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Tobacco: The Coming Free For All


Legal Affairs: LEGISLATION

TOBACCO: THE COMING FREE-FOR-ALL

Everyone wants a deal, but don't bet on it happening soon

After a three-month cease-fire, the bullets are starting to fly again in the tobacco wars. With the fate of the industry's proposed $368.5 billion global settlement of its legal and regulatory woes now in the hands of Congress, an all-out war is erupting over who will get the loot. President Clinton intends to stake a claim for $60 billion to pay for an array of programs from child care to medical research. The states--whose lawyers, after all, brought cigarette makers to the bargaining table--are trying to prevent Clinton and Congress from cheating them out of what they consider their fair share of the settlement windfall.

Public-health advocates, meanwhile, want to make the deal tougher, and cigarette makers are spending millions lobbying to preserve the deal as is. In an effort to avoid an onslaught of bad publicity, potentially harmful to the fragile agreement, the industry is now trying to settle its next major court challenge: Texas' suit to recover Medicaid expenses shelled out to treat smokers. Finally, Congress is busy on both sides of the aisle drafting legislation to embody the ever-changing terms of the pact.

TORT LAW. What makes the whole ordeal so daunting is that Congress has never before been asked to do anything like this. The deal wasn't the brainchild of any party or any lawmaker but rather was handed to Congress by a coalition of cigarette makers, state attorneys general, and plaintiffs' lawyers. Moreover, the logistical problems associated with deciding how to spend hundreds of billions of dollars, establishing a new regulatory regime for cigarettes, and taking the historic step of exempting the tobacco industry from American tort law are all enormous. "There's hardly an area of government not implicated by this," says Salomon Smith Barney analyst Martin Feldman.

And to top it all off, negotiations will coincide with an election year, when lawmakers are likely to be skittish about passing anything that might be construed as a bailout for Big Tobacco. That prospect is most worrisome to Republicans, who count on the industry as a major contributor, so the GOP is making an effort to be tougher. Senator Orrin G. Hatch (R-Utah) is proposing legislation to boost the industry payout--to about $400 billion--and raise penalties against the industry if it doesn't cut teen smoking enough. House Commerce Committee Chairman Tom Bliley (R-Va.), meanwhile, a close tobacco ally, last month released 834 industry documents, arguing that Congress can't consider granting legal protection unless it knows if the companies engaged in fraud. The GOP is also attacking the huge fees coming to many Democrat-affiliated plaintiffs' lawyers hired by the states to sue the industry.

But no Republican proposal challenges a core issue: immunity from class actions and a cap on the tobacco industry's yearly payouts to litigants. Cigarette makers, whose share prices have been dragged down by endless litigation, hope such protection would restore tobacco stock valuations. Feldman predicts that a deal that includes strong immunity would boost Philip Morris Cos. shares about one-third, to 60, and push up RJR Nabisco Inc.'s around one-quarter, to 45.

"HEALTH FEE." Across the aisle, the Democrats see tobacco as a no-lose issue. If the deal goes through, they will claim credit for pushing the toughest regulatory scheme possible on Big Tobacco. If it doesn't, they will claim they saved citizens from an industry bailout. "If this industry thinks they will get protection no other industry has, then they are smoking something," says Senator Kent Conrad (D-N.D.).

In late January, a Democratic tobacco task force led by Conrad is set to introduce a bill that would impose a $1.50-per-pack "health fee" on smokers and stiffen oversight by the Food & Drug Administration. While Conrad's Democratic task force is unlikely to give Big Tobacco protection from class actions, it will probably settle 40 pending state Medicaid suits. An even tougher bill pushed by Senator Edward M. Kennedy (D-Mass.) would allow the states to seek past Medicaid expenses--while giving them about $200 billion from a huge tobacco excise tax that would raise $600 billion.

But intra-party fissures could undermine positions forged by political leaders. While liberals could be lured by the spending goodies tax hikes would pay for, powerful tobacco-state Democrats, such as Senator Wendell H. Ford of Kentucky, probably will be reluctant to back anything that hurts homegrown industry. And though many Republicans want to impose tough limits on tobacco, government minimalists such as Senator Don Nickles of Oklahoma will bristle at higher taxes and tougher regulation.

Several Johnny-come-lately special-interest groups will also make life harder for proponents of the pact. Many union-backed health plans now argue that if the states deserve compensation for health outlays made on behalf of smokers, then they do, too. Tobacco farmers, meanwhile, want to be protected against a potentially calamitous drop in income. Another wild card: states that believe they are entitled to as much as $196 billion to cover Medi-caid expenses. But Congress may claim a share of this because the federal government finances about half of Medicaid.

Any of these or other vexing issues could scuttle a congressional deal. Take the question of money. The industry publicly claims that it is unwilling to cough up more than $368.5 billion. Although industry sources privately say the companies are willing to spend more, they could reach some breaking point. "The companies can be shot, but they won't commit suicide," says J. Phil Carlton, the lead settlement negotiator for the tobacco industry. "They won't approve any deal that leaves them in financial peril." Legal immunity is another potential deal-killer. A coalition of hard-line anti-tobacco health groups, led by the American Lung Assn. and former Surgeon General C. Everett Koop, has made opposition to legal protection its top priority.

Hoping to deflect some of the political heat, lawmakers from both parties want the President to push hard for a deal. White House officials say they are working with lawmakers from both parties to fashion a bipartisan bill. But on Jan. 13, Senate Majority Leader Trent Lott (R.-Miss.) accused Clinton of "inflaming the problem" by unilaterally dividing up the spoils before the deal becomes law.

Instead of sniping, Clinton and Lott must work together to cut a deal. Unless they do, the odds are high that this political hot potato will get dropped. For tobacco combatants, that means this fight could even wind up back where it started--in America's courtrooms.By Susan B. Garland, with John Carey, in Washington and Mike France in New YorkReturn to top


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