Tobacco Documents Online

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0 Copyright 1997 The Washington Post The Washington Post Apri127,1997, Sunday, Final Edition SECTION: A SECTION; Pg. A01 LENGTH: 1981 words HEADLINE: Money Is Tipping Big Tobacco's Scales; Weighing Cash Now for Profit Later BYLINE: Glenn Frankel, Washington Post Staff Writer BODY: Faced with their gravest legal and political threat, America's tobacco companies are pondering what they long considered unthinkable: whether to submit to extensive federal regulation and pay out billions of dollars in a gamble that they hope will make even greater future profits, according to financial analysts, legal experts and anti-smoking is activists. Money is the crucial factor compelling the companies to enter secret negotiations with their opponents in which the fate of Big Tobacco and the future of the country's number one public health problem are both at stake. Those who watch the industry closely agree the companies have made the cold calculation that they have more to lose in court than they do by agreeing to a settlement that forestalls future litigation. But fear of lawsuits isn't their only motivation. The companies also seek to reverse a 30- year tide of adverse medical findings, bad publicity and deceit that have branded them as pariahs and denied them the corporate legitimacy they insist they deserve. "It's more than just the liability issue," said Gregory Connolly, a longtime industry critic who heads the Massachusetts Tobacco Control Program. "The companies also face big state and federal tax increases and ingredient disclosure laws and all kinds of other restrictions. It's almost becoming a political feeding frenzy. They want to put this debate to an end." Company officials won't admit they are engaged in the talks, let alone discuss their motives and expectations for entering into a potentially historic negotiation. Nonetheless, senior executives for months have dropped hints that they are prepared to bargain. "Our . position has been if we are sued we'll defend ourselves," Steven C. Parrish, vice president for corporate affairs for Philip Morris, said in an interview last November. "But that

. 1967: Surgeon General William H: Stewart's report concludes that smoking is the principal cause of lung cancer. Federal Trade Commission releases the first tar and nicotine report. 1970: Congress strengthens cigarette warning labels. 1971: TV and radio ads for cigarettes are banned as the Cigarette Smoking Act of 1969 takes effect. 1973: Civil Aeronautics Board requires no-smoking sections on commercial flights. Arizona becomes the first state in modern times to restrict smoking in public places. 1986: Surgeon General C. Everett Koop issues reports on involuntary smoking and smokeless tobacco. 1988: Koop issues report declaring cigarette smoking "addictive." 1993: EPA issues report identifying secondhand smoke as a health risk. President Clinton bans smoking in the White House. 1994: Occupational Safety and Health Administration proposes regulations banning ~ workplace smoking or requiring separate, ventilated smoking rooms. 1995: Clinton and the Food and Drug Administration declare cigarettes "drug delivery devices" and propose restrictions on tobacco marketing and sales to reduce smoking by young people. 1996: Clinton approves the proposed rules, allowing the FDA to enforce them as law. 1997: In April, tobacco companies begin negotiating possible settlement with state attorneys general and anti-tobacco litigants. Federal judge upholds FDA's authority to regulate tobacco but not to restrict advertising and promotional activities. SOURCES: Centers for Disease Control and Prevention; "Ashes To Ashes" by Richard Kluger, Alfred A. Knopf, 1996; Washington Post research GRAPHIC: Chart, john anderson, DEFEND OR SETTLE (This chart was not available) LANGUAGE: ENGLISH LOAD-DATE: April 27,1997 0 _ 00 w V N Q1 to

~ doesn't mean that we can't at the same time try to work with others to resolve some of these issues. We're committed to working with whoever will work with us." They face daunting legal challenges. In its most recent annual report, R.J. Reynolds stated that at the end of last year it faced 234 active lawsuits from individual smokers and their families, up from 54 cases just two years ago. Fifteen class-action lawsuits are also pending and 23 attorneys general have filed suit seeking compensation for heath costs to state Medicaid programs for treating tobacco-related disease. On Friday, a federal judge affirmed the Food and Drug Administration's power to regulate sales and labeling of cigarettes, although he denied the agency's right to restrict advertising. The companies are being told by investors that they need to put these legal issues behind them to reach their full economic potential. Many analysts believe that tobacco company stocks trade at less than half their potential value because of the liability cloud over the companies. "It's a question of financial risk, pure and simple," said Steven Marascia, a tobacco industry analyst with Branch, Cabell & Co. in Richmond. "Why put yourself on a legal limb when you can find a way to insulate yourself from risk by settling?" People familiar with the discussions say the companies are prepared to accept far- reaching reaching restrictions on advertising and drop their opposition to FDA regulations. They would also agree to a financial settlement -- unconfirmed reports have put the offer of up to $300 billion over 25 years -- in return for some sort of protection from future lawsuits. Anti-smoking activists are deeply divided over how much to demand from the industry, whose deep pockets and political clout they still fear. Many are keenly aware that the industry has faced serious restrictions before, but managed to preempt or circumvent them. For example, after Surgeon General Luther L. Terry issued the first federal report linking cigarette smoking and lung cancer in 1964, the Federal Trade Commission drafted a rule requiring warning labels for cigarette packs and advertisements. But the companies went to Congress, where their lobbyists helped craft legislation that preempted the FTC. The watered-down labeling requirement that resulted gave the industry new protection from liability lawsuits by claiming that smokers had been sufficiently warned about the health hazards of cigarettes. For decades the industry was able to boast that it had never lost or settled a product liability claim against cigarettes. Five years later, when federal regulators moved to ban television advertising of cigarettes, the industry again preempted them by voluntarily suspending such ads, and then pouring the money they saved into other kinds of marketing techniques. Cigarette ~ sales and profits continued to rise after the enactment of these efforts at tobacco control.

