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 18, 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.")
    THE COURT: Counsel.
    MR. BLEAKLEY: Thank you, Your Honor.
    ROBERT J. DOLAN called as a witness, being previously sworn, was examined and testified as follows:
BY MR. BLEAKLEY:
    Q. Good morning, Professor Dolan.
    A. Good morning.
    MR. BLEAKLEY: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    Q. Yesterday when we broke, for what I hope was an enjoyable balance of St. Patrick's Day for everyone, we were talking about some of the published literature dealing with the issue of the effect of cigarette advertising on -- on consumption. Do you recall that?
    A. Yes, I do.
    Q. And I was asking you about the 1987 economic report of the president. Is that correct?
    A. Yes, I recall that. Uh-huh.
    MR. BLEAKLEY: Your Honor, I now have a complete copy of the 1987 Economic Report of the President, which I have -- copy of which I have placed up there by Professor Dolan, I've given to counsel for the plaintiffs, and I believe Your Honor has a copy too.
    THE COURT: Are you moving its introduction?
    MR. BLEAKLEY: Yes, Your Honor, we move the admission of Exhibit CW000158.
    MR. CIRESI: As a government document?
    MR. BLEAKLEY: Yes, Your Honor.
    MR. CIRESI: No objection, Your Honor.
    THE COURT: Court will receive CW000158.
BY MR. BLEAKLEY:
    Q. Would you turn, Professor Dolan, to page 188 in that exhibit. Excuse me, 186.
    A. 186? Yeah.
    Q. Actually let me first ask you: This document is entitled "Economic Report of the President" as "Transmitted to the Congress" in January of 1987; is that correct?
    A. That's what I see on the front page, yes, uh-huh.
    Q. And chapter six of this exhibit is entitled "Risk and Responsibility," do you see that?
    A. Well, let's see --
    I do now on page 111. Okay.
    Q. And chapter six -- I'm sorry.
    A. Table of contents? On the table of contents page?
    Q. Yes.
    A. Yes, chapter six, "Risk and Responsibility," yes, uh-huh.
    Q. And would you turn to page 179 first.
    A. 179?
    Q. Yes.
    A. Okay. Okay.
    *2 Q. Page 179 is the beginning of chapter six --
    A. Yes.
    Q. -- which reads, "Risk and Responsibility." Do you see that?
    A. I do.
    Q. "Risk is a fact of life. Every person balances risks of accident and injury against the attainment of other goals." Do you see that?
    A. I do see that.
    Q. Okay. Now if you would turn to page 186, the Economic Report of the President states, "The effects of tobacco advertising are complex. There is little evidence that advertising results in additional smoking. As with many other products, advertising mainly shifts consumers among brands." That's what the Economic Report of the President says?
    A. I believe you read that correctly, correct, yes.
    Q. And when it says "advertising mainly shifts consumers among brands," that's the brand switching that we've been talking about; isn't it?
    A. Right. Uh-huh.
    Q. Now the Surgeon General of the United States in his 1989 report also concluded that there is no scientifically rigorous study available to the public that provides a definitive answer to the basic question of whether advertising and promotion increased the level of tobacco consumption; isn't that right?
    A. I believe that is correct. If you stipulate that that's true, I would not argue with you on that. Again, it's taking advertising away from the rest of the total marketing and communications campaign, and --
    Q. You --
    A. -- when the Economic Report of the President marshalled the evidence of tobacco bans in Italy, Finland, Iceland and Singapore as the primary evidence for their statement, I'd much rather look at what's going on in the United States and the total marketing and communications program in making a judgment about that.
    Q. Well let's talk about the advertising bans for a moment. You're also aware of the fact, are you not, that there have been a number of studies of the effect of advertising bans on cigarette consumption in those countries that have enacted advertising bans; aren't you?
    MR. CIRESI: Objection, irrelevant.
    THE COURT: Well you may answer if you know.
    A. Yes, I'm aware that there have been a number of studies.
    Q. And you know that these studies conclude that there is no significant change in cigarette consumption after advertising bans have been enacted; don't you?
    MR. CIRESI: Same objection, Your Honor, it's irrelevant.
    THE COURT: Sustained.
    Q. Now let's talk for a moment about some of the ads that you discussed yesterday.
    A. Are we done with the economic report?
    Q. Yes.
    A. Can I get rid of this?
    Thank you.
    Q. You would agree with me, would you not, that there have been no what you described as explicit health claims in cigarette ads since about 1954?
    A. I -- I honestly don't know the specific point in time beyond which I would say there would be no -- there have been no explicit health claims.
    Q. Well let's say the mid-1950s then. You would agree with me that there haven't been any since then?
    *3 A. I -- I'd really have to stick with my previous answer. I -- I
 

don't have any at the ready to offer you as being post-mid- '50s that did have explicit health claims, but that's as much as I can say about that.
    Q. Haven't been any for a long time in any event.
    A. Well I suppose that gets us into a discussion of what is a long time and so forth, so --
    But there haven't been any recently as far as I -- as far as -- not to my knowledge anyway.
    Q. Now Mr. Ciresi asked you yesterday if the cigarette companies in any of their ads have warned people about the risk of lung cancer. Do you remember that question?
    A. I do.
    Q. You know that in fact there has been a health warning on every pack of cigarettes sold in the United States since 1966, though; don't you?
    A. I do.
    Q. Now what you described as the implicit health claims have all related to filters and low tar and nicotine, haven't they?
    A. I -- I would not say that that's necessarily the case. I mean I think the ones that we looked at explicitly yesterday were around the issue of filtration, the Lark ad and the True ad and Merit and so forth, they were around the issue of filtration and low -- and lower tar and lower nicotine.
    Q. Well then let me ask the question directly: Are you aware of any advertisements in which the cigarette companies have made implicit health claims that did not involve filters or low tar and nicotine?
    A. I would say that some people would interpret an ad as being a health reassurance ad and not explicitly note the tar and nicotine aspect of it.
    Q. Which ones?
    A. I guess I don't have a specific example to give you as I sit here, but as I looked through the general theme of -- of the advertising, I mean I -- it's not clear to me that every one of them that is offering health reassurance -- it could be just depicting of a healthy person. If we looked at the -- as you remember the Merit ad that we looked at yesterday with the -- with the woman saying, "Yes, I can" on it, and then it goes on to discuss low -- low tar and nicotine, I believe that's a health reassurance-type advertising. I mean if you look at the general theme which is set out in the advertising and marketing strategy statement, the theme of health reassurance is there. And -- and as we saw with -- with B.A.T. Company saying, look, this has got to pervade everything that we do in our communications.
    So there could be some ads, some communications with the marketplace which don't explicitly have low tar/low nicotine in big letters which in fact do fall under this heading or promote the general theme of health reassurance.
    Q. Have you done any research to determine whether smokers looking at those ads see them as health reassurances?
    A. I have not. I have not looked explicitly at the question of: When you see this ad, do you interpret it as health reassurance? What I do know is that when they asked people in the mid-'70s what is the primary improvement you would like to see in your cigarettes, they said low tar/low nicotine. That's the primary improvement that they wanted to see.
    *4 Q. And in fact, filters and low tar and nicotine cigarettes are the primary improvement that took place in cigarettes during the '60s and '70s and '80s; isn't it?
    A. I wouldn't regard them as an improvement at all. Mr. Schindler said that he has no data at RJR and there's no data at all in the industry that shows that low tar/low nicotine cigarettes are in any way safer.
    Q. All right. We'll say design then. The principal changes in the design of cigarettes in the '60s, '70s, '80s, and '90s has been in the area of filters and low tar and nicotine; correct?
    MR. CIRESI: Objection, Your Honor, it's outside the scope. He's not here on the design of cigarettes.
    THE COURT: Sustained.
    MR. BLEAKLEY: I'm not asking him any questions about the actual design, what I am attempting to do, Your Honor, is establish that filters and low tar and nicotine, which is the subject of all of this advertising and is the subject matter of Professor Dolan's testimony.
    THE COURT: I don't think he's ever been qualified as an expert on the design. I don't think that's his area of expertise.
    MR. BLEAKLEY: Well I'll try a different question.
    THE COURT: Okay.
BY MR. BLEAKLEY:
    Q. You would agree with me, would you not, Professor Dolan, that as more and more filters and low tar and nicotine cigarettes came on the market, the cigarette market in the United States became intensely competitive; didn't it?
    A. I would say that coincidence -- coincident with the establishment of this new segment of the market, this health reassurance and the proliferation of brands, as we talked about a number of times about the product line extensions; for example, Merit now being available in -- well Merit coming onto the market first as a low tar brand and then being available in three different types, that there were many new brands introduced to the marketplace during that time period.
    Q. And virtually all of them, if not all of them, were filtered or low tar and nicotine cigarettes; weren't they?
    A. Well I would -- I would be certainly --
    I would be comfortable saying that it is my belief that most of the new product introductions in the mid -- you know, after 1970 had been in the low tar and low -- low nicotine area.
    Q. And the --
    A. The health reassurance segment.
    Q. And the claims that the cigarette companies could make about these cigarettes were regulated by the Federal Trade Commission; weren't they?
    A. I understand that to be the case, yes.
    Q. And the Federal Trade Commission wouldn't allow the cigarette companies to make any claims that they didn't think were supported by scientific evidence.
    MR. CIRESI: Objection, Your Honor, that calls for a legal conclusion. Also the form of the question, counsel is testifying.
    THE COURT: Sustained.
    Q. Incidentally, the health reassurance ads, as you described them, that you showed to the ladies and gentlemen of the jury yesterday, were for Barclay, True and Kool; were they not?
    *5 A. No, that's incorrect.
    Q. They weren't for Barclay?
    A. No.
    Q. And they weren't for True?
    A. They were for True.
    Q. And they weren't for Kool.
    A. No, they were not.
    Q. Has True been a big success in the market?
    A. Well in 1970 I believe it hailed itself as the largest selling brand in the market -- in the -- in the low tar/low nicotine segment of the market. I believe it is still sold today.
    Q. Has it been a big success?
    A. Well that would get us into a long discussion of how you want to define  "success."
    Q. Which you're not prepared to do; is that right?
    A. Well you can ask -- I could --
    I guess you could ask me if I regard it as successful, but - -
    Q. Well what are the biggest selling brands in the marketplace? What have been the biggest selling brands in the marketplace over recent years?
    A. Over the recent years?
    Q. Yeah.
    A. Well I would say the -- you know, certainly the -- obviously the --
    The largest selling ones would be Marlboro, and sticking within the -- sticking within the Philip Morris family for the moment, I mean it would be Marlboro and its different versions, Benson & Hedges, Virginia Slims, Merit I guess would be the Philip Morris ones. RJR, we'd have Winston, Camels, Salems. Brown & Williamson, we'd have -- I believe that's Kool. Right? Lorillard we'd have Newport. So those -- those would be some of the major ones.
    Q. Would you agree with me that the filtered and low tar and nicotine cigarettes were introduced in response to consumer demand?
    A. No, I don't -- I don't know that that's the case.
    Q. You don't think that's what consumers wanted?
    A. I think consumers would like a low tar -- would -- would like a cigarette which reduced their health risk, but they don't want a cigarette which is bogusly proclaimed to do so but in fact does not.
    Q. So my question is: Do you think that low tar and nicotine and filter cigarettes were introduced in response to consumer demand?
    A. I don't believe consumers had demand for a low tar/low nicotine cigarette which in fact provided them no benefit. Consumers have a desire, a demand for a product which is safer, does in fact give them benefits. The situation here is that consumers wanted health reassurance and this health reassurance segment was established because consumers wanted the health reassurance, and in fact they were provided products which were no safer than the products which were already on the market. So --
    Q. Your testimony is that they were no safer.
    A. I -- I know what Mr. Schindler said about this, that he has no data at -- at RJR and that he knows of no other industry data that would show that low tar/low nicotine cigarettes are safer than the other cigarettes.
    Q. Is it your testimony that low tar and nicotine cigarettes are not safer?
    MR. CIRESI: Objection, asked and answered.
    THE COURT: I think he answered it.
    Q. Do you have an expert opinion as to whether low tar and nicotine cigarettes are safer?
    *6 MR. CIRESI: Objection, Your Honor. He wasn't offered as a medical doctor. He reviewed the defendants' documents.
    MR. BLEAKLEY: But he offered the opinion, Your Honor, just a moment ago on his own.
    MR. CIRESI: Your Honor, I object to the form of the question. Counsel's argument is improper.
    THE COURT: Sustained.
BY MR. BLEAKLEY:
    Q. All right. Would you agree with me, Professor Dolan, that filtered and low tar and nicotine cigarettes were introduced -- were actually being called for by doctors and public health authorities?
    MR. CIRESI: Objection to the form of the question. Counsel is testifying.
    THE COURT: Okay. You can answer that.
    A. My understanding is that there was a --
    You know, certainly doctors and health authorities wanted to see a safer product in the marketplace, and there may well have been some doctors who perceived that having a lower tar/low nicotine cigarette in fact was a way to achieve that, not understanding the issues of compensation, which -- the changes in smoking behavior which the people inside the industry did -- did understand.
    Q. Are you testifying about compensation?
    A. I'm sorry?
    Q. Are you testifying here about compensation?
    A. Am I test -- I'm --
    I don't understand your question.
    Q. Do you have any expert knowledge on the issue of compensation?
    MR. CIRESI: Your Honor, he wasn't offered as an expert on compensation. Counsel asked a question. He told him his opinion based on the documents he's reviewed.
    MR. BLEAKLEY: Your Honor, if the witness volunteers information like that, I should be allowed to cross-examine.
    THE COURT: On what?
    MR. BLEAKLEY: On the issue of compensation. He has made a statement about compensation, and I want to find out if he knows what he's talking about.
    THE COURT: All right. I believe you asked him the question, he answered your question.
    He can answer whether he is an expert on compensation.
    A. Oh, I do not consider myself an expert on the issue of compensation.
    Q. Okay. Now, isn't it a fact that doctors and public health authorities made specific calls for the production and sale in the United States of filtered and low tar and nicotine cigarettes?
    MR. CIRESI: Objection, it calls for facts that this witness is not aware of. Counsel is testifying. He's not relating it to anybody. It's outside the scope of direct.
    THE COURT: You can answer that if you know.
    A. I really wouldn't know.
    Q. Would you turn to Exhibit 10 --
    Let me ask you first: --
    A. Okay.
    Q. -- don't the documents that you reviewed in this case in fact reveal that doctors and public health authorities were calling for filtered and low tar and nicotine cigarettes?
    A. I do -- I do understand that -- let's see, it would be what, late '60s or so, I think, the Surgeon General was saying that, you know, there seems to -- you know, the evidence suggests that low tar and low nicotine would be a -- I think had some health benefit associated with it. Subsequently, in later Surgeon General's reports, when we get to the Surgeon General report of 1981, that -- that report concludes there is no such thing as a safe cigarette, there is no safe level of compensation -- there is no safe level of consumption, and in fact says the move to low tar/low nicotine, there are some caveats that you have to adopt with respect to it. Number one is the issue of the changing of the smoking behavior. Number two is the issue of whether in fact, when that smoking behavior is changed, whether the smoke goes deeper into the lungs and now causes a different kind of cancer, and also the issue of additives. I mean it says, you know, there is no -- there's no substitute, really, for quitting.
    *7 So I think the Surgeon General adopted a much more cautious tone over time about what the benefits of low tar and low nicotine might be.
    Q. So the answer to my question is that, yes, public health authorities did call for the production and sale of filtered and low tar and nicotine cigarettes; right?
    MR. CIRESI: Objection to the form of the question, a characterization of the testimony.
    THE COURT: I think it's been answered.
    Q. Would you turn to Exhibit 10602.
    A. Out of mine or yours?
    Q. That's a plaintiffs' exhibit. I'm sorry.
    A. Okay.
    Q. Yes, one of the exhibits that you referred to yesterday, a BATCo Ltd. document.
    Do you have that document in front of you?
    A. I do.
    Q. Would you turn to the page that's Bates numbered 583.
    A. Uh-huh.
    Q. Yesterday you referred the jury's attention to paragraph 14 and 15 --
    A. Uh-huh.
    Q. -- about explicit health claims and implied health claims; right?
    A. I -- I did refer to those points, uh-huh.
    Q. Paragraph 16, which you did not bring to the attention of the jury yesterday, says, "Reduction in biological activity per cigarette (rather than specific activity) will continue to be accepted by doctors as desirable." Right?
    A. I believe you read that correctly, yes.
    Q. So according to one of the documents upon which you relied, the reduction in biological activity per cigarette will continue to be accepted by doctors as desirable; right?
    A. You read it correctly again.
    Q. Are you aware of the fact that Dr. Ernst Wynder recommended to Congress that --
    MR. CIRESI: Your Honor -- excuse me, counsel, I hate to interrupt you, but it's an entirely improper form of question. Counsel is testifying.
    MR. BLEAKLEY: Your Honor, I object to --
    THE COURT: Do you have --
    MR. BLEAKLEY: -- the repeated interruptions of my questions, especially when counsel then tells me the form of my question is objectionable when I haven't even been permitted to finish it.
    THE COURT: Do you have a document that you're going to be introducing?
    MR. BLEAKLEY: Yes, I do.
    THE COURT: Okay.
BY MR. BLEAKLEY:
    Q. Actually, let me go to -- let me go to the Surgeon General's report that you just discussed, the 1981 Surgeon General's report. Do you remember the 1981 Surgeon General's report in your testimony just a moment ago?
    A. I --
    Q. Remember what the subject matter of the 1981 Surgeon General's report was?
    A. Let's see, I believe it was health -- healthier cigarettes or something along -- I -- I honestly don't remember exactly what the title was.
    Q. Would you take a look at tab 45 in -- in the second of the three binders that we gave you.
    A. Sorry. Here I am. Okay.
    Q. Now did I understand you to be saying that the 1981 Surgeon General's report no longer recommended low tar and nicotine cigarettes?
    A. It -- as I said, it affirmed, I -- I believe, the -- the earlier Surgeon General's reports, saying that basically the idea of low -- moving to low tar and no -- low nicotine cigarettes seems to be equated with a potential improvement in health, particularly with respect to lung cancer. However, it then does go on to add the caveat that we talked about a moment ago and it said while it reaffirms the earlier report, it adopts a more cautious tone and says, you know, there's -- there's nothing like quitting.
    *8 There's the issue of compensation, there may be new diseases as people adjust their behavior in smoking and take the smoke deeper into their lungs, and we're not so sure about the new additives that have gone in. So it reaffirms what the earlier reports had said, but then adds these important caveats.
    Q. Would you turn to page 200, please. Do you see the paragraph that begins with "The U.S. Public Health Service...?"
    A. Yes, I see that.
    Q. And what that says down toward the bottom of the sentence that begins  "In 1966...," "In 1966, the PHS" --
    That's Public Health Service, right?
    A. I would --
    Yeah, right.
    Q. -- "the Public Health Service submitted to Congress (42) the Technical Report on 'Tar' and Nicotine. On the basis of the clear demonstrated -- clear demonstration of cigarette dose- dependent risks of several diseases, the PHS concluded:
    "The preponderance of scientific evidence strongly suggests that the lower the 'tar' and nicotine content of cigarette smoke, the less harmful would be the effect.
    "We recommend...the progressive reduction of the 'tar' and nicotine content of cigarette smoke."
    Right?
    A. Well there's a few dot dot dots in after the "recommend," saying that something has been taken out between -- in that last sentence, but other than that, right.
    Q. Now would you turn to page 18 of the 1981 Surgeon General's report. Now in this, the Surgeon General is not referring back to 1966, but making a statement as of 1981; isn't he?
    A. I'd have to go back and sort of check that, unless you just want me to accept that.
    Q. Why don't you accept it for the moment.
    A. Okay. Fine.
    Q. What the Surgeon General says is, "Today's filter-tipped, lower tar and nicotine cigarettes produce lower rates of lung cancer than do their higher tar and nicotine predecessors." See that?
    A. I do see that.
    Q. And then down in paragraph four he says, "The occurrence of laryngeal cancer has been reported to be reduced among smokers who use filtered cigarettes, compared with those who use non- filtered cigarettes."
    A. Uh-huh. Okay.
    Q. Now have you reviewed the testimony given by Professor -- Dr. Samet here in this trial?
    A. Have I reviewed it? No, I have not.
    Q. Are you aware of the fact that Dr. Samet said that there has been a reduction in lung cancer after the introduction of low tar and nicotine cigarettes?
    MR. CIRESI: I'm going to object -- object to the characterization of Dr. Samet's testimony.
    THE COURT: Sustained.
    MR. BLEAKLEY: Well Your Honor, I think it's an accurate characterization of what Dr. Samet said.
    THE COURT: Counsel, counsel, the objection was sustained. Do you have another question?
    MR. BLEAKLEY: May I refer the witness to Dr. Samet's testimony?
    THE COURT: If he hasn't reviewed it, no.
BY MR. BLEAKLEY:
    Q. You haven't reviewed it?
    A. Oh, no, I have not.
    Q. And no one has told you what Dr. Samet testified about this, on this subject?
    *9 A. No, I don't believe so.
    Q. And you didn't ask what the evidence was about the low tar and nicotine and what effect it has on --
    MR. CIRESI: Objection, Your Honor, it's irrelevant.
    THE COURT: You can answer.
    A. I didn't ask about the evidence?
    Q. Yeah.
    A. I did -- I did, as we --
    As I got into the analysis of the low -- low tar/low nicotine cigarettes, I did pursue the issue of what were the true health impacts of -- of that, yes.
    Q. You looked into it, but you didn't read what Dr. Samet said here in this trial.
    A. Well you could put together the two answers that I've just given and say that, right. I did not review what Dr. Samet said, but I examined the issue.
    Q. Now let's talk for just a moment about brand loyalty and brand switching, which was the fourth of your list of four objectives of what you describe as the defendants' total marketing and communications program. Right?
    A. Right.
    Q. Isn't it a fact that the principal objective of the defendants' advertising and marketing programs over the past years has been brand loyalty and brand switching?
    A. No, I -- as I said yesterday, you know, I -- I take those four objectives that we talked about and kind of look at them as a whole, and I don't really try to separate out -- I think it's improper to try to separate out which one of those four was more important or less important or what the priority order was. It's all part of the total marketing system.
    Q. Isn't it a fact that since industry demand is essentially fixed, the only way to increase sales is through share acquisition; i.e., at the cost of a competitor?
    A. No.
    Q. Didn't you say that?
    A. I quoted someone else saying that as they referred to the cigarette industry in the years 1890 to 1946.
    Q. Would you refer to tab 46, please.
    MR. CIRESI: May we have an exhibit number, please?
    MR. BLEAKLEY: Sorry. Exhibit No. SM000077.
    Q. This is an article entitled "MODELS OF COMPETITION: A REVIEW OF THEORY AND EMPIRICAL EVIDENCE" written by Robert J. Dolan, Harvard University.
    MR. CIRESI: Excuse me, counsel, may I have that again?
    MR. BLEAKLEY: Sorry. SM000077.
    Do you have it, Mr. Ciresi? Did you find it?
    MR. CIRESI: I have an empty folder, but you go ahead and proceed.
    MR. BLEAKLEY: That happened to me yesterday. Very frustrating. I know the feeling.
    MR. CIRESI: I'm not frustrated, counsel. You just proceed.
BY MR. BLEAKLEY:
    Q. Professor Dolan, do you have it?
    A. Oh, yes. I have it.
    Q. And that Robert Dolan is you; is it not?
    A. It sure is. That's me.
    Q. You wrote this article.
    And would you turn to page 232, please. Are you on page 232?
    A. Yeah, I'm there.
    THE COURT: Counsel, may I ask what tab this is, tab number?
    MR. BLEAKLEY: Sorry, I thought I said it. Tab 46.
    THE COURT: All right. I thought you said tab 45.
    MR. BLEAKLEY: I probably did. I apologize.
    THE COURT: Go ahead, I've got it.
    *10 MR. BLEAKLEY: Tab 46.
BY MR. BLEAKLEY:
    Q. Page 232.
    A. Uh-huh.
    Q. Entitled "Cigarette Motorcycle."
    A. Uh-huh.
    Q. You said, "Generic demands for cigarettes is price inelastic while selective demand is price elastic (Tennant 1961)," and then you went on to say, "Since industry demand is essentially fixed, the only way to increase sales is through share acquisition; i.e., at the cost of a competitor." Right?
    A. Well you read correctly what is --
    We don't want to put this one up on the --
    Q. I haven't offered it in evidence.
    A. Oh, I see. Okay. Sorry. Forgot the rules.
    That's -- that's what's written here. I mean basically, again, as I said a moment ago, this was a study which was done of the tobacco industry covering the years from 1890 to 1946, and Professor Tennant in this article and what I'm quoting here, generic demands for cigarette is price inelastic, right, that's what he's referring to there. That's what I'm referring to there, not anything about advertising. So it's saying the size of the market does not change with the price level. And, you know, but selective demand -- and he's looking at cigarettes which were -- some of which were -- he's looking at people switching from brands which were 10 cents to brands which were seven cents and saying that brand shares are -- are elastic. But I think -- I think most of us -- well I -- I would certainly kind of look at the market of recent times and say, "Gee, is the size of the market impacted by excise taxes? Is the size of the market impacted by the way that prices of cigarettes have gone up in the 1980s?" Certainly my judgment is that there has been an effect of price on the overall size of the market.
