Commentary

Larger Implications of the Tobacco Settlement

This testimony was delivered to the Kansas Legislature Select Committee 2000 on March 6, 2000.

Mr. Chairman, distinguished members of the Committee:

My name is Robert A. Levy. I am a senior fellow in constitutional studies1 at the Cato Institute, a pubic policy research foundation located in Washington, D.C. I would like to thank the committee for inviting me to testify on the larger implications of the tobacco settlement, in the context of House Bill No. 3006, the private attorney retention sunshine act. My testimony is submitted on behalf of the American Legislative Exchange Council.

First, some background: The Medicaid recovery lawsuits that precipitated the Master Settlement Agreement (MSA) were created out of whole cloth by states filling the dual and conflicting roles of lawmaker and plaintiff. Florida set the pattern by enacting a new statute that stripped tobacco companies of their traditional rights and put in their place a shockingly simple rule of law: The state needed money; the industry had money; so the industry gave and the state took. Under the new regimen, Florida, and the other states that modeled their lawsuits after Florida’s, could sue tobacco companies directly, without stepping into the injured party’s shoes. By abrogating the industry’s affirmative defenses, including assumption of risk,2 states could collect from the industry even if the illness was the smoker’s own fault. If a smoker happened to be a Medicaid recipient, individual responsibility was out the window. The same tobacco company selling the same product to the same person resulting in the same injury was, magically, liable not to the smoker but to the state. Liability thus hinged on a smoker’s Medicaid status, a happenstance totally unrelated to any misdeeds by the industry.

Further, in order to assure victory in court, the attorneys general asked that the requirement for proof of causation be expunged. Instead of having to show that a Medicaid recipient smoked and that his smoking was the cause of his illness, the states would only have to produce generalized statistics indicating that certain diseases are more prevalent among smokers than nonsmokers.3

A handful of private attorneys — later to be hired at contingency fees ranging from 10 to 30 percent of the recovered damages — were responsible for the novel legal theorizing that became the Florida statute and the model for other states.4 Those members of the plaintiffs’ bar were, in effect, government sub-contractors with financial incentives geared to the magnitude of their conquest. They were driven by the likelihood of a huge payoff while, at the same time, they served as prosecutors – a role in which their overriding objective was supposedly to seek justice.

What is worse, contingency fee contracts were awarded without competitive bidding to attorneys who often bankrolled state political campaigns.5 In Mississippi, attorney general Mike Moore selected his number one campaign contributor, Richard Scruggs, to lead the Medicaid recovery suit.6 In Texas, then-attorney general Dan Morales chose five firms for the state’s multibillion-dollar tobacco litigation; four of the five firms contributed a total of nearly $150,000 to Morales from 1990 to 1995.7

In West Virginia, tobacco defendants successfully challenged the state’s contingency fee contract.8 Attorney general Darrell McGraw had hand-picked six lawyers, without competitive bidding, and declined to specify his selection criteria.9 He did say, however, that “the State and her citizens stand only to benefit. The State has no exposure. There are no lawyer hourly fees. There are no costs. The taxpayers are thus fully protected.”10 He could have propounded a similar argument if the state were to hire private lawyers to prosecute criminal cases, and only pay for convictions. But defendants as well as taxpayers must be protected. The Supreme Court reminds us that an attorney for the state “is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all.”11

The Medicaid suits fashioned by state attorneys general and their allies in the private bar retroactively eradicated settled legal doctrine and denied due process to a single industry selected more for its financial resources and current public image than for its legal culpability. If tobacco companies were the only victims of the MSA, that would be bad enough; but the unhappy prospect is yet more incursions by states with an insatiable appetite for social engineering – states that seems to have abandoned the principles of free choice and personal responsibility in favor of regulatory mandates and absolution for the consequences of our acts.

