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The Federal Government's RICO Suit Against Big Tobacco:
An Unprecedented Case Begun by the Clinton DOJ, And Continued by the Bush DOJ

Monday, Oct. 04, 2004

Two weeks ago, in Washington, D.C., a remarkable trial began. The suit, captioned United States v. Philip Morris, et. al., is the Justice Department's effort to put the tobacco industry out of business.

This column, the first in a two-part series, will examine the history of, and ironies behind, the suit.

Why This Suit Is Unique

United States v. Philip Morris, et. al. is unique for a number of reasons.

First, it is probably the largest civil suit ever brought in the history of the United States (perhaps the world). Originally, the Clinton Justice Department estimated that it might demand that the tobacco industry disgorge up to $742 billion. The Bush DOJ has now reduced its estimate to $280 billion - still a whopping, unprecedented sum.

Second, it is an unusual application of the Racketeer Influenced and Corrupt Organizations Act. (RICO). RICO has generally been used against organized crime, as its name suggests. And initially, it was not seen as the most important part of the government's case. But when U.S. District Judge Gladys Kessler -- who has been overseeing the case since 1999 - threw out its other, Medicare-related claims, the government pressed forward with this one.

Third, although this suit was initiated by the Clinton Justice Department - and indeed, a number of very pro-consumer, anti-tobacco attorneys within it - the Ashcroft Justice Department is vigorously litigating it Despite intense tobacco industry resistance, DOJ has pushed forward aggressively.

It is estimated that the case has cost the Justice Department $139 million, much of it spent since Bush's inauguration. Moreover, the Republican-led Justice Department has used clever (though dubious) tactics in the case that, as my next column will show, have pushed Big Tobacco into a corner.

The Suit's Impetus: Unwillingness to Let Big Tobacco Off the Hook

To see why this suit was brought, it's necessary to go over a bit of history.

In 1998, Big Tobacco agreed to a settlement with the states - known as the Master Settlement Agreement (MSA). Under the settlement, Big Tobacco agreed to pay the states between $206 and $250 billion, over a 25 year period, if the states would drop their lawsuits against it. It also agreed to certain reforms. But anti-smoking activists attacked the settlement - pointing out that Big Tobacco would only pass the costs on to its addicted consumers, and critiquing the MSA's reforms as too weak.

By 1999, it was becoming increasingly clear that private lawsuits would not beat Big Tobacco, either. In virtually every state - with Florida being a prominent exception -- class action status was denied. Moreover, individual smokers' lawsuits -- alleging either product defect or fraud -- were often defeated when Big Tobacco argued that smokers knew the risks.

By 1999, it appeared both that the tobacco industry had lied to the American people about the risks of smoking, and that it would not effectively be punished for its lies. But the Clinton Justice Department set out to remedy that.

DOJ attorneys noted that the lies in question had been transmitted, at times, by U.S. mail (magazines and other print media) and interstate wires (telephones, televisions, and radios). That meant these lies constituted mail and wire fraud, which are federal offenses. It also meant RICO applied - for wire and mail fraud are among the offenses upon which a RICO claim can be based.

The Clinton Department of Justice's Choice: Civil, Not Criminal, RICO Claims

RICO can be used to bring both criminal and civil claims. Criminal RICO targets those organizations (typically, organized crime families) who engage in conspiracies that involve breaking various laws. But organized crime families aren't the only targets: Criminal RICO has been used to punish all sorts of coordinated wrongdoing, including shady schemes designed to defraud investors of their money.

Early on, however, the Clinton Justice Department abandoned the idea of pursuing Big Tobacco in criminal RICO - apparently, because they feared they would not succeed. The reason for their fears isn't clear from what has been publicly reported. But perhaps they were concerned that their evidence against Big Tobacco would not satisfy the very high "beyond a reasonable doubt" standard that applies in a criminal case.

A civil RICO claim, however, would only be governed by a "preponderance of the evidence" - roughly, a "more likely than not" - standard, and would be easier to win. (Unlike criminal RICO, civil RICO is not designed to punish. It is designed to allow victims of racketeering to get compensation plus a reward--a successful plaintiff in a civil RICO suit can get treble damages.)

But could the Clinton DOJ sue under civil RICO? Initially, it seemed they might not be able to. If the government had been injured at all by Big Tobacco, the injury was indirect - taking the form, for instance, of health costs the government ultimately to pay. Yet under a leading precedent, United States v. Bonanno Organized Crime Family, the U.S. Court of Appeals for the Second Circuit in 1989 had held that the United States could not sue for damages under civil RICO based on either a direct or indirect injury.

