Cornered (36 page)

The tobacco companies complained, of course. R. J. Reynolds charged that Moore had “carefully crafted a suit to avoid more than two hundred years of legal standards and to avoid allowing jurors in his state an opportunity to hear and decide the case.” Philip Morris said only that it looked forward to raising the merits of the case again “at the appropriate time.” But even as they spoke, the tobacco companies were about to enter secret negotiations that would stop the trial two weeks before it was set to begin.

12

THE IDES OF MARCH

C
AESAR
: The Ides of March are come.
S
OOTHSAYER
: Ay, Caesar, but not gone.

—
Shakespeare,
Julius Caesar

 

I
T BEGAN
with a drink in a Manhattan bar and ended, three months later, with the first breach in the tobacco industry's united front. At the end of November 1995, Don Barrett had left his rural redoubt in Lexington, Mississippi, to fight a liability case in New York about defective plastic-plumbing systems. Most of America's mobile homes had been fitted with plastic pipes that were corroded by chlorine. “It was the world's only biodegradable plumbing system,” said Barrett. The case was settled for over a billion dollars and Barrett was on the winning team. He was celebrating by having a cocktail with a New York lawyer named Marc Kasowitz, who had represented the plastic pipe company.

“Here was a streetwise, fast-talking New York Jewish lawyer having a drink with a slow-talking, slow-thinking Mississippian,” was how Barrett would begin the story. “He asked me what I was going to do next and I said that if and when I ever got paid for the plumbing case, I would use the money to feed my cigarette habit. And he just looked blank.

“I told him about the Nathan Horton case and the Wilks case in Greenville, and how I was involved with Gauthier's Castano group in New Orleans and the Mississippi Medicaid case. And he asked what was going to happen in those cases. I said the litigation is going to go on for a long time and eventually we're going to win.

“And he asked, ‘Is there no way out?' And I said no, because the tobacco company executives are too stupid to understand that we are not trying to put them out of business. If they would be socially responsible and pay some measure of damages and quit marketing to children then we could make a deal. And I thought that was the end of the conversation. I went home to Lexington.”

Barrett did not know that Kasowitz was the personal lawyer of Bennett LeBow, the financier who had a controlling interest in Liggett, the company that makes Chesterfield and L&M brands. As the smallest player, with just over 2 percent of the U.S. market, Liggett was barely staying alive. LeBow had sought a merger of his Brooke Group, which includes Liggett, with the tobacco unit of RJR Nabisco. The plan was to spin off RJR's food business as a separate company, but LeBow's offer had been rebuffed. Now, LeBow was waging a hostile proxy battle to take over the whole of the RJR Nabisco Holdings Corporation. His plan was to split off the food division to protect Nabisco's cookie profits from lawsuits and merge RJR tobacco with Liggett.

Kasowitz was intrigued by Barrett's mention of a possible deal. There was a clear opportunity for LeBow. If Liggett were to settle and in the deal the plaintiffs' lawyers agreed not to fight the spin-off of the food division, then LeBow would make his bid considerably more attractive. Moreover, if such a settlement also gave the same terms to any tobacco company that merged with Liggett, RJR's tobacco unit could be in an advantageous position compared with its big rival, Philip Morris.

Kasowitz thought the whole idea might appeal to LeBow, a onetime computer scientist who had a liking for complex, flashy financial deals. LeBow was a buccaneer, in much the same vein as the liability lawyers; he was both admired and despised for his adventurism and cunning, just as the lawyers were. But LeBow was an unlikely hero of the antitobacco forces. The fifty-seven-year-old scuba-diving leverage artist had been variously described as a “master finagler,” a “weaselly raider,” and the “Machiavelli of the foxy deal.” His ally in the raid on RJR was Carl Icahn. As
The New York Times
had put it, “LeBow is not a favorite of public shareholders, who have accused him of emptying companies he controls of their cash and assets. Brooke has poured millions of dollars into the LeBow family coffers through its purchase of assets controlled by LeBow.”

