United States District Court, District of Columbia
September 28, 2000
UNITED STATES OF AMERICA, PLAINTIFF,
PHILIP MORRIS INCORPORATED, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Gladys Kessler, District Judge.
Plaintiff, the United States of America ("the Government"),
brings suit against eleven tobacco-related entities ("Defendants")*fn1
to recover health care expenditures the Government
has paid for or will pay for to treat tobacco-related illnesses
allegedly caused by Defendants' tortious conduct. The Government
also asks this Court to enjoin Defendants from engaging in fraudulent
and other unlawful conduct and to order Defendants to disgorge the
proceeds of their past unlawful activity.
The Government makes four claims against Defendants under
three statutes. The first statute, the Medical Care Recovery Act
("MCRA"), 42 U.S.C. § 2651-2653, provides the Government with a
cause of action to recover certain specified health care costs it
pays to treat individuals injured by a third-party's tortious
conduct (Count 1). The second statute is a series of amendments
referred to as the Medicare Secondary Payer provisions ("MSP"),
42 U.S.C. § 1395y, which provides the Government with a cause of
action to recover Medicare expenditures when a third-party caused
an injury requiring treatment and a "primary payer" was obligated
to pay for the treatment (Count 2). The third statute is the
Racketeer Influenced and Corrupt Organizations Act ("RICO"),
18 U.S.C. § 1961-1968 (Counts 3 and 4), which provides parties
with a cause of action to recover treble damages due to injuries they
received from a defendant's unlawful racketeering activity, and to
seek other equitable remedies to prevent future unlawful acts.
This matter is now before the Court on Defendants' motions to
dismiss for failure to state a claim.*fn2
of the motions, oppositions, replies, the applicable case law, the
arguments presented at the motions hearing, and the entire record
herein, for the reasons discussed below, the Non-Liggett Defendants'
motion to dismiss for failure to state a claim [#72] is granted
as to the MCRA claim (Count 1), granted as to the MSP claim
(Count 2), and denied as to the RICO claims (Counts 3 and 4).
Liggett's separate motion to dismiss for failure to state a claim [#70]
Summary of Legal Conclusions
The United States Government has brought this massive civil
action against the tobacco industry, seeking billions of dollars
in damages for what it alleges to be a lengthy unlawful conspiracy
to deceive the American public about the health effects of smoking
and the addictiveness of nicotine. In order to prevail on these
allegations, the Government has offered three distinct legal
theories of liability. Two of these theories are being rejected,
and therefore, Counts 1 and 2 of the Complaint will be dismissed.
A significant portion of the Government's case, however, will go
forward, namely its claims under RICO for disgorgement of all
profits Defendants derived from activities, beginning in 1953 and
continuing to the present, related to the alleged pattern of
racketeering activity. Consequently, Counts 3 and 4 of the
Complaint will proceed. In sum, while the Government's theories
of liability have been limited, the extent of Defendants'
potential liability remains, in the estimation of both parties, in
the billions of dollars. The scope and complexity of this case
will continue to pose significant challenges to the parties and to
1. The Government's Medical Care Recovery Act claim will be dismissed.
The congressional intent in enacting MCRA in 1962 — at which time
Medicare did not exist and the Federal Employees Health Benefits Act
was still in its infancy — was to provide
a means for the Government to recover from third-party tortfeasors*fn4
medical expenses it had furnished for (primarily military)
employees. Applying the principles from a recent U.S. Supreme Court
decision, FDA v. Brown & Williamson Tobacco Corp., —
U.S. —, 120 S.Ct. 1291
(2000), this Court concludes that Congress
did not intend that MCRA be used as a mechanism to recover Medicare or
FEHBA costs. The Court reaches this conclusion after examining the broad
context in which MCRA has existed for 38 years — including its
legislative history, the construction given it by those agencies charged
with its interpretation, a body of long-standing state and federal case
law, and its total non-enforcement by the Department of Justice for
thirty-seven of those thirty-eight years.
2. The Government's Medicare Secondary Payer claim will also be
dismissed. MSP permits the Government to seek reimbursement from
insurance entities, when Medicare has paid for health care
expenses for which those entities should have paid. Although MSP
also allows the Government to bring suit against non-insurance
entities required to pay for health care costs under a "self-insured
plan," the Government's Complaint contains no allegation that Defendants
have at any time maintained a "self-insured plan," as that term is
defined by MSP and the relevant regulations. Further, it is clear
that Congress did not intend MSP to be used as an across-the-board
procedural vehicle for suing tortfeasors, which is precisely how the
Government attempts to use the statute in this case.
3. The Government's Racketeer Influenced and Corrupt Organization Act
claims will be permitted to go forward. The Government has adequately
alleged, which is all it must do at this early stage in the litigation,
the necessary elements of a RICO claim: that Defendants formed an
"enterprise" which engaged in the requisite "pattern of racketeering
activity." In addition, given the nature and scope of Defendants' alleged
prior misconduct, the Government has adequately pleaded its basis for
requesting injunctive relief, including the specific remedy of
II. Standard of Review
A "complaint should not be dismissed for failure to state a claim unless
it appears beyond doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief." Conley v.
Gibson, 355 U.S. 41, 45-46 (1957); see also Davis v. Monroe County
Bd. of Educ., 526 U.S. 629, 654 (1999). At the motion to dismiss
stage, "the only relevant factual allegations are the plaintiffs'," and they
must be presumed to be true. Ramirez de Arellano v. Weinberger,
745 F.2d 1500, 1506 (D.C. Cir. 1984), vacated on other grounds,
471 U.S. 1113 (1985); Shear v. National Rifle Ass'n of Am.,
606 F.2d 1251, 1253 (D.C. Cir. 1979). Despite the sweeping breadth and
seriousness of the Government's allegations, their validity is not for this
Court to judge at this time.
III. Statement of Facts
The Government's Complaint describes in detail what it
alleges to be a four-decade long conspiracy, dating from at least
1953, to intentionally and willfully deceive and mislead the
American public about, among other things, the harmful nature of
tobacco products, the addictive nature of nicotine, and the
possibility of manufacturing safer and less addictive tobacco
products. Complaint ("Compl.") at ¶ 3. Defendants'
conspiratorial activity includes making numerous "false and
deceptive" statements and concealing documents and research in an
attempt to cover-up their deceit. Compl. at ¶ 5. According to
the Government, Defendants continue to "prosper and profit" from their
actions and will continue to do so into the future, unless restrained
by this Court. Compl. at ¶ 6. The specifics of the alleged
conspiracy are described below.
"In the 1940's and early 1950's, scientific researchers
published findings that indicated a relationship between cigarette
smoking and diseases, including lung cancer." Compl. at ¶ 30.
Tobacco companies "closely monitored" this research, conscious
that if the public became aware of these findings, the companies'
profits would likely decline and they would "face the prospect of
civil liability and government regulation." Compl. at ¶ 31.
To combat these possibilities, the chief executives of Defendants
American Tobacco, Brown & Williamson, Lorillard, Philip Morris,
and R.J. Reynolds met in late 1953 in New York City, where they
devised a concerted strategy to preserve and expand the market
for, and profits from, cigarettes. Compl. at ¶ 32.
According to the Government, the underlying strategy Defendants adopted
was simple: to deny that smoking caused disease and to consistently
maintain that whether smoking caused disease was an "open question."
Compl. at ¶ 34. To maintain and further this strategy, Defendants
issued deceptive press releases, published false and misleading articles,
destroyed and concealed documents which indicated that there was in fact a
correlation between smoking and disease, and aggressively targeted children
as potential new smokers. Compl. at ¶ 36.
One of the first major steps Defendants took was to announce
the formation of an entity initially known as the Tobacco Industry
Research Committee ("TIRC") and which later became known as the
Council for Tobacco Research ("CTR" or "Council").*fn6
This entity, which Defendants publicized widely as an objective
research body, published in January 1954 a full-page statement
that ran in 448 newspapers throughout the United States. Titled
"A Frank Statement to Cigarette Smokers," the statement asserted
that, according to "distinguished authorities," "there is no proof
that cigarette smoking is one of the causes" of lung cancer.