Tobacco was merely the first and easiest victim. Guns came next. Quite a different dynamic is at work in the city and county litigation against gun makers. With a piddling $1.5 billion in annual revenues, that industry will not yield the same treasure trove as the tobacco behemoths whose domestic and worldwide sales are $50 billion and $300 billion, respectively. But that is not a problem, because the real goals of the gun suits are twofold: first, to bypass the legislative process which, despite the recent scourge of high-profile multiple killings, has been remarkably unreceptive to gun control measures; and second, to chalk up one more victory for the trial lawyers, thus demonstrating to future fat cat defendants that groundless legal theories are good enough when the coercive power of multiple government entities is arrayed against an unpopular industry.

The gun suits are not intended to go to trial. In fact, the threat by the U.S. Department of Housing and Urban Development to coordinate litigation by 3,200 public housing authorities, on top of the claims filed by 30 cities and counties, points toward a settlement, not a trial. HUD Secretary Andrew Cuomo and his acolytes understand well that the smallish gun industry cannot afford to defend itself – even against unfounded suits – in the face of such overwhelming firepower. A Wall Street Journal story emphasized that very point: “As with the municipal suits, one filed on behalf of housing authorities would be groundbreaking and certainly not a sure bet to succeed in court. But a suit by a large group of housing authorities could [exhaust] gun companies’ resources in pretrial maneuvering – by making demands for documents concerning industry distribution practices in hundreds or thousands of localities.”12 No better than thinly veiled blackmail.

The common threads that link tobacco and gun litigation have also surfaced in the current spate of suits against HMOs. Start with a friendless industry. Then attempt to redress the industry’s perceived misbehavior by enacting remedial legislation. When the legislature resists, find a cadre of smart, unprincipled contingency fee lawyers who are willing to champion flawed legal theories in order to extort money from, or compel “better” conduct by, the wayward industry. Next step: sue – preferably as a class action in one or more states known to be sympathetic to plaintiffs. After judges rightly dismiss, or juries reject, one private lawsuit after another, bring in the big guns from the public sector. Procure local, state, or federal officials to threaten the industry with bogus claims in as many jurisdictions as possible. The rest is relatively easy. Announce your settlement terms and wait for the industry to cave.

Right around the corner could be similar suits against alcohol, coffee, chocolate, diet drinks, dairy products, red meat, fast food, sugar, sporting equipment, cars – you name it. Proposals from supposedly intelligent people in positions of responsibility include grading foods for their fat content, taxing them proportionately, and using the tax revenues for public bike paths and exercise trails.13

When decisions about the products we choose to consume are entrusted to government officials, the loss of personal freedom is inescapable. Once we relegate such choices to the state, we should not be surprised by pernicious side effects, including a flourishing black market exploited by organized crime. We never seem to learn. California, Maryland, Michigan, and New York hike their cigarette taxes and the result is rampant smuggling – not just from low-tax neighboring states, but from military bases, Indian reservations, even exports to Mexico that are smuggled back into the United States.14 After Canada raised its excise tax, smuggled cigarettes accounted for an estimated 30 to 50 percent of consumption; so Canada was forced to lower the tax to keep smuggled cigarettes away from children.15

It does not take a rocket scientist or a surgeon general to know that the MSA will inevitably foment illegal dealings dominated by criminal gangs hooking underage smokers on an adulterated product freed of all constraints on quality and price that competitive markets usually afford. The destructive effect on our nation’s health – lamentable but not surprising – will undoubtedly be accompanied by an ever more expanding and intrusive government. The war on tobacco will likely produce no better results than our endless war on drugs, or Prohibition before that. Instead of forays into South American countries to destroy their coca fields, we could find ourselves combing the back roads of North Carolina hunting down tobacco farmers.

