The Cigarette Century

by Allan Brandt

  The debates about the McCain bill had brought into sharp relief the contrast between the tobacco CEOs’ worldviews and those of the leaders of the public health community, so loosely configured. The CEOs believed they had shown remarkable flexibility and candor in the negotiating process, seeking to find “common ground” through historic concessions. In return, they sought legitimacy for their industry, relief from legal assault, and a modicum of respect. For them, the Global Settlement grew out of a series of critical business decisions, reached through complex assessment of what might best assure their industry’s future profitability. Steven Goldstone of R.J. Reynolds, who had promoted the “peace talks,” explained, “I finally saw that there wasn’t a chance in hell of any resolution to this problem in the near future. . . . I know these guys love to put this in moral terms, but if they can’t convince Congress to ban this product, we don’t have any choice but to sell it. As far as I am concerned, the day after any bill passes, we’ll be selling cigarettes.”109 Geoffrey Bible of Philip Morris remarked:There’s an interesting question you should ask the public health people. What do you think smokers would do if they didn’t smoke? You get some pleasure from it, and you also get some other beneficial things, such as stress relief. Nobody knows what you’d turn to if you didn’t smoke. Maybe you’d beat your wife. Maybe you’d drive cars fast. Who knows what the hell you’d do.110

  To public health advocates, the idea of “common ground” and “negotiation” with the tobacco industry was a corruption of their core moral values and political identity. Kessler later explained, “I don’t want to live in peace with these guys. . . . If they cared at all for the public health, they wouldn’t be in business in the first place.”111 For those who had spent their careers in public health, the very idea of a “conventional business” producing such a dangerous product—especially given the industry’s deceitful history—was a contradiction in terms.

  The tobacco companies weathered the media and tort disasters of the 1990s, the efforts to promote more aggressive regulation, and the attempt to pass comprehensive public health legislation. Richard Scruggs explained, “The industry has the cards. They stopped legislation. They stopped the FDA. They have the momentum.”112 He and others now looked back to the failure of federal legislation with considerable regret and even bitterness, blaming the intransigence of antitobacco forces. “I think history will reflect that June 20 [1997] was a golden opportunity for major reform,” noted Washington State Attorney General Christine Gregoire.113 Following the collapse of the McCain bill, the companies and the attorneys general retreated to fashion a new agreement to settle the cases.

  The tobacco companies had learned much from their experiment with a negotiated settlement. They now understood that opening the process to all litigants, let alone public health advocates, was decidedly against their interests. The final settlement negotiations brought together only eight of some forty attorneys general with unresolved cases. These eight negotiated a $200 billion cash settlement with modest provisions for marketing and advertising restrictions. The new agreement was offered to all the states—with a critical seven-day limit for them to sign on. This time limit offered almost no opportunity for public health critics to mount an effective response. It also placed overwhelming economic and political pressure on attorneys general to join in the settlement. For a state to reject billions of dollars to take a chance with a judge and jury constituted too great a political risk for any elected official. Even those critical of the new agreement offered their consent. “If the deal is so good,” noted Glantz, “they wouldn’t mind putting it out there and letting people take pot shots at it.”114 Although Glantz and others continued to support state-by-state litigation to resolve the suits, arguing that the states that had negotiated individual settlements had achieved more, the pressures bringing the attorneys general into the “master settlement” were intense.115

  The new Master Settlement Agreement (MSA) was a pale reflection of the earlier proposal. All provisions requiring congressional approval, such as FDA regulation, were dropped, as were mandates for stronger package warnings, tighter enforcement on sales to youth, stronger public smoking bans, and look-back provisions to reduce youth smoking. The MSA, announced on November 16, 1998, consisted of three major terms. First, it required the five major tobacco companies to pay $206 billion to forty-six states over twenty-five years.116 The four states that had already settled their suits, Mississippi, Florida, Texas, and Minnesota, added another $40 billion to this total. Second, the industry agreed to fund a national foundation devoted to public health and the reduction of smoking. Finally, there were modest restrictions on advertising and promotion; Joe Camel and other cartoon characters would be prohibited. Critics found nothing to celebrate in these provisions. Richard Daynard noted that the restriction on cartoon advertising was an example of “closing the barn door only after the camel has escaped.”117 R.J. Reynolds had agreed more than a year before to withdraw the Joe Camel campaign. Unlike the earlier agreement, which had banned both human and animal figures from tobacco ads, the new proposal banned only cartoons; Ralph Nader pointed out that the settlement “left the Marlboro Man in the saddle.”118

  Right away, public health officials roundly attacked the new settlement. For one thing, there were no guarantees that the money paid by the companies to the states would go to antitobacco programs. In many states, it became clear that these funds would simply be a windfall to governors and legislators with little interest in battling tobacco. The money itself, moreover, was inadequate to cover the costs of smoking-related disease. In California, for example, UCSF health economist Dorothy Rice estimated the costs for just one year at $8.7 billion, but the state was to receive just $500 million. “It’s a terrible deal,” she concluded.119

