Tuesday, October 30, 2007

Altria Shareholders Need to Watch Exxon's Supreme Court Appeal

Chief Justice John Roberts Supreme Court has elected to increase it's review of punitive damages against corporations by hearing an appeal of a $2.5 billion award against Exxon Mobil (XOM) over the 1989 Valdez oil spill in Alaska. Altria (MO) shareholders ought to be very interested.

The award against Exxon, the largest ever by a U.S. federal court is the final major litigation left from the Valdez oil spill. To date Exxon has paid more than $3.4 billion in claims and fines tied to the spill, which dumped 258,000 barrels of oil into the Prince William Sound after the Valdez oil tanker ran aground.

The appeal, which is supported by business groups, challenges the punitive award with several legal arguments, chiefly, that a federal appeals court ignored both recent punitive damages precedent and improperly allowed the damages award under maritime law.

In recent years, the Supreme Court has put restrictions on the size of punitive damages awards and limited the use of awards to punish broader conduct outside the scope of a particular case. It is clear that there is a sea change underway in this area. Once used to punish and essentially destroy a business, the Roberts court has taken a microscope to the issue of what it views as "grossly excessive damages" and has said that these types of awards "violate due process".

The last appeal ruling the court made in this area was last February when they set aside a nearly $80 million judgment against Altria awarded to the widow of a smoker in Oregon.

This has already filtered down to the state level. On July 6, 2006, the Florida Supreme Court decertified the Engle class-action litigation and reversed the state court jury’s award of $145 billion in punitive damages because, as a matter of law, the award was "improper and excessive." The Florida Supreme Court also concluded that certain issues decided by the Engle trial jury may be considered as resolved for any potential future cases filed by former class members.

On March 22, 2002, an Oregon jury awarded a Mr. Schwarz $168,500 in compensatory damages, and $150,000,000 in punitive damages, which the court reduced to $100,000,000. On May 17, 2006, the Oregon Court of Appeals found no error in the award of compensatory damages, but vacated the punitive damages award and ordered a new trial to determine the amount of punitive damages.

The Exxon case will further define the scope of punitive damages available to plaintiffs in cases and based on history, that will be very good for Altria and its shareholders. The litigation environment has not been this good for Altria in over a decade now and the valuation cap that has been on shares for that time period is beginning to dissipate. Once the litigation risk to shares is clearly defined, and the Roberts court is slowly doing that, one can expect PE expansion in shares, lifting them higher.

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