U.S. Appeal in Tobacco Case Denied

The U.S. Supreme Court gave top cigarette makers a win Monday, refusing to hear an appeal aimed at letting the Justice Department seize up to $280 billion in past profits in its fraud and racketeering case against the industry.

The decision, announced by the court without comment, limits the scale of a potential loss by ruling out the most devastating penalty.

Because the appeal was filed before the end of the 6-year-old case, the Justice Department has the option of renewing the challenge after final rulings -- but with no assurance of a different outcome. With the government’s leverage in the case apparently waning, Monday’s decision could increase prospects for a modest settlement, some observers said.

Atty. Gen. Alberto R. Gonzalez called the decision disappointing. “We believe very strongly in this case,” he said. “I’ll have to sit down with our team of litigators and hear from them as to what is the appropriate next step.”

Industry lawyers praised the decision. The “Supreme Court appropriately denied the government’s petition,” said William S. Ohlemeyer, associate general counsel for Altria Group Inc., parent of defendant Philip Morris USA. Other defendants include R.J. Reynolds Tobacco Co. and Lorillard Tobacco.

Altria shares rose $4.30 to $74.96 on Monday, while Reynolds American Inc. leaped $5.06 to $83.80, and Carolina Group, a tracking stock for Loews Corp.’s Lorillard Tobacco unit, climbed $2.01 to $41.75.

The decision clears the way for final rulings by U.S. District Judge Gladys Kessler in Washington, who conducted a nine-month trial that ended in June. She is expected to decide in coming months whether the industry is liable and, if so, what remedy is needed.

Before Kessler is a Justice Department request for smoking-cessation and advertising programs that would cost the industry $14 billion -- along with a ban on discounts for brands most popular with teens and fines if youth smoking doesn’t drop by targeted amounts.

A coalition of health groups -- whom Kessler allowed to intervene in the case -- has submitted a more ambitious plan that would cost the industry as much as $108 billion over 20 years.

The groups, including the American Heart Assn. and the American Cancer Society, said in a joint statement Monday that “strong remedies” were still available to Kessler, and that the setback must not be “an excuse to let the tobacco companies off the hook with a weak settlement.”

However, at least some proposals to the judge could be deemed in conflict with the sweeping appeals court ruling that the Supreme Court left intact Monday.

Filed in September 1999 by the Clinton administration, the suit claims that top cigarette makers conspired over 50 years to deceive the public about the addictiveness of nicotine and the risks of smoking and secondhand smoke. The defendants admitted to questionable actions in the past, but said they never rose to the level of fraud.

The government appeal stemmed from a big setback to its case five months into the trial.

In February, a panel of the U.S. Court of Appeals for the District of Columbia ruled 2-1 that the government could not demand $280 billion in allegedly ill-gotten gains under civil provisions of the Racketeer Influenced and Corrupt Organizations Act, or RICO law. In a further blow to the case, the appeals court said Kessler could not order any measures to punish past wrongs -- only to prevent future acts of fraud.

Deprived of their main weapon, government lawyers instead proposed a court order that would include a $130-billion, 25-year smoking-cessation program.

Then, in an eleventh-hour reversal, prosecutors -- under orders from political appointees at the Justice Department -- slashed the program to $10 billion, revealing the change in closing arguments.

Anti-tobacco groups and many Democrats denounced it as a sellout, accusing the Bush administration of shielding the industry. Justice officials said they shaved the demand to maintain credibility with a skeptical judge, and to conform to the appeals court interpretation of the racketeering act.

In July, however, they asked the Supreme Court to overturn that ruling, which they said would tie prosecutors’ hands not only in this but in other fraud cases.

The ruling “disabled the government from employing a critically important remedial tool,” with “enormous consequences for the American public,” prosecutors wrote.

The Supreme Court usually is loath to review a case before it is over. Some observers thought this would be an exception because of the magnitude of this case and a split among federal circuits in interpreting the racketeering act.

If the court did take an appeal once the case is over, the government would have a tough time persuading high court judges, said Jonathan Turley, a George Washington University law professor. “Tobacco is getting into an increasingly strong position” he said.

Bloomberg News was used in compiling this report.