Q & A : LANDMARK TOBACCO SETTLEMENT : Deal Is Seen as the First Crack in Industry Solidarity
Liggett Group’s unprecedented plan to settle a mountain of cigarette litigation could herald the end of a public health menace. Or it could be a minor blip in Big Tobacco’s history of legal triumphs. It all depends on who’s doing the predicting.
Some questions and answers about the deal’s effects on those of us who inhale and those who don’t:
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Q: Why is this settlement such a big deal?
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A: Because it’s the first time any tobacco company has agreed to pay anything in response to claims that cigarettes kill. Although Liggett Group has just 2.2% of the U.S. share of cigarettes sold, the plaintiffs say the agreement drives a wedge into the monolithic wall of tobacco company solidarity. Mississippi Atty. Gen. Mike Moore called the settlement the most important public health development in history. “That’s because this industry kills more people than any public health menace in history.”
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Q: What does the settlement do for smokers?
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A: Very little, actually. Liggett has agreed to pay 5% of its pretax profit each year for 25 years to plaintiffs in a class-action lawsuit covering as many as 50 million smokers. But the money will go to anti-smoking programs, not individuals. A still-pending settlement between Liggett and five state governments could add another 7% of profit. However, based on Liggett’s 1995 profit of $11 million, that’s just $1.3 million a year, a tiny fraction of the estimated health costs of smoking.
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Q: What about efforts to stop children from smoking?
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A: Here Liggett breaks ranks with the industry again by agreeing to some of the Food and Drug Administration’s proposed advertising restrictions. Liggett won’t use cartoon characters, it won’t post billboards within 1,000 feet of schools, and it will stop giving away clothes as promotional items.
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Q: It seems like the company is getting off easy. Is this true?
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A: Perhaps. Even the company admits this is a low-risk way of shielding itself from the unknown expenses of litigation. It also has written in some escape clauses. If other tobacco companies fight the lawsuits and win, the settlement is voided. Liggett also could scotch the deal if too many smokers or states refuse to participate.
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Q: So why did the plaintiffs agree?
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A: They hope that investors in other tobacco companies will start to pressure them to settle too, adding hundreds of millions of dollars to the national anti-smoking effort. Although the other big tobacco companies vowed Wednesday to fight on, the deal may make it easier for Liggett chief Bennett LeBow to succeed in his hostile takeover battle for RJR Nabisco, the No. 2 tobacco maker. If he does, RJR will sign on to the settlement, potentially adding $120 million a year.
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Q: The stock market can be a good gauge of whether this is good or bad for the tobacco business. How did Wall Street react Wednesday?
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A: Stocks of tobacco companies fell, but analysts remained skeptical that the settlement will indeed set a historic precedent. Several told clients to buy tobacco stocks, calling them bargains. “These companies have been sued for the last 40 years and may be sued for the next 40 years, and they don’t intend to settle anything,” said Jack Maxwell at Wheat First Butcher Singer in Richmond, Va.
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Non-Smoking
Major tobacco stocks closed mostly lower Wednesday after Liggett Group, a subsidiary of Brooke Group, agreed to settle a class-action lawsuit. Brooke, however, rose. How the stocks fared Wednesday and where they stand versus their 52-week peaks:
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52-week Wed. close Decline from Stock high and change 52-week high Brooke Group $14.00 $9.88, +$1.50 -29.4% American Brands 47.88 43.75, -1.00 -8.6% Loews 88.25 81.00, -0.63 -8.2% Philip Morris 104.63 98.00, -3.38 -6.3% RJR Nabisco 35.25 33.88, -0.50 -3.9% UST Inc. 36.00 34.63, -0.50 -3.8%
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All stocks trade on NYSE.
