By Saundra Torry and Ceci Connolly
Washington Post Staff Writers
Friday, January 16, 1998; Page A01

The tobacco industry has tentatively agreed to pay a record $14.5 billion to settle a lawsuit filed by the state of Texas, representing the latest in a series of concessions by the beleaguered industry, sources said yesterday.

Lawyers were still finalizing the details of the settlement, but if the agreement is completed and announced today, as many expect, it would mark the fourth time since July that the industry has agreed to settle rather than fight a class-action lawsuit.

Although it was still possible that a last-minute review of the settlement by top state and tobacco officials could derail the deal, Texas Attorney General Dan Morales scheduled a news conference at a downtown Austin hotel for this morning.

Morales was expected to fly to Texarkana, where the case was to have been tried, to brief U.S. District Judge David Folsom on terms of the deal before heading back to Austin to meet with reporters.

Under the terms of the settlement, private lawyers representing the state plan to seek legal fees of nearly $2.2 billion, according to two sources. Negotiations over the size of the lawyers' fees had been one of the major stumbling blocks in the settlement talks. The size of the fees could further erode support for a $368.5 billion national settlement, which Congress must approve, because Republicans already are making legal fees a target in the debate.

The Texas lawsuit was one of 41 filed by state attorneys general seeking billions of dollars to compensate states for the costs of treating sick smokers through Medicaid programs.

The case had been scheduled for trial Monday, but jury selection was delayed because of the settlement talks.

The Texas deal will be the richest civil settlement in history, larger than the $11.3 billion cigarette makers agreed to pay the state of Florida to avoid trial of its Medicaid suit last August. Under the potential agreement, the state would receive an up-front payment of more than $1 billion and the remainder over 25 years. The industry would also fund a multimillion-dollar campaign aimed at stopping underage smoking, according to a source familiar with the talks.

The Texas agreement will reportedly include public health provisions identical to those the industry agreed to in Florida and in a prior settlement with Mississippi. Those combined settlements will cost the industry $14.7 billion.

In a $349 million deal in October, the industry settled a class-action suit filed by flight attendants over secondhand smoke.

Along with a ban on tobacco billboards, provisions of the Texas settlement include elimination of cigarette vending machines from any place accessible to teenagers and the removal of tobacco advertising from sports arenas, buses and trains, according to the Los Angeles Times.

The tobacco industry had specifically said it would not settle the Texas case, which originally was considered weaker than the Florida case. But a series of pretrial rulings strengthened the case, which sought damages for fraud and racketeering along with reimbursement of state Medicaid costs for treating sick smokers.

Private lawyers who worked on the Texas suit were seeking 15 percent of the state's settlement as their fees, based on the contract they signed when they took on the case, according to a legal source.

Word of the tentative settlement came one day after new revelations that R.J. Reynolds Tobacco Co. targeted young people.

Those revelations, contained in 81 internal documents, could make it increasingly difficult for Congress to give the tobacco industry the one thing it wants most -- protection from class-action lawsuits -- lawmakers and lobbyists said yesterday.

Tobacco companies have been pushing for broad legal relief as part of a proposed national settlement that must be approved by Congress. But recent developments cloud those prospects. No single development will turn the tide against the industry, industry supporters and foes said yesterday, but the steady battering is taking its toll.

"Who would be in favor of giving this industry any protections?" said former Food and Drug Administration commissioner David A. Kessler. "There can't be any deal, there can't be any trade after you've seen documents like these," he said, referring to Wednesday's release of the Reynolds documents.

Rep. Henry A. Waxman (D-Calif.) released the papers, which show the firm for decades studied the smoking habits of teenagers and developed strategies for wooing young smokers. Last week, the Justice Department brought its first criminal charges arising from its tobacco investigation and strongly hinted more could follow.

More bad news may loom for the $50 billion-a-year industry. Next Tuesday, one of the strongest cases against the industry is scheduled to go to trial in Minnesota. And House Commerce Committee Chairman Thomas J. Bliley Jr. (R-Va.) has summoned executives from the largest tobacco companies to Capitol Hill for questioning Jan. 29 in a session that could repeat a dramatic 1994 confrontation in which seven executives swore they were not in the business of hooking young smokers.

As tobacco's image worsens, many question why Congress should shield the beleaguered industry from punitive damages and major lawsuits.

Industry spokesman Scott Williams, however, insisted that legal protections are "an essential part" of the deal. "Today was a bad day, but we are going to have bad days. That is part of the whole, big process," he said. The nation's top tobacco firms are so eager for civil liability protections they have offered to pay $368.5 billion and curb youth marketing in exchange.

Proponents of the deal say the Reynolds documents are further evidence of the need to pass a bill quickly. President Clinton yesterday nudged congressional Republicans, saying they should enact comprehensive tobacco control legislation this year.

"The documents that came to light today show more than ever why it is absolutely imperative that Congress take action now to get tobacco companies out of the business of marketing cigarettes to children," he said.

But Clinton has not specificed exactly what he wants in the legislation, a point Republicans seized on yesterday as the two parties positioned themselves for battle.

"Calling for action is not enough," Bliley said. "We have yet to see a legislative proposal from the White House."

The partisan bickering, combined with the complex nature of the settlement, could mean Congress passes a scaled-down version. Several congressional staff members said yesterday that Republican leaders are weighing the value of quickly passing a bill that simply focuses on curbing teenage smoking but does not address the more contentious issues.

Sen. John McCain (R-Ariz.) called Wednesday's documents "pretty damning" and said they complicate the prospects for a comprehensive deal. "If the settlement is placed in jeopardy because of" Wednesday's revelations, "we may have to just go after the issue of teen smoking" in a narrower bill, McCain said. If Congress does not move swiftly, tobacco is certain to become a major election-year issue. Waxman, one of the industry's most ardent foes, threatened yesterday to use the issue against Republicans if they do not enact legislation to protect youngsters.

Senate Majority Leader Trent Lott (R-Miss.), who has recused himself from the debate because his brother-in-law is a prime architect of the settlement, lashed out at what he called Waxman's "personal diatribe."

Democrats "may cynically hope that the tobacco agreement does not become law so they can use its failure as an election-year weapon," he said. "Congressional Republicans will disappoint them."

Senate Minority Leader Thomas A. Daschle (D-S.D.) said the politics of tobacco defy conventional wisdom. There has been a "fairly significant change in perception and attitudes" about the industry, he said. "I think all bets are off."

Staff writers Peter Baker and John Schwartz contributed to this report.