Compl. at ¶ 37. Defendants further stated: "We believe the
products we make are not injurious to health" — even though
Defendants' own employees had by this time "identified the
carcinogenic substances in tobacco smoke." Compl. at ¶¶ 37, 38.
Promising to aid and assist research into all phases of tobacco
use and health and to provide complete information to the public,
the publication stated that the newly formed Council would perform
independent, objective, and reliable research about the allegations
against smoking. Compl. at ¶ 37.*fn7
According to the Government, CTR was not independent, objective or
reliable. Its purpose was not to research issues of concern to the public,
but rather to serve as a "front" or "cover" for Defendants' conspiracy
to conceal the truth about smoking's health risks. Compl. at ¶ 60.
used CTR to fund "Special Projects" that were devised to counter
evidence of smoking's adverse health effects by providing alternative
explanations for tobacco-related diseases. Compl. at ¶ 65.
The Government alleges that these projects were designed
largely to generate research data and witnesses for use in
defending lawsuits and opposing tobacco regulation, rather than to
ascertain or improve the safety of Defendants' products. To
accomplish this objective, Defendants put attorneys in control of
the Council's research and devised strategies to withhold from
civil discovery critical information about the health effects of
cigarette smoking by improperly invoking the attorney-client
privilege and work-product doctrine. Id. If CTR research
ever "threatened to confirm the link between smoking and disease,"
Defendants exerted pressure on the scientists conducting the
research, so as to alter the results, terminate the research,
and/or conceal the findings. Compl. at ¶ 67.
In 1958, Defendants created another entity, the Tobacco Institute
("TI"), a "public relations organization" whose function was to keep
the public, the medical establishment, the media and the government
in the dark about tobacco's health risks, especially the "connection
between smoking and disease." Compl. at ¶ 42.
Defendants also entered into what they termed a "gentleman's
agreement" not to perform in-house research on smoking, health, or
the development of "safe" cigarettes. Compl. at ¶ 45. Each
Defendant enforced this agreement — a central tenet of the
conspiracy — by obstructing research efforts by any other company.
Even when individual companies performed limited in-house research,
the fundamental understanding remained intact: information that would
tend to establish the harm caused by cigarette smoking would be suppressed
and concealed. Compl. at ¶ 48.
The Government alleges that over the course of the conspiracy, Defendants
have made numerous misstatements concerning one item in particular:
nicotine. Defendants continually denied that nicotine is addictive, even
in the face of overwhelming evidence to the contrary. Compl. at ¶¶
71-72. For example, Defendant Brown & Williamson acknowledged internally
in 1963 that "we are . . . in the business of selling nicotine, an addictive
drug." Comp. at ¶ 72. Researchers hired by Philip Morris in the
1980's concluded that "in terms of addictiveness, `nicotine looked like
heroin'." Compl. at ¶ 73. Instead of making these results public,
however, Defendant Philip Morris threatened the researchers with legal
action, killed the lab animals, removed the lab equipment and closed the
lab down entirely. Id.
And in 1963, Defendant Brown & Williamson deliberately withheld from the
Surgeon General research on the addictiveness of nicotine. Compl. at ¶
74. When the Surgeon General finally concluded, based on independent
research, that nicotine is in fact addictive, TI attacked and criticized
the report as "an unproven attempt to find some way to differentiate smoking
from other behaviors." Id. Defendants have engaged in these and
numerous other acts of deception because they recognize that "getting
smokers addicted to nicotine is what preserves the market for cigarettes and
ensures their profits." Compl. at ¶ 71.
Not only have Defendants denied the addictive powers of
nicotine, but it is alleged that they have also taken non-public
actions to increase its potency and make cigarettes even more
addictive. Despite having used "highly sophisticated technologies,"
including the selective breeding and cultivation of tobacco plants,
to manipulate and increase the potency of nicotine in their cigarettes,
Compl. at ¶ 77, Defendants have repeatedly denied that they
manipulated the level of nicotine in their products. Compl. at ¶
79. A 1994 R.J. Reynolds advertisement, for example, states: "We do
not increase the level of nicotine in any of our products in order to
addict smokers." Compl. at ¶ 81. Defendants also marketed "light"
or "low tar/low
nicotine" cigarettes as being less hazardous to smokers, Compl.
at ¶ 86, even though individuals who smoke such cigarettes
are "not appreciably reducing their health risk." Compl. at ¶ 88.
The Government also alleges that Defendants suppressed
research regarding less hazardous cigarettes. Phillip Morris, for
example, conducted research which concluded that a "medically
acceptable low-carcinogen cigarette may be possible," but this
finding was never released to the public. Compl. at ¶ 105.
Indeed, Defendants have refused to acknowledge the possibility of
such a cigarette. Compl. at ¶¶ 108, 109.
The Government charges that Defendants have "aggressively
targeted their campaigns to children." Compl. at ¶ 96. R.J.
Reynolds' Joe Camel campaign is just one of the most well-known
examples of such tactics. Compl. at ¶ 97. Defendants have
advertised in stores near high schools, promoted brands heavily
during spring and summer breaks, given away cigarettes at places
where young persons congregate, paid for product placement in
movies with youth audiences, placed advertisements in magazines
with high youth readership, and sponsored sporting events, rock
concerts, and other events of interest to children. Compl. at ¶
96. Defendants have consistently made false and misleading
statements that their expenditures on advertising and marketing
were directed exclusively at convincing current smokers to switch
brands, not at enticing children. Compl. at ¶ 100.
The Government maintains that all the above misstatements,
and fraudulent and conspiratorial activity are ongoing. Although
Defendants have now admitted that there is "a substantial body of
evidence which supports the judgment that cigarette smoking plays
a causal role in the development of lung cancer and other diseases
in smokers," Compl. at ¶ 116, and have conceded that cigarettes
are "addictive," as that term is used by the public at large.
Compl. at ¶ 120, Defendants still market their products in
deceptive and unlawful ways; they conceal documents relating to
the health effects of cigarettes, nicotine and the true nature of
CTR; and they continue to pose a threat "to the health and
well-being of the American public." Compl. at ¶ 124.
The Government alleges that the harm caused by the
Defendants' decades-long conspiracy has compelled numerous
entities, including the government, to expend immense resources to
treat, alleviate and minimize the resulting disease and
devastation. Compl. at ¶ 6. In this action, the Government seeks
to recover some or all of the "$20 billion annually" it has spent
to treat the "injuries and diseases caused by defendants'
products." Compl. at ¶ 5. It also seeks various forms of
equitable relief, including the disgorgement of Defendants'
profits, to deter Defendants and others from engaging in similar
conduct in the future.
IV. Defendants' Motion To Dismiss*fn8
A. The Government's Medical Care Recovery Act Claim
In 1962, Congress enacted the Medical Care Recovery Act
("MCRA"), which provides in pertinent part:
In any case in which the United States is authorized or
required by law to furnish [or pay for]*fn9 hospital,
medical, surgical, or dental care and treatment . . . to a
person who is injured or suffers a disease, . . . under
circumstances creating a tort liability upon some third
person . . . to pay damages therefore, the United States
shall have a right to recover (independent of the rights of
the injured or diseased person) from said third person, or
that person's insurer,
the reasonable value of the care and treatment so furnished,
to be furnished, paid for, or to be paid for and shall, as
to this right be subrogated to any right or claim that the
injured or diseased person . . . has against such third
person . . .
