Smoke-Filled Rooms: A Postmortem on the Tobacco Deal

by W. Kip Viscusi

Overview

The 1998 out-of-court settlements of litigation by the states against the cigarette industry totaled $243 billion, making it the largest payoff ever in our civil justice system. Two key questions drove the lawsuits and the attendant settlement: Do smokers understand the risks of smoking? And does smoking impose net financial costs on the states?

With Smoke-Filled Rooms,W. Kip Viscusi provides unexpected answers to these questions, drawing on an impressive range of data on several topics central to the smoking policy debate. Based on surveys of smokers in the United States and Spain, for instance, he demonstrates that smokers actually overestimate the dangers of smoking, indicating that they are well aware of the risks involved in their choice to smoke. And while smoking does increase medical costs to the states, Viscusi finds that these costs are more than financially balanced by the premature mortality of smokers, which reduces their demands on state pension and health programs, so that, on average, smoking either pays for itself or generates revenues for the states.

Viscusi's eye-opening assessment of the tobacco lawsuits also includes policy recommendations that could frame these debates in a more productive way, such as his suggestion that the FDA should develop a rating system for cigarettes and other tobacco products based on their relative safety, thus providing an incentive for tobacco manufacturers to compete among themselves to produce safer cigarettes. Viscusi's hard look at the facts of smoking and its costs runs against conventional thinking. But it is also necessary for an informed and realistic debate about the legal, financial, and social consequences of the tobacco lawsuits.

People making $50,000 or more pay .08 percent of their income in cigarette taxes, but people with incomes of less than $10,000 pay 1.62 percenttwenty times as much. The maintenance crew at the Capitol will bear more of the "sin tax" levied on cigarettes than will members of Congress who voted to boost it.

Cigarettes are not a financial drain to the U.S. In fact, they are self-financing, as a consequence of smokers' premature mortality.

The general public estimates that 47 out of 100 smokers will die from lung cancer because they smoke. Smokers believe that 40 out of 100 will die of the disease. Scientists estimate the actual number of 100 smokers who will die from lung cancer to be between 7 and 13.

Product Details

ISBN-13:	9780226857480
Publisher:	University of Chicago Press
Publication date:	02/15/2010
Series:	Studies in Law and Economics
Sold by:	Barnes & Noble
Format:	eBook
Pages:	263
File size:	2 MB

About the Author

W. Kip Viscusi is the John F. Cogan Jr. Professor of Law and Economics and director of the Program on Empirical Legal Studies at Harvard Law School. He is the author, coauthor, or editor of a number of books, including Smoking: Making the Risky Decision and Punitive Damages: How Juries Decide, the latter published by the University of Chicago Press.

Read an Excerpt

Smoke-Filled Rooms: a Postmortem on the Tobacco Deal

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By W. Kip Viscusi

University of Chicago Press

Copyright © 2002 W. Kip Viscusi
All right reserved.
ISBN: 0226857476

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I - Introduction

Cigarettes in a Market Economy

Cigarettes are the most dangerous consumer product used on a mass scale. The risks associated with smoking are extreme, including outcomes such as lung cancer, cardiovascular disease, and emphysema. Indeed, official estimates suggest that over 400,000 smokers die prematurely every year because of their smoking behavior-a figure representing more deaths than are attributed to any other product and roughly ten times the number of people killed every year in automobile accidents. Smoking is also addictive; it is hard to quit.

These risks of smoking are well known. Indeed, surveys show that people now consistently overestimate how risky smoking actually is. This awareness that smoking is dangerous is not a new development. The potential hazards of cigarettes have been well known for decades and perhaps centuries.

The extent to which people who smoke are aware of the risks, together with the fact that smoking arises from market transactions by the smokers themselves, provides the context of both cigarette litigation and the smoking policy debate. Cigarettes are sold in the marketplace to consumers who choose to make these purchases. Enjoyment of smoking is not an idiosyncratic taste: smoking was once the norm among the U.S. adult population. Even now, over one in five American adults still smoke. Comparable statistics exist throughout the world.

The fundamental principle of a market economy is that consumer choices should be respected. Freedom to make such choices enables people to select those goods that best advance their welfare. If we limit these choices because we believe that people's decisions are not good for themselves or are harmful to others, then consumers will be worse off in terms of how they perceive their well-being. As a general rule, we should interfere with these private decisions only if people are making misinformed choices or if there is a pressing overriding societal concern.

In light, then, of the respect usually accorded to private consumption decisions, why is it that smokers themselves should be compensated considerable sums of money because of their smoking-related illnesses? How could a legally sold product have given rise to such a diverse assault on legal and regulatory fronts?

