Cornered

by Peter Pringle

  Tobacco’s next challenge—and its central defense in the Medicaid suits—was to argue that the only way the state could pursue recovery of medical expenses was by stepping into the shoes of the smoker and asserting the smokers’ rights of recovery. In other words, this was not the state seeking to recoup funds it believed had been wrongfully extracted from its coffers; this was really a personal-injury action by the state on behalf of smokers. As such, the industry would be able to rely on its traditional—and, in the past, always successful—legal defenses of “assumption of risk” and “contributory negligence.” These said that the smoker, not the cigarette company, is to blame for the harm caused to him or her by smoking.

  Moore, in his turn, argued that the state was not a surrogate or “subrogee” of the smoker. This was not a claim by individual smoking victims; the state was suing in its own right to protect its interests and to recoup funds that it had no choice but to provide under the federal Medicaid system. Mississippi was entitled to be repaid for Medicaid expenses because, as Scruggs put it, the state had conferred a “benefit” on the tobacco industry by paying the medical bills of injured smokers. The “injury,” in other words, was to the Mississippi taxpayer, not to the smoker. In legal terms, the industry had been “unjustly enriched.”

  This would be the legal basis for all the Medicaid cases. In Florida in the summer of 1994, the state legislature had actually passed a law that recognized the financial injury sustained by the taxpayer in tobacco-related illnesses through the Medicaid system. The law, however, had been challenged by the industry. A similar law enacted in Massachusetts allowed the state’s attorney general to bring a Medicaid reimbursement lawsuit against the tobacco companies. By the beginning of 1995, at least fifteen states were considering Medicaid reimbursement actions and they were all watching to see how the Mississippi judge would rule on Mike Moore’s arguments.

  On February 21, 1995, Judge William Myers of the Jackson County Chancery Court officially endorsed the logic of Moore’s arguments against the state being regarded as a surrogate of the smoker, leaving the industry without its traditional defense of blaming the smoker. It was a tremendous breakthrough for Moore and Scruggs, and for the other states as well. It meant that Mississippi’s case remained in the chancery court. The tobacco companies would continue to challenge the legal theory, but to no avail. On the same day as Judge Myers’s opinion, Florida filed its Medicaid case. Others would follow.

  The tobacco companies had been bloodied, but they still regarded Moore, Scruggs, and his entourage—Barrett and Motley—as minor irritants in a wider war they fully intended to win. If the state wanted to base its lawsuit on economics and fairness instead of personal injuries, the industry was ready. In fact, the economics of tobacco was one of their favored topics.

  * * *

  FOR DECADES, the $45 billion tobacco industry had promoted itself as an essential and indispensable part of the U.S. economy. It contributed billions of dollars in excise and income taxes and created thousands of jobs inside and outside tobacco production. Its advertising and promotion budget was $6 billion. In the early 1990s, for example, the industry claimed that 2.3 million Americans owed their jobs to tobacco, either directly as farmers, or in cigarette production or related industries. But this was the economic version of their claim that nicotine is not addictive, or that smoking does not cause cancer. The 2.3 million figure was grossly inflated, a concoction of the industry’s lobbying arm, the Tobacco Institute, to oppose cigarette-tax increases in Congress.

  The number of jobs in tobacco growing, manufacturing, auction warehousing, and wholesaling was around 260,000. There were 432,000 jobs in the retail and supply sectors, making a total of 692,000. To inflate that figure, the industry used a “multiplier” to show the “ripple effects” of tobacco-industry spending on other sectors of the economy. This, they said, added another 1.6 million, giving a total of 2.3 million. But those jobs were not in or related to the tobacco industry; this multiplier is used by economists to estimate economic activity that stimulates additional economic activity, not for estimating the actual number of jobs in a particular sector.

