Tobacco Firm Agrees to Settle a Health Suit

Liggett Group on Wednesday became the first tobacco company in U.S. history to settle a health-related lawsuit, agreeing to donate a portion of its profits over the next 25 years to cover programs that would encourage smokers to quit.

While not admitting guilt, Liggett chose to settle in a big class-action case in New Orleans that alleged cigarette makers manipulate nicotine levels to keep smokers addicted.

Liggett also agreed to begin complying with certain proposed Food and Drug Administration regulations governing smoking by children. Those include a prohibition on the use of cartoon characters in tobacco advertising and limits on the use of promotional materials and the distribution of free samples where minors are present. The Wall Street Journal broke the story about the negotiations in Wednesday’s editions and then all the key parties confirmed that a deal had been forged.

Liggett, which has just 2% of the domestic cigarette market, emphasized that it was not conceding that the FDA had a right to regulate the tobacco industry.

Other cigarette manufacturers, including industry leader Philip Morris Inc., showed no signs of surrender, expressing confidence in their legal position and vowing to continue their vigorous defense of the New Orleans case and a myriad of others.

The deal does not immediately provide any money to plaintiffs in the New Orleans case or in any cases brought by individual smokers. However, analysts said they thought the settlement clearly would strengthen the hand of plaintiffs because they now have a cooperating defendant.

The settlement also would not preclude future suits by individual smokers or their families, and it would not affect suits brought by nonsmokers claiming to have been injured by so-called secondhand smoke.

If the settlement is approved by a federal judge in New Orleans, where the so-called Castano class-action suit was filed on behalf of every U.S. smoker who claims to be addicted, it would be the first time that a cigarette maker paid anything to resolve a lawsuit involving smoking.

Mississippi Atty. Gen. Mike Moore said Liggett is also close to signing an agreement with the attorneys general of four states suing the industry to recoup money spent in treating smokers’ illnesses. The company would pay Florida, Massachusetts, Mississippi and West Virginia the greater of 2.5% of pretax profits or $25 million annually for 25 years, Moore said. (On Wednesday afternoon, Louisiana became the latest state to sue the companies.)

The Liggett settlement was hailed by plaintiffs’ lawyers, the FDA, the attorneys general of several states who are suing tobacco companies and longtime industry critics, including Rep. Henry A. Waxman (D-Los Angeles).

They stressed both the potential public health significance and the fact that Liggett had broken ranks with an industry whose members have for decades maintained a powerful alliance on legal and legislative matters.

“This settlement marks the first time a tobacco company has accepted financial responsibility for tobacco-related diseases, which claim 420,000 lives each year,” said Scott Ballin of the Washington-based Coalition on Smoking OR Health.

“I think it’s a very dramatic development,” said Waxman, a vocal critic of the industry who has accused tobacco executives of perjuring themselves when they swore in congressional testimony that they had no knowledge that their products were addictive.

“For the first time in 40 years, we see a break in the ranks of the tobacco industry, which in the past has stood shoulder to shoulder to defend tobacco and smoking,” he said.

Mississippi attorney Don Barrett, who helped negotiate the deal, proclaimed: “We just put a brick through the myth of the impregnable steel wall of this industry. We’re going to recapture our children from these people.”

The settlement also could have a major effect on suits against other cigarette companies, according to John H. Banzhaf III, a George Washington University law professor and executive director of Action on Smoking and Health, a Washington group that works for the rights of nonsmokers.

“Every juror in every state will now go into [the jury] box knowing that Liggett is paying millions of dollars to settle and figuring, ‘Where there’s smoke, there’s fire,’ ” Banzhaf said.

Other tobacco companies and independent analysts stressed that the process that led to the settlement was heavily influenced by a merger battle in which Liggett’s parent group, Brooke Co. Ltd., is seeking to acquire RJR Nabisco Corp., which has major tobacco holdings.

Indeed, R.J. Reynolds, RJR Nabisco’s tobacco unit, issued a strong statement calling the settlement “an irresponsible and reckless ploy to influence RJR Nabisco shareholders” in the current battle for control of the company. Brooke is proposing a slate of directors to replace the existing RJR Nabisco board at the company’s annual meeting on April 17.

For his part, Bennett S. LeBow, Brooke’s chairman and chief executive, said in a statement that the pact means that the tobacco firm’s assets would “no longer be held hostage by the tobacco litigation,” which threatens the industry with “financial catastrophe.”

He said Liggett’s payments under the settlement would amount to up to 5% of its pretax income each year for 25 years, with an annual maximum of $50 million a year--meaning a potential total of $1.25 billion. Liggett’s pretax profit was $11 million last year; 5% would be about $550,000.

