DC Appeals Court Will Not Hear DOJ Disgorgement Appeal

The District of Columbia Appeals Court today announced its 3-3 decision not to hear the Department of Justice's appeal of the February decision of a three-judge Appeals Court panel that disallowed disgorgement of past tobacco industry profits as a potential remedy in the government's lawsuit against the tobacco industry. Although the Department of Justice may appeal this decision to the Supreme Court, the chances of the Supreme Court hearing the case are apparently not great.

Assuming that this decision is not overturned by the Supreme Court, it means that disgorgement of past profits will not be a remedy available to District Court Judge Gladys Kessler should she decide in favor of the government in this case. Since past profits for which disgorgement was being sought were estimated to be on the order of $280 billion, today's announcement is certainly a major victory for the tobacco companies.

Nevertheless, there are still a number of important remedies that the government may ask Judge Kessler to impose should DOJ prevail. Among the potential remedies that have been mentioned are:

• requiring substantial changes in cigarette advertising and marketing, including measures to prevent the marketing of cigarettes to youths and to prevent certain deceptive aspects of the marketing, such as the potential health value of "light" and "low-tar" cigarettes;
• requiring substantial changes in cigarette labeling and packaging, including larger, stronger, and more graphic warning labels;
• requiring substantial changes in retail tobacco sales practices;
• requiring certain disclosures from the companies, including manufacturing methods, marketing research, smoke constituents, additives, and ingredients, and certain research;
• forcing the companies to fund an independent anti-smoking media campaign; and
• forcing the companies to fund smoking cessation programs for current smokers.

The Rest of the Story

I think it is important for public health practitioners who are observing this case to realize that there are only two of the above remedies that would both have a substantial impact on improving the public's health and be likely to withstand a tobacco industry appeal.

Despite widespread talk about the possibility of a District Court decision forcing tobacco companies to fund a national anti-smoking media campaign and/or smoking cessation programs, such as today's Campaign for Tobacco-Free Kids statement that the trial judge may "require the industry to pay billions of dollars -- possibly tens or hundreds of billions -- to fund programs to prevent kids from smoking and help smokers quit," I do not think such a remedy is likely to withstand an almost certain tobacco industry appeal should Judge Kessler decide in the government's favor and impose such remedies.

I have explained previously why I believe that in contrast to what the Citizens Commision to Protect the Truth argued in its amicus brief, forcing the companies to fund an independent anti-smoking media campaign is not an appropriate remedy under the RICO civil remedy provision. Briefly, forcing the companies to fund a smoking prevention campaign does not require them or entice them in any way to discontinue their current deceptive, pro-smoking marketing. If anything, it would give the companies more of an incentive to aggressively market their product, as they would have to be increasingly effective in their pro-smoking marketing in order to offset any negative impacts of the independent anti-smoking campaign.

In short, I do not think that forcing the companies to fund the truth® campaign or something similar is a remedy that is consistent with 18 U.S.C. section 1964(a) (the civil remedies provision of the RICO statute), because it is not a remedy that is going to prevent future violations of the Act.

Remember that the relevant provision of the RICO statute states: "The district courts of the United States shall have jurisdiction to prevent and restrain violations of section 1962 of this chapter by issuing appropriate orders, including, but not limited to: ordering any person to divest himself of any interest, direct or indirect, in any enterprise; imposing reasonable restrictions on the future activities or investments of any person, including, but not limited to, prohibiting any person from engaging in the same type of endeavor as the enterprise engaged in, the activities of which affect interstate or foreign commerce; or ordering dissolution or reorganization of any enterprise, making due provision for the rights of innocent persons."

The key is that any remedy fashioned under this provision must prevent and restrain future violations, not punish or remedy the effects of past violations. If the relevant violation is deceptive or fraudulent marketing, misrepresentation of the harms of the product, and targeting of youths, then the appropriate remedy seems to be the first two mentioned in the list above: requiring substantial changes in cigarette advertising, marketing, labeling, and packaging. With the availability of such a direct remedy that is consistent with section 1964(a), it is difficult to imagine the D.C. Appeals Court upholding a District Court decision to force the companies to fund an anti-smoking media campaign.

