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This is a Draft Document--NCSL would appreciate any comments or corrections.
Contact Bill Waren or Ellona Wilner at (202) 624-5400.

The Proposed Tobacco Settlement and Outlook
for National Legislation: An Overview

Contents:
Tobacco Litigation
The Settlement Agreement
Criticism of Agreement
The Politics of Tobacco

State-Federal Relations

In response to the high toll of death and illness attributable to tobacco, forty-one state attorneys general sued the tobacco industry for tobacco-related Medicaid costs incurred by states and for other alleged civil wrongs.

After weeks of negotiations, the tobacco companies agreed on June 20, 1997 to pay $368.5 billion over the next 25 years alone in order to settle the state suits, provided certain conditions were met by new provisions in federal law. As a result of this proposed deal negotiated by state attorneys general and the industry, Congress will consider tobacco legislation in its 1998 session. Federal legislation is necessary because the industry agreed to a global settlement only if its legal liability is limited by federal law.

Congress, not having been consulted in the course of tobacco settlement negotiations, will not simply rubber-stamp it. On the other hand, the settlement has created a public expectation that something will be done. Congressional leaders may, therefore, feel compelled to act. If they do act, though, congressional leaders, in all likelihood, will try to write their own tobacco bill, and it is far from clear that it will be a bill that protects all the states' interests.

1. Tobacco Litigation

The tobacco industry is supporting national legislation for one primary reason: the pressure of product liability lawsuits.

The first wave of these product suits against the industry began in St. Louis in 1954, with Lowe v. R.J.Reynolds and continued through the 1960s. Although dozens of suits were filed, the tobacco industry never lost a case. Notions of strict liability for manufacturing unreasonably dangerous products were not then given much, if any, credit by courts. A defective product, generally, was regarded as one that deviated from the product norm, such as "the occasional exploding soda bottle, pin in a bread loaf, or crumbling wheel base."

The second wave of tobacco suits was filed in the early 1980s based on newer legal theories of failure to warn and strict liability. Courts began to exhibit increased sensitivity to toxic risk and inherently dangerous products in cases involving Agent Orange, DES, the Dalkon Shield, Bendicton, and especially asbestos. The most celebrated of second wave cases, Cipollone v. Liggett, was handled by a team of attorneys who had developed their expertise in asbestos cases. The tobacco industry again refused to settle and fought back tenaciously, as well they might given that they saw from the example of asbestos suits against Johns-Manville that an otherwise profitable major corporation could be bankrupted by product liability claims.

What the plaintiffs in Cipollone and other second wave tobacco cases failed to recognize was a crucial distinction between the asbestos and similar toxic tort cases and the tobacco cases: smokers, by the 1980s, knew the risks they were taking. After the 1964 Surgeon General's report and passage of the federal Cigarette Labeling and Advertising Act, requiring warnings on each pack, almost every American was informed about the risk of cigarette smoking. The jury in Cipollone, as a consequence, found the tobacco company only 20 percent at fault and found the plaintiff 80 percent at fault, and New Jersey requires that plaintiffs be 50 percent or more at fault to sustain a damage claim. The tobacco industry's "assumption of risk" defense was very convincing to juries. Cipollone and other smokers knew what they were doing and the risks they ran. Juries held them responsible for their own behavior. This is in contrast to asbestos and other toxics cases where evidence was presented that industry knew of the danger and conspired to hide it from consumers. Unlike smokers, these earlier plaintiffs were deceived and victimized in the eyes of jurors. Even evidence of the addictive quality of tobacco proved unconvincing to jurors. Regardless of expert scientific testimony, jurors knew as a matter of common sense that quitting smoking is hard but not impossible. Half of all long-term smokers manage to quit. "Thus after thirty-five years of litigation, the tobacco industry could still maintain the notable claim that it had not paid out a cent in tort awards."

The third wave of tobacco litigation began in 1994 with the filing of suits by attorneys general in three states. Mississippi Attorney General Mike Moore and West Virginia Attorney General Darrell McGraw filed suits based on theories of unjust enrichment and restitution, to recoup the millions spent by their states to provide medical care to smokers. They sought to avoid the "assumption of risk" defense by not filing a subrogation claim, under which they would have been suing on behalf of specific smokers.

Minnesota Attorney General Skip Humphrey, on the other hand, alleges that the tobacco industry violated consumer protection and antitrust laws. He says the industry, knowing that nicotine is addictive, conducted a "unified campaign of deceit and misrepresentation" to conceal this from the public and the government.