    Q. But what you said in this article was, "Since industry demand is essentially fixed...," is that not what you said?
    A. I'm -- I'm sort of carrying on with his analysis of the industry from 19 -- 1890 to 1946.
    Q. Isn't it a fact that industry demand is essentially fixed and indeed declining?
    A. I --
    MR. CIRESI: Excuse me, professor. Your Honor, what time period? This one is outside the scope of this case. Is he now --
    THE COURT: Yeah. Can you give us a time period, please?
    Q. Hasn't industry demand been fixed or declining for the last 30 years?
    A. Well those are two different things. Fixed --
    It has been declining. My -- the way I have it in my head, it goes -- starts to go down, what, in 1982 or so, something around there.
    Q. That's about right. Sorry.
    A. Is that right? All right.
    But the issue of whether it's fixed or not is an entirely different issue from whether the number of cigarettes sold has been going down or not. "Fixed" means does the size of the market -- is it responsive to the marketing and communications efforts of the manufacturers? So fixed and whether you're going down or not are totally different concepts.
    Q. Would you turn to tab three.
    MR. CIRESI: May we have an exhibit number, counsel?
    *11 MR. BLEAKLEY: Exhibit MD000113, the 1979 report of the Surgeon General of the United States.
    Q. Do you have that?
    A. Oh, yeah, I have it.
    Q. Would you turn to page 18-23, and refer you specifically to the paragraph that starts with the word "Whiteside...."
    A. Okay.
    Q. Do you see in the middle of that page, "As the cigarette industry has asserted, the major action of cigarette advertising now seems to be to shift brand preferences, to alter market shares for a particular brand?"
    A. Do I see that --
    Q. Yes.
    A. -- statement?
    Q. Yes.
    A. I do see that statement.
    Q. And now would you turn back to the 1987 Economic Report of the President, and to the statement that we referred to before.
    A. So are we done with Mr. Whiteside's speculative analysis?
    MR. BLEAKLEY: Move to strike the commentary, Your Honor.
    Q. Yes, we're finished with that.
    THE COURT: Okay. That will be stricken.
    A. Okay.
    Q. Page 186 of the Economic Report of the President --
    A. Right.
    Q. -- said, "As with many products, advertising mainly shifts consumers among brands." That's the Economic Report of the President. Do you see that?
    A. Yes, I do.
    Q. So I repeat the question I asked before: Hasn't the primary objective of the cigarette companies' advertising been brand switching and brand loyalty?
    A. I -- I would not agree with that conclusion.
    Q. Okay.
    A. I -- I --
    My conclusion, based on my review of the internal company documents which the people who are writing these things did not have access to, is that the role of -- of advertising was a part of the total marketing and communications package, and that total marketing and communications package had four purposes and impacts in the marketplace.
    Q. Based on your review of approximately 4,000 out of 250,000 marketing documents that were produced, a substantial percentage of which were ads; right?
    MR. CIRESI: Your Honor, I'm going to object to the form of the question. Counsel is testifying.
    THE COURT: Restate the question, counsel.
    MR. BLEAKLEY: I'll withdraw it, Your Honor.
BY MR. BLEAKLEY:
    Q. Now, we've talked about your opinion regarding the objectives of what you describe as defendants' total marketing and communications programs. Yesterday you were asked whether or not your review of the selected documents you saw permitted you to conclude that the defendants' objective of keeping people smoking had been successful. Do you remember that?
    A. I don't recall that question specifically, but may -- maybe -- maybe I had -- was asked that one specifically.
    Q. You showed four documents that you said were representative that showed the success of the defendants' objectives. Do you remember that?
    A. That was --
    Are we referring to Marlboro, the two Newports and -- I forget what the other one was now. Are those the four you're referring to?
    Q. B&W.
    Those are the documents, yes.
    A. But that was under the heading of inducing people to start smoking,. --
    *12 Q. I'm sorry, I misspoke.
    A. -- not quit.
    Q. Success in getting people to start. And you cited those four documents.
    A. I cited those four in particular, but I think it comes out of the more general understanding of the themes that you pick up in the -- in the documents.
    Q. And your -- your testimony is that they're representative; right?
    A. I'm sorry, I couldn't hear you.
    Q. Your testimony is that those four documents were representative.
    A. My testimony is that those four were illustrations -- representative illustrations of the general point.
    Q. Now, have you done any research to permit you to opine on the question of whether the communications of the tobacco industry have had any impact on smokers?
    A. I would say that the analysis which -- which I've done was directed to the issue of understanding what those communications efforts were, how they fit in with the rest of the elements of the total marketing and communication package, what their objectives were, what their impacts were.
    Q. Well let me restate the question then.
    Apart from the approximately 4,000 documents that you reviewed, have you done any research on the effect or impact of defendants' communications programs?
    A. Well I set out for you yesterday what the process was via which I did my research in this -- in this case, and as I did mention, there were a number of journal articles that I looked at. But again, I'll reiterate what I said yesterday. My -- my opinions in my expert report, which are the same opinions that I express when I come to testify here, were based on my review of the internal documents.
    Q. Have you done any research on the attitudes and beliefs of smokers about the health hazards of smoking?
    A. As -- as contained in the -- in the documents that I -- that I reviewed, that was one of the issues I looked at, yes.
    Q. Apart from your review of approximately 4,000 selected documents, have you done any research on the attitudes and beliefs of smokers about the health hazards of smoking?
    A. Well again, I -- I -- I guess I'm just a little confused about --
    My previous answer -- I mean I've described --
    We started out with me describing my research process, and that research process covers the issue of customers' -- of smokers' attitudes and beliefs about the health hazards of smoking, so it comes from the 4,000, actually 5400 documents that I've looked at in this -- in this case.
    Q. Have you reviewed any of the polls that have been taken, either here in Minnesota or elsewhere, about the beliefs and attitudes of smokers regarding health hazards of smoking?
    A. Well certainly contained within the -- the documents which we -- we've referred to previously, there were -- there were various polls in those -- in those documents which I reviewed, and in the set of documents that you sent to me to look at before my testimony here there were more polls, and I reviewed those.
    Q. Did you do any sort of survey of smokers to determine their beliefs or --
    *13 A. Did I?
    Q. -- attitudes?
    Yes, you.
    A. Did I conduct my own survey?
    Q. Yes.
    A. No, I did not conduct my own survey.
    Q. Or have it conducted by anyone else?
    A. No, I did not direct anyone else to conduct a survey for me. There were a large number of large-scale surveys which were -- which had already been done.
    Q. Have you done any research on Medicaid recipients in Minnesota or elsewhere?
    A. Well I've raised --
    I've read the depositions of the Medicaid recipients as the documents -- which are involved in this case. Other than that I have not independently conducted -- conducted research on them.
    Q. And so you don't know what the beliefs and attitudes about the health hazards of smoking there are for Medicaid recipients.
    A. Well I didn't say that at all.
    Q. Well you do know?
    A. Could I have a chance to answer my -- my -- my question, to -- to deliver my question -- my answer? Sorry.
    Q. I apologize.
    A. You know, I said I -- I read 13 Medicaid depositions, and in there there are some beliefs for those 13 people about their perceptions of the health hazards of smoking. That's what -- that's what I did. Now, you know, if you want to characterize -- I guess you can characterize that how you want, but that's what I did. So does that give me -- is that a broad sampling of Medicaid recipients? No. Is it reading the 13 depositions that were available in this case? Yes.
    Q. Did you do any sort of review of the activities of anti- smoking groups in Minnesota?
    A. Again, I'm right where I was a minute ago, such that it was in the documents which were part of the set that I reviewed, I was aware of it, I paid attention to it as I -- as I did my analysis. I did not, again, did not go outside the documents which we've already talked about in doing other research.
    Q. Did you review any of the educational materials used by the Minnesota public school systems to educate the young people of Minnesota about the health hazards of smoking and addictiveness?
    A. I certainly am aware of -- of the -- of the curriculum activities. I don't know that I went down to the level of detail of looking exactly -- at exactly what materials were used, but I -- I am aware of those general -- of the existence of those general efforts.
    Q. Have you made any effort to determine or to estimate the impact of all of the activities of anti-smoking groups, anti- smoking legislation, public education?
    A. Well certainly I did consider the -- as I mentioned when we first started, that when you're looking at your marketing and communications efforts, you have to understand the information environment in which they are taking place. So I generally try -- did try to have an assessment of -- to make an assessment of what was going on, what was being said by others about the industry as well as what was being said by the manufacturers.
    Q. The "information environment" is a term that marketing experts use frequently; isn't it?
    *14 A. Well it's -- it's a term you hear around marketing circles, right.
    Q. And the -- I'm sorry. And the -- the information environment refers to all of the sources of information and knowledge that go into making up people's beliefs and attitudes; isn't that right?
    A. Yeah, that -- I think that's a fair characterization. If you have -- they're targeting a particular customer, you want to understand what's in that person's mind, and, you know, what is shaping their attitudes and behaviors, so you would like to be aware of all the kind of information that they're processing.
    Q. And you know for a fact that the Surgeon General's reports have been widely publicized in the press; right?
    A. Well I -- I do know that they've been published in newspapers and so forth. I'm not sure how many 16-year-olds are reading them as they're published in the newspapers, but I -- I do know that the Surgeon General's reports were generally reported upon in the press, yes.
    Q. You -- you don't know whether 16-year-olds did or did not read the articles that appeared in the newspapers; do you?
    A. I have not conducted a survey, nor do I recall seeing a survey of 16- year-olds' consumption of the front page of the Minnesota newspapers as the Surgeon General's report was written about.
    Q. You do know, however, that 16-year-olds in the state of Minnesota have been taught about the health hazards of smoking and the addictiveness of smoking for decades; don't you?
    A. I do understand that there certainly has been a history of health education, and particularly smoking, the health hazards associated with smoking in the Minnesota schools. I don't know exactly what period in time they were instituted and how they've changed over time. But I certainly do know that there was a long history of them within the state, yes.
    Q. And you do know that anti-smoking groups have been very active in the state of Minnesota for a long time, too; don't you?
    A. I -- I don't really know too much of the details of the extent of their activity, but I -- but I do know that -- I did see in my review of the documents that there were a number of anti- smoking groups which were active, yes.
    Q. And you do know that the polls that you have reviewed show that virtually everyone in Minnesota has believed that cigarette smoking is hazardous for the last 25 years or so; do you not?
    MR. CIRESI: Objection, that's a misstatement of polls, and it's also counsel's testifying.
    THE COURT: Sustained.
    Q. Now let's look at the other side of the coin here. You talked yesterday about The Tobacco Institute. Do you know how many people in Minnesota have ever seen a press release of The Tobacco Institute?
    A. Have ever seen a press release?
    Q. Yes.
    A. Gee, I would -- I don't -- I -- I don't know. I'd be surprised if it were a lot since basically a press release is given to the press to influence what they write about an issue rather than distributed to individuals.
    *15 Q. Do you know how many of the press releases given to the press in Minnesota have been read by the people of Minnesota?
    A. I'll need that read back. I'm sorry. I missed it.
    Q. It was a clumsy question. Why don't I try a different one.
    A. Okay, fine.
    Q. Okay?
    You said that press releases from organizations like The Tobacco Institute are given to the press; right?
    A. That's how I generally think of it.
    Q. And then the press decides whether to print them or not; right?
    A. Well I don't think they so much print them as use the information in them in their article.
    Q. Okay. Do you know how many have been reprinted in exactly that form or any other form in newspapers in the state of Minnesota?
    A. I'm sorry -- I'm sorry, I -- I --
    How many of them have been reprinted --
    Q. Yes.
    A. -- in that form or any other form?
    Q. Yes. What I'm trying to get at is have you made any effort to determine how effective what you call the communications program of the tobacco industry has been in the state of Minnesota?
    A. Oh, particularly in the state of Minnesota. Well my -- my analysis was really at the -- as I looked at the marketing campaigns, the marketing -- total marketing/communications campaigns of the cigarette industry, I really looked at the national -- you know, kind of looked at it from a national point of -- point of view. And by and large the programs are -- you know, the sort of direction, the strategies are national programs. I did not kind of look down at the level of saying exactly -- I -- I did not come down to the state level other -- other than to understand what was going on in the state along the dimensions that you talked about.
    Q. Well let's talk about the national level then.
    A. Okay.
    Q. Have you made any kind of systematic effort to compare the communications from the tobacco industry on smoking-and-health issues against all of the information available to people from anti-smoking groups, legislation, Surgeon General's reports, polls, to compare the two to make any analysis of the two?
    MR. CIRESI: I'm going to object to the form of the question. It's compound.
    THE COURT: Yes, I think you're going to have to rephrase that.
    MR. BLEAKLEY: All right. I'll try to rephrase it, Your Honor.
BY MR. BLEAKLEY:
    Q. What I'm trying to get at is whether or not you have sat down and taken all of the communications that you learned about in reading your selected 4,000 documents and compared them to all of the other information in the information environment that people were receiving and make an analysis of it? Have you done that?
    A. I wouldn't say I compared them. What I did is integrate them. I try to --
    I don't say it's A versus B. I put A and B together so that I get a total understanding.
    Q. And how did you do that?
    A. How did I do that?
    Q. Yes. How did you do it?
    A. Via my review and research in the, quote, selected 4,000 documents.
    Q. So we're back to the 4,000 selected documents; right?
    *16 A. Yes. To use your terminology, yes.
    Q. At least half of which were ads; --
    MR. CIRESI: Your Honor, --
    Q. -- correct?
    MR. CIRESI: -- objection, now asked and answered.
    THE COURT: You can answer it again if you want.
    A. I believe the -- again, in -- in your counting system of a one-page ad counts as a document and a hundred-page marketing document, marketing plan counts as a document, the majority of them were ads. If you put them on a scale, as I said yesterday, the ads would lose miserably to the other -- the non-ads.
    MR. BLEAKLEY: I have no further questions, Your Honor.
    THE COURT: Should we take a break now, or --
    It's about time. Is that all right?
    MR. CIRESI: Fine, Your Honor.
    THE COURT: Why don't we take a short recess.
    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. Good morning, professor.
    A. Good morning, Mr. Ciresi.
    MR. CIRESI: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    Q. Professor, after your expert report, did you look at additional documents?
    A. I did. I continued my review and analysis.
    Q. Okay. How many total documents did you look at?
    A. Five thousand four hundred, I believe.
    Q. Now are you aware of how many documents Mr. Bible of Philip Morris looked at of his own documents?
    A. No, I don't know.
    MR. BLEAKLEY: Objection, Your Honor, that's not relevant.
    THE COURT: Sustained.
    Q. Can you direct your attention to Exhibit 12493, which was the RJR presentation to the board of directors of September 30, 1974. It's in volume one, sir.
    A. Yes.
    Q. And you recall that Mr. Bleakley asked you a series of questions regarding whether there was anything in there about the target market after the first six charts? Do you remember that?
    A. I do recall that, yes.
    Q. Can you direct your attention to the Bates number page 1316.
    Do you have that, sir?
    A. I do.
    Q. And that's the point where the reference was made to the book store at Harvard Square. Do you see that?
    A. Right, I do. They're referring to Vantage cigarettes.
    Q. Correct. And do they talk about targeted efforts, right below that, against young adults?
    A. Right. Quite -- quite clearly, as you see there, what they say,  "Advertising spending has been increased with more targeted efforts against young adults." You know, clearly, clearly the young adults being the target market.
    Q. And right there in the next chart, chart 14, do they talk about increased media efforts toward young adults?
    A. Yes, they do.
    Q. Now Mr. Bleakley also asked you a number of questions concerning the Surgeon General's report --
    A. Right.
    Q. -- of 1981. Do you recall that, sir?
    A. I do.
    Q. I believe that was in tab 45 of the defendants' documents, if you could pull that up. Do you recall that?
    *17 A. Yes. Oh, yes, I do.
    Q. And was that the right tab? I wasn't sure if I had that right.
    A. Yes, that's the right tab.
    Q. Now he directed your attention, I believe, to pages 200 and page 18. Do you recall that?
    A. I honestly don't recall the specific page numbers, but that could well be.
    Q. All right. If you take a look at page 200 and page 18, could you just confirm that those are the pages he directed your attention to?
    A. Okay. Well 18, yes, I recognize that, and yeah, 200, yeah, right.
    Q. Okay.
    A. You refreshed my memory that those were the two pages, yes.
    Q. Now do you recall that you, in response to a question, told him about the statements of the Surgeon General over succeeding years with respect to low tar and low nicotine cigarettes?
    A. Yes, I recall that I did that.
    Q. Okay. Could you go to the preface of the Surgeon General's report there.
    A. In tab 45?
    Q. Yes.
    A. Well I was looking for it earlier in response to the direct -- to the cross-examination. I couldn't find it.
    Q. It's not there?
    A. It doesn't seem to be here.
    Q. All right. Well we'll put up the whole part here. Could you put up preface? Maybe you could use the -- the monitor right next to you.
    A. I'll use this. Fine.
    Q. Okay?
    Now on the preface, which is part of the complete 1981 Surgeon General's report, is there a history provided by the Surgeon General with regard to low tar and low nicotine?
    A. Yes. Yes.
    Q. All right. I'd like to direct your attention, then, to the third paragraph of the preface where it starts, "In 1966...," do you see that?
    A. I do see that.
    Q. Okay.
    A. That's exactly what I was looking for earlier.
    Q. I want to read some -- some parts of this.
    "In 1966, the Public Health Service held that 'The preponderance of scientific evidence strongly suggests that the lower the tar and nicotine content of cigarette smoke, the less harmful would be the effect."' Do you see that?
    A. I do.
    Q. And you related to that on your direct -- or cross- examination; did you not?
    A. Yes, I did.
    Q. The Surgeon General's report of 1981 then goes on to state, "In 1979, the Public Health Service confirmed this statement, citing new evidence, but was more cautious. 'In presenting information on the public,' I wrote in the Preface to the 1979 Report, 'three caveats are in order: consumers should be advised to consider not only levels of tar and nicotine but also, paren, (when the evidence becomes available) levels of other tobacco smoke constituents, including carbon monoxide. They should be warned that, in shifting to a less hazardous cigarette, they may in fact increase their hazard if they begin smoking more cigarettes or inhaling more deeply. And, most of all, they should be cautioned that even the lowest yield of cigarettes presents health hazards very much higher than would be encountered if they smoked no cigarettes at all, and that the single most effective way to reduce the hazards associated with smoking is to quit."'
    *18 Now, sir, in responding to questions by Mr. Bleakley, did you give that chronology with regard to the succeeding Surgeon General's reports?
    A. The general spirit of that. I think I missed the point about one of the caveats being to look at things other than -- other than tar and nicotine. But this was certainly the sense that I was trying to convey in my answer.
    Q. Okay. Now the '81 report goes on to state in the preface, "In this 1981 Report, the Public Service has reviewed the question again and in far greater depth than before. Overall, our judgment is unchanged from that of 1996 and ' 79; smokers who are unwilling or as yet unable to quit are well advised to switch to cigarettes yielding less tar and nicotine, provided they do not increase their smoking or change their smoking in other ways. But our new review raises new questions and suggests an even more cautious approach to the issue.
    "Here are the basic findings of this Report:"
    Now sir, the basic findings then are set forth below there; is that correct?
    A. That's correct.
    Q. And these were some of the findings that you related in your answer on cross-examination; correct?
    A. Yes, they were.
    Q. Okay. Number one, "There is no safe cigarette and no safe level of consumption."
    Number two, "Smoking cigarettes with lower yields of 'tar' and nicotine reduces the risk of lung cancer and, to some extent, improves the smoker's chance for longer life, provided there is no compensatory increase in the amount smoked. However, the benefits are minimal in comparison with giving up cigarettes entirely. The single most effective way to reduce hazards of smoking continues to be that of quitting entirely."
    Number three, "It is not clear what reductions in risks may occur in the case of diseases other than lung cancer. The evidence in the case of cardiovascular disease is too limited to warrant a conclusion, nor is there enough information on which to base a judgment in the case of chronic obstructive lung disease. In the case of smoking's effects on the fetus and newborn, there is no evidence that changing to a lower 'tar' and nicotine cigarette has any effect at all on reducing risk."
    Number five, "Smokers may increase the number of cigarettes they smoke and inhale more deeply when they switch to lower yield cigarettes. Compensatory behavior may negate any advantage of the lower yield product or even increase the health risk."
    Six, "The 'tar' and nicotine yields obtained by present testing methods do not correspond to the dosages that the individual smokers receive: in some cases they may seriously underestimate these dosages."
    Number seven, "A final question is unresolved, whether the new cigarettes being produced today introduce new risks through their design, filtering mechanisms, tobacco ingredients, or additives. The chief concern is additives. The Public Health Service has been unable to assess the relative risks of tobacco -- of cigarette additives because information was not available from manufacturers as to what these additives are."
    *19 Now sir, that also is part of the 1981 report?
    A. That's a part of the entire report, yes.
    Q. Okay. And can you direct your attention to page seven of the 1981 report, and specifically to the bottom, the second-to-the- last sentence. "As discussed...," do you see that, sir?
    A. I do.
    Q. "As discussed in this report, the recent reductions in 'tar' yield have been accomplished by altering tobacco growth and processing and by changes in cigarette manufacture. These changes may have produced a 'tar' with a different composition from that of old higher 'tar' cigarettes and may have changed the concentrations of some of the constituents contained in the gas phase of the smoke."
    Now is that another part that you had read in this Surgeon General's report?
    A. It is.
    Q. And can you direct your attention to page 99.
    A. I don't have that page either.
    Q. That's not either --
    Okay. We'll put that up on the overhead. This deals with flavor additives, and I -- I would direct your attention to the last paragraph, and is it reported there, "The exact delineation of the chemical structure of the additives, their pyrolytic products, the possible carcinogenic properties, and the quantities found in smoke of lower 'tar' cigarettes is urgently needed in order to assure the customer that the filter, lower 'tar' and nicotine cigarette does not carry additional or new health risks." Do you see that?
    A. I do.
    Q. And earlier in this Surgeon General's report it was reported that the defendants did not provide that information; correct?
    A. That's correct.
    Q. And finally, sir, can you direct your attention to page 181 of the Surgeon General's report of 1981.
    A. I have that one.
    Q. And at the top of that page it talks about compensatory smoking. Do you see that?
    A. Yes, I do.
    Q. Is it reported there in the 1981 report that, "Compensatory smoking is central to the question of the public health benefits of lower 'tar' and nicotine cigarettes. The frequency and extent of compensatory smoking should be measured in detail in order to determine whether smokers who switch to lower 'tar' and nicotine cigarettes actually inhale fewer harmful compounds." Is that reported?
    A. Yes, it is reported.
    Q. And is that consistent with what you found in your investigation, sir?
    A. Yes, it was.
    MR. CIRESI: I have no further questions. Thank you, professor.
    MR. BLEAKLEY: I have two questions.
    THE COURT: Is this something -- an area that's new?
    MR. BLEAKLEY: Yes. Very short.
    THE COURT: All right.
BY MR. BLEAKLEY:
    Q. Professor Dolan, this 1981 Surgeon General's report was a public document; was it not?
    A. I think so, yes.
    Q. And widely published in the public press throughout the United States; wasn't it?
    A. Widely published in --
    Q. Yes, widely reported in the public press throughout the United States?
    A. I believe it was.
    MR. BLEAKLEY: That's all I have, Your Honor.
    *20 MR. CIRESI: No further questions, Your Honor.
    THE COURT: You may step down.
    THE WITNESS: Thank you, Your Honor.
 (Witness excused.)
    MR. GILL: Good morning, Your Honor.
    THE COURT: Good morning.
    MR. GILL: The state of Minnesota and Blue Cross Blue Shield call Professor Adam Jaffe.
 (Witness sworn.)
    THE CLERK: Please state your name and spell your last name.
    THE WITNESS: My name is Adam B. as in Benjamin, Jaffe, J-a- f-f-e.
    THE CLERK: Thank you. You may be seated.
    MR. GILL: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    ADAM B. JAFFE called as a witness, being first duly sworn, was examined and testified s follow:
BY MR. GILL:
    Q. Good morning, Professor Jaffe.
    A. Good morning, Mr. Gill.
    Q. Would you introduce yourself to the members of the jury, please.
    A. I'm Adam Jaffe.
    Q. And where you live, Professor Jaffe?
    A. I live just outside of Boston, Massachusetts.
    Q. And is your mike turned on, Professor Jaffe?
    A. No, it is not.
    How is that?
    Q. That's much better.
    I think you told us that you live just outside of Boston?
    A. That's correct.
    Q. Are you married?
    A. I am.
    Q. And do you and your wife have any children?
    A. Yes, I have a boy and a girl.
    Q. And what do you do, Professor Jaffe, for a living?
    A. I'm professor of economics at Brandeis University, which is just outside Boston, and I'm also a partner in an economic consulting firm in the Boston area.