  When faced with state or federal measures that could reduce smoking—such as excise-tax increases—the industry argued that the drop in tobacco consumption would result in a drop in employment not just in tobacco states, but nationally as well. They assumed that the resources spent on tobacco and its distribution would vanish if sales declined. Several economists challenged this picture, pointing to the flaw in the industry’s argument. For example, a 1996 study done by Dr. Kenneth Warner of the Department of Health Management and Policy at the University of Michigan projected a decline in tobacco consumption and actually found a net increase in the number of jobs in nontobacco regions (which includes Mississippi), with a net loss only in the southeastern tobacco states. The overall national result, Warner found, was a small increase in total jobs.

  The tobacco companies were equally inventive in their specific economic arguments against the Mississippi lawsuit. During the 1980s, a handful of economists had challenged the conventional wisdom among public health officials that argued that smoking costs the nation about $100 billion a year: $50 billion in smoking-related hospital charges, doctor fees, drugs, and nursing-home bills, and another $50 billion in lost working hours and income taxes from smokers who get ill and die early. Now leading the challenge to these figures was Kip Viscusi, a Harvard economist, who complained that the public health officials were ignoring the long-term, or “life-time,” approach.

  If you looked at smokers this way, you would find a set of savings; not costs. There would be savings from excise taxes paid by smokers, plus income taxes paid by doctors, pharmacies, and health-care providers involved in looking after smokers with tobacco-related diseases. Even in a nontobacco producing state, such as Mississippi, these taxes could be considerable.

  But the Viscusi argument that drew the most attention was the one that said smokers produced extra savings in geriatric care, pensions, and social security payments by dying early—on average about eight years before nonsmokers. His detached analysis even suggested that the introduction of low-tar cigarettes might make them “perform less well from a societal standpoint, because you don’t get the savings from the fatalities.” In other words, smokers who smoke filter cigarettes with less tar don’t die off early enough to produce meaningful gains.

  The tobacco companies quickly adopted Viscusi’s work, and his claim became known among antitobacco forces as the “euthanasia defense.” Put together, these “savings,” or “offsets” as the economists call them, had already compensated the states for any extra health costs, the tobacco companies argued. According to one set of Viscusi’s calculations, the total cost to society per pack of cigarettes sold, including medical care, sick leave, group life insurance, fires, secondhand smoke, and lost taxes on earnings of those who died early, was $1.37. The total benefit to society, including excise taxes and savings on nursing homes and pensions, was $1.95.

  Moore had a list of responses. First, he argued, taxes are not debts that can be offset against damages to property or health caused by corporations. Second, the sales and income taxes claimed were not paid by the companies. Third, the distribution of taxes is the sole domain of the legislature: tobacco companies cannot direct them to health care or anywhere else they find convenient for their business. As Scruggs put it, “Taxes are not a damage deposit. They do not allow you to go out and injure the public good to the extent of your tax payments. The guys who blew up the federal building in Oklahoma City can’t defend that damage claim by saying, ‘Well, we’ve paid more than that in taxes over our lifetime.’”

  Other economists also challenged Viscusi’s analysis, arguing that the model estimating a smoker’s true medical costs is inherently unreliable. For example, they point out that the alternative to an early death from smoking may be a long life under intense and expensive medical care common to a tobacco-related illness.

&
nbsp; Viscusi’s calculations also fail to put a value on life itself, something a court would have to consider. As one of the plaintiffs’ lawyers observed, “I don’t know that a court is going to agree with the tobacco companies and say, ‘Wow, you need an offset because you killed people.’” Jeffrey Harris, an MIT economist who is also a physician, argues that government shouldn’t weigh dollars saved from early deaths in making public policy decisions; it’s not the kind of argument that a civilized society engages in. “Viscusi is not including a key benefit. We value life.”

  The industry’s argument gave politicians like Moore a chance to take the moral high ground. “It is utterly repugnant to a civilized society and must be rejected on the grounds of public policy,” declared Moore. His submission to the court on the matter called the argument “perverse and depraved,” and he accused the tobacco companies of being merchants of death. “Seeking a credit for a purported economic benefit from early death is akin to robbing graves of Mississippi smokers who died from tobacco-related illness,” he declared. “No court of law or equity should entertain such a defense or counterclaim. It is an offense to human decency, an affront to justice, uncharacteristic of civilized society, and unquestionably contrary to public policy.”

