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 20, 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. GILL: Thank you, Your Honor.
    Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    ADAM B. JAFFE called as a witness, being previously sworn, was examined and testified as follows:
BY MR. GILL:
    Q. Good morning, Professor Jaffe.
    A. Good morning, Mr. Gill.
    Q. You'll recall yesterday, at the time we recessed, you had been discussing with us Liggett's XA project.
    A. That's correct.
    Q. Let's clear up something for the record before we proceed. Do you recall, in connection with Exhibit 11523, that that was a slide show that was being presented with Dr. Mold's voice informing the audience of various speakers of the program?
    A. That's correct.
    Q. And in a question that I put to you, I believe I asked you whether the slide show was being presented to the board of directors at Liggett.
    A. That's correct.
    Q. And you answered in the affirmative.
    A. Yes.
    Q. Now Exhibit 11523 does not specifically identify the board of directors; does it?
    A. That's correct.
    Q. Why, then, did you respond in the affirmative?
    A. Well there's another Liggett document that indicates that there is going to be a board of directors meeting on January 25th, 1979, which is the date that appears on that presentation, and also indicates that Dr. Mold is going to make a presentation at that meeting regarding the XA project, so it seems an appropriate inference that this was in fact the presentation that was made.
    Q. Thank you for clearing that up, professor.
    Let's go, then, to Exhibit 11482, which we were discussing at the time we broke.
    A. I'm sorry, could you give me the number again?
    Q. Certainly, 11482.
    A. Oh. Just missed it.
    Q. For the sake of context, let's go over the lineage of this particular document. It is a letter on the letterhead of Liggett & Myers Tobacco Company?
    A. That's correct.
    Q. It's dated July 25, 1978.
    A. That's correct.
    Q. So it would be about six months prior to Dr. Mold's presentation to the board.
    *2 A. That's correct.
    Q. And it comes from the office of Joseph H. Greer, and he's the vice- president and general counsel of Liggett.
    A. Correct.
    Q. All right. What is being discussed in this particular document, professor?
    A. Well it's basically memorializing the creation of a legal project team related to the Project XA, which is the palladium cigarette project. We see in the first paragraph under the heading where it says, "Re: Project XA"
    "As a result of a meeting held at the instance of the Law Department...I have been directed by Mr. Dey to form a Legal Project team to further develop the Legal Project program."
    Q. And who was Mr. Dey?
    A. He was the president of Liggett.
    Q. And the memorandum is addressed to certain individuals, including Mr. Africk?
    A. That's correct.
    Q. And that was the gentleman whose name we saw in the upper right-hand corner of the document that involved the presentation to the board of directors six months later.
    A. That's correct.
    Q. And also Dr. Mold is listed as one of the recipients of this memorandum?
    A. That's correct.
    Q. And then it identifies the membership of the legal project team.
    A. Yes, it does.
    Q. And Mr. Africk is on it, Dr. Mold is on it, Mr. Greer is on it.
    A. Yes.
    Q. And then down below the identification of the project team, is there an indication of management's intentions with respect to this project as of that point in time?
    A. Yes. It says, "It is Mr. Dey's intention to successfully proceed with the program. Your help and assistance in this area is anticipated and will be appreciated."
    Q. And again, just to give us the benefit of context, what essentially was the XA program, as we have previously seen through the other documents?
    A. The XA project or program was a project to develop a new kind of cigarette that used a palladium catalyst to significantly reduce the effect in terms of cancers on the mouse-skin backs of smoke condensate.
    Q. And as far as the information that was presented to the board of directors in January of 1971, how significant a program or project was this?
    A. That was January 1979.
    Q. I'm sorry.
    A. And it was considered by Liggett to be a successful project that was going to be a very successful commercial endeavor for the company.
    Q. At a time when Liggett's market share was falling?
    A. That's correct.
    Q. All right. Now, Professor Jaffe, do you draw any significance from the fact that six months prior to the time that this project was presented to the board of directors, that a legal project team had been formed at the instance of the president of the company to participate in the program?
    A. Just that they seem to be on a systematic program to evaluate this project, including the legal dimensions, and to attempt to proceed with it successfully.
    Q. And the fact that the project is being presented to the board of directors six months after the lawyers have become involved tells you what?
    *3 A. Well just that they've had six months to review whatever issues might have arisen with respect to the project.
    Q. All right. Do we know what ultimately became of the XA project?
    A. Yes, we do.
    Q. Would you turn to Exhibit 11497.
    A. I have it.
    Q. Is this a document that you've relied upon in support of your opinion?
    A. Yes.
    MR. GILL: Your Honor, we'll offer Exhibit 11497.
    MR. BLEAKLEY: No objection.
    THE COURT: The court will receive 11497.
BY MR. GILL:
    Q. Professor Jaffe, this is an internal memorandum. It is now dated June 25, 1979, so we're one year out from the last memo in which the legal project team had been formed; correct?
    A. That is correct.
    Q. And this is approximately six months to the day after -- actually five months to the day after the presentation to the board of directors.
    A. That sounds right.
    Q. And do you understand --
    Of course this is addressed to Mr. Greer, and we know that he's the general counsel.
    A. Yes.
    Q. Okay. Do you understand that, based upon answers to interrogatories supplied by defendants in this case, that the author of the memo, Mr. Seidensticker, was the president of Liggett at that time?
    A. Yes.
    Q. And then Mr. Seidensticker was formerly a marketing employee of Philip Morris in Europe.
    A. Yes.
    Q. Now what is being discussed in this memo?
    A. It says, "With reference to the Law Department's XA Project, would you please issue a memorandum to those concerned requesting that any materials which have not already been turned over to the Law Department related to XA, be it financial, scientific, production or marketing, should be transferred to the Law Department no later than Thursday, June 28."
    Q. In reviewing the internal documents of defendants, and specifically with regard to the documents produced by Liggett, did you ever see another document discussing the status of the XA project?
    A. No, I didn't.
    Q. What significance do you draw from the content of this memo?
    A. Well, the indication of this memo in -- taken together with the fact that there's no further discussion of the project in the company documents, suggests that the project was terminated. This memo was giving people three days to produce all the materials related to it and send it to the law department.
    We saw in the material we looked at yesterday that this project was quite far along, that the board of directors was told that it was going to be a significant commercial opportunity for the company. We saw a document that discussed the potential problems that the project might face but concluded that those problems were not insurmountable.
    I can only conclude that if they had for some reason determined that the problems that they thought were insurmountable were in fact big problems, you would have seen some document describing why this project that had such potential, that they'd been studying for this period of time, was going to be dropped, and since we don't see that, we just see this sort of unexplained termination, it seems to me that the logical inference is that the reason the project was dropped was because they concluded that they couldn't successfully exploit it without relying on competitive exploitation that would rely on the health issue, and that they couldn't do that because of the collusive agreement.
    *4 Q. Professor Jaffe, based upon your training and experience in the field of antitrust economics, how typical would it be for documents relating to a terminated scientific project to be sent to a law department as the final act of a scientific research project?
    A. Well again, if there had been a reason --
    If the reason the project had been dropped was because they had concluded that from a business point of view it was not going to work, you would have thought that they would have wanted, for example, the scientific materials to stay in the research department for future use if they decided to develop this project at some point in the future. So again, the fact that they're collecting all materials in the law department points in the direction of another explanation.
    Q. Now how would Liggett's market share, its declining market share at this point in time factor in to the incentives that Liggett had to develop this project further and to exploit it if in fact Liggett had information that would support its claims?
    A. Well from Liggett's individual point of view, the fact that its market share was declining was all the more reason why it would have wanted to try to pursue this project, to try to save its market position, taking advantage of the large commercial potential that they clearly saw with this project.
    Q. Yesterday, Professor Jaffe, you discussed for us the concept of unilateral action. Do you recall that?
    A. Yes.
    Q. Did you consider unilateral or independent action on the part of Liggett management as a possible explanation for the content of this memorandum from Mr. Seidensticker to Mr. Greer?
    A. Yes.
    Q. And what conclusion did you reach?
    A. Well I think, as -- as I indicated, if unilateral action were the reason why this was being terminated, the thing you would expect to see would be some explanation as to why the course that they had been on, that seemed to be working, had turned out was not going to be pursued, whereas on the other hand we know that Mr. Greer participated in the committee of counsel and was in discussions with the other companies, and therefore, given the absence of any explanation related to unilateral action, it seems to me much more likely that the explanation for what happened here was that this was in connection with the collusive agreement.
    Q. Professor Jaffe, in your review of the defendants' internal documents, did you find any other safer cigarette projects which you felt support a collusive agreement not to exploit development of a safer cigarette?
    A. Yes.
    Q. Would you turn to Exhibit 12873, please.
    Is this one of the documents that you relied upon in support of your opinions with respect to the failure to exploit development of a safer cigarette project?
    A. Yes.
    MR. GILL: Your Honor, we'll offer Exhibit 12873.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 12873.
BY MR. GILL:
    Q. Now this is a document that was produced from the files of the RJR Tobacco Company; is that correct, professor?
    *5 A. That is correct.
    Q. All right. And it indicates that this is a document relating to "PROJECT SPA PRESENTATION, BOARD
    A. Yes.
    Q. Now is there an indication on this page as to the type of research project that SPA involves?
    A. Yes.
    Q. And is that down at the bottom of the page?
    A. Yes.
    Q. All right. Can you fill us in on what's being discussed, please.
    A. It says toward the bottom of the page, "As you know, smokers have been facing increasing pressures over the past several years, ranging from the smoking and health controversy to the declining social acceptability of smoking. In response to these pressures and perceptions, and the fact that further advancements in traditional cigarette technology might be limited, we began an ambitious program to develop a smoking product with the benefits and advantages of current cigarettes but without many of the perceived negatives. The product developed from this effort is the biggest technological breakthrough in the cigarette industry over the past thirty years."
    Q. Did we see similar language expressed by Dr. Mold in connection with Liggett's XA project?
    A. Yes, somewhat similar.
    Q. That was about eight years prior to the timeframe that we're now discussing.
    A. That's correct.
    Q. If we go to the next page, is there an indication there in the first full paragraph on that page of the particular problem that the SPA project was attempting to solve?
    A. Yes. It says, "It has been alleged that certain of the by-products of burning tobacco in a traditional cigarette cause lung cancer. Since SPA does not burn tobacco, the vast majority of these by-products are eliminated. Those that remain are present at biologically insignificant levels."
    Q. So you would evaluate the significance of this project how?
    A. Well it's clear from this document and the materials that this was a product that was significantly different technologically from the existing cigarette products.
    Q. And was it projected as a significant breakthrough?
    A. Yes.
    Q. Does the author go on to describe the design for this particular cigarette?
    A. Yes.
    Q. I think if you turn to page three, there's some information on that subject, about in the middle of the page.
    A. Yes.
    Q. Can you describe what's being discussed at -- at item seven, please.
    A. Yes. It says, "The front end of the product consists of a 10-millimeter carbon fuel source that provides the heat for the system. The fuel source is surrounded by a glass fiber jacket that insulates the fuel source and forms a gray ash-like appearance after the fuel cell is lit. The fuel source is connected to a macrocapsule that is filled with substrate granules. These granules are loaded with glycerin, tobacco extract and flavors that vaporize and condense to form a smoke-like aerosol when heated and cooled. Surrounding the macrocapsule is a tobacco jacket that provides additional tobacco flavor and nicotine. Behind to macrocapsule is a 10- millimeter tobacco paper plug which cools the smoke and provides additional flavor. This is followed by a 30- millimeter polypropylene filter."
    *6 Q. And does this presentation -- or this report to the board of directors of RJR, professor, go on to describe the results of toxicological studies that were done in connection with this breakthrough project?
    A. Yes, it does.
    Q. All right. If you go to page eight, I believe we'll find something on that subject there.
    Directing your attention to the bottom of the page, to item 14, what does the author have to say at that point with respect to the toxicology work that's been undertaken?
    A. It says that "Much of the toxicology work is either complete or nearing completion, and all results observed to date have consistently supported our product objective:"
    Number one, "The chemical analyses have shown that the SPA aerosol is much simpler than the smoke from traditional cigarettes, consisting of less than 10 percent of the 5,000 plus chemical compounds in traditional cigarette smoke."
    Continuing on the next page, number two, "No problematic compounds have been observed in the components of the aerosol at 'biologically significant' levels (except for CO and nicotine).
    "Our battery of five kinds of mutagenicity tests completed to date demonstrate that the project has no mutagenic activity."
    And "The 14-day and initial 90-day animal inhalation tests have been completed, and there have generally been no chemical or pathological results from these studies that have given our scientists or our Scientific Advisory Board concern."
    Q. So this report makes clear that RJR was engaged in extensive biological studies with respect to the effects of this cigarette.
    A. That's correct.
    Q. Now did the documents provide an indication as to whether or not those studies were conducted in-house at RJR or elsewhere?
    A. I actually don't recall whether it's in this document, but I believe the evidence shows that they were conducted elsewhere and not at RJR.
    Q. And at some point in time in the process of the development of this particular cigarette, did RJR give it a name, - -
    A. Yes.
    Q. -- this cigarette?
    What did it call it?
    A. It was called Premier.
    Q. So at this point in time, with respect to the presentation to the board of directors that we're seeing from this document, is it fair to say that this appeared to be a promising project in connection with a dramatic commercial breakthrough?
    A. That's correct.
    Q. Do we know what ultimately happened to Premier?
    A. Yes, we do.
    Q. Okay. Would you look at Exhibit 13082, please. Is this a document that you've relied upon in support of your opinions, Professor Jaffe?
    A. Yes.
    MR. GILL: We'll offer Exhibit 13082, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 13082.
BY MR. GILL:
    Q. All right, now, this is also a document that has been produced from the files of R. J. Reynolds; correct?
    A. Yes.
    Q. It is not dated, but it appears to be well after the last exhibit; is that fair?
    A. Yes. It's clear that it was after the test marketing of the Premier product.
    *7 Q. All right. Now the very first paragraph indicates "WHERE DOES PREMIER STAND TODAY?" And the author states, "PREMIER is thought of in some quarters -- both inside and outside the company -- as the largest and most expensive marketing failure since the Edsel."
    From your review of the internal documents of RJR, do you have an understanding of what the author is talking about there?
    A. Yes. He's referring to the fact that the Premier product which they had developed and which they had great hopes for was test marketed in a couple of markets, but was not successful in those test markets and was withdrawn from the market.
