States lose, trial attorneys don't as tobacco market shifts

Steve Korris Apr. 13, 2006, 3:27am

Stanford's Jeremy Bulow

Tobacco company payments to states may drop as smoker choices change the market, but fees for trial lawyers who negotiated the payments will never drop.

Trial lawyers collect half a billion dollars a year under the agreement, no matter how much states receive.

The 1998 agreement committed companies to pay states more than $200 billion over 25 years, but it allowed downward adjustments in case the market changed.

In March a consultant for the companies and the states found that in 2003, the biggest tobacco companies lost market share because of the agreement.

The finding would allow companies to reduce payments for 2005 from $6.5 billion to $5.3 billion, unless states prove they diligently suppressed competition.

Like income taxes, tobacco payments fall due the following April 15. As the due date approached this year, some companies considered sending adjusted amounts.

Even if a company pays the full amount, it can try to recover a portion of it later.

Unlike states, private law firms that worked on the agreement as special assistant attorneys general do not have to worry about reduced payments.

The agreement allocates an annual $500 million legal fee in proportion to cigarette sales, according to Stanford University business professor Jeremy Bulow.

In a report last year he estimated legal fees at 30 cents a carton.

He wrote that if a smoker switched from RJ Reynolds to Philip Morris, Philip Morris would pay lawyers 30 cents on the new carton while subtracting 16 and a half cents from the rest of its cigarettes, for a net fee of 13 and a half cents.

According to Bulow, the agreement constitutes a set of taxes even if states and the companies that signed it do not call them taxes.

"The trial lawyers, who wanted contingency fee payments, would have a harder time getting away with billions of dollars in fees if their contribution were framed as helping to pass a set of tax increases," he wrote.

"The state attorneys general were also happier claiming that they had extracted damage payments from the companies rather than claiming that they had helped their citizens by pushing through tax increases."

Even if scientists regarded the agreement as beneficial to public health, he wrote, the benefit would not justify antitrust violations.

"I myself might obtain a health benefit if the price of ice cream were raised $10 per scoop, but that does not justify breaking the antitrust laws to do this," he wrote.

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