Illegal settlement

Jacob Sullum
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Posted: Oct 22, 2005 12:05 AM

The Justice Department's lawsuit against the country's leading tobacco companies accuses them of "racketeering." Yet the government's lawyers are the ones behaving like mobsters. Once you cut through the legalese, the message they're sending is clear: "Nice business you've got here. It would be a shame if something happened to it."

 Like mafia thugs extorting money from a shopkeeper, the Justice Department cannot follow through on its threat without breaking the law. In a decision the Supreme Court recently declined to review, the U.S. Court of Appeals for the D.C. Circuit said there was no legal basis for the government's demand that cigarette makers "disgorge" $280 billion -- a sum that exceeds the combined value of the companies' stock.

 The federal lawsuit was inspired by a 1998 deal under which 46 states got billions of dollars a year from the major cigarette makers, the tobacco companies got protection from liability and competition, and smokers got stuck with the bill. That arrangement, known as the Master Settlement Agreement (MSA), undermined the rule of law, usurped the authority of state legislatures and Congress and set a precedent for shaking down politically unpopular industries.

 At first the Justice Department was reluctant to imitate state lawsuits seeking compensation for the cost of treating smoking-related diseases under Medicaid. In 1997 Attorney General Janet Reno said she lacked statutory authority to pursue a similar claim based on Medicare expenses.

 After the MSA showed you didn't need a viable legal theory to squeeze protection money from tobacco companies, Reno changed her mind. But this time around, the cigarette makers stood their ground, and in 2000 U.S. District Judge Gladys Kessler threw out the government's Medicare claim.

 That decision forced the Justice Department to rely on the argument that cigarette makers had violated the Racketeer Influenced and Corrupt Organizations Act by committing various acts of "mail fraud" and "wire fraud" that tricked people into smoking. The government's lawyers said the industry's "pattern of racketeering activity" had generated "ill-gotten gains" of at least $280
billion.

 But as the D.C. Circuit noted last February, the racketeering law's civil provisions do not authorize the government to seek the surrender of profits from illegal activity. Any remedies must be "forward-looking," designed not to punish past behavior but to prevent future racketeering.

 It's doubtful that even the government's remaining demands -- $10 billion for a smoking cessation program, $4 billion for anti-smoking "education," and financial penalties that would be imposed if the number of smokers under 21 does not decline at a government-specified rate -- meet this test. Judge Kessler, who presided over a nine-month trial that ended in June, has yet to decide whether the tobacco companies are guilty of racketeering and, if so, what remedies are appropriate.

 Although the federal lawsuit looks like a flop, the example set by the MSA remains worrisome. Already it has inspired a legal assault on gun manufacturers, and it's not hard to imagine government-sponsored attacks against distillers, fast food chains and other businesses blamed for their customers' risky choices.

 The ramifications extend beyond U.S. borders. Last month the Canadian Supreme Court approved British Columbia's lawsuit demanding compensation from tobacco companies for smoking-related medical expenses, and since then Quebec and Nova Scotia have announced similar suits.

 Anyone troubled by this trend should root for the Competitive Enterprise Institute, a D.C.-based think tank that recently filed a federal lawsuit seeking to overturn the MSA. The suit argues that the deal violates the Constitution's requirement that interstate compacts be approved by Congress.

 There's reason to believe Congress would have objected to the MSA. In 1997 the attorneys general who put the agreement together asked Congress to endorse a similar deal, implicitly conceding that the Constitution required such approval. When Congress turned them down, they decided they didn't need permission after all.

 Instead of being punished for their lawlessness, these extortionists have reaped political benefits as foes of Big Tobacco. Talk about ill-gotten gains.