    Q. A little over a year ago, Professor Jaffe, did you agree to review information concerning the competitive behavior of defendants?
    A. Yes, I did.
    Q. And do you have in mind the issues that you'll be addressing during your testimony?
    A. Yes, I do.
    Q. What are those issues?
    A. Whether the defendants engaged in an antitrust conspiracy to suppress fundamental competition in the U.S. cigarette market with respect to the smoking-and-health issue, and if so, whether that conspiracy unreasonably restrained trade in that market.
    Q. All right. Professor Jaffe, I think you've given us a mouthful. Let me see if we can break that down a little bit in terms of some of the particular terms that you used.
    You first mentioned antitrust conspiracy. What is an antitrust conspiracy?
    A. From an economist's point of view, an antitrust conspiracy is an agreement among the firms in an industry to suppress or restrict competition among themselves.
    Q. And you mentioned "fundamental competition." What type of competition is fundamental competition?
    A. Well when I talked about fundamental competition with respect to smoking and health, what I meant was significant or important competition that would have an effect on the market.
    Q. And then you mentioned an "unreasonable restraint of trade." What do you mean by that term?
    A. Well an unreasonable restraint of trade is one that has more than a minimal impact on the market and which does not have any pro-competitive or legitimate justifications.
    *21 Q. Now have you reached opinions in connection with the issues of antitrust conspiracy and economic impact?
    A. Yes, I have.
    Q. All right. Before I ask you to explain your opinions, I'd like to have you cover the qualifications that you bring to the effort to analyze the defendants' anti-competitive behavior. Are you agreeable to doing that?
    A. Okay.
    Q. Let's start with your educational background. Would you summarize that, please.
    A. Yes. I did my undergraduate work in chemistry at the Massachusetts Institute of Technology, and I got that degree in 1976, and then I stayed at MIT and got a master's degree in technology and policy from MIT, and then did doctoral work in economics at Harvard University, and I got the Ph.D. degree in economics in 1985.
    Q. And in connection with earning your doctorate degree, I take it you were required to do a thesis or a dissertation?
    A. That's correct.
    Q. What did your dissertation deal with?
    A. My dissertation looked at the process of research and development among firms in the private sector in the U.S. economy.
    Q. All right. Now in addition to doing your thesis work as you've just described, how else did your educational background come into play in addressing and analyzing issues of antitrust conspiracy and economic impact?
    A. Well my undergraduate science training in the technology and policy degrees that I did prepared me generally to look at the research process in the private sector and its consequences, but then more specifically in my Ph.D. work I focused on the areas of antitrust economics as well as the economics of research and development and innovation and its consequences in the economy.
    Q. All right. You introduced a new term to us in that answer, "antitrust economics." What do you mean by that term?
    A. Well antitrust economics is a -- sort of a broader subfield within economics in which economists study competitive behavior, anti-competitive behavior, or behavior that restricts competition in many different forms, as well as the factors in a particular industry that would be conducive to competition, and on the other hand, the factors that are conducive to restrictions of competition.
    Q. So if I understand you correctly, antitrust economics can refer to pro- competitive behavior or anti-competitive behavior.
    A. That's correct.
    Q. Let's move now to your professional background and experience. Would you briefly summarize that, please.
    A. Yes. After getting my doctoral degree at Harvard in 1985, I joined the faculty at Harvard in the economics department and I taught at Harvard until 1993, when I moved to my current position at Brandeis University, where I teach in the economics department at Brandeis.
    During the time I was at Harvard for the academic year 1990- '91, I was granted a -- an academic leave of absence from Harvard because I was asked to go to Washington to serve as a senior staff economist at the President's Council of Economic Advisors in Washington, D.C., which is the organization that produces that report that we just saw some excerpts discussed previously.
    *22 In addition to my academic appointments, initially when I was at Harvard I began doing some consulting work on the side relating to economics, particularly in the areas of competition and antitrust economics, and in the late 1980s I started a consulting firm with another economist from Harvard, which is called the Economics Resource Group or ERG, and I continued through ERG to do consulting for various organizations in the areas of -- of economics. And finally as part of my academic responsibilities, in addition to my work at Brandeis, I'm the coordinator of a project at an organization called the National Bureau of Economic Research, which is a non-profit economics research organization also in Boston, and I coordinate the project on industrial technology and productivity at the National Bureau of Economic Research, and I've done that since 1993.
    Q. All right, then, professor, let me ask you: How specifically has that professional background that you just recited qualified you to address the issues of antitrust conspiracy and economic impact?
    A. Well all of my professional work has really focused on the areas of antitrust economics, competitive behavior, anti- competitive behavior, as well as the area of research and development and innovation and interaction between the two, and I've really focused on these two areas in my research in my -- that is, in my academic research, in my teaching, as well as in sort of the real-world work that I've done through the consulting and the government work.
    Q. Let me ask you if you can explain for us what the relationship is between antitrust economics on the one hand and your focus there, and new- product innovation which you've mentioned several times.
    A. Yes. Well there really --
    The relationship goes in both directions. The extent of competition and the nature of competition in an industry is an important factor which affects the way research is done and in particular how much innovation, how much development of new products there will be in an industry. And then conversely, the process of innovation is itself an important component of competition within industries. And so there's a -- there's a -- a relationship that goes from innovation to competition as well as a relationship from competition to innovation.
    Q. All right. And you mentioned that you have focused on antitrust economics and new-product innovation in several different forums; is that correct?
    A. Yes.
    Q. All right. Let's go through those one at a time and get a better idea of exactly where the focus has been in those particular forums.
    First of all I heard you mention research. How has your work on -- in the research area particularly focused on these areas of antitrust economics and new-product innovation?
    A. Well as an academic researcher really for the last 15 years or so, I have spent most of my time studying the processes of innovation in the -- in firms and how it relates to competition, reading the -- the material that's been written by other economists on the subject, and then really going out and doing my own original research where I gathered data in various forms on various different topics, and I -- and I do research on the subject of research and development and innovation and its relationship to competition, and I've published many academic papers on this topic in economics journals, and also this project that I've coordinated at the National Bureau of Economic Research, my role there really has been to be in touch with economists all over the country who are working on issues relating to technology and productivity, organizing conferences and that sort of thing related to that issue.
    *23 Q. So your own individual research or original research has led to publications.
    A. Yes.
    Q. And have these publications occurred in peer-reviewed journals?
    A. Most of them, yes.
    Q. Approximately how many publications have you had in peer- reviewed journals that related to the subjects of antitrust economics and/or new-product innovation?
    A. Several dozen.
    Q. In addition to publishing in peer-reviewed journals, have you had any particular relationship with peer-reviewed journals in other ways?
    A. Yes. I'm a member of the board of editors of the American Economic Review, which is, most economists would agree, the leading American -- most widely read American economics -- academic economics journal, and as a member of the board of editors I play a prominent role in reviewing papers submitted by other people within my areas of expertise, which are antitrust economics and -- and research and development, and reviewing those papers, providing advice to the -- the ultimate editor of the journal regarding whether those papers should be published.
    Q. In addition to that journal, have you served in the capacity of a reviewer of peer-review submissions for other economic journals?
    A. Yes. In economics they're called referees, and I've served as a referee for probably eight or 10 of the economics -- academic economics journals that publish in the areas in which I have expertise.
    Q. All right. You also mentioned that in your teaching background at Harvard and at Brandeis, you have focused on these areas of antitrust economics and new-product innovation. How has that developed?
    A. Well the courses that I've taught since 1985 have been in the areas of, first of all, what's called microeconomics, which is more -- a broader area within economics. It really refers to generally the study of how firms and consumers interact in particular markets and how that interaction affects the amount of benefits that consumers derive from particular products. And so microeconomics looks at this interaction in particular markets as opposed to macroeconomics, which is the study of what determines the overall rate of inflation, the overall rate of unemployment and things like that in the economy as a whole. So I've taught courses in -- in microeconomics. I've also taught courses at both the undergraduate and the doctoral level in antitrust economics, and I've taught courses in the economics of research and development and innovation, the other major area of my expertise.
    Q. What does a professor such as yourself have to do to get ready to teach those types of courses?
    A. Well you really do a fair amount of work. In general, I would be familiar with the important literature that already exists within a given area, but what I would do would be to sit down with the material that I know exists that people have written within a given area and then try to organize it in a way that I think is systematic and -- and most susceptible to being digested by the students so that I can prepare an outline and a syllabus for the course.
    *24 Q. And finally with respect to your consulting activities, how have they focused on the antitrust economics and the innovations?
    A. Well in consulting, what I've specifically done is I've been asked by -- sometimes by law firms, sometimes by companies or by government organizations, to examine issues with regard to various industries, and much of this work has related to competition, often assessing how competitive a particular industry is, assessing whether certain behavior in a particular industry has been anti-competitive, and assessing whether the structural conditions in a given industry or given market are or are not conducive to competition or conducive to anti-competitive behavior.
    Q. You mentioned your work with respect to the President's Council of Economic Advisors.
    A. Yes.
    Q. First of all let me ask you: Was that a political appointment?
    A. No. The -- the staff of the President's Council of Economic Advisors are traditionally non-political. The majority of them are academic economists like myself who are brought in for a year or two in order to give the members of the council who in turn advise the president essentially objective economic advice on issues of economic policy.
    Q. What kinds of duties did you perform in that role?
    A. Well my --
    The areas that I was responsible for when I was at the council, not surprisingly, included technology and science policy, and also policy relating to competition, both with respect to legislative and regulatory proposals involving the antitrust laws themselves, and also regulatory issues in other industries regarding regulatory efforts to promote competition.
    Q. As someone who has specialized in the field of antitrust economics, what is your understanding of the purpose of the antitrust laws?
    A. Well from an economist's point of view, the purpose of the antitrust laws is to preserve competition in industries and also to preserve for consumers the benefits that competition normally generates.
    Q. Why is competition so desirable to consumers?
    A. Well economists generally believe that competition is desirable because, if we have an industry in which the firms in that industry are engaged in vigorous competition, that competition will drive them to produce products that consumers desire and to produce them in a way that is cost effective, that -- that efficiently uses resources. And therefore an industry that is competitive is an industry that will, in general, deliver the maximum benefits to consumers for the resources that are being consumed by that industry in the production of its products.
    Q. Are there various aspects of competition?
    A. Yes.
    Q. Would you explain.
    A. Well there are -- there are a number of different aspects to competition. I guess probably the most obvious one is the price that firms charge for the good or service that they sell. You'll often see firms competing with other firms by trying, if they can, to sell their product at a lower price in order to garner a larger share of the sales in that industry. So the price of a good is clearly one aspect or dimension along which firms compete. But it's not the only one. Firms will also compete with respect to any attributes or characteristics of a given product that are important to the consumers of that product.
    *25 So if we were talking, for example, about competition among auto companies, consumers compare how durable, how reliable, how fuel-efficient, how powerful, and also how safe the automobile is. These are all characteristics or attributes of an automobile that matters to consumers. And so the firms in that industry, in addition to competing with respect to price, will also compete with respect to these particular attributes or characteristics that consumers value. So these -- these product's characteristics collectively are another aspect of the competition typically among firms.
    Now this process of competition, particularly with respect to these attributes or characteristics, also generates information, so information is another aspect of competition, if you will. The firms in the industry, in an attempt to sell their products, in an attempt to convince consumers that their products are superior with respect to these characteristics that consumers value, will generate information to consumers about those products. They will tell the consumers about the characteristics or the attributes of the products that they sell, and so in this way the process of competition among them with respect to these attributes generates information for consumers which, of course, the consumers need in order to make informed choices, in order to decide, you know, do I want to buy a Ford Taurus or do I want to buy a Buick, they need to have information regarding all of the different characteristics of those products that are important to them. And in a normally functioning industry, the process of competition will generate that information so that consumers can make those choices.
    Now then the last sort of aspect of competition that's important for the analysis in this case is the notion of short-run competition versus long-run competition. So if we think of firms, just to stay with the auto industry for a minute, if the firms are competing on a very short-run basis, one of the things a firm can do, for example, is offer a rebate, you know, 500-dollar rebate on this model for the next couple months if they want to increase their sales over a short period of time. And so there are certain aspects of competition that occur over this relatively short time horizon involving the price and some of the characteristics of the good over the short run.
    But the firms in an industry also compete on sort of a long- term basis. At the same time that they're trying to figure out how to sell more cars tomorrow, they're trying to figure out what can I do today that will allow me two years from now or five years from now or 10 years from now to be selling more cars than I do today, and hopefully more cars than my competition. And this long-run competition involves really a long-term, often expensive effort to fundamentally change the nature of the products that are being offered, to sell a car 10 years from now that is significantly different from the cars that are being sold today, or figure out a way of making them that's significantly less expensive so that I can lower the price, and in that way over the long term gain a really significant competitive advantage over other firms.
    *26 Q. While in comparing, Professor Jaffe, short-term competition with long-term competition, as an economist, which type do you believe is more beneficial to consumers?
    A. Well over any significant time horizon, if we look at a period, say, of -- of decades, I think most economists would agree that the long-term competition ultimately is much more important for consumers. It's the long-term competition which allows really quantum changes in what consumers can get out of the economy.
    And in fact there's an economist named Joseph Schumpeter who's looked at this, and he coined a term which is now widely used among economists for this notion of long-term competition, he called it "creative destruction," and the notion of creative destruction is that when firms in an industry compete over a long period of time, they're driven by their urge to get ahead, to increase their market share, to increase their profits. They're driven to create, to come up with new ways of doing things that no one has ever done before. Because it's only by coming up with a new way of doing things, a new product or a new way of making it or a new way of delivering it, that firms can really get a long-term advantage over their competitors.
    So they're driven by their competitive instincts to this process of creation, or "innovation" is another word that Schumpeter used for the creation part of it. But at the same time, when a firm does that, when a firm succeeds in creating a new product, there is a destructive aspect of that which is that they destroy the market position of the current market leaders because a new and better product is going to undermine the sales of the existing products.
    And so Schumpeter described creative destruction like a race that nobody ever wins. The firms are always trying to get ahead. And how do they try to get ahead? They try to get ahead by innovating, by creating. But you can never be permanently ahead because there's always some other firm behind you or next to you who is trying to do the same thing, trying to engage in this creative, innovative process, and one of these days, typically, if you're the market leader, one of these other firms is going to come up with something even better than what you've got and destroy your market position.
    So we have this constant process of creation and destruction. Firms create new things and, in so doing, destroy the market position of the existing product. But of course consumers get the benefits of the creation and don't really need to worry about the destruction because they don't care that some other firm's profits have now been reduced.
    And in fact the way Schumpeter and other economists have talked about it is the creative destruction is an engine of economic progress, it's the force which over time drives the economy forward. And in industry -- (clearing throat) excuse me -- industry after industry or market after market over a long period of time will transform the market and deliver far greater benefits to consumers than was there before.
    *27 Q. Professor, do economists believe that an industry's research and development capability is important to the process of creative destruction?
    A. Yes. Research and development in firms in a modern economy is to a significant extent the activity that they engage in in order to run this race, in order to try to innovate and get ahead. They -- they -- they hire scientists, they build laboratories, and they invest often very large sums of money in trying to figure out better ways of doing what has been done before in order to get ahead in this creative destruction race.
    Q. Are there factors that economists such as yourself have identified which would tend to promote or foster this process of creative destruction that ultimately benefits consumers?
    A. Yes. As we -- as we just indicated in talking about research and development, this -- this creative destruction process requires money. Firms are making long-term investments in order to try to get ahead, and the more resources that they have available for these long-term investments, the more competition that there will typically be to try to win this race.
    And this is not only an expensive process, but it's a very risky process, because the way that you engage in research is you try new things. Someone has a good idea, you work on it, you invest money in it, you develop it, you build a prototype, and sometimes it doesn't work and you throw it away. Or other times you invest, you develop it, you are working on it, you think you're almost there, and your competitor comes out with something even better before you've even managed to get it to the point where you can deliver it. And so even if in some technical sense it works, you still have to abandon it because basically you've been preempted. So this process of -- of research leading to creative destruction is an expensive and a risky one, and therefore one which requires significant resources in order to undertake.
    Now in addition -- in addition to resources, I've been describing this as a long-term process, so obviously it takes time. We can't expect through the process of creative destruction to see an industry transformed over night. It's typically -- it's a process which takes years or decades as firms make these long-term investments in research in order to try to get ahead.
    So money, time, and then the third thing that's important, really, is the incentive or motivation to engage in the contest. And as I've indicated, that incentive will typically be there; firms always want to get ahead of their competitors. But if you have an industry where the market dynamics are such that the stakes are really high, where there's perceived to be a very significant - - some kind of transforming event in the industry which makes it clear to everyone in the industry that there are huge opportunities to use research to respond to consumer demands, and that kind of high-stakes opportunity will create an unusually large incentive or motivation for this creative destruction process.
    *28 Q. Professor, can you cite for us any examples that we might all be familiar with of how this process of creative destruction has benefited consumers?
    A. Sure. You really just have to look around the courtroom. I mean -- or around your house. I mean we see automobiles today that are far more fuel- efficient, far more reliable and durable and also much safer than automobiles just a couple decades ago, and that has been brought about by investments that automobile companies have made in improving the technology in cars. And interestingly, in the car industry, that process seems to have been particularly accelerated in the late 1970s and '80s when the competitiveness of the industry was increased by the entry of Japanese and other foreign competitors into the U.S. market, and that that -- it was partially the force of that competition which seems to have really spurred tremendous improvement in -- in cars.
    Computers, we all know about computers, they didn't even exist a few decades ago. And what's interesting about computers is that the companies which today are the market leaders in the computer business also didn't exist decades ago, and the companies that were the pioneers in the sale of computers are companies you may not even have heard of, companies like Sperry and Univac, who were essentially driven out of the computer market by IBM in the '60s and '70s, and then IBM in turn was not exactly driven out of the computer market, but its dominant position in the computer market was significantly undermined when other firms came along with PCs. So that now we have Compaq and Dell and all these other companies that -- that have joined or -- or surpassed IBM in sales of computers.
    Q. Well what were the product attributes of the computers that Sperry and Univac were distributing decades ago?
    A. Well they were able to process very large amounts of information relative to what could be done at the time, but of course they took up a whole room and they were very, very -- they consumed a lot of energy. And what they considered to be large amounts of information we would laugh at today. I mean today you have a computer sitting on your desk has many, many times more information-processing capability than computers that filled an entire room in the 1960s.
    Q. And what was the nature of the cost to acquire one of those pioneering computers that Sperry and Univac were marketing decades ago?
    A. I don't know exactly, but it was tens of thousands of dollars.
    Q. And compared to today's computers, how has the cost changed?
    A. You can get one today for less than a thousand dollars.
    Q. And taking up about how much space?
    A. Well, some of them are about yea big (gesturing).
    Q. Well, Professor Jaffe, if time and money and motivation foster and promote the process of creative destruction, have economists identified conditions which would tend to inhibit, stymie, or frustrate that process?
    A. Well the conditions that are going to stymie the process of creative destruction are essentially an aversion to the risk that this dynamic race represents for firms and a desire to try to maintain the status quo. So that if we have the firms in an industry looking at this possibility of a vigorous race, particularly in the kind of circumstance I mentioned a minute ago where you have some kind of transforming event that really shows the possibility of a huge change in the industry, on the one hand that's a very attractive prospect, particularly to the firm that thinks they're going to win, but it's also a very frightening prospect because, A, it's very expensive, the firms are going to recognize that once that race is begun it's going to consume enormous resources on the part of all of the firms in the industry, and they're not all going to win, some of them are going to run that race and lose, and in the process, having invested a lot of money which is going to basically have gone down the tubes. So there is going to be a reluctance typically, on the part of at least some of the firms, to make that leap, to take that chance. And if they have the ability, if they have some mechanism to get together and say, "Hey guys, this is really scary, this is really risky, we could undermine everything we've got, let's hold back," then that kind of agreement to hold back could be what stymies the process of creative destruction.
    *29 Q. And you describe that as a maintenance of the status quo?
    A. Yes.
    Q. Is the process that you just described something that would fall into the category of anti-competitive behavior?
    A. Well if the firms individually should all just happen to chicken out, then that would not be anti-competitive behavior. But if they get together and agree to hold back, to restrict this process of long-term dynamic competition, this process of creative destruction, then that is anti-competitive behavior because they are restricting or suppressing the competition that would otherwise occur among them.
    Q. Have you over the years studied various forms of anti- competitive behavior?
    A. Yes, I have.
    Q. Which particular form of anti-competitive behavior have you focused on in connection with this case?
    A. Well economists use the term "collusion" to describe a situation where the firms in an industry agree not to compete, agree to restrict or suppress in some way what would otherwise be their natural inclination to compete with each other, and so what I have looked at in this case is the possibility of collusion.
    Q. And how does collusion differ with the concept of antitrust conspiracy which you previously explained?
    A. From an economist's point of view, those terms are essentially interchangeable.
    Q. How, then, would an economist such as yourself go about performing an investigation as to the possible existence of a collusive agreement in a particular industry?
    A. Well there are basically three steps that you would want to go through. The first step is, from an economist's point of view, to -- to define what we would call the relevant market. So if we're going to analyze an allegation of collusion with respect to a particular set of firms, we need to define or delineate what are the boundaries of the market in which those firms compete so that we can then look at the question of anti-competitive behavior. And when we're looking at defining the boundaries of the relevant market, there are two dimensions that we think about. We need to define the boundaries in terms of what products are included. So if we were thinking about an allegation that the car dealers in St. Paul were somehow suppressing competition, we would have to decide, well, is the market cars or is the market cars and trucks or is it cars and trucks and buses or is it cars and trucks and buses and trains? We have to make a determination as to what set of products is the set of products that are truly competing with each other, and that's called the product dimension of the relevant market.
    Q. Professor, if I can interrupt for a moment, why would that type of a distinction be so important to the type of work that an economist would do in connection with investigating a collusive agreement?
    A. Well as we're going to talk about a little bit more in a minute, the next step is going to be to investigate whether the structure of the market is such that it is plausible that collusion would have occurred, and before we can get to sort of analyzing the structure of the market, we just need to decide what is the market that we're talking about in order to proceed to the next step.
    *30 Q. Why would it make a difference, though, whether the product, relevant product under analysis, would be cars or cars and trucks?
    A. Well it -- it may or it may not. But it could, for example, affect the number of competitors, the number of potential competitors, and it could affect the ability of the alleged -- firms that are colluding to succeed in controlling competition depending on exactly how large is the scope of the market that would have to be controlled. And so the principle that's followed in defining relevant market is what we -- what we typically do is we would want to define the smallest area, whether we're talking about -- for example, with respect to products, the smallest set of products which, if it were controlled, if competition was suppressed, you could succeed and you would not be frustrated by competition from something that's outside the boundaries.
    So, for example, clearly, if we thought about a hypothetical relevant market that consisted of red cars, we would say well that can't be the right relevant market because even if you control everything about red cars, well people don't care that much about the color. If you didn't control the blue cars and the green cars and the orange cars and the brown cars, you couldn't succeed in controlling that market. So red cars is clearly too small.
    At the other extreme, probably airplanes, even though they're also a means for getting people around, are not a substitute for cars. If you control the market for cars, you wouldn't really have to worry about the fact that your efforts to control the market for cars are somehow going to be undermined by people buying airplanes. People don't go out and buy an airplane for the same reasons they buy a car.
    Now in between it may be a closer call. It may be a matter of judgment at what point the products become poor-enough substitutes that they're not competing with the products within the relevant market. But that's the basic concept.
    Q. So then the analysis in this particular analogy would be: Would trucks be a conceivable substitute for cars if someone had controlled the car market.
    A. That's correct.
    Q. Okay. How about with respect to the geographical aspects of the relevant market, what's involved there?
    A. Right. So I -- I don't think I know -- remember if I said this yet, but the second dimension of relevant market, after you've figured out which products would be included, is what is the geographic scope of that market. So if we stay with the St. Paul car dealers for -- for a moment, if there was an allegation that the St. Paul car dealers were colluding and we were trying to assess that allegation, one of the things we need to figure out is: Is the market St. Paul? Or do St. Paul car dealers, if they were hypothetically to collude, face sufficient competition from Minneapolis car dealers that you really couldn't successfully monopolize the market just by controlling car dealers in St. Paul, you'd really have to also control the car dealers in Minneapolis?
    *31 And so there's an issue of what is the geographic extent of the market. And again, the principle that we would follow would be what is the smallest geographic extent which, if you did control it, would be sufficient to carry out an anti-competitive purpose without that anti-competitive purpose being significantly undermined by competition from outside the boundaries that you've drawn.
    Q. All right. That's the relevant market.
    A. Right.
    Q. What other factors would economists analyze in attempting to determine the possible existence of a collusive agreement?
    A. Okay. Well after analyzing -- after establishing and defining a relevant market, the next step is to investigate the question of whether the notion of collusion in this case is plausible, is economically sensible. Does it make economic sense that the firms in this particular industry would have been likely to have even tried to engage in some kind of collusive behavior?
