MICHAEL WHEELER and GEORGIA LEVENSON
It was late on a Friday afternoon and the press corps was restless. For three months it had followed a series of negotiations between state attorneys general (AG)2, public health advocates, and the five largest tobacco companies in the United States.3 Hundreds of billions of dollars were potentially at stake, as well as important public policy issues, including the future rights of private citizens to sue the industry for wrongful death and illness.
A ground-breaking deal had been rumored earlier in the month, but it had fallen through. Some observers concluded that there were too many parties and too many contentious issues to ever expect settlement. Just this morning, however, reporters had been alerted that agreement was imminent; as the day dragged on, it became increasingly apparent that there still were major roadblocks.
At long last, representatives of more than three dozen state attorneys general filed into the crowded room. Television lights went up as Mike Moore, the AG from Mississippi and a leader in the assault against the tobacco industry, stepped up to the podium. He looked both tired and exhilarated as he announced what he called “the most historic public health achievement” of all time. Sharing credit with his counterparts from across the country, Moore noted that “we have been in a grueling negotiation that has sometimes been humorous, sometimes been rocky, sometimes been hard. The last week has been the most contentious thing I’ve ever seen in my life, down to the last couple of minutes.”
The whole settlement process had been triggered by an unusual lawsuit that Moore filed just three years earlier. At that time, many people had written off his efforts as quixotic or perhaps politically motivated. After all, the tobacco companies had been sued hundreds of times for smoking related illnesses and death, but had never paid a penny in settlement or court order. At the press conference, Moore himself recalled what many skeptics had once said about his strategy: “Never amount to a hill of beans, as they say in Mississippi.”[4]
By the time he was done, however, Moore had built powerful alliances with other states, as well as with lawyers representing private claimants and various public interest groups. This collective “army,” as he called it, made up of “men and women with the most courage I’ve ever seen in this country” ultimately won what most people would regard as a very large mountain of beans, indeed.
Specifically, on June 20, 1997, Moore announced that the five major United States tobacco companies had formally committed themselves to a remarkable settlement in which:
In return for these unprecedented concessions, the five tobacco companies henceforth would be immune from paying awards for punitive damages to individual plaintiffs, and from any class action suits against the industry. Suits by individual smokers and their families would continue to be allowed, with no limit on the recovery of compensatory damages by individual plaintiffs.
In trumpeting the agreement, Moore stated, “We had to punish this industry in such a way that everybody in this country and in the world would recognize that they had paid a higher price than any other corporation in history.” Such punishment was fitting, he explained, because the industry had “done more harm than any other in history.”
Also, Moore and his colleagues had made sure that the tobacco industry could not use the agreement as a stalling device. The state attorneys general had retained the right—over the industry’s strenuous objections—to go forward with their multiple lawsuits unless and until Congress and the White House could resolve the remaining regulatory issues and enact the proposed national settlement into federal law.
No matter how the next stage of the process unfolded, the history of the provisional settlement between the states and the major American tobacco companies was itself a remarkable illustration of a complex, multiparty negotiation. The process took place in a highly politicized context, in the glare of the media, and in the shadow of numerous (and sometimes conflicting) lawsuits and regulations.
That Moore and his colleagues succeeded where so many before had failed testified to significant changes in the political and regulatory landscape. It also reflected shrewd coalition-building and clever strategy, plus a good measure of luck. Finally, the agreement raised important questions about negotiating the life and death rights and interests of parties who are not themselves at the bargaining table. Though few would second-guess Moore’s strategy, many critics challenged the agreement that he and his fellow attorneys general endorsed, some calling it a “massive bailout” of the tobacco industry.
This is the story of that deal and how it was reached.
The central claims of Moore’s Mississippi lawsuit—and of the dozens of others like it that would follow—was that the state taxpayers were unfairly shouldering the costs of tobacco-related illnesses through the Medicaid program. The notion of invoking the interests of taxpayers was new, but the idea that smoking is expensive, and that the tobacco industry was breaking the law by selling an otherwise legal product to children under 18 (the legal age of sale), certainly was not.
A precise account of illness and death caused by tobacco can never be made. Yet the total number of American deaths in the twentieth century attributed to smoking is commonly measured in the many millions. In the 1950s, nearly half of the American adult population smoked. If there is any good news in recent public health statistics, it is that the frequency of smoking has dropped significantly since mid-century. By 1997 only a quarter of the population smoked, down from 42% in 1965.7 This drop in the percentage of smokers was somewhat offset by general population growth, however, so that even in the 1990s there still were nearly fifty million American smokers, each consuming on average 27 cigarettes a day.
Of those who still smoked, an estimated 80-90% became addicted to cigarettes as teenagers. Public health advocates had long accused cigarette companies of marketing directly to teenagers and even younger children for just this reason, using campaigns with cartoon characters like Joe Camel.8 For years the industry denied this charge, lest it appear to condone illegal behavior (cigarette sales to children under 18 were prohibited in the United States). Nevertheless, it was estimated that 3,000 young people became regular smokers each day.[9]
Despite the mounting evidence of the individual and social costs of smoking, the federal government’s attempts to regulate tobacco have come slowly. In 1964, in a landmark announcement, the U.S. Surgeon General declared that cigarette smoking was a serious health hazard; specifically, that it caused lung cancer. In 1969, a federal law was passed requiring cigarette manufacturers to put warning labels on each package of cigarettes. Two years later cigarette advertising was banned from television. Growing concern about second hand smoke also helped antitobacco activists achieve “smoke free” zones—on airplanes, in restaurants, and often in the workplace. Yet for each of these steps, there were dozens of more stringent measures that were successfully defeated by the tobacco lobby. Relatively few ever came up for direct votes in Congress. Much more often stricter regulations were bogged down by endless agency studies and subcommittee debates.
“There’s no magic in it,” explained an aide to Congressman Henry Waxman, one of the first representatives to challenge Big Tobacco. “It’s a very basic issue—their power and influence starts and ends with their money.”11 In 1996, operating profits of the five major U.S. cigarette manufacturers and UST, Inc. (a manufacturer of smokeless tobacco) were almost $10 billion on domestic tobacco sales alone. For the entire industry, profits were $15.781 billion (see Exhibits 1, 2, 3 and 4). Also in 1996, tobacco companies were the largest corporate contributors to both the Democratic and Republican parties, giving nearly $11 million dollars to political parties and individual candidates during the election cycle.12 Between 1986 and 1996, three of four members of Congress—314 Representatives and 78 Senators—accepted industry political action committee (PAC) contributions13 (see Exhibits 5 and 6).
In addition to direct contributions, tobacco companies also maintained federal lobbyists in Washington who attempted to directly influence tobacco policy. In 1996, Philip Morris alone spent $19.6 million on its Washington lobbying operation, which included 13 house lobbyists and 15 side consultants, law and lobbying firms. The Tobacco Institute, an industry clearinghouse for intelligence reports on antismoking efforts around the country and a coordinator of defensive efforts, had a Washington headquarters which cost the industry an estimated $5-10 million annually.[14]
Tobacco companies also made political investments at the state level, when antismoking activists started to make more local inroads. In New York, for example, during the 1993 session of the state legislature, the $600,000 reportedly spent by tobacco companies amounted to more than any other industry or special interest group devoted to political persuasion in the state. Likewise, when an antismoking campaign seemed to be gaining momentum in California, cigarette companies spent a reported $4 million on campaign gifts and fees to more than two dozen lobbyists working during the 1989-90 legislative term.[15] Similar efforts were made by the industry in states with strong antitobacco activity, such as Massachusetts and Minnesota.?p>
The political influence and power wielded by the industry was exerted in both overt and subtle ways. In 1994, for example, when Republican Tom Bliley, the largest single recipient of Congressional tobacco money, took over the House Commerce Committee, he immediately canceled an investigation of the tobacco industry. Special treatment of tobacco interests was not new. Since the 1940s, Congress had awarded the annual farming subsidies to tobacco farmers in the southern states. By restricting cultivation, these subsidies (valued at an estimated $80 million dollars in 1996) helped to prop up the price of tobacco and expand the network of allies.