  The “euthanasia defense” had already been memorably rejected by the economist Thomas Schelling. In a 1986 article entitled “Economics and Cigarettes” in the journal Preventive Medicine, he wrote:

  The idea that people who smoke and die fifteen years early are net financial benefactors to the rest of society, by living most of a normal productive life and dying before they can claim their retirement benefits, is momentarily surprising and somewhat paradoxical. But, we must not reverse the conclusion. If we begin by thinking that smokers in the aggregate inflict costs on the rest of us, and that this is the reason we should encourage them to quit or penalize them financially, then discovering that those who die leave behind more than they take from us might seem to suggest that we should happily let them smoke and relieve us of supporting them in their old age. But that would be a perverse and unnatural conclusion.

  We do not hope that sixty-year-old fishermen die at sea, that sixty-year-olds neglect seat belts and die in their automobiles, or that sixty-year-old marital difficulties lead to suicide or homicide.

  * * *

  JUDGE MYERS would throw out these tobacco defenses, one by one, but Governor Fordice continued to brand Moore’s lawsuit a “selfish attempt to gain publicity and enrich a few people”—by which he meant Dick Scruggs, Don Barrett, Ron Motley, Mike Lewis, and the other Southern attorneys who had signed up to help Moore. The tobacco companies joined in the mud slinging, accusing Moore, as Fordice had done, of politicking for governor.

  In the spring of 1996, Judge Myers ruled that the attorney general is a constitutional officer with common-law powers to control and manage litigation on behalf of the state, and that included litigation against the tobacco companies to recover Medicaid expenses. “The Court is aware of no constitutional provision, statute or decision of the Mississippi Supreme Court, which gives the Governor of this State or the Division of Medicaid the power to bring or maintain an action on matters of statewide interest. Such authority is reserved to the Attorney General.”

  In most states, including Mississippi, the attorney general is elected by the people and entrusted by them with the common-law power—both legal and criminal—to represent them in all litigation that affects the public interest. Mike Moore believed that he did not have to ask the governor’s permission to litigate the suit. Moreover, it was overwhelmingly clear to him that the citizens of Mississippi had a direct interest in whether their tax dollars were being used to pay for harm caused by the tobacco industry, or for roads or schools or some other worthwhile project. Following Judge Myers’s ruling that Moore did have the authority to bring the lawsuit, Fordice and the tobacco companies appealed to the Mississippi Supreme Court.

  Local Mississippi lawyers hired by the industry began to advise the companies that they had better start taking the case more seriously, but most of the national lawyers remained confident the case would be dismissed. Then, on March 13, 1997, the Mississippi Supreme Court rejected Fordice’s petition. The court did not rule on the merits of whether Moore had the authority, but, in a 5 to 1 decision, said that the public interest would be better served by allowing the case to proceed in the chancery court. The issue of who had the authority and the right to file a Medicaid recovery action could still be decided by the court on appeal, if the industry wanted to pursue the matter. The mood of the tobacco lawyers changed overnight, recalled Charles Mikhail, one of Scruggs’s leading lawyers who had argued many of the motions in front of Judge Myers. “It was almost like someone had slapped them in the face and told them to wake up and take the case seriously,” said Mikhail. The Mississippi trial was due to start on July 7.

  The tobacco companies complained, of course. R. J. Reynolds charged that Moore had “carefully crafted a suit to avoid more than two hundred years of legal standards and to avoid allowing jurors in his state an opportunity to hear and decide the case.” Philip Morris said only that it looked forward to raising the merits of the case again “at the appropriate time.” But even as they spoke, the tobacco companies were about to enter secret negotiations that would stop the trial two weeks before it was set to begin.

  12

  THE IDES OF MARCH

  CAESAR: The Ides of March are come.

  SOOTHSAYER: Ay, Caesar, but not gone.

