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By
Jeremy
Bulow
It’s too bad that just 98 percent of all the
trial lawyers, politicians and tobacco executives give such a
bad name to all the rest. But if you look at the tobacco
Master Settlement Agreement – the deal that purportedly
punished Big Tobacco for its sins and compensated state
governments for the burden of tobacco-related health care
costs – you can see how stuff happens.
In November 1998, the executives of four major tobacco
companies and the attorneys general of eight states formally
settled their liability disputes. The settlement required the
companies to pay fees to the states on future sales of ciga-
rettes, in return for an end to all state claims against the
companies for fraud and violations of antitrust laws as well
as for smoking-related Medicaid expenses. The remaining
©gary roebuck/alamy
states (other than the four that had previously made similar
deals with the big cigarette makers) were given a week to
decide whether to sign, and all of them did.
40-year period, published in the British Medi- health, public and private enterprises seem
cal Journal in 2003, found no measurable ef- within their rights to bar smoking on their
fect from passive smoking. A problem in such property, if only because of the distasteful
studies, which tend to focus on the health of smell. But today, with such bans so prevalent,
nonsmokers who live with smokers, is that it the remaining costs of secondhand smoke are
is hard to correct for other differences in be- overwhelmingly borne by spouses and other
havior that may affect health. To illustrate the family members. Applying compensatory
pitfall of not making such corrections, con- taxes to correct for cost spillovers within
sider the fact that people in Greece smoke households is difficult at best, as those who
©fogstock llc/age fotostock
much more and spend much less on health impose the cost and those who should be
care than Americans do – yet still live longer. compensated share family incomes.
That hardly means the Greeks benefit from While smokers do incur higher average
smoking. annual health care expenditures, and some of
Regardless of how one interprets the evi- these expenditures are borne by state and fed-
dence on the effects of secondhand smoke on eral governments, there is more to this part of
eight state attorneys general determined the lawyers (who receive what is effectively a tort
fees (tax rates) and exemptions. In 2004, for settlement contingency fee on what by any
example, New York collected a tax of about 45 other name is a tax increase), the results are
cents for every carton of cigarettes sold any- more mixed for the states and for smokers.
where in the country, regardless of whether On the one hand, New York and California
0 100 200 300 400 500 600 700 800 0 100 200 300 400 500 600 700 800
ing, even though joining enabled them to participating manufacturers will be able to
market their cigarettes much more widely. remain in business – a reality that hardly up-
Consider Liggett, which, thanks to small- sets Big Tobacco.
manufacturer exemptions, had an average Wait; it gets worse. If a nonparticipating
settlement cost of 37 cents per carton in 2005, manufacturer cries uncle and applies for
saving the company over $160 million com- membership in the settlement agreement, it
pared to what it would have had to pay with- must sign a pledge to pay back any money it
out exemptions. But that still suited the big- saved by not being a participant in the past.
four tobacco companies, which no longer had But that just isn’t going to happen; the com-
to worry that Liggett would chip away at their panies don’t have this money because they
market share. After all, under the agreement, passed along the savings to cigarette buyers
Liggett would have had to pay the full settle- before the escrow rules were changed in 2003.
ment fee – over $4 a carton – on incremental
sales that came at the expense of the market the rationale
share of the major manufacturers. for the msa structure
Under pressure from the participating To understand why the states chose to make a
manufacturers, who feared the rise of the non- deal with the cigarette companies rather than
participating manufacturers and their no- just raise cigarette taxes to cover alleged ciga-
name brands, the state escrow statutes were rette-related medical costs, do as good report-
modified in 2003. The sums that nonpartici- ers do: follow the money. Had the lawsuits
pating manufacturers must leave in escrow that the states brought against tobacco mak-
no longer depends on the number of states in ers been dropped and the state legislatures
which they sell cigarettes. Hence there is no simply passed tax increases on cigarettes to
longer much cost advantage to a strategy of cover their smoking-related medical costs, the
staying out of the settlement agreement and lawyers working for the states would have
operating in only a handful of states. gotten, at most, hourly fees for their services.
