Center for Tobacco Control Research and Education

The proposed tobacco settlement agreement, as negotiated by some state attorneys general and the tobacco industry that was made public on June 20, 1997 (Appendix F), raises a complex array of public health, public policy, legal and economic issues. It was intended to be a blueprint for national tobacco control legislation that would end the most important litigation current and potential against the tobacco industry. As with most complex legislation, the deal, after it was announced, underwent a great deal of scrutiny and criticism. Many public health and policy groups analyzed the deal in whole or in part in order to provide guidance for those who wished to distill the essential elements and implications of the deal. While many have pronounced the original deal 'dead' as a result of this criticism, it remains the fundamental framework around which most proposals for federal legislation on tobacco has been based. As a result, a careful analysis of the terms and implications of the original June 20 deal remains a worthwhile effort.

This report seeks to provide policy makers and advocates with a context and analysis of the most important aspects of the deal through a series of briefing papers, which can be read independently or collectively. Each paper addresses one aspect of the deal. The papers are organized according to general topics: political issues related to the deal, financial and tax aspects of the deal, regulatory implications of the deal, and civil liability controls in the deal. For those who desire a more technical approach to the issues, we have included five technical appendices to provide additional support regarding the economic analysis of the deal, the economic analysis of the lookback provision, the political analysis of the deal, and the public health analysis of the deal, the legal analysis of the deal. To the extent that the deal is reflected in any legislative proposals that emerge, this analysis will be relevant to that legislation.

In the months leading up to the publication of the deal, many commentators discussed the relative merits of entering into a negotiated resolution of the tobacco litigation. The advocates of the deal pointed to the ability to obtain specific relief, the advantages of having a national tobacco policy, and the elimination of the risks to continuing the litigation. Critics of the deal-making process were concerned that making a deal would: guarantee tobacco industry profitability; require Congressional action, which in turn would provide weak proposals because of the influence the tobacco lobby in national politics; preempt stronger state and local regulatory efforts to control tobacco; and preclude broad based public health efforts to control tobacco in the future.

Many commentators have described the deal as one in which the tobacco industry accepts strong restrictions in exchange for some limitation of liability. Our analysis reaches just the opposite conclusion: A close reading of the deal reveals that the benefits to the tobacco industry are concrete and substantial whereas the public health benefits are less clear.

The Funding Provisions of the Deal Are Inadequate

The money in the deal is large in absolute terms but small when compared to the damage done by tobacco products. Even if one takes the more limited view of the deal that its purpose is only to reimburse the states for future Medicaid expenses plus fund the specified public health programs, the payments are not high enough to cover these limited costs. If the deal is designed to reimburse society for all damage done by tobacco, it provides less than 10 cents on the dollar.

The financial portions of the deal are structured in such a manner that they will guarantee industry profits.

The Taxpayers will Absorb a Substantial Fraction of the Nominal Costs to the Industry

All payments by the tobacco industry, including those made 'in lieu of' punitive damages, are tax deductible, which results in a decrease in the impact of the deal on the industry and a cost shifting to American taxpayers. Taxpayers will absorb 30-40% of the cost of the deal, which will need to be recovered through increased taxes or spending cuts. The tax subsidy provided to the tobacco industry by the deal, amounting to about $4 billion a year, dwarfs both the current tobacco price support program and the funds that the deal makes available for public health programs.

The Industry Will be Protected from Litigation

The civil liability protections will strongly protect the tobacco industry. The deal eliminates large-scale suits that are most threatening to the industry and only allows individual cases, which the industry has been successful in defeating. In addition, the deal changes the rules of evidence and civil procedure in ways that will make it more difficult for people with cancer, heart disease, and other smoking-induced problems to win their individual cases. The deal provides the industry financial security by capping exposure. These limitations on litigation will effectively preclude injured smokers from receiving just compensation and perhaps limit future criminal and civil enforcement actions against the tobacco companies. Moreover, the caps eliminate the incentives the civil justice system to improve corporate behavior, by reducing the threat that the tobacco companies will be held fully accountable for their actions. Under the terms of the deal, the industry will avoid about $150-$200 billion in liability at a cost of $6-$7 billion.

