Justice vs. Tobacco: Ready to Rumble

On Sept. 21 a landmark trial will begin. At stake is no less than $280 billion in what the feds claim is ill-gotten profits

By Nanette Byrnes

As an industry, tobacco is no stranger to the courts. The largest cigarette makers are actively involved in hundreds of lawsuits, most brought by individual smokers suffering from cigarette-related disease.

But on Tuesday, Sept. 21, the biggest of all tobacco trials begins. That day the Justice Dept. will begin to argue its case against the companies. Led by Sharon Eubanks, director of its tobacco litigation team, the government will take the floor of the ceremonial courtroom of Washington's Federal District Courthouse to make its opening arguments to Judge Gladys Kessler -- and what's expected to be a capacity crowd.

This case is quite different from the traditional smoker litigation. For one thing, it doesn't seek punitive damages. Instead, the government is arguing that the industry violated the Racketeer-Influenced & Corrupt Organizations Act, or RICO. That law is better known as a tool for prosecutors to flush out organized crime, but this case uses the civil version of the law, not the criminal one. So, if the tobacco companies lose, no one will be heading to jail (see BW, 9/13/04, "Double Danger For Big Tobacco").


  Arguing against Eubanks will be a team of well-experienced tobacco lawyers, and they'll have their chance at oral arguments next, probably on Wednesday. By Thursday, it's quite likely that Justice will put its first witness on the stand -- former Food & Drug Administration Commissioner Dr. David A. Kessler (no relation to the judge in this case).

All told, the government expects to present testimony, either live or previously taken, from 182 witnesses, many of whom are industry executives hostile to Justice, such as Andrew Tisch, former CEO of Lorillard Tobacco and still an officer of its parent company Loews Corp. (LTR ), as well as others who are sympathetic, including industry whistleblower Jeffrey Wigand. Justice has 35 lawyers working on the case and has spent $135.2 million preparing it.

The government's claims are sweeping, though much reduced from what they were when the case was launched in 1999. Then the feds were looking for the reimbursement of medical expenses paid by Medicare to treat smokers. The judge dismissed that claim early on. What remains is Justice's argument that since 1953 the defendants have engaged in a conspiracy to defraud the public with misleading smoking and health research, and deceptive marketing that downplayed smoking's risks, especially to young smokers.


  The defendants vigorously deny the fraud and conspiracy charges. In a conference call earlier this week, Altria (MO ) General Counsel William Ohlemeyer argued that the tobacco companies have in previous suits successfully defended many of the charges being made in this case. The cigarette makers also argue that the Master Settlement Agreement signed with most of the state attorneys general in 1998 has already successfully dealt with many of the changes the federal government would like to see the industry make.

Defendants are currently appealing the government's claim to $280 billion in ill-gotten profits. Oral arguments in that appeal are expected to begin Nov. 19.

At this point, the best guesses are that the trial will last until next spring unless some kind of settlement is reached first. But the two sides found little common ground the one time they did meet to discuss a possible settlement. Expect them to come out fighting on Tuesday.

Byrnes is a senior writer for BusinessWeek in New York

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