Also in 1994, the Florida legislature enacted the Medicaid Third-Party Liability Act, authorizing its Attorney General to bring a Medicaid reimbursement suit and stripping the industry of a number of legal protections, including "assumption of risk" and "contributory negligence." (The legislature later voted to repeal the act but failed to override the veto of Governor Lawton Chiles). Attorney General Bob Butterworth then sued the industry.

On March 15, 1995, more than forty years after the first tobacco suit, the Liggett Group broke ranks and settled lawsuits with states. A flood of lawsuits by states followed. Eventually, forty-one states sued the industry. On March 22, 1997, Liggett signed a second settlement agreement with twenty-two attorneys general and agreed to turn over thousands of previously secret documents.

On June 3, 1997, the four remaining major tobacco companies, Philip Morris, R. J. Reynolds, Brown and Williamson, and Lorillard, settled with Mississippi. In August of 1997, the industry settled with Florida for $11.3 billion. Texas became the third state to settle in January 1998 to the tune of $14.5 billion, the largest settlement award yet for an individual state.

Most significant of all, the tobacco industry agreed on June 20, 1997, after three months of negotiation with attorneys general and public health advocates, to a plan for a global tobacco settlement that would have to be implemented with national legislation.

2. The Settlement Agreement

The state attorneys general had four goals that are reflected in the global settlement agreement: 1) to win financial compensation for states; 2) to reform the tobacco industry's business practices; 3) to protect the public health by treating tobacco products as addictive and lethal drugs; and 4) to protect children from industry marketing efforts and restrict their access to tobacco products. The plan also reflects the major goal of industry negotiators: to shield tobacco companies from future product liability suits.

States have spent billions, under Medicaid and other programs, to treat illnesses caused by tobacco. States also allegedly have been wronged by acts of the tobacco industry in violation of state antitrust, consumer protection, and other laws. The proposed settlement would provide compensation for these costs.

The settlement agreement would require the tobacco industry to make $368.5 billion in payments over the next 25 years. The industry would immediately pay $10 billion, of which $7 billion would go directly to states and the remaining $3 billion would be allocated to a fund for compensating private claimants, a smoking cessation program, FDA programs, anti-tobacco programs administered by the Department of Health and Human Services, and other similar elements of the agreement. In addition, the industry would make, in perpetuity, annual payments, rising to $15 billion per year in 1997 dollars. The industry would pay $50 billion in punitive damages over twenty-five years. The punitive damage award would fund children's health care and be used to establish a $25 billion health care fund administered by a presidential commission. Attorney General Mike Fisher of Pennsylvania estimates that over 25 years, $193.5 billion of the $368.5 billion in tobacco industry payments would go directly to the states, with much of the balance eventually returned to the states to administer anti-tobacco programs.

The table below shows the proposed distribution of monies under the June 20 agreement. Total payments are displayed in column 2, and direct payments to states are displayed in column 7. Columns 3 through 6 display other major categories of spending (which cumulate to $175.5 billion of the first twenty-five years).

Source: Testimony of Jeffrey A. Modisett, Attorney General of Indiana
U.S. House Commerce Committee, December 8, 1997

The attorneys general placed a high priority on changing the corporate culture of the tobacco industry and reforming its business and political practices. A variety of provisions, therefore, were incorporated into the settlement agreement to change fundamentally the way the tobacco industry operates in both the marketplace and the political arena. It would require that tobacco companies adopt and enforce corporate principles that express a commitment to complying with the law, to reducing tobacco use by children and to developing less risky products. Companies would be subject to fines and penalties for failure to fulfill compliance plans and corporate principles. Tobacco trade associations alleged to have conspired to conceal information about the danger of smoking would be disbanded. Corporate whistleblowers would be protected from retribution. The activity of corporate lobbyists would be regulated. A three-judge federal panel would be created to consider whether internal tobacco industry documents should be released despite claims of privilege.

The attorneys general also made it one of their primary goals to ensure full disclosure to the public of the health dangers associated with tobacco and to regulate tobacco as a drug.

Thus the settlement agreement would strengthen warnings on advertisements, cartons, and packs of cigarettes. It would expand the Food and Drug Administration's authority over tobacco product development and manufacture, requiring ingredients to be tested and imposing standards for reducing harmful ingredients, including nicotine. The industry, also, would be required to disclose ingredient information and health research to the FDA. Minimum federal standards, also, would be imposed for smoking in public places and workplaces. The Occupational Safety and Health Administration would enforce public smoking regulations.

