The Feds’ Tobacco Suit: Some “Victory”

This AP report from the Fox News site on the tobacco ruling last Thursday is the conventional wisdom:

Judge: Big Tobacco Guilty of Decades of Deception
Thursday , August 17, 2006

WASHINGTON — A federal judge ruled Thursday that the nation’s top cigarette makers violated racketeering laws, deceiving the public for years about the health hazards of smoking.
U.S. District Judge Gladys Kessler stopped short of ordering the companies to pay for a quit-smoking program.

The judge did order the companies to publish in newspapers and on their Web sites “corrective statements” on the adverse health effects and addictiveness of smoking and nicotine.

Kessler said that adoption of a national smoking cessation program, as sought by the government, “would unquestionably serve the public interest” but that she was barred by an appeals court ruling that said remedies must be forward-looking and not penalties for past actions.

The government had asked the judge to make the companies pay $10 billion for smoking cessation programs, though the Justice Department’s own expert said $130 billion was needed.

What? No money? News coverage of the ruling has been very sparse in the area of monetary damages. It takes until the tenth paragraph of the report for the AP to tell us that there’s a good reason for this:

A separate court issued an interim ruling in the case last year, finding that civil racketeering laws did not permit the government to seek $280 billion from the companies for money they allegedly earned over many years through fraud.

So it took The Wall Street Journal, in a subscription-only editorial Saturday, to bring some common sense back into play:

What Were They Smoking?
August 19, 2006

After seven years of litigation, $140 million of taxpayer money and a 1,700-page decision, the government could finally claim this week to have won its racketeering case against the tobacco industry. But then why were tobacco stocks up by some 3% yesterday, with Altria, parent company of Philip Morris and the Marlboro Man, hitting new multi-year highs?

Investors know a loser when they see one, and in this case it’s the Justice Department. Federal Judge Gladys Kessler ruled for the government on the civil racketeering charges, claiming that the tobacco companies had done what everyone already knew they’d done for decades, which is aggressively market a dangerous but legal product. But she also awarded no damages, instead requiring a series of “remedial” measures from the cigarette makers. These include a requirement to publish mea culpas in the form of paid advertisements in newspapers, the elimination of the words “light” and “low tar” on cigarette packs and additional warning labels. For whatever that’s worth.

The government will also be allowed to apply for reimbursement of its costs in the case, which were estimated last year at $140 million. But that’s a far cry from the $280 billion that government lawyers were seeking before the D.C. Circuit Court of Appeals last year ruled out going after 50 years worth of industry profits, plus interest.

This misbegotten case goes back to the Clinton Administration, which looked at the $250 billion settlement between the industry and the state Attorneys General and decided it wanted its own quarter-trillion-dollar chunk of Big Tobacco’s profit stream. The cynicism here is remarkable, since the government was essentially claiming that the industry was unconscionable precisely so it could lay claim to the cash flow from its unconscionable behavior.

….. Philip Morris has already pledged to appeal both the unfavorable ruling and the remedial measures, and legal experts give it some chance of success. Judge Kessler seems to have inserted herself into all manner of minutiae in how cigarettes are sold and marketed. Given how heavily regulated tobacco marketing already is, it’s an open question whether the judiciary is stepping on executive branch toes with the ruling.

….. But we suspect investors know the real score here, and their verdict on Friday was to bid up tobacco stocks. No doubt many state politicians around the country were also cheering the verdict because it means the feds won’t be able to horn in on their long-term tobacco income stream. The war against cigarettes long ago stopped being about public health; today it’s all about public revenue.

Yep, it was always about the money. The feds won’t get any, will lose money if its legal costs aren’t reimbursed, and could even lose the remedial measures on appeal. That looks like a loss to me. Investors appear to agree.

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UPDATE: The CEI Open Market blog rips other aspects of the decision.