Big tobacco in the dock as America prepares for biggest ever lawsuit

$280bn action over claims that industry deliberately withheld damning health studies

The tobacco industry will face its biggest legal challenge yet next month, when it will finally appear in the dock to fight a $280bn claim from the US Government for deceiving the public over the health risks of smoking for more than 50 years.

It is the largest suit ever launched by the Department of Justice and promises to reveal whether scientific research on nicotine was withheld, destroyed and ignored by a number of companies in a conspiracy designed to keep "profits above the public health", dating back to 1954.

The secrets of the tobacco industry have already been the subject of an Oscar-nominated Hollywood blockbuster. When Jeffrey Wigand, who was head of research and development at Brown & Williamson, British American Tobacco's former US subsidiary, described cigarettes as the "delivery device for nicotine" to the US media, the tobacco industry was almost choked by the biggest public health lawsuit to date. His revelations that tobacco companies knew nicotine was addictive and that carcinogenic material was knowingly added to cigarettes were made public by the American investigative journalist Lowell Bergman, whose work inspired the film The Insider, starring Al Pacino and Russell Crowe. Mr Wigand's testimony helped bring about a $206bn settlement between the tobacco industry and 46 US states for the costs of treating sick smokers.

On 13 September, the sequel to that settlement will open to the public, with a federal trial set to take place in Washington DC that has taken five years to bring to court. A number of major cigarette companies, including BAT, are on trial on "fraud and deceit" charges that were originally designed to fight the mafia. Along with BAT stands Philip Morris, R J Reynolds, Lorillard and Liggett, which represent the best-known brands in cigarettes such as Marlboro, Lucky Strike, Pall Mall and Camel.

These giant corporations stand accused of conspiring to wilfully mislead the public over the health dangers of smoking in a pact that began in January 1954. The US Department of Justice claims that a group of chief executives met at the Plaza Hotel in New York to agree a "long-term public relations campaign based on fraud and deception". It is claiming $280bn from the past profits of these companies on racketeering charges, making it the largest case of its kind in history.

President Bill Clinton began the action in 1999 and originally sought to recoup the healthcare costs for treating smoking-related diseases. Deaths from smoking in the US amount to 400,000 a year, and $20bn a year of taxpayers' money goes on treating smokers. Janet Reno, the then Attorney General, said at the time that over the past five decades, tobacco companies had "conducted themselves without regard to the truth, without regard to the law, and without regard to the health and life of the American people". She claimed the tobacco industry had waged an "intentional, co-ordinated campaign of fraud and deceit, designed to preserve their enormous profits whatever the cost - in human lives, human suffering and in medical resources".

News of the lawsuit in 1999 sent shares in BAT plummeting. Some £5.8bn was wiped off its market capitalisation and the then chairman, Martin Broughton, was forced to appeal directly to Wall Street to support the business and stop the downward orbit of its share price.

Since then, the road to trial has been beset with difficulties. The tobacco industry scored a large victory in 2000 when the Government's claim to recover healthcare costs was thrown out.

The case now hinges on racketeering charges. Under these laws, designed to restrict companies that benefit from organised crime, the Government can make a claim on the past profits made by the companies involved as a means to dissuade them from behaving wrongly in the future. When George W Bush came into office in 2000, the tobacco industry had hoped the case would be stubbed out as many leading Republicans had opposed the action. The budget for taking the case had already risen from $1.8m in 1999 to $23.25m in 2001. Shares in tobacco stocks rose in anticipation of a tobacco-friendly Bush administration, which would be prepared to neglect the industry. But to the surprise of many commentators and companies, President Bush has continued with the litigation apace. The Department of Justice has budgeted $29.8m to fight the case this year.

Through many court hearings leading up to the trial, BAT has been fighting to keep a number of its internal documents secret. In June, it was criticised for "inexcusable conduct" by the judge hearing the case for resisting demands for the documents. Gladys Kessler ordered BAT to hand over evidence from a partner in the law firm Lovells, who advised BAT on its document retention policy. The Government prosecutors claim the document advises on the destruction of sensitive internal records and could expose BAT to fraud charges. The lawyer, Andrew Foyle, claimed his communications with the company were subject to legal privilege, but this was dismissed.

BAT's exposure to the lawsuit, however, has been somewhat diminished after the very recent merger of Brown & Williamson and R J Reynolds. The UK group still owns 42 per cent of the newly merged Reynolds American business, but R J Reynolds agreed, as part of the deal, to foot the bill for any legal liabilities of Brown & Williamson. This provides BAT with some escape from potential damages, but it is named separately in the suit to Brown & Williamson, through an investment company that carried out research and development activities in the US. This means it is still part of the suit, and because the suit is against all the companies named, jointly and severally, BAT may be held to account for the profits made by all the companies named.

Although much of the potential damage from the case has already been priced in to BAT's shares, some investors will be getting edgy about the forthcoming court drama. One analyst said: "$280bn is a very large figure to be sued for, and once this trial starts, it is going to attract a lot of attention. It may not matter that the charges are speculative or that there is not much chance of the Government winning - the trial will make people nervous and BAT could suffer some reputational fallout."

Anti-smoking campaigners are certainly booking front row seats for the trial. Ian Willmore, of Action on Smoking and Health (Ash), said yesterday: "It is hugely important as it will expose the heart of what cigarette companies do. They are unique across all corporations as they knowingly produce and sell a product that kills the people that use it. So they have an internal culture of keeping scientific research secret."

BAT has already spent "many millions" on legal costs. The trial could run for six months, but it continues to believe it has no case to answer. A spokesman for BAT said yesterday: "The defence case has enormous merit and we believe the judge will find in its favour."

The tobacco companies are appealing against the Government's claim to past profits, as well as the claim that they are jointly liable for damages. This appeal is set to run in parallel to the main trial.