surprised many tobacco companies.

However, Richard Larkin, senior vice president and director of research for Herbert J. Sims & Co., said Friday he is not surprised Weinstein's decision was overruled.

"I think most people didn't take this case too seriously, because the judge in question ... was viewed as an activist judge who had a track record of having his rulings dismissed," he said.

The suit has an indirect tie to the muni market in that Michael Hausfeld, a partner at Cohen, Milstein, Hausfeld & Toll PLLC, representing the plaintiff smokers, is also representing a group of muni issuers suing 37 banks, brokers, insurance companies, and investment advisory firms for allegedly engaging in widespread bid-rigging and price-fixing in the muni derivatives market.

Dakin Campbell contributed to this story.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.