In addition to their regulatory activity, tobacco companies were also fighting aggressively on another front: the courtroom. Until the time of the settlement, they were even more successful in this venue than in federal and state legislatures. The first suit brought against the industry was filed in 1954 by a widow, Eva Cooper, who contended that the Camel cigarettes her husband smoked caused him to develop cancer and killed him. She sued R.J. Reynolds and lost, unable to prove that her husband’s death was a result of smoking.
Other individual suits were filed against various companies in the late 1950s and early 1960s. Relatively few cases actually got to a jury, and not one resulted in a verdict that cigarette companies were responsible for the death or illness of smokers. Some plaintiffs simply dropped their claims after being dragged through extensive and expensive pretrial proceedings. In the words of a lawyer for R.J. Reynolds, “The way we won the cases, to paraphrase General Patton, is not by spending all of Reynold’s money, but by making the other son-of-a-bitch spend his.”[16]
Despite increasing awareness of the hazards of smoking, cigarette lawsuits in the 1980s and early 1990s shared the fate of the earlier litigation. In the courts, tobacco companies continued to successfully employ a dual strategy defense: they either denied that cigarettes were health hazards, or maintained that even if cigarettes were harmful, smokers were responsible for their own actions. “The plaintiffs have lost every case because of a single flaw in their approach,” explained a former tobacco counsel. “For a product to be defective, it must be bad beyond the average public knowledge. Yet, if you walk into a room of 1,000 people and ask who believes that cigarettes are dangerous and cause cancer, every person in that room—smoker or not—will raise a hand.”17 After 40 years and over 300 lawsuits, no tobacco company had paid a plaintiff a single penny.
One of the formidable barriers to success in the courtroom was the fact that for many years, the tobacco industry knew more about the health effects of smoking than did consumers and their lawyers (and for a time, perhaps, even more than the government.) As public health research increased, many critics suspected that the industry covered up incriminating evidence, though this was not fully confirmed until the landmark Cipollone decision in 1992.[18] In an unprecedented legal move, Cipollone attorneys subpoenaed 100,000 pages of documents from the tobacco industry, which they claimed proved that the industry suppressed, ignored, and even lied about data on the harmful effects of smoking. In short, they argued, the industry engaged in massive fraud.
Scientific studies by independent researchers began linking cigarettes to lung cancer in 1950. Around that time tobacco companies themselves became interested in developing their own research laboratories. In January of 1964, when the Surgeon General decried smoking as a major health hazard for the first time, R.J. Reynolds Chairman Bowman Gray told Congress that the industry was prepared to do whatever it took to make smoking safe: “If it is proven that cigarettes are harmful, we want to do something about it regardless of what somebody else tells us to do. And we would do our level best. It’s only human.”[19]
Reynolds soon built an animal testing laboratory in Winston-Salem dubbed the “Mouse House,” where scientists focused on the links between smoke and lung disease. The operation (and precipitous closing) of this facility were not well known, however, until the release of the documents obtained in the Cipollone case. One scientist who joined the Mouse House in 1967, said that the lungs of his “smoking bunnies” confirmed the causal links between smoking and disease. According to the Washington Monthly, Reynolds executives were not pleased with their in-house scientists’ findings, and in March 1970 closed the Mouse House, fired the scientists, and confiscated dozens of research notebooks. “I strongly suspect we were fired,” reported one scientist, “because anything we were doing was subject to subpoena.”[20]
Similar incriminating information surfaced in the years following Cipollone from other sources. In 1988 Merrell Williams, a legal temp at Brown & Williamson,21 discovered a cache of documents showing that the company’s lawyers had long known that cigarettes were deadly and nicotine was addictive. Williams secretly photocopied many of the documents and left the company in 1992.
By this late date, the medical issues had long been resolved—industry research was not needed to confirm the link between smoking and illness—but such evidence was very important to the legal issue of fraudulent concealment, particularly in light of the Supreme Court’s decision in Cipollone on June 3, 1992. Specifically the Court ruled that the health labels on cigarettes (required since 1969) effectively shielded tobacco companies from consumer claims that the industry failed to warn of the dangers of smoking. On the other hand, the Court held that plaintiffs nonetheless could sue cigarette makers on a somewhat different theory. Plaintiffs could hold the tobacco companies responsible for concealing facts about smoking or actually lying about damaging information they possessed, thereby engaging in fraud.
Having been thwarted in the courts, antismoking advocates carried the fight to other venues where they found some allies. In February 1994, Dr. David Kessler, the U.S. Food and Drug Administration (FDA) Commissioner, proclaimed that his agency was considering classifying nicotine as a drug and cigarettes as “drug delivery devices.” This announcement marked a radical change for the FDA. For the first time it would be able to regulate the production, chemical content, advertising and distribution of cigarettes.
Up to this point, the role of the government in regulating tobacco per se was limited. Tobacco had been specifically excluded from the Consumer Product Safety Act and the Toxic Substance Control Act. Even Kessler’s predecessors as FDA Commissioner had assumed tobacco products also were not encompassed by the Food, Drug, and Cosmetics Act.22 If classified as “drugs,” however, cigarettes would require FDA testing and approval before they could be sold to the American public. Kessler could force cigarette makers to submit detailed information and then demand that the ingredients of cigarettes be listed on packages. The FDA could potentially require tobacco companies to remove certain ingredients from cigarettes, and ultimately produce cigarettes that were less toxic and less addictive. Furthermore, in theory, the FDA could prohibit entirely the sale of cigarettes and other tobacco products in the United States. Kessler’s reasoning was bolstered by industry documents discovered in the Cipollone case as well as those produced by Williams, indicating that the industry itself thought of cigarettes in just these terms (nicotine as a drug and cigarettes as “nicotine delivery systems.”)
Within a few months Representative Henry Waxman, who chaired the House Subcommittee on Health and Environment, convened Congressional hearings to examine the tobacco issue. Waxman produced internal tobacco company documents that showed that companies had long manipulated nicotine levels in cigarettes. Kessler himself testified that the companies knew nicotine was addictive and manipulated nicotine levels. Notwithstanding overwhelming medical evidence to the contrary, however, the CEOs of the seven major tobacco companies testified under oath that they did not think smoking was addictive.
Far from Waxman’s hearings and the stirrings of the FDA in Washington, another assault on big tobacco was being mounted. It received much less media attention at the time, but in the end proved to be much more significant. This attack started with an informal discussion between three former law school classmates. One was Mike Moore, a Democrat who in 1988 had been elected as the youngest attorney general in Mississippi in over seventy-five years. Moore was an activist and aggressive reformer. Therefore when his friend Mike Lewis called with a question about tobacco litigation, Lewis had Moore’s attention. Was it possible, Lewis asked, that Moore could sue the tobacco companies on behalf of Mississippi taxpayers to recoup Medicaid spending on tobacco-related illness? Moore listened carefully. This certainly was a novel approach. Moore immediately contacted another Ole Miss Law School classmate, Dickie Scruggs.
