Up in Smoke
How greed, hubris and high-stakes lobbying laid waste to the $246 billion tobacco settlement
Posted Mar 18, 2007 6:31 AM CDT
By Mark Curriden
The goal was “to bring this industry to its knees.”
That’s what Texas Attorney General Dan Morales said on March 28, 1996, as he announced filing the first-ever federal civil racketeering lawsuit against the major tobacco companies.
“The purpose of this lawsuit is to change how this industry does business,” said Morales, who was the seventh state attorney general to sue the cigarette makers for smoking-related health care costs. “We are going to stop them from selling their deadly product to minors. We are going to force them to manufacture a safer product.”
In a little more than a year, 30 more states had filed similar lawsuits. The monetary claims topped $100 billion. Hundreds of lawyers were employed by both sides.
“The money at stake was unprecedented. The breadth of the litigation, reaching to nearly every state, was unprecedented,” says Tim Bouch, a Charleston, S.C., litigator
specializing in mass torts who closely followed the tobacco litigation. “And the legal claims, which were truly novel in theory, would have been unprecedented if successful.” But today, 10 years after the parties announced a record $369 billion settlement—which was later reduced to $246 billion—it’s business as usual.
Young adults still overwhelmingly make up the 3,000 people who start smoking daily. Cigarettes remain unregulated by the U.S. Food and Drug Administration. And a study released in January by Harvard University’s School of Public Health found that nicotine levels in major-brand cigarettes sold in Massachusetts increased by about 11 percent between 1997 and 2005.
The only big winners in the litigation appear to be the tobacco companies, the state treasurers and the lawyers who represented both sides.
Profits for industry leader Philip Morris were $4.5 billion in 2005—up 36 percent from 1997. The company’s stock price has doubled since the filing of the first state lawsuit in 1994.
Of the $61 billion that Big Tobacco has paid as part of the settlement, the states have spent less than 8 percent on anti-smoking efforts. The vast majority of the money has gone to fund ordinary state operations and tax cuts.
And $15 billion has been awarded to the private lawyers hired by the state attorneys general. That’s the largest attorney fee award in history. More than $100 million—Big Tobacco won’t say precisely how much—has been paid to the lawyers defending the companies.
“The tobacco litigation was a failure of historic proportions,” says Linda Eads, a law professor at Southern Methodist University’s Dedman School of Law in Dallas. “A complete and utter failure in every sense.”
This is a story of how good intentions snatched defeat from the jaws of victory.
A Public Purpose
The point of the tobacco suits was to “dramatically improve public health and save lives,” according to former Mississippi Attorney General Michael Moore, who is now in private practice in Flowood, Miss. The idea that a lawsuit could change the way the tobacco companies did business was almost laughable when Moore filed the first state lawsuit against tobacco in May 1994.
Moore’s team of lawyers, which included mass tort bar giants Richard Scruggs of Pascagoula, Miss., and Ron Motley of Charleston, S.C., developed the legal theory for suing the cigarette makers for reimbursement of Medicaid and other state health care expenses. They were trying to maneuver around Big Tobacco’s highly successful defense strategies that had won every lawsuit filed by sick smokers for 40 years. Scruggs says the industry’s legal defense was two-pronged: Deny that there is any evidence that cigarettes are addictive or dangerous, and argue that even if cigarettes are addictive or dangerous, the smoker knew they were but made the choice to smoke. (In fact, a month before Mississippi filed suit, the CEOs from the nation’s seven largest tobacco companies all testified before a congressional subcommittee that they believed nicotine was not addictive.)
“Our theory was to sue on behalf of states, which had not chosen to smoke but were still being forced to pay health care costs, and that the tobacco companies had gotten rich because of it,” Scruggs says.
The Mississippi lawyers quickly realized they wanted to get other states on board. “At our first court hearing, Scruggs and me were at one table, and 68 lawyers for the tobacco companies at the other table,” Moore says. “I leaned over and told Dickie that he was going to have to let me use his airplane to fly around to meet with other state attorneys general to get them on board, too.”
