Global Tobacco Settlement




Robert A. Levy
Cato Institute
Washington, D.C.

August 15, 1997

1. Question from Chairman Hatch: In ProfessorTribe's testimony, he argued that the settlement actually fosterssmaller government. This is apparently because absent theimplementation of the settlement, Congress, to obtain the sameresults, would have to require agencies to implement manyburdensome command and control regulations. With the settlement inplace, many of its terms would be implemented through judicialenforcement of the consent decree. Any comments?

1. Response: To be sure, smaller government isa splendid objective, which I passionately support. But implicit inyour question is this mistaken premise: The substantive goals ofthe proposed tobacco settlement are desirable; we need simplyresolve whether those goals can best be accomplished by agencyregulations or by judicial enforcement of consent decrees. Irespectfully reject that premise on two grounds.

First, there are no "consent" decrees. An arrangement can not becharacterized as consensual when it is exacted by subvertingsettled principles of law, retroactively, in order to assure thatan unpopular defendant has no chance of prevailing in court. I takeup that issue below in response to a question from Sen.Thurmond.

Second, the goals of the proposed settlement are misconceived,unworkable, and counterproductive. They are no less so because theyare incorporated in a purported bargain. The real costs are notthose associated with administrative or judicial implementation ofthe settlement, but those that arise in its wake. Indeed, that is acentral tenet of my testimony before your committee. In particular,I refer you to page 2, where I identify some of the indirecteconomic costs; page 5, where I discuss the negative implicationsof nicotine regulation; and page 7, where I document the futilityof planned restrictions on cigarette advertising. To reinforce oneof those points, let me remind the committee of the likelyaftermath should the Congress adopt the draconian "solution"promoted by former FDA commissioner, David A. Kessler, and formersurgeon general, C. Everett Koop.

Anti-smoking partisans like Messrs. Kessler and Koop wanttougher FDA regulation, stiffer penalties imposed upon the industryif the nation doesn't meet targeted declines in youth smoking, hugeincreases in cigarette taxes, tighter rules on smoking in publicand work places, and export controls on industry access to foreignmarkets. That's all -- just Prohibition, without the label, andwithout the precursor to Prohibition which, as you will recall, wasan amendment to the Constitution. Kessler and Koop objectespecially to a provision requiring the FDA to show that itsregulations will not spawn black market transactions. No wonderthey regard that provision as a material limitation on the agency'spowers. When FDA restrictions on nicotine content are coupled withinflated retail prices to help pay for the settlement, theunavoidable consequence will be a pernicious black market.

We never seem to learn. California, Maryland, Michigan, and NewYork hike their cigarette taxes and the result is rampant smuggling-- not just from low-tax neighboring states, but from militarybases, Indian reservations, even exports to Mexico that aresmuggled back into the United States. [1]After Canada raised its excise tax, smuggled cigarettes accountedfor an estimated 30 to 50 percent of consumption; so Canada wasforced to lower the tax to keep smuggled cigarettes away fromchildren. [2]

It doesn't take a rocket scientist, an FDA commissioner, or asurgeon general to know that the proposed tobacco settlement willinevitably foment illegal dealings dominated by criminal gangshooking underage smokers on an adulterated product freed of allconstraints on quality and price that competitive markets usuallyafford. The destructive effect on our nation's health -- lamentablebut not surprising -- will undoubtedly be accompanied by an evermore expanding and intrusive government.

