Chapter 32, Part 2

By Frank Tursi, Susan E. White and Steve McQuilkin
JOURNAL REPORTERS
© 1999 Winston-Salem Journal

There was no other word for him. Bennett LeBow was a traitor.

In March 1996, LeBow, the chief executive of Liggett Group, announced that his company was settling out of court with five states that were suing the tobacco industry. Liggett, the smallest cigarette company, would settle with other states a year later.

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

By crossing the line, LeBow implicated the entire industry.

''It was really a PR stunt on the part of the AGs already involved in those actions,'' said Thomas McKim, R.J. Reynolds' assistant general counsel. ''But I have to concede it was effective because what it did was legitimize these suits. Now everybody could point the finger and say, `Well, Liggett settled.' ''

LeBow was a maverick whose heart was never in tobacco. He had built his career as a corporate raider -- buying up failing corporations, rebuilding them and then selling them for profit.

Yet he insisted that Liggett's settlement was a sound business decision. Barely 2 percent of all smokers bought Liggett brands. LeBow knew that his debt-ridden company would go bankrupt if even one state won its lawsuit. Liggett made about $11 million a year in pretax profits but it was also spending close to $10 million in legal fees.

LeBow also believed that the lawsuits were weighing down the industry's stock. Settle and all the tobacco companies make money, he insisted. ''Let's sit down, make peace and stop fighting,'' he said. (Newsweek footnote, LeBow quote.)

Bennett LeBow, Liggett's chief executive, was the first to agree to settle. (AP Photo)

LeBow agreed to pay the five states less than $26 million -- $5 million over the next 10 years and as much as 7.5 percent of Liggett's pretax profit for up to 25 years. In exchange, Liggett was freed as a defendant in the states' Medicaid cases.

LeBow's actions were a nightmare for the industry, but he wasn't the only problem. For the first time, the companies also faced whistle-blowers. Jeffrey Wigand, a former research chief with Brown & Williamson Tobacco Corp., revealed company secrets to the media and then helped the FDA gather evidence that the industry was manipulating nicotine. Merrell Williams, a former paralegal with the law firm that represented Brown & Williamson, leaked thousands of confidential industry documents that supported the theory of an industrywide conspiracy to cover up the truth about the dangers of smoking.

Those documents eventually made their way to the Internet, giving the public an insider's view of the tobacco industry. There, in the companies' own words, was proof that they had known for years that their cigarettes caused various health problems, including cancer.

These were galvanizing factors for attorneys general who were uncertain about whether to sue as other states had done. By 1996, more than 30 states had filed cases, and others would soon follow.

Tobacco lawsuits were overburdening America's courtrooms and politicizing Congress, which was feeling pressure to take action.

Sen. Trent Lott, a Mississippi Republican, was the first to draft a tobacco bill. He was in the awkward position of being Senate majority leader and the brother-in-law of Dickie Scruggs, who was representing Mississippi in its lawsuit. Lott's thinking was that the bill might shore up support for Republicans, who were routinely accused of being soft on tobacco because of the industry's campaign contributions. Republicans received more than $6 million from tobacco interests for the 1996 election, more than five times the amount given Democrats. Lott was worried that Republicans might lose some key seats in the approaching election because of their tobacco ties. The time seemed right to make a move on tobacco.

Lott, Scruggs and Mississippi Attorney General Mike Moore worked in August 1996 with the tobacco companies to craft a bill. As proposed, the industry would pay the states $150 billion over 15 years. In exchange, the companies would be freed from the states' Medicaid cases and from any individual smoking lawsuits. The bill also would have protected the industry from the Food and Drug Administration, which was threatening to regulate nicotine as a drug.

Word of the proposed deal was leaked to The Wall Street Journal. When the story broke, the bill died; the cigarette companies denied that they were involved in any talks.

Health officials, plaintiffs' lawyers and others blasted Moore for the closed-door negotiations. They said that the deal smacked of the same kind of favoritism Washington had shown the tobacco industry for years.

