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Supreme Court Rejects $280B Tobacco Ruling Reinstatement

The Supreme Court (search) Monday handed cigarette makers a victory, rejecting a Justice Department appeal aimed at allowing a potential $280 billion penalty in the government's landmark racketeering case against the industry.

Without comment, the justices denied the request to review a U.S. appeals court ruling that barred the government from seeking $280 billion in past tobacco profits as a legal remedy for decades of alleged fraud by the tobacco industry.

Targeted in the 1999 lawsuit are: Altria Group Inc. (MO) and Philip Morris USA (search); Loews Corp.'s (LTR) Lorillard Tobacco unit, which has a tracking stock, Carolina Group (CG); Vector Group Ltd.'s (VGR) Liggett Group; Reynolds American Inc.'s (RAI) R.J. Reynolds Tobacco unit and British American Tobacco Plc unit British American Tobacco Investments Ltd.

Analysts said the decision would keep the industry shielded from the harshest potential penalties, if the trial judge finds them liable, and could set the stage for settlement talks.

Tobacco stocks rose sharply following the Supreme Court decision. Altria led the rally, jumping 6.1 percent to close at $74.96 a share on the New York Stock Exchange (search). The Dow Jones tobacco index (search) was up 5.9 percent.

Attorney General Alberto Gonzales (search) said the department was disappointed. "We believe very strongly in this case.... I'll have to sit down with our team of litigators and hear from them as to what is the appropriate next step," he told reporters.

A nearly nine-month-long trial ended in June. The presiding judge in the case, U.S. District Judge Gladys Kessler, is expected to rule in coming months.

The government accused the companies of waging a decades-long effort to hide the dangers of smoking.

The companies denied that they illegally conspired to promote smoking and said the government has no grounds to pursue them after they overhauled marketing practices as part of a 1998 settlement with state attorneys general.

Policy and litigation analyst Mary Aronson believes Kessler will be hard-pressed to impose any substantial new penalties on the tobacco companies even if she concludes that they broke the law. "I think that's going to be very hard to do," she said.

At issue in the appeal was a February decision by the appeals court that civil racketeering law only allows forward-looking remedies aimed at curbing future violations.

The appeals court reversed a decision by Kessler, who had concluded that the law does allow the government to seek disgorgement of industry profits as a way to "prevent and restrain" future misconduct.

By eliminating the disgorgement option, the appeals court's ruling took away the government's biggest weapon in the case. In a later opinion, Kessler said it also had undercut many of the other remedies proposed by the government.

With the appeals court ruling left standing, Aronson said, it could be hard for Kessler to justify the government's biggest alternative remedy: Forcing the industry to fund a $14 billion program to help smokers quit and discourage new users.

"I think it's going to be very difficult for the judge to find penalties that could indeed be construed as forward-looking," Aronson said.

Christopher Growe, an analyst at A.G. Edwards & Sons, said the two sides might be more apt to settle the case in light of the setback to the government. He said the tobacco industry maintains the upper hand in any settlement negotiations.

But the anti-smoking group Campaign for Tobacco-Free Kids (search) urged the government to continue pressing for tough sanctions and "not use the Supreme Court's decision as an excuse to let the tobacco companies off the hook with a weak settlement."

William Ohlemeyer, Altria's associate general counsel, said in a statement, "Philip Morris USA believes the U.S. Supreme Court appropriately denied the government's petition."

Lawyers for the cigarette companies had urged the Supreme Court to reject the appeal, saying the appeals court's decision was "entirely consistent" with Supreme Court precedent.

In appealing to the Supreme Court, the Justice Department said the appeals court decision squarely conflicted with rulings by other appeals courts on the same legal issue and was inconsistent with past Supreme Court rulings.