RICO Convictions of Major Tobacco Companies Affirmed

May 12, 2011

 

by Ronald A. Goodbread, Legal Editor

In a punishing affirmance, the D.C. Circuit Court of Appeals has issued a 92-page per curiam opinion upholding the judgment issued by D.C. District Court Judge Gladys Kessler in August 2006, in which she found eleven of America’s major Tobacco Companies and related entities guilty of nearly 150 counts of mail and wire fraud in a continuing “pattern of racketeering activity” with the “specific intent to defraud” under the Racketeer Influence Corrupt Organizations (RICO) Act. The panel consisted of two Republicans, Chief Judge David B. Sentelle, of the tobacco state of North Carolina, a Reagan appointee, and Janice R. Brown, a George W. Bush appointee, together with David S. Tatel, appointed by President Clinton. The familiar names include Philip Morris, R.J. Reynolds, Brown & Williamson, Lorillard, Liggett, British American, and the Tobacco Institute.

The Appellate Court’s opinion, dated May 22nd, is all the more astonishing in view of its magnitude. No fewer than 39 attorneys entered appearances on behalf of the Tobacco Companies urging reversal, while 59 lawyers, including the Attorneys General of 37 States, entered appearances in favor of affirming the convictions. Names were dropped on both sides, including former U.S. Solicitor General Theodore B. Olson for the Tobacco Companies and G. Robert Blakey for the Appellees. Weighing in on behalf of various States whose health care systems are being increasingly burdened by tobacco-related maladies were such luminaries as Attorneys General Edmund G. Brown, Jr. of California, Joseph R. Biden III of Delaware, Lisa Madigan of Illinois, Douglas F. Gansler of Maryland, and Andrew Cuomo of New York.

Brought in the last year of the Clinton Administration, the case charged that the Tobacco Companies had for decades engaged in “a pattern of racketeering activity” geared to “deceive the American public about the health effects and addictiveness of smoking cigarettes.” The trial lasted nine months, included live testimony from 84 witnesses, documentary evidence from 162 more, and produced almost 14,000 exhibits. The District Court had granted leave to intervene as to proposed remedies to the American Cancer Society, the American Heart Association, the American Lung Association, and Americans for Nonsmokers’ Rights, the National African-American Tobacco Prevention Network, and the Tobacco-Free Kids Action Fund.

After a review of all the evidence the Trial Court concluded that the Tobacco Companies had engaged in a decades-long scheme to defraud actual and potential smokers by falsely denying the adverse health effects of smoking; that nicotine and smoking are addictive; that the Companies had manipulated cigarette design and composition so as to assure nicotine delivery levels that create and sustain addiction; had falsely represented that light and low tar cigarettes deliver less nicotine and tar and therefore present fewer health risks than full flavor cigarettes; engaged in an invidious marketing campaign to youth; had falsely denied that secondhand smoke causes disease; and throughout it all had suppressed and destroyed documents, information, and research to prevent the public from learning the truth about these subjects and to avoid or limit liability in litigation.


The Court of Appeals pulled no punches, engaging in none of the niceties of appellate nomenclature in drawing on the record below to document its ruling.

The Baby Boom Plume. The Government adduced evidence that traversed almost the entire lifetime of the Baby Boom Generation, starting in 1953, when four of the major tobacco giants joined together to strategize a response to an emerging public concern about health risks associated with smoking. Their initial public response was that any health hazards attributable to smoking constituted “an open question.” Their first ploy was the publication on January 4, 1954, in over 400 newspapers throughout the country, of an advertisement entitled “A Frank Statement to Cigarette Smokers” in which they asserted “[t]hat there is no proof that cigarette smoking is one of the causes” of lung cancer and “[t]hat statistics purporting to link cigarette smoking with the disease could apply with equal force to any one of many other aspects of modern life.” Hearkening back to the time of John Rolfe, they assuringly concluded that “[f]or more than 300 years tobacco has given solace, relaxation, and enjoyment to mankind.” They pledged, however, to keep an eye on emerging research to monitor any health hazards to smokers.

