Big Tobacco May Be Ready To Deal

Plaintiffs' lawyers see signs that makers want to bargain

The tobacco industry spends a lot of time these days reminding the public that it has no interest in settling any of the hundreds of lawsuits filed against it. When a proposed congressional pact surfaced in late August, the companies quickly denied any participation in the alleged settlement talks. And they insisted they had no plans to bargain with opponents in the future. Cigarette makers continue to go out of their way to hammer the point home. After a Florida judge handed manufacturers a minor victory onSept.16 by dismissing most counts in that state's suit against them,R.J. Reynolds Tobacco Co. zapped out the following statement: "This ruling should clarify for doubters why the tobacco industry has taken the firm position that it will not settle litigation that has no merit in law or fact."

But there are signs that tobacco companies are becoming increasingly interested in striking a deal that would put their legal woes behind them. Several leading plaintiffs' attorneys say that since mid-August they have received phone calls from lawyers, lobbyists, and politicians claiming to represent the industry and trying to lay the groundwork for a possible settlement. Washington-based John Coale of Coale & Van Susteren says he had a 20-minute conversation with an industry lobbyist in mid-September who wanted to know whether he would be willing to go along with a deal brokered by Congress.

PHONE CALLS. Such a deal, which both sides consider the only plausible method of settling the tobacco litigation, would likely require the manufacturers to shell out billions for injured smokers and teenage-prevention programs. In exchange, Big Tobacco would receive immunity from legal liability, in effect ridding itself in one fell swoop of its many lawsuits.

Plaintiffs' attorneys Elizabeth Cabraser of San Francisco's Lieff, Cabraser, Heimann & Bernstein, and Patrick J. Coughlin, partner at Milberg Weiss Bershad Hynes & Lerach in San Diego, said that they, or partners at their firms, have received similar calls. The lawyers declined to identify the callers, saying only that none of them worked directly for cigarette manufacturers. "There are a lot of folks surfacing right now, putting out feelers, trying to test the waters for a potential settlement," says anti-tobacco attorney Russ Herman of Herman, Herman, Katz & Cotlar in New Orleans. He says he has also been approached by industry representatives.

The standard pitch, says Herman, goes like this: "I have on occasion represented X, Y, and Z [a tobacco company]. I'm very interested in settling this issue, and I know they would be. If I can be of assistance in bringing you folks together or floating proposals, I'm more than willing to do that." Such feelers, adds attorney Coale, are the first part of "a real courtship" between the two sides, "where you are going to have this type of thing, and then you'll have negotiation through intermediators, and then you'll have direct negotiations."

The cigarette manufacturers deny that they are putting out any settlement feelers, and say that several plaintiffs' lawyers lied about the industry's participation in the proposed August congressional deal. Noting that the anti-tobacco bar has invested millions in suing the industry and is at best years away from recouping any money, they argue that the plaintiffs' attorneys are simply trying to force a settlement by drumming up support for a deal with politicians, the public, and the media. "The company is talking to absolutely no one about [a litigation settlement]," says Philip Morris Cos. spokesman Michael York. "We remain absolutely confident of our position both legally and factually, and I can't think of a case where I don't think we'll prevail."

DEPRESSED STOCK. But there's no doubt that the companies have plenty of incentive to settle. They're spending tens of millions annually defending themselves, and analysts say that their share prices are depressed by at least 50% because of the threat of litigation and increased regulatory oversight (table). Says industry analyst Jeffrey A. Altman, a vice-president at major tobacco shareholder Mutual Series Fund Inc. in Short Hills, N.J.: "In my opinion, the companies have to think about a settlement very seriously."

Evidence is mounting that that's just what the companies are doing. In early September, Gary D. Black, a tobacco analyst at investment banking and money management firm Sanford C. Bernstein & Co., which holds a large chunk of Philip Morris, wrote that "for the first time since we started covering this group, we detect a clear willingness by the industry to bargain." Because the share prices of tobacco companies are heavily discounted, a settlement would be appealing even if the companies had to spend billions to achieve it. The market value of Philip Morris alone is discounted by $60 billion because of litigation risk, estimates Black. And it would not be hard for the industry to fund a settlement simply by upping prices: a 25 cents-per-pack increase, Black calculates, would yield at least $6 billion a year--even taking into account a drop in consumption.

Other large institutional investors are starting to hear conciliatory words from the tobacco companies themselves. Lon West, a securities analyst at San Antonio-based USAA Investment Management Co., a large shareholder in several of the companies, recalls that in private meetings with attorneys from RJR and Philip Morris on Sept. 16 and 17, they told him they would be interested in a global settlement in order "to limit the downside risk, get out from under the cloud of litigation, and carry on with business," says West. While those same lawyers denied the existence of any current negotiations, they did discuss legislative precedents for a global settlement, citing the 1969 Federal Coal Mine Health & Safety Act and the 1986 National Childhood Vaccine Injury Act as proof that a congressional grant of immunity to an industry is plausible, according to West.

The tobacco companies also have made attempts to reach out to the state attorneys general who are suing to recover Medicaid expenses. North Carolina Attorney General Michael F. Easley says the tobacco companies have asked to use his office "as a vehicle through which they can communicate with the other AGs--especially those with whom they have pending litigation--because it's just hard to communicate once the suit is filed." He adds that the companies have not asked him to air any settlement proposals.

TEEN SMOKING. Nonetheless, Easley says that Philip Morris and RJR representatives did meet face-to-face with North Carolina state officials this summer to craft a statute aimed at curbing teen smoking. Among other measures, the proposal called for the manufacturers to give up to $100 million annually to eligible states to prevent youth smoking--double the amount that Philip Morris and U.S. Tobacco offered in a comparable federal proposal floated in May. Easley says the industry originally hoped to use his plan to fend off states considering Medicaid suits. When the tobacco companies sued the Food & Drug Administration to stave off new teen-smoking rules, they dropped their support for the state proposal.

The one thing everybody can agree on is that hammering out a deal would be a Herculean feat. Before forking over billions to its adversaries, the industry would insist on a global settlement that would insulate it from any further litigation. That alone would take an act of Congress, which could easily choke on the divisive politics of tobacco. Moreover, a deal would require the approval of plaintiffs' lawyers, the FDA, state attorneys general, and health activists. But compared with all-out war for the next few years, Big Tobacco just may decide that negotiating is a risk that is worth taking.

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