STATE OF MINNESOTA AND BLUE CROSS AND BLUE SHIELD OF MINNESOTA,

PLAINTIFFS,
 

V.
 

PHILIP MORRIS, INC., ET. AL.,

DEFENDANTS.
 
 

TOPIC: TRIAL TRANSCRIPT

TRANSCRIPT OF PROCEEDINGS

DOCKET-NUMBER: C1-94-8565

VENUE: Minnesota District Court, Second Judicial District, Ramsey County.

YEAR: March 16, 1998

A.M. Session
 

JUDGE: Hon. Judge Kenneth J. Fitzpatrick, Chief Judge
 

THE CLERK: All rise. Ramsey County District Court is again in session, the Honorable Kenneth J. Fitzpatrick now presiding.
 

(Jury enters the courtroom.)

THE CLERK: Please be seated.

THE COURT: Good morning.

(Collective "Good morning.")

MR. CIRESI: Your Honor, the plaintiffs will call for adverse examination under Rule 611(c), as we did with the videotape depositions last week, we'll call Roger R. Black, B-l-a- c-k, who was the director of leaf blending at Brown & Williamson.

(Videotape played.)

MR. BERNICK: Your Honor, we have an objection to the questions that begin at page 30, line two, and going on to line 16, on grounds of relevance and Rule 403, they post-date the filing of suit.

MR. CIRESI: Your Honor, I would direct the court's attention to page 2474 of the transcript where this issue was raised by Mr. Bernick in cross- examination of Dr. Robertson with regard to when Y1 was used or not used.

MR. BERNICK: Well Y1 was used prior to the time the plaintiffs filed. Our objection to that doesn't relate to those designations, it relates to these designations which pertain to a different period of time.

MR. CIRESI: Well --

THE COURT: The objection is sustained.
 

(Videotape continued to be played.)

MR. BERNICK: Same objection, Your Honor -- I think Your Honor's ruling would cover this -- beginning at line 13 at page 31 and going up to line three of page 32. Then we have a separate objection that kicks in at that point.

MR. CIRESI: We again point out pages 2472 for the record, and 2474 for Mr. Bernick whose question implied that Y1 was stopped because of consumers didn't like the taste.

MR. BERNICK: Your Honor, I object to that statement by counsel. It relates to an entirely different matter, a different period of time.

MR. CIRESI: It relates to Y1, page 2474, commencing at line 10.

THE COURT: The objection is overruled.

(Videotape continued to be played.)

MR. CIRESI: Your Honor, Exhibits 1 and 2, Deposition Exhibits 1 and 2 have been marked as Trial Exhibits 26074 and 26075. 26074 is Exhibit 1 in the deposition and 26075 is Exhibit 2.

*2 MR. BERNICK: Your Honor, we would object to those exhibits and to the testimony that is offered on page 32, beginning at line eight, and going on through page 34, line one. The same issue will occur later on, but the documents themselves are hearsay and they pertain to further hearsay matters that involve the activities of a governmental agency, and they're
 

objectionable on relevance grounds as well as Rule 403. And we'd be prepared to take that up further at side-bar if the court chooses.

MR. CIRESI: Your Honor, the two articles relate to statements made by the company, admissions by the company in June of 1994, and that's what they're offered for. They're --

The deponent is asked about certain statements, and then it goes on from there.

MR. BERNICK: In point of fact, the articles do not contain - - or the portions that are cited don't actually involve quotations, they involve characterizations of the company's views. And that, in any event, doesn't solve the second layer of hearsay, which is that the articles and matters pertain to governmental agency activities and are therefore hearsay.

THE COURT: Anything further?

MR. CIRESI: I have nothing further, Your Honor.

THE COURT: Okay. Court will receive 26074 and 26075.

(Videotape continued to be played.)

MR. BERNICK: Your Honor, I would object to the question that's asked at page 34, line 11, continuing on to page 35, line five. Once again, this pertains to matters that took place following the discovery cutoff in October of 1994. And counsel's remarks regarding statements made previously in the case concerning the reaction to Y1 are totally inapplicable to this period
 

of time, have nothing to do with the use of Y1 that was being made at this time.

THE COURT: Anything further?

MR. CIRESI: Nothing further than what I've said before, Your Honor.

THE COURT: Okay. I think it's relevant to the use of Y1, and I'll allow it.

(Videotape continued to be played.)

MR. BERNICK: Your Honor, again, the same objection to the testimony that begins at page 37, line 14, and continuing on to page 38, line nine. It is both a relevance objection and it's a foundational objection because the witness has now testified to the lack of his involvement in the decision-making process concerning the continued use of Y1 at the time.

MR. CIRESI: The relevance has been dealt with previously, Your Honor. With regard to the foundation, the testimony shows how Mr. Black became aware of it from another employee.

THE COURT: What was Mr. Kohnhorst's position at that time?

MR. BERNICK: Mr. Kohnhorst was an executive at Brown & Williamson during this period of time. I believe that he was head of R&D.

THE COURT: Okay. All right. The objection is overruled.

(Videotape continued to be played.)

MR. BERNICK: Your Honor, at page 134 -- yeah. It's not worth the effort. Why -- just go ahead with 134.
 

(Videotape continued to be played.)

*3 MR. BERNICK: Page 140, line five, and continuing on through the balance of that page, indeed the same subject matter continues on to page 142, deals with, again, the same government agency activities and a whole series of hearsay conversations involving people who are not parties to this case, as you can see on through the balance of 140. This is hearsay, it's hearsay within hearsay, and it's also subject to Rule 403.

MR. CIRESI: Well Your Honor, DNAP under 802(d)(2), I believe it is, on co- conspirators, with respect to the manipulation of nicotine, this is highly relevant with regard to that area. It also was raised by Mr. Bernick in the cross- examination of Dr. Robertson in the sense that he asked whether or not the Department of Agriculture had any role in the development of Y1.

MR. BERNICK: Well that's an entirely separate matter. Indeed, they've objected to the designations of the U.S. Department of Agriculture.

Also object, Your Honor, to Mr. Ciresi's characterization of what actually happened with the product and its references to nicotine manipulation. That's a fact that's at issue in this case. The jury will reach its own decision on that matter. That has nothing to do with the objection that was made, nothing to do with the particular events that pertain to Y1 in 1994. We had a hearsay objection to this testimony.

MR. CIRESI: Your Honor, I believe it does because of the nature of the
 

objection. I'm not suggesting that's the conclusion that should be drawn. It goes to that issue. It's for the jury to draw the conclusion, not for the lawyers.

THE COURT: Okay. Objection is overruled.

(Videotape continued to be played.)

MR. BERNICK: Excuse me. We have an objection at page 146, line 18, and continuing on through page 147, line 10. It is the same objection as Your Honor previously has ruled upon, but we would have a continuing objection to this line of examination.

THE COURT: All right. The objection is overruled.

(Videotape continued to be played.)

MR. BERNICK: We have an objection, page 156, line 18, going on through page 158, line five, the same objection, grounds of relevance and the post-lawsuit issue.

THE COURT: Overruled.

(Videotape continued to be played.)

MR. CIRESI: Your Honor, exhibit number three in the deposition is Trial Exhibit No. 13188, and that is already admitted, 13188.

(Videotape continued to be played.)

MR. BERNICK: Excuse me, Your Honor, can I have a brief side- bar with the court?
 

(Videotape continued to be played.)

MR. BERNICK: Your Honor, we would object to the testimony that's offered beginning at page 250, line three, extending up to page 251, line 19, under Rule 403 on relevance grounds. This relates to a now repealed seed-transport statute, and its irrelevant to this case.

MR. CIRESI: Well Your Honor, it wasn't irrelevant at the time the actions were undertaken by the defendant. I don't think I should argue it here, but it goes to the overall issues that have been discussed.

*4 THE COURT: Okay. The objection is overruled.

(Videotape continued to be played.)

MR. BERNICK: Your Honor, we have some additional designations that are not on the videotape we'd like to cite to the jury at this point in time. I don't know if you'd like --

If you'd like a side-bar on the subject, I'll address it there. Either way.

THE COURT: Are these the --

Well, why don't we take a short recess, and then maybe just you two could come back and we can just --

MR. BERNICK: Sure.

THE COURT: -- resolve that.

THE CLERK: Court stands in recess.

(Recess taken.)
 

THE CLERK: All rise. Court is again in session.

(Jury enters the courtroom.)

THE CLERK: Please be seated.

MR. BERNICK: May I proceed, Your Honor?

THE COURT: Proceed.

MR. BERNICK: Good morning.

(Collective "Good morning.")

MR. BERNICK: I've got some additional designations to read from the deposition that was played by videotape, the Black deposition, and these are designations that both parties have contributed to reading. So I'm just going to read them now. To my best, I'll give you the questions and answers which are part of this additional designation.

The first designation begins at page 68, line 14.

(Deposition read by Mr. Bernick.)

(Deposition concluded being read by Mr.

Bernick.)

THE COURT: Counsel.

MR. CIRESI: Your Honor, the plaintiffs call Robert J. Dolan.

(Witness sworn.)

THE CLERK: Please state your name and spell your last name.

THE WITNESS: Robert J. Dolan, D-o-l-a-n.
 

THE CLERK: Thank you. Please have a seat.

THE WITNESS: Thank you.

ROBERT J. DOLAN

called as a witness, being first duly

sworn, was examined and testified as

follows:

BY MR. CIRESI:

Q. Good morning, professor.

A. Good morning, Mr. Ciresi.

Q. Sir, you're presently employed by Harvard University at the Graduate School of Business Administration?

A. That's correct. I'm professor at Harvard Business School.

Q. And are you married, sir?

A. I am.

Q. Any children?

A. Yes, I have two children, a daughter Hillary, who's age 20, and a son Nicholas, age 12.

Q. Now professor, you've been asked to consult with the state of Minnesota and Blue Cross and Blue Shield regarding the purposes of the marketing and communication programs of the defendants and the target audience of those programs; correct?
 

A. That's correct, I have been.

Q. And you have consulted in accordance with generally accepted principles of marketing; correct?

A. That's correct.

Q. Professor, I'd like to deal first of all with your educational background and your professional experience.

You obtained your undergraduate degree from Boston College?

A. That's correct, in 1969, and mathematics was my -- was my major field.

*5 Q. Okay. And you then attended graduate school at the University of Rochester?

