National Journal, January 13, 2001

A few days after Christmas, I made my way to an office building in Bethesda, Md., for a visit with Paul L. Perito, the chairman and president of a small company called Star Scientific. Star had only just moved into its new executive suite, so the place still lacked a few amenities, such as furniture. Framed pictures leaned rather than hung on the walls, and Office Movers stickers dotted the doorways. Perito turned out to be a short, loquacious 63-year-old who is not what you might call an ordinary tobacco executive. For one thing, until recently he was a senior litigator at a Washington law firm; for another, he doesn't smoke. None of Star's executives smoke. "It's too dangerous," Perito says, smiling. The company has offered its employees incentives to quit.

Perito hands me two packs of Advance, a new cigarette that Star began test-marketing in October. The front carries a logo of the usual bland, corporate sort, but the back is given over to four warnings, none of which appears on any other brand of cigarette:

* "There is NO such thing as a safe cigarette."

* "Star's processing methods greatly reduce SOME cancer-causing chemicals (nitrosamines) and a special filter reduces SOME toxic gases in cigarette smoke."

* "There is NOT enough available information to know if Star's methods will actually lower your health RISKS."

* "Smoking-related diseases can KILL you. It is much safer for you to QUIT than to switch or smoke."

As Advance's packaging suggests, Star Scientific is possibly the world's most health-conscious cigarette manufacturer. It makes no bones about the hazards of tobacco. Rather, it hopes to enrich its shareholders by reducing those hazards. True, Star currently pays its rent by making four brands of discount cigarettes, but Perito says the company intends to abandon that market as soon as it can afford to devote itself to its prize technology, StarCure.

StarCure is a patented process that Star says virtually eliminates tobacco-specific nitrosamines, or TSNAs, from flue-cured tobacco. Cigarette smoke contains thousands of chemicals, of which something like four dozen are known to be poisonous or cancer-causing, but TSNAs are widely regarded as being among the worst of the lot. Star maintains that its process has little or no effect on the leaf's taste; a smoker who tried Advance for me reported that it tastes like a fairly typical "light" cigarette. Because the standard American blend is predominantly flue-cured, Advance is 70 percent lower in TSNAs than are regular cigarettes. Star also adds a charcoal filter that reduces the levels of various other toxic gases.

Unfortunately for Star, there is no major constituency for less-toxic cigarettes--apart from committed smokers, who happen to be the most despised group in America. The major tobacco companies have no interest in admitting that regular cigarettes are more dangerous than they need to be, and many public health activists think the whole idea of a safer cigarette is a red herring. Moderate activists look with understandable misgivings upon any "safer cigarette" that might provide excuses not to quit (which is why Star emphasizes in its sales pitch that only quitting is safe). The zealots believe that selling any sort of cigarette is immoral. "You could basically eliminate tobacco use in 10 years," Stanton Glantz, a prominent anti-tobacco activist, told U.S. News & World Report in September. "Why screw around with the cigarette?"

(These left-wing tobacco-bashers hardly differ from right-wing opponents of needle exchanges and sex education; American puritanism is ecumenical. Interestingly, British anti-smoking activists are friendlier to safer cigarettes. But then, Europeans generally seem more open to health strategies that stress harm-reduction over abstinence or abolition.)

This all leaves Star with a daunting business challenge. Star's tobacco is more expensive to make than the conventional stuff, and Star's brand is unfamiliar. Advance's only claim on smokers' affections is its reduced levels of key toxins. But Star declines to make any health claims for its product until those claims can be proven, and human trials take years, even decades--if they can be funded in the first place. Star is thus left to bet on the one proposition that most U.S. public health advocates agree is ridiculous: that consumers will make intelligent choices when presented with slightly complicated information.

And so Star eschews conventional advertising. Instead, the in-store displays for Advance feature the slogan--Madison Avenue would wince--"Know What You Smoke." Star tapes onto every package an "onsert" explaining in detail how Advance differs from other cigarettes. It stresses that the product is lower in toxins but may not be less toxic. "This is sort of a pharmaceutical approach" to marketing cigarettes, says Mark S. Greenberg, a Boston psychologist who consults for Star.

With that as its marketing strategy, Star cherishes no illusions about being a giant tobacco company. It hopes, rather, to license its technology to the giant tobacco companies. Stage one is to demonstrate, with Advance, that smokers will accept StarCured leaf; stage two is to induce the majors to adopt it. Here, however, Star faces the most daunting obstacle of all.

In 1998, 46 states' attorneys general, the five leading tobacco companies, a miscellany of health groups, and an assortment of plaintiffs' attorneys made a deal to settle the states' lawsuits against the companies. Under a so-called master settlement agreement, the majors agreed to raise their prices and pay $206 billion in "damages" (really taxes) to the states, over 25 years. Separately, the other four states settled for $40 billion. The states would then spend some (far from all) of their windfall on public health programs, while lawyers took fees that made many of them staggeringly rich. Cigarette prices duly rose by almost 60 percent in the 18 months following the deal, but consumption dropped only slightly. After taking a transitional hit, Big Tobacco is once again a cash cow, its profits rising smartly.

What not many people appreciated until recently was that the deal's biggest beneficiaries, arguably, were none other than the major tobacco companies themselves. They could not raise prices and pass the cost along to the consumer if newcomers were free to enter the market and undersell them. So the states agreed that, as a condition for getting their cash, they would pass laws requiring any upstart tobacco company to pay even more (per pack and after taxes) to the settlement authorities than the majors pay. This despite the fact that new entrants, by definition, were not around to commit the wrongs that the tobacco settlement purported to settle.

The end result was to exclude new entrants and lock in the five leading tobacco companies' 98 percent market share. "The barrier to entry is the secret that protects the nearly quarter of a trillion dollars that's flowing to these states," says Robert A. Levy of the libertarian Cato Institute. "What's involved here is the cartelization of an industry and the sale of an immunity from antitrust laws to the tobacco companies."

That might be fine if the only result were to keep cigarette prices high. But there turns out to be another result: shutting out an innovative and possibly safer cigarette. "It has a direct and crippling effect on our ability to fulfill our mission," Perito says of the tobacco settlement. "This was designed to make it impossible to compete with the major companies." In 1999, Star was required to pay the settlement authorities more than its entire after-tax income from all sources.

To lift this boulder from its chest, Star filed a federal lawsuit in December arguing that the tobacco deal is unconstitutional on a number of grounds. The suit is, by all accounts, a long shot. According to Cato's Levy, federal courts have so far dismissed five out of five legal challenges to the settlement agreement. No court will be eager to cut off a $200 billion cash pipeline beloved by states, Big Tobacco, health advocates, and lawyers.

On the other hand, Star's case is arguably the strongest yet and is certainly the most sympathetic, since earlier plaintiffs were mostly discounters who wanted to make cigarettes cheaper, not safer. Also, there is the black-letter text of the Constitution's so-called compacts clause, which says, "No state shall, without the consent of Congress, ... enter into any agreement or compact with another state." That clause has rarely been invoked, but its plain purpose is to prevent states from joining forces to make de facto national policy behind Congress's back. If the tobacco settlement is not a violation of the compacts clause, it is hard to imagine what would be.

While the courts deliberate, Star Scientific hangs on. The rest of us might contemplate who wins when a few self-dealing interests--contemptuous of "gridlocked" (read: democratic) legislatures and enthralled by dancing dollar signs--repair to back rooms and do the country a favor.