Cornered (49 page)

As prices were raised, there was no danger of outside competition, in part because of the addictive property of nicotine. Unlike other products, which may suffer a rapid decline in sales when prices are raised, cigarettes have an “inelastic demand”; there are no substitutes that give equivalent satisfaction. And the industry is virtually unassailable because it's a classic oligopoly; that is, 90 percent of the market is shared by a handful of companies—in this case, actually only three: Philip Morris (48 percent), R. J. Reynolds (25 percent), and Brown & Williamson (17 percent). Being an oligopoly means that the tobacco companies can raise prices of cigarettes without fear of attracting new market competitors; the entry barriers are simply too high. Competition with the big three would not only require enormous capital outlay for production capacity, but also the establishment of new brands in an era that, under the terms of the proposal, would include severely restricted advertising.

The proposal contained several sweetheart clauses for the industry. One was an antitrust exemption that would allow the companies to “jointly confer, coordinate, or act in concert” to achieve the goals of the settlement. With this exemption, critics argued, the companies could raise prices far in excess of an amount needed to cover their annual payments under the settlement.

Another clause meant that the industry would end up paying significantly less than the $368 billion. The proposal pegged penalties to packs of cigarettes sold. As the companies raised prices to pay for the settlement, sales would decline but so would industry payments. Jeffrey Harris, the MIT economist, calculated that total U.S. cigarette consumption could fall from 24.2 billion packs in 1996 to 18.4 billion after twenty-five years. If that turned out to be true, the industry would pay $304 billion, not $368 billion. In addition, the $368 billion payment does not reflect the “present discounted value”—that is to say, the current market value of the payments, or the amount investors would be willing to pay today for a portfolio of twenty-five-year corporate bonds that promised to pay the settlement amount. Even when Harris took into account the inflation-protection provision in the proposal, he found the present discounted value of volume-adjusted industry payments would be $194.5 billion over the twenty-five years. The Federal Trade Commission, doing their own separate calculations, estimated that the industry, by raising prices to the levels suggested to pay for the settlement, could reap a “windfall profit” of $123 billion.

The industry claimed that these figures were all highly speculative and assumed, wrongly, that a given price increase is all profit to the companies when, in fact, there may be changes in trade margins, sales taxes, and the inflation adjustment to the annual penalty payment. Even so, the prevailing impression was that the industry had gotten off lightly.

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PRICE INCREASE WAS
, of course, central to the goal of reducing underage smokers (thirteen- to seventeen-year-olds), which were supposed to decline by 30 percent in five years, 50 percent by the seventh year, and 60 percent by the tenth year. The proposal prescribed a 62-cents-a-pack price increase, but the most recent economic research (a study by Frank Chaloupka of the University of Illinois at Chicago) suggested the 62-cents increase would cut teen smoking by only 18 percent in five years. The proposal's negotiators contended that the combined force of the price hike and the advertising and marketing restrictions would reach the 30 percent goal. But MIT's Harris calculated that that would take a price rise of $1.50.

If such an increase were mandated by Congress, and it was periodically revised to keep pace with inflation, then the face value of the payments to the Treasury would be $653.2 billion over twenty-five years, not the $368 billion under the proposal.

These disputed figures are merely one of many contested parts of the proposal that suggested months of debate in Congress. Others included restrictions on private civil litigation, especially the prohibition on class actions. Among these were the “forgotten plaintiffs”: 2,000 labor-management medical-insurance trust funds that represented 30 million union workers throughout the country. Over the years, these funds had paid many millions of dollars in claims for tobacco-related illnesses (47 percent of all construction workers are smokers—double the national average). The funds had begun to file class-action lawsuits to recover those medical costs; sixteen had been filed by June 20. But the proposal terminated those actions without compensation and allowed them recovery only by filing individual lawsuits from the settlement fund. In any legislation, Congress would have to find a workable plan for compensating all the various governmental and private health-insurance programs, not simply Medicaid.

Also under fire were the provisions for disclosure of industry documents for which the companies claimed privilege. Under the proposal, a three-judge panel would review contested documents, but critics argued that this procedure would be slow—one document at a time—too expensive, and open to industry abuse. The industry's real history would remain under wraps for years to come.

