U.S. Wins Round in Tobacco Lawsuit

Dealing the big tobacco companies a legal setback, a federal judge has ruled that the Justice Department could pursue a claim for $280 billion in allegedly ill-gotten gains as part of its fraud and racketeering case against the industry.

The decision by U.S. District Judge Gladys Kessler in Washington rejected industry efforts to scuttle the most threatening part of the government’s case, which is scheduled for trial Sept. 13. The $280-billion figure represents 30 years’ worth of the companies’ revenues, plus interest.

Kessler’s ruling, dated Friday but issued Monday, does no more than assure that Justice Department lawyers will have a chance to prove their case at trial. Even so, tobacco stocks plummeted on news of the decision.

The ruling “was not unexpected but still represents a setback” for the industry, said Martin Feldman of Merrill Lynch & Co. in a note to investors.

“We think the decision is wrong,” said William S. Ohlemeyer, vice president and associate general counsel for Altria Group Inc., parent of industry leader Philip Morris USA. He said the firm might seek review by the D.C. Circuit Court of Appeals, though there is no automatic right of appeal before the trial.

William V. Corr, executive director of the Campaign for Tobacco-Free Kids, said Kessler’s ruling meant the case “has great potential to hold the industry accountable for its long history of wrongdoing, and to bring about fundamental change in the industry’s harmful practices.”

Justice Department officials declined to comment.

Filed in 1999 during the Clinton administration, the suit originally sought reimbursement for tobacco-related healthcare costs borne by U.S. taxpayers. Kessler dismissed that portion of the case in September 2000.

But the industry still stands accused of fraud and racketeering. The government alleges that it conspired for decades to mislead the public about the risks and addictiveness of smoking and the possibility of manufacturing safer and less addictive cigarettes.

As part of the claim, Justice Department lawyers are asking that the companies be made to disgorge about $280 billion -- or all revenues from sales, plus interest, to smokers under 21 from 1971 to 2000.

Cigarette makers bitterly complained that the government had treated all the sales as fraudulent, making no attempt to distinguish between legal and ill-gotten gains.

Though she did not endorse the government’s calculations, Kessler said whether they were “accurate, adequate or appropriate ... can only be resolved at trial.”

The judge also declared that disgorgement could be ordered only if the government can prove there is a “reasonable likelihood” of future acts of fraud.

In a telephone conference with financial analysts and reporters after the ruling, Ohlemeyer brushed aside a question about whether the industry might consider offering a settlement.

“We’re working, as we speak, to prepare the case for trial,” he said. “We think we have a compelling defense.”

On Monday, shares of Altria Group fell $4.37 to $44.95. R.J. Reynolds Tobacco Holdings Inc. dropped $3.53 to close at $53.73. Carolina Group, a tracking stock of the Lorillard Tobacco unit of Loews Corp., slipped 70 cents to $22.66. All trade on the New York Stock Exchange. Other defendants include Brown & Williamson Tobacco Corp. and its parent British American Tobacco and Liggett Group Inc.