Nicotine Addiction. What the Trial Court found, however, was that the Tobacco Companies, in fact, engaged in “disseminating advertisements, publications, and public statements denying any adverse health effects of smoking” in “promoting their … strategy of sowing doubt” when they knew full well “that smoking causes cancer and emphysema, that secondhand smoke causes lung cancer and endangers children’s respiratory and auditory systems, [and] that nicotine is an addictive drug.” The “research group” that they had promised to set up pursuant to their 1954 statement conducted its own “extensive research into the physiological impact of nicotine, how it operates within the human body, and how the physical and chemical design parameters of cigarettes influence the delivery of nicotine to smokers.” In the end it presented them with evidence early on that, in fact, showed the highly addictive nature of nicotine. As early as 1963, Brown & Williamson’s General Counsel wrote in a confidential memorandum, “We are … in the business of selling nicotine, an addictive drug ….” In 1981, a Philip Morris executive wrote, “Cigarettes are not just habit-forming – the body builds up a requirement for them.” Similarly, by 1991, an R.J. Reynolds report bluntly concluded, “We are basically in the nicotine business.” As a result of their own internal research, the Trial Court found, they “recognized and internally acknowledged that smoking and nicotine are addictive.” Thus, the Court of Appeals concluded “that Defendants were aware that nicotine creates a chemical dependency far stronger than mere habit.”

Suppressing Evidence. Yet, the Court found, “despite this internal knowledge, for decades … [the Tobacco Companies] denied and distorted the truth about the addictive nature of their products, suppressed research revealing the addictiveness of nicotine, and denied their efforts to control nicotine levels and delivery.” R.J. Reynolds ran a commercial in the mid-1950’s asserting that more doctors smoke unfiltered Camels – one of the most virulent of the carcinogen delivery devices – than any other brand because they “agree with your throat.” In one of the most pernicious examples of fraudulently misleading the public, in a 1971 CBS “Face the Nation” interview, the President of Philip Morris denied “that cigarettes posed a health hazard to pregnant women or their infants,” despite the fact that he had been notified to the contrary by his company’s own internal research division. He conceded that while it is true that "babies born to women who smoke are smaller, they're just as healthy as babies born to women who do not smoke,” adding grimly that "some women would prefer having smaller babies." Six years later one of his vice-presidents notified him of the results of a joint study with other Tobacco Companies which concluded “that exposure to cigarette smoke causes emphysema” but he never changed his public position. He was but one of the numerous executives, CEO’s Vice-Presidents, scientists, and heads of R&D divisions at each of the major Companies who had engaged in similar public conduct. The Court pointed out an assertion by a Philip Morris Vice-President that “[n]obody has yet been able to find any ingredient as found in tobacco or smoke that causes human disease.” Twenty-eight years after Reynolds scientists had conceded that the presence of carcinogenic compounds was “now well established,” a company press release continued to declare the subject “an open controversy.”

Moreover, the Tobacco Companies’ employees and attorneys were also involved in “destroying documents relevant to their pubic and litigation positions and suppressing or concealing scientific research” which contravened their public position. Indeed, these numerous false statements led the Court of Appeals to conclude that “[t]he fact that Defendants continually denied any link between smoking and cancer … suggested that they themselves consider the matter material,” thus providing one of the elements of fraud.

The industry seldom lost an opportunity to trivialize the allegations of nicotine addiction, likening it to “attachments” such as tennis, jogging, candy, rock music, Coca-Cola, girl-watching, and hamburgers – each an All-American custom. In one of the more absurd analogies, the CEO of Philip Morris was quoted in Time Magazine in 1997, as saying that cigarettes were no more addictive than his fondness for Gummi Bears, while a vice-president for public affairs at the Tobacco Institute analogized the putative addiction to being a “chocoholic.”

On such a record, Judge Kessler had found, “[i]t is absurd to believe that the[se] highly-ranked representatives and agents of these corporations and entities had no knowledge that their public statements were false and fraudulent.” The truth was, the Court of Appeals also found, that for decades those in control of the Tobacco Companies had known “that cigarette smoking causes disease, that nicotine is addictive, that light cigarettes do not present lower health risks … and that secondhand smoke is hazardous to health.”

