The following issues surface in this case and will be used as anchor points for interactive class discussion and exercises. As you read the case, it may be helpful to take notes with these topics in mind.
Executives’ decisions (corporate decisions) to deny (or rather disregard) the harmful effects of tobacco and nicotine throughout history.
Did the executives know the scientific evidence regarding the effects of tobacco and nicotine when they testified to the contrary?
What motivates people to lie? Is this different from what motivates executives to lie? Perhaps as agents of the shareholders, executives have a fiduciary duty to lie (If it leads to profit maximization)?
Is it cheaper to provide a safe product or avoid the truth and pay the liability claims later? Should this be a business decision?
What is the economic impact of enforcing stricter regulations on the tobacco industry?
What ethical issues are involved in the marketing strategies of the tobacco companies? Does targeting certain segments in the market cross the ethical boundary?
In addition to the narrative information provided in the following sections, a timeline of key events in the tobacco industry is available at Exhibit 1. In addition, this timeline provides an accurate summary of what the many the tobacco companies knew and when they knew it.
A complete collection of the issues discussed in this case can be found at:
http://www.pbs.org/wgbh/pages/frontline/shows/settlement/
THE ISSUES
Over the years, court cases have consistently raised several questions for the tobacco industry. This section provides a list of the issues and their basic elements in order to provide some perspective as you read the remainder of the case.
Issue 1: The tobacco industry has been accused of marketing their products toward all segments of the consumer market, even children.
Issue 2: The tobacco industry has denied the addictive nature of cigarettes.
Issue 3: The tobacco industry has denied that tobacco use can cause a myriad of health problems and denied that tobacco use has been specifically linked to many of the major causes of death (cancer, heart disease, etc?).
Issue 4: The tobacco industry has been accused of tampering with the nicotine levels in cigarettes to increase the likely dependence on the product.
Issue 5: Whether the tobacco industry has an obligation to sell the consumer a safe product.
1994 HEARINGS
Prior to 1996 there had been more than eight hundred antismoking lawsuits filed, but the cigarette manufacturers had never paid a single dollar in damages. The tobacco industry’s pugnacious litigation strategy had prevailed for over forty years. As one lawyer for R.J. Reynolds boasted: The industry’s hard-ball tactics have made the litigation [of these cases] “extremely burdensome and expensive for plaintiffs’ lawyers . . . To paraphrase General George Patton, the way we won these cases was not by spending all of [R.J.] Reynolds’ money, but by making the enemy spend all of his.”
Despite the failure of these claims, the federal government was quite actively involved in researching the tobacco industry and its impact on the nation. In 1994 David Kessler, then-Commissioner of the FDA, announced plans to consider regulating tobacco as a drug. This action prompted Rep. Henry Waxman’s (D – Calif.) to form the Subcommittee on Health and the Environment to convene a panel of tobacco corporate executives as part of the fact-finding initiative. Table 1 provides a list of the executives the subcommittee called to testify at what became known as the “Waxman Hearings.”
Table 1 – Tobacco Industry Representation at the 1994 Congressional Hearings
Company
Senior Leader
Philip Morris USA William Campbell, CEO
RJ Reynolds Tobacco Company Jim Johnson, Chairman and CEO
U.S. Tobacco Joe Taddeo, Board President
Lorillard Tobacco Company Andrew H. Tisch, Chairman and CEO
Liggett Group Inc. Ed Horrigan, Chairman and CEO
American Tobacco Company Donald S. Johnston, President and CEO
Brown and Williamson Tobacco Company Tommy Sandefur, Chairman and CEO
Source: Federal Information Systems Corp., Federal News Service: April 14, 1994.
The five issues presented in the beginning of this case provide an accurate summary of the issues discussed in testimony. The subcommittee also addressed other issues that had been prevalent in litigation involving the industry.
During the hearing, the subcommittee discovered that Philip Morris had been using questionable tactics as far back as 1953. An example of PM’s tactics was the creation of the Tobacco Industry Research Committee (now the Council for Tobacco Research (CTR)). Philip Morris had followed the advice of the public relations firm Hill and Knowlton to create the committee to launch a monumental public relations campaign to counter mounting evidence linking tobacco to lung cancer. In response to this discovery, the executive director of CTR, Dr. James Glenn, testified that CTR was independent of the industry and that there was no causal link between smoking and health diseases. This testimony directly contradicted a Wall Street Journal investigation, which had reported that CTR was at the center of “the longest-running misinformation campaign in United States business history.”
The degeneration of the industry’s credibility continued when Brown & Williamson’s Chief, Thomas Sandefur, Philip Morris’ President, William Campbell, and other industry CEOs intransigently declined to admit to Rep. Waxman’s subcommittee that smoking was addictive. The executives did so “even as the aforementioned internal company memos revealed that cigarette manufacturers had long understood and hidden nicotine’s addictive properties.” The industry’s blatant obstinacy before Congress swayed the tide of public sentiment and presaged an onslaught of epic proportions.