42 U.S.C. § 2651(a), Pub.L. No. 87-693, § 1, 76 Stat. 593 (1962).
At first blush, MCRA's language might seem quite clear. The
statute generally provides the Government with a means to recover
from tortfeasors the health care costs it has expended on behalf
of victims of tortious conduct. If the Government has "paid for"
or "furnished" such care, it may seek reimbursement from the
individual or entity that caused the injury. The statute is
broadly worded: Congress could have restricted the Government's
ability to obtain reimbursement in any number of ways, both
substantively and procedurally, but it did not.
However, the specific question before this Court — and it is a
difficult one the resolution of which has enormous ramifications
— is whether MCRA, a statute enacted in 1962 and amended in a
minor fashion in 1996, covers, or was intended by Congress to cover,
payments made by the United States Government under Medicare and the
Federal Employees Health Benefits Act ("FEHBA")*fn10
tobacco-related illnesses allegedly caused by Defendants' tortious conduct.
Only a few months ago, the Supreme Court grappled with an
equally difficult issue of statutory interpretation in FDA v.
Brown & Williamson Tobacco Corp., ___ U.S. ___, 120 S.Ct. 1291
(2000), a case in which it had to decide whether the Food and Drug
Administration possessed authority to regulate tobacco products as
customarily marketed. While this Court fully recognizes that the
present case, unlike Brown & Williamson, does not involve "an
administrative agency's construction of a statute," thereby
triggering the two-step Chevron analysis,*fn11 120
S.Ct. at 1300 (citing Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984)), the general analytical
approach followed in Brown & Williamson as it relates to statutory
construction and congressional intent is nevertheless instructive
and illuminating. Like the Supreme Court in Brown & Williamson,
this Court's obligation is to ascertain congressional intent by
viewing a particular statute in the context of relevant congressional
action taken during and subsequent to its enactment. Accordingly, there
are significant principles articulated by the Brown & Williamson
Court that speak to how the instant case should be resolved.
One such principle is that subsequent legislative action may shed light
on congressional intent. "At the time a statute is enacted, it may have
a range of plausible meanings. Over time, however, subsequent acts can
shape or focus those meanings." 120 S.Ct. at 1306.*fn12 In
adopting subsequent statutes, Congress is presumed to act "against the
backdrop" of agency statements regarding the parameters of the agency's
authority to act under the original statute. Id. at 1306-07.
Another such principle is that agency "interpretations and
practices" should be given "considerable weight where they involve
the contemporaneous construction of a statute and where they have
been in long use." Davis v. United States, 495 U.S. 472, 484
(1990). In fact, congressional action (or inaction) can, in certain
circumstances, be viewed by courts as having "effectively ratified"
an agency's long-standing position. 120 S.Ct. at 1307.*fn13
A final principle announced by the Supreme Court — and one
which has more concrete application in the instant case — is that
Congress, "for better or for worse, has created a distinct regulatory
scheme for tobacco products." 120 S.Ct. at 1315. In conjunction with
this scheme, "Congress has persistently acted to preclude a meaningful
role for any administrative agency in making policy on the subject of
tobacco and health." Id. at 1313; see also
id. at 1309 (Congress' intent was to "preclude any administrative
agency from exercising significant policymaking authority on the subject
of smoking and health"); id. at 1315 (Congress has "repeatedly
acted to preclude any agency from exercising significant policymaking
authority in the area").
The principles delineated above lead this Court to the
conclusion that Congress did not intend MCRA to cover Medicare or
1. Legislative History
Recourse to MCRA's legislative history cannot by itself answer the
question presented (i.e., whether MCRA applies to Medicare
and FEHBA expenses), since the record relating to the statute's enactment
is virtually non-existent. Nevertheless, even the sliver of legislative
history that does exist provides the Court with "guidance" in understanding
how Congress meant MCRA to be interpreted. See National
Wildlife Federation v. Snow, 561 F.2d 227, 237 (D.C. Cir. 1976);
American Soc'y of Travel Agents v. Blumenthal, 566 F.2d 145,
166 (D.C. Cir. 1977) ("Legislative history can be and often is an
important instrument in the determination of congressional intent.")
(Bazelon, C.J., dissenting).
The parties agree, and the legislative history confirms, that
MCRA was enacted in response to a 1947 Supreme Court decision,
United States v. Standard Oil Co., 332 U.S. 301 (1947), which
held that the Government lacked a common law cause of action to
recover from tortfeasors expenses the Government had incurred in
treating military personnel under its health care programs. Id.
at 314-16. Standard Oil narrowly construed the Government's
authority to recover such expenditures and directed Congress to
enact appropriate legislation if it wished to provide the
Government with more expansive authority. Id. at 315-16.
For over a decade, Congress apparently ignored Standard Oil
and did nothing to provide the Government with a statutory cause of action
to recover the medical expenses resulting from care it had provided.
Finally, in 1960, thirteen years after Standard Oil was handed
down, the Comptroller General of the United States submitted a Report to
Congress entitled "Report On Review Of The Government's Rights And
Practices Concerning Recovery Of The Cost Of Hospital And Medical Services
In Negligent Third-Party Cases." See Govt's Opp'n, Appendix
("App.") at 5. The Report's purpose was to "ascertain the extent, adequacy,
and consistency of the rights and practices of the Government to
recover" the costs of health care it furnished to tort victims. Id.
In particular, the Report reviewed the ability of four government
agencies to recover their medical costs: the Department of Defense,
the Veterans Administration, the Department of Health Education and
Welfare's Public Health Service, and the Labor Department's Bureau
of Employees' Compensation. Id. at 6.
The Report explicitly referred to Standard Oil and what the
Comptroller General determined the consequence of that decision to be,
namely, that "each year the Government is not recovering several million
dollars of costs in negligent third-party cases." Id. at 14.
he Report labeled this outcome "inequitable" and declared that "the
Government should have the right in all cases to recover its costs of
treating those injured as a result of the negligence of third parties."
Id. at 10. The Comptroller General therefore recommended that
Congress adopt one of two options for remedying the problem: enact
legislation "in the form of either a general bill" or amend the statutes
governing "the specific agencies involved." Id. at 10, 20-21.
It should be remembered that Medicare, enacted in 1965, did not exist when
the Comptroller General issued his report, in 1960, but FEHBA did.
In response to the Comptroller General's Report, Congress chose the
alternative of enacting "a general bill" rather than amending statutes
agency by agency. According to the Senate Report on MCRA, the statute's
"purpose" was to
provide for the recovery by the United States from negligent
third persons for the cost of hospital, medical, surgical, or
dental care and treatment furnished by the United States,
pursuant to authority or requirement of law, to a person who
is injured or suffers a disease under circumstances creating
a tort liability upon such third person.
S. Rep. No. 87-1945 (1962), reprinted in 1962 U.S.C.C.A.N. 2637,
2637 (under heading "Purpose"). Both the House and Senate Reports
state that MCRA would enable the Government to recover expenses
under "[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." Id. at 2639; H. Rep.
No. 87-1534, at 5 (1962).
While this language would, by itself, suggest an intent to limit MCRA to
the cost of health care provided to members of the military, the very next
paragraph of the Senate Report discusses the manner in which the Government
would be able to recover payments made under the Federal Employees'
Compensation Act ("FECA").*fn14
Since that statute covers
civilian employees, it is clear that MCRA was not meant to be restricted
to the military.
The three documents described above (the Comptroller General's Report,
the Senate Report and the House Report) constitute MCRA's entire legislative
history. However, even more significant than what the legislative history
does contain (very little) is what it does not. Despite the fact that the
Comptroller General's Report expressly refers to FECA — which both
parties agree is covered under MCRA — nowhere in the Report is any
mention made of FEHBA, the wide-ranging civilian health insurance
program which had been enacted several years earlier, and which the
Government now claims is also covered by MCRA. Nor did the Senate or
House Reports refer to FEHBA, even in passing. These omissions are, if
not in direct conflict, at least in sharp tension with the Government's
position that MCRA applies to FEHBA. Surely, Congress knew of FEHBA's
existence, especially since that
statute had been enacted only five years before MCRA.
Although the legislative history, and particularly Congress' failure to
make any mention of FEHBA after specifically mentioning other programs
covered by the statute, would by itself suggest that MCRA was not meant
to apply to FEHBA, the paucity of legislative history necessitates a
review of other considerations relating to congressional intent.*fn15
2. Agency Interpretations
Another tool for ascertaining congressional intent is to examine the
statements, rulings and interpretations of government agencies —
particularly those agencies entrusted to administer the relevant statute.
Because the Health Care Financing Administration ("HCFA") is the agency
charged with administering MCRA, its approach to enforcing that statute
should be given special attention.
As an initial matter, it cannot be overlooked that HCFA has
issued no MCRA-specific regulations providing for recovery of
Medicare or FEHBA costs. In contrast, agencies that do have, and
have always had, an undisputed and established right to recovery
under MCRA, such as those governing the armed services, do have
such regulations in place. See 32 C.F.R. § 199.12 (Civilian
Health and Medical Program of the Uniformed Services ("CHAMPUS")
MCRA regulations); 32 C.F.R. § 842.115-842.125 (Air Force MCRA
regulations); 32 C.F.R. § 757.11-757.20 (Navy MCRA regulations);
33 C.F.R. § 25.131 (Coast Guard MCRA regulations).*fn16
No such structure has ever been established by HCFA to collect
Medicare or FEHBA expenses under the general MCRA framework.
Moreover, several agencies have explicitly concluded that
MCRA does not provide the Government with a cause of action
to recover Medicare costs. First, in 1968, the General Counsel
of the Federal Bureau of Health Insurance (which administered
Medicare at that time) issued an Opinion to that effect, stating
that Medicare payments are "insurance benefits," as distinguished
from the health care "provided directly by the federal government"
to which MCRA clearly applied. See Subrogation Rights Under
Medicare, For the Defense, Apr. 1970, at 44 (Defs.' Mem., App. J
at 67). Second, in 1979, HCFA issued a ruling that, in cases in
which the Government was liable for an injury under the Federal
Tort Claims Act ("FTCA") and Medicare paid the medical expenses,
the victim could retain all payments the Government made to her
under the FTCA. See HCFA Ruling 79-4 (1979), reprinted
in 52 Fed. Reg. 26,088, 26,090 (1987). The rationale underlying
this ruling (that Medicare was not to receive any reimbursement for
the care it had provided to the injured person) was that Medicare
was "in the nature of social insurance." Id.
Since MCRA's enactment in 1962, neither HCFA nor any other
administrative agency has ever indicated, or even suggested, that
MCRA applies to Medicare or FEHBA expenses. These agency
statements and silences, taken in conjunction with the absence of
regulations that would formalize and facilitate the Government's
recovery of Medicare or FEHBA costs under MCRA, lend further
credence to Defendants' position that MCRA was never meant to
apply to Medicare or FEHBA expenses.
3. Application of the Brown & Williamson
Having considered both the legislative history and agency
interpretations of MCRA, the Court's final task is to apply the
Brown & Williamson principles enunciated in Section IV.A.1 to
discern what Congress' intent was in enacting MCRA in 1962 and
amending it in 1996. Based on this examination, the Court must
conclude that MCRA does not provide the Government with a cause of
action to recover Medicare or FEHBA expenses. The legislative
history and relevant agency conduct, when taken together,
overwhelmingly support the notion that MCRA was never intended to
be used in the way the Government now advocates.
First, it is significant that even though FEHBA existed before
MCRA's enactment, MCRA makes no reference to FEHBA —
either in the statute itself, in the legislative history or in agency
Second, it is striking that the Government had never, prior
to the initiation of this lawsuit in 1999, attempted to recover
Medicare or FEHBA costs under MCRA. Although the Government is
correct that mere nonuse of a statute cannot cause the Government
to forfeit powers granted thereunder, see United States
v. Morton Salt Co., 338 U.S. 632, 647-48 (1950), nonuse can be highly
significant. When, despite many opportunities to do so, a government
agency refuses to take advantage of the wide-ranging powers seemingly
implicated by a statute's plain language, courts may presume that
Congress did not intend the statute to be given the meaning that its
language, in a vacuum, might imply. See Brown &
Williamson, 120 S.Ct. at 1306-07; see also BankAmerica
Corp., 462 U.S. at 130-31 (holding that where Government had not
applied a statute in a particular way in 60 years, it had effectively
acknowledged that it lacked authority to do so); Bunte Bros.,
312 U.S. at 352; National Classification Comm. v. United States,
746 F.2d 886, 892 (D.C. Cir. 1984). This is particularly true in this
instance, where the broader interpretation of MCRA (i.e.,
that every conceivable type of government expenditure, even under
Medicare and FEHBA, can be recovered under MCRA) had never
been advanced by any government entity until thirty-seven years after
the statute's enactment.
Third, Congress is presumed to act "against the backdrop" of HCFA's
interpretations of the statutes HCFA is entrusted to administer.
See Brown & Williamson,
120 S.Ct. at 1306-07. HFCA consistently indicated that it did not
understand MCRA to cover Medicare or FEHBA expenses, and Congress
never expressed any disapproval with HFCA's readings of MCRA. In
fact, Congress' enactment of the 1996 amendment to MCRA, which the
parties agree codified the existing manner in which MCRA was being
enforced, can be viewed as a ratification of HFCA's consistent and
narrow interpretation of that statute. 120 S.Ct. at 1307. Congress
had the opportunity to express its displeasure with the restrictive
way in which MCRA was being enforced, but it did not do so.
Finally, given Congress' intense involvement in legislative
regulation of tobacco,*fn17 and its keen awareness of
"tobacco's health hazards and its pharmacological effects," 120
S.Ct. at 1313, it is simply impossible to conclude that the
Government's current interpretation of MCRA, either in its
original or in its 1996 amended form, is one that Congress
intended. In fact, the Government's reading is in direct tension
with Congress' recognized intent to create a "distinct scheme to
regulate the sale of tobacco products, focused on labeling and
advertising, and premised on the belief that the FDA lacks such
jurisdiction under the FDCA." Id. at 1313. It is therefore
particularly difficult to believe that Congress would have intended
to subject tobacco companies to extraordinary financial liability
under MCRA, when those entities are not even subject to rudimentary
Congress has, through hearings and legislation, closely
monitored the cigarette industry. While, over the years, it may
not have adopted the aggressive, pro-consumer and pro-health
stance that many activists have continually fought so hard for,
the inescapable fact is that Congress chose, as a legislative
body, to use only limited measures to regulate tobacco products
and minimize their health hazards to the public. In light of all
these considerations, it is simply inconceivable that the
executive branch possessed for so many years (thirty-seven for
FEHBA and thirty-four for Medicare) a statutory weapon that could
wield the economic, and therefore regulatory, clout MCRA would
carry if enforced as the Government advocates. This is
especially true given that there has never been any congressional
recognition that this substantial power existed or congressional
demand that it be utilized. Congress' total inaction for over
three decades "preclude[s] an interpretation" of MCRA that would
permit the Government to recover Medicare and FEHBA
expenses.*fn18 See Brown & Williamson, 120 S.Ct. at 1312.
Accordingly, the Government's MCRA claim must be dismissed.
B. The Government's Medicare Secondary Payer Provisions Claim
The Medicare Secondary Payer provisions ("MSP"), a series of
amendments to Medicare enacted in 1980 and further amended
thereafter,*fn19 provide the Government
with statutory authority to obtain reimbursement for certain Medicare
expenditures. MSP essentially makes Medicare a "secondary" payer
where another entity is required to pay under a "primary plan" for
an individual's health care. See 42 U.S.C. § 1395y(b)(2).
