US tobacco settlement on brink of collapse

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THE AMERICAN tobacco industry's landmark $368.5bn (pounds 233bn) settlement with US states was on the brink of collapse yesterday. Cigarette manufacturers threatened to abandon the deal in response to a move by the US Congress to raise the total payment to as much as $600bn amid growing hostility towards the industry.

A key committee in the US Senate is set to pass a draft bill which imposes much tougher terms on the tobacco giants and will replace the agreement reached with state attorney generals last June. Notably, it strips away most of the legal protections written into the original pact.

Under that agreement, the tobacco firms would pay $368.5bn over 25 years and take voluntary steps to curb advertising and reduce smoking among teenagers. In return, they would earn a ban on class-action suits against them as well as immunity from punitive damages for past misconduct.

The Senate bill, drafted by Senator John McCain of Arizona, would offer no such blanket immunity. Instead it would merely set a cap of $6.5bn on civil liability damages that the industry would ever have to pay in one year.

Big tobacco companies, including Brown & Williamson, a subsidiary of BAT Industries, warned yesterday that they would not sign the new deal, claiming it would force some manufacturers into bankruptcy.

The tobacco companies are likely to walk away from the entire deal if the US Congress is unwilling to compromise - and at the moment it shows no signs of doing so.

The tobacco industry is also threatening to take legal action if the US authorities force companies to cut back on cigarette advertising or make them provide extra money to help prevent young people taking up smoking. The manufacturers will drop these measures if the wider agreement breaks down.

BAT said yesterday it was willing to return to the courtroom to fight lung cancer victims if the deal floundered. It also launched an attack on the White House for failing to back the original agreement.

A spokesman for the group said: "At the moment the deal is dead. We are bitterly disappointed with the White House for not delivering a better agreement."

While the McCain bill faces several hurdles, the move by Congress has left a cloud of uncertainty hanging over the industry and it sent tobacco shares skidding in New York. Shares in RJR Nabisco, whose subsidiary RJ Reynolds makes Camel cigarettes, and Philip Morris, which makes Marlboro, continued to slide yesterday. In morning trading yesterday, Philip Morris was off $1.4375. On Tuesday, Philip Morris stocks dropped $1.3125 to $41.6875 while shares in RJR Nabisco slid $1.875 to $31.3125. In London BAT shares eased 5.5p to 603.5p.

A withdrawal of the tobacco companies from the settlement process could lead to all-out warfare between them and lawmakers, leading to long instability in share prices.

The negative sentiment in Congress was vividly demonstrated, meanwhile, by a non-binding resolution that was overwhelmingly passed by senators 79-19 on Tuesday demanding that no legal protections be afforded to the industry.

With elections in November, it seems that few in Congress dare expose themselves as friends of the tobacco industry.

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