A. That's correct. I went right from Boston College into a doctoral program at the University of Rochester. I did my first year there. And then I went into the Army for three years, and then I went back and finished up my doctorate at the University of Rochester.

Q. And you then taught at the University of Chicago Graduate School of Business?

A. That's correct. My first academic job which began in 1976 was then assistant -- as an assistant professor of management science in marketing at the Graduate School of Business at the University of Chicago. So I -- there I had a -- a joint appointment, half in marketing science and half -- excuse me, half in management science and half in marketing.
 

Q. Can you describe just generally what the nature of the subjects that you taught while you were at the University of Chicago Graduate School of Business.

A. Well under the management science side of my appointment I taught things like -- basically things like mathematical programs, sort of the applied mathematics and of business. In the marketing area I taught -- taught courses on advertising management, strategic marketing management, product policy.

Q. Okay. And in 1990 -- excuse me, in 1980, you took an appointment as an associate professor of business administration at Harvard?

A. That's correct. I left the University of Chicago, decided to leave Chicago and go back to Boston and join the faculty at Harvard Business School in the marketing area.

Q. And from 1980 until June of 1985, you were an associate professor of business administration in the marketing area?

A. That's correct, uh-huh.

Q. Can you describe, just briefly, give us an overview of the type of courses that you taught during that period of time, professor.

A. Surely.

During that period of time I was teaching basically in the M.B.A. program, so when I first went to the school I started teaching in what we call first- year marketing. It's a fairly long course that all of the first-year students in the M.B.A. program take, and it's really designed to cover all aspects of
 

marketing management with those students. So I did that for three years, and then I taught in the doctoral program for a year, and then I taught a second- year M.B.A. program elective which was called marketing decisions support systems, which is sort of a fancy name for marketing research, a marketing research course. I think that kind of gets us up to the time when I got promoted to full professor.

Q. All right. And then in July of 1985 you became a full professor?

A. That's correct. That's generally right.

Q. Okay. And from July of '85 to July of 1990 you taught in the marketing area, and in July of 1990 you became the Edward W. Carter professor of business administration; is that correct?

A. Right, that's correct. I granted a chair professorship in 1990.

*6 Q. That's an endowed chair at Harvard?

A. It is.

Q. Okay. Can you describe what the nature of your teaching curriculum was in the period July of 1985 through July of 1990, up until the time you became the Edward Carter professor of business administration.

A. Surely.

I basically first continued on with the course that I -- that I mentioned a moment ago, the marketing decisions support systems course, and really evolved that into more of a new product development course than just a market research
 

course. And then the -- the second big activity that we have at Harvard Business School, in addition to the M.B.A. program, is we have a number of executive programs for seasoned managers, so one of the programs that we have is called the advance management program, and that's for people who are sort of aspiring for their next-level appointment to be as a CEO or that kind of level of an organization. The average age of a participant in that program is in their late forties. So after I finished up with my new product development course, I went to teach in the advanced management program, which is a program that we run twice a year for about 11 or 12 weeks, and we have about 120 participants from all over the world in each one of those two offerings of the advanced management program.

In addition, throughout this time I ran our -- and still do run our two- week-long strategic marketing management program, which we run every summer for -- for marketing executives, and again we take about a hundred, 110 people for that two-week time period. And the different thing about that is that it's all people who make their living doing marketing where as the advanced management program is a very broad general management program in which I -- I teach the marketing piece.

Q. Okay. Now from July of 1990 up to the present time, after becoming the Edward W. Carter professor, did your curriculum change, your responsibility with regard to the curriculum?
 

A. Well initially it remained the same, that I -- that I stayed teaching the advanced management program, and then two years ago I decided I would like to go back and teach in the M.B.A. program again, so I went back to the course that I started in at the school in 1980, going back to the first-year marketing course, but this time as the course head where I have -- basically have a faculty team of about six or seven people that I supervise, and -- and we are basically responsible for offering the first-year marketing course to the 800 M.B.A. students who arrive at Harvard Business School.

Q. Okay. Now professor, during the course of your career you've published some books?

A. I have, yes, uh-huh.

Q. Okay. I'd like to just deal with some of them. One is called "Marketing Management," and some co- authors were John Quelch and Thomas Kosnik. Can you describe the nature of -- of that book, please.

A. Surely.

Basically what we -- what we like to try to do is we like to really export our ideas as we've expressed them in the first year of the M.B.A. program at Harvard, we like to try to export them to other schools, so basically this book is a mechanism via which try to do that. We try to capture in this book really the teaching materials, the cases and the notes and so forth that we use, and then other schools adopt -- adopt the book and use it in their own M.B.A.
 

program, or potentially undergraduate programs, but more often than not in another M.B.A. program.

*7 Q. Other books that you have authored or co- authored include sequels, if you will, to that original book, "Marketing Management: Principles, Analysis, and Application" in 1985; correct?

A. Well that was a predecessor --

Q. Predecessor.

A. -- rather than a sequel, right.

Q. And the last one was the '93 version; is that correct?

A. That's correct, uh-huh.

Q. Now you mentioned cases. You've published various cases?

A. Yes. I've written quite a number of cases, uh-huh.

Q. Can you describe what is a case in the context of a teaching tool in business schools.

A. Right. Okay.

A case is basically -- it's the primary way we -- we -- we teach at Harvard Business School. So if you -- if you imagine a typical class that we have with -- with M.B.A. students or executives, it will be the same for either, what we do is we give them a story basically, we present them with a business problem.

And so I'll use an example. I wrote a case a few years ago about a Black &
 

Decker Corporation, and so Black & Decker Corporation had this problem where they were doing great in their power tools business for everyday users like me, but then they were doing terrible with tradesmen, you know, like the home remodeler or roofer or that sort of thing. So -- and then basically I went to Black & Decker and I spent some time with the company, and I wrote about a 15-page description of the situation at Black & Decker, describing the kind of issues that the management faced, reporting in the case what the market research evidence was, and basically we present this -- we try to present the situation that the management faced at the time, we try to present that to the students. So hopefully you can do that in about 15 pages plus a few pictures so the students can read it in a few hours. And then you come into class the next day, after students have read the case, and basically you say, okay, you're Joe Galli, the vice-president of marketing at Black & Decker, what would you do to solve this problem?

So those case studies are -- we -- we generally work with the companies to try to come up with a factual description of the situation as it was taking place at that point in time so that we can have our students assume the position that the manager in the case was facing. So it helps us to -- to really come in with real-life materials into the classroom. And then we use those cases to really look at the cases and then try to go from those individual cases up to the level of more general principles of what is

Page 18 follows ---------------------
 

effective marketing from the individual cases.

Q. When you develop a case, do you use the company's internal documents?

A. We certainly try to. The -- the vast majority of cases that I've written have been with the company's cooperation. So basically we would -- again we can stick with Black & Decker as -- as a typical example. I spoke to the people at the company and I said, "Gee, this is what I would like to do. I've seen what you've done with or DeWalt brand and it must have been a tough decision for you to decide to move away from the Black & Decker brand. Do you think I should -- could possibly come visit you and talk about it?"

*8 So basically what the company does is they give you access to their confidential information to write up the case study. So you interview the managers. You are given a -- like until the Black & Decker case, I was given all their market research, all the internal memoranda, and even to the extent of having -- having revealed to me basically what the strategy was.

Before you can use the case, before it can be published, the company has to agree to it. So we have a thing that we call a green card that in the end you submit the case to them and say, you know, this is what I would like to teach, and -- and sometimes they say, well, you know, we're not really too happy about our competitors knowing what our cost levels are, so could we change those cost levels a little bit? And then we write down at the bottom -- bottom of the case that certain confidential data have been -- have been disguised. But basically
 

it's a cooperative relationship that -- where you get inside the company, you look at their internal documents so you can really understand the problem, and you get a much more in-depth case that way rather than inf -- if you tried to write one from seeing what was in the newspaper or looking at annual reports. I've done -- I've done a couple of those. The one I did on Eastman Kodak Fun Time Film was of that basically library type. But you can't get near the depth and really get to the -- the core of the issues and as deep an understanding, unless you have access to the internal company documents. So that's the way we do it the large majority of the time.

Q. Now when you talk about the Black & Decker case and the DeWalt line of tools, can you describe a little bit what the nature of that problem was?

A. Well the basic --

As I sort of alluded to a minute ago, some of you may be familiar with DeWalt product line and -- and some people don't even know it's from -- from Black & Decker, but basically the -- what was happening in that situation was Black & Decker really owned the power-tool business among, you know, the kind of everyday person like myself who every time I pick up a -- if I pick up an electric knife, that my family starts to pray that I won't hurt myself. So for the sort of incompetents of the world, Black & Decker really owned that segment of the market, they had like 50 percent market share, but as you went up one level kind of in performance to this tradesperson who really makes their living
 

with their tools, this tradesperson was looking at Black & Decker and saying, "Well, gee, that's a household brand, that's not good enough for me." And it was that segment of the market -- Makita was the number one brand in that segment of the market. In fact Makita had, I think it was on the order of a -- something like a 50 percent market share and Black & Decker had a 10 percent market share with those -- with those tradesmen. So the issue for Black & Decker was --

And Black & Decker's product really kind of worked okay, but it was this image that this was a household brand, that that's really what -- Black & Decker was good for the household and really couldn't stand up to the demands of a professional, you know, 10- hours-a-day working use kind of situation. That was what created their -- their market-share problems in that tradesman segment of the market.

*9 So then the question that we came to in the case was, well, how is Black & Decker going to fix this, and in particular, should they move away from the Black & Decker brand name even though it was one of the most well-known brand names in the -- in the -- in the country? So that's sort of the controversy that you build a case discussion around.

Some students say, boy, they have to get rid of Black & Decker because the tradesmen don't like it, and other people say, boy, they spent so much developing that brand equity, they really have -- they really have to stick
 

with it. So that's how we set it up, is should they move from Black & Decker to DeWalt.

And then the end of the story as it kind of rolls out, basically what Black & Decker does is with the DeWalt program, puts together a complete, total marketing and communications package that, at the time they institute it, they have about 30 million dollars' worth of sales with these tradesmen, two years later they have 300 million dollars' worth of sales and they have passed Makita in terms of market share within that segment of the market.

So it's really quite a phenomenal story in the sense that they were losing some to Makita, like 50 percent market share points to 10, and then two years later they had completely flipped that around by this introduction of a new total marketing and communications program.