Scruggs was a 51-year-old plaintiff lawyer operating out of the Mississippi gulf coast town of Pascagoula. A former navy pilot, Scruggs had made his millions in the 1980s in asbestos litigation. Until 1991—seven years and millions of dollars into his asbestos practice—Scruggs never actually tried an asbestos case in a courtroom. “I like to get the stakes so high,” he said, “that neither side can afford to lose.” As a judge who watched Scruggs settle one case on the morning it went to trial explained, “He’s the best I’ve ever seen at getting people to agree. He is a master.”[23]
Scruggs could not simply launch the novel suit on his own. He was a private citizen. Only the state attorney general, as a representative of the people of Mississippi, could try to reclaim their Medicaid payments. Doing so, however, would not be easy. Until that point states had not even considered mounting an attack on the tobacco industry. Attorneys general like Moore, working in resource-strapped state agencies, were well aware of the court room record of the tobacco companies, their deep pockets, and knew the industry was nearly indefatigable.
In addition to the financial obstacles, there were also major legal hurdles facing the states. Courts’ interpretations of the pre-emption provisions of the Food, Drug and Cosmetic Act, as well as the Federal Cigarette Labeling and Advertising Act, had often shielded cigarette companies from state and local laws on youth access to cigarettes, advertising, and other state efforts to control tobacco. In spite of these very real impediments, Moore and Scruggs were intrigued by Lewis’ theory. It had not been tried before, and the time and political climate might be right.
To build a case against the tobacco companies, Moore and Scruggs approached people like Merrell Williams, the legal temp who photocopied incriminating documents from Brown & Williamson. By the time Williams met Moore and Scruggs in 1994, he was so terrified of recriminations from the tobacco industry, and so poor from defending himself against their lawsuits, that he was sleeping and hiding out in his boat. Over time, Moore and Scruggs managed to reassure Williams that he would be protected from Brown & Williamson. (Scruggs also helped to secure for Williams a loan on a house and gave him a $3,000 a month job as a “consultant.”) In return Williams would give Moore and Scruggs the evidence.
Moore and Scruggs anticipated that the tobacco companies would contend that Williams’ documents were stolen or protected by lawyer-client privilege, hence inadmissible in court. In the spring of 1994, they therefore began to disseminate the documents to newspapers, academics, and to the larger antitobacco community. Scruggs also helped another Brown & Williamson whistle blower, Jeffrey Wigand, a former vice president of research. Wigand claimed that Brown & Williamson fired him in 1993, after he objected to company executives that the company was lacing a pipe tobacco product with a cancer-causing additive. Wigand also claimed that the Brown & Williamson CEO had repeatedly said in private conversations that nicotine was addictive and that the company was in the “nicotine delivery business.”[24] Wigand said the CEO had therefore perjured himself in telling Congress that he did not believe that tobacco was addictive.
Armed with such evidence, on May 23 1994, Moore filed the first lawsuit by a state against the nation’s cigarette manufacturers, seeking to recover $940 million in Medicaid expenditures. “This lawsuit is premised on a simple notion: you caused the health crisis; you pay for it,” Moore said. “The free ride is over. It’s time these billionaire tobacco companies start paying what they rightfully owe to Mississippi taxpayers. It’s time they quit hooking our young people on nicotine delivered through the dirty needle of cigarettes and other tobacco products. . . . I fully intend to make the tobacco companies pay for their sins.”[25]
“You know,” he continued, “Mississippi is the little guy. We get beat up on all the time; we get the negative press. And so this has made the people of Mississippi very proud that Mississippi is leading the rest of the country in this very important public health fight. That’s driven the thing.”[26] Much of the litigation would be handled by Scruggs, who agreed to a contingency fee arrangement with the state.
As they began joint preparations for the Mississippi suit, Moore and Scruggs recognized that the credibility of the Medicaid theory would be strengthened if other state attorneys general were pursuing similar cases in their own jurisdictions. Having allies would also facilitate the discovery process. The more attorneys general and private lawyers unearthing condemning industry documents or timid whistle blowers, the better. Moore and Scruggs also believed that exchanging theories, strategies, materials, and even attorneys, might help to reduce the costs and improve the efficiency of what promised to be a long, difficult, and expensive process. Finally, a broad array of legal theories would only complicate matters for the tobacco industry. As states took on the industry with different laws, defenses would be harder to mount. And as more states filed suits, the odds that the industry would lose at least once increased. In addition, even for the powerful tobacco industry, facing off against the top law enforcement offices of several states would be a new and difficult fight than prior “litigation wars” against private plaintiffs. Using Scruggs’ Learjet as their transport, Scruggs and Moore began their cross-country crusade to rally other states to the cause.
Working to Moore’s advantage, the attorneys general had almost a 20-year tradition of cooperation on a variety of issues. The National Association of Attorneys General (NAAG) often helped to coordinate multistate cases, particularly in the area of antitrust and consumer protection. NAAG’s efforts were regularly nonpartisan and geographically diverse. The states had already worked together on some antitobacco activity. Several states, including Massachusetts and Minnesota, had done youth access stings where the states sent juveniles into stores to buy cigarettes, and then sued large chains for noncompliance with the law. In 1993 27 attorneys general urged the Federal Trade Commission to ban R.J. Reynolds’s “Joe Camel” advertising campaign, arguing that it unfairly encouraged children to smoke. Also in 1993, 16 attorneys general issued a report recommending that fast food restaurants ban smoking. Scott Harshbarger, the AG of Massachusetts, a state with a proven record on antitobacco, was the president of NAAG and would support Moore. Moore also knew that NAAG met three times a year, and these conventions would provide a useful forum for sharing his Medicaid theory.
Support from other states would also be important for Moore in the face of the opposition he faced at home. When Moore first filed, Mississippi’s Republican Governor Kirk Fordice asserted, “I have nothing to do with the tobacco lawsuit. Philosophically, I want to throw up when I think of all the lawsuits going on in this country.”[27] Fordice went on to try to block the case.
The Governor was not Moore’s only critic. Others in Mississippi argued that Moore’s driving force was his political ambition. After nine years as AG it was rumored that he might run against Fordice for Governor in 1999, or for Senator if either Trent Lott (Scruggs’ brother-in-law, as it happened) or Thad Cochran’s seats opened up. The defendants in the Mississippi case, 13 tobacco companies, tobacco research organizations and a public relations firm, charged that Moore’s twin goals were to generate publicity for himself and to enrich a clique of trial lawyers (namely Scruggs) who had contributed to his campaigns. “What you’ve got here is a wildly ambitious politician who will stop at nothing to further his career,” said a cigarette distributor named as a defendant in Moore’s suit. “And if we’re road kill along the way, then so be it as far as Mike Moore is concerned.”[28]
In June 1994, following Moore’s announcement of the Mississippi suit, the FDA discovered that Brown & Williamson had secretly developed a tobacco plant with twice the nicotine content that occurred naturally. Simultaneously, the Department of Justice began investigating whether the tobacco CEOs had obstructed justice by lying to Congress during the Waxman hearings. Moore found that the states, buoyed by these events, were more confident about taking on the industry. In July he met individually with attorneys general of more than fifteen states during the NAAG summer conference in Texas. Mississippi was not alone for long. Minnesota, under the leadership of AG Hubert “Skip” Humphrey, was the second state to file. West Virginia was third, and Florida, a very large and important state for Moore, was fourth in February 1995.[29] Florida’s $1.4 billion lawsuit against the industry was the largest thus far, and was considered one of the strongest because of the state’s new Medicaid Third Party Liability Law, which stripped cigarette manufacturers of many traditional defenses.[30]
Soon thereafter Moore and Scruggs boarded the Learjet for Florida, where they met with the attorneys general from Florida, Minnesota, and West Virginia to share information and develop legal strategies. Moore believed that a united front of attorneys general and pooled financial resources would help to attract additional states to the suit. “I predict six to seven more states will join very soon,” he said at the Florida meeting.[31]
Moore was right. Attorneys general from Maryland, Massachusetts, and Utah were strongly considering suits. Massachusetts had already passed legislation in the summer of 1994 which would allow its AG, Scott Harshbarger, to sue the industry. With a long history of antitobacco activity, Massachusetts would be a critical state to have on board. When the industry filed a pre-emptive lawsuit against Massachusetts, Moore knew this would galvanize Harshbarger to join the coalition. “Suing Scott Harshbarger is like kicking a bulldog,” Moore said.
