$368-Billion Tobacco Accord : Deal With States Would Restrict Marketing

WASHINGTON — In a landmark settlement that is easily the largest in the history of litigation, lawyers representing 40 states announced Friday that cigarette makers had agreed to pay $368.5 billion over 25 years and submit to unprecedented new rules that aim to dramatically scale back tobacco’s hold over people’s lives.

The remarkable settlement, which must be approved by Congress and the White House, would acknowledge the government’s authority to regulate nicotine, repay billions of dollars to the states for smoking-related health care costs, and fund free stop-smoking programs for whoever wants them.

It would also shrink tobacco’s profile across the nation, sharply restricting the advertising of cigarettes while funding a massive anti-smoking campaign and ordering up bigger and blunter notices on cigarette packs, such as “WARNING: Smoking can kill you.”

“This agreement is the most important public health achievement in history,” said Mississippi Atty. Gen. Michael Moore, the lead negotiator for the 40 attorneys general who had sued the industry in a novel legal campaign that sought to upend decades of courtroom successes by the tobacco industry.

“This agreement will do more for the public health of our nation than all of our lawsuits combined--even if we had all won our individual suits,” said Moore at a crowded news conference here.

The deal faces tough scrutiny in Congress and at the White House, judging from skeptical or cautious remarks from both quarters Friday. None of its provisions would take effect until enabling legislation is passed and signed into law, which is likely to take many months.

If the settlement becomes law, it almost certainly will reduce smoking rates because the tobacco companies are likely to sharply increase cigarette prices to finance the deal.

The agreement is by far the largest ever, dwarfing those in cases involving asbestos, breast implants or massive oil spills.

The negotiators had been racing to conclude a settlement before the July 7 trial of Mississippi’s massive lawsuit against the industry. Because congressional review of the deal will take time, the Mississippi case, as well as Florida’s, set for trial in August, may be resolved through a separate settlement, Moore said in an interview.

Under the settlement, the state lawsuits seeking recovery of Medicaid funds and some 20 private class-action suits will be dismissed. Such suits would be barred in the future, though individual smokers could still sue.

Industry Faced Costly Problems

The industry’s potential liability was in the billions of dollars. Meanwhile, its legal bills had risen to an estimated $600 million annually. Some analysts said the settlement would help the industry gain financial stability and perhaps ultimately shed its image as a pariah.

The deal also preserves the authority of the federal Food and Drug Administration to regulate the nicotine content of tobacco products, currently the subject of a court challenge that the companies agreed to drop.

While the FDA would be permitted to start reducing nicotine levels, it could not ban nicotine from tobacco products for at least 12 years, and any such decision would be subject to congressional review.

Moore and the other jubilant attorneys general acknowledged that Friday’s announcement is only the first step in what could be a lengthy journey through Congress and the White House. Immediately after the news conference, Moore and his old friend, Pascagoula, Miss., attorney Richard Scruggs--whom Moore had retained to help with the Mississippi case--delivered the agreement to the White House.

President Clinton, in Denver for an economic summit meeting, applauded the attorneys general and public health advocates for their role in bringing about the agreement and said in a written statement that a White House task force would now give the pact a thorough review.

“We must now carefully consider whether approving this proposed settlement will protect the public health--and particularly children’s health--to the greatest extent possible,” Clinton said. “Until now we have not had the opportunity to review the actual terms of the agreement, and we have not concluded whether it is in the best interests of the public health.”

Gov. Pete Wilson and California Atty. Gen. Dan Lungren, who earlier this month became one of the last of the attorneys general to file a Medicaid claim, applauded the deal.

But critics ranging from consumer advocate Ralph Nader to the American Lung Assn. immediately jumped in, signaling challenges in Congress.

“Given the track record of deceit, manipulation and bad faith by the tobacco industry, there is every reason to be skeptical of any agreement which the tobacco industry is willing to support,” said Sen. Edward M. Kennedy (D-Mass.). “This proposal is clearly underfunded.”

