Cornered
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When Kasowitz called, Barrett was taken aback. He had not thought again about the conversation in the bar and was astonished to hear about the LeBow-Liggett connection. But he agreed to discuss the matter, agreeing also to total secrecy.
From Barrett’s point of view, a Liggett deal looked good, too. It might even be key to the Castano suit’s survival. The Fifth Circuit Court of Appeals was considering an appeal from the tobacco companies on the class action’s certification by the District Court in New Orleans. The prognosis was grim. The Fifth Circuit was loaded with conservative judges who were expected to favor the tobacco industry’s contention that Castano was a novel and invalid claim. Signing a deal with Liggett would show the court that Castano had clout. Before Barrett could make a move, however, he was supposed to clear it with Wendell Gauthier, the chairman of the Castano executive committee. But without telling Gauthier anything about Kasowitz, or LeBow, Barrett asked if there were any rules about committee members exploring settlements. Gauthier recalls, “I told him there were no rules. No one had the authority to bind the committee to a settlement, but anyone could talk. Don didn’t show his cards.”
Barrett was risking a lot. After his Horton and Wilks adventures and before the money from the New York plumbing cases arrived—if it ever did—he was underfunded, to put it mildly. He was also wary of dealing with Kasowitz on his own. He wanted another lawyer at his side, preferably someone who could also help with expenses. Bob Lieff and Richard Heimann from the San Francisco firm of Lieff, Cabraser, which was part of the Castano group, agreed to help.
Barrett also brought in Dr. David Burns, a professor of medicine on the San Diego campus of the University of California. Burns had testified on behalf of Nathan Horton and helped Barrett on the Wilks case. Now, Barrett asked him to draw up a set of public-health demands for LeBow. Burns was the author of the annual government reports for the Centers for Disease Control on the number of smoking-related deaths and had coauthored the 1975 Surgeon General’s report on smoking and health. It was familiar ground to him. When the call from Barrett came, according to Burns, “Don began by saying he couldn’t tell me anything about it, but he was involved in something that could lead to an extraordinary precedent for the tobacco companies. And then, of course, he told me what it was.”
The two sides negotiated for two months in total secrecy. To avoid being discovered, the negotiating teams met in different places—Houston, New York, Memphis, and Miami, the city where LeBow spends most of his time. Barrett was so conscious of what the deal might accomplish that initially he didn’t even tell his Mississippi buddies, Scruggs and Moore.
Three months later, LeBow would become the first tobacco company CEO to settle a lawsuit, admit his company was marketing to children, and take steps to curb youth sales of cigarettes. The truism of tobacco litigation in the First and Second Waves—that the companies had never paid a penny in damages—was now history. It was the first time a tobacco company had taken any responsibility for the tobacco-related diseases that Dr. Burns and his colleagues now estimated to be causing 440,000 premature deaths a year.
But LeBow did not stop there. Within a year, he had widened the scope of his settlement by finally putting an end to the carefully crafted scientific falsehood by which the tobacco industry had lived for so long. He would become the first CEO of a cigarette company to declare that nicotine was addictive and that smoking actually causes cancer. He would refer to himself as just another “whistle-blower,” which, in effect, he was, except that he was the loudest of them all.
His break with the brethren at Philip Morris and R. J. Reynolds was viewed as nothing less than treachery. They accused him of engaging in a “reckless ploy” to take over RJR. Wall Street went into shock—but only for a moment. Investors soon realized that LeBow might actually have hit upon a great strategy in settling the industry’s liability. They started bidding up the idea that the rest of the tobacco industry should also seek a permanent truce.
Keeping the plaintiffs’ bar at bay had become a major investment, even for tobacco companies that turned an easy profit. The industry as a whole was now spending $600 million a year defending lawsuits. Five hundred and fifty law firms and thousands of high-priced attorneys were involved. More than half of the nation’s largest law firms were working in some capacity for the industry. In a February federal securities filing, Philip Morris had listed ten pages of lawsuits. In Washington, the Justice Department was weighing perjury charges against the seven CEOs who had testified in April 1994 that nicotine was not addictive. Grand juries were probing whether the Council for Tobacco Research had been involved in criminal fraud. There were federal investigations into possible antitrust violations and cigarette smuggling. Each time a settlement was mentioned, it was not surprising that stocks surged.