    Q. And the reference to an Edsel?
    A. Well the Edsel was a famous marketing failure of an automobile, I believe in the 1950s.
    Q. Now does the author go on to provide any analysis of why Premier failed?
    A. Yes.
    Q. All right. Directing your attention to the third paragraph on that page, what does the -- what is the author discussing in that connection?
    A. The author says that "PREMIER failed for reasons that are well understood. The concept addressed the greatest latent market demand that will ever exist in the tobacco industry. It was not executed and presented to the consumer in an effective way. The smoking experience was significantly inferior to existing products on the market, and the product advantages were prevented from being communicated effectively."
    Q. And Professor Jaffe, what significance do you attach to R. J. Reynolds' failure to provide the consumers with information concerning the significant health benefits that RJR believed Premier possessed?
    A. Well what we know is that when RJR test marketed this product, they did not utilize the information that we saw in the board of directors presentation that they had which indicated, based on extensive, valid scientific evaluations, that the product had significant advantages over existing products in terms of its biological activities. That information was not communicated to consumers by RJR, and what this document is reflecting is the fact that the result of that was that the customers didn't understand the benefits of the products because the product advantages were not communicated effectively, and this -- this author is attributing the failure of the product at least partially to that failure to communicate effectively the true product advantages that the Premier offered.
    Q. Now in the presentation to the RJR board, we saw four categories of toxicological studies that RJR had conducted as of that time.
    A. That's correct.
    Q. All right. Beyond the descriptions that were contained at that place in that document, have you seen any other indication of the extent to which RJR had supportable claims for the lower biological activity of Premier?
    A. Yes. They had done extensive studies, they -- they published those studies, they had put together a Scientific Advisory Board of outside scientists to evaluate the studies, and they had an opinion from that board that the studies were valid and appropriately demonstrated the reduced biological activity of the product.
*8 Q. Now you mentioned the term "Scientific Advisory Board." The jury has heard that term many times in connection with TIRC and CTR. Was there any connection between, as far as you could tell from the internal documents of defendants, the Scientific Advisory Board which RJR established in connection with the Premier project versus the Scientific Advisory Board of CTR?
    A. No. They just happened to have chosen the same name.
    Q. Now did, as far as you know, RJR ever publish any of the results of the scientific studies that it had undertaken in connection with Premier?
    A. Yes, they did publish the results.
    Q. And what was the nature of the publication?
    A. They put out a rather thick book which contained all of the -- I don't know if it contained all -- which contained many papers describing the experiments and the research that they had done, as well as the opinion of this Scientific Advisory Board that the results generally supported the conclusion that the product had significantly reduced biological activity.
    Q. And as far as you've been able to tell, did any of the marketing information in connection with the test marketing of Premier rely in any way on the contents of the thick book that demonstrated support for claims of lower biological activity attendant to smoking this product?
    A. No, it did not.
    Q. Now do you recall from the exhibits that we've discussed in connection with the XA project that yesterday we were talking about a memorandum that dealt with Liggett's concerns about the possibility of regulatory action that might present an obstacle to the successful marketing of the XA?
    A. Yes.
    Q. In your review of RJR's internal documents, did you locate or are you aware of any document indicating that RJR ever approached the Food and Drug Administration or the Federal Trade Commission in connection with the Premier project?
    A. No, I haven't found any evidence of that.
    Q. Are you aware of any action taken by the Food and Drug Administration or the Federal Trade Commission relative to the Premier cigarette?
    A. No, I'm not.
    Q. Now, the author of the whither Premier memorandum also talked about the fact in this paragraph we've been discussing that one of the reasons that the Premier cigarette failed was that it didn't taste particularly good and the public was not aware of its health benefits.
    A. That's correct.
    Q. Did you see any documents from the files of RJR's competitors that commented on RJR's attempts to market Premier?
    A. Yes.
    Q. All right. Let's go to Exhibit 13481.
    A. I have it.
    Q. Is this a document that you've relied upon in support of your opinions, professor?
    A. Yes.
    MR. GILL: Your Honor, we'll offer Exhibit 13481.
    MR. BLEAKLEY: 13481?
    MR. GILL: That's correct.
    MR. BLEAKLEY: I thought that was already in evidence.
    No objection.
    THE COURT: Court will receive 13481.
BY MR. GILL:
    Q. Professor Jaffe, this is a document produced from the files of Brown & Williamson Tobacco Corporation?
    *9 A. That's correct.
    Q. From their research department.
    A. Yes.
    Q. And the author is L. K. Templeton and the date is December 19, 1988.
    A. Correct.
    Q. Now what is being discussed at the beginning of this document?
    A. Well it says there, just under the word "ABSTRACT," "The following exercise was undertaken to improve the taste of a synthetic smoke aerosol, for project AIRBUS, similar to the R. J. Reynolds' PREMIER product."
    Q. And then if we go to page three of this exhibit, what conclusion did Mr. Templeton reach in connection with the taste problems of Premier?
    A. The document indicates at the top of the page there, "Smoking results showed the blended extract beads" -- that's referring to some beads produced by Brown & Williamson -- "produced a much more palatable aerosol than the RJR beads."
    And then down at the bottom of the page there's a summary of the document.  "This work shows that the smoke quality of PREMIER can be improved, with a minimum amount of work. The fact that PREMIER was launched with some poor smoke quality remains a mystery."
    Q. Is it a mystery to you, professor?
    A. Yes, it's a mystery to me as well.
    Q. Would the presence of a collusive agreement not to exploit development of a safer cigarette explain the mystery?
    A. Well it doesn't really explain the mystery about the smoke quality. The smoke quality was clearly part of the reason for the failure, but it does suggest that that aspect of the product could have been improved.
    Q. Now did Philip Morris also critique the Premier project?
    A. Yes.
    Q. All right. Let's go to Exhibit 11632, please. This particular document, I believe, is already in evidence, professor.
    A. Okay.
    Q. It's produced from the files of Philip Morris?
    A. Yes.
    Q. Its date is November 7, 1988.
    A. Correct.
    Q. And it's a memorandum to Jan Jones from Page Callaham of the consumer research group.
    A. Yes.
    Q. And the subject of the memo is "Premier - Concept and Product Reactions."
    A. Yes.
    Q. All right. In the abstract portion of this document, what is the author discussing?
    A. Well at the very top there it indicates that they conducted interviews and focus groups to try to determine what smokers' response to the Premier product was. And then a little farther down the page, about halfway down that abstract page it says, "The results in this text reflect the research findings of our specific study and are more positive than what we have read in the media with Premiers' test market. We attribute this to several critical differences between our research approach and the RJR test market."  Number one, "RJR's advertising of Premier is ineffective in communicating a relative advantage over the smokers' current brand."
    And number two, "We," meaning this test that was done for Philip Morris,  "structured our research to specifically convey the products' salient features and to simulate, without bias, the possible outcome of potential improvements in RJR advertising."
    *10 Q. Are you surprised by the results obtained by Philip Morris's consumer research group?
    A. No. What this document is suggesting is that they did some tests where they presented in a more salient way to smokers what the real benefits of the Premier product were, and they found that their -- at least in their test basis, that the product was more favorably received as a result.
    Q. Once the consumers understood the significance of the product.
    A. That's correct.
    Q. Now Professor Jaffe, I'd like you to assume that RJR spent significant sums of money developing Premier.
    A. Okay.
    Q. All right? Assuming that to be true, would that be inconsistent, in your opinion, with RJR's participation in a conspiracy, one of whose prongs was not to exploit development of a safer cigarette?
    A. No, I don't think so. As we've talked about for the last couple days, the competitive incentive to try to exploit the clear market demand for safer products was enormous, all of the companies perceived this to be the greatest competitive opportunity that they had, and so it is not surprising that Reynolds would have invested significant sums of money to go after it.
    However, what the documents and the evidence show is that they went after it walking a very fine line. They did it in a way that did not violate the collusive agreement, that avoided a competitive exploitation of the product in a manner relying on health fears. They were hoping that they could have it both ways, that they could go after this opportunity while walking this fine line. And what the evidence shows is that it didn't work, that without the -- the -- the actual competitive exploitation, the product was not successful.
    Q. So what would have constituted a violation of that prong of the overall conspiracy?
    A. Well if Reynolds in its marketing of Premier had used its own scientific information that it had developed at great expense regarding the superior biological activity of this product, then that would have been a competitive exploitation relying on health fears. And the documents suggest, both the Reynolds document and this Philip Morris document, that if they had done that, the product would more likely have been successful, but they chose not to do that.
    Q. Professor Jaffe, in your opinion, what effect did the fourth prong of the conspiracy, the agreement not to exploit development of a safer cigarette, have on the broader conspiracy with respect to the attempt to suppress fundamental competition between these defendants on the smoking-and-health issue?
    A. Well this fourth aspect of the conspiracy relating to avoiding the competitive exploitation of safer products contributed to the overall conspiracy in two important ways. It inhibited the whole process of creative destruction. Though Reynolds was willing to take the chance of spending all of this money but not crossing the line to really exploit the product, it's quite likely that the fact that the companies knew that they were not really going to fully exploit any such products, even if they developed it, inhibited the very efforts to begin with to develop such a project. So this agreement inhibited and reduced the amount of competitive research activity that the companies engaged in.
    *11 And secondly, it avoided an outcome, it avoided the kind of competitive dog fight that we saw discussed in the Hill & Knowlton memoranda where firms' attempts to exploit consumers' health fears for their competitive advantage was going to lead to a situation where consumers' fears were in fact strengthened and the health problem that the industry faced in terms of consumers' fears was exacerbated, and so by avoiding that kind of competitive exploitation, that competitive dog fight was avoided.
    Q. Professor, in your review of defendants' internal documents, did you find any willingness on the part of the defendants to compete?
    A. Yes. It's clear from the documents that they did compete along dimensions other than smoking and health. We know that they competed to attract kids to smoking, we know that they competed to manipulate the chemistry of nicotine through pH, we know that they competed through their advertising and marketing --
    MR. BLEAKLEY: Objection, Your Honor, this witness is going far beyond his expertise, far beyond his expert report. I object to it.
    MR. GILL: Your Honor, this is all contained in his expert report.
    MR. BLEAKLEY: He's talking about pH and ammonia. He's not an expert on chemistry.
    THE COURT: Counsel, counsel, please, you may make your objection standing at the table.
    MR. BLEAKLEY: Sorry.
    THE COURT: All right. The objection is sustained.
BY MR. GILL:
    Q. Did you evaluate, based upon your review of the defendants' internal documents, the nature of any competition in connection with the low tar/low nicotine cigarettes?
    A. Yes, I did.
    Q. And was that an area in which you found some level of competition among defendants?
    A. Yes.
    Q. Was that fundamental competition?
    A. It was not fundamental competition related to smoking and health, no.
    Q. Let's look at Exhibit 10584. This is a document produced from the files of BATCo Ltd.; is that correct, professor?
    A. Yes.
    Q. And the date of this document is April 28, 1977, and it is a memorandum going to Dr. F. Haslam for his information. Do you see that at the top?
    A. Yes.
    Q. And the author is P. L. Short, who you understand to be the marketing manager of BATCo.
    A. Correct.
    Q. And it's indicated that this particular memorandum is restricted.
    A. Yes.
    Q. Okay. What's being discussed in the first paragraph?
    A. It says, "The agreements reached at the first and second Conferences on Marketing in the '80s, held in October 1976 and March 1977, have been approved by Mr. Sheehy," the chairman of B.A.T Industries.
    I take that back. In '77 I'm not sure he was the chairman of B.A.T Industries.
    MR. CORRIGAN: Well then I move to strike the speculation. Clearly he wasn't.
    MR. GILL: Well I'll simply ask another question, Your Honor, to clarify that.
    THE WITNESS: I apologize.
    THE COURT: All right. Counsel, I don't think it's appropriate for your testimony. Just make your objection, please.
    *12 MR. CORRIGAN: Yes, Your Honor.
    THE COURT: Okay. Rephrase your question.
BY MR. GILL:
    Q. Just so we have a clear record, professor, do you recall that Mr. Sheehy became the chairman of B.A.T Industries in 1982?
    A. Yes, I do.
    Q. And at this time in 1977 he was a senior executive with BATCo.
    A. That's correct.
    Q. All right. Then Mr. Short goes on to say that he's enclosing to Dr. Haslam a copy of the agreements reached at the second conference on marketing in the '80s that was approved by Mr. Sheehy.
    A. That's correct.
    Q. And if we turn to Exhibit 10585, does that appear to be what Mr. Short passed on to Dr. Haslam?
    A. Yes, I believe it is.
    Q. All right. Now under --
    We've got a portion of that report that's related to smoking and health, item seven. Do you see that?
    A. Yes.
    Q. And it refers to the effect on marketing.
    A. That's correct.
    Q. So this was a conference in which the various BATCo family of tobacco companies were going to discuss appropriate and effective marketing techniques; is that your understanding?
    A. Yes.
    Q. Now down in the second paragraph on this particular page, is there an indication of what the main strategies were?
    A. It says, "The main strategies agreed by the first Conference, and the TDB, were regarded as highly relevant and achievable by delegates who attended the second. In summary, the position we have arrived at is this, on marketing in the '80s, resulting from the two Conferences:"
    Q. Okay. And with respect to the reference to delegates, would the Brown & Williamson Tobacco Company have been a delegate at this conference?
    A. Yes.
    Q. Now it goes on to discuss future prospects?
    A. That's correct.
    Q. And what is the author discussing at that place?
    A. It says, "The new approach to marketing, supported by suitable strategies, offers distinct opportunities to create brands and products which reassure consumers, by answering to their needs. Overall marketing policy will be such that we maintain faith and confidence in the smoking habit, whether brand choice is traditional or not in particular markets."
    Q. Now do we know whether the author is talking about low tar cigarettes in connection with those marketing strategies?
    A. Yes.
    Q. All right. If you go to page three, there is a section there dealing with communication.
    A. That's correct.
    Q. Okay.
    MR. BERNICK: Your Honor, if I could have a brief side-bar on this issue.
BY MR. GILL:
    Q. I believe, Professor Jaffe, we had just moved to page three, and I had directed your attention to the heading at the top of the page "Communication."
