The Tobacco Settlement: Who Will Win? Who Will Lose?

The Tobacco Settlement: Who Will Win? Who Will Lose?

When the news broke on April 16 that Big Tobacco, 22 state attorneys general, and a group of plaintiffs' layers were negotiating, editorial writers around the country brimmed with excitement. The industry had finally been brought to its knees, they exulted. Some observers hailed Big Tobacco's willingness to talk (albeit secretly) about addiction, lung cancer, payments to tobacco victims, and obedience to proposed FDA rules as evidence that the merchants of death were ready to cave in.

News of a possible deal sent tobacco stocks up, and up, and up. "Investors Cheer News of Tobacco Settlement" typified the financial headlines. The market saw a potential deal as a terrific boost for the health of the industry. Since the physical health of Big Tobacco's customers (and of some bystanders) is the price paid for the financial health of the cigarette industry, a deal resulting in a "win-win" situation is unlikely: If Big Tobacco continues to prosper, the health of the public will continue to suffer.

So who wins and who loses?

Liggett

At this writing, the situation is too fluid to answer that question. Although there are many proposals on the table, the parties don't seem close to coming to terms. A deal was, however, struck with the smallest of the major cigarette makers, Liggett. Surely some of the attorneys general had conceived the Liggett deal as a way of getting the "corner dealer" to rat on the "drug lords."

However, given the financial power of Big Tobacco, it would not be surprising if the Liggett deal became a model for a deal with the industry. If it does, we're in trouble.

On March 20, facing an onslaught of lawsuits, Liggett reached a settlement agreement with the 22 states that, to recover the Medicaid expenses of treating smoking-related illness, had sued the company. On the same day, Liggett signed a settlement agreement with a group of plaintiffs' attorneys in a Mobile, Alabama, class action. Although the details of the two agreements differ, they clearly were written by the same lawyers, and many of their provisions are identical.

The release in Liggett's agreement with the attorneys general reads, in part: "Each Settling State and each Attorney General thereof shall...release, dismiss and discharge each and every civil claim, right, and cause of action...known or unknown, asserted or unasserted, direct or indirect, which they had, now have, or may hereafter have against each Settling Defendant...."The release in the Alabama class action suit is similar.

The "Settlement Purposes Only" clause is also advantageous for Liggett. According to this clause, no action taken in carrying out the agreement can be used as evidence "in any other action or proceeding of any kind or of any wrongdoing, fault, violation of law...."This probably means that the documents produced by Liggett cannot be used as evidence in any criminal proceeding. Together, the two settlements apparently resolve all of Liggett's legal problems.

There are also many provisions in the agreement that make a Liggett deal with R. J. Reynolds -- the company behind the "Joe Camel" ads -- attractive. For example, if Liggett becomes an affiliate of RJR, RJR must abide by the proposed FDA rules immediately-with one exception: The "future affiliate" need not eliminate cartoon advertising until its elimination becomes "reasonably practicable." Because the agreement defines "future affiliate" as an entity whose market share does not exceed 30 percent -- thus excluding Philip Morris -- it seems geared toward an affiliation between Liggett and RJR.

It's hard to understand why some of the agreement's provisions are so lenient. For example, if Liggett decides, "in its sole and exclusive discretion," that "too many states have opted out" of the agreement, it can simply terminate the agreement.

Liggett has made the following concessions.

- It has admitted that smoking is addictive and that it causes "health problems," including emphysema, heart and vascular disease, and lung cancer. Both agreements required Liggett's CEO to issue a specific statement -- vetted by Liggett's lawyers -- to that effect. Liggett has also agreed to put a bold-faced "Smoking Is Addictive" warning on its cigarette packs.

- Liggett has agreed to abide by the proposed FDA regulations.

- The cigarette company has agreed to set up a fund to pay the settling states and private plaintiffs about 25 percent of its pretax income.

- Liggett will voluntarily turn over documents incriminating the other tobacco companies.

The "Settlement Fund"

The "settlement fund" would be a single joint fund administered by both the state attorneys general and the plaintiffs in the Alabama class action. This is the principal tie-in between the two suits. Whether this will ever come about is questionable. The plaintiffs' counsel in the Alabama class action would like it to be the only class action -- to encompass all claims nationwide.

Normally, class action suits are confined to a state; but class action suits in state courts have occasionally been certified nationwide. There is no judicial mechanism for coordinating competing class actions; and, surely, many would oppose nationalizing the Liggett settlement.

