CHAPTER 8
THE GOVERNMENT AND THE COURTS

TAXATION

Taxation is an age-old method by which the government raises money. Alcoholic beverages have been taxed since colonial times, and tobacco products have been taxed since 1863. The alcohol and tobacco industries contribute a great deal of tax money to federal, state, and local governments.

Alcohol Taxes

According to the Distilled Spirits Council of the United States, Inc. (DISCUS), liquor is the most highly taxed consumer product in the nation. The organization estimated in 1999 (the most recent data available) that direct and indirect local, state, and federal taxes account for 51% of the typical bottle price. While the beer and wine industries are taxed at lower levels, they also contribute a significant amount of tax revenue.

In fiscal year 2004 the federal government collected approximately $8.7 billion in excise taxes on alcoholic beverages. (Excise taxes are monies paid on purchases of specific goods, such as alcohol and tobacco.) Federal excise taxes on distilled spirits amounted to about $4.3 billion, which included taxes on both domestic and imported distilled spirits—nearly half that total. (See Table 8.1.) Distilled spirits are taxed by the proof gallon (pg). A proof gallon is a standard United States gallon of 231 cubic inches containing 50% ethyl alcohol by volume, 100 proof.

Excises taxes on wine and beer make up the other half of the excise taxes collected on alcoholic beverages. The calculation of wine taxes depends on several variables, such as alcohol content and the size of the winery; in 2004 federal excise taxes on wine totaled $767.9 million. Total beer excise taxes were much higher, at $3.7 billion. Brewers who produce fewer than two million barrels (one barrel equals thirty-one gallons) get a reduced excise tax rate of $7 per barrel on the first sixty thousand barrels. Those who produce more than two million barrels pay an excise tax of $18 per barrel. (See Table 8.1.)

In addition to the federal excise taxes, the states levy sales taxes on alcohol. In 2003 the per capita state sales tax collected on alcoholic beverages—averaged across states—was $15.16. Total state tax collections from alcohol include not only the sales tax ($4.4 billion in 2003) but also payments for alcoholic beverage licenses ($345.9 million in 2003). Taxes on alcohol amounted to about 0.085% of the nation's total state taxes collected in 2003. (See Table 8.2.)

Tobacco Taxes

In 2001-02, federal, state, and local governments collected $17 billion in excise taxes on tobacco products. (See Table 8.3.) Most of this revenue came from the sale of cigarettes.

In 2005 the federal excise tax on cigarettes was thirty-nine cents a pack, up from thirty-four cents in 2000 and sixteen cents in 1991. In May 2001 a presidential commission comprised of farmers, health advocates, and economic experts recommended to President George W. Bush that the excise tax on cigarettes should increase by seventeen cents a pack, which would be used to pay tobacco farmers to stop growing the crop. In addition, the National Action Plan for Tobacco Cessation recommended to Congress that the excise tax be raised by an additional $2.00 per pack to pay for smoking cessation programs. Congress did not raise the tax.

Cigarette prices increased forty-five cents per pack on November 16, 1998, the day of the Master Settlement Agreement (MSA) (Thomas C. Capehart, Jr., Trends in the Cigarette Industry after the Settlement Agreement, U.S. Department of Agriculture, October 2001). Between 1998 and 2002, the tobacco industry raised the average price of cigarettes by more than

$1.25 a pack to cover the costs of state lawsuits against them. However, Wall Street tobacco industry analyst Martin Feldman has calculated that companies paid out only about fifty-one cents per pack in 2000 to cover their settlement costs and roughly fifty-nine cents per pack in 2001 ("U.S. Cigarette Companies' Settlement-Related Price Hikes Are Excessive," National Center for Tobacco-Free Kids, October 28, 2002). Thus, he calculated, tobacco companies were receiving more than fifty cents per pack of surplus revenue from that $1.25 price increase.

States have raised their sales taxes on cigarettes (see Table 8.3) to help defray health costs associated with tobacco. According to the Centers for Disease Control and Prevention (CDC), every pack of cigarettes

sold in the United States in 1999 cost the country an estimated $7.18–$3.45 for medical care and $3.73 for lost productivity ("Annual Smoking-Attributable Mortality, Years of Potential Life Lost, and Economic Costs—United States, 1995-1999," MMWR, April 12, 2002).

Another rationale for raising taxes on cigarettes is to discourage people from starting to smoke. Furthermore, some smokers may be motivated to stop smoking because they can no longer afford cigarettes.

According to the Campaign for Tobacco-Free Kids, the average price for a pack of cigarettes was $4.12 as of early 2005. Prices vary from state to state, depending on the state sales tax. (See Figure 8.1.) The average tax in the nation in early 2005 was eighty-five cents per pack. Between January 2002 and early 2005, sales taxes on cigarettes were raised in thirty-seven states, the District of Columbia, and Puerto Rico.

