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Law 12Tort LawMs. Ripley
Suit settlement rocks tobacco industry
Copyright The Financial Post Company Mar 14, 1996
A stunning first-ever settlement of a class-action smokers' suit against a major U.S. tobacco company yesterday was quickly derided by rivals as a ploy in a corporate power play. Miami-based Brooke Group Ltd. and its tobacco subsidiary Liggett Group, the fifth-largest cigarette maker in the U.S., announced the settlement of a massive lawsuit launched by a consortium of law firms on behalf of every U.S. smoker who claims to be addicted to nicotine. Under the settlement terms of what is known as the Castano suit, Liggett has agreed to pay up to 5% of Liggett's pretax income--to a maximum of US$50 million--each year for the next 25 years. The money will be used to fund programs to help smokers quit the habit.
The settlement requires approval of a federal court in Louisiana. Liggett said it is also in settlement discussions with five state attorneys general who are also seeking reimbursement for their Medicaid plans. "The tobacco industry has lived for too long with the possibility of financial catastrophe from product liability lawsuits that could destroy the industry," said Bennett LeBow, Brooke's chairman and chief executive.
The settlement is significant on two counts. Until now, the U.S. tobacco industry has maintained a unified front opposing the lawsuits. Secondly, industry giant RJR Nabisco Holdings Corp. is in the midst of a heated proxy battle with LeBow and corporate raider Carl Icahn, who are minority investors in RJR and are trying to force a spinoff of its Nabisco food business. Potential liability from the Castano suit is one reason RJR management gives for not wanting to pursue a spinoff for at least a year. But as part of the settlement with Brooke, the Castano litigants agreed not to attempt to prevent a Nabisco spinoff. In response, RJR said in a statement that it remains confident that it "will prevail in all pending tobacco litigation. We have no intention of settling any of these claims."
While RJR had not yet reviewed LeBow's proposed settlement, "we suspect it's an irresponsible and reckless ploy to influence RJR Nabisco in the proxy contest." RJR also announced yesterday that 50.58% of shareholders voted in favor of the corporate raiders' non-binding resolution that Nabisco be spun off immediately. A small percentage appear to have filed their proxies shortly after Brooke's deadline, RJR said.
Philip Morris U.S.A. also said it intends to "fight and win all of the cases in which we are involved." It hadn't reviewed Liggett's settlement, but "we suspect that any such settlement would be a ploy in Mr. LeBow's effort to assume control of RJR Reynolds."
The settlement knocked shares of some major U.S. tobacco companies. RJR (RN/NYSE) was down US$1 1/8, closing yesterday at US$33 3/4.
Under Canadian law, it is more difficult to launch class-action suits of the kind that have struck U.S. tobacco companies.
"It certainly isn't going to help the tobacco companies in any jurisdiction," said Rich Morrow, an analyst at James Capel Inc. in Toronto.