    A. Yes.
    Q. What is the author discussing there?
    A. It says, "All work in this area should be directed towards providing consumer reassurance about cigarettes and the smoking habit. This can be provided in different ways, e.g. by claimed low deliveries, by the perception of low deliveries and by the perception of 'mildness'. Furthermore, advertising for low delivery or traditional brands should be constructed in ways so as not to provoke anxiety about health, but to alleviate it, and enable the smoker to feel assured about the habit and confident in maintaining it over time."
    *13 Q. Does that last sentence, professor, focus on a concept that is directly opposite to the concept of the fourth prong of the conspiracy with regard to refraining from exploitation of cigarettes based upon health fears?
    A. That's correct.
    Q. Okay. Now does the author go on to elaborate?
    A. Yes. Further down on the page, about the middle of the page, it talks about "Existing brands with known goodwill," it says these "can be used as a basis for lowered-delivery spin-offs, provided the latter are (a) within the range of credibility of the parent image and (b) within the range of smoking satisfaction of the parent brand, via the mechanism of smoker compensation. This, quote, mechanism, unquote, involves involuntary modifications in the method of smoking a cigarette."
    Q. How do you interpret that paragraph, professor?
    A. I interpret that paragraph to mean that what they're saying is that they can reduce the tar and nicotine of their existing brands, and they can do that partially because they can count on compensation to ensure that the smoker will continue to get what they're used to getting or close to what they're used to getting from a product, which indicates clearly that these low tar line extensions are not intended by the company as a product that is really intended to be healthier.
    MR. BLEAKLEY: Your Honor, this is really speculating, it's also beyond this witness's expertise, and I move to strike that answer.
    THE COURT: Okay. Motion is granted.
BY MR. GILL:
    Q. Now professor, in looking through and reviewing the documents of defendants, is Exhibit 10585 representative of other documents that you have seen in which the low tar/low nicotine cigarette has been coupled with the concept of smoker reassurance?
    A. Yes, it is.
    Q. And have you also reviewed other documents that have focused on the concept of compensation, documents from the files of other defendants?
    A. Yes, I have.
    Q. And is this document, Exhibit 10585, representative of those documents with respect to the reliance of defendants on compensation to provide cigarette users of low tar cigarettes with the necessary amount of nicotine?
    MR. BLEAKLEY: Your Honor, same objection, just using different documents.
    THE COURT: No, that's a different question. You can answer that.
    A. Yes, it is representative.
    Q. All right. In your review of the low tar/low nicotine competition that did occur, what conclusions did you reach regarding the significance of that type of competition with respect to health effects of smoking?
    A. Well based on the documents, it's clear that the low tar/low nicotine cigarettes were not fundamental competition related to smoking and health, they were not -- (clearing throat) excuse me -- the creative destruction process, the response in terms of truly innovative response to the demand that consumers felt, because if they were, what the companies would have done is they would have done the scientific research necessary to determine whether these products in fact were safer, and if they did that research and they determined through that research that they were safer, then they would have exploited that fact competitively. But what we see in the record is that they didn't do the research that would have had to have been necessary to determine if these products were indeed safer.
    *14 Q. Professor Jaffe, I would like you to assume that Andrew Schindler, the president and CEO of RJR Tobacco Company, testified at this trial that he did not have any data that low tar/low nicotine cigarettes are safe and that he was not aware of any such data that the industry has. Did you find any such data in your review of the industry's internal documents?
    A. No, I didn't.
    Q. Assuming that no such data exists, professor, did the defendants' competitive behavior regarding low tar/low nicotine cigarettes amount to the type of fundamental competition characteristic of the process of creative destruction?
    A. No, it didn't.
    Q. What role, then, does the plaintiffs' competition in connection with low tar/low nicotine cigarettes play in your analysis of the collusive agreement to suppress fundamental competition related to the smoking-and-health issue in the United States?
    A. Well in my opinion, the development of the low tar and low nicotine cigarettes is evidence of the companies competing along certain dimensions but not competing with respect to fundamental competition relating to smoking and health.
    Q. All right. Let's turn for a moment, then, if we can, back to Exhibit 30229. That's the exhibit that dealt with the market share of the defendants in 1954 and 1994.
    A. Yes, I have it.
    Q. One of the things that we are seeing in that market-share data, professor, is that while the defendants comprise the overwhelming majority of the market share in both 1954 and 1994, there is a -- in some cases at least -- a significant difference in position with respect to the individual market share; correct?
    A. That is correct.
    Q. We see American Tobacco on top of the market in 1954 with 33 percent share, and by 1994 they're shown as zero, but they've been acquired by Brown & Williamson or are about to be acquired.
    A. That's correct.
    Q. And with respect to Philip Morris, Philip Morris had a relatively modest nine percent share in 1954, and their share has risen to 45 percent in 1994.
    A. That's correct.
    Q. With respect to the rest of the defendants, we've got Brown & Williamson moving from nine to 19 percent. And the other defendants, except for Liggett, are more or less static over the 40-year period; correct?
    A. Correct.
    Q. Now, given your opinion with regard to the existence of a collusive agreement to suppress fundamental competition on the smoking-and-health issue in the U.S. market, how do you account, then, for the rise of Philip Morris over this 40-year period and the decline of the previous market leader? Was this creative destruction that we're seeing?
    A. No. I think this is competition along other dimensions as we talked about. The documents that I've reviewed clearly show that Philip Morris competed very successfully along certain dimensions; they did it by attracting new smokers, they did it through the manipulation of the chemistry of a cigarette --
    MR. BLEAKLEY: Objection, Your Honor, manipulation of chemistry is beyond this witness's expertise.
    *15 MR. GILL: Let me lay some foundation for that, if I may.
    THE COURT: You'll have to.
    MR. GILL: Okay.
BY MR. GILL:
    Q. Professor Jaffe, in connection with your review of the industry's documents, were you seeking documents that related to competition?
    A. Yes, I was.
    Q. And in connection with that effort, did you review documents from the files of defendants that dealt with nicotine and the manipulation of pH?
    A. Yes. That was one of the topics I specifically asked to see documents relating to.
    Q. Okay. And why did you want to see those documents?
    A. Because I wanted to understand the nature of the competitive process in the industry, the way the firms were competing, and the role that the design of the cigarette itself, including the pH and the nicotine issue, played in the competition in the industry.
    Q. In the broad terms as opposed to attempting to determine whether the pH moved this fraction or that fraction or exactly why it moved? You weren't approaching it from the standpoint of a scientist; were you?
    A. No. The issue to me was not what was the pH or even ultimately what effect did pH have on nicotine, but rather the role that these design changes played in competition in the perception of the companies themselves regarding the role that this chemical manipulation played in competition.
    Q. And did you also in the same connection review documents that related to marketing efforts toward younger adults and teen- agers?
    A. Yes, I did.
    Q. For the same purpose?
    A. That's correct.
    Q. All right. Let me ask you that same question again.
    How, then, do you account for the difference in market share that we see depicted on Exhibit 30229?
    MR. BLEAKLEY: Same objection, Your Honor.
    THE COURT: No, you may answer that now.
    A. Well what the documents show is that Philip Morris was a very successful competitor along certain dimensions. They were very successful at attracting kids to smoking, they were very successful at adjusting the chemistry of the cigarette, including the pH as it affected nicotine in order to increase the demands for the product, they were very successful in broader marketing terms with the Marlboro Man and the Magnificent Seven, and it's clear that that worked competitively for them and allowed them to increase their share dramatically through this competition along dimensions other than smoking and health.
    MR. BLEAKLEY: Move to strike the answer, Your Honor.
    THE COURT: No. The answer will stand.
BY MR. GILL:
    Q. Professor Jaffe, if the defendants, based upon the crisis that arose in the industry in late 1953, were intent upon pursuing the process of creative destruction as you have described it to the jury, what should the defendants have been doing?
    A. Well what they should have been doing is investing very large resources, which were available at their disposal, to try to win this competitive contest and, in the process, transforming the nature of the market.
    *16 Q. In your review of the companies' documents, did you find any documents that reflect that very view?
    A. Yes, I did.
    Q. Would you turn to Exhibit 10322. This is a document that the jury has seen before, it is the February 18, 1964 report by Mr. Wakeham at Philip Morris with respect to the Surgeon General's report.
    A. That's correct.
    Q. Do you recall that?
    And -- and this particular report, as shown in the lower left-hand corner, went to some of the top executives in the company at that time.
    A. That's correct.
    Q. All right. Does Dr. Wakeham offer some recommendations in this report at page five?
    A. Yes, he does. At the very top of the page there he's discussing the competitive implications of the Surgeon General's report, and what he says is any important new situation in an industry presents a fresh opportunity for the smaller companies, and of course at this time Philip Morris was still one of the smaller companies in the industry, "for the smaller companies to compete with the leaders on a new basis. Since the issue has been joined, Philip Morris should embrace the health area as such an opportunity with the same aggressiveness that it has shown in packaging innovation."
    Q. Okay. Now does Dr. Wakeham then go on to describe, through research, a means of achieving such an objective?
    A. Yes, he does.
    Q. All right. Let's go back, then, to the first page of the document in terms of its content. That's labeled "SMOKING AND HEALTH." Where on that page does Dr. Wakeham address the steps that he recommends should be taken as a means of achieving the objective that he discussed on page five?
    A. Well if we look at approximately the middle of the second paragraph, he says, "Meeting this challenge," talking about the competitive challenge that the company faces, "affords Philip Morris a splendid opportunity to gain a competitive edge through effective technical activity. Positive programs to cure ills cited in this report, whether real or alleged, are recommended, as little basis for disputing the findings at this time has appeared."
    And then he goes on to describe in numbers one, two and three there some of the components and what this research program that he'd like Philip Morris to undertake would be.
    And he summarizes at the bottom of the page, in that final paragraph or partial paragraph, he says, "The hoped-for result of these efforts will be cigarettes with distinguishing new product properties which are biologically approved on all major health questions. Such products should be advertised vigorously on the basis of studies so conducted."
    Q. Professor, were there other documents in which Dr. Wakeham addressed the potential benefits of long-term competitive behavior?
    A. Yes.
    Q. Would you look at Exhibit 10300, please. If we go to the second page, as Ms. Sutton has done, again it's a report, Philip Morris Incorporated, this happens to be copy number four shown in the upper right-hand corner, and it concerns "TOBACCO AND HEALTH - R&D APPROACH."
    *17 A. That's correct.
    Q. And this is a presentation to the R&D committee of the company by Dr. Helmut Wakeham, and it's at a meeting held in New York on November 15, 1961; correct?
    A. Yes.
    Q. All right. Would you turn to the last page of this exhibit, please. In the summary contained there, what does Dr. Wakeham say in connection with two different types of competitive programs?
    A. Well the first thing he does, sort of like Mr. Mace did in 1958, is he talks about a short-run program that would look at low irritation and low nicotine cigarettes, and then at the bottom he says, "A medically acceptable low-carcinogen cigarette may be possible. Its development would require
    "TIME
    "MONEY
    "UNFALTERING DETERMINATION."
    Q. This was 1961.
    A. That's correct.
    Q. So that would be 37 years ago.
    A. That's correct.
    Q. Did Philip Morris have the time?
    A. Yes, they did.
    Q. Did Philip Morris have the money?
    A. Yes, they did.
    Q. Let's look at Exhibit 30230.
    MR. GILL: Your Honor, this particular exhibit has not been offered, and the foundation for this exhibit will be supplied by the last expert witness that the plaintiffs intend to call. We would seek permission to examine Dr. Jaffe about this exhibit based upon the understanding that the foundation will be properly placed into the record by that witness. And if that doesn't occur, we're certainly agreeable that the -- that the testimony regarding this exhibit could be struck if that doesn't happen. We're confident that it will, Your Honor.
    MR. BLEAKLEY: Excuse me, Your Honor. Could I take a moment?
    MR. BERNICK: Your Honor, I have responsibility for the cross-examination of Mr. Much, who I believe will be their last witness, and I don't see from correspondence from counsel that they intend to offer the first column of this chart. It's inconsistent with what they told us in the letter.
    MR. CIRESI: The numbers will be talked about. The chart is being offered here for illustrative purposes. The underlying data that supports the chart will be testified to by Mr. Much.
    THE COURT: All right. I'll allow it, subject to a motion to strike if you're not able to --
    MR. GILL: Thank you, Your Honor.
    THE COURT: -- lay a foundation for it.
BY MR. GILL:
    Q. All right. Professor Jaffe, you understand that Exhibit 30230 is an illustrative exhibit?
    A. Yes.
    Q. And I do have a blowup of the exhibit which I'm going to place before the jury at this time.
    A. Okay.
    Q. Now this is a comparison of research, advertising and profits relating to defendants. Do you understand that?
    A. Yes.
    Q. All right. Now first of all, I'd like you to assume various bits of information before I put any substantive questions to you. I want you to assume that the data reflected on this exhibit covers the timeframe 1954 through 1996.
    A. Okay.
    Q. I would like you to assume that the green bar on the far right, representing 167 billion dollars, is in relation to the global tobacco profits of B.A.T Industries, Philip Morris, RJR, American Tobacco, Lorillard and Liggett.
    *18 A. Okay.
    Q. I would like you to assume that the blue column or blue bar in the middle with respect to advertising, marketing and promotion expenditures, showing 47 billion dollars, relates to the domestic tobacco expenditures of Philip Morris, RJR, Brown & Williamson, American Tobacco, Lorillard, and Liggett.
    A. Okay.
    Q. And then with respect to the column on the left labeled "Research and Development Expenditures" in the approximate amount of 3 billion dollars, I would like you to assume that that relates to those expenditures by the domestic tobacco companies. All right?
    A. Okay.
    Q. And finally with regard to the 167 billion in the profit column, that would be the operating profits prior to taxes.
    A. Okay.
    Q. Now based upon the information that is illustrated on Exhibit 30230, and with the assumptions that I have asked you to make, what is the significance of the profits before taxes, the advertising, marketing and promotion expenditures, and the research and development expenditures of defendants with respect to defendants' ability to pursue the process of creative destruction to develop and exploit a fundamentally safer cigarette?
    A. Well what the exhibit shows is that defendants had available financial resources that would have permitted vastly greater expenditures on research than they undertook, and that in fact the expenditures that they undertook were quite meager compared to the resources that they had to the stakes of the competitive situation and to their expenditures on other forms of competition as represented by the advertising and other promotion expenditures, which are approximately 15 times the level of their expenditures on research.