In the case of cigarettes, there is not only substantial knowledge in the public domain, but also the first formal warnings program that ever emerged for any consumer product other than prescription drugs. Warnings are now commonplace. While we now take warnings on dangerous products for granted, it was cigarettes that were the first among mass-marketed consumer products to bear on-product warnings, almost four decades ago. The only products with earlier warnings were those that posed acute hazards, such as rat poison and sulfuric acid, not general consumer products. Moreover, unlike the acute hazards that merited legally mandated warnings before cigarettes, the threats posed by cigarettes are not immediate or certain. Furthermore, Congress did not simply indicate a general need for cigarette warnings. It completely specified the text, format, and placement of the warnings. Public health officials have also fostered smoking risk communication efforts for decades.

In spite of these efforts to publicize the hazards of smoking, paternalism often intrudes on smoking debates in the form of claims that consumers still have not gotten the message. Such claims are not supported by empirical evidence but rather seem to be the conjecture of nonsmokers who are puzzled by people's decision to smoke despite overwhelming evidence of risks of staggering magnitude. Surely people would not smoke if they really knew the risks. Inferences along these lines, however, are contradicted by extensive survey data on smoking risk beliefs. The idea that nonsmokers have been privy to information not known to smokers simply lacks any foundation.

A second paternalistic approach is to deny the rationality of choices even if they are informed. This line of reasoning suggests that smokers are addicted and are acting in an irrational manner. Quitting smoking is certainly very difficult for many smokers, and the influence of such difficulties will be explored in this book.

When assessing such irrational-choice hypotheses, it is important to distinguish what, in fact, is really driving the paternalistic concern. Is it that smokers are making erroneous decisions given the character of their preferences and their own valuation of the smoking experience? Or is it that given our preferences as nonsmokers, we believe that they should not smoke? If people are smoking cigarettes, then surely they must be irrational. As a policy matter, extremely strong justification should be required whenever paternalistic preferences are imposed on others, because any such intervention will necessarily reduce the perceived well-being, in their own eyes, of those who are being regulated.

The most extreme antismoking advocates would support a complete ban on cigarettes. However, the experience with the alcohol bans during Prohibition suggests that a ban is not feasible and will simply spur considerable illegal activity. More fundamentally, the economic basis for a ban, even if it were feasible, seems problematic. Once we have restricted smoking to the adult population and have undertaken a vigorous risk communication effort that adequately conveys the risks of smoking, then any further limitation on smoking behavior has the character of an intrusive form of paternalism. If there is harm to others in terms of medical costs or effects of secondhand smoke, these can be addressed by targeted policies short of a ban on cigarette sales.

Cigarette Litigation

Understanding the recent tobacco litigation first requires an understanding of the legal environment. Whereas personal injury cases were formerly a small-stakes legal backwater, over the past two decades there has been a tremendous change in the character of personal injury litigation. Beginning in the mid-1980s there was a substantial explosion in product liability litigation in the United States. Multimillion-dollar lawsuits, such as those for asbestos, often involve mass toxic torts with thousands of claimants. Such large-scale suits boosted the stakes involved in litigation, offering unprecedented payoffs for the plaintiffs and unprecedented losses for the defending companies.

Even within the realm of high-stakes litigation, cigarette litigation has a Guinness Book of Records quality. For years the industry fought off lawsuits filed by individual smokers. Despite a continuing wave of individual plaintiff lawsuits, the tobacco industry had an unblemished record of courtroom success that was possibly unrivaled by any other litigation effort. Though some plaintiffs attribute this success to "scorched earth litigation tactics," the basic fact is that when cases reached the jury, the jurors consistently concluded that the risks of cigarettes were well known and voluntarily incurred.

This unbroken string of industry successes came to a halt with the state attorney general suits that began in the mid-1990s. This litigation was based on a completely untested legal concept, the validity of which many continue to question. Did states have a legal right to be reimburse for the health-related costs that state programs incurred due to cigarettes? These lawsuits were not about health status and individual smokers' well-being at all, so there would be no emotional appeal to jurors. Rather, the lawsuits were strictly an accounting exercise, albeit a quite expensive one. What financial costs did cigarettes impose on the states? Without ever suffering an adverse jury verdict, the cigarette industry settled these suits in separate deals with four states and a Master Settlement Agreement with the remaining states. The combined price tag was $243 billion-setting a record for any damages payment. The industry's payoff of billions of dollars in plaintiffs' attorneys' fees also set records for lucrative paydays. Some observers pegged the fee amounts to be in the thousands of dollars per hour actually worked, or $18 billion to $38 billion overall. The exact totals have not been made public. However, the Freedom of Information Act request by the U.S. Chamber of Commerce yielded data on twenty-one states, indicating legal fees totaling $11 billion.

