After stunning the tobacco industry Wednesday by settling a class action suit by the nation’s smokers, the Liggett Group dropped the other shoe Friday.
Liggett, the smallest of the nation’s five major tobacco companies, and its parent, Brooke Group Ltd., announced a preliminary settlement agreement with five states covering lawsuits seeking reimbursement for state Medicaid spending on smoke-related illnesses.
The agreement includes provisions for payments to other states that want to sign on.
Liggett’s abandonment of the industry’s 50-year-old strategy of fighting all smokers’ lawsuits will result in still more litigation, tobacco companies and Wall Street say. Officials in Maryland said on Thursday that the state would file a Medicaid suit within a month, Hawaii officials said Friday that they were considering a similar suit and lawyers familiar with the litigation said Texas might file as early as next week.
The turmoil is causing investors to reassess the outlook for the industry, which until this week had never agreed to pay anything in damages to people exposed to its products. The stock price of Philip Morris, the industry leader, plunged 12 percent on Wednesday and Thursday to $90 a share before rebounding Friday to $95.375.
“Bennett LeBow has really upset the apple cart,” said Allan Kaplan, a tobacco industry analyst for Merrill Lynch, referring to the chairman of the Brooke Group.
Liggett will be dismissed from suits filed by Florida, Massachusetts, Mississippi, Louisiana, and West Virginia under the agreement announced Friday.
In return, it will pay them a total of $1 million immediately and $440,000 a year for the next nine years.
Liggett will also pay 2.5 percent of its annual pretax income over the next 25 years and withdraw from the industry’s battle against the Food and Drug Administration’s drive to impose sweeping new regulations on the sale, distribution and marketing of tobacco products.
Liggett would also create a pool of 5 percent of its income to pay other states that want to join the settlement; immediately adopt many of the marketing and advertising restrictions that are part of the FDA proposal, and cooperate with the states’ efforts to assemble evidence as they pursue their claims against the rest of the industry.
By themselves, Friday’s settlement and the class action settlement represent historic but probably minor breaches in the common front the tobacco industry has presented against those that sued it and government efforts to tighten regulations. Liggett, which makes Chesterfield cigarettes and many private label brands, represents just over 2 percent of the $45 billion market.
With both settlements in hand, though, LeBow, the chairman of Liggett’s parent company, is now set to pursue his campaign to convince shareholders of RJR Nabisco Holdings that acquiring Liggett would give their R.J. Reynolds Tobacco Co. subsidiary an escape route out of the deluge of litigation engulfing the industry.
RJR, which makes Camel, Winston and Salem cigarettes, is 10 times the size of Liggett. The terms of the two settlements Liggett reached would be extended to RJR in the event of a merger.
The states involved in the settlement calculate that such a merger would create an initial compensation pool of $160 million and swell the pot from profit-sharing to about $2 billion over the 25-year period.