First, Big Tobacco wanted a national deal that Mississippi $1.4 billion Scruggs; Ness Motley
would spare it from being nickeled-and- Florida $3.4 billion Scruggs; Ness Motley;
9 other firms
dimed in lawsuits by individual states. The Texas $3.3 billion Scruggs; Ness Motley;
only way to force all the states to join was by 5 other firms
taxing consumers in all states and then giving Massachusetts $775 million Ness Motley; Lieff
Cabraser; 4 other firms
money back to individual states only on the Hawaii $90 million Scruggs; Ness Motley;
condition that they sign on the dotted line. 4 other firms
Illinois $121 million Lieff Cabraser;Hagens
But since one state cannot impose taxes on Berman; 2 other firms
business transactions in other states – New Iowa $85 million Ness Motley; 6 other firms
York sales and excise taxes must be based on Louisiana $575 million Scruggs; Lieff Cabraser;
15 other firms
New York (not national) sales – it was in the Kansas $54 million Scruggs; Ness Motley;
companies’ interests to structure the pay- 2 other firms
Ohio $265 million Scruggs; Ness Motley;
ments as the costs of settling a lawsuit rather 5 other firms
than as taxes. Second, the structure of the set- Oklahoma $250 million Scruggs; Ness Motley;
4 other firms
tlement allowed states with proactive attor- Puerto Rico $75 million Scruggs; Ness Motley;
neys general to set up a financial distribution 2 other firms
schedule that reserved disproportionate New Mexico $25 million 2 local firms
South Carolina $83 million Ness Motley
shares for their own states. Utah $65 million Ness Motley;
The politicians involved had two extra in- Giaque Crockett
California $638 million Lieff Cabraser; Millberg
centives to go the settlement route. It sounds Weiss; 2 others
better to say you negotiated a large settlement Michigan $450 million Scruggs; Ness Motley
from the death-dealers of tobacco than to say
you imposed an equally large tax increase on source: The American Lawyer, Dec. 2002
long-suffering smokers. What’s more, by notes: Lieff Cabraser = Lieff, Cabraser, Heimann & Bernstein of San Francisco, CA;
Scruggs = Scruggs, Millette, Lawson, Bozeman & Dent of Pascagoula, MS; Ness
claiming that the revenues were attributable Motley = Ness, Motley, Loadholt, Richardson & Poole of Charleston, SC
to a one-time settlement paid out over de- The head of the Scruggs firm is Richard Scruggs, who first hit big money in mass
torts litigation against asbestos makers. He is the brother-in-law of Sen. Trent
cades rather than to a tax increase, states were Lott of Mississippi.
able to borrow against future revenues and
spend the cash immediately without violating as well as hourly rates, were heavily padded by
constitutional requirements to balance their reading into the record of the cases in differ-
budgets each year. ent states the same testimony over and over
again. But the subsidies that the settlement
the msa’s “success stories” created for the small participating tobacco
The egregious sums paid to the trial lawyers companies (Liggett, in particular) are equally
as part of the settlement – up to $92,000 an unconscionable. After all, at its peak, Liggett
hour in some cases – have been well publi- sold more cigarettes than Phillip Morris. If
cized. Perhaps less well known is that hours, the responsibility for smoking deaths lies
Liggett was given exemptions from the Master been the only person on the list to create a
Settlement Agreement fees that save it over fortune by starting a company in a low-tech,
$125 million per year. Not bad when you con- declining manufacturing industry in the
retail transactions to state-owned stores that In reality, the settlement preserved tobacco
have little incentive to generate volume, as a companies’ profits, while it gave the trial law-
number of states (among them Idaho, Mon- yers an incredibly large ongoing source of in-
tana, North Carolina, Ohio, Pennsylvania, come gouged from the hides of smokers and
Utah and Washington) do with liquor. handed state politicians bragging rights as
Davids to Big Tobacco’s Goliath.
will we ever be rid of the msa? While some states came out ahead finan-
jessica persson/afp/getty images
Few people trust tobacco companies, trial cially compared to the sums they would have
lawyers or politicians. But somehow when the garnered from equivalent state excise taxes,
three groups got together and spoke with one the states lost as a group because they were
voice they were able to convince most people forced to share the windfall with the trial law-
– particularly nonsmokers who benefit from yers and a handful of smaller settlement-
higher cigarette tax revenue – that the settle- favored companies like Liggett.
ment had achieved a noble public health goal. The confluence of such muscular special
sion of the agreement that requires states to they have a significant finan-
compensate them if they lose market share as cial interest in dumping the
a result of ineffective enforcement of the es- agreement or changing the
crow provisions designed to undermine the distribution formula, they
competitive edge of the nonparticipating should be able to rid
manufacturers. If the companies win these themselves of it. M