Some of the state attorneys general adamantly object to the possibility of an Alabama court decision preempting proceedings in their own courts.

Jennifer Freeman, a spokesperson for Minnesota Attorney General Hubert Humphrey III, has declared: "Minnesota courts would not give full faith and credit to an Alabama court's certification of a class outside of Alabama."

Perhaps the most troubling issue in the settlement -- and one that is surely central to Big Tobacco's agenda -- is preclusion of all future claims against Liggett. This might not pass constitutional muster. Some have suggested a global settlement that would involve the establishment of a system of compensation similar to workers' compensation.

The implications of this are horrendous. One of the fundamental purposes of workers' compensation was to insulate employers from lawsuits by their employees. Workers' compensation enables employers to buy insurance for that liability. This is justifiable: First, the price of the insurance (a) changes with the frequency and severity of workplace injuries and illnesses and (b) affects product prices. Second, workplace accidents occur even with the most careful employer.

The workers'-compensation slogan early in this century -- "The blood of the workman is in the cost of the product" -- was plausible: A negligent employer's products would be more expensive than a safe employer's products, and market forces would motivate employers to promote safety.

But there is no free market in tobacco. The tobacco industry is an oligopoly (few suppliers, many consumers), and its customers are physically addicted to their product. Furthermore, cigarette smoking is not unavoidable; it has been sold to the public through mass marketing.

Insulation of tobacco companies from future claims amounts to a license to kill.

There is a striking historical parallel to the unfolding tobacco-industry situation: Workers' compensation became popular among employers mainly because workers were beginning to win major lawsuits against them. The law at that time was changing to favor plaintiffs, and juries were becoming very biased against large corporations.

"To Continue the Legal Business of Selling Cigarettes"

The tobacco companies are offering large sums for legal immunity. The Liggett settlement fund supposedly would consist of 25 percent of the company's pretax income. Since Liggett is a relatively small company, this percentage is not a very large sum. Big Tobacco has offered between ten billion and twelve billion dollars per year for 25 years. The industry could recoup this simply by increasing the price of a cigarette pack by 50 cents. If a settlement materializes that grants legal immunity to the tobacco companies, their stocks would soar. The value of Philip Morris stock, for example, might increase by $250 billion.

Should the state attorneys general and plaintiffs' lawyers be seeking a higher percentage? Richard Daynard, chairman of the Tobacco Products Liability Project, says: "If a settlement is based on profits, there is no reason why the companies should pay less than 100 percent." Daynard believes that a settlement should require the highest possible increase in the price of cigarettes -- the price a cigarette monopoly would charge. This would decrease demand and provide for a significant share of smoking-related healthcare expenses.

There is not even a hint of Daynard's tough position in the Liggett settlement agreements. The Alabama agreement states explicitly that one of its purposes is to enable Liggett to avoid insolvency (e.g., bankruptcy) and "continue the legal business of selling cigarettes." Thus, settling plaintiffs have become de facto partners of the cigarette company, and the company has attained the status of a regulated industry.

The Alabama settlement disturbs some of the state attorneys general. Tom Purcell, a lawyer who works for Minnesota Attorney General Humphrey, says: "We want a fundamental change in the way this country deals with smoking and health. Cigarettes are ultra-hazardous products. They're dangerous when they are used as they're intended to be used. Why would we want to protect them?"

Yet the Liggett agreements do protect at least that one company.

A busted small-time drug dealer may avoid incarceration if he turns in the drug cartel, but he won't gain the right to resume selling drugs.

And, if the purpose of Liggett's cooperation is to make Big Tobacco accountable, why are the interested parties rushing to settle with RJR and Philip Morris -- before the Liggett documents are fully understood?

Surprised?

Anti-tobacco forces have mounted hundreds of lawsuits. The federal government has proposed regulating tobacco through the Food and Drug Administration. The general public does not like the tobacco companies and, as more and more damaging industry documents surface, the jury pool will become increasingly anti-tobacco.

Is it surprising that RJR and Philip Morris initiated settlement talks?

Big Tobacco has several major strategic assets. Fifty million Americans addicted to its products provide them with a virtually inexhaustible river of cash. Nearly a century of successful lobbying has carved out a privileged niche for tobacco in federal and state laws.

And whatever happens in the U.S., foreign markets will continue to expand.

American Council on Science and Health, Inc.

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By Larry C. White

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