Minnesota Atty. Gen. Hubert H. Humphrey III, who filed the second Medicaid recovery suit, called the deal “woefully inadequate.” It was uncertain if other attorneys general might seek changes.

Firms Say Parts of Deal Are ‘Bitter Pill’

For their part, the tobacco companies issued a joint statement that the settlement “represents a carefully developed consensus on how best to resolve public health concerns immediately, particularly regarding youth access to, and usage of tobacco products.” The statement, read by Philip Morris Inc. senior vice president Steven C. Parrish, said the agreement would permit the cigarette companies “to operate in a more stable and predictable environment.”

In some respects, “the proposal is a bitter pill because our companies have made concessions that were extremely difficult,” he said. Moreover, the companies “have agreed to support, subject to approval of our boards of directors, a package which includes certain legislative and regulatory provisions with which we do not necessarily agree. Nevertheless, the companies are willing to accept legislation incorporating these provisions in the interest of reaching an overall resolution of the important issues facing the industry and the nation.”

It is anticipated that the industry will fund the deal by raising the price of cigarettes about 50 cents a pack. Experts say such increases are likely to reduce cigarette consumption by 10% or more. Prices could rise by as much as $1 a pack if various proposed state and federal tax hikes are enacted.

Further declines in smoking could result from other provisions of the deal, such as bans on all billboards and on the use of cartoon characters and human figures in ads.

“The Marlboro Man will be riding into the sunset on Joe Camel,” said Florida Atty. Gen. Bob Butterworth.

Industry analysts have said for weeks that a settlement would be good for the industry, and earlier this week tobacco stock prices rose about 10% in anticipation of a deal. But the prices fell moderately after Friday’s announcement, which came about 40 minutes before the New York Stock Exchange closed.

The deal requires the industry to make an up-front payment of $10 billion when the agreement is approved by Congress. Of that, $7 billion would go to the states and $3 billion to the federal Department of Health and Human Services, which would fund a smoking-cessation program, FDA enforcement of the ban on sales to minors and a compensation fund for smokers who prevail in court in the future.

The pact also calls for a series of annual payments, starting at $8.5 billion and increasing to $15 billion, totaling $318 billion. Additionally, over a 25-year period, the industry is to pay $50 billion for what is designated as punitive damages for past wrongdoing. Moore said this money would be used for health care for uninsured children and to establish a $25-billion trust fund for health care, which would be put together by a presidential commission.

Although the settlement amount was pegged at $368.5 billion, negotiators said the fund runs in perpetuity, meaning that the ultimate dollar value of the settlement could be vastly greater. Said one industry source: “As long as there is a cigarette industry in this country, we will pay $15 billion a year.”

The allocation of funds has not been determined, so it was unclear how much would go to California or other individual states.

Some details have not been finalized, and only a summary of 80-page agreement’s key terms was made available Friday. There was no word on the size of fees to be paid to private attorneys who represented the states and class-action claimants--although Moore said they will be paid separately by the tobacco companies.

Of course, Congress is free to modify any of the terms of the deal. Washington state Atty. Gen. Christine Gregoire said that while the attorneys general welcomed improvement of the package by Congress, there is a specific clause in the settlement that provides that if it is eviscerated by Congress, the deal will be off and lawsuits will continue.

Deal Tries to Cut Youth Smoking

The settlement puts a heavy emphasis on reducing youth smoking. It expands on FDA rules, adopted in August 1996, that the industry has vigorously fought in court. They include a requirement that retailers demand identification from tobacco purchasers who appear to be 27 or younger to ensure none are younger than 18.

The agreement goes further though, mandating a ban on all vending machine sales; placement of tobacco products behind store counters and out of reach of consumers; and a nationwide licensing system for all sellers of tobacco products, with graduated penalties and license suspensions to be established for violations of the youth-access and marketing provisions.

Additionally, the agreement requires a 30% reduction in smoking by teenagers in five years, 50% in seven years and 60% in 10 years. If those goals are not met, the industry faces penalties of $80 million per percentage point below targeted levels. Gregoire said this provision could cost the cigarette industry more than $1.5 billion a year in penalties and would give the industry an economic incentive for the first time to stop marketing to kids.

