2 Tobacco Giants Weigh $300-Billion Settlement


In a potentially historic development, the nation’s two largest cigarette makers--Philip Morris and R.J. Reynolds--have started negotiations toward a huge tobacco litigation settlement that could cost the cigarette industry as much as $300 billion over a 25-year period.

Lawyers for the two tobacco giants, negotiating for the industry, have held talks in three U.S. cities in recent weeks. The proposed deal provides for a settlement fund in the range of $250-$300 billion, heightened restrictions on marketing cigarettes to minors, and would require the industry to make greater disclosures about the ingredients in cigarettes, according to sources close to the talks.

The industry also would submit to some jurisdiction by the federal Food and Drug Administration, something it is currently resisting in court. But the industry’s use of nicotine would not be regulated and the $50-billion-a-year industry would get a sweeping settlement of hundreds of lawsuits pending against it and gain immunity from future suits, sources said.


Disclosure of the settlement talks drove stock prices up. But the proposed deal drew sharply negative reaction from representatives of several public health organizations and key members of Congress, where such a settlement would have to be appproved.

Although there has been periodic negotiations toward such a massive settlement since last summer, talks intensified in recent weeks after Liggett Group, which holds 2% of the market and is the smallest of the cigarette companies, reached a settlement with 22 attorneys general in late March. Liggett broke ranks with the rest of the industry and admitted that it sold addictive products and marketed to underage youths. It also agreed to turn over internal documents and permitted its employees to testify.

Mississippi Atty. Gen. Mike Moore, who played a key role in the Liggett settlement and in the current talks, said: “We’re making tremendous progress on a settlement.” But he acknowledged that much remained to be done.

But two other attorneys general who also have sued the industry, Hubert H. Humphrey III of Minnesota and Richard Blumenthal of Connecticut, cautioned that a resolution is not imminent. But both said it was a monumental event for the companies just to come to the table.

“The mere fact that we’re seriously talking . . . is a historic breakthrough because the industry vowed never to come to the table any time anywhere with anyone,” Blumenthal said.

He added: “At the same time we’re nowhere near a deal today. None of the relevant issues has been brought to closure.”


“The only reason the industry has come to the table is because they’re on the ropes in court,” Humphrey said. While saying that he is “willing to listen,” Humphrey stressed that so far “the industry’s proposals fall short of meeting the comprehensive goals we’ve set about reforming the industry.”

Sources who have been involved in the talks said there are several major sticking points at this time: how big the settlement is and how the payments will be structured; whether the industry will have unfettered ability to use nicotine, the key ingredient in cigarettes, in any quantity it chooses; how much power the federal Food and Drug Administration will have to regulate the industry; how strict youth marketing guidelines will be; the industry’s demand that it get immunity from all future smoking litigation; and whether the industry will be required to cough up all their internal documents about smoking and health.

In fact, in talks over the past few days in suburban Washington, D.C., the negotiators have been so concerned with health issues that there was not even any discussion of money, said Russ Herman, a New Orleans plaintiffs’ lawyer, who said he had attended the talks.

“Until the teen and child addiction issues are resolved, there’s no basis for talking about money,” Herman said.

Despite the fact that a settlement does not appear imminent, a report in the Wall Street Journal Wednesday about the possibility of a deal sent cigarette stocks soaring.

Philip Morris rose $4.25 to close at $43.25; RJR Nabisco Holdings gained $3.25 to close at $33.50; Loews (parent company of Lorillard) surged $5.375 to $91.75; UST Inc. advanced 37.5 cents to close at $27.

Noted Wall Street tobacco analyst Gary Black of Sanford Bernstein & Co. said he thought the industry could finance such a deal by increasing the price of a pack by about 40 cents on average, which he said would cause only a 10% drop in consumption while substantially boosting stock prices. Black, along with several other tobacco analysts, has maintained for months that tobacco stocks are undervalued because of the threat of litigation.

“The basic point is that this is an industry with incredibly lucrative and stable markets and enormous entry barriers,” Black said. “So, anything that surrenders revenue while creating stability is tremendously positive.”