Harshbarger also recognized the value of alliances both with other states and with public health and consumer protection groups. “I think a coalition is an important piece of this litigation,” he said.[32]
On December 19, 1995 Massachusetts became the fifth state to bring a lawsuit against the industry, seeking more than $1 billion in damages. During the press conference at a Boston hospital where Harshbarger announced the suit, Cardinal Bernard Law happened to be in the next room wrapping children’s Christmas gifts. Law heard Harshbarger speak, and then approached the podium himself. The Cardinal described to the assembled crowd how his mother had died of lung cancer. “If this effort can save others from such a devastating disease,” he said of the Massachusetts suit, “then God will have indeed have blessed a very good effort.”[33]
Beyond this blessing, Massachusetts was the first state to dedicate massive in-house legal resources to the fight, instead of largely subcontracting the litigation to private firms. Harshbarger put supervision of the case in the hands of Tom Green, his First Assistant Attorney General. Harshbarger’s staff drafted model complaints and legal documents that were followed closely by states that filed subsequently. Harshbarger joined Moore—the “pied piper”—and Butterworth as the leaders in the tobacco fight.
The mounting activity of the antitobacco forces caused great consternation within the $45 billion tobacco industry, which was not optimally structured to respond. Though often faced with a common enemy in public health and consumer advocates, the industry—a handful of tightly knit companies—was rarely unified. They jointly sponsored organizations like the Tobacco Institute to mount a mutual defense, but such collaboration did not temper the fierce competition between the tobacco companies.34 In their struggle for market share, Philip Morris and RJR were competing for a declining number of American smokers. Their Marlboro and Camel brands were pitted against each other, as well as against the large number of other brands available to consumers.[35]
Competition was also intensified by the growing fight for overseas markets. In 1996, Eastern Europeans consumed 660 billion cigarettes a year. There was also a growing demand for American tobacco in Latin America, Asia, Africa, and the Middle East.[36] The key for the tobacco companies, under the mounting attack from the states, would be to manage cooperation in the face of this competition.
As the state antitobacco movement gained momentum, the industry responded aggressively. Tobacco lobbyists launched a campaign to convince politicians that the AG suits were ill conceived. They tried to argue that similar suits could eventually be brought against other industries, hence litigation would only cause the states grave economic harm over the long term. Mother Jones magazine reported that the tobacco company lawyers were heavy-handed in their dealings with the attorneys general, in one instance allegedly threatening to depose every Medicaid recipient in the state. Connecticut AG Richard Blumenthal described a visit by tobacco lawyers. “In effect they said a lawsuit won’t be successful, and that it would be opposed vigorously and would be very strongly held against me by the tobacco companies and anyone they could persuade to their view,” he said.
Washington AG Christine Gregoire said that tobacco lawyers emphasized the cost-savings of smoking. “They told me how much money the state was saving because people who smoke die younger,” she said.[37] Carried to its logical extreme, this argument turned Moore’s theory upside down; perhaps the states should pay the cigarette companies! Whatever the economic merits of this position[38], however, the tobacco industry retreated from it publicly.
When behind the scenes lobbying failed, tobacco companies often went to court. In addition to the pre-emptive suit against Massachusetts, the industry filed a variety of suits against other states, including challenges to their right to hire attorneys on a contingency basis, their right to sue tobacco, and other objections to specific state statutes. But Moore did not falter. “What it really boils down to,” he said, “is the politics are not right, the powers [that] be are against it, but the issue is right. This is a very important thing to do.”[39]
During the same period, the tobacco companies were attacked on another legal front by a coalition of 65 law firms formed to finance the case of Peter Castano, a lawyer who died of lung cancer. Their coalition sought to fashion a nation wide class action lawsuit against the cigarette industry on the emerging issue of nicotine manipulation and addiction. In Castano, the tobacco manufacturers were accused for the first time of intentionally addicting smokers by manipulating nicotine in cigarettes. In 1995, a U.S. District Judge sided with the plaintiffs by certifying a loosely defined class covering every “nicotine-dependent person” who smoked any cigarette brand in the last 50 years. The scope of the Castano case was unique, with potentially 50 million plaintiffs.
Between the lawsuits brought by Moore and his colleagues, Castano, and the literally hundreds of private suits, the industry was spending $600 million annually on legal bills by the mid-1990s. Unlike some of its more prosperous rivals, Liggett was buckling under the pressure of these legal expenses. Back in the 1950s, Liggett had been a major player in the cigarette business, but its sales had declined over several decades. In 1986, the company came under control of Wall Street rogue Bennett LeBow, a takeover maverick who was an outsider to the Big Tobacco club.[40]
Despite LeBow’s efforts to turn the company around, Liggett continued to operate in the red. By 1994, Liggett’s market share had plunged to 2%, the company earned only $11 million in pretax profit, and its legal bills amounted to $10 million. LeBow sought to retain Marc Kasowitz, an attorney experienced as a product defense lawyer, but relatively new to tobacco litigation. “I decided I didn’t like the old approach of ‘Let’s fight this to the death,’” LeBow said. “It’s expensive. There was big litigation coming up. What happens when you lose?”[41]
“When Philip Morris got wind of this, they went ballistic with the idea that Liggett would be represented by someone not part of the regular crowd,” said a lawyer familiar with Liggett’s dealings.42 In fact, Philip Morris was so unhappy with the prospect of Liggett’s changing counsel that it agreed to pay the bills if Liggett would keep its old lawyer to defend the cigarette suits. Even with this subsidy, LeBow still went ahead and hired Kasowitz in 1995. LeBow had an ambitious master strategy. As a major RJR Nabisco shareholder, LeBow wanted to raise Nabisco’s stock value by spinning it off and releasing it from “the albatross of the tobacco litigation” belonging to R.J. Reynolds.[43] Specifically, Kasowitz suggested to LeBow that Liggett try to settle the state Medicaid and Castano suits, and win a provision that any company that later merged with Liggett would be covered by the same agreement. As LeBow imagined it, having the terms in place would make it easier for R.J. Reynolds to break away from Nabisco and join Liggett under the settlement’s umbrella. If he could pull off a Liggett settlement, LeBow hoped he could use the tobacco issue to gain control of the RJR Nabisco Board.
At the end of January 1996, Mike Moore learned of Kasowitz’s overtures to the lawyers in the Castano group about the possibility of a settlement. Moore immediately contacted Harshbarger (Massachusetts) and Butterworth (Florida), who flew to meet him. The three discussed strategy, and the significance of this opportunity. “They immediately saw the strategic value—as in any other drug case—of getting the little guy to turn state’s evidence,” Green said. “And there was concern, frankly, about LeBow being sort of a Wall Street raider. In most other contexts, there might have been distaste for dealing with him, but compared to the tobacco executives, he was a model citizen.”