As previously mentioned, the tobacco companies’ leaders were adamant in making the point that tobacco was not addictive. Mr. Campbell even quoted a 1988 Surgeon General’s report by stating “People can and do quit smoking?there are more than 40 million former smokers in the United States, and 90 percent of those who quit, did so on their own, without any outside help.” CEO Campbell continued to defend the fact that cigarettes are not addictive throughout his testimony and provided the subcommittee with no information about unethical tampering with the products to keep consumers buying them.
Later in the testimony, two former scientists and an ex-production manager of Philip Morris publicly stated that Philip Morris President William “Campbell and the company were aware of nicotine’s addictiveness and deliberately controlled nicotine levels to satisfy smokers.” These statements directly contradict Campbell’s testimony: “Philip Morris does not manipulate or independently control the level of nicotine in our products.” Philip Morris attorneys retorted that Campbell did not say that tobacco is not addictive, instead, he said that he did not believe it is addictive; a “personal viewpoint he has every right to hold.”
Mr. Johnson, CEO of RJR Tobacco, follows Mr. Campbell’s lead in his testimony before the committee. He responds to the subcommittee’s question of whether the company manipulates the levels of nicotine in order to “hook” smokers by saying, “?we do not do anything to hook smokers or keep them hooked.” He even continues with “Let me repeat: We do not manipulate nicotine to addict smokers.”
In the interest of time, Mr. Sandefur, CEO of Brown & Williamson Tobacco, submitted a written statement for the record and provided no oral testimony for the subcommittee. Despite the format of his testimony, it provided no indication that Brown & Williamson agreed with the views of the committee.
The subcommittee then questioned Mr. Tisch, CEO of Lorillard Tobacco. Mr. Tisch relates that the only nicotine used in Lorillard products is derived from the mix of tobacco used in the manufacturing process and not by any additional methods (tampering). He also states “Lorillard does not take any steps to assure a minimum level of nicotine in our products. Lorillard does not add nicotine to cigarette tobacco for the purpose of manipulating or spiking the amount to nicotine received by the smoker. ?I respectfully suggest to you that Lorillard has acted, and will continue to act, in a completely responsible manner in this as well as all our business practices.”
The remaining CEOs provide similar testimony in the remainder of the hearing. After their formal statements, Senator Waxman began specific questioning of the tobacco executives and they continued to provide evasive answers and denied any impact their products may have had on the health of their consumers. For instance, when asked whether “smoking causes heart disease” Mr. Johnson responded, “It may.” He proceeded to respond in kind to similar questions from Rep. Waxman regarding lung cancer, emphysema, bladder cancer, stroke, and low birth rates.
In a final attempt to get an answer from the executives, Rep. Wyden, a member of the subcommittee, described all of the professional medical associations and societies that have declared nicotine an addictive drug. The evidence also indicated that smoking is “quite addictive.” Following Rep. Wyden’s presentation, Mr. Campbell refutes the evidence and provides no relief to the members of the subcommittee.
Rep. Waxman provided closing comments for the 1994 hearing and relayed a strong message of concern over the responses of the executives.
“It started, I guess Mr. Chairman, more than six hours ago where we began to talk about whether nicotine was addictive. I brought out, and our colleagues did, all these studies, all these experts, saying nicotine was addictive. And what we found, low and behold, is the one organized body of thought [tobacco executives] that says it is not — are people with the financial interest to say that nicotine in not addictive. That pattern is continued through the day.”
1998 HEARINGS
Representative Waxman’s efforts in 1994 opened the door for further scrutiny of the tobacco industry. Despite the past success of the tobacco industry in “spending-down” any potential plaintiffs’ attacks, the number of potential lawsuits were mounting and legal strategies were being tested that would eventually bring the tobacco giants back into the courtroom.
Following the hearing in 1994, one such legal strategy was discovered by “four old law school friends from Ole Miss, including the Attorney General of Mississippi.” Those who had been harmed by the product (the consumers) had filed all of the previous lawsuits. The tobacco companies were quite adept at beating any attempts at proving cause or negligence on the part of the cigarettes or the companies’ marketing efforts. Instead of this approach, this group of Mississippi lawyers figured although “the State did not smoke [it], it had suffered considerable damage from tobacco related illnesses.” Therefore it seemed appropriate that the state could file for damages rather than continuing the stream of ill-fated individual tort claims.
With this line of reasoning, the State of Mississippi filed suit against the tobacco industry in 1994 to recoup the “tens of millions of dollars it spends each year to provide medical care to victims of tobacco-related illnesses.” The complaint maintains that the cigarette manufacturers concealed from and misled the public about information demonstrating the dangers of smoking. The state’s suit was seeking unspecified damages for restitution and unjust enrichment, indemnity, common law public nuisance, and injunctive relief.” The Mississippi suit was scheduled to go to trial on June 2, 1997.
