Addendum to Cato Policy Analysis No. 275             June 27, 1997

TOBACCO SETTLEMENT
NOTHING BUT A SHAKEDOWN

by Robert A. Levy

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

On June 20, 1997, as this Policy Analysis was being printed, a coterie of state attorneys general, joined by plaintiffs’ lawyers and public health advocates, announced a sweeping settlement of their litigation against the tobacco industry. In a 68-page "Proposed Resolution," the industry agreed to pay $370 billion in monetary damages to various parties, submit to health-related restrictions including Food and Drug Administration regulation of nicotine, and rein in certain sales and marketing practices purportedly targeted at children. In return, tobacco companies will be exempt from all punitive damages for their past conduct and immune from any new class action lawsuits, but not from suits by individuals. The settlement, if approved, also wipes out claims by more than three dozen state and local governments for Medicaid reimbursement.

Those tradeoffs are the shameful product of extortion by public officials who have retroactively altered the rule of law to tap the deep pockets of a feckless and friendless industry. While the agreement may serve the political interests of 39 attorneys general and cram the wallets of private contingency fee lawyers, it is destructive of the health of a free nation. First, as a result of a bargain to which they were not even a party, future litigants will be denied access to the courts, thus abridging their Seventh Amendment common law rights. State attorneys general have no authority under our system of government to extinguish the rights of third parties through agreements with second parties. Second, the U.S. Congress, if it enacts legislation codifying the settlement, will be interceding in product liability cases that have long been the prerogative of state and local jurisdictions, thus dishonoring our federal system of dual sovereignty. Finally, states that have malevolently manipulated the law in an effort to fund their Medicaid programs will be rewarded for their misbehavior.

If tobacco companies were the only victims of this settlement, that would be bad enough; but the unhappy prospect is yet more incursions by a nanny state run amok -- a state with an insatiable appetite for social engineering. As discussed on pages 2-10 of the Policy Analysis (hereafter, PA), American governments at all levels seem to have abandoned the principles of free choice and personal responsibility in favor of regulatory mandates and absolution for the consequences of our acts. The following discussion briefly summarizes the terms of the tobacco settlement, with a short commentary, and refers to the pages in the Policy Analysis where the issues are discussed at greater length.

 

Money

The tobacco industry will be required to disgorge $370 billion over 25 years -- $15 billion per year plus a similar amount annually thereafter. Where necessary, a presidential commission will determine precisely who gets how much, but the estimated annual breakdown by category is $5 billion for compensatory damages to individual litigants, $5 billion for Medicaid reimbursement, $2 billion to fund health care for uninsured children, $1.5 billion for anti-smoking campaigns and research, and $1.5 billion to help smokers quit. In addition, tobacco companies will be assessed a penalty in the years 2002, 2004, and 2007 if the nation fails to meet respective goals of 30 percent, 50 percent, and 60 percent declines in youth smoking. For each percentage point by which we fall short, the companies must pony up an extra $80 million, less a 75 percent rebate if they can demonstrate a good faith effort.

Some analysts argue that the tobacco companies will simply pass those costs along to their customers by raising the price per pack of cigarettes (now roughly $1.90) by as much as 75 cents. Economists anticipate that sales volume will decline, however, by about 4 percent for each 10 percent increase in the retail price. Therefore, a full 75-cent price hike (roughly 40 percent) would reduce the number of cigarettes sold by about 16 percent. That reduction will mean diminished government revenues from sales taxes, excise taxes, and income taxes, along with higher unemployment costs as the misfortune of the tobacco manufacturers predictably spills over to farmers, wholesalers, retailers, the advertising industry, and athletic events, to name a few of the innocent bystanders. The costs are uncalculated, and perhaps incalculable, but nonetheless real and incontrovertibly substantial.