The Campaign for Tobacco-Free Kids alleges that $1.2 billion in tobacco products are annually sold illegally to children, and that over five million children living today will die prematurely as a result of a decision made in adolescence to start smoking. They say that one million children start smoking each year, and that "most people could be prevented from becoming addicted if they would be kept tobacco-free during adolescence." The attorneys general largely accepted this argument and incorporated tough provisions to curb teen smoking.

The settlement agreement provides for comprehensive FDA regulation of underage smoking, building on current FDA rules. A national minimum smoking age of 18 would be explicitly established in law (currently it is established by an FDA regulation that might be subject to a court challenge). Retailers would have to check everyone under the age of 27 for photo identification. Display of tobacco products for sale would be regulated. Vending machine sales would be banned, as would other forms of impersonal sale. Tobacco advertising and marketing would be tightly regulated in an attempt to reverse a 1997 federal court decision to strike down FDA regulations in this area. Joe Camel and the Marlboro Man would be banned. The industry would be required to fund a national anti-tobacco advertising campaign.

Among the most important elements in the agreement are the so-called "look-back" provisions. They would be numerical goals for reducing underage smoking with fines for the industry if these goals are not met. The goals would be to reduce levels of under-aged cigarette use, compared to historical averages over the past decade, by 30 percent in five years, 50 percent in seven years, and 60 percent in ten years. The tobacco industry as a whole would be subject to a financial surcharge of approximately $80 million for each percentage point it falls below the targeted goals.

The states would be enlisted into a tough nationwide retail licensing and enforcement program, providing for sting operations and tough graduated penalties against stores that sell tobacco to minors. States also would have to meet stringent goals for reducing illegal tobacco sales to minors, i.e. 75 percent compliance in five years, 85 percent compliance in seven years, and 90 percent compliance in ten years. States would be required, under penalty of losing federal funding, to file annual plans for approval by the FDA. This provision builds on the so-called Synar Amendment mandate in the federal substance abuse prevention and treatment block grant.

The tobacco industry agreed to pay $368.5 billion and submit to extensive regulation in return for substantial protection from product liability suits.

Under the agreement, all current state and local suits and suits based on addiction would be terminated. Future suits of a similar nature would be banned. Class action lawsuits and other forms of consolidated action would be prohibited, thus making it more difficult for plaintiffs to marshal their resources for protracted and expensive litigation. Traditional joint and several liability would be abolished. An annual cap would be set on aggregate industry liability. Punitive damages would be eliminated for claims based on past misconduct.

The annual cap on damages and the ban on punitive damages would be enormously helpful to the industry. The worst thing about the current civil liability exposure of the industry, from its perspective, is its unpredictability. Even if the industry believes it has a strong case in court, the consequences of losing -- including bankruptcy and stock losses -- are very high . Remember what happened to Johns-Manville. Uncertainty also spooks the stock market. When the settlement terms were announced, tobacco stocks rose.

3. Criticism of Agreement

In general, there are three criticisms of the proposed settlement: 1) that it is too easy on the industry; 2) that it broadly preempts state law, and 3) from another perspective altogether, that state damage claims are bogus.

Not everyone, including other state officials, is convinced that the attorneys general cut a good deal on June 20. Three hundred and sixty-eight point five billion dollars is a lot of money, but the attorneys general, in the view of critics, gave up a lot in return. It is a good deal, they say, for the industry, even at such a dollar cost, because the attorneys general agreed to ask Congress to preempt a swath of state product liability law and to terminate state suits. As for the cost to the industry, the deal would allow it all to be passed on to consumers and deducted from corporate taxes. Because the cost is shared, no firm would gain a competitive advantage. Overall impact on sales would likely be minimal given the remarkably inelastic demand for the product based on price (an indication perhaps of the addictive quality of the product). Most important of all, the tobacco companies' biggest money maker, international sales, would be protected.

A "legislative settlement" by congressional act, unless properly worded, would cut short suits that states want to pursue. Minnesota, for example, is not ready to settle. Attorney General "Skip" Humphrey is convinced that he has a very strong case. He claims to have explosive documentation of wrongdoing by the industry. Humphrey wants to go to trial.

State liability law related to tobacco products would be preempted under the agreement: another "sell out" in the eyes of critics. Future state and local suits would be barred. The settlement agreement also would make it more difficult for an individual claiming injury by a tobacco product to successfully sue. While individual product liability suits would be allowed, the terms effectively preclude a tobacco company being broken and bankrupted, because an annual cap would be placed on aggregate industry liability payments.

Nor is the preemption contemplated by the agreement limited to the law of civil liability. Building upon current FDA regulations on the sale and distribution of tobacco products to youth, minimum federal standards would be imposed for smoking in public places, tobacco advertising, and so on. While they in many circumstances would be free to impose tougher standards, state legislatures would not be free to pursue a more relaxed approach.