    Q. And what would you focus on in connection with the analysis of plausibility?
    A. Well with respect to plausibility there are now three factors. The first is the market share or the concentration of the firms in the industry, because collusion essentially is an agreement to coordinate our activities and -- and to suppress competition. And if you've got lots and lots of firms, or the firms involved in the collusion have very small shares of the market, then -- (clearing throad) excuse me -- it's just not plausible to think that they would think that they could pull that off.
    You couldn't imagine, for example, all of the wheat farmers of America trying to get together and somehow control the wheat market. There's just too many of them and it would be too hard for them to -- to arrange that.
    And so I mean when looking at the plausibility of a conspiracy, we look at the market shares of the firms and the concentration of those market shares among relatively few firms, and the larger are the market shares and the more concentrated are the sales among a small number of firms, the more plausible it is that they might have engaged in collusion.
    Q. If you could just clarify a bit, professor, the relationship between this term "market share" on the one hand versus your other term, "concentration" on the other hand.
    A. Yes. Market share refers to the sales of the individual firm, what fraction of the market does an individual firm have. And large market shares are conducive to collusion, all else equal, and small market shares make it less plausible.
    Q. Simply because there are too many members of the potential conspiracy to deal with?
    A. That's correct.
    Q. And then concentration --
    A. A related -- a related concept, which is sort of really another way of measuring the same thing, looks at what fraction of the industry is controlled by collectively some small number of firms. So market share, you look at one firm or you look at each firm individually, but when you look at concentration, you're looking at the industry as a whole and you're asking how much of the sales in that industry as a whole are controlled by a relatively small group of firms.
    *32 Q. And again, the significance of that is what?
    A. It's the same idea, it's really just another way of looking at the same question, that if -- if a large fraction of the sales in an industry are controlled by a relatively small number of firms, then, all else equal, it's more plausible that they could get together and coordinate their activities and reach some kind of agreement to suppress competition. Whereas on the other hand, if relatively little of the sales in the industry are controlled by any one group of firms, then it's hard to imagine how they would coordinate some kind of collusive agreement.
    Q. You mentioned, I believe, that there were three factors to consider --
    A. Right.
    Q. -- in connection with plausibility. What is the second factor?
    A. Okay. So we talked about market share and concentration. The second aspect of this -- of plausibility is whether or not there are barriers to entry in the industry. "Barriers to entry" is an economist's term. Now barrier to entry is something which makes it hard for firms that are not currently competing in a given market to enter that market if there are profit opportunities in that market. So the notion of a barrier to entry is, in general, economists believe that if there's a market in which firms are making a lot of money, and in particular if firms are making sort of more money than firms typically can expect to make, then that's going to attract entry by new firms. New firms are going to say, hey, that looks good to me. Those guys are making a lot of money, so I'm going to come in and I'm going to try to make money in that market. Now if there are aspects of the structure of a market that would make it hard for new entrants to come in in that circumstance, then we call that a barrier to entry.
    Q. Can you provide us with some examples of these barriers. Because you're not talking about a physical barrier, obviously.
    A. That's right, I'm talking about an economic barrier. And it would be things like strong brand loyalty among the existing products in an industry makes it hard for someone in the outside to come in with a new product if the consumers in this market are very loyal to the products that are already on sale. Another example of a barrier to entry would be the need to engage in large levels of advertising and promotion in order to be successful in this industry, because that means that if you're going to come in as a newcomer, you're going to have to spend a lot of money and you're going to have to spend that money without necessarily knowing that you're going to be successful in terms of getting into the industry, and so that would be another example of a barrier to entry.
       Now the reason -- I haven't yet told you why barriers to entry are important. The reason that the barriers to entry enter into this analysis of the plausibility of the conspiracy is because even if we have the first factor, so we have an industry that's concentrated where there's relatively few firms that control the sales in the industry, if the barriers to entry are low and they were to think about the possibility of colluding, they would say to themselves, well, we can control our behavior, there aren't very many of us, we can coordinate that, but, you know, even if we succeed, someone else is going to just come in and compete against us, and so it's not going to work, and so we probably shouldn't even bother.
    *33 And so what we would think from this plausibility point of view would be that if we have an industry with low barriers to entry, it's really not very plausible that the firms would even attempt to collude to begin with, because what they would expect would be that if they tried to collude and even if they sort of succeeded among themselves, that that attempt would be undermined by the entry of new firms that are not currently in the market.
    Now on the other hand, if we have an industry that has this first feature; that is, the sales are concentrated and there are significant barriers to entry so that you wouldn't really expect that other firms not currently competing in that market would come in, then we have a more plausible situation for collusion because the firms might well say to themselves we have a concentrated industry, we can coordinate our activities, and we don't really have to worry about competition from somebody else who's not already in the market because the barriers to entry are most likely going to keep them out.
    Q. What then, professor, is the third factor to consider with regard to plausibility?
    A. Okay. The third factor related to plausibility is really one of motivation, one of economic incentives. So if we're going to tell a story that says the firms in this industry engaged in collusion, then what we have to have is a situation where what they would expect would be that if they didn't reach any kind of agreement, there would be vigorous competition; whereas if they reach an agreement, they can suppress that competition and preserve the status quo in a way that would be beneficial to the firms in the industry.
    So economists believe that, in general -- to some extent it would be true in any market -- that the firms in that market, if they could, would like to get together and agree not to compete, because if they can get together and agree not to compete, then they could earn higher profits and they can have a quiet life and they don't have to take the risks that competition would normally pose in terms of who's going to win and who's going to lose.
    But that kind of normal baseline level of incentive to engage in collusion can be greatly enhanced when an industry faces a situation where the incentive to compete is particularly strong and the risks that that competition poses for the status quo for the firms who, like the existing profit relationship in the industry, is particularly great.
    So if you have a situation with some kind of, as I put it a minute ago, transforming event, that really presents the industry with a choice, a situation where it's clear that there are tremendous incentives to compete, but that that race, that process of competition is really very risky, very expensive, very dangerous to the firms that are currently enjoying profits in the industry, then that would be a situation in which there is a strong motivation to engage in collusion.
    Now that doesn't say that collusion happened. All we're talking about now is whether it was plausible. So -- but what we're saying is that if you have this -- this very high-stakes situation where there's a real tension between a tremendous urge to compete but also a tremendous threat and risk and expense that that race poses, then it would be plausible that firms in the industry would collude to avoid that competition if they could.
    *34 Q. Professor, do I infer correctly that "transforming event" is the type of term that economists use?
    A. I'm not sure I'd call it a term of art in economics, but all I meant was to use it to describe a situation where something happens in a market that really has a big impact on the firms' perception of their market opportunities.
    Q. And would an external threat to the profits of an industry qualify, as far as economists are concerned, as a transforming event for purposes of measuring the motivational plausibility of collusive behavior?
    A. I think an external threat that also has the property that it contains within it an instigation to compete, something that increases tremendously -- not just a threat, but also creates an opportunity where the firms in the industry would be inclined to compete to go after that opportunity.
    Q. Well I think most of us tend to think of threats as bad things. In economic terms, is a threat a bad thing?
    A. Well a threat --
    I guess it depends on who's being threatened. A threat to the market position of the firms in an industry could be a very good thing for consumers. If what that threat does is set off this kind of competitive race to improve the products in the industry, then that could be a good thing from the point of view of consumers.
    Q. All right. Now are there any additional factors that economists would examine in connection with the possible existence of a conspiracy? You've spoken about relevant market, you've spoken about plausibility.
    A. Okay. So once we've defined the market and then we've looked at these several different components of the plausibility of collusion, if we conclude based on that that it is plausible, that this is an industry where collusion might have occurred, then the final step would be to look at the evidence of actual collusion in order to determine whether the collusion that we decided was plausible did in fact occur.
    Q. In the relevant market.
    A. Within the relevant market, yes.
    Q. All right. What would be the considerations that you would investigate or analyze in connection with evidence of a collusive agreement?
    A. Well broadly speaking there are sort of two categories of evidence that I would look for as an economist. The first thing I would look for would be the extent to which the behavior of the firms in the industry is consistent with competitive behavior as opposed to it being consistent with a restriction of competitive behavior.
    Q. So activities that would be inconsistent with incentives to compete?
    A. Would be evidence that collusion occurred, that's correct.
    Q. Anything else?
    A. In addition to looking at competitive behavior versus anti-competitive behavior, the other general category we would look at would be simply evidence of communication between firms that related to competitive activities. Because if firms in an industry are vigorously competing, then you would expect they're not going to be talking to each other about what they should or shouldn't be doing with respect to these competitive activities. But if we observe them talking to each other and telling each other what to do and what not to do, and if we observe firms listening when another firm tells them what to do and what not to do, then that would be another kind of -- of economic evidence that collusion is going on.
    *35 Q. In investigating the possible existence of a collusive agreement, are you looking for a document that sets forth the nature of the collusive agreement signed by the participants, dated, notarized?
    A. No. We would typically not expect that we're going to see any kind of written agreement. And it may well be that the -- the very nature of the agreements and exactly what the agreement expects the participants to do will be somewhat vague because this is not something they're supposed to be doing. And so we wouldn't expect, as a matter of economics, people to create a paper trail in which they record those kinds of activities.
    Q. Let's move now, professor, to those activities that you have specifically undertaken relative to this case to enable yourself to reach opinions with respect to the issues of antitrust conspiracy and economic impact.
    Would you tell us what you've done specific to this case to prepare you for that analysis?
    THE COURT: Counsel, this seems to be a new subject. Maybe we'll recess for lunch and reconvene --
    MR. GILL: Fine, Your Honor.

THE COURT: -- at 1:30.
    THE CLERK: Court stands in recess, to reconvene at 1:30.
 (Recess taken.)

AFTERNOON SESSION.

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

 (Jury enters the courtroom.)
    THE CLERK: Please be seated.
    THE COURT: Counsel.
    MR. GILL: Thank you, Your Honor.
    Good afternoon -- I'll turn my mike on.
BY MR. GILL:
    Q. Good afternoon, Professor Jaffe.
    A. Good afternoon.
    MR. GILL: Good afternoon, ladies and gentlemen.
 (Collective "Good afternoon.)
    Q. Professor Jaffe, when we broke or lunch, I think the question that I had put to you was to explain to the members of the jury the activities that you have undertaken specifically related to this case that have enabled you to form opinions with respect to the issues of antitrust conspiracy and economic impact.
    A. Okay. I started --
    I guess a little over a year ago, I began by reviewing published material about the tobacco industry in the economic literature, historical material that related to the industry to give me background, as well as published material about anti- competitive behavior and relating to innovation more generally in other industries, and then I proceeded then to look at evidence from the record in the case, including documents that were produced by the defendants that were provided to me by the attorneys, as well as depositions of the relevant people relating to the topics that were the subject of my testimony.
    Q. Who were the relevant people whose depositions you reviewed, or what types of people were relevant as far as you were concerned, Professor Jaffe?
    A. Yes. I believe I reviewed the depositions of all of the individuals from the defendants who had been involved in the research process, as well as some others that came up along the way that were related to topics that we're going to talk about later on, the introduction of certain products, and certain incidents that -- that were of interest to me.
    Q. Professor Jaffe, have you relied upon the information that you obtained from the activities that you just described, together with your educational background and your professional training and experience, in reaching and forming opinions in this case?
    A. Yes, I have.
    Q. Let me then ask you at this time, Professor Jaffe, what opinion have you reached with respect to whether or not the defendants engaged in an antitrust conspiracy?
    *2 A. It's my opinion that the defendants engaged in an antitrust conspiracy in the U.S. cigarette market to suppress fundamental competition with respect to smoking and health.
    Q. Who were the participants in this conspiracy to suppress fundamental competition in the United States market with respect to the smoking-and-health issue?
    A. The participants were Philip Morris, R. J. Reynolds, Brown & Williamson, BATCo, B.A.T Industries, American Tobacco, Lorillard, Liggett, The Council for Tobacco Research, and The Tobacco Institute.
    Q. When did these various defendants participate in this antitrust conspiracy to suppress fundamental competition?
    A. It's my opinion that the conspiracy began in late 1953 and early 1954 with the events surrounding the meetings at the Plaza Hotel and the issuance of the Frank Statement, and at that time the domestic tobacco companies, with the exception of Liggett, joined to form the initial conspiracy.
    Q. And the domestic tobacco companies at that time were?
    A. Domestic tobacco companies were Philip Morris, R. J. Reynolds, Brown & Williamson, American Tobacco, Lorillard -- and Lorillard, in addition to Liggett, who we've put to the side for the moment.
    Q. All right. Please continue, then, with your explanation of when these various participants joined this conspiracy.
    A. Yes. It's my opinion that The Council for Tobacco Research joined the conspiracy with essentially the creation of its predecessor, the Tobacco Industry Research Committee, in 1954, that The Tobacco Institute was part of a conspiracy from its inception in the late 1950s, and that Brown & Williamson's affiliated companies, BATCo and B.A.T Industries, were part of the conspiracy, BATCo from sometime near the initial participation of Brown & Williamson in the conspiracy in the early 1950s, and B.A.T Industry from its inception in its current form in the mid-1970s.
    Q. How long has this conspiracy been in progress, professor?
    A. Well I haven't been able to find any evidence that the conspiracy has ended, except that Liggett appears to have left the conspiracy in connection with its settlement of some of the litigation in the last few years.
    Q. The remainder of the defendants, in your opinion, continue to be participants in the conspiracy?
    A. That's correct.
    Q. Professor, based upon your review of the internal documents, the review of the depositions that you mentioned, have you been able to identify any specific elements or components of the overall conspiracy to suppress fundamental competition on the smoking-and-health issues in the U.S. cigarette market?
    A. Yes, I have.
    Q. Can you explain to the jury the various elements or components of the overall conspiracy that you've been able to identify.
    A. Yes, I can. It would help me to do that if I could use the flip chart there.
    MR. GILL: May the witness come down, Your Honor?
    THE COURT: Yes, go ahead.
    MR. BLEAKLEY: Your Honor, may I --
    *3 MR. GILL: Let me just mention, Professor Jaffe, as you do this, to try to position yourself in such a way that all members of the jury can have access to the flip chart.
    THE WITNESS: Yes. And boy, I'm used to using a blackboard, but I'll do my best.
    A. Okay. So we're talking about the agreements to suppress fundamental competition related to smoking and health, and this agreement was complicated and had a lot of different parts to it, but there appear to have been four main elements of the conspiracy or aspects of the conspiracy that I've identified in the evidence.
    And the first of those was an agreement for no in-house animal research relating to smoking and health, so that was the first component.
    The second component was an agreement that the companies would collectively engage in reassurance of smokers and suppression of unfavorable research. And what I mean here by "unfavorable research" is research that would tend to confirm smokers' beliefs or concerns regarding the adverse health consequences of smoking.
    The third component was an agreement that the companies would not engage in explicit warnings unless compelled to do so by government agency.
    Q. What do you mean by "explicit warnings?"
    A. I can't write and talk at the same time, so just give me one second.
    Q. Fine.
    A. No warnings unless compelled -- the notion was that the companies would not themselves volunteer to put a warning of some sort on the product that would convey to consumers the health hazards of the product.
    Q. So an explicit warning would be a warning that would be on the product itself?
    A. On the product, yes. So that's three.
    And then the last component was an agreement not to engage in competitive exploitation of safer products in a manner relying on consumers' health fears. So as part of the effort to suppress this fundamental competition with respect to smoking and health there was an agreement that, to the extent that any of the firms did develop safer products, that they would not competitively exploit those products in a way that would tend to exacerbate or make worse consumers' -- or customers' fears about the health consequences of cigarettes.
    Q. And professor, is it your position that you have found evidence to support not only the broad anti-competitive collusive agreement that you've outlined at the top of that particular page of the flip chart, but each of the various components?
    A. Yes.
    MR. GILL: Professor, before you resume your seat on the witness stand, I'd like to mark this as Trial Exhibit two thousand -- or 26077, and we would offer that for illustrative purposes, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive twenty-six thousand, that's 26077.
    MR. GILL: Thank you. You can resume your seat now, professor.
    Q. All right, Professor Jaffe, at this time are you prepared to discuss the basis or the reasons for the opinions that you have just recited to the jury?
    *4 A. Yes.
    Q. Let's begin, then, at the beginning. And as I understand it, the first area of analysis would be relevant market.
    A. That's correct.
    Q. You've spoken about that in general. Would you address it now in connection with this case.
    A. Yes. Based on my analysis, it's my opinion that the relevant market for assessing or analyzing the allegations of the collusive behavior in this case would be the United States cigarette market. So with respect to the two dimensions that I discussed earlier on the product dimension, it's my opinion that the relevant market is cigarettes. And on the geographic dimension it's my opinion that the relevant geographic area is the United States market.
    Q. Why cigarettes as opposed to some broader set of products that relate to the tobacco plant?
    A. Well as I indicated, the way that this issue was approached is to identify the smallest market definition, which, if it were successfully controlled through anti-competitive behavior, would be able to succeed in terms of that anti-competitive behavior, and it's my opinion that cigarettes -- that -- that other products such as, say, cigars or smoking tobacco, or, say, smoking cessation products like nicotine gums, are not sufficiently good substitutes for cigarettes that they would provide a significant competitive discipline if there were to be successful anti- competitive behavior with respect to cigarettes.
    So therefore, the appropriate conclusion is that the relevant market is the market for cigarettes.
    Q. And what about, professor, with respect to your determination that the geographical boundaries of the conspiracy were the United States of America, on what basis did you come to that conclusion?
    A. Well I concluded that the -- the appropriate boundaries for the relevant geographic market was the United States because if the alleged conspirators did succeed in controlling the United States cigarette market through anti- competitive behavior, consumers, purchasers, smokers in the U.S. would not be able to undermine or avoid the consequences of that anti-competitive behavior by purchasing cigarettes that are not sold within the United States because those products are not available to purchasers in the U.S. to any significant degree.
    Q. Did you analyze for purposes of the opinions you formed in this case any broader geographical area than the United States of America?
    A. No, I didn't.
    Q. Why not?
    A. Well it wasn't necessary. Once I had decided that the relevant market for assessing the allegation regarding anti- competitive behavior of these defendants was the U.S. cigarette market, it was not then necessary to examine what was going on in other geographic areas. And I didn't have any significant amount of information at my disposal about the nature or extent of competition in cigarette markets outside the United States.
    Q. So will you be offering any opinions with respect to the presence or absence of collusive agreements involving cigarette industries beyond the borders of the United States of America?
    *5 A. No, I won't.
    Q. All right. The --
    As I recall, the next circumstance that needs to be considered with respect to examining the possible existence of a collusive agreement would be the plausibility.
    A. That's correct.
    Q. And I think you told us there were three factors that would be considered in connection with plausibility.
    A. That's correct.
    Q. Do I recall correctly that the first had to do with market shares/concentration?
    A. That's correct.
    Q. What did you do to investigate the market share and concentration within the United States cigarette industry?
    A. Well the first thing I did was I looked at -- at data, so-called Maxwell data which gives the sales of the different individual cigarette companies over time in the United States.
    Q. What is the Maxwell data, as you understand it?
    A. Maxwell data is the data that's collected by a firm -- I -- I think there's actually an individual named Mr. Maxwell who at least at some point in time was involved in this, and it's data that is commercially available and is widely relied upon in terms of the sales of the particular cigarette products.
    Q. And over what time span did you review the Maxwell reports?
    A. I looked at Maxwell information for the period from 1954 through 1994.
    Q. And you concentrated on 1954 for what reason?
    A. Because that's the period of time in which it was alleged that the conspiracy began.
    Q. And is it your understanding that the discovery phase of this case closed in 1994?
    A. Yes.
    Q. So that was the end point?
    A. That's correct.
    Q. Would you take a look at Exhibit 14985, please.
    A. Yes, I have that.
    Q. Would you identify that exhibit, please.
    A. This is a printout of Maxwell sales information for different cigarette companies for the period from 1925, I believe, through 1984.
    Q. And then would you take a look at Exhibit 20264.
    A. Yes, I have it.
    Q. And can you identify that exhibit, please.
    A. Yes. This is another Maxwell publication that presents sales information regarding particular cigarette products for the years 1992, '93 and '94.
    Q. So those two exhibits cover essentially most of that 40- year timeframe?
    A. That's correct.
    Q. Now do you have any understanding as to who uses Maxwell report data?
    A. It's my understanding that it's widely used by people both in the industry and the advertising industry who want to have information on sales of particular cigarettes.
    Q. By "people within the industry," are you talking about the defendant cigarette companies?
    A. Yes.
    Q. And do you know of any other source to obtain market- share information that would be reliable with respect to the market shares of the cigarette industry between 1954 and 1994?
    A. I don't know of any other practical or reliable source of such information that I could have gotten my hands on.
    MR. GILL: All right. Your Honor, we will offer Exhibits 14985 and 20264 under 803(24), based upon the equivalent trustworthiness of this particular data and the impracticability of supplying this information through any other source.
    *6 MR. BLEAKLEY: Your Honor, we have no objection to either of the exhibits. However, the exhibit number that we have for the earlier of these two is 14985.
    MR. GILL: If I misspoke, Your Honor, I apologize, it is 14985.
    THE COURT: Court will receive 14985 and 20264.
BY MR. GILL:
    Q. Now what did you do with all of that data that's contained in those two thick reports?
    A. Well I looked at the reports which give the total sales of the individual companies in these different years, and I used that to calculate on a percentage basis their shares of the market in various years, including 1954 when the conspiracy is alleged to have begun, and in 1994.
    Q. Would you look at Exhibit 30229.
    A. Yes, I have that.
    Q. Can you identify that document, please.
    A. This is an illustrative table that I put together that shows the calculated market shares of the domestic defendants in 1954 and 1994.
    Q. And this exhibit was prepared under your direction?
    A. That's correct.
    MR. GILL: Your Honor, we would offer for illustrative purposes Exhibit 30229.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 30229.
BY MR. GILL:
    Q. As you've indicated, Professor Jaffe, this particular illustrative exhibit deals with defendants' market shares?
    A. That's correct.
    Q. And you got two columns on the exhibit, 1954 and 1994?
    A. That's correct.
    Q. Why don't you explain the significance of the data that is set forth on this exhibit.
    A. Well what this exhibit shows is that in both years there were several of the defendants that had very large market shares, and that collectively the defendants controlled, in 1954, 99 percent of the market, and in 1994, according to Maxwell, essentially 100 percent of the U.S. cigarette market.
    Q. What did you deduce from that particular information?
    A. What I deduced from that was that in terms of the plausibility of collusion, as I discussed earlier, we had here an industry where the market shares of the -- the defendants were such that -- that it is in fact plausible that pollution -- excuse me, collusion could have occurred because there is a relatively small number of firms who collectively control essentially all of the sales in the industry.
    Q. Professor Jaffe, what did you do to investigate the level of concentration within the U.S. tobacco -- within the U.S. cigarette industry between 1954 and 1992?
    A. Well as -- as I discussed earlier, another way of looking at this sort of market-share information is to calculate the fraction of the sales in the industry that are controlled by a relatively small number of firms. The -- the U.S. government, through the Census Bureau, collects information on many manufacturing industries and publishes what's called a four firm concentration ratio, which is simply the fraction of the sales in any given industry that is accounted for by the four largest firms, and I looked at data on these four firm concentration ratios for the cigarette industry and for other industries to compare it to.
    *7 Q. Why is four the magic number?
    A. Four is not really a magic number. What economics would say is you want to look at some relatively small number in the United States. That's the way the government collects and publishes the information, is the so-called four firm concentration ratio.
    Q. So the U.S. government decided the number should be four.
    A. The U.S. government decided the number should be four.
    Q. All right. Would you take a look at Exhibit 1824, please.
    A. Yes, I have that.
    Q. Can you identify that exhibit.
    A. This is the printout of data from the Census Bureau, from the census of manufacturers that includes the so-called four firm concentration ratio for a number of different industries for time periods actually going all the way back to 1935, and up through the most recent census which has been completed, which is 1992.
    Q. So there isn't information currently available with respect to '94.
    A. Well they do this census only every five years, so there will never be information for '94. After '92 -- I probably misspoke. They probably have completed the 1997, but they won't publish it for several years yet, so it's not yet available.
    Q. So 1992 is the last -- latest data available.
    A. That's correct.
    Q. You said Census Bureau. Whose Census Bureau?
    A. It's part of the U.S. government.
    Q. And have you relied upon the information contained in the report of the U.S. Census Bureau with respect to concentration levels in industries between the periods of 1994 and 1992?
    A. I think you misspoke, 1954 and 1992. And the answer is yes.
    Q. Thank you, professor.
    MR. GILL: We will offer Exhibit 1824.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 1824.
BY MR. GILL:
    Q. Now as I recall, Professor Jaffe, Exhibit 1824 is also a large, thick document; is it not?
    A. That's correct.
    Q. Does it specifically identify industries by name?
    A. No. The data in the exhibit, it's a printout of data where the industries are identified by a four-digit numeric code, which is referred to as the Standard Industrial Classification or SIC code.
    Q. And hopefully did our government provide an index to the codes?
    A. Yes. The government publishes a directory which allows you to identify the names of the industries that correspond to those particular four-digit codes.
