THIS week's landmark United States Supreme Court decision allowing individuals to sue cigarette companies under state law throws a cloud of uncertainty over the long-range prospects of the multibillion-dollar tobacco industry.
"Some market volatility regarding tobacco stocks" appeared immediately following the court's decision Wednesday, according to stock strategist Dennis Jarrett. Mr. Jarrett, with Kidder, Peabody & Co., expects tobacco stocks to settle down, in regard to day-to-day price performance. But he does not expect the stocks to remain the major market players - "market leaders," as they are called by investors - that they have been.
"Tobacco stocks have done very well for many investors over the years. But for now, investors will probably bank their earnings" and take a "wait-and-see" approach to the companies during the months ahead, as the issue of litigation becomes clearer.
The 7-to-2 decision surprised many investors, although tobacco industry officials insisted the decision was a "victory."
"We are very pleased with the outcome," says a spokesman for Philip Morris Companies Inc. In a press statement, Philip Morris said that "the Court held that smokers cannot sue cigarette companies [while] claiming that after 1969 [when warning labels were in effect] they were not adequately warned of the risks of smoking. In addition, the court held that smokers cannot base claims on the post-1969 advertising and promotion of the companies."
Still, this week's decision - in a suit first brought almost a decade ago by the family of the late Rose Cipollone of New Jersey - held that not all liability suits were precluded by the federal law requiring warning labels. The court ruled that cigarette companies could be sued under state laws for concealing the dangers in smoking. The basis for such state suits would be the duty of a manufacturer not to deceive consumers, according to Justice John Paul Stevens, who wrote for the majority. Moreover, Ju stice Stevens said, state suits would not be precluded by restrictions in the federal labeling law.
"Hallelujah," says Patrick Reynolds, the grandson of tobacco magnate R. J. Reynolds, and now a crusader against smoking. Mr. Reynolds, who heads up Citizens for a Smokefree America, a public interest group based in Los Angeles, says there will be "a rising tide of litigation" against tobacco companies.
Nor is he displeased at the likelihood of such suits and potentially large cash awards. "People who work in the tobacco industry are denying to themselves" what they are doing in selling people - particularly young people - tobacco products, Reynolds argues.
"We've very happy with the decision," says Kathleen Scheg, an attorney with Action on Smoking and Health, a citizens action group in Washington. Ms. Scheg says that the high court decision allows state suits against tobacco companies based on three legal postulates: a "breach of expressed warranty" that tobacco products are not harmful; a "conspiracy" to hide potentially damaging information about the dangers of smoking; and "intentional deceit" to hide information.
`WE expect a number of suits," she says. For the companies, there is a "substantial risk of liability. That means that the companies are probably going to be far less favorable for investors."
Tobacco companies' stocks have been highly popular on Wall Street in recent years. But impressive earnings growth has come not just from the manufacture and sales of tobacco products, but food products. Several tobacco firms have bought out major food companies; industry leader Philip Morris, for example, owns Kraft - a "cash cow," in terms of earnings flows. R. J. Reynolds is also a major food manufacturer, owning, for example, Nabisco.
Philip Morris, meantime, is the world's largest tobacco company, and close to becoming the world's largest food company, notes John McMillin, an analyst for Prudential Securities Inc. Philip Morris stock has been considered excellent to own.
Mr. McMillin says it is too early to conclude that the court decision will take the luster off tobacco firms. He sees the decision as a "mixed" judgment, with both sides winning something. "Turning this ruling into dollars will be difficult" for litigants, he says.