A Judge Accepts a Claim Paralleling the Mafia and the Tobacco Industry

On August 17, Judge Gladys Kessler of the U.S. District Court for the District of Columbia issued a 1683 page set of findings and order that ended one of the longest, strangest suits the tobacco companies have ever had to face. The decision is remarkable--it is an exhaustive and careful consideration of claim that the tobacco industry is, well, like the mafia. And the judge basically said: Yes. It is.

This case, which I have written about earlier for this site - including in this most recent column -- has ended (if it has indeed ended) with a whimper, not a bang. And, as I will explain, it may not have ended quite yet.

The History of the Suit

The suit was begun by the Clinton Department of Justice (DOJ), which tried to bring a battery of claims against the tobacco industry. The Clinton DOJ considered, and abandoned the idea of, a criminal indictment under the Racketeering-Influenced Corrupt Organizations Statute. But it did bring a civil RICO claim. (In addition, the Clinton DOJ sued for reimbursement under theories similar to those successfully brought by the states in the mid-90's, but without success.)

Under the civil RICO claim - the only claim that was left, in the end -- the Attorney General sued Big Tobacco for "injunctive relief" to prevent it from committing, in the future, wrongdoing similar to that it had committed in the past. But DOJ hoped to get money too: The Clinton Justice Department's attorneys figured that, if they could show that the entire tobacco industry was engaged in interstate mail and wire fraud when it lied about the health consequences of smoking, then they could at least get some sizeable disgorgement of ill-gotten profits from the industry.

But that was all back in 1999. Since 2000, of course, Republicans have been in charge - and they have been less than enthusiastic about the suit. . In particular, the Bush Administration has seemed to pursue it in a desultory fashion.

With only the "disgorgement" claim left in the case as a potential source of a monetary award, the tobacco companies filed an interlocutory appeal (that is, an appeal in the midst of the case) to the U,S. Court of Appeals for the D.C. Circuit. It asked the D.C. Circuit to clarify what "injunctive" relief really means under civil RICO. The D.C. Circuit answered that the injunction had to be "forward looking," and that took disgorgement - a remedy that looked to the ill-gotten profits of past bad conduct -- off the table.

Judge Kessler's Recent - and Scathing - Opinion Condemning Big Tobacco

And yet the case would not die. Judge Kessler wouldn't let it.

And last month, she finally got her chance to pass judgment. Her opinion is scathing in its treatment of the industry--she basically found that the industry had engaged in widespread fraud for over forty years--and in its comments about the law firms who had worked tirelessly to insulate the industry from liability during that time. And then came the remedy section.

In a 1683-page opinion, the remedy was only 20 pages long. Judge Kessler had indicated earlier that the D.C. Circuit had tied her hands, and that, therefore, she was forced to come up with a remedy that would both survive on appeal and express her fury at the industry. So, since she could not really punish the industry or make its companies pay, she decided to shame the companies instead.

Judge Kessler's Shaming Remedy Is Ingenious - But Doesn't Impress the Market

She ordered the industry to, in effect, wear a big scarlet A for the next few years. For two years, the industry will have to attach special stickers on every pack of cigarettes they sell. Each sticker will contain a special "corrective statement" explaining that cigarettes may cause illness and that nicotine is addictive.

For one year, Big Tobacco will also have to broadcast television ads on national evening news programs that say the same thing. And Big Tobacco will have to take out full-page ads in the major Sunday papers that also repeat the corrective statement.

Finally, the companies are forbidden from using the words "light" or "low tar" or "mild" in their packaging. That's right: No more "Marlboro Lights."

After the decision came out, the share prices of the tobacco companies all hit new highs. Basically, the market's and the companies' view was: "Sticks and stones (and damage awards) can break our bones, but names will never hurt us."

When the suit was initiated in 1999, the Clinton Justice Department had asked for a remedy of a $480 billion disgorgement--profits from 40-plus years of the racketeering enterprise. The remedy ordered by Kessler is humiliating, but the industry is sure that it can survive it.

And yet, the industry is sure to appeal. Why?

Why the Industry Will Appeal: Rebranding and Overseas Marketing Limits

The one forward-looking remedy ordered by the judge that could really hurt the bottom line of the company is the abandonment of the words "light" or "low tar" from any packaging or advertising.

This would require a huge rebranding effort. And the cost of that effort is not the only downside of the order. The abandonment of familiar logos and labels means that established consumer loyalties will be uprooted, and each company will have a chance to poach customers off of each other.

From the industry's perspective, a further, and much more disturbing, potential result of the judge's order is that it will have to conform to her demands overseas. The overseas market represents the true growth area for the industry, and anything that might inhibit the firms' freedom to market their product as they see fit is a negative for them.

It is not obvious that a federal judge can order a defendant to conform with the demands of an injunction even when it does business overseas. Obviously, conduct performed in the United States that has an effect overseas can be enjoined by a federal judge. But what about an injunction that separately reaches domestic conduct, and identical conduct occurring overseas? Is only the domestic component of such an injunction valid.

The authority for the federal statute under which Kessler issued her order is the Commerce Clause of the U.S. Constitution. Yet various decisions, especially in the area of antitrust, have held that the power of Congress to control purely foreign conduct is quite limited.

Furthermore, there is a significant comity question. In many foreign countries, tobacco sales are controlled by the state. Questions about packaging, and especially the health statements on packaging, are often regulated by foreign governments. Even assuming the Constitution does grant federal judges the power to enjoin purely foreign activity, that power may be limited where a foreign government had already "occupied the field" and does not want to share the field with a federal judge in Washington, D.C.

Can Judge Kessler tell the French subsidiary of Philip Morris that it must put an "onsert" in its packages that announces that the American tobacco companies lied in the past? Can she prohibit the use of the word "light" in a package printed and marketed in Turkey? Maybe, but I think it is unlikely.

Why Judge Kessler's Remedies Are Likely to Be Stayed Pending Appeal

All these considerations make me think that there is a good chances the D.C. Court of Appeals will stay the judge's order (that is, render it temporarily ineffective) until it can rule on the appeal. (The DOJ has appealed too, but its claims seem less likely to succeed).

The industry asked Kessler to stay her order four weeks ago, on the grounds that compliance would cause "irreparable injury" if her judgment were ultimately reversed. Kessler refused, but Big Tobacco now has a second bite at the apple with the Court of Appeals, and I think the pressure is mounting on the Court of Appeals to grant the stay.

There is a good case for irreparable injury, here, after all. When and if Judge Kessler's order takes effect, it will trigger a long and costly rebranding operation and a long and difficult series of negotiations with other countries. Both the operations and negotiations, however, could turn out to be unnecessary if the D.C. Circuit overrules Judge Kessler.