A guarantee to purchase U.S.-grown tobacco and $200 million from six tobacco companies who settled a class-action lawsuit “stabilizes the industry for the next 10 years” and will help bring a buyout, says the grower who brought the lawsuit alleging cigarette makers of fixing prices at auctions.
Philip Morris and five other tobacco companies agreed to the out-of-court settlement on May 16. One defendant, R.J. Reynolds, did not settle. Trial is set for that case on April 19, 2004. The agreement becomes effective upon approval by the U.S. District Court in Greensboro, N.C.
“I think probably the most important thing is that growers, quota holders and tobacco companies now have the same direction,” says Lamar DeLoach of Statesboro, Ga., whose name was on the class-action lawsuit, DeLoach vs. Philip Morris USA, et al. “Tobacco companies realize the importance of a buyout for the future of the industry. I think the commitment that they made in the settlement to buy tobacco in the future is important.”
Growers brought the suit alleging manufacturers fixed prices at auction in February 2000. The settlement gives growers a “level of security they've never had before,” says plaintiffs' attorney Alan Wiseman of Howrey Simon Arnold & White LLP.
In agreeing to the settlement, Philip Morris and the other tobacco companies “vigorously denies the allegations…and entered into the settlement to avoid litigation with the growers — a group of suppliers with whom Philip Morris USA has historically maintained a strong alliance.”
“We are pleased that we have reached a settlement agreement that allows us to put to rest the controversy and begin to make progress on issues that tobacco manufacturers and growers have in common,” says Denise F. Keane, senior vice president and general counsel for Philip Morris USA.
In the settlement, Philip Morris, Brown and Williamson, Lorillard, Universal, Dimon and Standard agreed to pay $200 million in cash to the class, $100 million to growers and $100 million to quota holders based on the number of pounds of tobacco the class member sold between 1996-2001 and/or the number of pounds of quota they owned between those years.
“Philip Morris has a long history of supporting American tobacco farmers and this is another example of the company's willingness to invest in the future of that partnership,” Keane says.
For its part, Philip Morris USA will make settlement payments estimated at between approximately $79 million and $145 million, plus attorney's fees and costs. The company will make an initial payment of $86.3 million to be adjusted downward later by a $7.5 million payment from one of the settling defendants. Philip Morris also agreed to make a second payment of $65 million on the day before the first day of trial against any non-settling defendant. Should a settlement be reached with R. J. Reynolds, Philip Morris' settlement would be reduced.
Brown and Williamson agreed to pay $23 million to growers and Lorillard will pay $20 million.
Also, Philip Morris is largely responsible for a $8 million trust fund, which may be used for research and Extension. Of that total, $5 million can be used to lobby for a quota buyout to include FDA regulation of cigarettes. Growers will work with Philip Morris on buyout legislation that focuses on $8/$4 for quota holders and growers based on 1998 quota levels.
“We're very happy with the monetary settlement,” DeLoach says. “The big prize is that with the quota buyout fund, we're all helping to get a buyout passed.”
In addition to the monetary settlement, the tobacco companies made a 10-year commitment to purchase U.S.-grown leaf. All totaled, Philip Morris, Brown & Williamson and Lorillard have committed to 405 million pounds annually, with annual adjustments on cigarette sales or for very bad crop years. DeLoach points out that the pounds can be bought at auction or under direct contract. The commitment extends to 12 years if a buyout happens.
Philip Morris made a commitment to purchase 330 million pounds of U.S.-grown tobacco annually; Brown and Williamson, and its subsidiary, Export Leaf Tobacco, 55 million annually; and Lorillard, 20 million pounds annually. Standard Commercial Corporation, Dimon Inc. and Universal Leaf Tobacco Company and its subsidiaries, J.P. Taylor Company Inc. and Southwestern Tobacco Company Inc. are also party to the settlement agreement.
“I think the commitment that they have made in the settlement to buy U.S. tobacco in the future is important,” DeLoach says. The companies have also committed to use a minimum of 70 percent U.S. tobacco in their cigarettes. Cheap cigarettes, made from foreign leaf, have “bombarded” the U.S. market, DeLoach says.
Keith Parrish, CEO of the National Tobacco Growers Association, says the purchase guarantee isn't a price support, but “says that companies won't be going offshore to buy” large amounts of tobacco.
“As far as domestic content on cigarettes, Philip Morris is a big key.”
“We're very happy with the monetary settlement,” DeLoach says. “The big prize is that with the quota buyout fund, we're all helping to get FDA regulation and the buyout.”
Parrish, who grows 50 acres of flue-cured tobacco in Coats, N.C., said the agreement was more than two months in the making.
When the growers brought the suit, some described the action as biting the hand that feeds you. “It's never been about trying to destroy tobacco companies,” DeLoach says. “It was about fairness and our future.
“I've always felt that tobacco farmers and quota holders were in the same boat,” DeLoach says. “There were just some of us paddling a lot harder than others. Now, I feel like we're all paddling equally.”
DeLoach says some farmers may not understand the settlement or may say it's “not what we expected. But farmers need to remember we all want a future for us and the tobacco companies.”
The court will first decide on the form and plan for notifying the class of the settlement and will set a date by which class members must decide to stay in the case or opt out of the case. The court will also set a date for final approval of the settlement and set dates for claim forms must be submitted or objections made.
DeLoach declined to comment on why R.J. Reynolds did not settle. The class will continue to pursue claims against R.J. Reynolds.
DeLoach points out that the settlement has no effect on Phase II money.