Contact FreedomWorks

400 North Capitol Street, NW
Suite 765
Washington, DC 20001

  • Toll Free 1.888.564.6273
  • Local 202.783.3870

Press Release

    Issue Analysis 92 - The Federal Government Has No Legal Case Against the Tobacco Companies

    06/14/1999

    In his State of the Union Address, President Clinton announced that the Justice Department would sue the tobacco companies. This directly contradicted earlier testimony Attorney General Janet Reno provided the Senate Judiciary Committee, indicating the federal government had no independent cause of action to bring such a lawsuit. Now the administration is seeking $20 million, largely to hire lawyers who can help them determine how and where to file their lawsuit. A closer look at the legal theories, however, indicates that the administration does not have a viable case.
    Last year, an outrageous transfer of wealth occurred – with as much as $250 billion going from the pockets of smokers (many of whom tend to be in lower income brackets) to state governments and private contingency-fee trial lawyers. This transfer was the result of a settlement entered into by the tobacco companies after a number of states filed lawsuits against them, but not before some states changed their laws to give the government an unprecedented upper hand in court.

    At the time, the federal government admitted it had no independent cause of action upon which to sue the tobacco companies.1 As a result, the federal government pursued two strategies for getting its hands on tobacco dollars: (1) push a settlement through Congress that included a federal excise tax hike on cigarettes; and (2) try to recoup Medicaid dollars paid to the states as a "tax" on their subsequent settlement. Rebuffed on both fronts by Congress, the Clinton administration has now changed its tune and apparently decided to bring its own lawsuit.

    In his 1999 State of the Union address to the nation, President Clinton announced that the Department of Justice is preparing a lawsuit against the tobacco companies to recover federal funds paid out as a result of alleged tobacco-related illnesses. The Department of Justice also has requested $20 million in new funds, in part to hire 40 attorneys to help determine how and where to bring its case. They have already hired the same trial lawyer who brought Minnesota’s tobacco lawsuit, Michael Cerisi.

    The Clinton administration will have a difficult time making its case against the tobacco industry. Existing law makes it difficult, if not impossible, for the government to prevail. The Clinton administration's only alternative may be to change existing law to make it easier for them to sue. However, the administration will have to tread lightly. At least one state court has overturned a statute passed to facilitate a tobacco case, and the Supreme Court of the United States will be loathe to uphold any law that strips away constitutional due process protections.

    What follows is a brief discussion of the statutes under which the Clinton administration may seek to bring a lawsuit. Past judicial interpretations of these statutes, as well as their legislative histories, all indicate that the proposed lawsuit would have little, if any, merit.

    The Government Cannot Bring a Successful Antitrust Claim
    The incentive to collect treble damages may spur the Clinton administration to bring an antitrust claim that the tobacco companies conspired to restrain competition and, as a result, suppressed information about the dangers of smoking. Such a conspiracy, the Clinton administration may argue, violates Section 1 of the Sherman Act.2 Further, they could argue that it is because of this alleged conspiracy, more individuals developed smoking-related health problems, causing the government to incur the medical costs it now seeks to recoup.

    Again, the government is trying to bring a claim under a statute that does not permit such a claim. The purpose of the antitrust laws is to protect competition. As such, antitrust claims must be based on injuries resulting from harm to competition.3 The government, therefore, cannot establish that it suffered an antitrust injury because it is not a "competitor" in the market for tobacco products. Moreover, the federal courts have consistently rejected Section 1 Sherman Act antitrust claims in cases to recover tobacco-related health care costs.4

    A Federal RICO Claim Against the Tobacco Industry Should Also Fail
    Bringing a claim to recover the cost of smoking-related illnesses under the Racketeer Influenced and Corrupt Organizations Act (RICO) would be perhaps the administration's most reaching legal maneuver. Here, too, the administration would be seeking treble damages to further fuel the growth of government, as well as legal costs. Again, the Clinton administration will have a very difficult time making a successful RICO claim.

