Accord Ends Key Phase in Ongoing Tobacco War

The record $206-billion legal settlement announced Monday between the nation’s major cigarette makers and state attorneys general has ended the most pivotal phase of a grueling legal war of attrition that began in 1994 with state lawsuits seeking recovery of tax money spent treating sick smokers.

If approved by the states, as expected, the 131-page agreement will eliminate the single greatest legal threat facing the $50-billion-a-year industry. However, the industry still faces hundreds of lawsuits filed by well-financed plaintiffs’ attorneys in courts around the country, and its legal problems are by no means over.

“Looking ahead, I think they’ll probably have to pay out some more money, but it’s hard to see they have as much exposure in front of them as they have closed out here,” said UC Berkeley law professor Stephen Bundy.

In agreeing to the legal settlement and accepting significant limits on its right to advertise its products, the industry got off relatively cheaply in strict financial terms. The deal will be funded by a 35-cent-per-pack price increase, and that will be paid by the millions of American smokers, not the companies themselves. Any price increase dampens consumption, but this one by itself will not be high enough to drive away large numbers of smokers.

The four major cigarette companies issued a muted joint statement, saying only that the settlement was “a way to end this unique litigation and join in a common-sense approach to addressing important tobacco issues.”

The settlement encountered immediate criticism from tobacco foes, who said the industry got off too easy. The settlement “does too little to protect public health and too much to protect tobacco industry profits,” said John R. Garrison, chief executive of the American Lung Assn.

However, President Clinton, appearing with several of the attorneys general who negotiated the deal, said, “Today is a milestone in the long struggle to protect our children from tobacco.”

Clinton’s pronouncement represented how far tobacco litigation has evolved over the last four years. When Mississippi Atty. Gen. Mike Moore filed the first Medicaid recovery suit in May 1994, industry officials and others contended that the suit was groundless and would go nowhere. Ultimately, however, those suits became the biggest legal threat to the industry and forced it to shell out billions. Until July 1997, when Mississippi settled, the industry had never paid a penny in damages.

Still, Clinton said that more is left to do and that Congress should pass national tobacco legislation.

The industry also still faces huge legal costs to defend hundreds of lawsuits by individual smokers and about 125 class actions with the potential for massive damages, even if only a few of them are successful.

To be sure, recent pretrial rulings in a number of the class-action suits have generally favored the industry. But several courts have refused to dismiss them, and one major class action on behalf of tens of thousands of Florida smokers is currently in trial in Miami.

Also casting a shadow over the industry is a long-running criminal probe by the Justice Department, which is investigating whether industry officials lied to government agencies and the public about the hazards and addictiveness of smoking.

The settlement, announced Monday at a packed news conference in Washington, is the culmination of five months of negotiations, which began after Congress failed to ratify a much broader settlement that would have imposed a $516-billion financial burden on the industry and more public health concessions. But that deal also would have eliminated the threat of class-action suits.

The new deal was negotiated by attorneys general from eight states, including California. It will become effective if states representing 80% of the nation’s population of Medicaid patients sign on to it. They have until noon Eastern time Friday to do so.

For most states, the settlement represents a potentially huge windfall, and, because of the risk of losing in court or winning lesser damages, virtually all of the attorneys general are likely to grab it.

Washington Atty. Gen. Christine Gregoire, the lead negotiator for the states, said the settlement “moves the fight out of the courtroom . . . so we can begin protecting kids now.” She acknowledged that the settlement will not end youth smoking in America, but she said it provides “realistic, workable steps to stop the addiction of our children.”

The industry has already paid out $41 billion to settle cases filed by four states--three on the eve of trial and one just before a jury was to receive the case after a four-month trial.

California would get $25 billion over 25 years. Even 10 states that did not sue the industry, including the nation’s three largest tobacco-producing states--Kentucky, North Carolina and Virginia--would get billions.

