No Taxation Through Litigation

By Peter J. Ferrara and Bob Williams

Introduction

Abusing our legal system for political, social or selfish ends is fast becoming America’s favorite pastime. Raising revenue through litigation is the newest weapon in the arsenal of those who advocate using government to change cultural and social policy and who need more money to do it. Billions of dollars, millions of jobs, and the survival of legitimate businesses are at stake. If the Clinton administration’s latest proposed legal action against the tobacco companies proceeds, government will become the biggest abuser of them all—with the potential to threaten dozens of industries from fast food outlets to automobile manufacturers.

Former Clinton Secretary of Labor, Robert Reich, wrote a USA Today editorial in February titled "Regulation is Out, Litigation is In." He closed by stating, "the era of big government may be over, but the era of regulation through litigation has just begun." ¹

In his January State of the Union Address, President Clinton announced, "The Justice Department is preparing a litigation plan to take the tobacco companies to court and with the funds we recover, to strengthen Medicare." Clinton had ordered the Justice Department to sue cigarette manufacturers to recover the costs allegedly paid by Medicare to treat smoking-related illnesses. To our knowledge, never before has the President of the United States announced that the purpose of federal litigation was to raise revenue. And never before has the President targeted for a lawsuit a company which made a legal product in a legal manner.

State AGs have sued the tobacco companies to recover their allegedly smoking-related costs through Medicaid. That suit was settled when the cigarette manufacturers agreed to pay almost $250 billion to the states over the next 25 years. The tobacco settlement effectively imposed on smokers a tax increase of $250 billion over the 25 year period, or about 45 cents a pack, since the cigarette prices paid by smokers are the only source of funds to finance these settlement payments. The cigarette prices paid by consumers will be $250 billion higher overall during the next 25 years, due to this settlement. If President Clinton’s Medicare suit is successfully pursued, it would result in another, even greater tax increase. Clinton has said his suit would impose "hundreds of billions" in additional costs on cigarettes.

The tobacco deal forged by state AGs opened a new frontier, and the emerging trail is becoming clear. The state attorneys and trial attorneys will pick "socially incorrect" targets that are unpopular or underfinanced and threaten to sue. The prospect of a major legal battle, with the potential for enormous jury settlements, will often be enough to force the other side to settle out of court.

After paying federal, state and city governments their agreed-upon take, trial lawyers will use some of the proceeds left from previous wins or out-of-court settlements to finance continuing rounds of litigation. An example of this can be seen in the tobacco settlement where individual trial attorneys will be taking a large "cut" of the $206 billion payout and then will be signing up to do another round against tobacco manufacturers. One Mississippi law firm will collect more than $800 million of the deal, and Texas attorneys will get around $3.3 billion. And this issue isn’t dead since President Clinton ordered the Justice Department to sue the tobacco industry.

These suits are primary examples of a dangerous new trend. As the strong opposition of voters to higher taxes has generally stopped overt, legislated tax increases in Congress and state legislatures, the forces of big government are turning to other, more hidden means of raising taxes. Perhaps the most dangerous of these is taxation through litigation.

Under this approach, federal, state or local governments locking arms with trial attorneys will sue an industry for some general, foreseeable social harm that everyone knows about. Cars inevitably lead to accidents; guns are used in crimes; milk, eggs, cheese and hamburgers cause heart attacks; beer, wine and alcoholic beverages drunk to excess result in illness and accidents; etc. The government will claim that the producers of these products must pay for the costs of such results, even when the real cause is misuse of the product. Then through a settlement or a costly legal battle that could result in a very expensive final judgment, the industry will be forced to pay the government some enormous sum over many years to compensate for the alleged harmful results of their products. This amount will be recovered from consumers through higher prices. Thus, government action imposes higher prices on consumers—in effect, a tax increase. To us, this action borders on extortion.

The most alarming aspect of such revenue-raising litigation is the government’s new willingness to ensure its victory by stripping businesses of their substantive legal rights and defenses. This may occur through what are inaccurately labeled "clarifying amendments" to existing law, forum shopping, or through attempts to twist and change existing precedents. Suffice it to say that we believe that the radical legal theories that the Department of Justice is likely to use against tobacco could be used against virtually any industry.