    Congress designed the RICO Act in 1970 to assist in bringing criminal and civil legal actions against organized crime. Under RICO, a person injured in his business or property by a pattern of criminal activity can bring a civil claim. However, federal courts have specifically held that, "Congress did not intend to authorize treble damage actions by the United States pursuant to [RICO]."5 The legislative history also makes it clear that Congress did not intend for RICO to provide the United States with a civil cause of action for treble damages. During the debate on RICO, an amendment that would have provided for damages to the United States was eventually withdrawn.6

    In addition, the alleged harm to the federal government may be found to be too remote for the United States to recover damages under RICO. In order for a RICO claim to succeed, there must be a "direct relationship" shown between the injury and the conduct that allegedly caused it. In Holmes v. Securities Investor Protection Corp., the Supreme Court ruled that the government could not bring a RICO claim to recover for harm it suffered as a result of a third party’s injuries.7 In the case against the tobacco companies, it is the smoker, not the government, who suffered the alleged direct injury. Moreover, in several other tobacco cases, the courts have been unable to find the "direct relationship" required by RICO.8

    Finally, the courts have held that RICO only allows recovery for injuries to a business or property – not for personal injuries or health care costs, such as those covered under the Medicare program.9

    The Medical Care Recovery Act Does Not Supply the Administration With a Clear Cause of Action
    In United States v. Standard Oil Co. of California,10 the United States Supreme Court ruled that, in the absence of a statute, the federal government had no direct and independent right of action to recover the costs of medical care provided to a serviceman injured as a result of third-party negligence. In response, Congress passed the Medical Care Recovery Act (MCRA) to allow the federal government to independently file suit to recover its costs for medical treatment provided to military personnel and other federal employees that resulted from injuries caused by third-party negligence.

    The Clinton administration has said that it will most likely base its claim against the tobacco companies on MCRA, arguing that because the government paid for smoking-related illnesses, they have a direct and independent cause of action against the tobacco companies. Statutory language and court interpretations of this statute, however, all indicate that MCRA does not provide a basis for the government’s proposed suit against the tobacco companies.

    First, the statute and its legislative history make clear that MCRA only applies to recovery for servicemen and other federal personnel’s health-care-related costs. Congress enacted MCRA because "[s]tatutes providing for care by the Department of Defense to military personnel and their dependents, the Public Health Service to Coast Guard personnel and other classes of persons, and the Veterans’ Administration to veterans, either [were] silent or not specific concerning the Government’s right of action to effect such recovery."11 Conspicuously absent from these reports is any suggestion that MCRA applies to anyone other than the above-mentioned classes.

    Second, MCRA passed before Medicare was enacted and clearly was not intended to be used to recover Medicare dollars. Third, in the three decades since MCRA’s enactment, the federal government has never brought a MCRA claim seeking compensation for money paid under the Medicare program. If the government had such authority, it surely would have used it. Congress instead amended the Medicare statute to add the Medicare Secondary Payer provisions, giving the government the authority to file lawsuits against specific third-party insurers to recover Medicare costs.12

    The Medicare Second Payer Act Does Not Provide a Cause of Action Against the Tobacco Companies
    The Clinton administration also may seek to sue the tobacco companies under the Medicare Secondary Payer (MSP) provisions of the Medicare statute. These provisions were added to the Medicare statute in 1980 to make certain parties (such as insurers of parties committing torts as well as other insurers, workers compensation plans and group health plans) liable for Medicare costs. The act did not include provisions allowing the government to take action against the alleged wrongdoers themselves.

    In 1984, Congress amended the Medicare statute again, providing authority for the government to file lawsuits against specific third parties.13 The government remains limited, however, in the number of specified entities from whom it can recover costs. The MSP provides, in pertinent part:

    Action by United States: In order to recover payment under this subchapter for such an item or service, the United States may bring an action against any entity which is required or responsible (directly, as a third-party administrator, or otherwise) to make payment with respect to such item or service (or any portion thereof) under a primary plan . . . or against any other entity (including any physician or provider) that has received payment from that entity with respect to the item or service, and may join or intervene in any action related to the events that gave rise to the need for the item or service.14

    Under the statute, "primary plan" is defined as "a group health plan or large group health plan … a workmen’s compensation law or plan, an automobile or liability insurance plan (including a self-insured plan) or no fault insurance ...."15

    A problem the government must overcome in a suit against the tobacco industry based on the MSP is the Act’s limitations on whom the government may directly sue to recover Medicare costs. In particular, the language of the Act does not allow actions against specific tortfeasers, which the tobacco companies are alleged to be. For example, assume ACME Insurance Company insures a product manufacturer and the manufacturer’s product injures individuals whose medical expenses were paid by Medicare. Pursuant to the MSP, the federal government could sue only ACME Insurance Company—and not the product manufacturer.

    While the federal courts have not ruled on whether the MSP allows the government to bring such an independent action to recover Medicare costs from a third-party tortfeaser, they have consistently ruled that the MSP provides the government with a right to recover Medicare costs only from third-party insurers. This interpretation is consistent with the MSP’s legislative history.

