From: bill@smokescreen.org
Date: Tue, 09/16/03
This article exposes secret tobacco industry lobbying in California to
protect the companies from lawsuits. To send letters to State AGs
urging them to stop supporting these tobacco industry protection
measures, go to www.smokefree.org/AGs Instead of enacting appeal bond
caps, States can ensure receipt of future revenue (as owed via the MSA)
by simply enacting a $.20/pack contingency cigarette tax hike. PA
legislation that would accomplish this is available at:
http://www.legis.state.pa.us/WU01/LI/BI/BT/2003/0/HB1420P1766.HTM
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How Big Tobacco Got Its Way in California
In a little-noticed action, state legislators and Gov. Davis have
adopted two laws that soften legal blows to the industry
By James F. Peltz and Myron Levin
Los Angeles Times
September 14, 2003
http://www.latimes.com/[...]ines-business-manual
<http://www.latimes.com/business/la-fi-smoke14sep14,1,6876616.story?coll=la-head
lines-business-manual>
With its tough anti-smoking laws and huge jury verdicts for sick
smokers, California is known as uniquely hostile to Big Tobacco. But in
a move so quiet that it went virtually unnoticed, state lawmakers and
the Davis administration have pushed through one of the industry's most
cherished legislative goals - a law that could reduce the threat to
tobacco companies from massive damage awards.
The law was one of two tobacco measures adopted during frenzied
eleventh-hour wrangling over the state budget, which Gov. Gray Davis
signed Aug. 2. Several officials said they passed the laws to help
resolve the state's budget crisis, not to help the tobacco industry.
Even so, one of the laws was aggressively pushed by cigarette makers,
whose lobbyists "were all over the Legislature in the final weeks of the
budget negotiations," said Sen. Joseph Dunn (D-Garden Grove).
And though officials generally denied that there was any attempt to keep
them secret, the actions received little or no attention. Health groups
and government agencies that closely track tobacco issues were stunned
to learn about the laws days or even weeks after the fact.
The most controversial of the two places a ceiling of $150 million on
the size of the bond a tobacco company must post during the appeal of a
courtroom loss. Normally, the loser in a lawsuit must deposit a
guarantee for the full amount of damages to protect its assets while it
appeals. In Illinois, for example, where there is no cap on appeal
bonds, Philip Morris USA is on the hook for a $12-billion bond. The
company is fighting the bond in court, arguing that it would mean
bankruptcy.
The other new California law calls on the state to guarantee a flow of
money from bonds that are backed by payments owed California under the
tobacco industry's $206-billion litigation settlement with the states.
Officials said that should bring the state an extra $500 million from a
sale of tobacco settlement bonds set for this month. However, it also
means the state might be on the hook to make up for investor losses
should any of the tobacco companies default or file for bankruptcy
protection.
Supporters say the laws were dictated by the state's dire budget straits
and were meant simply to sustain the flow of money from the 1998 tobacco
settlement. The settlement is providing about $1 billion a year to the
state and its largest cities, which also sued the tobacco companies.
The governor's "tough stance on smoking continues to this day," said
Davis spokeswoman Hilary McLean, noting that Davis' budget originally
called for higher cigarette taxes. "A different set of solutions was
ultimately adopted by the Legislature," she said, and "the effect of
having the state backing the bonds is simply a tool for us to get a
better return on our dollar."
Low-Key Legislation
But the appeal-bond cap, in particular, has drawn scathing criticism
from anti-tobacco activists and lawyers because it helps the industry -
and because of the way it was approved. "This was something that was
done quietly," said Stanton Glantz, a professor at UC San Francisco
medical school and a leading tobacco-control advocate. "Nobody I know of
who keeps track of this stuff knew it was going on."
Also in the dark was state Atty. Gen. Bill Lockyer, said his spokesman
Tom Dresslar. "We knew nothing about that [the appeal-bond cap] before
it was enacted," Dresslar said. Lockyer's office has "consistently
opposed that proposal" as bad public policy, Dresslar said, adding that
the cap was "unnecessary given the well-heeled financial condition of
the tobacco companies."
Dresslar also said Lockyer's office was not asked for help in drafting
the bill authorizing the state to backstop tobacco-bond payments,
although it usually is asked to assist in crafting bond-related bills.
The situation demonstrates the extent to which the state - while often
acting as tobacco's staunch foe - has developed a powerful interest in
the industry's financial health because it is hooked on tobacco money.
"One can see where the Legislature would be sheepish, to say the least,
about passing legislation that looks like a special favor to the
industry," said Robert Rabin, a Stanford University law professor and an
expert on tobacco litigation. "So the inference can be drawn that if
there's strong pressure to do it, you do it in the dead of night when
nobody's alert to what's happening."
Even now, there is considerable finger-pointing and some mystery over
who is most responsible for the new laws. In late July, they were added
to an obscure budget "trailer" bill as part of a deal struck between
Senate President Pro Tem John Burton (D-San Francisco) and Republican
Senate Leader James Brulte (R-Rancho Cucamonga) to resolve the budget
stalemate.
Brulte acknowledged in an interview that he demanded the appeal-bond cap
be part of the deal. Records kept by the secretary of state show that on
June 30, Philip Morris USA, the nation's biggest tobacco company and a
unit of Altria Group Inc., made a $20,000 contribution to one of
Brulte's campaign committees.
