TOBACCO DEAL: SMOKED OUT : INDUSTRY AGREES TO PAY BILLIONS, ACCEPT LIMITS ON ADVERTISING.

Byline: Charles Pope and Carol D. Leonnig Knight-Ridder Tribune News Wire

In a historic settlement, cigarette manufacturers agreed Friday to submit to unprecedented government limits on the way cigarettes are advertised and sold, and to pay $368 billion to offset the effects of smoking.

The money also will pay to discourage young people from ever starting to smoke.

The settlement will affect nearly every American - smokers, tobacco farmers, retailers who sell cigarettes, fans of sporting events sponsored by tobacco companies, taxpayers who've been footing the bill for smoking-related illnesses, and people used to seeing colorful cigarettes ads on billboards and in magazines.

The deal was struck between the largest cigarette makers and a group that included attorneys general from 40 states, lawyers for people suing tobacco companies, and an assortment of public-health organizations.

If the agreement stands, cigarettes no longer would be a consumer product as easily available as milk and bread from the corner market. Nicotine, the addictive agent in cigarettes, would be regulated as a drug for the first time. Cigarettes would carry bigger and more explicit health warnings, and stores selling them would be licensed much like liquor stores.

``An industry that has never been regulated before is now the most regulated industry in America. And that is the way it should be,'' said Bob Butterworth, Florida's attorney general and one of the negotiators.

Both sides conceded that the complex agreement is merely a starting point: It must first be approved by Congress, where there already are sharp divisions over smoking, and the White House. Even if they approve, the agreement is sure to be challenged in court by critics who wanted it to be tougher on cigarette makers.

The agreement caps the amount of money that manufacturers have to pay each year to people who win lawsuits that claim their health was damaged by smoking. In return, the beleaguered industry gets protection from legal losses that, if left to juries, could skyrocket into billions of dollars.

For decades, the industry fought - and won - every lawsuit brought by a smoker and kept much federal regulation at bay by cultivating allies in Congress.

Two years ago, the industry's position began to erode. It lost its first court case, and its influence in Congress waned as government regulators became more aggressive. It began to be clear that its traditional strategy could end up costing far more than settling.

``Our companies have made concessions that were extremely difficult, but on balance this plan was preferable to the continuation of a decades-long controversy,'' the nation's four largest cigarette companies said in a joint statement. The companies are Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard Tobacco Co.

In the settlement, the companies get stability in legal costs: They would pay no more than $5 billion a year in compensatory damages to smokers who win suits, and they would never again would face class-action lawsuits.

Reached after three months of negotiation, the agreement also lays out an ambitious blueprint to keep children from smoking, to repay states billions of dollars spent treating smoking-related ailments, and impose sharp limits on the way cigarettes are marketed.

``We wanted to do something that would punish this industry for their past misconduct, and we have done that,'' said Mississippi Attorney General Michael Moore, who led the negotiations for the states.

The industry does not have to apologize for any past conduct. But it agreed to strict measures intended to significantly reduce the number of young smokers and to make payments to the legal and medical funds every year for the next quarter-century.

There would be a price for consumers. Cigarette prices would certainly rise, perhaps by as much as 75 cents a pack. But shareholders in tobacco companies would benefit, as the industry's legal threats died. One analyst predicted Philip Morris' stock ultimately could jump by $16 a share, or more than 30 percent.

Industry stocks, which rose Thursday on expectations of an agreement, fell Friday after it was announced.

In the agreement, tobacco companies would settle 40 state lawsuits that seek to recover billions of dollars in Medicaid money spent treating sick smokers and 17 class-action suits. The first of those lawsuits was scheduled to begin in Mississippi on July 7.

Tobacco companies would be required to turn over documents that anti-tobacco activists say will show a 40-year effort to hook smokers and keep them addicted. How many documents would have to be turned over and how they would be handled was one of the major sticking points during negotiations.

The agreement also requires the industry to:

Pay a $60 billion lump sum to compensate people who sue tobacco companies.

Drop all billboard advertising and sponsorship of sporting events and concerts.

Add stark warnings to cigarette packages, such as ``WARNING: Smoking Can Kill You.''

Pay for anti-smoking education and counter-smoking advertising.

And most significantly, according to anti-tobacco activists, the industry also would have to submit to full regulation by the Food and Drug Administration.

President Clinton, who had closely watched the negotiations, said he would review the settlement.

WINNERS AND LOSERS

Smokers who try to quit would win free help. But those who keep puffing would pay a price - maybe as much as $520 a year.

A possible boon for investors holding tobacco stock could be a bust for convenience store owners who make a quarter of their profits from cigarette sales.

Some potential winners and losers in the $360 billion tobacco deal - though they shouldn't count their money until Congress and the president have their say.

WINNERS

Despite the big payout, tobacco companies reap rewards. They escape the threat of future class-action lawsuits. And their profits are expected to hold steady thanks to higher prices and increasing reliance on foreign markets. Tobacco stocks should rise in value.

Children and future generations will be less tempted to take up a life-threatening habit. No more Joe Camel ads; anti-tobacco campaigns will take their place. Parents can breathe a sigh of relief.

Children who aren't covered by health insurance receive about $25 billion worth of medical care over 25 years thanks to a fund paid for by tobacco companies doing penance.

40 states that filed lawsuits recover billions of dollars from costs of Medicaid bills for sick smokers.

Smokers who want to kick the habit may qualify for free nicotine patches and other help, plus get an extra nudge from public service ads and large labels on cigarette packs warning ``Smoking can kill you.''

Lawyers who brought 17 class-action suits and those representing the states win big fees paid by the tobacco companies.

The Food and Drug Administration takes on new power to regulate nicotine as a drug, maybe even banning it after 2009.

THE LOSERS

Smokers could pay 75 cents to $1 more a pack, or $520 a year for a carton-a-week habit. And that doesn't count higher taxes that Congress is considering separately.

Farmers, mostly in the South, might suffer from dropping tobacco sales, although sales to overseas smokers could make that up.

Convenience stores, which sell half of the cigarettes smoked in the United States, could lose business.

Children overseas get no protection from cigarette promotions by U.S. companies seeking to expand their markets.

People who might sue tobacco companies in the future lose the right to seek punitive damages for past industry wrongdoing; they can only recover actual damages such as medical costs. Their lawyers lose out, too.

Winston Cup racing and other sporting events lose tobacco company money because name-brand sponsorship is banned.

TOO SOON TO SAY

Congress and President Clinton face political risks as they weigh whether to embrace or reject the deal, which will be the subject of intense lobbying. Clinton benefited in the public eye by taking on tobacco companies; that could change if he supports a settlement viewed by some as too lax.

CAPTION(S):

5 Photos, 2 Boxes

Photo: (1--Color) Once a symbol of Hollywood sophistication, product placement of cigarettes would be restricted in movies, TV. See story Business, Page 1.

(2--Color) no caption (Racing car)

(3) Whistle-blower Jeffery Wigand, left, and attorney Scott Motley smile at the tobacco settlement announcement.

Associated Press 

(4) State attorneys general from six states gather in Washington, D.C. to announce a settlement with U.S. tobacco companies Friday.

(5) Tobacco farmer Tommy Beach bends down to cover the roots of a tobacco plant Friday on a field near Carrollton, Ky.

Box: (1--Color) HIGHLIGHTS OF SETTLEMENT

Associated Press

(2) WINNERS AND LOSERS (See Text)