Moreover, one must inquire why tobacco companies should be responsible for anti-smoking campaigns and programs to help smokers break the habit. Cigarettes are a lawful product when sold to adults; the choice to smoke is freely made. Claims that some consumers are hopelessly addicted, having relied on fraudulent information and deceptive advertising (PA 10-17), are subject to an evidentiary showing in a court of law; those claims cannot be resolved by legislative fiat or by negotiation at gun-point. Equally objectionable, the industry will be required to finance health care for uninsured children. By what possible logic can that problem be laid at the doorstep of the tobacco companies? Selling tobacco to children is illegal; those laws should be vigorously enforced; violators should be prosecuted; proof-of-age requirements are reasonable, as are restrictions on vending machine sales in areas like arcades and schools. But no one has suggested that the tobacco companies have violated existing law. To hold a single industry financially liable because some families are unable or unwilling to insure their offspring is an unconstitutional imposition of punishment without notice, without a trial, and without evidence. It is no more than a bald transfer of wealth from an unfavored to a favored group.

There is neither legal nor empirical justification for any payment whatsoever to reimburse state Medicaid programs. First, corrupting the rule of law in order to fatten their own coffers, states have argued that they could dispense at trial with the usual proof of causation. Instead of showing that an injured Medicaid recipient smoked, and his smoking was the cause of his illness, the states have insisted that they could prevail simply by producing generalized statistics indicating that certain diseases were more prevalent among smokers than nonsmokers (PA 21-30). Second, authoritative empirical studies have concluded without exception that the excise taxes collected over the years on cigarette sales have far exceeded any rational estimate of the social costs attributable to smoking (PA 30-37).

 

Health

Under the "Proposed Resolution," the FDA will be authorized to regulate nicotine as a drug and cigarettes as a delivery device. Proposed regulations must be adopted by a formal rulemaking proceeding entailing notice and an opportunity for comments from interested parties. The agency must document by "substantial evidence" that its regulations are reasonable, and it must show -- in a manner yet undefined -- that they will not result in black-market cigarette sales. After the year 2009, the FDA is empowered to ban nicotine altogether. In addition, cigarettes will contain a more dire warning (cigarettes are addictive, they cause cancer, they can kill you) covering 25 percent of the surface area of the front of each pack. Tobacco companies will have to identify and quantify any harmful ingredients. Smoking will be prohibited in most public places (restaurants and bars are among those exempted) and in the workplace.

Those provisions could be just the tip of the iceberg, of course, with tobacco merely the first and easiest victim. Right around the corner are similar restrictions on alcohol, coffee, 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 (PA 45-46). When decisions about the products that we choose to consume are entrusted to an unelected and unaccountable bureaucracy, the loss of personal freedom is inescapable. To those of us who care about such things, that situation is intolerable.

Indeed, allowing Congress to make product selections on our behalf is not much better than assigning those matters to an administrative agency. Arguably, we might ask the government to serve as a gatherer of, and repository for, the data that are necessary to facilitate voluntary and informed consumer transactions (although there is no apparent reason why the private sector couldn’t perform that function). But once we relegate such choices to the state, we should not be surprised by pernicious side effects, including a flourishing black market, rampant and organized criminality, and a backlash among rebellious teens. A war on tobacco will produce no better results than our absurd war on drugs, or Prohibition before that. Instead of forays into South American countries to destroy their coca fields, we could find ourselves in a confrontation with our own 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 the federal and state governments opt for financial health over smokers’ health. Facing claims by military personnel for tobacco-related illnesses allegedly caused by cigarettes dispensed free of charge, Veterans Affairs secretary Jesse Brown told former soldiers to pay their own freight for having chosen to smoke. 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." If that principle renders the government immune from liability, it renders private companies immune as well (PA 19-20).

Should any doubt remain about the extent to which health concerns really animate this settlement, consider Florida’s unclean hands (PA 17-19). Over nearly a decade, the state manufactured cigarettes and dispensed them to its prison population. For good measure and not a little revenue, the state sold some of its cigarettes to local jurisdictions. More recently, Florida invested $825 million of its pension assets in tobacco stocks. And most hypocritically of all, when a two-vote margin in the last Congress ensured that federal tobacco subsidies would be renewed, 10 of the state’s 23 representatives voted for renewal. On the one hand, Florida bemoans the ill health of its citizens; on the other hand, the state produces and sells cigarettes, provides equity capital for Philip Morris, and helps subsidize tobacco farmers.

