Nicotine Fit

The LeBow deal could mean open season on Big Tobacco

Like most tobacco advertising, the billboard features a pair of glamorous, healthy models. On the left is a handsome rake in a tux; on the right, an elegant brunette with a 1940s chignon. "Mind if I smoke?" he asks, balancing a cigarette on his lips. Her eyebrows are raised flirtatiously: "Care if I die?" she responds. The tough antismoking ad was developed by California's Health Services Dept., part of a $107 million campaign against tobacco that will include ads on television, radio, and billboards. A similar campaign in the early 1990s, California officials claim, cut cigarette consumption there by 12%.

California's antismoking crusade barely rated a mention in the news, however. The day state officials unveiled their renewed initiative, Mar. 20, Liggett Group Inc. made headlines around the world when it announced a sweeping settlement with 22 states that are suing the tobacco industry to recover Medicaid costs. Bennett S. LeBow, chairman of Brooke Group Ltd., Liggett's parent, dominated news reports everywhere--acknowledging that cigarettes are addictive and carcinogenic, and saying that manufacturers had targeted youths under age 18 in their marketing. LeBow also agreed to turn over documents that the state attorneys general think might give them the ammo to slay the industry in court.

Perhaps they will. But California's hard-hitting ad campaign symbolizes a threat that may be even more deadly to Big Tobacco. While the Liggett deal could eventually help the AGs and a herd of antitobacco plaintiffs' lawyers win a fortune from the industry, LeBow's bombshell will have a more immediate effect. It will make it open season on Big Tobacco, encouraging states to step up antismoking campaigns and lay on ever-bigger taxes. "Legislators have decided that being opposed to the tobacco industry is motherhood and apple pie," says Richard Daynard, chairman of the Tobacco Products Liability Project in Boston.

TAX HIKE. Cigarette taxes, already on the rise, could be the biggest threat to the tobacco companies. Antismoking activists claim that for every 10% increase in the price of a pack, overall consumption decreases 4%. Teen use drops by an even sharper 12%. In February, Oregon imposed a cigarette tax increase of 30 cents a pack, effectively boosting the price for most smokers by well over 10%. Tax hikes ranging from 2 cents to 25 cents have been passed over the past year in Arkansas, Utah, and Massachusetts. Meanwhile, 21 other states are considering raising the levy on cigarettes.

In Washington, Senator Edward M. Kennedy (D-Mass.) is joining forces this year with Senator Orrin Hatch (R-Utah) on a measure to raise the federal tax to 67 cents from 24 cents a pack. "Right now, it appears that taxing cigarettes is a politically acceptable way of raising money," says Stephen Moore, director of fiscal policy at the Cato Institute, a Washington conservative think tank.

In Washington and in state capitals across the country, officials are tripping over themselves trying to find some new way to punish the tobacco industry. A new law in Massachusetts requires companies to disclose the ingredients of cigarettes starting in July, though the industry is challenging the law in court. The Justice Dept. is expected to use Liggett's new documents to bolster its criminal inquiry into allegations that the tobacco companies lied to federal authorities and defrauded the public. And the Federal Trade Commission is considering reopening an unfair advertising case against R.J. Reynolds Tobacco Co.'s Joe Camel campaign, alleging that the cartoon character induces minors to smoke.

Pending the outcome of an industry challenge, new Food & Drug Administration restrictions on a variety of industry marketing practices go into effect this summer. They range from eliminating most vending machines to banning free samples of cigarettes.

Investor pressure is also on the rise. Last year, the New York State Common Retirement Fund and the New York State Teachers' Retirement Fund took steps to restrict tobacco stock ownership, and the Maryland Retirement & Pension System decided to divest completely. This year, pension funds in Maine, Massachusetts, Minnesota, and New York City are considering similar options according to Doug Cogan, an activist with the Investor Responsibility Research Center.

Moreover, the New York State Common Retirement Fund and the Minnesota State Board of Investment are sponsoring shareholder resolutions asking RJR Nabisco Inc. and Loews Corp., parent of Lorillard Tobacco Co., to volunteer to comply with the new FDA tobacco regulations.

Cogan likens the campaign for tobacco divestment to the campaign for South African divestment in the 1970s and 1980s. Back then, state pension funds took the lead in filing socially oriented shareholder resolutions aimed at ending apartheid. LeBow's bombshell "could be an example of the type of event that will lead more institutional investors, if not to divest, then to at least support shareholder resolutions," he adds.

COLLEGE OUTCRY. A whiff of campus activism is also in the air. On Mar. 13, Smith College announced that it would sell the tobacco stocks in its $617 million endowment, and Haverford College is considering following suit. The decision "was made on principle because... we feel that tobacco companies appear to be doing some heavy promoting of smoking amongst women," says Smith spokesperson Ann Shanahan.

In spite of the crowing of the attorneys general, it's not clear what impact LeBow's admissions and new documents will have on the state health-care cases--or on the hundreds of personal-injury cases against the industry. While plaintiffs' lawyers could certainly use his words about the dangers of cigarettes as a damning confession, defense lawyers for other tobacco makers would have no trouble discrediting the corporate raider on grounds of lack of expertise and self-interest in securing a settlement.

The documents that Liggett intends to turn over, which include notes from meetings of the Committee of Counsel, a group of in-house tobacco lawyers that plotted litigation strategy, are more threatening. In some of the 22 suits, the AGs have charged the industry with running a criminal conspiracy. And, says University of Florida law professor Lars Noah, the Liggett documents could provide evidence of such corporate collusion. The industry, however, challenges the validity of the AGs' claims on legal and factual grounds and is trying to prevent the release of the documents.

Publicly, Big Tobacco is maintaining a unified and belligerent front. RJR and Philip Morris Cos. wasted no time in attacking LeBow, who they say is only trying to shore up his troubled company. "While Bennett LeBow is entitled to express his personal views regarding smoking and health issues, those views tend to change, depending on the circumstances in which they are uttered," Philip Morris said in an official release. Like RJR, Philip Morris tried to downplay LeBow's admissions by arguing that the American public has long been aware of warnings about the health risks of cigarettes.

MORALE BOOSTER. But the publicity surrounding LeBow's deal has clearly stung. On Mar. 21, RJR Chairman Steven F. Goldstone fired off a memo to his troops to boost morale. "When you cut through all of the sensational rhetoric, a simple truth remains: Our colleagues at Reynolds Tobacco manufacture and market a legal product that millions of people choose to enjoy. They...have every reason to be proud of their company and their accomplishments," he wrote. And share prices, which rose sharply on settlement hopes, have dropped. Bellwether Philip Morris peaked at 1395/8 on Mar. 11, closing at 1191/2 on Mar. 26.

The irony of LeBow's betrayal of Big Tobacco is that it may delay, not hasten, the peace process between the industry and its opponents. LeBow's public mea culpa has emboldened antismoking activists to insist on even more stringent regulation. That would mean generic packaging and a nationwide tax increase of at least $1 to $2 a pack. Activists may also demand "essentially the elimination of all tobacco marketing," says Daynard, of the Tobacco Products Liability Project. To add insult to injury, the industry would also be expected to pay for a new nationwide antitobacco ad campaign such as the one in California.

Clearly, peace will come to Big Tobacco only at a very stiff price. On the other hand, war gets more expensive every day.