e-mail to media @ tplp.org
September 16, 2004
Questions and Answers Regarding the Civil RICO
See our Timeline Summary of the DOJ Case
Q: What are the basic allegations being litigated?
Answer: The Department of Justice ("DOJ") 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 [pdf] (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.
The Defendants also 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.
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.
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
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.
The Defendants have targeted youth in their marketing campaigns despite laws making it illegal to sell cigarettes to minors. 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. (top)
Q. Why does the Racketeer Influenced and Corrupt Organizations Act ("RICO") apply in these circumstances?
A. The Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. s.1961 et seq authorizes the Department of Justice to pursue criminal and civil sanctions against individuals and organizations that are engaged in a conspiracy which involves certain federal felonies including mail and wire fraud. The Department of Justice is pursuing civil sanctions in this case and is currently requesting a number of equitable remedies for the fraud conspiracy engaged in by the Defendants. RICO is not limited to pursing 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. (top)
Q. What does the Government have to prove?
A. The DOJ must prove the Defendants engaged in a conspiracy that violated an underlying violation such as wire fraud or mail fraud. (top)
Q. What is the Government’s evidence?
A. The government’s evidence is based on the formerly secret cigarette industry documents consisting of over 50 million pages of industry research, public statements, and internal memos. The internal memos demonstrate the Defendants’ conspiracy to defraud the public in the Defendants’ own words. (top)
Q. Does government have a strong case?
A. The judge in the case has repeatedly denied Defendants’ motions to dismiss the case because there is enough evidence in the Defendants’ documents to support the allegations. DOJ will juxtapose the Defendants’ public statements that cigarettes do not cause disease, are not addictive, and that they do not market to children, with internal memos demonstrating that the Defendants’ performed research and knew that all these claims were false. Furthermore, similar claims have been accepted by juries in tobacco liability cases and upheld by both trial and appellate judges. (top)
Q. Who are the Defendants in this case?
A. The defendants are the major cigarette companies in the United States including Altria Group, Inc.; Philip Morris USA, Inc.; R J Reynolds Tobacco Company ("RJR"); Brown & Williamson Tobacco Corporation (now merged with RJR); 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. (top)
Q. What is the Industry arguing in its defense?
A. 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 with the state Attorneys General. The government will show that the industry has repeatedly violated the MSA and that the MSA was not intended to solve all problems related to the industry’s fraud conspiracy. (top)
Q. Were parts of the Government’s case dismissed?
A. 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. (top)
Q. Must the Government show the industry’s bad acts have continued?
A. No. The government could win a RICO verdict on past conduct. The relief Judge Kessler grants, however, will depend in part on the likelihood of whether the Defendants’ bad acts will continue. (top)
Q. Why is there no jury?
A. 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. (top)
Q. What major actions have already occurred?
A. 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 as the Defendants demanded. Please refer to the timeline briefly describing the judge’s rulings in the case to date. (top)
Q. What new evidence does the government have that were not part of the state claims?
A. Most states' 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 was not part of the state claims or settlements. (top)
Q. What remedies is DOJ seeking?
A. DOJ’s court filings indicate that the government may request many different equitable remedies to help correct the effect of the Defendant’s 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 requested that the court restrict all cigarette advertising to black-and white print only format with half the space reserved for graphic warnings similar to Canadian warning labels. The government may also seek marketing restrictions related to promotions, free samples, and vending machines. The government may also seek packaging restrictions such as preventing the Defendants from labeling their cigarettes as “light” or “low tar” and requiring the industry to list ingredients. The government may also seek limits on retail marketing of cigarettes including elimination of slotting fees and retailer discounts. 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; requiring Defendants to fund an independent program to assist smokers with smoking cessation (such as nicotine patches, gum, etc), and restricting point of sale marketing. (top)
Q. What is disgorgement?
A. 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 the appropriate remedy in this case because of the lengthy and ongoing fraud that inured to the financial benefit of the Defendants. This is an appropriate remedy because one should not be allowed to profit from illegal and reprehensible acts. The judge ruled that DOJ may pursue profits that accrued before 1971 when RICO was passed because the RICO statute is retroactive. This issue is currently under appeal to the District of Columbia Court of Appeals. (top)
Q. How is the outcome of the appeal regarding disgorgement likely to affect the case?
A. The outcome of the appeal is important because it may limit or eliminate the government’s ability to seek disgorgement. The industry is appealing the judge’s ruling that disgorgement is a possible remedy under RICO. The industry argues that if a wrongdoer does not use the ill-gotten gains for future bad actions or in furtherance of the conspiracy, then the wrongdoer does not have to return the wrongfully attained money. The judge correctly held that the District of Columbia Court of Appeals ruled that disgorgement was an appropriate remedy in a similar case under the Securities and Exchange Commission’s governing statute. Further it would be odd to prevent disgorgement just because the wrongdoer has successfully laundered the money. Other equitable remedies available to the judge will be unaffected by the Court of Appeals ruling, so the government will still have to prove the same facts. (top)
Q. When is the Court of Appeals likely to rule?
A. 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. (top)
Q. Will the companies go out of business if the government wins the case?
A. No. If the judge awards more disgorgement than the companies can pay, they would most likely file for Chapter 11 bankruptcy protection. (top)
Q. If the Defendants lose, will they have to pay the judgment immediately?
A. 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). (top)
Q. What would be the result if one of the tobacco companies declared bankruptcy?
A. Bankruptcy would only be declared after all appeals are exhausted many years in the future. It is likely that the Defendants would seek Chapter 11 bankruptcy protection which allows a debtor to reorganize its debts and payment schedule. Potentially, a bankruptcy court would oversee the reorganization and the management of the company. A creditors committee would also be involved in monitoring the company. Although the focus of bankruptcy protection is on financial matters related to repayment of debt, new managers or those providing oversight of the process may also require more truthful marketing campaigns to avoid future liability. (top)
Q. Is there a possibility of a settlement?
A. There is a possibility of a settlement, especially after the presidential election on November 3, 2004. A settlement might be acceptable if it reflected the demonstrated strength of the DOJ case and depending on the specific terms. The settlement would need to have a lasting positive effect on public health with dedicated funding for prevention and cessation into the future, and oversight of the Defendants’ behavior to prevent them from engaging in similar actions in the future. (top)
Q. Why is the Bush Administration still pursing this case?
A. The Bush Administration probably feels it would be politically unpopular to interfere with this case. In May, 2001, Attorney General Ashcroft stated that he thought this was a weak case, but backed off that statement after a strong public response favoring pursuit of the case. Ashcroft’s views have been shown to be incorrect because the judge, who is very familiar with the particulars of the case, has held that the case is strong enough to go to trial. It remains to be seen what the administration will do with this case after the upcoming election. (top)
Q. If damages are paid to the federal government where would the payments go?
A. 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. (top)
-- ## --