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A Big Win for Big Tobacco:
Why It Essentially Moots the Ongoing RICO Trial in D.C.

Monday, Feb. 07, 2005

On Friday, February 4, the U.S. Court of Appeals for the District of Columbia gave the tobacco industry a big win.

Ironically, the great victory won by Big Tobacco does not directly affect the trial which is currently being conducted by the Justice Department against the industry in the courtroom of U.S. District Judge Gladys Kessler. Still, the decision by the D.C. Circuit Court--involving a highly technical interpretation of a federal statute--essentially renders the trial moot.

The Problem with the Justice Department's RICO Suit

In previous columns, I have written about the long, strange saga of the Justice Department's crusade to hold the tobacco industry liable under the federal racketeering law known as RICO - the Racketeering-Influenced and Corrupt Organizations Statute.

There is nothing wrong, in itself, in using RICO to pursue corporations. Although passed by Congress in the early 1970's as part of the federal government's ongoing war against the Mafia, it has been used properly to hold white collar malefactors responsible in for both their criminal and civil wrongs. My problem with the Justice Department's case is that it has been playing fast and loose with RICO in order to "get" the tobacco industry by any means necessary.

No doubt, the Clinton Administration, which initiated the litigation in 1999, had reason to believe that Big Tobacco had not really reformed itself -- despite the promises it made when it cut a deal with the attorney generals of 46 states to reimburse approximately $206 billion in health care costs and to accept a voluntary code of "good conduct." But the Clinton Administration decided not to bring criminal racketeering charges against the industry and its attempts to bring a reimbursement suit (similar to the states') was dismissed. Thus, the only weapon the Administration had left at its disposal was a claim under "civil" RICO (18 U.S.C. 1964(a)), which only allowed it to ask a federal judge to enjoin the tobacco industry from violating the federal racketeering laws in the future.

Since '99, the Justice Department - under both Democratic and Republican presidents - has been trying to use 1964(a) to get through the back door what it could not through the front: either criminal penalties against Big Tobacco, or an order from the court requiring the industry to pay almost as much as it agreed to pay the states in restitution.

Judge Kessler's Ruling: Disgorgement Is Proper to Deter Future Bad Conduct

Until Friday, it looked like Government might get away with it. It had convinced the trial judge to adopt an extremely broad interpretation of the sort of equitable remedies Congress intended to make available under 1964(a).

As I explained in my column of October 18, 2004, Judge Kessler's interpretation was controversial because she took the only existing precedent on the issue--the Second Circuit's decision in a 1995 case called United States v. Carson--and basically rejected its modest limitations on the equitable remedies the government can demand in civil RICO.

According to Judge Kessler, if the Justice Department proved its case, it potentially could demand and receive disgorgement from the tobacco industry for every dollar of profit it made from promoting cigarette smoking among youths between 1971-2001--a figure that it estimated was $280 billion.

The D.C. Circuit's Ruling: Disgorgement Is Not a Proper Remedy Here

While trying the case before Judge Kessler, the tobacco industry asked the D.C. Circuit to hear an interlocutory appeal (that is, an appeal that comes before final judgment) on only the question of whether her expansive reading of the remedy available under 1964(a) was wrong. A three-judge panel heard the argument in November and on Friday published its opinion.

At oral argument, it was clear that the Justice Department was in trouble. Two of the judges on the panel, Judges David Sentelle and Stephen Williams, asked a series of extremely probing, somewhat hostile questions to the government. For many observers, the question was not whether the government would lose, but how badly.

A little loss for the government would have meant that the D.C. Circuit overturned Judge Kessler's opinion and reinstated the Second Circuit's holding in Carson. According to Carson, the government can request disgorgement of funds that were wrongfully obtained by a defendant who committed a civil violation of RICO if the government can prove that separating the defendant from those funds would "prevent and restrain" a future violation of RICO by that defendant. Judge Kessler had held that the government could request disgorgement even if it could not meet this test with regard to tobacco industry. She held that, since the threat of the disgorgement of wrongful gains could deter future wrongdoing, the government could request disgorgement whenever it proved that the defendant could violate RICO in the future.

A big loss for the government would have meant that the D.C. Circuit disagreed with Carson, and held that disgorgement is never available under 1964(a). This would mean that the Justice Department not only lost the advantage Judge Kessler had given it vis-à-vis Big Tobacco, but that they had lost an advantage it had enjoyed vis-à-vis all defendants in civil RICO suits it would want to bring in the future.