    Q. Going back, then, to the 1961 memorandum from Dr. Wakeham to the R&D committee at Philip Morris, the time was present, they had the money, the one additional factor was the unfaltering determination?
    A. That's correct.
    Q. Based upon your review of defendants' internal documents, did the defendants manifest unfaltering determination?
    A. No.
    Q. All right. Professor Jaffe, based upon your review of all of the documents and depositions in this case, based upon your entire analysis, based upon your education, training and experience in the field of antitrust economics, did each of the defendants intend to suppress fundamental competition on the smoking-and- health issue in the U.S. market?
    A. Yes.
    Q. What's the basis for that answer?
    A. Well it goes back to the Hill & Knowlton documents that we saw where they laid out the reasons and what they were trying to do. We had behavior on the part of CTR and TI that clearly was intended to carry out one of the prongs of the conspiracy. We had active participation by BATCo and B.A.T Industries in the form of communication with Philip Morris, active participation by Philip Morris and R. J. Reynolds, for example, in the form of the communications regarding their shutting of the Mouse House, and participation of the other defendants in the meetings at CTR and Committee of Counsel, all of which formed components of this overall collusive agreement to suppress fundamental competition with respect to smoking and health.
    *19 Q. Back at the very beginning of your testimony two days ago, Professor Jaffe, you told the jury that there were two issues that you were going to be addressing; is that correct?
    A. Yes.
    Q. The second of the issues had to do with the economic impact of an unreasonable restraint of trade. Do you recall that?
    A. Yes.
    Q. Based upon your review of all the documents in this case, your entire analysis, your professional education, training and background, do you have an opinion based upon a reasonable degree of probability in the fields of economics and competitive behavior as to whether the antitrust conspiracy, as formed and executed by defendants, unreasonably suppressed and restrained fundamental competition in the U.S. cigarette industry on the smoking-and- health issue?
    A. Yes, I do.
    Q. What is that opinion?
    A. It is my opinion that it did unreasonably restrain competition on the smoking-and-health issue. As we discussed a while ago, the elements from an economist's point of view of an unreasonable restraint of trade is, first of all, that it not have some justification, some pro-competitive justification for the restraint, and I've seen no evidence of such a pro-competitive justification. And then the second element is that the impact on the market be a significant economic impact, and I think from everything that we've seen, including the tremendous incentives that the companies themselves understood was offered to them, the tremendous financial resources that they had available to them, the time that they had available to them, and the partial progress that was made in the direction of safer products under the restraints that the conspiracy imposed, I think -- it's my opinion that if this restraint had not been in place, we would have seen a market for cigarettes in the United States today that would have been significantly different from the market that emerged under this competitive restraint.
    Q. Let me ask you, then, Professor Jaffe -- and again based upon all of your work in connection with this case, based upon all of your education, training and experience -- do you have an opinion, based upon a reasonable degree of probability in the fields of economics and competitive behavior, as to how defendants would have responded to the smoking-and-health issue over the last 44 years had the meeting at the Plaza Hotel never occurred and had the collusive agreement that you have described never taken place?
    A. Well I think that what would have happened, in my opinion, is that the kind of program laid out by the early documents would have been carried out by one or more of these companies, and it would have been carried to its logical conclusion, which would have included true exploitation of that program, relying on scientifically valid information about the health impacts of the products, and that the effect of that would have been that the engine of economic progress would have operated in this industry and we would have seen a significantly broader variety of products available to smokers, and they would also have had available to them the information necessary to make informed choices among those different products in purchasing and smoking them.
    *20 Q. Do any of the internal industry documents that you've reviewed provide support for that opinion?
    A. Yes.
    Q. Would you look at Exhibit 12878. This is one of the documents that you have relied upon in support of your opinion, Professor Jaffe?
    A. Yes.
    MR. GILL: We'll offer Exhibit 12878, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 12878.
BY MR. GILL:
    Q. This document is a report of the Scientific Advisory Board by Dr. A. W. Hayes on presentation at meeting of October 23, 1987. Is this the same Scientific Advisory Board that you previously mentioned that consulted with RJR in connection with the Premier project?
    A. That's correct.
    Q. All right. In order to get a context of this particular meeting, would you review the first sentence, please.
    A. It says, "Three members of the Scientific Advisory Board," then it gives their names, "attended a meeting at R. J. Reynolds Tobacco Company on October 23rd, 1987...to hear presentations on the status of the test cigarette," which from the context of the document is the Premier product.
    Q. And at some point in this document, does the Scientific Advisory Board address the very same concept that you were previously discussing?
    A. Yes.
    Q. Okay. Could you go to that, please.
    A. Yes, that's at the bottom of page four.
    Q. The last paragraph?
    A. Correct.
    Q. All right. Would you describe what the author is discussing there, please.
    A. Yes. It says, "In the long run, the company may want to find a substitute for nicotine in a product, using very low nicotine tobacco and adding a substance with the same satisfaction providing qualities as nicotine but without its cardiovascular effects. The search for such a substance would require a method of assaying, quote, satisfaction-giving, unquote, potency in experimental animals."
    Q. Now the Premier cigarette, as we've previously seen, produced almost no biological activity based upon the research that RJR had conducted.
    A. That's correct.
    Q. And there was a taste problem, but Brown & Williamson felt that the taste problem could be alleviated.
    A. That's correct.
    Q. And now the Scientific Advisory Board is suggesting that down the road further studies could be undertaken to produce a substitute for nicotine.
    A. That's the possibility that they're discussing here.
    Q. Did you find any other documents that addressed the possibilities inherent to a different competitive climate?
    A. Yes.
    Q. Would you look at Exhibit 12089. Is this one of the documents that you've relied upon in support of your opinion, professor?
    A. Yes.
    MR. GILL: We'll offer Exhibit 12089, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: Court will receive 12089.
BY MR. GILL:
    Q. This is a document produced from the files of BATCo Ltd.?
    A. Yes.
    Q. It is a report entitled "THE ASSOCIATION OF SMOKING AND DISEASE?"
    A. Correct.
    Q. On page three of the document, do we see that it is authored by Dr. S. J. Green?
    *21 A. Yes.
    Q. In July of 1972.
    A. Correct.
    Q. All right. Directing your attention back to the first page, what is being discussed there?
    A. Well in many ways, Dr. Green is laying out, as of 1972, an alternative vision of how this industry might have evolved, and he starts at the top of the page by saying, "I believe it will not be possible indefinitely to maintain the rather hollow, quote, we are not doctors, close quote, stance and that, in due course, we shall have to come up in public with a more positive approach towards cigarette safety. In my view, it would be best to be in a position to say in public what was believed in private i.e. to have consistent responsible policies across the board."
    Q. Now how would consistent responsible policies impact the process of creative destruction?
    A. I think they would be very consistent with creative destruction.
    Q. In the next paragraph Dr. Green goes on to discuss certain basic assumptions?
    A. That's correct.
    Q. Do any of the basic assumptions involve attempts to develop a demonstrably safer cigarette?
    A. Yes. At the very bottom he talks about -- the last one being, "Attempts will be made to find pharmacological agents alternative to nicotine and non- tobacco materials in cigarettes will increase."
    Q. Now back in 1972, did Dr. Green suggest a specific design for such a product?
    A. No.
    Q. Well if you'd look at the second page, let me direct your attention to the information in the middle paragraph, the last sentence of that paragraph.
    A. Yes. He says, "Accepting that there will be no unique product design solution to our problem, we must ensure that our consumers have a choice between genuine alternatives and are sufficiently informed to exercise their choice effectively."
    Q. Now how does Dr. Green's assessment of the situation in 1972 compare to the testimony that you just gave?
    A. I think he's essentially saying the same thing I said.
    Q. All right. Professor Jaffe, I would like you to assume that evidence has been introduced in this case that cigarette smoking causes various forms of cancer, chronic obstructive pulmonary disease and emphysema, heart disease, diminished health status and nursing home costs. Do you have an opinion as to whether the conspiracy was a substantial contributing factor to the cost of health-care services in Minnesota to treat those diseases and conditions?
    A. Yes.
    Q. What is your opinion?
    A. Well based on the assumption you asked me to make about the health costs, and the opinion that I've already described about how dramatically different the cigarette market would have been in the absence of the collusive agreement, it's my opinion that the collusive agreement, by shutting down the process of creative destruction, by preventing the transformation of the market that would have otherwise occurred into one in which there was a wider variety of products available and in which consumers would have had the information necessary to make effective choices among those products, was a significant contributing factor to health-care costs in Minnesota.
    *22 Q. Do any of defendants' internal documents support your opinion, Dr. Jaffe?
    A. Yes.
    Q. Would you turn to Exhibit 10349, please. Is this a document that you're relying upon in support of your opinions?
    A. Yes.
    MR. GILL: We'll offer Exhibit 10349, Your Honor.
    MR. BLEAKLEY: No objection.
    THE COURT: The court will receive 10349.
BY MR. GILL:
    Q. All right. This is another memorandum written by Dr. Green; correct?
    A. Yes.
    Q. He writes it to a number of gentlemen, including Dr. Felton?
    A. That's correct.
    Q. And to one of the attorneys.
    A. Okay.
    Q. And he indicates that he's sending these gentlemen the minutes of the Montreal conference, "Although much of this was discussed in Montreal you have not, of course, seen the conclusions in this form or approved the minutes of the last day."
    Then he invites them to add anything that they may wish. And then on the second page we see what he's sending him.
    A. Yes.
    Q. And this is a reference to B.A.T R&D conference that occurred in Montreal, Canada, in October of 1967.
    A. Yes.
    Q. Correct?
    A. That's correct.
    Q. And among those present would be Dr. Green and Dr. Felton. Do you understand that Dr. Griffith was the director of research and development at Brown & Williamson at that time in the 1967 timeframe?
    A. Okay.
    Q. And that Dr. R. A. Sanford would become the director of research and development at Brown & Williamson sometime thereafter?
    A. Yes.
    Q. Okay. Now there are conclusions and recommendations. Do you see that?
    A. Yes.
    Q. What is the second conclusion and recommendation from this marketing conference of the BATCo family of tobacco companies?
    A. It states that, "Smoking is now irreversibly associated with health."
    Q. Now Professor Jaffe, have you participated in the preparation of the damages model presented in this case on behalf of the state of Minnesota and Blue Cross Blue Shield?
    A. No, I have not.
    Q. Do you defer to Drs. Zeger and Wyant with respect to the reliability of the damages model and their conclusions regarding the appropriateness of their calculations?
    A. Yes, I do.
    Q. Professor Jaffe, have all of the opinions that you have expressed during your testimony over the last three days been to a reasonable degree of probability in the fields of economics and competitive behavior?
    A. Yes.
    MR. GILL: Thank you, professor. I don't have any further questions.
    THE COURT: We'll 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. BLEAKLEY: Thank you, Your Honor.
BY MR. BLEAKLEY:
    Q. Good morning, Professor Jaffe.
    A. Good morning, Mr. Bleakley.
    MR. BLEAKLEY: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    Q. I heard you mention my name, so you know who I am.
    *23 A. That's correct.
    Q. So I won't introduce myself.
    Let me ask you first, Professor Jaffe: You've talked a lot in the last couple of days about the documents, the internal company documents that you reviewed. Tell us just exactly what company documents it is that you reviewed.
    A. Tell you what documents --
    Q. Yes, --
    A. -- they are?
    Q. -- which documents. How were they selected?
    A. Okay. I identified categories of documents that I was interested in seeing, and I told the attorneys at Robins Kaplan the categories of documents that I wanted to see. They sent me boxes of documents which I then reviewed, and there was an iterative process, I would see things in documents that would make me think of other possibilities, I would suggest additional topics, they would send me more boxes, so that over the course of my review I accumulated and reviewed the documents.
    Q. And what were the categories of documents that you asked for?
    A. Well I don't remember all of them, but I asked for documents -- anything relating to competition, documents relating to research and development in the companies, documents relating to safer cigarettes, documents relating to marketing particularly as it affected kids, documents relating to tar and nicotine, nicotine manipulation, documents relating to competitive activities of the companies, documents relating to particular incidents that I came across as I began the review like the shutdown of the Mouse House and the ads in Holland, and other specific occurrences that based on my initial review seemed had some relevance to my opinions.
    Q. Is that pretty much it?
    A. That's all I remember, yes.
    Q. And about how many documents did you review?
    A. I don't know the number. It was thousands. It's several file drawers, filing cabinets in my office.
    Q. Well was it like 5,000 or 50,000?
    A. I doubt that it was 50,000.
    Q. Do you know how many documents were produced by the defendants in these cases?
    A. I know it's millions.
    Q. And you know that there -- these documents were maintained in a depository here in the Twin Cities area.
    A. That's correct.
    Q. You never went out to the depository and examined documents there; did you?
    A. That's correct.
    Q. And you never asked for the indexes of the documents that were maintained in the depository; is that right?
    A. No. I haven't looked at any of that.
    Q. When you asked --
    You asked counsel to supply you with documents in these particular categories; is that -- is that right?
    A. That's correct.
    Q. Counsel for the plaintiffs?
    A. That's correct.
    Q. So you would say --
    For example, with respect to competition, you would say, "I'd like to see all documents on competition," or whatever the language was that you used.
    A. Yeah, that's correct.
    Q. And you relied on them to provide you with the documents responsive to your request.
    A. Yes.
    Q. And let's take research and development. That was one of the categories you mentioned; wasn't it?
    *24 A. Yes.
    Q. Did you ask counsel for the plaintiffs to supply you with every document in the depository, every document produced by the defendants that had anything whatsoever to do with research and development?
    A. No, I don't think that's how it would have been phrased. I think I said that I was interested in documents relating to research and development and they should send me the documents that they have identified that were related to that topic.
    Q. Well how did you know whether you were getting all of the relevant documents on research and development?
    A. Well it was in their interests to provide me with what -- all the information they had, it was in my interests to get as much information as I could. Ultimately I formed my opinions based on the documents that I saw. And I've assumed from the beginning that if there were documents that were missed that seemed to show that this behavior was competitive rather than collusive, that you'd show them to me on my cross-examination.
    Q. But you didn't ask plaintiffs' counsel to show you all documents relating to competition that would tend to show there wasn't a conspiracy; is that right?
    A. No. I definitely asked for documents that would have indicated if the behavior was competitive rather than collusive, because that's the kind of document you want to see early in your work rather than having it be a surprise later on.
