$15 Billion Deal May End Big Tobacco Fight in Texas

Not long ago, tobacco industry lawyers, encamped in Texarkana, Texas, talked of sure victory. They said the lawsuit filed against them by Texas officials was "the weakest of the bunch." But this week they're expected to announce a $15 billion settlement to avoid facing a day in court.

The timing for this swift turnaround may have as much to do with politics as with legal arguments, but the impact of the tobacco industry settling out of court is already reverberating throughout the country.

In Minnesota, where Attorney General Hubert "Skip" Humphrey is preparing his own state's case against the tobacco industry, the Texas settlement is seen as a virtual white flag thrown up by tobacco. And in Washington, where some members of Congress and the tobacco industry are still trying to push a $368.5 billion national settlement plan through Congress, the Texas deal could add a touch of momentum.

"This really sends a signal of how vulnerable the industry must feel," says Sen. Kent Conrad (D) of North Dakota, head of a Democratic task force charged with creating tough tobacco legislation. "This will alter the terms of the public debate and strengthen calls for a toughening of the proposed national settlement."

Suddenly tobacco is on the run

Clearly, the steady drumbeat of litigation over the past two years has taken a toll on Big Tobacco. Before Mississippi and Florida filed lawsuits - and eventually won out-of-court settlements worth a combined $14.8 billion - tobacco companies were untouchable. Their products, from cigarettes to chewing tobacco, were practically unregulated. States enjoyed tax revenues from tobacco sales, and many politicians depended on the campaign contributions that tobacco companies lavished on them.

Now tobacco companies face an uncertain future. Many of their friends in Congress are withdrawing support, worried about appearing chummy with one of the nation's least-popular industries. And with the next state trial set to begin Jan. 20 in St. Paul, Minn., tobacco companies face the very real - and expensive - prospect of more copycat lawsuits.

"The tobacco industry is desperate to have a national deal, but the problem is ... every time they settle out of court they undermine a national settlement," says Richard Daynard of the Tobacco Products Liability Project at Northeastern University in Boston. "They kept saying what a weak case Texas has, so if they settle here, other states will think they don't need a national settlement" to fill their coffers.

Trying tobacco executives as Mafiosos

In Texas, some observers say the success came with the decision to take on the tobacco industry as a criminal racketeering organization. Texas Attorney General Dan Morales (D) filed charges under the federal Racketeer Influenced and Corrupt Organizations law, which allows prosecutors much leeway in proving a pattern of criminal behavior. In this case, Mr. Morales alleged the tobacco companies had knowingly misled consumers about the dangers of smoking. Industry executives faced an unsavory comparison with other racketeering groups, such as the Mafia. Furthermore, the judge in the case ruled that the industry couldn't use its best line of defense - that tobacco is a legal product.

"The industry can't take this case to trial, because the very first issue to be confronted by the court is the criminal conduct that has allegedly been conducted by the tobacco companies," says Calvert Crary, an analyst for Auerbach, Pollack, & Richardson, an investment banking firm in Stamford, Conn. Given the current climate, he adds, "clearly there's a criminal case coming.

For their part, tobacco industry representatives say the settlement in Texas should add momentum for a national settlement.

"Under state lawsuits, you don't get advertising restrictions, marketing restrictions, and sponsorship of antismoking programs - that can't be compelled by litigation," says Scott Williams, a spokesman for Bozell, Sawyer, & Miller, the public-relations firm handling tobacco's push for a national deal. "The question for each state is, do you want some certainty of outcome [from a $368.5 billion deal] or do you want the uncertainty of litigation and the confrontations of the past?"

Of course, Mr. Williams will have his work cut out for him in getting members of Congress to step forward to support a national deal. Republicans, who were once among the staunchest industry supporters, have splintered over the issue. Some don't want to be tied to an industry that is so unpopular, and others balk at a plan that would expand the federal government's role and diminish states' ability to seek justice for their citizens.

Even so, some Democrats and Republicans are tinkering with national settlement plans, hoping to create a deal that can be passed into law this year. While Senator Conrad is in no rush to legislate a national deal, he sees a pragmatic argument for doing so. "If we just have a bankruptcy of the current tobacco companies, they would likely be replaced by successor tobacco companies who would be under no liability for the misdeeds of their predecessors."

Whether the legal wars are settled one state a time or all at once, the years ahead will be a marked change from the days when tobacco firms were considered a wise investment.

"Increasingly, their income and assets will go to paying victims, not their shareholders," says Mr. Daynard of Northeastern University. "It's not a fun time to be a tobacco executive."