Finally, there was the question of lawyers' fees. Because it was such a contentious issue, the June 20 proposal had deliberately left the matter to a separate agreement between the lawyers and the industry. But this was a partisan issue: Republicans were traditional seekers of tort reform and despised plaintiffs' lawyers, who, in their turn, tried to keep Republicans at bay by funding Democrats. Signaling a battle ahead, the congressional Republicans, led by Newt Gingrich, pledged that the lawyers would get not a penny more than they thought they deserved: fees at $150 an hour, considerably less than many had charged. “No matter how much it is it'll sound like a lot [and] be another black eye for all of us,” said the Atlanta trial lawyer Ralph Knowles.

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HOWING HOW QUICKLY
old enemies can become friends in this business, the key negotiators of the June 20 proposal—principally Mike Moore, Dick Scruggs, John Coale, and Stan Chesley—joined forces with the tobacco lobbyists to sell their extraordinary achievement on Capitol Hill. “I'm going up there arm-in-arm with Steve Parrish [of Philip Morris],” said Coale, “I actually like him.”

Politicians of both parties found the process somewhat distasteful. “Who do these people think they are?” asked Arizona's Republican senator John McCain. The new partners encountered a stream of complaints. Senator Edward Kennedy, of Massachusetts, a longtime tobacco foe, complained that the proposals pandered too much to industry demands. “It is not for the tobacco industry to dictate what controls on tobacco are acceptable.” He suggested that the industry's payment should be doubled to compensate federal taxpayers to Medicare (the federal health-care program for the elderly) that had also paid out for smoking-related diseases. “The concessions made so far by the industry should be regarded as the beginning, not the end,” he said.

In response, Mike Moore admitted that the deal was “not perfect, but very good for the goals we have.” He worried that the concessions gained could also be lost if the legislation took too long. “Move expeditiously,” he urged the senators at one committee hearing. Referring to an industry lawyer, Scott Wise, who was sitting beside him, Moore said, “I've got my foot on his neck right now. Let's don't miss this opportunity.” But Senator Tom Harkin, who grew up in rural Iowa, where his father was a coal miner, said, “Mr. Moore, I like how you say you have your foot on Mr. Wise's neck, but it's the first time this country boy has heard someone say he has his foot on someone's neck, and that guy says he likes it.”

The congressional leadership of both parties looked at the lengthening list of disputed issues and forecast that there could not possibly be any legislation until the spring of 1998, or later—unless the president gave the proposal a strong endorsement.

The long-awaited White House response confirmed that the legislation would not be completed in short order. On September 17, in the Oval Office, President Clinton did not endorse the proposal. Instead, he outlined five broad principles: a combination of industry payments and penalties to reduce youth smoking by raising the price of cigarettes by up to $1.50 a pack; full authority for the FDA to regulate tobacco products; a voluntary ban on advertising to youth; legislation for broad disclosure of industry files; and moves to reduce secondhand smoke and to protect tobacco farmers and their communities. “We're not rejecting what the attorneys general have done, we're building on it,” he said. The president praised David Kessler and the AGs and the “private lawsuits” for starting the movement to change the tobacco industry. “Look, if it hadn't been for what they did, we wouldn't be here,” he said. Among the carefully chosen guest list in the Oval Office with Clinton were David Kessler, Matt Myers, Mike Moore, Stan Chesley, and Dianne Castano. There were no members of the tobacco industry. The president's message was clear: the legislation was too complex and the key issues far from resolved. It could not be done in a few weeks, or even a few months.

It was a great disappointment to Moore and Scruggs, who had clung to the hope that Clinton would endorse the proposals and restore momentum. Outside the White House, Moore suggested the president should ask Congress to stay in session beyond October to push the legislation along, but the answer came back: “No.”

The industry was upset, as well. In a frosty statement, Philip Morris, R. J. Reynolds, Lorillard, and the United States Tobacco Company said they stood by the June 20 plan and would do their part to meet its “ambitious goals.” In a separate statement, Brown & Williamson objected to vice president Al Gore's calling the June 20 plan “half a loaf.” Such a remark “trivialize[d] its considerable achievements,” said B&W. For a while, it seemed the deal might never come off.

