Big Tobacco rolls on

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KEYSVILLE, Va. - Three years ago, Steven Bailey's small tobacco company was growing so fast that he could have retired early. Now, he's fighting for every sale.

On July 1, a new Virginia law will force his company, S&M Brands Inc., to raise prices on its cigarettes. That's on top of a $2-per-carton increase last year, after other states passed similar laws at the urging of large tobacco companies.

"You're kind of fighting the world," said Mr. Bailey, whose family has been in the tobacco business for more than a century.

Few would shed tears for a cigarette maker. But Mr. Bailey's reversing fortunes show how the states' $206 billion settlement with major tobacco companies over smoking-related Medicaid costs is altering the industry.

Critics say the 1998 Master Settlement Agreement has not turned out as expected as big players accused of wrongdoing wound up with market protections while small businesses were forced to pay up.

But few think the deal will vanish soon.

"It's 46 state attorneys general, the 200 or so wealthiest trial lawyers in the world and the six largest tobacco companies against a bunch of very small businesses who are losing money," said Jeremy Bulow, a Stanford University economics professor.

Under the deal, the big cigarette companies agreed to restrict their marketing, fund stop-smoking efforts and make annual payments to the states for 25 years.

But attorneys on both sides knew the large companies would raise cigarette prices to make their payments, so they built in protections to prevent companies outside the agreement from taking too much market share.

They also invited other manufacturers to join the agreement by offering favorable deals. Those who did not join had to pay about $4 per carton into escrow accounts, which would be refunded in 25 years if the states didn't sue them over health-care costs.