The Liggett deal was essentially a self-interest gamble by LeBow, by the Castano group, and also by the attorneys general of the four states that would initially sign up.
The deal gave a much-needed legitimacy to the lawsuits—both the Castano case and the state Medicaid cases. They were not all novel and meritless claims, as the tobacco companies insisted, but they were untested departures in tobacco litigation. The deal demonstrated that one company, at least, took them seriously. The deal also made other attorneys general sit up and wonder if they, too, shouldn’t be suing the industry. A year later the number involved in tobacco litigation had shot up to twenty-two. Finally, LeBow’s gamble forced the companies themselves to publicly address the issue of settlement. The end game had begun.
* * *
BY LATE JANUARY 1996, Barrett and Kasowitz had a draft of the settlement. The money offered by Liggett—only a few million dollars a year—was bound to be small because Liggett was barely surviving as a cigarette company. It had a 2.3 percent share of the U.S. market and pretax profits of about $11 million. But the money was not the lure. Barrett and Heimann were insisting that there had to be some public-health concessions, especially on the issue of advertising aimed at children. Kasowitz was initially resistant. Dr. Burns had said they had to be the same concessions, or close to those in the FDA’s proposed rule: no billboards within 1,000 feet of schools, no vending machines accessible to children, no promotional material such as T-shirts, sporting bags, and lighters, no shop-counter advertising, and all cigarette advertisements in black and white.
At first, LeBow took the position—the standard tobacco industry defense—that the company did not target children in its advertising. He also complained bitterly about the provision banning so-called point-of-sale advertising, or the rack of cigarette packs next to the cash register. If Liggett’s Chesterfields were removed, Philip Morris would only grab the spot for Marlboro, LeBow said. He could not agree to such a condition. His company was in bad enough shape as it was without giving Philip Morris a further advantage.
In February, Barrett was ready to enlarge the team. But who should be next? Barrett was negotiating without any authority from the two clients he represented: the state of Mississippi and the Castano group. “It was like a little dog chasing a Porsche. You catch the son of a bitch. Now what are you going to do?” He brought in Scruggs, and then Moore. Moore would represent the other three state attorneys general who had filed suits. The unwieldy Castano group would only be brought in at the last moment to avoid leaks; once sixty law firms knew of the negotiations, it would be impossible to keep them secret.
Barrett’s extended team continued to shuttle around the country meeting with Kasowitz and his law partner, Dan Benson. At one stop, in Houston, they panicked when they thought their plot had been discovered. Arriving in a limousine at the Four Seasons hotel, Scruggs and Barrett saw two well-known tobacco lawyers walking toward them, Robert McDermott of Jones, Day, who worked for R. J. Reynolds, and Philip Morris attorney James Scarboro of the Washington firm of Arnold & Porter. “Hell, do you know who they are?” Scruggs said as they passed. Barrett didn’t know and when Scruggs told him, he feared the whole operation might
be blown. But the tobacco lawyers were there on other business. They had no inkling of the talks with LeBow.
The negotiations resumed on the children’s issue. As Burns explained how children get hooked at an early age and, in effect, replace those smokers who die off, LeBow started to shift his position. Barrett became convinced that he really was concerned about teenage smoking. “The refreshing thing about him, and the reason you can deal with him,” said Barrett later, “is because he will tell you that he has selfish motives, that he wants to make a lot of money, but he also wants to do the right thing. He told us, ‘Selling cigarettes is legal and I’ll sell the hell out of them as long as they’ll let me.’ But I think he began to look at himself as a person who was doing something for America. I started to think he would be perfectly satisfied to see a smoke-free country in thirty years, providing he gets to make money in the meantime.” Burns was impressed, too. “He’s a businessman … but he was honest, direct, and concerned.”