~ deal makers and lawyers whose loyalties are more to the bottom line than to a particular product or ideology. Bennett S. LeBow, head of the Brooke Group Ltd. which controls the Liggett Group Inc. that last month broke ranks with the industry to settle with the attorneys general, is one such executive. Steven F. Goldstone, chairman of the board and president of RJR Nabisco Holdings Corp., is another. 0 Even Bible of Philip Morris, one of the few remaining pack-a-day true believers, who just last year lashed out at "ambitious politicians and bureaucrats;" has learned to adapt. "We are prepared to work with responsible government representatives and others to develop a consensus about a regulatory system that would be balanced, reasonable and effective," he told shareholders in Richmond last week. Still, the industry's insistent dismissal of the hazards of smoking has not changed. Even while Bible and Goldstone were appearing at the negotiating table earlier this month, senior executives giving private depositions in a Florida liability case again denied that cigarettes were addictive or a proven health risk. According to the Miami Herald, Andrew J. Schindler, president of R.J. Reynolds Tobacco Co., acknowledged that his father, a three- pack-a-day man, died of a stroke after the doctor warned him to quit. Yet under oath Schindler insisted tobacco was no more addictive than coffee. "What they were giving me was the same old party line," said Stanley M. Rosenblatt, the Miami-based plaintiffs attorney who took the deposition. "It's like the old hard-line communists. They know what they say is absurd but they stick to it anyway." Unlike many of his colleagues in the tobacco control movement, John Slade, an associate professor at St. Peter's Medical Center in New Jersey, said he believes the companies want to change. "I think the industry would like to turn over a new leaf, but I don't think they know how to escape the past," said Slade. "That's why we need a statement of responsibility, not for the emotional satisfaction but because we need to have a new relationship with each other and we can only build that if we are honest with each other." REGULATING SMOKE 1964: Surgeon General Luther L. Terry issues a "Report on Smoking and Health" linking cigarette smoking and lung cancer. 1966: The Federal Cigarette Labeling and Advertising Act takes effect, requiring warning labels on cigarette packaging. N O 0 O a W 01 - 4 N O 00

• "A major difference between then and now is there really wasn't an organized anti- smoking movement that exists today," said Michael Pertschuk, former FTC chairman and a veteran tobacco control activist. As a result, he said, Congress passed laws "not in the public interest but to forestall greater damage to the industry." Times have changed. While the industry continued to win in court, the Cipollone liability case in New Jersey, brought by the family of a smoker who died of cancer in 1984, unearthed thousands of pages of internal documents showing companies had long been aware of the heath risks of smoking. Simultaneously, there has been a steady drumbeat of critical reports from succeeding surgeons general, disclosures of corporate duplicity by whistle-blowers and findings by federal regulators on the addictive nature of nicotine, the alleged dangers of secondhand smoke and the allegedly deliberate effort of the companies to market their products to children. The result has been a massive public backlash against the industry. "It isn't any one piece of information or any one whistle-blower, but the cumulative effect of all the bad stuff about the tobacco industry," said Mary Aronson, a Washington-based tobacco industry analyst. "It's basically polluted the water that jury pools drink from. And that's got to be what scares the companies the most." The companies got a warning last August when a jury in Florida, presented with what ~ analysts contend was a so-so plaintiff's case that did not take full advantage of all the recent disclosures, nonetheless awarded a $750,000 judgment. "That really spooked the companies," said Gary Black, a tobacco industry analyst with Sanford C. Bernstein & Co. At the same time, the companies have turned increasingly to overseas markets for sales and profits. Philip Morris has more than doubled its foreign cigarette sales volume and increased its income from those sales eightfold over the past decade. "I can assure you that Philip Morris International will compete ferociously for an even bigger share of the international market," Philip Morris Cos. chairman and chief executive officer Geoffrey C. Bible told shareholders at the company's annual meeting last week. The companies have insisted that a settlement in this country not restrict their right to export their products. But tobacco control activists here and abroad say they will demand that any agreement offer at least some protection to smokers overseas; for example, extending a ban on advertising. "Any settlement with the U.S. tobacco companies that offered compensation only to people with the U.S.A., ignoring smokers of U.S. tobacco products elsewhere, would be ethically totally unacceptable," said Judith Mackay, director of the Asian Consultancy on Tobacco Control in Hong Kong. ~ There has been a changing of the guard inside the tobacco industry. Traditional tobacco advocates who believed fervently in their product have given way to a new generation of