Big Tobacco Wins Big—for Now


U.S. District Judge Gladys Kessler sent tobacco stocks soaring Aug. 17 when she found the industry guilty of racketeering but imposed no financial penalties. The long-awaited ruling is the final chapter in a case that had its start in 1999 when the Clinton Administration first filed suit against the industry.

Kessler's 1,652-page opinion forces the industry to make amends to the public through a high-profile publicity campaign to atone for having "conspired to deceive the public." But it puts cigarette makers in the clear financially, ordering them to pay only the Justice Dept.'s costs. Though that's estimated at more than $135 million, it's a far cry from Justice's original request that the industry turn over $280 billion in ill-gotten profits and its most recent demand for $10 billion to fund smoking cessation and education efforts. Kessler said an earlier appeals court ruling prevented her from levying financial penalties.

The opinion is a second big win for tobacco in as many months. In July, the Florida Supreme Court dismissed the so-called Engle class action, the last of the big class-action cases that sought to directly link cigarettes to smokers' health woes. That court found key evidence against the tobacco industry, but told Florida's thousands of ill smokers that they would have to file their own individual lawsuits against the industry—a time-consuming and expensive proposition for plaintiffs' lawyers (see BusinessWeek.com, 7/24/06, "Tobacco May Be Partying Too Soon").

LIGHTS OUT? Tobacco's pocketbook is safe for now, but Kessler's guilty verdict could have a far-reaching and potentially expensive impact, thanks to some critical findings of fact. Big Tobacco, Kessler found, engaged in a "lengthy, unlawful conspiracy to deceive the American public about the health effects of smoking," particularly when it came to claims of health benefits from low-tar—or "light"—cigarettes. "Even as they engaged in a campaign to market and promote filtered and low-tar cigarettes as less harmful than conventional ones, defendants either lacked evidence to substantiate their claims or knew them to be false," Kessler wrote.

Indeed, Kessler's order could prove the death knell for light cigarettes, which make up some 80% or more of the U.S. industry's market. Her opinion bans cigarette makers from using certain labels in any marketing or on any packaging. Among the forbidden words: "low tar," "light," "lite," "mild," and "natural."

Executives at Philip Morris USA, the lead defendant in the case, were dismayed at much of Kessler's order, making note in particular of her ban on marketing light cigarettes. The company intends to appeal. "[We] believe much of today's decision and order are not supported by the law or the evidence presented at trial, and appear to be constitutionally impermissible or infringe on Congress' sole right to provide for the regulation of tobacco products," said William Ohlemeyer, vice-president and associate general counsel of Philip Morris' parent company, Altria Group (MO).

CASE PENDING. Other defendants in the original case include Lorillard Tobacco, part of Loew's Corp. (LTR); the R.J. Reynolds unit of Reynolds American (RAI); British American Tobacco; and Liggett Group, part of the Vector Group (VGR). Kessler excluded Liggett from her decision, however. She singled out the company for breaking with the rest of the industry in the 1990s and admitting that smoking was addictive, as well as for cooperating with state and federal officials in their investigations of the industry.

Despite the guilty verdict, the opinion is a big disappointment to the Justice Dept. and anti-smoking groups. But it's good news for Paul T. Gallagher, a lawyer who is representing millions of smokers in a lawsuit pending in Brooklyn.

Kessler's findings will play a key role in that case, which is now in U.S. District Court for the Eastern District of New York, where Judge Jack B. Weinstein has been asked to certify a class of smokers who bought light or low-tar cigarettes. Plaintiffs' lawyers claim smokers were defrauded because the light cigarettes were no safer than regular smokes and the manufacturers knew it.

FALSE ADVERTISING. Unlike other big lawsuits that have plagued the industry for a decade, the lights lawsuit—known as the Schwab case, after one of the lead plaintiffs—doesn't try to prove that smoking was the direct cause of a person's lung cancer or other illness. It is, in many ways, an uncomplicated, plain-vanilla consumer fraud case—a false advertising claim. And Kessler's opinion has just made the plaintiff's job easier.

"This has a huge impact," says Gallagher, a partner at Cohen, Milstein, Hausfeld & Toll in Washington, D.C. "We have to prove the exact same facts the government had to prove, and Judge Kessler found they did prove." Gallagher says he will use Kessler's findings to try to persuade Weinstein to skip the liability phase of the trial. "We're asking for hundreds of billions of dollars in refunds for people who bought these cigarettes based on the very fraud that Judge Kessler already concluded there was." The case, and a handful of others like it, could affect tens of millions of smokers who bought "light" cigarettes dating back to 1971. Gallagher is seeking $120 billion in damages.


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