U.S. alleges scheme of fraud, deceit in suing tobacco firms; Justice Department says conspiracy cost taxpayers billions

THE BALTIMORE SUN

WASHINGTON -- The Clinton administration dramatically opened a new legal assault on the cigarette industry yesterday -- a legally uncertain venture, based on novel ideas, that the industry will try to kill immediately.

In a 131-page lawsuit against the cigarette manufacturers, the Justice Department blamed the industry for nearly five decades of harm to Americans' health and billions of dollars in financial injury to the federal Treasury.

"The tobacco companies should answer to the taxpayers for their actions," President Clinton said. "The taxpayers of our country should have their day in court."

Denouncing the lawsuit as having "no basis in fact and no basis in law," the industry said it would ask the courts to throw out the case immediately.

Even if that does not happen, there is little chance that the case would move through the courts before the end of Clinton's term in early 2001, raising the prospect that the lawsuit could be abandoned in the administration that follows.

With those hurdles before her, Attorney General Janet Reno nevertheless went ahead with the legal broadside against the cigarette makers that Clinton had promised in January in his State of the Union address.

Reno charged that, for 45 years, the manufacturers have waged "an intentional, coordinated campaign of fraud and deceit."

"It has been a campaign designed to preserve their enormous profits whatever the cost -- in human lives, in human suffering and in medical resources."

While the new lawsuit was unveiled with fanfare, the Justice Department took another step much more quietly: It disclosed, without elaboration, that it has ended a five-year criminal investigation of cigarette company executives.

Though the Justice Department refused to say how much it was seeking in the lawsuit, the stakes are clearly enormous. The government spends more than $20 billion a year to treat smoking-related illnesses of Medicare patients, the military, veterans, Native Americans and federal employees.

The suit seeks to recoup much of that money, as well as company profits that the department says were secured through fraud and deceit.

Defendants in the suit are six cigarette companies, their parents companies and two trade groups.

The $206 billion legal settlement reached last year by 46 states and the tobacco companies would pay less than $10 billion a year over 25 years, or half what the federal government could be seeking, said Richard Daynard, director of the Northeastern University Law School's Tobacco Control Resource Center.

"These are big dollars," said Mary Aronson, a Washington-based tobacco industry analyst. "They're going to dwarf anything we've seen so far."

With those stakes in mind, the tobacco industry reacted furiously to the federal suit.

Gregory Little, the associate general counsel for Philip Morris, called it "a blatant political maneuver" that was "nothing more than the height of hypocrisy."

The Justice Department's allegations are not new.

The suit alleges that as far back as 1953, cigarette manufacturers colluded to lie about the health effects of tobacco, to hide damaging health research and to disseminate misleading scientific studies, to squelch research into safer cigarettes and to intentionally market their products to children.

Those allegations have been used for years by state attorneys general and class-action lawyers to good effect. State governments have reached settlements totaling $246 billion. A class-action lawsuit by flight attendants secured $300 million for research into the effects of secondhand smoke.

And this year, a jury decided that the cigarette industry was liable for the deaths and illnesses of thousands of smokers in a Florida class-action lawsuit. The damages have not been decided.

Case relies on three laws

But rather than sue to recover money directly for the harm to smokers, the Justice Department based its lawsuit on its right to recover its own financial outlays for health care for smokers.

It relied on three federal laws: the Medical Care Recovery Act, enacted initially to help the government recoup the cost of treating servicemen; the Medicare Secondary Payer Act, enacted to combat Medicare fraud by insurers; and the Racketeer Influenced and Corrupt Organizations statute, originally aimed at mobsters but now widely used against business fraud.

The department argued that it has a right under the Medical Care Recovery Act to recoup fraud-induced payments to patients who receive federal health benefits. Damages under that law can be recouped only for the past three years.

In addition, citing the Secondary Payer Act, it claimed a right to force the companies to underwrite the government's health care costs for smokers going back six years.

Finally, relying on RICO, a sweeping law against fraud, the department asserted that the industry had committed 116 separate racketeering acts.

