Big Tobacco in the balance
A week tomorrow, 12 jurors in Florida will meet to decide whether, and by how much, they should punish the tobacco industry. The case, which is expected to last for up to two months, is already being hailed as a landmark.
The anti-smoking lobby says it marks the beginning of the end for the industry. The tobacco companies dismiss it as just another court procedure, which will be overturned on appeal.
Both would agree on two things. The Engel case is the first class action against tobacco companies to be heard in a US court. It is also the first significant case to be heard since the industry agreed to a settlement under which US states, including Florida, receive a share of $246 billion (Â£160bn) over the next 25 years in exchange for giving up the right to take legal action against tobacco companies. These are both having a significant influence on proceedings.
Big Tobacco - the generic name for the big manufacturers such as Philip Morris, RJ Reynolds and Brown & Williamson, US subsidiary of British American Tobacco - has already been found guilty by the Florida jury of fraudulently conspiring to make a dangerous, addictive product that causes cancer, heart disease and other illnesses. Last month it awarded a total of $12.7m compensation to Mary Farnan, Angie Della Vecchia and Frank Amodeo, three representatives of the class of Florida smokers behind the Engel action.
Next week's hearing is to decide on punitive damages, which some estimate could go as high as $300bn. That has raised before the industry the spectre of bankruptcy. Worse, court rules say defendants have to post a bond, equal to the amount of damages awarded, before they can appeal. That raised the prospect of the industry going bust before it had the chance to argue its innocence.
The anti-smoking camp claims the $300bn figure was dreamt up by the industry as a tactic to frighten the states into giving them protection. If so, it has worked. Late on Friday the Florida Senate passed a Bill limiting the amount of any bond to the lower of $100m or 10 per cent of the tobacco companies' net worth.
Some say that simply codifies existing Florida law, which prohibits a damages award so high that it puts a company out of business. All the tobacco companies could easily pay that level of bond.
More interesting than the amount, however, is the logic behind it. The Florida legislature was driven less by concern about the financial stability of the tobacco industry - although it is one of the tobacco-growing states - than by the prospect of $18bn in revenue disappearing. A bankrupt industry would hardly be able to carry on paying the $246bn agreed under the state settlements.
That is an interesting side-effect of the states' settlement with the industry. Not only does it stop them taking legal action against cigarette makers, it could also encourage them to protect the tobacco industry against legislative onslaughts from others. Indeed, a number of other states have already introduced legislation limiting the amount of bond payments.
'Although it seemed obvious that the (agreement) would create a financial partnership between the leading US tobacco manufacturers and the states,' said Morgan Stanley Dean Witter, the New York broker, 'the Engel punitive damages bonding process provides the first conclusive evidence that the agreement can have a real worldwide legislative impact.
'These efforts are truly extraordinary and make us increasingly optimistic that, if faced with similar financial risks, other states may take similar protective action.'
Anti-tobacco campaigners are furious, seeing the legislation as just another way of protecting the interests of Big Tobacco. They are pushing the states to sever their links with the industry by securitising their payments, as a few states, New York among them, have already done. That does give them the money in a lump sum - though they have to settle for a bit less than they would get by taking it in instalments - but it does not fully break their ties with the industry. If the tobacco companies default, the securitisation company simply claims back from the states.
But there is another spin-off from the settlement which could benefit the industry. It gives them another legal defence, and the signs are that the industry is already taking full advantage of it. Under the agreement, the tobacco companies had to cut their advertising, particularly when it could be seen by young people, fund anti-smoking campaigns and pay for a foundation to study smoking-related diseases. This all had to be paid for from an increase in the price of tobacco which, the states hoped, would reduce the level of smoking. It is policed by the attorney-generals of the states, who act against any breach of the terms.
That means the industry can claim it is reformed. It has already been punished by making the payments (although, given that the cost has to be recouped through price rises, that is rather tenuous) so should not be punished again. It has admitted the error of its ways and is making amends. It can also claim that its behaviour is being thoroughly policed by the states, so the courts no longer need to mete out punishment in damage awards.
That argument is likely to be heavily used in Florida in the coming months - indeed, Philip Morris has already started the campaign with newspaper ads emphasising its changed attitudes. It may not be that successful. Philip Morris and RJ Reynolds used these arguments in California, but Lesley Whiteley, a woman who did not even start smoking until after the health warnings started appearing on cigarette packets and who had a history of marijuana abuse, was awarded $1.7m compensation and $20m punitive damages.
It is one of the three cases which have gone against the tobacco industry and are now on appeal. Engel will also be subject to an appeal immediately it ends. Indeed, the industry has been trying to get it thrown out since it was filed in 1994.
It has argued that smokers, who smoke different brands, for different periods, and have different illnesses, cannot be treated as a class. And it has argued that it is impossible to determine punitive damages for every smoker until the courts have decided on their level of compensation. There could be as many as a million Florida smokers, and if compensation had to be determined first the whole process could take years. So far, however, the higher Florida courts have refused to intervene.
The industry is confident it will eventually win. It insists the class action will be thrown out by the higher courts - and it always appeals right to the Supreme Court if necessary. It is also confident that the three individual victories will be overturned.
History provides some justification for this optimism. Since the first suit was launched in 1954, only 50 cases have come to court. All victories in lower courts have been overturned on appeal. No class action has ever been successful - although two, in Maryland and Louisiana, are still pending, probably awaiting the outcome in Florida.
But the pace of litigation continues to accelerate. More than 300 cases are pending and prosecution lawyers - who have still not made a penny out of tobacco litigation - are finding more and more ingenious ways of getting under tobacco's defences.
The anti-smoking lobby believes that the three recent individual victories and the decision to allow the Florida class action to proceed are hugely significant. Richard Daynard, chair of the Tobacco Products Liability Group, says the key is the recent discovery of documents showing that the tobacco companies knew of the risks years ago but covered them up. 'In every case where they have been used, the plaintiff has won.'
The history of tobacco litigation suggests that victories are usually short-lived. Will that be true of the current crop of cases? That will take longer than the duration of the Engel case to find out. But the future of Big Tobacco depends on it.
Dragging on: 50 years of US smoking tussles
1954 First lawsuit by lung cancer victim alleging negligence. Dropped after 13 years' wrangling.
1964 Surgeon General releases reports concluding that smoking causes lung cancer.
1965 Federal Cigarette Labelling and Advertising Act requires warnings on packets.
1967 Government insists on one anti-smoking advertisement for every three cigarette ads.
1971 Broadcast ads for cigarettes banned.
1972 Airlines told to create non-smoking sections.
1981 Life insurers offer discounts to non-smokers.
1984 Tougher warnings on cigarette packets.
1988 Smoking banned on short domestic flights. Surgeon General concludes nicotine is addictive.
1992 Nicotine patches introduced.
April 1994 Executives of top seven US tobacco firms swear to Congress that nicotine is non-addictive.
May 1994 Proof that tobacco executives discovered smoking's risks before Surgeon General's declaration. Mississippi files first of 24 state lawsuits.
March 1996 Liggett Group, the smallest of major tobacco firms, settles with five states.
April 1997 Federal judge rules that government can regulate tobacco as a drug.
June 1997 Landmark settlement calls for unprecedented restrictions on cigarettes and on tobacco makers' legal liability. Industry to spend $368 billion over 25 years, mainly on anti-smoking campaigns.
July 1997 Mississippi agrees $3.6bn deal.
August 1997 Florida reaches$11.3 bn settlement.
January 1998 Texas settles for $15.3 bn.
Tobacco executives admit to Congress that nicotine is addictive, and smoking may cause cancer.
May 1998 Minnesota and insurers Blue Cross and Blue Shield reach a $6.6bn settlement. Senate rejects $1.50 a pack cigarette tax increase.
November 1998 Forty-six states embrace $206 bn settlement with cigarette makers over bills for treating sick smokers..
September 1999 Justice Department sues industry for billions spent on smoking-related health care, and accuses it of 'coordinated fraud and deceit'.
December 1999 Government and industry argue in the Supreme Court over whether the Food and Drug Administration can regulate tobacco as a drug.
February 2000 Tobacco farmers sue cigarette makers for $69bn alleging conspiracy to undo federal regulations on tobacco prices.
March 21, 2000 Supreme Court says the government can't regulate tobacco as an addictive drug.