Moreover, researchers have pointed out that smokers may wellrespond to nicotine reductions by smoking more, puffing harder, oreven physically altering the filters that are intended to dilutethe smoke stream. [3] Washington Stateattorney general Christine Gregoire reminds us that "people aren'tdying because of nicotine. It's the other stuff," she said,referring to the carcinogens present in tar and smoke. [4] And Gregory Connelly, director of theMassachusetts Tobacco Control Program, cautions that anti-smokingcrusades may backfire, as apparently happened in Massachusettswhere teenage smoking rose by 10 percent in the first three yearsof Connelly's $35 million-a-year campaign. "Among kids, you get abacklash anytime Big Brother goes after them," Connelly observed.[5]

If the health imperative is to reduce smoking among teenagers,we have the requisite tools at our disposal; but they do notinclude either command and control agency regulations or judiciallyenforced consent decrees. The sale of cigarettes to youngsters isillegal in every state. Those laws must be vigorously enforced.Retailers who violate the law must be prosecuted. Proof of agerequirements are appropriate if administered objectively andreasonably. Vending machine sales should be prohibited in areaslike arcades and schools where children are the principalclientele. And minors -- who are often held responsible as adultswhen charged with a serious crime -- should at least have theirwrists slapped when caught smoking or attempting to acquirecigarettes. Among the remedies available to state authorities:inform the parents of would-be smokers, levy fines, imposecommunity service, or suspend driving privileges.

Finally, let me comment briefly on Professor Tribe's concernabout the size of government. He testified that the settlement willnot "create another unnecessary federal bureaucracy," primarilybecause no group is more interested than the attorneys general "infederalism, states' rights, and the Tenth Amendment." The focus ison "decentralization"; the settlement "should not be greeted… with suspicion that it's just another big Washingtonprogram"; it involves "market-based incentive[s], notcommand-and-control regulation." [6]

With all due respect, Professor Tribe's testimony utterlyconflates power with programs. Federalism -- a jurisdictionalmatter -- is quintessentially about the locus of power; and theproposed settlement locates power in federal not state agencies.The size of government, on the other hand, is a function of itsprograms, the scope of which determines the extent of governmentalintrusion into private affairs. Smaller government cannot beachieved by federally mandated programs, operative in all 50states, even if administered by state and local bureaucrats. Thereis but one way to reduce the size of government: repeal oldprograms and avoid new ones, especially a massive new one like theGlobal Tobacco Settlement.

2. Question from Chairman Hatch: Could youamplify the point you made in your testimony that the cumulativerestrictions the settlement places on present and future lawsuitsviolate both due process and the right to a jury trial?

2. Response: When parties are injured, the tortsystem permits them to seek recovery from those who caused theinjury. Unquestionably, legislatures can alter the rules at themargin (e.g., they can eliminate punitive damages); butlegislatures cannot cut into the irreducible core that is our dueprocess right. In my view, the cumulative effect of the immunitiesconferred by this settlement -- no class actions, no punitivedamages for past acts, a limit on compensatory damages -- may wellgo too far. By foreclosing adequate legal remedies, thoserestrictions may have the practical effect of denying access to thecourts.

Accordingly, should it approve the tobacco settlement, therebyfrustrating judicial redress by civil litigants, Congress will haveviolated the common-law right to trial by jury in federal court asguaranteed by the Seventh Amendment, and the right to due processof law as guaranteed by the Fifth Amendment. Further, if Congresswere to grant the tobacco industry partial immunity againstlitigation in state court, that would flagrantly violateprinciples of federalism and the Tenth Amendment. On that point,Professor Tribe and I agree. [7]

In 1987, the Supreme Court restated its long held position that"those incidents which are regarded as fundamental, as inherent inand of the essence of the system of trial by jury, are placedbeyond the reach of the legislature." [8]We cannot know with certainty what aspects of trial by jury theCourt considers essential. Nonetheless, when a plaintiff may notbring suit as a member of a class, when he cannot collect punitivedamages, when any compensatory damages might be subject to an upperlimit, when because of those combined constraints his prospect ofattracting skilled legal assistance is materially diminished, andwhen he must confront a well-financed and competently representeddefendant, it strains credulity to suggest that his right to trialby jury has not been fundamentally compromised.