So, who’s next? It depends on who you ask. In answering this question, one of the trial attorneys handling the case against the tobacco industry said, "It’s hard to say. Right now our plates are full tackling these politically powerful and unregulated industries. But we are interested in taking a close look at the exorbitant prices of prescription drugs, for example. Unless the courts reject our approach, we will continue to utilize it to tackle industry bullies." ²

We believe no one is safe from this new taxation mechanism. The list of potential victims is endless, limited only by imagination. On the government’s list of targets are the obvious, like tobacco companies, and gun manufacturers and dealers. But lesser-known inclusions are industries manufacturing paint, chemicals, pesticides, fatty foods (including ice cream), alcohol, movies, videos, and health-care products.

States, too, are turning to the courts to raise revenue. In some states, politicians are using the courts to raise taxes for education. New Hampshire saw its opposition to statewide taxes broken by a court decision that "forced" the Democrat governor to create a statewide property tax. Microsoft, Intel and American Airlines have also been attacked, both by the federal Justice Department and state AGs.

Cities also have caught on to litigation as a way to fill government coffers. A number of cities have now sued gun manufacturers as well, demanding payment for the health costs of treating gun injuries and for the policing costs needed to deter such criminal conduct. In June, it was announced that lead paint manufacturers could be the next big legal target even though lead paint was banned in residences in 1978.³ In Washington, D.C., there is already a proposal to revise the city’s lead control laws and ease the way for potential lawsuits against former lead-paint manufacturers.

America was founded on the "Rule of Law’ not the "Rule of Coercion and Extortion." Under the rule of law, if a manufacture makes a legal product and conducts itself in a legal manner, it cannot be sued unless the product is defective. We already have laws on the books to handle defective products. Now the AGs and trial attorneys are suing the manufacturers for alleged misuse of legal products by people who either bought or sold the product! Under such a system, no manufacturer is safe.

Raising revenue and attempting to change social policy through this type of coercion is unacceptable. It grants de facto taxing authority to state AGs and trial attorneys. Remember: In our "republic," it took a constitutional amendment (16th) for Congress to even have the authority to levy an income tax!

Washington state Attorney General Christine Gregoire stated, "We decided to use the leverage of these lawsuits [the tobacco suits] for an even greater public good—to fundamentally change the public policy of this country regarding tobacco."⁴ Gregoire appears to believe AGs have dictatorial power and disregards the legislative branch of government which has the only constitutional power to set policy.

Taxation without representation was one of the fundamental causes of our rebellion against England. Ultimately, consumers and taxpayers will pick up the tab. Where will it end? It’s hard to say, particularly since some of the legal proceeds are being spent to help elect pro-litigation lawmakers.

Clinton’s Medicare suit is the clearest and most immediate example of this trend. For several major reasons, this lawsuit is wrong and should be stopped. And these overwhelming criticisms also apply to similar suits that may be brought against other industries. Fortunately, there are solutions and taxpayer protections that could be enacted to stop this new threat.

Individuals who sat back and let the tobacco industry take a body blow because they do not like tobacco products need to understand the deeper principles at work. It’s tobacco today; tomorrow it will be another industry deemed socially irresponsible by the elitists who pat us on the head, promise us a cut of the action, and then plan to run our country without us. If we let government and trial lawyers exploit manufacturers of legal products, then we deserve what we get!

Taxes are already too high

Proponents of tobacco litigation advocate making tobacco companies pay for what they have cost government. But what are the real costs of smoking to government? This is a question government doesn’t want to answer.

Smokers already pay high federal, state and even local excise taxes on cigarettes. The federal excise tax alone is 24 cents per pack. With the varying state and local taxes, the total excise tax levy averages more than 50 cents per pack.

Studies show that these taxes are already greater than the total costs to government which can be attributed to smoking. The Food and Drug Administration in fact has estimated that "smoking creates net external costs of about $0.33 per pack."⁵ Indeed, the FDA has stated, "the most detailed research on the issue of whether smokers pay their own way is the 1991 study by Manning, et al., who concluded that there is no net externality, because the sum of all smoking related externalities is probably less than the added payments imposed on smokers through current federal and state excise taxes."