If the "primary" payer has an obligation to pay for such costs, but does
not and cannot "reasonably be expected" to do so, Medicare may
make a "conditional payment" and later demand reimbursement from
the primary plan. 42 U.S.C. § 1395y(b)(2)(A) and (B)(ii). If the
entity administering the primary plan refuses to reimburse, the
Government may then bring suit against it to recover the Medicare
A "primary plan" is defined in the statute as "a group health
plan or large group health plan, . . . a workmen's compensation
law or plan, an automobile or liability insurance policy or plan
(including a self-insured plan) or no fault insurance . . ."
42 U.S.C. § 1395y(b)(2)(A) (emphasis added). A "self-insured plan"
is in turn defined in the implementing regulations as an
"arrangement, oral or written . . . to provide health benefits
or medical care or [to] assume legal liability for injury or illness"
under which an entity "carries its own risk instead of taking out
insurance with a carrier." See 42 C.F.R. § 411.21 (defining
the term "plan") (emphasis added) and 411.50(b) (defining the term
It is this last phrase — "self-insured plan" — on which the
Government rests its legal basis for Count 2 of this lawsuit. The
Government's theory, as expressed in its Opposition to Defendants'
Motion to Dismiss, is that Defendants have themselves assumed the
liability stemming from tobacco-related tort suits and, therefore,
as "self-insured" entities, may be sued under MSP.
To survive a motion to dismiss, a complaint "must allege all the material
elements of [a] cause of action." Taylor v. FDIC, 132 F.3d 753,
761 (D.C. Cir. 1997) (internal citations omitted); see also
Croixland Properties Ltd. Partnership v. Corcoran, 174 F.3d 213,
215 n. 2 (D.C. Cir. 1999); Alicke v. MCI Communications Corp.,
111 F.3d 909, 912 (D.C. Cir. 1997).
The MSP Count of the Government's Complaint states simply
that "defendants are required and responsible to make payment for
the health care costs of Medicare beneficiaries that were caused
by defendants' tortious and unlawful conduct, which costs have
been and will be unlawfully shifted to the United States." Compl.
at ¶ 170. The Complaint does allege, in other words, that
Defendants are "required or responsible . . . to make payment" for
certain health care costs, thus tracking a portion of the statute's
language. See 42 U.S.C. § 1395y(b)(2)(B)(ii).
However, there are a number of "material elements"*fn20
of an MSP cause of action conspicuously absent from the Complaint.
First, the Complaint does not allege, in even the most conclusory
fashion, the existence of any "primary plan" under which Defendants
pay health care costs, despite the fact that the statute on which
the Government bases its claim applies only to entities required
to make payment "under a primary plan." See 42 U.S.C. § 1395y
(b)(2)(B)(ii). In fact, the Complaint does not even allege the
existence of any elements of a "primary plan," such as a "plan" or an
"arrangement." See 42 C.F.R. § 411.21. Even if the Complaint had
made such allegations, it still fails to allege, or even suggest,
that Defendants specifically maintain any form of "self-insured plan"
(emphasis added), even though this is the only theory on which the
Government bases Defendants' liability.*fn21
the Complaint does not allege that Defendants are "self-insured"
in any way.
In those instances in which the Government has used MSP to
seek recovery from entities that are unquestionably providers of
insurance, as is certainly the typical factual scenario,*fn22
there has been no dispute regarding whether defendants maintain a
"primary plan," since that term expressly includes a "group health
plan," a "liability insurance policy or plan," and other traditional
forms of insurance. See 42 U.S.C. § 1395y(b)(2).
In those cases, the Government's allegation that defendants are
"responsible" for certain health care costs is sufficient to state
an MSP claim, as it gives "sufficient information to suggest that
there exists some recognized legal theory upon which relief can be
granted." See Wells v. United States, 851 F.2d 1471, 1473 (D.C. Cir.
1988) (internal citations and quotations omitted).
In the instant case, however, the claim of "responsibility"
to make health care payments is entirely conclusory, since
Defendants are clearly not insurance entities and the Complaint is
devoid of any allegation that they have established a "plan" or
"arrangement" under which they would be considered self-insured
entities subject to MSP's reach. Without alleging the existence
of such a "plan" or "arrangement," the Complaint's assertion that
Defendants are "required and responsible to make payment" for
certain health care costs fails to give Defendants even the most
rudimentary notice of the Government's theory of liability. See
Wells, 851 F.2d at 1473. Accordingly, the MSP count must be
C. The Government's Racketeer Influenced and Corrupt
The Racketeer Influenced and Corrupt Organizations Act ("RICO"),
18 U.S.C. § 1961-1968, prohibits individuals or entities from
engaging in racketeering activity associated with an "enterprise."*fn23
To successfully state a RICO claim, the Government
must allege "(1) the conduct (2) of an enterprise (3) through a pattern
of racketeering activity." Salinas v. United States,
522 U.S. 52
, 62 (1997) (citing Sedima, S.P.R.L. v. Imrex Co.,
Inc., 473 U.S. 479
, 496 (1985)).
An enterprise includes "any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals
associated in fact although not a legal entity." United States v.
Turkette, 452 U.S. 576, 580 (1981) (quoting 18 U.S.C. § 1961(4)).
"Racketeering activity" includes, among other things, acts prohibited by
any one of a number of criminal statutes. 18 U.S.C. § 1961(1). A
"pattern" is demonstrated by two or more instances of "racketeering
activity" ("predicate acts")
that occur within ten years of one another. 18 U.S.C. § 1961
(5). In this case, the alleged predicate acts are violations
of 18 U.S.C. § 1341 (mail fraud) and 1343 (wire fraud).
The Government brings its RICO counts (Counts 3 and 4) under
two specific subsections of § 1962. Count 3 is brought under
subsection (c), which makes it unlawful to "conduct or participate,
directly or indirectly," in an enterprise through a "pattern of
racketeering activity." Count 4 is brought under subsection (d),
which makes it unlawful to "conspire to violate" subsection (c).
RICO provides both legal and equitable remedies. Plaintiffs
may seek treble damages — that is, three times the value of the
damages inflicted on them by a defendant's unlawful racketeering
activity. 18 U.S.C. § 1964(c). In addition, the Court may in its
discretion order equitable remedies, "including but not limited
to" restricting defendants from taking future actions and even
dissolving or restructuring the "enterprise."*fn24 In the
instant case, the Government seeks to "disgorge" Defendants' past
profits associated with and derived from their alleged unlawful
racketeering activity, and to enjoin them from committing future
1. Future Injunctive Relief
Except for Liggett,*fn26 Defendants do not dispute that
the Government has adequately alleged the elements of a RICO claim
(i.e., "enterprise," "racketeering activity, and "pattern").
What they do dispute is whether the Government has adequately alleged
that Defendants' racketeering activity will continue into the future,
so as to warrant the broad equitable relief sought.
The Government contends that the pattern of the past four
decades in which the tobacco companies have made countless false
and deceptive statements, concealed and destroyed documents, and
improperly asserted legal privileges to evade legitimate civil
discovery and government requests, establishes a "reasonable
likelihood," SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir.
1992), that Defendants will continue to violate the law. Accordingly,
the Government requests equitable relief in the form of disgorgement
of the profits they have realized from their criminal activities,
for the purpose of deterring Defendants
and others from committing such acts in the future. Govt's Opp'n,
Defendants concede that "past allegations may be relevant to
whether . . . a `reasonable likelihood' exists" that such acts
will continue into the future, Defs.' Mem. at 65, but argue that
the Government's exclusive reliance on these past violations and
its speculative allegations of future misconduct are too
"conclusory" to justify equitable relief. Defs.' Mem. at 68.
Defendants contend that, under the law of this Circuit, the
Government may not rely solely on allegations of earlier unlawful
activity to warrant the imposition of equitable relief. Defs.'
Mem. at 66 n.* (citing SEC v. First City Fin. Corp.,
890 F.2d 1215, 1228 (D.C. Cir. 1989)). Defendants also argue that, because
the RICO predicate acts in this case involve mail and wire fraud,
the command of Federal Rule of Civil Procedure 9(b) that allegations
of fraud be made with "particularity" is applicable, and that the
Government has failed to make the particularized showing required by
this Rule. Defs.' Mem. at 67-68.
