THE FINAL ROUND IN THE SMOKE RING?

America's cigarette companies are about to do battle in a tiny Mississippi courthouse with a group of lawyers called 'The Equalizers', who want them to pay for the billions of dollars spent treating people with smoking-related diseases. And this time, the tobacco firms are running scared because of a series of defections, secret deals, and what was found in a bundle of stolen documents. Peter Pringle reports

The waiters at Antoine's, one of the most famous and oldest restaurants in the French quarter of New Orleans, still talk about the night the tobacco lawyers came to dinner. It was a few days before Christmas 1994. One private room had been booked by 60 law firms who had banded together to sue the tobacco companies. Another room had been reserved by the tobacco company lawyers. And in a third room were Wall Street analysts wondering what the price of tobacco stocks would be after the lawyers had done battle in court the next morning.

The anti-tobacco group was in a festive mood. It belonged to that gifted but often despised (they are regarded by many as ambulance chasers) group known as "The Equalizers". It puts up funds to sue big business on behalf of the common man and takes a percentage of the damages. But its guest list sounded more like the cast of The Godfather. Its leader was a local Cajun lawyer, Wendell "The Goat" Gauthier, also known as "The General". There was Melvin Belli, "The King of Torts", and Stanley Chesley, "The Master of Disaster".

The tobacco companies are tough opponents in court. They have yet to pay a dime in damages after more than a thousand claims from smokers with lung cancer and heart disease. A tobacco company lawyer had once boasted, paraphrasing General Patton, that he won cases not by spending his company's money, "but by making the other son-of-a-bitch spend all of his."

But Gauthier's group was ready for battle. In recent years its members had made millions of dollars representing victims of asbestosis and some of them had just landed the biggest-ever damages award, $4.2 billion, from the makers of silicon breast implants. They would take a third in fees.

Success against "Big Tobacco" (the six major cigarette firms in the US) depended on a mass offensive - but this collection of super egos had never hunted in a pack. With masterful tact and humour, Gauthier had persuaded each lawyer to put up $100,000 a year to sue on behalf of tens of millions of Americans addicted to nicotine. A cache of stolen tobacco company documents, recently made public, provided new evidence.

The tobacco companies had never faced such a formidable foe. The financial risk to the industry was "staggering", Wall Street had warned. Loss of the suit could result in damages of $100 billion - twice the industry's annual turnover.

The tobacco company lawyers, chosen from the most prestigious law firms in the country, looked down on Gauthier's group as a lower caste - vulgar, money-grabbing and generally a disgrace to the profession. They were led by a former US attorney general, Griffin Bell. Their job was to persuade the New Orleans court that Gauthier's unprecedented class action was simply too big for the courts to handle.

At one point during the evening Gauthier, known for his practical jokes, hired a Santa Claus and sent the tobacco companies a Christmas present: an Antoine's speciality called Baked Alaska, a huge ice-cream pudding covered for the occasion with bright red "No Smoking" signs made out of icing sugar. The company law-yers refused the gift and left in a huff, abandoning their brandy and, of course, their cigars.

The battle for Big Tobacco had begun. The next day each side argued its case in front of a judge and the Wall Street analysts confidently predicted an instant victory for the tobacco companies. The suit would never go ahead, they advised their nervous blue-chip investors. But the advice was premature.

Over the next 18 months, while the court debated the merits of the massive law suit, Gauthier and his comrades blasted the companies in an unrelenting media blitz.

They leaked copies of internal tobacco company documents - sometimes in defiance of court orders - harboured and promoted industry whistle- blowers, and they turned up the heat of America's anti-smoking crusade as never before. Whenever possible, Gauthier's group derided the tobacco companies as liars, bullies and cheats. They were a bunch of "rascals who should be in jail," Gauthier said, savouring the thought. Big Tobacco became America's new Evil Empire.

The new anti-tobacco climate spurred other liability lawyers to greater efforts against the industry. Most significantly, state governments joined the fray. Taking the tobacco companies by surprise, they adopted an ingenious new legal strategy. They sued for billions of dollars in state medical-care expenses spent on smokers with tobacco-related diseases.

Gauthier's massive lawsuit was finally rejected as too big and unwieldy, but he fought on. He simply divided the suit into smaller ones and filed in cities across the nation.