    Changing the Laws to Strengthen the Government's Hand is Unfair and Unconstitutional
    Since even the administration has questioned whether it has a cause of action to bring a tobacco suit, the idea has been discussed of changing the MSP and/or MCRA to "clarify" that the government has an independent right of action. 16 The purpose, however, would not really be to clarify the laws but to give the government broad new legal powers against private defendants. A few states took a similar approach in their tobacco lawsuits, and their claim that only tobacco would be targeted served to anesthetize the political community to both the bad policy implications of such laws and the insidious abuse of power they represent. There is nothing inherent in these laws that would limit their applicability to other industries. Fortunately, at least one state court has already rejected as unconstitutional a state law passed to facilitate a tobacco suit.17

    Passing laws that retroactively expose any party to a mass federal tort is bad policy. Changing the law in the midst of the government’s already announced plans to sue the tobacco industry would give the government a new cause of action against the industry for acts the industry engaged in well before this new legislation could take effect. Such an act would not only be unfair; it would violate the constitutional right to substantive due process. Moreover, legislation permitting a direct cause of action against the tobacco companies would be equally applicable to other products and services, opening the floodgates to an avalanche of other lawsuits. To avoid such criticisms, the administration may attempt to limit the scope of any legislation to focus exclusively on the tobacco industry. But this approach would also face serious challenges. Not only would this be viewed as an unconstitutional bill of attainder, it would also violate the most fundamental principle of equal justice under the law.

    Another shocking aspect of the new laws being suggested is that they could strip the defendants of their traditional defenses in court. The administration may claim that because its case rests upon an independent cause of action, it would not need to name individual injuries or even individual claimants on whose behalf they are acting. The government would file a suit against, in this case, all tobacco companies on behalf of the government itself, not on behalf of any injured parties or even taxpayers. This is far different from the typical subrogation claims brought by the government and others to recover specific dollars spent on behalf of a named party.

    Although MCRA originally gave the government only a subrogation claim,18 the legislation was amended to provide an independent cause of action. But it is important to note that the courts have rejected the notion that this independent statutory claim allows the government to avoid substantive defenses that the party being sued could raise regarding actions by the injured party. In fact, the regulations implementing MCRA state that "[t]he existence of the government’s right [to recover] … is dependent upon establishing the liability of the third person under ordinary principles of law,"19 and that "[r]ecovery is allowed only if the injury or diseases resulted from the circumstances creating a tort liability under the law of the place where the injury occurred."20

    Normally, defendants in a tort claim have the right to defend themselves based on the conduct of the person suing. In other words, "How much of the injury was caused by the actions or negligence of the injured parties themselves?" If an injured party is mostly responsible for inflicting damages on himself, the defendant can ask the jury to take that into account. Also, defendants have the right to defend themselves by asking the plaintiff to provide proof of causation – they can ask the plaintiff to demonstrate what specific injury was caused by what specific action. The legislation being discussed could strip defendants in third-party Medicare claims of these fundamental defenses.

    Here, given the impracticality of the government litigating every individual tobacco claim and the fact that recovery would be limited to medical costs proved to have been caused by the tobacco companies, the government could try to pursue an action on an aggregate basis. In other words, the government would sue the tobacco companies as a group, without identifying specific harm caused by specific actions. Current case law, however, suggests that a trial based solely on statistics would be unconstitutional.21 Moreover, unless the government brings its case in all 50 states and the District of Columbia, it would violate MCRA’s requirement that the "law of the place where the injury occurred" apply.

    Another way the government may try to avoid having to prove which tobacco company caused each individual illness is to argue that liability be determined based on each companies’ market share. This doctrine was used by the courts to address problems raised in diethylstilbestrol (DES) lawsuits. However, the two factors the court emphasized in applying the market-share theory of liability in DES cases are not applicable to the tobacco case. First, the court determined that all DES was exactly the same, whereas the risk allegedly associated with different tobacco products may vary widely. Second, the DES product could not be traced to any specific producer, whereas it is possible to determine which tobacco products and brands each smoker used. Given these two "tests," the courts have consistently refused to apply market-share liability in cases involving products other than DES.

    The True Agenda: An End Run Around the Constitution to Raise Taxes
    Whichever statute the administration chooses as the basis for its claims, it will be grasping at legal straws to succeed in the courts where it has failed in the Congress. According to The Wall Street Journal, "Each of these statutes ... would require leaps of logic and backdoor strategies that offend the legal sensibilities of some career Justice Department lawyers."22 As former Labor Secretary Robert Reich admitted in February, "Many legal experts doubt the federal government has the authority to launch such a lawsuit [against the tobacco companies]. But that is irrelevant. The lawsuit would be a bargaining chip for settling the case. The administration wants cigarette makers to agree to a 55-cents a pack tax...."23

    Last year, Congress denied such a tax increase. If Congress allows the executive branch to now petition the judicial branch for revenues to be spent at the pleasure of the executive, the Congress will effectively cut itself off from one of its own primary responsibilities. Article I, Section 7 of the Constitution states that "All bills for raising revenue shall originate in the House of Representatives ...." Article I, Section 9 states that "No money shall be drawn from the treasury, but in consequence of appropriations made by law ...." Our Founding Fathers made plain their intention that Congress, not the executive or the judiciary, be the branch of government with the power to raise and spend money, and they insisted that any bill introduced to raise revenue must originate among the members of the House of Representatives -- the branch of government most accountable to the people.