As it turned out, LeBow did like the idea of trying to settle the lawsuits and authorized Kasowitz to go back to Barrett and start negotiations. But they had to be super-secret, LeBow insisted. If the other tobacco companies found out, they would try and scupper the deal. After all, this was breaking the gentlemen's agreement of no surrender that had been in place for half a century of litigation. He was most concerned about Philip Morris, whose attitude to the Castano class action and the state suits had been one of unrelenting hostility. Kasowitz said that LeBow told him, “I can't risk my company on your relationship with some redneck from Mississippi.”

When Kasowitz called, Barrett was taken aback. He had not thought again about the conversation in the bar and was astonished to hear about the LeBow-Liggett connection. But he agreed to discuss the matter, agreeing also to total secrecy.

From Barrett's point of view, a Liggett deal looked good, too. It might even be key to the Castano suit's survival. The Fifth Circuit Court of Appeals was considering an appeal from the tobacco companies on the class action's certification by the District Court in New Orleans. The prognosis was grim. The Fifth Circuit was loaded with conservative judges who were expected to favor the tobacco industry's contention that Castano was a novel and invalid claim. Signing a deal with Liggett would show the court that Castano had clout. Before Barrett could make a move, however, he was supposed to clear it with Wendell Gauthier, the chairman of the Castano executive committee. But without telling Gauthier anything about Kasowitz, or LeBow, Barrett asked if there were any rules about committee members exploring settlements. Gauthier recalls, “I told him there were no rules. No one had the authority to bind the committee to a settlement, but anyone could talk. Don didn't show his cards.”

Barrett was risking a lot. After his Horton and Wilks adventures and before the money from the New York plumbing cases arrived—if it ever did—he was underfunded, to put it mildly. He was also wary of dealing with Kasowitz on his own. He wanted another lawyer at his side, preferably someone who could also help with expenses. Bob Lieff and Richard Heimann from the San Francisco firm of Lieff, Cabraser, which was part of the Castano group, agreed to help.

Barrett also brought in Dr. David Burns, a professor of medicine on the San Diego campus of the University of California. Burns had testified on behalf of Nathan Horton and helped Barrett on the Wilks case. Now, Barrett asked him to draw up a set of public-health demands for LeBow. Burns was the author of the annual government reports for the Centers for Disease Control on the number of smoking-related deaths and had coauthored the 1975 Surgeon General's report on smoking and health. It was familiar ground to him. When the call from Barrett came, according to Burns, “Don began by saying he couldn't tell me anything about it, but he was involved in something that could lead to an extraordinary precedent for the tobacco companies. And then, of course, he told me what it was.”

The two sides negotiated for two months in total secrecy. To avoid being discovered, the negotiating teams met in different places—Houston, New York, Memphis, and Miami, the city where LeBow spends most of his time. Barrett was so conscious of what the deal might accomplish that initially he didn't even tell his Mississippi buddies, Scruggs and Moore.

Three months later, LeBow would become the first tobacco company CEO to settle a lawsuit, admit his company was marketing to children, and take steps to curb youth sales of cigarettes. The truism of tobacco litigation in the First and Second Waves—that the companies had never paid a penny in damages—was now history. It was the first time a tobacco company had taken any responsibility for the tobacco-related diseases that Dr. Burns and his colleagues now estimated to be causing 440,000 premature deaths a year.

But LeBow did not stop there. Within a year, he had widened the scope of his settlement by finally putting an end to the carefully crafted scientific falsehood by which the tobacco industry had lived for so long. He would become the first CEO of a cigarette company to declare that nicotine was addictive and that smoking actually causes cancer. He would refer to himself as just another “whistle-blower,” which, in effect, he was, except that he was the loudest of them all.

His break with the brethren at Philip Morris and R. J. Reynolds was viewed as nothing less than treachery. They accused him of engaging in a “reckless ploy” to take over RJR. Wall Street went into shock—but only for a moment. Investors soon realized that LeBow might actually have hit upon a great strategy in settling the industry's liability. They started bidding up the idea that the rest of the tobacco industry should also seek a permanent truce.

