TOPICS > Politics

Tobacco Troubles

September 22, 1999 at 12:00 AM EDT


ELIZABETH FARNSWORTH: President Clinton spoke briefly about the tobacco lawsuit late today at the White House.

PRESIDENT CLINTON: Last January, in my State of the Union Address, I announced that the Justice Department was preparing a litigation plan to recover the cost of smoking-related illnesses. Over the years, smoking-related illnesses have caused taxpayers billions of dollars through Medicare, veterans’ health, and other federal health programs. Today, the Justice Department declared that the United States is, in fact, filing suit against the major tobacco companies to recover the costs borne by taxpayers. I believe it’s the right thing to do. The tobacco companies should answer to the taxpayers for their actions. The taxpayers of our country should have their day in court. Thank you very much.

REPORTER: Mr. President, the tobacco companies say this lawsuit is pure politics, sir. What do you say?

PRESIDENT CLINTON: Well, if you look at the record of this administration, we’ve been out there on this issue a very long time. No one else ever tried to do that. And we did our best to work with them and with the Congress to resolve many of these matters legislatively, and they declined, and I believe this is the appropriate thing to do.

ELIZABETH FARNSWORTH: And here to discuss the suit and its potential impact are Mary Aronson, head of the Tobacco Policy & Litigation Research Firm in Washington, and Martin Feldman, a tobacco analyst with the Wall Street firm Salomon Smith Barney. Mary Aronson, tell us more about what the government is claiming and what it’s asking in this suit.

MARY ARONSON: The government is asking primarily for repayment of medial expenditures under a variety of federal programs, including Medicare, various Department of Defense programs, and federal employees’ health benefits programs, and the like, and a disgorgement of ill-gotten gains by the industry for possibly as long as the past 45 years. I believe there was some discussion of that today. It’s bringing its case under three important statutes: the Medical Care Recovery Act, which was initially established in 1962 to help the government sue for primarily, I think, then for military people who had been injured and for which the government had to foot the bill; under a civil RICO claim; and under the Medicare Secondary Payer.

ELIZABETH FARNSWORTH: Martin Feldman, anything first to add on the claims and the demands?

MARTIN FELDMAN: Well, just one quick point; the government is also claiming that the industry should reveal all the documents that it believes have not yet been made public and also fund anti-smoking campaigns, which we’ve clearly seen the states do exactly the same thing, so much of those two aspects of the claim have, in fact, been satisfied, I think, as a result of the state settlements of last year.

ELIZABETH FARNSWORTH: Martin Feldman, how do you see the legal basis for this? And just briefly say what RICO is.

MARTIN FELDMAN: RICO came out of a different type of litigation a long time ago, but it’s racketeering, and its claim here is or the allegation is that the industry conspired to act together to withhold information from the American people on the dangers of smoking. I think the real problem is that in 1964, the Surgeon General published his report saying very clearly smoking will kill you. Government went on until 1974 handing out free cigarettes to the military, subsidizing the growth of tobacco leaf, debating whether or not to raise tobacco taxes, so there are — it’s slightly disingenuous, I think, the attempt to bring this claim, given the way it’s acted as a partner for the industry over all these years, a tacit partner, at that.

ELIZABETH FARNSWORTH: Mary Aronson, disingenuous?

MARY ARONSON: Well, you know, maybe the government had some sense that smoking was dangerous, maybe it had a lot of information about the dangers of smoking, but who had the best information? Who had the most complete information? And I think that was clearly the industry. And the industry, according to the claims made today, withheld that information, made promises to make it public, made promises to do research, and according to the complaint made today did just the opposite.

ELIZABETH FARNSWORTH: Ms. Aronson, how big a threat is this to the tobacco companies, compared, for example, to the various suits they faced before, in the states, for example?

MARY ARONSON: Well, ever since I’ve started looking at tobacco, one of the big threats was what was going to happen in Washington and what would happen in the courtroom, and you know, five years ago, we started hearing all of this negative information about the industry, whistleblowers, documents coming forward, and the like, and as a result of that, I think a lot of attorneys felt free to litigate against the industry in what I call “boutique” cases — the state cases, the federal government case, third party insurer cases, and the like. Certainly, certainly, the federal case is the case of the hour; it’s the biggest thing that’s out there, and it really dwarfs the state cases — I believe it will dwarf — even though we haven’t heard what the price tag is. But even if it is settled and even after it is completed, I think we’re still going to have the lingering threat of individual smokers going forward with their injuries, and the punitive damages that can be assessed. Two cases earlier this year had punitives assessed at $50 million in one and I think about $70/80 million in the other. So I think there’s still problems out there.