Initially, it was a hard sell. The National Association of Attorneys General refused to allow Moore on the agenda at its August 1994 meeting in San Antonio. Instead, Moore would corner different state attorneys general in the hallway of the hotel to make his pitch.
“But the tobacco industry had sent its own lawyers and lobbyists to the meeting, and [they] would watch me and would immediately gang up on an AG after I had spoken with them to tell them my lawsuit was a waste of time and had no basis in law,” Moore says. Over the next two years, Minnesota, Florida, Massachusetts, West Virginia, Louisiana and Texas would file their own similar lawsuits. Each state hired, on a contingency fee basis, private plaintiffs lawyers to pursue their cases.
“Our goal was to raise the stakes so high that the industry would not be able to sustain a single loss,” says Scruggs. “We wanted them to face a ‘bet the company’ lawsuit in each state, which we believed would force them to the negotiating table.” Matt Myers, general counsel for the Washington, D.C.-based Campaign for Tobacco-Free Kids and an advocate of the state lawsuits, says the “potential impact for the litigation was enormous and real.”
“For the first time, the tobacco industry had a worthy adversary,” Myers says.
The Smoking Gun
For nearly three years, the state attorneys general and trial lawyers unearthed previously secret internal tobacco documents to show that the companies knew cigarettes were addictive and dangerous, and that they intentionally targeted minors with their advertising. Whistle-blowers revealed confidential information on NBC News’ Dateline and CBS’ 60 Minutes.
The public disclosures had a significant impact. A poll by the Dallas Morning News in April 1996 showed only one-third of Texans supported the state’s lawsuit against the cigarette makers. A year later, nearly three-fourths favored it.
Before the first case made it to trial, the once-unthinkable occurred. Big Tobacco, which had never lost a case or paid a dime in settlement, raised a white flag. The two sides agreed to meet for the first time on the morning of April 3, 1997, at the Crystal City Sheraton Hotel near Washington, D.C. Everyone at the meeting was sworn to secrecy.
Thirty-five lawyers, including a handful of state attorneys general, crowded around a conference room table. Former Senate Majority Leader George Mitchell, invited by the tobacco industry to kick off the meeting, introduced everyone, then disappeared. Then all eyes focused on two men—Philip Morris CEO Geoffrey Bible and his R.J. Reynolds Tobacco Co. counterpart, Stephen Goldstone.
“The CEOs told the AGs that their companies were willing to do things that would surprise them,” says former North Carolina Supreme Court Justice Phil Carlton, who was there representing the tobacco companies. “When we told them we were willing to do away with the Marlboro Man and Joe Camel, I thought the AGs were going to have a heart attack. They were shocked.”
Steve Parrish, senior vice president of corporate affairs for Altria Group Inc. (formerly Philip Morris Inc.), says the tobacco companies started realizing in 1995 that public attitudes about the industry were changing.
“It seemed that every day there was a new assault, a new article in the paper, new allegations. It just seemed like it was never going to end,” Parrish told ABC News in 2005. “The notion that we could always fight and win, those days had to end. We just couldn’t do that anymore. We were looking for peace. We were trying to let the other side let us surrender.”
For three grueling months, the two sides engaged in a series of negotiations in Chicago, Dallas, New York City and Washington, D.C. Then, on June 20, 1997, a settlement was announced at a press conference carried live on CNN.
The companies agreed to make huge payouts—$368.5 billion over 25 years. The industry also agreed to fund billions of dollars in anti-smoking and cessation programs, and it promised to dramatically reduce teenage smoking or face additional multibillion-dollar fines. And most importantly, the cigarette manufacturers said they would submit, for the first time, to the regulatory authority of the Food and Drug Administration.
In return, Big Tobacco wanted limited liability protections in the form of a $6.5 billion cap on the amount of damages from civil lawsuits it would be required to pay in any one year and a promise that the FDA would not ban nicotine for 10 years.
