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Action on Smoking and Health
A National Legal-Action Antismoking Organization Entirely Supported by Tax-Deductible Contributions
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US Tobacco Industry Faces Several Important Court Decisions [05/04-2]
Excerpts from: Moody's issues report on U.S. tobacco litigation
iWon Money [05/03/04]
The US tobacco industry is entering a critical period of important court decisions that may well move credit ratings dramatically, Moody's Investors Service says in a newly released report."In the coming months, up until early 2005, various court rulings and jury verdicts could have the potential of decreasing or increasing risk, and of having drastically positive or negative impacts on the companies' ratings," says Moody's Vice President/Senior Credit Officer Christophe Razaire.
He says the most significant of these cases right now is the Department of Justice claim brought under the 1970 RICO Act accusing the industry of conspiring to hide the negative effects of smoking for decades. The Department of Justice has indicated that it will seek $289 billion from the industry, an amount that represents the entire gains of the industry over several decades, in what is called a "disgorgement" remedy.
In the coming weeks, a judge will rule on a pre-trial motion to dismiss the disgorgement remedy. Should the judge deny the motion, Moody's says the risk of a large award could become very high (should the defendants go on to lose the case). A bench trial is scheduled to begin in the federal District Court for the District of Columbia on September 13th. Should the judge rule to dismiss the engorgement remedy, any possible penalties would be limited to injunctions such as a nationwide ban on cigarette vending machines. Razaire says such restrictions could have a "negative effect on free cash flow that could be significant, but not crippling, on the companies."
Razaire notes that the DOJ case also names Altria, in addition to its US subsidiary Philip Morris USA, as a defendant. This raises concern because up to now the holding company - obligor of the bonds rated by Moody's - has always been legally remote from the litigation against its US tobacco subsidiary.
Other important cases Moody's is watching include three product liability class actions, various consumer fraud class actions including the Illinois Price/Miles case, price-fixing class actions, and the Scott medical monitoring case in Louisiana.
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