UPDATE 2-U.S. top court dismisses Philip Morris appeal

* Philip Morris was appealing $79.5 mln punitive damages

* Case involved widow of longtime Oregon smoker

* Supreme Court does not decide merits of dispute

* Altria shares down about 3 pct (Adds company, analyst comment)

By James Vicini

WASHINGTON, March 31 (Reuters) - The U.S. Supreme Court dismissed an appeal by Altria Group Inc's MO.N Philip Morris USA over $79.5 million in punitive damages awarded to the widow of a longtime Oregon smoker.

The top court did not decide the merits of the dispute, but in a one-sentence ruling on Tuesday dismissed the appeal as “improvidently granted.” Philip Morris in its appeal argued the Oregon Supreme Court in upholding the award had defied an earlier U.S. Supreme Court ruling in the case.

Altria shares were down about 3 percent at midday following the ruling.

Since the court did not rule on the merits of the merits, “it isn’t necessarily and indication that the floodgates will open in litigation cases,” Morningstar analyst Phil Gorham said. “But I do think it is a setback.”

Gorham said the case should remind investors that tobacco companies are still subject to product liability lawsuits, even though the legal atmosphere for the industry has improved in recent years.

The case stemmed from a lawsuit filed by Mayola Williams, whose husband died of lung cancer in 1997 after smoking for more than 40 years.

Williams said her husband, a public-school janitor in Portland who smoked as many as three packs a day of Philip Morris’ Marlboro cigarettes, had believed the decades of tobacco industry assurances that smoking did not pose a health threat.

In 1999, a jury awarded Williams $821,000 in compensatory damages, which was reduced under state law to $521,000, and $79.5 million in punitive damages. With interest, the award has grown to more than $150 million, a lawyer for Williams said.

The U.S. Supreme Court initially set aside the award in 2003 in view of its ruling that generally limited punitive damages to no more than nine times the compensatory damages.

The Oregon Supreme Court then upheld the award and ruled the company’s reprehensible conduct warranted such a large verdict.

The U.S. Supreme Court in 2007 overturned the award for a second time. It ruled it was unconstitutional for juries to impose damages to punish a defendant for the harm done to those who are not parties in the lawsuit.

The Oregon Supreme Court in 2008 again upheld the $79.5 million award. It ruled the proposed jury instructions by Philip Morris were flawed under state law and the company thus forfeited its claim of federal constitutional error.

Phillip Morris again appealed to the Supreme Court and said the state court had ignored the Supreme Court’s instructions.

The Supreme Court heard arguments in the case on Dec. 3. By dismissing the appeal and saying the appeal should not have been granted, the justices left intact the award against the tobacco company.

Philip Morris said the ruling on Tuesday was based only on a procedural matter.

“Today’s decision does not impact the court’s earlier decisions on punitive damages,” Murray Garnick, an Altria attorney said in a statement on behalf of Philip Morris. “Importantly, the court did not disturb its 2007 Williams decision which held that a jury may not impose punitive damages for harm caused to anyone other than the plaintiff in a particular case.”

Philip Morris is still battling with Oregon over a state law that requires 60 percent of any punitive damages award be paid to the state.

The company argues that, under the 1998 settlement agreement between tobacco companies and the states, Oregon is barred from collecting punitive damages. That issue is currently before an Oregon state court, the company said.

Altria shares were down 47 cents at $15.91 at midday on the New York Stock Exchange. (Additional reporting by Brad Dorfman in Chicago; Editing by Lisa Von Ahn and Andre Grenon)