“The June 20th agreement was truly historic and would have been one of the single-greatest improvements in public health in United States history,” says Dr. John Seffrin, president of the American Cancer Society. “The tobacco companies made concessions that we had only dreamed about.”
Not So Fast
but there was a catch: the deal required congressional approval. Immediately, the settlement came under fire.
Many leaders of the anti-smoking community complained it was a sweetheart deal for the industry because it prevented the FDA from regulating nicotine for a decade and granted the companies too much in liability protections. Large business interests also opposed the agreement, arguing litigation is never a proper means to change public policy.
“The concept of litigation forcing legislation and public policy changes totally freaked the Chamber of Commerce and corporate America because they feared they could be next,” Scruggs says. “Their goal was to make sure nothing like this could ever happen again, and it hasn’t happened since.”
Opponents tried various techniques to damage the legislation. One significant point of attack was the fees being paid to the plaintiffs lawyers hired by the states. As part of the settlement agreement, attorney fees were set by a special arbitration panel and paid separately by the tobacco companies.
A handful of Republican senators, predicting trial lawyers would be getting a multibillion-dollar windfall from the deal, proposed to cap the fees plaintiffs attorneys could be paid at $250 an hour. The proposed amendment, which did not limit the money Big Tobacco paid its lawyers, barely failed.
The senators were wrong in one respect: Their prediction of how much the trial lawyers would be paid was grossly underestimated. The amount awarded by the arbitration panel to the first three states alone was mind-numbing. The lawyers in Mississippi were given $1.4 billion, while those who handled the Florida and Texas cases were awarded about $3.3 billion each. Ultimately, the tobacco companies agreed to hand over more than $15.4 billion to the plaintiffs attorneys.
“Immediately, we went through a period of buying faster planes, bigger boats and nicer cars,” says Scruggs, whose personal take from the deal was about $1 billion. “The obscene amounts of money being handed out certainly damaged our cause before Congress and in the public.”
Meanwhile, Sen. John McCain, R-Ariz., tried to make the agreement more acceptable to public health advocates by increasing the amount the cigarette makers would pay to $516 billion over 25 years. But the new price tag was too much for Big Tobacco, which ordered its lobbyists to stop pushing for passage of the bill and start fighting it. “All the way around the table, we overreached,” Parrish says. “We tried to do too much in one agreement. ... Everyone in Congress could find something objectionable.” Parrish says several members of Congress viewed the state attorneys general as possible future political opponents and thought the private attorneys’ fees would likely go to finance coming campaigns.
“We didn’t do enough to include key members of Congress in the negotiating process early on,” Moore says. “We should have paid more attention to their interests and egos.”
The Bill Dies
In June 1998, the McCain comprehensive tobacco bill died on the floor of the U.S. Senate after several key senators concluded it wasn’t tough enough on the cigarette makers. In the eight years since, not a single piece of tobacco-control legislation has even made it to a vote.
“The pursuit of perfection became the enemy of the good,” says Iowa Attorney General Tom Miller, who was one of the negotiators. “We should have accepted less. We missed an opportunity to make historic changes.”
Myers says his fellow public health leaders believed that if they could shoot down the June 20 settlement, the state cases would go to trial.
“That clearly wasn’t reality,” Myers says. “Some public health people miscalculated the fight against a very powerful foe. They saw the blood in the water and thought the enemy was mortally wounded, which wasn’t true. They didn’t understand what the trial lawyers knew, that the home run to be achieved in these cases was much more likely to happen in a settlement than through a trial.”
As the McCain bill was being debated, four states—Mississippi, Florida, Minnesota and Texas—faced trial dates. Each settled for a total of $40 billion to be paid out over 25 years. In November 1998, the remaining 46 states (along with U.S. protectorates and territories) jointly cut their own deal, getting $206 billion.
Absent from the Plan B settlement was any mention of FDA regulatory authority, industry funding of cessation programs or industry funding for anti-smoking efforts for minors. In an ironic twist, today the FDA regulates nicotine cessation devices but not the nicotine in cigarettes.