Finally, Defendants argue that the Master Settlement
Agreement ("MSA") which they entered into with the States enjoins
Defendants from engaging in the same unlawful activity which the
Government believes will occur in the future. Defendants point to
various specific MSA provisions that they contend will make
equitable relief in this action unnecessary and unwarranted.
Accordingly, they argue that their "business" (manufacturing,
selling and marketing tobacco products) will not present
"opportunities to violate the law in the future," Defs.' Mem. at
66 n.* (citing First City, 890 F.2d at 1228).
The Government responds that, applying the three factors announced
in First City, there is indeed a "reasonable likelihood"
that Defendants' past unlawful conduct will continue into the
future. Govt's Opp'n at 86. The Government maintains it would be
able to prove at trial that the past conduct alleged "would
provide strong support for an inference of a risk of future
wrongdoing," and that, to the extent that Defendants argue that
the Government is required to make such a showing now, at the
motion to dismiss stage, rather than at trial, they are simply
mistaken. Govt's Opp'n at 87. The Government also denies that
it is required to plead the likelihood of Defendants' future acts
of fraud with particularity under Fed.R.Civ.P. 9(b). It argues
that the core purpose of 9(b) is to protect defendants from
reputational harm and "strike" suits, and to provide them with
"sufficient information to respond to plaintiff's claims."
Firestone v. Firestone, 76 F.3d 1205, 1211 (D.C. Cir. 1996).
Finally, the Government contends that Defendants' reading of Rule
9(b) would "demand access to a crystal ball," Govt's Opp'n at 90,
because it would force plaintiffs to describe the detailed
contours of acts which have not yet occurred.
To obtain injunctive relief in this Circuit, a plaintiff must
show that the defendant's past unlawful conduct indicates a
"`reasonable likelihood of further violation(s) in the future.'"
SEC v. Kenton Capital, Ltd., 69 F. Supp.2d 1, 15 (D.D.C. 1998)
(Kollar-Kotelly, J.) (quoting SEC v. Savoy Ind., Inc.,
587 F.2d 1149, 1168 (D.C. Cir. 1978)); SEC v. Bilzerian, 29 F.3d 689, 695
(D.C. Cir. 1994).
To determine whether there is a "reasonable likelihood" of
future violations, the following factors must be considered: "
whether a defendant's violation was isolated or part of a pattern,
 whether the violation was flagrant and deliberate or merely
technical in nature, and  whether the defendant's business will
present opportunities to violate the law in the future." First
City, 890 F.2d at 1228 (citing Savoy Indus., 587 F.2d at
1168); Bilzerian, 29 F.3d at 695. None of these three factors
is determinative; rather, "the district court should determine the
propensity for future violations based on the totality of circumstances."
First City, 890 F.2d at 1228 (citing SEC v. Youmans,
729 F.2d 413, 415 (6th Cir. 1984)).
The Government has clearly and overwhelmingly satisfied each
of the three First City factors. First, Defendants cannot
possibly claim that their alleged conspiratorial actions were
"isolated." On the contrary, the Complaint describes more than 100
predicate acts spanning more than a half-century. Second,
Defendants cannot contend that the alleged RICO violations are
"technical in nature." The Government alleges that Defendants'
numerous misstatements and acts of concealment were made
intentionally and deliberately, rather than accidentally or
negligently, as part of a far-ranging, multi-faceted,
sophisticated conspiracy. Third, Defendants' business of
manufacturing, selling and marketing tobacco products clearly
"present[s] opportunities to violate the law in the future."
First City, 890 F.2d at 1228. As the Government points out,
as long as Defendants are in the business of selling and marketing
tobacco products, they will have countless "opportunities" and
temptations to take unlawful actions, just as it is alleged they
have done since 1953. Govt's Opp'n at 87.
Defendants' contention that the MSA precludes such opportunities
is not persuasive. See Defs.' Mem. at 70-77. In
arguing that the MSA obviates the need for injunctive relief,
Defendants implicitly ask the Court to make the following two
assumptions: that Defendants have complied with and will continue
to comply with the terms of the MSA, and that the MSA has adequate
enforcement mechanisms in the event of non-compliance. Even
assuming the Court could take judicial notice of the MSA, that
document's existence certainly does not mean that the Court can or
should assume that the MSA will be fully enforced or otherwise
accomplish its intended objectives.
Further, the decisions Defendants cite for the proposition that past
allegations of wrongdoing alone cannot warrant injunctive relief are
inapposite, because those cases all discuss the standard for
proving a reasonable likelihood of future violations, not for
pleading it at the motion to dismiss stage. See, e.g.,
SEC v. Commonwealth Chem. Secs, 674 F.2d 90
, 100 (2d Cir. 1978);
SEC v. Blatt, 583 F.2d 1325
, 1334 (5th Cir. 1978).
Indeed, the sole decision cited by Defendants which does address the
injunctive relief standard appropriate for a motion to dismiss,
SEC v. Cassano, 61 F. Supp.2d 31 (S.D.N.Y. 1999), clarifies
the distinction between those two very different legal standards. In
Cassano, the court recognized that it was "obliged to accept
the truth" of the Government's allegation that defendants are "likely
to violate securities laws in the future," "for purposes of this motion
to dismiss, and so this aspect of the defendants' motion must be denied.
Whether the [Government] can prove the allegation remains to be seen."
Id. at 34. The same can be said of the instant case.
Finally, Defendants' contention that the Government "must allege
"a `reasonable likelihood' of future violations — future frauds
— with the specificity required by Rule 9(b)," Defs.' Mem. at 67,
simply defies common sense. It is difficult to see how a plaintiff could
ever allege with "particularity" an offense which has not yet happened.
Defendants are able to cite only two decisions, both of which are from
other circuits, in support of this contention: Menasco, Inc. v.
Wasserman, 886 F.2d 681 (4th Cir. 1989) and Continental Realty
Corp. v. J.C. Penney Co., 729 F. Supp. 1452 (S.D.N.Y. 1990).
In Menasco, the defendant's actions "involved a limited
purpose," "one perpetrator," "one set of victims," and the racketeering
transaction "took place over approximately one year." 886 F.2d at 684.
The court specifically held that defendant's acts, as alleged, did not
"suggest a `distinct threat of long-term racketeering activity, either
implicit or explicit.'" Id. (quoting H.J. Inc.,
492 U.S. at 242). It was on this basis, and these facts, that the court
determined that plaintiff's allegations of on-going fraud missed the
Rule 9(b) mark. In
Continental Realty, the court observed that plaintiff's attempt
to "infer a threat of repeated fraud from a single alleged scheme
would in effect render [RICO's] pattern requirement meaningless."
729 F. Supp. at 1455. Therefore, the court declared that plaintiff's
allegations did not pass Rule 9(b) muster.
In neither decision — nor any other decision cited by Defendants,
for that matter — did the plaintiff allege as many predicate acts
(116), as long a duration of racketeering activity (45 years), as many
significant participants (11 entities, which together control virtually
the entire tobacco products market), as many victims (hundreds of millions
of individuals, scores of government entities, the federal government) or
as much money derived from the racketeering acts (hundreds of billions of
Based on the sweeping nature of the Government's allegations,
and the fact that the parties have barely begun discovery to test
the validity of these allegations, it would be premature for the
Court to rule on the propriety of injunctive relief in this case.
At a very minimum, the Government has stated a claim for
injunctive relief; whether the Government can prove it, "remains
to be seen."
2. The Specific Equitable Relief of Disgorgement
Defendants contend that even if the Government has alleged the
likelihood of future illegal activity, it is still not entitled
to the remedy of disgorgement,*fn27 because that
particular remedy is never available under a civil RICO count.