Similarly, researchers for the Congressional Research Service have stated:

The financial costs smokers impose on nonsmokers have been extensively examined in a 1991 study funded by the Rand Corp. Updating the study’s mid-range estimate to 1995 levels yields a net external cost of smoking of 33 cents per pack. Since current federal, state and local taxes are 50 cents per pack or more on average, the Rand-sponsored study suggests that smokers are already paying more than their way. ⁶

Moreover, smokers—like everyone else—already pay heavy payroll taxes over their entire working careers and substantial monthly premiums to finance Medicare. These payments cover most of their costs to Medicare and are not counted in the above analysis.

Indeed, the government gains from smoking overall, as early deaths from smoking save the government huge amounts in costs for Social Security and Medicare. In a 1994 study, economist W. Kip Viscusi (now of Harvard) concluded: "The cost savings that results because of the premature deaths of smokers through their lower Social Security and pension costs will more than compensate for the added costs imposed by smokers…On balance there is a net cost savings to society." ⁷ In fact, a 1997 study published in The New England Journal of Medicine found smoking actually reduces total medical spending, because people who die earlier consume fewer medical services over their lives than people who live longer.

For these reasons, the Congressional Research Service concluded "all in all, smoking has apparently brought financial gain to both the federal and state governments." Consequently, there is no justification for imposing higher taxes to compensate for the smoking-related costs of Medicare.

In addition, a tax hike through a government-imposed increase in cigarette prices would be highly regressive. It would fall most harshly on lower income people for two reasons—they are more likely to smoke, and cigarette costs consume a larger share of their modest incomes. More than half of current cigarette tax revenue comes from people earning less than $30,000 per year, and about a third comes from those making less than $20,000 per year. Almost all of it, 97 percent, comes from people whose incomes total less than $75,000. As Amy Ridenour, President of the National Center for Public Policy Research says, "If President Clinton really believes the federal government needs more revenue, he should not look to the poor and middle class to finance it."

Out of what the consumer pays for a pack of cigarettes, 75 percent already goes to federal, state and local governments for various taxes rather than to the cigarette producers. This includes federal income taxes, state income taxes, federal payroll taxes, unemployment insurance taxes, worker’s compensation taxes, local property taxes, and any local income taxes. For the delivery truck, the cigarette producer must pay gas taxes, tire excise taxes, truck highway use taxes, and heavy truck excise taxes. On the phone in the cigarette factory, the producer must pay telephone excise taxes.

With huge Medicare and Medicaid-related de facto tax increases added, what the consumer pays for cigarettes will be almost all taxes. The price for a pack of cigarettes could well soar to $4 or $5, with the actual cost of producing it much less than $1.

This will only stimulate a massive black market in cigarettes from alternative and mostly foreign producers. Organized crime will greatly increase as a result, with a vast new market and vast new reserves. As the Hispanic Business Roundtable states:

A higher federal tax would further the significant price differences between Mexico and the United States—for example— virtually guaranteeing the creation of a massive black market controlled by organized crime, which would likely be more lax in sales to youth. Without a doubt, a new black market trafficking tobacco from Mexico would target the Hispanic community in the southwestern states, and our youth in particular.⁸

Clinton’s huge de facto tax increase would also hurt many small farmers, who are already reeling from the lower demand due to the state-imposed, Medicaid-related tax increases. The expected drop in cigarette demand from these increases has already reduced tobacco crop demand by 30 to 35 percent. Unlike most other crops, tobacco can be grown profitably on small acreages, providing a viable niche for many small farmers. Indeed, many small farmers use tobacco as a profitable economic foundation for an entire operation diversified into other crops and livestock. Without the tobacco income, many of these small farm operations will fail as well. As several members of Congress recently wrote to President Clinton, "Often, these small tobacco allotments provide the difference between being able to keep or having to sell the family farm."⁹

Every acre of tobacco grown in fact already raises more than 10 times as much in taxes for the government as income for the tobacco farmer. The federal, state and local excise taxes alone amount to $19.54 per pound of tobacco. But tobacco farmers have recently averaged in the range of $1.88 per pound for their product. If taxes on tobacco increase even further, it will just drive tobacco and cigarette production overseas, causing the loss of American jobs and economic growth, with no end effect on smoking. As a result, as the Virginia Tobacco Growers Association recently wrote, Clinton’s Medicare suit "will ultimately and inevitably lead to nothing short of the total devastation of both the nation’s tobacco farmers and the communities in which they live."¹⁰

Taxes overall are already far too high. The average family today pays more in federal, state, and local taxes than they do for food, clothing, and shelter combined. Taxes are at their highest level relative to the economy since World War II, which was the highest level in U.S. history. Taxes need to be cut sharply, not increased further.