Q. Okay. Now doctor, with regard to the cases that you have written, are those placed for sale so that other institutions and businesses can use them?

A. Right. As I was sort of mentioning a moment ago, with respect to the marketing management book, we like to have our kind of -- our ideas and our -- our ideas about how you -- how one should teach, we like to spread those as far around the world as we can. So the material, while we develop it primarily for our in- house use first, and we always try it out a couple times in- house before we will make it available for adoption by other institutions, but generally as long as the company agrees, the company has to agree that we can
 

distribute it elsewhere, we -- to the extent we can, we make it available for -- for as wide distribution as possible.

Q. And how many of your cases have been purchased, sir?

A. Well my cases and -- and notes, the two -- the two of them together -- a note would be something that you would write to kind of go along with a case, if you wrote a case like on survey research methodologies, might be a 10-page note that would go along with the case. In the last decade or so, my -- my materials have been distributed, I've had 600,000 copies of my materials distributed.

Q. And when you talk about notes, those also deal with marketing research; is that correct?

A. That would be one of the topics that my notes deal with, yes.

Q. And you published a number of notes; correct, sir?

A. Yes, I have. Market research, pricing, developing a marketing plan, marketing strategy, so forth, a wide variety of notes.

*10 Q. And have you also during the course of your career published in peer-reviewed journals?

A. I have, yes.

Q. And have those articles included marketing and pricing information?

A. Yes, they have, uh-huh.

Q. And if I could just name some of them, one of them is "Marketing
 

Turnarounds" published in the European Management Journal, September of 1995?

A. Right. That would not be --

The European Management Journal was really sort of an invited paper rather than a -- rather than a peer-reviewed one. That's a paper that I wrote about really BMW., if you go back and look at BMWabout mid-19 -- well late 1980s, I guess, if you remember when BMW, the sort of the yuppy image was -- was not -- which is what they had -- was not sort of the in thing any more. Black & -- BMW's sales had gone down tremendously in the United States from like 95,000 to 65,000 cars, and this was basically the story of how they -- how they built it back up.

Q. Okay. Another journal article that you published is "An Assessment of the Contribution of Log-Linear Models to Marketing Research," Journal of Marketing, spring of 1981?

A. Correct. That would be a peer-reviewed journal, correct.

Q. And what was the nature of that paper, sir?

A. It's basically looking at statistical methodologies to see if one method or another was -- was better at forecasting response rates. Consumers' responses.

Q. And what do you mean by that?

A. Well whether consumers decided to buy a product or not.

Q. Okay. Another peer-reviewed article is the "Models of Competition: A
 

Review of Theory and Empirical Evidence," which was published in the Review of Marketing in 1981.

A. That's correct.

Q. What was the subject matter of that peer- reviewed article?

A. Well, basically I trying to look at the notion of how do firms compete with one another and in what kind of situations would you expect strong competitive reactions and which ones would you expect kind of weaker competitive reactions, so that you could carry out your own marketing program without worrying too much about what your competitors were going to do.

Q. Okay. And another peer-reviewed journal article was "Marketing Segmentation via Alternative Discriminant Procedures," and that was published in Marketing, the Challenge and Opportunities, August 1975?

A. That's correct.

Q. Can you describe just briefly what that was about, sir.

A. Well it was -- that --

Kind of go -- going back that far we're into my more mathematical days, so that was the -- that was really looking at the -- again kind of looking at using different kind of mathematical procedures, whether one gave you better forecasting ability than another.

Q. All right. And you've also served as an editor and a member of editorial positions?
 

A. Yes, I have. I've had a number of those.

Q. You've been the editor of Field Studies Section, Marketing Science?

*11 A. That's correct, I was.

Q. And you've been a member of the Editorial Review Board of the Journal of Marketing and Marketing Science?

A. That's correct.

Q. And you've also been a member of the Marketing Science Institute Advisory Council from 1986 to '89?

A. That's correct.

Q. And also the Harvard Business School Press Publications Review Board.

A. Right, that's correct.

Q. Now do you also consult with private industry, sir?

A. I do. I do.

Q. Can you describe some of the consulting that you have done during the course of your career?

A. Okay. I can just touch on a few of the more recent ones.

I guess recently I -- I joined the board of directors of Knoll, which is an office furniture company, Steel Cases is probably is the most well-known of our competitors, but we're in that sort of office furniture business, about an 800- million- dollar-in-sales business. I started working with Knoll about three or four years ago when I was looking at their product-line strategies and -- and
 

also their sales force organization and sales force compensation issues. So when the company went public earlier this -- well I guess it's last year now, in 1997, the CEO whom I had worked with at that time asked me if I would join as the -- join the board of directors.

I have also had a number of consulting assignments with, for example, Frito Lay, you know, the people who make Dorito's and Lay's Potato Chips and that kind of things, division of Pepsi, looking at how to figure out sort of what the demand was going to be at a particular convenience store because -- you know, perhaps you've seen the Lay's trucks sort of -- Frito Lay trucks parked outside a convenience store, and the way it works now is the -- the route person sort of gets out of the truck, runs into the store, sees what is gone since the last time he your she was there, they run out to the truck again, they pick the stuff off the truck and they go back in and sort of fill in. What was going --

Well, if you could predict what that person was going to see when they got there so that the night before, in the middle of the night there was somebody else who was kind of picking that order, so when the route person drove up to the convenience store, all they had to do was go get this order and come pretty close to filling it in exactly the way that it was, you know, that would be a tremendous timesavings. So I worked with them on their forecasting methodologies for that.
 

I worked with a company called Cognizant, which is a company that owns A. C. Nielsen, which is the Nielsen television ratings service people, so basically collecting -- you know, they collect the data on who's watching what television shows and that sort of thing, and -- and they sell it to advertisers and to the network TV stations and the cable TV stations, and they also sell it to advertising agencies. So I've worked with them on developing their product lines and also thinking about how you price their product lines.

*12 I've worked with Coca-Cola looking at their marketing systems in the United States. And over the -- the course of my career I've had an opportunity to work with a wide variety of firms in sort of consulting and -- and executive education activities together where I'll go in and -- and do an assessment of where their people are with respect to their marketing knowledge, and I'll work with them on a consulting basis in the short-term, but really try to develop the skills in-house so that they -- they don't need consultants and can basically do it themselves. So I've worked with lots of people, IBM, Citibank, 3M, lots of different companies in that particular venue.

Q. Now at the present time you're still teaching?

A. I -- I am, yeah.

Q. Okay. And you're still consulting with the private enterprises.

A. Yes. Oh, yes, I am.

Q. Now professor, during the course of your consulting on this case, have
 

you reviewed the defendants' documents?

A. I have, yes.

Q. Do you know approximately how many documents you have reviewed?

A. Well I wasn't counting, but it's boxes and boxes. Thousands.

Q. Okay. Was any restriction put on whether you would have access to the documents or not?

A. No, I had no restrictions at all put on me.

Q. Okay. Were you able to discuss the documents with your colleagues at Harvard?

A. No, I was not, because I had to sign a confidentiality agreement at the request of the defendants -- or at the insistence of the defendants.

Q. Now doctor, we've -- the jury and the court has seen over the past six weeks a number of documents, some of which we'll be discussing with you today, they've seen them from the vantage point of physicians, chemical engineers, some of the employees of the companies themselves. And I want to put in perspective what -- what you're here to do, sir.

Will you be talking about these documents from the standpoint of the total marketing and communications programs of the defendants?

A. That's right. That -- that would be the perspective that I'd be taking, really looking at it from -- from the marketing perspective or the marketing point of view, looking at the total marketing and communications packages that
 

they've put together and the target markets for those -- for those marketing efforts.

Q. And are you here to give your opinion on the target customers of the defendants as indicated by the total marketing and communication programs of the defendants?

A. I am.

Q. And are you here to give your opinion as to whether or not the total marketing and communication programs, how they represented low tar/nicotine as health reassurance products?

A. Yes, I'm here to offer an opinion on that.

Q. And are you also here to offer an opinion as to whether the defendants' total marketing and communication programs failed to disclose the addictive nature of nicotine?

A. Yes, I'm here to offer a judgment on that, yes.

*13 Q. Before we get into your opinions themselves and the documents, professor, could you describe for the jury and the court exactly what marketing is. What is a total marketing and communications program?

And we have an illustrative Exhibit 30225, if you could step down, with the court's permission, and describe what marketing is before we get into the documents.

A. Sure, that would be great.
 

MR. CIRESI: With the court's permission.

THE COURT: Go ahead.

MR. CIRESI: Your Honor, for illustrative purposes, we would offer Exhibit 30225.

MR. BLEAKLEY: No objection.

THE COURT: Court will receive 30225.

A. Okay. Well marketing -- just a little preview here.

The way I think about it, marketing really has -- has three -- threes phases to it, and I'll go through each one of the three. But just by -- just so we can kind of follow -- follow on, the first phase is really selecting a target market group that you're going to try to direct your marketing efforts to in developing the understanding of that group. The second phase is having developed an idea of whom it is you're going to try to target and how they feel about things. You then put together this total marketing and communications package, the purpose of which is to create in the mind of those consumers the perception of value for your product.

So, you know, an easy way to think about what marketing does is to just keep in mind that basically marketing is trying to create perceived value in the minds of your target customers. Now in that second phase, along with creating a perception of value, having created the perception of value, I set a price on my product. All right. So I create value and I get some value back
 

from the customers via the price that I charge them. So that's the second phase, is to come up with this total communications -- total marketing/communications program to develop that value and then develop a price in concert with that.

And then the third phase is really to say, okay, that's nice that I did that at one point in time, that I created the perception of value in your mind, but I want to sustain that over time. I want to be able to maintain that. I don't want to just have a transaction with you one time and then have you disappear, I'd really would like to have a relationship with you so I retain you as a customer, because I would like to sustain my ability to have that perception of value in your mind.

So those are -- those are the three phases, and -- and -- that I'm going -- that I'm going to go through here. But let me just go back and pick up on the first one, which is this notion of the target customer for your -- for your total marketing and communications program.

Now let me, in terms -- in terms of sort of illustrating this, let me ask you to imagine that you've just gotten a new job, and I don't know whether you think this is a great new job or not, but let me just kind of imagine -- ask you to imagine that you've just gotten the job as the vice-president of marketing for the Minnesota Twins, and you've gone out there and they said to you -- you said to them, "Okay, what am I supposed to do?" And they say to

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you, "You're supposed to sell tickets." All right. It's not hard. You're supposed to sell tickets.

