Thursday, August 17, 2006

Tobacco Companies Found Guilty of Racketeering But are Spared by Judge's Denial of Any Monetary Remedies

In what can at once be called a great victory for the government as well as Big Tobacco, the major cigarette companies were today found guilty of violating the Racketeer Influenced and Corrupt Organizations (RICO) statute of the U.S. Criminal Code and ordered to undertake a series of remedies including ceasing to use health descriptors in their marketing, disseminating corrective communications, and making millions of industry documents available to the public.

Despite the general ruling in favor of the government and the imposition of these remedies, however, the D.C. District Court (Judge Gladys Kessler) failed to impose the remedies most highly sought by the government and by the anti-smoking group intervenors: the monetary remedies, which would have required tobacco companies to pay billions of dollars for a national smoking cessation program, a national counter-advertising campaign, and a youth smoking reduction target program.

The remedies imposed by Judge Kessler include:
  • the enjoinment of Defendants from using health descriptors in their marketing, including the terms "low tar," "light," "ultra light," "mild," and "natural."
  • the requirement that Defendants make a series of corrective statements regarding the health effects of smoking, the addictiveness of smoking, the lack of health benefits from low-tar or light cigarettes, the cigarette companies manipulation of nicotine levels in their products to maintain or enhance addiction, and the adverse health effects of secondhand smoke;
  • disclosure of tobacco industry documents in depositories and on websites; and
  • the disclosure to the government of disaggregated (i.e., brand-specific) marketing data.
The corrective messages are to be not only included in cigarette package inserts, but also disseminated through full-page newspaper advertisements in Sunday editions of the largest newspapers and through 15-second television commercials on the three largest broadcast networks. These corrective communications would run over approximately a two-year period.

The cigarette companies have already announced that they plan to appeal Kessler's ruling. It is likely that the government will appeal the appellate court ruling that disallowed disgorgement as a remedy. Thus, none of this is final. It is possible that the finding of violation of racketeering laws could be overturned and at the opposite extreme, it is possible that the appellate court's disallowing of disgorgement could be overturned, opening the door to huge monetary remedies.

The Rest of the Story

Without a doubt, the finding that the cigarette companies are guilty of racketeering is a significant one, and it probably closes out this phase of the history of these companies in appropriate fashion. That the cigarette companies deceived the public for many years about the health hazards and addictive nature of smoking probably does not come as a surprise to too many in 2006. But it is important, from both a historical and from a public image and public knowledge standpoint, to have this federal court finding. It takes any final guesswork out of the picture and makes it clear to all for all time the true history of what the tobacco companies did to undermine the health of the American people for decades.

This finding is likely to have some impact on the public image of the companies, but I suspect it will be a small one. I think the public is largely aware already of the nature of what the companies have done, and it's not clear that this finding will have a huge impact.

Of the remedies that were imposed, the most significant, by far, is the ban on the use of health descriptors. This will (if sustained on appeal) have the practical effect of requiring cigarette companies to re-name brands such as Marlboro Lights, Winston Lights, and many others. It would also require a change in the advertising of these products, as words such as "light," "mild," and "low-tar" could no longer be used.

The corrective statements remedy is probably going to have less of an impact than it might appear. If sustained, these statements will likely blend into the existing public relations campaign of the industry, in which it is trying to alter its image as being a more responsible corporate citizen. If the industry plays its cards right, the negative impact of these statements on its public image could be mitigated by the promotion of a public perception that the industry is changing its ways. Ultimately, I don't see the impact of any such statements as being particularly substantial.

The document disclosure remedy does not seem all that huge, since there are already millions of documents out there and it is not clear what more we will find out that we don't already know.

The marketing data disclosure remedy also does not seem too huge, since there is already apparently sufficient data to convince a federal judge that the industry targeted youths in its marketing.

Ultimately, then, I see the actual effects of the remedies as being marginal at best. The biggest impact would be on the marketing of light cigarettes. I'm sure cigarette companies could find another way of effectively marketing such products.

What it comes down to is that this represents an important victory for public health and a kind of penultimate acknowledgment of the wrongdoing that the tobacco companies committed for decades. But the remedy allowable under RICO is little more than a slap on the wrist for these cigarette companies.

The remedies that could potentially have really hurt the companies - the monetary ones - have been all but eliminated.

And the only other remedy that could have been truly problematic - the appointment of industry monitors - was also nixed by Judge Kessler, on the grounds that it violates the Constitution by impermissibly delegating judicial authority to the independent hearing officers and monitors.

A few comments on the strength of potential appeals in the case.

I do not see much of a chance of the government succeeding in its attempt to have the U.S. Supreme Court overturn the D.C. Appeals Court's ruling that backwards-looking remedies are not allowable under RICO. That ruling seems to be consistent with the clear intent and meaning of the statute.

The defendants' success in reversing the finding of guilt will rest primarily on whether they can convince the appellate body that there is not a signficant likelihood of future RICO violations due to major structural changes in the industry (including the Master Settlement Agreement). My opinions on the MSA are clear, so I don't think it likely that the industry will be successful in this regard.

I think there is a moderate likelihood that an appeals body could find some Constitutional problems with a few of the corrective statement remedies. As Judge Kessler pointed out, the D.C. Court of Appeals has already ruled that corrective statements do not present a First Amendment problem if they are necessary to prevent continuing deception of the public, so it's hard to see how there would be a problem with the health effects of smoking and addictiveness of smoking corrective statements. However, it's not clear why the "low tar" corrective statement would be necessary since health descriptors are being banned, it's not clear why the nicotine manipulation statement is necessary if it is acknowledged that smoking is addictive, and one simply doesn't know what the court would find with respect to the need to put out secondhand smoke corrective statements. This latter area is the one where I think an appeals court might tamper most with the ruling.

At the end of the day, this does stand as an important victory for the government. But it is a victory more of historical than practical significance. It is a victory that had to, at some point, be forthcoming. But the end result is little more than a slap on the wrist for the tobacco companies. There is little threat to their long-term viability and no meaningful long-term institutional changes that will change the fundamental nature of the public health problem of tobacco use.

So when all is said and done, it is really the tobacco companies which come away with a victory they had to have.

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