GOVERNMENT LEGISLATION
AND REGULATIONS

In addition to taxation, the alcoholic beverage and tobacco industries are subject to federal and state laws that regulate factors such as sales, advertising, and shipping.

Alcohol Regulation

The best-known pieces of legislation regarding alcohol are the Eighteenth and Twenty-first Amendments to the Constitution. The Eighteenth Amendment prohibited the manufacture, sale, and importation of alcoholic beverages. Ratified in 1919, it took effect in 1920, ushering in a period in American history known as Prohibition. After twelve years, during which it failed to stop the manufacture and sale of alcohol, Prohibition was repealed in 1933 by the Twenty-first Amendment.

Most interpretations of the Twenty-first Amendment hold that the amendment gives individual states the power to regulate and control alcoholic beverages within their own borders. Consequently, every state currently has its own alcohol administration and enforcement agency. "Control states" directly control the sale and distribution of alcoholic beverages within their borders. There are eighteen control states: Alabama, Idaho, Iowa, Maine, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. Some critics of this policy have questioned whether such state monopolies violate antitrust laws. The other thirty-two states are licensure states and allow only licensed businesses to operate as wholesalers and retailers.

DIRECT SHIPMENTS—RECIPROCITY OR FELONY?

A legislative controversy has developed over the direct shipment of alcoholic beverages from one state directly to consumers or retailers in another. Under the U.S. Constitution's Interstate Commerce Clause, Congress has the power to regulate trade between states. Nevertheless, the Twenty-first Amendment to the Constitution, which ended Prohibition, gives states the authority to regulate the sale and distribution of alcoholic beverages. It allows states to set their own laws governing the sale of alcohol within their borders.

Because the laws of the states are not uniform, several states passed reciprocity legislation, allowing specific states to exchange direct shipments, thus eliminating the state-licensed wholesalers from the exchange. Wholesalers and retailers have charged that reciprocity and direct shipment are violations of the Twenty-first Amendment. They fear being bypassed in the exchange, as do states that prohibit direct shipments of alcohol. Other stakeholders in this issue are consumers and wine producers who want the right to deal directly with each other.

ALCOHOL SALES AND THE INTERNET.

In January 2001 the Twenty-first Amendment Enforcement Act became law. This legislation makes it difficult for companies to sell alcohol over the Internet or through mailorder services. It allows state attorneys general in states that ban direct alcohol sales to seek a federal injunction against companies that violate their liquor sales laws.

Within a month of the passage of this legislation, the high-tech community voiced its concern over such legislation, suggesting that if states could ban Internet wine sales they might restrict other electronic commerce as well. Senator Orrin Hatch (R-Utah) said he crafted the bill to take other e-commerce concerns into account, and insisted that the measure is "narrowly tailored" to deal with alcohol only.

On May 16, 2005 the U.S. Supreme Court ruled on three cases that had been consolidated under the name Granholm v. Heald. At issue were state laws in Michigan and New York that prohibited out-of-state wineries from selling their products over the Internet directly to Michiganders and New Yorkers, but allowed in-state wineries to make such sales. The governments of Michigan and New York argued that these laws were permissible under the Twenty-first Amendment. A group of wineries and business advocates argued that the state laws were unconstitutional restrictions of interstate trade. In a 5-4 decision the Supreme Court agreed that the state laws were unconstitutional, stating "States have broad power to regulate liquor under §2 of the Twenty-first Amendment. This power, however, does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on evenhanded terms. Without demonstrating the need for discrimination, New York and Michigan have enacted regulations that disadvantage out-of-state wine producers. Under our Commerce Clause jurisprudence, these regulations cannot stand."

Early Tobacco Regulation and Legislation

Federal tobacco legislation has covered everything from unproved advertising claims and warning label requirements to the development of cigarettes and little cigars that are less likely to start fires. In the past, the U.S. Food and Drug Administration (FDA) has prohibited the claim that Fairfax cigarettes prevented respiratory and other diseases (1953) and denied the claim that tartaric acid, which was added to Trim Reducing-Aid cigarettes, helped to promote weight loss (1959).

The U.S. Federal Trade Commission (FTC) has also been given jurisdiction over tobacco issues in several areas. As early as 1942, the FTC had issued a "cease-and-desist" order in reference to Kool cigarettes' claim that smoking Kools gave extra protection against or cured colds. In January 1964 the FTC proposed a rule to strictly regulate cigarette advertisements and to prohibit explicit or implicit health claims by cigarette companies.

The tobacco industry has managed to avoid federal regulation by being exempted from many federal health and safety laws. In the Consumer Product Safety Act, the term "consumer product" does not include tobacco and tobacco products, nor does the term "hazardous substance" in the Hazardous Substances Act. Tobacco is similarly exempted from regulation under the Toxic Substance Control Act and the Fair Packaging and Labeling Act.

