UPDATE: Altria Hldrs Eye Ill. Crt For State Farm Opinion
DOW JONES NEWSWIRES
August 17, 2005 5:41 p.m.
By Christina Cheddar Berk Of DOW JONES NEWSWIRES
NEW YORK -- An upcoming decision from the Illinois Supreme Court in a class-action case against insurer State Farm will be watched closely by some investors in Altria Group Inc. (MO), as the case could have implications in a "lights" cigarette case against Philip Morris USA.
The Illinois Supreme Court plans to issue its opinion in Avery vs. State Farm, as the case is known, on Thursday morning.
In the case, the plaintiffs alleged State Farm had cheated its customers by specifying generic replacement parts for insured auto repairs, rather than the sometimes more-expensive parts supplied by auto manufacturers. The case, which resulted in a $1.2 billion verdict against the Rohnert Park, Calif., insurance company in 1999, was filed in a Madison County, Ill., court on behalf of State Farm policyholders drawn from 48 states. The decision was later upheld by an appellate court.
"The central issue in this case is whether a few class representatives can represent a whole class or whether class certification is inappropriate," said Bonnie Herzog, a tobacco industry analyst at Smith Barney, in a research note.
This issue is also central in the Price case against Philip Morris USA as the cigarette maker has argued that the case shouldn't have been certified as a class action because there are too many individual issues involved in the case.
In the Price case, a group of Illinois smokers sued under the state's consumer-protection law to recover damages because they believe they were misled by Philip Morris into thinking it was less risky to smoke Marlboro Lights and Cambridge Lights cigarettes than the company's regular brands when it was not. A trial court, also in Madison County, Ill., sided with the plaintiffs and levied a $10.1 billion verdict against Philip Morris.
The plaintiffs in Avery also sued under the Illinois Consumer Protection Statute, but it should be noted that there are some real differences between the two cases as well.
In research note late Wednesday, Goldman Sachs & Co. analyst Judy Hong urged investors "from putting too much weight" on the Avery decision.
"After speaking with our legal contacts and exploring the Avery case more closely, we believe that Avery is a far stronger case for plaintiffs than Price on both class certification and damages," Hong said.
Other analysts also noted differences between the two cases, but still expect there could be implications in the Avery decision.
Notable among the differences is that the Avery case is nationwide in scope, while the Price case was limited to Illinois residents.
The Avery case also is considered a "breach of contract" case, while the Price case is not, said Morgan Stanley analyst David Adelman.
Even with these distinctions, Adelman said he expects there could be some implications for Price in the Avery decision. This is especially true if either the court upholds the lower court's decision in Avery, or if it reverses the decision in a way that is relevant to Price. Obviously, the latter would be a positive development for Philip Morris.
"For example, the Court could indicate that even on a state-wide basis Avery could not proceed as a class action" because there are too many individual issues, Adelman said. Or the Court could find that the damages methodology was flawed, he said.
However, there remains the possibility that the court could reverse Avery using an argument that isn't relevant to the Price case such as a conflict-of-law issue stemming from its status as a national class action, Adelman said.
In addition, Avery can be seen as a "marker" that could indicate the Price opinion will be issued by the court in the not-too-distant future, said Prudential Equity analyst Robert Campagnino.
Analysts have been waiting for a ruling in the Price case for sometime. Previously, many expected the decision would be issued before the court went into summer recess, but the court headed into its summer break without a resolution. The court will reconvene the second week of September.
The Price case is significant because it was the first class-action case using consumer fraud protection statutes to seek damages for the smokers of light cigarettes. There are several other similar cases pending, including cases in Illinois against Reynolds American Inc.'s (RAI) Reynolds Tobacco and Brown & Williamson Co. units.
The case is also is an important factor in determining whether Altria's board will be able to pursue the break-up of the company. In the past, the New York company has said it would consider splitting into two or three parts once certain legal issues are resolved. The decision hinges on the Price case as well as on decisions in the Engle class-action case in Florida and the Department of Justice's case against the tobacco industry. In addition, to Philip Morris USA, Altria owns Philip Morris International and a majority stake in Kraft Foods Inc. (KFT).
Of all three cases, the Price case carries the "overwhelming majority" of the industry's legal risk, Adelman said.
None of the analysts owns Altria shares. Citigroup, Goldman, and Morgan Stanley have an investment-banking relationship with Altria. |
