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Texas Tbacco Settlement Essay, Research Paper










How it all Began

Dan Morales never thought that he would be involved in the biggest negotiation process of his political career. He had to convince a judge that the tobacco industry was in violation of conspiracy and racketeering. This entire process for Morales and the state of Texas began in 1996, when as the Attorney General, he sued the entire tobacco industry. The tobacco industry was renowned for its undefeated record in court battles, and doubt about the success of the Texas lawsuit was widespread. Now, scarcely more than two years later, the people of Texas have become the beneficiaries of the largest victory in American legal history. But, what was Morales thinking when he sued the industry for illegal activities in 1992.

He asked several national restaurant chains to voluntarily protect their customers especially children from the dangers posed by second-hand smoke. He believed the fast food industry, which was spending millions on advertising to entice children into their facilities, had a duty to ensure that those facilities were safe. When negotiations failed in 1994, the Attorney General filed suit against several fast food chains. As a result of his legal actions, these chains agreed to impose non-smoking policies in their corporate owned restaurants and encouraged their franchise owners to go smoke free. At the same time, the Texas Attorney General joined forces with other state attorneys general to explore ways to hold the tobacco industry accountable for the harm it has caused to public health. The Texas Attorney General would not stop at this point. It was as if he knew that persistence would pay off if he could convince the right people that the tobacco industry was lying about their role in killing off children, adults and making life difficult for the love ones of the victims. How could he pursue a negotiation with an industry as powerful as the tobacco industry, not to mention the industry leaders in tobacco products?

In 1994, the heads of America largest tobacco companies testified under oath in congress that:

 Cigarettes do not cause cancer

 Nicotine is not addictive

 Their companies do not manipulate Nicotine levels in cigarettes

Events would quickly prove that these executives were lying. A package was delivered by Federal Express to the University of California researcher specializing in tobacco related health problems. The package, sent anonymously, held thousands of pages of files containing forty years of tobacco industry secrets.

Those documents, which came to be known as the Cigarette Papers, provided the first hard evidence of an illegal conspiracy by the tobacco industry. They revealed that promises made since 1954 by the tobacco industry to inform the public of smoking effect on health were never kept. Even worse, for the next forty years, the industry actively worked to discredit valid research and distorts the truth about the dangers of smoking. The tobacco industry suppressed documentation that showed smoking caused disease. They suppressed research that identified ways to make safer cigarettes. They publicly denied that nicotine is addictive when their own internal documentation prove they were actively working to make cigarettes more addictive. Is this perhaps the last of the tobacco industry dynasty that has made a lot of people and companies very rich? This is when the actual negotiation process between the tobacco industry and heads of states and other officials began. More evidence began to leak out from the tobacco industry’s smoke screen, as scientist who knew other secrets about the tobacco companies came forward. This powerful evidence increased the State’s resolve to challenge the tobacco industry.

Literature Review:

A Game Theory

Unlike other State Attorney Generals, Morales wanted to make the charges against the tobacco industry stick. During my research, I found that there were some complication with the litigation process, particularly when it came down to negotiating the actual pay of the attorneys involved. Morales put together a superb team of attorneys that had one simple goal in mind, which was to negotiate a deal that would make the people in the State of Texas happy. Several issues for negotiation were put on the table and the attorneys knew that with the history involving suing the tobacco industry before them, they had to be crisp and detailed with presenting the evidence gathered by the state. Texas like every other state that sued the tobacco companies, was compelled to enlist the help of private attorneys to litigate the case and to underwrite its enormous costs. To wage the lawsuit against the multi-billion-dollar tobacco industry would cost tens of millions of dollars in up-front legal expenses. Given that the tobacco industry had never lost a dime in smoking related litigation, the case could otherwise have put an excessive amount of taxpayer dollars at risk. This argument assured that the state could pursue the litigation without any financial risk. A group of the nation s most successful litigators was assembled to take on the tobacco industry. They agreed to pay all litigation costs, to assume all financial risks and to be compensated only in the event the state won by a contingency fee of 15%, the lowest fee agreement negotiated by any state at the time.

