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Tobacco's foes work to save it

Lawyers who battled cigarettemakers lobby to avert bankruptcies that might sink the legal settlement and their fees.

By JO BECKER

© St. Petersburg Times, published April 12, 2000


TALLAHASSEE -- For years they were tobacco companies' worst enemies. Now, the big-gun lawyers who brought the industry to its knees in states all over the country are trying to keep Big Tobacco afloat.

In one of the more ironic twists in the topsy-turvy world of tobacco litigation, several of those lawyers urged state lawmakers Tuesday to cap the amount of punitive damages tobacco companies may have to pay sick smokers.

The lawyers said it is in the best interest of the state to ensure that tobacco companies don't go bankrupt.

For one thing, Florida is dependent on the multibillion-dollar settlement that the lawyers helped the state win three years ago. For another, if the companies go belly-up, the state loses regulatory concessions it won from the industry in that same settlement.

Then comes the matter of the lawyers' own fees: Tobacco companies owe lawyers who fought them as much as $5-billion.

"I don't really want to be in the position of pulling for the tobacco industry," acknowledged lawyer Dick Scruggs, who helped dream up the first big lawsuit by a state to recover the taxpayer cost of treating sick smokers.

The reason Scruggs and others made the trip to Tallahassee is a huge class-action lawsuit against tobacco companies, brought on behalf of sick Florida smokers.

A Miami jury last week awarded $12.7-million in compensatory damages to three representative smokers and is scheduled to begin the next phase of the trial May 15, awarding punitive damages to as many as 500,000 people.

That notion has Wall Street analysts closely tracking every legal move. Lawmakers in some tobacco-growing states already have taken action, while others who are dependent on cigarette money are in a tizzy.

And it's not just the money: Bankruptcy of the big tobacco companies sued by Florida would relieve them of settlement obligations such as an advertising ban on billboards, in mass transit and in sports arenas.

"Bankrupting these companies won't end smoking, it'll end controlled smoking," Scruggs said.

The problem facing Florida lawmakers comes down to uncertainty:

No one knows what the final Miami award will be, though one figure recently tossed about is as high as $300-billion. It also is unclear that any legislative action will be enough to dissuade tobacco companies from filing for bankruptcy protection.

Furthermore, if the Miami lawsuit is successful, other massive class-action lawsuits may follow.

Joseph Rice, an attorney involved in Florida's lawsuit and others, described the scenario as a "Field of Dreams" in which class actions suits are built, and smokers come by the droves.

"If that process starts, I don't believe it stops," Rice said. "There's no reason it can't be duplicated 50, 60, 70 times."

An analysis by investment bankers A.G. Edwards & Sons says that is unlikely. Citing court trends, it concluded that class-action lawsuits involving smokers will have a hard time surviving judicial scrutiny.

But Scruggs said that while this scenario plays out, tobacco executives still may find it in their best interest to file for bankruptcy protection and pick the states where they do it.

While companies cannot file bankruptcy simply to get out of paying punitive damages, Scruggs said some tobacco companies' finances already are so precarious that a judge, particularly in a tobacco-growing state, could find their arguments compelling.

In Florida, lawmakers have much to sort out and not a lot of time to do it. The Legislature adjourns in less than a month.

The debate here began with a proposal by Gov. Jeb Bush.

Florida is owed $13-billion over the next 25 years. Bush wants to sell about $9-billion of that to investors, who would assume the risk that tobacco companies would actually make the payments. Under the plan, the state would receive $2.8-billion upfront, which it could then invest.

Besides reducing the state's risk, the plan has an added benefit.

The state's take from the settlement is tied to domestic cigarette sales. If the sales drop, so does the state's income. Selling off future tobacco revenue would allow lawmakers to pursue tough anti-smoking policies without worrying about a conflict of interest.

Lawyers such as Rice and Scruggs think selling future revenues, called "securitization," is so smart they are trying to strike the same deal for fees they are owed.

But they have encountered a problem that Florida also may face: No one on Wall Street is buying while the Miami case is pending.

"Until this thing becomes clear, securitization is dead in the water," said Rex Deloach, an investment consultant to the lawyers.

That has Florida lawmakers debating other proposals.

One, by Sen. Skip Campbell, D-Fort Lauderdale, would cap at $50-million the bond amount that companies would have to post while pursuing an appeal. Under current Florida law, a judge can order a bond of up to 120 percent of the punitive damage award. Some fear that the bond alone in the Miami case could bankrupt tobacco companies.

Rice said Campbell's proposal doesn't go far enough.

He and Scruggs are pushing a measure that would limit the annual amount of punitive damages the tobacco companies would have to pay. One proposal caps that amount at $50-million a year.

That doesn't sit well with lawmakers who are worried about limiting the payout to Florida residents who were genuinely harmed by tobacco companies.

"You're the guys that got the choo-choo train rolling, and a lot of cabooses got on board," Campbell said to the lawyers. "Now you're saying to these folks, "Folks, you don't deserve your compensation, but we're going to get ours.' "

Scruggs said there is a major difference between Florida's lawsuit against tobacco companies and the Miami lawsuit. Florida sued on behalf of taxpayers who had to pay to treat Medicaid patients with illnesses caused by smoking. Three-quarters of those taxpayers don't smoke, he said.

"It's a question of culpability," Scruggs said. "I elevate the taxpayers of Florida above the smokers of Florida."

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