A FORK IN TOBACCO ROAD

By ELIZABETH GLEICK

IT BEGAN OVER A DRINK IN A NEW YORK City hotel, after two adversaries agreed to settle a hard-fought case about defective plumbing pipes. "What are you going to do next?" New York attorney Marc Kasowitz asked. Don Barrett, a Mississippi lawyer, explained that he was involved in his state's lawsuit to recoup Medicaid money spent treating smoking-related illnesses. Kasowitz quizzed him, but, says Barrett, "I didn't realize he was the personal friend and attorney for Ben LeBow." Not until a few weeks later, that is, when Kasowitz called Barrett to arrange a meeting and floated the news that his client, Bennett LeBow, majority shareholder in the Liggett Group, was ready to cut a deal.

With the announcement last week that Liggett, the smallest of the nation's five major cigarette makers, had agreed to settle the Castano class action in Louisiana on behalf of all smokers and five state Medicaid suits against cigarette makers, the landscape of tobacco litigation underwent a seismic shift. In real dollars, the terms of the agreement--Liggett will wind up paying less than $2 million a year over the next 25 years toward antismoking programs, and will comply with proposed Food and Drug Administration rules about marketing to children--have little bite. Any capitulation, however, marks a drastic change. Publicly, at least, the other tobacco companies are hanging tough. "We haven't changed our assessment on strategy, which is that we don't intend to settle these cases," says Steven Parrish, senior vice president for corporate affairs at Philip Morris.

But TIME has learned that even before news of the Liggett deal broke, other settlement feelers had gone out. Florida state senate minority leader Ken Jenne says that last Tuesday he was approached by Jon L. Shebel, president and ceo of the powerful Associated Industries of Florida, a lobbying group that includes Philip Morris, R.J. Reynolds and the Tobacco Institute. Shebel confirms that a conversation took place in which actual dollar amounts were bandied about. He admits that he mentioned payments of $105 million a year, "for a long time, maybe indefinitely," to settle the state's $1.4 billion lawsuit. He says he was not talking with Jenne at the behest of the tobacco industry, but comments, "We all know who the targets of this lawsuit are." Tobacco-industry lawyers say they know nothing of the talk. "Philip Morris doesn't want to settle," says a tobacco-industry lawyer. "We don't know what Shebel is doing."

What the other cigarette companies do is of little interest to LeBow, a takeover artist who has set his sights on R.J.R. Nabisco. "He's in it to make money,'' says Richard Scruggs, one of whistle-blower Jeffrey Wigand's lawyers, who is helping on the Mississippi Medicaid suit. "This is a very sophisticated business transaction by Bennett LeBow." If LeBow can force a merger between Liggett and R.J.R., then R.J.R. will participate in the settlement, moving out from under the shadow of incessant litigation, boosting its stock price and enabling LeBow to split the company's food and tobacco divisions. Even if this scheme fails, LeBow tells TIME, "it was a good economic deal for us to settle."

In fact, the costs of the settlement are about one-fifth what the company has been hemorrhaging in legal fees each year, not to mention its share of the record $4.1 million in political donations made by tobacco companies in 1995. The only losers in the great tobacco sweepstakes may be all those smokers, who will get no cash--only the chance to attend a Smokenders class on the industry's dime.

--By Elizabeth Gleick. Reported by Elisabeth Kauffman/Nashville, Elaine Rivera/New York and Elaine Shannon/Washington

With reporting by ELISABETH KAUFFMAN/NASHVILLE, ELAINE RIVERA/NEW YORK AND ELAINE SHANNON/WASHINGTON