Social Studies August 2005

Can a Little Lawsuit Shut Down a Big Tobacco Racket?

Here's hoping that a lawsuit filed in federal court against the 1998 Master Settlement Agreement—otherwise known as the Tobacco Deal—is taken seriously.

Coming soon to a courtroom near you: Bambi meets Godzilla. This week, the Competitive Enterprise Institute, a free-market advocacy group in Washington, filed suit in federal court to challenge the constitutionality of the massive and fantastically lucrative 1998 Master Settlement Agreement—otherwise known as the Tobacco Deal. Arrayed against the suit's five plaintiffs (several small tobacco companies and distributors, plus a discount tobacco store and a smoker) will be Big Tobacco, the state attorneys general, a host of public-health organizations, and probably most of the mainstream media. Other than that, it's a fair fight.

Asked about the lawsuit's prospects, Sam Kazman, the institute's general counsel, says, "It's a long shot to ever get something declared unconstitutional." After a beat, he adds: "A meritorious long shot." After another beat: "I don't think it's even right to call it a long shot. I think we've got a significant chance of success."

Sorry, Sam—it's a long shot. Still, miracles do happen, and this lawsuit deserves a prayer. Not without reason has the Tobacco Deal been called the constitutional crime of the (last) century.

For years, tobacco companies faced and won lawsuits in which smokers claimed damages for ailments caused or aggravated by smoking. In 1994, however, the state of Mississippi filed a different kind of suit, demanding that the companies repay the state for health-program costs allegedly attributable to smoking. Dozens of other states soon filed copycat suits, many of them financed by law firms that acted as subcontractors and stood to earn contingency fees of unprecedented size.

The four tobacco giants that together controlled about 99 percent of the market were smart enough not to bet on prevailing against dozens of state governments. They and nine attorneys general retreated behind closed doors and emerged in 1998 with a 245-page settlement. "The nonparticipating attorneys general," notes the CEI complaint, "were given seven days to review its terms and decide whether to join it." Thus hustled, they signed on. The AGs would drop the state lawsuits. In exchange, the companies would pay the states (including four that had already made separate deals) a total of almost $250 billion over 25 years—as in, a quarter of a trillion dollars.

Who would foot this enormous bill? Ordinarily, shareholders. But the majors didn't like that idea. They preferred to pass the cost to smokers. So they colluded with the AGs to create a national tobacco cartel. The deal guaranteed the majors their overwhelming market share and effectively barred new competitors from all but a tiny sliver of the U.S. tobacco business.

Any company that wanted to sell cigarettes—even a start-up that had never fouled a single pair of lungs, much less committed any tort—would be forced either to join the MSA and pay "damages" for wrongs never committed or to place an even larger amount into "escrow" against wrongs that might be committed someday. Not surprisingly, the majors' small competitors—about four dozen of them so far—have reluctantly agreed to pay the same new national tax as the majors pay.

And a national tax, not damages, is plainly what these payments are. Under the settlement's terms, all tobacco companies, large and small, are assessed at nationally standardized rates based on their national (not state) sales. The states give Big Tobacco permanent protection from competition, Big Tobacco showers the states with money, and smokers pay. Not at all coincidentally, billions of dollars also found their way to lawyers who cut themselves in for mind-boggling fees.

What was wrong with this deal? A better question would be, What was not wrong with it? For a start:

  • The states' claim was bogus to begin with. Economists have found that smoking, if anything, reduces the cost of government programs, because smokers die younger and have fewer years to collect health and pension benefits. Smoking is bad for smokers, but it has done state coffers no harm at all.
  • The transaction was, literally, mercenary. In effect, the attorneys general rented out the states' sovereign authority to private lawyers who were cut in on the take. Moreover, some of the lucrative subcontracting deals smacked of cronyism, or worse. (Former Texas AG Dan Morales got a four-year prison sentence in a case stemming from his role in the deal.)
  • The deal was Robin Hood in reverse. It provided an immense windfall to the powerful (state governments) and the rich (giant tobacco companies, now favored with a state-enforced cartel), at the expense of the small (would-be competitors to the tobacco giants) and not-rich (smokers).
  • The deal was falsely advertised. Most of the settlement revenues did not go for public-health programs, as promised, but for whatever a state's politicians chose to spend the money on. Public-health advocates were played for patsies.
  • Still, the tobacco deal is not the first public policy arrangement to break a promise, or to favor the rich, or to be tainted with cronyism, or to be built on bogus premises. What sets it apart is that it bypasses and neuters the system of checks and balances we call constitutional government.

    Presented by

    Jonathan Rauch is a contributing editor of The Atlantic and National Journal and a senior fellow at the Brookings Institution.

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