Under the settlement, the cigarette companies would pay $12 billion in “upfront” money over five years. Annual payments would increase gradually over the next several years. The companies would shell out more than $9 billion annually starting in 2008, with the $206 billion figure reached in 2025. However, since the settlement runs in perpetuity, the total payout is unclear.

The states also reached a separate $400 million, 25-year settlement with U.S. Tobacco Co., far and away the nation’s largest producer of smokeless tobacco products, with about 80% of the market.

In addition to payments to the states in the main $206-billion pact, the settlement would restrict the ubiquitous pro-smoking imagery that health authorities say contributes to smoking among youth.

For example, the deal would ban tobacco billboards and transit signs, eliminate advertising in sports stadiums and prohibit merchandise such as caps, T-shirts and tote bags branded with cigarette logos.

The companies would also be limited to one brand-name sponsorship of entertainment or sporting events, such as the Winston Cup auto racing series. The industry now has no restrictions.

The deal would also outlaw tobacco product placement in films, television shows and videos; would bar the sale of cigarettes in packs of less than 20; and would create a $1.45-billion anti-smoking advertising campaign to be funded by the companies.

Critics complained that the deal does not include other important public health concessions, including an agreement by the industry to abandon its legal challenge to the authority of the Food and Drug Administration to regulate nicotine.

The deal would also permit the companies to use human figures, such as the Marlboro man, in advertising, something they would have been prohibited from doing under the broader settlement proposal.

Other observers said they did not understand such criticisms since the anti-smoking forces, in essence, weren’t giving anything up.

“The industry is conceding a huge amount of its advertising rights” while providing the states a substantial 25-year annuity, said Martin Feldman, a leading tobacco analyst on Wall Street. “It seems to me strange that the public health community would not endorse this deal, because it does nothing to prevent any of the opponents of tobacco from seeking more onerous legislation or higher excise taxes on either a state or federal level.”

Indeed, some anti-smoking activists said the deal’s limitations make it essential for Congress to step into the breach and enact comprehensive tobacco legislation.

Matt Myers, general counsel for the Campaign for Tobacco Free Kids, noted that the deal does not address FDA authority, does not strengthen warning labels on cigarette packs and advertising, and creates no protection against secondhand smoke or penalties if youth smoking does not fall by targeted amounts. “It puts the onus squarely back on the shoulders of Congress” to pass a law that deals with these issues, Myers said.

Tobacco stocks in recent weeks have been outperforming the market, reflecting Wall Street’s anticipation of the deal.

Despite the relief the deal would provide, the legal threats facing the industry remain formidable.

Industry leader Philip Morris Cos. faces at least 600 lawsuits, a representative said Monday, and R.J. Reynolds Tobacco Co., the second-biggest U.S. cigarette maker, faces 673 active cases, according to papers it filed with the Securities and Exchange Commission. Brown & Williamson Tobacco Corp. and Lorillard Inc. also face hundreds of suits between them.

The majority of these cases are claims by individual smokers, which tobacco firms have had remarkable success in turning back over the last 40 years. In fact, juries in smoking and health cases have found against the industry only four times. In one of those cases, the jury awarded no damages; in two others, damage awards were overturned on appeal, and the industry has a pending appeal in a case won by a Florida smoker.

But about 125 class actions, filed on behalf of hordes of allegedly addicted smokers or on behalf of union health-care funds and insurance providers, are also pending.

“The group suits have some oomph in them because they are well-financed,” UC Berkeley’s Bundy said. “It’s hard for me to believe [the industry] can ever go back to the regime of ‘we don’t settle anything.’ ”

The industry has been buoyed by a number of pretrial rulings either gutting or dismissing class actions on grounds they are the wrong vehicle for resolving tobacco-related claims. Under judicial rules, grouping individual claims together is acceptable only when issues common to the entire class outweigh individual issues.

In recent decisions favorable to the industry, courts have held that tobacco cases cannot be lumped together, because smokers differed in their health problems as well as the length of time they smoked and how hard they tried to quit.

