No. 83 The States vs. the Tobacco Industry: Smoke and Assorted Mirrors (executive summary - html)

Two dozen states have filed lawsuits against the tobacco industry seeking reimbursement of Medicaid and other public health monies spent on smokers. As a matter of legal policy, these suits are a bad idea and should fail. If a state government wishes to raise additional moneys to cover smoking-related health care spending, raising the cigarette tax would be a much simpler, much cheaper, and much quicker route.

1. The lawsuits filed against the tobacco industry are flawed and do not fall within standard legal theories of liability.

Medicaid law allows states to pursue reimbursement from third parties only through the traditional legal theory called "subrogation," which allows the substitution of one party in the place of another. States do not want to sue under this theory, however, because it allows tobacco companies to defend themselves against the state in the same way they defend themselves against individual smokers who sue: by arguing that smokers "assume the risk" of smoking. Tobacco companies have consistently won such lawsuits against individual smokers, and it is unlikely that the states would fare much better.

So the states have been inspired to creatively apply a number of common law and statutory theories against the tobacco companies. When tested, these novel applications of the law have failed. Moreover, they represent a dangerous expansion of tort law that conscientious state attorneys general should avoid.

2. The failure of suits filed in Florida and San Francisco exposes the weakness of the legal case against tobacco.

In 1994, the Florida legislature went to extraordinary lengths to amend its Medicaid subrogation statute to pave the way for the state's tobacco lawsuit. In 1996, the Supreme Court of Florida upheld the constitutionality of the amended statute, but struck down several key provisions. Even in Florida--where the legislature was willing to throw out the common law and write new rules specifically to facilitate tobacco litigation--the state will be required in its lawsuits to identify by name individual Medicaid recipients who are smokers. The tobacco companies will be allowed to argue that Medicaid payments made to those individuals were improper. And the state can seek reimbursement only for Medicaid payments made after 1994, the effective date of the amended statute.

In 1997, a U.S. District Court judge dismissed a suit brought by the city and county of San Francisco to recover monies spent on smokers in local health care programs. The judge ruled that the city and county had not convinced the court that the smokers had relied on the tobacco companies' misconduct in deciding to smoke, nor that the smokers' health problems were caused by the tobacco companies' misconduct.

3. If the states are likely to lose their Medicaid suits, why have the tobacco companies offered to settle?

A decision by the companies to litigate these cases would be a high-risk, "bet-the-company" decision. It may be that tobacco company executives simply do not have the stomach for that kind of risk. Moreover, it is expensive for them to continue to fight. One estimate places the tobacco industry's 1996 legal expenses at $600 million, with $100 million spent to defend the Minnesota Medicaid case alone.

A decision to settle would likely have positive effects on the stock prices of the cigarette companies. The news that settlement negotiations were underway sent RJR Nabisco and Philip Morris shares up 11 percent in a single day's trading. Current proposals would settle the state suits and pending and future suits by individual smokers, allowing the companies to get out from under a significant legal cloud.

4. If the states are likely to lose their Medicaid suits, why have they sued?

State attorneys general are elected officials, many of whom have further political ambitions and can be expected to court public opinion. They know the value of favorable press and publicity, and the tobacco industry is a tempting target. The tobacco lawsuits represent a golden opportunity for attorneys general to score political points with an increasingly tobacco-hostile public, while at the same time "scratching the backs" of their friends in the plaintiffs' bar. Eighteen of the 24 tobacco suits have been brought by Democratic attorneys general, and six by Republicans. Democratic attorneys general have proven twice as likely to file these suits as Republican attorneys general. This is consistent with both the overwhelmingly Democratic make-up of the trial bar, and trial lawyers' patterns of support to political candidates.

The contingent fees that have been arranged with the trial lawyers representing the plaintiff states range from 10 percent to 25 percent of the state's recovery. Even if the tobacco companies settle, the plaintiffs' attorneys could earn as much as 3 percent of the settlement. With a rumored settlement of $250 billion, the 3 percent payment to the plaintiffs' bar would total $7.5 billion over 25 years--$300 million per year.