But President Clinton was ready to sever those ties. Since his election in 1992, he had established himself as an industry enemy. He had supported the FDA's proposal to control nicotine and condemned the tobacco companies for hooking teen-age smokers.

Nothing seemed certain anymore, not even in a pro-tobacco state such as North Carolina, where farmers were beginning to question their futures. Local legislators reacted harshly to the Clinton administration and to the Medicaid lawsuits. They passed a law preventing the state from suing the industry.

N.C. Attorney General Mike Easley felt caught in the middle. Easley respected his colleagues and especially Moore, whom he considered a good friend. The two were a lot alike: both were raised Catholic, they had similar reputations and their sons were about the same age. Easley was just as interested in stopping teen smoking, but he wasn't sure that the states' lawsuits were the answer.

''I thought, well, nobody's ever been run over by a smoking driver yet. I mean, come on. We don't have girls out on the street -- young teen-age girls out selling their bodies for a Virginia Slim. Let's put this thing in perspective.''

N.C. Attorney General Mike Easley, who grew up on a tobacco farm, felt caught in the middle as states started suing. (Journal File Photo)

Easley's reservations were expected. He had grown up on a tobacco farm in Eastern North Carolina. His grandfather and father had run a tobacco warehouse, and he had worked summers as a relief buyer in south Georgia. The money he earned helped pay for his education at the University of North Carolina at Chapel Hill. There were similar stories across the South. Families and communities depended on tobacco. Easley feared that North Carolina's economy and the livelihood of other tobacco-growing states were at risk.

But Easley also faced personal risks. Like his buddy Moore, he was interested in seeking higher office. His name was already being tossed around for governor. What kind of support would he get if he came down hard on tobacco? Yet, one issue continued to eat at him -- accusations that the industry, that RJR, had marketed to teens. For Easley, there was no moral struggle there.

''Whether they were or weren't (targeting teens) was not important as much as they were perceived as doing it,''he said. ''There's not a farmer in North Carolina that I know who wants kids smoking cigarettes. So I didn't have any problem dealing with the companies on that.''

In the fall of 1996, Easley met with Reynolds' attorneys in Winston-Salem to discuss the industry's problems, including the teen issue. ''You guys have got to straighten this out,'' Easley told the RJR lawyers. ''This youth-targeting issue has got to go away or you're never going to see the end of these lawsuits. Even if they're bad suits, you can't defend them all.''

The company attorneys played it cool. They agreed that some action was needed but told the attorney general nothing of their plans. ''It may be that they had already decided that they were going to work something out,'' Easley said.

Bringing the Sides Together

Buzz of a settlement and behind-the-scenes negotiations went on for nearly a year before Mike Moore's historic meeting with RJR Nabisco CEO Steven Goldstone and Philip Morris CEO Geoffrey Bible on April 3, 1997. Talks began in earnest in Chicago five days later.

Much to Moore's surprise, the companies immediately offered a solution on the teen-smoking issue. RJR attorney Arthur Golden, one of the industry's negotiators, said that the companies were willing to get rid of their advertising billboards and to stop sponsoring sports events.

''Are you ready to get rid of Joe Camel?'' Moore asked.

''We're willing to talk about that,'' Golden responded. ''But the Marlboro Man has to go as well.'' (The People vs. Big Tobacco footnote, quotes from Moore, Golden and Goldstone.)

It sounded too good to be true. After all, the industry was spending $6 billion a year promoting its cigarettes. Much of the money went to advertise Philip Morris' rugged Marlboro Man, one of the most recognizable images in the world. RJR's Joe Camel was also a favorite. Moore believed that the companies flaunted these characters to lure young smokers.

As the industry's liaison, Phil Carlton had hoped to start things off smoothly. He was just as pleased with the companies' first offer and believed that it would help earn the trust of the attorneys general.