Altria spokesman David Tovar said the contribution was not "specifically
earmarked" to reward Brulte's support for the bond cap. Tovar said the
company makes campaign contributions because "we want to have a seat at
the table with elected officials who are important to our business."
Brulte said he supported the bond cap to safeguard the flow of
settlement funds, not to appease the industry. "We made it clear that,
absent a cap we would not support a budget" with tobacco-settlement
proceeds "that might not be in existence 22 or 25 years from now as a
result of lawsuits," he said.
Industry Priority
State appeal-bond caps have been a top priority of the industry since
2000, when cigarette makers suffered their first multibillion-dollar
punitive damages award in a class-action case in Florida. California
became the 21st state to adopt a bond cap. But it is one of just seven
states whose cap protects only tobacco companies, rather than any
business facing a giant courtroom loss.
The tobacco companies say caps are needed so they can exercise their
appeal rights without having to post a devastating - even bankrupting -
bond. Their campaign gained momentum in the spring when Philip Morris
was ordered to post a $12-billion appeal bond to cover the judgment,
plus interest, after a $10.1-billion loss in a class-action case in
Illinois.
The judgment and bond both are under appeal, with the company saying it
may be forced to file for bankruptcy protection if it has to deposit a
$12-billion bond. This, in turn, could delay or reduce settlement
payments to the states, the company says. "We feel that every defendant
is entitled to a full and fair appeal, and from the states' perspective
bond caps protect future tobacco settlement payments during the appeal
process," Altria's Tovar said.
Anti-smoking groups have decried bond caps as special favors for an
industry that least deserves them. By limiting its bond cap to tobacco
industry appeals, California has given the industry "protection that no
other industry has," which is "ludicrous," said Ben Alamar, an economist
at UCSF's Center for Tobacco Control, Research and Education.
Sen. Dunn, who opposed the bond cap, said there was no "evidence that
this industry needed any special dispensation Now that they've got it,
there are going to be lots of industries knocking on the Legislature's
door next year seeking" the same treatment. However, the need for a cap
to protect the interests of the state was "the argument that swayed most
Democrats," Dunn said, because Democrats usually "are hostile votes for
the industry."
Los Angeles lawyer Michael Piuze, who has tried three cases against
Philip Morris on behalf of lung cancer victims, said, "The same
politicians who bragged about their victorious settlement against the
tobacco industry five years ago are now in bed with that industry." Even
if the motive was shoring up state finances, he said, "it's always bad
business to deal with the devil, and this particular devil is smarter
than all of those politicians."
The tobacco industry was joined in support of the bond cap by several
business groups, including the California Manufacturers and Technology
Assn., whose members include Philip Morris and R.J. Reynolds Tobacco Co.
But the group's president, Jack Stewart, said non-tobacco members worry
that shortfalls in tobacco payments might lead the state to seek new
fees or taxes from them.
Raising the Cap
The measure was opposed by the Consumer Attorneys of California, a
leading plaintiff lawyers group. A letter from the group to Senate
President Burton and Assembly Speaker Herb Wesson (D-Culver City)
reveals that lawmakers originally were considering a far more
industry-friendly bond cap than the one they ultimately passed.
According to the July 27 letter, the earlier proposal called for an
aggregate cap of $100 million for appealing all adverse verdicts. In
other words, once tobacco companies cumulatively had posted appeal bonds
totaling $100 million, they would not have to deposit any further
guarantees to appeal future losses.
The letter said the industry did not need special protection. While
warning of financial disaster, "these same companies speak to Wall
Street investment concerns and to individual shareholders in glowing
terms about their current and future 'bottom lines,' " the letter said.
Bruce Brusavich, president of Consumer Attorneys, said that when it
became clear the bill would pass, he "made some suggestions" in the
spirit of "if it's going to happen, it ought to be fairer."
In recent years, California and other states and municipalities have
sold bonds covering a portion of future settlement payments, opting for
quick cash infusions over larger payments over time. California already
has conducted one bond sale of $3 billion, but another sale was
postponed in the spring when the appeal-bonding requirement in the
Illinois case created turmoil in the market for the bonds.
Several states canceled sales as credit firms lowered ratings on the
bonds. That led the state Finance Department and Treasurer's office to
recommend the state backstop the bonds to reassure investors and raise
more cash in the upcoming $2.3-billion bond sale. With or without that
added risk, the bonds have many opponents on both sides of the political
aisle, including Assemblywoman Lois Wolk (D-Davis).
The settlement payments were "intended to go to the health care of
Californians for the next 20 years, not to be spent in one or two years
simply to balance the budget," said Craig Reynolds, Wolk's chief of
staff. But many who say they oppose the bonds on principle, including
Davis and Steven Peace, head of the Finance Department, have concluded
that the state's budget woes have forced their hands.
Peace said that once the Legislature decided to sell more bonds, his
agency determined that it would get a lower interest rate, and about
$500 million in additional proceeds, if the securities had state
backing. Staring at a $38-billion deficit, that's simply what California
must do "to protect this much-needed revenue source," the California
Manufacturers and Technology Assn. said in a letter to the Legislature
in July. The state, it said, is "clearly dependent upon the proceeds
from the tobacco settlement."
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