Nevertheless, former FDA Commissioner David A. Kessler and former Surgeon General C. Everett Koop, who head a panel set up to evaluate the deal, said those standards are not tough enough. In a joint statement, they said that “if the level of youth smoking does not go down within two years, there should be much stiffer, punishing penalties and further restrictions on advertising, promotions and marketing practices,” and graduated penalties thereafter if youth smoking does not decline.

The agreement hardly ends all of the industry’s legal problems. Unaffected by the settlement is an unfair-business-practices suit in San Francisco against R.J. Reynolds Tobacco Co., stemming from the Joe Camel campaign, which is scheduled to go to trial in December.

Further, industry officials face an ongoing criminal investigation by the Justice Department and federal grand juries in Brooklyn, N.Y., and Washington. The probe is focused on whether tobacco companies or their executives defrauded the government, the public or their shareholders. The Justice Department issued a statement Friday saying the investigation would not be affected by the settlement.

The agreement requires the companies to turn over tons of internal research documents about the health effects of smoking and to set up a public depository where anyone could read them.

Additionally, the settlement requires the industry to abolish both its lobbying arm, the Tobacco Institute, and its controversial scientific wing, called the Council for Tobacco Research.

Friday’s dramatic announcement came after three months of negotiations that almost were derailed over the issue of protection for tobacco industry whistle-blowers. The attorneys general insisted that they would not sign the deal unless the tobacco companies ceased any attempts to harass former employees who have come forth with damaging information against the industry, in particular former Brown & Williamson vice president Jeffrey Wigand, the highest-ranking defector in the history of the industry. Wigand had accused the company’s former chairman of lying to Congress about the addictive properties of nicotine.

The company balked at ending its lawsuit against Wigand and freeing him from a confidentiality agreement, but Butterworth said, “We don’t leave our wounded on the field of battle.”

A transatlantic conference call was hastily arranged between the chief executives of the nation’s two largest tobacco companies, Philip Morris and R.J. Reynolds, and Martin Broughton, the CEO of B.A.T. Industries, the British-based parent of Brown & Williamson.

Ultimately, sources said, Broughton acceded. When Arizona Atty. Gen. Grant Wood heard the news, he declared, “Done Deal!”

Moments later, Phil Carlton, a North Carolina lawyer who played a key role in setting up the negotiations, emerged from a meeting room at the Park Hyatt Hotel, gave a thumbs-up gesture to waiting reporters, signifying a successful conclusion.

Then Moore and the team of attorneys general marched triumphantly across the street for their news conference. While one of the attorneys general was talking, Wigand walked in and was cheered by the prosecutors and embraced by trial lawyers who have been suing the industry.

Official Is Hailed as ‘American Hero’

At the news conference, Moore was hailed by the other attorneys general as “an American hero.” A virtually unknown official from one of the nation’s poorest states, Moore vaulted on to the national stage when he sued the industry in May 1994.

Matt Myers, executive director of the National Center for Tobacco Free Kids, said those suits paved the way for Friday’s historic development. “Three years ago the attorneys general started a movement . . . that led us to a point no one could have dreamed of.” Indeed, in 40 years of litigation, the cigarette companies had never paid a dime in damages and vowed never to settle a case.

“Apparently, those attorney general cases scared the hell out of them,” said Richard Kluger, the author of “Ashes to Ashes,” a history of the cigarette industry that won a Pulitzer Prize this year. “This is monumental. . . . I never thought the industry would put up this kind of money.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Highlights of a Historic Pact

THE INDUSTRY AGREES TO . . .

* Pay $368.5 billion over 25 years, mainly to reimburse state health care costs and fund anti-smoking campaigns and other health programs.

* A ban on all billboard and outdoor advertising.

* Recognize that the FDA has regulatory power over tobacco products, including the authority to eventually eliminate nicotine.

* Expand warnings on cigarette packs

* Ban on vending machine sales

INDUSTRY RECEIVES . . .

