A federal appeals court on Friday ruled that the Justice Department (search) cannot force cigarette makers to pay up to $280 billion in past profits as part of its racketeering case against the industry.
The Court of Appeals for the District of Columbia (search) ruled 2-1 that federal law does not provide for the monetary "disgorgement" penalty the government is seeking as part of the case that went to trial in September.
"We hold that the language of [the racketeering law] and the comprehensive remedial scheme of [the racketeering law] preclude disgorgement as a possible remedy in this case," the opinion of the majority said.
The decision comes in the midst of a monthslong trial in U.S. District Court on the government's lawsuit contending the industry knew about the health dangers of smoking but hid that information from the public. The trial will crippling continue while the government considers an appeal.
Even if the decision stands, U.S. District Judge Gladys Kessler (search) could impose restrictions on the tobacco companies, such as limiting marketing or requiring the industry to fund public health campaigns or smoking cessation programs.
Still, the appeals court decision was a major win for tobacco companies. Wall Street greeted it by sending stock prices of cigarettes makers sharply higher.
The defendants in the lawsuit are: Philip Morris USA Inc. and its parent, Altria Group Inc. (MO); R.J. Reynolds; Brown & Williamson Tobacco Co.; British American Tobacco Ltd. (BTI); Loews Corp.'s (LTR) Lorillard Tobacco unit, which has a tracking stock, Carolina Group (CG); Vector Group Ltd.'s (VGR) Liggett Group; Counsel for Tobacco Research-U.S.A.; and the Tobacco Institute.
Shares of Altria Group were up $3.26, or 5.1 percent, to $67.00, on the New York Stock Exchange. The stock reached $68.50, its highest level in at least 10 years, after the ruling. Reynolds American shares were up $3.59, or 4.4 percent, at $84.85, Carolina Group was up $1.21 at $33.19 and smokeless tobacco company UST was up $1.20 at $51.69. Vector shares were up 42 cents at $16.48.
Charles A. Blixt, executive vice president and general counsel for R.J. Reynolds Tobacco, said the ruling "dramatically transforms" the government's lawsuit.
Government lawyers were reviewing the ruling and had no immediate comment, Justice Department spokeswoman Kimberly Smith said. Government lawyers could request a rehearing in front of the three judges, ask for the full appeals court to consider the case or appeal to the Supreme Court.
Robert Mintz, a former federal prosecutor now in private practice in New Jersey, said the decision lowers the stakes for the tobacco companies, potentially clearing the way for a settlement.
"The decision significantly changes the leverage that the government had going into the case," he said.
The $280 billion is the most ever sought in a civil racketeering trial. The government has described the sum as an estimate of money the companies earned illegally through fraudulent activities such as marketing to children and denying doing so.
The trial, which comes six years after the states reached settlements worth $246 billion with the industry to recoup the cost of treating sick smokers, is in its fifth month and probably will continue for several more.
The government has described the $280 billion as an estimate of money the companies earned illegally through fraudulent activities such as marketing to children, while doing just that.
The tobacco companies deny they illegally conspired to promote smoking and say the government has no grounds to pursue them after they drastically overhauled marketing practices as part of the 1998 settlement with state attorneys general.
The industry had argued that the government should have filed its case under criminal RICO laws, which require a higher burden of proof and would have allowed the government to go after money in the case.
But the government argued that judges have the power to impose monetary remedies in civil RICO cases and that the government therefore has the right to go after earnings made through fraud.
Last year, Kessler ruled the government could seek the penalty, called a "disgorgement," under the racketeering statute. The tobacco companies appealed and the appellate court sided with them, ruling the government can't recover any money using the racketeering law because the statute requires "forward-looking remedies."
Disgorgement is "a remedy aimed at past violations," Judge David Sentelle wrote in the latest ruling. He was joined by Judge Stephen Williams. Both were appointed by President Reagan.
In dissent, Judge David 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. Tatel was appointed by President Clinton.
Jamin Raskin, a law professor at American University, said the decision is a big win for tobacco, "but the game isn't over yet." Tatel's strong dissent gives the government strong grounds for an appeal, he said.
William V. Corr, executive director of the Campaign for Tobacco-Free Kids, urged the government to continue pressing its case.
"Today's ruling should not be an excuse for this administration to seek a weak settlement that lets the tobacco industry off the hook," he said.
Reuters and the Associated Press contributed to this report.