    Your previous question had something -- said something about every document in the depository, and given that there are millions of them, I don't think I could have expected the plaintiffs attorneys or anyone else to ensure that I had seen every one of the documents that related to research and development.
    Q. Let's go back to research and development for a moment. Did you review all of the documents that would show the actual research work that was done by the five defendants over the last 40 years?
    MR. GILL: Asked and answered, Your Honor.
    THE COURT: You may answer that.
    A. I reviewed all the documents that we could identify that related to research and development, particularly as it related to the topic that I was interested in. I mean I don't remember --
    Many, many of the documents I received I looked at, and it was clear that they related to aspects of research that were not important for my opinions and I didn't focus on them particularly.
    Q. Now you said you read some depositions.
    A. Yes.
    Q. What depositions did you read?
    A. Well again in terms of my memory as I sit here, I read Wakeham, Osdene, Rodgman, Senkus, Price, Sanford, Kohnhorst, I read the depositions of the defendants' economic experts, and I believe there were a few others that I read portions of that related to particular issues that I was interested in, like Premier and so forth, but I don't -- I don't remember as I sit here.
    Q. Did you read the depositions of all of the marketing people that were taken in this case?
    A. No, I didn't.
    Q. Did you read any of them?
    *25 A. I don't recall reading a deposition of a marketing person, no.
    Q. Have you, in the course of the investigation that you did in this case, talked with any of the researchers who may have retired from any of the defendant companies?
    A. Talked with them personally? No.
    Q. People that actually did research for the defendants.
    A. No, I didn't.
    Q. Have you talked with any experts in the field of biological research in preparation for your testimony?
    A. No, I have not.
    Q. Have you talked with any scientific research experts in preparation for your appearance and testimony here?
    A. I'm not sure I know what you mean by "a scientific research expert," I'm sorry. You mean a scientist --
    Q. A scientist.
    A. A biologist or a chemist?
    Q. For example, a scientist, a biologist or chemist.
    A. I don't think I talked to any biologist or chemist as part of the preparation for my work, no.
    Q. Or any experts on smoke chemistry or the manufacture of cigarettes or anything like that.
    A. That's correct.
    Q. None of that.
    A. That's correct.
    Q. Do you know, for example -- strike "for example." But do you know how many people defendant Lorillard had in its research and development center over the 40 years? Do you know anything about their research facilities?
    A. I don't remember what was described in the deposition testimony. I do know how much, according to the interrogatory answers of the companies, was expended by Lorillard and the other companies. And certainly, based on my work on the economics of research, if it mattered to me to know how many bodies were there, I could easily make an estimate of that, if the interrogatory answers are correct.
    Q. Well what I'm --
    What I'm asking you is, with respect to Lorillard, for example, whether you know how many people at Lorillard were devoted to smoking-and-health research?
    MR. GILL: Repetitious, Your Honor.
    THE COURT: I think he's answered the question.
    Q. Do you know how many people at any of the defendants were devoted to smoking-and-health research?
    A. Other than the answer I gave you previously about the interrogatory answers, no.
    Q. Do you know how much money any of the defendants spent on biological research over the years?
    A. Including both contract research and research done in- house?
    Q. Let's take them separately. Do you know how much any of the defendants spent on in-house biological research over the years?
    A. Well based on the deposition testimony that I've reviewed, there are only very limited occurrences where in-house biological research occurred at any of the companies. I don't have an exact dollar figure, no.
    Q. Do you have an approximate dollar figure?
    A. Well it's clearly a small fraction of the total research expenditures that were reported in the interrogatory answers.
    Q. Why is that?
    A. Because, based on the deposition testimony, it only occurred for a couple years at a couple companies, so it couldn't be a large fraction of the total.
    *26 Q. Your testimony is that in-house biological research only occurred for a couple of years at a couple of the defendants; is that correct? Is that your testimony?
    A. I believe that the deposition testimony of the representatives from the companies says that with respect to in- house biological research, particularly using animals relating to smoking and health, that that did not occur except with a few exceptions, yes.
    Q. Let me repeat my question. Is it your testimony that only a couple of the defendants spent a couple of years doing in-house biological research?
    A. Well as I sit here, I can't remember in all the depositions when the  "with animals" was included with that and when it was not, so I'm not positive about how clear the answers were if you take out the "with animals" qualifier.
    Q. Do you know how much money any of the defendants spent contracting biological research to outsiders?
    A. Only that it was within the total research expenditures that was reported in the interrogatory answers.
    MR. GILL: Your Honor, since this information was not provided during discovery, I don't think it's fair to pursue this line of questioning.
    THE COURT: Okay. Was that information provided, counsel?
    MR. BLEAKLEY: You mean a separate category of outside biological research? I don't know whether it was or not, but the issue --
    THE COURT: Well if it wasn't provided, then it's not relevant. Move on.
    MR. BLEAKLEY: No. The issue, Your Honor, is what this witness's expertise is.
    THE COURT: All right. If it was not provided, then we should move into a different area.
BY MR. BLEAKLEY:
    Q. You described a couple of research projects that were done by two of the defendants in this case. You mentioned one, for example, was called Saratoga. Do you remember that?
    A. Yes, I do.
    Q. The filter cigarette.
    Do you know how much money was spent trying to develop the Saratoga cigarette by Philip Morris?
    A. No, I don't.
    Q. Do you know how many years were spent on it?
    A. I think Dr. Wakeham's memo talks about it being a several-year project, but I don't recall exactly.
    Q. Do you know how many people at Philip Morris were involved in trying to develop the so-called Saratoga cigarette?
    A. No.
    Q. You talked about the XA project at Liggett & Meyers, a project involving a cigarette to which palladium would be added. Do you know how much time -- I mean how many dollars was spent by Liggett in attempting to develop the palladium cigarette?
    A. I think there was a figure in one of the documents that - - something like 15 million dollars, but I don't recall exactly.
    Q. And do you know how many years were spent by Liggett in attempting to develop the so-called palladium cigarette or the Project XA?
    A. Based on the documents, the project commenced sometime, I think, in the early '60s, so it would have been 10 or 15 years.
    Q. Ten or 15 years devoted to palladium by Liggett & Myers; right?
    *27 A. That's what the documents suggest, yes.
    Q. Do you know how much time was spent by RJR in attempting to develop a Premier cigarette about which you testified here this morning?
    A. Well based on the documents, it would appear that the effort began sometime in the early '80s, I can't tell exactly when, so it would have been something like five or six years.
    Q. Based on the documents you reviewed, it appeared that Liggett -- that Reynolds spent five or six years on the Premier project; is that your testimony?
    A. I think that's what I said.
    Q. And do you know, when the Premier project was dropped, whether RJR went on to attempt to develop other products using some of the knowledge that it gained in the Premier project?
    A. Yes, I believe they did.
    Q. And still are today; aren't they?
    MR. GILL: Your Honor, discovery closed, as counsel knows, in 1994.
    THE COURT: Sustained.
    Q. Now you've described and discussed with the ladies and gentlemen of the jury over the last three days a lot of documents that reported on meetings that were held. You didn't attend any of those meetings; did you?
    A. That's correct.
    Q. You're relying for your testimony on what a single participant at one of those meetings said about what happened at the meeting; right?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: No, you may answer that.
    A. If you direct me to a specific meeting and with respect to what I said about it, I could look at that. I don't know in general whether it was one or more participants of particular meetings.
    Q. Well let's take, for example, the Hill & Knowlton meetings that took place back in 1953. You weren't there, obviously; right?
    A. That's correct.
    Q. And there was a memorandum written of one of the meetings by a particular person; right?
    A. That's correct.
    Q. Then there was another meeting of Hill & Knowlton people, and that was written by -- I can't remember whether it was the same person or a different person.
    A. The second memorandum actually describes a series of meetings with the different research directors.
    Q. Fair enough.
    A. Yes.
    Q. But what you know about those meetings is what you read in that -- those memoranda.
    A. That's correct.
    Q. And you don't know anything else about them except what you read in those memoranda; do you, what happened in those meetings?
    A. I don't have any other basis other than what we see in terms of the consequences that followed to determine what happened at those meetings.
    Q. And when there were meetings of the Executive Committee of the CTR, or TIRC before it became CTR, you weren't there; were you?
    A. No.
    Q. You're relying on what you've read in those memoranda by the person who wrote the memorandum about what happened in those meetings.
    A. Yes. I'm relying on documents which were often, in many cases, created as memos for the purposes of superiors at the company, clearly with the intent of recording what happened at those meetings, to tell other people about them.
    *28 Q. And some of them were very detailed and some of them were not very detailed; isn't that right?
    A. That's true.
    Q. But in any event, all you know is what was in those memoranda; right, --
    A. Yes.
    Q. -- about what actually occurred at the meeting.
    MR. GILL: Asked and answered, Your Honor.
    THE COURT: It's been asked and answered.
BY MR. BLEAKLEY:
    Q. There were a lot of individuals identified in the documents that you've talked to the ladies and gentlemen of the jury about over the years. For example, there was a memo to a Dr. DuPuis at Philip Morris back in the 1960s. You don't know Dr. DuPuis; do you?
    A. That's correct.
    Q. You've never talked to him.
    And you've never talked to any of the scientists from B.A.T who came over to the United States on their trip in 1958; have you?
    A. I believe I already told you that I hadn't talked to any scientists from the companies.
    Q. And you hadn't talked to anyone from Hill & Knowlton either; had you?
    MR. GILL: Repetitious, Your Honor.
    THE COURT: Sustained.
BY MR. BLEAKLEY:
    Q. You've never visited any of the research centers or the research and development facilities of any of the defendants; have you?
    A. That's correct.
    Q. Okay. Let's talk about some of the opinions that you've expressed over the last three days.
    I believe you said that the first step in your analysis was to define the relevant market. Remember that?
    A. Yes.
    Q. And you divided the relevant market into the product market and the geographic market; right?
    A. That's correct.
    Q. And you concluded that the relevant product market was cigarettes.
    A. Yes.
    Q. You excluded from the relevant product market -- I'm not sure I got all of them -- but you excluded cigars.
    A. Uh-huh.
    Q. And chewing tobacco.
    A. Uh-huh.
    Q. And nicotine substitutes like the patch.
    A. That's correct.
    Q. Excluded the --
    A. Smoking-cessation devices were excluded.
    Q. Smoking-cessation devices, that was the term you used.
    A. Yes.
    Q. You excluded them from the market --
    A. That's right.
    Q. -- because they were not adequate substitutes.
    A. From the point of view of the consumer, that's correct.
    Q. From the point of view of the consumer.  What is a cigarette?
    A. What is a cigarette?
    Q. Yes.
    A. Well, a cigarette is something which is sold and labeled as a cigarette. In packages. I haven't done -- haven't studied from an engineering point of view like Dr. Robertson did what is the structure of a cigarette. But I think the government, for example, in the SIC categorizations, has data on what are cigarettes and what are not and it makes that distinction, and I'm relying on that kind of categorization to define a market including those sorts of products.
    Q. Well you concluded as an economist that the relevant product market was cigarettes; didn't you?
    A. Yes.
    Q. And when you as an economist determine what the relevant product market is, you make a judgment about the essential features and characteristics of the product; don't you?
    *29 A. Well I don't know what you mean by "essential features and characteristics." I make a judgment about the marketplace. I've looked at the Maxwell data, for example, which -- which categorizes things as cigarettes and looks at market shares and sales information of cigarettes, and I've looked at the government information about definitions of industry categories, and concluded, on the basis of that, combined with the fact that in the company documents when they discuss competition they don't talk about the manufacturers of cigars or the product cigars or chewing tobacco as being the focus of their competition, I concluded that that was the relevant market.
    Q. Well as an economist, do you or do you not take into account the essential features and characteristics of a product in defining a market?
    A. I don't know what you mean by "essential features and characteristics." If you're saying by that those features which determine whether it's a good substitute, then by definition that's what I looked at. But if you're talking about how long is it, what is it wrapped with, and, you know, exactly what's in it, I don't think that's relevant.
    Q. Well this wouldn't be a cigarette, this book; would it?
    A. I think that's correct.
    Q. Okay. And I don't know about when you grew up, but when I grew up we had candy cigarettes that looked a little bit like cigarettes.
    A. Yes. And the government would not have included the production of those products within SIC 2111 which defines cigarettes.
    Q. And you wouldn't --
    And you wouldn't include them within the definition of a cigarette either as an economist; would you?
    A. That's correct.
    Q. Because from the consumers' viewpoint, that wouldn't be an adequate substitute.
    A. That's correct.
    Q. So when you define a relevant product market for the kind of purposes for which you're here to testify today, you have to take into account what the consumer wants; don't you?
    A. Yes, I think that's --
    MR. GILL: Objection, it's vague, Your Honor.
    THE COURT: Well he's answered the question.
    Q. And if there is a feature in a cigarette that is not attractive to consumers and they won't buy it, then that product may itself not be a part of the product market; right?
    A. You're -- you're saying a product that nobody buys is not part of the market? I don't -- I don't understand the premise.
    Q. No, I'm not saying that, and my question was a bad one. Let me try to rephrase it.
    A. Okay.
    Q. For example, you excluded nicotine -- nicotine -- nicotine-delivery devices or -- I can't --
    What was the name?
    A. I excluded smoking-cessation devices --
    Q. Smoking-cessation devices.
    A. -- because in my view people that buy them are buying them for a different reason than people buy cigarettes.
    Q. People buy cigarettes for what reason?
    A. People buy cigarettes to smoke, to get whatever -- whatever pleasurable and pharmacological benefits they think they get from cigarettes.
    *30 Q. Okay. So now we do have a couple of the features and characteristics of a cigarette that are important. We have enjoyment. What was the other one you just used?
    A. Well I didn't say that those were the important features. You asked me a question why do people buy cigarettes, and I said that they -- they get pleasure out of them and they get certain pharmacological benefits from them.
    Q. Okay. They get pleasure from them. I used the wrong term. But in any event, the product has to be one the consumer wants; right? The essential features and characteristics of a cigarette have to be ones that the consumer will accept; right?
    A. Yes. I think I said that for the product to be in the market, it has to be a reasonably close substitute for the products that are being sold by the defendants, and therefore it would have to have enough of the characteristics of that product that people who purchased cigarettes would be interested in purchasing that product. At least, you know, some of those consumers at some times.
