Tobacco Firms Face U.S. in High-Stakes Trial

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September 20, 2004

Tobacco Firms Face U.S. in High-Stakes Trial

By MICHAEL JANOFSKY

 

WASHINGTON, Sept. 19 - In 1953, the chief executives of the country's

leading cigarette companies and officials from a major public

relations firm gathered at the Plaza Hotel in Midtown Manhattan.

 

What they discussed that day and what happened over the next 50 years

as a result go to the heart of the biggest legal challenge the tobacco

industry has ever faced.

 

In a nonjury trial scheduled to start here on Tuesday in Federal

District Court, the government is seeking to strip the companies -

disgorgement, in legal terms - of $280 billion that Justice Department

lawyers say was earned through fraud. As the largest civil case ever

prosecuted under the federal Racketeer Influenced and Corruption

Organizations Act, it has the potential to put the companies out of

business.

 

Five years in preparation, at a cost to the government of $135

million, the trial is scheduled to last at least six months, with 100

witnesses expected to testify in person and 200 others through

depositions or testimony in other trials.

 

Company lawyers say the hotel meeting produced only a research

organization, now defunct, to study smoking and health. The

government's lawyers say the meeting led to a widespread conspiracy of

deception that remains in effect, reflecting a carefully built

strategy to misrepresent the addictive nature of cigarettes, lie about

the health risks of secondhand smoke and direct marketing efforts at

young people to sustain a large population of smokers.

 

" The government has provided extensive evidence to support our case, "

Peter D. Keisler Jr., assistant attorney general for the civil

division of the Justice Department, said in a statement. " We look

forward to presenting it in court. "

 

The defendant companies - Philip Morris USA; its parent, the Altria

Group; the R.J. Reynolds Tobacco Company; the Brown & Williamson

Tobacco Corporation, which merged over the summer with Reynolds; the

Lorillard Tobacco Company, a subsidiary of the Loews Corporation;

British American Tobacco; and the Liggett Group - say that the

government's case is groundless.

 

They deny engaging in a conspiracy and accuse the government of

distorting history to drive them into bankruptcy. They also say that

under the terms of a 1998 settlement with 46 states that sued to

recover nearly $250 billion for the health care costs of smoking, the

companies have already complied with orders that the government is

seeking in the lawsuit, like public disclosure of company research

relating to smoking and bans on marketing to children.

 

William S. Ohlemeyer, vice president and associate general counsel for

Altria, said the judge, Gladys Kessler, could decide for the

government only if it could show that a pattern of fraud in the past

was evidence of fraud in the present and future.

 

Mr. Ohlemeyer said that past behavior was debatable. He said positions

the companies once held - that smoking does not cause disease, for

example - " can be wrong without being evidence of committing fraud. "

 

As for the present and future, he said, the 1998 settlement created so

much government oversight that continuing fraud would be impossible.

" The court is required to review the totality of circumstances, " Mr.

Ohlemeyer said in a conference call with reporters last week. " It's

difficult for the government to argue that the past is a reasonable

predictor of the future. It ignores a detailed list of how cigarettes

are sold today versus the past. "

 

Filed in 1999, the case originally included charges to recover federal

health care costs due to smoking. Judge Kessler dismissed them,

leaving two counts under the racketeering act. The Justice Department

has aggressively pursued those charges despite several efforts by

Congress to block financing for the case.

 

" With President Bush's election, the tobacco industry thought they

were going to have a friend who would get the lawsuit dismissed, " said

William V. Corr, executive director of the Campaign for Tobacco-Free

Kids. " Fortunately none of those efforts succeeded, and when terrorism

became such a prominent issue for our government and the public, it

appears that the effort to undermine the lawsuit diminished. "

 

Full victory for the government after appeals would have major

financial consequences for the companies. Martin Feldman, an analyst

for Merrill Lynch who tracks the tobacco industry, estimated that the

combined net worth of the companies, which account for 85 percent of

the domestic cigarette market, was less than $200 billion, at least

$80 billion less than what the government is seeking.

 

But whether the government has the right to seek disgorgement under

its theory of the case is now before the United States Court of

Appeals for the District of Columbia Circuit. That court has agreed to

hear an appeal of Judge Kessler's decision in May dismissing the

companies' request that the disgorgement claim be thrown out. Oral

arguments are scheduled for Nov. 17.

 

If Judge Kessler's ruling is overturned, Mr. Feldman said, " this case

ceases to be newsworthy. "

 

Justice Department officials, who discussed the case in a background

briefing with reporters under the promise that their names not be

used, said the government would try to show a conspiracy to sell

cigarettes through intentional misstatements about smoking and health,

the addictive nature of cigarettes, the manipulation of nicotine as

the addictive ingredient, the marketing of low-tar cigarettes as safer

and the suppression of evidence that would adversely affect sales.

 

The companies' chief strategy is to direct the judge's attention to

industry reforms since 1998. " The focus of this case should be on

recent history, the activities of the defendants today, and an actual

threat of a specific ongoing or future violation, " the companies said

in court documents.

 

" We intend to rebut the charges that fraud was committed in the past, "

Mr. Ohlemeyer said. " And we're going to make it very clear to the

judge that no evidence currently exists of an intent to commit fraud

in the future. "

 

To speed the case along, Judge Kessler has instructed each side to

conduct direct examinations of witnesses outside court before their

appearances. That means that when David A. Kessler, a former

commissioner of the Food and Drug Administration who is not related to

the judge, takes the stand on Thursday as the first witness, company

lawyers will immediately cross-examine him about testimony that was

filed last week.

 

In that testimony, Dr. Kessler recounted efforts by the agency during

his tenure, 1990 to 1997, to regulate nicotine as a drug in the belief

that the cigarette companies manipulated the level of nicotine to

sustain addiction.

 

Citing company documents, he told the court that the companies had

known for decades that nicotine was a drug but that the agency's

effort at regulation had been challenged by a lawsuit from the

industry that reached the Supreme Court.

 

In 2000, the court ruled 5 to 4 for the industry, saying that Congress

did not intend the agency to regulate cigarettes. But when Dr. Kessler

was asked if any justice took issue with the agency's findings, he

said, " No. "

 

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