Tobacco Dividend Sparks Fights; Lawyers Fees Challenged

For all the hoopla surrounding the $206 billion tobacco settlement that 46 states are set to share, the states are unlikely to get a penny of the money before the middle of next year.

But that hasn’t dampened the fight over how to spend the money. 

Although the five giant tobacco firms who bought their way out of a massive lawsuit last year have already put $2.4 billion in special escrow accounts, none of the plaintiffs will get a cent until 80 percent of them have finalized the deal or June 30, 2000, whichever comes first.

According to Melissa Hough, a policy specialist at the National Conference of State Legislatures, less than half of the states have taken the necessary action so far. But this hasn’t dampened a furious competition for the funds that pits health advocates against education leaders and a multitude of other constituencies.

While an underlying assumption of the settlement was that at least a portion of the money would be used to underwrite anti-smoking campaigns, there are no actual strings on use of the money. The settlement only spells out how the states receive the money, not how it must be allocated.

Oklahoma Governor Frank Keating has sparked a spirited debate by recommending that the entirety of Oklahoma’s $2.6 billion settlement share go to common, vocational and higher education in his state.

“Smoking prevention is education and the place for education is in the classroom. You can run wild spending a little here and a little there, or you can concentrate it where it will do the most good,” Keating said in a statement.

For Oklahoma, that means deciding where in the fiscal year 2001 budget to put the additional $60.1 million it will get the first year.

Keating has said the funds should be used to fund technology, infrastructure, teacher pay raises and bonus pay. In addition, he said, the money could bolster the state’s flagging teacher pension system. Health advocates are fuming.

“Forty percent of your high school kids admit to using tobacco products. Half of them say they’d like to quit and the criticism that there are no demonstrable benefits coming from tobacco use prevention programs is just false,” Dr. Nancy Dickey told the Oklahoma legislature.

Dickey is immediate past president of the American Medical Association.

Oklahoma’s debate is not unusual. Increasingly, the argument over how to allocate the tobacco money comes down to education funding versus anti-tobacco programs.

Oregon Governor John Kitzhaber’s $4.95 billion school funding plan took a major hit last week when House Republicans blocked his plan to partially pay for it with tobacco money.

The vote clears the way for a Republican plan to invest all the money in a health care trust fund. According to GOP leaders, putting the state’s first $180 million installment in the trust would provide interest earnings of $2.8 million during 1999-2001 to fund smoking cessation and other public health programs.

Kitzhaber’s plan would have sent $150 million to schools over the next two years.

After a bitter fight in Louisiana, the State House and Senate finally agreed on a compromise plan to split their $4.6 billion share between health and education programs. The plan places 75 percent of the settlement in a so-called Millennium Fund, from which only interest can be spent. The interest earnings would be divided equally between a variety of health programs, grants to local school boards and a scholarship program called the Tuition Opportunity Programs for Students, or TOPS.

The remaining 25 percent of the total settlement would be put into a “Louisiana Fund,” which the legislature can appropriate annually.

The allocation debate gets even more complicated in tobacco-farming states, where government officials must satisfy the pleadings of tobacco farmers affected by both the costs of the settlement and future anti-tobacco campaigns.

Controversy has erupted in North Carolina over a proposal to set up three separate boards to dole out the state’s $4.6 billion share of the settlement.

One board, to be given 50 percent of the settlement, would distribute money to communities hurt by the declines projected in the tobacco industry.

Another, controlling 25 percent, would specifically aid tobacco farmers.

The third would distribute the final 25 percent to various health programs.

While the latter would be required to save half its allotment each year for future use, the tobacco boards are not required to put any money away.

The proposed communities board would not be required to give public notice of its meetings. It would not be governed by the rules that apply to other state agencies, and would be exempt from conflict of interest laws.

“As the bill is drawn, in my opinion, this group of 15 people can go off in a meeting, not necessarily public, and decide in that meeting they’re going to give the money to one group of people, and we find out about if after the money’s gone,” Representative Martin Nesbitt told the Raleigh News & Observer .

North Carolina is one of fourteen tobacco growing states that reached a separate $5.15 billion settlement with tobacco companies to assist tobacco interests..

While various constituencies compete over the anticipated tobacco bonanza, at least six states (Massachusetts, Wisconsin, Nevada, Utah, California and Washington) remain embroiled in financial disputes with the lawyers who helped file the suits, throwing into doubt the eventual total that they will receive.

Massachusetts Governor Paul Cellucci has proposed a bill to slash the $2 billion legal fee requested by the law firms that helped his state sue the tobacco industry. The firms have argued that they are entitled to 25 percent of the state’s settlement under a fee agreement signed with then-Attorney General Scott Harshbarger.

In a statement accompanying his bill, Cellucci called the fee request unreasonable.”I think it’s against public policy. I don’t think we should allow it to happen,” he said.

The standoff has sent the dispute to an arbitration panel created under the national tobacco settlement, which will determine how much of the state’s $8.3 billion share goes to legal fees. According to the Concord Monitor, one firm is readying legal action if the arbitration panel’s decision is not to their liking.

“I think the best thing to do is wait and let the panel decide what the appropriate award is. But, we took the risk and we got a good result,” attorney Robert Lieff told the Monitor. Lieff is senior partner at Lieff Cabrasser Heimann & Bernstein, one of five firms who worked on the lawsuit for Massachusetts.

Legal scholars doubt that a law invalidating the fee agreement would be upheld if challenged in court. The arbitration panel has not set a hearing date, and the possibility that the state could lose a large chunk of its share of the settlement to legal fees has pushed back decisions on how to spend the money.

Wisconsin’s Republican Governor Tommy Thompson and Democratic Attorney General Jim Doyle are blaming each other over who is at fault for the contract allowing law firms to initially claim $847 million of Wisconsin’s $5 billion settlement.

Doyle insists that Thompson took the lead in negotiating and signing the contract with the three firms. Thompson has said that the agreement, ruled invalid by a Wisconsin court in late June, was drafted by the attorney general.

Adding fuel to the fire is the fact that Doyle is running for governor in 2002.

As Thompson and Doyle play the blame game, the law firms have settled with the tobacco companies and will receive $76.8 million over five years. By reaching an agreement with the companies and making Wisconsin’s invalidated contract moot, the firms have avoided the arbitration system that will be tested in Massachusetts.

Texas, one of four states to settle individually with tobacco companies (along with Florida, Minnesota and Mississippi), is not immune from the disputes over legal fees.

Federal prosecutors are investigating whether former Attorney General Dan Morales misused his position to help a longtime friend a political supporter claim up to $520 million in legal fees.

A grand jury in Austin has subpoenaed originals of state contracts, computer records, correspondence, affidavits and phone records from Morales’ office. A Texas arbitration panel initially awarded attorney Marc Murr $260 million for his work on the case, but a national panel reduced that award to $1 million.

Murr has dropped claims to both awards after disclosures that his contracts with the state were probably altered and backdated. Lawyers who worked on the state’s tobacco litigation have said that Murr had no involvement in the case and should receive no money.

Because of the possibility that continued litigation could alter the sum each state receives, the National Governor’s Association is urging governors not tie themselves too closely to particular tobacco money programs and funding levels.

“States have not received any funds from the settlement yet, and, with so much money in question, not only is it unwise for states to appropriate these funds, most states are constitutionally unable to appropriate these funds,” an NGA position paper says.

The NGA position further argues that anti-smoking programs have been in effect for years and simply increasing funding will not assure their success. Instead, says NGA policy specialist Matt Salo, states should consider using the money for other needs.