On Friday, the D.C. Circuit handed the government a big loss. Judge Sentelle, writing for a two-judge majority, noted that although the court was loath to create a split among the circuits, he could not see any argument for attributing to Congress the belief that disgorgement was a "forward-looking remedy as required by 1964(a)."

Judge Williams, in his concurrence, was even more biting. Carson, he noted, despite its good intentions, made no sense. The Carson tried to strike a compromise between two incompatible ideas, and in the end simply produced an unprincipled rule that could not withstand the test of time. The search for some special cache of "tainted" money that could enable a defendant to do wrong again is arbitrary, Judge Williams argued. All money, especially to a corporate defendant, might be used for bad acts if the defendant was so inclined.

As Judge Williams noted, if Carson falls, then the hard question remains: why not allow the Attorney General to pursue unfettered disgorgement, since it stands to reason that the threat of loss of money by the defendant is probably going to make it less likely to do wrong?

For Judge Williams, who has a strong interest in law and economics, the irony of the Government's argument must of have been exquisite. Citing from Posner and Landes's classic work on "The Economic Structure of Tort Law," Williams dryly observed that the Government's argument proved too much. Of course disgorgement would, on the margin, disincentivize future RICO violations--as would a whole menu of sanctions, including criminal sanctions. But Congress did not adopt the economic theories of deterrence of when it passed 1964(a). It passed a statute that adopted certain limited equitable remedies. The Justice Department's reinterpretation of Carson is based on assuming that Congress adopted Posner and Landes' theories--something which Judge Williams himself might have wanted, but something which obviously was pretty unlikely.

In my opinion, the D.C. Circuit is right. Judge Williams' concurrence is especially persuasive and it reveals just how much mischief the Carson opinion might have caused had the tobacco litigation not come about to allow the courts to engage in a little course-correction.

What Will Happen to the Ongoing Trial Before Judge Kessler Now?

It is interesting to speculate about what will happen now in the wake of Friday's opinion. One question of paramount importance to the tobacco industry is whether the Justice Department has any appetite to continue its costly litigation in Judge Kessler's courtroom.

Unless the D.C. Circuit decides to review Judge Sentelle's opinion en banc, or the Supreme Court decides to take an appeal, the downside facing Big Tobacco if they lose the trial is limited. The government is now limited to requesting non-monetary relief if it wins. Perhaps it could still get Judge Kessler to issue some orders that could sting the industry, such a severe ban on advertising, but I doubt that she would do that, or that such a remedy would be upheld on appeal.

The next question is whether the Justice Department will even try to appeal Judge Sentelle's opinion. The chances of the D.C. Circuit allowing an en banc appeal (that is, an appeal resolved by a larger panel of the same court, with the power to reverse the finding of the three-judge panel) are very slim. The opinions written by Judges Sentelle and Williams are very persuasive and they are very highly respected by their colleagues on the court. The same can be said for an appeal to the Supreme Court.

The deeper question is, however, whether the Bush Administration even is sorry that it lost this case. I have always wondered why the Republicans in the White House allowed this litigation to get this far. One might say, cynically, that it was politically expedient for the White House to let Big Tobacco get harried, but I think this explanation is short-sighted.

Why the Court's Decision is a Wise One: Recognizing Carefully Balanced Power

As both opinions for the majority in Friday's decision note, something larger than the fate of the tobacco industry was at stake in the suit. The distinction between a criminal and a civil case is not trivial. Congress has given the Justice Department enormous power through RICO. That power, however, has been carefully balanced against certain deeply-entrenched principles.

One of those principles is that the government cannot punish people except under the narrow constraints of the criminal law. To allow the Justice Department to expand its power to punish under the innocent-sounding goal of "preventing and restraining" future civil wrongdoing would be to subvert the rule of law.

As they say, the road to hell is paved with good intentions. No doubt the Clinton Justice Department was filled with good intentions about protecting Americans from unscrupulous corporations. It is hard for me to imagine that the current administration is filled with quite the same intentions, or possessed by the same fervor. I would not be surprised if Friday's decision is never appealed and the disgorgement remedy is quietly dropped from 1964(a).

Anthony J. Sebok, a FindLaw columnist, is a Professor at Brooklyn Law School. His other columns on tort issues may be found in the archive of his columns on this site.

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