That same accumulation of obstacles may also deprive a litigantof due process. The Supreme Court has been somewhat moreforthcoming in its musings on that possibility. When a survivingspouse sued under the Workmen's Compensation Law following herhusband's death in a work-related accident, the Court remarked thatdamages available under the Act were limited, then volunteered that"[t]he scheme of the act is so wide a departure from common-lawstandards ... that doubts naturally have been raised respecting itsconstitutional validity." [9] In thatinstance, the Court found no constitutional infirmity because theemployee, although "no longer able to recover as much as before entitled to moderate compensation in all cases of injury, andhas a certain and speedy recovery." [10]

The Court pondered whether "a state might, without violence tothe constitutional guaranty of `due process of law,' suddenly setaside all common-law rules respecting liability ... withoutproviding a reasonably just substitute." [11] Then, after explaining that the case athand did not require resolution of that question, the Courtconjectured that "it perhaps may be doubted whether the state couldabolish all rights of action ... without setting up somethingadequate in their stead." [12] Applyinga similar rationale in a 1978 case, the Court upheld thePrice-Anderson Act, which imposed a limitation on liability fornuclear accidents in federally licensed private nuclear powerplants. The Act's "panoply of remedies and guarantees," noted ChiefJustice Burger, "is at the least a reasonably just substitute forthe common-law rights replaced by the Price-Anderson Act. Nothingmore is required by the Due Process Clause." [13] Two years later, Justice Marshallreiterated that "[q]uite serious constitutional questions might beraised if a legislature attempted to abolish certain categories ofcommon-law rights in some general way. Indeed," he continued, "ourcases demonstrate that there are limits on governmental authorityto abolish 'core' common-law rights ... at least without acompelling showing of necessity or a provision for a reasonablealternative remedy." [14]

Thus, while the Court has not established a bright line test fordue process infractions, it has repeatedly intimated that litigantspossess a nucleus of rights under the common law that may not betransgressed without substituting rough equivalents. The proposedtobacco settlement indisputably abridges rights long held under thecommon law. Class actions, for example, can be traced to theEnglish "bill of peace" in the seventeenth century, which allowed arepresentative party to sue when the number of persons was toolarge to permit joinder, the class members had a common interest,and the absent members were adequately represented. [15] And the origin of punitive damages extendsback to eighteenth century English decisions in which punitiveawards were associated with honor, insult, and other dignitarytorts. [16]

The question, then, is whether proscribing class actions,eliminating punitive damages, and capping compensatory damages -each of which, standing alone, is concededly within the scope oflegislative power -- are cumulatively so grave as to reducecommon-law rights below a base level to which we areconstitutionally entitled. If that is the case - and I suggest thatit is - then the rights thus denied must be replaced by otherrights that will restore the depleted core. Clearly, the tobaccosettlement has offered future litigants no substitute for therights that it will take away. Therein lies a denial of dueprocess.

3. Question from Sen. Thurmond: Opinion pollstend to show that the public believes smokers should be primarilyresponsible for the consequences of their decision to smoke.However, this settlement agreement would essentially shiftresponsibility to the tobacco companies. Should the Congress heedany lessons from public opinion regarding this agreement?

3. Response: Smokers must assuredly be heldaccountable for their freely chosen acts -- but for reasons rootedin the rule of law, not merely the power of public opinion. Oneneed not entirely agree with Robert Peel ("Public opinion is acompound of folly, weakness, prejudice, wrong feeling, rightfeeling, obstinacy, and newspaper paragraphs") to conclude thatindividual liberty and personal responsibility rest on a morepermanent foundation than the most recent poll. Shifting the blamefor informed and voluntary decisions is thoroughly objectionable,first, because it is immoral and, second, because it isincompatible with the law as it existed when those decisions weremade. Public support for that basic principle is encouraging and,from a political perspective, conducive to doing the right thing;but it is not why the right thing must be done.

