Suit: Tobacco must forfeit $280 billion

Bob Van Voris and Chris Burritt

Tuesday, Sept. 21, 2004 | 9:19 a.m.

The U.S. government is asking a judge to order Altria Group Inc.'s Philip Morris USA unit and four other U.S. tobacco companies to forfeit an unprecedented $280 billion in profits, invoking a racketeering law that the industry argues authorizes no penalty at all.

The companies go on trial today in Washington, where the Justice Department will attempt to show that they violated the law through organized fraudulent marketing to children. To win forfeiture of any profits, the department must prove it is likely the companies will break the law in the future.

"I think that is a very hard threshold for the government to get over," said John Coale, a Washington lawyer who was one of the state and private attorneys whose suits against the industry led to its $206 billon settlement of health-care reimbursement claims with 46 states in 1998. "They have changed their ways. There's no question about it. They're not Mother Teresa, but they're not the devil anymore."

The government, which filed the racketeering suit in 1999, claims $280 billion constitutes ill-gotten gains that the industry made from smokers who became addicted before they were 21. If the judge agrees, the resulting judgment would be the biggest in U.S. history and would bankrupt the companies, according to investors and the companies themselves.

"There is no way they could pay," said Nicholas Xie, who helps manage $48 billion, including 5.8 million Altria shares, at Pittsburgh-based PNC Advisors. He's based in Philadelphia. "I do not believe the dollar amount can hold up because there's no precedent in the courts to justify that amount."

In court papers filed before trial, the companies said that they have changed their business practices since the 1998 settlement, which limits how the companies market cigarettes, including a ban on cigarette billboards, cartoon pitchmen and distribution of non-cigarette items with brand logos.

The companies also argue that the racketeering law that is the basis of the suit doesn't authorize seizure of proceeds of past cigarette sales, an argument that will be considered by a federal appeals court in November while the trial is under way.

The Justice Department claims the remedy is warranted because the companies conspired for 50 years to hook kids on cigarettes while denying that smoking causes cancer and other diseases. The department calculated the $280 billion as the proceeds of sales to addicted smokers since 1971, the effective date of the law the department has invoked, the Racketeer Influenced and Corrupt Organizations Act, or RICO.

Government lawyers say they will prove that the industry has continued to violate RICO, which bans organized criminal activity, by making misleading claims about the dangers of second-hand smoke and light cigarettes and continuing to market to kids. The Justice Department is also seeking an order to require the companies to make further changes in sales and marketing practices.

In addition to Altria and Philip Morris, the world's biggest cigarette maker, the companies sued are R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., British American Tobacco Plc's British American Tobacco (Investments) Ltd., Loews Corp.'s Lorillard Tobacco Co. and Vector Group Ltd.'s Liggett Group Inc. The government also sued two disbanded industry associations.

In July, R.J. Reynolds Tobacco Holdings Inc. acquired the U.S. operations of British American Tobacco. The combined company, a unit of Reynolds American Inc., is the No. 2 U.S. cigarette maker.

Last year's net income for the five defendants was $6.4 billion, with Altria's profit of $9.2 billion muted by losses of $3.45 billion at R.J. Reynolds Tobacco Holdings Inc. and $15.6 million at Vector Group. Brown & Williamson's profit was $183 million. Carolina Group, a tobacco tracking stock of Loews, earned $468.3 million, according to company filings.

The case got its start when President Clinton said in his 1999 State of the Union speech that the Justice Department would file a suit seeking reimbursement for the money spent by Medicare and other federal programs to treat sick smokers.

In 2000 U.S. District Judge Gladys Kessler threw out the government's claim for reimbursement of health-care costs, permitting the RICO suit to go forward.

President Bush, who had advocated changes in the civil litigation system as governor of Texas, criticized the suit while running for the White House in 2000. After aborted settlement talks in 2001, the Bush administration has spent $135.2 million preparing the case for trial.

The government's tobacco litigation team has 35 lawyers led by Sharon Y. Eubanks, a 21-year Justice Department veteran. They reviewed 40 million pages of documents turned over by the industry and provided 80 million pages for company review.

No public record exists of how many lawyers the industry has working on the case in some capacity outside the courtroom. The court docket for the case lists 145 defense lawyers compared with four for the government.

The case has been at least twice as expensive and time- consuming as any other Altria faced, William S. Ohlemeyer, vice president and associate general counsel said. The defendants' lead lawyer is Dan Webb, a former U.S. attorney who defended Philip Morris in lawsuits by the state of Washington and by a class of Florida smokers.

Webb, of the Chicago firm of Winston & Strawn, also represents the New York Stock Exchange in litigation over pay to former chairman Richard Grasso. He represented Microsoft Corp. when the department sued the software maker for antitrust violations in 1998. His fee is $700 per hour, according to the New York Times.

The trial is expected to take six months.