Big Tobacco's Self-Immolation

Big Tobacco's Self-Immolation

Big Tobacco's Self-Immolation

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April 10 1998 3:30 AM

Big Tobacco's Self-Immolation

The industry doggedly pursued its doom through lying and stock-price obsession.

At this point, why don't we just line tobacco company executives up against the wall, gun them down, and then blow up all the cigarette factories? It'd certainly be more cathartic for the anti-smoking forces, and probably less painful for the tobacco industry, than the farcical death by a thousand cuts process that's currently underway in Washington.


R.J. Reynolds Chairman Steven Goldstone probably wouldn't opt for the firing squad. But his pronouncement this week that the deal now being worked over in Congress is "dead" probably signals the final collapse of tobacco industry support for a settlement that once promised to serve the interests of both anti-tobacco forces and the industry. That $368.5 billion settlement, agreed to last June by R.J. Reynolds, Philip Morris, and their smaller kin, would have ended most tobacco advertising, raised the price of cigarettes by more than 50 cents a pack, given the Food and Drug Administration authority to regulate nicotine, committed the industry to reducing teen smoking, and established a trust fund to pay for past health claims and help smokers quit. Other than the FDA provision, these were all voluntary agreements on the part of the industry, which made them in exchange for protection against class action suits and punitive liability.

The settlement was negotiated with a group of state attorneys general who were already suing or planning to sue the tobacco companies to recoup Medicaid costs for the treatment of dying smokers. But the national character of the settlement--particularly the protection from liability--meant that Congress had to ratify it. And after some delay, the Senate commerce committee last Wednesday approved a revised version of the agreement. The provisions regarding advertising, the FDA, and teen smoking are pretty much the same, if a little tougher, while the price tag has been raised to more than $500 billion. In exchange, the tobacco companies get ... well, nothing. The protection from punitive damages and class action suits is gone, replaced only by a cap on the amount the industry has to pay every year. If this is a settlement, so was the Versailles Treaty.

It is, of course, difficult to feel sorry for the tobacco industry, if only because it spent more than 30 years lying about what it knew to be true, namely that nicotine was addictive and that smoking caused lung cancer. But the Senate tobacco bill is nonetheless a preposterous piece of legislation, predicated on the concept that the industry has near total control over whether people smoke or not. It's a bill for people who want to ban cigarettes but don't have--or aren't willing to spend--the political capital it would take to do so. Moreover, parts of it are either unconstitutional or unworkable, since the bans on advertising would have to be agreed to by the industry, which at this point doesn't really have an incentive to agree to anything. And yet what's really odd about the whole affair is that the tobacco companies really have no one to blame but themselves.

What I mean by that is not the obvious point, which is that if these companies didn't make products that kill people, they wouldn't be in trouble. What I mean instead is that the commerce committee bill is, in a sense, the result of the collision between Big Tobacco's two great obsessions: lying and shareholder value. And it's the industry's commitment to both that's got it into this mess.


I f you want to pick a moment when a punitive law against tobacco became almost inevitable, it might very well be that April day four years ago when seven tobacco executives went before a House committee and said that nicotine was not addictive. This was injudicious of them, considering that as early as 1963, Brown & Williamson's general counsel had written in a memo, "We are in the business ... of selling nicotine, an addictive drug." As a symbol of industry arrogance and deceit, you'd have to search far and wide to find a better example than the photo of those seven execs.

Of course, they were simply doing what the industry has done ever since the late 1950s, when it became clear both that cigarettes were bad for people and that the nicotine in them was addictive. Instead of admitting what almost everyone believed, Big Tobacco insisted on complete denial. Initially, this strategy made a certain amount of sense from a business angle. Until the surgeon general's 1964 report, and until warnings went on cigarette packs, admitting that cigarettes were dangerous could have opened the companies up to consumer fraud as well as product liability charges.

A fter their packs began carrying warnings about the hazards of smoking, though, it was hard to see how anyone could argue that the tobacco companies were deceiving their customers (though, certainly, lawyer after lawyer has tried). And yet the tobacco industry persisted in its strategy. Instead of being honest about smoking's dangers and then arguing that adults should be allowed to choose their own poison, the industry hid. And in hiding, it left itself with no real protection against the prohibitionist impulse. (For more on how the industry booted its "informed choice" argument, click.)

If the decision to lie took away the industry's ability to make a plausible case for individual choice, its obsession with shareholder value made it believe that only a massive settlement could solve its problems. Although Philip Morris is an enormously profitable company, its stock price has remained relatively deflated, because investors were so concerned that the company might lose a massive class action lawsuit somewhere down the road. Signing an agreement that would protect the industry from such suits would boost the stock price immediately, even if that agreement cost hundreds of billions of dollars. In other words, Philip Morris and R.J. Reynolds would make fewer dollars, but each one of those dollars would be valued more highly by the stock market.


"Shareholder value," which is shorthand for executives' obsession with their companies' stock prices, has become the prism through which most of corporate America now sees business. This has had some beneficial effects, but in the case of tobacco, it pushed the industry into a settlement it could not control. It's possible that these companies believed that their lobby in Washington was so strong that Congress would ratify any deal. But if so, this was self-delusion on a really impressive scale.

In the history of tobacco litigation, only one plaintiff had ever been awarded any damages, and those were compensatory rather than punitive. Save for one Florida jury, whenever juries have been asked whether the tobacco industry is liable for a smoker's health problems, they've decided that the plaintiff knew what the risks were and chose to ignore them. Given that, there's a real argument to be made that the tobacco companies should have just continued to litigate on a case-by-case basis. They were spending obscene amounts of money on litigation--as much as $750 million a year, by one account--and the strain of wondering if this case would be the one that broke the bank couldn't have made working at these companies much fun. But next to $500 billion, $750 million a year looks like a bargain. And as time went on, the case for tobacco's liability would have grown weaker, since public awareness of smoking's hazards has grown stronger.

It's possible, of course, that the cost of losing a major class action suit or one of these state Medicaid suits was just too enormous to chance. But what seems clear is that the desire to get a higher stock market valuation, combined with a history of refusing to defend itself honestly, pushed the tobacco industry to the negotiating table. And there--in no small part as a result of that history--it has found itself with very little leverage. For 35 years, Big Tobacco never gave an inch. It's not really surprising that when it finally did, its foes realized they could take a mile.

If you missed the discussion of tobacco executives' choice to smoke, click.