Supreme Court Turns Away Justice Department Tobacco Suit

Statement by Hans Bader, Special Projects Counsel

Washington, D.C., October 17, 2005— The Supreme Court today rightly rejected the Justice Department’s attempt to revive its demand that the tobacco industry pay the Government $280 billion under the Racketeer-Influenced and Corrupt Organizations Act (RICO), denying the Justice Department’s petition for certiorari in United States v. Philip Morris.

The government argued that a statutory provision permitting the government “to prevent and restrain violations” of RICO allowed it to seek money for past violations, even though that same money could be sought by individual citizens, who can obtain treble damages for any violations. The D.C. Circuit Court of Appeals disagreed, holding that the government’s power to “prevent and restrain” only includes forward-looking remedies against future misconduct, not compensation for past violations, such as “disgorgement.”

The Supreme Court’s decision is a welcome rebuke to overreaching by the Justice Department and regulation through litigation. In 1999, the Justice Department sued the tobacco industry for $280 billion, alleging it committed wire and mail fraud by downplaying the danger of cigarettes and denying it marketed them to young people. The lawsuit is a textbook abuse of the legal system.

The $280 billion is based on all cigarette sales to so-called “youth-addicted” smokers between 1971 and 2000. Anybody who legally smoked between the ages of 18 and 21 in that period is deemed a “youth-addicted” smoker, even though it’s legal in most states to smoke at age 18. The government says that people in that age group are a “protected class” who cannot think for themselves about whether to smoke (although the law considers them old enough to make other important decisions, like whether to fight in Iraq).

The tobacco industry doesn’t have $280 billion, but trial judge Gladys Kessler said the government could seek it anyway, since that much money may have passed through the industry over the years and forcing them to cough it up might discourage wrongdoing in the future. The D.C. Circuit Court of Appeals rightly rejected such expansive reasoning in reversing Judge Kessler.

The Government wants the tobacco companies to pay it billions it already received. It admits the $280 billion it demands includes tens of billions of dollars in taxes that smokers paid not to the tobacco companies but to the government, as well as more than $200 billion in interest. So much of the money the government demands never even passed through the hands of the tobacco companies, but rather into its own pocket. The Government wants to have its cake and eat it, too.

The government claims the $280 billion as “disgorgement” of ill-gotten gains — that is, money from smokers who smoked because they were deceived about the dangers of smoking. But ever since 1965 — years before the Government seeks to recover for the tobacco companies’ alleged fraud — tobacco packs have contained warning labels that smoking is hazardous to your health. That’s why smokers themselves generally admit that they know smoking is hazardous to their health. They’re not deceived.

And the government’s own paid expert, Dr. Fisher, who computed the $280 billion figure, testified that he was ordered not to consider what portion — if any — of that $280 billion demanded came from legal, as opposed to fraudulent, cigarette sales. And he said himself it was “preposterous” to assume that smokers all smoked because they were deceived about the dangers of smoking.

The RICO statutory provision the government is suing under doesn’t say anything about “disgorgement,” much less $280 billion. It just says that a court can issue an order when that’s necessary to “restrain and prevent” future violations by a defendant. It doesn’t say anything about orders to deter the same behavior by other entities in the future.

The trial judge, however, said that narrow language included orders that deter others from misconduct, even if the defendant itself lacks the will or resources to commit future violations. She reasoned that the definition of “deter” includes “restrain” and “prevent,” so “restrain and prevent” must also mean “deter.” That’s like saying that since Socrates is a man, all men are Socrates.

The Supreme Court held that similar language didn’t allow recovery of money for past violations in the 1996 Meghrig v. KFC decision, which held that language in an environmental law that allowed courts “to restrain” persons who were improperly disposing of hazardous waste didn’t permit plaintiffs to demand money for such violations, such that goes beyond restraining future violations to punishing past ones. The D.C. Circuit rightly followed that reasoning in dismissing the Justice Department’s demand that the tobacco companies “disgorge” $280 billion.

The government’s claim that is can seek disgorgement in a civil action under RICO is hard to square with the fact than another section of RICO, which the Government did not sue under, permits the government to seek disgorgement upon a finding of a criminal violation – which requires a much higher burden of proof. Allowing the government to seek disgorgement in a mere civil action both renders that provision partially redundant, and circumvents Congress’s intent to protect businesses from disgorgement except in cases of clear-cut criminal wrongdoing.

Judge Kessler, the trial judge who allowed the government to make this staggeringly large $280 billion demand, has frequently been reversed on appeal in past cases. She was reversed unanimously by the D.C. Circuit in 2001 when she held that tobacco companies can be sued by insurers for health care costs they incur in treating smokers. She allowed the lawsuit to proceed regardless of the fact that smokers knew the risks of smoking and insurers voluntarily insured smokers against health risks. That case — just like this case — involved RICO and fraud claims. It also involved similarly defective economic models purporting to measure the costs of smoking.

And she was reversed unanimously by the D.C. Circuit in 2002 when she waded into partisan politics to hold that when a civil rights commissioner steps down a moment before her term ends, an outgoing president can appoint a replacement to serve for a full eight years, leaving his successor unable to pick any replacement for that seat. In that case, she allowed Mary Frances Berry, the liberal Chairwoman of the U.S. Commission on Civil Rights, to block President Bush’s appointee, Peter Kirsanow, from sitting on the left-wing Commission.

Yet the Bush administration, which champions tort reform in every other context, seems happy to embrace Judge Kessler’s eccentric interpretation of RICO. The $280 billion the Justice Department is seeking dwarfs the damages awarded annually by all of the nation’s courts put together.

The lawsuit was brought by the Clinton Administration in 1999, despite the misgivings of Attorney General Reno, and many expected the more pro-business Bush Administration to drop it. But neither John Ashcroft nor Al Gonzales has lifted a finger to stop it.

If only they had. The taxpayers have already incurred over a hundred million dollars in wasted legal bills bringing this case. For taxpayers and businesses alike, it is a good thing that the Justice Department’s extortionate lawsuit is on its last legs.