In February 1996, the negotiations between Kasowitz and plaintiffs’ lawyers in the Castano case began in earnest. After a few weeks, Harshbarger and the other attorneys general realized a deal was imminent. Harshbarger dispatched Green to go immediately to New York. It was snowing hard, and the airports were closed. Green hopped on a train, buying a change of underwear along the way. For the next few weeks he camped out in Kasowitz’s office with Moore, Butterworth, several of the Castano lawyers, and a handful public health advocates. On March 12 Liggett reached a settlement in the Castano case. “Liggett just can’t afford a scorched-earth litigation policy,” LeBow said. “One major judgment against Liggett would put us out of business.”[44]
The Liggett settlement was in two parts: Liggett broke rank with its fellow tobacco companies and agreed to settle its portion of the Castano class action suit. The settlement called for Liggett to pay:
In addition to the Castano case, Liggett struck a deal on March 15 with Moore and representatives of four other states—West Virginia, Florida, Massachusetts, and Louisiana—that had brought suits against the tobacco industry. In the agreement with the attorneys general, Liggett agreed to:
The settlement marked the first time a tobacco company had agreed to pay damages. According to the agreement, any state that filed subsequently could share in the settlement, which provided two pools of money—one for the five original states and a second for subsequent filers. The settlement also included the provision that any company that merged with Liggett would also take part in the settlement. Specifically, it would be absolved of further liability, though it would be obligated to Liggett’s payments and additional payments to the AG Settlement Trust, and would be bound by Liggett’s FDA obligations.
Originally, Liggett had viewed the state claims as a kind of sub-class of the Castano class action suit. The attorneys general, however, had been very clear that they wanted a separate settlement. First, they knew that there was always the possibility that the Castano class action could be decertified in federal court. More important, they insisted on a significant distinction from Castano; the state cases were not about money (the primary issue in the class action), but rather about law enforcement. According to one of the negotiators for the states, “We wanted to be very clear that as attorneys general, we’re not members of some class. These cases are law enforcement cases; they’re run by the chief law enforcement officers in each state. They’re brought to address the leading preventable cause of death in America, and they’re brought to protect kids who by and large are hooked before they turn legal age. That’s what we’re about.”
After the settlement other tobacco companies immediately distanced themselves from Liggett. “Our clients intend to defend the litigation, continue to litigate, have no intention of settling, and didn’t know what Mr. LeBow was doing,” said a lawyer for Philip Morris.46 According to another company spokesman, “The word settlement is not even in Philip Morris’ lexicon.”[47]
The major tobacco companies were not alone in their aversion to the settlement. Some states were wary of an agreement that would give RJR the opportunity to escape liability by getting in on Liggett’s deal. Even one of Moore’s original partners, Minnesota, rejected the deal. According to a lawyer for Minnesota, “As long as there is the thread of possibility that RJR could get out that cheap [by acquiring Liggett], it’s not a good deal.” Minnesota elected to break with the other attorneys general and pursue its own case through the discovery process.48 In the meantime, LeBow’s takeover strategy had failed. The settlement did not assist his proxy fight to spin off Nabisco. An article in the Wall Street Journal reported that the “maverick strategy of pushing to settle cigarette lawsuits backfired badly among tobacco investors.”[49] Some observers concluded that the take over attempt had been flawed, particularly because LeBow had failed to realize that many RJR Nabisco shareholders also held stock in competing tobacco companies that would have been threatened by such a deal.
The soundness of LeBow’s strategy was called into further question in May, when the Castano class action was decertified by the federal court in New Orleans.[50] In some respects, it appeared as if LeBow had paid to settle a case that he would have won with only a little more patience. In any event, the separate deal that Liggett had made with the state attorneys general was still in force.
Although the Liggett settlement provided little money for the five states involved (Liggett was in dire financial shape), the deal helped to bring other states into the fold. “We knew it could be a tremendous momentum booster,” Moore said. “Whether you get a small check or a large check, the money gets people’s interest.”51 Although only two state suits were pending when Liggett was settled, others soon followed. “Once there was a break in the dike,” Butterworth said, “it made it much easier to come aboard.”[52]
In May of 1996, less than two months after the Liggett settlement, Moore helped to organize a one- day conference in Chicago to discuss strategy and information sharing. Although the Chicago meeting was similar in design to the Florida meeting of five attorneys general a year before, this time representatives from 30 states attended. At the conference, officials from each state that had already filed emphasized the importance of their coalition, and the gains that could be made by pooling experience and strategy. Some attorneys general offered advice about assembling a legal team, others pointed to the advantages of the shared discovery process (ongoing debriefings of whistle blowers, recruitment of free experts from the medical community and discovery and analysis of core tobacco industry documents). Medical experts made presentations on the industry’s targeting of children and on the pharmacology of tobacco addiction. Presentations were also made on developing a damages model to quantify costs and representatives from Massachusetts even handed out a “how to file a case” primer.[53]
Soon the states began to file in increasing numbers, and their particular claims varied widely, reflecting underlying differences in state laws. The state cases included common-law theories, such as Mississippi’s charge that the tobacco companies had unjustly enriched themselves at state expense. States also pursued statutory claims, such as Minnesota’s antitrust charge, where the industry was accused of conspiring to suppress research into a safer cigarette. In every case, the attorneys general followed the Moore and Scruggs model and hired outside counsel, usually on a contingency-fee basis (10%-25%), to go after the tens of billions of Medicaid dollars the states claimed to have spent on tobacco-related illnesses.
As the state coalition expanded, Moore, Butterworth, and Harshbarger realized that some kind of “larger picture,” beyond the individual state cases, could potentially take shape. Green described the Chicago meeting, The fact that 30 states showed is very significant. . . . Of the 30, there was a broad cross section by party and geographic region. I think if another 5 to 10 actually file, it will place great pressure on the industry to reconsider an “end game” solution apart from the litigation. At the same time, the leaders of the issue must do their cases in state courts wherever possible, and with sufficient independence, so as not to hand the industry an opportunity to consolidate all the litigation in a single federal court in one consolidated case that they can then bottle it up in the fashion of Cipollone. There truly is strength in numbers, but only if we both coordinate and maintain our independence.
In June, during the NAAG meeting in St. Louis, Moore, Scruggs, Harshbarger and Butterworth met away from the group at a small restaurant. Moore and Scruggs had news: operatives for the tobacco industry—men by the names of Tommy Anderson and John Sears—indicated that the industry was interested in some kind of national settlement.
Harshbarger and Butterworth were intrigued. They agreed to discuss the matter further, and within a few weeks they again convened secretly to discuss appropriate responses to the industry’s overtures. The attorneys general considered what a global settlement might include: both up-front and long term payments to the states for Medicaid reimbursement and public health programs, some federal tobacco regulation, state and local enforcement authority, action against youth access. Of course in exchange, they knew that the industry would want some kind of protection against further lawsuits.
In the weeks that followed, Scruggs drafted a proposed agreement with Anderson and Sears (the two operatives). Harshbarger, Moore, and Butterworth then reviewed the draft over a series of conference calls in early August. Yet the privacy of these tentative and fragile discussions would not last. Only a few weeks later, at the Democratic National Convention in Chicago, the story of a supposed deal was leaked to the Wall Street Journal. The tobacco companies denied any knowledge or involvement. And the attorneys general who had been excluded from the discussions (and who had never even considered a national settlement) were furious with Moore. It seemed that their coalition was in jeopardy.
