Commentary

Tobacco Extortion: Round 3

After a winless season against tobacco, Bill Clinton seems eager to trumpet the latest settlement between the industry and 46 state attorneys general. The new settlement, he gloated, “reflects the first time tobacco companies will be held financially accountable for the damage their product does to our national health.” Never mind that tobacco companies had already agreed to pay more than $40 billion to four states. Never mind that every authoritative study has concluded that current excise taxes on cigarettes — averaging 53 cents per pack and climbing — already exceed the social costs of smoking. Never mind that greedy politicians and their over-zealous allies in the health community had already rejected a settlement that would have netted almost twice as much money and subjected the industry to more stringent regulation.

Nearly a year and a half ago, in June 1997, tobacco companies more or less capitulated to state demands. The industry rolled over for state Medicaid suits, waived its First Amendment right to advertise, submitted to Food and Drug Administration control of its products, agreed to fund programs designed to persuade customers not to buy its merchandise, and undertook to fulfill the states’ responsibility for preventing illegal retail sales to minors. In return tobacco companies sued by individuals for smoking-related losses were to receive immunity from class action litigation and punitive damages, and a cap on compensatory damages — protection against suits that hadn’t cost them a dime in over 40 years. That was Round 1.

Incredibly, a year later Congress said no, and Sen. John McCain (R-Ariz.) introduced his doomed tobacco bill. Instead of $370 billion from the industry, McCain called for $520 billion; he stripped the industry’s immunities and increased the penalties to be imposed if targeted reductions in youth smoking weren’t met. Lambasted by industry ads and weighed down by unrelated amendments to fund anti-drug programs, eliminate the income tax marriage penalty, and pay for health insurance and child care, the McCain bill was mercifully killed by the Senate in June 1998. That was Round 2.

Now we’re in Round 3. The current settlement doesn’t require congressional approval. It squeezes the industry for $206 billion, plus a billion or two for anti-smoking campaigns. It restricts advertising and sponsorship of sporting events, but not as rigorously as either the 1997 settlement or the McCain bill. There’s no mention of FDA regulation, youth smoking penalties, or industry immunity from litigation. Basically, tobacco companies pay a couple of hundred billion dollars and the states drop their Medicaid suits.


The states have effected a shakedown — no better than extortion — grounded on this repugnant rule: the states need money; the industry has money; ergo, the industry pays and the states collect.


What should we make of this latest rendition? First, the good news, which won’t take long. Tobacco companies should not be immunized from litigation. When parties are injured, the tort system permits them to seek redress from those who caused the injury. Our courts are the proper forum for resolving those private disputes — not secret negotiations involving an industry cowed into submission, attorneys general seeking to replenish their states’ depleted Medicaid coffers, private lawyers padding their wallets at public expense, and health groups bent on imposing their lifestyle choices on the rest of us.

If a plaintiff can prove he relied on deceptive industry advertising, became addicted prior to age 18, and contracted a disease because of his smoking, then he should prevail in a court of law. But once 18, he is an adult who is accountable for the consequences of his behavior — the same adult who can vote, sign contracts, go to war, get married, and get divorced. Those decisions are no less weighty than the decision to smoke cigarettes. If an 18-year-old chooses to smoke, he assumes the risk, and he cannot hold tobacco companies responsible for his injury.

Now for the bad news. Most damning, the settlement rewards attorneys general and their co-conspirators in the plaintiffs’ bar, who have retroactively subverted the law to punish the sale of a legal product by a deep-pocketed and unpopular industry — without notice, opportunity for fair trial, or evidence. By eliminating the requirement to prove that smoking caused a particular injury, and by rejecting all claims that smokers are personally responsible, the states have effected a shakedown — no better than extortion — grounded on this repugnant rule: the states need money; the industry has money; ergo, the industry pays and the states collect.

Contingency fee lawyers — many of them major donors to the political campaigns of the attorneys general — were permitted to wield the coercive power of the state even though they have a financial interest in the outcome. It’s as if we were to employ private prosecutors and pay them only for convictions. We don’t do that for good and obvious reasons, which the Supreme Court laid down more than 60 years ago. An attorney for the state “is the representative not of an ordinary party to the controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all.”

