United States District Court for the District of Columbia
March 10, 2004.
UNITED STATES OF AMERICA, Plaintiff,
PHILIP MORRIS USA., f/k/a Philip Morris, Inc. et al. Defendants
The opinion of the court was delivered by: GLADYS KESSLER, District Judge
This matter is now before the Court on the United States' Motion for
Partial Summary Judgment Regarding Defendants'*fn1 Affirmative Defenses
Asserting Violations of the Eighth Amendment and the Ex Post Facto Clause
of the United States Constitution and that the Decision in United
States v. Carson Controls the Scope of Disgorgement in this Case
("Motion"). The Government argues that each of these affirmative defenses
is insufficient as a matter of law and must be dismissed.*fn2
Upon consideration of the Motion, the Opposition, the Reply and the
entire record herein, and for the reasons set forth below, the United
States' Motion is granted in part and denied in part.
Plaintiff, the United States of America ("the Government") has brought
this suit against Defendants pursuant to Sections 1962(c) and (d) of the
Racketeer Influenced and Corrupt Organizations Act ("RICO),
18 U.S.C. § 1961 et seq.*fn3 Defendants are manufacturers of
cigarettes and other tobacco-related entities. The Government seeks
injunctive relief and $289 billion*fn4 for what it alleges to be an
unlawful conspiracy to deceive the American public. The alleged
conspiracy has been described at length in prior opinions, see
e.g., United States v. Philip Morris, 116 F. Supp.2d 131,
136-138 (D.D.C. 2000); Mem. Op. January 23, 2004 at 3-5, and need not be
In its Motion, the Government seeks partial summary judgment as to
certain of Defendants' affirmative defenses that relate to the
disgorgement it seeks. Specifically, in the challenged
defenses Defendants assert that: (1) the disgorgement sought is so
grossly disproportionate to the alleged RICO offenses as to constitute an
excessive fine prohibited by the Eighth Amendment to the United States
Constitution; (2) the Government's attempt to disgorge proceeds acquired
from conduct pre-dating RICO's effective date (October 15, 1970) is
foreclosed by the Ex Post Facto Clause of the Constitution; and
(3) any disgorgement in this case is limited, as a matter of law, to
ill-gotten gains that "are being used to fund or promote the [alleged]
illegal conduct, or constitute capital available for that purpose."
United States v. Carson, 52 F.3d 1173, 1182 (2d Cir. 1995). For
the reasons set forth below, the Court will not grant summary judgment at
this time as to issues (1) and (3) because a pending motion raises
arguments relevant to resolving them. The Government is entitled to
partial summary judgment as to issue (2).
II. SUMMARY JUDGMENT STANDARD
Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment
is appropriate if the pleadings, depositions, answers to interrogatories
and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c).
Material facts are those that "might affect the outcome of the suit under
the governing law." Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986).
In considering a summary judgment motion, "the evidence of the
non-movant is to be believed, and all justifiable inferences are to be
drawn in his favor." Id. at 255; see also Washington Post
Co. v. United States Dep't of Health and Human Servs., 865 F.2d 320,
325 (D.C. Cir. 1989).
A. Whether the Relief the Government Seeks Is, in Fact,
"Disgorgement" Is Very Much in Dispute
The Excessive Fines Clause*fn5 applies only to penalties that are
properly characterized as "punishment." Austin v. United
States, 509 U.S. 602, 609-10 (1993)("The Excessive Fines Clause
limits the government's power to extract payments . . . `as
punishment for some offense.'")(emphasis in original)(quoting
Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal,
Inc., 492 U.S. 257, 265 (1989)). As set forth below, it is
well-established that disgorgement of ill-gotten proceeds is not
punishment. SEC v. Bilzerian, 29 F.3d 689, 696 (D.C.
Cir. 1994).*fn6 Therefore, insofar as the relief sought by the
Government can be
properly characterized as "disgorgement," it does not implicate the
Excessive Fines Clause.
In Bilzerian, the defendant was ordered by the district court
to disgorge the profits he had obtained from his violations of the
securities laws. Id. at 691. He argued on appeal that the
disgorgement order violated the double jeopardy clause of the Fifth
Amendment because it punished him for the same conduct that had led to
his criminal conviction. Id. at 696. However, the Court of
Appeals rejected this argument, holding that the disgorgement order did
not constitute "punishment" because "[t]he district court ordered
Bilzerian to give up only his ill-gotten gains; it did not subject him to
an additional penalty. Therefore the disgorgement does not constitute
punishment." Id. (citing United States v. Tilley,
18 F.3d 295, 300 (5th Cir. 1994) (" [T] he forfeiture of illegal proceeds,
much like the confiscation of stolen money from a bank robber, merely
places that party in the lawfully protected financial status quo that he
enjoyed prior to launching his illegal scheme. This is not punishment
within the plain meaning of the word.")(internal citation omitted)).
