Kicking the habit of a lifetime

One day, as historians survey the Great Tobacco Wars that raged across America for most of the second half of the 20th century and into the following millennium, 13 March, 1996 may prove to be the decisive turning point.

For on that day the Liggett Group, smallest of the country's five main cigarette manufacturers, struck a landmark deal in the largest of the class action suits brought on behalf of aggrieved smokers against the companies.

The annual payment involved is puny, just $2m, or three hours' worth of profits for the $45bn US tobacco industry. But a Rubicon has been crossed.

In America, the most litigious country on earth, lawsuits beget lawsuits. Hitherto the greatest psychological bulwark for the companies was their boast that in decades of litigation in which they had been accused of everything from making people addicted to their product to killing them, they had paid not a single cent in damages. Hundreds of millions of dollars in legal defence costs, millions of words of obfuscation, evasion, half- truth and denial - yes. But never had a plaintiff actually won.

That absolute no longer holds. Small in itself, Liggett's surrender means Big Tobacco is no longer invincible.

Its champions, of course, hold otherwise. Even though the settlement formula would imply a pre-tax cost to the industry of $800m annually, analysts insist the risk of massive legal payments has long since been factored into share prices. Take, for example, Philip Morris, the largest, richest and most intransigent of the companies, which accounts for half the US cigarette market; its shares might be worth $150 today instead of around $100, were Mars Bars or Big Macs, not Marlboros, its flagship product.

"We intend to fight and win all of the cases in which we are involved," was the company's predictably dismissive reaction to Liggett's white flag, as it damned a settlement "so full of holes that it won't affect our approach to litigation". And the arithmetic of that defiance is crystal clear. Under the proposed settlement, Liggett's agreement to pay out $2m is a far better bargain than the $10m it currently shells out annually in legal fees. If Philip Morris accepted similar terms, it would be liable for $440m a year, or 12 per cent of its 1995 pre-tax domestic tobacco business profit of $3.7bn.

Then again, as analysts further point out, the behaviour of Bennett LeBow, chairman of Liggett's parent Brooke Group and the prime architect of the deal, is not unalloyed. Mr LeBow has designs on RJR Nabisco, the second- biggest tobacco company, in which he is a dissident shareholder. The Liggett deal has been tailored to help him persuade RJR's stockholders to dismiss the current board, approve a merger with Liggett, and split RJR-Nabisco's food and tobacco operations into independent entities. All of which, of course, would suit Mr LeBow mightily.

But even Philip Morris cannot discount the longer-term impact of what he has done. The monolithic facade of unity of the companies has been splintered. With Liggett gone, plaintiffs' attorneys and the government will focus their fire on the other four major companies, the Lorillard Tobacco subsidiary of Loew Corp, BAT, RJR and Philip Morris. Most important, on every one of Big Tobacco's overlapping legal and legislative battlegrounds, its assailants will be re-energised. The Food and Drug Administration, the federal watchdog which seeks to have cigarettes regulated as drugs, has been handed a sweet victory in Liggett's undertaking not to give out free samples or use cartoon characters in advertisement. That is an implicit acceptance of the FDA's assertion that these campaigns are deliberate attempts to hook children.

Larger perils for the industry lurk elsewhere. This week's fragmentary victory in the Castano suit, brought by 60 law firms on behalf of every single smoker who claims to be addicted, will revitalise every other class action suit, in which billions of dollars are at stake. Individuals will be more inclined to sue, even though the most tangible benefit from the Liggett settlement will be stop-smoking programmes paid for by the company. That is a bizarre measure of the legal thicket in which the industry is entrapped - the obligation to pay to help people stop consuming its products.

The second threat are the separate claims pressed by five states, led by Mississippi and Florida, for re-imbursement from the companies of public money spent on treating people for smoking-related diseases. The deal makes only a small nod in this direction, but once again a principle is legitimised.

A third, scarcely less menacing front exists in the person of Jeffrey Wigand, the former executive of Brown and Williamson, BAT's American subsidiary. Mr Wigand is the most senior figure ever in the industry to turn against his former employers and a crucial potential witness in both the class action and state suits.

Brown and Williamson has fought tooth and nail to muzzle him, and briefly forced CBS to drop an interview in which he accused the company of dropping work on safer cigarettes, and its top management of lying to Congress in 1994 when they testified that nicotine was not addictive. But the Wall Street Journal broke the story anyway, and CBS ran its interview. More to the point, the Justice Department is currently examining whether the company's finest should be charged with perjury.

And tobacco's tribulations do not end there. Whole armies of its lawyers are fighting Government attempts to ban cigarette vending machines (so accessible to under-age smokers), and to have second-hand smoke classified as an environmental hazard and a cause of cancer. All this on top of the routine skirmishes of recent years - an end to smoking on all civil flights within the United States, as well as in many airports, and attempts by several states to ban smoking in all public places, including restaurants, bars - even in at least one extreme case the very pavements around office buildings, where workers addicted to the weed must go to snatch a huddled, guilty puff.

Big Tobacco, of course, has the resources to continue the fight for decades. Its lobby is among Washington's best organised, spearheaded by the mid Atlantic states for whom tobacco is a pillar of the economy.

And for every domestic smoker who buckles beneath society's opprobrium and abandons the habit, the industry finds new takers in emerging markets abroad, whose cultures do not share America's penchant for moral crusades. Maybe even in the US, a pro-tobacco backlash will occur, as it has done to some extent over affirmative action. But do not bank on it. If there is an addiction as powerful as nicotine here, it is the obsession with health and healthcare. In the end, and for all the belligerence of Philip Morris and the rest, the industry will have to come to a serious, reasoned accommodation with its foes. On 13 March, 1996, perhaps, the first outline of that accommodation emerged.

THE SETTLEMENT: MAIN POINTS

To settle the Castano class action Liggett would pay 5 per cent of its pre-tax profits, up to a maximum of $50m for the next 25 years. The money would fund stop smoking programmes.

To settle suits against it from Florida, Massachusetts, Mississippi and West Virginia Liggett will pay $4m over 10 years towards smoking-related healthcare costs.

Liggett will pay between 2 per cent and 7 per cent of its pre-tax profits for state healthcare costs depending on how many states claim against it.

Company agreed to comply with tough Food and Drug Administration code on tobacco advertising, resisted by the rest of the industry.

The same terms would apply to any other tobacco company that took it over, other than the giant Philip Morris.