Icing on the Cake for PM USA

Ohio Supreme Court narrows scope of class-actions

COLUMBUS, Ohio -- In a ruling that Philip Morris USA Inc. hailed as sensible and that reflects the intent of the state's consumer protection law, a consumer may qualify to file a class-action lawsuit against a business under Ohio's Consumer Sales Practices Act (CSPA) only if the business's alleged violation of the act is substantially similar to an act or practice previously declared to be deceptive in a published court decision or an attorney general's rule, the Supreme Court of Ohio said on Wednesday.

The decision, authored by Justice Evelyn Lundberg [image-nocss] Stratton, reversed lower-court rulings holding that Catherine Marrone and Greg and Eva Phillips of Medina, Ohio, had met the prerequisites to institute a class-action suit against PM USA under the Ohio CSPA. In its opinion, the Court addressed the narrow issue of whether PM USA had sufficient advance notice that its alleged conduct was deceptive.

It is consistent with decisions by other courts recognizing that [PM USA] cannot be sued in a consumer fraud act class action, said William S. Ohlemeyer, vice president and associate general counsel for the Richmond, Va.-based tobacco company.

This was the most positive ruling [for PM USA] and the [tobacco] industry in setting precedent for other lights' litigation, said Citigroup tobacco analyst Bonnie Herzog in a research note. It will have an impact on the general tone of the overall litigation environment'an important factor for the Altria breakup.

Marrone, Phillips and other individuals filed suit collectively seeking damages from PM USA, alleging that the company had deceptively marketed light versions of its popular Marlboro and Virginia Slims brands as a safer low-tar alternative to its regular cigarettes. They contend PM USA knew that the tobacco blend in the light versions was identical to that in the regular versions, and that medical tests had showed the amount of tar and nicotine actually ingested by typical smokers of light cigarettes was as high as the amount ingested by smokers of the company's regular cigarettes.

The trial court found that the plaintiffs had met the statutory requirements to move forward with a class-action against PM USA under the CSPA, and certified class status for two groups of consumers from northeast Ohio who had purchased Marlboro Lights and Virginia Slims Lights during the preceding two-year period. PM USA appealed to the Ninth District Court of Appeals, which affirmed the trial court's class certification. The court of appeals ruled that earlier Ohio court decisions dealing with deceptive marketing of gasoline and autos were sufficient to give PM USA the required prior notice that its advertising claims suggesting reduced health risks of its light cigarettes were sanctionable under the CSPA.

In the current decision, the Supreme Court reversed the rulings of the trial and appellate courts and held that the plaintiffs should not have been granted class-action certification because they failed to cite any prior court cases or attorney general rules dealing with advertising or marketing practices in the tobacco industry, or dealing with specific factual or scientific issues comparable to those that underlay PM USA's marketing claims regarding its products.

Writing for the majority, Stratton said that the court decisions cited by the Ninth District did not meet the standard necessary to support a class-action claim under the CSPA because the practices labeled as deceptive in those cases were not substantially similar to PM USA's alleged conduct. These cases did not involve the cigarette or tobacco industries, wrote Justice Stratton. The industries and conduct in these cases were too dissimilar from PM USA's to have afforded PM USA advance notice that its acts or practices had been declared deceptive under the CSPA.

In addition, the majority said that the Federal Trade Commission (FTC) extensively regulates the tobacco industry and had approved the testing methods and advertising of such methods that PM USA used. PM USA was required to follow the federal mandates and standards for its light cigarettes. Because of such regulation, Ohio has deferred to the FTC on tobacco industry standards which may account for the absence of specific Ohio regulations.

The ultimate question in this litigation is whetherPM USA used the data to deliberately deceive consumers into believing that Marlboro Lights and Virginia Slims Lights are safer or healthier than other cigarettes, wrote Stratton. That issue is not before us, and our opinion should not be read to suggest that we find that the conduct at issue was deceptive or otherwise violated Ohio law. The plaintiffs may be entitled to pursue class-action relief under Civ.R. 23; however, they have failed to identify any prior rule or court decision that would entitle them to pursue CSPA relief under R.C. 1345.09(B).

Chief Justice Thomas J. Moyer and Justices Maureen O'Connor and Terrence O'Donnell joined in the majority decision. Judge Thomas J. Grady of the Second District Court of Appeals, sitting for Justice Alice Robie Resnick, entered an opinion that was joined by Justice Judith Ann Lanzinger in which he concurred in part and dissented in part from the majority holding. Justice Paul E. Pfeifer entered a separate dissent.

Grady concurred with the majority holding that the prior court decisions relied upon by the Ninth District were insufficient to provide advance notice for a class action under the Ohio CSPA. He pointed out, however, that the CSPA statute also allows plaintiffs to establish advance notice by reference to pre-existing Ohio attorney general rules that are written in generic language and are not worded to apply to any specific product or industry.

As applied to acts or practices that allegedly violate generic but reasonably specific rules promulgated by the Attorney General pursuant to R.C. 1345.05(B)(2), the (majority's) substantially-similar test imposes an unworkable comparative analysis that effectively prevents consumers from using those generic rules as a basis for the relief that R.C. 1345.09(B) authorizes, wrote Judge Grady. The General Assembly would not have made rule violations a basis for R.C. 1345.09(B) actions had it intended that a substantially similar test be used. Therefore, I dissent from the majority's decision to that extent.

Pfeifer criticized the majority's opinion as an unconscionably narrow reading of Ohio Revised Code that he said severely limits the ability of consumers to bring class-action lawsuits under the Ohio CSPA. The CSPA does not require industry-specific notice and neither should this court, wrote Pfeifer. Selling a product as one thing, when it is in fact another, is sufficiently similar to selling [a different] product as one thing, when it is in fact another. I would certify the class and allow the plaintiffs to proceed to trial. To do otherwise is to encourage everyone doing business in this state to engage in deceptive practices.

We believe the verdict in the Price lights' case helped quell some investor concern over the threat of light class-action suits against the industry, but the Marrone decision is a little icing on the cake, said Herzog. The Ohio decision and the Illinois Supreme Court's decision in December 2005 should have far-reaching implications for [PM USA] and other cigarette manufacturers, as these rulings set precedent for other lights' class actions. There are 25 potential class-action cases against [PM USA] that allege the company misrepresented its products by using the term light' or ultra light.' Some of these caseshave been certified. Additionally, other cigarette manufacturers in our coverage universe are facing similar lawsuits. Given these recent decisions, we view these cases as having much less headline risk for the companies in our sector.

She added, Price, Engle and the DOJ case have been the major roadblocks for Altria to move forward with the dismantling of the company, a move that is widely regarded as an enormous positive for investors; however, the company has stated that the breakup also depended on the general litigation environment.' We believe Marrone, along with Schwab and a few other cases, are major contributors to this environment and a decision in Marrone bodes well for setting the environment for a breakup when we finally get a decision in Engle. We continue to believe the Engle case will be resolved favorably enough.

Click here to view the Ohio Supreme Court's opinion.

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