Eliminating Litigation Will Eliminate a Valuable Public Health Tool

The current litigation against the tobacco industry has a discernible benefit to the public health community which will be eliminated should the litigation cease. For example, the litigation provides a ready means to educate the public about the dangers of smoking and misbehavior of the tobacco industry. Without the prosecution of the current lawsuits, a valuable health education opportunity will be lost. In addition, the litigation which the deal seeks to resolve is based upon the enforcement of laws which serve public health interests, such as consumer protection and anti-trust laws. The deal restricts use of these laws in against the tobacco industry. Losing both a timely health education opportunity and the right to fully utilize consumer protection and related laws against the tobacco industry limits the public health tools to combat death and disease related to tobacco.

The public health community has an interest in preserving the right to litigation to obtain social justice. The deal compromises the rights of individuals and institutions to sue the tobacco industry without fair compensation. Similarly, the public health community has an interest in fairly allocating the damages related to a particular harm. Societal resources which are currently being expended to remedy the harms related to tobacco could be re-allocated to serve other public health interests. The litigation provides a valuable tool to force the tobacco companies to pay for the damages related to tobacco, leaving societal resources to address other public health problems. The absence of litigation will remove one tool the public health community can use to force the tobacco companies to internalize the costs of the damage tobacco does.

The Deal Requires Congress to Preempt Laws in Every State

The essential principle behind the deal was the willingness of the Attorneys General, private lawyers, and health officials who negotiated the deal to support substantial limitations on liability of the tobacco industry for its past and future behavior. The deal not only 'legislatively settles' the Medicaid lawsuits brought by the Attorneys General, but also effectively ends most other forms of litigation against the tobacco industry. Since most of this litigation is being brought under state (as opposed to federal) consumer protection, fraud, anti-trust, and other laws, granting the tobacco industry the immunity it seeks will require Congress to preempt these laws in every state and the District of Columbia.

In addition to preempting these laws, the deal preempts existing state authority to require ingredient disclosure and may increase the strength of tobacco industry claims that local and state restrictions on tobacco industry marketing practices are illegal.

Regulatory Controls are Unnecessary and Insufficient

The details of the regulatory provisions in the deal favor the tobacco industry. Rather than recognizing that there are many agencies with jurisdiction over tobacco, the deal concentrates almost exclusively on the federal Food and Drug Administration (FDA). The deal also ignores the fact that most progress in tobacco use has been made at the local and state level.

The FDA currently has jurisdiction over tobacco products and is executing its regulatory authority pursuant to its jurisdiction. The few provisions in the deal which are not currently a part of FDA regulations could become so even without the deal, or like the current advertising restrictions, be regulated by another agency. Furthermore, the expectations regarding the benefits attendant with many of the regulatory changes should be small. Even with the advertising restrictions in place, the tobacco industry will still find successful ways to market their products, and tobacco imagery will be ubiquitous. Similarly, the proposed regulations regarding tobacco warnings and restrictions on youth access add little new authority. The deal would essentially codify the law as it currently exists, except that it would also place limitations on future FDA authority. Although the codification of FDA authority may be desirable, the deal would add intensive rollback FDA authority by requiring the FDA to meet additional regulatory hurdles before it can regulate tobacco constituents and restricting how and when it can regulate nicotine. These hurdles will preclude much of the potential for true regulatory reform. Similarly, the secondhand tobacco smoke provisions in the deal represent a rollback of the current ability of the Department of Labor to regulate broadly. The secondhand smoke provisions within the deal accept industry claims that smokefree workplace laws would harm the hospitality industry, which is not true.

The Lookback Provision Is Inadequate

There are provisions in the deal designed to penalize the industry for not meeting specific targeted reductions in youth smoking. The lookback provision is a good example of how the technical details of the deal have important impacts that are not evident. The lookback provision ties goals in reducing teen smoking to the percentage of teens who are daily smokers. While 75% of smokers have their first cigarette by age 14, 75% do not become daily smokers until they reach age 18 (the cutoff for calculating the lookback penalty). Epidemiological evidence indicates that nicotine is as addictive as cocaine heroin and opiates. Symptoms of addiction begin before the onset of daily smoking. Limiting the measure of youth smoking to daily smokers will allow the tobacco industry to comply with the lookback provision by simply marketing in a way that leads children to begin smoking two years older than they do now; it will continue to recruit new adult smokers by addicting them as youths. By increasing the age of initiation by two years, the transition of most smokers to daily smoking in new smokers will occur after their eighteenth birthday.

