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Smoke and mirrors; Tobacco industry says it has no love for 'punitive tax-and-punish bill'; Cigarette companies claim to hate the latest tobacco bill, but critics say its liability shields have the industry applauding

Legal Times  July 6, 1998, Monday


WASHINGTON, D.C. -- The tobacco bill that may be headed for a floor vote this month is widely regarded as the bill the industry hates.

But some congressional critics, public health advocates and at least one state attorney general say the bill, sponsored by Arizona Republican Sen. John McCain, is actually loaded with loopholes that offer cigarette companies substantial civil-liability protection -- something they are covertly seeking. "There are special protections here for the industry that are unprecedented," says Sen. Kent Conrad, D-N.D. "It is clear to me that there are provisions that seem to be unknown to a lot of our colleagues and that seem to be unknown to the general public."

Conrad says that when the markup of the bill was completed on April 1, lobbyists for the tobacco industry broke into applause. At least two other observers also noted this at the time.

Tobacco industry spokesman Scott Williams scoffs at the notion that the industry's opposition to the legislation is a decoy. He said he had never heard of the applause incident and couldn't explain it. "If anybody is saying the industry secretly likes [the McCain bill], they haven't been in the rooms that I've been in and they have not heard the comments that I've heard about this punitive tax-and-punish bill," says Williams, of BSMG Worldwide.

That's certainly the conventional wisdom. Considered the most viable tobacco legislation yet, the McCain bill has been lauded in the press and has received broad political support, including from the Clinton administration, for taking a tough stance against the industry. Backers of the bill say it will impose large fines by forcing an increase in the price of cigarettes without providing the broad protection against class actions and punitive-- damages that cigarette companies are seeking.

The legislation appeared to take such a hard line, in fact, that it drove the tobacco industry from the table. After the bill was formulated, the industry launched a vigorous media campaign in 30 states to try to kill it. But the huffing and puffing could be a diversionary tactic, say tobacco critics, who argue that the industry secretly hopes the McCain bill will pass because, while it does not give the industry everything it wants, it gives it everything it needs.

They say the legislation would place significant limits on the industry's liability -- including the dismissal of many major pending cases, a cap on punitive damages for future suits, specific restrictions about what kinds of suits are to be allowed, and immunity to corporate parents and affiliates. Ever since the tobacco industry started formally negotiating a settlement in April of last year, say industry observers, its top priority has been curtailing its liability.

From a floor into a ceiling

Recently, though, it became apparent that broad liability protection like that in the now-rejected June 20, 1997, omnibus agreement with state attorneys general was politically unfeasible. Since then, say critics, the industry has sought more subtle protections that would limit its exposure.

"I think they have tried to convert the McCain bill from a floor into a ceiling," says Conrad.

Those who are skeptical of the McCain legislation's liability provisions include many of the same politicians -- senators. Conrad, Edward Kennedy, DMass., and Frank Lautenberg, D-N.J. -- and public health groups -- Public Citizen and the American Lung Association -- who opposed last year's proposed settlement with the state attorneys general.

While the McCain legislation was supposed to be so tough that the industry did not even take part in its crafting, these critics say that it actually contains many of the same breaks Big Tobacco sought.

That perception is not surprising, since much of the liability language was drafted by the same state attorneys general who put together last summer's settlement, according to two Senate Commerce aides.

"We started with the June 20 agreement and tightened it down a lot," says a Commerce staffer.

But not enough, according to critics, including the Minnesota attorney general's office, which was not party to the June 20 settlement and did not work on the McCain bill.

A 16-page memo from the Minnesota AG's office, obtained by Legal Times, outlines some of the most controversial provisions of the bill: * The dismissal of many of the major state and private suits pending against the industry.

* A liability cap of $ 6.5 billion annually, up from $ 5 billion in the June 20 deal.

* Immunity from lawsuits for the corporate parents, affiliates and foreign subsidiaries of tobacco companies.

* Immunity from lawsuits for companies that worked with or for the tobacco companies, including the Tobacco Institute, the Center for Tobacco Research, insurers, law firms, public relations firms, advertising agencies, wholesalers, distributors and retailers.

