How Big Tobacco Got Its Way in California

With its tough anti-smoking laws and huge jury verdicts for sick smokers, California is known as uniquely hostile to Big Tobacco. But in a move so quiet that it went virtually unnoticed, state lawmakers and the Davis administration have pushed through one of the industry’s most cherished legislative goals -- a law that could reduce the threat to tobacco companies from massive damage awards.

The law was one of two tobacco measures adopted during frenzied eleventh-hour wrangling over the state budget, which Gov. Gray Davis signed Aug. 2. Several officials said they passed the laws to help resolve the state’s budget crisis, not to help the tobacco industry.

Even so, one of the laws was aggressively pushed by cigarette makers, whose lobbyists “were all over the Legislature in the final weeks of the budget negotiations,” said Sen. Joseph Dunn (D-Garden Grove).

And though officials generally denied that there was any attempt to keep them secret, the actions received little or no attention. Health groups and government agencies that closely track tobacco issues were stunned to learn about the laws days or even weeks after the fact.

The most controversial of the two places a ceiling of $150 million on the size of the bond a tobacco company must post during the appeal of a courtroom loss. Normally, the loser in a lawsuit must deposit a guarantee for the full amount of damages to protect its assets while it appeals. In Illinois, for example, where there is no cap on appeal bonds, Philip Morris USA is on the hook for a $12-billion bond. The company is fighting the bond in court, arguing that it would mean bankruptcy.

The other new California law calls on the state to guarantee a flow of money from bonds that are backed by payments owed California under the tobacco industry’s $206-billion litigation settlement with the states.

Officials said that should bring the state an extra $500 million from a sale of tobacco settlement bonds set for this month. However, it also means the state might be on the hook to make up for investor losses should any of the tobacco companies default or file for bankruptcy protection.

Supporters say the laws were dictated by the state’s dire budget straits and were meant simply to sustain the flow of money from the 1998 tobacco settlement. The settlement is providing about $1 billion a year to the state and its largest cities, which also sued the tobacco companies.

The governor’s “tough stance on smoking continues to this day,” said Davis spokeswoman Hilary McLean, noting that Davis’ budget originally called for higher cigarette taxes.

“A different set of solutions was ultimately adopted by the Legislature,” she said, and “the effect of having the state backing the bonds is simply a tool for us to get a better return on our dollar.”

Low-Key Legislation

But the appeal-bond cap, in particular, has drawn scathing criticism from anti-tobacco activists and lawyers because it helps the industry -- and because of the way it was approved.

“This was something that was done quietly,” said Stanton Glantz, a professor at UC San Francisco medical school and a leading tobacco-control advocate. “Nobody I know of who keeps track of this stuff knew it was going on.”

Also in the dark was state Atty. Gen. Bill Lockyer, said his spokesman Tom Dresslar. “We knew nothing about that [the appeal-bond cap] before it was enacted,” Dresslar said. Lockyer’s office has “consistently opposed that proposal” as bad public policy, Dresslar said, adding that the cap was “unnecessary given the well-heeled financial condition of the tobacco companies.”

Dresslar also said Lockyer’s office was not asked for help in drafting the bill authorizing the state to backstop tobacco-bond payments, although it usually is asked to assist in crafting bond-related bills.

The situation demonstrates the extent to which the state -- while often acting as tobacco’s staunch foe -- has developed a powerful interest in the industry’s financial health because it is hooked on tobacco money.

“One can see where the Legislature would be sheepish, to say the least, about passing legislation ... that looks like a special favor to the industry,” said Robert Rabin, a Stanford University law professor and an expert on tobacco litigation. “So the inference can be drawn that if there’s strong pressure to do it, you do it in the dead of night when nobody’s alert to what’s happening.”

Even now, there is considerable finger-pointing and some mystery over who is most responsible for the new laws. In late July, they were added to an obscure budget “trailer” bill as part of a deal struck between Senate President Pro Tem John Burton (D-San Francisco) and Republican Senate Leader James Brulte (R-Rancho Cucamonga) to resolve the budget stalemate.

Brulte acknowledged in an interview that he demanded the appeal-bond cap be part of the deal.

Records kept by the secretary of state show that on June 30, Philip Morris USA, the nation’s biggest tobacco company and a unit of Altria Group Inc., made a $20,000 contribution to one of Brulte’s campaign committees.

Altria spokesman David Tovar said the contribution was not “specifically earmarked” to reward Brulte’s support for the bond cap. Tovar said the company makes campaign contributions because “we want to have a seat at the table with elected officials who are important to our business.”

Brulte said he supported the bond cap to safeguard the flow of settlement funds, not to appease the industry.

“We made it clear that, absent a cap ... we would not support a budget” with tobacco-settlement proceeds “that might not be in existence 22 or 25 years from now as a result of lawsuits,” he said.