In addition, the penalty is too small to provide an effective economic incentive for the industry to reduce youth smoking; if the industry were to simply continue its current recruiting of teens, the after-tax cost of the lookback provision would be about a nickel a pack. Furthermore, the penalties are pooled among the industry, which decreases the pressure any one company will have to reform its behavior.

The Deal Preserves the Oligopoly Structure of the Industry

Throughout the deal there are a number of provisions which increase barriers to market entry and preserve the current profit structure. These provisions will encourage anti-competitive behavior and eliminate any incentive to innovate toward safer products. Furthermore, by closing the market, new companies will find it more difficult to compete. This situation will further guarantee excess profits for the existing companies.

The Deal does not Provide for Full Disclosure of Tobacco Industry Wrongdoing

One of the most important aspects of the current litigation is the ongoing disclosure of industry wrongdoing. The document disclosure provisions of the deal are weak and would permit the industry to continue to withhold privileged documents, which many believe are the most damaging to the industry. The deal may not be necessary to secure disclosure of these documents, because the Congress has subpoenaed and disclosed some tobacco industry documents, and more are emerging through litigation. Between further Congressional action and the litigation there is likely to be a continuous release of documents without a need for the deal.

There are No Barriers Other than a Lack of Political Will to Adopting the Beneficial Provisions of the Deal

Tobacco control advocates have successfully enacted legislation that meets many of the goals of the deal at the state and local level without compromise with the tobacco industry. The federal government could do the same. For example, the public health measures of the deal could be enacted and the funds for these programs appropriated out of the general fund or through an increase in the tobacco excise tax. Congress can give the FDA and Department of Labor more direct authority over tobacco products, and it could ensure full funding for their programs. Plaintiffs can enter (and Mississippi, Florida, Texas, San Francisco, and a plaintiffs' class of non-smoking flight attendants have entered) into individual legal settlements with the tobacco industry.

The Deal is Silent on International Issues

The deal ignores the implications that U.S. tobacco control policy has on international tobacco control efforts. The precedents established by the deal are particularly important because litigation against the tobacco industry is beginning in other countries. The limitations on liability in the deal may compromise the ability of other countries to recover the cost of tobacco-induced illness.

The Deal is Based on Several Premises that are no Longer True

The original premise behind the deal was that if the Attorneys General, public health advocates, and the tobacco industry could come to an agreement that all found acceptable, such legislation would be enacted into law rapidly. Some public health advocates argued that such a compromise was necessary and appropriate because the power of the tobacco industry in Congress was such that industry acceptance was necessary in order to get legislation enacted. Legislation was seen as necessary because the tobacco industry had never lost nor settled any health-oriented lawsuits against it. Because of this, rather than risking everything in Court, the Attorneys General and other decided that it was better to gain a partial victory in Congress.

Since then, the terms of the deal have been declared unacceptable by all elements of the public health community, so the original premise of going to Congress with a partnership between public health and tobacco forces no longer holds. The tobacco industry has maintained that the deal should be enacted as negotiated and has dramatically increased its campaign contributions and lobbying activities in order to see the deal enacted. Tobacco executives have testified in Congress that a grant of immunity for the industry is a condition of industry support for federal tobacco legislation. Public health groups are divided about the wisdom of trading some form of immunity for the tobacco industry in exchange for public policy changes that some believe will reduce tobacco control. Even the forces in the health community who are willing to entertain such a trade, however, have rejected the deal as originally negotiated. As a result, they are now in the position of going into Congress opposed to the tobacco industry, the very situation that the deal was supposed to avoid.

Finally, the belief that the tobacco industry would never settle or lose heath-related lawsuits has changed. The industry settled the Mississippi, Florida, and Texas Medicaid suits on favorable public health terms, as well as a case brought by San Francisco over the Joe Camel advertising character and a class action suit on secondhand smoke brought by flight attendants. The industry has also lost several cases brought by individuals. It will be difficult for the industry to return to a no-settlement strategy, particularly in light of documents and other information that have come out of the litigation process and Congressional hearings to date.