The Justice Department is demanding that the nation's biggest cigarette makers be ordered to forfeit $289 billion in profits derived from a half-century of "fraudulent" and dangerous marketing practices.

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U.S. Seeks $289 Billion in Cigarette Makers' Profits

The Justice Department is demanding that the nation's biggest cigarette makers be ordered to forfeit $289 billion in profits derived from a half-century of "fraudulent" and dangerous marketing practices.

Citing new evidence, the Justice Department asserts in more than 1,400 pages of court documents that the major cigarette companies are running what amounts to a criminal enterprise by manipulating nicotine levels, lying to their customers about the dangers of tobacco and directing their multibillion-dollar advertising campaigns at children.

Those practices continue even today, despite the industry's repeated pledges to change its ways, the Justice Department said in filings in federal court in Washington as part of a federal lawsuit first filed by the Clinton administration in 1999.

The Justice Department's aggressive attack on the industry surprised many legal analysts because Attorney General John Ashcroft has voiced public skepticism in the past about the strength of the federal lawsuit.

This is the first time the federal government has given a dollar figure for what it believes the tobacco industry should have to forfeit in "ill-gotten gains." The $289 billion figure is based partly on proceeds the government says the industry made from selling cigarettes to an estimated 30 million people who started smoking regularly before the age of 18 beginning in 1954, when the industry allegedly began its illegal collusion.

That figure, if endorsed by Judge Gladys Kessler of Federal District Court when United States v. Philip Morris et al. goes to trial next year, would eclipse the $206 billion that the industry agreed to pay 46 states in a landmark 1998 settlement in a separate lawsuit brought by the states. If the Justice Department were to win out in its demands in the federal case, the judgment could threaten to bankrupt the American tobacco industry, lawyers and analysts said.

The five principal defendants in the lawsuit are: Philip Morris; R. J. Reynolds; the Loews Corporation's Lorillard Tobacco; British American Tobacco's Brown & Williamson, and the Vector Group's Liggett Group.

A financial analyst who covers the tobacco industry said that if the Justice Department were to win anything approaching the $289 billion figure, cigarette makers would, at the very least, have to consider raising their prices by about 50 cents a pack.

Even then, the analyst said, "their survival would be problematic."

The new filings lay out the details of the government's case for the first time and rely on potentially incriminating new documents from within the tobacco industry. The Justice Department filed seven volumes of material on Jan. 29, along with additional filings earlier this month.

The tobacco industry said the charges were without merit, asserting in new filings of its own that its public pronouncements about cigarettes were free speech protected by the First Amendment.

Moreover, the tobacco industry, which has been a major political contributor to the Bush administration, said it was wrong for the Justice Department to charge cigarette makers with engaging in a conspiracy when the federal government has been an active partner for years, subsidizing cigarettes for military personnel and reaping billions in taxes and fees. Tobacco lawyers also accused the government of withholding federal health documents helpful to the industry's case.

The lawsuit, one of the biggest in federal history, was initiated in 1999 by President Bill Clinton and Attorney General Janet Reno. Mr. Ashcroft, who opposed the lawsuit when he was in the Senate, has demonstrated occasional resistance to it since becoming attorney general in 2001. Months after he took office, he moved to curtail financing for the legal team working on the case, and he said he wanted to try to reach a settlement because he was concerned the case was too weak for trial.

But with the Justice Department's senior officials preoccupied with terrorism for the last 18 months, Mr. Ashcroft let it go forward and the lawyers working on the case have quietly sifted through reams of documents to move toward a trial date of September 2004.

Antismoking groups said that given Mr. Ashcroft's past positions on the lawsuit, the scope and volume of the department's latest accusations surprised them.

"For this Justice Department to pursue this case so aggressively is very significant," said William V. Corr, executive vice president of the Campaign for Tobacco-Free Kids, an advocacy group. "With these filings, the Justice Department has documented that the tobacco industry continues to violate the law by marketing to our children and by deceiving the American public."

