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Contact: Edward L. Sweda e-mail to media[at]tplp.org (use @sign)
February 4, 2005
DESPITE ELIMINATION OF DISGORGEMENT,
Today's decision (pdf) will be portrayed by the cigarette companies in a way that suggests that they have won the case. Far from winning the case at trial, the cigarette companies are facing the daunting prospect of remedies other than disgorgement that could transform the way that they conduct their business.
UNITED STATES COURT OF APPEALS, UNITED STATES OF AMERICA, v. PHILIP MORRIS USA INC., f/k/a Philip Morris
Incorporated, et al., Case No. 04-5252. On May 26, 2004, the trial judge, Gladys Kessler, issued an opinion rejecting the tobacco industry’s motions for summary judgment on the issue of whether the Government could seek disgorgement of $280 of allegedly ill-gotten gains that the industry acquired between 1970 and 2000 through sales of cigarettes to minors or people addicted as minors. The tobacco industry defendants asked the trial court to allow an interlocutory appeal to move forward while the rest of the case proceeded and she granted that request.
Key Issues: 1) Is disgorgement an available remedy in a civil RICO case? 2) Does a ruling in the Second Circuit in U.S. v. Carson support a ruling that disgorgement is unavailable in this case? 3) Whether the Government’s disgorgement model fails as a matter of law.
Issue 1: Do the civil provisions of RICO allow disgorgement or not?
The statute is not clear on this point. While the criminal provisions of RICO do expressly provide for disgorgement as a remedy, the civil remedies are silent on the issue. They do say, however, district courts of the United States shall have jurisdiction to prevent and restrain [RICO] violations by issuing “appropriate orders, including, but not limited to: ordering any person to divest himself of any interest, direct or indirect, in any enterprise; imposing reasonable restrictions on the future activities or investments of any person, including, but not limited to, prohibiting any person from engaging in the same type of endeavor as the enterprise engaged in, the activities of which affect interstate or foreign commerce; or ordering dissolution or reorganization of any enterprise, making due provision for the rights of innocent persons.”
Disgorgement is among the remedies generally available to federal courts. Can the RICO statute’s silence on disgorgement possibly mean that this established equitable remedy is specifically not available to the Court? Note that Civil RICO’s mandate to the court is to prevent and restrain future RICO violations by issuing orders including, BUT NOT LIMITED TO, those specifically mentioned in the statute.
Issue 2: What did U.S. v. Carson say: Carson involved a civil RICO action against a former union officer who had previously been convicted of embezzling union funds and taking illegal kickbacks from employers who wanted a guarantee of labor peace. The district court ordered Carson to disgorge the $16,200 in kickbacks he had received thirteen years earlier. On appeal, Carson argued, inter alia, that the district court had exceeded its jurisdiction when it ordered him to disgorge all his ill-gotten gains. Carson, 52 F.3d at 1176. The Second Circuit held, as a threshold matter, that such disgorgement is an available remedy under Section 1964(a), a holding previously endorsed by this Court as "well reasoned and persuasive." Philip Morris, 116 F.Supp.2d at 151. The Second Circuit also held that disgorgement of gains which were ill-gotten long in the past would not ordinarily "prevent and restrain" future RICO violations under Section 1964(a) unless such gains "are being used to fund or promote the illegal conduct, or constitute capital available for that purpose." Id. at 1182. This standard rests on the Second Circuit's interpretation of the phrase "prevent and restrain." Emphasizing that the examples of available remedies listed in the statute are "forward looking," see discussion infra, § II B, Carson treats the issue presented as "whether the disgorgements [sic] ordered here are designed to 'prevent and restrain' future conduct rather than to punish past conduct." Under Carson, the Government could only seek disgorgement of past profits currently on hand that would be used to continue the conduct at issue into the future. This would drastically reduce the size of the Government’s disgorgement claim. Carson is not a controlling case in the DC Circuit and the trial judge declined to follow it, finding that, given the remedial purpose of RICO, the limitation Carson imposes on the Court's equitable jurisdiction is particularly inappropriate. In Porter Vs. Warner Holding Co., which Judge Tatel cited during oral arguments, the Supreme Court in 1945 stated that unless specifically restricted, courts have a full range of equitable powers available to them. Issue 3 – Is Disgorgement is Unavailable to the Government as a Matter of Law? The tobacco companies have argued that it is impossible for the Government to prove that the taking of $280 billion would prevent or restrain future RICO violations. They argue any available remedy must be “forward looking” and that disgorgement is clearly “backwards-looking.” Also, the Government’s model for calculating disgorgement is crude and does not clearly distinguish between legally and illegally gained moneys. The trial court found that that disgorgement is an effective form of deterrence and that deterring is a means of preventing or restraining future violations, which is precisely what the statue charges the Court with overseeing. Oral Arguments: Oral arguments were held on November 17, 2004. The 3 judge panel of the US Court of Appeals for the District of Columbia consisted of Judges: David B. Sentelle, David S. Tatel, and Stephen F. Williams.
Judge Sentelle forcefully made the point to the Government’s attorney that disgorgement is inherently backward looking and therefore not available under civil RICO which is designed to prevent future violations.