The tobacco industry remained defiant until days before the trial was set to begin. They sued Attorney General Morales in 1995, claiming he lacked the authority to sue them even before he filed suit. They paid for and released a poll that intended to show that there was little public support for a lawsuit against them. They engaged in personal and political attacks against the Attorney General. As mentioned earlier, the tobacco industry is very powerful and consists of the following Companies:

1. The American Tobacco Company – a Delaware corporation whose principal place of business is located in Greenwich, Connecticut. The American Tobacco Company (ATC) manufactured, advertised and sold Lucky Strike, Pall Mall, Tareyton, Malibu, American, Montclair, Newport, Misty, Barclay, Iceberg, Silk Cut, Silva Thins, Sobrania, Bull Durham and Carlton cigarettes throughout the United States.

2. R.J. Reynolds Tobacco Company – a corporation located in New Jersey, with an agent for service in the State of Texas. R.J. Reynolds Tobacco Company is a wholly-owned subsidiary of RJR Nabisco, Inc. R.J. Reynolds Tobacco Company manufactures, advertises and sells Camel, Vantage, Now, Doral, Winston, Sterling Magna, More, Century, Bright Rite and Salem cigarettes throughout the United States.

3. Brown & Williamson Tobacco Corporation (”B&W”) is a corporation located in Delaware. Brown & Williamson Tobacco Corporation (B&W) manufactures, advertises and sells Kool, Barclay, Belair, Capri, Raleigh, Richland, Laredo, Eli Cutter and Viceroy cigarettes throughout the United States.

4. B.A.T. Industries P.L.C. (”B.A.T. Industries”), prior to 1976 known as British American Tobacco Company Limited, is a British corporation with its principal place of business London, England.

5. Philip Morris, Inc. (Philip Morris U.S.A.), a subsidiary of Philip Morris Companies, Inc., is a corporation located in Virginia. Philip Morris, Inc. manufactures, advertises and sells Philip Morris, Merit, Cambridge, Marlboro, Benson & Hedges, Virginia Slims, Alpine, Dunhill, English Ovals, Galaxy, Players, Saratoga and Parliament cigarettes throughout the United States.

6. Lorillard Tobacco Company, Inc. is a corporation located in Delaware. Lorillard Tobacco Company, Inc. is a subsidiary of Loews Corporation. Lorillard Tobacco. Company, Inc. manufactures, advertises and sells Old Gold, Kent, Triumph, Satin, Max, Spring, Newport and True throughout the United States.

7. United States Tobacco Company (UST) is a Delaware corporation whose principal place of business is located in Greenwich, Connecticut. United States Tobacco Company manufactured, advertised and sold Sano and Skis cigarettes and smokeless tobacco products throughout the United States.

8. Hill & Knowlton, Inc. is a corporation located in New Jersey. Hill & Knowlton, Inc. played an active and knowing role in the conspiracy complained of, aiding the circulation and/or publication of many false statements of the tobacco industry attributable to the Tobacco Institute Research Committee (TIRC) and the Council for Tobacco Research.

9. The Council for Tobacco Research — U.S.A., Inc. (successor in interest to the Tobacco Institute Research Committee) is a non-profit corporation organized under the laws of the State of New York.

10. The Tobacco Institute, Inc. is a non-profit corporation organized under the laws of the State of New .

11. Liggett Group, Inc., (Liggett) a subsidiary of the Brooke Group, Ltd. and operating successor of Liggett & Myers Tobacco Co. (Liggett & Myers), is a corporation located in Delaware. Liggett Group, Inc. manufactures, advertises and sells Chesterfield, Decade, L&M, Pyramid, Dorado, Eve, Stride, Generic and Lark cigarettes throughout the United States.