Within the last week, for example, the U.S. 3rd Circuit Court of Appeals in Philadelphia upheld a trial judge’s ruling that decertified a case on behalf of all allegedly addicted Pennsylvania smokers.

“I believe the handwriting is on the wall for class actions,” said Daniel Donahue, senior vice president and deputy general counsel of R.J. Reynolds. “They are certainly not seen by the mainstream courts to deal with large numbers of individual cases.”

But the sheer number of class-action cases and the fact that some courts are allowing them to proceed means the industry’s problems “have just begun,” said Richard Daynard, director of the Tobacco Products Liability Project in Boston, a group that promotes litigation against the industry.

The pending suits are wide-ranging. For example, three have been filed by Blue Cross medical insurance plans and another has been lodged on behalf of African American smokers of menthol cigarettes.

The biggest group comprises 67 cases filed on behalf of union health and welfare funds, which use payroll deductions from workers and contributions from employers to pay for medical care. Like the Medicaid cases, the union claims seek reimbursement for smoking-related health-care costs.

Several courts have thrown out such cases, but one filed on behalf of 114 union health-care funds is scheduled for trial in February in federal court in Akron, Ohio, and another is set for trial in Washington state next September.

The union health-care cases are “the next big front,” said Patrick J. Coughlin, a San Diego attorney who represents the plaintiffs in most of these cases.

Another group of 27 cases, brought by a national consortium of plaintiffs’ attorneys known as the Castano group, were filed on a state-by-state basis on behalf of millions of allegedly addicted smokers.

In most of these cases, courts have not ruled on whether the cases can go forward. In several of them, the industry has won dismissals; in two of them, class certification has been granted, although the industry has appealed.

But John Coale, a Washington, D.C., lawyer who is one of the leaders of the Castano group, said he is not discouraged.

“I’ve always thought that if we had three or four states under certification, which is what I think we’ll end up with, we’re in a strong position,” Coale said, explaining that the plaintiffs would still have a chance to extract large judgments or settlements.

“My view is we’re still very much alive,” Coale said. “I would have much rather had” all the major litigation settled in Congress, “but, you know, life’s like that.”

He was referring to Congress’ failure in June to enact sweeping legislation that would have imposed a settlement of all the major litigation but under much harsher terms for the industry than in the deal announced Monday.

* CALIFORNIA REACTION: Cities and counties embraced the potential windfall. A22

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How the Case Evolved

May, 1994: Mississippi Atty. Gen. Mike Moore sues tobacco industry to recover Medicaid expenses for treating sick smokers. Eventually, about four fifths of the country’s state attorneys general will file similar suits.

June 1997: Atty. Gen. Dan Lungren files a Medicaid case against the industry, as California becomes the 37th state to join the battle.

June 1997: State attorneys general and industry negotiators unveil a proposed $368.5-billion settlement agreement that would resolve lawsuits by the states and class-action claims. The deal must be ratified by Congress because certain provisions require changes in federal law.

July 1997: Virtually on the eve of trial, the industry settles with the state of Mississippi for more than $3 billion.

May 1998: Minnesota case against Big Tobacco is settled after months of trial, just before case goes to jury. State joins Mississippi, Florida and Texas in settling with industry for a total of $41 billion.

June 1998: Legislation ratifying the tobacco accord--but with much harsher terms for the industry--dies in the Senate.

July 1998: Industry and attorneys general launch “Plan B,” beginning talks aimed at a narrower accord that will resolve state lawsuits but not affect class actions and other major claims.

Nov. 16, 1998: New settlement proposal is announced. Deal must be endorsed by states with at least 80% of Medicaid population.

The 13 States

States have until Friday to sign the deal. The 13 reportedly planning to sign:

Arizona

Arkansas

California

Colorado

Iowa

New York

North Carolina

North Dakota

Oklahoma

Pennsylvania

Utah

Washington

Wisconsin