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The Big Tobacco Settlement: $9bn a Year. Forever.

For Millennials and Gen Z, it may seem impossible to believe, but there was a time when advertisements for cigarettes actually featured children. For generations who grew up with anti-tobacco campaigns in the school and PSAs about the dangers of smoking during their Saturday morning cartoons, it’s weird to learn that until the late 90s, tobacco companies legally marketed to teenagers and even kids. 

Just think about Joe Camel. In 1987, J.R. Reynolds, the manufacturer of Camel cigarettes, specifically designed this goofy, big-eyed cartoon character to appeal to young viewers and give them a positive image of smoking. Willie the Penguin was a similar mascot for Kool cigarettes.

However, these sorts of marketing campaigns have been banned since 1998 when the major American tobacco companies entered into something called the “Master Settlement Agreement,” or MSA, with the governments of 46 US states who had previously brought lawsuits against them. 

At the time, the MSA was the largest civil settlement in US history, and along with the stipulations on marketing, it brought a number of other serious penalties against the big tobacco companies, the most shocking of which is an annual payment of 9 billion dollars to be paid “into perpetuity.” If you don’t have Black’s Law Dictionary on hand, that means forever.

Nevertheless, there are many critics of the Master Settlement Agreement. Believe it or not, they say that despite the big price tag, the settlement has actually helped the tobacco industry.

Prior to the 50s, it wasn’t a medically accepted fact that smoking was bad for you at all, much less that it caused lethal diseases like lung cancer. In fact, tobacco ads in the 40s often featured doctors promoting cigarettes or other tobacco products for their “health benefits.”

The first extensive evidence of the dangers of smoking reached the public in 1950 when the British Medical Journal published an article linking it to lung cancer and heart disease. This was confirmed by a British Doctor Study in 1954 and then by the US Surgeon General in 1964.

With this evidence in hand, a number of people decided to sue the tobacco companies themselves over the negative health effects they’d suffered. In fact, from 1954 to 1994, over 800 individuals filed lawsuits against Big Tobacco, but all of them lost.

Why? A couple of reasons. First, when fighting individual plaintiffs, the big tobacco companies could easily argue that the person’s health was their own responsibility and that they chose to smoke. 

Second, Big Tobacco was able to argue something called “contributory negligence.” Basically, they claimed they didn’t know about smoking’s negative health effects anymore than the plaintiffs did and therefore weren’t at fault. These private citizens didn’t have the resources or investigative means to prove otherwise.

These defenses all fell apart, though, when the government decided to take on Big Tobacco. At first, state governments brought lawsuits against the companies themselves. The first was Mississippi in 1994, but they were soon followed by nearly every state as well as Puerto Rico and the US Virgin Islands. 

The argument was simple: states pay a significant amount of their citizens’ healthcare bills through public health programs like Medicare and Medicaid. The tobacco companies increased these costs by addicting the public to a product that causes cancer and heart disease. So they should pay for it.

The states, of course, had a lot more resources than the individual plaintiffs and were able to uncover internal documents showing that not only did Big Tobacco know cigarettes were dangerous but that they purposefully marketed them to children. 

Perhaps most blatantly, an internal memo from Lorillard Tobacco stated “[T]he base of our business is the high school student.” This led to some pretty tough claims against Big Tobacco including unfair trade practices, fraud and civil conspiracy.

By 1996, the onslaught of state lawsuits against all the various companies was too extensive, too complicated, and, frankly, impossible for Big Tobacco to defend against. To simplify things, the big four US tobacco companies formed a bloc referred to as the “Majors.” This included Philip Morris, R.J. Reynolds (makers of Camel), Brown & Williamson (makers of Kool), and Lorillard (makers of Newport). They approached the US Congress for a national resolution.

In 1998, the government and the Majors finally came to the Master Settlement Agreement under a number of strict conditions:

First, the Majors had to disband most of their trade organizations. These included: the Tobacco Institute, a tobacco lobbying group; the Center for Indoor Air Research, a non-profit that funded scientific studies often with the aim of downplaying the risk of second-hand smoke in lung cancer; and the Council for Tobacco Research, which similarly attempted to cast doubt on the claims of tobacco’s negative health effects.

Tobacco cancers caused
Tobacco cancers caused. By Cancer Research UK, is licensed under CC-BY-SA

In their place, the MSA established a national organization called the American Legacy Foundation that Big Tobacco had to pay for. You may know it better by its new name, the Truth Initiative. From 2000-2003, the Majors had to pay 1.45 billion dollars into a public education fund that helped start the Truth Initiative. 

The Truth Initiative and its youth smoking prevention campaign called simply “Truth” have been very successful. While 23% of high-school aged children smoked in 2000, that figure is now 6%.   

Additionally, the Majors agreed to considerable restrictions on their advertisements and marketing, specifically those targeting teenagers and children. For example, they agreed to bans on billboard and public transportation ads as well as their use of cuddly cartoon characters. 

At the same time, the MSA made public all the documents the government had uncovered showing Big Tobacco knew about the health risks of smoking and purposefully targeted young people and minority populations. Most of these are now online, many published and broadcast by the Truth campaign.