This turn of fortune did little to enhance the tobacco industry's image or its future prospects in court. The press labeled the industry "the new evil empire." One governor justified possible ethical lapses in his antitobacco efforts as being warranted, "because I was fighting the powers of darkness." When tobacco is the target, usual legal and ethical standards need not apply. The industry appeared likely to sweep all possible adverse comparisons: "Now, the tobacco industry has little more support in Congress than the Mafia, and being on the wrong side of the smoking issue would be like being on the wrong side of communism."

The enormous payoff of tobacco and other large-scale suits also has profound implications for the character of the plaintiff 's bar and personal injury litigation. Lawyers in such cases often work out of small firms, with modest resources to muster on behalf of their clients. The outcome of most of these suits is not a million-dollar payday, but rather coverage of the injured person's medical expenses and lost earnings.

There is also a different class of tort litigation. This is the world of high-stakes litigation, often involving class-action suits that result from the mass nature of product-related disease cases such as asbestos. One such high-stakes attorney is Texas lawyer John O'Quinn. O'Quinn and his partner, John Laminack, have been featured on the cover of Fortune magazine for its story on "Lawyers from Hell," or as Mr. O'Quinn likes to rephrase it, "lawyers who give them hell." For these lawyers, cigarettes is just another high-stakes pit stop after reaping major rewards from the asbestos and breast implant litigation.

O'Quinn was not the only high-profile lawyer engaged in the tobacco litigation. In the tobacco litigation, I have also been deposed by a prominent Louisiana attorney, Daniel E. Becnel Jr. Notwithstanding his homespun manners, Mr. Becnel is a shrewd, talented, and highly successful plaintiffs' attorney. As are many of the cigarette lawyers, he is a successful veteran of the asbestos litigation. In the year 2000, he was simultaneously juggling his involvement in large-scale suits involving cigarettes, the diet drug combination phentermine-fenfluramine, and Firestone tires. The cost of this frenzy of activity is that he is unable to spend time at his vacation home in Aspen, where he keeps a spare Mercedes for guests. However, there appear to have been offsetting financial rewards, as he claims to now own Jetway, the Mercedes-Benz dealership in Paris, and what he described to me as perhaps the world's most extensive collection of Nazi memorabilia, including Hitler's uniform.

John O'Quinn and Daniel Becnel Jr. are not the only high fliers among the cigarette case attorneys. Richard (Dickie) Scruggs, who represented Mississippi and other states, reaped roughly a billion dollars from the state tobacco settlement, and others are not far behind. Indeed, ten of the top-earning lawyers profiled in the 2001 Forbes magazine cover story on "Killer Lawyers" were veterans of the tobacco litigation. Some, such as South Carolina attorney Joseph F. Rice, have not had the high media profile of attorneys such as John O'Quinn and Dickie Scruggs, but have nevertheless scored big in the tobacco settlement. Joseph Rice brought back $2 billion in legal fees to his firm as a result of the tobacco settlement. Not wishing to be left out of the tobacco feeding frenzy, O. J. Simpson attorney Johnnie Cochran launched a cigarette class action in 2001.

These successful plaintiffs' attorneys do not cash in their winnings and retire to a world of golf, though some such as Dickie Scruggs have purchased private jets to ferry them to various cases. Rather, they use these payoffs to bankroll subsequent litigation, such as Firestone tires and HMOs. The ultimate impact of the tobacco settlement will consequently go well beyond the initial price tag, as it provides the financial backing for additional suits against cigarette companies and other products, altering the tort liability landscape.

The battle against the cigarette industry had an additional element as well-consumers against Big Tobacco. Populism and the desire to transfer money from corporations to individuals remains a prominent force. The lucrative nature of high-stakes personal injury litigation seems somewhat at odds with this populist approach. In this book I will explore how these suits arose, what issues were at stake, and how a catastrophic error in judgment by the tobacco industry led to a dramatic decline in its fortunes and that of other similarly situated companies.

Information, Regulation, and Smoking Policy

Both antismoking regulations and litigation against the cigarette industry can be traced back to issues of information. Do smokers, in fact, understand the risks consequent upon their smoking decision? If people are embarking on smoking behavior with full knowledge of the consequences, their decisions should be respected. Alleged wrongful conduct by the industry is of legal concern almost exclusively to the extent that it may lead people to make mistaken decisions to smoke. As I hope to demonstrate, there is widespread understanding of the potential adverse health consequences of cigarettes as well as the difficulties of quitting smoking.

This result does not imply that there is no additional role for government policy. More can and should be done to promote market competition on the basis of the comparative safety of various cigarettes. There needs to be a better comparative risk rating scheme so that people can better understand the risks associated with particular brand choices. Safety information will promote competition among cigarette companies in developing safer cigarette designs, ultimately promoting smokers' health and well-being.

There is also a need for more financial information on which to base public policy. We often hear claims that smokers cost society a dollar a pack, perhaps even two dollars a pack. Where do such estimates come from? Shouldn't cost estimates of this magnitude play a key role in driving smoking policy? The first task is to determine whether such claims are in fact true, and we can then determine how these costs can be addressed. Do cigarettes, in fact, impose substantial costs on society, and, if so, what are these costs?

