BAT shares knocked by US lawsuit news
Thursday 14 March 1996
and JOHN CARLIN
A furious tobacco industry closed ranks yesterday after one of its smallest manufacturers broke the line by agreeing to settle two important liability cases in the United States. News of the out-of-court deal, which sets a dramatic and unexpected precedent, sent BAT's shares tumbling in London.
Liggett, which makes about 2 per cent of American cigarettes including the Eve and Chesterfield brands, has offered to settle its portion of two class actions against the industry and could pay out between 2 and 7 per cent of its pre-tax income over the next 24 years to states attempting to recoup the cost of funding smoking-related health care.
To settle a suit brought by 60 law firms on behalf of US smokers claiming to be addicted, Liggett has also agreed to pay a further 5 per cent of its pre-tax income for 25 years. Pending approval by a federal court in Louisiana, it would be the first time a cigarette manufacturer has paid a single cent in legal redress for tobacco-related illnesses.
BAT, which is involved in the US lawsuits through its Brown & Williamson subsidiary, said it would continue to defend its position aggressively. It also pledged to continue the fight to prevent the US Food & Drug Administration from extending its jurisdiction to the tobacco industry.
BAT was joined by the other US tobacco giants in its promise to fight on. Philip Morris, the US's biggest tobacco maker, said it remained "confident in the strength of our litigation position, and we intend to fight and win all of the cases in which we are involved." Lorillard Tobacco said it had no plans to settle any liability litigation.
A spokesman for BAT attempted to play down the impact of Liggett's decision to break ranks with the rest of the industry, claiming that the move was based on a continuing proxy fight with RJR Nabisco to force a split of the bigger company into its constituent tobacco and food operations. Liggett is understood to be attempting to force RJR to take it over and the legal settlement is being seen as a deck-clearing move to force a bid.
As part of the deal with the states of Florida, Massachusetts, Mississippi and West Virginia, Liggett has agreed to fund programmes to help people give up smoking. The states would use the money to help cover costs of treating smoking-induced diseases, as well as education programmes to persuade people to quit cigarettes.
Liggett also said it had agreed to comply with regulations proposed by the Clinton administration to discourage the sale of cigarettes to children - for example by prohibiting the use of cartoon characters in cigarette advertising.
If the court accepts the deal, Liggett would be absolved from further liability in a class-action suit built on the argument that nicotine levels in cigarettes have been deliberately manipulated by US tobacco companies to foster addiction.
Anti-tobacco campaigners have been increasingly confident of substantiating that claim since Jeffrey Wigand, a former BAT employee in the US and the industry's highest ranking defector, turned on his former company, claiming it had long known that tobacco was an addictive drug even when it made public statements to the contrary.
The consortium taking on the tobacco companies represents millions of smokers, as well as former smokers. The total number of plaintiffs involved could add up to 50 million people.
Industry analysts were divided yesterday over the likely impact of Liggett's move. One said: "The settlement is tantamount to an admission of guilt for the whole tobacco industry and that could affect their ability to contest legal action against them. There is no cap on the potential liability of all the tobacco companies to pay compensation to smokers and pay the cost of treating smoking-related illnesses."
Others claimed, however, the development might actually clear away some of the uncertainty that has dogged the industry.
Liggett is the smallest of America's Big Five tobacco makers, which also include RJ Reynolds, American Tobacco, Lorillard Tobacco and Philip Morris. Liggett's proposed damage control exercise has enraged the other companies because up until now it has stood by them, in a united front, to repel attacks by litigators or government health agencies seeking stricter regulations on cigarettes.
Bennet LeBow, chairman and chief executive of Liggett's parent company, Brooke Group, said in a statement that the agreement meant that Liggett's assets would "no longer be held hostage by the tobacco litigation".
"The tobacco industry has lived for too long with the possibility of financial catastrophe from product liability suits that could destroy the industry," Mr LeBow added.
Legal landmarks in the long battle against tobacco companies in the United States
1957: First official warning from the US Surgeon-General that excessive cigarette smoking may cause cancer
1971: Cigarette advertising is banned from radio and television in the US, curb appealed by the tobacco companies, but upheld by the Supreme Court in 1972
1979: The Surgeon General issues a new report, saying cigarettes are more dangerous than previously thought, and would kill 350,000 Americans that year
1983: The landmark Cipollone case is brought, by a dying smoker who charged the companies with failing to give adequate warning about the dangers of smoking. Case finally dismissed in 1992, but courts rule that labelling law does not shield the companies from liability
1988: Surgeon General issues finding that cigarette smoking is addictive under the standards which apply to illegal drugs
1994: Castano vs American Tobacco Co, the first big class action suit in which 60 law firms seek massive punitive and compensatory damages for all past and present smokers
1994: Mississippi brings the first state lawsuit against the industry, seeking re-imbursement of medical costs incurred in treating smokers. Three other states have since filed similar lawsuits
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