Spokesmen for both Philip Morris and RJR declined any comment Wednesday, as did RJR chairman Steven Goldstone at the company’s annual meeting. Nonetheless, several sources said that both Goldstone and Philip Morris chairman Geoffrey Bible attended one of the negotiating sessions during the last three weeks. The two companies between them have about three-quarters of the nation’s tobacco market.

Negotiations toward a so-called global settlement of all tobacco litigation were launched by Moore and his close friend Richard Scruggs, a plaintiffs lawyer from Pascagoula, Miss., last summer. Talks have waxed and waned since then.

The parties have been discussing a $250-300-billion settlement fund that would be administered similar to the “Black Lung” program Congress enacted in the 1970s for injured coal miners.

Well-known New York litigator Herbert Wachtell, who represented Philip Morris in a libel suit against ABC in 1995, and a team of attorneys from his firm, Wachtell, Lipton, Rosen & Katz, are playing a key role in the negotiations. So is Arthur Golden of Davis, Polk & Wardwell, another large New York law firm. Both declined to return calls on Wednesday.

Moore and several other attorneys general have been participating in the talks, along with a number of private plaintiffs’ lawyers, including Scruggs and Hugh Rodham, Hillary Clinton’s brother, as well as Matthew Myers, vice president of the National Center for Tobacco Free Kids.

However, reaction to the proposed deal was decidedly negative from several key congressmen and senators, as well as representatives of the American Lung Assn., the American Heart Assn. and Americans for Non-Smokers Rights.

“We strongly oppose any sort of deal that would weaken the FDA’s authority over tobacco, especially if it excludes nicotine from regulation,” said Diane Maples of the American Lung Assn.

She branded an industry proposal of changing the name of the agency to the Food, Drug and Tobacco Administration “an obvious ploy to keep tobacco from being regulated as a drug. . . . We know nicotine is the addictive ingredient in tobacco products; that’s why people continue to smoke and get sick and die.”

Scott Ballin of the American Heart Assn., Julia Carol of Americans for Non-Smokers Rights and University of California medical school professor Stanton Glantz all decried the idea of a premature deal that would allow the industry to escape FDA nicotine regulation and finance the deal with future tobacco profits.

They all contended that public health interests have not been well represented in Congress historically and that antitobacco foes have been more successful on a state and local level.

“There’s an extremely strong consensus in the public health community that we don’t want a ‘global deal,’ because we don’t have confidence in this Congress to protect the public interest on tobacco issues,” Glantz said. “This is a Republican-controlled Congress whose two largest sources of ‘soft money’ were Philip Morris and RJR.”

He also expressed concern that a settlement now might curb the Justice Dept.’s impetus to bring criminal prosecutions against cigarette companies and their executives. Four federal grand juries are currently investigating tobacco matters that could lead to prosecutions.

The adverse reactions put Myers, a longtime tobacco foe on the defensive.

“My sole reason for participating in the talks was to ensure that nothing took place to undermine the opportunity for fundamental change and to keep the discussions focused on what is most important--the public health goals,” he said. “I participated to make sure nothing would happen to weaken the FDA’s jurisdiction, weaken the FDA rule protecting children or undermine the ability of state and local governments to take strong action on their own.”

A group of senators, led by Democrat Frank R. Lautenberg of New Jersey, sent a letter to the White House urging President Clinton to be cautious about approving any deal.

“To waive claims of future liability against this industry is a very serious undertaking,” the senators wrote. “We are still in the process of finding out the truth about the tobacco industry. . . . We are on the cusp of a victory and should not allow the tobacco industry to use a global settlement to turn the tide against necessary protections to the public health, plaintiffs, our taxpayers and our children.”

Both Rep. Henry A. Waxman (D-Los Angeles), a longtime tobacco foe, and Rep. Thomas J. Bliley (R-Va.), perhaps the industry’s strongest defender in Congress, said they had not been involved in the talks and were not aware of any member of Congress participating.

* BIG PROFITS: Tobacco firms can afford liability deals; immunity is critical, James Flanagan says. D1