The 1998 master settlement agreement between major tobacco manufacturers and the US states will have a profound effect on many tobacco industry practices and will significantly influence future settlements with the tobacco industry. This article analyzes the settlement's key provisions pertaining to youth sales, advertising, marketing, and lobbying. It also examines the ways in which the settlement restricts industry practices as well as the many industry practices that remain unregulated.
IN THE WAKE OF THE $145 billion in punitive damages awarded by a Florida jury in July 2000, Philip Morris launched a nationwide television campaign extolling the virtues of the “master settlement agreement” (MSA). Implicit in the advertising is the claim that the MSA fundamentally changed the way cigarettes are sold, obviating the need for further reform or punishment. This commentary examines that claim by reviewing the effects of the MSA on tobacco control efforts.
On November 23, 1998, the attorneys general of 46 states and the major tobacco manufacturers entered into the MSA, resolving outstanding state lawsuits against the tobacco companies.1 Under this settlement and previous settlements with the other 4 states, the tobacco companies are obligated to pay the states an average of $10 billion per year for the indefinite future. In addition, the companies have agreed to significant restrictions on their advertising, marketing, and lobbying practices. The companies have not accepted responsibility for their past misdeeds, however. Nor have they agreed to cease many troubling practices.
The MSA arose out of efforts by 41 states to sue tobacco manufacturers for state health care costs attributable to tobaccorelated illnesses. These suits represented a major threat to the industry, which had previously avoided all liability.2
Faced with potentially bankrupting liability, on June 20, 1997, the industry agreed with a group of state attorneys general and private attorneys to enter into a so-called “global settlement”3 that would have resolved all of the tobacco industry's domestic liability concerns.4 Because this global settlement would have affected the Food and Drug Administration's authority over tobacco, as well as closed the door to private litigation, legislation was required.
Various versions of the proposed global settlement were introduced in Congress. In March 1998, the Senate Commerce Committee endorsed one version, the McCain bill, that was less favorable to the tobacco industry than the original settlement. As a result, industry representatives withdrew their support5 and successfully campaigned to defeat the bill.6
Industry representatives then met with attorneys general to discuss a less comprehensive settlement. By then, 4 states had reached individual agreements with the industry. In November 1998, the attorneys general of the remaining states and the participating manufacturers, including Brown & Williamson Tobacco Corp, Lorillard Tobacco Co, Philip Morris Inc, and RJ Reynolds Tobacco Co, agreed to the MSA.
Because the MSA had no direct impact on federal policies or private litigation, it did not require federal approval. Instead, it takes its effect from consent decrees approved by each relevant state court. The states that had not previously sued then did so solely to obtain such consent decrees. Enforcement is left primarily to the attorneys general, although the agreement calls for the National Association of Attorneys General to monitor the settlement and attempt to reconcile conflicting interpretations.
In their suits, the states sought billions of dollars for tobaccorelated health care expenses. This amount might have been tripled if the states had prevailed on antitrust or racketeering grounds. In some states, punitive damages might also have been assessed. The MSA relieved the tobacco companies of these potentially crippling judgments.
In return, the industry agreed to pay each state each year an amount, set through a schedule and a series of adjustment formulas, designed as a reasonable estimate of each state's future tobacco-related health care costs. Including the 4 states that had settled previously, the industry will owe in total about $10 billion per year, adjusted for inflation, to be paid by the companies largely on the basis of their market shares.7 The companies are expected to cover these costs by raising cigarette prices, with only modest adverse effects on their future profitability.8
The MSA provides each state, on average, a $200 million annual revenue enhancement. The settlement also relieved states of paying their outside counsel; the industry agreed to pay these lawyers through a complicated arrangement that reduced or eliminated the lawyers' claims on the states' receipts.9
From a public health perspective, however, the MSA's accomplishments are more modest. Perhaps the clearest benefit derives from the cigarette price increase imposed to cover the first year's payments. That increase has produced a decline of about 10% in cigarette sales.10
The settlement money could produce further public health benefits if it is spent on tobacco control. Experience with comprehensive programs in California and Massachusetts11 indicates that such programs can yield significant declines in cigarette sales. The Centers for Disease Control and Prevention (CDC) therefore recommended a range of expenditures of MSA money for states to allocate to comprehensive tobacco control programs.12 The MSA, however, did not require states to earmark their receipts for public health purposes.
Predictably, early results indicate that, contrary to widespread public opinion,13 most states will spend little for public health, much less for tobacco control. As of August 4, 2000, for example, approximately 18 states had allocated $1 million or more of the settlement money for tobacco control, and of these states only 4 had allocated settlement funds for tobacco control in amounts that fell within the CDC's recommendations.14
The MSA also created an industry-funded foundation to run tobacco control programs and make grants to the states and their subdivisions.15 The American Legacy Foundation is charged with supporting studies and programs designed to reduce use of tobacco products and substance abuse among young people and to prevent diseases associated with tobacco products (see www.americanlegacy.org).