  Public health critics identified a chain of loopholes that weakened various provisions. On a range of issues, from targeting young smokers to sponsorship of sporting events, public health advocates read the agreement with skepticism and often outrage. For example, while the industry conceded to a ban on billboards (already in effect in some states), smaller signs—up to fourteen square feet—were protected. As antitobacco activists well-understood, the industry was both resilient and creative in finding new and effective ways of marketing their product. Even as they ended the use of billboards and promotional paraphernalia, like T-shirts and hats, they dramatically expanded their marketing budgets. From $7.4 billion in 1998, the year of the settlement, promotional spending reached $11.4 billion in 2001.120

  Source: FTC annual reports

  CHART 6 Cigarette industry adversting and promotion expenditures, 1963-2002

  The settlement preempted any future litigation brought by any “settling states subdivisions (political or otherwise, including, but not limited to municipalities, counties, parishes, villages, unincorporated districts, and hospital districts), public entities, public instrumentalities, and public educational institutions.”121 This preemption did not apply to individual and class-action suits, but it eliminated a wide range of legal vulnerabilities for the industry. Tobacco stocks rallied at the endorsement of the agreement by the forty-six states.

  The MSA, for all intents and purposes, was principally a new excise tax on cigarettes. Following the agreement, the four principal tobacco companies—Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard—raised their prices more than 45 cents per pack. The costs of the settlement, as predicted, were passed on to consumers. Although higher taxes had long had been recognized as one of the most effective mechanisms for reducing smoking, by the mid-1990s state and federal excise taxes were one-third lower in real dollars than they had been at their peak three decades earlier.122 The federal cigarette tax of 24 cents in 1997 was about half of the 8 cents imposed by Congress in 1951. Since several economic studies had shown that youth smoking was especially sensitive to price, taxes could be a powerful tool in reducing teen smoking and, ultimately, overall smoking prevalence (since adults rarely be
came new smokers). Most estimates—confirmed by industry assessments—suggested that a 10 percent price increase would reduce demand by at least 4 percent and perhaps as much as 12 percent.123 This elasticity of demand was well understood within the industry. When Philip Morris reduced the price of Marlboros by 40 cents per pack on April 2, 1993—Marlboro Friday—the other companies immediately followed. So too did a sharp increase in the prevalence of youth smoking. By the end of the year, Philip Morris had raised its market share to nearly 47 percent.124 The MSA “tax” has itself had a significant impact on youth smoking. Since it went into effect, smoking rates among American adolescents have reached their lowest point in nearly three decades, with approximately 23 percent of teens reporting that they had smoked in the last thirty days.125

  When the agreement was signed, the attorneys general had noted their states’ commitment to reserve some of the new money for tobacco control efforts. The Centers for Disease Control established guidelines recommending that at least 20 percent of the settlement funds go to tobacco prevention and cessation programs. But only a handful of states met this benchmark. By 2005, the states had received nearly $41 billion, according to the National Conference of State Legislatures, but only about 4 percent of it had gone toward tobacco-control efforts.126 And strikingly, in the wake of the settlement, some states that had developed successful antitobacco programs now found these campaigns being shortchanged. 127 The tobacco settlement funds had been used to balance state budgets.

  As critics of the MSA feared, the deal had made the states dependent on tobacco revenues. This had the ironic result of raising concerns within state governments about costly tort litigation against the companies. When they signed the MSA, the states became partners with the tobacco industry; significant revenues now depended on the industry’s success and stability. “There’s no doubt that the largest financial stakeholder in the industry is our state governments,” said Tommy Paine, executive vice president for external affairs at R.J. Reynolds. “Some would say that whole issue has a fair amount of irony associated with it.”128 According to Daynard, “Under the agreement, there’s a multi-state permanent lobby for business-as-usual.”129

  Adding insult to the injury suffered by tobacco control advocates, a number of states sold bonds against future tobacco funds. This process, known as securitization, has resulted in the discounting of revenues from the settlement. The states get immediate cash by selling bonds to be covered by future receipts from the settlement. This approach, now utilized by almost half the states, has further increased their dependence on future tobacco revenues. Glantz offered a pessimistic assessment of the long-range impact of the MSA: “Probably the tobacco industry will win in the long run, largely because of the securitization of the money putting pressure on states to keep consumption up to get their bonds paid off.”130

  Legal threats to the industry have, thus, become threats to the states’ cash flow. In instances where the companies might be forced to post bonds while appealing adverse judgments in class-action litigation, attorneys general have worked to get caps legislated. In Illinois, where Philip Morris lost a class-action suit with a judgment of $10.1 billion, more than thirty attorneys general filed an amicus brief warning that bankruptcy to the company would cause dire harm to the states. It was a remarkable turnabout to have the attorneys general defending the industry and its economic well-being.131