*14 So then you think about well, okay, I'm supposed to sell tickets. How am I going to do that? You might jump from I have to sell tickets to say, well, I better go take out an ad or something like that; right? But you're really much better off that before you do that you come back and you say to yourself, gee, what are the groups out there or what are the target segments that I might like to go after? And let me think about that first. So you might first say, well gee, one possible segment that I could go after would be to say, look, I'll go after corporate business. I'll try to get more corporate people to buy season tickets. So I'll go out to General Mills, I'll go out to 3M, I'll go over here to Ecolab, and I'll go and see those people and I'll try to get them to buy more season tickets. That would be one way to sell tickets.

A second target market, you may say, well I'll go after the youth group. Right? I'll go for the Boy Scouts, the Girl Scouts, the Little League Team, the church organizations, and what I'll do is that will really be the way that I will try to sell my tickets.

A third thing you might say is, well, I kind of noticed the last couple times I've been to the Twins games there haven't been any families there. It really is a good economical evening for a family out, so I'll really after the family market.
 

So those would be three different groups that you might decide to -- to go after. And I think it's kind of intuitive that depending upon which one or which set of ones, you'd do different things; right? I mean you'd say different things to the people at General Mills if you're trying to sell them a season ticket than if you went and were trying to go to a church group and get them to take the 60 kids who are part of the church group to the game. Okay.

So those are the three things you've got in mind that you would like to do. And then you might be out to your office and on your first day in your office you look at the mail that's there. All right. And you open up the mail and the first thing that's in the mail is "Dear vice-president of marketing: I've been a Twins season ticket holder for 15 years. However, in light of everything that's going on with the team, I've decided to give up my season ticket." So then it sort of hits you that well, gee, there's a fourth group of people that I ought to be worried about here; that is, my current customers, that I'd like to keep them current customers.

So we've got four different groups, then, that might require different kinds of marketing efforts, and each one of which you would like to understand a little bit about what their motivations are and how you could -- how you could address those particular needs. So it's not the case that we always say, okay, you just got to pick one group, but you might -- you probably would like to prioritize them, and also what's really critical is that we
 

understand that we'd be doing different things for different people. Okay? So that's part one, developing a specification of whom our target marketing, and really specifying it in a -- perhaps doing some market research to figure out what their motivations and behaviors might be.

*15 Q. So the first step in a total marketing/ communications program is to identify your target market; is that --

A. Right. Right. It is. It is. And then sort of prioritize the ones you'd like -- like to be going after.

Q. And your target market may be made up of different segments. Is that what you're suggesting?

A. Right. There could be multiple -- there could be multiple segments that you decide to go after, and each one of those segments, you know, might need little customizations of your overall marketing approach. There would be certain elements of your total marketing and communications program that would impact all of the segments, but there are other things you would like -- like to customize. For example, if you've decided to go after the corporate accounts, you want to try to sell it to General Mills, what you'd probably like to do is have a meeting with the vice-president of marketing at General Mills or the vice- president of human resources or something along those lines.

Q. Once you've identified, then, your target customers, what's the next step in devising and putting together a total marketing and communications
 

plan?

A. Okay. So we've got our target market segment, which I had mentioned a minute ago as phase one. Phase two we kind of say, okay, how are we going to create value for our target customers? Well the first thing as I've designated here is product design. Okay? So you say all right, I've got to come up with a product. Now if we're sticking with the Twins for a minute, you know, this may seem kind of silly. You know, you say well what's the product? Well, you know, it's a baseball game. Nine innings, three outs, you get up, we get up, you know, stand up in the seventh inning and all that kind of thing. What do you mean product design?

But if you think about it for a little bit, you know, maybe there are things we can do to the product that we've got that will make it more appealing to our target market segment. So we're going to the youth group. We're going to a -- to a particular church organization. What is it that we want to sell them? Maybe we don't want to sell them a baseball game, maybe what we want to do is sell them a picnic down the right-field line for the hour before the game at which Kirby Puckett comes and has his picture taken and signs autographs. So the product becomes the picnic plus the game because that's really what my target market, what this youth group is really going to get excited about.

When I take my son to a -- to a Red Sox game, our day is kind of made with whether or not he gets a foul ball during batting practice. Doesn't have
 

anything to do with whether the Red Sox win or lose, this little inning thing that goes on -- goes on after. So you really want to think about, gee, how do I design the -- the product so that it delivers value to my chosen target customer group?

Now in the -- in the tobacco industry, as you know, this product design issue is kind of a big deal. You know, you start talking about how long a cigarette is going to be, how much tar, how much nicotine, what the specific blend is going to be. So sometimes people run past the product-design issue and really don't think deeply enough about it, but the first part of the -- of delivering this value proposition is really to come up with the right target -- with the right definition of the product for your particular target group. So this idea of product design is -- is -- is really critical.

*16 Q. And professor, you have two other segments there outside of the target customer, --

A. Right.

Q. -- advertising and promotion.

A. Right.

Q. Are they different and distinct?

A. Those -- those are different and -- and distinct, but they're -- they're part of the overall -- of an overall communications strategy that --

Okay. I mean if we go back for a second, I've got my customer, my target
 

customer and I've got my product. You know, what happens -- what happens next? Well, you know, if you -- if you have ever seen the movie Field of Dreams, that Kevin Costner movie where, you know, the voice says to Kevin Costner, "If you build it, he will come." There's a lot of companies that kind of think the same way about their products, that, well, if we've got a great product, our customers will find us. Right? And those companies tend to have some problems. Right? But really what we have to do is we have to say, look, I've got this customer, I've got this product that's of value to them, the next thing I've got to do is I've got to tell them about it. I've got to communicate this value to them. Now there are lots of ways that I can do that.

Probably the most well-known to -- to us and just our everyday experience is in advertising. So advertising is one way that the manufacturers, the marketers of products communicate with us. And so, you know, I don't think I have to go into what that's all about. We're all exposed to it in magazines, newspapers, and so forth every day. But one important aspect of advertising is that it is the communication vehicle which is almost totally -- which is -- which is totally under the control of the manufacturer. All right?

So in the tobacco industry, for example, Sports Illustrated Swim Suit Issue comes out a couple weeks ago. Philip Morris decides they want the Marlboro ad on -- there's a -- there's a -- on the inside cover there is a Tommy Hilfinger ad -- Philip Morris decide they want a Marlboro ad on two page,
 

on the next two pages that folds out this particular way. They can do that, all right? They go and they pay whatever it takes. They're totally in control of what the -- how big the advertising is, the color of the copy and so forth.

R. J. Reynolds decides that in this swim suit issue, what they would like is an ad featuring a model in a swim suit with a Camel tattoo or a Camel sand sort of left in the shape of -- sand left in the shape of a Camel on the top of her shoulder, so she's in a swim suit that looked very much like she's part of the overall copy of -- of the magazine.

Kool -- Brown & Williamson decides they want Kool in this magazine. They go -- basically they're in control, you buy it, you pay for it, you get it in. So that's -- so that's the story with advertising, an element of the communications mix which is totally under the control of the manufacturer.

Now the other one that I've put in here on this -- on this inner ring is -- is promotion, and what a promotion is is sort of something that usually involves -- it's something -- it's something that's a little special. For example, if you -- put you back in your job as the vice-president of marketing for the Twins, one of the things you may decide to do is you'll do a bat day or a helmet day; you know, the first 15,000 kids there under the age of 12 get a helmet, and then you hope they wear this Minnesota Twins helmet all over their neighborhood and tell everybody what a great time they had at the Twins game and they ought to go the next helmet day themselves. So promotions
 

which we see -- generally there's been -- generally in marketing there's been a lot of movement of dollars, communication dollars from advertising into promotion, and I think you've seen this in the -- in -- well certainly it has been the case in the tobacco industry, and I think maybe you've -- you've had that mentioned to you already. But a promotion is basically these things like -- like bat day or a -- you saw one the other day with Professor Perry, you may recall, when she showed you the 25 dollars off on Ticketmaster tickets if you send in so many Joe Camel coupons. You know, that's -- that's a promotion. And any of these kind of things with a dollar-off coupon that's sent to you in the mail or a buy three packs, get two free, all of those kind of things are -- are promotional activities.

*17 So those are two of the major communication vehicles that I kind of put on the inside of this -- inside of this circle here, suggesting that those are the ones that more or less immediately pop to mind when we think about how we communicate with our target customers.

Q. Now professor, we've talked about, I guess, the second circle there, the first is the target customer, and we've had promotion, advertising and product design. As we move to the outer ring, can you describe how each one of those components, and let's start with public relations, --

A. Okay.

Q. -- fits within an integrated total marketing and communications program.
 

A. Okay. So -- so we've covered two pieces of communications, advertising and proposal on the grounds. And the next one is public relations. All right? So this is the efforts that you undertake to have public statements made about your product. So, for example, in your job with the Twins, obviously you talk to sports writers for the local newspapers and try to get them to include in their articles, well, the Twins are having helmet day next week, or they're having this kind of promotion, having a special family-night promotion, whole family can go for fifty dollars and you get hot dogs and hamburgers and so on and so forth.

So public relations -- and public relations can be critical. I mean if you think about a -- an automobile manufacturer, when they're bringing out a new car, what do they really worry about? Well they're obviously worried about advertising and promotion, but they're worried a lot about, you know, what's that guy in Motor Trend Magazine going to say? What's that -- I don't know if you have a car writer for the local newspapers, but at the Boston Globe we have a guy that every Sunday he sort of makes or breaks some car locally by writing a full front-page- of-the-automobile -- automotive-section review of that car. So public relations can be critical. So these are the attempts by the firm to influence really what other people are saying about -- about their product.

So, for example, in the tobacco industry you see a wide range of public- relations tools being used. The Tobacco Institute, for example, issues
 

a number of press releases which -- which would influence newspapers to write articles in a particular way or another, they offer spokespersons to be available to discuss news articles, they place spokespeople on TV shows. You know, we've seen tobacco industry representatives on shows like Nightline, 20/20, Face the Nation, Larry King Live and -- and -- and so forth. And they publish pamphlets and -- and even to the level of writing to people who have written in to the company with some kind of concern.