By the beginning of March, LeBow had agreed to many of the FDA proposals, and draft settlement papers were ready in Kasowitz’s New York office. The negotiators were ready to bring in the Castano group, then still the most visible lawsuit against the industry.
“Scruggs, Kasowitz, and I were in a hotel in Miami and we invited Ron Motley to come over for a drink,” said Barrett. “He walked in and saw us at the bar with LeBow and he was floored. He had known nothing about the negotiations. We then flew to New Orleans and told Russ Herman. (Gauthier was out of town.) But we’re not giggling. These are sensitive people and they’re prominent lawyers. We had to fall all over ourselves for not including them earlier. First, we had to tell why this had been secret, and then we had to tell them the secret. Everyone realized what a breakthrough it was.” But under LeBow’s rules, they couldn’t talk about it until everyone involved—the four other states and the sixty members of the Castano group—had signed up.
* * *
THE FINAL HOURS of the three-month-long negotiations demonstrated what an unlikely conspiracy it had become. There was Barrett from Mississippi’s hill country, Scruggs from the Gulf Coast, Mike Moore from the attorney general’s office in Jackson, the theatrical Ron Motley and his numbers wizard Joe Rice from Charleston, Wendell Gauthier and his Louisiana legal team from New Orleans, and Bennett LeBow, the international financier from Miami, all packed into the conference room at Kasowitz, Benson, Torres & Friedman at 1301 Avenue of the Americas in Manhattan. Only a few blocks away in the Park Avenue headquarters of Philip Morris, with all its lawyers and its resources, there was no early warning of the bombshell that was about to burst.
For LeBow, security was now an even greater problem. Gauthier insisted that before the Castano group could sign off on any deal the entire membership of sixty law firms had to be notified. LeBow gave the Castano group the minimum time to okay the deal. He wanted a clear month between the announcement and the April 18 RJR Nabisco shareholders meeting that would decide his fate.
The Castano group flew to New York on Thursday, March 7. In addition to the Herman brothers and the Castano document keeper Suzy Foulds, Gauthier included another Louisiana lawyer, Calvin Fayard from Baton Rouge. Fayard was a veteran of state class-action suits. On the flight, they sat in the back of the plane and reviewed the draft of the settlement Kasowitz had sent by fax from New York. Several paragraphs bothered them. Gauthier thought the money Liggett proposed to pay Castano—5 percent of its pretax income, or about $50 million, over the next twenty-five years—was pitiful. He also objected to a “release clause” that gave Liggett immunity from all future claims, not only on addiction but also on lung cancer, emphysema, and heart disease. “They want total absolution,” complained Gauthier.
Gauthier also wanted more concessions on promotions aimed at children, he would say later. He wanted specific agreements covering advertisements near schools, and promotions in shops, and he wanted an agreement not to use cartoon characters like Joe Camel, the R. J. Reynolds creation. To Gauthier, these items were all “deal breakers.” If they weren’t changed, he was not going to recommend the settlement to the Castano group.
At nine o’clock on the morning of March 8, about thirty of the players gathered at Kasowitz’s law offices. LeBow had been in Russia and was flying in on the Concorde from London, so the morning was spent on minor issues—”dancing and wordsmithing,” Fayard called it.
With LeBow’s arrival progress was rapid. Gauthier complained about the release clause. It had to be changed, or there was no deal. LeBow backed down and they agreed that the immunity would cover claims for addiction only. Gauthier pushed for more money, even though he knew Liggett was short of funds. “We wanted to show the Fifth Circuit judges that we were in a good position to manage this claim—up to and including the point of reaching a settlement. The timing was as important for us as it was for LeBow.”
It was Burns who persuaded Gauthier not to ask for more. He told Gauthier that he’d been in the tobacco wars for twenty-seven years and this was a gigantic step forward for the public health community. “Burns told me to forget the money, we were only talking two percent of the market,” said Gauthier. “He also said there’s probably not a single smoker out there who has only smoked Chesterfields so I was not giving anything up for our Castano clients by settling with Liggett. I agreed.”
Next, Gauthier pushed for the FDA’s “point of sale” provision, but LeBow stood his ground. The group broke up. In Barrett’s view, Gauthier had almost “queered the deal.”