Finally, nothing could be more ironic or hypocritical than for federal and state governments to be reaping hundreds of billions of dollars from the sale of a product, on the grounds that the product is dangerous and harmful to health. It is evident that government does not want to ban tobacco; they want to milk it as a cash cow and take as much money as they can from its sale. As Dan Popeo, president of the Washington Legal Foundation, has written:

Now, with classic hypocrisy, we’re being told that it’s still going to be perfectly acceptable to keep selling these ‘dangerous’ products as long as government can get a big enough piece of the new tax pie. Who’s kidding whom? They don’t really want ‘Big Tobacco’ or its customers to go away at all. The new smoking control scheme is just public policy pageantry. ¹¹

In Washington state, the State Investment Board invests public pension funds in tobacco stocks. The state spent taxpayer dollars building smoke shacks for state employees to use on their breaks. And, the state’s lead attorney in the lawsuit against Big Tobacco and the evils of smoking is a heavy smoker. What hypocrisy!

Similarly, the Wall Street Journal has denounced "the spectacle of politicians denouncing cigarettes as a drug while trying to fill their pockets with the drugs’ profits." 12 Or, as Pat Buchanan put it, "Pardon the cynicism, but these shakedowns by government in the name of compassion are getting to be both transparent and addictive."¹³

No legal basis for a suit

Not only does the proposed federal tobacco litigation have no economic basis, it lacks any legal basis. During testimony by Attorney General Janet Reno before the Senate Judiciary Committee, on April 30, 1997, Senators Kennedy and Durbin both asked Reno why the federal government doesn’t file its own suit to recover the smoking-related costs of Medicaid, Medicare, and other programs. Reno responded with the results of a Justice Department study of the issues, saying "What we have determined was that it was the state’s cause of action and that we needed to work with the states, that the federal government does not have an independent cause of action."¹⁴ Justice Department spokesman Joe Kirovsky explained the very same day, "Right now, it would seem we don't have the authority to sue."¹⁵

The Justice Department was right. It has no case. But Clinton has ordered the Department to sue anyway. Former Labor Secretary Robert Reich said, "Many legal experts doubt the federal government has the authority to launch such a lawsuit. 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..."¹⁶

No statute provides authority for a federal suit to recover the costs Medicare pays to treat smoking-related illnesses. The Medicare statute says nothing about suing for recovery of Medicare costs. The Medical Care Recovery Act provides only that the government can recover benefits it has provided to an injured person if that person also receives benefits from a private insurer or recovers costs for the injury from a wrongdoer. Its purpose is to save the government from effectively paying a double recovery to the injured person.

Under the common law, the government could try to recover Medicare costs as a private insurer might. In that case, it would stand in the shoes of particular Medicare beneficiaries who were harmed through smoking and sue in their stead under the doctrine of "subrogation." But the government would then have the same rights and be subject to the same defenses as the individual beneficiaries would be if they sued.

As has been shown over and over in suits by individuals against cigarette companies, these individuals cannot prevail because they assumed the risk of smoking. They certainly knew the dangers of smoking—each pack of cigarettes itself warns of the danger, and has done so for over 30 years. Each smoker decided to smoke anyway.

The government under President Clinton recognized this principle when it was threatened with suits for having provided free cigarettes to soldiers before 1974. Clinton’s former Veteran’s Affairs Secretary Jesse Brown disclaimed any liability saying it would be "borderline absurdity" for the government to be held liable for the "veterans’ personal choice to engage in conduct damaging to their health." He also said, "If you choose to smoke you are responsible for the consequences of your act." ¹⁷

Any attempt by the Clinton administration to recover in a suit on these grounds would pervert the tort law beyond all recognition. The government may try to argue that smoking caused some general estimated degree of illness among Medicare beneficiaries and that has produced some general estimated costs. The government would then have to argue on some new made-up theory that it should be entitled to recover these costs resulting from the legal use of a legal product. It would then have to hold companies liable for these costs based on the market share of each, without proof that each company’s product caused any particular share of the harm.

