GOVERNMENT, TOBACCO GEAR UP FOR EPIC CLASH

WASHINGTON - On Dec. 15, 1953, top executives of the nation's tobacco
companies met at the Plaza Hotel on a cloudy, windy day in New York City to
confront what they considered a crisis: studies showing a link between
cigarettes and cancer.

They acted quickly. Less than three weeks later, they issued a "frank"
statement insisting there was "no proof" that smoking causes lung cancer.
"We believe the products we make are not injurious to health," they said.

That meeting, according to a groundbreaking Clinton administration lawsuit
filed Wednesday against tobacco companies, began a decades-long campaign to
deceive the public about the health risks of smoking. The lawsuit, citing
newly disclosed industry documents, says the industry knew even 45 years
ago that smoking was deadly.

The industry argues that the government has a laughable, politically
motivated case and says it will try immediately to have it dismissed. But
if that doesn't happen, what could emerge is a years-long epic battle
between Big Government and Big Tobacco that is unprecedented in several
ways and that could trigger much higher cigarette prices.

The lawsuit doesn't specify an amount, but damages could reach hundreds of
billions of dollars, the amount taxpayers spent to treat smoking-related
illnesses in the past and what they might still pay out in the future.

The lawsuit has the potential to change how the industry operates and how
government uses litigation to make policy. Its claims are based on two
statutes never tried before in court, and its goals go way beyond money. It
seeks smoking-cessation programs, advertising restrictions, a public
education campaign and the release of industry documents.

In essence, the government is trying to do in the courtroom what it could
not do in Congress, which rejected a bill last year that would have settled
government claims in exchange for $516 billion in payments over 25 years.

The federal lawsuit was filed at a time when cigarette makers already are
facing bitter legal challenges, including a class-action lawsuit in Florida
and a pending Supreme Court ruling about the government's right to regulate
tobacco products.

But the federal challenge may dwarf any others. "Right now, it's probably
the largest quake on the Richter scale the industry has ever suffered,"
says Mary Aronson, a policy and litigation analyst who studies the industry
for institutional investors.

Hard Choices For Industry

Legal analysts say the industry, reeling from a $206 billion, 25-year
settlement it reached last year with states, might have little choice but
to seek a deal with the federal government.

"For the first time, the tobacco industry is confronting someone its own
size," Harvard law professor Laurence Tribe says. "The underlying legal
arguments are quite strong. The evidence is staggering."

For smokers, a settlement could tack on another 50 to 60 cents a pack,
which now averages about $3, Merrill Lynch analyst Emanuel Goldman says.

For investors, the suit puts additional pressure on tobacco stocks. The
suit names the nation's largest tobacco firms, which together make up 98%
of the U.S. market: Philip Morris Inc.; Philip Morris Companies; R.J.
Reynolds Tobacco; American Tobacco; Brown & Williamson Tobacco;
British-American Tobacco P.L.C.; British-American Tobacco; Lorillard
Tobacco; and Liggett and Myers.

The industry has largely passed its prior settlements costs on to
consumers, but it has not gone unscathed. Stocks of tobacco marketers fell
close to 52-week lows Wednesday.

Philip Morris, the nation's largest cigarette maker, dropped 1 1/8 to $34
½. RJ Reynolds lost 1 3/16 to $27 5/16. Brooke Group fell 1 5/16 to $17
3/4, and Loews, parent of Lorillard Tobacco, eased 1 15/16 to $71 11/16.
This year, Philip Morris has seen its stock price fall more than 30%.

This is not the first time the U.S. government has taken on an entire
industry. It did so in 1908 when it filed an anti-trust lawsuit to break up
Standard Oil's monopoly. And in the late 1970s, it sued auto companies for
conspiring to suppress development of pollution-control devices.

But analysts say this lawsuit is unparalleled because of the scope of
potential damages and the legal statutes involved.