    Q. Okay. Let's talk for a moment about the geographic market, the second component of the relevant market. You defined the relevant geographic market as the United States; is that correct?
    A. That is correct.
    Q. And you excluded from the relevant market the rest of the world.
    A. I excluded from the relevant market cigarette products that are not sold in the United States.
    Q. And you excluded from the relevant geographic market all of the manufacturers of cigarettes outside the United States.
    MR. GILL: Objection, assumes facts not in evidence.
    MR. BLEAKLEY: Well I'm sure the witness will correct me if I'm wrong.
    THE COURT: Well you can correct him if he's wrong.
    A. Well the way you define a relevant market is not in terms of the companies but in terms of the products. So what I'm saying is that the cigarette products that are sold in the United States are in the relevant market, and the cigarette products that are sold outside of the United States are not in the relevant market.
    Q. Well let me ask you this: Does not an antitrust economist, in defining the relevant market, look to see whether there are potential competitors poised on the edge, ready to enter --
    MR. GILL: Assumes facts --
    Q. -- the market?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: You can answer that.
    A. That's a different question which I also investigated. There's a question of defining the relevant market, and then there's also a question of whether, once that relevant market is defined, entry by firms that are not currently in that market would also present a competitive discipline to potential anti-competitive behavior in that market. And so to the extent that there are competitors, I think as you put it, poised outside the market, then the question would be one not of defining the market but one of whether the barriers to entry with respect to the relevant market were sufficient that that competition would be unlikely.
    *31 Q. Now you said you investigated this?
    A. Yes.
    Q. You investigated whether or not there were likely potential entrants into the U.S. cigarette market who were located outside the U.S.?
    A. Well the way I looked at it was I looked at the question of the barriers to entry to some extent with respect to specific competitors. For example, there's a Philip Morris document that discusses the Japanese Tobacco Company and expresses the opinion that if the Japanese company were going to market some kind of new cigarette product in the United States, it would not do it by itself, it would do it in conjunction with one of the domestic manufacturers. So where the evidence regarding barriers to entry related to specific potential competitors, I looked at that, but it wasn't necessary to make some kind of comprehensive inventory of foreign tobacco companies.
    Q. Well apart from that Philip Morris memorandum in which --
    I take it that was the opinion of one Philip Morris person; is that correct?
    A. I don't recall.
    Q. Well was it more than one?
    A. It could have been a report that had multiple authors. I don't remember as I sit here.
    Q. Well did you see any other documents in which anyone said the Japanese tobacco monopoly is not a potential entrant into the United States except in coordination with anyone else, a domestic company?
    A. I don't recall seeing any other documents, but the other evidence that I've discussed would support the same conclusion.
    Q. What other evidence is that?
    A. Well as we talked about, as an economist, one of the things you look at is what are the nature of the barriers to entry, and I identified those barriers to entry. And then the other thing you look at is has entry occurred, and in particular, has entry occurred in a market that has been extremely profitable, and what the evidence showed was that we have here a market that has been extremely profitable for a very extended period of time and there has been no entry.
    Q. You are --
    You know there are very large foreign manufacturers of cigarettes; right?
    A. That's correct.
    Q. You know, for example, that there is a French tobacco monopoly in France; right?
    A. I don't remember the details of the French market. But if you say that's true, I would have no reason to dispute it.
    Q. You didn't investigate the French market to see what -- what -- who the -- who the manufacturer is or what kind of market power or finances or resources they have?
    A. No, I didn't.
    Q. Why not?
    A. Because it wasn't relevant to my opinion.
    Q. It wasn't relevant to your opinion. Okay.
    You know that there's a company in Germany that's a very large manufacturer of cigarettes named Reemstsma; right?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: The objection is sustained.
BY MR. BLEAKLEY:
    Q. Do you know whether there is a large cigarette manufacturer in Germany?
    A. I know that there are cigarettes manufactured and sold in Germany. I don't know how big those companies are.
    *32 Q. And you know that there is a monopoly company that makes cigarettes in Japan; right?
    A. I understand that to be the case, yes.
    Q. Now, have you made no investigation to determine the resources of any of these companies to enter in the U.S. market?
    A. I have not.
    Q. So for all you know, the French cigarette monopoly may be thinking about entering the U.S. market even today.
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: Sustained.
    Q. It was not important to you to know whether any of the foreign manufacturers of cigarettes have considered entering the United States?
    A. What I know is that they have not done so successfully, and whatever resources they have at their disposal to do that they've had at their disposal, and -- or other companies with similar resources have had at their disposal, and if it were easy to enter the U.S. cigarette market, then as an economist I would expect that, given the profit levels that have persisted in the industry, such entry would have occurred.
    Q. You said you don't know of anyone who's done it successfully. Do you know of anyone who's tried and failed?
    A. I don't.
    Q. Now you're not, I assume, and you correct me if I'm wrong, that you are not asserting that the French tobacco monopoly is part of the conspiracy in this case.
    A. I have no opinion one way or the other as to whether the French company is part of the conspiracy.
    Q. Well you're not opining to the ladies and gentlemen of the jury that the French tobacco monopoly is a member of this conspiracy; are you?
    MR. GILL: Repetitious, Your Honor.
    THE COURT: It's repetitious.
    Q. Is it your opinion that the Japan Tobacco & Salt Corporation, the Japanese cigarette monopoly, is a member of the conspiracy in this case?
    A. I have no opinion one way or the other on that.
    Q. Is it your opinion that the manufacturer in Germany that makes Prince cigarettes is a member of the conspiracy?
    MR. GILL: This line of questioning is irrelevant, Your Honor, and it is repetitious as well.
    THE COURT: You may answer.
    MR. BLEAKLEY: Your Honor, I will tie it up.
    Thank you.
    A. I have no opinion one way or the other.
    Q. Do you know whether any of these companies have done any research and development in efforts to develop less-hazardous or safer cigarettes?
    A. I haven't had at my disposal information to determine what they've done in that respect.
    Q. Wouldn't that have been relevant if they had done research?
    MR. GILL: Your Honor, I'm informed that there was not discovery in connection with the foreign operations of tobacco companies other than the defendants in this case.
    MR. BLEAKLEY: Your Honor, that was plaintiffs' choice, not ours. We didn't stop them from doing discovery abroad.
    THE COURT: The objection is sustained.
    MR. BLEAKLEY: May I have a side-bar on this, Your Honor?
    THE COURT: Yes.
BY MR. BLEAKLEY:
    Q. Professor Jaffe, you mentioned that the second step in the analysis that you did was to evaluate the plausibility of a conspiracy; right?
    *33 A. That's correct.
    Q. And there were three factors that you took into account in opining that a conspiracy was plausible; right?
    A. Yes.
    Q. The first of which was concentration.
    A. That's correct.
    Q. Right?
    Can you turn to the demonstrative exhibit you've shown the jury two or three times here, Exhibit 30229.
    A. I have it.
    Q. Now you acknowledged this morning that there have been -- there's been a substantial shift in market shares over the last 30 -- last 40 years; right?
    A. The exhibit shows that, yes.
    Q. And you've acknowledged that it's a fact.
    A. I said --
    Yes.
    Q. American Tobacco went from being the largest company in the United States to being one of the smallest, and then eventually was acquired by Brown & Williamson; right?
    A. That's correct.
    Q. American Tobacco went from being the number one company in the United States to essentially failing in the marketplace over the course of the years; right?
    A. That's correct.
    Q. Brown & Williamson has gone from nine to 19 percent, some of which is attributable to its acquisition of American Tobacco.
    A. That's correct. I discussed all those this morning.
    Q. I understand.
    And Philip Morris has had, I think anyone would acknowledge it to be, phenomenal success in going from the smallest or the next-to-smallest company in the industry over the last 40 years to being far and away the largest.
    A. That's correct.
    Q. Liggett Group has basically failed in the marketplace; right?
    A. That's correct.
    Q. Lorillard stayed about the same, R. J. Reynolds has stayed about the same. However, Exhibit 30229 doesn't tell the whole story about R. J. Reynolds' experience during that 40-year period; does it?
    MR. GILL: Objection, vague, Your Honor.
    THE COURT: Do you understand the question?
    A. Are referring to the fact that there were changes in market share in intervening years up and down?
    Q. Yes.
    A. That's correct, the exhibit does not show the market- share changes except for the two years 1954 and 1994.
    Q. In fact, R. J. Reynolds for a considerable period of time had the largest-selling brand of cigarettes in the United States, Winston, and then substantially lost market share over years to Marlboro; didn't it?
    A. That is correct.
    Q. Okay. So what we have is an industry which, despite the fact that there is a small number of sellers --
    Which is what "concentration" means; isn't it?
    A. As I explained, it relates to the small number of sellers and the share of the market controlled by the largest firms, yes.
    Q. But the level of competition in the industry is not determined only by the number of sellers; is it?
    A. I don't think I said it was.
    Q. It's also determined by looking at what's happening to market shares over a period of years; isn't it?
    A. Well I thought we were talking about my opinions regarding plausibility. And -- and regarding plausibility, the issue is: Is the industry sufficiently concentrated that one could imagine or expect that the participants could successfully engage in collusion? But you want to raise a different question, which is: Has there in fact been significant competition in this industry over the years?
*34 A. I think I talked about that in my testimony and I indicated that, yes, in fact there had been significant competition along dimensions other than smoking and health, those dimensions not being restricted by the collusive agreement.
    Q. My question is: Isn't it a fact that volatility, changes in market share, is a factor that is inconsistent with the plausibility of a conspiracy?
    A. No, that's not correct.
    Q. And your testimony is that that's accepted in antitrust economics; is that right?
    A. My testimony is that an antitrust economist looking at this, when evaluating the plausibility question, would look at the concentration. That was one aspect of volatility -- I'm sorry, excuse me, one aspect of the plausibility.
    If I were looking at the issue of a collusive agreement that was alleged to cover all dimensions of competition in the industry, then I think it would be relevant to look at the volatility of the market shares, because it would not be plausible that there was a collusive agreement covering all dimensions of competition in the industry if in fact what occurred was vigorous competition along some of those dimensions. But I think, given the task at hand, which is to look at an alleged collusive agreement that only related to one dimension of competition, I don't think that the issue of volatility is relevant.
    Q. So is it your opinion that any antitrust economist would agree that the volatility in market shares and other competition that has taken place in the cigarette industry over the last 40 years would not militate against the plausibility of a conspiracy, that the only factor is concentration?
    MR. GILL: Repetitious, Your Honor.
    THE COURT: Okay. I think it's been answered.
    Q. The competition that has taken place in the cigarette industry over the last 40 years has been intense; hasn't it?
    A. As I testified this morning, the competition in the U.S. cigarette market over the last 40 years with respect to some aspects of competition has been intense.
    Q. And we're talking about a market that has been essentially fixed for a substantial part of that period of time and declining since about 1981 or 1982; right?
    A. Well an economist --
    I guess what I would say is the actual sales have declined. Whether the market was declining was a function of the actual actions of the firms in the industry and would have depended, for example, on whether they seized upon the competitive opportunities provided in order to develop truly new products. But it is certainly true that the actual volume of packages sold, as we've observed it, has declined.
    Q. This intense competition that we're talking about here has taken place in a market in which the overall demand for cigarettes has been fixed or declining during virtually that entire period of time; right?
    A. Well I hate to quibble, but you're using economic technical terms, and the fact that the number of units sold has declined is not the same from an economist's point of view as saying that the demand has declined.
    *35 Q. Is it your testimony that demand for cigarettes has not declined?
    A. I have not analyzed that question.
    Q. You don't know whether cigarette demand has declined, demand for cigarettes has declined; is that right?
    MR. GILL: Repetitious, Your Honor, no foundation.
    THE COURT: You may answer.
    A. I haven't analyzed it, and without analyzing it, I can't know.
    Q. And you know that in addition to the low tar and nicotine brands that you testified about this morning, there were discount brands introduced into the marketplace during this period of time; weren't there?
    A. That is correct.
    Q. And that in fact discount brands achieved as much as 30 percent of the overall market for cigarettes at one point.
    MR. GILL: Assumes facts not in evidence, Your Honor. Counsel is testifying.
    THE COURT: Sustained.
    Q. Do you know what percentage of the market discount brands achieved at their peak?
    A. I don't know the percentage, no.
    Q. You didn't consider that important?
    A. No. That would relate to price competition, and I wasn't offering any opinions regarding price competition.
    Q. Price competition was irrelevant to your analysis; is that right?
    A. Price competition was not relevant to my analysis.
    Q. The second of the factors that you described as bearing on the question of whether a conspiracy was plausible was barriers to entry, which you talked about here a moment ago; right?
    A. That's correct.
    Q. And you listed within barriers to entry some specific subfactors; correct? I don't know whether "subfactors" is the right term, but you listed some specific facts.
    A. I gave examples of what I thought the sources of barriers to entry were --
    Q. Okay. I --
    MR. GILL: Could the witness be allowed to complete his answer, Your Honor?
    MR. BLEAKLEY: I'm sorry.
    A. -- as well as indicated that part of the analysis of barriers to entry was looking at the actual occurrence or lack thereof of entry.
    Q. One of the ones that you offered was advertising and marketing expenditures; correct?
    A. That's correct.
    Q. Are you suggesting that the advertising and marketing expenditures of the cigarette industry are disproportionate to what they are in comparable industries?
    A. No, I'm not suggesting that.
    Q. But they're nevertheless a barrier to entry.
    A. Well I don't know what you mean by "disproportionate." I guess what I'm saying is this is an industry in which, in order to compete and particularly in order to introduce a new brand, you have to spend large sums of money on advertising and marketing. There are other industries in which that is also true and there are many industries in which that is not true. But all else equal, that high level of advertising and marketing that is necessary in this industry is a barrier to entry.
    Q. There are industries in which the level of advertising and marketing expenditures is as high as the cigarette industry but where barriers to entry are not high; isn't that right?
    *36 MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: You can answer that.
    A. I don't think I said that. If you --
    Q. Is it true?
    THE COURT: Counsel, allow him to finish his answer, please.
    MR. BLEAKLEY: I'm sorry.
    A. As I sit here, I can't think of an industry that has advertising and promotional expenditures relative to sales or profit that is as high as this industry that I would characterize as an industry with low barriers to entry, but I wouldn't rule that out as a possibility, depending on the other circumstances in the industry.