The tobacco industry was accused of violating conspiracy, racketeering, wire fraud, mail fraud, consumer protection, and antitrust laws, as well as other violations of federal and state laws. As Attorney General Morales began this process, he explained, If you are an adult and you choose to smoke, that s your business. But when the tobacco industry violate Texas laws, that s our business . This is not a game that Morales is playing, not even in the sense of the Game Theory mentioned in the text for Negotiation Skills for Managers. But, could this lawsuit end in a situation in which one party wins and the other necessarily loses, or the interest and outcomes of the parties are both in conflict and congruent. This would make it possible for one to win, both to win, or neither to win. Morales wanted the first option, either to win or lose and he had no plans on losing. What he wanted to do was to put an end to tobacco advertising targeting children, plus the recovery of billions of Texas tax dollars paid to treat Medicaid patience suffering from tobacco related illnesses. The state said it could prove that the cigarette companies conspired to profit from product designed to cause mass addiction they knew would result in disease or death.

The Settlement:

For months after the Texas suit was filed, the tobacco companies engaged in a familiar pattern of delay and diversion. But the state s case built steadily, so that by late 1997, Texas was prepared to be the first state to confront the tobacco industry in a court of law. The tobacco companies said repeatedly they would never settle, but the day before jury selection was to begin, they backed down. The long-running battle with Big Tobacco was all but over. What had begun as a legal battle of unparalleled difficulty ended as an unprecedented victory for the state and its citizens.

On January 16, 1998, Texas agreed to a settlement with the tobacco industry for more than $15 billion dollars, making it the largest dollar amount ever won in a court of law. Throughout the settlement discussions, Attorney General Morales insisted on the inclusion of a most favored nation provision, which would allow Texas to benefit from future more favorable settlements negotiated by other states with the tobacco companies. When the industry balked at the demand, the Attorney General called it non-negotiable, he considered the provision essential to protect the state s interest. Failure to include it was, he said, a deal breaker. The industry gave in. This was indeed, Dan Morales Resistance Point.

The next state to sue Big Tobacco, Minnesota, reached a settlement after a four-month court battle. The Minnesota settlement triggered the most favored nation provision Attorney General Morales had negotiated and required the tobacco industry to pay Texas an additional $2.2 billion. Working with state leaders, the Attorney General was able to earmark the additional funds for Texas counties and hospital districts throughout the state. The final revised settlement was signed on July 24, 1998.

Dan Morales said the settlement would be paid out over 25 years, with the first $1.2 billion due this year. Much of the initial money is earmarked for a variety of health programs for children, including a foundation for children’s health, anti-smoking programs and cancer research at state institutions. More than a million poor children in Texas without health insurance will receive the care they need. The taxpayers of Texas are now fully compensated for the cost of providing health care to those afflicted with tobacco-related diseases.

Summary of the negotiated tobacco settlement

1. The Foundation

Anti-smoking advertising campaigns are extremely effective when they are long-term, and consistently portray smoking as hazardous for adults and children alike, according to an article in the Annals of Internal Medicine.

a) The Settlement:

 Requires the industry each year for ten years to pay $25 million to fund a charitable foundation, which will support the study of programs to reduce teen smoking and substance abuse and the prevention of diseases, associated with tobacco use.

2. Cartoon Characters

Tobacco advertisements present images that appeal to children and youths and are seen and remembered by them. Concern has been expressed that while smoking may not have had an immediate effect on smoking uptake, they may increase susceptibility to smoking, which over time translates into behavior.” Institute of Medicine.

a) The Settlement:

 Bans use of cartoons in the advertising, promotion, packaging or labeling of tobacco products.

3. Targeting Youth

“This young adult market, the 14-24 group represent(s) tomorrow s cigarette business. As this 14-24 age group matures, they will account for a key share of the total cigarette volume for at least the next 25 years.” Presentation from C.A. Tucker, Vice President of Marketing, to the Board of Directors, RJR Industries, September 30, 1974.

a) The Settlement:

 Prohibits targeting youth in advertising, promotions, or marketing.

 Bans industry actions aimed at initiating, maintaining or increasing youth smoking.

4. Public Access to Documents and Court Files

“The American people deserve to know the truth about the tobacco industry s marketing practices .” U.S. Rep. Thomas Bliley.

a) The Settlement:

 Requires tobacco companies to open, at their expense, a Website which include all documents produced in state and other smoking and health related lawsuits.

 Requires the industry to maintain the site for ten years in a user-friendly and searchable format (requires and index and other features to improve searchable access).

