CHARLAYNE HUNTER-GAULT: It is an historic reversal of decades of tobacco industry policy. After years of litigation, the Liggett Group broke out of the pack of the nation's five major tobacco companies and agreed to settle its part of a class-action law suit against the industry. The Liggett Group makes Chesterfields and Eve cigarettes. The terms of the settlement include paying 5 percent of the company's pre-tax income for the next 25 years toward anti-smoking programs, complying with some proposed regulations from the Food & Drug Administration regarding smoking and children, limiting certain kinds of advertising and promotion. To explain the settlement and its impact for the industry, we turn to Paul Raeburn, senior editor for science and technology at "Business Week." Paul, Raeburn, it is historic, is it not? Tell us about that.
PAUL RAEBURN, Business Week: (New York) Well, it is, indeed. One of the lawyers I talked to today described this as an earthquake. It's the first chink in the armor that the industry has successfully maintained for, for many years. They have always been able to say we have never paid a penny for any settlement in any tobacco liability case. And this for the first time changes that.
CHARLAYNE HUNTER-GAULT: You heard the little bullets that I just gave, or the general terms of it, but in the simplest terms, what has Liggett agreed to?
PAUL RAEBURN: Well, it's a very complicated settlement, but essentially it involves payouts of various kinds to, to groups in--to a group of plaintiffs, a group of smokers in what's called a Castano Class Action Suit. This is a suit that represents about 60 million American smokers who have sued on the grounds that the tobacco companies knew that smoking was addictive, didn't tell them, and they became addicted. Liggett will be, under the terms of the settlement, will be paying those folks not money directly for those smokers, but will be giving money to that group for smoking cessation programs. And in another set of cases--
CHARLAYNE HUNTER-GAULT: Although, excuse me, although Liggett hasn't acknowledged any liability, right?
PAUL RAEBURN: No. They've acknowledged no liability and there's some very interesting escape clauses in this settlement which we can get to in a minute. There's another parallel settlement, however, that's quite interesting which involves cases brought by four attorneys general in four states, and in these cases, completely different legal argument, the attorneys general are arguing that they--their states' Medicaid programs paid a huge amount, billions of dollars, to treat and take care of smoking-related illnesses, and they're suing to get that money back. That settlement is not quite set yet, but in that case, Liggett, if the settlement is completed, will be agreeing to pay money directly to those states.
CHARLAYNE HUNTER-GAULT: Is this settlement--we've sort of jumped ahead of it--but while we're on this, I mean, is this settlement of Liggett's do you think going to affect that one?
PAUL RAEBURN: Both of them are really part of a package. The Castano settlement was agreed to first. The other is very close to settlement, and under this package, there are a series of complicated formulas according to which Liggett will pay the various plaintiffs. What's interesting about this is that their total payment, given their current earnings, is likely to be well under $2 million a year, so ultimately, it's quite a small amount of money.
CHARLAYNE HUNTER-GAULT: Mm-hmm. Why did Liggett do this?
PAUL RAEBURN: Well, I think pressure has been building on the industry. Many of the tobacco smokers, plaintiffs, and anti-tobacco lawyers have expected some sort of chink in the armor sometime soon. It wasn't clear when. Some thought it would take a couple of losses for the tobacco companies in court, but a couple of developments last year have changed the landscape. One was the testimony from Jeffrey Weigan, the former Brown & Williamson tobacco executive, who testified that tobacco executives did, indeed, know that nicotine or believed that nicotine was addictive, even though they concealed that fact, and in a separate incident, about 4,000 pages of documents, internal documents from Brown & Williamson, were leaked to anti-tobacco activists, and those documents again show that the tobacco companies have known that nicotine was addictive for more than 30 years but concealed that information. Those really put pressure on the industry were a great help to the anti-tobacco lawyers.
CHARLAYNE HUNTER-GAULT: So is Liggett trying to get out of having a judgment against it, is that what they get out of this?
PAUL RAEBURN: That's exactly what they get out of it. The judgments in these cases could run into the billions of dollars, and Liggett is the sixth largest tobacco company in the United States. It's actually a small player, and if it's hit with one of those judgments, it could be in very serious trouble. This precludes any of those judgments, but the interesting escape clause that I mentioned earlier was that if ultimately these suits fail, Liggett is entitled to walk away from the settlements and everything it has agreed to, very unusual in any kind of legal settlement.
CHARLAYNE HUNTER-GAULT: The other door that opened in all of this, as I understand it, is the door that allows the federal government, I mean, to regulate some aspects of their advertising and so on, isn't that right? I mean, isn't this the first time that--I mean, they fought all of these years against that kind of litigation.
PAUL RAEBURN: That's right.
CHARLAYNE HUNTER-GAULT: I mean, regulation, sorry.
PAUL RAEBURN: That's right. The Food & Drug Administration last year proposed a series of regulations aimed primarily at limiting tobacco sales and tobacco advertising to children, to teenagers. The industry has fought this extremely strongly and put up a very tough resistance to these regulations. Liggett has agreed to some of the principal regulations, to begin adopting those now. These include removing all billboards that are closer than one--less than one thousand feet from a school or playground, in magazines that are read by children, they'll be moving to black and white, text-only advertising, and several other similar moves intended to reduce the appeal to children. Now, this begins right away, whatever happens ultimately with the FDA's proposed regulations.
CHARLAYNE HUNTER-GAULT: You said that Liggett was a small player, but Liggett is also aiming to take over RJR Nabisco, isn't that right?
PAUL RAEBURN: It's a very interesting situation there, and this--the business angle on this story is quite interesting. Liggett--Liggett is run by a man named Bennett LeBeau, who is--has been working for some time--is a shareholder in RJR--has been working for some time to persuade shareholders to vote for a split to separate the food business, which is Nabisco, and all its products, from the tobacco business, the RJ Reynolds Tobacco Company. If that happens, the LeBeau is hoping that Liggett can merge with RJR or be acquired by RJR, which would be a good business deal for him, and interestingly, under the terms of this settlement, if that should happen, RJR would be bound by the terms of this settlement.
CHARLAYNE HUNTER-GAULT: You anticipated my question. So that this really does begin to crack open the industry, if this goes according to this scenario?
PAUL RAEBURN: That's right.
CHARLAYNE HUNTER-GAULT: In terms of the victory for the anti-smoking people.
PAUL RAEBURN: That's exactly right. It's a small crack. Liggett is a small player, but Liggett may soon merge with RJR. RJR is a big player, and in any case, it's going to shift the landscape very dramatically.
CHARLAYNE HUNTER-GAULT: And is this a done deal, or could it still fall apart?
PAUL RAEBURN: It has to be approved by the judge in the Castano case, but that seems to be likely. There's no serious speculation that won't happen. The deal with the attorneys general is not quite completed, but it looks like that is likely to go through.
CHARLAYNE HUNTER-GAULT: All right. Well, Paul Raeburn, thank you very much for being with us.
PAUL RAEBURN: Thank you.