A person may not recover for an injury to which he assents. Inboth negligence and product liability actions, if a plaintiff isaware of a condition, knows it to be dangerous, appreciates theextent and nature of the danger, and voluntarily exposes himself tothe danger, he may not hold the defendant liable. That time-honoredprecept has now been repealed -- by statute in Florida, and byresort to so-called equitable doctrine in most of the other statesthat are suing the tobacco companies for Medicaid recovery. What isimmeasurably worse, the repeal is to be applied both retroactivelyand discriminatorily. Florida eliminated the industry'sassumption-of-risk defense in 1994. Yet that defense will bedisallowed even for harms allegedly caused by cigarettes solddecades earlier. Moreover, the well-heeled tobacco industry is theonly targeted defendant at this writing, and the single plaintiffthat will benefit from the new rule is the state itself -- the samestate that sponsored the repeal in order to refill its Medicaidcoffers without enacting a politically unpopular tax increase.

What could possibly justify this abuse of power? Incredibly, thestates have contended that they may abrogate affirmative defenseslike assumption of risk because, after all, the state as plaintiffnever smoked. Imagine, analogously, that you are exceeding thespeed limit by five miles per hour and hit another car driven by aMedicaid recipient; he is driving 80 miles per hour, intoxicated,and hurtles through a red light. When the state Medicaid programsues you for negligence, you properly respond that the other driverwas 99% at fault. The state counters that the Medicaid recipient'sbehavior is irrelevant; the state doesn't drink, nor does it drive.Such arrant nonsense -- the exact equivalent of "the state neversmoked" -- is unworthy of serious consideration.

There is but one legitimate argument for holding tobaccocompanies liable notwithstanding a consumer's decision to smoke: Asmoker is not free to choose if he is misled by fraudulentadvertising or if he is addicted as a minor and unable to quit oncehe is capable of appreciating the risks.

On the other hand, more than 40 million people have quit.[17] In Florida's motion to dismiss a1995 lawsuit by a prisoner for a smoking-related illness, the stateacknowledges that "whether nicotine is addictive or not is a grayarea. You have as many in the medical field that say it is as thatsay it isn't." [18] And tobacco critic,Richard Kluger, concedes:

Whether one categorizes smoking as a practice, a habit, anindulgence, a vice, a dependency, or an addiction, it was commonlyknown -- and had been for decades -- to be hard to stop once begun.Nor could anyone say for certain how much of a daily dose served toinduce addiction; tolerance differed from person to person, and theindustry had in fact made available brands with extremely lowdosages. How, then, to justify a claim that the cigarette makershad massively imposed an intentionally addicting product on aninnocent public that had little knowledge or choice in the matter.[19]

It is not enough to show that tobacco industry statements andadvertisements were deceptive. A plaintiff must also demonstratethat he relied upon the misinformation. The hazards of tobacco werewell-documented, however, from sources outside the industry as longas 400 years ago. Indeed, throughout this century incessantwarnings have emanated from thousands of health publications,medical professionals, and government entities. By the 1920s,fourteen states had actually prohibited cigarettes. Printed healthwarnings appeared on every pack of cigarettes lawfully sold in theUnited States for the past thirty years. To be unaware of thedanger of tobacco is to have been hopelessly oblivious.

In any event, those are the claims and counterclaims that shouldbe resolved in court; they are not resolved by secret negotiationsor by congressional fiat. Our adversarial system -- includingevidence, trial, and jury verdict -- must be permitted to function.Smokers, insurance companies, and the industry should fight it out,applying traditional principles of tort law. State Medicaid systemsmay sue like any other insurer; but they are subject to theassumption-of-risk defense and they must prove case-by-casecausation and damages. If a plaintiff can show that he wasdefrauded, otherwise unaware, and addicted by the industry'sdeception, then he should prevail. But the rules must be objectiveand evenhanded, the same rules applied against any otherdefendant.

