What if the government wins its case?

Tobacco executives and their lawyers, who believe the government has overstepped its bounds, predict U.S. District Judge Gladys Kessler won't hobble the firms by ordering another huge payout in the nonjury trial she's presiding over and that's expected to last well into 2005.

As the industry is quick to note, it has undergone significant change in the past decade, adding youth smoking prevention programs and operating under stricter rules. In the late 1990s, it agreed to the $246 billion payment to settle suits filed by multiple states over health care costs. The agreements also forced the companies to alter their practices.

"Those are irreversible changes that are the best indication of how we'll do business in the future," said Peggy Roberts, a spokeswoman for industry leader Philip Morris USA, the subsidiary of Altria Group Inc. that relocated from New York to Richmond.

Still, what if the companies lose? Although the companies say they're confident of victory, they also say a defeat would put them out of business.

Since the trial started Sept. 21, government lawyers have produced witnesses who have accused the companies of manipulating nicotine levels and failing to make their products safer despite having the knowledge to do so.

Former Philip Morris scientist William Farone testified Oct. 6 that the companies put aside ideas for safer cigarettes because any move to put them on the market would be an admission that existing brands were harmful.

To hear the industry tell it, the result of an adverse court decision would be simple. "If we lose, we all go bankrupt and the federal government will own all the tobacco companies," said Seth Moskowitz, a spokesman for Reynolds American Inc., created through the merger this summer of R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Co., and second in size only to Philip Morris USA.

Critics and legal experts, however, say such a drastic outcome is unlikely. They contend the defendant companies - R.J. Reynolds, Brown & Williamson, British American Tobacco Ltd., Lorillard Tobacco Co., Liggett Group Inc. and Philip Morris USA and its parent Altria Group - are likely to settle if they sense defeat. And if they do, the landmark Master Settlement Agreement with states six years ago provides a road map for their survival, according to these experts.

"If this settlement is structured like the MSA, it's highly likely it will be passed on to smokers through higher prices, which means the industry won't suffer as much," said Jonathan Gruber, an MIT professor of public finance who plans to testify for the federal government at the Washington trial.

The master settlement limited the financial damage by allowing the companies to make annual, volume-based payments over 25 years. The industry passed on most of the costs through wholesale price increases that contributed to a rise in the retail price of a pack of cigarettes by more than $1.50 a pack.