    Q. And how did you use the index in connection with your work on this particular phase of the -- of this case?
    A. I used the index to look up the names of the industries that I was interested in.
    Q. And you were interested in identifying specifically what?
    A. Well what I've done is I've looked at the most concentrated industries in the United States in 1954 and in 1992 in order to compare the level of concentration in the cigarette industry to other industries to get a benchmark as to whether this is highly concentrated or not.
    Q. And once you had made that type of an identification between 1954 and 1992, what did you do with the information?
    *8 A. I prepared an illustrative exhibit that shows the top -- the 10 most concentrated industries in both of those years.
    Q. All right. Would you take a look at Exhibit 30227, please.
    A. Yes, I have that.
    Q. Now does this contain the actual identification of the various industries that made the top 10 list --
    A. Yes.
    Q. -- for both of those time periods?
    A. Yes, it does.
    Q. Have you personally verified that the identification on Exhibit 30227 conforms to the source code in Exhibit 1824?
    A. That's correct.
    MR. GILL: We'll offer, Your Honor, for illustrative purposes, Exhibit 30227.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 30227.
BY MR. GILL:
    Q. Again I think it's fairly clear how this particular exhibit has been formatted, Professor Jaffe, in terms of 1954 information in the left column and 1992 information in the right column. Would you explain the significance of the information set forth on this exhibit.
    A. Yes. Well as I indicated in describing it, what the 10 industries that are on the exhibit for each of these years are are the 10 most concentrated industries according to this four firm measure of concentration in each of these two years, so you could see, for example, in 1954 the most concentrated industry in the census data was primary aluminum, where four firms controlled the entire market, so the four firm concentration measure was 100 percent, and then as you move down from that you see 90 percent, 90 percent, 88 percent and so forth, and cigarettes was number nine out of some 150 or so industries that were analyzed in 1954, with 82 percent of the market according to the census controlled by the four largest firms.
    And then when we go over to 1992, you can see that there's a slightly different list of industries. The concentration of the cigarette industry has increased, as the census department measures it, from 82 percent to 93 percent. Cigarettes have moved up from the ninth most concentrated industry to the fourth most concentrated industry out of over 400 that were analyzed in 1992.
    And you'll also note that cigarette is the only industry in the United States that was among the 10 most concentrated in 1954 that is still among the 10 most concentrated in 1992. And what this indicates is, again, in terms of just this plausibility issue of is it economically plausible that collusion could have occurred in this industry, what this clearly shows is we have one of the most concentrated industries in the United States over the entire relevant time period, and so my -- my opinion is that it is plausible based on this market-share or concentration consideration that collusion would have occurred.
    Q. Let's turn now to barriers to entry. That was the second factor under plausibility.
    A. Yes.
    Q. All right. What was the nature of your analysis of the barriers-to-entry consideration in the plausibility analysis?
    A. Well the first thing I did was I just looked at the -- the information I had about the industry in the literature regarding the industry to see what evidence there was that there were barriers to entry regarding the cigarette industry, and what I concluded was that there were significant barriers to entry in the form primarily of brand loyalty that the consumers in the industry have towards existing products as well as the very large advertising and marketing expenditures that are necessary to compete in this industry which would have made it expensive and risky for an outside firm to -- to enter this industry if an entry opportunity had presented itself.
    *9 Now in addition to looking at the evidence of the actual barriers to entry, the other thing that I considered was the fact that economists would generally expect that if there were not barriers to entry in a given industry, and if that industry has a level of profitability over some extended period of time which is higher than is typical for most industries, that that profit opportunity would tend to attract entry, we would tend to see new companies wanting to enter that industry, and if we don't observe successful entry in an industry which is highly profitable over an extended period of time, then that in and of itself is evidence that there must be some significant barriers to entry, because if there weren't, somebody would have seen that profit opportunity, somebody not currently in the industry would have seen that profit opportunity and attempted to exploit it.
    And in the cigarette industry, what we have is an industry which has been highly profitable throughout the post-war period, the last four decades, among the most profitable industries in the United States, and yet there has been no significant entry into this industry over -- over longer than a four-decade period in which those profits have persisted. And from an economic point of view, that lack of entry in the face of significant profit opportunities is itself evidence that there are likely to be significant entry barriers in the industry.
    Q. The third factor with respect to plausibility was motivation?
    A. That's correct.
    Q. And let me ask you, professor: Are we dealing, with respect to motivation, essentially with the motivation that would have existed at the time the conspiracy was formed?
    A. Well we would want to look at the motivation at the time the conspiracy was formed as well as how that motivation would have played out over time, yes.
    Q. And you came to the conclusion that this conspiracy was formed in late 1953 and early 1954.
    A. That's correct.
    Q. Now can you compare the incentives to compete that existed within this industry in late 1953 with whatever -- whatever incentives may have existed to conspire.
    A. Yes. When I was talking earlier about the issue of motivation, I talked about the fact that typically there would be a motivation to compete and some -- and some incentive to suppress competition, but that that tension could be exacerbated or heightened in a situation where you have a large event affecting the industry that raises the stakes for both competition and for the desire to maintain the status quo. And what we have in the cigarette industry in the early '50s, culminating in -- in 1953, was a significant increase in consumers' perceptions regarding the health risk of cigarettes, and the industry was faced with a situation where, on the one hand, there was a tremendous opportunity created because it was understood that there was now a huge consumer demand for a cigarette that would not be so harmful, and any company that could produce such a thing would gain an enormous competitive opportunity, so in terms of the sort of race that I talked about, this was an event which tremendously would have stimulated the desire to begin that sort of race.
    *10 At the same time, that race would have been extremely threatening to the participants of the industry. They would have seen that that race, that competition, would have, first of all, been very expensive, would have been very risky, and would have required ultimately the -- the acceptance of the health hazards of the product which would have, for any companies that didn't succeed in developing a safer product, would have been a tremendous competitive disadvantage to the firms in the industry. So what we had in the early '50s was precisely the kind of situation where there was a huge tension between very high stakes that would tend to drive competition while at the same time that competition being extremely threatening to the status quo in the industry, leading to a situation where there would be a large motivation, if possible, to agree to suppress that competition, not to go down that dangerous and risky road of fighting it out in the marketplace, but rather to try to maintain the status quo.
    Q. Well in the absence of a collusive agreement, as of late 1953, what type of competitive conduct would you have expected to see occurring in this industry in the subsequent decades?
    A. I would have expected to see the companies in the industry devoting large resources to trying to develop a product that would satisfy what consumers wanted, which was a cigarette that was not as harmful as the products that were available on the market, and I would have expected that they would have done that in a highly competitive manner, racing to be the first to develop such a product, and continually striving to get ahead in terms of developing such products.
    Q. Well in order to reap the potential rewards that the process of creative destruction offer, what type of information would a competitor need to have in order to convince consumers that they truly have come up with a much better mousetrap?
    A. Well essentially the firms would have had to have done research that would allow them to demonstrate to consumers the superiority of their product along the dimension that they were competing for, which was the safety of the product. So they would have had to have done scientific research, first of all, to develop a cigarette product that was less harmful, but then also to demonstrate via scientific evidence that it was in fact less harmful so that they could present that information to the customers in the effort to get the customers to buy the new superior product.
    Q. In your review, Professor Jaffe, of the industry's internal documents, did you find any indication of any of the defendants focused on the potential benefits that might accrue from an effort at a long-term development of a safer cigarette?
    A. Yes, I did.
    Q. All right. Would you turn to Exhibit 11622.
    A. 11622?
    Q. 11662.
    A. Ah.
    Q. Sorry if I misspoke.
    A. Okay, I have it.
    Q. Professor Jaffe, this is a memorandum that was produced from the files of Philip Morris. It is dated July 24, 1958, it is from a Mr. C. V. Mace to a Dr. DuPuis, who was at that time the director of research and development at Philip Morris. Have --
    *11 Is this one of the documents that you reviewed?
    A. Yes.
    Q. Is it one of the documents that you've relied upon in forming your opinions?
    A. Yes.
    Q. Is it representative of other documents that you've reviewed along the same lines?
    A. Yes, it is.
    MR. GILL: We'll offer, Your Honor, Exhibit 11662.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 11622.
BY MR. GILL:
    Q. Now Professor Jaffe, right at the top of the document --
    THE COURT: Excuse me, counsel, it's 11662.
    MR. GILL: That's correct, Your Honor, it is 11662.
    THE COURT: I made a mistake.
BY MR. GILL:
    Q. Professor Jaffe, directing your attention to the portion of the exhibit just below the addressee's name --
    A. Yes, I see that.
    Q. All right. The indication here is that the exhibit concerns brief statements on a program to produce a low delivery filter cigarette with flavor; is that correct?
    A. Brief comments, yes.
    Q. Now does the author consider the implications of short- term versus long-term research?
    A. Yes, he does.
    Q. And where does that occur?
    A. In the second paragraph of the document, the author lays out both a short-range and a long-range program for -- for Philip Morris, and it says, "For short range, let's concentrate on means to produce a substantial reduction in tar delivery, even if it is only across the board, since the chance is good that any special irritants and/or carcinogen, if present, would be reduced also." So that's the short-range program that the author envisions. Which he then contrasts in the next sentence --
    Q. Before we go on, Professor Jaffe, based upon your review of the internal documents of Philip Morris, did Philip Morris proceed to develop such a short- term program?
    A. Yes, they did.
    Q. Please continue.
    A. So in contrast to that short-range program, he described a long-range program where he says "let's study means for identifying carcinogenic substances as well as all substances in cigarette smoke that are irritating or are known to produce undesirable physiological effects, and find means of removing them. If the latter appears to be impossible, let's develop a non- tobacco cigarette which doesn't have them to begin with. Now, how should we go about it?"
    Q. Does the author, Mr. Mace, answer his own question further on in the document?
    A. Yes, he -- he does propose an approach on page two of the document at the top.
    Q. All right. If you would turn to page two, direct your attention to the top of page two, and how does the author answer his own question at that point?
    A. Well he -- he lays out sort of a plan, at least in general terms, where he says, "The long range program would grow out of studies being carried out by the fundamental filter group as well as the other groups of the Research Division working on smoke chemistry. The fundamental program could be broadened to include the study of tobacco additives (catalyst), tobacco extraction and finally an all synthetic aerosol to replace tobacco smoke, if necessary. Simultaneously, other sections of the Research Division should be making a strong effort to develop means to evaluate the physiological effects of smoking. Initial studies could be carried out with animals or certain animal tissues known to be irritated by cigarette smoke, and known to be susceptible to cancer when exposed to known carcinogens."
    *12 Q. Now this was occurring in July of 1958?
    A. That's correct.
    Q. How would the program that Mr. Mace is suggesting at the top of page two have fit into the process of creative destruction that you described this morning?
    A. Well I would read Mr. Mace as proposing that Philip Morris should try to win this race, that Philip Morris should commit itself on a long-term basis to a fundamental solution to this health problem, redesign the cigarette if possible, and if not possible, something completely different that would satisfy consumers by providing them with what they want, which included a safe product.
    Q. Did Mr. Mace then go on to indicate how such a program might be related to competition?
    A. Yes, he does.
    Q. Where does that occur, professor?
    A. In the last paragraph of the document further down the page, he says, "I know this sounds like a wild program," and he's referring there, the wild program being his long-range plan, "but I'll bet that the first company to produce a cigarette claiming: a substantial reduction (say 50 percent less than the present Parliament and Kent) in tars and nicotine, or an ersatz cigarette whose smoke contains no cigarette tars" -- sorry, "contains no tobacco tars, and with good smoking flavor, will take the market. Further, if he has the intestinal fortitude to jump on the other side of the fence (provided he has some convincing experimental evidence to back him up) on the issue of tobacco smoking and health, just look what a wealth of ammunition would be at his disposal."
    Q. Professor, what is Mr. Mace discussing in that last sentence that you just read?
    A. Well what he's basically saying is not only that he thinks Philip Morris should enter this race, but what he is recognizing, first of all, was that to really win the race, they would have to have experimental evidence showing that their product is safer, and they would have to in some way jump on the other side of the fence and be prepared to explain to the customers, to the smokers, just why the product was safer. But that if they were -- if they had the guts to do that, then they would have tremendous ammunition at their disposal.
    So I guess where Schumpeter used the metaphor of a race, he's adopting the metaphor of an all-out war. But the concept is the same, that if they undertook this long-range program and they had the data, the experimental evidence to back up a successful outcome of that program, that they would be able to destroy their competition.
    Q. Based upon your review of Philip Morris's internal documents in this case, did Philip Morris ever jump that fence?
    A. No, they did not.
    Q. Did Philip Morris ever conduct the long-term research program suggested by Mr. Mace in July of 1958?
    A. No, they did not.
    Q. Did any of the other defendants consider the gains in market share that might accrue from the development of a demonstrably safer cigarette?
    A. Yes.
    Q. All right. Would you look at 11 -- at Exhibit 14020, please.
    *13 Do you have that?
    A. Yes, I do.
    Q. All right. This is a document produced by Lorillard; is that correct, Professor Jaffe?
    A. That's correct.
    Q. Its title is --
    MR. BLEAKLEY: What's the number?
    MR. GILL: 14020.
    Q. The title of this document is "A REVIEW OF ANIMAL STUDIES CONDUCTED AT BIO-RESEARCH CONSULTANTS INC AND THE SLOAN-KETTERING MEMORIAL INSTITUTE;" is that correct?
    A. Yes.
    Q. And it is dated May 25, 1966?
    A. That's correct.
    Q. And the author is Dr. A. W. Spears, who was director of research and development at Lorillard at that time.
    A. That's correct.
    Q. Did you rely on this document in forming your opinions, Professor Jaffe?
    A. Yes.
    Q. Is it consistent and representative of other documents that you have reviewed on the subject of potential market-share gains from the development of a demonstrably safer cigarette?
    A. Yes, it is.
    MR. GILL: Your Honor, we will offer Exhibit 14020.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 14020.
BY MR. GILL:
    Q. All right. We just covered what appears on the face page of Exhibit 14020; correct?
    A. Yes.
    Q. All right. Let's turn to the second page, and what we have here is a letter that is from Dr. Spears, based upon his signature on page six of the letter; is that correct?
    A. That's correct.
    Q. And Dr. Spears' letter is addressed to Mr. J. E. Bennett, who is the president of the P. Lorillard Company in -- and the date of the letter is May 25, 1966; is that correct?
    A. That's correct.
    Q. The letter shows that Dr. Spears is down in Greensboro, North Carolina, and he's writing to the president who's up on 42nd Street in New York City.
    A. That's correct.
    Q. And the subject, as we've indicated, is "A REVIEW OF ANIMAL STUDIES CONDUCTED AT BIO-RESEARCH CONSULTANTS INC AND THE SLOAN-KETTERING MEMORIAL INSTITUTE;" correct?
    A. Yes.
    Q. All right. Now directing your attention to the bottom of the first page, does Dr. Spears at that point address the development of a demonstrably safer cigarette?
    A. Yes, he does. Beginning with the last sentence on the page, he says, "It is thought that the development of a cigarette, the smoke condensate from which gives little or no tumorigenic response, would be regarded as a highly significant development by the scientific community." Then turning over to the next page he continues, "Undoubtedly, such a product would place the corporation in a highly enviable position, and in the writer's opinion a two or threefold increase in sales could result within a short period."
    Q. Professor, would that type of a gain in market share be considered significant in economic terms?
    A. That would be a very significant increase in market share, yes.
    Q. Please continue.
    A. He goes on, "It is unrealistic to envision a cigarette sales monopoly, in that such a product would be effectively duplicated by competitors in a short time. On the other hand, if we fail to pursue this research and/or a competitor marketed a cigarette whose smoke condensate gave little tumorigenic response, the writer is of the opinion that a significant sales loss could result."
    *14 Q. On this page of the letter, is Dr. Spears addressing the concept of fear of being left behind in some type of a competitive race?
    A. Yes. I mean basically he's got here both sides of the incentives to engage in competition; first he notes the large benefit of being the first to produce this product, and then he notes the significant risks of the company of being left behind if they do not pursue this and one of their competitors is successful in doing so. So he's identified both the need and the fear motivation for pursuing this kind of long-range development.
    Q. Based upon the documents that you've reviewed, did Lorillard pursue the long-term development of such a product?
    A. No, they did not.
    Q. Professor Jaffe, did you find other examples in which defendants' employees predicted that a safer cigarette would generate substantial gains in market share?
    A. Yes.
    Q. Would you turn to Exhibit 12509, please.
    A. I have it.
    Q. Is Exhibit 12509 a document that you've relied upon in forming your opinions?
    A. Yes, it is.
    Q. And is it also representative and consistent with other documents on the subject of market-share gains from the development of a safer cigarette?
    A. Yes, it is.
    MR. GILL: Your Honor, we move the admission of Exhibit 12509.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 12509.
BY MR. GILL:
    Q. Now this is a document that was produced from the files of RJR; is that correct, Professor Jaffe?
    A. That's correct.
    Q. It is marked "SECRET?"
    A. Yes.
    Q. The date is March 14, 1983.
    A. Yes.
    Q. The subject in the upper left-hand corner is "Events Likely to Occur Prior to 1993."
    A. That's correct.
    Q. And the author is R. A. Lloyd, Jr., and it is addressed to Mr. Mike McKee; correct?
    A. Yes.
    Q. All right. Would you please direct your attention to the second paragraph on the first page. The author states, "The task you set for me was to identify three external events which will impact the tobacco industry and R. J. Reynolds within the next ten years. The three that I have identified are regulatory issues, smoking and health and social acceptability."
    In which of those three categories did the author address the potential market gains of a safer cigarette?
    A. In the smoking and health category.
    Q. If you turn to page two -- or actually page three, I believe, the author deals with the category of smoking and health on that page?
    A. That's correct.
    Q. Okay. What does the author say about the potential market-share gains of a safer cigarette?
    A. Well first, if you'll notice at the end of that first paragraph under the heading "Smoking and Health," he notes that there have been patents that have been granted or applied for by various companies for smoking devices that implied increased safety, and then he goes on in the next paragraph to refer to the consequences of those devices. He says in the second sentence of the paragraph, "The company which can produce such products, which also supply a degree of user satisfaction which approaches that of current cigarette products, will become the dominant company in the industry almost over night. It is reasonable to assume that the company who introduces such a product might capture as much as 25 share points in the first year if supply could keep pace with demand. RJR must be that company, even though we are currently far behind a number of our competitors in this area."
    *15 Q. What is your reaction to the author's prediction?
     A. Well once again he's predicting a -- a tremendous competitive gain. Twenty-five share points is -- that's 25 percent of the market, a quarter of the entire market, and I guess I would agree that that would be -- make you the dominant company in the industry, and he's suggesting that that could be the results, if you could introduce one of these products, if it also provided a degree of smoking satisfaction.
    Q. Now in order to achieve the market-share gain of that magnitude, and assuming that a company was able to develop a demonstrably safer product, would the company have to do anything else in order to reap those benefits?
    A. Yes, it would have to make sure that consumers understood that it had taken this one attribute of the product, safety, and it had succeeded in achieving a very significant improvement along that attribute. Because if you solve the technical problem of producing a less harmful product, but consumers didn't understand that this very significant improvement had occurred, then you're not going to get the kind of large competitive advantage that is discussed in this document or the other documents.
    Q. So if the product achieved a significant market advantage with respect to the dimension of safety, you're saying that the company that developed the product would have to exploit the safety issue in connection with informing consumers about the product.
    A. That's right. Because otherwise consumers would not be fully informed regarding why it is that this product is superior to the alternatives.
    Q. And based upon your review of RJR's documents, did RJR ever embark upon a program to exploit the advantages of the demonstrably safer cigarette?
    A. No, they didn't.
    Q. Professor, please sum up your conclusions with respect to the motivation portion of your plausibility analysis.
    A. Well I think what we've seen in these documents is that the companies did in fact perceive a tremendous competitive advantage that could potentially be gained through exploitation of the smoking-and-health issue in a long-range program, that they or individuals within the companies contemplated undertaking such a program, but that they also understood that such a program was a very dangerous thing for the industry, that there would be losers as well as winners, and that to effectuate such a program they would have to have the guts to tell customers, smokers, about the health effects of their products. And so I see a very strong motivation for a conspiracy that would -- where -- where the firms would perceive that there was this tremendous driving force which was going to push them to compete, but that that competition would be extremely dangerous from the industry's point of view, and therefore they had a very strong motivation to suppress that competition if they could figure out how to do so.
    Q. Let's move now to the evidence that you found that supports your opinion that the defendants engaged in a conspiracy to suppress fundamental competition on the smoking-and-health issues. All right?
    *16 A. Okay.
    Q. First of all, let me ask you this, professor: In reviewing the defendants' internal documents, did you find any indication that any of the companies, any of the defendants had established an antitrust compliance program?
    A. Yes, I did.
    Q. Let's look, then, at Exhibit 13763. Now is this one of the documents that you've relied upon in support of your opinions, professor?
    A. Yes, it is.
    MR. GILL: We'll offer Exhibit 13763, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 13763.
BY MR. GILL:
    Q. Now this is a document that was produced by Brown & Williamson Tobacco Corporation?
    A. That's correct.
    Q. The date is April 1977, as indicated in the upper right- hand corner?
    A. That's correct.
    Q. The title of the document is "ANTITRUST COMPLIANCE PROGRAM?"
    A. Yes.
    Q. All right. Directing your attention to the section in the middle of the first page that's labeled "COMPANY POLICY," what's being discussed in this section?
    A. Well it says, "It is the policy of the Company to conduct its operations in strict compliance with all applicable antitrust and trade regulation laws. The laws are based upon the principle of conserving and encouraging a free and competitive marketplace -- a principle to which Brown & Williamson wholeheartedly subscribes. The decisions made on behalf of this Company are to be without collusion, agreement, or understanding with competitors. The law requires a business to act alone in making competitive decisions such as what to buy, how much to pay, what to sell, how much to charge, with whom to deal, et cetera."
    Q. Do you agree, professor, with the author's assessment of antitrust principles as set forth in that particular portion of the document?
    A. Yes.
    Q. This is dated in April of 1977, as we've just indicated. What type of changes would have occurred in the antitrust laws between the early '50s, the time when you believe this conspiracy was formed, and the time that this document was drafted?
    A. There were no major changes in the antitrust laws that would have affected the principles that are being articulated here in this document.
    Q. So the author's assessment of the situation in 1977 would have been equally applicable to the situation in late 1953?
    A. That's correct.
    Q. Now did Brown & Williamson issue any specific directives to guide their employees with respect to their compliance with the company's antitrust program?
    A. Yes, those appear beginning on the next page.
    Q. Okay. You go then to page two, there is a section in the middle of the page labeled "SPECIFIC with Competitors."
    A. That's correct.
    Q. All right. What did you find significant about that particular section of this document?
    A. Well it says there, right after the number one, "No employee shall agree, expressly or by implication, with a competitor in any way to limit or restrict any of the following aspects of the activities or strategies of Brown & Williamson or the competitor:"
    *17 And then it goes on. There's a long list that begins on that page and continues on the next page of activities or strategies that are not supposed to be discussed with competitors.
    Q. Are any of the items on that list relevant to the analysis that you've made?
    A. Yes. For example, I guess about the fourth or fifth one in the list on that first page, it says "Product or service offerings." So a product offering of Brown & Williamson would be, you know, its -- its various cigarette products. And then on the next page, I guess about halfway down the continuation of the list on the next page, it indicates "Sales or promotional plans or activities" as a kind of activity or strategy of Brown & Williamson that employees are not supposed to discuss with competitors.
    Q. Based upon your review of internal documents and the depositions that you reviewed, did Brown & Williamson comply with its own antitrust compliance program?
    A. No, it didn't.
    Q. Did you find any documents, Professor Jaffe, that addressed the formation of the conspiracy?
    A. Yes, I did.
    Q. Would you turn, then, to Exhibit 18905.
    A. I have it.
    Q. This is a document that's already been admitted into evidence that the jury has seen a number of times. This is one of two Hill Knowlton memoranda; is that correct?
    A. That's correct.
    Q. And this one is dated December 15, 1953 in the upper right-hand corner; is that correct?
    A. Yes.
    Q. All right. And is it your understanding that the author of this document, as indicated on the last page of the document, is Bert Goss, Hill Knowlton?
    A. Yes.
    Q. All right. And the title is "BACKGROUND MATERIAL ON THE CIGARETTE INDUSTRY CLIENT."
    A. Yes.
    Q. What's the significance of this document and the other Hill Knowlton document with respect to the opinions that you've formed?
    A. Well these two documents taken together essentially provide a description of the events in -- beginning in December of 1953 at which the defendants agreed to conspire, and actually provides an explanation in significant ways of why they did it as well as in effect a blueprint that was significantly carried out over the subsequent several decades.
    Q. Under the section that's labeled "Participants," did Mr. Goss provide some historical perspective on the cigarette industry?
    A. Yes. In the first paragraph there he talks about the fact that the industry was getting together to discuss this, and that they had not had such discussions in the recent history, at least partly because of the antitrust cases that had previously been brought against the tobacco industry.