ELIZABETH FARNSWORTH: And Mr. Feldman, how do you see the threat to the tobacco companies?

MARTIN FELDMAN: Well, I see the biggest threat to the tobacco companies, agreeing with Mary, with the individual cases. After the Minnesota case was settled last year, the industry made public a lot of documents that clearly showed misconduct and tough behavior of the 50’s and 60’s, and I think that that has rearmed a number of individual plaintiffs. I think on a case like this federal claim the Health Care Recovery Act does not appear, on its face, to allow for an aggregation of the claims. So, in other words, I think that the industry has some quite good technical defenses to keep the plaintiff out of court, and simply allow the plaintiff instead to seek compensation on a one-plaintiff-at-a-time basis. But the individual cases are out there. They could grow in number. I think the industry will win some and lose some. I think to date we’ve never seen any money paid off as a result of a loss. I think in years to come that will probably change. The industry can clearly afford some losses, but for me that’s the bigger threat than these cases, because on the individual cases it’s tough to keep the plaintiff out of court. Anyone has a right to bring a claim and even the industry doesn’t deny that.

ELIZABETH FARNSWORTH: And, Mr. Feldman, just briefly, we heard what the argument of one attorney for Philip Morris was. What are they arguing about this? We heard the argument that this is a political case. What else will they be arguing?

MARTIN FELDMAN: Well, again, to reiterate my previous comment, I think they will be arguing that the plaintiff has very little right to bring his claim in court. In other words, the Health Care Recovery Act doesn’t allow for an aggregated claim. It doesn’t — some of these claims don’t allow for employees that perhaps are not federal employees of the government, and that’s only at the initial stages. I think then if they fail on those grounds, they will fight it substantively and they will argue that then the federal government knew as much about the dangers of smoking as they did from the period 1953 to the late 70’s, the period that perhaps represents most doubt.

ELIZABETH FARNSWORTH: Mary Aronson, do you have anything to add to that about their argument?

MARY ARONSON: Well, my sense on something that Martin said — my sense in reading about the Medical Care Recovery Act is that it doesn’t prohibit aggregations; it’s simply silent on aggregation.

ELIZABETH FARNSWORTH: Explain aggregation.

MARY ARONSON: Grouping of cases.

ELIZABETH FARNSWORTH: As opposed to individual cases.

MARY ARONSON: Exactly. And given that the Medical Care Recovery Act does provide an independent cause of action to the federal government, it would seem that aggregation is obviously the most efficient way for the federal government to go — and because it is an independent cause of action, you would think — I believe that — you know — the aggregation issue isn’t all that clear, as Martin would suggest it is.

ELIZABETH FARNSWORTH: Ms. Aronson, the criminal investigation that had been underway was dropped today, as Jim Lehrer said earlier. Can any of the evidence gathered in that, in the grand jury, for example, be used in the Justice Department’s case?

MARY ARONSON: I think the Justice Department, the federal division, was going out of its way — I think the reports a few weeks ago — they were going out of their way to hire FBI personnel who were completely divorced from the criminal investigation, and so I’m not exactly sure what that means in terms of — it didn’t sound like the evidence is going to be carried over; maybe it will be discovered independently. But, you know, that’s my sense.

ELIZABETH FARNSWORTH: Mr. Feldman, what’s been the effect so far on tobacco stocks of this suit?

MARTIN FELDMAN: Well, when the President announced the claim on January 20th at his State of the Union Address, the stocks fell sharply. Philip Morris, the biggest tobacco stock, probably gave up $6 on a $46/$47 price over the course of the subsequent two weeks. Today the stocks were weak — Philip Morris down about $1.50, I believe, at the close, slightly more than the market today. So much of the bad news was already in the stock prices. From here, the market is obviously going to be nervous about this case. I think as the market begins to evaluate the risks, you might see the stocks recover from their current lows, but clearly this does represent enormous uncertainty. There’s a case in Miami, called the Engel[ph] case, a class action, where the court has allowed an aggregated claim, obviously much smaller than this, but to go ahead, and that’s worried investors as well. This represents a bigger form of the same claim. For me, the biggest worry is, however, the individual cases where I think the industry’s defenses are perhaps less obvious than they might be in this federal claim or in the class action in Miami.

ELIZABETH FARNSWORTH: All right. Thank you both very much for being with us.

MARY ARONSON: Thank you.