Keeping the plaintiffs' bar at bay had become a major investment, even for tobacco companies that turned an easy profit. The industry as a whole was now spending $600 million a year defending lawsuits. Five hundred and fifty law firms and thousands of high-priced attorneys were involved. More than half of the nation's largest law firms were working in some capacity for the industry. In a February federal securities filing, Philip Morris had listed ten pages of lawsuits. In Washington, the Justice Department was weighing perjury charges against the seven CEOs who had testified in April 1994 that nicotine was not addictive. Grand juries were probing whether the Council for Tobacco Research had been involved in criminal fraud. There were federal investigations into possible antitrust violations and cigarette smuggling. Each time a settlement was mentioned, it was not surprising that stocks surged.

The Liggett deal was essentially a self-interest gamble by LeBow, by the Castano group, and also by the attorneys general of the four states that would initially sign up.

The deal gave a much-needed legitimacy to the lawsuits—both the Castano case and the state Medicaid cases. They were not all novel and meritless claims, as the tobacco companies insisted, but they were untested departures in tobacco litigation. The deal demonstrated that one company, at least, took them seriously. The deal also made other attorneys general sit up and wonder if they, too, shouldn't be suing the industry. A year later the number involved in tobacco litigation had shot up to twenty-two. Finally, LeBow's gamble forced the companies themselves to publicly address the issue of settlement. The end game had begun.

*   *   *

B
Y LATE
J
ANUARY
1996, Barrett and Kasowitz had a draft of the settlement. The money offered by Liggett—only a few million dollars a year—was bound to be small because Liggett was barely surviving as a cigarette company. It had a 2.3 percent share of the U.S. market and pretax profits of about $11 million. But the money was not the lure. Barrett and Heimann were insisting that there had to be some public-health concessions, especially on the issue of advertising aimed at children. Kasowitz was initially resistant. Dr. Burns had said they had to be the same concessions, or close to those in the FDA's proposed rule: no billboards within 1,000 feet of schools, no vending machines accessible to children, no promotional material such as T-shirts, sporting bags, and lighters, no shop-counter advertising, and all cigarette advertisements in black and white.

At first, LeBow took the position—the standard tobacco industry defense—that the company did not target children in its advertising. He also complained bitterly about the provision banning so-called point-of-sale advertising, or the rack of cigarette packs next to the cash register. If Liggett's Chesterfields were removed, Philip Morris would only grab the spot for Marlboro, LeBow said. He could not agree to such a condition. His company was in bad enough shape as it was without giving Philip Morris a further advantage.

In February, Barrett was ready to enlarge the team. But who should be next? Barrett was negotiating without any authority from the two clients he represented: the state of Mississippi and the Castano group. “It was like a little dog chasing a Porsche. You catch the son of a bitch. Now what are you going to do?” He brought in Scruggs, and then Moore. Moore would represent the other three state attorneys general who had filed suits. The unwieldy Castano group would only be brought in at the last moment to avoid leaks; once sixty law firms knew of the negotiations, it would be impossible to keep them secret.

Barrett's extended team continued to shuttle around the country meeting with Kasowitz and his law partner, Dan Benson. At one stop, in Houston, they panicked when they thought their plot had been discovered. Arriving in a limousine at the Four Seasons hotel, Scruggs and Barrett saw two well-known tobacco lawyers walking toward them, Robert McDermott of Jones, Day, who worked for R. J. Reynolds, and Philip Morris attorney James Scarboro of the Washington firm of Arnold & Porter. “Hell, do you know who they are?” Scruggs said as they passed. Barrett didn't know and when Scruggs told him, he feared the whole operation might be blown. But the tobacco lawyers were there on other business. They had no inkling of the talks with LeBow.

The negotiations resumed on the children's issue. As Burns explained how children get hooked at an early age and, in effect, replace those smokers who die off, LeBow started to shift his position. Barrett became convinced that he really was concerned about teenage smoking. “The refreshing thing about him, and the reason you can deal with him,” said Barrett later, “is because he will tell you that he has selfish motives, that he wants to make a lot of money, but he also wants to do the right thing. He told us, ‘Selling cigarettes is legal and I'll sell the hell out of them as long as they'll let me.' But I think he began to look at himself as a person who was doing something for America. I started to think he would be perfectly satisfied to see a smoke-free country in thirty years, providing he gets to make money in the meantime.” Burns was impressed, too. “He's a businessman … but he was honest, direct, and concerned.”