$200-Billion Pact in Tobacco Case Down to the Final Details

Negotiators for cigarette makers and state attorneys general are working out the final details of a $200-billion agreement to settle 36 state lawsuits against the tobacco industry, according to several sources close to the talks.

California would receive about $23 billion over 25 years as its share of what would be the largest civil settlement in U.S. history. The proposed deal may be announced to the public as early as Monday at a news conference in New York.

The tentative settlement is an outgrowth of the collapse of federal legislation earlier this year that would have imposed sweeping controls on the tobacco industry. Instead, this multi-state settlement would impose more modest regulation of the industry and a smaller monetary payout, but also less protection for the industry from other lawsuits.

The proposal, which includes restrictions on tobacco advertising and promotion, would eliminate the biggest legal threat facing Big Tobacco: state lawsuits seeking recovery of Medicaid funds spent to treat ill smokers.

In California, the deal would bring not only a windfall to the state, but also substantial income to the city and county of Los Angeles and other large metropolitan areas that joined in the anti-tobacco litigation.

A formula agreed to by state Atty. Gen. Dan Lungren and municipal representatives in August would give Los Angeles County $2.8 billion and the city $287.5 million of the state’s $23-billion share. Orange County would receive roughly $725 million, Ventura County $200 million and San Diego County $825 million.

L.A. County’s payout would amount to about $100 million a year for the next 25 years. Although sizable, it would not meet the $300 million a year the county says it spends to treat tobacco-related illnesses.

The industry is expected to pay for the settlement through an estimated 35-cents-per-pack price increase on cigarettes.

California, New York and six other states were represented at the bargaining table in talks that began in July following the collapse of legislation in Congress.

Washington Atty. Gen. Christine Gregoire, the lead negotiator for the attorneys general, declined to return calls seeking comment, as did industry spokespersons.

But several sources close to the negotiations said that once the deal is announced, states that did not participate directly in the talks will have about a week to decide whether to join the settlement or take their anti-tobacco lawsuits to trial. If some states decline to settle, the total pot would be reduced by those states’ proposed shares.

Besides Washington, New York and California, the states participating in the talks are Colorado, North Carolina, North Dakota, Oklahoma and Pennsylvania. It was unclear Tuesday how many states must sign on to finalize the deal, but sources close to the talks have indicated that no more than a few states are likely to spurn a settlement and take their chances in court.

Gary Black, a leading tobacco analyst at investment firm Sanford C. Bernstein, said he expects four or five states to hold out, not enough to create problems for the deal.

“What’s important is that California and New York are part of the deal,” Black said. He said Maryland, Massachusetts, Michigan and Wisconsin may hold out but that they are not large enough to derail the deal.

Cigarette makers already settled for a total of $41.5 billion with the four states whose Medicaid cases were among the first filed. The cases of Mississippi, Florida and Texas were settled just before trial, and Minnesota’s case was settled after a lengthy trial but prior to a jury verdict.

Washington’s anti-tobacco case has been in trial in Seattle since September but would also be settled under the agreement.

The industry would still face dozens of private class-action suits seeking damages for allegedly addicted smokers, or reimbursement of smoking-related medical payments by union health-care funds. Recent pretrial rulings in some of these cases indicate that many of them may be gutted or dismissed.

Overall, Black characterized the deal as “a consolation prize,” good for the industry but not as good as the $368.5-billion proposed national settlement that was announced June 20, 1997. Some of the terms of that deal required federal legislation, which ultimately failed in Congress this year.

“That settlement would have given the industry much more protection,” including elimination of class-action suits and caps on punitive damages, Black stressed.

But Stan Glantz, a UC San Francisco medical school professor and a leading industry critic, said he believes the deal “is not good for public health.” He said he believes that individual states should continue to pursue their cases in court.

However, some states that filed their suits in 1997 have done little trial preparation. The deal also would provide compensation to 10 states that have not even sued the industry, including such tobacco strongholds as Kentucky and North Carolina.

Like the cigarette industry, the states are not getting as much as they would have under the proposal that died in Congress. In particular, the current deal does not provide for full regulation of the industry by the Food and Drug Administration. The states simply did not have the authority to negotiate such a condition, said Patrick Coughlin, a San Diego lawyer fighting the tobacco industry.

Nonetheless, he said, if the settlement includes the restrictions on the industry that are expected, it will be “a significant achievement nationwide and it will reduce teen smoking.”

Several sources said the settlement would impose some important restrictions on industry marketing. For example, it calls for a ban on billboards, transit advertising and merchandise carrying the brand logos of cigarette makers, such as Marlboro or Camel. And the size of industry promotional signs outside retail outlets would be restricted.

However, the industry would be allowed to continue utilizing human figures in its advertising, meaning that Philip Morris Inc. could continue to use the Marlboro Man, perhaps the most potent advertising symbol in history. That would have been banned under the proposed federal legislation.

The settlement also calls for the creation of an industry-funded $1.4-billion counter-advertising program, sources said.

The deal would cover the nation’s four major cigarette manufacturers: Philip Morris; R.J. Reynolds Tobacco Co.; Brown & Williamson Tobacco Corp., a subsidiary of BAT Industries; and Lorillard Tobacco, a subsidiary of Loews Corp. It would also cover smokeless tobacco manufacturer U.S. Tobacco.

Under provisions of the settlement sought by the cigarette companies, the firms’ annual payments to the states would be reduced if they lost significant market share to minor cigarette companies that didn’t sign on to the agreement and therefore gained a price advantage. Those firms, including Liggett and several smaller companies, hold about 3% of the U.S. market.