Debate and Issues Index

draft settlement

Sample Letter To Block Tobacco Settlement

The leadership of the California State Senate has written the judge who must approve the AG deal. I suggest that people seek similar letters in all states.

Honorable Ronald S. Prager
Department 46, Superior Court, San Diego County
Hall of Justice, 330 W. Broadway
P.O. Box 2724
San Diego, CA 92112-2720

In Re Coordinated Tobacco Litigation

Letter of various legislators as amicus curiae pertaining to imminent settlement

Dear Judge Prager:

We understand that a proposed settlement of the coordinated tobacco litigation now assigned to your court is imminent.

Over the past several years we have become aware of an anomaly involving California's Unfair competition Act, Business and Professions Code Section 17200, which is at issue in this case. Uniquely, it allows "any person" to file suit for unfair or unlawful acts in competition for "himself" or "for the general public." This universal statutory grant of standing to sue for the general public creates problems in accomplishing collateral estoppel finality. How can such finality - a goal of all litigation - be accomplished where the statute lacks the notice, hearing and opportunity for comment common in class action litigation and commanded by due process?

These problems have been considered by our Law Revision Commission and its expert consultant, see esp. Professor C. Fellmeth, Unfair competition Act enforcement by Agencies, Prosecutors, and Private Litigants: Who's on First?, 15:1 Cal. Reg. L. Rep. 1 (Winter 1995). And we remain interested in fashioning a solution to this difficulty. Meanwhile, its dilemma is now before you as some of the counsel representing parties purporting to speak for the public may attempt to unilaterally interpose a final agreement without full participation by all parties and counsel. As Professor Fellmeth notes, such a precedent regrettably allows defendants to "choose their suitor." If the problem is ameliorated by denying finality, then that important judicial goal is jeopardized and litigation may continue in piecemeal fashion. Accordingly, we respectfully urge you to refuse final judgment sign-off until there has been a proper hearing giving all parties and counsel an opportunity to object and participate, and that all issues, from the form of final judgment to attorney compensation procedures, be decided in coordinated fashion by and through the court - and only by and through the court.

There are a multitude of unanswered questions regarding the scope, impact, and fairness of the proposed settlement as to whether it appropriately addresses the State's public health concerns, as the consent decree recommended by the proposed settlement agreement finds. These questions, involving financial, legal and health concerns, include:

1. Will the proposed settlement provide sufficient monies to the State of California to cover its claims for past, current and future costs for treating tobacco-related illness? According to 1993 estimates, California reportedly expends $1.7 billion a year treating tobacco-related illnesses. Projecting those costs prospectively for the term of the agreement, California can be expected to expend about $42.5 billion over next 25 years while receiving a possible maximum payment of $23.9 billion. Under the proposed settlement, under Part II (nn) of the Master Settlement Agreement, any future claims for reimbursement of health care costs allegedly associated with the use of or exposure to tobacco products would be released without limitation. Thus, the proposed settlement amount does not even equal the State's projected costs of treating tobacco-related illnesses, and the proposed settlement agreement would preclude the State from future litigation to recover the shortfall.

2. What other state or local public entity claims would be barred by the proposed settlement? Does this Attorney General have the sole authority to release the rights or limit the power of future governors, attorney generals, and Legislatures?

3. The proposed settlement figure of $23.9 billion is only a theoretical maximum recovery. The settlement agreement provides for several contingencies which could reduce the settlement payments to the state. One such contingency requires the California Legislature to pass a qualifying statute that "effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis-a-vis Non-Participating Manufacturers within such Settling State as a result of the provisions of [the Master Settlement] Agreement." (See Part IX, (d) (2) (E).) Does this provision impermissibly commit the Legislature to a course of action under penalty of forfeiting a substantial part of the settlement payments? In determining the fairness of the proposed settlement, should the court determine how much of the settlement would be forfeited if the Legislature does not act as required, or if the enactment is held to be enforceable?

4. Another contingency that would reduce the monies paid to California under the proposed settlement is the enactment of federal tobacco-related legislation before November 30, 2002, which provides for payments by any original participating manufacturer (whether by settlement, payment, tax or any other means), all or part of which are actually made available to California, each original participating manufacturer shall receive a continuing dollar-for-dollar offset for any and all amounts that are paid by such manufacturer. Any potential reduction of the proposed $23.9 billion settlement amount is an issue that should be considered in determining the fairness of the proposed settlement. A further question is whether this Attorney General has the authority to limit future actions of members of Congress representing California by establishment of the proposed condition.

5. Would any proceeds of the settlement be subject to lien under the federal health Care Financing and Administration Act? The assertion of federal lien rights would clearly reduce the settlement proceeds to California. This contingency should also be considered by the court in determining the fairness of the settlement proposal.

6. Does the settlement provide sufficient protection to California to collect the settlement money in light of the "back-loaded" financing, the limited liability of parent entities to provide payments if the subsidiary entity becomes bankrupt, and the protections afforded to affiliates? The payments to California are "back-loaded," meaning the industry would make considerably smaller payments in the first several years and larger payments in later years. In addition, the settlement also would require only the tobacco-selling affiliates of the tobacco companies to make the required industry payments, not international or other affiliates. In light of the immunity from liability given to the parent company and other affiliates, the risk of bankruptcy appears to fall entirely on California. In determining the fairness of the proposed settlement, the court should determine whether that risk is fairly apportioned.

Another major public health concern resulting from this payment schedule is that the smaller payments in the early years would minimize the financial impact on the tobacco companies, thereby avoiding immediate price increases that would tend to reduce tobacco consumption and render tobacco products less affordable for children.

7. Would the settlement provision regarding youth targeting by participating tobacco companies invite litigation? The settlement states that the tobacco companies will not "take any action the primary purpose of which is to initiate, maintain, or increase the incidence of youth smoking." (Section III. (a), page 9.) The inclusion of the word "primary" appears to mean that the industry can undertake activities whose primary purpose is to, say, get smokers to switch brands, but whose secondary purpose is to target children. This provision would place a burden of proof on public health officials to prove the industry is primarily "targeting youth," which would result in extensive litigation.

8. In determining the fairness of the proposed settlement, should the court consider the failure of the proposal to include a "look back" provision? Look back provisions provide participating manufacturers with a strong economic disincentive against marketing or otherwise encouraging the sale of tobacco products to children. Under such provision, if the industry fails to reduce youth smoking within a certain number of years, the settlement payments are increased. This provision was a key element in the previous national attorneys general settlement and the McCain bill in Congress. Such a provision would appear to be an essential component of any state settlement that is serious about reducing sales of tobacco products to children. It is notably absent under this settlement.

9. Would the restrictions on brand name sponsorships in the proposed settlement be difficult, if not impossible, to enforce, leading to litigation and uncertain public health benefits? According to various health advocates, restricting sponsorships is very important because the tobacco industry has shifted the bulk of its promotional dollars to sponsorships. Under the settlement, a participating manufacturer may not sponsor "events in which the intended audience is comprised of a significant percentage of Youth." (Section III (c) (1), page 9.) This provision raises numerous questions, which would lead to litigation, including: What percent of an audience need be identified as "youth" for the restriction to apply? Is the manufacturer excused if the manufacturer "intends" the event to be for an adult audience, but a significant proportion of the audience is youth? Such vagueness would appear to weaken the restriction.

These are but a few of the many unanswered questions posed by the proposed settlement. Again, we respectfully urge the court to conduct a fair settlement hearing before approving any settlement.


John L. Burton
President Pro Tempore
California State Senate


Adam B. Schiff
Senate Committee on Judiciary