This social theorizing is not a lawsuit. There would be no proof here of specific harm to a specific claimant caused by the wrongful act of a specific party. Producing and selling cigarettes for smoking—with the health risks broadly publicized and universally known—is not a wrongful act. It is a specifically permitted activity under government policy. If the law were set loose from finding liability only for specific harm to a specific claimant proximately caused by a specific wrongdoer, then there would be no limits on the liabilities courts could impose. Government and trial lawyers could then effectively loot any and all property based on some popular opinion of the day. No property and no industry would be safe. This is not the rule of law, and a modern economy cannot function under such a regime.

Arguments on this broad basis belong before a legislature considering how to correct some social problem, subject to democratic control. They do not belong in a court asking an unelected, lifetime-tenure judge to rearrange society to suit a particular philosophical perspective.

Moreover, how could the government expect to win any such suit when it has so directly subsidized and encouraged smoking for so long? The government has subsidized tobacco farming, reducing the price of tobacco and cigarettes, which translates into more smoking. By the very act of covering smoking illnesses under Medicare, the government has again encouraged smoking—it reduces smoking costs by volunteering to pay the bills of any resulting illness. Up until 1974, the government even distributed free cigarettes to soldiers.

Indeed, the government has directly benefitted from all this smoking, effectively taking the lion’s share of the profits through its high excise tax on cigarettes. How can the government expect to recover funds for a practice in which it has effectively participated and shared the gains?

In addition, the government assumed the risk of covering smokers under Medicare. The government cannot claim it did not know of the health and cost risks of smoking. It has been warning of the health risks since before Medicare was adopted in 1965, and began requiring health warning labels on cigarette packs the very next year. The government knew when it adopted Medicare that many would get sick due to smoking and the program would be paying their health care costs. Even so, the government voluntarily assumed this risk anyway.

A final legal bar to recovery is the factor discussed above: that smokers have already more than paid their own way through the excise tax on cigarettes, let alone their Medicare taxes and premiums. Through Clinton’s ordered Medicare lawsuit, the government would be seeking a double—or higher—recovery.

Unconstitutional claims

The government, in fact, knows that its legal case is so bad that the Justice Department has discussed passing legislation to grant the federal government specific authority to recover from the cigarette companies and strip those companies of any legal defenses. To put it another way, cigarettes are a legal product made by a legal company in a legal manner. In order for the government to increase its chances of winning in court, the government wants to change the law after the fact and hold the companies responsible for possible misuse of their products by the consumers.

Such legislation, however, would be unconstitutional on several grounds. First, such retroactive legislation would violate the constitutional requirement for due process of law. In Honda Motor Co. v. Oberg, 512 US 415, 430 (1994), the Supreme Court said, "abrogation of well-established common law protections against arbitrary deprivations of property raises a presumption that its procedures violate the Due Process Clause." Similarly, in Landgraf v. USI Film Products, Inc., 511 US 244, 265 (1994), the Supreme Court said, "Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly." Passing a law after the fact that imposes liability on the cigarette companies and deprives them of long-established legal defenses cannot be consistent with the procedural fairness mandated by the due process clause.

Indeed, the state of Florida passed a statute allowing a state suit to impose liability on cigarette manufacturers for smoking-related Medicaid costs without requiring the suit to name specific individuals harmed or show specific Medicaid costs they incurred as a result. In Agency for Health Care Administration v. Associated Industries of Florida, 678 So. 2d 1239 (Fla. 1996), the Florida Supreme Court ruled that these provisions of the statute violated due process and struck them down as unconstitutional.

Such retroactive legislation would also violate the Takings Clause, as well as quite possibly the Bill of Attainder and Ex Post Facto Clauses. In Eastern Enterprises v. Apfel, 118 S. Ct. 2131, the Supreme Court held the Coal Industry Retiree Health Benefits Act an unconstitutional taking because it effectively imposed liability on the coal industry retroactively to pay for illnesses of retired coal miners. The Court said such retroactive laws undermine "confidence in the Constitutional system." 118 S. Ct. at 2159.