Some of the legislation of the late 1980s included requiring four alternating health warnings to be printed on tobacco packaging, prohibiting smokeless tobacco advertising on television and radio, and banning smoking on domestic airline flights. In 1992 the Synar Amendment was passed. The amendment said that states must have laws that ban the sale of tobacco products to persons under eighteen years of age. In 1993 the Environmental Protection Agency (EPA) released its final risk assessment on environmental tobacco smoke (ETS, or "secondhand smoke") and classified it as a known human carcinogen (cancer-causing agent). In 1994 the Occupational Safety and Health Administration (OSHA) proposed regulations that would prohibit smoking in workplaces, except in smoking rooms that are separately ventilated.

TOBACCO SALES AND THE INTERNET.

The Internet plays a role in the distribution of tobacco as well as alcohol. There are more than four hundred Web sites that sell tobacco products.

There are a number of problems with such Web sites. One in five online cigarette vendors do not say that sales to minors are prohibited on their sites, according to an American Journal of Public Health survey (Kurt M. Ribisi et al., "Are the Sales Practices of Internet Cigarette Vendors Good Enough to Prevent Sales to Minors?" American Journal of Public Health, vol. 92, 2002). More than half require that the user simply state that he or she is of legal age. Three-quarters of Internet tobacco sellers explicitly say that they will not report cigarette sales to tax collection officials, a violation of federal law. States may lose as much as $200 million each year in uncollected tobacco excise taxes, according to one Forrester Research estimate ("Forecast: U.S. Online Tobacco Sales, 2001 to 2005").

In July 2003 the Senate Judiciary Committee approved the Prevent All Contraband Tobacco Act (the PACT ACT, S. 1177). The Senate passed the PACT Act by unanimous consent in December 2003. Similar legislation (amended H.R. 2824) passed the House Judiciary Committee in January 2004. This legislation requires Internet vendors of tobacco to register with the states in which they intend to sell their products. They are then required to comply with all state laws regarding tobacco tax collection and reporting. The bill allows states to block the delivery of cigarettes and smokeless tobacco sold by Internet vendors who fail to register with the state.

FDA REGULATION OF TOBACCO PRODUCTS.

In 1994 the FDA investigated the tobacco industry to determine whether nicotine is an addictive drug that should be regulated like other addictive drugs. Weeks of testimony before Congress indicated that tobacco companies may have been aware of the addictive effects of nicotine and the likely connection between smoking and cancer as early as the mid-1950s.

At first representatives from the tobacco companies and the Tobacco Institute (which represented the major tobacco companies) denied that there was any scientifically proven connection between smoking and cancer and claimed that nicotine was not addictive. The industry acknowledged that it changed levels of nicotine in cigarettes, but claimed this was for taste purposes only, not to increase the addictiveness of its products.

In August 1995 the FDA ruled that the nicotine in tobacco products is a drug and, therefore, liable to FDA regulation. Based on this finding, the Clinton administration proposed strengthening existing legislation designed to stop the sale of cigarettes to minors. One of President Bill Clinton's recommendations was that cigarette sales be prohibited to anyone under eighteen. While the Synar Amendment requires states to enact laws prohibiting tobacco sales to minors, states have not consistently complied with this legislation. According to a September 2000 study published in the Archives of Pediatric and Adolescent Medicine, some states were failing to conduct enforcement inspections, were not prosecuting violators, and were not reporting their enforcement progress to the Department of Health and Human Services. Some states claimed to be enforcing federal law when they were not.

President Clinton also recommended that the sale of cigarettes through vending machines be banned, and that advertising in media designed for minors be stopped.

Some of the provisions of the proposed FDA regulations were:

• The minimum age for purchasing tobacco products would be eighteen.
• Vending machines and self-service displays would be banned, except in nightclubs and other facilities that bar the admission of persons under age eighteen.
• "Kiddie packs" (containing five or fewer cigarettes) and free samples would be banned.
• Advertising billboards would have to be one thousand or more feet from schools and playgrounds.
• Other billboards, in-store advertising, and outdoor displays would be limited to black-and-white text only—no colors or graphics, except in "adult-only" facilities where the advertising cannot be seen from the outside or removed from its display location.
• Brand-name sponsorship of sporting or other public events would be prohibited; only company-name sponsorship would be allowed. Also, it would be prohibited to print brand names on hats, T-shirts, and other personal items.

The FDA recommendations were to go into effect on August 28, 1996, but a lawsuit by the tobacco, advertising, and convenience store industries against the FDA delayed the implementation of the FDA order. In April 1997 the Federal District Court in Greensboro, North Carolina, in Brown and Williamson Tobacco Corp., et al. v. Food and Drug Administration, et al. (966 F Supp 1374), ruled that the FDA did have jurisdiction under the Federal Food, Drug, and Cosmetic Act (52 Stat 1040) to regulate cigarettes and smokeless tobacco products, upholding the restrictions that involved youth access and labeling. But the court found that the FDA did not have authority to regulate the advertising of tobacco products. Both parties appealed the district court decision.