The result is the biggest legal showdown America has ever witnessed. Two-and-a-half years after the Antoine's dinner, at least 530 law firms and thousands of attorneys are engaged in the battle for the hearts and lungs of America. The costs are stunning. Half of the country's largest law firms, whose attorneys charge $500 an hour, are working for the tobacco companies. And the industry's legal bills are at least $600 million a year.

More than 300 law suits are pending with potential damages amounting to hundreds of billions of dollars. They include 200 suits filed by individual smokers and scores of class actions - one of them is seeking damages for all US flight attendants who claim that they have suffered from secondary smoking, or what Americans call "second-hand smoke". An individual smoker actually won a suit last year. In Florida, a jury awarded $750,000 to a lung-cancer victim, the industry's first defeat if it stands up on appeal.

The long arm of US civil law has drawn in Britain's biggest tobacco enterprise, BAT Industries. The company owns Brown & Williamson, the third largest American cigarette maker. BAT spent $100m last year on legal fees in America, including a court-ordered production of 12 million company documents. And tobacco trial fever has finally hit Britain where Imperial Tobacco and Gallaher are being sued by 40 lung cancer victims (see box).

Chastened, BAT has said it will look at "any sensible proposal" for an out-of-court settlement. In the US, the smallest of the American tobacco companies, Liggett, whose ailing Chesterfield brand was once advertised by a young B-movie star named Ronald Reagan, has already agreed on a symbolic settlement.

The bigger American companies - Philip Morris and R J Reynolds - are vowing to fight on, but their legal costs keep rising and, at some point, the company accountants, or the shareholders, are bound to complain. The White House and several members of Congress appear interested in brokering a deal that would end the law suits, but efforts are stalled. A national settlement would require approval by the US Congress and payments by the companies of as much as $250 billion over the next 25 years.

The focus now is on the first batch of the 23 state trials to recoup medical costs. Four of them are due within 12 months; Mississippi, Florida, Texas and Minnesota.

The tobacco companies presumed they would never face the massed armies of The Equalizers in court. They had hired the finest legal minds money could buy - graduates of the Ivy League law schools of Harvard and Yale - and they believed their unbeaten record was safe. But they had misjudged the ingenuity and determination of opponents like Gauthier - and especially of a small band of Mississippi country lawyers, whose willingness to spend their own money, capacity for secret deals and dogged pursuit of victory has brought Big Tobacco to its knees. "Up there, they think of us down here as a bunch of yahoos," said one of them, "but we're going to win."

In a few week's time, the first of the state suits to recover medical costs is due to start in the tiny courthouse of Pascagoula, a small port on Mississippi's Gulf coast.

The last big liability case there was brought by a local lawyer of modest background named Dick Scruggs. Like many adventurous youths in Pascagoula, Scruggs joined the navy. He flew jets from aircraft carriers for 10 years before leaving to attend law school at Ole Miss, the state university famous for its football team and literary alumni, among them William Faulkner. After graduation, Scruggs moved back to Pascagoula where thousands of shipyard workers had suddenly found themselves crippled with asbestosis. Scruggs read up on pulmonary medicine and started suing the asbestos firms. Within a few years he made the first million dollars for his company.

A law-school buddy named Mike Moore was elected the state's attorney general and one of his first tasks was to sue the asbestos companies for the cost of removing asbestos from the state's public buildings. He hired Scruggs.

So far, the state has recovered $20 million. Scruggs received his 25 per cent fee and became a Southern gentleman of considerable means. "I happened to be in the right place at the right time," he says modestly.

By the Nineties, Scruggs was the owner of two yachts, a holiday home in Florida and his own jet. His personal after-tax income averages about $1m a year, but you wouldn't know it. Unlike some of his more colourful brethren in the plaintiff's bar - Stan Chesley, for example, has an office the size of a football field - Scruggs's cramped, spartan headquarters are in a shopping mall. He drives a dark-green Mercedes two-seater, but it's parked outside the back door because there is no room at the front of the office. In place of the usual English hunting prints on the wall, there are pictures of sailing boats and Scruggs piloting navy jets.

To Scruggs, the time had come for social responsibility. As he says, "We had bought boats and aeroplanes but once we got past that stage it was time to put money back into the system. We had a war chest and it was our duty to reinvest it."