So the important thing is you want to get all of these elements, the advertising, the promotion, and the public relations, kind of all working -- all working together. So you want to make sure you've got a consistency between all of these elements, these first three elements we've talked about in the communications program.

*18 Q. And another segment of the outer-lying circle there is product line strategy, and can you describe what that is?

A. Yeah. Let me come -- if I can just -- let me come to that one in a minute. I think it would be better if I do the --

Q. Sponsorship.

A. -- sponsorship --

Q. All right.

A. -- one, if that's okay, just to kind of go along with the train of thought that I had in my head anyway.
 

Sponsorship -- you know, so we're talking about the total communications package. So we've got advertising, promotion, and public relations. Sponsorship is obviously another way which you can communicate with your target customers. You know in the -- in the tobacco industry, I guess the most ones we probably would be most familiar with would be like a Virginia Slims Tennis Tournament or perhaps the Winston sponsoring of NASCAR races. So these sponsorships can be, you know, can be an important way of -- of getting across your advertising message. I mean if you -- you're -- not your advertising message, but your communication message. I mean if you just flip on the TV, any -- any college sporting event these days, what are you likely to see? You know, you're virtually guaranteed that one team or the other or probably both is going to have a little Swoosh on their Jersey somewhere, right, because Nike has sponsored their football program or their basketball program. And it's just a way where it's not -- you know, we see advertisements, they come on there every -- every five or six minutes or so, but the sponsorships that Nike has undertaken just gets that Nike Swoosh, a very familiar symbol, kind of in -- in our -- in our face virtually for, you know, the entire time we're watching the basketball or the football game. So sponsorships are another part of the overall -- of the overall communications mix.

And you know, any one of these things you kind of look at and say, well, gee, can that be that big a deal? You know, can the fact that Nike has got the
 

Swoosh on -- on these football players' jerseys, is that big -- that in and of itself that big a deal? And in and -- in and of itself it may not be, but that -- but that's, you know, not the way to look at it. The way to look at it is in concert with all of these other things, that how do all of these things add up into a total package, total communications package?

The fifth element of the communications strategy is really the packaging; that is, what -- what do you see when you -- when you actually see the product? You know, if you think about something like Godiva Chocolates. All right? Well what's -- what's -- what's with that? I mean there's some chocolates inside, but that gold box is -- is fantastic; right?

And Black & Decker, one of the things when -- when they -- which they felt was absolutely critical in driving sales for DeWalt is they did research that showed that if these trades -- these tradespeople, if you -- if they went to a store, if they went to a Home Depot or something like that and there was a box there that had a very bright, colorful picture of the product and somebody outside looking up at some trees, that that had a very negative impact on their target customer, so they said we're going to design our packaging to have a very strong industrial look. It's going to be yellow and all it's going to say on the outside is stuff -- I haven't got a clue what it means -- is this wattage and amps and all this other stuff, because our package should present to that tradesman that, hey look, we're the brand for you. You know, let -- let
 

those incompetents go buy something else. But this packaging is really critical.

*19 So, you know, the phrase that we use in marketing now is always "integrated communications campaign," because marketing really gets its power out of a -- when you have this total marketing/ communications campaign in which these elements, the advertising and the promotion, which you very directly control, the public relations where you don't pay for it directly like you do an ad in Sports Illustrated but you invest a lot in the -- in development of doing it right, the sponsorships and the packaging, when you bring all those elements together so that you really got them working together rather than contradicting one another in their messages and really coming across and presenting this very clear image, and that's when you really create the value of your product, the perception of value in -- in the mind of your customer.

So those are sort of the five elements of a -- you know, that we typically think of an as composing the communications part of marketing.

Q. Now you also have product line strategy, distribution, and pricing. Can you describe each one of those elements.

A. Right. I -- I can. So -- so we've got --

Just to go back, right, we got -- we got a customer, we got a product and we communicate to that customer about -- about our product. What's next? Well
 

what's next is to make that product easily available to them. Right? They should be able to go get it somewhere that is not a big chore. So we've created a perception of value and they say, yeah, I want this thing. Where -- where is it? So distribution is a key element of our overall marketing and -- and communications strategy.

Now distribution, there are a couple things that -- that -- that I think are important about it. One is that, you know, although intuitively it may seem I'd like to be distributed everywhere, you know, I'd like to be every place, that's not true generally. For -- for Black & Decker with DeWalt, they are trying to say to this tradesman, hey, DeWalt is the brand for you. So what happens if this tradesman happens to go off to a K-Mart one day to buy a basketball for their kids and they see DeWalt? They say, whoa, I don't buy my -- the tools I make my living with at K-Mart or Wal-Mart or BJ's Wholesale Club or, you know, whatever kind of membership clubs you have around this part of the world. Black & Decker specifically decides we are not putting DeWalt into mass- merchant channels. It is going into the Home Depots, the Home Quarters, the upscale hardware stores, because we want our distribution to reinforce the product positioning and the value that we've created for our other things.

So distribution, even though we think of like a Home Depot or a K- Mart or something like that, it's independent of the manufacturer. The
 

manufacturer has a lot of control over -- over -- over the distribution that they have. Okay?

So with this control, there are really two key things you got to think about with distribution. Number one is -- is really to explicitly ask yourself this question: Well how intensely do I want my product distributed? Do I want it everywhere? And, you know, I think that firms like the tobacco companies and soft drink manufacturers and so forth basically have said, well, we'd like our products pretty widely distributed, you know drug stores, gas stations, convenience stores, vending machines, we want it out there so people can really get it very easily. So one part of the distribution is how do you get into the stores that you want, but a second part of distribution is to say, well, okay, I'm in a store, a particular store carries my product, but obviously there's different -- different levels of being carried. Right? You could be Dr. Scholl's in -- Dr. Scholl's' inner soles, you know, and where are you carried? Well you're over in aisle 27 about angle high with about this much shelf space. Right? So what manufacturers want to do is they want to influence how their products are displayed at the outlets that they're in.

*20 So Professor Perry the other day showed you some photographs, I believe, of -- of stores and what they look like and how the cigarettes are -- are displayed in those -- in those stores. So the manufacturers put in place programs to induce those retailers to show the products in the way that they
 

do. All right. I mean ultimately it's the retailer's decision, that person is an independent entity, but if somebody comes along and says, look, if you put this counter display here, you'll get 10 percent off off the invoice price of everything I'm shipping you, or I will pay you so many dollars if you will give me this amount of shelf space. That's what's going on now in -- in -- in marketing generally, that people are paying to get this shelf space with off- invoices and so on and so forth.

So it's ultimately the retailer's decision, but there are lots of programs that you can put in place to influence the -- the retailer in exactly how -- how they display your brands. So we worry about how many places we're distributed, but also the quality we've got. Are we at ankle length with -- ankle height with about this much shelf space, or do we have a huge sign sort of almost knocking people over as they walk in -- walk in the front door? And then we have shelf space, you know, along many linear feet behind -- behind the sales clerk.

So -- so that's sort of all the stuff. The product, the communication, and the distribution, all that creates the value, the perception of value in line with the -- in the customer's mind. And then the pricing is basically the way that you, having created that value, you know, you have to pay for this stuff. Right? You have to -- you've got a product development organization, you've got to pay Sports Illustrated, you've got whatever deal you cut with Ticketmaster,
 

you have to pay to the people who work in your public relations organizations, you have to pay the people on the tennis tournament, you have to pay to develop the packaging, all of that costs money. So this is the way you generate revenues to pay for all that stuff and generate -- and -- and then generate some profits for yourself that will help with sustaining this process over time.

Q. The product line strategy, what -- what -- what does that relate to?

A. Well product line strategy really relates to, if you -- if you remember phase three of when I started out talking about marketing, phase three is really about how do you -- how do you sustain this process over -- over time? That I've created a value in your mind, a perception of value, but I want that to continue, I want that to continue over -- over time, so product line strategy is a way that -- it helps me to have the product that will help keep you in a relationship with me. And it's kind of interesting what happened with -- with the length of product lines over time.

You know, I think, you know, as I mentioned a moment ago, I have a -- I have a 12-year-old son and I think about what it's like for him versus what it was like for me when I was 12. You know, when -- when I was this high, I said to my mother and father, "Gee, I'd like a Coke." You know, what do they say? Well, you know, they usually said, "Have some juice." But if I happened to hit them on a good day, when I said "I would like a Coke," no further discussion
 

was needed. Right? My mother would go to the refrigerator, she would reach in and pick out this six-and-a-half- ounce, green, wavy bottle of Coke and open it up and give it to me, and that's the end of it.

*21 But now what's happened with the Coke product line? I mean my kid says to me, "Dad, can I have a Coke?" First thing I do is I imitate my parents and then I cave in, and basically I then have to say to him, "Okay, Nicky, you want a Coke. Did you want regular Coke, Diet Coke, caffeine-free Coke, caffeine free Diet Coke, Cherry Coke?" So there's been very broad product- line proliferation here, very broad movement of the product lines over time.

But you see the same thing going on in the tobacco industry. Right? I mean in the beginning there was Marlboro. Right? Then there's Marlboro menthol, then Marlboro Lights and Marlboro Mediums and Marlboro -- I think it's Ultras is the one I saw the other day when I went past a convenience store. So basically what's happening is that we have a proliferation of the product lines over time to help the manufacturers maintain this relationship with their customers so that we don't just do a transaction, but in fact I sort of start -- use this transaction to create a relationship with you, so I sustain this -- sustain this process all over time.

So, you know, really the keys to this, I think, in terms of marketing, are -- are -- really the way I think about it are, you know, just a couple
 

things, that the key is really the integration of all these elements into the marketing mix to get all of them kind of working together. And I teach the Black & Decker case in the third and fourth sessions of the first-year marketing course because it's the best example I know of how you pull those things together. But -- and -- and secondly, when you pull those things together, they can have phenomenal power. As I mentioned a moment -- a few moments ago, this marketing program, total marketing communications program took a 30-million-dollar business that was losing money and turned it into a 300-million- dollar business. Right?

So that's the kind of situation in which it's most intuitively appealing, I think, that marketing has a lot of power, but I mean that isn't the only situation in which your total marketing and communications program is having a lot of power.