Most importantly, though, the Majors had to pay. Up-front, they had to pay the states involved in the settlement almost 13 billion dollars. They also had to essentially pay for the states’ legal fees through a “Strategic Contribution Fund” of 8 and a half billion from 2008-2017 and a payment of 1.5 billion to the National Association of Attorneys General spread over the first 10 years.

Plus, Big Tobacco has to make annual payments to the states to cover the healthcare costs related to smoking. These payments were set to increase gradually, starting at 4.5 billion dollars in 2000, rising to 6.5 billion in 2002, then 8.14 billion in 2008, and finally 9 billion dollars in 2018. For context, this is bigger than the GDP of 50 countries. The Majors will theoretically have to continue paying this forever.

Practically speaking, though, Big Tobacco rarely pays the full 9 billion. That’s because the payment is also subject to changes based on inflation and the Majors’ share of national cigarette sales, which have declined more than was expected at the time of the settlement, thanks in part to the anti-smoking educational campaigns the settlement funded.

As a result, the total MSA payment for 2021 was about 6 and a half billion, still no small fee. Each state receives a different amount based on population and their health expenditures. For instance, California received more than 900 million in 2021 while Alaska received just over 21 million.

At first glance, the penalties on the tobacco industry appear mind boggling. Plus, the campaigns and organizations funded by the settlement seem to be successful mechanisms for curbing health problems due to smoking and teen tobacco use. However, despite all this, many believe the MSA has done little more than help and prop up the tobacco industry.

The most basic criticism is simply that the MSA was too lenient. In 2020, the US tobacco industry was worth over 50 billion dollars, so a payment of 9 billion a year isn’t as big as it at first sounds. The few billion Big Tobacco had to pay for anti-smoking education like the Truth Initiative was basically pocket change.

Many believe the Majors should have paid more for anti-smoking education, but since the settlement provided immunity for Big Tobacco from any future government lawsuits, they’ll never have to.

A more nuanced criticism points out that the MSA forged a dependency between the state governments and Big Tobacco. For one thing, the settlement only applied to the big four tobacco companies. These were called the Original Participating Manufacturers, or OPMs. Several other companies joined into the settlement after the fact, called the Subsequent Participating Manufacturers, or SPMs, but there are many smaller tobacco companies in the US that simply weren’t involved, called Non-Participating Manufacturers, or NPMs. 

The various penalties imposed on the OPMs and SPMs increased their costs and made them less competitive on the market. Naturally, they began to lose market share to the NPMs who could sell tobacco with lower costs and fewer restrictions. 

But with lower market share, the OPMs and SPMs didn’t have to pay the states as much. Since MSA payments actually make up a good amount of many states’ Medicaid budgets (usually around 1-2%), the result is that state governments have a big incentive to preserve the competitiveness of big tobacco companies over their smaller competitors. This creates a “cartel” where the tobacco companies essentially pay the government in exchange for protection, both from future litigation and market competition.

In some cases, states have even issued securities backed by the MSA payments. These are called “Tobacco Bonds.” If you take out one of these bonds, the government will pay you back with money from the MSA. In other words, they get to use money from future MSA payments right now.

Tobacco Bonds give states an obvious incentive to support and promote the tobacco industry. If future tobacco sales drop more than expected, states won’t get enough MSA money to pay back the bonds. In 2005 alone, California issued over 3-billion-dollars-worth of these bonds, meaning the government will need considerable payouts from the MSA going forward.

Some of these criticisms have even manifested as lawsuits. Small tobacco companies and private individuals have sued the government claiming the MSA breaks antitrust laws and facilitates illegal practices like price fixing. 

To date, though, none of these lawsuits has been successful, not at the state or federal level. For better or worse, it looks like the Master Settlement Agreement is here to stay, and that means Big Tobacco is going to be dipping into its pockets for billions of dollars every year for the foreseeable future.

Sources:

“Advocacy Group Shows How Rebranding Can Rebuild Momentum” The Chronicle of Philanthropy: https://www.philanthropy.com/article/advocacy-group-shows-how-rebranding-can-rebuild-momentum/

“How Did We Get Here?” Truth: https://www.thetruth.com/info/how-truth-was-created

“Market value of cigarette and tobacco manufacturing in the United States from 2012-2021” Statista: https://www.statista.com/statistics/491709/tobacco-united-states-market-value/

“Payments to States Since Inception through April 22, 2021” National Association of Attorneys General: https://1li23g1as25g1r8so11ozniw-wpengine.netdna-ssl.com/wp-content/uploads/2020/09/2021-04-22-Payments_to_States_since_Inception_through_April_22_2021.pdf

“The History of Tobacco Marketing: It’s a Scary Story” Tobacco Stops With Me: https://stopswithme.com/history-tobacco-marketing-scary-story/

“The Master Settlement Agreement: an Overview” Tobacco Control Legal Consortium: https://www.publichealthlawcenter.org/sites/default/files/resources/tclc-fs-msa-overview-2015.pdf

“The mortality of doctors in relation to their smoking habits: a preliminary report “ British Medical Journal: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC437141/

“Tobacco Company Marketing to Kids” Campaign for Tobacco-Free Kids: https://www.tobaccofreekids.org/assets/factsheets/0008.pdf

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