Engineering Addiction. Worse yet, knowing that their products were already indiscriminately addictive, while denying that fact at every turn; the cigarette manufacturers actually “engineered their product around creating and sustaining this addition.” At the outset of the 1980’s, they began to spike the nicotine content by as much as 1.6%. The overwhelming evidence showed that they “designed their cigarettes to precisely control nicotine delivery levels and provide doses of nicotine sufficient to create and sustain addiction.” A 1988 Report by the U.S. Surgeon General concluded that "[c]igarettes are highly efficient delivery devices and are as addictive as drugs such as heroin or cocaine." Thus, while publicly denying that fact, what the Tobacco Companies did for decades was to engage in a process which they actually deliberately “manipulated it to sustain addiction.”

Having this knowledge clearly in mind, however, did not stop the Tobacco Companies from continuing to proclaim their denials and disbelief of the plain and compelling evidence. In one of the most notorious incidents, on April 14, 1994, the CEO's of Philip Morris, R.J. Reynolds, U.S. Tobacco, Lorillard, Liggett, Brown & Williamson, and American Tobacco, the seven largest Tobacco Companies in the country, appeared under subpoena before a subcommittee of the House Committee on Energy and Commerce and in response to inquiries from then Congressman (now Senator) Ron Wyden of Oregon each stated under oath that he "believe[d] that nicotine is not addictive.”

Low Tar Cigarettes. Beyond that, the Tobacco Companies’ creating and marketing an “alternative” to heavy-duty smoking was also a pernicious ploy. The District court had found that the companies “engaged in massive sustained and highly sophisticated marketing and promotional campaigns to portray their light brands as less harmful than regular cigarettes.” They “marketed and promoted their low tar brands to smokers – who were concerned about the health hazards of smoking or considering quitting – as less harmful than full flavor cigarettes despite either lacking evidence to substantiate their claims or knowing them to be false.” Following the simple analogies of some of their executives, the Companies analogized their light and low tar cigarettes to low caffeine sodas and low fat cookies.

The truth, the Trial Court found, was that they had “known for decades that filtered and low tar cigarettes do not offer a meaningful reduction risk, and that their marketing which emphasized reductions in tar and nicotine was false and misleading.” By the beginning of the 1970’s, the Tobacco Companies “were aware that lower tar cigarettes are unlikely to provide health benefits because they do not actually deliver the low levels of tar and nicotine as advertised.” This is because habitual smokers would modify their smoking behavior with these brands by taking more frequent puffs, inhaling more deeply, holding the smoke in their lungs longer, or simply by smoking more cigarettes. As early as 1978, the British-American Tobacco Company was informed in a report that longtime smokers who switched to the low-tar brand “will in fact increase the amounts of tar and gas phase that they take in, in order to take in the same amount of nicotine.” As a result of this “nicotine-driven behavior,” any benefits of these low-tar brands were lost. Beyond that, those who used the low-tar brand were smoking more packs, thus increasing their purchases, and enhancing company profits into the bargain.

The Court of Appeals concluded that the hundreds of example of such evidence provided “sufficient evidence from which to conclude that Defendants’ executives, who directed the activities of the Defendant corporations and their joint entities, knew about the negative health consequences of smoking, the addictiveness and manipulation of nicotine, the harmfulness of secondhand smoke, and the concept of smoker compensation, which makes light cigarettes no less harmful than regular cigarettes and possibly more” so since they result in increased attempts at nicotine maintenance.

Secondhand Smoke. The Court further found that “internal industry documents revealed that … [the Tobacco Companies] believed the public perception of secondhand smoke would determine the industry’s survival and that secondhand smoke research by the cigarette manufacturers was a sensitive issue due to the absence of ‘objective science’ supporting their position and the risk that their own research would lead to unfavorable results.” The Tobacco Companies then set up a scientific front organization euphemistically styled the Center for Indoor Air Research to feign “independence” whose assignment was to generate “marketable science” to “use for public relations purposes.” As early as the 1970s, their own research revealed the lethal hazards of secondhand smoke. A Philip Morris scientist forwarded with approval an outside report which concluded that secondhand smoke caused “significant damage to airway function” in exposed nonsmokers. Two years later the company’s own research concluded that it is “more irritating and/or toxic … than main stream smoke inhaled by the smokers” themselves. At about the same time in the early 1980,s the Tobacco Institute nevertheless criticized an independent study showing a strong correlation between secondhand smoke and lung cancer as “suffering from a statistical flaw” when the evidence showed that the Institute “knew at the time not only that the statistical error did not exist, but also that the study was in fact correct.”

