A federal appeals court yesterday rejected the government's attempt to recover $280 billion in past profits from the tobacco industry, wiping out the most powerful penalty that could have been imposed in the landmark racketeering case against cigarette manufacturers.
The huge victory for the six largest tobacco companies left them facing much smaller sanctions, even if the Justice Department prevails in its civil lawsuit.
In a trial that has been proceeding in federal court since September, the government charges that the companies engaged in a 50-year conspiracy to defraud and mislead the American public about the illnesses and deaths that they knew smoking caused. The $280 billion would have been the largest penalty in U.S. history.
But by a vote of 2 to 1, a panel of the U.S. Court of Appeals for the District of Columbia Circuit overturned an earlier decision by the judge presiding over the trial, who said she could order the companies to make such a payment, known as "disgorgement," if she found an industry pattern of past fraud.
The appeals panel ruled that U.S. District Judge Gladys Kessler is limited in civil racketeering cases to ordering penalties only to prevent and restrain future bad acts. She cannot demand past profits as a way of preventing future violations.
The $280 billion figure is the government's estimate of the profits the industry made selling cigarettes to minors over three decades, even as it promised it was not marketing its products to young people.
"Congress intended to limit remedies to . . . forward-looking orders . . . to separate the criminal from his future RICO enterprise," Judge David B. Sentelle wrote. "Disgorgement would therefore thwart Congress' intent."
Mary Aronson, a longtime tobacco industry analyst, said the victory was a historic one in the tobacco industry's wars with a series of plaintiffs. The decision comes in what could be the last major legal battle the industry is likely to face.
The industry has been sued by sick smokers, government regulators and state attorneys general. Under intense pressure in 1998, the companies agreed to a $246 billion settlement with 46 states and the District of Columbia to avoid paying state costs of providing health care for ill smokers.
"This was probably going to be the last big threat," Aronson said. "This has got to be a major disappointment for the Department of Justice. While they're crying in their beer, I think the tobacco industry is going to be popping champagne corks with a major sigh of relief."
Tobacco company leaders yesterday applauded the decision and said they remain convinced they will successfully defend themselves against the charges. Privately, industry officials likened the panel's ruling to a gunshot wound to the heart of the government's case, and they predicted it would lead to settlement talks.
Tobacco stocks rose on the ruling. The Standard & Poor's tobacco index closed up nearly 5 percent. A U.S. Chamber of Commerce official said members of her organization cheered the decision as one that would stop the government from using a "novel legal theory" to run businesses into the ground.
Government lawyers declined to comment on the decision or whether they might appeal it to the full appeals court. Legal experts said such an appeal is unlikely, because government chances of success there are slim.
"We have received the decision, and we are reviewing it now," said Justice spokeswoman Kimberly Smith.