Philip Morris' $300 million verdict

Big Tobacco's high dividend payout strategy might not be working.

A Florida Circuit Court last week awarded a former smoker, 61-year old Lucinda Naugle, $300 million in her lawsuit against Philip Morris (NYSE:PM), finding wheelchair-bound Naugle, who now has emphysema after smoking from age 20 to 45, 10% guilty and the cigarette manufacturer 90% guilty for compensatory damages. Philip Morris shares dropped 1.2% $18.98 on Friday at the news and haven't been doing too well since.

This was actually a case that came out of the so-called "Engle Progeny lawsuits", when in 2006 the Florida Supreme Court vacated a 2000 verdict in a class action lawsuit (Engle v. R.J. Reynolds Tobacco Co). And while the $156 billion verdict was overturned (this lawsuit involved 700,000 smokers) the court allowed plaintiffs to file individual claims and use the liability findings from the trial.

So Naugle's verdict was the 10th Engle verdict this year and 8 out of 10 of these verdicts were against Big Tobacco, although Naugle's was the largest of all of them. And Philip Morris isn't done yet-there are about 8,000 more waiting for their day in court.

Obviously Philip Morris is crying foul, saying the decision is unconstitutional since it allowed the jury to look at previous jury findings and evidence unrelated to Naugles.

You might wonder how this sort of thing comes about. After all, I thought the MacDonald-made-me-fat lawsuits were far and wide decried as pointless. Haven't we had these cases before?

Actually we have: just in 2007 in Philip Morris v. Williams, the Supreme Court overturned an Oregon jury’s award of $79.5 million in punitive damages. This wasn't because the smoker should've known about the harmful effects of smoking though. Rather the Court ruled 5-4 that "the Constitution's Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that it inflicts upon nonparties."

This meant that it's unfair for Philip Morris to be held responsible for harm to strangers since the charges would be limitless as well as arbitrary. Which would explain the Engles decision.

If Philip Morris loses the appeal, it'll obviously be a bad sign for Big Tobacco, even if $300 million could be considered small fries when you think about the $206 billion the seven largest tobacco companies agreed to pay in a 1998 nation-wide settlement.