Archived Issues

Major industry victory in U.S. federal suit

A three-judge panel of a U.S. federal appeals court ruled in early February that the Department of Justice (DOJ) cannot use a federal racketeering law to seek us$280 billion in disgorgement claims in its suit against the tobacco industry. The ruling could cripple the government’s entire case, analysts say.

Last year, the tobacco industry pressed the appeals court to throw out a lower court ruling that allowed the DOJ to seek the $280 billion in disgorgement. In February, the appeals court said that the civil Racketeer Influenced and Corrupt Organizations (RICO) statute does not allow the government to recover money in the ongoing lower court case because RICO statutes require forward-looking remedies. The government was seeking money for past violations.

Rob Campagnino, tobacco analyst at Prudential Equity Group, says, “We believe the ruling substantially reduces the risk associated with the DOJ lawsuit and should alleviate investor concerns about the case.”

Bonnie Herzog, a tobacco analyst with Smith Barney, says, “This was the best-case scenario since it would essentially remove any monetary remedy for the government.” She adds, “The disgorgement ruling in favor of the defendant takes away an essential part of the government’s case, rendering it a ‘toothless’ prosecution.”

Though the industry may escape paying the enormous sum to the government, it could still face additional marketing restrictions and increased payments for public health campaigns and smoking cessation programs.

At press time, the government’s next move was unclear. A Prudential report indicated that the government will likely appeal the February ruling.