Washington - The Supreme Court heard arguments yesterday in a case that could determine whether tobacco companies may face new liabilities from smoker lawsuits filed over the alleged deceptive marketing of "light" cigarettes under state laws.
The case comes as states have issued a total of $55.3 billion tobacco bonds between 1999 and 2008 that securitized annual payments from tobacco companies under the Master Settlement Agreement, according to Thomson Reuters. Last year's $16.9 billion of tobacco bond sales was the largest annual volume since the debt was first sold in 1999.
The original lawsuit - which Maine residents who smoked "light" cigarettes or cigarettes marketed as low-nicotine or low-tar for at least 15 years filed against the Altria Group Inc., parent company of Philip Morris USA Inc., in a federal court in Maine - claimed that the description of cigarette brands as "light" or having lowered tar and nicotine was fraudulently misleading because the cigarettes were actually as hazardous to smokers' health as regular cigarettes.
The court in Maine decided in favor of Altria and Philip Morris. The smokers appealed the decision in August 2007 to the U.S. Court of Appeals for the First Circuit in Boston, which reversed the lower court's holding. Altria appealed to the Supreme Court.
The Supreme Court's ruling will decide whether a federal tobacco labeling law enacted by Congress in 1965 preempts Maine's unfair trade practices statute that prohibits deceptive advertising. The court's decision will clarify whether "light" cigarette cases in states are preempted under the Federal Cigarette Labeling and Advertising Act that came after the surgeon general's conclusion that cigarette smoking is a health hazard, the American Bar Association said in a preview of the case.
The fate of other "light" cigarette lawsuits under consideration at the state level will hinge on whether the court finds state laws like the Maine statute are preempted by the federal labeling act. If the court decides the act does preempt claims based on state statutes, many other pending lawsuits could be thrown out.
The labeling act says state laws can impose no requirement or prohibition based on smoking and health, "with respect to the advertising or promotion of any cigarette the packages of which are labeled in conformity with" the act's provisions.
Theodore B. Olson, the counsel for Altria and Philip Morris told the court that Congress "intended for consumers to receive certain information about the smoking of cigarettes with specific labels ... without hurting the commerce and the national economy to be protected from confusing cigarette labeling and advertising regulations that might be 'non-uniform, confusing, or diverse.'... Congress didn't want to pre-empt general common law standards about fraud or misrepresentation or anything like that except in the context of the marketing."
"Of course, every national advertiser faces that situation at the moment," said Justice Stephen Breyer. "Everyone who advertises across the nation could find deceptive - anti-deception laws differently administered in different states. Yet, they'd survive. There is no evidence even that there is a problem."
David C. Frederick, the counsel for the Maine residents, led by Stephanie Good, explained that the damages sought by the residents would not be health-related but would instead be based on false advertising. Nevertheless, both sides argued over the health issues before the justices.
"We are asking damages for the difference in value between a product we thought we were buying and a product we actually bought," Frederick told the court. "If you buy a car thinking it's a Ford and it's a Yugo but it still drives, you still have a claim under the lemon laws for deceptive advertising."
Justice Antonin Scalia responded with sharp skepticism of that argument, asking: "But what if Yugos and Fords are worth the same amount of money?" He then asked Frederick whether light cigarettes had been sold by tobacco companies at a premium.
"They did not charge more for light cigarettes," Frederick admitted. But he said "economists have projected that if a person would have quit smoking and, therefore, not purchased light cigarettes or would have paid a different amount of money thinking it was getting a safer cigarette, there is an economic value."
Philip Morris claims that if the court decides in favor of the Maine residents, the tobacco company would have to scrap its use of "light" descriptions or add to cigarette packages an explanation that machine-simulated tests authorized by the Federal Trade Commission for measuring nicotine and tar yields have been found to give results lower than the amount of tar and nicotine a human smoker actually consumes from light cigarettes, said the ABA's analysis.
The case could be significant for the municipal market because tobacco manufacturers signed the Master Settlement Agreement with 46 states and six territories in 1998, agreeing to pay states and territories billions of dollars over a 25-year period.
One year later, the first tobacco bonds, $709 million, were sold by New York City's TSASC Inc.
An Illinois judge in 2003 ordered Philip Morris' parent company to pay $10.1 billion in damages in a "light" cigarette class action suit. The decision was soon followed by tobacco bond credit downgrades.
Further litigation against cigarette companies slowed tobacco bond issuance to a halt in 2004, and in 2006 tobacco companies withheld $755 million of their annual settlement payments during a dispute over 2003 payment adjustments. Companies again withheld $696 million in annual payments over a dispute about annual payments in 2004, which they said were overpaid.
By the first quarter of 2007, tobacco bonds had recovered strength in the market, representing 7.7% of all municipal bonds sold during the quarter.
Standard & Poor's put 11 tobacco settlement bond ratings on negative watch in April due in part to "stressed assumptions on U.S. cigarette industry volume." The credit rating agency said that based on its revised assumptions on the participating manufacturers' relative market shares, less cash would be available to service the bonds whose ratings were placed on watch.