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N THE END
, Clinton had adopted much of what Drs. Kessler and Koop's special commission had asked for—with one important exception. He made no mention of U.S. sales abroad—the fastest-growing markets and the key to the industry's long-term profitability. More than 1.1 billion people smoke; about one-fifth of the world's population. In developed countries, the habit is declining by 1.4 percent a year, but in the developing nations it is growing by 1.7 percent, according to the World Health Organization. Revenue from overseas sales of Philip Morris and R. J. Reynolds leaped from $5 to $27 billion between 1984 and 1996. In 1997, as legal fees and settlements bit into tobacco profits at home, international cigarette sales climbed 7.3 percent.

With home consumption falling faster than in other developed countries, the U.S. companies had started looking at foreign markets well before the era of the Third Wave. New markets were opening up in Eastern Europe (with the heaviest smokers in the world), in Latin America, and in the Far East. Threatening severe economic sanctions, the Reagan administration had helped the industry pry open markets in Japan, South Korea, Taiwan, and China.

As barriers in Asia came tumbling down, Philip Morris targeted Japanese women with Virginia Slims. Japanese female college students obliged. One study showed they were four times more likely to smoke than their mothers. RJR sought young smokers with Joe Camel. In South Korea, the U.S. cigarette invasion happened so fast that by the late '80s students, antismoking activists, and local retailers staged protests against “tobacco imperialism,” and boycotted American cigarettes. In Taiwan, imported brands, most of them American, grew from 1 to 20 percent in less than two years.

In China, with its 350 million smokers, there was a Marlboro soccer league and Marlboro music hour, a Kent billiards contest, and a Salem tennis tournament. In the Philippines, Asia's most Catholic nation, U.S. brands could be found on promotional calendars under a picture of the Virgin Mary.

Even before the collapse of the Soviet Union, Philip Morris and R. J. Reynolds happily responded to an emergency request from Mikhail Gorbachev when Soviet cigarette factories failed to meet demand. The U.S. companies delivered 34 billion cigarettes, the single biggest order in their export history. A pack of Marlboros became standard barter for a cab fare in Moscow. When the Soviet Union collapsed at the end of 1991, Western tobacco companies rushed to buy up dilapidated Russian cigarette enterprises and quickly became the largest investors in the former communist bloc. Philip Morris, RJR, the German tobacco conglomerate Reemstma, and BAT, the British tobacco giant, all snapped up shares. The Marlboro Man was among the first Western ads to appear on Gorky Street. Britain's former prime minister Margaret Thatcher teamed up with Philip Morris (for a reported $1 million) to help the U.S. company establish a foothold in Kazakhstan, among other things. In the Ukraine, American companies outspent health ministry lobbying in the Rada, the national legislature, to reverse a ban on cigarette billboards and other outdoor advertising.

The U.S. global invasion was so crude it sometimes backfired. In Europe, Philip Morris sought to counter moves for antismoking legislation by launching an ad campaign that suggested inhaling secondhand smoke was less dangerous than eating cookies or drinking milk. “Life is full of risks,” declared one headline above a picture of three cookies. “But they're not all equal.” France's health ministry complained; so did Belgian cookie makers, who said the ads defamed their product. Philip Morris dropped the ads.

The unprecedented legal assault on the U.S. tobacco industry at home stimulated antismoking efforts abroad—especially in Britain, Canada, Australia, and Israel. The American antitobacco forces gave support to the strongest of these legal challenges—in Britain where Tony Blair's new Labor government promised a new antismoking drive. A young environmental lawyer named Martyn Day launched Britain's first smoking class action of forty-seven lung cancer victims against the two biggest cigarette companies, Imperial and Gallahers, which together control 80 percent of the British market. The claim was a simple one: that the manufacturers have known since the 1960s how to make less dangerous cigarettes and had failed to do so, despite their duty under British common law. Day had learned a lot from his U.S. counterparts and from the Merrell Williams documents. Elsewhere in Europe, legal action was minimal. In France, where smoking bans in public places are simply ignored, two individual cancer cases were pending. In Italy, one such case was recently lost against the state's cigarette distribution monopoly. In Germany, there were moves to regulate secondhand smoke. In Asia, two class actions in Japan called on the government to end the state cigarette-manufacturing monopoly. In Brazil, the industry settled two lawsuits by agreeing to put tar and nicotine levels on cigarette packs. But nowhere outside the United States was government as supportive of antismoking measures; nowhere did the legal system present such opportunities to the plaintiffs' bar to confront the tobacco industry.