Morgan Stanley: A Too Rosy Picture for Florida Tobacco Litigation?

Is it the job of investment companies, such as Morgan Stanley, to provide analysis reports about industries with a one-sided slant to them? No, and their recent report on the state of financial exposure to tobacco companies by “Engle Progeny” cases is not one-sided, but in my view, it certainly presents an overly rosy picture of what is really going on.

Let’s take a look.

Morgan Stanley: A critical shortcoming of the general findings (for example, the determination that tobacco manufacturers were “negligent”) is that it is unclear what particular behavior was negligent, and more importantly, whether a particular plaintiff was aware of the negligent action, and if so, whether it was the legal cause of his/her injury.

Comment: It is anything but “unclear” what conduct on the part of Big Tobacco was “negligent”. First, they redesigned tobacco to a point where it no longer resembled the plant grown in the fields. They engineered nicotine in tobacco in a way to make it as addictive as possible. Morgan Stanley’s use of “negligent” is also designed since the worse conduct on the part of Big Tobacco companies dealt with their failures to disclose the dangers of smoking until they were forced to do so (long after the Engle Progeny plaintiffs were hopelessly addicted and injured). The worst conduct is about fraud, misrepresentation, fraudulent marketing practices and the manipulation of addiction.

Morgan Stanley: Finite scale. There are a discrete number of Engle progeny cases, with approximately ~3,325 lawsuits (with ~4,925 plaintiffs) outstanding in Florida state courts…

Comment: The problem here is that they fail to continue by doing the math. If we were to look at the averages of win vs. loss; the average costs for Big Tobacco to try cases (whether they win or lose); and the exposure Big Tobacco has to their failure to pay Proposals for Settlement made by plaintiffs; then, Tobacco companies are facing substantial losses. Even if plaintiffs win only 30% (a much lower percentage than historically) of the cases, if costs and punitive damages continue, the industry could face exposures in excess of $10 billion and I suspect that number is pretty conservative.

Morgan Stanley: there are serious limitations on the capacity of plaintiff attorneys – and more importantly, on the Florida Courts – to hear these claims (although admittedly there have been only a few defense attorneys that have distinguished themselves in being able to effectively defend Engle progeny lawsuits). During 2009, 2010, and 2011 year-to-date there have been 10 (as the dynamic ramped-up), 23, and 18 Engle progeny trials, respectively (averaging a case every nineteen days).

Comment: This is a way of saying a few things. First, Big Tobacco is banking on this litigation taking a very, very long time. During this very, very long time, Tobacco is earning additional investment income and profits. Most importantly, during this very, very long time, Big Tobacco is banking on many of the plaintiffs who are still alive, dying off. That may sound callous, but Big Tobacco’s “bean counters” have very likely determined that of the +4000 claims, X number will not live long enough to see their case tried if this litigation can be delayed long enough.

Morgan Stanley: Bonding caps. There are both individual case – and more importantly – cumulative ($200 million) Florida state court Engle appeal bond caps. Importantly, the prior December 2012 expiration of the Florida Engle cumulative appeal bond cap was recently removed by the Florida state legislature, challenges to this legislation – to date –have been unsuccessful, and the Florida State Attorney General has litigated to defend the bonding legislation.

Comment: A couple of years ago, Big Tobacco was successful in “accumulating” enough Republican legislator votes to pass this very special, Big Tobacco legislation. Every other defendant, individual or corporation, who has a verdict rendered against them in Florida, must post a cash bond (or its equivalent) in order to secure the verdict while the defendant exercises its right to appeal. One of the many reasons for this is to prevent defendants from appealing a verdict only to file for bankruptcy after lengthy appeals and untold expenses on the part of the plaintiff; effectively allowing the defendant to walk away from any verdict. In these cases, the Florida legislature passed a Big Tobacco welfare bill that prevents the bonds on tobacco verdicts from ever exceeding all put together, any more than $200 million. That has been a real advantage for Big Tobacco since over $410 million in verdicts have already been rendered against them.

Morgan Stanley: A pro-plaintiff selection bias will moderate. In all likelihood the claims brought to trial to date do not represent a random sample of the ~3,325 outstanding state court claims, but rather reflect the plaintiff bar’s selection of relatively stronger claims (e.g., better fact patterns, more sympathetic plaintiffs [began to smoke before the warning label, living, several documented and unsuccessful efforts to quit smoking, a “signature” tobacco-related disease], and so forth);

Comment: I think what you will find is that judges, court calendars and sick plaintiffs have done the most to influence which cases are tried and which are not. If Morgan Stanley and Big Tobacco are banking that “the plaintiff bar’s selection of relatively stronger claims” is what has happened, I suspect they will be sadly disappointed.

Morgan Stanley: Punitive damage safeguards. The US Supreme Court’s State Farm ruling provides a punitive damage safety value of single-digit multiples of compensatory damages. In addition, in the event that multiple punitive damage awards are upheld against any particular defendant, we believe that a defendant can argue that it should not be punished again and again for the same conduct within Florida.

Comment: They are banking on punitive damage awards being limited by the court. In the “State Farm” ruling the court set forth that most punitive damage awards should be limited to a single digit multiple of the jury’s damages award. As set forth in the Morgan Stanly’s analysis, that has been exactly what jurors have done so far. As a result, this seems to be an overly optimistic view.

There are some fundamental reasons this report may also be an overly rosy picture.

It has been difficult for the public to understand the very special nature of the “Engle Progeny” cases. Big Tobacco has spent considerable money and resources to perpetuate the “it was the smoker’s choice to smoke when everyone knows its bad” approach to defending the litigation.

Big Tobacco is being naïve. Jurors have, in varying degree, largely understood that nearly all the Engle smokers were hooked on tobacco addiction and had been seriously injured before everyone knew cigarettes were really, I mean really, bad for you. Big Tobacco continued ranting and screaming into the late 1990’s that cigarettes were not addictive and that smoking did not cause cancer and other serious health issue.

Sorry, but people should simply not forget the “Seven Dwarves” testifying, under oath, that cigarettes are not addictive:

Or that cigarette smoking by pregnant moms is not dangerous…or that Big Tobacco can eliminate “any ingredient found to be harmful in cigarettes”:

So, if jurors continue to hear the real evidence of Big Tobacco’s fraud and misrepresentations to the public. If jurors are understandably outraged over an industry that deceived the public for nearly a century. Then I believe that the Morgan Stanley analysis will ultimately be seen as an overly very rosy outlook on very dangerous litigation for Big Tobacco.