Perhaps most curious of all from a states' rights perspective, the settlement agreement would mandate the form of state licensing and regulation of retail sellers of tobacco products and FDA supervision of state enforcement of these licensing standards. Again, these provisions build on current federal law, in this case the so-called "Synar Amendment" mandate in the Substance Abuse Prevention and Treatment Block Grant. The question is whether the "enlistment" of state law enforcement officers for tobacco licensing enforcement would violate the 10^th Amendment. Recall that in Printz v. United States the Supreme Court held that Brady Gun Law provisions requiring state and local law enforcement officers to perform federally-mandated background checks were impermissible.

In contrast to criticism of the settlement agreement as a "sell out" and to criticism of specific provisions as contrary to the states' interests, the whole basis of the attorneys generals' suits is, in some quarters, regarded as bogus. From this point of view, the cost of smoking is largely borne by smokers themselves, who after all freely choose to smoke, knowing the risk; who suffer most of the costs, intangible and economic, of an early death; and who pay high tobacco taxes. Moreover, what is it about smoking that distinguishes it from other risk-taking personal behaviors such as riding motorcycles or consuming fatty foods? And, why is the tobacco manufacturer regarded as a tort-feasor, but not the brewer, the dairy farmer, or for that matter the state government that allowed "deadly" tobacco products to be offered for sale and even profited by their taxation?

Robert Levy, a constitutional scholar at the CATO Institute, argues the state tobacco suits and state legislation such as that in Florida which facilitated its suit, constitute an egregious violation of the due process rights for an industry "singled out for its deep pockets and public image, not its legal culpability." Similarly, William Van Alstyne, professor of law at Duke University, argues in a recent law review article that the Florida statute is a clear-cut violation of due process. Similar arguments can be used against many of the legal theories employed by state attorneys generals.

State damage claims have been criticized not merely as unconstitutional but also as a sloppy economic calculation. Jane Gravelle, an economist at the Congressional Research Service, argues that while federal, state and local governments incur large up front costs in paying for the medical treatment of smokers, these same governments realize savings that are at least as large because smokers live shorter lives, thus reducing the cost of Social Security, Medicare, and Medicaid (especially long-term care in nursing homes). Similarly, Harvard economist Kip Viscusi estimates that the total external cost of a pack of cigarettes in 1993 dollars is 25.3 cents, less than half the average tax of 53 cents a pack.

4. The Politics of Tobacco

Given the sweeping and controversial nature of the tobacco deal, many state officials, other than the participating attorneys general, have been cautious about endorsing it, at least in all its specific detail. The trade-offs necessary to cut the deal with the industry were made by state attorneys general, not governors or legislators: a major political complication.

The tobacco issue is further complicated because the Clinton administration and congressional leaders also have declined to take their cue from the authors of the settlement agreement.

Leading members of Congress, like most state legislators and governors, were not parties to the agreement and were not consulted in any meaningful way in the course of settlement negotiations. So, they are not inclined to rubber-stamp the agreement.

Senator John McCain, chairman of the Senate Commerce Committee, has introduced a bill, S.1415, that in many respects tracks the June 20 settlement agreement. Senators Orrin Hatch and Edward Kennedy, among others, have also introduced tobacco bills, S.1530 and S.1492, respectively. The Hatch bill and especially the Kennedy bill differ in several important provisions from the settlement agreement. Even Senator McCain says his bill is only a starting point for negotiations.

The Clinton administration, on the other hand, was asked to join the states in their tobacco suits and was consulted in the course of negotiations. But, the Justice Department declined to join the suits, and the president declined to endorse the settlement. Instead, the U.S. Department of Health and Human Services is seeking to "recoup" over half the value of all state settlement and damage awards attributable to Medicaid costs. The Veterans Administration at the Department of Defense also have recoupment plans.

Nor is the administration alone in seeking a slice of the tobacco settlement pie, or in otherwise seeking to rewrite the deal. Local governments, insurers, public health advocates, trial lawyers and a variety of other interest groups are either making claims for a share of tobacco settlement money or in some way seeking to influence the form of the legislation to their advantage. As a result, members of Congress are being bombarded with proposals that would divert state money, as well as dictate how states spend the money, how they would regulate the industry and individual smokers, and how state courts would conduct tobacco trials.

NCSL staff contacts: Bill Waren; Ellona Wilner

NCSL's Analysis of State Interests in National Tobacco Legislation
Link to federal tobacco legislation
Link to the tobacco settlement agreement of June 20, 1997

State-Federal Relations

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