Like all liability lawyers, Scruggs had thought of suing the tobacco companies but had been warned off by their unbeaten court record. The companies bullied their opponents into submission with endless motions and harrowing depositions: the pre-trial examination of witnesses which is part of the American legal process. These would sometimes last days with lawyers' costs mounting. It was not unusual for plaintiff law firms to spend $1m before giving up the hopelessly unequal struggle.

In the 21 cases that have been tried to a verdict the tobacco lawyers successfully argued that the smoker knew about, and had assumed the risks, of smoking. The companies also persuaded juries, against the common scientific consensus, that there was a reasonable doubt that smoking caused cancer and heart disease. A battle against Big Tobacco required a new legal theory, immune to such debates.

Scruggs and Moore chose the theory of equity: it was unfair, they claimed, that the state - the Mississippi taxpayer actually - had to pay the medical bills of smokers whose health had been damaged by the tobacco companies. In such a claim the state was not stepping into the smoker's shoes, so arguments about assumption of risk and proof of causation didn't apply. "It was like choosing the right weapon in war," says Scruggs. "If you use the wrong weapon against a tank, you're not going to blow it up."

When Scruggs and Moore filed their case in the summer of 1994, the tobacco companies were taken by surprise. They tried all kinds of legal tricks to get the case dismissed, including a challenge to Moore's authority to bring the suit in the first place. They resurrected an ancient state law which suggested that Moore, a Democrat, should have first asked permission of the state's governor, who happened to be a pro-tobacco Republican. It didn't work. "These lawyers spend more time thinking of ways to play dirty tricks than they do trying to win the case," says Scruggs. "We're going to beat them anyway."

Meanwhile, Scruggs had some luck. A $9-an-hour clerk named Merrell Williams had been working in Kentucky for the British-owned tobacco company, Brown & Williamson. Sorting through confidential files Williams was shocked to discover how much the companies knew about smoking and health - especially about nicotine addiction, lung cancer and heart disease. But the companies hadn't told anyone. Williams stole several thousand pages of the most damaging memoranda and gave them to Scruggs.

Scruggs immediately flew to Washington in his private plane and delivered the Williams documents to a Congressional comm-ittee holding hearings into the effects of smoking. Within one month the documents were all over the US media and ended up on the World Wide Web. Since then, tobacco company whistle-blowers have come forward with additional evidence on what the companies knew and how they attempted to suppress it.

For their part, the tobacco companies greeted each revelation with disdain; it would not affect their chances of winning, they said. They didn't owe the state anything, they argued, because of "offsets" to the medical bills. Smoking might actually have saved the state money, they claimed, through tobacco sales taxes and the reduced cost of state pensions and geriatric care because cigarettes killed people prematurely.

Moore said the "euthanasia defence", as it became known, was "perverse and depraved - seeking benefit from an early death was like robbing the graves of Mississippi smokers who had died prematurely from tobacco-related diseases." Scruggs pointed out that taxes are "not a damage deposit... the guys who blew up the federal building in Oklahoma can't defend that damage claim by saying they paid more than its value in taxes. Anyway, the tobacco companies don't pay the taxes, the smokers do." Scruggs and Moore met each move by the companies with an even better countermove. They also had a secret weapon which would change the course of the battle.

ANOTHER of their buddies from law school was Don Barrett, a disarmingly unpretentious member of the plaintiff's bar. He runs the family law firm in the tiny town of Lexington, population 2,000, in the northern hill country of Mississippi. He tried his first tobacco case in 1988.

A local black man had died of lung cancer after 30 years' smoking cigarettes and Barrett sued for $17m. The jury found smoking caused his death but awarded no damages because it found the smoker was partly to blame. Before the trial was over Barrett had to mortgage his house to pay his costs and by then, as he put it, he had developed his own tobacco habit. He was hooked on suing the industry until he won a case. "If you're going to fight the snake, kill the snake," is one of his favourite Southern aphorisms. When Gauthier launched his suit in New Orleans, Barrett joined in. He also teamed up with Scruggs and Moore.

But the real chance of a breakthrough for Barrett came towards the end of 1995, in a New York bar. He was having drinks with an attorney he had just beaten in a liability case over faulty industrial pipes and was talking of spending his award money of several millions on his "tobacco habit". The attorney asked, "What's that?" And Barrett told him.