In August 1998 the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia, reversed the district court's decision. In Brown and Williamson Tobacco Corp., et al. v. Food and Drug Administration, et al. (153 F.3d 155), the court ruled that the "FDA lacks jurisdiction to regulate tobacco products" and that "all of the FDA's August 28, 1996, regulations of tobacco products are thus invalid."

On April 26, 1999, the U.S. Supreme Court granted the FDA's Petition for a Writ of Certiorari to review the decision of the U.S. Court of Appeals for the Fourth Circuit (67 LW 3652). The granting of the petition allowed the age and identification provision of the FDA's tobacco regulations to remain in effect pending the Court's final decision. On March 21, 2000, the Supreme Court ruled (5-4) that the government lacks authority to regulate tobacco as an addictive drug. Although the ruling would not allow the FDA to regulate tobacco, state laws on selling cigarettes to minors were not affected.

STATE REGULATIONS.

In 1998 the CDC and the National Cancer Institute reviewed state tobacco laws regulating smoke-free indoor air, youth access to tobacco products, advertising, and excise taxes. Their survey, entitled State Laws on Tobacco Control—United States, 1998, identified state laws related to tobacco control in effect as of December 31, 1998. Forty-six states and the District of Columbia restricted environmental tobacco smoke to some degree or in certain places, all states taxed cigarettes and prohibited the sale of tobacco products to minors, and thirteen states restricted tobacco advertising.

Other Government Programs

Antismoking campaigns, including those launched by the U.S. Surgeon General, are taking their toll on the tobacco industry, particularly on farmers for whom tobacco is their primary source of income. In an effort to prevent the complete collapse of these farms, the government has helped many farmers diversify their crops.

The U.S. Department of Agriculture (USDA) has continued its efforts to stabilize tobacco production by administering marketing quotas to limit the amount of tobacco produced, thus artificially maintaining higher prices.

Alcohol and Tobacco Lobbying

This chapter has addressed some of the significant legislation directed at the tobacco and alcohol industries. It is important to note that these industries spend a great deal of money on lobbyists—people who act for special group(s) trying to influence the voting on particular legislation. In 2002 the tobacco industry spent $20.6 million to lobby Congress. According to the Campaign for Tobacco Free Kids, in the first six months of 2003 the tobacco industry spent $10.6 million to lobby Congress.

The 2002 and 2003 tobacco industry lobbying expenditures were down significantly from the $38.2 million spent in 1997 and the $66.6 million spent in 1998. Spending was particularly high in those years because the late 1990s saw a great deal of legislative activity regarding the tobacco industry: the possibility of the FDA regulating tobacco as a drug, the first attempt at a tobacco settlement agreement, the 1998 MSA settlement, and some highly publicized lawsuits against cigarette firms. In later years, spending was reduced largely because of restrictions placed on lobbying in the 1998 MSA settlement.

The alcoholic beverage industry is active in the political arena as well. The National Beer Wholesalers Association political action committee saw the eighth-largest growth in the nation in contributions to candidates between 1998 and 2000. Their contributions jumped from $1,301,719 in 1998 to $1,871,500 in 2000, an increase of $569,781, according to data from the Federal Election Commission. In 2004 their contributions totaled $2,616,285.

SUING THE TOBACCO COMPANIES

Between 1960 and 1988, approximately three hundred lawsuits sought damages from tobacco companies for smoking-related illnesses; courts, though, consistently held that people who choose to smoke are responsible for the health consequences of that decision. But in 1988, a tobacco company was ordered to pay damages for the first time. A federal jury in Newark, New Jersey, ordered Liggett Group, Inc., to pay $400,000 to the family of Rose Cipollone, a longtime smoker who died of lung cancer in 1984. The case was overturned on appeal, but the Supreme Court ruled in favor of the Cipollone family in Cipollone v. Liggett Group, Inc. (505 U.S. 504, 1992). In the 7-2 ruling, the Court broadened a smoker's right to sue cigarette makers in cancer cases. The justices decided that the Federal Cigarette Labeling and Advertising Act of 1966 (PL 89-92), which required warnings on tobacco products, did not preempt damage suits. Despite the warnings on tobacco packaging, people can still sue on the grounds that tobacco companies purposely concealed information about the risks of smoking.

The "Tobacco Wars"

In 1994 Mississippi became the first state to sue tobacco companies to recoup health care costs associated with smoking (The State of Mississippi v. American Tobacco et al., Case No. 94-1429). Minnesota and West Virginia soon followed. In 1995 and 1996, fifteen states would file suit against cigarette companies. About forty states, the cities of New York and San Francisco, the Commonwealth of Puerto Rico, and other third parties involved in paying for medical care have sued to try to recover Medicaid, Medicare, and other medical costs associated with tobacco-related health problems.

