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[ Cover Story]
Hitting the wall
After years of litigation, Justice Department’s suit against tobacco industry runs out of steam
by Chris Traczek
What were you doing on May 24, 2004? Though it seems like it wasn’t really that long ago, for perspective, if you are a fan of the Chicago White Sox or Boston Red Sox, on that day you were still wondering if your favorite team would ever win another World Series championship.
May 24, 2004, also had the potential to be the leaping-off point for what could have been one of the most devastating chain of events to ever hit the tobacco industry. On that day, the United States Justice Department, in U.S. District Court, was given the green light by Judge Gladys Kessler to proceed with its $280-billion (yes, billion) lawsuit against the tobacco industry. The DOJ said the potential $280-billion award, or “disgorgement,” coincided with the amount of “ill-gotten gains” earned by the industry over the previous 40 years. Justice lawyers also wanted new restrictions on the industry, including limiting in-store promotions or banning product descriptions such as “low tar” or light.” The government first brought the racketeering case in 1999 (what were you doing then?) and had spent $135 million pursuing it.
Over the next 17 months, though many in the CTS industry were unaware of it, the future of tobacco retailing rested on a knife edge as the case slowly wound toward its conclusion. At stake was cigarette retailing as we know it, with a favorable ruling for the DOJ bringing with it the potential to bankrupt the entire cigarette industry.
Specifically, the lawsuit, which was filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act — most commonly used in Mob trials — contended that cigarette companies marketed their products to minors and then lied about doing so, as well as misled consumers about tobacco’s health risks. The government chose to file the case under RICO provisions because that law is designed to achieve remedies where there has been a group effort to violate fraud statutes.
To receive any remedy, let alone the entire $280 billion, the government had to prove that the industry was likely to engage in wrongful conduct in the future, which tobacco-industry lawyers argued was a standard that could not be met under the current regulatory and public environment in which cigarettes are marketed and sold today.
Industry lawyers also argued that it would be impossible to demonstrate the likelihood of future fraud because the industry now runs ads and makes information available on Web sites detailing the hazards of smoking and addictive nature of nicotine. In addition, health warnings have been required on cigarette packs for 40 years.
The defendants in the suit included Philip Morris USA’s parent company, Altria Group Inc.; R.J. Reynolds Tobacco Co.; Brown & Williamson Tobacco Co.; British American Tobacco Ltd.; Lorillard Tobacco Co.; Liggett Group Inc.; the Counsel for Tobacco Research-U.S.A.; and The Tobacco Institute.
Following is a timeline of major events in the case, ending with the Oct. 17 decision by the U.S. Supreme Court that the tobacco industry would not be paying $280 billion in damages to the DOJ. The actual outcome of the case itself was still pending in mid-November
September 2004
On Sept. 21, the first courtroom salvos were fired in the case.
Justice Department attorney Frank Marine, citing internal tobacco-industry documents, said that starting in the 1960s the industry spent hundreds of millions of dollars on organizations set up to counter the growing body of scientific evidence linking smoking to cancer.
“The problem to them was that the public might stop smoking because of health concerns,” he said.
To that end, the DOJ claimed, the industry created the Center for Tobacco Research and the Center for Indoor Air Research to rebut scientific findings about smoking and the dangers of second-hand smoke, and set up the Tobacco Institute to promote their findings and serve as a public relations and lobbying arm.
Marine said the goal was to create a controversy where none existed. He said the “massive scheme” was successful and has had devastating consequences, citing the nearly 500,000 Americans who die from smoking-related illnesses each year.
Then, industry lawyers made their opening statements.
“The government will focus on the past, with little or no mention of the significant changes that have been imposed on the industry and reflected in the tobacco settlement agreement reached with the states in 1998,” said Michael Pfeil, vice president of corporate communications for Altria Group, the parent company of Philip Morris USA. “The future of the industry will be shaped by the blueprint of comprehensive change that exists today. You simply can’t ignore the breadth and depth of the changes the tobacco industry has made in its business practices, and nothing the government can say in court will alter that fact.”
The industry argued that the government and public were well informed about the risks of tobacco, from the mandated health warnings on the packages to annual reports published by the Surgeon General to frequent government involvement in many aspects of the industry.
Industry lawyers also noted that the government previously advanced the idea in ads and public statements that it was better to smoke cigarettes with lower levels of tar and nicotine than regular ones.
“The government was out there telling people, ‘If you aren’t going to quit, switch,’” said R.J. Reynolds lawyer Peter Biersteker.