  —Shakespeare, Julius Caesar

  IT BEGAN with a drink in a Manhattan bar and ended, three months later, with the first breach in the tobacco industry’s united front. At the end of November 1995, Don Barrett had left his rural redoubt in Lexington, Mississippi, to fight a liability case in New York about defective plastic-plumbing systems. Most of America’s mobile homes had been fitted with plastic pipes that were corroded by chlorine. “It was the world’s only biodegradable plumbing system,” said Barrett. The case was settled for over a billion dollars and Barrett was on the winning team. He was celebrating by having a cocktail with a New York lawyer named Marc Kasowitz, who had represented the plastic pipe company.

  “Here was a streetwise, fast-talking New York Jewish lawyer having a drink with a slow-talking, slow-thinking Mississippian,” was how Barrett would begin the story. “He asked me what I was going to do next and I said that if and when I ever got paid for the plumbing case, I would use the money to feed my cigarette habit. And he just looked blank.

  “I told him about the Nathan Horton case and the Wilks case in Greenville, and how I was involved with Gauthier’s Castano group in New Orleans and the Mississippi Medicaid case. And he asked what was going to happen in those cases. I said the litigation is going to go on for a long time and eventually we’re going to win.

  “And he asked, ‘Is there no way out?’ And I said no, because the tobacco company executives are too stupid to understand that we are not trying to put them out of business. If they would be socially responsible and pay some measure of damages and quit marketing to children then we could make a deal. And I thought that was the end of the conversation. I went home to Lexington.”

  Barrett did not know that Kasowitz was the personal lawyer of Bennett LeBow, the financier who had a controlling interest in Liggett, the company that makes Chesterfield and L&M brands. As the smallest player, with just over 2 percent of the U.S. market, Liggett was barely staying alive. LeBow had sought a merger of his Brooke Group, which includes Liggett, with the tobacco unit of RJR Nabisco. The plan was to spin off RJR’s food business as a separate company, but LeBow’s offer had been rebuffed. Now, LeBow was waging a hostile proxy battle to take over the whole of the RJR Nabisco Holdings Corporation. His plan was to split off the food division to protect Nabisco’s cookie profits from lawsuits and merge RJR tobacco with Liggett.

  Kasowitz was intrigued by Barrett’s mention of a possible deal. There was a clear opportunity for LeBow. If Liggett we
re to settle and in the deal the plaintiffs’ lawyers agreed not to fight the spin-off of the food division, then LeBow would make his bid considerably more attractive. Moreover, if such a settlement also gave the same terms to any tobacco company that merged with Liggett, RJR’s tobacco unit could be in an advantageous position compared with its big rival, Philip Morris.

  Kasowitz thought the whole idea might appeal to LeBow, a onetime computer scientist who had a liking for complex, flashy financial deals. LeBow was a buccaneer, in much the same vein as the liability lawyers; he was both admired and despised for his adventurism and cunning, just as the lawyers were. But LeBow was an unlikely hero of the antitobacco forces. The fifty-seven-year-old scuba-diving leverage artist had been variously described as a “master finagler,” a “weaselly raider,” and the “Machiavelli of the foxy deal.” His ally in the raid on RJR was Carl Icahn. As The New York Times had put it, “LeBow is not a favorite of public shareholders, who have accused him of emptying companies he controls of their cash and assets. Brooke has poured millions of dollars into the LeBow family coffers through its purchase of assets controlled by LeBow.”

  As it turned out, LeBow did like the idea of trying to settle the lawsuits and authorized Kasowitz to go back to Barrett and start negotiations. But they had to be super-secret, LeBow insisted. If the other tobacco companies found out, they would try and scupper the deal. After all, this was breaking the gentlemen’s agreement of no surrender that had been in place for half a century of litigation. He was most concerned about Philip Morris, whose attitude to the Castano class action and the state suits had been one of unrelenting hostility. Kasowitz said that LeBow told him, “I can’t risk my company on your relationship with some redneck from Mississippi.”