Cigarette Company Agrees to Settle Class-Action Suit, Turn Over Industry Documents

TOBACCO April 1996

Liggett Group, Inc., one of the major cigarette manufacturers in the U.S., has settled a class-action suit and agreed to cooperate with any proposed federal regulations on tobacco sales (Saundra Torry and John Schwartz, "Cigarette Firm Agrees to Settle Suit," Washington Post, March 13, 1996, p. 1; Lorraine Woellert, "Liggett Again Breaks With Tobacco Industry," Washington Times, March 16, 1996, p. A13).

Liggett said it would pay Mississippi, Massachusetts, Florida, Louisiana, and West Virginia $1 million each to settle those states' suits to recover health care costs related to smoking. The states will also receive 2.5 percent of Liggett's total income before taxes for the next 25 years. The company agreed to set up a fund to pay any other states that choose to bring suit against tobacco companies. Liggett will pay 5 percent of their annual income before taxes into that fund for the next 25 years.

The case was initially brought by four smokers in New Orleans, but the judge in the case allowed it to become a class action suit on behalf of 50 million U.S. smokers. About 120 lawyers are now working on the case, representing clients from across the nation.

The lawsuit claims that tobacco manufacturers hid their knowledge about the addictiveness of cigarettes. Other companies still listed as defendants include American Brands, Inc., Brown and Williamson Tobacco Co., Lorrilard Tobacco Co., Philip Morris Inc., and R.J. Reynolds Tobacco Co.

In what may become a more significant part of the settlement, Liggett said it would agree to any regulations issued by the Food and Drug Administration to limit underage smoking and turn over industry documents as part of lawsuits brought by five states to recover health care costs related to smoking. In the past, tobacco companies have linked arms to keep such documents secret and fend off class action lawsuits and legal action by states.

Liggett, maker of Chesterfield and L&M brands, controls 2 percent of the cigarette market. Their income in 1995 was about $11 million.

Payments to states under the settlement may soon increase dramatically. Liggett's parent company, Brooke Group, Ltd., is attempting to take over the board of R.J. Reynolds, break the tobacco portion of the company from its food holdings, and merge it with Liggett. Should the takeover proceed, the five states now suing tobacco companies might expect to receive $135 million and 2.5 percent of annual profits. R.J. Reynolds controls 25 percent of the cigarette market.

In full-page newspaper advertisements, R.J. Reynolds, which is fighting the takeover, complained that Liggett's settlement "demonstrated ... reckless disregard for the long-term interests of RJR Nabisco shareholders."

Bennett LeBow, chairman of Brooke Group, argued that the settlement is good business. "A new economic model for the industry based on responsible coexistence instead of scorched-earth confrontation can substantially increase stock valuations over time," he said.

R.J. Reynolds is suing LeBow and Carl Icahn in federal court. The two men own 4.8% of R.J. Reynolds, and the tobacco giant is charging that they have been conspiring in secret to take over the company, a violation of securities laws (Staff Reporter, "RJR Trades Angry Words With LeBow," Wall Street Journal, December 12, 1995, p. B10; Glenn Collins, "Unlikely Allies Demand Spinoff At RJR Nabisco," New York Times, December 26, 1995, p. D1).