Congress would do well to heed the advice of former Sen. GeorgeMcGovern, who knew firsthand the ravages of addiction, having losthis daughter to alcoholism. Sen. McGovern points to "those whowould deny others the choice to eat meat, wear fur, drink coffee orsimply eat extra-large portions of food." He cautions that "thechoices we make may be foolish or self-destructive [but] there isstill the overriding principle that we cannot allow themicromanaging of each other's lives…. [W]hen we no longerallow those choices, both civility and common sense will have beendiminished." [20]

4. Question from Sen. Thurmond: You havecriticized the settlement as unfair to the tobacco companies,essentially portraying the industry as a victim. Yet, the tobaccocompanies have voluntarily chosen to enter into this agreementafter extensive negotiations. Why shouldn't we respect and supporttheir decision to enter into a settlement agreement?

4. Response: As an initial matter, the proposedsettlement requires that non-participating and future tobaccocompanies -- which will not be immunized against class actions andpunitive damages if they do not consent to the settlement -- placesubstantial sums in escrow for 35 years to ensure that potentialfuture liabilities will be paid. Professor Tribe blithely dismissesthat extortion with a declaration that "Congress is entitled toensure that non-participating companies will not becomejudgment-proof." [21] He provides nosubstantiation. In my view, the escrow requirement raises obviousconstitutional concerns under the Due Process Clause, the EqualProtection Clause, the prohibition on bills of attainder, and theTakings Clause.

Moreover, Congress has no enumerated power that would permit itto compel private companies to escrow funds for satisfaction ofpotential judgments arising out of state tort law. The notion thatsuch a power exists under the rubric of the Commerce Clause --which was intended to safeguard the free flow of trade among thestates -- makes a mockery of that clause as well as the TenthAmendment and the principle of limited government. [22]

With respect to companies that participated in the settlement,their involvement and signature by no means equates to "consent."Some background is necessary. Over four decades, after thousands ofclaims, not one dollar of damages has been paid by the industry fora smoking-related illness. Juries have understood -- even if stateattorneys general have not -- that we are free to consume whateverlegal products we wish, but having done so, we must bear theconsequences.

As juries were reaffirming that basic rule of law, stateMedicaid programs were coming under intense financial pressure. Ofcourse, states were entitled to sue the tobacco companies forrecovery of Medicaid outlays supposedly traceable to smoking; butthe states bore the same burden of proof as the injured party andthey were subject to the same defenses -- including assumption ofrisk. Unwilling to raise taxes, and unable to prevail in court, thestates came up with a creative solution: they simply eliminatedassumption of risk as a defense in Medicaid recovery suits and, forgood measure, applied the new rule retroactively.

While they were at it, to head off any possibility of an adversejury verdict, the states abolished the requirement for proof ofindividual causation. Instead of demonstrating that a particularclaimant's illness was caused by his smoking, all the states had toproduce were aggregate statistics showing that certain injurieswere more prevalent among smokers than nonsmokers. So tobaccocompanies, under the new regimen, would have to pay for such thingsas burn victims who fell asleep with a lit cigarette, cancervictims who never smoked, and even Medicaid recipients whodefrauded the system and weren't injured at all. Astonishingly, nocorroborating evidence need be furnished.

Naturally, the states laughed off the charge that the new lawwiped out the industry's defenses. Mississippi's lawyer said, forexample, "It doesn't mean that the tobacco industry is defenseless.They [sic] can show that the state has unclean hands, that thestate has participated in the activity somehow." [23] Yes, unclean hands is a legitimate defense;but when the time came to test that defense, the states went tostill greater lengths to corrupt the law and tilt the playingfield. Here's what happened.

Florida's Medicaid recovery suit commenced on Friday, August 1,1997. The state's attorney bemoaned the "carnage" from smoking,which he laid at the door of the tobacco companies. In its defense,the industry had identified several examples of Florida's uncleanhands: the state had voted for a continuation of federal tobaccosupport programs, invested $825 million of its pension assets intobacco stocks, and manufactured cigarettes for sale to localjurisdictions and distribution to prisoners. When the industrysought to introduce that evidence, the state filed a motion tosuppress, and the state judge granted the motion. [24] So much for the unclean hands defense.

