Big Tobacco's Self-Immolation
At this point, why don't we
just line tobacco company executives up against the wall, gun them down, and
then blow up all the cigarette factories? It'd certainly be more cathartic for
the anti-smoking forces, and probably less painful for the tobacco industry,
than the farcical death by a thousand cuts process that's currently underway in
Washington.
R.J. Reynolds Chairman
Steven Goldstone probably wouldn't opt for the firing squad. But his
pronouncement this week that the deal now being worked over in Congress is
"dead" probably signals the final collapse of tobacco industry support for a
settlement that once promised to serve the interests of both anti-tobacco
forces and the industry. That $368.5 billion settlement, agreed to last June by
R.J. Reynolds, Philip Morris, and their smaller kin, would have ended most
tobacco advertising, raised the price of cigarettes by more than 50 cents a
pack, given the Food and Drug Administration authority to regulate nicotine,
committed the industry to reducing teen smoking, and established a trust fund
to pay for past health claims and help smokers quit. Other than the FDA
provision, these were all voluntary agreements on the part of the industry,
which made them in exchange for protection against class action suits and
punitive liability.
The
settlement was negotiated with a group of state attorneys general who were
already suing or planning to sue the tobacco companies to recoup Medicaid costs
for the treatment of dying smokers. But the national character of the
settlement--particularly the protection from liability--meant that Congress had
to ratify it. And after some delay, the Senate commerce committee last
Wednesday approved a revised version of the agreement. The provisions regarding
advertising, the FDA, and teen smoking are pretty much the same, if a little
tougher, while the price tag has been raised to more than $500 billion. In
exchange, the tobacco companies get ... well, nothing. The protection from
punitive damages and class action suits is gone, replaced only by a cap on the
amount the industry has to pay every year. If this is a settlement, so was the
Versailles Treaty.
It is, of course, difficult to feel sorry for the tobacco
industry, if only because it spent more than 30 years lying about what it knew
to be true, namely that nicotine was addictive and that smoking caused lung
cancer. But the Senate tobacco bill is nonetheless a preposterous piece of
legislation, predicated on the concept that the industry has near total control
over whether people smoke or not. It's a bill for people who want to ban
cigarettes but don't have--or aren't willing to spend--the political capital it
would take to do so. Moreover, parts of it are either unconstitutional or
unworkable, since the bans on advertising would have to be agreed to by the
industry, which at this point doesn't really have an incentive to agree to
anything. And yet what's really odd about the whole affair is that the tobacco
companies really have no one to blame but themselves.
What I
mean by that is not the obvious point, which is that if these companies didn't
make products that kill people, they wouldn't be in trouble. What I mean
instead is that the commerce committee bill is, in a sense, the result of the
collision between Big Tobacco's two great obsessions: lying and shareholder
value. And it's the industry's commitment to both that's got it into this
mess.
If you want to pick a moment when a punitive
law against tobacco became almost inevitable, it might very well be that April
day four years ago when seven tobacco executives went before a House committee
and said that nicotine was not addictive. This was injudicious of them,
considering that as early as 1963, Brown & Williamson's general counsel had
written in a memo, "We are in the business ... of selling nicotine, an
addictive drug." As a symbol of industry arrogance and deceit, you'd have to
search far and wide to find a better example than the photo of those seven
execs.
Of
course, they were simply doing what the industry has done ever since the late
1950s, when it became clear both that cigarettes were bad for people and that
the nicotine in them was addictive. Instead of admitting what almost everyone
believed, Big Tobacco insisted on complete denial. Initially, this strategy
made a certain amount of sense from a business angle. Until the surgeon
general's 1964 report, and until warnings went on cigarette packs, admitting
that cigarettes were dangerous could have opened the companies up to consumer
fraud as well as product liability charges.
After their packs began carrying warnings about the hazards
of smoking, though, it was hard to see how anyone could argue that the tobacco
companies were deceiving their customers (though, certainly, lawyer after
lawyer has tried). And yet the tobacco industry persisted in its strategy.
Instead of being honest about smoking's dangers and then arguing that adults
should be allowed to choose their own poison, the industry hid. And in hiding,
it left itself with no real protection against the prohibitionist impulse. (For
more on how the industry booted its "informed choice" argument, click .)
If the
decision to lie took away the industry's ability to make a plausible case for
individual choice, its obsession with shareholder value made it believe that
only a massive settlement could solve its problems. Although Philip Morris is
an enormously profitable company, its stock price has remained relatively
deflated, because investors were so concerned that the company might lose a
massive class action lawsuit somewhere down the road. Signing an agreement that
would protect the industry from such suits would boost the stock price
immediately, even if that agreement cost hundreds of billions of dollars. In
other words, Philip Morris and R.J. Reynolds would make fewer dollars, but each
one of those dollars would be valued more highly by the stock market.
"Shareholder value," which is shorthand for
executives' obsession with their companies' stock prices, has become the prism
through which most of corporate America now sees business. This has had some
beneficial effects, but in the case of tobacco, it pushed the industry into a
settlement it could not control. It's possible that these companies believed
that their lobby in Washington was so strong that Congress would ratify any
deal. But if so, this was self-delusion on a really impressive scale.
In the history of tobacco
litigation, only one plaintiff had ever been awarded any damages, and those
were compensatory rather than punitive. Save for one Florida jury, whenever
juries have been asked whether the tobacco industry is liable for a smoker's
health problems, they've decided that the plaintiff knew what the risks were
and chose to ignore them. Given that, there's a real argument to be made that
the tobacco companies should have just continued to litigate on a case-by-case
basis. They were spending obscene amounts of money on litigation--as much as
$750 million a year, by one account--and the strain of wondering if this case
would be the one that broke the bank couldn't have made working at these
companies much fun. But next to $500 billion, $750 million a year looks like a
bargain. And as time went on, the case for tobacco's liability would have grown
weaker, since public awareness of smoking's hazards has grown stronger.
It's
possible, of course, that the cost of losing a major class action suit or one
of these state Medicaid suits was just too enormous to chance. But what seems
clear is that the desire to get a higher stock market valuation, combined with
a history of refusing to defend itself honestly, pushed the tobacco industry to
the negotiating table. And there--in no small part as a result of that
history--it has found itself with very little leverage. For 35 years, Big
Tobacco never gave an inch. It's not really surprising that when it finally
did, its foes realized they could take a mile.
If you missed the
discussion of tobacco executives' choice to smoke, click .