Just let me just finish up by saying, you know, let me take you back working where we started out, working for the Minnesota Twins. And let's suppose that, you know, you kind of run around and you go out to the folks at General Mills, you have a great meeting, you sell them a bunch of season tickets. You know they wouldn't have bought those season tickets if you hadn't gone there. You get together a group of people, you go to all these youth groups, you have tons of youth groups coming in, you know they never would have gone there without you -- you going to see them. So you know your
 

marketing -- your marketing activities are selling products that would otherwise not be sold. But then things happen. Right? The folks in North Carolina announce that, you know, we just built this new stadium and anybody who's got a major league team that begins with T can move into it for free. Or, you know, the Twins don't do so hot out on the field, you know, maybe overall sales don't go up. But you know in your heart of hearts what your marketing effort did: it sold tickets. And so even though maybe the Twins' seat total sales for the season went down from one year to the next, it doesn't mean, you know, marketing efforts didn't have a lot of impact. Because you got to look at all this marketing within the context of what's going on in the overall information environment.

*22 MR. CIRESI: Judge, that might be a good time to break for lunch.

THE COURT: We'll recess for lunch, reconvene at 2:00 o'clock.

THE CLERK: Court stands in recess, to reconvene at 2:00 o'clock.

(Recess taken.)
 

*1 TITLE: STATE OF MINNESOTA AND BLUE CROSS AND BLUE SHIELD OF MINNESOTA, PLAINTIFFS, V. PHILIP MORRIS, INC., ET. AL., DEFENDANTS.

TOPIC: TRIAL TRANSCRIPT

TRANSCRIPT OF PROCEEDINGS

DOCKET-NUMBER: C1-94-8565

VENUE: Minnesota District Court, Second Judicial District, Ramsey County.

YEAR: March 16, 1998

P.M. Session
 

JUDGE: Hon. Judge Kenneth J. Fitzpatrick, Chief Judge
 

AFTERNOON SESSION.
 

THE CLERK: All rise. Court is again in session.
 

(Jury enters the courtroom.)

THE CLERK: Please be seated.

THE COURT: Counsel.

MR. CIRESI: Thank you, Your Honor.

MR. CIRESI: Good afternoon, ladies and gentlemen.

(Collective "Good afternoon.")

BY MR. CIRESI:

Q. Good afternoon, professor.

A. Good afternoon, Mr. Ciresi.

Q. Professor, did the cigarette industry utilize the type of total marketing and communications program that you described this morning in its marketing of cigarettes?

A. Oh, yes, they did.

Q. And are there representative documents of the defendants which are illustrative of the industry's adoption and adherence to such a comprehensive marketing and communications program?

A. Yes, there are.

Q. Can you direct your attention, please, in volume two to Exhibit 12989, and that would be the first exhibit, 12989. Sir, this is a document that's already been admitted into evidence. Is this one of the documents that you reviewed with respect to the rendering of your opinions in this case?
 

A. Yes, it is.

Q. Does it form part of the basis of your opinion?

A. It does.

Q. And is it representative of the subject matters therein with regard to the other defendants?

A. It is.

Q. Okay. This is an RJR document dated 1989. Do you see on the top it's "CAMEL Y&R ORIENTATION." That's Young & Rubicam.

Can you direct your attention, please, to that page which bears the Bates number 1614.

A. Uh-huh.

Q. And those are in the lower right-hand corner, professor.

A. Right.

Q. Now directing your attention to that page, does this indicate the customer targets or some of the customer targets of this campaign?

A. Well, this is an outline of the document which follows, and basically it talks about, as noted, strategic importance of YAS, "YAS" meaning Younger Adult Smokers, and -- and what this is is -- is a document which leads to, if we go back to the chart we had over there, the little guy in the middle in the red there, the target market here is being specified as the younger adult smoker.
 

Q. All right. And does the overview on page 1614 of Exhibit 12989 also set forth the guidelines that are going to be utilized in marketing to the young adult smoker?

*2 A. Right. It -- it denotes the fact that this document will provide guidelines for effective marketing to that target market segment, and the document will go on to specify five guidelines that RJR and Young & Rubicam have developed for targeting these young adult smokers.

Q. Can you direct your attention, then, professor, to page 1616 of Exhibit 12989. Is this then the beginning of the section that relates to younger adult smokers?

A. Yes, that's correct.

Q. Can you please direct your attention, then, to the next page, 1617, and describe in context of a total marketing/communications program what is being illustrated and depicted on this page.

A. Okay. Well there are a number -- number of things, I guess, but starting -- kind of have so many opportunities to look different places here -- but starting at the top of the page, we have -- I think what's important is to -- to note the fact that younger adult smokers are being denoted as having strategic importance, and the document, this page, really shows why that is the case for -- for RJR. And so the -- the first point is that about a million new smokers enter the market, enter the cigarette market every year, and that these
 

young adults are the -- the only source of replacement smokers. That's point two. So we know that people are leaving the market for cigarettes; people are dying, some people are quitting.

And they say we basically need a source of replacements for the people who are leaving. Where are we going to get them? And then it cites, I think the fact that you probably had called to your attention before, that less than one- third of smokers start after the age of 18. So these young adults are the only source of these replacement smokers.

So what they call, then -- go on to call these FUBYAS, F-U- B-Y-A-S there, these First Usual Brand Younger Adult Smokers, they really drive the growth of two brands; that is, Marlboro and Newport. And then the reason that these FUBYAS are so important and why RJR is so -- regards them as having strategic importance is basically two things. Number one, when you get them into your market in the first place, they tend to stay with you over time. And that point is being made there in -- in point four, that there's extreme brand loyalty. And then secondly what happens is as people come into the market and start smoking, over time their rate of consumption goes up. So you get people, they come in and they tend to stay with you through the brand-loyalty effect, and then they're also increasing their consumption rate. So you've got kind of a double importance there, both of which add up to -- to make these first-time smokers extremely important so the firm. And the last point is just to denote
 

how -- how Philip Morris at this point in time is really much more popular in terms of attracting -- attracting people, new smokers into the market, and attracting them to their -- their brand, most of which is -- is Marlboro.

*3 But you see at the chart at the bottom of the page that Philip Morris in 1988, all the way over to the -- to the right there, Philip Morris has a 69.8 percent share of 18- to 20-year-old smokers, whereas R. J. Reynolds has only 13.8 share. And so -- and so that's -- that's basically the -- a problem, obviously, for -- for RJR, that they're -- they're not getting the new smokers into the market the way that Philip Morris is.

Q. And is that problem depicted on the next page, page 1618 of this exhibit?

A. Yes, it is. I mean basically what they're doing here is kind of running out what -- what the implications of that are. And if I can just run through this aging calculation here for a minute, it's a -- might be a little bit confusing at first, but basically what they're saying there is that in 1988, the number of smokers in 1988 is 48.36, and then the two -- there's two columns, one of which has scribbled on top of it PM and then the other one RJR, representing obviously Philip Morris and R. J. Reynolds, and you see that the new people coming into the market, the new smokers, the new young smokers is representing 1.1 million people, but they're getting split up, 69 percent of them are going to RJR -- I mean, I'm sorry, Philip Morris, whereas only 13.8
 

percent of them are going to R. J. Reynolds. Even though people are quitting the market, you have 1.76 people quitting the market down in the third row, the net effect for Philip Morris, because they attract such a large percentage of new people coming into the market, is that Philip Morris's share goes up from 1988 to 1989, whereas R. J. Reynolds, because they don't attract many of the new smokers, their market share is going to go down.

Q. And is that depicted in text at the top of the page right under the heading "YOUNGER ADULT SMOKERS, STRATEGIC IMPORTANCE?"

A. Right. The strategic importance being that Philip Morris gains 1.3 market share points each year because of their strength with the young smokers, whereas R. J. Reynolds is losing .6 share points per year.

Q. And could you direct your attention, then, to the next page, 1619, of this exhibit. If I can ask you: On that page is the longer-term strategic importance set forth if that trend would continue?

A. Right. They just run this -- run this out for 20 years and basically say, well, what's -- what's going to happen to us in the year 2009 if we let this trend continue? It says we have -- we really have a lost opportunity because we know these young people come into the market, they're brand loyal, then they tend to increase their smoking rates. And so they've worked through this calculation that -- that basically shows that if R. J. Reynolds continues along at its present rate; that is, the rate that they were showing
 

in 1989, into the future, what will happen is that their market share will decline by 14 points over the next 20 years. So that really is indicating the degree of importance of this market segment to R. J. Reynolds.

*4 Q. Can you direct your attention, then, professor, to page 1621 and tell us what is illustrated on that page and the significance of it.

A. Well the significance of it is they're now saying, well, if -- if R. J. Reynolds is able to achieve their young smoker objective, and basically they're saying, you know -- which they said somewhere else, they -- they were going to try to raise the share that they got of the young smokers up to 40 percent of the new people coming in, its share of smokers will turn around, reaching 35 percent in 20 years, rather than, you know, kind of where they are now. As you can see down at the bottom of the page, if this young -- if the young smoker program is successful, the share in the year 2009 will be 35.1 percent, whereas if it continued along in their current state of decline, their share of the market would only be 17 percent. So they're talking about having an 18-share-point difference here if they're able to be successful with their young adult program.

Q. And is it illustrated here as to what the growth would be in market point per year and also in terms of the unit gains?

A. Yes, it is. That -- that if they were able to do what they want to do with this young adult program, their growth rate will be .6 points per year,
 

and over 20 years they'll have a gain of 572 billion units cumulatively over that 20 years.

Q. All right. And can you direct your attention, then, to page 1622, and is the purpose of the young adult smoker marketing program set forth?

A. Right. I -- I think it's, you know, sort of saying two pieces. Okay, we understand the problem, now what are we going to do about it? And then the purpose is to say let's figure out what actions that we can undertake to get these FUBYAS; that is, the people who are just getting ready to adopt their first brand of cigarette?

Q. And can you direct your attention, then, to Exhibit -- same exhibit, page 1624. Are there set forth there principles of successful marketing to young adult smokers -- younger adult smokers?

A. Yes, there are. Basically the ideas for positioning success, I think, first of all, go right back to the -- to the diagram that we have up on the easel there that we talked about just before lunch. The second bullet point there under point two, it says knowing the target. So this is really understanding who that target market is and what is their mindset, developing some understanding about what this -- what this person would like, how it is you would go about approaching them. And then their executional ideas are saying, look, if we're going to -- if we're going to be impactful with these young smokers, with these young adult smokers, what we have to do is we have to
 

make it look right in their eyes. So -- so the document -- or the portions, it says basically what we have to do is when we put our total marketing/communications program out there, this young -- this YAS has to look at us and say, hey, they're talking to me. So that's basically what they're doing here, setting out that we're going to target these people, understand something about it, and then conduct -- construct a total marketing and communications campaign which fits this particular group.

