Frequently Asked Questions

1. There has been a lot of talk about lawyers making billions of dollars from the tobacco deal. How does this work and what will they make?

The tobacco deal is no different from many other deals negotiated by plaintiff's lawyers, except for its size. Attorneys who have brought suit to recover state and federal Medicaid expenditures will get contingency fees of between 3 and 33 percent, with most getting between 10 to 25 percent. For example in Texas, Attorney General Dan Morales and his attorneys got $2.3 billion. They secured a record $15 billion settlement with the nation's major cigarette makers. In Florida, attorneys stand to make $3 billion.

The basic idea is that plaintiff's attorneys put up all the money to try these risky types of cases. Because they are taking such a big risk, they can negotiate huge fees should the cases pay off. In the event of a national settlement of the tobacco cases, which could be as much as $500 billion, the plaintiff's lawyers would collect a percentage of the negotiated settlement, usually based on how much time and effort they put into the case.

A number of people including George Bush, Jr., Governor of Texas, have attacked the fees as "excessive" and have called on Congress to set limitations. The fees are still in arbitration.

Richard Scruggs and Ron Motley are two of the plaintiff's lawyers who stand to make the most, since they started the case and are working on many different state cases. Scruggs and Motley have both agreed to let their fees be decided by a national panel of judges. The attorneys fees would be paid by the tobacco companies above and beyond the money collected by the states and the federal government.

2. Will the massive litigation against the tobacco industry cause the industry to go into bankruptcy?

Not everyone agrees that bankruptcy is a certainty. President Clinton said in April that he has no desire to put farmers out of work. More than 660,000 jobs depend on growing, manufacturing and selling tobacco. But the current legal challenges have raised the possibility that one or more tobacco firms will face hard times. In FRONTLINE's interview, Steve Parrish, Senior Vice President of Philip Morris said, "It would be a terrible thing, and it would not only be terrible from an industry standpoint and all the hundreds of thousands of people across the country who depend on the industry for their livelihood ..but also for the public".

The bankruptcy issue is complex. If the tobacco companies do not settle, the magnitude of all the state cases would likely force most of the companies into bankruptcy. Philip Morris may survive. But the companies can still manufacture cigarettes in bankruptcy.

In the event of bankruptcy, the individual States would not receive the large pay off expected from a national settlement. The company's assets would be divided up by bankruptcy fees, lawyers and the States that manage to win judgments before the bankruptcy.

If they do go into bankruptcy, the biggest losers will be the tobacco stock holders. Many large pension funds in the United States are currently heavily invested in tobacco stock. Another possibility is that the bankrupt companies would be bought up by new companies. These new companies would have no past liability and could operate without fear of past damages. The new companies would present a difficult dilemma to regulators.

 Click here for more about Big Tobacco's economics and the bankruptcy question.

3. Why does the tobacco industry want immunity ...and from what?

The question of immunity is a thorny one. When Big Tobacco came to the negotiating table, the first thing they asked for was immunity from criminal prosecution. That was not an issue the States Attorneys General had the authority to negotiate. The industry also wanted to prevent other "third parties" from suing them, including insurance firms. The June 20, 1997 settlement dealt with the following issues:

(i) Class Action: Pending class actions suits would be "settled" No new class action lawsuits for past grievance would be allowed. This includes insurance groups, restaurant workers, bartenders and the federal government. Individuals may still sue. But Dick Daynard, Professor of Law at Northeastern University, told FRONTLINE that tobacco has never lost an individual case because juries have generally felt that individuals were aware of the dangers of smoking. Attorney Ron Motley said, "There hasn't been a single individual suit against the cigarette companies that has given the victims a single penny". Experts also say that there is no incentive for law firms to take on tobacco considering the past record.

(ii) Punitive damages : Punitive damages for past actions will be eliminated and a payment of at least $60 billion will be made($10 billion in the first year) instead. Punitive damages for ongoing activity will not be affected.