    Q. Now it goes on to state in that section, in the third paragraph, "The group was called together by Mr. Paul Hahan, President of American Tobacco Company. The chief executive officers of all the leading companies - R. J. Reynolds, Philip Morris, Benson & Hedges, U.S. Tobacco Company, Brown & Williamson - have agreed to go along with a public relations program on the health issue."
    *18 Did I read that correctly?
    A. Yes.
    Q. All right. Now what significance, if any, do you draw from that particular information, that they had agreed to go along with the public relations program? Would that have been anti- competitive?
    A. No. If that's all that they had agreed to, that would not necessarily have been anti-competitive.
    Q. Why not?
    A. Well anti-competitive means activities that restrict competition, and if they had merely been involved in a -- in a collective or cooperative effort regarding public relations and had not reached any agreements that restricted or suppressed their competitive activities, then that would not have been anti- competitive.
   Q. All right. Let's go on to the next paragraph. It reads, "Liggett & Myers is not participating in the organization because the company feels that the proper procedure is to ignore the whole controversy." Essentially describing a head-in-the-sand approach?
    A. Yes. I mean what they're saying is that Liggett & Myers is not participating. However, if Liggett & Myers is going to ignore the whole controversy, then the companies that were there presumably would not have had too much fear that Liggett & Myers was about to take off on significant competitive activities that were going to undermine any agreement by the companies that were there.
    Q. So the level of threat posed by Liggett & Myers' abstinence from the conspiracy at the beginning was what?
    A. Well the level of threat was low, because what it's saying is that although they're not participating, it appears that what they were doing was ignoring the whole situation, so they would not pose at least at that point in time a significant threat.
    Q. And you previously told us that, in your opinion, Liggett subsequently joined the conspiracy.
    A. Yes.
    Q. All right. Directing your attention to the bottom of page one of Exhibit 18905, under "Organization," it states, "Because of the antitrust background, the companies do not favor the incorporation of a formal association. Instead, they prefer strongly the organization of an informal committee which will be specifically charged with the public relations function and readily identified as such."
    Then going on to the next page, it continues, "For example, Mr. Hahn reported that one name they had considered was the "Tobacco Industry Committee for Public Information." John Hill suggested that he felt the word "research" should appear along with the "information" in the title of the committee".
    Now as you understand it, what committee is being discussed here?
    A. Well they're -- they're discussing the formation of a committee which eventually took the form of the TIRC, or Tobacco Industry Research Committee.
    Q. Now directing your attention further down on page two under the heading  "The Industry's Position" to the very last sentence of that particular section, it reads, "Each of the company presidents attending emphasized the fact that they consider the program to be a long-term one." See that?
    *19 A. Yes.
    Q. In your opinion, Professor Jaffe, would the 44-year history and tenure of the TIRC, later changed to the CTR, have qualified with respect to an estimate that the presidents were prepared to engage in a long-term program?
    A. Yes.
    Q. All right. If you turn to the next page, starting on this page there are a series of questions and answers that apparently were posed by the staff of Hill & Knowlton and responded to by the industry executives. Is that your understanding?
    A. That's my understanding.
    Q. All right. In approximately the middle of the page there is a question that starts out, "Do the companies consider that their own advertising and competitive practices have been a principal factor in creating a health problem?" Do you see that?
    A. Yes.
    Q. Then the author states, "The companies voluntarily admitted this to be the case even before the question was asked. They have informally talked over the problem and will try to do something about it. They do, however, point out that this is the one important public relations activity that might very clearly fall within the purview of the antitrust act."
    What is the significance of that question and answer with respect to the opinions that you have formed in this case, Professor Jaffe?
    A. Well what we have here is just an extraordinarily clear statement as to what was going on. First of all, do the companies consider that advertising and competitive practices are creating a health problem? Now of course from their point of view the health problem is not that cigarettes are harmful, the health problem is that their business is threatened. That's the problem that they're trying to solve here. And what they're worried about or what they're recognizing is that their own advertising and competitive practices, including, for example, the ads that Professor Dolan discussed yesterday with their health claims that were reinforcing consumers' beliefs that cigarettes were harmful, they're saying this is a principal factor creating the problem that we face as an industry. The companies voluntarily admitted this to be the case, and then it goes on to say they've talked about it, they recognize it is a problem, and they're going to do something about it.
    Well what are they going to do about it? Presumably whatever they're going to do about it, having talked it over informally among themselves, is not a competitive response. I mean we saw in the Brown & Williamson document that you're not even supposed to discuss these things with competitors, let alone get together with your competitors and agree to do something about it.
    So what we have here, through the fact that Hill & Knowlton recorded these discussions, we have really an amazingly clear description of the companies in an industry getting together and agreeing to suppress competition.
    Q. The Hill & Knowlton memorandum with regard to the antitrust compliance program, that was directed to the employees; correct?
    *20 A. You said "Hill & Knowlton." You meant Brown & Williamson.
    Q. I did.
    The Brown & Williamson memo with regard to the antitrust compliance program, that was directed to all of its employees; correct?
    A. That's correct.
    Q. Of course, even the president of the company is an employee; true?
    A. Yes.
    Q. With respect to the conduct that has been memorialized on this page of this exhibit, does any of that conduct fit or comply with the program set out in the Brown & Williamson memo to avoid antitrust problems?
    A. It doesn't comply with the Brown & Williamson type of guidelines, and it's -- I can't imagine an explanation of this kind of behavior that would be innocent or -- or involve competition rather than suppression of competition.
    Q. Let me direct your attention, then, Professor Jaffe, to the bottom of the same page. There's one more question and answer there. The question reads: "Do the companies view this problem as being extremely serious and worthy of drastic action?"
    And the answer is, "The answer is obvious since the companies have not met together for the first time" --
    Excuse me. "The answer is -- The answer is obvious since the companies have met together for the first time since 1939, since they have promptly proceeded to retain Hill & Knowlton, and are already considering such expensive techniques as the use of institutional advertising. They recognize the possibility that it might be desirable to use institutional advertising to promote the basic statement."
    And then it continues on the next page, "As another indication of how serious the problem is, the officials stated that salesmen in the industry are frantically alarmed and that the decline in tobacco stock on the stock exchange market has caused grave concern, especially since tobacco earnings will be much higher next year because of the termination of excess profits taxes."
    Now how does the seriousness of the perceived problem impact competitive motivation?
    A. Well I think what this shows is that the people meeting in 1953 clearly perceived the kind of transforming event that I talked about a little while ago. Here was a situation where the stakes were extremely high while the urge to compete was very strong. This was also a situation fraught with tremendous danger for the companies, and therefore one in which they would have had a strong motivation to conspire, if they could, to maintain the status quo.
    Q. Let's go, then, to the other Hill Knowlton memoranda, that's Exhibit 18904, which is also already in evidence.
    A. I have it.
    Q. All right. The second Hill Knowlton memo is addressed to the members of the planning committee; correct?
    A. That's correct.
    Q. It is entitled "FORWARDING MEMORANDUM."
    A. Yes.
    Q. The author is apparently unknown. There are no authors listed on this document; correct?
    A. Yes, that's correct.
    Q. Now does this particular memo also discuss suggestions for industry strategy?
    *21 A. Yes, it does.
    Q. Okay. Let's turn, then, to the second page. And first, in order to establish some timeframe here, do you see at the top of this page that the author states, "The attitude of the men we must directly deal with in the industry is at once interesting, and important for us to understand. That is why notes on the four interviews with 'research directors' are given at some length."
    Do you recall that the first Hill Knowlton memo that was dated December 15, 1953, contained some language concerning an upcoming imminent meeting between Hill & Knowlton and the research directors of the companies?
    A. That's right. It describes a plan to hold interviews with each of the research directors.
    Q. So this memorandum was apparently prepared sometime subsequent to the first memorandum.
    A. That's correct.
    Q. All right. Let me direct your attention about halfway down that first paragraph to the language that reads, "Boy!"
    We went just a little bit too far, Ms. Sutton.
    "Boy! wouldn't it be wonderful if our company was the first to produce a cancer free cigarette. What we could do to competition!"
    Now what does that say about the incentive to compete that was recognized by the research directors of these companies?
    A. Well what we see in this quote, which obviously is similar in some ways to quotes we saw later from the various companies, but what this shows is that right from the very beginning, in 1953, at the same time where, as we saw in the previous document, they're recognizing that their competitive practices are part of what's creating the problem that the industry faces, at the same time the research directors are saying, boy, we'd like to go out and do this, we'd like to go out and be the one that produces a cancer-free cigarette because we could destroy the competition. And so what this basically shows is that the industry in 1953 was really at a crossroads. There was a tremendous opportunity and at the same time a tremendous threat.
    The individual companies, particularly the research director quoted here, saw a path which was to go after this, to compete in a long-term way through the creative destruction process to try to solve this problem, not necessarily because they were altruistic, but because they perceived that if they solved this problem, they would destroy the competition.
    At the same time, as we saw in the other document, it was understood that this free-for-all would be very threatening to the industry. And it's clear from this document and the other documents and the subsequent evidence that the path the industry chose was not that free-for-all, the path the industry chose was to suppress this competition so that they could maintain the status quo.
    Q. So even an extremely strong desire to compete can under certain circumstances be overcome by a collective incentive to conspire?
    A. If the stakes are high enough, if the danger that's perceived from that free-for-all is big enough, and if the companies have the opportunity because there aren't very many of them and they can meet and work it out and they have the opportunity to collude, then it can overcome the very strong incentives to compete.
    *22 Q. Let's move to page three of Exhibit 18904. Second paragraph on that page reads, "To work with these men successfully, it is most important for us to understand a wide range of extraordinary things - so that all of us can reach a rather new outlook together."
    In economic terms, Professor Jaffe, what is the author proposing there?
    A. Well I think what the author is saying is that although it may seem extraordinary compared to our past behavior, we need to collude, we need to reach a new outlook and we need to reach it together rather than pursuing our own individual approaches to this situation.
    Q. Are you able to see any other reasonable interpretation of that language, professor?
    A. No, I can't see any other way to read it.
    Q. Then continuing, the author states, "There is only one problem - confidence, and how to establish it; public assurance, and how to create it - in a perhaps long interim when scientific doubts must remain."
    What type of a solution is the author proposing there, Professor Jaffe?
    A. Well clearly they're not proposing the competitive solution where the problem would have been how to make the product safer and how to market that safer product; rather, they're clearly proposing a collective solution that involves the effort instead to maintain the status quo by reassuring the public, maintaining confidence, and hopefully toughing it out.
    Q. Let's go to the next page. There are a series of problems now that the author sets forth?
    A. That's correct.
    Q. With respect to problem one, the very last sentence under problem one reads, "May not our real problem be the establishing of a complete understanding that old patterns of idea competition are not going to be perpetuated in this emergency?" Now what is the author suggesting?
    A. Well to me, idea competition is basically creative destruction. What he's saying is that our old pattern of competing with each other by trying to come up with new and better ideas cannot be perpetuated. We -- we can't tolerate that kind of old behavior, the competitive behavior, because we face an emergency. Again, of course, the emergency is not from their point of view that the products are dangerous, but that people are threatening to stop buying them. And they're basically saying that we're going to deal with this emergency by not allowing idea competition to be perpetuated.
    Q. Would you turn now to Bates page 500 of Exhibit 18904. There the author lists some things to do?
    A. That's correct.
    Q. And on this to-do list there are various items, the first of which deals with naming the committee; correct?
    A. Yes.
    Q. And the name of the committee that was ultimately formed was the Tobacco Industry Research Committee.
    A. That's correct.
    Q. Did that closely parallel the suggestion by Mr. Hill, along with the input of the company presidents?
    A. Yes, it did.
    Q. The second suggestion had to do with a basic credo statement. "'We place health first; we have long been seeking the facts; we are financing more research, seeking still more facts."'
    *23 How did that particular proposed credo compare to the credo that was set forth by the sponsors of the Frank Statement?
    A. It's very similar to the language in the Frank Statement where the companies talked about health being a paramount concern, and talked about creating the TIRC, which was going to do research and get at the facts. Very -- it's the basic idea that was conveyed by the Frank Statement.
    Q. All right. And as you've been answering that question, I've been showing to the jury Exhibit 30210, which is a copy of the Frank Statement; correct?
    A. That's correct.
    Q. And there's a reference in the Frank Statement in the left column that  "We accept an interest in people's health as a basic responsibility, paramount to every other consideration in our business."
    A. That's correct.
    Q. And is that similar to the first sentence of the proposed credo?
    A. Yes, it is.
    Q. And in the right-hand column of the Frank Statement, are there various references to conducting research?
    A. Yes.
    Q. And in fact, at the bottom of the left-hand column and going into the right-hand column, are there references to cooperation with health authorities, that we'll be seeking answers to the questions of smoking and health?
    A. That's correct.
    Q. And does the Frank Statement contain a representation that the Tobacco Industry Research Committee will sponsor research or fund research into all phases of tobacco use and health?
    A. Yes, it does.
    Q. So that particular credo was basically adopted by the industry -- or by the sponsors of the Frank Statement?
    A. That's correct.
    Q. All right. Item two goes on to state in the second sentence, "Then -- consider exactly what viewpoint and attitude industry will universally adopt toward unfavorable research reports."
    Now is that concept consistent with the information that was set forth in the Frank Statement?
    A. I don't think it's consistent with the Frank Statement as it was published, and it's certainly not consistent with the fact that -- well not consistent with a competitive response to this situation by the individual companies. Because as I described earlier, this situation was, although it was a threat, was also in many ways a competitive opportunity, and what we would expect in a competitive industry is that the firms in the industry would want to address such a competitive opportunity in whatever way they saw as best, as opposed to universally adopting some particular attitude that they're all going to take towards unfavorable research reports.
    Q. And from an antitrust point of view, what significance do you place on the use of the term "universally" in that sentence?
    A. I read that to be another statement that they're going to collude with respect to their approach to unfavorable research reports.
    Q. And would that statement be inconsistent with an expressed willingness in the Frank Statement to cooperate with public health authorities?
    *24 A. Yes, I think so.
    Q. Would that be --
    Would that statement, to adopt a universal position toward unfavorable research reports, be consistent or inconsistent with a pledge to cooperate with public authorities?
    A. It would be inconsistent.
    Q. All right. Directing your attention to the fifth item on the to-do list, that one states, "Decide whether we suggest company publicity or advertising. Consider what the chief points in such messages should be. Decide how this advertising could be coordinated, so that it doesn't bog down a competitive dog fight. Decide what any one company could say, that couldn't be better said by all companies jointly -- when they honestly face a problem of human import where competition has no place."   Do you agree with that assessment?
    A. Well I certainly don't agree with the assessment that competition has no place, unless you define "problem" as the financial threat to the industry as opposed to the problem being that the product has been shown to be potentially harmful. And certainly from a competitive point of view, basically what they're saying is instead of adopting the approach that the Brown & Williamson guidelines say you should, which is you don't discuss advertising with your competitors, they're saying let's avoid a competitive dog fight, let's make sure that we don't bog down in such a dog fight by coordinating what we say to the public.
    Q. All right. And lastly, Professor Jaffe, let me direct your attention to item number nine. The first sentence there reads, "Develop some understanding with companies that, on this," and the word "this" is underscored, "problem, none is going to seek a competitive advantage by inferring to its public that its," and "its" is underscored, "product is less risky than others."
    Now what would be the competitive consequences of such an understanding as was suggested by the author at item number nine?
    A. Well the consequence of successfully achieving such an understanding would be essentially to shut down the process of creative destruction, because it is precisely the competitive advantage that you could gain by trying to tell the public that your product is -- is less risky, if you really could succeed in making one that was less risky, that drives the process of creative destruction. So the agreement that's described in number nine there is essentially an agreement to shut down fundamental competition with respect to the smoking-and-health issue in the U.S. cigarette market.
    Q. Now Professor Jaffe, with respect to both of the Hill Knowlton memoranda, were you able to locate anywhere on either memorandum where the authors indicated that a copy was provided to any representative of the tobacco industry?
    A. No. They don't indicate that they were copied to people in the companies.
    Q. In all of your review of the internal documents of the defendants dealing with their competitive behavior, were you able to locate any internal document that contained any reference to the type of discussions that we have seen memorialized in these two documents?
    *25 A. No, I didn't see any such documents.
    Q. Assuming that the formation of the Tobacco Industry Research Committee was merely a public relations ploy, would you have expected to find some memorialization of the events that occurred at these meetings somewhere in the files of at least one of the defendants?
    MR. BLEAKLEY: I object, Your Honor, that calls for speculation on the part of the witness.
    THE COURT: Well you may answer that.
    A. Well I think, given what's said in these documents and what the company said publicly about the significance of these events, I think it would be a reasonable expectation that if what was going on there was innocent, that there would have been some internal documents where the presidents gave instructions to other people in the company about how to carry this out and so forth. So I think it would have been reasonable to expect that you might have seen this.
    Q. And what inferences do you draw from the absence of any such mention?
    A. Well it --
    MR. BLEAKLEY: Same objection, Your Honor, calls for speculation.
    THE COURT: You may answer.
    A. I think that the fact that we don't see any documents from the companies describing the kind of decisions that were reached at the meetings is certainly consistent with the fact, as laid out in the Hill & Knowlton document, that the agreements that were reached were agreements that they didn't want to be -- there to be evidence of.
    Q. And finally, Professor Jaffe, in your opinion, what is the overall significance of these two Hill Knowlton memoranda in terms of the ability of the process of creative destruction to provide consumer benefits?
    A. Well I think if we take these two documents together and examine them together, and also in the context of what we know then transpired over the next four decades, what we have is really an amazing description of what would have occurred or what could have occurred if creative destruction had been allowed to operate, why that competition, that long-term competition was to incredibly threatening to the members of the industry and the status quo, as well as essentially a blueprint for an agreement to prevent that from happening by suppressing that competition, by colluding to suppress that competition.
    Q. Did the defendants create any internal documents that reflect conduct consistent with adoption of the proposals contained in these Hill Knowlton memoranda?
    A. Yes.
    Q. Would you look at Exhibit 10598, please.
    THE COURT: Counsel, why don't we take a short recess.
    MR. GILL: Thank you, Your Honor.
    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. GILL: Thank you, Your Honor.
BY MR. GILL:
    Q. Professor Jaffe, can I ask you to take another look at Exhibit 18904.
    A. Yes.
    Q. To your understanding, Professor Jaffe, were these two Hill Knowlton memoranda produced from the files of any of the defendants in this lawsuit?
    *26 A. No, that's not where they came from.
    Q. Where did they come from?
    A. As I understand it, there's a stamp on that page which indicates that they came from an archives at the University of Wisconsin, apparently from the estate of Mr. Hill.
    Q. Does the same stamp appear on Exhibit 18905?
    A. Yes, it does.
    Q. All right. Before the break, then, Professor Jaffe, I believe I'd asked you to take a look at Exhibit 10598. Will you do that now, please.
    A. Yes, I have it.
    Q. Professor Jaffe, is this a document that you have relied upon in forming your opinions in this case?
    A. Yes.
    MR. GILL: Your Honor, we'll offer Exhibit 10598.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 10598.
BY MR. GILL:
    Q. Professor Jaffe, this exhibit was produced from the files of BATCo Ltd.; is that correct?
    A. That's correct.
    Q. And it is a "REPORT ON GROUP SMOKING AND HEALTH CONFERENCE" that occurred in Germany during May of 1974; is that correct?
    A. That's correct.
    Q. 1974 would place us 20 years out from the time that the Frank Statement was issued.
    A. That's correct.
    Q. Now the particular document deals with various reports that were delivered during this conference that occurred in Germany in 1974.
    A. Yes, it does.
    Q. And if you would turn to page two under agenda item two, the report deals with "Reports by Delegate Companies." And you understand that BATCo as of this point in time consisted of a number of different tobacco companies throughout the world?
    A. That's correct.
    Q. One of which was Brown & Williamson.
    A. That's right.
    Q. And the first area where reports from delegates were received, with respect to this document at least, was the U.S.A.?
    A. That's correct.
    Q. And then if you'll turn the page, about two-thirds of the way down on that page there is a paragraph that reads, "On the whole, the U.S. industry was still united, but L&M was developing a technique for reducing biological activity by direct spraying, and B&W was attempting to get agreement from the other companies not to pursue this line."
    Would that type of conduct on the part of B&W have been in compliance with its own internal antitrust compliance program?
    A. No. As we saw in that document, one of the things that they weren't supposed to discuss with other companies were product offerings, and what appears to me -- or what this document says B&W reported to the other BATCo companies was that they were talking to the other U.S. companies attempting to get an agreement not to pursue a particular form of product development.
    Q. And BATCo, of course, was a participant in this conference, as well as B&W.
    A. It was -- it was a BATCo conference, that's correct.
    Q. What is the significance of the statement that "On the whole, the U.S. industry was still united...?"
    A. Well again, companies in competitive industries aren't supposed to be united. What this suggests is a reference on the part of Brown & Williamson reporting to the other BATCo companies that the collusive agreement for the most part seemed to be in place in the United States.
    *27 Q. Professor Jaffe, are you able to point to any single incident that manifested the importance of the conspiracy to the participants?
    A. Yes.
    Q. Would you turn to Exhibit 11512. Is this a document that you relied upon, Professor Jaffe?
    A. Yes.
    MR. GILL: We'll offer Exhibit 11512, Your Honor.
    MR. BLEAKLEY: No objection, Your Honor.
    THE COURT: Court will receive 11512.
BY MR. GILL:
    Q. Professor Jaffe, this is a document that was produced by B.A.T Industries. What's your understanding of the relationship between B.A.T Industries, as of the time of this document, with BATCo?
    A. Well as of 1983, B.A.T Industries was, I believe, a parent company of BATCo.
    Q. And this document of course, as indicated, is on the letterhead of B.A.T Industries?
    A. That's correct.
    Q. The date is 9 September, 1983.
    A. Yes.
    Q. It is from the chairman's office.
    A. That's correct.
    Q. And who -- who signed this document on behalf of B.A.T Industries?
    A. It's signed on page two by Mr. Sheehy, the chairman of B.A.T Industries.
    Q. Going back to the first page, there's an indication in the upper right- hand corner that various individuals received copies of this letter.
    A. That's correct.
    Q. One of those is Mr. E. A. A. Bruell. Is it your understanding that Mr. Bruell held an executive position with BATCo at this time?
    A. That's my understanding.
    Q. And what was his position?
    A. I believe he was the president of BATCo at that time.
    Q. So the chairman of B.A.T Industries is sending a letter, and he's copying it to the president of BATCo.
    A. Among others, yes.
    Q. Now the letter is addressed to Mr. George Weissman at Philip Morris Incorporated on Park Avenue in New York; correct?
    A. Correct.
    Q. Who was George Weissman at that time?
    A. George Weissman was the chairman of Philip Morris Inc.
    Q. So we have a letter coming from the chairman of B.A.T Industries to the chairman of Philip Morris Incorporated.
    A. That's correct.
    Q. Now in the first paragraph Mr. Sheehy states, "Philip Morris Holland B.V. recently took out full-page newspaper ads in violation of Dutch law to republish an anti-smoking group's slander of Barclay."
    Have you reviewed documents that deal with this particular incident?
    A. Yes, I have.
    Q. Does Mr. Sheehy go on to state specifically what he found objectionable about this incident?
    A. Yes, he does.
    Q. And where does he do that?
    A. Well in the third paragraph of the letter, Mr. Sheehy says to Mr. Weissman, "I find it incomprehensible that Philip Morris would weigh so heavily the short-term commercial advantage from deprecating a competitor's brand while weighing so lightly the long-term adverse impact from an on-going anti-" -- excuse me, "from an on-going anti-smoking program. I believe this is the first time a Tobacco Manufacturer has purchased space to promulgate the anti-smoking position. In doing so, Philip Morris not only makes a mockery of Industry co- operation on smoking and health issues, but also appears to inaugurate a free- for-all in which illegal conduct is condoned provided the commercial stakes are high enough."
*28 Q. Now this letter would have been written 30 years from the time of the meeting at the Plaza Hotel of the domestic cigarette companies, including Brown & Williamson.
    A. Approximately, that's right.
    Q. What is the significance of what Mr. Sheehy is saying to Mr. Weissman in that paragraph?
    MR. CORRIGAN: Your Honor, Your Honor, excuse me, if I might interpose an objection. As the document itself specifically makes clear, this has nothing to do with the United States. The witness has already testified the relevant market is the U.S. market. Since objections by Mr. Ciresi to matters having to do with outside of the United States were sustained, mine should be as well.
    THE COURT: The objection is overruled. You may answer.
    A. What the significance of the document is that --
    I'm sorry, I forget what the question was.
    Q. What is the significance of the statement by Mr. Sheehy to Mr. Weissman in the third paragraph of the first page of this letter?
    A. Okay. I thought that's what it was, but I wanted to make sure.
    What he's saying is that Philip Morris is making a mockery of industry cooperation, suggesting that industry cooperation was, prior to this, an important and continuous property of the industry, and in particular he's making a mockery of industry cooperation on smoking-and-health issues.
    And clearly, this is a matter of tremendous significance and importance to B.A.T Industries. We have a letter from the chairman of the parent company, B.A.T Industries, to the chairman of Philip Morris regarding an incident in Holland that involved subsidiaries of each company in Holland.