The two sides negotiated for 2 1/2 months. To avoid publicity, the negotiators met in Dallas, New York, Chicago and Washington. But details leaked out, and by late April it was being reported that the industry might pay more than $300 billion to settle pending lawsuits. The dollar figure floated about wasn't as surprising as news that the tobacco industry was actually involved with the negotiations. This was serious. Market analysts even predicted that the companies would pay off the states by increasing cigarette prices, maybe as much as a dollar a pack.

Word of a potential settlement hit Winston-Salem while Goldstone was preparing for his first shareholders' meeting as CEO of RJR Nabisco. He skirted the issue until the end of the meeting. ''A resolution to this issue is important to our shareholders, our customers and our country. But it has to be fair, and it has to be reasonable,'' Goldstone said. Until such a deal was reached, ''We're going to do it the old-fashioned way, by continuing to win cases.''

Though industry executives did their best to avoid publicity, the states' attorneys general attracted it. Many were outraged that they weren't invited to participate in the negotiations. Moore had asked a handful of attorneys general, including Washington State's Christine Gregoire, Arizona's Grant Woods and Florida's Bob Butterworth, to sit in on the discussions. He had hoped to work out a suitable deal that he could sell to the other attorneys general. But some didn't like being left out and began showing up at meetings. This show of force irritated tobacco lawyers. Scruggs urged Moore to take control.

Trust wavered between the negotiators. As the days grew longer, the pressure mounted. Tobacco negotiators accused their opponents of backing down from promises. Some threatened to walk out. ''We warred; we fought; we screamed; we yelled; it got ugly at times,'' Moore recalled.

Tobacco lobbyists didn't make things any easier. At one point, several cigar-toting lobbyists stopped the attorneys general out in a hallway and blew smoke in their faces. For some of the attorneys general who had cancer or relatives with cancer, the action was unforgivable.

''There was some very rude, horrible things done,'' said Jim Tierney, the former attorney general of Maine and an adviser to the attorneys general during the negotiations.

Carlton, a corporate lawyer and former N.C. Supreme Court justice, did his best to hold everybody together. He was comfortable in high-pressure situations and had a way of getting opposing sides to agree.

''Judge Carlton has always been sort of a global thinker,'' said Easley. ''He has the ability to get everybody trying to solve the problem. He can chew tobacco or drink champagne -- whatever the situation requires.''

North Carolina Gov. Jim Hunt, in his fourth term, had suggested that the industry hire Carlton. He had known Carlton since high school, considered him a confidant, and knew that he could protect tobacco's interests. Their careers were intertwined. In his first term as governor, Hunt had appointed Carlton secretary of Crime Control and Public Safety, then to the N.C. Court of Appeals and finally the N.C. Supreme Court. In 1985, after Hunt failed to unseat Sen. Jesse Helms, he joined Carlton's Raleigh law firm, Poyner & Spruill. One of their clients had been RJR Nabisco, so Carlton wasn't surprised when Hunt came calling.

Part of Carlton's job was ensuring that the states' attorneys general understood that any deal had to be in everyone's best interests, including those of farmers. Nationally, tobacco farmers made nearly $2.5 billion a year, about $4,000 an acre. In North Carolina, tobacco remained the chief crop, earning growers $1 billion a year and providing about 30,000 jobs.

Carlton recognized the significance. He was raised on a 200-acre farm in Edgecombe County, and his father was a tobacco warehouseman. Tobacco money helped build his hometown of Pinetops, including the old Pinetops Hotel where Carlton still has an office.

Carlton didn't like to argue the rights and wrongs of cigarette smoking, though he smoked for 30 years before stopping about 10 years ago. ''It was time,'' he said. He was tired of the industry getting bashed. A national settlement might be the industry's last chance to save its reputation, he thought. ''The people of the tobacco industry, people like my mother and father, have been demonized. . . and that's not fair. You can work on the smoking problem without demonizing the people in the industry.''

• Coming Wednesday: Hammering Out a Deal