* A ban on class actions and state Medicaid lawsuits, and protection from suits seeking punitive damages for past industry misconduct. Smokers could still sue to recover actual damages, such as medical bills.

The Crackdown on Smoking

A brief look at the history of tobacco regulation in the U.S.:

* 1964: Surgeon general issues a report linking cigarette smoking and lung cancer.

* 1966: Warning labels on cigarette packaging required.

* 1971: Television and radio ads for cigarettes are banned.

* 1973: No-smoking sections required on commercial flights.

* 1988: Surgeon general issues a report declaring cigarette smoking “addictive.”

* 1993: The EPA issues report identifying secondhand smoke as a health risk.

Roots of Friday’s Settlement

* May 1994: Mississippi Attorney General sues the tobacco industry to recoup Medicaid costs of smokers. Eventually about four-fifths of the nation’s top legal officers will join the battle.

* December 1994: Florida judge certifies Norma Broin vs. Philip Morris Cos. Inc. as a class-action lawsuit. It is the first class-action for alleged health problems caused by secondhand smoke.

* August 1996: Top legal officers from 14 states that filed massive lawsuits against the tobacco industry work to refine and win support for a proposed global settlement of tobacco litigation.

* March 1997: Breaking ranks with the industry, the Liggett Group reaches a settlement with 22 state attorneys general to end lawsuits aimed at recouping health care costs of smokers.

* April 1997: Tobacco companies begin negotiating a possible settlement with state attorneys general and anti-tobacco litigants.

* June 20: Tobacco companies agree to pay $368.5 billion in settlement.

Sources: Centers for Disease Control and Prevention; “Ashes To Ashes,” Richard Kluger (Alfred A. Knopf, 1996); Times and wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times

Smoking in America

Individual cigarettes sold per person in the U.S.:

In thousands

1965: 4,196

1994: 2,516

Death Rates

Estimated number of deaths per year linked to the following causes:

Deaths in thousands

Tobacco: 400

Diet/behavior: 300

Alcohol: 100

Microbial agents: 90

Toxic agents: 60

Firearms: 35

Sexual behavior: 30

Motor vehicles: 25

Drug use: 20

Sources: Journal of American Medical Assn., cigarette manufacterers, U.S. Census

How Smoking Kills

Specific causes of deaths linked to smoking:

Lung cancer: 29%

Heart disease: 24%

Lung disease: 16%

Stroke: 5%

Other: 27%

Where the Billions Go

$25 billion dedicated for punishment for past industry wrongdoing;

$25 billion for health care of unisured children;

$310 billion for free stop-smoking programs, anti-smoking campaigns, enforcement of the settlement and reimbursements to states.

Note: Attorney fees will be paid separately by tobacco companies.

What It Means to Consumers

The tobacco settlement would present costs and opportunities for consumers. Here are some:

PRICE HIKES: The cost of cigarettes is expected to rise by as much as $1 a pack because tobacco companies will pass along the sting of penalties to consumers. On top of that, the Senate is mulling a 20-cent-a-pack tax increase, and various states plan hikes too.

HELP QUITTING: The settlement requires the industry to pay for stop-smoking programs that will be free to consumers. Smokers also will be able to read scarier new warnings on cigarette packages, like “WARNING: Smoking Can Kill You.”

ADVERTISING: Consumers no longer will be subjected to cigarette billboards or other outdoor advertising, Internet ads or tobacco sponsorship of sporting events. But they will see lots of anti-smoking ads, paid for by the settlement.

BUYING AND SMOKING: Vending machine sales will be banned, and smoking prohibited in public places and most workplaces without separately ventilated areas. Restaurants (except fast-food), bars, casinos and bingo parlors are exempt, but may be subject to local laws.

LAWSUIT CONSTRAINTS: Smokers no longer will be able to join class-action lawsuits against tobacco companies, and they will not be able to sue for punitive damages. But smokers still will be able to sue individually to recover actual damages, such as medical costs.

CHILD HEALTH CARE: As part of its punishment, the tobacco industry will pay billions of dollars to fund health care coverage for uninsured children.

Source: Times staff