In February and March 1994, the ABC newsmagazine Day One broadcast two stories entitled "Smoke Screen" and "The List," which contended that Philip Morris and RJ Reynolds increased (or "spiked") the nicotine content of their cigarettes from outside sources, thereby making them more addictive. A few weeks later, Philip Morris filed a $10 billion lawsuit against ABC. In August 1995 the network apologized for its Day One broadcasts.

In May 1994 top secret documents from tobacco company Brown & Williamson were leaked to the New York Times and the University of California Tobacco Control Archive. These documents included memos, marketing reports, research papers, and corporate policy statements from the 1960s through the 1980s. The papers clearly indicated the company's efforts to conceal the health risks of their product.

In November 1995 the New York Times reported that CBS terminated a broadcast of a 60 Minutes interview with a former tobacco executive, later identified as Jeffrey Wigand. CBS was believed to have chosen not to run the story for fear of a lawsuit by Brown & Williamson, which would have come just as a $5.4 billion merger between CBS and Westinghouse Electric Corporation was about to take place. A New York Times editorial pointed out that "a multi-billion dollar lawsuit would hardly have been a welcome development" ("Self-Censorship at CBS," New York Times, November 13, 1995). Wigand would later testify before federal and state prosecutors about what he knew concerning the misleading and harmful practices of Brown & Williamson. His statements also included charges that company executives lied during Congressional hearings when they claimed to believe that nicotine was not addictive. (Mr. Wigand's story was later dramatized in the film The Insider.)

A POTENTIAL SETTLEMENT.

To avoid the onslaught of lawsuits, the tobacco industry sought a national settlement with the states, in return for future protection from lawsuits. In June 1997 the country's largest tobacco companies and forty states that had filed suit against the tobacco industry agreed on a settlement. According to the proposed agreement, tobacco companies would pay the states $368.5 billion over twenty-five years to reimburse them for their tobacco-related medical costs and to pay for tobacco-control programs to reduce tobacco use among teenagers.

In addition, tobacco companies would accept FDA authority to regulate tobacco products, restrict their advertising, and release internal research documents related to the health effects of their products. The states would drop all claims against the tobacco companies and grant the industry immunity from future class-action lawsuits (suits on behalf of large groups of people). This proposed settlement required changes in federal law before taking effect.

Over the following months, various members of Congress introduced their own comprehensive tobacco bills, broadly based on the settlement. Each of these efforts failed and by September 1997 the potential settlement was perceived by many to have unraveled. The states resumed negotiation with the tobacco companies to try to reach a more limited settlement, one that would not require federal legislation to take effect.

MORE STATE LAWSUITS.

In the meantime, the industry settled two of its pending state lawsuits. In the summer of 1997 tobacco companies agreed to pay Mississippi $3.4 billion and Florida $11.3 billion. In the Florida settlement, they agreed to remove tobacco billboards, public transit advertising, and vending machines. The Florida settlement also required that the tobacco companies release internal documents.

The tobacco companies had long denied that nicotine was addictive, that they had manipulated nicotine levels to make their products more addictive, and that they had targeted young people in their advertising campaigns. They had also denied that scientific research had demonstrated links between health problems and tobacco products. The release of the documents about Brown & Williamson in 1994 did offer some challenges to these assertions. In August 1997 two important events occurred in pretrial testimony for the lawsuit brought by the state of Florida.

First, the chairman of the Philip Morris Companies, Geoffrey Bible, testified that smoking-related diseases "might have" caused the deaths of one hundred thousand Americans in recent decades. Second, Steven F. Goldstone, chairman of RJR Nabisco Holding Corporation (the parent company of the RJ Reynolds Tobacco Company), testified that he believed cigarettes "play a role in causing lung cancer."

In April 1998 New York Attorney General Dennis Vacco filed a court motion to dissolve the Tobacco Institute and the Council for Tobacco Research, calling them "propaganda fronts" funded by the tobacco industry that allegedly misled the public about the health risks of smoking. In early 1998 the industry settled with Texas for $15.3 billion. In May, after having gone to trial but just before the case was to go to the jury, the tobacco companies settled with Minnesota for $6.6 billion. The Minnesota case forced the disclosure of millions of internal tobacco company documents, exposing deceptive conduct and laying the foundation for future legal actions. The Minnesota agreement required the industry to maintain depositories of these documents and to release an index to millions of previously released documents.