*5 Q. Professor, can you turn to page 1690 of Exhibit 12989, and at that point does there start the marketing campaign directed to younger adult smokers in terms of what RJR's plan was?

A. Well this is the -- the beginning of a set of looks like overheads, presentation on -- on the effects -- the principles of the -- of -- behind an effective marketing to younger adult smokers, yes.

Q. And can you turn, then, to page 1734 of that section, and it's entitled "GUIDELINE 1." Can you tell us what is depicted on this page?

A. Yes. Well as I mentioned a moment ago, this document comes up with five guidelines for effective marketing to young -- young people, and so this is guideline number one, which is to say, you know, we have to create a brand image, a personality for our brands, and we're going to do that by learning what the brand stands for across the values, performance, symbols, and place. So basically they're saying, you know, we -- we have to develop a total
 

marketing and communications campaign so this brand really has meaning for these -- for these young people.

Q. And can you direct your attention, then, to Exhibit -- or page 1737 of the same exhibit, and is that guideline number two of the five you mentioned?

A. Right. Guide -- guideline number two is, for effective marketing to young people, is to say --

Well down at the bottom there what it's saying, we're trying to create an emotional relationship. So this goes back to what we were talking about this morning, that, you know, it's fine to have a transaction, that we have one particular sale, but what they're really saying is to be successful, I have to create a relationship with you, that there is some bond between this young person and the brand so that that continues over time.

So they're saying we're going to create this emotional relationship by buying -- by being entertaining and stimulating, and that our goal really is to -- is to have this emotional relationship.

Q. And with regard to guideline three, can you turn to page 1739 of Exhibit 12989.

A. Uh-huh.

Q. And what is depicted on this page, sir?

A. Well, as you suggested a moment ago, this is -- this is basically guideline number three of the five, and it's saying to -- to have these young
 

adults that, when we're -- so that when we address them, they say yeah, you're talking to me, I understand this is the message directed to me, we have to have a relevant, contemporary tone. So consequently we've got to use the young adults' hot button, as they have identified the -- as they use the terminology, and through their market research they have developed these five particular hot buttons for young people that they're going to fold into their marketing campaign, the hot buttons being excitement, humor, irreverence, romanticism and sex.

Q. And professor, can you direct your attention, then, to Exhibit -- or page 1741 of Exhibit 12989 for guideline four, and please describe what is within guideline four.

*6 A. Well guide -- guideline four is basically saying in order to be successful with the young people, that your campaign, your marketing campaign has to have a fresh, unique, and original look to it. So the way they want to try to implement that is by using eye-catching visuals, for example, in the packaging or the advertising, using bright colors, unique graphics, and a different kind of format.

Q. And can you turn, then, to Exhibit -- or page 1743 of Exhibit 12989 for guideline five, and please describe what is illustrated there.

A. Well this -- this is the last of their -- the last of the guidelines, and it basically represents pretty much what we talked about this morning
 

already in terms of my diagram over there on -- on the easel, that they're saying in order to -- in order to make this work, in order to -- to really be successful, one of the things we really have to do is be consistent, and by that we mean, you know, you don't have your advertising saying one thing and your promotion saying one thing and your packaging saying another thing. So -- so their total marketing and communications package, they're saying we're going to use an umbrella approach, and what we're going to do is we're going to bring together pretty much the same things we have on the diagram over there, media, meaning advertising, promotions, special events, packaging, merchandising, which you could think about what's going on with distribution, and product line extensions.

So we're going to use this total marketing and communications package, bring all the elements together under an umbrella in a consistent fashion. That way we won't diffuse the -- diffuse the image. And this consistency of image established by all of the elements of the marketing and communications package, all of those brought together in a consistent fashion, is what's really going to have impact with these people.

Q. Is consistency in a total marketing and communications program essential for creating a brand image?

A. Well it's -- it's certainly -- it's certainly a desirable characteristic. Things work a lot better if you have the consistency and really
 

have all of the elements complementing one another and leveraging off one another. Certainly -- and this is very much in line with the guidelines that they have specified here. Certainly, if you are trying to establish a brand image, it works out a heck of a lot better if you are following a consistent approach, which they have established as a guideline in this document.

Q. Now professor, with regard to this document, did you find this to be consistent or inconsistent with documents of the other marketing defendants -- or the other manufacturing defendants with regard to the marketing of their products?

A. It was consistent in terms of the overall approach. I'm not sure that every one of the manufacturing defendants used the term "umbrella approach," but certainly this idea of putting together a consistent -- a broad-based and consistent total marketing and communications package, that -- that would be -- this is representative across the industry -- people in the industry.

*7 Q. And with regard to the defendants in the industry, were different forms of communication mechanisms used to get across their message?

A. Oh, sure. A wide -- a wide variety as we -- as we set out this morning, as you can pick up from here, that advertising/media would be one, promotion is another, special events, you know, running your bat day or your cap day or sponsoring car races, that sort of thing, packaging, merchandising. And then -- and then public relations is another important part of it in this industry,
 

that we have The Tobacco Institute being the public relations arm of the -- of the industry, issuing press releases, making people available to go on television shows, publishing pamphlets and that sort of thing. So a wide variety of communication vehicles exactly as we laid out this morning, a wide variety of communication vehicles are being used to get the message across.

Q. When an industry sets up a marketing program -- or a company within an industry sets up a marketing program, do you look at the characteristics of the industry in establishing your marketing program, whether there are any special characteristics?

A. Right. Typically you would take a look at your industry and say, gee, is mine special in any kind of way that I really have to factor into the kind of marketing program that I'm going to have?

Q. Did you ascertain, based on your review of the documents and your investigation in this case, whether the cigarette industry had any special characteristics which impacted the establishment of their marketing and promotional programs?

A. Well as I reviewed the documents, there were three characteristics of the industry which struck me as -- as distinct, and factors that would be folded into the development of a marketing campaign.

Q. What were those, sir?

A. Basically the three were, first of all, that the majority of the people
 

who are in this market wish they weren't. When you -- that is, that people say, boy, I wish I had never begun smoking and I would really like to quit. So that sort of struck me as -- I guess I hadn't thought about industries in this way before, but it struck me as a little odd that here was an industry in which virtually everybody who is using the product says gee, I wish I wasn't doing it. So that's the point number one.

Point number two, as we've mentioned in this document -- document a moment ago, there is a high level of brand loyalty in this product category, that once somebody adopts a particular brand, they tend to stick with that brand over time.

And then the -- the third thing is that -- though I guess the way I think about it is its window of vulnerability if you look at it from the customer side, the young person's side, or the window of opportunity if you look at it from the manufacturer's side, that basically this is a product category in which, by and large, people come in by the time they're age 18 or they don't come in. So we know -- and this document just -- Professor Perry went through some numbers with you last week on this, and this document here just stated that only a third of smokers start after they reach the age 18.

*8 So this idea of, gee, really that -- being that window, that you have to get people into the market during the time they're that age or it's very difficult to get them in, I guess that was something that I -- the third thing
 

that I thought was distinctive about the particular -- the cigarette market.

Q. And were these special characteristics evidenced by the defendants' documents?

A. Oh, yes, they were. That's where I discerned them from, yes.

Q. And are there representative documents which indicate that -- what these characteristics were?

A. Yes, there -- there are representative documents.

Q. And are they representative of the documents as a whole with regard to these subject matters? And by "as a whole," I mean with regard to all defendants?

A. Yes, I believe so. Yes, uh-huh.

Q. Can you direct your attention, please, to Exhibit 11899, which would be in volume number one, professor.

MR. CIRESI: And this is a document that was entered into evidence with Dr. Hurt, so it is in evidence, Your Honor.

Q. Is this one of the documents that you've reviewed?

A. It is.

Q. Does it form part of the basis of your opinion?

A. It does.

Q. And is it representative with regard to the subject matters contained therein of the other defendants?
 

A. It is.

Q. It's entitled "THE CIGARETTE CONSUMER," it's a Philip Morris document dated March 20th, 1984. If you go on the first page, page 2191, does it state what is covered in the document, professor?

A. It does, basically noting that the three major topics to be covered within the document are who smokes, the heaviness of use, and the third point being brand loyalty.

Q. And can you direct your attention to page 14 -- and I'm not referring to the Bates number now, but the page number of the document itself at the bottom -- and I'd specifically like to direct your attention to the bottom, the last two check points.

A. Right.

Q. Is there represented there the type of statements that you saw with regard to the special characteristic, the fact that the majority of smokers wanted to quit?

A. Yes, yes, there is. We'll come back to this document in a few minutes to pick up the brand loyalty part of the thing, but here basically what it -- what it's saying is that when -- it's Philip Morris referring to a survey in which, when smokers were asked did they agree, very strongly agree, and so forth to the statement "I wish I had never began smoking," 85 -- over 85 percent of the people who were using the product agreed either strongly or very
 

strongly with the statement that "I wish I had never began smoking."

And the second point there being that over 80 percent of the people claim to have attempted to quit.

Q. Okay. And can you direct your attention, then, to the first exhibit in this volume, which is the Surgeon General's report of 1989. And this has also been introduced into evidence as Exhibit BYN00058.

*9 And I'd like to direct your attention to page 289 of the 1989 Surgeon General's report and ask you if on that page the characteristic of the majority of people wanting to quit is set forth in the Surgeon General's report?

A. Yes. Basically what the Surgeon General report says here is -- they're talking about some data which have been -- been collected and they say, "Of those who had smoked during the past year, 70 percent had made at least one quit attempt."

Q. Now did you find that same type of expression set forth in other documents of the defendants?

A. Yes. There were a number of documents which refer to the fact that the majority of the people who are currently in the market, using cigarettes, wish they weren't.

Q. Can we go back now to Exhibit 11899, which was the cigarette consumer, the Philip Morris document.

A. Uh-huh.
 

Q. And I'd like to direct your attention to the second special characteristic of the cigarette market that you talked about, professor, and that was the extent of brand loyalty.