 Requires the industry to add, at its expense, all documents produced in future civil actions involving smoking and health cases.

5. Outdoor Advertising

“Tobacco companies spend more than $5 billion annually, or $13 million a day, on advertising and marketing campaigns.” Federal Trade Commission.

a) The Settlement:

 Bans all outdoor advertising, including: billboards, signs and placards in arenas, stadiums, shopping malls, and video game arcades.

 Limits advertising outside retail establishments to 14 square feet.

6. Tobacco Merchandise

“Thirty percent of kids (12 to 17 years old), both smokers and nonsmokers, own at least one tobacco promotional item, such as T-shirts, backpacks, and CD players.” Campaign for Tobacco-Free Kids.

a) The Settlement:

 Beginning July 1, 1999, bans distribution and sale of apparel and merchandise with brand-name logos (caps, T-shirts, backpacks, etc.).

7. Product Placement and Sponsorships

A document uncovered in the Minnesota case revealed how Phillip Morris provided products for use in movies as youth-oriented as “The Muppet Movie” and “Who Framed Roger Rabbit.”

a) The Settlement:

 Bans payments to promote tobacco products in movies, television shows, theater productions or live performances, live or recorded music performances, videos and video games.

 Prohibits brand name sponsorship of events with significant youth audience or team sports (football, basketball, baseball, hockey or soccer).

8. Dissolution of Tobacco-Related Organizations

“The documents, considered as a whole, provide evidence that supports the state s assertions that defendants used CTR (Council for Tobacco Research) to mislead the public…” Honorable George Finkle, King County Superior Court Judge (Washington State).

a) The Settlement:

 Disbands the Council for Tobacco Research, the Tobacco Institute, and the Council for Indoor Air Research.

 Requires all records of these organizations that relate to any lawsuit to be preserved.

 Provides regulation and oversight of new trade organizations.

9. Financial Recovery for the States

a) The Settlement:

 Requires industry payments to the states in perpetuity, with the payments totaling $206 billion through the year 2025.

 Provides that distributions to states will be made based on formulas agreed to by Attorneys General.

 Requires annual payments by the industry to begin April 15, 2000.

 Provides that if all states participate in the settlement, annual payments will “ramp-up” beginning with a $4.5 billion payment on April 15, 2000. Ensuing April 15 payments will be at the following rates:

 2001: $5 billion

 2002-2003: $6.5 billion

 2004-2007: $8 billion

 2008-2017: $8.139 billion (plus $861 million to the strategic fund)

 2018 on: $9 billion

 Requires tobacco companies will pay “up front” payments of nearly $13 billion in the following amounts:$2.4 billion in 1998, $2.472 billion on January 10, 2000, $2.546 billion in 2001, $2.622 billion in 2002, and $2.701 billion in 2003.

 Requires the companies, on April 15, 2008 and on April 15 each year through 2017, to pay $861 million into a strategic contribution fund.

 Money from the fund will be allocated to states based on a strategic contribution formula developed by Attorneys General no later than June, 1999. The allocation formula will reflect the contribution made by states toward resolution of the state lawsuits against tobacco companies.

10. Enforcement

“At least 516 million packs of cigarettes per year are consumed by minors and at least half of those are illegally sold to minors.” Institute of Medicine in its book Growing Up Tobacco Free.

a) The Settlement:

 Provides Court Jurisdiction For Implementation and Enforcement

 If the court issues an enforcement order enforcing the agreement and a party violates that order, the court may order monetary, civil contempt or criminal sanctions to enforce compliance with the enforcement order.

 Key public health provisions of the agreement are included in consent decrees to be filed in each state.

11. Free Samples

“Samples encourage experimentation by providing minors with a risk-free and cost-free way to satisfy their curiosity.” — Institute of Medicine.

a) The Settlement:

 Free samples cannot be distributed except in a facility or enclosed area where the operator ensures no underage person is present.

12. Gifts Based on Purchases

Teens save Marlboro Miles and Camel Cash coupons in order to acquire other types of goods. . . . My brother gets Camel Cash. He s got stacks and stacks of them to get hats or whatever.” The Institute of Medicine in its book Growing up Tobacco Free.

a) The Settlement:

 Bans gifts without proof of age.