Disgorgement of ill-gotten gains is instead remedial, serving to
deprive a wrongdoer of unjust enrichment as well as to deter*fn7
others from violating the law. SEC v. First City Financial
Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989).*fn8 The remedial
nature of disgorgement serves to limit its application. Because
disgorgement "may not be used punitively," a court's equitable power is
restricted to "property causally related to the wrongdoing."
at 1231. For this reason, the Government is required to
"distinguish between legally and illegally obtained profits."
The requirement that disgorgement be limited to illegally acquired
funds is at the heart of Defendants' argument. Defendants do not dispute
that disgorgement is subject to Eighth Amendment scrutiny only if it is
punishment. Defs.' Mem. in Opp' n at 18. They assert instead that the
Government is actually seeking something other than disgorgement because
its claim is not, in fact, limited to illegally-obtained profits.
The basis of their argument is that the models used by the Government's
experts to calculate the disgorgement sought fail to distinguish between
legally and illegally acquired proceeds. See Defs.' Mem. in
Opp'n at 19 ("not one of the Government's numerous estimates of its
disgorgement claim . . . is designed to approximate the gains Defendants
obtained as a result of their alleged RICO violations."). Therefore,
Defendants argue, the Government "may not invoke the protection of the
legal principle . . . that disgorgement of ill-gotten gains has not
traditionally been considered a punitive measure." Id. at 20.
The Government does not dispute the legal principle but insists that "the
sought disgorgement constitutes the Defendants' ill-gotten gains causally
related" to the alleged RICO violations. Gov't Reply at 9.
Defendants are correct that their Eighth Amendment defenses can not be
dismissed merely because the Government has affixed the
"disgorgement" label to the relief it seeks. However, the Court
need not resolve at this time the disputed issue of whether the
Government's models for calculating any disgorgement appropriately
distinguish between funds legally and illegally acquired by Defendants.
The adequacy of the Government's disgorgement models is the subject of
Defendants' pending Motion for Partial Summary Judgment Dismissing the
Government's Disgorgement Claim ("Defendants' Disgorgement Motion"), and
will be considered in connection with that Motion. Because the viability
of Defendants' affirmative defenses which rely on the Eighth Amendment
depends on this disputed issue, the Government's motion for summary
judgment as to affirmative defenses based on the Eighth Amendment is
denied without prejudice.
B. Disgorgement is Not Barred as an Ex Post Facto
According to the Defendants, the Ex Post Facto Clause*fn9 of
the United States Constitution proscribes the disgorgement remedy sought
by the Government with respect to any proceeds deriving from conduct that
occurred before RICO's effective date of October 15, 1970. Defs.' Mem. in
Opp'n at 26-28. That Clause prohibits retroactive application of penal
legislation. A statute is impermissibly retroactive where it "attaches
new legal consequences
to events completed before its enactment." Landgraf v. USI
Film Products, Inc., 511 U.S. 244, 270 (1994). Defendants assert
that, because disgorgement was not an available remedy for mail and wire
fraud before RICO's enactment, the disgorgement sought represents an
attempt to "`inflict a greater punishment' to pre-RICO conduct" than
otherwise would have been available, in violation of the Ex Post
Facto Clause. Defs.' Mem. in Opp'n at 27.*fn10
Defendants' argument fails whether or not the relief sought by the
Government is deemed to be "disgorgement." As already discussed,
supra, at 4-6, disgorgement of illegal proceeds is not
"punishment." The Ex Post Facto Clause applies only to
punishment. Smith v. Doe, 538 U.S. 84, 92 (2003);
Landgraf 511 U.S. at 266 ("The Ex Post Facto Clause
flatly prohibits retroactive application of penal
legislation")(emphasis added) and id. at 266 n.19 ("[w]e have
interpreted the Clause as applicable only to penal legislation.")
(citing Calder v. Bull, 3 Dall. 386, 390-391,
1 L.Ed. 648 (1798) (opinion of Chase, J.). Therefore, if the
Government is seeking what is ultimately deemed to be "disgorgement",
then affirmative defenses based on the Ex Post Facto Clause
fail as a matter of law.