Despite a commitment from the governors and legislators to use the money to address anti-smoking and health care concerns, only pennies on the dollar have actually gone to those causes. Instead, the money has gone to meet budget shortfalls or to pay for tax cuts. In Virginia, some of the tobacco settlement was used to build new seats at a NASCAR speedway, while New York used some of its money for sprinklers and golf carts for a course near Buffalo. Georgia renovated a hotel. Alabama funded a boot camp for young adult males. And North Carolina actually used money to build a tobacco warehouse. “This will be seen as one of the greatest lost opportunities to improve public health in history,” Myers says. “Here we are, a decade later, and there’s no regulation of tobacco products. The product is no safer or less addictive. The two largest manufacturers [R.J. Reynolds and Brown & Williamson in 2005] ... launched candy-flavored cigarettes, for God’s sake. This industry continues to behave in the way it has always behaved.”
While Moore, Myers and others are disappointed that the state cases didn’t have a bigger impact, they dispute those who contend the effort had no impact at all. The $246 billion total payout caused the price of cigarettes to increase about 45 cents a pack. Studies show cigarette consumption among young people declines as the cost goes up.
Mississippi, as part of its deal, got an extra $62 million to fund a three-year pilot project that reduced teenage smoking by 40 percent and adult smoking by 20 percent between 1997 and 2003. Nationally, 36 percent of teens smoked in 1996, according to the Campaign for Tobacco-Free Kids. In 2006, that number was down to 23 percent. Parrish, a former partner at Shook, Hardy & Bacon in Kansas City, Mo., also disputes those who say Philip Morris has not changed how it does business. He points out that the company fully supports FDA regulatory authority over tobacco. Parrish, who is lauded as a reformer within the industry, points to Philip Morris’ new national marketing campaign encouraging parents and smokers to visit its new smoking-prevention Web sites. “One of the tragedies is that we do not have a nationwide tobacco policy, and that’s a true shame,” Parrish says. “There have been times when litigation has led to profound changes in public policy. Brown v. Board of Education is just one example.” The state tobacco lawsuits could have been another, according to Parrish. Unfortunately, he adds, “we all blew it.”
Some legal observers say the full impact of the states’ tobacco lawsuits may not be fully realized for many years.
“Lawsuits are a blunt instrument that can do one thing—pull the money lever,” says law professor Stephan Landsman of DePaul University in Chicago. “But because of the documents and whistle-blowers unearthed by the attorneys general, plaintiffs actually have a fighting chance when they take a case before a jury now. That is a dramatic change.”
Critics have been proven wrong in their claim that tobacco litigation would ignite waves of suits by state attorneys general against other industries, such as guns, fast food, Big Oil or pharmaceuticals. The largest settlement by state attorneys general since the tobacco case was a 2002 settlement in which Household Finance Corp. agreed to revamp its real estate lending practices and pay consumers up to $484 million—which is just one-fourth of 1 percent of the tobacco deal.
The attorney general lawsuits did spark legislators in several states to pass new laws, though very few of them targeted the tobacco industry, according to Victor Schwartz, general counsel for the American Tort Reform Association. Instead, those states passed new statutes designed to prevent their attorneys general from ever bringing similar lawsuits against other industries and from hiring private lawyers on a contingency fee basis.
“The tragedy of the tobacco cases,” says Moore, “is that we had a chance to dramatically improve public health and save lives, but we let that opportunity slip by.”
The Big Payday
A state-by-state breakdown of arbitrated legal fee awards shows the three states that first filed suit got the major portion of a $15 billion pot. State attorneys general then distributed the fees to private attorneys hired to handle the negotiations. (Legal fees in California and Minnesota were handled differently.) Some attorneys were paid by more than a dozen different sources.
State Award (in millions) Florida $3,431
New York 625
Washington, D.C. 418
South Carolina 83
Puerto Rico 75
New Mexico 25
Source: Altria Goup Inc.
Mark Curriden covered the tobacco cases for 10 years for the Dallas Morning News. He is director of communications for Houston’s Vinson & Elkins, which was not involved in the tobacco litigation.