* The pre-emption of lawsuits based on claims of addiction and dependency, and possibly of suits for tobacco-related illness that include addiction in the claim.

"They rolled all sorts of junk in there,'' says a Senate staffer who worked on the bill. "It's like an ugly little fajita. There are all sorts of poisonous spices in it.'' Although the bill was marked up six weeks ago, criticism is surfacing now, according to the Senate staffer, because the liability provisions were only released the afternoon before the markup, and no one had a chance to analyze them properly.

This uncertainty extended all the way to the White House, the staffer says. When a senator involved in the tobacco debate brought the liability issue to the attention of Clinton adviser Bruce Reed, Reed "expressed surprise that that was how the language would be read," says the staffer. An administration aide says the White House is currently reviewing the liability provisions.

Compromising positions The bill's defenders dispute some of the assertions about its impact, while upholding others as necessary political compromises.

"You are much better off if you can gain the consent of the companies," says a McCain aide, who defended the $ 6.5 billion cap on annual liability because it can be removed if the industry violates any of a number of restrictions, including a self-imposed ban on advertising allegedly aimed at youth.

But Paul Billings of the American Lung Association disagrees with the premise that Congress ought to make deals with cigarette companies. "Congress doesn't need to play Monty Hall with the tobacco industry," he says.

Billings argues that the liability caps and legal limitations in the McCain bill, rather than punishing the industry, actually help to institutionalize its behavior. "If the tobacco industry gets economic or judicial certainty, the liability cost is essentially like paying the rent, the cost of doing business. They become like a regulated utility, with a guaranteed return on their investment," he says.

Industry spokesman Williams disagrees, saying that the restrictions the companies must follow to maintain the cap are so broad that "if the companies sneeze, they lose it."

One of the most controversial provisions limits liability to cigarette manufacturers and grants immunity to parent companies, affiliates and associated firms.

"It is particularly outrageous to give total immunity to the parent companies of cigarette manufacturers," Sen. Kennedy said in a statement. "These parent companies are where the real decisions are made and where the profits from cigarette sales ultimately go. They should be held fully accountable."

Furthermore, notes a staff member of the Minnesota attorney general's office, under the McCain legislation, a tobacco company could move most of its assets to its parent or an affiliate, which would be shielded from suits, and leave only a shell company to absorb liability. If a tobacco company were to attempt that under current law, it would be considered a "fraudulent transfer," he says.

The Castano conflict One of the most complicated and hotly disputed provisions of the McCain bill is the dismissal of "claims asserted in the Castano Civil Actions."

In a series of cases, beginning with Castano v. American Tobacco Co., a federal suit filed in Louisiana, smokers and their survivors have sued tobacco companies on the innovative theory that tobacco is addictive.

This argument was asserted to negate the tobacco companies' defense that warning labels on cigarette packages meant that smokers had knowingly assumed the health risks.

By dismissing Castano, congressional and public health critics contend, the McCain bill prohibits the bringing of any claims based on addiction or dependency. That leaves smokers only with disease-based claims, which tobacco companies have generally been able to defeat.

Furthermore, the Castano lawyers attempted to establish the class as national, to include all addicted smokers. This attempt was not recognized by a federal court. But the language of the McCain bill, critics argue, implies a recognition of that entire class, thus barring any addiction claims nationally.

This effectively cuts off all suits based on addiction and means that only people who are already sick with a tobacco-related disease can sue, says Billings. Three Senate staffers who studied the legislation say they agree with this interpretation.

A McCain staffer who worked on the legislation expressed surprise when told of this theory. "We had never envisioned it that way. That was never the intent," he says. He says the staff will work to clarify the legislative language, although he would not say how.

The White House, meanwhile, is trying to get a modified version of the McCain bill to the floor before Memorial Day. White House chief of staff Erskine Bowles, Secretary of Health and Human Services Donna Shalala, and Clinton adviser Reed have been walking the halls of the Senate trying to garner support for the legislation, according to an administration aide working on the tobacco deal.

The administration's agenda, says the aide, includes strengthening the bill's provisions for reducing teen smoking and tightening secondhand smoke provisions. The controversial liability questions, are still under review. "Reasonable liability limits," the aide adds, "are not going to be a deal-breaker."

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