But the federal government did have one power under civil RICO - specifically, under 18 U.S.C 1964(a) and (b). The Attorney General has the power, under these sections, to "institute proceedings" to ask a federal district court to issue "appropriate orders . . . to prevent and restrain" violations of RICO. So the Clinton DOJ decided to invoke this power.

Using the Attorney General's Power to Seek RICO Relief in a Pure Civil Case

Before this point in 1999, this power had rarely been used. And when it was used, it was almost always as part of a larger criminal RICO prosecution.

For instance, in United States v. Ianniello, the government had successfully prosecuted the defendant under criminal RICO. Then - using this special additional power - the government attempted to force him to give up his interest in Umberto's Clam House, in Manhattan's Little Italy. It argued that otherwise, Umberto's could be used in further racketeering activities. (Similar strategies were used in other criminal cases, as well, to prevent various shady characters from using restaurants, union funds and trash-collecting companies to maintain their links with organized crime.)

But this time, DOJ used this special power to bring a purely civil suit against Big Tobacco - with the sole purpose, it said, of preventing future RICO violations.

How could the court prevent these violations? DOJ argued it should force Big Tobacco to give up any assets that it had obtained by means of its fraud.

Why the Clinton DOJ's Argument Was a Brilliant Move

The combination of tactics the Clinton DOJ used was sheer genius. By opting for a civil case, it avoided the "beyond a reasonable doubt" standard. And even though civil RICO limited the government to seeking injunctions, the government asked for a special kind of injunction - an injunction forcing disgorgement of profits. And that kind of injunction, of course, has the same potentially bankrupting effect as a damages award.

Big Tobacco was probably taken by surprise. It knew it probably did not have to worry about a civil suit from the government for damages - for courts had deemed that the government was not a proper plaintiff in a suit for treble damages.

Big Tobacco also knew that there was not much in its present behavior that could be enjoined. After all, it was complying with the MSA's provisions. And on the whole, by 1999, Big Tobacco was behaving quite differently than it had in the Fifties, Sixties and Seventies.

But Big Tobacco probably did not count on DOJ's seeking an injunction that would have the effect of a damages award - and a huge one, at that. The Clinton DOJ initially suggested that the court had the power to enjoin Big Tobacco to disgorge all of its profits from 1954 onwards.

DOJ claimed that all these profits were wrongfully obtained - for the cigarettes were sold on a marketing campaign full of lies. DOJ also claimed that all those profits could now be used by Big Tobacco to market cigarettes deceptively - so that the court could enjoin Big Tobacco to disgorge them all, in order to prevent future RICO violations.

These expansive arguments depended on factual assumptions that would be extremely difficult to prove. They also may have assumed wrongly that the court's injunctive powers, in these context, are virtually limitless - so limitless, that they can be tantamount to a bankrupting, jury-determined damages award. Finally, they may have wrongly assumed that the post-MSA Big Tobacco could be treated as a possible repeat RICO offender - even though it was required by the MSA to act quite differently than it had in the past.

In sum, the DOJ's argument was as radical as it was brilliant.

The Bush DOJ Chooses to Continue the Clinton DOJ's Case

The case was assigned to a district court judge who had been appointed by Clinton. Then it was inherited by a Bush Justice Department that must have viewed it with extreme skepticism.

And yet, here it is--2004--and the case is being tried, with only one revision. The Clinton DOJ had asked the court to order disgorgement of all profits from 1954 to the present. The Bush DOJ is asking the court, instead, to order disgorgement for all profits derived from defrauding the "youth addicted population" (those who began smoking before age 21) from 1971 to the present. This amount is estimated to be $280 billion.

Why hasn't the Bush DOJ pulled the plug on this suit? It is possible DOJ hopes that Judge Kessler will either dismiss the suit, or order only a non-monetary injunctive remedy, such as increased restrictions on advertising. Or perhaps it hopes that the tobacco industry will settle the case by agreeing to new restrictions on youth smoking. (John Ashcroft, after all, was a critic of Big Tobacco when he was Missouri Attorney General.)

Yet no matter how the suit is resolved, it has set into motion forces which may be difficult to contain. The theory on which it has been brought, and continued, represents a potentially radical new expansion of RICO. And there is no reason this expansion will be limited to the tobacco industry. Any industry that lies - or even omits critically information - in its communications with its consumers is vulnerable.

In my next column, I will examine the arguments for rejecting this expansion of RICO. I will also discuss how - and why -- the D.C. Circuit might pull the plug on the largest civil lawsuit in the history of America.

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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