For that, the department said, the industry should have to surrender any profits it made -- for the entire 45-plus years of alleged racketeering -- from those acts. There is no time limit on that kind of penalty.

The department lawsuit is also keyed to consumer fraud and public health laws in effect in every state.

It contends that the industry violated those laws through deception and lies about the hazards of smoking, and that those violations led to federal health benefits for smokers.

The tobacco companies argued yesterday that the federal government was overreaching.

Under the tobacco industry's interpretation of the Medical Care Recovery Act, it cannot be stretched to cover tobacco-related illnesses, unless Congress passes a new law authorizing it.

Tobacco industry lawyers said the Medicare Secondary Payer Act allows the federal government to sue only medical insurance plans and care providers.

Besides, Little said, federal officials cannot contend that the tobacco industry successfully hid the ill effects of its products when the federal government did so much to persuade its citizens of those ill effects.

Since 1964, the surgeon general has been warning Americans of the hazards of smoking. Since 1966, the government has required warning labels on tobacco products.

Despite those warnings, the government has supported the industry in many ways.

Until 1974, the government provided the armed forces with free cigarettes with their rations.

Federal price supports and crop insurance for tobacco growers remain in place. And from the late 1960s to the late 1970s, the government worked with the industry to develop safer cigarettes.

Industry lawyers have a point, said Martin Feldman, director of tobacco research at the investment company Salomon Smith Barney. "The federal government has been a partner with the tobacco industry," he said, suggesting that the belligerence of the suit is "a little disingenuous."

Taking it seriously

Still, the industry would be wise to take the federal lawsuit seriously, warned Robert Rabin, a Stanford University law professor and expert on tobacco liability suits.

The damaging internal documents that forced the industry to settle with the states, he said, will still be the basis for this suit, and the underlying charges of fraud and deceit still are very threatening to the tobacco companies.

"The state cases, when they were first filed, came out of nowhere as well," he said, "and the tobacco industry reacted with outrage to them, too."

The Clinton administration might be eager to pursue a settlement before 2001, so the president can take credit before he leaves office, Aronson said. An industry lawyer vowed yesterday, "We will not settle this lawsuit."

The companies might be hoping that Clinton is succeeded by a Republican administration not eager to pursue the case.

Campaign aides for Gov. George W. Bush of Texas, the front-runner for the Republican presidential nomination, greeted the federal lawsuit skeptically, saying Bush was "troubled" by what he saw as a reversal from the Justice Department's previous decision to stay out of the tobacco wars.

Already, Republicans in Congress are blocking the $20 million that the Justice Department has requested to pursue the suit.

Even without that money, the department could go ahead with the case using other funds.

Hurdles for tobacco suit

The Clinton administration's lawsuit against the tobacco industry, if it goes to trial, will test a variety of unusual and complex legal claims.

A summary of the hurdles the government might have to overcome shows how complex the case could be and how hard it would be for the government to win. Here are the key challenges:

Defining the legal duty, if any, that the cigarette companies faced under the 50 states' consumer protection laws not to mislead or lie to consumers and government agencies about the risks of disease from smoking.

Defining the duties, if any, that the companies had under the states' laws not to sell dangerous products to consumers and not to risk the public health.

Deciding, in the event the companies did have such duties and did violate them, whether such illegal action caused diseases and deaths for smokers, and then whether the government was forced to pay the resulting medical costs.

Tracing any financial harm to the government to specific acts of fraud or health endangerment by the companies.

Assuming the government's financial costs can be linked to the companies' actions, deciding whether federal laws give the government any right to get its money back from the industry.

Deciding whether the companies' alleged actions were a kind of business racket, by analyzing 116 racketeering claims by the government.

If the companies were engaged in racketeering, deciding whether federal law requires them to surrender any profits earned as a direct result of those actions.

If the government wins on its legal claims, fashioning a court order that would stop the companies from future acts of fraud or health endangerment.

-- Lyle Denniston

Copyright © 2021, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
64°