RJ Reynolds' $23-billion punitive damage award unlikely to stand: experts

The headquarters of Reynolds American is seen with old R.J. Reynolds Tobacco smoke stacks from a previous manufacturing plant in downtown Winston-Salem
The headquarters of Reynolds American is seen next to the old R.J. Reynolds Tobacco smoke stacks from a previous manufacturing plant in downtown Winston-Salem, North Carolina May 23, 2014. REUTERS/Chris Keane (Reuters)

By Gertrude Chavez-Dreyfuss and David Ingram NEW YORK (Reuters) - A decision by a Florida jury to impose punitive damages of $23.6 billion against RJ Reynolds Tobacco Company on Friday is likely to be rejected on appeal or the award reduced substantially, lawyers with expertise in jury awards said on Sunday. The award, which the cigarette maker has said it will contest, likely falls outside the boundaries for punitive damages that the U.S. Supreme Court has laid down in a series of cases, the lawyers told Reuters. RJ Reynolds is a unit of Reynolds American , which last week announced it would acquire rival Lorillard Inc in a cash-and-stock deal valued at $27.4 billion, including net debt. A Florida state court jury decided the award in a case brought by Cynthia Robinson of Pensacola. She is the widow of a chain smoker, Michael Johnson, who died of lung cancer in 1996 at 36. After a four-week trial and 11 hours of deliberations, the jury returned a verdict granting compensatory damages of $7.3 million to the widow and the couple's child, as well as $9.6 million to Johnson's son from a previous relationship. The same jury deliberated for another seven hours before awarding Robinson the additional sum of $23.6 billion in punitive damages, according to the verdict forms. "Nobody thinks the $23 billion is going to remain," said Richard Daynard, a law professor at Northeastern University and the chair of its Tobacco Products Liability Project. Because of constitutional guarantees of due process, the Supreme Court has shown a reluctance to allow punitive damages that are far out of line with compensatory damages in the same case, he said. The court's general guideline is that the ratio of punitive to compensatory damages should be below 10:1. The court precedent, though, still leaves room for a punitive award of more than $150 million, Daynard said. Punitive damages are meant to discourage companies or people from bad conduct, while compensatory damages are intended to pay victims for their actual losses. "There were all these concerns about runaway awards with regard to punitive damages," said Neil Vidmar, professor of law at Duke University. "Some are saying that nine times (the compensatory damages) is the absolute limit, but actually many times, the courts have cut that down to one or two times." In 2008, the high court cut a $2.5 billion punitive damages award against Exxon Mobil Corp for the 1989 Exxon Valdez oil spill off Alaska to about $500 million, saying the ratio in that case should be 1:1 with compensatory damages. But there is "no mathematical bright line rule," said Professor Catherine Sharkey, a tort law expert at New York University School of Law. Robinson sued R.J. Reynolds in 2008 over the death of her husband, Michael, claiming the company conspired to conceal the health dangers and addictive nature of its products. Johnson, a hotel shuttle bus driver, smoked one to three packs a day for more 20 years, starting at age 13. Robinson's lawsuit originally was part of large class-action litigation known as the "Engle case," filed in 1994 against tobacco companies. A jury in that case issued a verdict in 2000 in favor of the plaintiffs, awarding $145 billion in punitive damages, which at the time was the largest such judgment in U.S. history. That award, however, was rejected in 2006 by the Florida Supreme Court, which decertified the class. It agreed with a lower court that the group was too disparate and that each consumer had smoked for different reasons. But the court said the plaintiffs could file lawsuits individually. Robinson was one of them. "I worked with juries for several decades, and I cannot put my mind on what they are doing, but the Florida jury (in awarding a huge sum) seems to be sending a message," said Duke's Vidmar. "This is a statement from the jury that this was an outrageous behavior by the tobacco companies." RJ Reynolds has paid about $114 million for 15 Engle-related cases that have been finalized, the company said in an April regulatory filing with the Securities and Exchange Commission. Another $180 million in damages are on appeal. Northeastern's Daynard noted that the $23 billion is close to the cost of the Reynolds-Lorillard merger deal, adding that Wall Street should be aware of the potential for more huge damage awards. "You're going to have a lot more cases where juries could find themselves similarly outraged," he said. "The reluctance of the tobacco companies to settle these cases, thinking they can handle the cases as a matter of course, may be a mistake." The two cigarette makers face thousands of suits, but the impact has not been as dramatic as was expected a decade ago, and trials have given investors an idea of what the companies will pay. (Reporting by Gertrude Chavez-Dreyfuss and David Ingram; Editing by Dan Grebler)