Cornered (37 page)

By the beginning of March, LeBow had agreed to many of the FDA proposals, and draft settlement papers were ready in Kasowitz's New York office. The negotiators were ready to bring in the Castano group, then still the most visible lawsuit against the industry.

“Scruggs, Kasowitz, and I were in a hotel in Miami and we invited Ron Motley to come over for a drink,” said Barrett. “He walked in and saw us at the bar with LeBow and he was floored. He had known nothing about the negotiations. We then flew to New Orleans and told Russ Herman. (Gauthier was out of town.) But we're not giggling. These are sensitive people and they're prominent lawyers. We had to fall all over ourselves for not including them earlier. First, we had to tell why this had been secret, and then we had to tell them the secret. Everyone realized what a breakthrough it was.” But under LeBow's rules, they couldn't talk about it until everyone involved—the four other states and the sixty members of the Castano group—had signed up.

*   *   *

T
HE FINAL HOURS
of the three-month-long negotiations demonstrated what an unlikely conspiracy it had become. There was Barrett from Mississippi's hill country, Scruggs from the Gulf Coast, Mike Moore from the attorney general's office in Jackson, the theatrical Ron Motley and his numbers wizard Joe Rice from Charleston, Wendell Gauthier and his Louisiana legal team from New Orleans, and Bennett LeBow, the international financier from Miami, all packed into the conference room at Kasowitz, Benson, Torres & Friedman at 1301 Avenue of the Americas in Manhattan. Only a few blocks away in the Park Avenue headquarters of Philip Morris, with all its lawyers and its resources, there was no early warning of the bombshell that was about to burst.

For LeBow, security was now an even greater problem. Gauthier insisted that before the Castano group could sign off on any deal the entire membership of sixty law firms had to be notified. LeBow gave the Castano group the minimum time to okay the deal. He wanted a clear month between the announcement and the April 18 RJR Nabisco shareholders meeting that would decide his fate.

The Castano group flew to New York on Thursday, March 7. In addition to the Herman brothers and the Castano document keeper Suzy Foulds, Gauthier included another Louisiana lawyer, Calvin Fayard from Baton Rouge. Fayard was a veteran of state class-action suits. On the flight, they sat in the back of the plane and reviewed the draft of the settlement Kasowitz had sent by fax from New York. Several paragraphs bothered them. Gauthier thought the money Liggett proposed to pay Castano—5 percent of its pretax income, or about $50 million, over the next twenty-five years—was pitiful. He also objected to a “release clause” that gave Liggett immunity from all future claims, not only on addiction but also on lung cancer, emphysema, and heart disease. “They want total absolution,” complained Gauthier.

Gauthier also wanted more concessions on promotions aimed at children, he would say later. He wanted specific agreements covering advertisements near schools, and promotions in shops, and he wanted an agreement not to use cartoon characters like Joe Camel, the R. J. Reynolds creation. To Gauthier, these items were all “deal breakers.” If they weren't changed, he was not going to recommend the settlement to the Castano group.

At nine o'clock on the morning of March 8, about thirty of the players gathered at Kasowitz's law offices. LeBow had been in Russia and was flying in on the Concorde from London, so the morning was spent on minor issues—”dancing and wordsmithing,” Fayard called it.

With LeBow's arrival progress was rapid. Gauthier complained about the release clause. It had to be changed, or there was no deal. LeBow backed down and they agreed that the immunity would cover claims for addiction only. Gauthier pushed for more money, even though he knew Liggett was short of funds. “We wanted to show the Fifth Circuit judges that we were in a good position to manage this claim—up to and including the point of reaching a settlement. The timing was as important for us as it was for LeBow.”

It was Burns who persuaded Gauthier not to ask for more. He told Gauthier that he'd been in the tobacco wars for twenty-seven years and this was a gigantic step forward for the public health community. “Burns told me to forget the money, we were only talking two percent of the market,” said Gauthier. “He also said there's probably not a single smoker out there who has only smoked Chesterfields so I was not giving anything up for our Castano clients by settling with Liggett. I agreed.”

Next, Gauthier pushed for the FDA's “point of sale” provision, but LeBow stood his ground. The group broke up. In Barrett's view, Gauthier had almost “queered the deal.”

