Peace Talks In The Tobacco Wars?

State attorneys general are weighing a settlement plan that would regulate the industry, BUSINESS WEEK has learned

After months of preparation, powerful state attorneys general who have declared war on the tobacco industry are girding for battle in the courtroom. Mississippi Attorney General Michael Moore will deliver opening arguments this June in his suit against seven cigarette makers to recover hundreds of millions of dollars in state Medicaid costs for smoking-related illnesses. Copycat cases in Florida and Texas will begin in September, while Washington Attorney General Christine O. Gregoire has a court date in October. On Jan. 27, New York became the 19th state to sue the industry.

But even as these suits speed toward trial, BUSINESS WEEK has learned that many attorneys general are simultaneously launching an important initiative aimed at reaching a settlement with their foes. Since December, sources say, several of the AGs who have sued the industry have held a series of meetings and conference calls to hammer out a unified position. Participants include Gregoire, Minnesota's Hubert H. Humphrey III, and Richard Blumenthal of Connecticut, and representatives from the Massachusetts and Florida AG offices, among others. This group's goal is ambitious: to develop a plan that would not only end their own disputes but also provide a framework for the long-term state and federal regulation of tobacco.

While the participants insist they are still committed to suing the cigarette makers, their feverish activity is a sign of how seriously all combatants in the tobacco wars now take the idea of settlement. Last August, when a small group of AGs first floated a settlement proposal, it quickly fizzled as the industry, health officials, several AGs, and many tobacco plaintiffs' lawyers decried the plan. This time, a far broader group of attorneys general is talking, and the views of leading health officials are also being sought. Meanwhile, industry leaders Philip Morris Cos. and RJR Nabisco Inc. have both recently said they would be receptive to the idea of a settlement. Industry and AG sources, however, say the two groups are not now talking.

SHELL OUT BILLIONS. The centerpiece of the state AG talks is a proposal drafted by Minnesota's Humphrey, which Connecticut's Blumenthal says is now backed by him and Washington's Gregoire. Sources say that plan, structured as proposed federal legislation, would give the industry the thing it most craves: a legislative guarantee that tobacco will remain legal (table). The AGs also are weighing some protection against future litigation. In exchange, Humphrey's proposal would require companies to submit to permanent regulation by the Food & Drug Administration, to dissolve trade associations such as the Tobacco Institute, and to shell out billions for antismoking campaigns and past injuries, although no exact payment amounts have been specified. In a written statement to BUSINESS WEEK, Humphrey confirmed that the AGs have been discussing "common ground goals" but declined to elaborate. "Any discussion of the details of these fluid conversations or ever changing rough drafts would be premature and fruitless at this point," says Humphrey.

Attorneys general from other states, convinced the Humphrey proposal goes too far, are hoping to devise a more pragmatic plan. Some members of this group have rallied behind Mississippi plaintiffs' attorney Richard Scruggs, the author of last August's ill-fated peace proposal and lead outside counsel in seven of the AG suits. "Scruggs is working it very hard," says one source in the medical community. "Scruggs's view is that the tobacco industry is under a great deal of pressure and the opportunity exists to get a real breakthrough kind of deal."

Scruggs acknowledges that he came up with a new settlement proposal after his last one died, but says he hasn't worked on his plan since November and that he's now more focused on going to trial. His most recent proposal, formulated in October, calls for the industry to pay out around $12 billion a year for 25 years to states and individuals who can prove harm from smoking. Up to 10% of that sum could be used to compensate lawyers and states who helped engineer the settlement. It would take regulation away from the tough-minded FDA and create a tobacco czar to administer the payment fund. The proposal would also earmark $700 million for the Health & Human Services Dept. to use to counter tobacco marketing and would require the industry to disseminate its research.

The attorneys general say that their cases are going well, and that they are only trying to formulate a joint peace proposal in case other players in the tobacco litigation suddenly decide to opt for peace. Noting the incessant talk that settlement legislation could one day surface in Congress, Blumenthal says: "Eventually, Congress may turn to us and say, `What's your bottom line?' We didn't want to then have to turn to one another and say, `What is it?"'

But many tobacco industry executives, health officials, plaintiffs' lawyers involved in other antitobacco cases, and government officials say the attorneys general may also have some trepidation about going to trial. Their suits will be costly, are based on novel legal theories, and could flop. Critics say that AGs are interested in settling now in order to avoid an embarrassing defeat in court. "I would want to push the cause of settlement, too, because I would realize at some point a rational court would take a look at this house of cards and make it come down," says Daniel W. Donahue, senior vice-president and deputy general counsel of RJR.

Whatever their motivations, the attorneys general still have many issues to sort out. For example, many of them have hired plaintiffs' law firms to help them bring the suits, and the lawyers are pushing for a big financial settlement, says a source in contact with the state AGs. Others are more interested in slapping tighter regulation on the industry than soaking it for billions. Despite this problem, North Carolina Attorney General Michael F. Easely, who has in the past served as a sort of unofficial emissary between the industry and the states that have filed suits, believes that "all of [the AGs] will settle."

Even if the attorneys general do reach an agreement, they will have a tough time coming to terms with tobacco companies. Despite the industry's increased interest in the prospect of settlement, executives are thought to be unwilling to shell out the massive sums sought by the plaintiffs' attorneys. Both Philip Morris and RJR declined to comment specifically on the current AG talks. But one key industry lawyer says that some of the plaintiffs' attorneys assisting in attorney general suits have informally raised the issue of settlement with him in recent weeks. He says he brushed them aside.

SNOOKERED. Nor will leading health advocates be easy to bring on board. Antitobacco activists are worried about giving the industry any protection from future litigation, and angry that even like-minded AGs such as Humphrey are now willing to consider peace. "The public health community has always been snookered by the industry," says Richard A. Daynard, chairman of the Tobacco Products Liability Project (TPLP) at Northeastern University in Boston. Aware of the shifting political winds, however, health advocates are now weighing the possibility of a truce. The TPLP is sponsoring a seminar in May to hash out health advocates' stance toward settlement talks.

For now, the health community has nothing to worry about. The AGs are still a long way from a unified settlement position. But considering how fiercely the law enforcers have been fighting cigarette makers, the fact they're even discussing peace could mark a new chapter in the high-stakes tobacco wars.

Before it's here, it's on the Bloomberg Terminal.