Improved health for our children is an objective that no reasonable person could disapprove. But make no mistake, dollars and cents – not health issues – are the driving force behind the tobacco settlement. When their own money is on the line, both federal and state governments opt for financial health over smokers’ health. Facing illness claims by military personnel to whom the U.S. government had dispensed cigarettes free of charge, Veterans Affairs secretary Jesse Brown told the former soldiers to pay their own freight for having chosen to smoke.16 When sued by a prisoner who was denied a nicotine patch for the habit he developed in a Florida jail, the state pleaded that it was no more responsible for his purchase of cigarettes than for his “buying a candy bar at the canteen.”17 If that principle renders the government immune from liability, it renders private companies immune as well.

To secure the liberty of all citizens, we must resolutely defend and protect our least popular citizens, including the tobacco companies. Disputes between private parties cannot be resolved in secret negotiations involving defendants who have the boot of government resting on their necks, state attorneys general who seek to replenish their Medicaid coffers without fiscal discipline, contingency fee lawyers who wield the sword of the state while retaining a financial interest in the outcome, and advocacy groups that have subordinated the rule of law to their health concerns, however well-intentioned.

Legislatures would do well to heed the advice of former U.S. Sen. George McGovern, who knew firsthand the ravages of addiction, having lost his daughter to alcoholism. Sen. McGovern points to “those who would deny others the choice to eat meat, wear fur, drink coffee or simply eat extra-large portions of food.” He cautions that “the choices we make may be foolish or self-destructive [but] there is still the overriding principle that we cannot allow the micromanaging of each other’s lives…. [W]hen we no longer allow those choices, both civility and common sense will have been diminished.”18

NOTES

1. Biographical sketch.

2. Fla. Stat. Ann. § 409.910(1) (Supp. 1994) (“assumption of risk and all other affirmative defenses normally available to a liable third party are to be abrogated to the extent necessary to ensure full recovery by Medicaid from third-party resources”).

3. Fla. Stat. Ann. § 409.910(9)-(9)(a) (1995) (“In any action brought under this subsection, the evidence code shall be liberally construed regarding the issue[] of causation [which] may be proven by use of statistical analysis”).

4. See Michael Orey, “Fanning the Flames,” American Lawyer, April 1996.

5. Carolyn Lochhead, “The Growing Power of Trial Lawyers,” The Weekly Standard, September 23, 1996, p. 21.

6. Ibid. at 22.

7. Ibid. at 23.

8. McGraw v. American Tobacco Co., Civ. No. 94-C-1707 (Cir. Ct. Kanauha County, Nov. 29, 1995).

9. Jack Deutsch, “McGraw Supporters May Profit from Suit,” Charleston Daily Mail, August 18, 1994, p. 1B.

10. McGraw v. American Tobacco Co., Civ. No. 94-C-1707, Memorandum in Opposition to Defendants’ Joint Motion to Prohibit Prosecution of Action Due to Plaintiff’s Unlawful Retention of Counsel (Cir. Ct. Kanauha County).

11. Berger v. United States, 295 U.S. 78, 88 (1935).

12. Paul M. Barrett, “HUD May Join Assault on Gun Makers,” Wall Street Journal, July 28, 1999, A3.

13. E. Katherine Battle and Kelly D. Brownell, Confronting a Rising Tide of Eating Disorders and Obesity: Treatment vs. Prevention and Policy, 21 Addictive Behaviors 755-65 (1996). Dr. Brownell is director of the Yale Center for Eating and Weight Disorders.

14. Dwight R. Lee, Will Government’s Crusade Against Tobacco Work? (St. Louis: Center for the Study of American Business, Washington University, 1997), pp. 2-4.

15. Ibid., p. 4.

16. Bill McAllister, “Smoking by GIs Raises Liability Issue at the VA,” Washington Post, April 24, 1997, p. A1.

17. Waugh v. Singletary, Case No. 95-CVC-J-20 (D. Fla., July 11, 1995).

18. George McGovern, “Whose Life Is It?” New York Times, August 14, 1997, p. A35.

This testimony was delivered to the Kansas Legislature Select Committee 2000 on March 6, 2000.

Robert A. Levy is senior fellow in constitutional studies at the Cato Institute.