As Moore tried to regain the confidence of his AG allies, other events were taking shape in the antitobacco crusade. In October, Scruggs and Moore attended a meeting in the office of Grant Woods, the Republican AG from Arizona who had filed his Medicaid suit that summer. LeBow and his attorneys were also present. Having heard talk of a proposed global settlement, they were anxious. LeBow feared that such a deal, in which he would be a minor player at the table, might drive his teetering cigarette company over the edge.[54] Kasowitz and LeBow wanted to work out an arrangement with the additional states that had now filed before any global settlement could be reached. “Settling would be our way to get protection for Liggett,” said Kasowitz. “The terms of a [global] settlement would have put Liggett out of business.” LeBow also thought “it would be very serious if one of the other tobacco companies [settled first].”[55] He urged the attorneys general present to consider the possibility of a second, more comprehensive settlement.
In the meantime, despite their public denials, the tobacco companies had resumed their own private activity regarding a settlement. In November 1996, through a series of intermediaries, RJR’s CEO Steven Goldstone retained Phil Carlton, a former North Carolina State Supreme Court Justice, to meet with Bruce Lindsey, an advisor to President Clinton. Carlton conveyed the wishes of the industry to work with the attorneys general—and even the antitobacco White House—towards some kind of global settlement. Goldstone later recalled, We could not continue to be seen as a renegade industry. We had to come into the process for our long-term well-being. . . . Why [couldn’t we] just stay in the courts? It’s a judgment that I made. The opportunity was so unique—I was able to go to the board, to the shareholders, and to the employees who own stock and say, “What is the point of producing earnings if nobody puts a value on them?” We’re getting Pyrrhic victories in these cases, because nobody is putting a value on our earnings. . . . The likelihood of a long-term healthy future for this industry, or even for a manageable decline, became more and more unlikely.[56]
Geoffrey Bible, the head of Philip Morris, agreed. “We had forty years of confrontation,” he said. “We were looking for a new route.”[57]
Clinton, who had supported Kessler in his 1994 attack on the industry and in his fight for FDA oversight of tobacco, now endorsed Lindsey’s efforts to facilitate a deal between the states and the tobacco companies. Lindsey called Moore and told him that Carlton was representing the industry, and wanted to talk.
Moore considered what a truly global settlement might entail. Would the states have to put their own individual cases on hold while negotiations took place? Presumably, any national settlement would have to be reviewed by Congress. That process could take years. For a state like Mississippi, that was possibly looking at billions of dollars from the industry in just a few months time, waiting first to negotiate a national settlement, and then on Congress, was unacceptable. Moreover, could Congress be trusted? In both Houses, Republicans and Democrats received enormous sums of money from the industry. Would it be possible to bring companies like Philip Morris and RJR, that spent $600 million a year on legal fees to avoid settlements, to the table in earnest? Skeptical, Moore stalled. He was in no hurry to meet with tobacco representatives while the state suits were still taking shape.
In March 1997, a year after its original settlement, Liggett announced a more comprehensive deal, this time with 22 states. In exchange for protection from all further smoking related claims, LeBow made the following admission (regarding the “three lies”):
In addition to these statements, Liggett agreed to:
As in Liggett I, Moore and others believed that the monetary benefit of the settlement was only part of its value.60 Moore noted that the volumes of documents Liggett would turn over might help convince judges that the industry carried out a lengthy conspiracy of deceit. Among the documents were Liggett’s attorneys’ notes from meetings of the Committee of Counsel, a group of tobacco lawyers who met regularly over the years to discuss litigation and other issues, such as health research and public relations.[61] Liggett’s statement on addiction and on tobacco’s health effects were also useful to Moore and other attorneys general. Plaintiffs’ attorneys who had argued that nicotine’s addictive powers robbed consumers of free will would be bolstered by Liggett’s admission. “This was just a home run in terms of obtaining ‘a crack in the dam’,” Green said. In addition, “we got every state that had filed, including Minnesota, which was a feat.”
“We got the least important culprit to turn state’s evidence and give testimony against the really bad guys,” agreed the Michigan AG.62 “I’ve been a prosecutor all of my life,” Moore beamed. “I know what happens when one of the five turns states evidence. We’ve got the goods on 98% of the industry by turning the little guy.”[63]
By the end of March 1997, the Liggett settlement was concluded and Moore was coming under increasing pressure from the White House to meet with Carlton and tobacco representatives. At the National Center for Tobacco Free Kids (TFK) in Washington, Moore, Scruggs, Matt Myers (TFK’s General Counsel), and the Castano lawyers meet with Carlton.[64] Although the CEOs of the two major tobacco companies (Philip Morris and RJR) were not present, this meeting laid the groundwork for a series of clandestine talks towards a comprehensive settlement.
The first of these took place on April 3. Two tobacco leaders, Steven Goldstone of RJR Nabisco and Geoffrey Bible of Philip Morris, came to the Marriott Hotel in Crystal City, Virginia, to begin discussions about a possible global settlement. Goldstone and Bible had been told by the heads of the other major tobacco companies that they could represent the industry at this first round of talks.[65] Their presence signaled to the other side that perhaps, for the first time, the industry had in fact “come to the table to sue for peace.”[66]
To many, Goldstone and Bible represented “a new type of tobacco executive.” The heads of the industry who, only three years before, had testified before Congress that tobacco was not addictive, had moved on. “It would have been inconceivable for the prior executives to agree to concessions,” said Myers.[67] Goldstone, a former smoker, did not share RJR’s “always fight” philosophy. Also a former litigator (not a cigarette salesman), Goldstone had been a longtime counsel to RJR before taking over in 1995. “This is a guy who always tried to settle cases before going to court,” said one RJR executive.[68]
Bible was more flamboyant. He was a smoker, and built his career selling cigarettes for Philip Morris. A tough Australian who brandished Marlboro menthols at press conferences and in the Philip Morris annual reports, Bible was often called the “Crocodile Dundee of the tobacco industry.”69 In 1994, when Bible replaced Michael Miles (a nonsmoking food marketer) as head of Philip Morris, he adopted the belligerent tobacco mantra. “It is our intention to defend our industry and consumers briskly,” Bible said at one of his first news conferences. But Bible was also a pragmatist. By 1996, he no longer posed with a cigarette in company reports. Bible also recognized that he was facing potential lawsuits from forty states, the possibility that the FDA might prohibit nicotine, and class action suits buttressed by documents and whistle blowers. “Crocodile Dundee ran up against a politically ferocious crocodile and he put down his knife,” said a tobacco analyst. “Geoff Bible is buying peace.”[70]
In addition to the two tobacco company CEOs, their lawyers, Carlton, Sears and Anderson, the industry was also represented at the talks by former Senate Majority Leader George Mitchell. On the other side of the table, the states had Moore and Scruggs, Woods (Arizona), Butterworth (Florida), Gregoire (Washington), a handful of Castano lawyers, and Myers (TFK). Mitchell helped to get the meeting started. He was certainly an unusual choice for the tobacco industry. A northern liberal Democrat, Mitchell could not be more different from the typical tobacco representatives. His presence also suggested to the attorneys general that perhaps the industry meant business.
