A lawsuit accusing tobacco companies of defrauding smokers into thinking light cigarettes were safer than regular brands can proceed as a class action, a federal judge in New York ruled on Monday.
The 540-page ruling by U.S. District Senior Judge Jack Weinstein marks a victory for the plaintiffs in the case, and caught some investors by surprise, sending tobacco company shares lower. The Dow Jones U.S. Tobacco index was down 4.6 percent on Monday.
Less than two weeks ago, Weinstein during a hearing had raised questions about whether there was a valid way to determine damages for such a large and varied group of smokers if he certified the case, in which tobacco companies are accused of violating racketeering laws, as a class action.
I think a lot of people weren't expecting this, because the judge a few weeks ago questioned whether the smokers could prove the damages or how, said Charles Norton, co-portfolio manager of the Vice Fund, which holds 36,000 Altria Group Inc. shares. Altria is parent of defendant Philip Morris USA, maker of Marlboro cigarettes and other brands.
The ruling could delay Altria's plans to spin off its Kraft Foods Inc. business, Norton said, though he predicted the spinoff will take place.
Altria has said it wanted the U.S. legal landscape to improve before spinning off Kraft, but three decisions in its favor in major cases in the past year led some analysts to believe the spinoff announcement was imminent.
Altria declined comment on Weinstein's ruling until its lawyers could review the decision. Other tobacco companies could not be reached immediately.
Lawyers for the plaintiffs argued that tobacco companies reaped between $120 billion to $200 billion in extra sales through the light cigarettes deception. They are seeking that much in damages.
Attorneys for the tobacco companies argued that, in order to be awarded damages, plaintiffs would have to prove how many smokers relied on the word light when deciding which cigarettes to buy.
They also said there are 65 cigarette brands represented in the case that approached consumers in different ways.
Altria shares were down $4.25, or 5.2 percent, on Monday on the New York Stock Exchange and Reynolds American Inc., parent of R.J. Reynolds Tobacco Co., was down $2, or 3.2 percent.
Other defendants in the case include Loews Corp.'s Lorillard Tobacco unit, whose tracking stock, Carolina Group, was down $1.51, or 2.7 percent, at $54.37.
Shares of Vector Group Ltd., parent of defendant Liggett Group, were down 31 cents at $16.41; and shares of British American Tobacco Plc, parent of British American Tobacco (Investments) Ltd, were down about 1.4 percent in London.
(Additional reporting by Martinne Geller)