U.S. Bid for Tobacco Damages Rejected by High Court

The U.S. Supreme Court rejected the Justice Department’s bid for as much as $280 billion in tobacco company profits, refusing to hear an Obama administration appeal. Altria Group Inc. and Reynolds American Inc., the largest cigarette makers, surged on the news.

The rebuff all but ensures that the racketeering suit first pressed by former President Bill Clinton’s administration won’t result in financial penalties against Altria’s Philip Morris USA and R.J. Reynolds Tobacco Co. It’s the second time the high court has refused to hear government arguments in the case.

Altria climbed 64 cents, or 3.3 percent, to $20.34 at 4:15 p.m. on the New York Stock Exchange. It rose as much as 6 percent, the biggest gain since November 2008. Reynolds American Inc. increased $2.08, or 4.1 percent, to $53.45 while Lorillard Inc. advanced $1.77, or 2.5 percent, to $73.54.

The court also rejected a group of industry appeals aimed at overturning a trial judge’s finding that the cigarette makers defrauded the public about the dangers of smoking for more than 50 years.

“It’s a breather for the industry,” said Tom Russo, who oversees more than $3 billion, including almost 7 million Altria shares as of March 31, at Gardner Russo & Gardner in Lancaster, Pennsylvania. “It would have been just another skirmish they would have had to address.”

FDA Regulation

The industry came under the regulation of the Food and Drug Administration last year. Among its legal risks, Russo said, are cases requiring it to pay for medical monitoring of smokers. It’s also fighting claims of sick and dead smokers in Florida after the state Supreme Court threw out a statewide class-action suit in 2006.

U.S. District Judge Gladys Kessler’s ruling could open companies to continuing judicial oversight and impose more stringent limits on their business practices than the 2009 law that let the FDA regulate tobacco.

The government appeal, filed by U.S. Solicitor General Elena Kagan, argued that judges have authority to order the return of “ill-gotten gains” under the 1970 U.S. Racketeer Influenced and Corrupt Organizations Act, known as RICO.

“Congress vested district courts with full equitable authority to award complete relief for violations of RICO, including orders to disgorge ill-gotten gains,” argued Kagan, now President Barack Obama’s nominee to the high court. Her confirmation hearings began today.

Public Education

Matthew Myers, president of the Campaign for Tobacco-Free Kids, said today in an e-mailed statement, “It is now critical that the trial court move forward with strongly enforcing the remedies that it did order.”

A federal appeals court in Washington said in 2005 that RICO allows only “forward-looking remedies” and doesn’t let the government recoup ill-gotten gains.

The Supreme Court rejected the government’s first bid for review of that ruling in 2005, while leaving open the possibility of a second Justice Department appeal after Kessler issued a final judgment in the case.

Philip Morris, maker of Marlboros and the largest U.S. tobacco company, called the 1999 lawsuit “an unprecedented effort to use litigation to obtain extensive regulatory authority over the tobacco industry that, until recently, it had been unable to secure through the legislative process.”

‘Light’ Cigarettes

Kessler’s order includes a ban on the use of “light” or “low tar” labels on cigarettes, a prohibition that has since been incorporated into the 2009 law. She ordered the companies to make statements about the health effects of smoking on cigarette packages and through a multimillion-dollar media campaign.

She also ordered the companies not to engage in future racketeering or deception. That aspect of her ruling would let the government or anti-smoking advocates return to court to seek additional sanctions on cigarette makers. Kessler didn’t award any damages.

Private litigants have attempted to use Kessler’s 1,653-page opinion as ammunition in their own lawsuits against tobacco companies.

The appeals court last year upheld Kessler’s finding that the companies had engaged in racketeering, as well as the restrictions she placed on their business practices.

Philip Morris contended that, because the case affects its free-speech rights, the appeals court should have given closer scrutiny to Kessler’s factual conclusions. The cigarette maker, based in Richmond, Virginia, also argued that the lower courts improperly extended the reach of RICO.

Speech Rights

Reynolds, the second-largest U.S. cigarette maker, pressed related arguments. The company said that the lawsuit punished the companies for exercising their constitutional speech rights in the public debate over smoking.

The No. 3 cigarette maker, Lorillard Inc., also sought high court review of Kessler’s findings.

Altria pressed an appeal separate from the one filed by its Philip Morris unit, arguing that Kessler lacked any basis for holding the parent company liable.

British American Tobacco Plc’s British American Tobacco (Investments) Ltd. contended that the lower courts improperly applied the U.S. racketeering law to overseas conduct.

The government’s appeal is United States v. Philip Morris, 09-978. The industry’s appeals include Philip Morris USA v. United States, 09-976; R.J. Reynolds Tobacco v. United States, 09-977; Altria Group v. United States, 09-979; and Lorillard v. United States, 09-1012.

(Updates with closing share prices in third paragraph.)
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