Judge Tatel noted that the federal court seemed to have inherent powers to disgorge ill-gotten profits regardless of RICO and that nothing in RICO prevents that. Judge Williams remained fairly quiet during the oral arguments.
The Decision:
A three-judge panel of the U.S. Court of Appeals for the District of Columbia held today that disgorgement of ill-gotten gains was not an available remedy in the Department of Justice’s Racketeer Influenced Crime Organization Act (RICO) case against the cigarette industry. The 2-1 ruling overturns the trial judge Gladys Kessler's pre-trial decision that permitted the Government to seek to strip the tobacco industry defendants of their ill-gotten gains. Judge Sentelle wrote the Majority Opinion and Judge Tatel wrote a lengthy and powerful Dissenting Opinion. Judge Williams wrote a third opinion in which he concurs with Judge Sentelle.
It is possible the the Government
will chose to appeal this decision. This opinion is from a panel of 3
judges from the Court of Appeals for the D.Cc Circuit. The first
avenue of appeal would be to ask the all of the judges on this court to review
the decision. Such a review is known as an en banc review.
Court's are more likely to grant en banc reviews in cases such as this
where there is a split decision with a vigorous dissent in a matter of great
importance. Beyond that, this decision represents a split among the
circuits. In the Second Circuit case, U.S. v. Carson (
Disgorgement is only one of many potential remedies available to the trial judge to help correct the effect of the Defendants’ conspiracy to defraud the public by lying about the effects of cigarette use. Other possible remedies that the Government, in a 2002 court filing, indicated it could seek include significant changes in the manufacturing, marketing, labeling and sale of tobacco products.
Possible Remedies:
Possible options the judge could consider include requiring the Defendants to share their research over the years with the public and requiring Defendants to fund independent public service messages to undo public perceptions regarding cigarettes based on the Defendants’ past fraudulent statements. This corrective advertising could very well be required to approach or even exceed the industry’s spending on advertising, estimated to be more than $12 billion per year currently. (see FTC press release)
The Court also could require Defendants to fund an independent program to assist smokers with smoking cessation (such as nicotine patches, gum, counseling, etc). In 2004, the price tag that a Louisiana jury put on such a program for that state alone was $590 million. (see our Verdict Backgrounder). Because Louisiana comprises less than 2% of the U.S. population, the cost for such a program nationally could well exceed $100 billion.
The Justice Department may ask the court to restrict all cigarette advertising to black-and-white, print-only formats, known as “tombstone ads,” with half the space in any ad reserved for "graphic health warnings." Such restrictions would radically transform the way that tobacco companies promote their products.
The Justice Department also may seek to end trade promotions and free samples as well as eliminate all vending-machine sales. Additional remedies could include prohibiting labeling cigarettes as "light," "low-tar" or "mild"; requiring Defendants to list all ingredients, additives and toxic chemicals in cigarettes; and force them to disclose their manufacturing methods and marketing research.
The government also may seek sweeping restrictions on retail cigarette sales, including elimination of important "slotting fees" paid to most retailers for favorable placement of tobacco products in stores. These fees and promotions are an important revenue source for retailers -- as much $20,000 a year for a busy convenience store, federal investigators found.
The judge has wide latitude to fashion a judgment that fits the Defendants’ violations of the law.
The Court of Appeals’ ruling today does not affect the underlying liability issues. The government has produced dozens of witnesses and tens of thousands of pages of documents that demonstrate the industry purposefully misled the public about the dangers of smoking by producing false science, creating a controversy where none existed among independent medical authorities, and targeting children with tobacco advertising, while reassuring the public that it was doing everything possible to uncover the true dangers of cigarette use. In fact, today’s ruling relieves the Justice Department of having to prove a difficult part of its case: that the tobacco industry would continue to violate RICO in the future. With disgorgement off the table, the burden of proof for the Government is reduced. Although the industry continues to target children with advertising and flavored cigarettes, continues to discount the dangers of second hand smoke, and continues to destroy documents to such an extent that the judge in the present case had to impose fines on the defendants for such behavior, it is difficult to prove future conduct in court. Other remedies the judge may chose to impose do not require a showing that the bad conduct will continue in the future.
Mark Gottlieb, a Senior Attorney for the Tobacco Products Liability Project at Northeastern University School of Law in Boston, noted that, "despite receiving a great deal of attention, disgorgement was but one of many potential remedies available to deter future racketeering by cigarette company defendants. Over the past 4 months, the Government has done a remarkable job of bringing together experts and the companies' own documents to prove the essential elements of its racketeering claims. The trial judge may very well be in a position to order remedies that that will fundamentally change the nature of the cigarette industry in this country. Potential remedies such as national smoking cessation programs, a massive corrective advertising campaign, or sweeping marketing and advertising restrictions could, like disgorgement, cost the defendants billions of dollars. More importantly, the types of remedies that are still available are the most significant in terms of the public health impact of the case."
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## See our Mid-trial Summary Report (2-4-05) (pdf) See our Pre-Trial Backgrounder and Q&A on the case |