    Q. You -- you didn't do that analysis though.
    A. No. That was not material to my analysis.
    Q. You also said that brand loyalty was a barrier to entry in the cigarette industry; is that right?
    A. Yes.
    Q. Now you know, in fact, that approximately 10 percent of smokers change brands every year; don't you?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: You can answer it if you know.
    A. I don't know the exact figure. I know there is some switching, yes.
    Q. You -- you did not --
    In determining that brand loyalty is a barrier to entry, you did not take into account the percentage of people who switch brands every year?
    A. I took into account the general phenomenon of switching. I didn't do a numerical analysis of it. I examined the company documents which clearly exhibit that the companies perceived there was a significant level of brand loyalty. Brand loyalty is not an absolute. I'm not testifying that it is impossible to get someone to switch brands, nor am I testifying that the barriers to entry in this industry are infinitely high. I am -- I offered the opinion regarding barriers to entry simply in the context of a plausibility issue to suggest that, taken together, all the evidence indicates that the likelihood of entry was sufficiently low that it was plausible that a conspiracy would have been undertaken.
    Q. The third factor that you mentioned -- I may not state this right because I wasn't quite sure how you characterized it -- but it had to do with motivation or incentives.
    A. That is correct.
    Q. And -- and I believe what you said is that -- that a third factor that could affect the plausibility of a conspiracy was whether something you described as a transforming event had taken place. And if I've misstated that, you correct me.
    A. Okay. I think what I tried to say was that the question of motivation generally was an issue of whether there was a tension or a conflict between the incentives of the individual participants and their collective interest as represented by what the conspiracy would have achieved, that that's sort of the general issue of motivation, but that one thing that would potentially be relevant to the issue of motivation would be a transforming event, which could heighten attention that would otherwise perhaps already have occurred or -- or existed between the individual incentives on the one hand and the collective interest on the other.
    *37 Q. And you found a transforming event in the cigarette industry in the 1950s; didn't you?
    A. Yes.
    Q. And that transforming event was an increase in consumer perception of the health risks of smoking?
    A. I think that's fair.
    Q. And a huge concern -- consumer demand for safer products.
    A. I think that's fair.
    Q. And this transforming event; that is, an increase in consumer perception of the health risks of smoking and a huge consumer demand for safer products, was a factor that led you to conclude that a conspiracy was plausible; is that right?
    A. I think that's fair.
    Q. And in fact, the increase in consumer perception of the health risks of smoking has increased, grown and grown in the '60s and the '70s and the '80s and the '90s; hasn't it?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: You may answer that.
    A. I think it's waxed and waned. There's been times that concern has been greater and times when it's been less, but I certainly wouldn't say that it's generally less today than it was in the 1950s.
    Q. Would you agree with me that by 1970 there was a universal belief by people that cigarette smoking was hazardous?
    A. You mean other than the defendants?
    Q. Universal belief by people.
    A. Well, for example, the chief executives of the defendants, the scientific director of CTR, the spokespeople for the TI were still saying that they didn't believe that smoking was -- had been shown to be harmful.
    Q. You can exclude them.
    A. Okay. I don't have an opinion about universal belief. I would believe -- I would say it was fairly widely believed that cigarettes were harmful.
    Q. When you were talking about motivation, you referred to a memorandum, a Philip Morris memorandum, Exhibit No. 11662. Would you take a look at that in the plaintiffs' Exhibit binder, 11662.
    A. I have it.
    Q. Remember, this is the memorandum from C. V. Mace to Dr. R. N. DuPuis.
    A. That's correct.
    Q. And you said that this memorandum -- Mr. Mace was suggesting in this memorandum a short-term and a long-term way of dealing with this transforming event, as you described it.
    A. I think that's fair.
    Q. And you described the short-term way of dealing with it as the development of low delivery cigarettes; right?
    A. Yes. He says "produces substantial reduction in tar delivery, even if it's only across the board."
    Q. And the -- and the long-term proposal was removing carcinogens from cigarettes.
    A. Yeah, I think that's a generally fair characterization.
    Q. Now what you know, in fact, is that the production of low and lower delivery cigarettes has continued for the entire 30-year period since this memorandum was written; isn't that right?
    A. Right. What you're saying is that what Mr. Mace said should be the short-range approach is the one that has continued indefinitely.
    Q. And the long-term approach, removing carcinogens, is it your testimony that none of the defendants in this case have ever tried to remove carcinogens from cigarette smoke?
*38 A. No, that's not my testimony.
    Q. Okay. I thought you testified that the defendants did not follow up on the long-term solution.
    A. Well the long-range program as described by Mr. Mace in the memo -- we read this yesterday -- includes pursuing this wild research program, and it also includes having the guts to jump on the other side of the fence on the issue of smoking and health and use that ammunition, and it was my testimony that none of the defendants had ever done that.
    Q. And that's --
    Is that the only thing you're saying they didn't do? You're not testifying that they didn't try to remove carcinogens from cigarettes; are you?
    A. Well I have testified that they did not engage in the kind of long-term, very-large-resource, sustained program to develop carcinogens that I think their competitive incentives suggested they would have, but I have testified that Reynolds, for example with respect to Premier, and Liggett with respect to XA, and other companies in other examples that I gave, did engage in efforts to try to reduce or eliminate the carcinogens from their products.
    Q. All of the defendants did; right?
    A. I don't actually know with respect to some of them because, from the documents that I have, it's a little hard to tell exactly what they were doing. But I would not -- I -- I would not reject the notion that it could have been that all of them did.
    Q. And the reason you don't know is because your knowledge on this issue is based on the selected documents that you reviewed in this case as produced to you by plaintiffs' counsel; isn't that right?
    MR. GILL: Argumentative, Your Honor.
    THE COURT: You may answer.
    A. My knowledge is based on the documents that I reviewed, which I believe were produced in a good-faith effort in response to my requests. And if you have documents that describe competitive efforts by other companies that I haven't talked about to develop safer cigarettes, I would be very interested in seeing them.
    Q. And your testimony is that while you acknowledge that some of the defendants have engaged in efforts to remove carcinogens, those efforts have been meager. Is that the term you used this morning?
    A. Meager relevant to the resources that were available and the stakes in the competitive situation.
    Q. You were asked by Mr. Gill to take a look at a Lorillard document, Exhibit number 14020. Can you find that in your book.
    A. Yes, I have it.
    Q. Do you remember that document?
    A. Yes, I do.
    Q. And I believe that Mr. Gill asked you whether or not you had any documents that showed that the defendants never engaged in any effort in the long-term.
    MR. GILL: Your Honor, the record will speak for itself. Counsel is now testifying as to what I said.
    THE COURT: Rephrase your question, counsel.
    MR. BLEAKLEY: Okay. It was a clumsy question, I agree.
BY MR. BLEAKLEY:
    Q. This is a document dealing with Bio-Research Consultants, Inc. and the Sloan-Kettering Memorial Institute and research that they were doing for Lorillard; is that right?
    *39 A. That is correct.
    Q. And in fact, the very first sentence of this document says, "During the past decade, the Research Division of P. Lorillard Company, Inc. has been investigating the tumorigenic properties of cigarette smoke condensate toward mouse epithelium through cooperative studies with Dr. Wynder, of the Sloan- Kettering Memorial Institute, and on a consulting basis with Bio-Research Consultants, Inc." Do you see that?
    A. Yes.
    Q. Do you know who Dr. Wynder is?
    A. He's a prominent scientist who's done a lot of work on the health consequences of smoking.
    Q. He's one of the scientists who did some of the epidemiological and animal studies back in the early 1950s; isn't he?
    A. That is correct.
    Q. And so what this document shows is that in 1966, Lorillard was doing -- investigating the tumorigenic properties of cigarette smoke condensate; correct?
    A. Through contract research, yes.
    Q. Through contract research. I -- I understand your opinion about contract research. But they were doing this.
    And the rest of this document describes in some detail the biological research that was being done for Lorillard; doesn't it?
    A. It gives some information about it, yes.
    Q. It shows that they were fraction -- fractionating or dividing up smoke into components to try to figure out what in the smoke was carcinogenic?
    MR. GILL: Can we have an indication where counsel is reading from, Your Honor?
    MR. BLEAKLEY: Top of page four.
    A. Yes, I see that.
    Q. Do you know that for many years scientists both inside and outside the tobacco industry considered this kind of research and whether it would develop a safe cigarette?
    MR. GILL: Counsel is testifying, Your Honor.
    THE COURT: Okay. Rephrase your question, counsel.
    MR. BLEAKLEY: I asked the witness whether he knew.
BY MR. BLEAKLEY:
    Q. Do you know what research was being done of this type both inside and outside the tobacco industry?
    A. I've reviewed these documents which discuss this kind of research being done by various consultants to the companies at various points in time, and I looked at that. What I said to Mr. Gill about this document was that, as far as I could tell, Lorillard had never introduced and competitively exploited a product that took advantage of this research which demonstrated that they had a product that could be shown to have less biological activity than other products.
    Q. Do you know whether they tried?
    A. Whether they tried what?
    Q. Whether they tried to develop such a product.
    A. I --
    Well I believe that they were trying to develop something with this research, yes.
    Q. Do you know what happened to it?
    A. Based on the documents that I've seen, I don't know what happened to it.
    Q. Do you know that Lorillard was considering treating cigarettes with a compound called phenylmethylisoxacole, or PMO?
    MR. GILL: Your Honor, assumes facts not in evidence.
    THE COURT: Objection sustained.
    *40 Q. Do you know whether Lorillard continued this kind of research for several years?
    A. I believe they did. I've seen references to this kind of research in the documents over a period of years.
    Q. But you don't know what happened to it or whether Lorillard was successful or not; is that correct?
    A. Well what I know is they were never successful in a competitive sense. I don't know why and I don't know how far they got.
    Q. For all you know, this project may have failed because it didn't work; isn't that right?
    A. That's correct.
    Q. And then you were shown a document, Exhibit 12509, which was an RJR document.
    A. Okay, I have it.
    Q. Do you see that document?
    A. Yes.
    Q. See a reference in there, for example, to a self- extinguishing cigarette?
    A. Yes, there is a reference to that.
    Q. And did you testify that R. J. Reynolds did not make an effort to develop cigarettes that removed carcinogens?
    A. I don't think I testified to that, no.
    Q. You don't know, in fact, what research that R. J. Reynolds has done over the last 35 years; do you?
    A. I know what research is described in the documents, and I know the total amount that their interrogatories say they spent on the process. But beyond that, I can't describe the nature of their research efforts.
    MR. BLEAKLEY: Your Honor, would this be a convenient time to break?
    THE COURT: All right. We'll recess till 2:30.
    MR. BLEAKLEY: That's fine. Thank you very much.
    THE CLERK: Court stands in recess.
 (Recess taken.)

*1 TITLE:       STATE OF MINNESOTA AND BLUE CROSS AND BLUE SHIELD OF MINNESOTA, PLAINTIFFS, V. PHILIP MORRIS, INC., ET. AL., DEFENDANTS.
TOPIC:          TRIAL TRANSCRIPT
 TRANSCRIPT OF PROCEEDINGS
DOCKET-NUMBER:  C1-94-8565
VENUE:          Minnesota District Court, Second Judicial District, Ramsey County.
YEAR:           March 20, 1998
 P.M. Session

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

AFTERNOON SESSION

 (The following conversation was held before the court and the jury entered the courtroom.)
    MR. BLEAKLEY: I allerted Mr. Gill and also told Mr. Stirewalt that I'm having some of the same problems that I understand juror number six was having. I don't know what that was, but that was the rumor floating around the courthouse anyway. And it seems to be getting worse, and I just wanted to alert the court that I may need relief.
    MR. GILL: We'd have no problem with that, with a sudden continuance, under those circumstances.
    MR. BLEAKLEY: I don't know what else to say.
    THE CLERK: Thank you, counsel.
 (Conversation concluded.)
    THE CLERK: All rise.
 (Jury enters the courtroom.)
    THE CLERK: Court is again in session.
    Please be seated.
    THE COURT: Counsel.
    MR. BLEAKLEY: Thank you, Your Honor.
BY MR. BLEAKLEY:
    Q. Good afternoon, Professor Jaffe.
    A. Good afternoon.
    MR. BLEAKLEY: Good afternoon, ladies and gentlemen.
 (Collective "Good afternoon.")
BY MR. BLEAKLEY:
    Q. Before the lunch break, professor, I was asking you some questions about R. J. Reynolds research. Do you recall that?
    A. Yes.
    Q. Do you know whether R. J. Reynolds ever tested and experimented with methods for using a hexane solvent to remove precursors of carcinogens from tobacco?
    A. I don't recall.
    Q. You don't remember whether you learned about that or not?
    A. I may have, but I don't remember as I sit here.
    Q. Do you remember whether these experiments proved successful?
    A. Well since I don't remember whether I've seen it, I couldn't remember whether it had been successful.
    Q. Do you know whether RJR ever worked on filters that would selectively remove chemicals, certain chemicals from tobacco?
    A. Yes, I think I've seen reference to that in the documents.
    Q. And have you seen evidence that the other defendants also engaged in research to remove selective chemicals?
    A. Yes.
    Q. Do you know whether any of those efforts proved successful?
    A. Well, I'm not sure what you would define as success. I think there was some evidence that those efforts were successful in some ways. There were some products that -- or test products that were identified that seemed to have some success with respect to that. I don't -- I don't know of a specific commercial product that was introduced that I know of as having come out of those efforts.
    *2 Q. Do you know whether RJR ever tested tobacco substitutes to be used in making cigarettes?
    A. I know that I've seen references to experiments on tobacco substitutes. I don't recall if it was RJR.
    Q. Did you do any research to try to determine the extent to which this kind of research was being done?
    A. Well I looked at all the references in the document that I had to those sorts of activities. I didn't have any way of going beyond that to try to figure out where that went.
    Q. Or to find out whether any of those methods ever proved commercially practicable?
    A. I don't believe I've seen any evidence of successful commercial products based on tobacco substitutes.
    Q. All right. Let's -- let's move on to the next major subject matter that you discussed in your direct testimony, which was the actual evidence that you believe you saw of a conspiracy. And I think that you started with reference to some meetings with people at Hill & Knowlton back in 1953; is that right?
    A. No, I believe the meeting was at the Plaza Hotel, and the report that we had of it was in the Hill & Knowlton documents.