Mr. Ashcroft does not appear to have personally reviewed or signed off on the latest filings, officials said. Asked about Mr. Ashcroft's current thinking on the case, officials said he has delegated responsibility for the lawsuit to the department's civil division and relies upon officials there to direct its handling. "The attorney general committed in his confirmation hearing to pursue the tobacco litigation despite his policy concerns about its filing as a legislator. His role as attorney general is different than that of a senator," a department official said.

The Justice Department's new filings, which represent its "proposed findings of fact," rely heavily on the tobacco industry's own words, quoting extensively from more than 38 million pages of documents turned over by cigarette makers since the litigation began three and a half years ago.

Among the documents, the Justice Department said the industry's own research showed that cigarettes marketed as "low tar" can be just as harmful as regular cigarettes. Although the Federal Trade Commission's automated testing may produce a "low tar" read-out, the industry's research has shown that people smoking such brands are likely to inhale more deeply and smoke more cigarettes to satiate their nicotine fix, the Justice Department said.

A 1982 interoffice memorandum from officials at the R. J. Reynolds Tobacco Company, discussing a competitor's new "low tar" brand, said: "Such products could (and would) be advertised as `tar-free,' `zero-milligrams F.T.C. tar,' or `the ultimate low-tar cigarette,' while actually delivering 20-, 30-, 40-mg or more `tar' when used by a human smoker!" the Justice Department quoted the memorandum as saying.

"Such cigarettes, while deceptive in the extreme, would be very difficult for the consumer to resist, since they would provide everything that we presently believe makes for desirable products: taste, `punch,' ease of draw and `low FTC tar,' " the memorandum said.

A number of other industry memorandums, as well as marketing data from the last few years, document the industry's interest in playing to under-age smokers, the Justice Department said.

A 1981 report from Philip Morris researchers, for instance, stressed that smokers often develop an "initial brand choice" in their teens. "Today's teenager is tomorrow's potential regular customer, and the overwhelming majority of smokers first begin to smoke while still in their teens," the report said, according to the Justice Department.

The government charged that tobacco companies, despite public denials and promises, continue to do extensive research and marketing to woo teenagers, advertising in youth publications and using imagery and messages and appealing to children. Last year, a state judge in California fined R. J. Reynolds $20 million for violating the terms of the 1998 tobacco settlement by running magazine advertisements intended for teenagers, a case now on appeal.

The Justice Department also cited a 1971 research report by Philip Morris that acknowledged the difficulties of quitting smoking, despite the industry's long-held contention that smoking was not addictive. The research said withdrawal could cause depression, irritability and other "neurotic symptoms," and it mocked an antismoking commercial that depicted an exuberant couple leaping for joy after they quit smoking, the Justice Department said.

"A more appropriate commercial," Philip Morris researchers wrote, "would show a restless, nervous, constipated husband bickering viciously with his bitchy wife who is nagging him about his slothful behavior and growing waistline," according to the filings.

The Justice Department said that "in short, defendants' scheme to defraud permeated and influenced all facets of defendants' conduct - research, product development, advertising, marketing, legal, public relations, and communications - in a manner that has resulted in extraordinary profits for the past half-century, but has had devastating consequences for the public's health."

But Kenneth N. Bass, a lawyer for Brown & Williamson, said he believes the Justice Department is overreaching.

The $289 billion demand "is a ridiculous figure. It bears no relation to reality," he said in an interview. "And many of the Justice Department's proposed findings don't bear any relationship to the law. They've put everything and the kitchen sink into these documents in the hopes that something sticks."

Mr. Bass said the industry plans to defend its case vigorously against the charges, and he sees little chance for a settlement. Based on the latest round of government filings, he said, "we're light years apart."

Mr. Bass said that if Judge Kessler were to side with the Justice Department, a case of this type should allow her significant discretion to consider the financial impact on the defendants in determining an award.

If Judge Kessler were to order the defendants to pay $289 billion, he said: "It would certainly cast a pretty big cloud over the industry. I don't want to say it would or wouldn't bankrupt the industry, but it probably exceeds the net worth of all the defendants. It's a pretty dire scenario."

Posted on March 21, 2003


Eric Lichtblau, The New York Times. March 18, 2003

Copyright © 2003 The New York Times Company. All rights reserved.