I think it is particularly important for readers to be aware of the central reasoning of the Appeals Court panel in disallowing disgorgement as a potential remedy: "Section 1964(a) provides jurisdiction to issue a variety of orders 'to prevent and restrain' RICO violations. This language indicates that the jurisdiction is limited to forward-looking remedies that are aimed at future violations. ... Divestment, injunctions against persons’ future involvement in the activities in which the RICO enterprise had been engaged, and dissolution of the enterprise are all aimed at separating the RICO criminal from the enterprise so that he cannot commit violations in the future. Disgorgement, on the other hand, is a quintessentially backwardlooking remedy focused on remedying the effects of past conduct to restore the status quo. ... It is measured by the amount of prior unlawful gains and is awarded without respect to whether the defendant will act unlawfully in the future. Thus it is both aimed at and measured by past conduct."

A third-party anti-smoking media campaign has no direct bearing on the tobacco companies engagement in fraudulent, deceptive, or youth-targeted marketing efforts and is thus unlikely to be viewed as "aimed at future violations" or as being awarded with respect "to whether the defendant will act unlawfully in the future." Instead, it appears to be aimed at "remedying the effects of past conduct to restore the status quo."

For the same reasons, I do not think that forcing the companies to fund smoking cessation programs for smokers is consistent with section 1964(a), nor is it likely to be upheld by the Appeals Court. I do not see how funding a smoking cessation program has anything to do with changing tobacco company conduct with regard to the alleged RICO violations. Such a remedy appears to be aimed at "remedying the effects of past conduct to restore the status quo," exactly what the Appeals Court ruled was not permissible under RICO.

While requiring changes in retail tobacco sales practices and requiring certain tobacco company disclosures may be appropriate remedies, I have presented evidence in previous posts why youth access approaches and disclosure of tobacco smoke constituents, additives, and ingredients are not likely to have any substantial benefits in terms of reducing tobacco use and improving health or saving lives.

Therefore, it is my opinion that the Department of Justice should focus the remedies portion of its case on the following two remedies that I think are both consistent with section 1964(a) (and likely to withstand appeal) and likely to have substantial public health benefits in terms of reducing tobacco use and improving health:

• requiring substantial changes in cigarette advertising and marketing, including measures to prevent the marketing of cigarettes to youths and to prevent certain deceptive aspects of the marketing, such as the potential health value of "light" and "low-tar" cigarettes; and
  
• requiring substantial changes in cigarette labeling and packaging, including larger, stronger, and more graphic warning labels.

In fact, I think that barring an unexpected Supreme Court reversal of the Appeals Court's disgorgement ruling, the potential value of the DOJ case now rests upon how successful it is in bringing about substantial, meaningful changes in tobacco product advertising, marketing, labeling, and packaging, which could directly prevent the tobacco companies from engaging in most of the alleged RICO violations in the future.

One final note. The kinds of changes in tobacco marketing required to effectively prevent future violations are not likely to be agreed to by the tobacco companies voluntarily in any settlement discussions, especially since the threat of massive punitive damages in the form of disgorgement payments has been all but eliminated and the threat of massive punitive damages in the form of payments for media campaigns and smoking cessation programs is I think quite weak given the Appeals Court's reasoning in disallowing disgorgement. In other words, the legal considerations discussed above put the tobacco companies in the driver's seat in settlement negotiations. They can demand just enough loopholes in any settlement so that it will have the appearance of being meaningful, but not really be in the public's best interest. For this reason, I believe that any truly meaningful changes in tobacco industry conduct are going to have to come from successful litigation of the case.

It is interesting to note that if my reasoning is accurate, then the American Legacy Foundation's only real chance of obtaining funding as a result of this lawsuit is for the suit to be settled. While requiring companies to fund the "truth" campaign is not, in my view, an appropriate remedy, the Foundation has made enough of a public spectacle of itself and its importance and has paid for the assistance of enough influential health figures to make me think that maybe, just maybe, the DOJ lawyers are going to cut out a slice of pie for Legacy should the Department decide to settle.