Nearly as disturbing, this new settlement, like its predecessors, simply will not work. In fact, the provisions of the settlement are worse than ineffective; they are destructive public policy. Smokers already pay $13 billion each year in federal and state excise taxes. That’s likely to increase substantially as tobacco companies raise prices to pay for the settlement. More than half of the price hikes will be paid by smokers with annual incomes under $30,000; only 1 percent will be paid by smokers earning more than $100,000. In other words, cigarette surcharges are regressive; they represent a wealth transfer from generally poor smokers to more affluent non-smokers. Why should 44 million adult consumers of a perfectly legal commodity have to fork up because retailers and 1 million kids break laws against tobacco sales to minors on the books in all 50 states?

There’s more. The unavoidable consequence of inflated retail prices will be a flourishing and pervasive black market. With 23 billion packs of cigarettes sold each year in the United States, it doesn’t take a rocket scientist or an attorney general to realize that the settlement will foment illegal dealings dominated by criminal gangs hooking underage smokers on an adulterated product with none of the constraints on quality that a competitive market normally affords.

Even if teenagers have to pay more for their cigarettes, a large reduction in consumption is unlikely. The latest evidence out of Cornell University is that the price elasticity of demand — which measures how sales volume changes in response to price changes — is roughly zero for teens. That is, within reasonable limits, teens will smoke about the same number of cigarettes no matter what the price. Government statistics show an increase in underage smoking in seven of eight states that have recently raised their cigarette taxes. And in the United Kingdom, where cigarettes are twice as expensive as they are here, the smoking rate for kids is the same as ours.

Restrictions on advertising do not hold out much promise for reducing teen consumption. The purpose of cigarette ads — analogous to automobile ads — is not to convert non-smokers to smokers but to encourage brand shifting. That’s why aggregate consumption hasn’t declined in the six European countries that have banned tobacco ads. Kids smoke because of peer pressure, because their parents smoke, and because they want to rebel against authority. Skyrocketing marijuana usage should tell us that advertising is not the source of the problem.

The way to keep cigarettes from kids is to enforce state laws against retail sales. We should prosecute retailers who break those laws, demand proof of age at retail establishments, and prohibit vending machine sales where youngsters are the primary customers, like arcades and schools. If kids are caught with cigarettes, we should at a minimum tell their parents. Parenting is, after all, the primary responsibility of mothers and fathers, not the government. Where that approach has been tried, it’s worked. In Woodbridge, Illinois, for example, youth smoking declined by 69 percent in two years after a vigorous enforcement effort.

The attack on tobacco is only the leading wedge, of course. Today it’s tobacco; tomorrow, it could be alcohol, sugar, fatty foods, sporting equipment, cars; the list is endless — social engineering without any sense of restraint and without any concern for personal liberty. And that’s not paranoia. Just listen to Mayor Edward G. Rendell of Philadelphia. His plan, now under discussion by the U.S. Conference of Mayors, is to go after gun manufacturers for the medical costs of gun-related violence, the cost of police overtime, even the expense associated with cleaning blood off the streets. Two lawsuits have already been filed — by New Orleans and Chicago — and more are on the way.

The Rendell plan calls for 30 to 60 cities to file suit in state court, all on the same day next year. “The impact of so many cities filing suit all at once would be monumental for gun manufacturers,” Rendell said. “They don’t have the deep pockets of the tobacco industry, and it could bring them to the negotiating table a lot sooner.” Got it? The merits of the litigation don’t matter at all. Frivolous litigation can bring an industry to its knees. It worked against big tobacco; surely it will work against small gun manufacturers. “Guns must now become the next tobacco,” confirms Dennis Henigan of the Center to Prevent Handgun Violence. Indeed, the same lawyers who took on the tobacco companies have concocted the novel theories about to be used against the gun industry.

“If you go back 5 years, everybody thought the tobacco lawsuits were completely silly,” brags Washington lawyer John Coale, an architect of both the tobacco and the gun cases. “Silly” is the wrong word. “Dangerous” is closer to the mark. “Tyrannical” hits the bull’s-eye. It’s scandalous and intolerable that 60 cities plan on filing concurrent suits — just to guarantee that a hapless industry can’t afford to defend itself. That could be the real legacy of the tobacco wars.

Robert Levy is a Senior Fellow in Constitutional Studies at Cato Institute.