There will be an annual cap of $6.5 billion in damages. This cap will be removed if youth smoking does not fall to intended target levels. (iii) Immunity from Criminal Prosecution. Federal authorities are still investigating whether tobacco executives have broken criminal law. There will be no criminal immunity in these negotiations.

The McCain Bill currently before Congress is much tougher than the above limits. It puts an annual cap on damages but does not limit the types of cases which can be litigated.

4. What are the tobacco companies giving up? What are they gaining?

The main thing that the tobacco firms want to eliminate is uncertainty. Throughout the current controversy, share prices have been adversely affected and there is a great deal of uncertainty about the future. Business analysts believe that stock prices will stabilize, even increase, when an agreement is reached. To achieve that goal, tobacco companies have been willing to voluntarily give up their First Amendment right to advertise (see question 8).

According to an advertisement they ran in major newspapers on March 11, 1998, the industry will also gain clear regulations about what it can and cannot do. Payments of legal judgments against them will be capped at $6.5 billion each year. Claims for past misdeeds will be barred. Lawsuits will be barred against people other than tobacco manufacturers.

5. How will the deal affect tobacco companies internationally?

According to Dr. Stanton Glantz, University of California, San Francisco, the tobacco industry is willing to enter a deal with the United States public health forces so it can remove financial uncertainties and clear the way for international expansion. He points out that the companies fastest growing profitable market is in Asia and eastern Europe. The National Cancer Policy board has described this as a "foreign policy time bomb". Furthermore, government warnings would not have to be displayed on cigarettes sold outside the United State and any FDA requirements about advertising, ingredient disclosure or nicotine levels will only apply to the United States.

Glantz's research concludes that the tobacco deal would result in increased international tobacco sales, and it will encourage American tobacco companies to establish overseas corporations.

6. How will the deal affect the 40 million people who currently smoke?

There is almost unanimous agreement that the deal will increase the price of cigarettes -- the only question is by how much. Some analysts believe a price hike will go as far as an extra $1.10 per pack. Critics of the proposed deal also claim that a price increase would create a new black market for untaxed cigarettes. It is also believed that there will be a decreased tolerance for smoking in public. More buildings will become smoke-free and more advocacy literature will circulate. Some see the deal as an attack on smoker's rights.

7. What other products are owned by Big Tobacco?

Many common household products are owned by tobacco firms. Kraft Food Inc. (the largest American food company) is owned by Philip Morris. It makes products such as Maxwell House Coffee, Jell-0 and Post cereals. Philip Morris also owns the Miller Brewing Company. RJR Nabisco makes cookies like Oreo, Ritz and Snackwells food. The tobacco firms also own several real estate and insurance companies.

 Click here for more on what Big Tobacco owns and who's on their boards.

8. Why are we trying to settle this issue via legislation?

Under the First Amendment of the United States, the tobacco companies have the right to advertise their products freely. However, they would voluntarily give up this right under the proposed settlement. They have agreed to eliminate billboards and not advertise near schools and in other places where young children may see them. In return, they want the whole issue to be settled by legislation.

Many people believe that the only way to stop children from smoking is to limit or stop tobacco advertising. A legislative framework would give the tobacco companies the added benefit of manufacturing and selling their product in a stable market environment.

 Click here for a sharp quiz about tobacco marketing practices.

9. How will the negotiations affect other companies who sell products that may be dangerous?

The deal being negotiated only addresses tobacco companies. But attorneys and other experts agree that it could be used as a framework for other industries including the chemical and nuclear industries. Opponents of the deal argue that it will open the flood gates for these industries to seek protection from immunity, even though they may pay large sums of money in compensation.

10. How will all the money be spent?.

A large proportion of the money will be spent on tobacco farmers, health promotion and public education about smoking. President Clinton has earmarked more than $65 billion for social and welfare programs, even though the deal has not been settled.

More than $22 billion will go to the individual states to use as they see fit. It is generally assumed that the most of the money will be used for health care programs. The lawyers fees would be paid by tobacco companies above and beyond the negotiated settlement amount.

 

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