A federal appeals court delivered a major victory to the nation’s leading tobacco companies on Friday, ruling that the government cannot force them to turn over $280 billion in profits if a trial court finds that the companies engaged in a conspiracy of fraud and deceit to promote smoking.
The 2-to-1 decision by the United States Court of Appeals for the District of Columbia strikes at the heart of the government’s biggest legal effort ever to punish cigarette makers.
It reverses a ruling by Judge Gladys Kessler of Federal District Court, who agreed with the government that the giving up of profits, or disgorgement, was a suitable remedy under federal civil racketeering law. Testimony in the trial continued while an appeal of that ruling was heard.
In writing the majority opinion for the appeals court, Judge David B. Sentelle found that the 1970 Racketeer Influenced and Corrupt Organizations Act, or RICO, the law under which the Justice Department sued, does not allow the government to recover illegal profits as a way to prevent and restrain future violations.
The law, Judge Sentelle wrote, only provides remedies intended to prevent future violations, like an injunction that blocks certain behavior or the dissolution of a corporation. Forcing the tobacco industry to give up profits, he continued, “is a quintessentially backward-looking remedy focused on remedying the effects of past conduct to restore the status quo.”
The requirement that companies give up profits might be acceptable under the criminal section of the RICO act, which has far higher burdens for proving culpability, Judge Sentelle wrote, but not under the civil section, which the government used in the lawsuit.
He was joined by Judge Stephen F. Williams; both judges were appointed by President Ronald Reagan.
In a dissenting opinion, Judge David S. Tatel, who was appointed by President Bill Clinton, said Judge Kessler had properly ruled the companies could be forced to give up their profits. He said that evidence in the case had shown that forcing the companies to relinquish profits would, in fact, “prevent and restrain” them from committing future violations because they would know to expect severe penalties for repeating such conduct.
The majority decision has no immediate effect on the trial, which is expected to last well into spring. Should Judge Kessler, who is deciding the case without a jury, ultimately rule for the government on the merits, she could still hold the companies accountable by requiring them to finance stop-smoking and education programs or to change advertising and marketing strategies, rulings that could still cost the companies many millions of dollars.
But the appeals court ruling, for now, eliminates the government’s biggest potential financial threat to the tobacco industry from the case. That is the government’s calculation of $280 billion in profits it estimates that the industry garnered from cigarettes smoked from 1971 to 2000. Lawyers for the tobacco companies had contended that being forced to disgorge so great a sum could have driven some companies into bankruptcy.
The stocks of tobacco companies surged after the ruling. Shares in the Altria Group, the parent company of Philip Morris USA, jumped $3.26, or 5.1 percent, to $67. Shares in Reynolds American rose $3.69, or 4.5 percent, to $85.60, while British American Tobacco added 75 cents, or 2.1 percent, to $36.15.
It is unclear what the government intends to do next. It can request a review of the decision by the entire appeals court or an appeal to the Supreme Court. Justice Department officials said that any decision would be made by the new attorney general, Alberto R. Gonzales, who was confirmed by the Senate on Thursday.