  As prices rose following the adoption of the MSA, sales of discount “no name” cigarettes began to climb. As a result, the companies invoked a clause in the agreement allowing them to reduce annual payments to the states if their market share fell below certain levels. The three largest companies, Philip Morris, R.J. Reynolds, and Lorillard, claimed they were owed rebates of as much as 18 percent of recent payments.132 In March 2006, as a result of declining domestic sales, Philip Morris announced that it expected to withhold $1.2 billion from its annual payment to the states.133 Payments to the Public Education Fund ended after 2003, when the collective market share of the major companies fell below 99.05 percent. The principal funding of the American Legacy Foundation, the not-for-profit organization established by the MSA, also required that the major companies maintain a 99.05 percent share of the U.S. cigarette market. Legacy was to receive payments of $300 million a year through 2003 and $32 million a year through 2008. When these payments stopped, Legacy could not maintain its full program of public service campaigns and research grants.

  Legacy had developed the “truth” campaign, dedicated to informing young consumers about the harms of smoking and issues of corporate responsibility. One ad showed teenagers piling up body bags, representing the twelve hundred who die daily in the United States from tobacco-related diseases. Another Emmy-winning spot, shown during the 2004 Super Bowl, satirized the companies’ sales pitch by offering “Shards o’ Glass” freeze pops with the slogan, “Yes, it’s gravely harmful, but you’ll love it!”134 Evidence suggested that adolescents in particular were influenced by hard-hitting, edgy ads that directed attention at corporate impropriety. 135 But unlike the antitobacco ads aired for free through the Fairness Doctrine between 1968 and 1970, the American Legacy Foundation purchased its ads with MSA funds. After March 2003, when the foundation received its final $300 million payment from the industry, there were limited funds to support the “truth” campaign.136

  The postmortems on the MSA reflected the dashed hopes of the attorneys general, public health officials, and grassroots activists. When the state suits were first filed in the mid-1990s, there had been ambitious talk about “toppling” the tobacco industry. Given the spate of revelations and the growing archive of incriminating documents, it appeared that radical changes were on the horizon: FDA regulation of nicotine; severe marketing and advertising restrictions; massive funding for smoking cessation; and the possibility of a bankrupt industry in receivership. After years of watching the industry derail all serious policy interventions, public health advocates thought the momentum had finally shifted their way. But in the aftermath of the MSA, the attorneys general changed from aggressive public health advocates to defenders of the very industry they had once sought to destroy. According to Mike Moore, the states were guilty of “moral treason. . . . I really believed we were making a difference in this country, and I think we did.” But, he said, “we could have made a much larger impact if the states had been true to the cause.”137 Moore’s legal ally Scruggs agreed, noting that “the perverse result of what we did was essentially put the states in bed with the tobacco companies. . . . What we did was give the states a financial incentive for tobacco sales. I don’t like it at all. . . . The tobacco guys are sitting there laughing at us.”138

  To those who had referred to the settlement negotiations as “dancing with the devil,” it appeared in retrospect that the devil had won. “Let’s give the devil his due,” noted John R. Seffrin, chief executive officer of the American Cancer Society. “They’ve been a step ahead of us most of the way through this journey. They predicted in advance that this would happen.” 139 The attorneys general, with little public health experience and little knowledge of the industry and its strategies, had been outwitted. Their settlements brought billions in cash to their respective states but had minimal public health impact. Frank J. Vandall, a law professor at Emory University, explained, “Some people have said this has worked out as if the tobacco companies designed it. Well, the tobacco companies did design it.

  They spent millions and millions of dollars over 50 years lobbying the legislators and the people of America. And now it’s paying off.” Matt Myers, who once thought the “global settlement” promised substantive public health gains, was forced to admit that the MSA was a debacle: “The tobacco companies counted on the greed and shortsightedness of politicians when they handed them millions of unexpected dollars, and they were right.”140 The MSA proved to be one of the industry’s most surprising victories in its long history of combat with the public health forces.

  To many observers, t
he state suits and the settlement that resulted typified the growing and objectionable trend of legislation through litigation. After all, the initial “global” settlement agreement had been hammered out by a group of industry lawyers, trial lawyers, the attorneys general and their staffs, and a lone “representative” of the public health “community.” This was anything but a process of advice and consent conducted by the duly elected representatives of the people. Not surprisingly, the outcome was skewed by the particular participants’ interests. The attorneys general secured revenues for their states; the trial lawyers secured astronomical fees; the industry secured relief from potentially bankrupting litigation; and public health got the short end. The failures of the MSA have been used to sustain traditional arguments against using the courts for regulatory interventions.141

  The bonanza for the trial lawyers elicited widespread indignation. They were given $1.25 billion initially, with subsequent annual payments of $500 million for twenty-five years. Their firms would receive millions in contingency fees allocated according to a complex formula for work in their respective cases. Many observers argued that litigation was a grossly inefficient way of, in effect, raising cigarette taxes.142 But the torrent of public resentment about these fees overlooked the fact that without such contingency arrangements, the massive assault on the tobacco industry could not have happened. The firms had invested tens of millions in extremely high-risk litigation.143