Smoking in trouble as Liggett blows the cover on addiction
Looks at the rupturing of the tobacco industry's smoke screen
AS AN industry under siege by the anti-smoking lobby, the health ministry and sin tax collectors, South African tobacco companies are, by their nature, tight-lipped on most issues relating to them.
So it is not surprising that they have put up a nonchalant face in reaction to an event in the US which has sent waves of shock through the international tobacco industry and could open up new possibilities for massive anti-smoking law suits.
Last week the small US-based Liggett Group, the maker of Chesterfield, Lark and Eve cigarettes, became the first manufacturer to admit that cigarettes were addictive and caused cancer and that advertising targeted teenagers.
Liggett said it would place "smoking is addictive" warnings on its products and, in return for immunity against litigation, would pay $25-million upfront and commit 25% of its annual pre-tax profits to 22 US states for the next 25 years to settle litigation claims. It would also hand over internal documents it had previously claimed to be privileged to lawyers involved in smoking-related lawsuits.
Displaying a certain amount of fear and with a sense of great urgency, US tobacco companies obtained a temporary restraining order from a North Carolina court to prevent Liggett from handing over the documents relating to earlier discussions with them. These papers are rumoured to have potentially damaging evidence and could show that the major companies conspired to hide the fact that smoking is addictive and can kill people.
But unlike in North Carolina, whose tobacco industry supports 200 000 families, judges in Illinois, Texas and Mississippi ruled this week that Liggett turn over the documents for review.
The North Carolina ruling was granted on behalf of the four major US manufacturers, Philip Morris, RJR Nabisco's RJ Reynolds Tobacco, Loews's Lorillard Tobacco, and BAT Industries' Brown & Williamson.
The effect on these companies of Liggett's admission was swift and damaging. Immediately following the announcement last week, major manufacturer Philip Morris's share fell $6.12 to $115.87 and RJR Nabisco dropped 62c to $31.62 - both after a six-month bull run - while Liggett's holding company Brooke Group picked up 62c to $4.87.
South African tobacco shares also felt the heat. On Monday Rembrandt lost 45c to R45.05 and Richemont dropped 75c to R58.75, while Utico remained stable just under R20. The shares were under continued downward pressure for most of this week, but the companies themselves refused to get hot under the collar.
A terse statement from Rothmans International Holdings, which holds the merged tobacco interests of the Rupert family's Richemont and Rembrandt groups, said it was not involved in any US litigation and its position (that it would fight any litigation) remained unchanged.
Utico company secretary Hilary Thomson said "obviously we are aware of litigation around the world and we are monitoring the situation", but she added that Utico was not doing anything specific in response to the controversy set off by Liggett.
Tobacco company shares are under pressure, not only because of potential threats of litigation and a natural drop-off in consumption in developed countries but also owing to the sharp increase in duties announced in the Budget.
Cigarette prices have increased as duties on cigarettes went up 25% in the 1994 Budget, 25% in 1995, 18% in 1996 and now a hefty 52% in 1997.
The Tobacco Institute says this has led not so much to lower consumption but rather to an increase in smuggling which does not benefit the companies or the government's coffers. A source estimates smuggling could be as high as 15% of the total market.
While industry sources say they don't believe events in the US will have any direct effect on local companies, Yussuf Saloojee, executive director of the National Council Against Smoking, says Liggett's admission will have some major ramifications.
Firstly, he says, the admissions show the tobacco industry has deceived its clients and SA companies will have to answer questions on what research they did into the effects of tobacco and why the results were not made public - in other words, it must be asked whether they are also hiding information and deceiving their clients.
He says a major breakthrough is that Liggett has "accepted that its advertising targeted children", whereas tobacco companies have, for years, been saying that advertising merely promotes brand switching. "This evidence overwhelmingly supports the health minister to ban cigarette advertising."
Saloojee says there have been no lawsuits in South Africa to date, but some could be in the offing. "The council will encourage SA smokers to start litigation," he says, adding that some high-ranking lawyers have indicated they are looking at taking on test cases. But these have not proceeded beyond initial discussions.
In the US, the situation is very different. Since last year, 22 attorneys general (the ones who concluded the deal with Liggett) have filed Medicaid suits against the tobacco industry. Pennsylvania, Missouri and Alaska are considering filing similar suits.
The US Justice Department is conducting a criminal investigation into the tobacco industry. The investigation covers many issues, including whether the top brass of the major manufacturers (which included Liggett) lied to Congress in 1994 when they testified under oath that nicotine was not addictive.
Analysts say the contents of the documents Liggett has threatened to expose are not likely to yield any seriously damaging information, but the most important part of Liggett's announcement is the admission that nicotine is addictive. It will have to explain when exactly it became aware of this fact between its 1994 oath and now, and why it did not come clean earlier.
Major manufacturers in the US and industry sources in South Africa have questioned Liggett's motives, saying its startling admissions must have a commercial agenda. Soon after Liggett's admission, they said Brooke Group chairman Bennett LeBow was "simply brokering this deal in a desperate attempt to force one of the other cigarette manufacturers to take over his financially troubled and failing tobacco interests". They argued that Liggett - which has not made money since 1991 and whose market share has dwindled to less than 2% - had no profits to give, so it stood to lose very little in real terms.
A year ago Liggett broke ranks when it offered to settle litigation by paying out a portion of its profits. According to the Financial Times, this was seen as a ploy in LeBow's attempt to win control of RJR Nabisco, the second-biggest US tobacco company. His bid failed, but the FT said "he has pursued a settlement in the hope of frightening a bigger company into taking over Liggett at an inflated price to shut him up".
Whatever its motives, however, damages to the industry could be enormous and tobacco companies seem to be all too aware of this.
The Sunday Telegraph reports that BAT Industries, through its US subsidiary Brown & Williamson, is trying to form a $3-billion US industry-wide fighting fund "as a buffer against the rising tide of litigation". This would enable the tobacco companies to fight each case, absorb the claims from cases which go against them and reassure financial markets about the value of the shares.
The move indicates an about-turn in BAT's attitude to tobacco litigation. Now it is looking at settlement alternatives for something it previously said it would "fight to the death".