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Background and Frequently Asked Questions

U.S. Department of Justice RICO Lawsuit Against the Cigarette Industry: Background and Frequently Asked Questions

Prepared by the Tobacco Control Resource Center, Northeastern University School of Law

Basic Allegations

The Department of Justice alleges that the cigarette industry has purposely and fraudulently misled the public about the risks and dangers of cigarette smoking. Specifically the government alleges that "the Defendants have engaged in and executed — and continue to engage in and execute — a massive 50-year scheme to defraud the public, including consumers of cigarettes, in violation of RICO". DOJ Final Proposed Findings of Fact (FPFF), Executive Summary, page 1.

DOJ alleges that starting in 1953 the Defendants met and engaged in a conspiracy to launch a public relations campaign to counter the growing body of scientific evidence that cigarettes were harmful, while at the same time the Defendants' research confirmed the scientific findings of disease, death and addiction. The object of this campaign was to maximize the number of smokers and profits, and "to avoid adverse liability judgments and adverse publicity." DOJ FPFF page 3

The Defendants formed the Tobacco Industry Research Committee (TIRC) and the Council for Tobacco Research (CTR) to reassure the public that smoking had not been proven to be harmful, despite their own knowledge to the contrary that their products contained a large number of human carcinogens. TIRC, CTR and cigarette industry members, through their public statements and advertising, purposely created a "controversy" over whether smoking was harmful, when no such controversy existed in the independent scientific community. The successful goal of these actions was that consumers concern over the danger of smoking was assuaged and sales of cigarettes continued.

DOJ alleges the Defendants engaged in RICO violations in a number of specific ways. The following are summaries of the major allegations.

A. Defendants entered into a non-compete agreement regarding health claims. The Defendants agreed not to compete on health claims or to perform certain biological research. Designing and advertising less hazardous cigarettes would have been an admission that the current cigarettes were dangerous and that admission would have undermined their fraudulent claim that cigarettes were not harmful.

B. Defendants' fraud regarding second hand smoke dangers. The Defendants misled and continue to mislead the public on the dangers of second hand smoke. The goal of this deception is to prevent effective limits on where cigarettes can be smoked. The greater the limits on venues for smoking the fewer cigarettes will be smoked and the less sales and profits. As with the dangers of direct smoking, the Defendants engaged in denial, misleading statements, and manipulated science despite the growing body of scientific evidence of the dangers of second hand smoke. Defendants promised to find the truth about the dangers of secondhand smoke by conducting independent research, but industry documents show the goal was to "keep the controversy alive" in order to delay implementation of public safety measures to limit exposure to second hand smoke.

C. Defendants manipulated nicotine levels while claiming it was not addictive. The Defendants publicly denied the addictive nature of nicotine while at the same time manipulating nicotine levels and absorption rates in cigarettes. The industry knew as early as the 1960s that nicotine was addictive, but rather than inform the public they vigorously denied it. The industry's scientific research focused instead on making the addiction as efficient as possible by adding ingredients such as ammonia to allow nicotine to enter the smoker's bloodstream faster. The industry "designed their cigarettes with a central overriding objective — to ensure that smokers can obtain enough nicotine to create and sustain addiction." DOJ FPFF ES page 17

D. Defendants misled consumers to believe light cigarettes are less dangerous. Beginning in the early 1970s, the Defendants designed and marketed light and low tar cigarettes to encourage consumers to continue smoking despite concerns about the health effects of smoking. The Defendants knew that reasonable consumers would perceive the words "light" and "low tar" as indicating that these products were less dangerous. In fact, these products provide no meaningful reduction in disease risk, and the Defendants knew this but did not warn the purposely-misled consumer. The products are more dangerous because smokers who are receiving less nicotine in "light" cigarettes compensate by inhaling more deeply or by smoking more cigarettes to get the dose of nicotine necessary to satisfy their addiction. In addition, Defendants recognized flaws in Federal Trade Commission standards for measuring tar and nicotine and purposely exploited those flaws to register favorable results on the government's machine testing of tar and nicotine. Those favorable results were negated by the behavior of actual smokers who were compensating for the lower nicotine levels.