 

Sales and Marketing

The proposed settlement is draconian in its restrictions on advertising and merchandising. Vending machine sales are prohibited. Retailers must be licensed so that prosecution for sales to minors can more readily be enforced. Only black-and-white ads with textual content are permitted except in adult publications. Billboards and store signs facing the street are proscribed. Joe Camel and the Marlboro Man are history, as are other cartoon and human advertising images; no more merchandise with company logos; no more sponsorship of athletic events.

If the industry had not "consented" to those limitations, they would never have passed First Amendment scrutiny (PA 42-43). After all, commercial speech is constitutionally shielded, albeit to a lesser degree than political speech. But it doesn’t require a constitutional scholar to conclude that the proposed rules are ridiculous. We rightly protect gangsta rap from the censors, despite its message to youngsters that the drug culture is worthwhile and killing police officers is a pleasurable recreational activity. Yet if Tiger Woods shows up wearing a sport jacket emblazoned with Joe Camel, our new speech guardians will see to it that the executives of R.J. Reynolds are prosecuted. Will the Budweiser frogs be next to croak; shall we muzzle Red Dog beer?

Not only does the settlement erode our most basic right to free speech, it will accomplish little or nothing in return. The debate is not whether teenagers smoke; they do. It’s not whether smoking is bad for them; it is. The only real question is whether there is a link between the proposed regulations and the decision by children to begin smoking or to increase their consumption. There is no evidence to establish that link (PA 13-15). The principal purpose of cigarette advertising is to persuade smokers of one brand to switch to another. Six European countries that have banned all tobacco ads have since seen overall consumption increase -- probably because health risks are no longer documented in the banned ads. In the United States, every relaxation of the restrictions on advertising health-related product improvements has generated a blizzard of ads, vigorous health-based competition for market share, and significant declines in tar and nicotine content. Not surprisingly, whenever health claims are outlawed, the industry promotes imagery and endorsements, the very ads that anti-smoking zealots decry. If health claims were allowed, a plausible case can be made for more ads, not fewer.

Even if we accept the argument that the tobacco companies have targeted underage prospects, they surely have not accomplished their objective. Over the 1985-95 decade, during the heyday of Joe Camel, the percentage of kids aged 12-17 who smoke dropped from 29 percent to 20 percent. Taking a longer term view, the average age of first-time regular cigarette users has trended slightly upward from 1962 through the latest 1994 data. And inner-city teens report that they are cynical about, even resentful of, cigarette ads; the percentage of minority youngsters who regularly smoke has plummeted over the past 10 years. Although some ads may have succeeded in gaining brand share, they have been singularly unsuccessful in expanding the overall market, especially among children.

 

What Future for the Settlement?

A White House panel, chaired by Health and Human Services secretary Donna Shalala and presidential adviser Bruce Reed, will review the settlement over the next four to six weeks. Senate Majority Leader Trent Lott (R-Miss.) has indicated that Congress probably won’t get involved until September or October at the earliest. Meanwhile, opposition has developed on the left. Former FDA commissioner David A. Kessler, former surgeon general C. Everett Koop, former Health, Education and Welfare secretary Joseph Califano, and several members of Congress have complained of constraints imposed on the FDA’s regulation of nicotine. Those same individuals, joined by the American Lung Association and some trial lawyers, object to the industry’s immunity from class action suits and punitive damages. Koop and Kessler will be producing their own blueprint for the industry sometime in July.

The correct disposition of the "Proposed Resolution" of June 20 is the same one that Steve Forbes has suggested for the tax code: Kill it, drive a stake through its heart, and start over. To safeguard 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 concerns about health, however well-intentioned. Our courts, not our legislatures, are constituted for the resolution of private disputes (PA 37-46). They can do justice only if the rule of law -- objective and evenhanded -- is scrupulously applied.

Meanwhile, our policymakers would do well to follow Professor Richard A. Epstein’s recommendations: Tobacco subsidies should be eliminated. The president can rail against smoking. Individuals must be held accountable for the consequences of their actions. And cigarette labeling requirements can be strengthened. Otherwise, if we are foolish enough to proceed along the path outlined in the "Proposed Resolution," the label that should appear on each pack of cigarettes is one that says "Warning: The Tobacco Settlement Is Dangerous to Your Liberty."