THE TOBACCO MASTER
SETTLEMENT AGREEMENT

On November 23, 1998, attorneys general from forty-six states (excluding the four states that had previously settled), five territories, and the District of Columbia signed an agreement with the four largest cigarette companies—Philip Morris, RJ Reynolds, Brown & Williamson, and Lorillard—to settle all the state lawsuits brought in order to recover the Medicaid costs of treating smokers. In addition to restrictions on tobacco advertising, marketing, and promotion, the Master Settlement Agreement (MSA) required the tobacco companies to make annual payments totaling more than $200 billion over twenty-five years, beginning in the year 2000. Since the original signing, more than thirty additional tobacco firms have signed the MSA, and Philip Morris contributed more than half of the payments received by the states under the agreement.

The master settlement provided for the disbanding of the Council for Tobacco Research, the Tobacco Institute, and the Council for Indoor Air Research. In a side agreement to the national tobacco settlement, a $5.15 billion trust was established between tobacco-growing states and major cigarette makers. This trust creates a pool of money separate from the MSA to help tobacco farmers who will lose money as a result of the settlement.

Four states—Minnesota, Florida, Texas, and Mississippi—do not participate in the agreement because they had previously settled out of court. Nearly $40 million was paid to these states.

An overview of the provisions of the MSA are listed in Table 8.4. Although the MSA settles all the state and local government lawsuits, the tobacco industry is still liable for class-action and individual lawsuits.

Receiving the Money

To maintain participation in the settlement, states were required to gain State Specific Finality by December 31, 2001. State Specific Finality was achieved when a state court approved the Master Settlement Agreement along with the required consent decree containing many of the provisions of the agreement. The approval was required to be final, with no appeals pending and all outstanding suits against the tobacco industry settled.

To receive all their expected payments from the participating tobacco manufacturers, each state was required to have its legislature enact a Model Statute, which assessed a per-pack fee on nonparticipating cigarette manufacturers. This fee was designed to protect the market share of participating companies. If a state failed to enact such a statute, it would receive reductions of up to 65% of its allocation.

The settlement funds are allocated to the recipients according to a formula developed by the state attorneys general. The formula is based on estimated tobacco-related Medicaid expenditures and the number of smokers in each state. Table 8.5 shows the estimated total amounts to be paid to each state through 2025.

The funds are subject to a number of adjustments, reductions, and offsets, such as the volume-of-sales adjustment. If, as anticipated by public health officials, cigarette sales decline as a result of higher prices, the annual payments will be reduced proportionately.

States had been concerned that the federal government would attempt to recoup some of the states' tobacco settlement revenues. However, the Fiscal Year 1999 Emergency Supplemental Appropriations Bill (PL 105-277) included an amendment prohibiting the federal government from taking any of the states' tobacco settlement money.

The four states that negotiated their own lawsuit settlements began receiving payments from the tobacco companies in 1998. Payments to other states began in 1999. A May 4, 2005, fact sheet released by the Campaign for Tobacco-Free Kids details the amount of money the states have received each year since the start of the agreement. (See Table 8.6.)

On June 18, 2003, states reached a $160 million agreement with several tobacco companies to settle disputes over payments involving the MSA. The major tobacco firms will take responsibility for cigarettes they manufacture for other companies. The agreement also resolves the issue about whether the 1998 settlement was a contributing factor to the loss of market share among the four largest firms.

Spending the Money

The Master Settlement Agreement does not tell states how to spend the money they receive from the tobacco companies. Nearly five hundred tobacco-settlement bills have been introduced in state legislatures. Most deal with establishing a trust fund to allocate money to specific issues, such as tobacco control and smoking cessation programs, children's health, education, and highway construction. Other bills propose using the settlement funds to compensate tobacco farmers or to pay for long-term care or tax cuts. Antismoking advocates are critical of states' plans to use the money for programs unrelated to tobacco control.

Since the November 1998 tobacco settlement, the Campaign for Tobacco-Free Kids, the American Lung Association, the American Cancer Society, the American Heart Association, and the SmokeLess States National Tobacco Policy Initiative have published annual reports to monitor how states are handling the settlement funds. The 2005 report "A Broken Promise to Our Children: The 1998 State Tobacco Settlement Six Years Later" (December 2, 2004) reports that states fell short in their efforts to adequately fund tobacco prevention and cessation programs.

The report notes that in 2005 only three states—Maine, Delaware, and Mississippi—were funding tobacco prevention programs at minimum levels

recommended by the CDC. Together, the states allocated $538 million for tobacco prevention in fiscal year 2005, only one-third of the $1.6 billion minimum that the CDC recommends.

Issues for Congressional Consideration

Several issues were unresolved by the MSA. It is likely that tobacco legislation will continue to be introduced in Congress. Public health officials and others want a "youth look-back" provision that would keep track of tobacco use by minors and penalize the industry if use does not decline. Antismoking advocates will likely continue to push for a tax increase on tobacco products. They maintain that sharp price increases result in a decline in cigarette sales.

INDIVIDUAL AND CLASS-ACTION LAWSUITS

The tobacco industry faces hundreds of individual cases across the country, including cases filed by health insurers. The following are examples of some of these cases.