13. Lobbying

“Big tobacco spent $28.8 million in 1996 and $35.5 million in 1997 and employed 208 lobbyists to lobby Congress. That is one lobbyist for every 2.5 members of Congress.” Public Citizen.

a) The Settlement:

 Tobacco companies prohibited from opposing proposed state or local laws or administrative rules, which are intended to limit youth access to and consumption of tobacco products.

 The industry must require its lobbyists to certify in writing they have reviewed and will fully comply with settlement terms including disclosure of financial contributions regarding lobbying activities and new corporate culture principles;

 Prohibits lobbyists from supporting or opposing state, federal, or local laws or actions without authorization of the companies.

14. Prohibition on Agreements to Suppress Research

“Cigarettes kill more than 400,000 Americans every year. This figure represents more deaths than from AIDS, alcohol, car accidents, murders, suicides, drugs and fires combined.” Campaign for Tobacco-Free Kids.

a) The Settlement:

 Prohibits manufacturers from jointly contracting or conspiring to:

 Limit information about the health hazards from the use of their products;

 Limit or suppress research into smoking and health; and

 Limit or suppress research into the marketing or development of new products.

 Prohibits the industry from making any material misrepresentations regarding the health consequences of smoking.

15. Minimum Pack Size

“As the price of a pack of cigarettes continues to increase, more merchants (in minority, white, poor, and middle-class communities alike) may begin selling singles as a way to continue to make profits from adult and minor customers. ” From a study by the Public Health Foundation.

a) The Settlement:

 Limits minimum pack size to 20 cigarettes through December 31, 2001.

 Tobacco companies prohibited from opposing state legislation, which bans the manufacture and sale of packs containing fewer than 20 cigarettes.

16. Cost Recovery and Attorney Fees

a) The Settlement:

 Requires the industry to reimburse states for costs, expenses and market rate for attorney fees.

 Requires the industry to pay for outside attorneys hired by the states.

 Establishes two payment methods liquidated fee agreement and arbitration.

 Outside counsel can negotiate a liquidated fee agreement with the industry, and if accepted, would be paid from a $1.25 billion pool of money from the tobacco industry over four years.

 If outside counsel rejects the liquidated fee process or cannot agree to an offer, they can go through arbitration.

 A three-member arbitration panel will be established with two permanent members and a member from the state represented by the outside counsel.

 The industry will pay whatever arbiters award, but timing of the payment will be subject to a $500-million-per-year cash flow cap.


The final settlement of $17.3 billion is the largest in the history of U.S. litigation. It will provide an average contribution of $580 million per year or $1.160 billion per biennium to the state budget, for the next quarter century. Legislative leaders have pledged to dedicate a large amount of this money for public health and anti-smoking efforts. The tobacco industry settlement presents Texas with an unprecedented opportunity to improve public health efforts, especially for children. This settlement gives Texas a chance to be compared to the best public health efforts, rather than the worse. Texas ranks 40th in the nation in terms of the well being of its children. We have more children in poverty, more children dropping out of school, and more teenage children giving birth than the national average.

The battle with Big Tobacco is over, and the citizens of Texas are the winners. The victory ensures our leaders have the resources to improve our state s commitment to public health, and especially to our children s health, without the need to raise taxes. In 1998, the use of tobacco remains the number one cause of preventable death, and the number one cause of preventable diseases in Texas. If the victory over the tobacco industry is to have long-term impact, we must reduce the damaging hold tobacco addiction has on the people of Texas. The single best way to reduce the harm tobacco causes is to lower the number of children who become addicted to cigarettes before they are old enough to legally buy them. The tobacco settlement, through its prohibition of cigarette billboard advertising and other practices, restricts the tobacco industry s efforts to market their products, especially to children. At the same time, it gives the state of Texas the funds to launch its own campaign against teenage smoking.

Finally, in his own words, Dan Morales made the statement: This settlement can be a great achievement for the people of Texas, but only if it is invested in public health.”















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