Faced with insurmountable legal hurdles in dozens of Medicaidsuits, the industry decided to negotiate. Was the settlementconsensual? Ask yourself why an industry would agree to disgorge$370 billion, subject itself to FDA regulation, overhaul itsadvertising, eliminate vending machine sales, and pay largepenalties if targeted reductions in youth smoking were not realized-- all in return for partial immunity from litigation that had notcost a single dollar of damages in forty years.

Because the market price of tobacco stocks advanced whenever thesettlement appeared to move forward, some argued that thesettlement must be good for the industry. That argument betrays aprofound confusion about the alternatives realistically available.Either tobacco companies could agree to the settlement or theycould mount an expensive, time-consuming, and ultimately futilechallenge to nearly forty Medicaid recovery suits under a pervertedsystem of law that effectively foreclosed every line of defense.Confronting those choices, it is no surprise that the industryelected to bargain, and it is no surprise that the stock marketreacted positively.

Yes, the settlement was perceived as good for the companies,relative to certain and enormous losses at the hands of stateattorneys general and their allies among the plaintiffs' bar--together wielding the sword of government in a manner sooutrageous as to threaten the liberty of any deep-pocketed industrythat might stand in their path. To call this settlement consensualis consummate doublespeak.


[1] Dwight R. Lee, WillGovernment's Crusade Against Tobacco Work? (St. Louis: Center forthe Study of American Business, Washington University, 1997), pp.2-4.

[2] Ibid., p. 4.

[3] John Schwartz,"Tobacco Pact's Fine Print Limits Action on Nicotine," WashingtonPost, July 8, 1997, p. A4.

[4] Ibid.

[5] Marc Fisher andJohn Schwartz, "Trying to Snuff Out the Tobacco Culture,"Washington Post, June 22, 1997, p. A1.

[6] Tribe testimony, p.2.

[7] Tribe testimony, p.10 ("For Congress directly to regulate the procedures used by statecourts in adjudicating state-law tort claims -- to forbid them, forexample, from applying their generally applicable class actionprocedures in cases involving tobacco suits -- would raise seriousquestions under the Tenth Amendment and principles offederalism).

[8] Tull v. UnitedStates, 481 U.S. 412, 426 (1987) (citations omitted).

[9] New York Cent. R.R.Co. v. White, 243 U.S. 188, 196 (1917).

[10] Ibid. at201.

[11] Ibid.

[12] Ibid.

[13] Duke Power Co.v. Carolina Envtl. Study Group, Inc., 438 U.S. 59, 93 9 (1978).

[14] PruneyardShopping Ctr. v. Robins, 447 U.S. 74, 93-94 (1980) (Marshall, J.,concurring).

[15] John J. Cound,et al., Civil Procedure (St. Paul: West Publishing Co., 1989), p.656.

[16] Dan B. Dobbs,Law of Remedies (St. Paul: West Publishing Co., 1993), p. 313.

[17] The data citedin this and the following paragraph are documented at pages 13-16of my extended paper, "Tobacco Medicaid Litigation: Snuffing Outthe Rule of Law," which is part of the committee's record.

[18] Waugh v.Singletary, Case no. 95-CVC-J-20, Defendant's Motion to Dismiss (D.Fla., October 4, 1995).

[19] Richard Kluger,Ashes to Ashes: America's Hundred-Year Cigarette War, the PublicHealth, and the Unabashed Triumph of Philip Morris (New York:Alfred A. Knopf, 1996), p. 760.

[20] George McGovern,"Whose Life Is It?" New York Times, August 14, 1997, p. A35.

[21] Tribe testimony,p. 11.

[22] See Levytestimony, pp. 10-12.

[23] Richard Scruggs,remarks to the Federalist Society, National Conference on CivilJustice and the Litigation Process, September 12, 1996, transcript,p. 188.

[24] Stephen Rothman,"Tobacco Industry Defense Move Curbed by Fla. Judge," Reuters,February 3, 1997.