In March 1999 a state jury in Portland, Oregon, in Williams v. Philip Morris (No. 02-1553), ordered Philip Morris to pay $79.5 million to the family of a man who smoked Marlboro cigarettes for forty years prior to his death in 1997. The family of the Oregon janitor accused the company of concealing information about the dangers of smoking. In October 2003 the U.S. Supreme Court ruled that the award should be reviewed by lower courts to ensure that it was not unconstitutionally excessive. In July 2004 the Oregon Court of Appeals reinstated the jury's award of $79.5 million.

In Henley v. Philip Morris, Inc. (No. 995172, San Francisco Superior Court, 1999), a San Francisco jury awarded $51 million in a case brought by a woman with inoperable lung cancer. The lawsuit contended that Philip Morris and other tobacco companies had acted in concert to suppress proof of the link between smoking and cancer. There was also testimony about how Marlboro, the brand favored by Henley, was marketed in a way that targeted teenage smokers. The award was reduced by appeals courts to $26.5 million and then to $9 million. Philip Morris took the case to the U.S. Supreme Court, and on March 21, 2005, the High Court left standing a prior $10.5 million San Francisco Superior Court judgment in favor of Henley.

On June 6, 2001, in Boeken v. Philip Morris, Inc. (No. BC226593, Los Angeles County, California Superior Court, April 2, 2001), a jury awarded a fifty-six-year-old California man $3 billion dollars in punitive damages and $5.5 million in compensatory damages. (Compensatory damages are meant to compensate the party that wins the judgment for their losses. Punitive damages are meant to punish the party that loses the judgment.) Jurors found against the tobacco maker on six counts of fraud, negligence, and making a defective product. Richard Boeken began smoking at age thirteen and was diagnosed with lung cancer in 1999; he has since died. In October 2004 a

California appeals court ruled that the punitive damages award was excessive and that a new trial was warranted.

Nationwide, prior to the Boeken case, juries had awarded damages to individual smokers only six times. Three of those verdicts were overturned, Williams and Henley have been settled as described, and one verdict was returned in May 2001 with $1.72 million in compensatory damages.

Secondhand Smoke Lawsuits

Some secondhand smoke lawsuits have been brought against tobacco companies. Others have been brought against companies or individuals deemed responsible for not correcting a situation in which secondhand smoke had detrimental effects.

In Norma R. Broin, et al. v. Philip Morris, et al. (No. 91-49738, Dade County, Florida, Eleventh Judicial Circuit, 1997), the lead plaintiff (the party that brought the lawsuit), Norma Broin, was a nonsmoking former American Airlines flight attendant whose lung cancer was diagnosed in 1989. One of the lawyers, Stanley Rosenblatt, claimed flight attendants are "totally innocent victims. They are forced to involuntarily suck in the smoke of other people while the tobacco industry has lied for years about the dangers." The sixty thousand flight attendants represented by Broin claimed injury from breathing secondhand smoke before the 1990 ban on in-flight smoking. In October 1997 the lawsuit was settled mid-trial for $349 million. The money paid in damages will be used for research into diseases associated with tobacco smoke, and their early detection and treatment.

In June 2002 flight attendant Lynn French claimed she suffered from chronic sinusitis as a result of exposure to secondhand smoke while working on planes in the 1970s and 1980s. She was awarded $5.5 million in damages, although this award was later reduced. According to a Wall Street Journal article ("Miami Judge Pares Down Award in Secondhand Smoke Suit," September 13, 2002), nearly 1,850 flight attendants had secondhand smoke cases pending in Florida as of the summer of 2002.

In December 2002 the Ninth U.S. Circuit Court of Appeals ruled that Olympic Airlines was liable for a physician's death in flight due to secondhand smoke from nearby passengers (Husain v. Olympic Airways, No. 00-17509). Smoking was allowed on the Olympic flight between New York City and Greece, and Dr. Abid Hanson was seated one row in front of the smoking section. When Hanson asked if he could change seats due to his sensitivity to the smoke, the flight attendant refused. The doctor subsequently died from respiratory distress.

In 2005 a Manhattan Supreme Court judge ruled that an attorney could sue the owner and managers of the building in which he leased his office, as well as sue a neighbor in an adjacent office who smoked. Attorney Herbert Paul contended that many of the rooms of his office suite became unusable due to infiltrating smoke, and that these conditions forced him to move out of his office (Paul v. 370 Lex, LLC, 105840/02). The case was pending at this writing.

Class-Action Lawsuits on Behalf of Smokers

A class-action lawsuit is one brought forward by a group of parties with similar claims. Engle, et al. v. RJ Reynolds Tobacco, et al. (No. 94-08273, Dade County, Florida, Eleventh Judicial Circuit, 1998) was the first class-action lawsuit to go to trial brought on behalf of smokers. In July 1999, following nearly a year of proceedings, the jury gave a detailed verdict. It found that smoking caused many diseases, including cancer and lung and heart diseases, and that the tobacco industry had committed fraud, misrepresentation, conspiracy, negligence, and intentional infliction of emotional distress—and therefore was liable for punitive damages.

