By Saundra Torry and John Schwartz
Washington Post Staff Writers
Saturday, November 21, 1998; Page A01

The tobacco industry yesterday clinched a $206 billion deal to settle all state lawsuits pending against it, rebounding from an unprecedented assault to ensure its financial health and secure significant legal protection for years to come.

The deal, while under attack from health groups and congressional tobacco foes, marks a turning point in the decades-long struggle over smoking. It ends the most formidable legal challenge ever launched against the powerful industry, returning the battle largely to Congress and state legislatures.

"The tobacco industry knows this [deal] is a winner," said political scientist Christopher Foreman of the Brookings Institution, who has watched the tobacco saga unfold. "They get a lot of predictability in their future marketing environment . . . they keep the legal process at bay . . . and they can say to people that they have done something in the interest of the public."

The settlement -- agreed to by 46 states, the District and four territories -- is far narrower than either the unsuccessful deal proposed last year or the failed Senate tobacco legislation. Those measures would have forced huge price increases on cigarettes, granted the Food and Drug Administration broad authority over tobacco and imposed financial penalties if smoking rates failed to decline. All those provisions were absent from yesterday's deal.

So were some of the strongest marketing and advertising restrictions included in those proposals. While last year's deal would have banished cartoon characters and human figures forever from cigarette ads, Philip Morris Cos.'s Marlboro Man remains alive under yesterday's deal. While the 1997 pact would have ended all brand-name sponsorships of sporting events, this deal instead limits such sponsorships, leaving in place such popular marketing tools as NASCAR racing and rodeos.

On the other side of the ledger, the industry failed to get its most coveted wish -- broad protection from all individual and class-action lawsuits. Those legal challenges remain, including a major class-action case now underway in Florida. But they do not represent as immediate and broad a threat as the suits filed by the chief law enforcement officers in 40 states. The Justice Department is also continuing its wide-ranging investigation of the industry.

The current deal will pour billions into state treasuries over the next 25 years and provide about $1.5 billion for research and advertising against underage tobacco use -- all of it coming from an industry that had never paid a cent in damages despite decades of litigation. The industry had previously settled with four states for about $40 billion.

The $206 billion settlement will likely be paid by smokers. It is likely to prompt cigarette makers to increase the price per pack by about 40 cents by 2003, which could translate into an even larger price boost for consumers.

Washington state Attorney General Christine Gregoire (D), one of the chief negotiators, said it is "the largest financial settlement" in history, "but more important, it has restrictions that money can't buy."

Those restrictions include a ban on all billboards and on the use of cartoon characters, such as Joe Camel.

"To those who say it's not enough," Gregoire added, it provides "more than any attorney general could achieve in the courtroom."

The nation's four largest tobacco companies -- Philip Morris, R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Inc. -- issued a statement saying they intend to sign the agreement on Monday. They added that the deal "will address many of the outstanding issues surrounding tobacco -- most importantly, youth smoking." Philip Morris's stock hit an all-time high yesterday, and Standard & Poor's index of tobacco companies gained 17 percent in the third quarter, the best performance of all 89 industry groups.

Many health advocates pronounced the deal a disaster, at best a pact that will bring money and some public health advances to states, and at worst one that will give the tobacco industry a weapon against more substantive anti-smoking measures.

Given the strong hand tobacco foes held as recently as five months ago and the industry's defensive position at that time, the deal seems an anticlimax. Then, the industry faced 40 state lawsuits and about a dozen class-action cases financed by some of the deepest pockets in the trial bar. A judge had ruled in favor of strong FDA jurisdiction over tobacco, and a Republican-controlled Senate committee had blessed a bill that would have raised cigarette prices $1.10 per pack in five years.

"Compared to what they [the cigarette companies] were looking at essentially in every serious bill on the Hill, they pulled off another coup," said Sen. Ron Wyden (D-Ore.), a staunch tobacco foe.

Wyden said the industry's campaign contributions, $40 million advertising campaign, heavy lobbying and high-priced lawyering beat back every threat. In June, Senate Republicans killed the tobacco measure.

Washington attorney John Coale, who helped negotiate last year's deal, accused health advocates of unwittingly helping the industry defeat the Senate bill by overreaching and trying to get their every wish.

"It's outrageous that these guys, who knew no limits to greed, are complaining about this deal," Coale said. "We brought the industry to the brink and these guys never knew when to cut the deal. Now they're suffering the consequences."

The fight, smoking foes said, is far from over. White House domestic policy adviser Bruce Reed said the states "have moved the ball forward," adding that he hopes the deal will "spur Congress to do its part."

"The loopholes and lack of real public health measures in the settlement underscore the need for Congress to act," said former FDA commissioner David A. Kessler. "They have set the stage for national legislation."

Still, the anti-smoking movement faces many obstacles and is now groping for its next move. Republicans, who killed the earlier Senate bill, remain in control of Congress. And industry sources already have said they hope the deal will buy them several years of "peace" on the national front. That is perhaps the health community's greatest fear.

"For many people, this will be seen as an end to the process," Matthew Myers of the Campaign for Tobacco-Free Kids told a public health conference Tuesday. "Only if we lay out a strong case and an agenda can we prevent policymakers from using this as an excuse to go no further."

Back in the states, health groups, who want the windfall used for tobacco control, are gearing up to join what is sure to be a mad scramble over the money in their legislatures. There are no restrictions in the deal on how states may use the funds.

But the states themselves may face a battle with Washington over how much of the money they can keep. Administration sources have said that, under federal law, a large portion of the funds belong to the federal government because they were gained through lawsuits seeking to recover the Medicaid cost of treating sick smokers. The states strongly disagree.

Far from ending the tobacco conflict, Kessler said, "The . . . settlement is another chapter. There will be other chapters written over the next several years."