    Q. Does Mr. Sheehy go on to state in the letter what he expects Mr. Weissman to do about it?
    A. Yes, he does.
    Q. Can you direct our attention there, please.
    A. At the bottom of that first page, the last paragraph there, he says, "I am confident that you do not approve of the questionable tactics behind your Dutch company's advertisement of the 2nd September in the newspapers 'De Telegraaf' and 'Algemeen Dagblad' and will ensure that not only are they not repeated, but that your Dutch Affiliate will unreservedly retract the advertisements."
    Q. Now was there additional correspondence between BATCo and Philip Morris with respect to this matter?
    A. Correspondence between BATCo and Philip Morris?
    Q. Were there additional communications of any kind?
    A. Yes, there were additional communications.
    Q. And was there additional correspondence from BATCo directly dealing with the subject matter of Mr. Sheehy's letter?
    A. Yes, there was.
    Q. All right. Would you turn to Exhibit 10933, please. This exhibit, I believe, is already in evidence, Professor Jaffe.
    This is a letter on the stationery of British-American Tobacco Company Ltd.; correct?
    A. That's correct.
    Q. And the letter is written by Mr. E. E. A. Bruell; is that correct?
    A. That's correct.
    Q. And who is the letter addressed to?
    *29 A. The letter is addressed to No. 1s -- excuse me, to all No. 1s of operating companies of BATCo.
    Q. And we have Mr. Bruell's initials right above that; do we not?
    A. That's correct.
    Q. And we also have his signature on the fourth page of the letter; do we not?
    A. That's right.
    Q. And one of the No. 1s would have been the number one at Brown & Williamson; true?
    A. At that time, that's correct.
    Q. Now this letter deals with relations with INFOTAB, national manufacturers associations, and competitors; correct?
    A. Yes.
    Q. Mr. Bruell states to the No. 1s that "On 2nd September in Holland, the Philip Morris company in that country published an advertisement - Appendix A attached. The advertisement had two inch headlines saying, quote, A message about which smokers must not think too lightly, unquote. There followed an extract from an article the previous day in the same newspaper." And then he goes on to say that the translation of the article is also being sent along.
    Now what is significant about this particular communication from Mr. Bruell to the No. 1s of the various BATCo companies?
    MR. CORRIGAN: Objection, Your Honor, same grounds as I elucidated earlier.
    THE COURT: You may answer that.
    A. Well this is a memorandum going out from Mr. Bruell to the heads of all of the BATCo operating companies. If you look later in the document you can see this includes, you know, Malta, Cyprus, South Africa, Zambia, countries all over the world, describing this incident in Holland. And as it shows right in the next section of the memo after the portion you read, what he's indicating has so upset BATCo and B.A.T Industries about this incident is that what Philip Morris has done is, number one, raise the health issue to gain competitive advantage, and then number two, quoted and thereby endorsed a report of an anti-smoking lobby, in this instance the Dutch Association of Public Health and Smoking, to attack another company in the industry.
    So what this shows is that from the perspective of the head of BATCo in 1983, raising the health issue to gain competitive advantage is a matter of tremendous concern and significance to the company and something that clearly they would have expected would not have occurred, and they are quite upset that it has occurred.
    Q. Now how would the language "raise the health issue to gain competitive advantage" relate to what was discussed in the Hill Knowlton memos 30 years before?
    A. Well I think what we're -- what we're seeing here is a potential outbreak of precisely the kind of competitive dog fight that the Hill & Knowlton documents feared, as companies in the industry, as a result of their desires to gain competitive advantage over other companies by raising the health issue, would exacerbate consumers' health concerns. And so this is exactly the kind of competitive practice that the Hill & Knowlton documents indicate the companies in the industry had agreed they were going to do something about.
    *30 Q. And what does this document tell you about the reaction of the industry to the proposals by Hill & Knowlton in 1953 on the subject of competitive behavior?
    A. Well this document, together with the other documents that we're going to see around this incident, shows that Hill & Knowlton's recommendation to agree to suppress this behavior was still being carried out some 30 years later.
    Q. Now the first page also, just below the two items that you referenced, contains a reference to lawyers in Holland immediately advising the Philip Morris company that they were breaking Dutch law.
    A. That's correct.
    Q. Do you consider the violation of Dutch law in connection with this incident as an alternative explanation for correspondence of the type that we've just been reviewing?
    MR. BLEAKLEY: Objection, Your Honor, that calls for speculation.
    THE COURT: You may answer that.
    A. In my opinion, it doesn't make sense to interpret this correspondence to mean that what BATCo and B.A.T Industries was upset about was the fact that Dutch law had been violated. First of all, this document very clearly says the number one concern, right at the top, was that the health issue was raised to competitive advantage, and it's only later that the issue of violating Dutch law is raised. And further, it doesn't make economic sense that the head of BATCo would be writing to the head of operating companies all over the world, in Africa, in Asia and the Far East, instructing them regarding how to relate to INFOTAB and other competitors as the result of an action of a Dutch subsidiary of Philip Morris in Holland if the only concern was a violation of Dutch law regarding competitive advertising.
    Q. Would a violation of Dutch law explain why Mr. Sheehy, as chairman of B.A.T Industries, was corresponding with the chairman of Philip Morris?
    A. I don't think so.
    Q. Were you able to review an interpretation of what this ad actually said?
    A. Yes.
    Q. Would you look at Exhibit 10934.
    A. Yes, I have it.
    Q. Is this a document that you've relied upon in forming your opinions?
    A. Yes, it is.
    MR. GILL: We'll offer Exhibit 10934, Your Honor.
    MR. CORRIGAN: Your Honor, same objection. This is a foreign advertisement. The witness has made it very plain that he did not analyze any of this, that it's not relevant to his opinion. During the testimony of Mr. Dolan, Mr. Ciresi objected to testimony about foreign advertisements; I'm entitled to equal treatment.
    THE COURT: The objection is overruled. You may answer.
    Q. Did you rely upon this document?
    A. Yes, I did rely on this document.
    Q. All right. Would you --
    Would you then refer to the title of this particular document. And actually, just above the title it shows that it was an appendix -- an appendix to some other document, Appendix A in the upper right-hand corner.
    A. Yes. It indicates it's Appendix A, which was mentioned in the previous document as being attached, and it was a copy of the ad.
    *31 Q. So this purports to be the English translation of the Dutch ad; is that your understanding?
    A. Yes, that's -- that's what you would conclude based on this document and the previous one.
    Q. And it appears to be the translation that Mr. Bruell provided to the No. 1s of all the operating companies.
    A. That's correct.
    Q. And it indicates that -- right at the top, that it's the translation of a full-page ad inserted on 2nd September, 1983 in national morning papers in Holland; correct?
    A. Correct.
    Q. All right. The heading for the ad was apparently "A message about which smokers must not think too lightly?"
    A. Correct.
    Q. And then it goes on to state in the next section, "The amount of smokers in this year has increased by 3 percent." And then in the next section it states, under "RESEARCH," "The above data have been derived from a research, instituted by the 'Association of People's Health and Smoking', done on a once a year basis."
    A. Right.
    Q. So the ad reports that the level of smoking is on the rise.
    A. That's correct.
    Q. Then it goes on to state, "The Association assumes that the new, so- called, quote, healthy, unquote, cigarette Barclay has been the evildoer. People think that there exists no health danger any more now, but research in America has proved that smokers, who slightly compress the Barclay filter between their lips, will take in six times as much nicotine and tar as stated on the packing."
    Did I read that correctly?
    A. Yes.
    Q. Now what's your interpretation of the type of competitive claim that's being made here by Philip Morris in connection with Barclay?
    A. Well Barclay is a -- is a BATCo product, and Philip Morris is running an advertisement. We can see in the very next section it says, "This is an advertisement of Philip Morris Holland B.V., the manufacturers of real low tar and nicotine cigarettes," and then it mentions two Philip Morris brands.
    So what Philip Morris is doing here is running an ad which says, you know, our products are the real low tar and nicotine cigarettes and the Barclay is not. And so it's an example of an attempt to competitively exploit the health issue.
    MR. BERNICK: Your Honor, I have a motion to make at side- bar, if the court will hear it briefly.
    THE COURT: In case the record's not clear, 10934 has been admitted.
    MR. GILL: Thank you, Your Honor.
BY MR. CIRESI:
    Q. Professor Jaffe, I believe the question that I was posing to you at the time of the side-bar had to do with the nature of this ad. Did you reference this ad as an example of competitive advertising?
    A. No, I don't think I said --
    Q. I'm sorry, comparative advertising.
    A. I don't know whether I said one way or another whether it was comparative advertising. I think what I said was what it shows is an attempt by Philip Morris to compete in Holland and to do so in a way that raises the health issue and relies upon consumers' health fears, and that the reaction that that produced from BATCo and B.A.T Industries, and as we'll see in a minute also Brown & Williamson, confirms that that was not something they expected Philip Morris to participate in, and that they were very upset that Philip Morris had done so.
    *32 Q. All right. And if I can direct your attention to the very bottom of this exhibit under the "Pay-off Line" where it reads, "the manufacturers of real low tar and nicotine cigarettes," with respect to a reference to Philip Morris's product, now is there an attempt in this ad run by Philip Morris's subsidiary in Holland to compare its low tar/low nicotine cigarettes to Barclay with respect to the health issue?
    A. Well yes. I think what it's suggesting, clearly, are the Philip Morris products are the, quote, real low tar and nicotine cigarettes, and that Barclay is not.
    Q. Now would this type of advertising on the part of Philip Morris's subsidiary be pro-competitive? Anti-competitive? How would you describe it?
    A. Well I would say that the -- the ad itself is an act of competition. It's pro-competitive.
    Q. And so this particular pro-competitive ad drew this type of reaction that we've been discussing.
    A. That's correct.
    Q. Now did you find additional evidence of further contact between executives of Philip Morris and BATCo with regard to this incident?
    A. Yes.
    Q. Would you turn, then, to Exhibit 11934. This is already admitted into evidence, I believe, Professor Jaffe.
    A. Okay. I have it.
    Q. All right. We'll just let Ms. Sutton catch up with us.
    A. Okay.
    Q. Can you identify Exhibit 10,000 -- or excuse me, 11934, in terms of what it purports to be.
    A. Yes. It's labeled "TELEPHONE CONVERSATION BETWEEN H. CULLMAN AND E.A.A.B. - 26TH OCTOBER 1983." And it's a document from BATCo.
    Q. All right. And H. Cullman would be Hugh Cullman?
    A. That's correct.
    Q. And do you have an understanding of what his position was with Philip Morris in October of 1983?
    A. I believe that at this time Hugh Cullman was the president of Philip Morris International.
    Q. Mr. Bruell, as we've previously seen, was the president of BATCo.
    A. That's correct.
    Q. Now this is a document that was produced by BATCo Ltd. in this case; correct?
    A. Yes.
    Q. So obviously it came from B.A.T. Company's files.
    A. Yes.
    Q. All right. Now what is occurring here in this document?
    A. Well essentially what's occurring here in this document is that Hugh Cullman, the president of Philip Morris International, is -- this is now subsequent to the letter that we saw that went from the chairman of B.A.T Industries to the chairman of Philip Morris Incorporated, which is the parent company above Philip Morris International that Hugh Cullman is the head of, and this is about a month later, and what's going on in this phone conversation, according to Mr. Bruell's notes of the phone conversation, is that Mr. Cullman on behalf of Philip Morris essentially is recognizing that this ad was a breach of the industry agreement and that he's going to make sure that it doesn't happen again.
    Q. Under the reference to H.C. at the top of the page where it reads,  "Essential Industry hang together," what is your interpretation of that statement?
    *33 A. Well I think when they're saying hang together, that's in a sense of, I guess, the signers of the Declaration of Independence, that they were all going to hang together rather than hang separately, that the industry is going to cooperate on this matter rather than acting competitively.
    Q. Then Mr. Cullman apparently indicated that Holland activity was not Philip Morris company policy. See that?
    A. That's correct.
    Q. And he indicates that they must try to prevent this happening in the future. Now what do you make of that -- that statement on the part of Mr. Cullman, that it wasn't Philip Morris company policy and that it's necessary to try to prevent this occurring in the future?
    A. Well particularly since these are Mr. Bruell's notes, I think that  "they" refers to Philip Morris, and what it's saying is that Philip Morris is going to make sure that this doesn't happen again, that they're going to in effect get back in line with regard to suppressing competition related to smoking and health.
    Q. How does Mr. Bruell respond?
    A. Well Mr. Bruell reiterates that they're concerned that this should never happen again, and that Philip Morris's message should go out to all parts of the world, and then describes how that should happen.
    Q. Then does Mr. Cullman indicate his understanding that there were two issues that still need to be addressed?
    A. That's correct.
    Q. And what does he say on that subject?
    A. He says first that all Philip Morris companies are to be told, and that that statement is to be reinforced by other member companies of INFOTAB, which is an international organization that these companies belong to.
    Q. Then does Mr. Cullman further in this exchange repeat for the sake of clarity what is requested?
    A. Yes, he does. He's quoted by Mr. Bruell as repeating and saying Philip Morris to instruct its No. 1s, they must not use anti-smoking activities, statements or programs for competitive gain.
    Q. And then Mr. Cullman wants to know what happens if this rule is broken?
    A. That's what it indicates.
    Q. How does Mr. Bruell respond?
    A. Mr. Bruell responds that he would expect that Philip Morris would take drastic action with the offender.
    Q. And then continuing on to the second page of this exhibit, how did this call conclude, according to the author of these notes?
    A. According to the note, Mr. Cullman concluded the call by saying that he did not know what disciplinary action was taken at this time. He now sees the ramifications of the issue as a whole.
    Q. What's your interpretation of the significance of the fact that Mr. Cullman now sees the ramifications of this incident?
    MR. BLEAKLEY: Objection, calls for speculation.
    THE COURT: You may answer that.
    A. Well I think the significance is that he's summing it up by saying he sees the ramifications of the issue as a whole, he sees the connection between this issue and the broader concerns that the industry face and the agreement that they have to deal with those concerns.
    *34 Q. All right. Based upon your review of the internal documents of the industry, is this the end of this incident?
    A. No, it's not.
    Q. All right. Let's go to Exhibit 13408.
    A. I have it.
    Q. Is this another document upon which you've relied in forming your opinions, Professor Jaffe?
    A. Yes.
    MR. GILL: We'll offer Exhibit 13408, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 13408.
BY MR. GILL:
    Q. Now this document is a little bit hard to read, but it does show that it was produced from the files of Brown & Williamson. Is that correct?
    A. That is correct.
    Q. All right. And I'd like you to assume that in producing this from the files of Brown & Williamson, the source was the files of I. W. Hughes, who was the CEO of Brown & Williamson in 1983. Can you assume that?
    A. Okay.
    Q. Now what does this document appear to be?
    A. This document appears to be a speech that was drafted for presentation by someone who was an employee of Brown & Williamson dealing with the incident in Holland that we've just seen discussed in correspondence between B.A.T Industries, BATCo and Philip Morris.
    Q. So somebody from Brown & Williamson was going to give a presentation, and it was going to focus on this incident.
    A. That's correct.
    Q. All right. The first paragraph reads, "Recently, a Dutch subsidiary of Philip Morris chose to adopt a position concerning the smoking and health controversy that aligned that company with a government backed anti-smoking organization. I understand that Philip Morris Corporate has since indicated that the action of the Dutch subsidiary does not reflect the corporate office view and that the subsidiary acted wrongly in an excess of competitive zeal."
    First of all, is that statement with respect to the response of Philip Morris consistent with the content of the exhibit that we just discussed?
    A. Yes, that -- that would seem like a reasonable summary of the position that Mr. Cullman took in the phone conversation that we just looked at that he had with Mr. Bruell.
    Q. And would I. W. Hughes, as the president and CEO of Brown & Williamson in 1983, have been a number one?
    A. Yes, he was the number one of Brown & Williamson, which was one of the BATCo companies.
    Q. So he would have assumedly received Mr. Bruell's letter reporting on this incident.
    A. That's what you would expect based on the fact that it was sent to all the No. 1s.
    Q. And then subsequent to that letter being sent to the No. 1s, we saw that Mr. Bruell had a telephone conversation with Mr. Cullman in which Mr. Cullman essentially apologized for the incident.
    A. Apologized and said that he would make sure it would not happen again.
    Q. Now the presenter with respect to this presentation referred to Philip Morris's actions as having been motivated by an excess of competitive zeal.
    A. Yes.
    Q. Do you agree?
    A. No. I mean to me an excess of competitive zeal would be - - I'm not sure what it would be, something like blowing up your competitor's facility or something. But certainly, running an advertisement that presents certain information about a competitor's product is not an excess of competitive zeal.
    *35 Q. Well based upon your experience and training, Professor Jaffe, where on the chart of competitive activity would that ad in the Holland newspapers have ranked?
    A. I would say that that was fairly mild competition, compared to some of the things that firms that are actively competing with each other do.
    Q. Directing your attention to the last paragraph of the first page of Exhibit 13408, that reads, "Having said that, I don't think that the matter should rest there. Brown & Williamson's real concern is that a precedent has been established and that something similar to what happened in Holland could easily be repeated."
    Now to your understanding, where was Brown & Williamson selling cigarettes?
    A. In the United States.
    Q. And the reference to the possibility of this incident being repeated would have what implications for the U.S. cigarette market?
    A. Well when he says "Brown & Williamson's real concern," to the extent that it's a concern of Brown & Williamson, it would have to be a concern regarding the U.S. cigarette market since that's where Brown & Williamson sells, and so if they say the real concern is that something similar to what happened in Holland could easily be repeated, the only reasonable interpretation is that Brown & Williamson was concerned that it could occur in the United States.
    Q. Does the speaker, with regard to this presentation, go on in the document to indicate what type of a response Brown & Williamson might have to the repetition of such an incident?
    A. Yes.
    Q. Is that at the start of page -- at the top of page two?
    A. That's correct.
    Q. All right. Would you indicate the language that you have in mind.
    A. The top of the page there it says, "Obviously, this would increase the jeopardy to the credibility and security of the industry. Certainly, if it is convenient to publicly embrace an anti-smoking position in the midst of competitive warfare, how long would it take before public retaliation became an operational necessity?"
    Q. Now most of us have learned as we grow up that retaliation is not a good thing; true?
    A. I guess that's right.
    Q. How about with respect to competition, is retaliation anti-competitive?
    A. No, I think in the context that's being discussed here, retaliation would mean competitive response or response in kind, responding with competition to a competitive action by the other firm. I mean I -- I read this paragraph to say that what this person from Brown & Williamson is saying is that this is the competitive dog fight that we saw described in the Hill & Knowlton documents as the thing that they wanted to avoid, and what he's saying is we've avoided it for 30 years, but if it's -- it's going to happen once, it could happen again. If it does, we would feel compelled to respond in kind, and then we would be in the competitive dog fight. And the clear implication is that nobody in the industry would want that.
    Q. Does this presentation by a Brown & Williamson executive reflect anyplace in it any concern about a violation of Dutch law?
    *36 A. No, it doesn't mention Dutch law.
    Q. To your understanding, Professor Jaffe, is this incident with regard to an ad in a newspaper in Holland something that is restricted or limited to that particular venue?
    A. No, it's clear from the document, including the Brown & Williamson document, that the reaction to this ad and the -- the reinstatement of agreement that occurred after the ad was -- was run was clearly intended to preserve a situation in the U.S. market where this kind of competition relating to smoking and health would not be tolerated by the -- the defendant companies.
    Q. Now what does this incident, as -- as described in the last number of documents or exhibits that we have been discussing, what does this incident tell you with respect to the participation of B.A.T Industries and BATCo in the conspiracy that you've identified?
    A. Well we've seen that they were involved in the communication to Philip Morris -- to George Weissman at Philip Morris in New York via B.A.T Industries that BATCo took an active role by its communication to its member companies, including Brown & Williamson, in essentially enforcing the agreements that was intended to suppress competition.
    Q. Professor Jaffe, in your opinion does this incident bear any connection to the events that occurred at the Plaza Hotel in December of 1953 as set forth and described in the Hill Knowlton memoranda?
    MR. CORRIGAN: Your Honor, I object. There's utterly no foundation for that question.
    THE COURT: You may answer that.
    A. Yes, I think when you look at the nature of the activity that was involved and the response that it brought forth, the language that's used by the participants about industry cooperation, about that cooperation being continuous and about this kind of action being unprecedented, it's my opinion that what we're seeing here is the playing out of essentially an enforcement of a component of the agreement that grew out of the meetings at the Plaza Hotel.
    Q. And playing out at what level of management with respect to B.A.T Industries, BATCo, Brown & Williamson and Philip Morris?
    A. It played out at absolutely the highest levels of management, the chairman of B.A.T Industries, the president of BATCo, and the chairman of Philip Morris, and the president of Philip Morris International.
    Q. Are you ready now, Professor Jaffe, to discuss the specific components of this conspiracy to suppress fundamental competition on the smoking-and- health issues?
    A. Yes, I am.
    Q. All right. The first component that you identified was no in-house animal research relating to smoking and health; is that correct?
    A. That's correct.
    Q. All right. Would you turn, then, to Exhibit 12512.
    First of all, let me ask you, Professor Jaffe, is this a document you've relied upon in support of your opinions with respect to animal research?
    A. Yes.
    MR. GILL: We'd offer Exhibit 12512, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 12,000 --
    *37 Sorry. Give me that again, counsel.
    MR. GILL: 12512, Your Honor.
    THE COURT: 12512.
BY MR. GILL:
    Q. All right. This is a document that bears the label "PHILIP MORRIS U.S.A.;" does it not?
    A. That's correct.
    Q. But it wasn't produced by Philip Morris U.S.A.; was it?
    A. No. This is a document, an R. J. Reynolds document, in which the employees at R. J. Reynolds are analyzing Philip Morris.
    Q. And is that showed on -- shown on the left margin of the face page just beyond the reference to "in HUMPHREY" that you see on the screen?
    A. Yes, it says "produced by RJRTC in HUMPHREY."
    Q. And the author of this document is an H. H. Cudd, Jr. The date is February 17, 1978.
    A. That's correct.
    Q. All right. If you turn to the second page, now it indicates under the heading "INTRODUCTION" that "This report presents a summary of data available on Philip Morris U.S.A. and pertinent information on its parent company, Philip Morris Incorporated. It is structured to present both data and interpretation on each major functional area of the company. The conclusions include the best judgment of Philip Morris strategies and the weaknesses upon which it can be attacked in the marketplace."
    So this is an espionage type of document in terms of competition?
    MR. BLEAKLEY: Objection, Your Honor. Object to the characterization, and Mr. Gill's testifying.
    MR. GILL: I'll withdraw that.
    THE COURT: Rephrase it, counsel.
    Q. What type of document is this?
    A. I guess I would characterize this as an industrial intelligence. So R. J. Reynolds is -- is collecting information on its competitor, Mr. Cudd is reporting that information to other people at Reynolds.
    Q. And does Mr. Cudd then go on in the second paragraph to indicate the sources for the best judgments that will be set forth in the memorandum?
    A. Yes, he does.
    Q. What does he indicate on that subject?
    A. Well he says he's going to look at published data, he's had discussions with knowledgeable RJR personnel, he's had confidential interviews with individuals in the general business, marketing and financial communities, and he's also talked to past Philip Morris executives, and that he thinks that the opinions that -- that are expressed in here appear to be supported by facts, and the impressions of individuals were solicited from very knowledgeable sources.
 (Juror coughing.)
    MR. GILL: Your Honor, perhaps we should take a short recess.
    THE COURT: Are you okay?
 (Juror nods affirmatively.)
    THE COURT: She says she is fine. That's all right. That's okay.
BY MR. GILL:
    Q. All right. Professor Jaffe, in other words, how do you interpret the author's conclusions regarding the reliability of the data that's going to be set forth in this memo?
    A. I think the authors are saying that this has been a very thoroughly researched report, and it's the best information that's available to -- to him at RJR at this time regarding Philip Morris.
*38 Q. All right. If you would turn to page eight of this report, Bates stamps 077. At this point in the report the author is discussing research and development at Philip Morris; is that correct?
    A. That's correct.
    Q. What does the author say of significance to your opinions with respect to his discussion of Philip Morris research and development?
    I'll direct your attention to the bottom of the page.
    A. Yes. Towards the bottom of the page where it starts talking about Philip Morris R&D, it says, "R&D for international operations is totally separate from domestic efforts and engages in activities apparently not found in domestic research." And it goes on to say, "A wholly owned subsidiary in Cologne, Germany engages in carcinogenic biological research, such as mouse painting, in violation of the verbal agreement among domestic companies not to perform animal testing in-house."
    Q. Based upon your review of the internal documents of defendants, are you aware of any wholly-owned subsidiary of Philip Morris in Cologne, Germany?
    A. Yes. There was a research firm called INBIFO in Cologne that was owned by Philip Morris at this time.
    Q. Is it your understanding that INBIFO engaged in carcinogenic biological research?
    A. Yes, I believe that's true.
    Q. Now what is the significance of the author's reference to a violation of the verbal agreement among domestic companies not to perform animal testing in- house?