5. A conscientious state attorney general has six strong reasons to decide against filing a Medicaid suit against the tobacco industry.

• "Creative" applications of tort law, aimed today at the tobacco companies, will likely be used in the future to trap other defendants. The attorneys general and their trial lawyer allies deny that suits against the liquor or fast-food industries are in the offing. But the theory of the tobacco suits will not simply disappear when those suits end. And a win by the states will create a huge new area of potential tort liability. It seems foolish to count on the future self-restraint of attorneys general and the plaintiffs' bar, given the amounts of money that would be at stake in pursuing other defendant industries.

• It will be extremely difficult to argue that the tobacco companies "caused" smokers to choose to smoke. People have known for a very long time that smoking is dangerous. Research by Harvard University economist Kip Viscusi shows that smokers tend to over estimate the health risks associated with smoking. The widespread public knowledge of the dangers of smoking means the plaintiff states will face an uphill battle on this issue.

• The states have profited from their "relationship" with the tobacco industry. By taxing cigarettes and other tobacco products, the states have long been partners with the tobacco firms and have profited from that partnership. The tobacco companies may be able to effectively argue that the states are coming before the court with "unclean hands"--something the law does not permit them to do.

• It will be difficult to prove that the state's treasury has been hurt by the tobacco companies' conduct. Unless a state can show that its treasury has been harmed by the activities of the tobacco companies, it cannot in good conscience take legal action against them. Research clearly shows that smoking does not impose a net financial injury on state treasuries. In 1993, state and federal cigarette taxes averaged 52.6 cents per pack; estimates of the medical care costs imposed on society by smokers that year range between 50 and 55 cents per pack. Smokers may actually save society money when lower nursing home care, pensions, and Social Security costs are accounted for.

• Smokers themselves, not the tobacco companies, will pay if the states win. State attorneys general want the tobacco companies to pay for their alleged misconduct. But smokers, not the industry, will pay the lion's share of any settlement or damages determined at trial. The amount of any judgment against tobacco would represent an increase in the companies' cost of doing business--just like an increase in the costs of labor or raw materials. The companies would pass as much of this cost increase along to their customers as the market will bear, and no court could stop them.

• Filing a Medicaid suit will have a negative effect on a state's legal system. A responsible attorney general--a state's chief law enforcement officer--is concerned with the orderly and rational development of the state's laws and the maintenance of the state's constitutional order, including the separation of powers. By contrast, even the most thoughtful and ethical plaintiff's lawyer has, by design, less interest in those matters. A close alliance between the attorneys general and the activist plaintiffs' bar threatens to be an unholy one, and should be avoided.

6. The legislature's power to tax should not be handed to the judicial branch in the guise of a lawsuit.

Tax policy is constitutionally the responsibility of the legislative branch. If a state government wishes to raise money to cover the smoking-related charges against Medicaid or other public health programs, its legislature can raise the state's cigarette tax. The costs of a tax increase would fall largely on the same people--smokers--as would the costs of a successful Medicaid lawsuit. No bounty need be paid to the plaintiffs' bar. In addition, a cigarette tax increase would be much simpler, much cheaper, and much quicker than a lawsuit against the tobacco companies, and would pose no danger to a state's constitutional order or the rest of its legal system.

Based on Heartland Policy Study #83, “The States vs. the Tobacco Industry: Smoke and Assorted Mirrors,” by Micheal E. DeBow. Printed copies are available from The Heartland Institute for $10 each.

Copyright 1997 The Heartland Institute. Nothing in this Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of any legislation. Permission is hereby given to reprint or quote from this Executive Summary; please send tearsheets to The Heartland Institute, 19 South LaSalle Street #903, Chicago, Illinois 60603.

Questions? Call us at 312/377-4000; fax 312/377-5000; email think@heartland.org; Web www.heartland.org.

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