Businessweek Archives

The Tobacco Deal: Not So Fast


News: Analysis & Commentary

THE TOBACCO DEAL: NOT SO FAST

Under heavy fire, it is likely to undergo major changes. How much tinkering can it take before it comes apart?

It could be the Settlement of the Century. After three months of tense, delicate negotiations, a group of attorneys general and lawyers for Big Tobacco have struck a deal of historic proportions: The cigarette companies would ante up $368 billion over 25 years to settle lawsuits against them, submit to Food & Drug Administration regulation, and meet strict goals for reducing smoking in the U.S. By 2022, tobacco's role in American society would be forever reduced.

But don't rewrite the history books just yet. The stunning, 68-page pact reached on June 20 marks the beginning of a new round of bitter, protracted battles. As Congress and the Clinton Administration ponder the details and test the political winds, two questions are emerging: Can the deal be improved? And how much tinkering can it withstand before it falls apart?

The answers--now being voiced from Capitol Hill to the White House to the boardrooms of leading public-health groups--are "yes" and "a lot." Says Frank J. Lautenberg (D-N.J.): "If the tobacco companies think Congress is going to rubber-stamp this agreement, I have one question for them: `What are you smoking?"'

Indeed, as people who weren't in on the deal read the fine print, a growing consensus is forming that it doesn't go nearly far enough in regulating the industry and cutting smoking in America. On June 25, a preliminary report was released by a high-powered advisory committee chaired by former FDA chief David A. Kessler and former Surgeon General C. Everett Koop outlining seven major objections to the proposed deal. The Administration's initial conclusion is that key provisions are wanting, and President Clinton's advisers believe the companies can be pushed to accept harsher conditions and penalties.

That's not good news for tobacco execs, who are already pleading hardship under the current proposal. Indeed, as the Kessler-Koop panel outlined their concerns, Philip Morris Cos.' stock price sank $1, to 43 3/16 a share.

Still, there are plenty of reasons to believe that a tobacco deal--in some form--will survive. Most players in this dance have compelling reasons to want an accord enacted by Congress. For beleaguered companies, it means an end to the dark cloud of litigation hanging over their heads--and a chance to reinvent themselves (page 36). That prospect has lifted tobacco stocks since the talks began.

The White House has a lot invested in reining in tobacco, too. The Administration may have reservations about some details of the proposal, but President Clinton badly wants the kudos for finishing a battle against tobacco--and teen smoking--that his Administration escalated. "We're determined to make sure that something good comes out of this whole effort," says White House Domestic Policy Council Chairman Bruce Reed, who's co-heading the Administration's review of the settlement with Health Secretary Donna E. Shalala. Even the most vocal tobacco foes in Congress are trying to find something to like in the deal as it has been proposed. "There are a lot of good things in the settlement," says Representative Henry A. Waxman (D-Calif.), a leading anti-smoking lawmaker.

LAWYER WINDFALL. There are other forces pushing for a deal. States stand to get billions of dollars in tobacco-industry payments if the deal stands as is. And the powerful trial lawyers would get the largest fees in history to settle the class-action suits against the companies. "Wall Street, the President, the attorneys general, and the cigarette companies all want a deal," worries Julia Carol, co-director of Americans for Nonsmokers' Rights, a vocal critic of the deal. "Those are some pretty damn powerful forces."

And the health advocates have reason to bend, not break, the agreement. With a settlement, the public-health community would get more weapons in the war against smoking than they dared dream of a few short months ago. "It would be a shame right now if the settlement was condemned and dismissed without the opportunity to work with all sides to get the best agreement," says Marilyn Hunn, chairman of the board of directors of the American Heart Assn.

How will a deal emerge? Part of the answer depends on how skillfully the anti-smoking and public-health forces play their hand. Many prominent players, including Matthew Myers of the National Center for Tobacco-Free Kids, who was the top public-health advocate in the negotiations, are also members of the Kessler-Koop group. But a strong faction in the health community continues to oppose any settlement at all. Activists such as Roman Bowser, executive vice-president of American Heart's California affiliate, argue that they're winning the fight against tobacco already--and don't need a settlement with loopholes the industry can exploit.

Even tobacco's supporters in Congress are conceding that opposition by the likes of Kessler and Koop means that the deal in its current form, cannot work. "This will never see the light of day," says a key GOP Hill staffer. "Either it dies up here, or it gets so changed it won't be recognizable."

So what are the most likely changes? For starters, FDA regulation. The accord gives the agency the power to regulate nicotine and other ingredients in cigarettes--though the agency can't eliminate the drug entirely for the next 12 years. But the language of the settlement makes it almost impossible for the agency to do its job. Before it can regulate nicotine, the FDA would have to prove that cutting nicotine levels will reduce the health risks of smoking, that such steps are technologically possible, and that the result won't be a black market. The deal also requires the FDA to do all this using a cumbersome rule-making procedure that takes years to complete.

FDA officials have been asked not to comment until the team led by Shalala and Reed finish their review in a month or so. But privately, they're aghast. The provisions that tie the agency's hands, they contend, are evidence of how the attorneys general got snookered by tobacco lawyers. The White House has already gotten the message. One of the key questions, says Reed, "is the FDA's ability to do its job."

Another area where the White House and congressional public-health defenders are expected to demand changes involves the goals for cutting youth smoking--and the penalties assessed to companies for not meeting them. The deal calls for a 30% reduction in kids' smoking in five years and 60% in 10 years. Companies get hit with an $80 million penalty for every percentage point short of the goal. But the industry can get much of that back if it shows "good faith" efforts in meeting the goal. "Even provisions that purport to be good, such as this penalty thing, come with ridiculous conditions," fumes an Administration official. That's why the Kessler-Koop panel is insisting on a 15% cut by the second year, increasing to 65% by year 10. It also wants far larger penalties that the industry can't avoid.

DIRTY SECRETS. Meanwhile, a group of renegade state attorneys general is also clamoring for changes. Their leader, Minnesota's Hubert H. Humphrey III, has a list of objections that include the deal's provisions for keeping industry documents secret, for limits on industry liability, and the terms of the financial payout. "The money does not cover the harm that this industry has done," he argues. Douglas Blanke, one of Humphrey's assistant attorneys general, says disclosing industry documents would bolster public-health advocates' arguments for a tougher deal. "Are there smoking guns in there? There are smoking howitzers," he says.

How far will the industry bend to satisfy all these new demands? Despite repeated requests for comment, company execs are remaining mum. But T. Rowe Price Associates Inc. analyst Arthur B. Cecil is pessimistic about the industry's chances of getting a settlement without paying a steeper price. "I think it's just going to get worse for them," he says.

He may be right. Early indications are that the industry will have to cough up more concessions to get this deal past Clinton and Congress. But having gone this far, it may be a cost Big Tobacco is willing to pay to remain a part--albeit a diminished part--of the American scene.By John Carey in Washington and Mike France in New York, with Richard S. Dunham and Amy Borrus in Washington, and David Greising in AtlantaReturn to top


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus