By James Vicini and Emily Stephenson
WASHINGTON/CHICAGO (Reuters) - The U.S. Supreme Court rejected an attempt by the federal government to wrest billions of dollars in damages from the tobacco industry, a decision that helped lift tobacco stocks.
The court sided against tobacco in a separate appeal, but that did nothing to temper enthusiasm on Wall Street, which saw the elimination of any potential for the federal government to win a multi-billion-dollar award against the industry as a clear win for cigarette makers.
"The fact that the court threw out the government's appeal is a positive for tobacco stocks because it removes one of many potential liabilities," said Jud Pyle, chief investment strategist at Options News Network, a division of option-market maker PEAK6 Investments in Chicago.
"Removing that appeal is viewed as a big positive for the share prices."
The Dow Jones tobacco index rose 1.83 percent on Monday afternoon. Shares of Altria Group Inc, the largest U.S. tobacco company, closed up 3.25 percent to $20.34, while rival Reynolds American Inc's closed up about 4 percent to $53.45.
The stocks moved higher even as the justices rejected a separate appeal by the tobacco companies of a lower court's ruling that the companies had violated racketeering law by conspiring to lie for years to sell tobacco products they knew were dangerous.
The case, filed in 1999 by the Clinton administration, sought to force the industry to fund a smoking cessation program and other remedies. The U.S. Justice Department under the Bush administration dropped demands from $280 billion to $14 billion.
U.S. District Judge Gladys Kessler ruled in 2006 that the companies broke the law and could no longer use expressions such as "low tar" or "light" in their cigarette marketing. But she also said she could not force them to fund a smoking cessation program. An appeals court held that the judge could act to prevent racketeering violations but not to impose smoking-cessation and other remedies.
The Obama administration appealed to the Supreme Court.
Administration attorneys said the appeals court's ruling prevented the trial judge from crafting appropriate remedies.
Tobacco companies argued in appeals that the government had improperly invoked the racketeering law and that the appeals court erred when it found that a group of corporations could form a racketeering "enterprise."
Lawyers for the companies also argued that the appeals court had been too deferential to the trial judge's findings and should have conducted an independent review because the case raised free-speech issues.
They said the decisions by the lower courts to brand their statements about smoking as fraudulent unfairly denied them their constitutional free-speech rights to engage in the public-health debate about smoking.
Murray Garnick, senior vice president of client services for defendant Altria Group, said in a statement on Monday that the company saw the decision as confirmation that the Supreme Court did not view disgorgement as a remedy.
Defendants also included Lorillard Inc; Vector Group Ltd's Liggett Group; and British American Tobacco Plc and its Brown & Williamson unit.
(Additional reporting by Doris Frankel, Editing by John Wallace, Matthew Lewis and Carol Bishopric)