Texas Will Settle Cigarette Suit for Record $15 Billion

Texas officials today are poised to announce a record-breaking $15-billion out-of-court settlement with cigarette makers that would mean a huge windfall for the state and allow the companies to avoid a potentially disastrous trial while Congress debates the proposed nationwide tobacco truce.

Officials have scheduled a noon press conference in Austin to announce the deal, in which tobacco firms will make huge payments over 25 years to reimburse costs of treating sick smokers, will eliminate tobacco billboards in Texas and will make other public health concessions.

People close to the deal said late Thursday that certain details were still being worked out, and a spokesman for the state said tobacco company executives and lawyers were expected to give the document a final reading early today. But the office of Texas Atty. Gen. Dan Morales issued a news release announcing the press conference at a downtown Austin hotel at 10 a.m. PST.

Morales was expected to fly to Texarkana, where the case would have been tried, to brief U.S. District Judge David Folsom on terms of the deal before heading back to Austin to meet with reporters.

Texas’ huge anti-tobacco lawsuit, which sought damages for fraud and racketeering along with reimbursement of state Medicaid costs, had been scheduled for trial Monday. But after being told about settlement talks, Folsom had delayed jury selection to give negotiators some breathing space.

The Texas deal will be the richest civil settlement in history, eclipsing the $11.3 billion cigarette makers agreed to pay the state of Florida to avoid trial of its Medicaid suit last August. The Texas agreement will include public health provisions identical to those the industry agreed to in Florida and in a prior settlement with Mississippi.

Along with a ban on tobacco billboards, these include elimination of cigarette vending machines from any place accessible to teenagers and removal of tobacco advertising in sports arenas and on public buses and trains.

Because of the unique structure of the case--the first of its three phases was to focus solely on evidence of fraud--the industry faced the risk that incriminating disclosures would serve as a backdrop for congressional debate on the nationwide tobacco deal. The industry is seeking to trade $368.5 billion and a raft of public health concessions for future protection from the most damaging types of lawsuits.

Even so, two other potentially fateful legal outcomes remain that could greatly affect the settlement dynamics in Congress. One is the long-awaited ruling by the U.S. 4th Circuit Court of Appeals on Food and Drug Administration authority to regulate the nicotine content of tobacco products.

The other is next week’s scheduled Medicaid trial in hard-line Minnesota, where prospects for settlement are uncertain at best.

When it was announced last June by tobacco companies, state attorneys general and private anti-tobacco lawyers, the tobacco deal provided for settlement of all state Medicaid cases, including those in Mississippi, Florida and Texas, which had the earliest trial dates.

However, because the legal protections sought by the industry required congressional approval, the cases had to go to trial or be resolved by separate agreements.

The Texas deal differs from the prior agreements in its treatment of the incendiary issue of attorneys’ fees.

Sources close to the Texas settlement said the state and industry compromised on the emotional issue of fees for the private law firms retained by the state.

On top of the settlement amounts, Morales wanted the industry to pay the lawyers an additional 15%, as provided in their retainer agreements with the state--or about $2.25 billion. The industry sought the identical terms outlined in the national truce and Mississippi and Florida agreements--calling for “reasonable” fees as determined by a three-judge panel.

The $2.25 billion in fees would be twice the largest amount ever awarded--the $1 billion in the Exxon Valdez case. That award is still on appeal.

Sources said the Texas agreement will call for the lawyers to get $100 million up front--$50 million to be paid by the industry and $50 million by the state from the proceeds of the settlement. A three-judge panel will determine the balance, and the industry has agreed not to actively oppose requests for the full 15%.

This arrangement is likely to become controversial because plaintiffs’ lawyers are barely more popular than cigarette makers, and a huge windfall could endanger congressional support for the nationwide deal.

“I think it’s bad business,” said one anti-tobacco lawyer, noting that critics will start zeroing in on the fees. “It’s better to have the reward postponed until after our goals [a national settlement] are achieved.”

Moreover, he said, “It’s bad for the states to give money to lawyers when the industry has agreed to do it through a separate proceeding.”

Mississippi Atty. Gen. Mike Moore, lead negotiator for attorneys general involved in the national deal, said he too was worried about political fallout from the fee arrangement.

“Beating on trial lawyers is an immediate applause line for Republicans,” said Moore, a Democrat. “We stand a chance of it becoming a big political issue, and that’s not good.”

Although the case was resolved with a handshake, it started with considerable animosity after cigarette makers used a public opinion survey in an effort to discredit Morales and dissuade him from filing suit. Rather than scaring him, Morales said, it egged him on.

The settlement marks the fifth time in six months that the once-implacable industry chose settling over trying a high-profile case that could undermine its quest for immunity from class-action lawsuits and punitive damages in individual cases.

As recently as September, tobacco lawyers had vowed to fight rather than settle with Texas, hoping to show Congress and the public that the June settlement was a reasonable compromise because the industry’s legal defenses remained strong.

“Under no circumstances will we settle this case,” industry lawyer Dan Webb proclaimed in September.

But with adverse pretrial rulings assuring that scathing testimony would coincide with congressional debate, cigarette makers had little choice but to seek an out-of-court resolution, several observers said.

For the state, the settlement eliminates the risk of losing at trial or sweating out a victory through years of appeals.

Along with legislation pending before Congress to implement the June settlement, rival measures would either extract more money from the industry or impose anti-smoking measures without the quid pro quo of legal protections.

A total of 37 other states, including California, have similar lawsuits pending, with jury selection in Minnesota’s trial scheduled to begin Tuesday. On Thursday, Minnesota Atty. Gen. Hubert H. Humphrey III reiterated his position that there should be no settlement with the industry until all of its internal documents have been disclosed.

Even before the final approval of the Texas pact, state officials and political candidates issued press releases on how the massive settlement pot should be spent.

Texas Gov. George W. Bush, a possible Republican presidential candidate in 2000, said he thinks that the state Legislature should make the decision. “I am concerned that the money is going to be pre-spent before those of us who have been elected have an option to decide what our priorities are.”

Meanwhile, fallout continued Thursday from the release of documents this week showing that R.J. Reynolds tried to lure young smokers. In response, President Clinton declared that it is important that Congress quickly pass comprehensive tobacco legislation.

“The documents that came to light . . . show more than ever why it is absolutely imperative that Congress take action now to get tobacco companies out of the business of marketing cigarettes to children,” he said.