Butt Ugly

Rand Carlson

At the start of the new year, the State of Minnesota cashed its latest check from Big Tobacco: a cool $242 million. That sum pushed the current public take in the much-lauded 1998 settlement with the industry to $787 million. But state Sen. Thomas Neuville isn't smiling about those astronomical numbers. The haul, he notes, has fallen short of early estimates, and the Minnesota Department of Finance's most recent calculations anticipate an additional $46 million drop in tobacco collections over the next two years. That's because the settlement negotiated by the state's attorney in the lawsuit, current U.S. Senate hopeful Mike Ciresi, links payouts to domestic cigarette sales, which have swooned of late.

As Neuville sees it, the geyser of Big Tobacco money--originally projected to pour some $6.1 billion into state coffers over the next quarter-century--may soon be far more radically capped. And that, he believes, will come not as the result of any change in the public's smoking habits but rather from continued legal assaults against the cigarette industry. "I think the burden of class-action lawsuits will break the tobacco companies, and when that happens, that will be the end of the settlement money," Neuville predicts.

The Northfield Republican's frequent complaints about the settlement have been repeatedly brushed aside as partisan ravings. In 1998, when he and GOP activist Roger Conant sued to block the $445 million in attorneys fees and costs paid to Ciresi's law firm, Hennepin County District Court Judge Peter Albrecht not only dismissed the lawsuit as baseless, but ordered the duo to pay Robins Miller Kaplan & Ciresi $12,000 to cover the law firm's expenses. Though that financial sanction was later tossed out, an appeals court also rejected the suit, and last month the Minnesota Supreme Court declined to rehear the issue.

But Neuville, Conant, and other tort-reform-minded critics of the tobacco settlements nationwide aren't the only ones now worried that states' deals might not live up to their original promise. In Florida earlier this month, a jury awarded $12.7 million in compensatory damages to three representative smokers in a landmark class-action suit. Next month that same jury is set to hear evidence in the trial's punitive-damages phase. Because the class covered by the suit includes as many as half a million people, the potential for a massive award--perhaps in the hundreds of billions of dollars--has sparked concerns about possible industry bankruptcy and fueled speculation about what twilight for Big Tobacco would mean to the public settlements.

"Whatever happens in Florida, I think there's a good chance the tobacco companies will go into Chapter 11 reorganization," says Richard Daynard, a law professor at Northeastern University and chair of the Tobacco Products Liability Project, a Boston-based nonprofit. "They're not going to do it eagerly or lightly, because it puts the jobs of executives at risk and the shareholders' stakes will not be worth a lot," he allows. Still, Daynard asserts, tobacco companies appear to be bracing themselves for such a prospect, with some already "systematically uploading" financial assets to parent corporations. This summer Daynard's organization will host a conclave of plaintiffs' lawyers and attorneys general on the possible repercussions of those machinations.

Though Daynard thinks Minnesota and the other 49 states that have reached accords with the industry stand to recoup "most of the money" guaranteed under the various settlement agreements, Stephen Gillers, a litigation expert and legal ethicist at New York University, is far less certain. "I don't think it's possible to predict," says Gillers, noting that the ultimate outcome may hinge on future federal tobacco legislation. "Clearly, the private lawsuits and the class-action lawsuits will compete for profits against the states' claims," he explains. "The states now have an interest in the financial health of Big Tobacco, so that may be the ultimate shield that guarantees their survival."

Already, Gillers points out, four Southern states have enacted laws designed to insulate the industry by limiting the size of bonds the companies must post when appealing potentially ruinous verdicts. Other states (including Florida) are examining similar protections. In Minnesota no such measures have been taken, but the industry recently received a minor boost from the Legislature in the form of a proposed law to crack down on the sale of so-called gray-market cigarettes.

If the tobacco companies are indeed bankrupted, Gillers says, creditors--including the states--may find themselves in an unusual position. "Think about the irony if that happens," he posits. "The plaintiffs class and the plaintiffs bar will become, in effect, the owners of the tobacco companies."

According to Leslie Sandberg, press secretary for Minnesota Attorney General Mike Hatch, all such musings about the fate of the settlement are premature. "Speculation at this point in time is just that: speculation," says Sandberg. "We are not interviewing bankruptcy lawyers and that's all we have to say on the subject. You can't be concerned about something you can't control."

Mike Ciresi pooh-poohs the concerns arising from the Florida case. "These are the same type of people who said we'd never recover a penny in the first place," he says of the doomsayers. "Everything I've heard from out of there [Florida] is that the plaintiffs' lawyers aren't going to ask for awards that would put the tobacco companies into bankruptcy." While Ciresi acknowledges the possibility of a future global tobacco settlement with unforeseeable consequences, he insists that the tobacco companies would remain obliged to "operate for the benefit of the creditors"--including Minnesota.

Thomas Neuville anticipates a different scenario. "At some point I bet these tobacco companies will pull the plug," the state senator says. "It's not unheard-of for huge industries to file for Chapter 11 reorganization. The airline industry is big, too, and ten, twelve years ago a lot of the airlines went into bankruptcy. It doesn't mean that we won't have cigarettes. What it means is that they'll reorganize and buy back all their equipment and plants at pennies on the dollar and go back into business with a clean slate."

Whatever effect such developments might have on the State of Minnesota, they'd have no bearing whatsoever on Robins Miller Kaplan & Ciresi's ability to collect its legal fees. Unlike the long-term deal the firm crafted for the state (which calls for payments to continue in perpetuity), Robins Miller's fee--which netted the firm a No. 1 ranking in profits per partner in a 1999 survey by the magazine American Lawyer--will be paid in full a few months from now.

As Richard Daynard sees it, that's only fair. "It was a spectacular job of lawyering, which produced spectacular results," says the law professor. "I wouldn't defend every fee that's been awarded to the trial lawyers nationwide, but by forcing the release of industry documents, Minnesota did more for public health than any other state. They were entitled to a spectacular fee."

Not surprisingly, Thomas Neuville disagrees. "The lawyers that represented the state did a better job of protecting themselves than the state," he scoffs. "The tobacco companies settled because they knew they could preserve the option of filing for bankruptcy in the future and they kept the settlement at a level they knew they could pass on to consumers. In the end, I think the net recoveries to the state will be much less than expected, and then people will say we really did get ripped off."

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