Appeals Court Rejects Potential $280 Billion Penalty in Federal Lawsuit Against Tobacco Companies

A federal appeals court on Friday "delivered a major victory" to the tobacco industry by ruling that the federal government cannot claim the $280 billion in profit disgorgements it had sought in its case against major U.S. tobacco firms, the New York Times reports (Janofsky, New York Times, 2/5). According to the Washington Post, the appeals court ruling "wip[es] out the most powerful penalty that could have been imposed in the landmark racketeering case" (Leonnig, Washington Post, 2/5).

The lawsuit alleges that Brown & Williamson, Philip Morris, R.J. Reynolds, Lorillard Tobacco and the Liggett Group violated the civil Racketeer Influenced and Corrupt Organization Act by misleading consumers about the health risks of smoking and directing multibillion-dollar promotional campaigns at children. The Department of Justice made the allegations as part of a larger federal lawsuit first filed by the Clinton administration in 1999 that accuses the tobacco industry of conspiracy to mislead consumers about the dangers of smoking.

The lawsuit seeks $280 billion in past profits, which represents revenue from sales to smokers younger than age 21 between 1971 and 2000, as well as interest. In addition, the lawsuit seeks $9 billion to pay for smoking-cessation programs and research into safer cigarettes. U.S. District Judge Gladys Kessler, who is presiding over the case, rejected an earlier appeal by the tobacco companies to dismiss the government's monetary claim, which was reached by Massachusetts Institute of Technology researchers Franklin Fisher and Jonathan Gruber, who are expected to testify next month on their research. The economists estimated the sum by studying the companies' profits on tobacco sales to young smokers who became addicts between 1971 and 2001 (American Health Line, 1/19).

According to the Los Angeles Times, Friday's "resounding victory" for the tobacco industry "was not unexpected, given the conservative majority of the panel and the tenor of questions at the November hearing on the industry's disgorgement appeal" (Levin, Los Angeles Times, 2/5).

The appeals court ruled that Kessler is limited in civil RICO cases to ordering only penalties that prevent or restrain future violations, not including past profits (Washington Post, 2/5). In the majority opinion, Judge David Sentelle wrote that although the government could attempt to claim profits under the criminal portion of the RICO act, forcing the tobacco industry to give up past profits under a civil case "is a quintessentially backward-looking remedy focused on remedying the effects of past conduct to restore the status quo" (New York Times, 2/5).

He added, "Congress intended to limit remedies to ... forward-looking orders ... to separate the criminal from his future RICO enterprise. Disgorgement would therefore thwart Congress' intent" (Washington Post, 2/5). Sentelle wrote that the courts "need not twist the language the create a new remedy not contemplated by the statute" (Los Angeles Times, 2/5).

In a dissenting opinion, Judge David Tatel said that evidence in the case had shown that the disgorgement would "prevent and restrain" tobacco firms from committing future violations because they would expect to face further severe penalties (New York Times, 2/5). According to Tatel, the ruling "disregards Congress' plain language" and "controlling Supreme Court precedent" (Los Angeles Times, 2/5).

Sentelle, "who comes from the tobacco-producing state of North Carolina," and Judge Stephen Williams, who joined Sentelle in the majority ruling, were appointed by former President Reagan, the Post reports. Tatel was appointed by former President Clinton (Washington Post, 2/5).

While the decision "has no immediate effect on the trial" and Kessler could still rule that the companies should pay millions of dollars to change their marketing strategies or finance antismoking campaigns, the ruling, "for now, eliminates the government's biggest potential financial threat to the tobacco industry from the case," the New York Times reports.

According to the New York Times, it is "unclear what the government intends to do next," although government lawyers "may have to shift their focus to convince Judge Kessler that there are other ways to punish the companies." DOJ officials said further action would be decided by Attorney General Alberto Gonzales, who was confirmed by the Senate on Thursday (New York Times, 2/5). DOJ spokesperson Kimberly Smith said, "We have received the decision, and we are reviewing it now" (Washington Post, 2/5).

Dean Richard Daynard of the Northeastern University Law School, who is a critic of the tobacco industry, said that while some industry opponents initially were skeptical that the Bush administration would pursue the case, he believed the government would appeal the ruling and continue its commitment to the lawsuit (New York Times, 2/5).

However, according to the Post, legal experts said such an appeal "is unlikely because government chances of success there are slim."

Industry officials privately "likened the panel's ruling to a gunshot wound to the heart of the government's case, and they predicted it would lead to settlement talks," the Post reports (Washington Post, 2/5). Some experts said the tobacco companies "now could be more willing to settle the case in order to get it behind them," the Wall Street Journal reports (O'Connell, Wall Street Journal, 2/7).

However, Mary Aronson, an industry analyst, said, "I don't think the industry would be interested in settling this case. I think they're in a position of power at this point, and I don't see why there would be any reason for them to want to sit down at a negotiating table with the government to cobble together a settlement."

Jamin Raskin, a law professor at American University, added, "The government will be much more likely to want to reach a settlement, and big tobacco may want to ride out the storm" (Daniel, AP/Long Island Newsday, 2/5).

David Bernick, a lawyer for Brown & Williamson, said, "Obviously we're pleased with the decision. What's happened is that an enormous piece of noise that never should have been there has been eliminated, and the case can now properly focus on whether or not we are doing something we shouldn't be doing." He added, "The threat of a draconian monetary award was something we could not ignore. But it was an improper threat" (New York Times, 2/5).

Aronson said the disgorgement penalty "was probably going to be the last big [legal] threat" to tobacco firms, adding, "This has got to be a major disappointment for the Department of Justice. While they're crying in their beer, I think the tobacco industry is going to be popping champagne corks with a major sigh of relief."

William Corr, executive director of the Campaign for Tobacco-Free Kids, noted that the case still revolves around the government's demand for industry reforms. "Today's ruling is disappointing because it takes away from the government a powerful deterrent," Corr said, adding, "But this opinion does not restrict the trial judge's authority to order remedies that would ... cause them to pay billions of dollars to undo the addiction they've caused and the damage they've done" (Washington Post, 2/5). Corr noted that the disgorgement was not "the most important remedy in undoing the harm the industry has caused" and said the ruling should not be used by the government as an excuse to seek a weak settlement.

William Schultz, the former deputy assistant attorney general who headed the case during the Clinton administration, said the ruling "is a setback, but it doesn't cut the heart out of the case." Schultz added that the new leaders of DOJ "will have to do a massive calculation" of "what's the right thing to do legally" and "what's the right thing to do politically" (Los Angeles Times, 2/5).

NPR's "All Things Considered" on Friday reported on the court's ruling (Elliott, "All Things Considered," NPR, 2/4). The complete segment is available online in RealPlayer.

DOJ's attempt to force disgorgement in a civil RICO case "was an abuse of power that deserved to be smacked down," and the ruling, split along ideological lines, "is another illustration of why appellate courts matter," according to a Journal editorial.

The editorial concludes that Gonzales "could do everyone a favor ... by rolling up the case" because "an administration campaigning against frivolous lawsuits will want to accept defeat gracefully and not appeal this decision to the Supreme Court" (Wall Street Journal, 2/7).