A. Right.

Q. And I believe if we turn to the first page of text, we'll see that that is addressed in what would be covered in this exhibit; correct?

A. That's correct. It is -- it's the third, third major section of this report.

Q. And can you direct your attention, then, to page 10 of Exhibit 11899, which is entitled at the top "BRAND LOYALTY," and can you describe what is being set forth on this page.

A. Right. Well what's being said here -- it's really just echoing what the RJR document that we looked at a couple minutes ago said about this -- this extreme brand loyalty in the marketplace, and it's amplified on a bit here where basically Philip Morris is saying smokers are extremely brand loyal. And it goes on to explain, you know, why -- why that is, that here we have a product that -- that is frequently purchased and constant use, so we can imagine that there is somebody smoking a pack a day, and so there is a buying opportunity on a regular basis. So it's not a situation where, you know, maybe you buy a washing machine in one year, and then seven years later it breaks down and so you don't really -- haven't really developed loyalty to that
 

particular brand. This is something you are doing on an everyday basis. So it's saying this strong habitual behavior. And basically what happens is right at the bottom of the -- of the screen there, they say that what happens is smokers grow accustomed to a particular taste, if you will, or a particular strength level, flavor profile, or -- or what they say is a mouth feel. So basically consumers adopt a brand and they kind of get used to it.

And then it goes on to say, in the next bullet point, that such is the extent of this getting used to and adaptation to the characteristics of that particular brand, that it says substitute brands generally cause malaise and smokers can't wait to get back to their regular brand. So all of this is -- is sort of by way of explanation of why do we see the high degree of brand loyalty that we observe in the marketplace.

*10 And then they go on and -- and talk a little bit about -- about switching from one brand to another, that it really does require extended use and motivation in order to get accustomed to the new brand, and how historically most of the switching that has occurred has been because of this issue of health. And that they say that most successful new brands have had a new tar/health motivation, and they offer the example here of their own brand, Merit, which was positioned in the low tar/low nicotine/health- reassurance segment of -- of the market.

So they're saying this health motivation, that is the primary driver behind
 

anybody switching, and other motivations, the kind of things we've talked about in our comprehensive marketing and communications plan, you know, the pricing, the image, the packaging, and the length, they contribute, but they are less able to overcome this inertia, this inertia that the customer has of sticking with the particular brand that they're already with.

Q. And if you go on to the next page, does the Philip Morris document set forth other reasons for the brand loyalty?

A. Well right, it does. It goes on to -- to state several implications of -- of this, and -- and basically they're all along the same lines of -- of reinforcing the brand loyalty. And they say about -- under the third bullet point under "PRODUCT TESTING VERY DIFFICULT" there, that the change in tar/nicotine levels, overall strength causes discomfort, weaker hits leaves smokers unsatisfied, stronger hits often taste too strong or harsh. So this -- the product characteristics are kind of reinforcing this notion of brand loyalty and sticking with the brand that you have, unless, as it mentioned a moment ago, there's this health motivation.

Q. Can you direct your attention now to Exhibit 12613, which is an RJR document, which is also directed to this issue of brand loyalty as a special characteristic of the cigarette market.

A. Right.

Q. Is this one of the documents that you have reviewed?
 

A. It is, yes.

Q. Does it form part of the basis of your opinion?

A. It does.

Q. And with regard to the issues that you will be discussing here, specifically the extent of brand loyalty as a special characteristic, is it consistent with other of the defendants' documents?

A. It is consistent with others.

MR. CIRESI: Your Honor, we would offer Exhibit 12613 as an RJR document produced in this litigation.

MR. BLEAKLEY: No objection.

THE COURT: Court will receive 12613.

BY MR. CIRESI:

Q. As we can see, professor, this is dated April 13th, 1984, it's from one marketing employee to another, R. C. Nordine to E. J. Fackelman, subject, "Strategies and Segments." Can you describe, if we look at the first two paragraphs, what's being illustrated in those two paragraphs?

A. Well it's basically the importance, again, reinforcing the notion that we already talked about, it's stressing the importance of repeat business. And as Mr. Nordine says here in the second paragraph, the analysis that they've done, the market research that they've done, if you will, really shows them how important repeat business is as opposed to switching, and it says that it is
 

relatively easy for a brand to retain 18-year-old smokers once it has attracted them. So once you've gotten somebody to adopt a particular brand, it's likely that they'll stay with that brand for a substantial time.

*11 Then it says conversely it's very difficult to attract a smoker that has already been won over by a different brand. And then using the exact same word as we saw a moment ago in the Philip Morris document, there's a principal of inertia; that is, a smoker at rest with a particular brand, a smoker at rest, is comfortable with a particular brand, tends to stay at rest, so again noting this notion of brand loyalty.

THE COURT: Counsel, we'll have to take a short recess at this time.

THE CLERK: Court stands in recess.

(Recess taken.)

THE CLERK: All rise. Court is again in session.

(Jury enters the courtroom.)

THE CLERK: Please be seated.

THE COURT: Counsel.

MR. CIRESI: Thank you, Your Honor.

BY MR. CIRESI:

Q. Professor, we were on Exhibit 12613. We had just dealt with the end of the second paragraph where there was the reference to there was a principal of inertia, a smoker at rest tends to stay at rest.
 

Can you direct your attention now to the next paragraph, and please describe what principle is being addressed in that paragraph of this document of RJR's.

A. Well this begins -- oh, extends over the next few paragraphs. This begins sort of the transformation of a smoker or the history of a smoker over time, basically saying that the smoker chooses a first brand, and Marlboro and Newport were the two most popular brands among starting smokers at that time, and then these start to talk about how this person transitioned, and then I guess it's down in the paragraph right at the bottom of your -- of the screens here, it talks about the wants of a typical smoker begins to change. So as the person gets a little older, perhaps, as it says here, the person becomes a father and starts to think about more long-term issues, as a result he becomes sensitive to smoking- and-health issues and moderation brands, you know, low tar/low nicotine/health-reassurance brands, become more appealing to him. And then they say, well, perhaps he switches away from Newport or Marlboro, and maybe it's Vantage, which is a low tar/low nicotine brand, or Merit gets him. And then they say that once this second brand is adopted, that person tends to settle down and become loyal to that brand as well.

So this phenomenon of brand loyalty occurs when -- the first time you come into the market, and then perhaps in the second time when you switch over to another brand, you settle -- you may switch around a little bit, but then --
 

then basically the bulk -- it says the bulk of smoke -- the bulk of smokers do settle down, preferring to be brand loyal, even in this second stage when they moved in because of health concerns, moved into the moderation segment of the market.

Q. And then the last paragraph states, "The brand that has strong appeal to first time switchers to a segment enjoys the strategic high ground in the same sense as a first choice brand does with 18-year-old smokers. While the above example is hypothetical, it illustrates the potential power of strategies aimed at loyal behavior."

*12 Did you find from your review of the defendants' documents that their total marketing and communications programs were directed toward this characteristic of the cigarette market, and that is, brand loyalty?

A. Yes, they were. Basically as is set out here, this notion of the strategic high ground, that because of the brand loyalty, and as we talked about, the increasing consumption rates over time, if you can get a person to come and adopt your brand, it's much easier -- it's relatively easier to keep them with you. So that's the strategic high ground from which you would like to operate.

Q. And if you turn over to page two of Exhibit 12613, after the first two bullet points where it states, "In a very real sense, the principle that is suggested by the younger adult smoker analysis" --
 

A. Right.

Q. -- "is much broader and also applies to switching. It can be stated as: Attract a smoker at the earliest opportunity and let brand loyalty turn that smoker into a valuable asset."

Did you find that principle throughout the defendants' marketing and communications documents?

A. Yes. Basically I think it -- it's a good summarization of what has gone before here, that he comes up with this what he calls a principle, and this idea of attracting a smoker at the -- the very earliest opportunity, holding on to that smoker, having brand loyalty help you hold on to that smoker, and then reap the benefits of that smoker as the consumption rates increase over time.

So this notion about attracting somebody at the earliest opportunity sort of fits in with this aspect of the market, the window of opportunity being -- being very limited, that the -- you know, the younger you get -- try to get somebody, the better off you are, the more likely you are to get them.

Q. All right. We've talked then about two of the special characteristics, the majority of smokers want to quit, number two, the extent of brand loyalty, now you've just touched on the third, --

A. Right.

Q. -- the fact that the overwhelming majority of smokers start before the
 

age of 18.

If you can direct your attention back to page 12989, which is the Young & Rubicam/RJR document, and again at page 1617 of that exhibit, there's reference there, that third characteristic, and that is the early age at which most smokers start smoking, and that's number two.

A. Correct.

Right. You know, this is -- we -- we've been on this -- on this page before, and this is just, you know, sort of documents what we said, that less than one-third of smokers start after the age 18. And so these young people that are basically your source of replacement smokers, and so it's the idea of this window of opportunity, that if people don't adopt it at a very young age, they are very unlikely to adopt in the future.

Q. Now professor, in -- in light of the special characteristics of the industry, did you find there were certain primary objectives of the industry's marketing and communications programs as disclosed by their documents?

*13 A. Yes.

Q. And what were those primary objectives?

A. I guess the -- the four primary objectives or the four primary things that marketing -- your total marketing and communications package has to do, in light of these characteristics of -- of the cigarette industry, basically four, number one is to, as we see right here, get new people into the market. Okay.
 

You know people are going to be leaving the market, and so it's essential that we have this flow of, as they call them here in this document, replacement smokers for the people who are leaving the market.

Second thing is because of this sort of characteristic of the large majority of the people who are in the market saying, boy, I wish I wasn't in here, I wish I could get myself out, the fact that they are -- would like to quit, you have to try to keep them in the market. So, you know, I -- you know, I - -

If you look at like Procter & Gamble marketing some of their soaps, well they don't have to worry -- not too many of us, I don't think, would say, gee, I wish I could stop using soap. We're not trying to get out of the market, so Procter & Gamble doesn't have to worry about us jumping out of the soap market so much. Whereas in this market, a necessary task and a task that these manufacturers did undertake is to keep people in the market, to have them not quit simply.

MR. CIRESI: We'll take a short recess.

THE COURT: Take a short recess.

THE CLERK: Court stands in recess.

(Recess taken.)

THE CLERK: At this time, court will recess for the day. We'll reconvene tomorrow morning at 9:30.

(Recess taken.)
 
 

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