Before this case became a reality, “the prevalence of whistle-blowers, incriminating corporate memoranda and the growing number of states joining the lawsuit caused one of the cigarette makers to falter. In an unprecedented maneuver, the Liggett Group, the smallest of America’s top five cigarette manufacturers, broke ranks with the other cigarette makers by settling five Medicaid recoupment suits brought by state Attorneys General. The March 1996 settlement amounted to $31 million dollars, to be paid over twenty-five years.”
In an extension of its previous five-state settlement, Liggett settled with the attorneys general from 22 states suing to recover health care costs attributable to smoking. As part of this settlement, Liggett released the following statement: “? we at Liggett know and acknowledge that? cigarette smoking causes health problems, including lung cancer, heart and vascular disease, and emphysema. We at Liggett also know and acknowledge that? nicotine is addictive. Liggett acknowledges that the tobacco industry markets to youth, which means those under 18 years of age.”
The pioneering effort of the Liggett Group left the other companies with no where to turn but toward the negotiating table. Up to this point, the executives had not compromised the long-standing tradition of denying the reality of their business. Considering the size of the mounting suit and the risk of losing the case if it ever was heard in court, a settlement strategy looked more attractive as each day passed.
Meanwhile, the legal strategy discovered by the attorneys in Missouri allowed state after state to file similar suits against the tobacco companies and eventually, all fifty did so. With the extreme number of cases being filed against the tobacco industry, the federal government became involved and finally convened hearings in late 1997. Since the Liggett “incident”, the other tobacco companies had been quite active in addressing the states’ suits; however, no formal resolution could be made at the state level.
With federal jurisdiction established, the federal government was not only interested in the legal interpretation being presented by the states’ attorneys general, but was intrigued by the possibility of recouping significant amounts of Medicaid dollars. The latter was quite attractive considering the challenges in funding the state health care appropriations and the looming crisis for Medicaid and Social Security.
Although some of the senior leadership changed during the four-year period between 1994 and 1998, the testimony changed much more dramatically. Table 2 summarizes the new breed of leaders that participated in the 1998 hearings.
Table 2 – Tobacco Industry Representation at the 1998 Congressional Hearings
Parent Company and Subsidiary
Senior Leader
Philip Morris Cos./Philip Morris USA Geoffrey Bible, President and CEO
RJR Nabisco/RJR Tobacco Steven Goldstone, President and CEO
UST Inc./US Tobacco Vincent Gierer Jr., President and CEO
Loews Corp./Lorillard Tobacco Company Laurence A. Tisch, Co-Chairman and Co-CEO
BAT Industries PLC/B&W Tobacco Nicholas Brooks, President and CEO
Source: PBS Online and WGBH/FRONTLINE, 1998.
Geoffrey Bible joined Philip Morris USA in 1968. Since succeeding Mr. William Campbell as chief executive in 1994, he had led the company’s fight against what he described as “outside threats,” suing governments and news organizations that portrayed tobacco as deadly. Despite his aggressive posture in past litigation, he led tobacco executives to taking a more conciliatory tone during the 1998 hearings. Three of the executives written testimonies discuss the proposed settlement the companies negotiated with the states’ attorneys general. The details of this settlement are provided in the section that follows; however the principle issue in this posture is that it is strikingly different than the one used in the 1994 testimonies.
Mr. Bible was the first chief executive called in the case, during the sixth week of testimony in the Warren E. Burger Federal Building. The following excerpts from his written statement on January 29, 1998 are provided to highlight the change in strategy the companies used in this round of hearings.
“The opportunity that enactment of the Proposed Resolution presents is a future of cooperation and progress in which the decades-old policy debate over tobacco policy would be resolved in a comprehensive, meaningful and efficient manner — and to do so now. This cooperative spirit is already reflected in the fact that the tobacco industry and its leading adversaries sat down together for the first time and, after much hard work, were able to find common ground on some very contentious issues.”
“The alternative is to cling to the past — a past that embraces what many have seen as the “jackpot” approach of ad hoc, unpredictable and protracted litigation and controversy — an approach leading only to continued conflict, lack of meaningful progress and instability.”
“I urge this Committee to seize this opportunity to look towards the future, and to act now to achieve the meaningful reforms presented by the Proposed Resolution by enacting it into law.”
In addition to these statements, Mr. Bible provided feedback on the issues of addiction and causation in unprecedented reflections on these topics; topics the executives made a mockery of in 1994. Mr. Tisch, CEO of Loews Corp, and Mr. Goldstone, CEO of RJR Nabisco, provided written testimonies that were similar in tone and quite contrary to the opinions of their predecessors in 1994. (Note: This Mr. Tisch is a different Mr. Tisch than the one involved in the 1994 hearings).