Major Tobacco Victory

Supreme Court won't let feds pursue $280 billion penalty

WASHINGTON -- The Supreme Court refused Monday to allow the federal government to pursue a $280 billion penalty against tobacco companies on claims they misled the public about the dangers of smoking, said the Associated Press.

The decision, considered a major victory for cigarette makers, was not unexpected, because the government's case is still pending and the federal judge who presided over the nine-month trial has not yet decided whether tobacco companies are guilty of wrongdoing. The court declined, without comment, to intervene now, and the case [image-nocss] could return to justices next year.

The fight at the Supreme Court was over the amount of money the companies would have to pay, if the judge rules that they violated the Racketeer Influenced & Corrupt Organizations (RICO) Act.

In a research note, Citigroup tobacco analyst Bonnie Herzog said, Clearly, this is a victory for the industry, since it severely limits the financial risk the industry will ever face in this case. Bottom line, the government has exhausted all of its options in pursuing the disgorgement claim under RICO. Although we were anticipating this outcome, we don't think the market was convinced that the Supreme Court was going to deny review. Therefore, because this was likely unexpected by the market, and it is a positive event, tobacco stocks should trade up on this news, with [Philip Morris USA] enjoying the most upside. One of the major litigation hurdles has now been resolved favorably enough. Therefore, Altria Group is closer to its eventual breakup of its company. We expect all attention to now focus on Engle and Price Lights [cases] and both could be resolved as soon as Thursday.

William Corr, executive director of Campaign for Tobacco-Free Kids, said Monday that the Department of Justice should not use the Supreme Court's decision as an excuse to let the tobacco companies off the hook with a weak settlement.

A federal appeals court in Washington had ruled that the government could not pursue the $280 billion, the most ever sought in a civil racketeering trial. Then-appeals court Judge John Roberts had recused himself from the case there, without giving a reason. Roberts, who is now the chief justice, participated in the case at the Supreme Court.

The government's suit, by any measure, is the most important civil RICO action that the government has ever brought, justices had been told by government lawyer Edwin Kneedler.

The lawsuit was filed by the Clinton administration, and Kneedler argued that if the court did not step in now to deal with this issue, the case might drag on several more years.

The tobacco companies' lawyer, Michael Carvin, said that the court should give U.S. District Judge Gladys Kessler time to decide the case. He also argued that the government had a weak case far removed from the heartland of RICO.

The government has said that the $280 billion is an estimate of money that companies including PM USA and R.J. Reynolds earned illegally through fraudulent activities. It may still pursue a request for $10 billion for a stop-smoking program and $4 billion for education. The government had been harshly criticized for not asking for more. An expert had recommended a $130 billion stop-smoking program.

The government has spent $140 million since 1999 litigating the case, and the Justice Department also is trying to force tobacco companies to pay those costs.

The federal case is independent of settlements worth $246 billion that states reached with the industry in the late 1990s to recoup the cost of treating sick smokers.

The defendants in the lawsuit are PM USA and its parent, Altria Group Inc.; R.J. Reynolds Tobacco Co.; Brown & Williamson Tobacco Co.; British American Tobacco Ltd.; Lorillard Tobacco Co.; Liggett Group Inc.; Counsel for Tobacco Research-U.S.A.; and the Tobacco Institute. The case is United States v. Philip Morris, 05-92.

Click here to view Justice Department tobacco litigation webpage.

Click here to view PM USA's tobacco litigation webpage.