Review of Remedies. The District Court imposed no fines but found that Philip Morris, Reynolds, Lorillard, American, and British-American were likely to commit future RICO violations, rejecting their argument that the injunction was unnecessary in light of their obligations under the Master Settlement Agreement emanating from the nationwide tobacco litigation in the mid-1990’s, because these Defendants were still not in full compliance with it. Liggett alone was excluded from the District Court’s general injunction because it had voluntarily withdrawn from the RICO conspiracy, admitted that smoking is addictive and causes cancer, voluntarily restricted its advertising, and cooperated with the Government in its case against the other Tobacco Companies. The other seven Companies and their subsidiaries were enjoined them from false and misleading statements and advertising and from committing further RICO violations, from setting up false research fronts such as the Tobacco Institute, were ordered to cease using any express or implied health benefit claims regarding light or low tar cigarettes; required to grant the Government and the public access to all industry documents disclosed in the litigation and to provide additional data to the Government; and were prohibited from selling or transferring their brands, product formulas, and business entities to others who were subject to the injunction, or to conduct such business outside the United States.

The District Court denied the remainder of the Government’s requests for the imposition of a national smoking cessation program, with a special provision for young smokers; a public education and counter-marketing campaign; appointment of a special monitor to restructure the Tobacco Companies themselves; and to make public all internally-developed health and safety risk information about their products.

On appeal, the Court independently assessed whether each company presented a “reasonable likelihood of further violations” and found that the general prohibitory injunction against future RICO violations and against making future false and misleading statements were sufficiently specific to withstand challenge. The Tobacco Companies were successful, however, in reversing the application of the general injunctive relief as to their “subsidiaries” because the record did not disclose the degree of control that the Companies had over various such entities. In addition, the District Court’s proscription against making health claims on low tar products was remanded for modification to limit it to instances which had no domestic effect.

The Tobacco Companies also challenged the mandatory injunction that they initiate a public program to inform present and prospective smokers of the addictiveness and major health dangers of cigarettes in general and the lack of any significant health benefit from light/low tar cigarettes, on the grounds that these requirements were imposed on them without sufficient notice and therefore amounted to a denial of due process of law. The Court of Appeals rejected this argument, finding that the massive nature of the litigation amply provided the Defendants with the scope of potential remedies. “Requiring Defendants to reveal the previously hidden truth about their products,” the Court found, “will prevent and restrain them from disseminating false and misleading statements, thereby violating RICO, in the future.”

As one of the methods for issuing corrective information, the District Court had required the Companies to affix an “onsert” to each pack of cigarettes disclosing the issues of addictiveness and the link to cancer and other diseases. The Court rejected the Companies’ argument that this did not comply with the requirement of Cigarette Labeling Act that such warnings be “on” the package, not affixed to it. At the same time, however, the Court of Appeals found that the District Court’s requirement of point-of-sale counter displays was too intrusive on uninvolved retailers such as convenience stores, and vacated that requirement with instructions on remand for the District Court to reconsider its point-of-sale injunction with the rights of retailers in mind.

Finally, the Court of Appeals swept aside the Tobacco Companies’ First Amendment argument as to protected commercial speech with the simple statement that “it is well settled that the First Amendment does not protect fraud” and that “[h]owever broad the First Amendment … may be, it cannot be stretched to cover … known falsehoods.”

It is rare to find a more excoriating appellate review of a defendant’s failed case, especially at the hand of Judges whose backgrounds might otherwise have led one to predict a less scathing, if not altogether different, result. The case is United States v. Philip Morris USA, Inc., et al., U.S.App.D.C. No. 06-5267 (May 22, 2009) and it the full text may be found and downloaded at http://www.cadc.uscourts.gov/bin/opinions/allopinions.asp.