In addition, if the legislation applied only to the cigarette industry, it would clearly violate the Equal Protection Clause. See, e.g., Yick Wo v. Hopkins, 118 US 356. If the legislation were drafted broadly to apply to everyone; then it would be a huge menace threatening to loot every private industry with no defense allowed.

Even apart from such retroactive legislation, a Medicare recovery suit seeking to hold the cigarette companies liable based only on broad statistical evidence regarding social harm and apportioning liability based only on market share would also be unconstitutional. Article III of the Constitution limits the judicial branch to trying specific cases and controversies—cases involving specific harm to specific claimants proximately and wrongfully caused by a specific product.

A federal appeals court rejected a broad statistical claim against asbestos manufacturers similar to Clinton’s Medicare claim on precisely these grounds, saying: "the procedures here called for comprise something other than a trial within our authority. It is called a trial, but it is not." In re Fireboard Corp., 897 F.2d 706, 712 (5th Cir. 1990).

In Cimino v. Raymark Industries, Inc., 151 F.3d 297 (5th Cir. 1998), the court rejected another broad-based asbestos claim on the grounds that holding the defendants liable without proof of specific harm to a specific claimant proximately caused by a specific product would violate the defendant’s 7th amendment right to a trial by jury. The same point would apply to Clinton’s Medicare suit against the cigarette manufacturers.

Such broad-based claims also deny the defendant due process of law, because they deny common law defenses and rights to challenge a specific harm to a specific claimant or whether the harm was proximately caused by the defendant. See, e.g., National Union Fire Insurance Co. v. City Savings, 28 F.3d 376, 394 (3d Cir. 1994). Accepting broad-based claims as legally valid would have the same effect as legislation specifying liability and stripping all defenses and, consequently, would be unconstitutional on the same grounds.

Subverting democracy

The tobacco litigation not only violates specific provisions of the Constitution, it threatens the basic structure of our government. Only Congress has the power to raise federal taxes and it took a Constitutional amendment (the 16th) to give Congress most of that power. Last year, Congress rejected a massive tax hike on cigarettes proposed by Clinton. Clinton’s ordered Medicare lawsuit is simply an attempt to go around Congress and impose this tax increase through the courts. As Amy Ridenour says, "By suing tobacco companies, President Clinton is clearly trying to raise revenue while bypassing the legislative branch, which is reluctant to raise taxes to the higher level Clinton prefers."

If this lawsuit maneuver is allowed to succeed, it would subvert our democracy and constitutional framework of government. It would take the power of taxation away from Congress and, as a result, the democratic control of the people; giving it instead to courts with unelected judges, who could impose taxes at the unilateral request of the president. Paul Weyrich says it best:

More, the entry of the federal government into the lucrative lawsuit business opens the door to taxation without representation. Any government action that takes money from an industry is a form of tax. But taxation by lawsuit bypasses the whole legislative process. In effect, it enables the executive branch to impose a tax by fiat….Taxation without representation was one of the fundamental causes of our rebellion against Great Britain. Americans should understand that the precedent established by this lawsuit will be the equivalent of King George’s hated Stamp Act. ¹⁸

Indeed, Clinton’s lawsuit strategy could even leave courts out of the equation as well as Congress. Clinton’s strategy apparently is to use the threat of highly burdensome and costly litigation to win a settlement with the cigarette companies, gaining concessions on taxes and regulation it could not achieve through Congress. The New York Times reported on January 21, 1999, that "lawyers involved in the [Medicare lawsuit] effort said the aim would be to win concessions not included in the recent [Medicaid] settlements…These would include measures like federal regulation of cigarettes and nicotine…under the Food and Drug Administration," as well as tax increases.

When issues such as higher taxes to counter social harms or FDA jurisdiction and regulation are decided through settlements, the president is allowed to make law unilaterally through intimidation, not democratic decision-making. Congress and the public are consequently denied the opportunity to consider all the complexities and interests involved and come to an acceptable compromise through political give and take in the democratic process. A more complete perversion of our democratic system is hard to imagine.

The states would lose as well

Clinton shouldn’t look to the states that just won their lawsuit against the tobacco companies for support in his attempt. The $246 billion Medicaid settlement with the states is dependent on the volume of cigarette sales. If the sales volume goes down, then the payments to the states decline as well! The state AGs are fighting the federal intrusion. Isn’t it amazing that the state AGs want to ensure the financial viability of the tobacco industry so they can keep milking this cash cow!