If what the Government is seeking is not deemed to be disgorgement and
is more properly characterized as punishment, these affirmative defenses
still fail as a matter of law. "A statute does not operate
`retrospectively' merely because it is applied in a case arising from
conduct antedating the statute's enactment." Landgraf, 511 U.S.
at 270. In the case of RICO a "pattern of racketeering activity" must
include at least one predicate act that occurred after the
effective date of the statute. 18 U.S.C. § 1961. Since the statute
applies only where the conduct in question is not completed until after
the statute's effective date, RICO does not "attach new legal
consequences to events completed before its enactment,"
Landgraf, 511 U.S. at 270, just because some predicate acts may
have preceded October 15, 1970. Therefore, the imposition of criminal
liability and punishment for RICO violations, where part of the criminal
conduct began prior to RICO's enactment, but continued after its
effective date, does not violate the Ex Post Facto Clause. As
the Fifth Circuit has explained:
It was obviously in an effort to avoid the ex post
facto problem that Congress, in defining the
"pattern of racketeering activity," required that
at least one illegal act occur after the effective
date of the Act. This feature has
quite properly been held to save the statute
from running afoul of the ex post facto clause.
United States v. Brown, 555 F.2d 407, 417 (5th Cir. 1977)
(citing cases). See also United States v. Boffa,
688 F.2d 919, 937 (3d Cir. 1982).
Defendants concede that RICO liability may be based on so-called
"straddle offenses," where some predicate act(s) pre-date RICO's
effective date so long as at least one racketeering act took place after
that date. Defs' Mem. in Opp'n at 26 (citing 18 U.S.C. § 1961(5)).
They argue instead that "liability" but not "punishment" may be imposed
for straddle offenses but do not cite any authority for this distinction.
In fact, Brown and Boffa involved the imposition of
criminal punishment for RICO straddle offenses.
Because disgorgement is not "punishment," that relief does not
implicate the Ex Post Facto Clause. Even if the Government
seeks punitive relief, criminal RICO straddle offenses do not violate the
Ex Post Facto Clause. Therefore, the Defendants' affirmative
defenses which rely on the Ex Post Facto Clause are
insufficient as a matter of law and will be dismissed. The Government's
Motion for Partial Summary Judgment as to affirmative defenses based on
the Ex Post Facto Clause is granted.
C. The Scope of Disgorgement under 18 U.S.C. § 1964(a) Will
Be Decided in Connection with Defendants' Pending Disgorgement
The Government also seeks summary judgment that this Court's
interpretation of the scope of disgorgement available under
18 U.S.C. § 1964 (a) will not be "controlled" by United States v.
Carson, 52 F.3d 1173 (2d Cir. 1995). The text of
18 U.S.C. § 1964 (a) confers on the district court jurisdiction to "prevent
and restrain" RICO violations. In the Carson decision, the Second
Circuit concluded that disgorgement of ill-gotten gains would not
ordinarily "prevent and restrain" RICO violations unless such gains "are
being used to fund or promote the illegal conduct, or constitute capital
available for that purpose." Id. at 1182.
It is Carson's limitation on the scope of disgorgement that
is at issue in the present Motion. The Government argues that the
limitation is overly-restrictive and contrary to the text of RICO and the
purposes of RICO disgorgement. The Defendants insist that
Carson was properly decided.
Defendants urge the Court to decide this issue in connection with their
pending Disgorgement Motion. Defs.' Mem. in Opp'n at 1. In order to
consider all the relevant arguments raised by the parties, the Court will
take up the Carson standard when deciding that Motion. The
Government's Motion for Partial Summary Judgment as to affirmative
defenses that rely upon Carson's interpretation
of the scope of disgorgement available under 1964(a) is therefore
denied without prejudice.
Because disgorgement of gains acquired in violation of RICO is not
"punishment," it does not implicate the Eighth Amendment. However,
whether what the Government is actually seeking constitutes
"disgorgement" is much in dispute, and cannot be decided on this record
as it stands. Therefore, the Government's Motion to dismiss Defendants'
affirmative defenses that rely on the Excessive Fines Clause is
denied without prejudice.
Defendants' affirmative defenses that rely on the Ex Post
Facto Clause are insufficient as a matter of law despite the dispute
about whether the remedy sought by the Government constitutes something
other than disgorgement. The Ex Post Facto clause, like the
Excessive Fines Clause, also applies only to punishment. If the
Government seeks disgorgement, then the Ex Post Facto clause
will not apply. However, even if the Government does seek "punishment"
for so-called straddle offenses, in which at least one predicate act is
alleged to have occurred after RICO's effective date, the courts have
held that such criminal liability is not impermissibly retroactive.
Therefore, the Government's Motion for Partial Summary Judgment as to
affirmative defenses that rely upon the Ex Post Facto Clause is
Finally, the Court will decide whether § 1964(a) restricts the
Court's power to order disgorgement of illegally acquired gains to those
funds that are being used to fund illegal conduct or that remain
available to do so in connection with Defendants' pending Disgorgement
Motion. Therefore, the Government's Motion for Partial Summary Judgment
as to affirmative defenses that rely upon such a limitation is
denied without prejudice.
An Order will accompany this opinion.