The MSA describes more than 10 specific foundation activities, including a major national counteradvertising campaign. In addition, foundation grants will separately fund state and local advertising and educational programs to counter youth tobacco use and to educate consumers about tobacco-related diseases. However, the MSA imposes some significant limits on foundation funds. For example, the agreement prohibits use of foundation funds for personal attacks or vilification of any person, company, or government agency. This could censor hard-hitting advertising campaigns that put the spotlight on industry manipulation.
The MSA declares that tobacco manufacturers and settling states are “committed to reducing underage tobacco use by discouraging such use and by preventing Youth access to Tobacco Products.”16 The actual provisions, however, do little toward achieving that end.
Some reduction in youth access may be accomplished by the MSA's prohibition of gifts, credits, or coupons based on proof of purchase without documentation that the recipient is an adult.17 However, a careful reading of how the MSA defines the critical terms adult and underage suggests that the restriction may apply only in states that have made the purchase or possession of tobacco products by minors illegal.
According to the MSA, an “underage” person is one who is “under the minimum age to purchase or possess (whichever minimum age is older) cigarettes applicable in the settling states.”18 Whereas all states prohibit the sale of tobacco products to minors, not all outlaw youth purchase or possession, and many public health advocates believe that “criminalizing” youth purchase and possession may be counterproductive.19
Another significant loophole permits redemption of proofs of purchase by mail. Although recipients must provide a copy of age identification, this requirement could be easily circumvented.
The MSA appears to restrict the distribution of free sample cigarettes. This provision also is more limited than initially evident, because manufacturers can distribute free samples at adult-only facilities.20 Again, the definition of adult-only facilities21 is tied to the problematic definition of underage. As a result, states that do not outlaw youth purchase or possession may not be able to enforce the ban. Manufacturers may also be able to continue to distribute free samples to college students in many venues.22
Another provision prohibits participating companies from producing, selling, or distributing so-called kiddie packs, cigarette packs containing fewer than 20 cigarettes and packages of loose tobacco with fewer than 0.60 oz (16.80 g) of tobacco.23 However, this prohibition expires in December 2001.
The MSA fails to include certain key tools for reducing youth access. For example, it does not limit self-service displays, vending machines, or point-of-sale advertising. And, unlike the proposed global settlement, the MSA does not establish any specific targets for reducing youth smoking. Nor does it impose any “lookback” financial penalties on tobacco manufacturers for failing to reduce youth smoking.
In short, the MSA advances only 3 very limited youth access measures. However, it does not expressly diminish the power of states and localities to adopt and enforce additional youth access laws.
The MSA's advertising restrictions24 also involve many loopholes. They follow past industry concessions by allowing tobacco companies to shift advertising dollars to other media while restricting a carefully defined set of activities.25 Indeed, in the first year of the MSA era, the industry increased tobacco advertising by 33% in magazines with high (15% or greater) youth readership.26
The MSA prohibits cartoon tobacco advertising,27 but the definition of cartoon limits the ban's scope.28 For example, although “Joe Camel” cartoons are banned, drawings of a camel are permitted unless they exaggerate or attribute human or superhuman qualities to the camel. Moreover, the “no cartoon” rule does not ban the use of the “Marlboro Man” or other human characters. The MSA also “grandfathers” existing cigarette logos.28
Under the MSA, tobacco product billboards, transit advertising, and certain other types of outdoor advertising (signs and placards in open-air or enclosed arenas, stadiums, shopping malls, and video game arcades) must be removed. However, tobacco retailers may continue to post any number of advertisements, each up to 14 sq ft (1.26 m2) in size, on the windows of their establishments or anywhere else on their property.29 Retailers are thus likely to remain an important venue for tobacco advertising.
The advertising restrictions are distinct from provisions applying to brand name sponsorships. These complex provisions ban 4 types of sponsorships: concerts, events at which “the intended audience” is composed of “a significant percentage of youth,” events featuring paid youth contestants or participants, and “any athletic event between opposing teams in any football, basketball, baseball, soccer or hockey league.”30 Exceptions exist, however, for certain concerts, such as the Kool Jazz Festival.31 And important questions remain as to how the ban will be interpreted. For example, it is unclear what percentage of an audience must consist of young people in order for the youth ban to apply.
The MSA also contains a complex series of restrictions on other types of brand name sponsorships, including a “one brand name sponsorship per year” rule.32 These rules have many detailed exceptions that will permit tobacco companies to engage in a wide variety of brand name sponsorship activities and advertising.
