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Insurer Beats Big Tobacco in Court

Litigation: A federal jury finds cigarette makers guilty of deceptive practices but not fraud. The award is a fraction of damages sought.


Cigarette makers Monday suffered their first courtroom defeat at the hands of an insurance company when a federal jury in Brooklyn, N.Y., awarded $17.8 million in damages to the largest health insurer in New York as compensation for smoking-related costs.

Industry foes hailed the verdict as a landmark victory but voiced regret that the damages were a fraction of the $2.4 billion that Empire Blue Cross Blue Shield of New York had sought.

"We're disappointed in the amount, but we're very happy with the basic result," said plaintiff's attorney Vincent FitzPatrick, who also represents 20 other Blue Cross providers with pending anti-tobacco claims.

Tobacco companies said they were pleased about the modest scale of damages, and the fact that jurors--while finding them guilty of deceptive practices--rejected the more serious claims of fraud and racketeering.

"We . . . consider this case a victory," said Thomas F. McKim, assistant general counsel for R.J. Reynolds Tobacco Co., the nation's second-biggest cigarette manufacturer. Also found liable were Philip Morris Inc., Brown & Williamson Tobacco Corp., Lorillard Tobacco Co. and Liggett Group.

Wall Street stood pat on news of the verdict, with little movement in tobacco share prices. Philip Morris shares slipped 11 cents to $51.16 and RJR dropped 2 cents to $59.72, both on the New York Stock Exchange. Loews Corp., parent of Lorillard, rose a penny to $68.17 on the NYSE, while American depositary receipts of British American Tobacco, parent of B&W, rose 7 cents to $15.80. Vector Group Ltd., parent of Liggett, rose $1.50 to $34.50 on the NYSE after being ordered to pay just $88,916 of the damages.

Damages awarded against the other companies included about $6.8 million for Philip Morris, $6.6 million for RJR, $2.8 million for Brown & Williamson and $1.5 million for Lorillard.

The verdict breathes life into a legal strategy that at one time appeared to pose a severe threat to the tobacco industry's health. But during the last two years, dozens of similar cases have been dismissed after rulings by eight federal appeals courts that the financial injuries claimed by third-party payers, such as insurance companies and labor union health-care funds, are too remote from the actual harm suffered by smokers.

Because one of those appeals courts, the U.S. 2nd Circuit, previously rejected third-party payer claims, some legal observers think cigarette makers have a good chance of reversing Monday's loss.

Before the Empire victory, only two similar cases had been tried to verdicts. In March 1999, an Ohio jury rejected claims by 114 union health-care funds that had sought as much as $2 billion. And in January of this year, a case brought by the Manville Personal Injury Settlement Trust, a fund that compensates sick asbestos workers, ended in a mistrial with deadlocked jurors leaning toward a defense verdict. Like the Empire suit, the Manville case was tried by Judge Jack B. Weinstein in U.S. District Court in Brooklyn.

Insurance and labor funds had taken their cue from state attorneys general, who had sued the tobacco industry to recover state Medicaid funds spent to treat sick smokers. None of the state cases ended in a verdict. Instead, tobacco companies and the states reached settlements in 1997 and 1998 that require the industry to pay $246 billion over 25 years.

Jurors in the Empire case deliberated four days before delivering a unanimous verdict at the end of the 2 1/2-month trial. The suit originally was filed in 1998 on behalf of Empire and 20 other Blue Cross and Blue Shield plans, but Weinstein ordered an initial trial on the claims of a single provider.

Monday's verdict came as jurors in Los Angeles Superior Court completed a seventh day of deliberations in the lung cancer case of former smoker Richard Boeken against Philip Morris. It is the first smoking and health case tried in Los Angeles County.

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