LeBow has advocated that Nabisco be spun off from the parent company’s tobacco operations in an attempt to free it of potential tobacco-related liabilities. He said Wednesday that the settlement should allay concerns among RJR Nabisco shareholders that a Nabisco spinoff could be halted by a court, which is the board’s key objection.

LeBow also said the deal “positively addresses concerns about underage smoking.” For example, the settlement could mean an end to RJR cartoon character Joe Camel, a central figure in cigarette industry advertising.

As part of the settlement, both the Castano plaintiffs and the attorneys general of Florida, Massachusetts, Mississippi and West Virginia agreed not to attempt to block the spinoff.

Calling the deal a “master stroke” for LeBow, Columbia University law professor John C. Coffee Jr. said the “RJR proxy battle is the reason Bennett LeBow is the first and only defector” from the tobacco coalition.

“It not only caps his tobacco liabilities at a very low level, but it makes him sort of the ‘Board of Pardons’ of the tobacco industry. Anyone who now merges with him, whether it’s RJR or Lorillard [Inc.] or BAT [Industries], now gets the benefit of this very low settlement of 5% of pretax income.”

Coffee said LeBow got the low settlement cap by acting first. “This is a lot like plea bargaining in a criminal case, where a prosecutor offers a very sweet deal to the first person who turns state’s evidence. Everyone else will get a progressively less attractive deal.”

Moreover, the pact contains escape clauses for Liggett. For example, if other tobacco companies prevail in the Castano case, Liggett could simply cancel the deal. Liggett also could get out of the deal if an excessive number of smokers chose not to participate in the settlement. Moreover, if many other states filed cases and declined to participate in the settlement, Liggett could bow out.

Stanton Glantz, a professor at the UC San Francisco Medical School, offered a similar critique: “If one thinks of this as copping a plea with a small fish to get a big fish, it’s reasonable.”

Indeed, as part of the deal, Barrett and Richard Heimann, lawyers for the plaintiffs, said they have secured an agreement from Liggett to make it easier for them to interview witnesses with potentially damaging information and to obtain documents that could be helpful in suits against other companies.

A key clause states that Liggett would disclose any material information “concerning any fraudulent or illegal conduct on the part of any parties . . . designed to frustrate or defeat the Castano plaintiffs or which have the effect of unlawfully suppressing evidence relevant to Castano.”

But Minneapolis attorney Michael Ciresi, who represents the state of Minnesota and Blue Cross in their joint suit to recover health care costs from the tobacco companies, said the agreement is too vague.

“There should be a clear, unequivocal statement that Liggett will turn over all documents regarding smoking health and safety now,” Ciresi said. He said he and his colleagues decided against joining the settlement after attending some meetings on the deal.

On the other hand, both Ciresi and Coffee said that LeBow, not a member of tobacco’s old guard, clearly now represents a threat to the rest of the industry.

“No one knows at this point what kind of files Liggett has,” Coffee said. “There may be a smoking gun or other kind of damaging evidence. From the standpoint of Mr. LeBow, he has every incentive in the world to turn over damaging evidence about a tobacco industry ‘conspiracy’ because it hurts his competitors and not him. Ruin your rival is a rational strategy.”

The FDA said that while its officials have not seen the details of the settlement plan, “it is encouraging that at least one company recognizes that there is a real effect on our children by all the advertising and promotion of the industry.”

Settlement negotiations began Dec. 7, almost serendipitously, according to Heimann. Barrett and Marc Kasowitz, a New York lawyer, were talking about what they would do next after settling an unrelated class-action case in Tennessee and Kasowitz revealed that he represented LeBow. After Kasowitz secured LeBow’s approval, exploratory talks began and more parties participated as time went on.

Secret meetings were held in New York, Miami and Memphis, Tenn. “LeBow’s position was that any leak would be catastrophic to the deal. Had the other tobacco companies learned of this, they would have taken whatever steps they could to disrupt our discussions,” Heimann said.

After Liggett’s settlement announcement, shares of Brooke Group rose $1.50 to $9.875, while its larger rivals took hits ranging from small to significant on the New York Stock Exchange. Philip Morris tumbled $3.375 to $98: Loews Corp. fell 62.5 cents to $81, and RJR Nabisco lost 50 cents to $33.875.

Gary D. Black, an analyst with New York brokerage firm Sanford C. Bernstein & Co., described the downward movements as a short-term reaction.

Times staff writers Myron Levin and Sheryl Stolberg contributed to this story.

* DEAL’S IMPACT: What settlement means for consumers and RJR fight. D2