The second phase of the trial (Phase II), to establish the punitive (punishment) damages as well as individual damages for the nine named plaintiffs, concluded with verdicts in 1999. The first stage of Phase II, the trial on compensatory damages for certain class representatives, ended with verdicts in favor of three of the named plaintiffs. The second stage of Phase II, the trial on the amount of punitive damages, concluded with verdicts totaling $145 billion. RJ Reynolds appealed this decision and, in May 2001, reached an agreement to pay Florida smokers $709 million regardless of the outcome of the appeal. In exchange, the defendants received a guarantee that the appeals process will be completed without their having to pay the punitive judgment damages during that process.

On May 21, 2003, a Florida Appeals Court over-turned the $145 billion verdict against tobacco firms in the Engle class-action lawsuit. The court found that the lawsuit could not be certified as class action because individuals had varying complaints. The punitive award was also precluded by the state's Master Settlement Agreement in 1998.

The ruling came on the heels of an Illinois court reducing a Philip Morris appeal to $800 million in cash and $6 billion deposited into an escrow account in the case of Price v. Philip Morris. The class-action lawsuit claimed Philip Morris deceived Illinois smokers of Marlboro Lights and Cambridge Lights by marketing these cigarettes as lower in tar and nicotine. Attorneys claimed that these "light cigarettes" would deliver just as much tar and nicotine as standard cigarettes.

The lawsuit is different from other class-action suits in that its members are not claiming that smoking made them sick, but rather that Philip Morris deceived them. Philip Morris attorney George Lombardi said that smokers do not associate the term "light" with less harmful. The term, he argued, applied to the flavor of the tobacco. Such an argument conflicts with a November 2001 report by the National Institutes of Health and the National Cancer Institute saying that light cigarettes are no better for smokers than regular brands. In fact, smokers would puff harder on the cigarettes, drawing more particulate matter, tars, and nicotine into their lungs and holding these substances there for longer periods of time than when smoking regular cigarettes. The report also states that smokers do indeed switch to light cigarettes out of the impression that such cigarettes are healthier.

THE STATE OF GOVERNMENT TOBACCO
CONTROL EFFORTS

The American Lung Association's State of Tobacco Control: 2004 report analyzes the performance of individual states in tobacco prevention measures. The report evaluated states in key areas such as smoke-free air, cigarette taxation, and restricting youths' access to tobacco. The majority of states were assigned a failing grade in these categories. Thirty-four states and the District of Columbia earned an "F" in smoke-free air laws. This is an improvement in the ratings from 2002, in which forty-three states and the District of Columbia ended up with an "F" in this category. In 2004, California, Delaware, Massachusetts, and New York state received an "A" in this category.

In 2004 twenty-three states received a failing grade for weakness in their laws restricting youth access to tobacco, down from twenty-eight in 2002. States receiving an "A" in this category were California, Connecticut, Maine, New York, Rhode Island, Texas, and Vermont.

Twelve states received an "F" grade for failure to raise cigarette taxes, down from seventeen in 2002. Finally, thirty-seven states and the District of Columbia received an "F" grade in tobacco program funding, up from thirty-two in 2002.

California's tobacco programs are often seen as a model for the rest of the nation. The state spends just over $108 million a year on tobacco education, smoking cessation and health care programs, and advertising. These funds come from the California Tobacco Tax and Health Promotion Act, passed in 1998, which imposed a twenty-five-cent-per-pack tax on cigarettes. This $108 million, however, falls short of the $165 million proposed as a minimum spending requirement by the CDC ("National Report Card Gives California Low Grades for Anti-Smoking Campaign," Ascribe Higher Education News Service, January 7, 2003). Nonetheless, the 2004 American Lung Association report notes that California's comprehensive approach to smoking prevention and cessation yielded a 14% decline in the incidence of lung cancer from 1988 to 1997, accounting for an estimated eleven thousand fewer cases of the disease.

Despite the low grades assigned, the American Lung Association report singles out positive efforts made in many states. Some examples of the successes highlighted in the report included:

• Idaho, Massachusetts, and Rhode Island passed laws that protect people from secondhand smoke.
• Massachusetts passed a comprehensive smoke-free air law prohibiting smoking in all workplaces, including restaurants and bars.
• Oklahoma passed a law prohibiting sales of tobacco products by self-service display.
• Arkansas, Delaware, Hawaii, Maine, and Mississippi maintained at least 90% of the CDC's minimum recommended funding level for tobacco control programs.
• Michigan, New Jersey, and Rhode Island have raised state cigarette taxes to at least $2.00 per pack.