The Medicaid settlement has already produced a cigarette price increase of about 45 cents per pack. If the much larger Medicare recovery that Clinton seeks—"hundreds of billions"—is also added, cigarette prices would have to rise much more. This will inevitably cause a major decline in cigarette sales, and an equivalent decline in the expected Medicaid settlement payments to the states.

That is the reason why Washington’s Attorney General, Christine Gregoire, has been so vocal in her opposition to Clinton’s tax proposal. Tennessee Governor Dan Sundquist has written about Clinton's Medicare suit; "To come along at this late date with legislation that is dubious constitutionally and patently punitive is a slap in the face to every state." ¹⁹

Who’s next?

If Clinton’s Medicare lawsuit is successful, it will establish a powerful precedent for taxation through litigation. This precedent would then be used to impose wide-ranging taxes on other industries.

Inspired by the cigarette industry precedent, the cities of Chicago and New Orleans have already sued gun manufacturers to recover the public health and safety costs incurred to treat and prevent injuries caused by guns in their cities. If successful, such suits would end up imposing de facto new taxes on guns by raising their price to finance the costs of any settlement or judgment. Harsh restrictions on private gun ownership by law-abiding citizens could result as well, all but ending the right to self-defense.

Gun makers and other industries have strong reason to be concerned about the alliances between the state AGs and private trial attorneys. Both the gun and tobacco suits have a common funding source: a handful of private trial attorneys who sign contingency fee agreements with the state AGs. Thus, private attorneys are essentially hired as government subcontractors but with a large financial interest in the outcome. It is as if the State Patrol hired troopers and paid them on a per-ticket basis. We believe there is potential for corruption in such a contingency-fee arrangement. Some of these trial attorneys have been large contributors to elected officials and now are receiving contracts from elected officials.

But that is just the beginning. Trial attorneys and politicians are gearing up to sue the lead paint industry. Suits against car manufacturers could add new taxes in effect because of the inevitability and foresee-ability of the crashes, injuries, and deaths that result from use of their product. Some cars, such as sport utility vehicles, or high performance cars, could effectively be banned as a result.

Other suits could impose new "taxes" on beer, wine and other alcoholic beverages because the inevitable excessive use by some produces harmful health consequences and accidents. Producers and servers of high fat foods could expect suits effectively taxing their products and services because of the health consequences of high fat diets. Dairy farmers beware. Chocolate lovers beware!

The list of potential victims is endless, limited only by imagination. In the end, consumers and working people would pay for all of this, suffering a massive new tax burden because of taxation through litigation. They may also lose access to many useful and valued products.

The attitude of the perpetrators of these lawsuits is revealed by plaintiffs’ attorney John Coales, who recently said:

What’s next? It’s hard to say. Right now our plates are full tackling these politically powerful and unregulated industries. But we are interested in taking a close look at the exorbitant prices of prescription drugs, for example. Unless the courts reject our approach, we will continue to utilize it to tackle industry bullies. ²⁰

Jonathon Rauch more accurately captured the approach of Mr. Coales and his colleagues in an article in the National Journal, writing, "They were like a bunch of bandits lurking on the highways, but using lawsuits instead of revolvers." ²¹ We are concerned that some of the millions of dollars in settlement fees these attorneys have obtained from the tobacco industry will be used to unduly influence political elections and fund new litigation. Individual trial attorneys will take a large slice of the $206 billion tobacco settlement. One Mississippi law firm will receive more than $800 million and Texas lawyers will get around $3.3 billion.

This is why the National Restaurant Association correctly writes, "The threat of this litigation casts a very disturbing shadow over the entire business community." ²² Several members of Congress have also written regarding Clinton’s Medicare lawsuit:

The simple assertion of such a claim, no matter the motivation, would create a troubling precedent that could be used to threaten the confiscation of massive funds from any American industry. Such a confiscation would allow the Executive branch to levee (sic) "taxes" on an industry without consulting with Congress. ²³ The U.S. Chamber of Commerce simply and accurately calls Clinton's Medicare suit "a gross misuse of Presidential authority." ²⁴

Solutions

This new taxation through litigation must be stopped. Instead of passing legislation authorizing Clinton’s suit, as Clinton may request, Congress should pass legislation to stop it and all future taxation through litigation claims. Suits seeking recovery for general social harm proved by general statistics should be prohibited in all federal courts. Federal cases must be limited to specific harm proven to be suffered by specific individuals. Indeed, Congress should adopt by statute the common law rule of liability only for proximate causation of the harm by the defendant, as well as the common law defenses, such as assumption of the risk and contributory negligence.