Government lawyers countered that past fraud is indicative of future behavior and that the industry has not reformed itself.
“The defendants’ recent superficial changes in behavior in reaction to this and other lawsuits are too little, too late,” said deputy associate attorney general Matt Zabel.
Some stunning testimony came on Sept. 24 when former Food and Drug Administration commissioner David Kessler testified that cigarette-makers manipulated nicotine to keep smokers addicted. In the 1990s, Kessler investigated the tobacco industry for the FDA, an investigation, industry lawyers argued, was a grandstand play in which Kessler labeled nicotine a “drug” while attempting to create FDA regulation of cigarettes.
Nevertheless, Kessler’s investigation revealed that nicotine levels in cigarettes were controlled by the companies and that the companies kept nicotine levels up, even as they lowered tar levels, by blending different kinds of tobacco leaves to make the product, a claim the tobacco companies staunchly refuted.
November 2004
There was much ado about a memo as government lawyers sought to have British American Tobacco produce a privileged 1990 memo that the DOJ believed could strengthen their fraud argument. Judge Kessler ruled that BAT had to deliver the memo, but her ruling was overturned by the U.S. Circuit Court of Appeals for the District of Columbia.
The memo advised an Australian subsidiary of BAT on whether the company should keep or destroy internal paperwork in light of increasing litigation. DOJ lawyers hadn’t seen the sealed memo, but knew much of the contents because an Australian appeals court decision in 2002 quoted the memo.
Judge Kessler had ruled that BAT had waived its right to attorney-client privilege by failing to list the memo on an initial document it gave Justice Department lawyers about items it was withholding on grounds the material was privileged. The three-judge appeals panel, while saying the company’s reasons for not handing over the memo were weak, however, said waiving attorney-client privilege was too serious a sanction for Kessler to have imposed.
• In May, when Judge Kessler ruled that the case could be heard, industry lawyers asked a federal appeals court to review her decision. That review came on Nov. 17 when two of the three judges on an appeals-court panel raised doubt about whether or not the government had the right to file the $280-billion lawsuit.
“This RICO law was issued with all sorts of testimony about racketeers and Mafiosi. I’ve seen the government using it in court against everybody except racketeers and Mafiosi,” Appeals Court Judge David Sentelle said.
To the point, before the three-judge panel was a motion by the industry challenging the government’s bid for disgorgement of some of their past profits.
Judge Sentelle was receptive to the industry’s argument, demanding to know how the government could “wedge” its $280-billion disgorgement claim into the “prevent and restrain” wording in the law.
Sentelle and Judge Stephen Williams both challenged the government’s reasoning and questioned whether the government’s disgorgement request would bankrupt the industry.
The government argued that the appeals court had no grounds to rule on the matter because cigarette-makers had a chance to appeal an earlier disgorgement ruling by Judge Kessler but declined to do so.
February 2005
On Feb. 4, Circuit Court of Appeals for the District of Columbia ruled in a 2-1 decision that disgorgement was not an appropriate remedy for the Department of Justice case against the tobacco industry, a “major win” for the industry that essentially removed the financial risk to the defendants.
As expected, Judges Williams and Sentelle ruled in favor of the industry while Judge David Tatel dissented.
Disgorgement is “a remedy aimed at past violations,” Judge Sentelle wrote in the ruling.
In dissent, Judge Tatel said his colleagues ignored Supreme Court precedent, misread the law and contradicted the decision of another appeals court, the 2nd U.S. Circuit Court of Appeals in New York.
The disgorgement ruling in favor of the defendants took away an essential part of the government’s case, rendering it a “toothless” prosecution and meaning that the only remedy the industry would be responsible for is a non-financial remedy such as funding more public education, smoking cessation programs or further disclosures of health risks.
Charles A. Blixt, executive vice president and general counsel for R.J. Reynolds Tobacco Co., said the ruling “dramatically transforms” the government’s lawsuit. “While we continue to believe that no remedies are warranted under the facts of this case,” he said, “with the threat of disgorgement removed, the principal remedies still available to the government are forward-looking measures. These would include marketing and sales restrictions already put in place by our company and others under the Master Settlement Agreement.”
After the circuit court ruling, with some saying that Judge Tatel’s strong dissent gave the government strong grounds for an appeal, the government also had the option to file a petition for certiorari with the United States Supreme Court.
On Feb. 16, the Justice Department said it would appeal the panel’s decision and would, with disgorgement at least temporarily off the table, ask Judge Kessler to require the industry to pay for large-scale smoking cessation programs, a public education campaign about the dangers of smoking and a long-term campaign to prevent youth smoking.
