Dec. 3 (Bloomberg) -- A divided U.S. Supreme Court wrestled with a $79.5 million award against Altria Group Inc.’s Philip Morris USA unit in an Oregon smoker lawsuit and discussed the possibility of broadening the scope of the case.

In a case now before the justices for the third time, Philip Morris is seeking a new trial and a reprieve from what would be a record payment in a smoker suit. The cigarette maker says the Oregon Supreme Court improperly circumvented a 5-4 ruling the company won at the U.S. Supreme Court last year. The Oregon court then reaffirmed the award, saying the company violated a state procedural requirement.

Comments during today’s argument suggested that several justices may switch sides, putting the outcome in doubt. Antonin Scalia, who dissented in 2007, today said the Oregon court had disobeyed the high court’s instructions. At the same time, Stephen Breyer and David Souter, who previously sided with Philip Morris, hinted they might vote against the company this time.

Originally, “I thought this is a runaround, and I’m not sure I think that now,” Breyer said.

Souter told Philip Morris’s lawyer, Stephen Shapiro, that he had a “steep hill” to climb to persuade the justices to bar plaintiff Mayola Williams from raising an argument based on state courtroom procedure. “What business do we have to do that?” Souter asked.

Those concerns led Chief Justice John Roberts, another supporter of Philip Morris in the earlier decision, to suggest that the court might shift the focus of the case and directly decide whether the award is so large that it violates the Constitution. When the court agreed to hear the case in June, it opted against considering that question.

Damage Limits

If the high court takes Roberts up on his suggestion, it likely would order a new round of legal briefs and possibly an additional hour of argument. His approach would give the case significantly more potential impact.

Williams’s husband, Jesse, died at age 67 from lung cancer in 1997. The lawsuit said Jesse kept smoking Marlboros in part because of assurances from Philip Morris that cigarettes don’t cause cancer.

The 1999 punitive award by a Portland jury has grown to more than $140 million with interest. The award came on top of $821,485 in compensatory damages, an amount later cut to $521,485 because of Oregon’s limits on awards.

‘Apply the Standard’

The high court’s ruling last year said juries can’t impose punishment for harm suffered by people who aren’t involved in the lawsuit. The Supreme Court sent the case back to the Oregon court with instructions to “apply the standard we have set forth.”

The Oregon court instead said it wouldn’t consider Philip Morris’s constitutional arguments because the jury instructions the company proposed for use at trial would have misstated state law. The court said that misstep violated a state law requirement that proposed jury instructions be “correct in all respects.”

Shapiro, the Philip Morris lawyer, called the Oregon court decision an “ambush.” He drew support from Scalia, who said the Oregon court ruling was “not what we remanded for.”

Breyer, however, pointed to 28 cases cited by Williams’s lawyers as examples of Oregon courts applying the “correct in all respects” rule.

“Under Oregon law, unless every part of it is right, the judge is correct in not giving it, even if he never mentions the other part,” Breyer said. “It does seem as if that’s what those 28 cases do say.”

‘Pretty Picky’

Later, Breyer was more equivocal, saying the errors found by a trial judge in Philip Morris’s proposed jury instructions were “pretty picky.”

Williams’s lawyer, Robert Peck, said Philip Morris had followed the “correct in all respects” rule in a different Oregon smoker case.

“Philip Morris showed in 2002, well before this court’s decisions, that they know how to do it when they want to,” Peck argued.

Breyer was the only other justice who voiced interest in Roberts’s proposal to have the court focus on the size of the award, asking Shapiro to respond to the chief justice’s suggestion.

The case is one of two involving Philip Morris on the Supreme Court’s 2008-09 calendar. The justices also are considering whether the company must face Maine smokers’ claims that it fraudulently portrayed “lights” as safer than other cigarettes. The justices are expected to rule by July in both cases.

The case is Philip Morris v. Williams, 07-1216.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: December 3, 2008 14:14 EST