Then, too, environmental tobacco smoke has generated its own scientific debate and policy remedies. Surely cigarette smoke is a smelly annoyance. But will environmental tobacco smoke also kill you? Is secondhand tobacco smoke in fact a serious health threat? Is it as great a threat as people believe it to be? What is the most sensible basis for a regulatory policy given the effects of smoking in public places on others?

Fashioning responsible risk policies in these areas requires an accurate and honest assessment of the real consequences of smoking. Too often these debates are dominated by claims of risk of unspecified magnitude. Misrepresenting the risk to the public is not acceptable whether it is by antismoking advocates trying to stop smoking or by tobacco companies trying to encourage smoking. Policies must be based on an honest assessment of the risks, not worst-case scenarios or hopeful best-case possibilities.

Given the public's general tendency to respond in an alarmist fashion to dimly understood risks that are given substantial public attention, there is also danger for overreaction. The policy task is to convey risks of true consequence, not create alarm about minor risks. Risks that cigarettes pose to smokers are enormous, but the damages to others are not. These differences in risk do not imply that there should be no policy for minor risks, but rather that any policy that is adopted should be based on a legitimate scientific assessment of the merits of such efforts.

Unfortunately, tobacco policy is not being shaped within usual policy arenas. The most recent wave of cigarette regulations was not the result of conventional regulatory channels, but the result of the cigarette industry's backroom deal with the state attorneys general to settle their litigation. The Master Settlement Agreement with the states imposed a wide range of regulatory restrictions on the cigarette industry, including the formal retirement of Joe Camel, extensive restrictions on advertising, and public education efforts. Some of the hastily drafted policies that emerged are sensible, but others have complex repercussions including adverse anticompetitive effects on an already highly concentrated industry.

Unlike officials in regulatory agencies, these deal cutters had no legislative mandate guiding their regulatory efforts. Nor did the regulations receive scrutiny by the experts within a regulatory agency. There was no evaluation of the merits of that regulatory approach or competing alternatives. Contrary to the standard practice with federal regulatory policy, there was also no review by the U.S. Office of Management and Budget. Nor was there any public comment period so that diverse points of view and information from a wide variety of sources could be incorporated in the regulatory design. Rather, the regulatory policy emerged as the result of a secret deal cut between the tobacco industry and the state attorneys general. This agreement received no public scrutiny whatsoever. The process by which these regulations were imposed is itself objectionable in that it short-circuits the usual political processes and public input on such matters. Moreover, as I will detail below, the policies that emerged fell short in a variety of measurable ways.

The tobacco settlement also was distinctive in that it was not a damages payment in any conventional sense. Rather, it was an unprecedented imposition of an excise tax on cigarettes that was sold to the public as a damages award paid by the companies. If there are financial costs that cigarettes or other products impose on the government, the solution is simple. Legislatures can levy additional taxes to reflect these harms.

Using litigation to impose taxes usurps the traditional governmental responsibility for fiscal matters. The tobacco industry accepted the deal because it escaped litigation at a cost that would not bankrupt the industry. States embraced the deal because of the enormous financial gains-far more than could be squeezed out of the companies in any one-time damages payment. The losers in this litigation tax were the smokers, who will actually pay almost all of the tax.



Continues...

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Excerpted from Smoke-Filled Rooms: a Postmortem on the Tobacco Deal by W. Kip Viscusi Copyright © 2002 by W. Kip Viscusi. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Acknowledgments
I. Introduction
II. The Proposed Federal Settlement
III. The Settlement of the State Lawsuits
IV. The Financial Costs of Smoking to Society
V. The Financial Costs to the States and the Federal Government
VI. Environmental Tobacco Smoke
VII. Risk Beliefs and Addiction
VIII. Youth Smoking: Beyond Joe Camel
IX. Promoting Safer Cigarettes
X. Lessons from the Tobacco Deal
Notes
References
Index

Editorial Reviews

Harvard law professor and tobacco industry expert witness Viscusi turns the tables on the 1998 tobacco settlement, arguing that tobacco companies made a colossal blunder in settling with the states. The book's underlying thesis is that tobacco is a consumer product whose risks are well known to those who choose to use it. He expertly dissects the settlement and its supporters, using charts, statistics, and medical studies to claim that smoking is not as dangerous or costly to society as believed. The settlement was politically driven, he submits, amounting to an excise tax on the poor. He believes that the government should have helped the tobacco industry develop a "safer" cigarette, since a total ban on smoking would fail. The book is well argued and worth reading, regardless of the reader's personal views on the subject. For specialized and law collections. Harry Charles, Attorney at Law, St. Louis Political Science Copyright 2002 Cahners Business Information.

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