But the talks reconvened, with LeBow and Gauthier chatting during coffee breaks and both sides leaving the room for consultations in the corridors. The “point of sale” issue was overcome with a “progressive settlement”: the companies who settle first have to agree to any upgrading of the rules in later settlements. LeBow agreed.
The deal breakers had been eliminated. On Saturday, Gauthier flew back to New Orleans and arranged a series of conference calls to Castano members, preparing them for a meeting where he would present the final draft. To the few who complained that there was virtually no money in the deal, Gauthier repeated Dr. Burns’s argument. A meeting of the full Castano group in New Orleans was scheduled for Tuesday, March 12, at 3 P.M. By then, the full text was to be ready. Russ Herman flew back to New York to be the Castano representative in the completion of the final document.
LeBow was now sure the deal would go ahead. On Monday night in New York, Kasowitz briefed The Wall Street Journal, knowing they could not publish the story until Wednesday. LeBow had taken the final step—without waiting for the approval of the Castano lawyers and thus putting pressure on Gauthier.
On Tuesday the rumors began. Reporters calling Castano headquarters in New Orleans were told no one was available to comment. In Washington, Scruggs and Moore were in a hotel rounding up support from the attorneys general of the four other litigating states—Florida, Massachusetts, West Virginia, and Louisiana—which had filed at the eleventh hour. Minnesota refused to enter the deal.
The talks at Kasowitz’s law offices in New York dragged on; Russ Herman, Richard Heimann, and Don Barrett did not have time to fly to New Orleans in time on a commercial flight to brief the Castano group on the final draft, so LeBow lent them his private plane. They arrived at the Castano group’s traditional meeting place—on the twenty-third floor of the Windsor Court hotel—with little more than an hour remaining before The Wall Street Journal’s 4:00 P.M. deadline. Gauthier phoned Kasowitz and told him it was impossible. “We have sixty lawyers here and they have to take our word for something. We can’t do it.”
But Russ Herman persuaded Gauthier to go ahead and try. Richard Heimann, who had been in the negotiations with Barrett from the beginning, reviewed the details of the settlement for the group. Essentially, Liggett had agreed to pay up to 5 percent of its pretax income, to a maximum of $50 million a year, for twenty-five years. The money would go toward smoking-cessation programs. Liggett had agreed to most of the FDA rules, including a ban on pro
motional T-shirts and other clothing, elimination of billboards within 1,000 feet of schools, black-and-white only ads in magazines, an end to free distribution of cigarettes at rock concerts and other youth events, plus a ban on all cartoon characters. Don Barrett then gave the history of the negotiations and why it had been necessary to keep them secret. Herman made an impassioned speech about the significance of the deal—the first concession with the industry curbing the sale of cigarettes to minors. Then he told the group why it was important to make a decision by 4:00 P.M.
Many said it was impossible, there was not even enough time to read through the document. But Gauthier reminded them that there would have to be a “fairness hearing” in which a judge would have to affirm the deal was fair to the Castano class-action members. If any Castano lawyer found anything they didn’t like between now and the hearing, they could bring it to the attention of the court. At five minutes before four o’clock, Herman asked for a vote—with Kasowitz listening in on the phone line from New York. A roar of “ayes” filled the room.
Next day, March 13, the headline in The Wall Street Journal read, “Breaking Away: Liggett Group Offers First-Ever Settlement of Cigarette Lawsuits,” with the subhead, “States’ Health-Cost Claims and Smoker Class Action Are Included in the Deal—LeBow Gambit in RJR Fight.” It was a “stunning break with the rest of the $45 billion tobacco industry,” said the Journal, and was “likely to infuriate other cigarette makers, which have built their litigation and regulatory strategy on a united front against all attacks.” This was an understatement. RJR called the deal “an irresponsible and reckless ploy in the proxy contest,” and the tobacco companies vowed to fight on. Philip Morris “remained confident in the strength of our litigation position.” Brown & Williamson said “a settlement is unlikely to ever become effective.”