What Barrett didn't know at the time was that the attorney also represented Bennett LeBow, a maverick financier and corporate raider who is the major shareholder in the Liggett cigarette company. LeBow, a former computer specialist, was always open to a deal and the thought of doing business with The Equalizers gave him no pause. In his time he had been called a "master finagler" and a "weasely raider". He once charted a jet to fly to London for a $3.5m party celebrating the launch of his custom-built yacht, which was modelled after Queen Victoria's. LeBow invited the Mississippi lawyers to start secret talks to settle the lawsuits against his firm.

Liggett is a minor player in the US tobacco market, with a mere two per cent, but LeBow was fighting a proxy war to take over R J R Nabisco, the parent of the R J Reynolds tobacco company which makes the popular Camel cigarettes.

LeBow's plan was to make an out-of-court settlement with lawyers like Gauthier and Scruggs and at the same time get them to agree that any other tobacco company he bought would have the same relief from law suits. That way, his bid for R J R looked more attractive to its shareholders.

In March last year an agreement was struck. It was a symbolic deal; the damages payable were negligible and depended on Liggett's pitiful profits. But as the anti-smoking President Clinton said, it was the "first crack in the wall of denial" of the harmful effects of smoking by the cigarette makers.

The bigger companies branded LeBow as a traitor, but at the same time there were hints that a deal to end the lawsuits was not out of line. Steven Goldstone, the CEO of R J R Nabisco, said of the proposal, "It isn't the kind of thing that the tobacco industry would try to obstruct." He added that the industry did not have "such a fight-to-the death mentality that it would not ignore eminently reasonable solutions."

LeBow's takeover bid failed, but the deal had opened the door and Scruggs sought a wider settlement. He called Trent Lott, the Senate Republican majority leader in Washington, who happens to be his brother-in-law, and proposed negotiations with the companies. Lott suggested a Republican intermediary to explore the possibility of a wider deal and Scruggs hopped on his plane to the capital for more secret talks.

The question was whether a deal could be pushed through Congress before the November Presidential election. Despite unprecedented funding by the tobacco companies of the 1996 Republican campaigns - and Republican candidate Bob Dole - Clinton still looked like a sure winner. Scruggs thought it would be easier to deal with Congress and the White House before Clinton was re-elected and he and Moore proposed a plan to give the tobacco companies immunity from liability suits for the next 15 years - and allow them to escape stricter government regulation. In return, the companies would pay up to $120 billion.

Rumours of the proposal divided the previously solid front of the anti-tobacco forces. Democrats in Congress derided it as a "sweetheart deal" for the tobacco companies. Public health officials complained that it would preclude a show trial that was desperately needed for the world to know what exactly the companies had been up to.

Scruggs dropped the idea, for the moment, as Wall Street analysts finally admitted the law suits were taking a toll. "For the first time we detect an unmistakable willingness by the industry to bargain, perhaps reflecting these litigation realities," wrote one of them citing the huge number of law firms which are now involved.

The burden of the mounting legal fees was being felt in Britain, too. BAT had been forced to produce over 20 million documents for inspection by a team of Minneapolis lawyers suing for medical-care costs. BAT was ready to evaluate "any sensible proposal" for an industry-wide settlement that would end the US litigation, but the largest US company, Philip Morris, continued to vow "no surrender".

BEHIND the scenes Scruggs, Moore and Barrett were working again with LeBow. By this time, the anti-tobacco lawyers had collected about all the evidence they needed, they said, to try their cases and win. But there was one key piece missing.

In the Seventies, the six largest tobacco companies, including Liggett, had formed an industry lawyers group called the "Committee of Counsel". The object was to have a legal review of company policy and research and to make sure nothing bad for business was released. Notes of the meetings were made by the lawyers - including those from Liggett. The Mississippi lawyers wanted those documents for their trial and they found LeBow open to a second deal.

LeBow appeared to be looking for a way to make ailing Liggett attractive to a bigger tobacco company. One way was to widen the previous deal, and further limit his liabilities, by including the 18 new states and numerous individuals who had jumped aboard the tobacco lawsuit bandwagon in the last year. Barrett went to work.

In March this year, LeBow struck a second deal with the plaintiffs' lawyers. This time, in return for immunity from liability, LeBow made an astonishing denunciation of the industry's long-held dogma that smoking does not cause cancer and that nicotine is not addictive. In a statement he said that Liggett officials "know and acknowledge" that cigarette smoking "causes lung cancer, heart disease and vascular disease and emphysema", and that "nicotine is addictive".