E. Defendants targeted youth. The Defendants have targeted youth in their marketing campaigns despite laws making it illegal to sell cigarettes to minors and despite their public claims to the contrary. Defendants continue to "advertise in youth oriented publications; employ imagery and messages that they know are appealing to teenagers; increasingly concentrate their marketing in places where they know youth will frequent such as convenience stores; engage in strategic pricing to attract youth." DOJ FPFF ES page 24. Despite enormous evidence to the contrary, the Defendants deny engaging in this behavior.

Why does RICO apply in these circumstances? The Racketeer Influenced Corrupt Organizations Act (RICO), 18 U.S.C. s.1961 et seq, authorizes the Department of Justice to pursue civil sanctions against individuals and organizations that are engaged in a conspiracy which involves certain federal violations including mail and wire fraud. This case is brought under a special section of RICO that allows the Attorney General to bring an action for equitable relief for serious and consistent violations of specified laws. RICO is not limited to pursuing members of organized crime, but rather has been used with court approval over the years to pursue conspirators engaged in fraud related to otherwise legal products and services.

What does the Government have to prove? The DOJ must prove the Defendants were involved in an enterprise that permitted violations of specified statutes, such as prohibitions on fraud.

What is the Government's evidence? The government's evidence will be presented at trial, but is expected to be based on the formerly secret cigarette industry documents consisting of over 50 million pages of industry research, public statements, and internal memos; approximately 300 depositions; and thousands of exhibits.

What indications has the Court offered about the strength of the government's case? The judge in the case has repeatedly denied Defendants' motions to dismiss the case and for summary judgment.

Who are the Defendants in this case? The defendants are the major cigarette companies in the United States including Altria Group, Inc.; Philip Morris USA, Inc.; R. J. Reynolds Tobacco Company; Brown & Williamson Tobacco Corporation (now merged with RJR under the name Reynolds American Inc.); British American Tobacco (Investments), Ltd (as the former parent company of Brown & Williamson); Lorillard Tobacco Company; The Liggett Group, Inc.; The Council for Tobacco Research-U.S.A., Inc.; and The Tobacco Institute. The judgment in this case will not apply to other tobacco companies that are not named as parties to this case.

What is the industry arguing? Originally the Defendants argued that the case was baseless and politically motivated, but the judge has consistently refused to dismiss the government's RICO claims because she believes that the government's allegations, if true, would meet the requirements of RICO. The industry also argues that they have reformed themselves because of the 1998 Master Settlement Agreement (MSA) with the state Attorneys General. The government is expected to show that the industry has repeatedly violated the MSA and that the MSA does not address many of the remedies that the government is seeking. On May 6, 2004, Judge Kessler ruled that ‘the existence of the MSA cannot establish, as a matter of law, that there is not reasonable likelihood of Defendants committing future violations." Among other things, she found that Congress has given the obligation to enforce RICO to the federal government, not the states; the MSA itself precludes Defendants from relying upon it in this lawsuit; and the government seeks significant relief not covered by the MSA.

Were parts of the Government's case dismissed? Yes. The government had sought reimbursement for tobacco-related disease medical expenses paid as required by Medicare. (see Medicare Recovery Act 42 U.S.C. 2651-53; and Medicare Secondary Payer Act, 42 U.S.C. 1395 (y)). The judge dismissed these claims because she ruled that the statutes did not permit the type of recovery sought by the government.

Must the Government show the industry's bad acts have continued? No. The government can win a RICO judgment on past conduct. The relief Judge Kessler grants will depend in part on whether the Government can show that there is a reasonable likelihood that the Defendants' RICO violations will continue. However, Judge Kessler has ruled that past RICO violations alone can demonstrate a reasonable likelihood of future RICO violations.