Depending on how these programs were structured, they could cost the industry tens of billions of dollars, said William V. Corr, executive director of the Campaign for Tobacco-Free Kids.
“The government’s filing today demonstrates that the most important remedies that will undo the harm that the industry has caused are still available to the court,” Corr said.
The industry objected to the proposed penalties, saying they failed to meet the standards set by the appeals-court ruling. The defendants argued that the penalties the government was seeking were not forward-looking and were “strikingly in conflict with the Court of Appeals’ unambiguous holding.”
“Like disgorgement, these anti-smoking efforts will have no effect on whether defendants ‘act unlawfully in the future,’” the defendants wrote in a brief presented to Judge Kessler.
June 2005
With the case finishing its 10th month, and closing arguments having been heard on June 9, Judge Kessler urged the DOJ and defendants on June 20 to renew efforts to settle. Judge Kessler described a closed meeting as a “routine informational discussion with the parties urging them, once again, to consider the advantages of settling this case rather than the risks of litigating it.”
The government had angered anti-smoking activists earlier in the month by drastically cutting one of the sanctions it was demanding should Kessler find that the tobacco companies violated racketeering laws.
In the closing arguments, the Justice Department asked that the companies be forced to fund a $10-billion, five-year, quit-smoking campaign, rather than a $130-billion, 25-year program recommended by a government witness. The government also asked for a $4-billion anti-smoking education campaign.
During closing arguments, Judge Kessler expressed doubts about most of the alternative legal remedies the Justice Department was seeking to impose, such as an “investigations officer” to oversee the industry; a ban on the use of “health descriptors” in cigarette ads, such as “light” or “mild;” and a system of fines to be imposed if youth smoking rates did not decline.
Kessler also questioned whether the quit-smoking plan was really “forward-looking,” as the appeals court required.
“It doesn’t really matter whether the amount the government is seeking is $1 billion, $10 billion or $100 billion,” said Altria Group associate general counsel William Ohlemeyer. “The law and the facts just don’t entitle the government to these remedies.”
On June 28, industry lawyers asked Judge Kessler to dismiss the case, with industry attorney Dan Webb saying the government’s case was in “complete disarray.”
The month closed with the case taking a new twist as six anti-smoking groups filed motions to become parties to the lawsuit. The groups included the Tobacco Free Kids Action Fund, the American Cancer Society, the American Heart Association and the American Lung Association. They argued that the government’s proposed sanction in the case were inadequate.
July 2005
On July 18, the Justice Department, as expected back in February, asked the Supreme Court to reinstate its demand for $280 billion in disgorgement.
In its filing with the high court, the government said the appellate ruling was “inconsistent with (the Supreme Court’s) decisions, squarely conflicts with the decisions of other courts of appeals, wrongly decides an important issue and, if left uncorrected, will impede, rather than advance, the ultimate resolution of the proceedings in this extraordinarily important case.”
In a written statement, Philip Morris said it continued to believe the appeals court “reached the correct decision” and vowed to oppose the government’s petition before the Supreme Court.
Any action by the Supreme Court was not expected until fall.
October 2005
On Oct. 17, the Supreme Court, without comment, denied the government’s petition for certiorari in its appeal of the disgorgement claim in the DOJ case against the tobacco industry, exhausting all of the options the government had in pursuing the disgorgement claim under RICO statutes.
Ohlemeyer, Altria’s associate general counsel, said in a statement, “Philip Morris USA believes the U.S. Supreme Court appropriately denied the government’s petition.”
Playing into the Supreme Court decision was the fact that Judge Kessler had not yet decided whether the companies engaged in any wrongdoing. When Judge Kessler does render a decision, the case could potentially return to the Supreme Court sometime next year.
“The Supreme Court’s decision is a welcome rebuke to overreaching by the Justice Department and regulation through litigation,” wrote the Competitive Enterprise Institute, a Washington D.C.-based free-market advocacy group. “The lawsuit is a textbook abuse of the legal system.”
So, what now? For the time being, the DOJ’s lawsuit — admittedly a monetary shell of its former self — under Judge Kessler will continue with the government seeking $14 billion in funding, $10 billion over a five-year period for a national smoking-cessation program and $4 billion over a 10-year period to fund a public education and counter-marketing campaign by the American Legacy Foundation.
Although Judge Kessler may finally rule on the case next year, a final decision, when factoring in appeals, is several years (and billions of dollars) away.
The Associated Press, Reuters and USA Today contributed to this report. |