To millions of smokers, not to mention thousands of medical scientists who had studied the effects of smoking, LeBow's admissions were hardly a revelation. But to lawyers like Gauthier and Scruggs, they were the key to persuading juries and judges in their lawsuits. LeBow was also ready to turn over the Committee of Counsel documents.

Minnesota's attorney general Hubert Humphrey III, the son of the former vice president, who is leading his state in a suit against the tobacco companies said about LeBow: "This is a little like busting a drug dealer to get at the Colombian cartel."

The tobacco companies complained bitterly about LeBow's "rogue operation" and said the states' attorneys were acting "irrationally". They pretended the lawyers notes were of little concern, but nevertheless immediately obtained a court injunction preventing their release, on grounds they were privileged.

Judges around the country must now decide if this privilege is valid. In US law, any document produced by an attorney for a client, or any document drawn up in anticipation of litigation, may be privileged. But if a judge deems that industry lawyers conspired to mislead the public, or were engaged in a fraud of some kind, then he could order the documents released.

Tobacco stocks tumbled anyway. Jay Leno of the late-night TV show turned the falling stocks into a joke about how much the tobacco industry pays politicians. "Philip Morris fell six points," he said. "They lost so much money, they said they may have to lay off two senators."

The plaintiff's lawyers, who also have large sums at stake, vow this will be the final year of this dirty war. Ron Motley of Charleston, South Carolina, a tough-talking trial lawyer who made his fortune out of asbestos, just like Scruggs, says this is "Armageddon for the tobacco companies - because we going to whip their ass."

Scruggs, who had punted $3.5 million of his firm's money on the state's case is more restrained, even philosophical. "This could be the trial lawyer's finest hour," he says. "I mean, we're vilified more than any other profession except used car salesmen. We ought to be taking on rogue industries like this and using our money and resources to stop them. That's why we're in this business, and if we don't do it, who's going to?"

The Wall Street analysts are still, for the most part, unimpressed. Even if there is a trial and even if the companies are beaten, there could be a forced settlement eventually with costly damages and more government restriction, but the industry will go on selling cigarettes. The only difference, they say, is that a packet of 20 will be at least twice the price.

Then again, the tobacco companies might not lose in court. Tell that one to Commander Scruggs.

CIGARETTE BOX

GANG OF 40 GET DAY IN COURT

In the first ever legal challenge to British tobacco companies, 40 lung-cancer victims have joined in a group-action suit against the two biggest cigarette companies, Imperial and Gallahers, which together control 80 per cent of the UK cigarette market.

The plaintiffs claim that the firms have known since the Sixties how to make cigarettes that contain less tar - the chemicals in tobacco smoke identified as causing cancer. Tar standards are set by the European Commiss- ion. The maximum is 12mgs per cigarette. The lawyers say that the companies could have made an "ultra-low-tar" product, lower than 12mgs, or even a tar-free one.

Under British common law there is a duty on manufacturers to minimise the risk to their consumers using products known to be harmful. The plaintiffs will have to show that tobacco companies' failure to reduce tar levels caused, or materially contributed to, the onset of cancer. This is a tricky calculation. The consensus among cancer researchers is that single cell changes which can initiate cancer stay benign unless supplemented by a series of mutations: between two and seven. So, again the plaintiffs will have to show that tar levels in the cigarettes smoked by the victims caused, or materially contributed to, the onset of cancer in each of these mutations.

"We are saying that if a person inhaled say 7-8kgs of tar in a smoking life, then a proportion of that was 'negligently inhaled'," says Martin Day, the lead plaintiff's solicitor. He argues that if the tobacco companies had complied with their duty under the law and produced lower-tar cigarettes, the "negligent part" would not have been inhaled.

His firm is working on a "no win, no fee" basis, like the US lawyers. To win, Day may have to show that at least one of the mutations was caused by tobacco smoke.

The plaintiff's lawyers have learned much from their US counterparts: especially from the documents stolen from Brown & Williamson in Kentucky, the firm owned by the British tobacco enterprise, BAT industries.

Each UK victim is asking for pounds 50,000 in damages, a tiny sum compared with US standards. But once a precedent is created, others may file suit and presume to win.