Defendants contend that civil RICO remedies must be
forward-looking, while disgorgement is, by its very nature,
backward-looking. See Defs.' Mem. at 80. They argue that
the Government is impermissibly attempting to convert its civil RICO
count into a criminal one by asking for disgorgement, which is
akin to criminal forfeiture of the proceeds of unlawful activity
(and permitted only under criminal, not civil, RICO suits).
Defendants contend that RICO is to be "read in pari materia
with the Clayton Act, from which it is in large part derived," Defs.'
Mem. at 80, and that disgorgement is not permitted under that act.
Finally, Defendants argue that disgorgement in this case would be
"impermissibly punitive" and would constitute a double recovery,
since the Government already seeks billions of dollars in damages
under the Complaint's MCRA and MSP counts. Defs.' Mem. at 82.
The Government argues that disgorgement is an available and
appropriate remedy for civil violations of RICO, and that
Defendants' claims to the contrary are, in addition to being
legally incorrect, premature at this stage. The Government
argues that RICO's plain language does not foreclose disgorgement,
and that the Supreme Court has held disgorgement generally
available unless a particular statute, "by a necessary and
inescapable inference, restricts the court's jurisdiction in
equity." Porter v. Warner Holding Co., 328 U.S. 395, 398-99
(1946). The Government rejects Defendants' argument that
disgorgement is backward-looking and punitive, arguing that it
is in fact remedial and may properly serve as a deterrent to
Defendants and others who may contemplate committing similar
offenses. In addition, the Government contends that disgorgement
in this case would in fact serve a forward- looking purpose,
namely, to prevent Defendants from using proceeds from prior
illegal activities as "capital available for the purpose of
funding or promoting [future] illegal conduct." Govt's Opp'n at
98 n. 70 (quoting United States v. Private Sanitation Indus.
Ass'n, 914 F. Supp. 895, 901 (S.D.N.Y. 1996)).
The only court of appeals to consider the question of whether
disgorgement is an
appropriate civil RICO remedy, the Second Circuit, has answered
in the affirmative. See United States v. Carson, 52 F.3d 1173
(2d Cir. 1995). The Second Circuit concluded, based on § 1964's
and its legislative history, that disgorgement
is permitted in civil RICO suits. The court stated that "the
legislative history of § 1964 indicates that the equitable
relief available under RICO is intended to be `broad enough
to do all that is necessary.'" Id. at 1181-82 (quoting S. Rep.
No. 617, 91st Cong., 1st Sess. at 79 (1969)).
Even before the Second Circuit's decision in Carson, district
courts within the Second Circuit had reached the same conclusion.
See United States v. Bonanno Organized Crime Family of La
Cosa Nostra, 683 F. Supp. 1411, 1442-49 (E.D.N.Y. 1988), aff'd
on other grounds, 879 F.2d 20 (2d Cir. 1989); United States v.
Private Sanitation Indus. Ass'n, 793 F. Supp. 1114, 1151-52 (E.D.N Y
1992); United States v. Int'l Bhd. of Teamsters, 708 F. Supp. 1388,
1408 (S.D.N.Y. 1989). Given that the only circuit to have
addressed the issue has declared, in a well-reasoned and persuasive
opinion, that disgorgement is permissible in civil RICO claims, and given
that Defendants cannot point to a single federal court that has declared
otherwise, this Court is not inclined to categorically rule out that remedy
at the motion to dismiss stage.
Defendants argue that because RICO was modeled after the Clayton Act,
15 U.S.C. § 26, and because a judge of this District Court has declared
disgorgement to be unavailable under the Clayton Act, FTC v. Mylan
Labs., Inc., 62 F. Supp.2d 25, 40-42 (D.D.C. 1999) (Hogan, J.),
disgorgement should likewise be unavailable under civil RICO. Defendants
do not explain, however, why this Court should rely on non-binding federal
district court case law under a different statute, when there is persuasive
case law — albeit from another circuit — on the precise statute
Further, the Supreme Court has not, as Defendants contend, declared
that the Clayton Act and RICO should be read "in pari
Defs.' Mem. at 80. Rather, the Supreme
Court has held that while the "Clayton Act analogy is generally
useful in civil RICO cases," particular case law interpreting the Clayton
Act "may not apply without modification in every civil RICO case."
Klehr v. A.O. Smith Corp., 521 U.S. 179, 180 (1997) (emphasis
added). Equally important is the fact that Judge Hogan's primary
concern in Mylan Labs— the possibility of "duplicative
recoveries" — is not applicable in this case, since the Court is
granting Defendants' motion to dismiss the non-RICO claims. Accordingly,
the Government is provided with only one "route to defendants' allegedly
ill-gotten gains," namely, its civil RICO suit. 62 F. Supp. d at 41.
The Court of Appeals in Carson observed that whether
disgorgement is appropriate in a particular case depends on whether
there is a "finding that the gains are being used to fund
or promote the illegal conduct, or constitute capital available
for that purpose." 52 F.3d at 1182 (emphasis added). This Court
has not made such a finding, nor could it at this stage. So long
as disgorgement is permitted in civil RICO suits as a matter of
law, as the Court so concludes, it would not be appropriate to
ask, at the present stage, whether the Government has proved that
it has an adequate basis for seeking such a remedy. Accordingly,
the Court will permit the Government to pursue the
remedy of disgorgement and the motion to dismiss as to this claim
must be denied.
V. Liggett's Motion To Dismiss RICO Counts
Although Liggett joins the other Defendants' "broad arguments
of general applicability to the Complaint," Memorandum of Liggett
in Support of Motion to Dismiss the Complaint ("Liggett Mem.") at
1, it has filed its own motion to dismiss the Complaint's RICO
counts, advancing some additional grounds in support thereof.
A. The RICO Elements
Liggett argues that the Government has not sufficiently alleged, as to
it, two of the four elements required for a RICO claim: "enterprise" and
"pattern of racketeering activity".*fn30
1. RICO's "Enterprise" Element
As defined earlier, an "enterprise," as that term is used in a RICO claim,
is "any individual, partnership, corporation, association, or other legal
entity, and any union or group of individuals associated in fact although
not a legal entity." Turkette, 452 U.S. at 580. It need not have
a formal hierarchy or framework, "so long as it involves some structure, to
distinguish an enterprise from a mere conspiracy." United States
v. Richardson, 167 F.3d 621, 625 (D.C. Cir. 1999) (internal citations
and quotations omitted). The three elements necessary to establish an
enterprise are: "(1) a common purpose among the participants, (2)
organization, and (3) continuity." United States v. Perholtz,
842 F.2d 343, 362 (D.C. Cir. 1998).
Liggett argues that the Government has not adequately alleged the
existence of an enterprise. Specifically, Liggett contends that the
Government has failed to show that the putative enterprise had the
requisite "organization." According to Liggett, the Complaint makes
only conclusory allegations, without describing how the enterprise
operated, who its leaders were, or how its decision-making process
functioned. See Liggett Mem. at 25-26.
The Court concludes that the Complaint properly alleges the
existence of an enterprise, and Liggett's involvement therein.
"It is clear an enterprise can be established through an informal
group of people who come together for the common purpose of
obtaining financial gain through criminal activity." United
States v. Cooper, 91 F. Supp.2d 60, 68 (D.D.C. 2000) (Joyce Green,
J.) (citations omitted). The enterprise can be as simple as an
"amoeba-like infra-structure that controls a secret criminal
network." United States v. Elliott, 571 F.2d 880, 898
(5th Cir. 1978).