Industry Priority

State appeal-bond caps have been a top priority of the industry since 2000, when cigarette makers suffered their first multibillion-dollar punitive damages award in a class-action case in Florida. California became the 21st state to adopt a bond cap. But it is one of just seven states whose cap protects only tobacco companies, rather than any business facing a giant courtroom loss.

The tobacco companies say caps are needed so they can exercise their appeal rights without having to post a devastating -- even bankrupting -- bond. Their campaign gained momentum in the spring when Philip Morris was ordered to post a $12-billion appeal bond to cover the judgment, plus interest, after a $10.1-billion loss in a class-action case in Illinois.

The judgment and bond both are under appeal, with the company saying it may be forced to file for bankruptcy protection if it has to deposit a $12-billion bond. This, in turn, could delay or reduce settlement payments to the states, the company says.

“We feel that every defendant is entitled to a full and fair appeal, and from the states’ perspective bond caps protect future tobacco settlement payments ... during the appeal process,” Altria’s Tovar said.

Anti-smoking groups have decried bond caps as special favors for an industry that least deserves them.

By limiting its bond cap to tobacco industry appeals, California has given the industry “protection that no other industry has,” which is “ludicrous,” said Ben Alamar, an economist at UCSF’s Center for Tobacco Control, Research and Education.

Sen. Dunn, who opposed the bond cap, said there was no “evidence that this industry needed any special dispensation.... Now that they’ve got it, there are going to be lots of industries knocking on the Legislature’s door next year seeking” the same treatment.

However, the need for a cap to protect the interests of the state was “the argument that swayed most Democrats,” Dunn said, because Democrats usually “are hostile votes for the industry.”

Los Angeles lawyer Michael Piuze, who has tried three cases against Philip Morris on behalf of lung cancer victims, said, “The same politicians who bragged about their victorious settlement against the tobacco industry five years ago are now in bed with that industry.”

Even if the motive was shoring up state finances, he said, “it’s always bad business to deal with the devil, and this particular devil is smarter than all of those politicians.”

The tobacco industry was joined in support of the bond cap by several business groups, including the California Manufacturers and Technology Assn., whose members include Philip Morris and R.J. Reynolds Tobacco Co. But the group’s president, Jack Stewart, said non-tobacco members worry that shortfalls in tobacco payments might lead the state to seek new fees or taxes from them.

Raising the Cap

The measure was opposed by the Consumer Attorneys of California, a leading plaintiff lawyers group. A letter from the group to Senate President Burton and Assembly Speaker Herb Wesson (D-Culver City) reveals that lawmakers originally were considering a far more industry-friendly bond cap than the one they ultimately passed.

According to the July 27 letter, the earlier proposal called for an aggregate cap of $100 million for appealing all adverse verdicts. In other words, once tobacco companies cumulatively had posted appeal bonds totaling $100 million, they would not have to deposit any further guarantees to appeal future losses.

The letter said the industry did not need special protection. While warning of financial disaster, “these same companies speak to Wall Street investment concerns and to individual shareholders in glowing terms about their current and future ‘bottom lines,’ ” the letter said.

Bruce Brusavich, president of Consumer Attorneys, said that when it became clear the bill would pass, he “made some suggestions” in the spirit of “if it’s going to happen, it ought to be fairer.”

In recent years, California and other states and municipalities have sold bonds covering a portion of future settlement payments, opting for quick cash infusions over larger payments over time.

California already has conducted one bond sale of $3 billion, but another sale was postponed in the spring when the appeal-bonding requirement in the Illinois case created turmoil in the market for the bonds.

Several states canceled sales as credit firms lowered ratings on the bonds. That led the state Finance Department and Treasurer’s office to recommend the state backstop the bonds to reassure investors and raise more cash in the upcoming $2.3-billion bond sale.

With or without that added risk, the bonds have many opponents on both sides of the political aisle, including Assemblywoman Lois Wolk (D-Davis).

The settlement payments were “intended to go to the health care of Californians for the next 20 years, not to be spent in one or two years simply to balance the budget,” said Craig Reynolds, Wolk’s chief of staff.

But many who say they oppose the bonds on principle, including Davis and Steven Peace, head of the Finance Department, have concluded that the state’s budget woes have forced their hands.

Peace said that once the Legislature decided to sell more bonds, his agency determined that it would get a lower interest rate, and about $500 million in additional proceeds, if the securities had state backing.

Staring at a $38-billion deficit, that’s simply what California must do “to protect this much-needed revenue source,” the California Manufacturers and Technology Assn. said in a letter to the Legislature in July.

The state, it said, is “clearly dependent upon the proceeds from the tobacco settlement.”