Tobacco Companies Fight Racketeering Ruling on Appeal
10/13/2008The country's largest tobacco companies squared off against the federal government on Tuesday in a bid to overturn a finding that they formed an illegal enterprise and conspired to systematically hide and deny evidence of the harms of smoking for over half a century.
In oral arguments on Tuesday, leading tobacco makers Philip Morris USA Inc. and R.J. Reynolds Tobacco Co., among others, argued to the U.S. Court of Appeals for the D.C. Circuit that the government did not have the right to use a lawsuit to more tightly regulate tobacco marketing and sales.
The U.S. Department of Justice has accused the tobacco companies of violating, and conspiring to violate, the Racketeering Influenced and Corrupt Organizations Act by using wire and mail fraud to spread false information and deny scientific evidence on smoking.
"This is an extraordinary case that never should have been brought under the RICO statute," said Murray Granick, senior vice president and associate general counsel for Altria Client Services, part of Philip Morris' parent company, Altria Group Inc.
"Most notably, the government failed to prove that there is a likelihood of future violations," Granick added. "The evidence at trial demonstrated that Philip Morris USA fundamentally has changed how it does business, and the 1998 landmark agreement between the tobacco industry and the states makes it impossible for the government to prove its case."
The appeal is the latest step in a decade-long war between the government and the tobacco industry, which has also drawn a large band of public health organizations to intervene.
The proceedings in the U.S. District Court of Washington, D.C., ended in 2006 with a 1,652-page ruling finding that the companies had formed an association-in-fact enterprise, as defined in RICO, that consistently committed wire and mail fraud.
District Court Judge Gladys Kessler further found that for some 50 years, tobacco makers had falsely denied that their product could cause health problems and that nicotine and smoking could be addictive.
In addition, Judge Kessler determined that the industry had manipulated the design and composition of cigarettes to make them more addictive, that they had denied the fact that second-hand smoke can cause illness and that they had suppressed their own scientific evidence of health risks. She also found that they had falsely stated that light and low-tar cigarettes deliver less nicotine and denied that they were marketing tobacco to younger customers.
However, Kessler's earlier order directing the industry to disgorge $280 billion in profits was barred in the D.C. Circuit in 2005 and denied certiorari in the U.S. Supreme Court.
Since RICO states that to form an enterprise, parties must join together to commit a crime – in this case spreading dangerously false and misleading information about tobacco – Judge Kessler provided a good basis for her ruling, said Thomas Walker, a partner at Cosho Humphrey LLP who specializes in civil RICO cases and is not involved in this litigation.
"The evidence was pretty overwhelming. Everything they said goes against what we already know, and the empirical scientific evidence that was presented to the court was pretty conclusive," Walker said. "So frankly, in my opinion, the tobacco industry's goose is cooked. In this case, the judge did a very thorough analysis of all the elements of RICO, and I believe she properly interpreted RICO."
In their appeal, the tobacco companies argued on Tuesday that Judge Kessler's findings missed one key criterion to warrant a RICO violation – that individuals intentionally binded together in an association-in-fact enterprise in order to commit a crime.
Designed to combat mafia crime, RICO defines an association-in-fact enterprise as "any union or group of individuals associated in fact although not a legal entity," the tobacco makers noted in a brief filed with the appeals court last year. They contended that the government had failed to prove that any individuals intended to defraud the public and that the enterprise even included any individuals.
"An industry compromised of corporations cannot constitute a 'union or group of individuals associated in fact,' because corporations are not 'individuals' within the meaning of RICO," the companies said.
"The alleged 'common purpose' was nothing more than to 'maximize profits for the tobacco industry' – a goal no different from the individual objective of each defendant (or any for-profit corporation for that matter)," they added.
The companies also took aim at injunctive remedies Judge Kessler imposed, which the D.C. Circuit stayed pending the appeal.
RICO requires there to be a reasonable likelihood that the wrongdoing will continue to warrant an injunction. The tobacco firms argued that the substantial internal changes they have made, and the multistate settlement they struck in 1998, seriously weaken the likelihood that it could happen in the future.
Under the settlement, seven tobacco makers agreed to change the way they marketed their products, to pay the states about $206 billion, to finance a $1.5 billion anti-smoking campaign, to share industry documents they had kept secret and to disband industry trade groups that were accused of conspiring to hide damaging research.
The tobacco industry's case has also received support from some who lodged amicus briefs arguing that a ruling in the government's favor would breach the companies' First Amendment rights. If the government is allowed to use a RICO action to suppress marketing and advertising statements it disagrees with, it could then move to take action against controversial industries such as fast food or pharmaceuticals, said Richard Samp, chief counsel for the Washington Legal Foundation.
"Some people argue, 'Well, everybody knows the tobacco industry is different from other industries, it's a product that doesn't have whole lot of beneficial uses other than that people enjoy it, so it can't have precedence elsewhere," Samp said. "My concern is, yes, it can. We have other groups that have their first amendment rights restricted – fast food restaurants, the pharmaceutical industry."
Others countered, however, that the government's argument is not just based on a difference of opinion, but on a mountain of evidence showing that tobacco companies hid and denied important health information.
"There is no free speech right to commit fraud," Walker said. "You have the right to free speech, which includes advertising, but it has to be truthful, and if it's not, that's fraud."
In its own brief to the appeals court, the DOJ argued that the industry's claim that an association of corporations cannot form a RICO enterprise is foreclosed by a 1988 case in which the D.C. Circuit stated that corporations can indeed form an enterprise.
Responding to the tobacco industry's claim that their common purpose has been to maximize profits, the DOJ added, "That is true only in the sense that all schemes to obtain money or property by fraud can be characterized as profit-maximization. As the court found, defendants formed and maintained their enterprise to deceive American consumers about the two defining characteristics of their product: its toxicity and its addictiveness. It is that purpose, not a generalized interest in making money, that underlies the enterprise."
The DOJ, along with a group of public health organizations that intervened in the case, also asked the appeals court for remedies that require the industry to launch a public education campaign on the dangers of smoking and a smoker cessation program that assists people who attempt to quit.
While the district court agreed that the remedies would be effective, it believed that the D.C. Circuit's 2005 ruling barring the disgorgement award had precluded these two remedies.
"The education and smoking cessation remedies cannot plausibly be thought to duplicate those provisions, and can only be predicated on the court's equitable authority," the DOJ said.
"Moreover, an educational campaign is uniquely appropriate to address the 'open question' strategy that defendants have employed so effectively for so long," it added. "The proposed smoking cessation remedy is integrally linked to the education remedy. It would give smokers the key to the chemical handcuffs of nicotine addiction and preclude future profits resulting from defendants' past and ongoing misrepresentations."
Philip Morris USA is represented in the matter by Gibson Dunn & Crutcher LLP, Paul Weiss LLP and Winston & Strawn LLP. R.J. Reynolds is represented by Jones Day. Lorillard Tobacco Co. is represented by Thompson Coburn LLP and Shook Hardy & Bacon LLP. Liggett Group Inc. is represented by Kasowitz Benson Torres & Friedman LLP and Robinson Woolson O'Connell.
The public health organizations, including the American Cancer Society, American Heart Association, American Lung Association and Tobacco-Free Kids Action Fund, are represented by Meyer Glitzenstein & Crystal.
The case is U.S.A. v. Philip Morris USA Inc. et al., case number 06-5267, in the U.S. Court of Appeals for the D.C. Circuit.