    The administration's effort to circumvent the Constitution and contort existing statutes into a means of extorting money from a legal industry is reprehensible. Any disinterested court should dismiss the Clinton administration's case at first glance. Moreover, Congress should exercise its appropriations and oversight authority and stop the administration from wasting any more of the taxpayers’ money pursuing such a baseless, unconstitutional claim.

    1Attorney General Janet Reno, Testimony before the U.S. Senate Judiciary Committee, April 30, 1997.

    215 U.S.C. @ 1.

    3See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977).

    4See, e.g., Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., 17 F. Supp. 2d 1170 (D. Ore. 1998); Southeast Florida Laborers Dist. Health and Welfare Fund v. Phillip Morris, 1998 WL 186878 (S.D. Fla. April 13, 1998); Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip Morris, Inc., 1998 WL 476265 (N.D. Cal. Apr. 30, 1998); Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., 7 F. Supp. 2d 277 (S.D.N.Y. 1998); New Jersey Carpenters Health Fund v. Philip Morris, Inc., 1998 WL 547126 (D.N.J. Aug. 26, 1998).

    5U.S. v. Bonanno Organized Crime Family of La Cosa Nostro, 879 F.2d 20, 26 (2nd Circ. 1989).

    6116 Cong. Rec. 35, 346-47 (1970).

    7503 U.S. 258, 268-71 (1992).

    8See Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip Morris, Inc., 1998 WL 476265 (N.D. Cal. Apr. 30, 1998); Texas Carpenters Health Benefit Fund v. Philip Morris, Inc., 1998 WL 685364 (E.D. Tex. Aug 31, 1998); Southeast Florida Laborers Dist. Health and Welfare Fund v. Phillip Morris, 1998 WL 186878 (S.D. Fla. April 13, 1998); Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., 1998 WL 544305 (D. Ore. Aug. 3, 1998).

    9See City and County of San Francisco v. Philip Morris, Inc., 957 F. Supp.1130, 1138 (N.D. Cal. 1997); Bast v. Cohen, Dunn & Sinclair PC, 59 F. 3rd 492, 495 (4th Cir. 1995); Doe v. Roe, 958 F.2d 763, 767 (7th Cir. 1992).

    10332 U.S. 301 (1947).

    11H.R. Rep. 1534, 87th Cong., 2d Sess. 5 (Mar. 28, 1962); S. Rep. 1945, 87th Cong., 2d Sess. 5 (Aug. 28, 1962).

    12See 42 U.S.C. @ 1935(b)(2).

    13See 42 U.S.C. @@ 1395y(b)(2)(B)(ii) and (iii).

    1442 U.S.C.A. @ 1395y(2)(B)(ii).

    1542 U.S.C.A. @ 1395y(2)(A)(ii).

    16William Armistead, "Federal Mass Tort Litigation: An Insidious Abuse of Power," Capitol Comment 233 published by Citizens for a Sound Economy, June 3, 1999.

    17See Agency for Health Care Administration v. Associated Industries of Florida, 678 So.2d1239 (1996).

    18H.R. 298, 87th Cong., 1st Sess. (1961).

    1932 C.F.R. Sec. 199.12 (e)(4) (1998).

    2032 C.F.R. Sec. 537.22 (a)(1) (1998).

    21In re Fibreboard, 893 F.2d 706 (5th Cir. 1990) and Cimino v. Raymark Industries, Inc., 151 F.3rd 297 (5th Cir. 1998). Both cases addressed consolidating asbestos claims, and the Fifth Circuit found that applying the results of a "sampling" of plaintiffs to the entire group not only violated the defendant’s right to a jury trial but also violated the Erie doctrine, which requires courts to apply in most cases the law of the state in which the court is located. Here, Texas law applied and it required liability to be determined as to individuals, not groups.

    22"U.S. Faces Hurdles to Recovering Tobacco Health Costs," The Wall Street Journal, May 27, 1999, p. A28.

    23"Regulation is Out, Litigation is In," USA Today, Feb. 11, 1999, p. 15A.