But the talks reconvened, with LeBow and Gauthier chatting during coffee breaks and both sides leaving the room for consultations in the corridors. The “point of sale” issue was overcome with a “progressive settlement”: the companies who settle first have to agree to any upgrading of the rules in later settlements. LeBow agreed.

The deal breakers had been eliminated. On Saturday, Gauthier flew back to New Orleans and arranged a series of conference calls to Castano members, preparing them for a meeting where he would present the final draft. To the few who complained that there was virtually no money in the deal, Gauthier repeated Dr. Burns's argument. A meeting of the full Castano group in New Orleans was scheduled for Tuesday, March 12, at 3
P.M
. By then, the full text was to be ready. Russ Herman flew back to New York to be the Castano representative in the completion of the final document.

LeBow was now sure the deal would go ahead. On Monday night in New York, Kasowitz briefed
The Wall Street Journal,
knowing they could not publish the story until Wednesday. LeBow had taken the final step—without waiting for the approval of the Castano lawyers and thus putting pressure on Gauthier.

On Tuesday the rumors began. Reporters calling Castano headquarters in New Orleans were told no one was available to comment. In Washington, Scruggs and Moore were in a hotel rounding up support from the attorneys general of the four other litigating states—Florida, Massachusetts, West Virginia, and Louisiana—which had filed at the eleventh hour. Minnesota refused to enter the deal.

The talks at Kasowitz's law offices in New York dragged on; Russ Herman, Richard Heimann, and Don Barrett did not have time to fly to New Orleans in time on a commercial flight to brief the Castano group on the final draft, so LeBow lent them his private plane. They arrived at the Castano group's traditional meeting place—on the twenty-third floor of the Windsor Court hotel—with little more than an hour remaining before
The Wall Street Journal's
4:00
P.M
. deadline. Gauthier phoned Kasowitz and told him it was impossible. “We have sixty lawyers here and they have to take our word for something. We can't do it.”

But Russ Herman persuaded Gauthier to go ahead and try. Richard Heimann, who had been in the negotiations with Barrett from the beginning, reviewed the details of the settlement for the group. Essentially, Liggett had agreed to pay up to 5 percent of its pretax income, to a maximum of $50 million a year, for twenty-five years. The money would go toward smoking-cessation programs. Liggett had agreed to most of the FDA rules, including a ban on promotional T-shirts and other clothing, elimination of billboards within 1,000 feet of schools, black-and-white only ads in magazines, an end to free distribution of cigarettes at rock concerts and other youth events, plus a ban on all cartoon characters. Don Barrett then gave the history of the negotiations and why it had been necessary to keep them secret. Herman made an impassioned speech about the significance of the deal—the first concession with the industry curbing the sale of cigarettes to minors. Then he told the group why it was important to make a decision by 4:00
P.M
.

Many said it was impossible, there was not even enough time to read through the document. But Gauthier reminded them that there would have to be a “fairness hearing” in which a judge would have to affirm the deal was fair to the Castano class-action members. If any Castano lawyer found anything they didn't like between now and the hearing, they could bring it to the attention of the court. At five minutes before four o'clock, Herman asked for a vote—with Kasowitz listening in on the phone line from New York. A roar of “ayes” filled the room.

Next day, March 13, the headline in
The Wall Street Journal
read, “Breaking Away: Liggett Group Offers First-Ever Settlement of Cigarette Lawsuits,” with the subhead, “States' Health-Cost Claims and Smoker Class Action Are Included in the Deal—LeBow Gambit in RJR Fight.” It was a “stunning break with the rest of the $45 billion tobacco industry,” said the
Journal,
and was “likely to infuriate other cigarette makers, which have built their litigation and regulatory strategy on a united front against all attacks.” This was an understatement. RJR called the deal “an irresponsible and reckless ploy in the proxy contest,” and the tobacco companies vowed to fight on. Philip Morris “remained confident in the strength of our litigation position.” Brown & Williamson said “a settlement is unlikely to ever become effective.”

