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October 12, 2004

Gop Tobacco Two-step

by Robert A. Levy

Robert A. Levy is a Cato Institute senior fellow. His book "Shakedown: How Corporations, Government and Trial Lawyers Abuse the Judicial Process" is out next month.

Republicans love to criticize judicial shakedowns — using the court system to redistribute income from unpopular industries to "more deserving" plaintiffs. So why has a Republican-run Justice Department embraced the mother of all baseless lawsuits — the crusade against tobacco? If ever there were an appalling example of government's addiction to litigation (and a waste of $136 million in taxpayer money as the trial began), this lawsuit is it.

Basically, the executive branch is trying to bypass Congress and legislate via the courts — a tactic the Bush administration denounces whenever it's used by the reviled trial lawyers.

Justice accuses cigarette manufacturers of making false statements, manipulating nicotine content, marketing tobacco products to kids and misleading customers about less hazardous cigarettes. For those misdeeds, Justice wants $280 billion, to be disgorged under the civil provisions of the Racketeer Influenced and Corrupt Organizations Act.

But government investigators already rejected these charges: In a five-year, multimillion-dollar inquiry by two dozen prosecutors and FBI agents, the Justice Department came up dry. Prosecutors probed allegations that tobacco executives perjured themselves when testifying before Congress and plowed through documents for evidence that cigarette makers manipulated nicotine levels. Whistle-blowers and company scientists testified before grand juries. The outcome: not a single indictment of a tobacco executive. Still, the civil trial moves forward.

If the Court of Appeals rejects the government's demand for disgorgement of "ill-gotten" gains, as it should, the case will likely be settled: The only dispute remaining would be over Justice's insistence on industry behavior-modifications, none of which goes much beyond what the tobacco companies already agreed to in their 1998 settlement with 46 states.

But if $280 billion remains on the table, don't count on a settlement.

This case is not like the state Medicaid recoupment suits, when the cigarette giants rolled over for $246 billion. The industry covered that price tag with some sleight-of-hand that the public hasn't fully digested. Essentially, the major companies, state attorneys general and soon-to-be-billionaire tobacco lawyers colluded to "cartelize" the industry — requiring tobacco companies that didn't agree to the settlement to post damages in escrow. That sufficed to prevent those companies from cutting prices to capture market share. That way, the four large cigarette makers could raise their prices with impunity, foisting the entire cost of the settlement onto their customers.

Not even the politicians are willing to burn smokers with yet another quarter-trillion-dollar cost. Thus the cigarette giants, who'd have to raise prices significantly to cough up $280 billion, won't be protected against price-cutting rivals. So the major companies must 1) resist the Justice Department suit with all of the weapons in their considerable legal arsenals, or 2) be forced into bankruptcy, or 3) reduce their payments to the states.

The 1998 settlement provides for cuts in those payments if cigarette sales fall markedly. But the states won't sit still for that: How would they fund their favorite "tobacco-cessation" programs like improved sidewalks, cuts in college tuition and flood control?

Assume the cigarette companies did exactly what the Justice Department claims. Who were the victims? Smokers? If so, let them sue for damages: Several have done so — somesuccessfully — in private lawsuits. The Medicare system, which paid for smoking-related injuries? Sorry, a federal judge has already dismissed that claim.

Instead of helping smokers or Medicare, the federal lawsuit is designed to punish an industry for quasi-criminal infractions for which federal investigators could not produce sufficient proof. This suit is a second bite at the apple, a blatant and shameful attempt to extort money from a tobacco treasure-trove perceived as bottomless.

Plain and simple, the Justice Department is engaged in double dipping — a failed criminal investigation has given way to a new civil suit by that same government for the same charges originally found wanting.

This article originally appeared in the New York Post on October 12, 2004.