The states should each adopt these provisions for their courts as well. In addition to ending taxation through litigation, this would effectively solve the tort crisis. We believe states should outlaw contingency fee arrangements with the state AGs and limit the expenditure authority the state AGs can take without legislative approval. In our republican form of government, we should not condone private attorneys enforcing public law when those attorneys have a personal stake in securing severe penalties.

Moreover, Congress should amend the equity powers of all federal courts specifically to remove any power of a federal court to order a tax increase. One of the bedrock principles of this nation is "no taxation without representation." Taxes can only be imposed by the democratically-elected representatives of the people. Rep. John Manzullo (R-NJ) has already developed such a proposal. The states should each adopt this provision for their courts as well.

Conclusion

Americans for Tax Reform President Grover Norquist says, "This fight is not about tobacco or teenagers. It is yet again about spending more money, and consolidating more power and authority in Washington. It is also a model for future action."

Clinton’s Medicare suit, and the broader taxation through litigation it portends, must be stopped. Such suits would impose effective tax increases on working people through the courts rather than through the democratic system. Control by the people of this nation would be subverted, and we would return to taxation without representation. There is no sound legal basis for such suits; the claims are in fact unconstitutional. If not stopped now, taxation through litigation will grow, eating up industry after industry, until it destroys the prosperity of the American people.

Congress and the state legislatures can and should take concrete steps to stop this new taxation through litigation crusade.

Endnotes

1. Robert Reich, "Regulations is Out, Litigation is In," USA Today, February 11, 1999.

2. Washington Post, January 31, 1999

3. Saundra Torry, "Lead Paint Could Be Next Big Legal Target," Washington Post, June 10, 1999.

4. Washington State Bar News, September 1997, page 24.

5. 61 Fed. Reg. 44,572 (1196)

6. Jane G. Gravelle and Dennis Zimmerman, The Washington Post, June 5, 1994. See also, Jane G. Gravelle and Dennis Zimmerman, CRS Report for Congress, "Cigarette Taxes to Fund Health care Reform: An Economic Analysis" (1994)

7. As quoted by Jacob Sullum, "Following Suit," Reason, April 1999.

8. Roberto Garcia de Posada, Executive Director, Hispanic Business Roundtable, letter to Senator Pete Domenici, March 19,1999.

9. Reps. Rick Boucher, William L. Jenkins, and Van Hillary, letter to President William J. Clinton, February 3, 1999.

10. Don L. Anderson, President, Virginia Tobacco Growers Association, letter to President William J. Clinton, January 28, 1999

11. Dan Popeo, The Washington Post, May 8, 1998

12. Editorial, Wall Street Journal, April 23, 1998.

13. Patrick Buchanan, The Washington Times, June 25, 1997

14. Attorney General Janet Reno, Senate Judiciary Committee Hearing, April 30, 1997.

15. Joe Kirovsky, Justice Department Spokesman, April 30, 1997.

16. Robert Reich, "Regulation is Out, Litigation is In," USA Today, February 11, 1999.

17. As quoted by Robert Levy, "Clinton’s Illegal Assault on the Tobacco Industry," Wall Street Journal, February 8, 1999.

18. Paul M. Weyrich, National Chairman, Coalitions for America, "New Assault on Tobacco A Smokescreen for Attack against Freedom," January 26, 1999.

19. Governor Dan Sundquist, letter to Senator Bill Frist, March 16, 1999.

20. Washington Post, January 31, 1999.

21. Jonathon Rauch, "Read This or I’ll Sue You," National Journal, February 6, 1999.

22. Letter from Elain Graham and Lee Culpepper to Senate Majority Trent Lott, January 28, 1999.

23. Letter from Rep. Jay Dickey, et al. to Speaker Dennis Hastert, March 24, 1999.

24. Letter from R. Bruce Josten to Senate Majority Leader Trent Lott.

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org