    A. Well this indicates that Mr. Cudd, based on his research in 1978, believed, as I've indicated on my exhibit there, that there was in fact an agreement among the domestic companies not to engage in animal testing in- house.
    Q. Now you've been discussing an agreement not to engage in animal testing in-house. Would the conducting of biological research in Cologne, Germany by INBIFO qualify as in-house research?
    A. Well I suspect that because this was not a sort of written agreement, that they probably had never worked out the issue of whether it covered in- house research in wholly-owned subsidiaries overseas, and so it probably would have been ambiguous as to whether Philip Morris engaging in that kind of research in a wholly-owned subsidiary in Germany would or would not violate the agreement. What's clear is that Philip Morris -- or this --
    Based on this, Philip Morris was not engaging in that kind of research in- house within the United States, but it had chosen instead to go overseas to do it.
    Q. So it's your conclusion that Philip Morris regarded research in Cologne, Germany as being outside the conspiracy?
    A. Yes, I think so.
    Q. Okay. Is there any indication that you've seen that RJR made a formal complaint to Philip Morris based upon the information disclosed in this memo regarding some research being conducted in Cologne, Germany of a biological nature?
    A. No, I haven't seen any evidence of that.
    Q. All right. Are there additional documents that deal with the subject of animal research?
    *39 A. Yes.
    Q. Would you look at Exhibit 2544.
    A. I have it.
    Q. Now is this a document that you've relied upon?
    A. Yes, it is.
    Q. And it's already been admitted into evidence.
    All right. Can you, first of all, tell us which company produced this document?
    A. This is a Philip Morris document.
    Q. And in the very upper left-hand corner of this document, above the title, is there a stamp on there that says "DRAFT?"
    A. Yes, that's correct.
    Q. And do you know who was the author of this document?
    A. Yes, this document was authored by Helmut Wakeham, the director of research at Philip Morris.
    Q. What's your basis for saying that?
    A. He discussed it in his deposition, said that he authored it.
    Q. And the title, the working title of the draft document was "NEED FOR BIOLOGICAL RESEARCH BY PHILIP MORRIS RESEARCH AND DEVELOPMENT."
    A. That's correct.
    Q. And from other documents, are you able to place a timeframe with respect to the creation of this draft?
    A. Yes. This draft was written sometime in 1968.
    Q. All right. If you would go to the page that ends in Bates stamp 058, directing your attention to the bottom of the page, it reads, "We have reason to believe that in spite of gentlemans agreement from the tobacco industry in previous years that at least some of the major companies have been increasing biological studies within their own facilities."
    What is the significance with respect to your opinions, Professor Jaffe, of what Mr. Wakeham has written in this paragraph of the draft?
    A. Well again, this is another document, now from Philip Morris rather than RJR, in which someone -- the head of research at Philip Morris is saying that there was a gentlemen's agreement within the tobacco industry that it was -- that they were not going to engage in biological studies. We know from the discussion of this document and Dr. Wakeham's deposition that the particular concern that that related to was the use of animals for testing in- house.
    Q. And this document would have been prepared by Dr. Wakeham 10 years before the RJR document that referenced a verbal agreement within the industry?
    A. Approximately, yes.
    Q. Now were you able to locate the final draft of this document?
    A. Yes.
    Q. Would you then go to Exhibit 10257.
    A. I'm sorry, could you say it again?
    Q. Yes, 10257. This is also admitted into evidence.
    This is a memorandum from Mr. Wakeham to C. H. Goldsmith dated November 15, 1968. Who was Mr. Goldsmith at that time?
    A. I believe Mr. Goldsmith was the president of Philip Morris U.S.A.
    Q. The subject of this document is "Need for Biological Testing and Research by Philip Morris Research and Development." Correct?
    A. Yes, which is exactly the same title as appeared on the draft that we just looked at.
    Q. All right. And where do we find in this document, the final draft, the language that Mr. Wakeham had used in the original draft?
    *40 A. Well we don't find the exact same language, but the paragraph that corresponds to the paragraph that we just looked at appears in the middle of page two.
    Q. And would you read into the record, Professor Jaffe, what you believe to be the final version of the language that Dr. Wakeham had initially put together in which he referenced a gentlemen's agreement.
    A. The final document, he says, "We have reason to believe that while this proposal to carry out biological research and testing may seem a radical departure from previous policy and practice, we are in fact only advocating that which our competitors are also doing."
    Q. Now first of all, how did you determine that Exhibit 10257 is actually the final version of the draft that we saw a few minutes ago?
    A. Well as I said, the title is the same, the first sentence is essentially the same, the last sentence of the paragraph before what we just read is the same, and in fact Dr. Wakeham in his deposition agreed that this document was the final version of the draft that we just looked at.
    Q. What is the significance, then, Professor Jaffe, to the deletion of the reference to gentlemen's agreement and the substitution of language consisting of "a radical departure from present policy and practice?"
    A. Well I think what it shows is that Dr. Wakeham was trying to convey the same idea, but decided that it was not a good idea to use the phrase "gentlemen's agreement" in the final version of the memorandum.
    Q. Do you find any substantive difference between the concept that Professor Wakeham has included in the final version as compared to the concept of a gentlemen's agreement in the draft?
    A. It's not as clear, it's -- it's more vague, but it's not -- it's not dramatically different.
    Q. Now in both the draft and in the final version, Dr. Wakeham is including statements that competitors are already doing what he's requesting authority from higher management to do.
    A. That's correct.
    Q. And -- and that is to conduct biological research on animals.
    A. That's correct.
    Q. Now based upon your review of the internal documents of defendants, was Dr. Wakeham correct with respect to his suspicions in late 1968 that Philip Morris's competitors were violating the gentlemen's agreement by conducting in- house animal research?
    A. He was correct with respect to R. J. Reynolds, and we'll see in a minute what the consequences of that was, but he was not correct with respect to the other competitors.
    Q. Now you mentioned earlier Professor Wakeham's deposition. Did he disavow in his deposition his use of the terminology "gentlemen's agreement?"
    A. No, he did not. In his deposition he agrees that there was a gentlemen's agreement, that a focus of it was animal research. He actually states that as being somewhat broader than that.
    Q. Somewhat broader?
    A. That's correct.
    Q. Would you turn to the Wakeham deposition at page 89, please.
    A. Where do I find that?
    *41 Q. I believe you'll find it in the very back of the second volume.
    A. Okay, I have it.
    Q. All right. At that location in his deposition, essentially what does Dr. Wakeham say about his involvement in the term "gentlemen's agreement?"
    MR. BLEAKLEY: What page are you referring to?
    MR. GILL: Page 89, beginning with the question at line five.
    A. He's asked what does he mean by the gentlemen's agreement in the draft document, and he says, "Well I was referring, as I recall it, to the understanding which I felt or sensed existed between the companies at the time the Tobacco Research Institute was established, and that is that since the companies did not have expertise within their own research departments, which were relatively elementary in the 1950s, that research being done in the general area of smoking and health be done by the experts who were in -- being supported through the Tobacco Research Institute."
    Q. Now let me just interrupt you for a moment.
    When Dr. Wakeham references his understanding or his sense that such an understanding existed between the companies at the time the Tobacco -- of -- at the time the Tobacco Research Institute was established, there are two different industry organizations, are there not, with similar names?
    A. Yes. There's The Tobacco Institute and there's -- there was a Tobacco Industry Research Committee.
    Q. And your understanding -- or your opinion with respect to the formation of the conspiracy dates back to the meetings at the Plaza Hotel; correct?
    A. That's correct.
    Q. And was that the time that the Tobacco Industry Research Committee was formed?
    A. Yes, it was.
    Q. The Tobacco Institute wasn't formed until when?
    A. Toward the end of the 1950s. I don't remember exactly when.
    Q. Okay. Now what does Mr. Wakeham go on to state starting at line 17 on page 89 of his answer?
    A. He says, "I may have coined the term "gentlemans agreement" in writing this document, but it, in my mind, was a term I used to express this understanding between the companies that the company laboratories in general were not qualified or capable of carrying out research of that kind that was necessary to address the question of smoking and health, and that the industry had set up The Tobacco Research Council to bring together experts who would address this question and who would be supported by the industry for whatever researches they deemed desirable to do in this field."
    Q. Now based upon that additional reference to a Tobacco Research Council bringing together experts, is it clearer now which organization Dr. Wakeham was referring to in the first part of his answer?
    A. Yes. I think it's clear he means the TIRC, the Tobacco Industry Research Council, that was described in the Frank Statement and formed in 1954.
    Q. Based upon your review of Philip Morris's internal documents, Professor Jaffe, did Dr. Wakeham ever express sentiments that were inconsistent with his answer to this question regarding the ability of Philip Morris in-house scientists to conduct research with respect to animals?
    *42 A. Yes, he did.
    Q. He was consistent or inconsistent?
    A. I'm sorry, in --
    In his documents, memos written at the time in the 1960s, he expressed the view that the company was capable of doing this kind of research, and that in fact it was important from the company's perspective that this kind of research be done within the company, not just through TIRC or through other entities outside the company.
    Q. So at the time of this answer, he was disavowing his earlier opinion with respect to the capabilities the companies had?
    MR. BLEAKLEY: Objection, Your Honor, leading. He's testifying. And it's also characterizing the testimony.
    THE COURT: All right. Rephrase it, counsel.
    MR. GILL: Certainly.
    Q. How would you characterize what Dr. Wakeham is saying here in this answer relative to the ability of the companies to conduct this research in- house with what you saw him saying in documents that he authored?
    MR. BLEAKLEY: Object to that, it's been asked and answered.
    THE COURT: You may answer that.
    A. Well he's giving an explanation here for why there was this agreement not to engage in research, which is not consistent with the views he expressed internally through memoranda at the time about both the capabilities of Philip Morris and the needs of Philip Morris.
    Q. All right. Now I believe you earlier stated, Professor Jaffe, that you understood that Dr. Wakeham broadened to some extent the nature of the agreement that he understood or sense had taken place at the time of the formation of the Tobacco Industry Research Committee.
    A. That's correct.
    Q. Now does that occur on page 91?
    A. Yes.
    Q. Starting with the question at line five?
    A. Yes. He's asked there, the question is, "What is the type of research that you understood that there was an understanding that the cigarette companies would not be doing in-house?"
    And his answer is, "Studying a relationship which might exist between smoking and diseases such as were tabulated in the Surgeon General's report."
    Q. Now did Dr. Wakeham ultimately learn that one of the competitors that he was concerned about in the memo to Mr. Goldsmith was actually violating the gentlemen's agreement?
    A. Yes, he did.
    Q. Would you go to Exhibit 2545, please.
    Now in this particular exhibit, Professor Jaffe, you've got a memorandum from R. D. Carpenter, the research and development department at Philip Morris, to Dr. Wakeham, the head of the department, dated October 3, 1969; correct?
    A. That's correct.
    Q. We're about one year out from the time of the draft document and the final document that went to Mr. Goldsmith; correct?
    A. That's correct.
    Q. And the subject of this report from Mr. Carpenter was "R. J. Reynolds Biological Facilities."
    A. That's correct.
    Q. All right. And he reports in the first sentence of the memorandum, "Dr. Nielson showed the R. J. Reynolds biological facilities to Dr. Arthur Burke of American Brands and to me on Wednesday, October 1."
    *43 Do you have an understanding who Dr. Nielson was?
    A. Yes. Dr. Nielson was the head of the biological research operation within the R. J. Reynolds research facility in North Carolina at the time.
    Q. And if you go to the -- to the next page of this document -- actually go to the third page first. This is appended to the memorandum, and does it show the facilities that Mr. Carpenter is talking about in this memo?
    A. Yes. On the right-hand side, in sideways letters, it says "R. J. REYNOLDS BIOLOGICAL FACILITIES," and then included -- what we have here is a floor plan indicating the layout of the various rooms including where animals of unknown identity, with a question mark, are going to be housed or were housed, where there were rats, where there were rabbits, and so forth.
    Q. Well if RJR is party to a conspiracy not to conduct in- house biological research, why is Dr. Nielson giving Dr. Burke of American Tobacco and Mr. Carpenter of Philip Morris a tour?
    MR. BLEAKLEY: Objection, Your Honor, that calls for speculation.
    THE COURT: Sustained.
    Q. Do you have an opinion, Professor Jaffe, as to an explanation for a tour of these biological facilities in which Dr. Nielson hosts representatives of two competitors, assuming that the companies have entered into a conspiracy not to conduct the very type of research that Dr. Nielson is explaining to his competitors?
    MR. BLEAKLEY: Objection, Your Honor, still calls for speculation.
    THE COURT: You may answer that.
    A. Well I think what it shows is that there was, you know, a general cooperative approach to issues of research rather than a competitive one, and Dr. Nielson apparently was not concerned about the consequences of showing these people the facilities.
    Q. Well to your understanding, Professor Jaffe, was Dr. Nielson at RJR a member of upper management?
    A. No, Dr. Nielson was not a member of upper management. He was not even a director of the research facility. He was just in charge of the biological part of the research.
    Q. As far as you've been able to tell from your review of the internal documents, was Dr. Burke at American Tobacco a member of upper management of that company?
    A. No, he was not.
    Q. How about MrCarpenter --
    A. No, he was not.
    Q. -- at Philip Morris?
    A. Mr. Carpenter was not either.
    Q. Based upon your experience and training in the fields of antitrust economics, including antitrust conspiracies, is it typical for a conspiracy to be communicated at various levels throughout the participating companies, extending down to the middle management, lower management?
    A. Well a conspiracy would only be --
    MR. BLEAKLEY: Object, Your Honor, leading.
    THE WITNESS: I'm sorry.
    MR. BLEAKLEY: I understand some leading, but this is a very leading question. Mr. Gill is testifying.
    THE COURT: It is leading, counsel.
    MR. GILL: I'll be glad to rephrase, Your Honor.
    Q. Based upon your experience, Professor Jaffe, typically what types of individuals become privy to the existence of a collusive agreement between companies not to compete?
    *44 A. Well typically the knowledge of the conspiracy would be limited to those people who the upper management felt needed to know about it.
    Q. Why is that?
    A. Well because you don't want to have knowledge of illegal behavior very widespread through the company.
    Q. If you'd go back to page two, then, of Exhibit 20545, there's a statement at the top of that page, "Reynolds has developed an inhalation smoking machine which we also saw. The machine has obviously been in use for some time and is being used to expose rats to cigarette smoke."
    What does this observation by Mr. Carpenter say about the status of this project?
    A. Well what it says is that as of October of '69, experiments were clearly underway with this inhalation smoking machine in which animals were being exposed to cigarette smoke, so this would clearly be in-house animal research relating to smoking and health.
    Q. And then down at the bottom of page two it reads, "In summary, R. J. Reynolds has animal experimentation facilities, a staff of 10 to 12 people doing animal experimentation work, and is doing smoke inhalation studies."
    Now is there any indication that Dr. Wakeham initiated any type of action to bring this matter to the attention of his superiors?
    A. Yes.
    Q. And in fact, going back to page one of this memorandum, there are some initials in the upper right-hand corner. Are you able to make out those initials?
    A. I don't know what the first one is, but the second one -- the first initial seems to be C, and the -- I guess -- no.
    Q. CHG?
    A. I'm sorry?
    Q. CHG?
    A. Well that's what I thought it might be, but I wasn't sure.
    Q. Would CHG be the initials of Clifford H. Goldsmith?
    A. That's correct.
    Q. And would RAM be the initials of Ross Millhiser, who was the -- who was a senior executive and vice chairman of Philip Morris at that time?
    A. Yes, that's correct.
    Q. And there's a date on there next to the initials?
    A. Yes, sometime in October of 1969.
    Q. Now did Mr. --
    Did Dr. Wakeham receive additional reports of RJR's animal inhalation activities?
    A. Yes, he did.
    Q. Would you turn to Exhibit 10465.
    A. I have that.
    Q. This is a memorandum dated December 15, 1969 and was produced by Philip Morris. It is from L. Weissbecker to Mr. R. D. Carpenter, who was the author of the previous exhibit; correct?
    A. That's correct.
    Q. And in the upper right-hand corner, do you see some initials?
    A. Yes, HW.
    Q. Okay. And in the lower left-hand corner does it indicate to whom copies of this memorandum were sent?
    A. Yes. To Dr. Osdene, and this copy apparently went to Dr. Wakeham.
    Q. And there's a check next to Dr. Wakeham's typewritten name?
    A. That's correct.
    Q. And the subject is "R. J. Reynolds Biological Research Program;" correct?
    A. Correct.
    Q. And it reads in the first paragraph, "I met Dr. Price from R. J. Reynolds at the CTR-USA meeting of December 11 and 12, 1969. He mentioned doing chronic cigarette smoke exposure studies with rats. The animals received up to 500 cigarettes and emphysema was produced. They were also looking for other changes by apparently were not successful."
    *45 A. That's right.
    Q. Now in the earlier exhibit dating back to October of nineteen sixty -- or November of 1968, had Dr. Wakeham sought permission from Mr. Goldsmith to do in-house biological testing?
    A. Yes, he had.
    Q. Did he ultimately receive some response from management in connection with that request?
    A. Yes, I think he did.
    Q. Would you turn to Exhibit 2548.
    A. I have that.
    Q. All right. This is a document produced from the files of Philip Morris Incorporated, it is a memorandum dated February 24, 1970, it is to Helmut Wakeham and from Joseph Cullman III. Who was Joseph Cullman III?
    A. Joseph Cullman III was the chairman at that time of Philip Morris Incorporated.
    Q. And in the upper right-hand corner we see again Mr. Wakeham's initials and a reference to confidential?
    A. That's correct.
    Q. Now what does this memo deal with?
    A. It deals with Mr. Cullman's reaction or follow-up to a meeting that he had with Dr. Wakeham just shortly before it.
    Q. Now the last documents that we looked at were dated in late 1969; is that correct, with respect to Carpenter to Wakeham and Weissbecker to Carpenter, also a copy to Wakeham?
    A. That's right. They were in the fall of 1969.
    Q. So Dr. Wakeham had two independent reports of animal biological research being conducted by RJR as of the end of 1969.
    A. That's correct.
    Q. And we know that he copied at least one of the memos to his superiors, Mr. Goldsmith and Mr. Millhiser.
    A. That's correct.
    Q. All right. Now in the first paragraph of Exhibit 2548, Mr. Cullman states, "I enjoyed our conversation last Thursday in Richmond, and I hope that you feel it will serve to clear the air somewhat on the strong stand I have taken in connection with certain kinds of research activities by Philip Morris."
    Now first of all, is it your understanding that Mr. Cullman officed in New York?
    A. Yes.
    Q. And Dr. Wakeham officed where?
    A. In Richmond, where their research facility was.
    Q. So apparently a meeting did take place on the Thursday preceding February 24, 1970, a meeting between Mr. Cullman, the CEO of the company, and Dr. Wakeham, the head of research and development.
    A. Yes.
    MR. BLEAKLEY: Objection, Your Honor. Objection, Your Honor, that's leading. And also the document does not say meeting, it says conversation.
    THE COURT: The objection is sustained.
    Q. Now in the second paragraph, Professor Jaffe, the author, Mr. Cullman, goes on to state, "You have given me a better understanding of the rationale behind your position and I repeat my assurance to you that my position is not intransigent and that I am willing to discuss broad corporate policy in this area with you, Ross and Cliff at regular intervals."
    Now what's your understanding of the reference to "broad corporate policy?"
    MR. BLEAKLEY: Objection, Your Honor, that calls for speculation on the part of the witness.
    THE COURT: No, you may answer that.
    *46 A. Well I think in the context -- (coughing) excuse me -- of the other documents we've seen and the rest of this document, I think what he's talking about is the -- is the broad policy of Philip Morris with respect to the kinds of research they're going to do or not do, including biological research.
    Q. He then goes on, "In the meantime, I feel that our present policy is the correct one and that the program you are carrying out in Boston is as far as we should go."
    Do you have any understanding of what is being referenced there?
    A. Yes. I think, again, in the context of the other documents, what he's saying is that he's not convinced by Dr. Wakeham's arguments that they should begin doing this kind of research in-house; that is, within the Philip Morris laboratories, and that they're going to stick with some kind of research that they're purchasing through an outside party located in Boston.
    Q. From the standpoint of the process of creative destruction, is the proposal by Dr. Wakeham to engage in in-house biological research consistent with that process, or antagonistic to it?
    A. Well in order to effectively engage in the kind of long- term competition that we've been talking about, the companies would have needed to do biological research, and there are good reasons, some of them articulated in Dr. Wakeham's own documents, as to why it is likely to be more effective as a matter of long-term competitive advantage to do that research in-house rather than relying on arm's-length or contract research with other parties. And so I would characterize Dr. Wakeham as basically saying we have to do this in order to compete effectively, but he's not convincing his superiors.
    Q. The memorandum goes on, "The possibility of getting answers to certain problems on a contractual basis in Europa appeals to me and I feel presents an opportunity that is relatively lacking in risk and unattractive repercussions in this country."
    Is that language consistent or inconsistent with your opinions with respect to the existence of an antitrust conspiracy to suppress fundamental competition?
    A. Well I think what it shows is that Mr. Cullman recognizes in some ways the need for the company to do this kind of research, but rather than doing it in a way that would violate the agreement not to engage in in-house animal research, he's trying to figure out a way around that, and what he suggests is that they do it outhouse, so to speak; that is, on a contractual basis in Europe, and we know that in fact they did eventually do that.
    Q. All right, Dr. -- Professor Jaffe, given Dr. Wakeham's desire to perform in-house animal research at Philip Morris and given our review of the documents reporting the incident at RJR, is it reasonable to infer from this document that Dr. Wakeham made Mr. Cullman aware of Dr. Wakeham's understanding of what RJR was doing with respect to biological testing?
    MR. BLEAKLEY: Objection, that calls for speculation.
    *47 THE COURT: Well you may answer.
    A. Well it says right in the document that the conversation they had in Richmond gave Mr. Cullman better understanding of the rationale behind Dr. Wakeham's position. And the rationale we know included Dr. Wakeham's knowledge regarding what was going on at R. J. Reynolds.
    Q. And who received copies of this memorandum, as shown in the lower left- hand corner?
    A. Mr. Weissman, Mr. Smith, Mr. Millhiser and Mr. Goldsmith.
    Q. Do you know who Mr. Smith was?
    A. No, I don't recall.
    Q. All right. I'd like you to assume that he was the general counsel of Philip Morris at that time.
    A. Okay.
    Q. And the timing of this conversation would have been late February 1970; correct?
    A. That's correct.
    Q. All right. Do the documents show what became of the RJR animal testing program?
    A. Yes, they do.
    Q. Would you turn to Exhibit 12756.
    A. I have that.
    Q. And Exhibit 12756 bears the title "INTRODUCTORY REMARKS: BY DR. SENKUS."
    A. That's correct.
    Q. This relates to what became of the RJR program with respect to biological testing in-house?
    A. Yes, it does.
    Q. Now I want you to assume that defendants have indicated in answers to interrogatories that the timing of Exhibit 12756, in connection with the presentation at RJR, was March 19th, 1970.
    A. Okay.
    Q. So this would be approximately one month after the time that Dr. Wakeham had his conversation with Mr. Cullman; is that correct?
    A. That's correct.
    Q. All right. Do you recall what's being discussed here?
    A. Yes. Dr. Senkus is basically telling his employees that the biological research facility is being shut down.
    Q. All right. And if you would go to Bates stamp 747, --
    A. Yes, I have that.
    Q. -- at item nine he indicates that altogether 26 staff people are being terminated; is that correct?
    A. That's correct.
    Q. And if you go to 749, down at the bottom of that page, --
    A. Yes.
    Q. -- there's an indication that, "This was a tough decision to make, but there simply was no alternative and for this reason we hope that the detail provided will help you to understand the reasons this move is necessary. We wish you 'all the best' and hope that the special liberal termination arrangements we are making, together with your and our best efforts, will minimize hurtful effects to you and to your employees."
    Is that an indication to you that apparently the shutdown of this biological facility was a matter of some significance to these employees?
    A. Yes, I think that's right.
    Q. Is there an indication further on in this page with respect to the timing of the decision to close this facility?
    A. Well in the -- I guess skip one paragraph. The next paragraph, Dr. Senkus says, "I know this comes to you all rather suddenly. It had to be that way to give you the word first."
    Q. How would you describe the tone of this presentation by Dr. Senkus and his superior, Mr. Vassallo?
    *48 A. Well essentially they're telling the employees we're sorry this is a surprise, it came so quickly, but it had to be done, and we'll do the best to help you out.
    Q. Would the closing of that biological facility have served the competitive interests of RJR?
    A. I don't think so, no.
    Q. Do the internal documents reflect whether Dr. Wakeham learned of the closure of RJR's biological testing facilities?
    A. Yes, they do.
    MR. GILL: Your Honor, this might be a good time to break for the day.
    THE COURT: All right. We'll recess, reconvene tomorrow morning at 9:30.
    THE CLERK: Court stands in recess, to reconvene tomorrow morning at 9:30.
 (Recess taken.)



Return to The Putnam Pit

Return to the tobacco index