Cigarette Makers Lose Lawsuit

Judge says companies must stop marketing low-tar & light cigarettes

Published in CSP Daily News

WASHINGTON -- A federal judge ruled that Altria Group Inc.'s Philip Morris USA and other U.S. cigarette makers violated anti-racketeering laws by marketing low-tar cigarettes as healthier alternatives than full-flavored brands.

U.S. District Judge Gladys Kessler, while deciding the Justice Department had proved its claims at a nine-month trial that ended in June 2005, declined to order the companies to fund large-scale programs to help smokers quit. Kessler ruled that the industry must stop marketing low tar and light cigarettes, according to Bloomberg [image-nocss] News.

Kessler said she lacked authority to order a smoking-cessation program. The government had sought billions of dollars from the tobacco companies to help smokers quit and to reduce youth smoking.

Tobacco analyst Bonnie Herzog of Citigroup Investment Research said the ruling isn't all bad news for Altria Group. In our view, this is the last hurdle before the [Altria] board announces the beginning of the break-up of Altria Group into three separate businesses, she wrote yesterday. Even if the judge orders the industry to pay $14 billion over 10 years, we believe this decision is favorable enough for the board to give the green light to management.Therefore, it is likely that an announcement regarding the spin-off of Kraft Foods could be announced during the company's board meeting on August 30.

The government's win ends a 6-year-old lawsuit that once threatened to bankrupt the cigarette industry, according to Bloomberg. Several court decisions weakened the case to the point that, by the end of the trial, government lawyers reduced their claim from $280 billion to $14 billion.

The ruling against the industry comes in a case Altria identified as a possible roadblock to its plan to break up the company to make it more valuable to shareholders.

The government claimed in the lawsuit that cigarette makers conspired in a five-decade campaign of misinformation to deny the dangers of smoking and sell cigarettes to kids. The tobacco companies denied the claims and said a $206 billion settlement they reached with 46 states in 1998 ensured they would follow the law by disclosing the health risks of cigarettes and by keeping children from smoking.

The Clinton administration filed the suit in 1999, seeking to recover hundreds of billions of dollars the government claimed it spent treating sick smokers. The Justice Department suffered an early setback in 2000 when Kessler threw out the healthcare reimbursement claims.

At the same time, Kessler decided that the government was entitled to go forward with a claim that the industry violated the Racketeer Influenced and Corrupt Organizations Act, or RICO, which was passed in 1970 to target organized crime.

The tobacco industry appealed that decision, and the trial started in September 2004. Kessler heard the case without a jury.

Justice Department lawyers asked Kessler to order the companies to forfeit $280 billion, a figure that represented the proceeds from cigarette sales to people addicted to smoking before age 21, according to the government.

The Court of Appeals for the District of Columbia ruled on the appeal in February, during the trial, and threw out the $280 billion claim. Kessler called it a body blow to the government's case.

In a 2-1 decision, the appeals court said the government could seek only forward-looking remedies intended to prevent and restrain future violations of the RICO act rather than penalties for past violations.

On June 7, 2005, during his summation in the case, Justice Department attorney Stephen Brody told Kessler the government was asking for a five-year, $10 billion smoking cessation plan in place of the 25-year, $130 billion plan advocated less than a month earlier.

The government also asked Kessler to order the companies to fund a $4 billion education and anti-smoking ad campaign. Anti-smoking advocates and Democrats in Congress claimed the last-minute switch was imposed on the government's trial team by political appointees in the Justice Department, including Associate Attorney General Robert D. McCallum Jr., head of the Civil Division.

In addition to Altria and Philip Morris, the world's biggest cigarette maker, the defendants include Reynolds American Inc.'s R.J. Reynolds Tobacco, Brown & Williamson Tobacco Corp., Loews Corp.'s Lorillard Tobacco Co., British American Tobacco Plc's British American Tobacco (Investments) Ltd. and Vector Group Ltd.'s Liggett Group.

The Florida Supreme Court last month removed a hurdle to the break-up by refusing to reinstate $145 billion in punitive damages against cigarette makers in a state-wide class action. A decision in the case could come at any time.

In December 2005, the Illinois Supreme Court threw out a $10.1 billion verdict against Philip Morris in a case filed by light cigarette smokers in that state. The plaintiffs claimed the company had misled them into believing that light cigarettes posed less of a health risk than other cigarettes. The decision doomed similar cases against other cigarette makers in Illinois.