In fact, LeBow had a sweetheart deal: a small amount of money in return for settling his cases, partial immunity, and short-term glory. Castano agreed not to include the food section of RJR Nabisco in its lawsuit if LeBow were successful in his takeover bid. In that event, LeBow agreed that RJR tobacco would enter into a similar deal with Castano and RJR would cooperate with Castano litigation against the remaining tobacco companies. In other words, Castano would have access to Liggett and RJR documents to bolster their case. But the Brooke Group and Liggett also had the right to end the deal if the Castano class action was not upheld by the Fifth Circuit—and everyone, even the most optimistic Castano lawyer, thought the Fifth Circuit would reject the suit.

Each side pretended there was still a chance, however. If LeBow was successful with his RJR bid, Gauthier had thrown two personal touches into the settlement. RJR would pay the Castano group $25 million within sixty days of the approval of the settlement, the money going to establish an organization to provide notice of the deal to class-action members. They would also set up a Peter Castano Anti-Tobacco Research Committee, with $5 million in the first year and $10 million each in the second through the fifteenth years. The committee would be headed by Dr. Burns.

The deal was the high point of the Castano case. The day of the deal, Gauthier was besieged with phone calls from industry defense attorneys, and he was in a playful mood. “They were demanding copies of the agreement and I told them they had to be kidding,” said Gauthier. “I said, ‘What right do you have to have a copy. I can't get a document from you that you're supposed to produce when I want it.' They said I'd never get away with that kind of attitude. And I said, ‘Y'all have for forty years.'”

The first to call was Scott Delacroix from the New Orleans firm of Adams and Reese. Gauthier knew him well. “Scott was real nice. He said, ‘Man, you pulled one off, nobody suspected this. You blindsided us. Everybody is reeling over here. We don't know what to make of it. I know you can't tell me everything now, but after the litigation is over can we sit down and have a drink?'

“I said, ‘Scott, that will never happen.' And he said, ‘Why not?'

“And I said, ‘Well, because you keep saying the litigation will never end.'”

In the rush to meet
The Wall Street Journal
's copy deadline, the attorneys general had not, in fact, closed the deal. One reason was an unintentional mistake by Kasowitz's law firm. In their haste to get everyone the latest copies of the settlement, one page of an earlier draft had been mistakenly inserted into the copies faxed to the attorneys general. It was an earlier version of the money deal—considerably less than they were now being offered. “They went ballistic and thought they had been sandbagged,” said Gauthier. “Their number crunchers were looking at that page and saying this deal is crazy, it isn't worth anything. Finally, Don Barrett realized the mistake. It was an honest mistake but it kept the states out of the deal on the first day.”

Even during the negotiations, the states had almost pulled out because Liggett would not embrace the full FDA rules for limiting youth access. In the end, five states signed the deal, Mississippi, Florida, Louisiana, Massachusetts, and West Virginia. The only holdout was Minnesota. Mike Ciresi and Hubert Humphrey had never been a part of it. They were going to take the industry to court. Minnesota's partner, Blue Cross and Blue Shield, said the deal gave Liggett too many “outs” and provided “an unrealistic fraction of Liggett's potential liability.” Scruggs would say later, “I think they think we're a bunch of yahoos down here.” With a touch of bitterness from memories of the Bhopal affair, Gauthier said, “Minnesota stayed out and that's because of one person, Mike Ciresi, an excellent attorney. Mike is very thorough and very prodding and very detailed. He feels he can do better at some point.”

The terms for the states were no better than for Castano. Liggett agreed to pay the states 2 to 7 percent of pretax income for the next twenty-five years. The total, including Castano, would cost Liggett less than $2 million a year. The company would also establish a $25 million fund for other states that had not yet filed lawsuits, plus a small $3 million fund for research on children's smoking issues. Mike Moore said the settlement was about children. “Thanks to this agreement, we will soon be able to bid a not-so-fond farewell to Joe Camel.” But it was only a wish in those days.

*   *   *

W
ALL
S
TREET GAVE
a nod of approval to LeBow's strategy. His Brooke Group stock closed up $1.50 at $9.80. Of his success, LeBow issued the following statement: “The tobacco industry has lived for too long with the possibility of financial catastrophe from product-liability lawsuits that could destroy the industry. This settlement is a fresh and prudent approach to this problem.… Liggett's assets will no longer be held hostage by the tobacco litigation, and we will be free to run our business without this distraction.”