Illinois' highest court reversed and remanded back a 2003 ruling that held Philip Morris, Altira's tobacco unit, liable for false advertising in the sale of light cigarettes. It instructed the lower court to dismiss the matter.

Altria closed up $2.89, or 3.9%, to $76.62. Earlier, the shares touched an all-time high of $78.68.

The state Supreme Court ruled that the Federal Trade Commission specifically allowed companies to characterize their cigarettes as "light" and "low tar," so Philip Morris did not improperly mislead customers about the health impacts of its cigarettes.

An Illinois jury in March 2003 found in favor more than a million smokers who claimed they were deceived by Phillip Morris supposed claims that "light" cigarettes were safer than so-called full-flavored cigarettes. The brands in questions were Marlboro Lights and Cambridge Lights.

A judge in Madison County subsequently awarded plaintiffs in the lawsuit $10.1 billion in damages. The award comprised $5 billion in compensatory damages, $3 billion in punitive damages and $2.1 billion in interest.

Altria's very solvency was threatened when a court ordered it to post a $12 billion bond while it moved to appeal the award. The company was eventually allowed to bond roughly half the amount after Phillip Morris threatened to file for bankruptcy protection.

Altria remains a long way from freeing itself from its considerable litigation risk, but this development bodes well for the company in future cases. As of Nov. 1, it faced 25 potential class actions alleging that the terms "lights" and "ultra lights" are deceptive and unfair, or violate the Racketeer Influenced and Corrupt Organizations Act. Six of the cases now pending in state courts already have been certified as class actions.

Meanwhile, Thursday's ruling is expected to be appealed to the Supreme Court, but there is no guarantee the high court will agree to hear the case.

"This sets the benchmark that the rest of the country will look at when they're evaluating these cases," said Morningstar analyst Gregg Warren. "It's great news for Altria and great news for the rest of the tobacco industry. If this went the other way, you have the potential of 49 other cases hitting the industry."

Separately, Philip Morris is waiting for the Florida Supreme Court to complete its review of a $145 billion verdict against the industry in the so-called Engle case. The court would have to reverse an earlier appellate court which overturned the judgment.

"Tobacco is already on the positive side of that one," Warren said. "It's doubtful that the Flordia Supreme Court is going to reverse that decision. So, it will probably go to the Supreme Court and we'll get some resolution on that within the next year."

Cigarette-makers are also waiting for U.S. District Judge Gladys Kessler to rule in the Department of Justice's civil-racketeering case against several major players in the industry, including Phillip Morris. Warren has a settlement priced in to his valuation on Altria that he expects will be announced in 2006.

As Altria gets closer to shedding the burden of pending litigation, it clears the way for the company to spin off its Kraft unit as well as other non-tobacco assets.

"The key is to make sure the company gets fair value for these assets, which means they have to put these litigation issues to bed before they sell," Warren said. "Otherwise, if Phillip Morris runs into trouble down the road, lawyers could come after Kraft."

Get Jim Cramer's picks for 2006.