The complaint relies in part on the 1962 Medical Care Recovery Act, or
MCRA, which gives the government the right to sue to recover medical costs
in some cases. The law has never been used to go after a whole industry and
does not specifically allow the government to combine thousands of claims.

"This is an extraordinary situation," says David Ogden, acting assistant
attorney general for the civil decision. He says there's no parallel to
what he describes as a decades-long campaign to mislead the public.

"Their deliberate falsehoods caused a large number of people to continue
smoking," he says. "This is not about banning a product but about banning
fraud."

The lawsuit alleges that the industry:

- --Made false and misleading statements about whether smoking causes
disease, even though executives knew disease was a possible result.

- --Promoted biased research to assist in defending lawsuits brought by
smokers and suppressed research that suggested smoking caused disease.

- --Lied about the addictive qualities of nicotine.

- --Refrained from developing, testing and marketing potentially less
hazardous products.

- --Denied it marketed products to children, even though it sought to capture
the youth market.

The Industry's Side

The industry argues that the government has no explicit legal statute that
allows it to recover Medicare costs or to aggregate its claims. It says the
government long knew about tobacco's health risks, because it has required
warning labels on cigarettes since 1966.

Philip Morris says the government already receives $6 billion a year in
tobacco tax revenue and makes more money per pack from cigarettes than the
industry does. In addition, it says, the government provided free
cigarettes to servicemen until 1974 and continues to subsidize tobacco
farmers.

"This case is going nowhere," says Mark Smith, spokesman for Brown &
Williamson Tobacco Corp. "We relish the opportunity to get into court with
these folks because it's going to be embarrassing for them."

Joining the industry in opposing the lawsuit are business groups concerned
that it could set a dangerous precedent. "Who's next?" asks Bruce Jostin,
executive vice president of the Chamber of Commerce.

"No business can feel secure in the United States when the enormous power
of the Justice Department can be unleashed against them for the purpose of
raising revenue and scoring political points."

President Clinton denies that the action was politically motivated.

"We did our best to work with (the industry) and with the Congress to
resolve many of these matters and they declined," he said
Wednesday at the White House.

How Strong A Case?

Perhaps the strongest aspect of the government's lawsuit, some analysts
say, is its application of the Racketeer Influenced and Corrupt
Organizations, a law known as RICO.

The lawsuit includes more than 100 allegations of mail and wire fraud under
the RICO statute.

"If RICO was, among other things, designed to infiltrate drug
organizations, this (lawsuit) fits the paradigm," University of Notre Dame
law professor G. Robert Blakey says. "The tobacco industry morphs from
dealing in tobacco to dealing in highly addictive nicotine. They developed
among themselves an industry-wide conspiracy to continue the use of drugs
and targeted children.

"No family of the mob even remotely approaches this."

In the tobacco case, authorities allege that executives engaged in a
campaign of misinformation for nearly half a century. By invoking RICO
civil provisions, Attorney General Janet Reno is seeking to restrain the
industry from engaging in the same conduct in the future.

Blakey, an expert in RICO's use to break up organized crime, says the
stakes for the tobacco industry - given the existing evidence of the
industry's less-than-candid dealings - "are just too high to risk going to
trial."

Far-Reaching Effects

In the end, he says, the effect of this lawsuit could rival the influence
of existing policy such as the Sherman Anti-trust Act and its role in
breaking up the oil industry in 1911.

"There has to be a change of behavior on the part of this industry," he
said. "I think you will see that."

Any damages recovered by the government would either be funneled back into
the Treasury or would directly replenish individual health programs.

The Justice Department is seeking $20 million to finance the lawsuit, but
it has yet to get a commitment from Congress. Justice officials say they
are confident of getting enough money to move ahead with the case.

The case, filed in U.S. District Court, has been assigned to Judge Gladys
Kessler, 60, who was appointed by Clinton in 1994 after serving as an
associate judge in D.C. Superior Court. If the case is not dismissed, it
could last well beyond Clinton's presidency.

There is nothing in the lawsuit, however, to prevent a new administration
from dropping the case in 2001.