Under the MSA, tobacco manufacturers may not give anything of value to induce a person or entity to refer to, use, or display a tobacco product, package, or advertising “in any motion picture, television show, theatrical production or other live performance, live or recorded performance of music, commercial film or video, or video game.”33 However, media viewed in an adult-only facility, adult use of instructional media for nonconventional cigarettes, and media not intended for public distribution or display are excepted. In addition, the ban on endorsements and product placement does not apply to the permitted brand name sponsorships.34
The MSA also prohibits participating tobacco manufacturers from marketing, distributing, offering, selling, or licensing any merchandise or apparel bearing tobacco product brand names.35 Once again, there are exceptions. For example, the ban does not apply to merchandise distributed in an adult-only facility.
Historically, tobacco industry lobbying, either directly or via proxy groups, has impeded the enactment of state and local tobacco control laws.36 The MSA addresses this problem, but only to a limited extent. Rather than banning all industry efforts to derail tobacco control laws, the MSA prohibits lobbying against specific hypothetical state laws or regulations,37 including laws limiting youth access to vending machines and laws enhancing preexisting prohibitions on youth tobacco sales. Participating manufacturers remain free to oppose other significant youth access restrictions such as limits on selfservice displays.
The MSA makes clear as well that participating manufacturers may oppose all tobacco-related excise or income tax provisions.37 The industry can also continue to oppose enforcement of existing legislation or rules. Given that enforcement is often key to the success of tobacco control measures, this limitation may undermine the efficacy of the lobbying restriction.
The status of industry lobbying in support of state laws that preempt local tobacco control initiatives is not entirely clear. Because such laws would forbid local legislation pertaining to the initiatives covered by the lobbying ban, tobacco control advocates may argue that preemption falls within the ban. However, manufacturers can counter that the MSA preserves their right to support statewide bills that are not explicitly included within the lobbying ban.
The MSA also restricts participating manufacturers from supporting any diversion of the settlement proceeds to any other than tobacco- or health-related uses. However, it leaves the industry free to seek the diversion of the funds to health-related uses other than those focusing on tobacco.
Finally, the MSA dissolves the Council for Tobacco Research—USA (CTR) and the Tobacco Institute, Inc, and includes the statement that the industry “may not reconstitute CTR or its function in any form.”38 Manufacturers may, however, create new tobaccorelated trade associations.
The MSA settled the states' claims for past, present, and future tobacco-caused health care expenses. Because localities are subdivisions of states, their claims are also resolved. However, the states are not prevented from enforcing the MSA or from seeking court orders to enjoin tobacco industry misbehavior.
Nor does the MSA impede individual or class action cases brought by smokers, families of smokers, or afflicted nonsmokers. Indeed, the millions of pages of documents released in the course of the state litigation,39 many of which will be made publicly available under the MSA,40 have been crucial in fueling additional successful litigation. In 1999 alone, 2 large punitive damage verdicts were handed down in individual actions against Philip Morris,41,42 along with a detailed and damning verdict against all of the major cigarette manufacturers in the first phase of a Florida class action.43
Other third-party payers, such as BlueCross BlueShield plans, may also seek tobacco-related health care costs. The most dramatic such case was the one filed by the Justice Department in 1999, seeking recovery of tobacco-caused health care expenses. The costs at issue in the case were estimated to total more than $20 billion per year. However, these claims were recently dismissed by the court.44
The federal action still raises claims under the Racketeer Influenced and Corrupt Organizations Act. That action seeks the disgorgement of the tobacco industry's profits from its decades-long pattern of fraudulent behavior, as well as the cessation of future misbehavior and the funding of public information projects. A successful conclusion to the case could contribute substantially to public health goals by increasing the price of cigarettes, thereby discouraging consumption, and by plugging many of the MSA's loopholes.
The MSA and the 4 individual state settlements that preceded it represent a watershed in regard to tobacco control efforts. For the first time, the industry has assumed a significant share of the costs related to the illnesses it causes. And, for the first time, the industry has agreed to many restrictions on advertising, marketing, and lobbying.
Still, the MSA has not fundamentally changed the way cigarettes are sold. Nor has it punished the industry for its misdeeds. Even the ban on billboard advertising, arguably the most significant MSA restriction, has been circumvented through redirecting tobacco advertising to youth-oriented magazines.24 Tobacco company profits actually increased subsequent to the MSA.45
Several lessons seem to follow. First, bargains struck without substantial public health input may be less meaningful than they initially appear. Second, federal, state, and local regulations are as needed as ever. Finally, tobacco litigation remains an important public health tool. Litigation brought the industry to the bargaining table in the first place. Even after the MSA, it may be a potent tool for exposing industry misbehavior and weakening the industry's power to resist effective controls.
This article is based on work supported by a National Institutes of Health/National Cancer Institute award (grant 1 R01 CA67805-01).