Why is there no jury? The case seeks only equitable relief, which is the relief that is granted by judges. Equitable remedies seek to undo the harm caused by the wrongdoers' acts as opposed to compensating victims with money.

What major actions have already occurred? There have been numerous motions to dismiss, to compel discovery, and other legal actions. The judge has mostly ruled in favor of DOJ. The major rulings permitted the DOJ to gain access to tobacco industry documents, to allow both sides to present written testimony of direct evidence, to permit DOJ to seek disgorgement of profits dating back to the beginning of the conspiracy in 1953, and that there was sufficient evidence to support DOJ's allegations to create a need to review the evidence during a trial and not dismiss the suit outright or significantly restrict the RICO case as the Defendants demanded. Please refer to the attached timeline briefly describing the judge's rulings in the case to date.

What new evidence does the government have that were not part of the state claims? Most state claims were based on Medicaid recovery for state funds spent on tobacco-related disease. DOJ's case is based on fraud committed by the Defendants. There are no specific claims for reimbursement of medical expenses (that portion of the DOJ case was dismissed as not being authorized by Medicare statutes). DOJ has reviewed millions of pages of tobacco industry documents and will use the industry's own words against it to demonstrate that the industry publicly made false statements that cigarettes did not cause disease or addiction and that it did not market to children, while privately the industry knew of the dangers of smoking and purposely targeted children. In addition, the DOJ case seeks remedies for false statements regarding second hand smoke, which were not part of the state claims or settlements.

What remedies is DOJ seeking? DOJ's court filings indicate that the government may request many different equitable remedies to help correct the effect of the Defendants' conspiracy. DOJ is requesting the court require the Defendants to give up their ill-gotten profits, which are currently estimated to be $280 billion (disgorgement). DOJ has also outlined possible remedies that include significant changes in the manufacturing, marketing, labeling and sale of tobacco products. The judge has wide latitude to fashion a judgment that fits the Defendants' violations of the law. Other possible options include requiring the Defendants to share their research over the years with the public; requiring Defendants to fund independent public service messages to undo public perceptions regarding cigarettes based on the Defendants' past fraudulent statements; and requiring Defendants to fund an independent program to assist smokers with smoking cessation (such as nicotine patches, gum, etc).

What is disgorgement? Disgorgement is an equitable remedy that requires a person or organization that commits fraud to give up the ill-gotten gains of that fraud. Disgorgement is an appropriate remedy because one should not be allowed to profit from illegal and reprehensible acts. The judge ruled that DOJ may pursue ill-gotten profits and will not have to demonstrate that these profits will be used to fund future misconduct. This issue is currently under appeal to the District of Columbia Court of Appeals.

When is the Court of Appeals likely to rule? Oral arguments before the Court of Appeals are scheduled for November 19, 2004. We anticipate the court will take two to three months to rule, but there is no time requirement or deadline that the court needs to meet.

If the Defendants lose, will they have to pay the judgment immediately? The judge has broad powers to shape an appropriate remedy and conceivably could set payments to be made over time (similar to the MSA). Otherwise the payment must be made immediately. The payments could be accomplished by price increases and liquidation of assets. The industry could also make payments from money currently dedicated to advertising (over $12 billion per year) or by reducing dividends (for example, Altria spent cash amounts on dividends and repurchases of common stock totaling $8.1B in 2000, $8.7B in 2001, and $11.5B in 2002).

If damages were paid to the federal government, where would the payments go? If the Defendants are required to disgorge their profits it is likely that the money will be returned to the general funds of the United States Treasury and Congress will determine how to allocate the money. Other remedies that require payment of money could also be fashioned by the judge or through a settlement to be dedicated to tobacco control measures. These might include payments for an educational campaign to undo the harm caused by the Defendants' fraudulent statements or for tobacco cessation programs to help smokers quit.