During the talks, Bible and Goldstone announced that they had come in good faith, and were eager to reach some kind of agreement. They said that they were ready to consider the states’ claims for reimbursement for Medicaid expenses in exchange for some kind of limit to the liability from smoker suits. It was agreed that any “global” settlement reached would supersede state settlements and all states would receive a share of the proceeds, based on their population and estimates of state Medicaid costs. According to Harshbarger, “Our position is that if Big Tobacco is willing to accept terms and conditions that include financial relief, protections for kids, and changes in their business practices, it would be a major public health breakthrough. We have an opportunity to get more through a settlement now than we could through years of protracted litigation.”[71]
The first meeting was brief, but a starting point. For the next three weeks, clandestine talks followed in Northern Virginia, Washington, and Chicago. In this first round of negotiations, the companies expressed a willingness to accept regulation by the FDA, which could be given broad powers to regulate tobacco advertising and to force disclosure of cigarette ingredients. Advertising restrictions under consideration included the elimination of billboard and all other outdoor advertising, an end to cigarette company sponsorship of sporting events, and a ban on the use of human characters in cigarette ads. The companies might also be required to create a fund of as much as $500 million to educate consumers, particularly young people, about the risks of smoking, and pay hundreds of billions of dollars to reimburse the states for Medicaid costs of tobacco-related illness.
In exchange, the industry was seeking near-total protection from the states’ tobacco attack. According to one Philip Morris lawyer, the companies were seeking “total peace, now and forever.” By bringing an end to the state claims (as well as individual and class action suits filed by smokers and their families), the companies hoped to change the pariah status of the industry. They were also eager to ensure that the FDA would not ban the sale of tobacco products to adults. Most important, however, the companies pressed for a degree of immunity from future suits, which would allow them some quantification of their potential liability. The specter of these lawsuits had harmed the companies financially, and the price of the company stocks were significantly undervalued. This affected many of their nontobacco and nondomestic business assets. The companies believed that some degree of financial predictability, even if that meant a large and expensive settlement, would still pay off if it allowed them to regain investor confidence.
Although Moore recognized that the companies had only come to the table because they expected some kind of protection from the lawsuits, he and the other attorneys general were committed to preserving individual rights to sue. Scruggs suggested limited immunity: smokers perhaps could file suits if there were limits on damage awards or a bar on punitive damages.
By mid-April the industry had made significant advertising and marketing concessions. The states’ first demand for Medicaid compensation was $500 billion, to be paid out over twenty-five years. The industry responded that this figure was too large, and counter offered $1 billion up front, increasing eventually to $10 billion a year, over twenty five-years. The states were not satisfied.
Some progress was made regarding the form—if not the amount—of the payments. One proposal would create an expedited administrative fund against which smokers could file claims for injury and receive payment. Those dissatisfied with that system could choose to file lawsuits. Another possibility would be to forego the fund and allow those who wished to sue to do so with restrictions. Despite the exchange of proposals, no final agreement was reached. Differences remained about the mechanism under which individuals would be compensated. The two sides were also deeply divided over nicotine regulation, and the degree of immunity for the tobacco industry.
By the third week of talks, the negotiations were no longer secret. A leak to the Wall Street Journal produced an article on April 16th, which announced the talks to the world. Moore was furious. He believed that someone had leaked the talks to kill the deal.
After this first round of talks, the attorneys general assembled in Chicago to discuss strategy. They thought carefully about the motives of the other side. Why, exactly, had the tobacco companies come to the table? How much was a settlement worth to them? Green, who had spent seven years on Wall Street before joining the Massachusetts attorney general’s office, presented a disturbing scenario: there was a chance that settlement would actually be economically profitable for the tobacco industry. Green had hired a team of analysts to examine exactly what, in financial terms, a settlement would mean to the tobacco companies. They looked at the tobacco companies’ gross operating profits, both in the U.S. and internationally. They examined all the companies’ revenues, not just their tobacco businesses, attempting to gauge ability to pay. The main focus of the presentation, however, was on the marketplace. Specifically, Green noted, the unquantifiability of the costs of litigation made tobacco stocks risky for investors. Consequently, tobacco stocks were enormously discounted in the market. Any public announcement of an agreed settlement, and an assignment of a dollar value to these legal liabilities, might cause an enormous increase in the stock price, and accordingly, in the market capitalization of the tobacco companies (see Exhibit 7).
The attorneys general discussed the political risks of a settlement, particularly if it was seen as a bailout of the tobacco companies for what was egregious—and often criminal—behavior. This posed a serious dilemma to the attorneys general. They considered two alternative solutions. The first would be to have the industry’s payment be large enough to offset any increase in market capitalization. This would be virtually impossible to win at the bargaining table. The second would be to have more of the industry’s payment up-front rather than over time. “Otherwise you’re financing this off of future business,” Green said. The advantage of a large, up-front payment would be twofold. “An up-front payment underscores that it is for past wrongful conduct . . . making the payment high enough means that the companies will have to go off and finance it, or at least have Philip Morris pay for it. Either way it’ll be painful, and will dampen the run-up.”
On May 5, Moore, Scruggs, the other attorneys general, Carlton, and the rest of the tobacco representatives met for yet another round of negotiations in Dallas, Texas. Still unresolved were the issues of how much the industry would pay, and the extent of FDA regulation of nicotine. On the biggest sticking point, however, the question of future immunity, there seemed to be some advances. The cigarette producers had dropped their demand for complete legal protection as a condition in the settlement. According to the New York Times, “The change in the industry’s posture comes amid a swirl of activity involving the most contentious and complicated issue in the talks: how much legal protection, if any, should cigarette manufacturers receive in exchange for concessions on public health issues?”[72]
Nevertheless, the industry representatives were not satisfied with an AG version of a proposal for limited liability. Instead, the tobacco team offered its own lawsuit package that would, among other things, limit individual compensatory damage awards to $250,000, eliminate punitive damages, and bar traditional liability claims. Moore and the other attorneys general rejected this proposal as did the other plaintiffs’ lawyers.
Within the states’ camp, internal dissension arose over several key points, most notably liability. While Moore pressed for company liability, he also recognized that without a certain degree of immunity, the industry would not settle. Some states, like Minnesota, Wisconsin, and Maryland, took a hard line on whether to protect cigarette makers from punitive damages. Scruggs had proposed a ban on class actions, or a punitive damage cap. Blumenthal and Humphrey wanted no immunity. “I regret to say so, but I fear that this deal could be a tobacco bailout,” Humphrey said.[73]
Other complications emerged. State regulators and lawyers representing smokers differed over who should be speaking for the legal rights of individuals in the negotiations. “Right now, things are chaotic,” said one attorney.[74] State attorneys general referred to their presumptive allies, the lawyers representing smokers in private lawsuits as “girths,” a sarcastic reference to their waistlines. Reportedly in a telephone conference call among state officials, tensions flared when one private lawyer representing another state used an obscenity in referring to Moore. This comment was picked up and broadcast on the speakerphone to all on the line (including Moore).
To make matters more complicated, the incentives of the different private lawyers were not always aligned. Nearly two hundred private law firms were retained by the 28 states to help try their cases. Many lawyers had little personal financial interest in settling. If Texas were to go to trial, for example, and the state won its sought after $14 billion judgment, the state lawyers would be paid about $2.5 billion, based on an 18% contingency fee. If the cases settled, the lawyers from all the states suing would likely split $500-600 million, paid by the tobacco companies. Yet the most influential lawyers in this process were the minority (like Scruggs) who had been retained by more than one state. For them, settling made more sense than trying several cases. Scruggs, who represented many of the states at the talks, could reap a potentially huge windfall with a settlement. In addition, pressure for a settlement may have come from law firms representing multiple class action plaintiffs (such as the Castano Group lawyers) whose fates were tied to the settlement talks. These lawyers might have been willing to go for smaller individual damage awards in exchange for a big, quick settlement fee. Scruggs remarked that with the stakes so high the tension between the lawyers was thick. “We have a whole lot of roosters trying to take credit for the sunrise and only a few of them ha[ve] anything to do with it . . . I figure if anyone is going to be paid well, I am,” he said.[75]
In an attempt to provide some direction to the talks, the attorneys general who regularly attended all the meetings had split up into four sub-groups on the four areas under discussion in smaller “breakout sessions.” Mike Moore remained the overall quarterback of the AG team. Gregoire, Myers and Green took on teen access, tobacco regulation and the role of the FDA, and the other public health issues. Blumenthal focused on civil liability and immunity, and Butterworth was in charge of the financial issues. Grant Woods of Arizona was tapped to concentrate on state enforcement. Typically, these attorneys general would work intensively on the negotiations, and then report back to the larger group via conference call.
