Of Public Interest

Volume 2, Number 7
November 2000

The State as a Partisan Plaintiff: 
Reflection on the Tobacco Settlement

by Richard E. Wagner

What are we to make of the tobacco settlement that occurred in late 1998? The Big Four tobacco companies (Philip Morris, RJ Reynolds, Lorillard, and Brown & Williamson) settled suits that had been filed by the attorneys general of 46 states to recover what were alleged to be excess Medicaid expenses the states incurred on behalf of smokers. When added to the earlier settlements with Florida, Minnesota, Mississippi, and Texas for $40 billion, the tobacco companies agreed to pay some $246 billion for the settlement of state suits throughout the land.

What does this settlement tell us about commerce and politics? If these suits had been ordinary commercial disputes between private parties, there are some basic economic principles of litigation and its settlement that would provide a good framework for making sense of the settlement. A plaintiff sues a defendant for $100 million. Suppose each party expects to spend $10 million on the litigation, and each party thinks it has about a 50:50 chance of success in the courtroom. On average, the plaintiff can expect to recover $40 million from the litigation, after subtracting his litigation costs. On average, the defendant can expect to pay $60 million, inclusive of his litigation costs. Any settlement where the defendant pays less than $60 million to the plaintiff and the plaintiff receives more than $40 million will be better for both parties than going to court. The litigation costs provide the plaintiff and defendant with $20 million of room to settle their suit. The opportunity to save and share the costs of litigation is the central economic reason why more than 90 percent of suits are settled.

If two parties to a commercial dispute settle prior to trial, we can infer that the parties held similar views about a trial’s outcome and decided to save litigation costs. The fact of the tobacco settlement could be used to infer that the plaintiff and defendant agreed that the probable amount of damages that would have been attributed to smoking would have been in excess of $200 billion. This kind of inference, however, runs afoul of one overwhelming fact to the contrary: smokers do not impose costs on state treasuries. Quite a number of economists have examined the claim that excess state costs can be attributed to smoking. All have found these claims to be false, and overwhelmingly so. Most estimates attribute between four and six cents per pack for state health-care costs. This small figure is dwarfed by the high excise taxes that states impose on cigarettes. Smokers make excess payments to state treasuries through cigarette excise taxes in the general vicinity of ten times any health care costs they might incur.

In the face of such overwhelming evidence to the contrary, it is implausible that a commercial plaintiff would have pursued such a weak case. The tobacco settlement, of course, did not arise out of an ordinary commercial dispute. It involved a political plaintiff. A commercial defendant who faces a political plaintiff confronts a different beast than one who faces a commercial plaintiff. A commercial plaintiff acts on his own behalf out of his own pocketbook. A political plaintiff operates with other people’s pocketbooks, which gives such a plaintiff broad scope to pursue a partisan and ideological agenda.

Where the cost of litigation is a debit item for a commercial plaintiff (or a defendant), it can serve as a form of credit item to a political plaintiff. For instance, the tobacco litigation involved the state attorneys general in hiring private law firms, and with many of those firms making contributions to political campaigns on behalf of their sponsor. A political plaintiff bears no personal costs from litigation, and can even find that some of those costs actually operate as credit items on his personal account, in that they expand his future opportunities, whether in terms of seeking higher office or private employment.

What is a defendant to do when confronted with a subsidized political plaintiff driven by partisan interests and ideological zealotry? The defendant faces an adversary that calculates differently than commercial plaintiffs. A private plaintiff might think in terms of possible excess medical costs imposed by smokers. For a political plaintiff, however, those claims are secondary, a smoke screen to provide cover as it were, for the pursuit of an ideology animated by a vision of a smoke-free America. For the ideological plaintiff, the desired objective is not to offset some (non-existent) drain on state treasuries attributed to smokers, but rather is to degrade the commercial value of tobacco companies.

One might reasonably wonder why the tobacco companies might have capitulated when the claims lodged against them were so patently false. A man sitting on an iceberg in the North Atlantic as it floats south will recognize his ultimate fate, and yet be thankful when clouds obscure the sun. It is perhaps similar with the tobacco companies. The famous "problem of the gambler’s ruin" from probability theory tells us that in a fair game of chance, the player with the smaller fortune will eventually be ruined by the player with the larger fortune. In ordinary games, of course, play is voluntary, and either party can terminate the play at will. But the state can command participation, and it can exhaust the fortune of anyone against whom it plays. A wise person would not continuously play a fair game of chance against a much wealthier adversary, and similarly would not want to play continuously against a zealous, interest-driven political plaintiff. Settlement is perhaps like that welcome cloud in the North Atlantic. It brings respite to a weary soul, but it doesn’t give peace of mind.

The general theme illustrated by the tobacco settlement is the danger of being on the opposite side of the partisan use of state power to advance a private interest agenda at public expense. Eternal vigilance is the price of liberty, as Patrick Henry noted. And the state is potentially the biggest threat of all. We may well fault the tobacco companies for capitulating against the onslaught of state power. For if everyone did, this liberty would perish. Yet the state as a partisan plaintiff can pursue a strategy of divide-and-conquer against its potential defendants, which may render some such capitulation understandable, even if it can never render it admirable.


Dr. Richard E. Wagner is Public Interest Institute's Academic Advisory Board Chairman 
and Holbert L. Harris Professor of Economics at George Mason University.

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