Liggett's argument that the Government must spell out the
mechanics or logistics of the enterprise is unsupported by the
case law. Numerous courts, in this Circuit and others, have
established that the kind of allegations contained in the
Government's Complaint are easily sufficient to survive a Rule
12(b)(6) motion. For example, in Perholtz, the complaint
stated: "Defendant . . . constituted an enterprise . . . to wit, a
group of individual, partnerships, and corporations associated in
fact to unjustly enrich themselves from the proceeds of government
contracts . . ." 842 F.2d at 351, n. 12. And in Private Sanitation
Ind. Ass'n, 793 F. Supp. 1114, the complaint stated that the
enterprise was "a group composed of, but not limited to" 112
defendants "associated- in-fact for the purpose of controlling the
waste disposal industry in Long Island." Id. at 1126. In both
cases, the allegations were deemed sufficient to survive a motion
to dismiss. In the instant case, the Complaint alleges that
Defendants decided on a joint objective to "preserve and expand
the market for cigarettes and to maximize" their profits and
"agreed that the strategy they were implementing was a `long-term
one' that required defendants to act in concert with each other on
the current health controversy, as well as on issues
that would face them in the future." Compl. at ¶¶ 33-34. The
nature of these allegations is at least as detailed as those made in
Perholtz and Private Sanitation, if not more so.
Accordingly, the Government has adequately pleaded the enterprise element.
2. RICO's "Pattern Of Racketeering Activity" Element
A "pattern of racketeering activity" is defined as "at least
two acts of racketeering activity" committed within a ten year
period. In this case, as already noted, the Government relies on
violations of 18 U.S.C. § 1341 (mail fraud) and 1343 (wire fraud)
as the "predicate acts" which transform Defendants' alleged
misconduct into "racketeering activity." 18 U.S.C. § 1961(5). The
mail fraud statute*fn31 provides that "[w]hoever, having
devised or intending to devise any scheme or artifice to defraud,
or for obtaining money or property by means of false or fraudulent
pretenses, representations, or promises . . . for the purpose of
executing such scheme or artifice or attempting so to do," mails
or causes the mailing of any matter, is guilty of mail fraud.
18 U.S.C. § 1341.
Liggett argues that the Complaint does not allege convergence
between the party deceived (individual smokers) and the party
whose property was injured (the Government); according to Liggett,
it was the Government that suffered economic injury, not
individual smokers. Liggett Mem. at 29-30. Liggett's convergence
argument misstates the relevant case law. A defendant who uses
the mail with the intent of defrauding someone of property is
guilty (or in this case, liable), whether the attempt succeeds or
not. See, e.g., Carpenter v. United States,
484 U.S. 19, 26-27 (1987); United States v. Pollack,
534 F.2d 964, 971 (D.C. Cir. 1976). According to the
Complaint's allegations, Defendants did intend to defraud
individual smokers of their property (i.e., the money they spent
on cigarettes).*fn32 Moreover, the Complaint also alleges
— though it need not — that Defendants succeeded in
defrauding individual smokers. See Compl. at ¶¶ 204(b)-(d).
Liggett also argues that the Complaint fails to meet the
pleading standard of Federal Rule of Civil Procedure 9(b), which
requires that "the circumstances constituting fraud . . . shall be
stated with particularity." To satisfy this standard, a complaint
must specify "the time, place and content of the false misrepresentations,
the fact misrepresented and what was retained or given up as a consequence
of the fraud." Firestone, 76 F.3d at 1211 (internal quotations
and citation omitted).
The Appendix to the Complaint does describe the time, place, and content
of each allegedly fraudulent act, states the fact(s) misrepresented, and
names the particular Defendants involved. See Appendix at ¶¶
13, 17, 22, 28, 31, 44, 66, 67, 70, 73, 77, 88, and 112. Although each
allegation does not, in its body, include a statement of "what was retained
or given up as a consequence of the fraud," Firestone, 76 F.3d at
1211, the Complaint does allege elsewhere that the item "given up" was the
money the Government spent on tobacco-related health care. See
Compl. at ¶ 6. Accordingly, the Complaint alleges the mail fraud
acts with sufficient particularity.
B. Liggett's Alleged Withdrawal From the Conspiracy
Liggett also argues that, regardless of whether the
Government has generally satisfied the RICO elements, Liggett has
"withdrawn" from the enterprise, and accordingly the Complaint
fails to adequately allege the "enterprise" element as to Liggett
and/or the need for injunctive relief against it.
Liggett contends that the "public record" amply demonstrates
that it is no longer acting in concert with the other Defendants,
and that there is no reasonable likelihood it will commit unlawful
acts in the future to warrant injunctive relief. Even if the
Court were precluded from considering these outside sources,
Liggett contends that it is "plain from the face of the Complaint
that Liggett poses no risk of committing future acts of
racketeering activity" and that the Complaint "does not, and
indeed cannot, make any allegation that Liggett poses a risk of
any future violations of RICO." Liggett Mem. at 19.
The Government responds that this Court is "limited to
consideration of the facts alleged in the four corners of the
complaint," which do not indicate that Liggett has withdrawn.
Opp'n to Liggett at 10. The Government also contends that it
would be premature, at this early stage, for the Court to
determine whether Liggett threatens to commit future illegal acts
Although courts may take the "public record" into account
when deciding motions to dismiss,*fn33
that record includes
only certain official documents, not mere newspaper articles.*fn34
Liggett's evidentiary support for its claim to
have withdrawn from the enterprise consists almost exclusively of
quotations from newspaper articles or from government reports that
are neither part of a public record nor matters for judicial
See Liggett Mem. at 5-10.
Accordingly, the Court may not take these documents into account.
Without reference to the sundry newspaper clippings Liggett
cites, its claim to have withdrawn from the enterprise is wholly
unpersuasive. To establish that it is no longer a member of the
enterprise, Liggett must show that it "withdrew from the conspiracy
by an affirmative act designed to defeat the purpose of the conspiracy."
See In Re Corrugated Container Antitrust Litig.,
662 F.2d 875, 886 (D.C. Cir. 1981). Because withdrawal is an
affirmative defense, the affirmative acts listed above must
"clearly appear on the face of the complaint." Fortner v.
Thomas, 983 F.2d 1024, 1028 (11th Cir. 1993).
The Complaint is devoid of any affirmative acts by Liggett
that would indicate its withdrawal from the RICO enterprise. On
the contrary, the Complaint expressly states that "[f]rom at least
the early 1950's and continuing up to and including the date of
the filing of this complaint . . . Liggett . . . did unlawfully,
knowingly and intentionally" conduct and participate in, and conspire
to participate in, the enterprise's affairs. Compl. at ¶¶ 172, 201
Despite Liggett's attempt to use the Complaint's language to
show that it is now a fully law-abiding corporate citizen, the
above quoted language from the Complaint adequately alleges that
Liggett is likely to commit certain racketeering acts in the
future. In addition, given the complex nature of the Government's
allegations, and the fact that numerous allegations simply refer
to "Defendants" — without expressly excluding Liggett*fn36
— it would be premature at this time to
preclude the Government from pursuing injunctive relief.
Accordingly, Liggett's separate motion to dismiss the
Government's RICO Count must be denied.
For the reasons stated at length above, Certain Defendants' Motion to
Dismiss for Failure to State a Claim [#72] is granted in part and
denied in part. The motion is granted as to Count 1 (the
Medical Care Recovery Act claim), granted as to Count 2 (the
Medicare Secondary Payer claim), and denied as to Counts 3 and 4
(the Racketeer Influenced and Corrupt Organization Act claims). The Liggett
Group Inc.'s Motion to Dismiss for Failure to State a Claim [#70] is
An Order will issue with this Opinion.
This matter comes before the Court on Defendants' motions to
dismiss. Upon consideration of the motions, oppositions, replies,
the applicable case law, the arguments presented at the motions
hearing, and the entire record herein, for the reasons discussed
in the accompanying Memorandum Opinion, it is this __ day of
ORDERED, that Certain Defendants' motion to dismiss
[#72] is granted as to Count 1 (the MCRA claim),
granted as to Count 2 (the MSP claim), and denied
as to Counts 3 and 4 (the RICO claims); and it is further
ORDERED, that The Liggett Group Inc.'s motion to dismiss
[#70] is denied.