Keeping the process democratic, while also protecting the internal secrecy of information and strategy was therefore a difficult task. “You know that if you have conference calls with 40 AGs, that’s going to be in the papers the next morning,” said one of the key negotiators. So there’s always a balance between telling the colleagues and trying to advance the ball. . . . It was not odd for a few states to move the ball very far and then bring others in.” By the time of the Texas talks many attorneys general felt excluded from the process and joined their colleagues in Texas. The presence of many new negotiators on the states’ side—both attorneys general and Castano class action lawyers—exacerbated the tensions that were already making the negotiations difficult. According to knowledgeable observers of the talks,
Similar tensions, though less visible publicly, were felt across the bargaining table within the tobacco team. The issue of payment structure, for example, proved to be a difficult sticking point. Under a formula agreed to by the five tobacco companies taking part in the proposal, the first $10 billion payment would be divided based on their stock market value. Philip Morris, which would have to pay more than $6 billion of the initial payment (possibly more), was not satisfied with this arrangement. The subsequent annual payments under the settlement, which would start at $8.5 billion and grow to $15 billion, would be divided based on each company’s share of the cigarette market in the United States. Brown & Williamson, and BAT, its British parent, whose tobacco operations were larger overseas than in the United States, were more combative than the other companies on issues relating to FDA regulation of nicotine and of other cigarette ingredients, perhaps out of fear that the company lacked the research and new product capabilities of its rivals. Mirroring the states’ side, the tobacco team also had members who were more willing to settle without a comprehensive bar to future industry liability, and other hard-liners who insisted on blanket immunity for the industry.
By the afternoon of Wednesday, May 7, the Dallas talks had officially broken down. Meanwhile, the clock was ticking on the pending state lawsuits. Moore’s own Mississippi trial was set to begin in July, and he was nervous. Early on, the attorneys general had insisted that, until an agreement was reached and approved by Congress, they would proceed with their own state suits. This meant that both sides had representatives pursuing parallel tracks in the national settlement talks and the local state cases. “We fight by day and talk by night,” Moore said.
In the first week of June, both sides convened again, by mutual agreement, in the basement of the Park Hyatt Hotel in Washington for a third round of talks. Still unresolved were the issues of federal nicotine regulation and punitive damages. Moore again held frequent conference calls with the attorneys general who were not present. Many of these attorneys general reiterated their concerns about limiting individual litigants’ rights and punitive damages.
Also under discussion was the issue of youth access. The tobacco companies had proposed paying some penalty per pack sold to underage kids. To the attorneys general, this type of fine did not seem to fully reflect the lucrative opportunities for the companies in hooking youth smokers. In other words, they believed the tobacco companies’ incentives were still not aligned with the reduction of teen smoking. Even if there were penalties for selling cigarettes to minors, as soon as the minor was a smoking adult, the companies had secured a lifetime customer.
To try to solve this problem, Gregoire, Myers, Green and others calculated the average lifetime profits the companies earned from teen smokers, by estimating the number of packs per year smoked, the number of years, and the companies’ operating profits on these packs.[77] In order to reconcile the economic incentives of the industry with a reduction in teen/replacement smoking (or to at least eliminate the profit motive for selling to teens), the attorneys general devised a “look back” clause, which would require the companies to pay a fine each year that teen smoking reduction targets were not met. “This [would be] the first time anybody even imposed a penalty on the manufacturer, who does not sell directly to end users, for illegal youth sales, which are made at the retail level,” Green said. “There are penalties in each state, usually very mild, on retailers and illegal retail sales to a minor. There’s never been a manufacturer penalty. So, with the ‘lookback’ penalty, we’re trying to hit the manufacturer for every dime.”
In addition to the liability and youth access issues, in April both sides had been surprised by a federal court ruling against tobacco that confirmed the right of the FDA to regulate nicotine as a drug. Representatives of B.A.T. (the parent company of Brown & Williamson), who weeks before had expressed qualms about yielding power to the FDA, broke rank with the other tobacco companies. B.A.T. argued that the industry should fight to overturn the recent federal court decision. This became a major stumbling block of the talks, and one which threatened to halt the negotiations. The Clinton administration reportedly sent a clear message to all negotiators that it would not retreat from this legal victory for the FDA. Lindsey insisted that FDA regulation could not be bargained for punitive damages. However, he indicated that protection from punitive damages might be covered by a large financial settlement offer. Talks broke off as top executives of Philip Morris, RJR Nabisco and B.A.T. gathered for nine hours of meetings to discuss B.A.T.’s concerns about the settlement’s nicotine regulation provisions.
On Monday June 16th, negotiators gathered once again in Washington. This time industry negotiators, including representatives from B.A.T., said that they would accept some kind of FDA regulation. Apparently Bible had worked his Crocodile Dundee charm on Martin Broughton, the head of B.A.T. Bible reportedly convinced Broughton that this was the best deal tobacco could hope for. In exchange, the companies demanded a ban on punitive damages for past misdeeds. By Thursday, Moore and the majority of the states tentatively accepted the draft deal. Moore brought the plan to Lindsey to gauge the Administration’s support. Carlton indicated to Lindsey that the industry was prepared to pay $308.5 billion over 25 years. Moore, who, in a recent conference call had promised the other attorneys general that he could secure $358.5, was pleased by Lindsey’s response. $368.5 billion, Lindsey told Carlton.
By midday Friday, June 20th, the attorneys general were prepared to announce the agreement. Yet again, all was not ready to go. B.A.T. refused to drop its lawsuit against Jeffrey Wigand, the researcher turned whistle blower. Moore and Scruggs threatened to break off talks. They had vowed to protect Wigand in exchange for his testimony in the Mississippi case. With the press waiting for the announcement of the settlement, Scruggs and Moore pressed their final point: immunity for Wigand and the other whistle blowers. Phone calls were immediately placed to Broughton. Finally, the B.A.T. CEO was reached and he discussed the issue with Bible and Goldstone for half an hour, until he backed down. Immunity for whistle blowers was part of the final deal. Late in the day on Friday, an agreement was announced.
That evening, several of the key state negotiators gathered for a celebratory drink. They knew that that they had not yet won the war. The proposed deal faced an uncertain future in Congress, where some Senators and Congressman were already grumbling that they had been left out of the process.78 Yet the architects of the proposal had no doubt that they had fundamentally and favorably altered the terrain on which the campaign would be waged. The admissions of culpability that they had won from Liggett and the other big tobacco companies could never be retracted. Public perceptions had been radically changed as well. Florida’s AG, Bob Butterworth, boasted, “the Marlboro Man will be riding into the sunset on Joe Camel.”[79]
One cloud of doubt lingered over the group, however. There was still the possibility, as Tom Green had suggested, that Wall Street might reward the tobacco companies for reducing the uncertainty of adverse judgments in the future. With some trepidation, Butterworth pulled out a pocket wizard that posted the evening news. The machine booted up and soon a welcome Reuters headline flashed: “Tobacco Stocks Fall as Deal Tougher than Expected.”