    Q. It was a Hill & Knowlton document.
    And these meetings were the precursor to the creation of the Tobacco Industry Research Council; right?
    A. Yes, that's correct, among other things.
    Q. Subsequently known as The Council for Tobacco Research.
    A. That's correct.
    Q. Did you know or did you find out in the course of your research that the Antitrust Division of the U.S. Department of Justice found out that the tobacco industry was considering the creation of this organization?
    A. Yes, I did know that.
    Q. And did you know that the Antitrust Division of the Department of Justice looked into the activities of the Tobacco Industry Research Council in order to determine whether or not they would comply with the U.S. antitrust laws?
    MR. GILL: Assumes facts not in evidence, Your Honor, unless counsel has a document.
    THE COURT: The objection is sustained.
BY MR. BLEAKLEY:
    Q. What do you --
    What do you know about the activities of the Antitrust Division with respect to the Tobacco Industry Research Council?
    A. There were some references in the document to an inquiry on the part of the department and of materials being provided to the department. I can't tell from the documents how thorough any kind of such investigation was.
    Q. Did you make any independent effort to determine the extent to which the activities of the Tobacco Industry Research Council were being investigated by the Department of Justice?
    A. I don't know what you mean by "independent." That was one of the things that I saw references in documents. I did specifically request that whatever documents there were that related to materials that had been provided to the Justice Department by the companies, that I would like to see those.
    Q. Did you go to the Antitrust Division of the Department of Justice yourself and try to find out what happened?
    *3 A. No.
    Q. Why not?
    A. I don't see how that was relevant to what I was doing.
    Q. It was not relevant to what you were doing whether the Antitrust Division of the U.S. Department of Justice took a look at the activities of TIRC to determine whether or not they complied or would comply with the U.S. antitrust laws? That wasn't relevant?
    A. I guess I don't understand your question. I have no basis on any of the evidence I've seen that the Department of Justice had in its possession any of the material that I've seen regarding what actually happened at those meetings, and so if they did in fact determine based on what they knew in 1954 that the Tobacco Industry Research Council, as described in the Frank Statement, was an innocent set of activities, I don't see how that would bear on my opinion.
    Q. Would you turn to tab 46 in the book of exhibits that we gave you.
    MR. GILL: What exhibit number?
    MR. BLEAKLEY: I'm sorry, MD000288.
    MR. GILL: I don't think I have that here.
    MR. BLEAKLEY: We'll get you another copy. Are you sure?
    MR. GILL: I don't.
    MR. BLEAKLEY: We'll get you one. Excuse me, Your Honor, while we locate another copy of the exhibit.
    MR. GILL: Can you confirm that it was designated? It could be that we just overlooked it, but I'm not finding it yet.
    MR. BLEAKLEY: I believe it was designated.
    MR. GILL: Mr. Bleakley, I'm sorry, I've located it.
    MR. BLEAKLEY: You got it? Okay.
BY MR. BLEAKLEY:
    Q. Do you have tab 46 in front of you?
    A. I do.
    Q. It's a letter from Stanley W. Barnes, Assistant Attorney General, United States Department of Justice, to Mr. Paul Hahn, Temporary Chairman, Tobacco Industry Research Council, dated January 21, 1954.
    A. That's correct.
    Q. Correct?
    MR. BLEAKLEY: Your Honor, at this time we move the admission of MD000288.
    MR. GILL: No objection, Your Honor.
    THE COURT: Court will receive MD000288.
BY MR. BLEAKLEY:
    Q. It's unfortunately a very bad copy, but this letter reads, "Dear Mr. Hahn:
    "I read with interest the statement of the Tobacco Industry Research Council, which appeared in newspapers on January 4, 1954, regarding the Committee's pledge of aid and assistance to the research efforts into all phases of tobacco use and health. I would appreciate receiving as many details on the Committee's plan as you may care to disclose at this time." Do you see that?
    A. Yes.
    Q. So this was the head of the Justice Department's Antitrust Division asking for information about TIRC.
    A. Yes.
    Q. Okay. Would you turn to tab 47, which is Exhibit MD000289.
    A. Yes, I have it.
    Q. This is a letter dated January 26, 1954 from the -- I'm having trouble reading the signature myself, but the chairman of the Tobacco Industry Research Committee to Judge Barnes.
    A. That's correct.
    Q. See that?
    MR. BLEAKLEY: Your Honor, at this time we move the admission of MD000289.
    MR. GILL: No objection, Your Honor.
    *4 THE COURT: Court will receive MD000289.
BY MR. BLEAKLEY:
    Q. In this letter, the chairman of the TIRC acknowledges Judge Barnes' 21 -- January 21 letter. Do you see that?
    A. Yes.
    Q. And he states in the paragraph -- in the second paragraph of the letter, "I appreciate the interest you are taking in this matter, and I wish to assure you of our desire to keep you informed. Of course, the Committee is in its initial and formative stage at the present time and is charting its future course and formulating its plans and functions. We have already made an initial statement of our origin, purpose and proposed functions, two copies of which I am pleased to enclose herewith." Do you see that?
    A. I do.
    Q. And then the chairman goes on to offer additional responses of correspondence if Judge Barnes so desires; correct?
    A. Yes.
    Q. And the attachment, Exhibit A, do you see that? Do you have that there as well?
    A. Yes, I do.
    Q. Let's take a look at this attachment. On page six of the attachment --
    A. I have that.
    Q. -- the document says, "The Committee was formed and the firm of Hill & Knowlton, Inc. of 350 Fifth Avenue, New York, New York, was engaged to assist the Committee in effectuating its purpose;" correct?
    A. That's what it says.
    Q. So Hill & Knowlton's involvement in the creation of the Tobacco Industry Research Committee was not secret.
    A. No, it was not secret.
    Q. And the Justice Department itself was informed of that fact; right?
    A. That's correct.
    Q. And at the top of the next page, page seven, the document says that the purpose of the committee is to aid research into tobacco use and health; correct?
    A. It says that, yes.
    Q. Now are you aware of any instance in which the Antitrust Division of the Department of Justice challenged the activities of the Tobacco Industry Research Committee under the antitrust laws?
    A. I'm not aware of any such occurrence. And I wouldn't expect them to based on the representations that are made in here about what the committee was going to do, which are very consistent with the representations in the Frank Statement, but are in fact not consistent with what the Hill & Knowlton documents indicated was the intention and what we saw yesterday was the actual development.
    Q. The Hill & Knowlton document, you say, indicated the intentions of the Tobacco Industry Research Committee, but so also does this document; does it not?
    A. It purports to, yes.
    Q. Now let's turn to Exhibit 18905, which is in the -- one of the plaintiffs' exhibit books.
    A. I have that.
    Q. This is one of the Hill & Knowlton documents upon which you relied for your evidence of the beginning of the so-called conspiracy; right?
    A. That's correct.
    Q. At the end of the first -- third paragraph under the first heading, this document says, "The chief executives and 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;" correct?
    *5 A. That's what it says.
    Q. Now let me ask you: You would agree with me, would you not, that there is nothing per se wrong about having a public relations firm? Is there?
    A. I believe I said that yesterday when discussing this very document.
    Q. And indeed, there's nothing wrong about an industry research organization like the Tobacco Industry Research Committee having a public relations firm; is there?
    A. I don't think there's anything intrinsically wrong with an industry research group having a public relations firm, no.
    Q. Okay. Now are you aware of the fact that, in addition to submitting information to the Antitrust Division of the U.S. Department of Justice, what was then called the Department of Health, Education and Welfare of the United States government was informed about the proposed activities of the Tobacco Industry Research Committee?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: Okay. You can answer if you know.
    A. I was not aware of that, no.
    Q. Would you -- this is not in your exhibit book, so I have to hand it up to you.
    Oh, it is? All right, it's AM -- I'm sorry, Exhibit AM000604. It's not in --
    THE COURT: Do you have a tab number or something?
    MR. BLEAKLEY: Pardon?
    THE COURT: Do you have a tab number?
    MR. BLEAKLEY: It's not a tab number, Your Honor. It's a separate document there that we handed up.
    MR. GILL: AM?
    MR. BLEAKLEY: Yes, AM000604.
    THE WITNESS: Is it thick or thin?
    MR. BLEAKLEY: Depends or your viewpoint, I guess. It's about that thick  (indicating).
    THE WITNESS: 000604?
    MR. BLEAKLEY: That's it.
    THE WITNESS: I have it.
    MR. BLEAKLEY: Your Honor, have you located it yet? I apologize.
    THE COURT: Yes, I have one.
BY MR. BLEAKLEY:
    Q. Okay. Would you take a look at that exhibit.
    A. Yes, I have it.
    Q. This is a document entitled "CONFERENCE AT THE OFFICE OF THE SECRETARY OF HEALTH, EDUCATION & WELFARE."
    A. May 2nd, 1968.
    Q. Yes.
    MR. BLEAKLEY: At this time we move the admission of AM000604.
    MR. GILL: Your Honor, there's no foundation for this -- for this exhibit to be used with this witness. It's beyond the scope of his direct examination, relates to matters outside of this lawsuit. It would also contain hearsay, Your Honor.
    MR. BLEAKLEY: Well it contains hearsay, but it's an ancient document. And it is not matters outside this lawsuit, Your Honor, it has to do with the activities of the Tobacco Industry Research Committee and the extent to which they were disclosed to government authorities.
    THE COURT: I assume this is designated.
    MR. BLEAKLEY: Yes.
    THE COURT: Court will receive AM000604.
BY MR. BLEAKLEY:
    Q. Okay. You have the document in front of you; correct?
    A. I do.
    Q. And from the list of names it appears that the heads of several of the tobacco companies met with the secretary of Health, Education & Welfare; is that correct?
    A. That is correct.
    *6 Q. And with several doctors from the National Institutes of Health; is that correct?
    A. They're indicated as doctors. I don't know exactly where they're from, but the document does discuss their participation in the meeting.
    Q. And with a United States senator.
    A. I'm sorry?
    Q. And with a United States senator.
    A. Well I don't see that, but if you say that that's true, I would believe you.
    Q. Okay. The first sentence of the document says, "Secretary Cohen opened the meeting by asking Senator Clements to say a few words;" correct?
    A. Yes. But I don't believe he was a U.S. senator at this time. I think he was -- that was an honorific title because he had been a senator.
    Q. Former senator.
    A. Right.
    Q. Okay. If you turn to page five, the first full paragraph under paragraph four, it reads, "The Secretary" --
    That's referring to the secretary of Health, Education & Welfare?
    A. That's correct.
    Q. -- "stated that he was willing to start today's discussion in the area of research and that the other three areas can be discussed at subsequent meetings;" is that correct?
    A. That's what it says.
    Q. And it goes on to say, "The Senator stated that if there is a community of interest in research, how cooperation can be achieved might be a matter for discussion." See that?
    A. Yes.
    Q. So the parties to this meeting were discussing cooperation among the tobacco companies and the government on smoking-and-health research; were they not?
    A. Yes.
    Q. Would you turn over to page seven of this document. Here on page seven we see that the parties are talking about a program to develop a less-hazardous cigarette; do you see that?
    A. Yes.
    Q. A government-sponsored program to attempt to develop a less-hazardous cigarette. Do you see that?
    A. Does it say it's government-sponsored?
    Q. "Agreement has been reached that the National" -- pardon me.
    Well you know for a fact that the National Cancer --
    You know what the National Cancer Institute is; don't you?
    A. I do.
    Q. And the National Cancer Institute is a part of the National Institutes of Health.
    A. That's right.
    Q. It's one of the National Institutes of Health.
    A. It is.
    Q. And the National Institutes of Health are part -- or were in those days -- part of the Department of Health, Education and Welfare.
    A. That's right.
    Q. Okay. And you know, do you not, that the National Cancer Institute and National Institutes of Health did form a group called the Tobacco Working Group.
    A. Yes, we discussed that yesterday.
    Q. And the government and industry cooperated in the Tobacco Working Group for several years; did they not?
    A. That is correct.
    Q. And what they were talking about was trying to develop a less-hazardous cigarette; is that correct?
    A. That is correct.
    Q. And you also know that one of the recommendations of the head of the Tobacco Working Group was to develop low delivery cigarettes; wasn't it?
    *7 A. I don't recall exactly what the recommendation was. If you want to -- if that's in this document, I'd be happy to look at it.
    Q. Now let me ask you a question about the creation of the Tobacco Industry Research Committee. You're an antitrust economist. If the tobacco companies, through the Tobacco Industry Research Committee, had agreed to jointly do product research, that would raise certain antitrust concerns; wouldn't it?
    A. Yes, I think that's correct.
    Q. Potentially anti-competitive; right?
    A. As of 1954 that probably would have been viewed as anti- competitive.
    Q. Might still be anti-competitive today.
    A. Well it's less likely to be viewed as that today after amendments that were passed in 1984 that created a safe harbor for certain kinds of cooperative research.
    Q. But certainly prior to 1984, joint product research by an organization like the Tobacco Industry Research Committee would create antitrust problems; wouldn't it?
    MR. GILL: Repetitious, Your Honor.
    THE COURT: I think he's answered it.
    Q. And therefore it isn't surprising, is it, that lawyers would be involved in advising The Council for Tobacco Research and the Tobacco Industry Research Committee on whether their activities might or might not violate the antitrust laws? That wouldn't be unusual; would it?
    A. I don't think it would be unusual to have some participation by lawyers as needed to ensure that those topics of conversation and activity were avoided.
    Q. And there would be nothing surprising about a decision by the Tobacco Industry Research Committee and The Council for Tobacco Research to decide not to do product research.
    A. I think that's correct, yes.
    Q. Now let me go back for a moment to tab -- which was that, 47? Tab 47. That is the letter from the chairman of the Tobacco Industry Research Committee to the Assistant Attorney General in charge of the Antitrust Division.
    A. I have it.
    MR. GILL: Is that 290 or 289?
    MR. BLEAKLEY: It is -- yes.
    MR. GILL: Which one?
    MR. BLEAKLEY: 000289.
    MR. GILL: Okay.
    Q. Would you turn to page -- back to page seven of that document for a moment. Do you see there where it says "Limits of Power?"
    A. Yes.
    Q. I'm not sure anybody will be able to read that.
    A. I can read it.
    Q. Well you got better eyes than I.
    It reads, does it not, number IV, Roman numeral number IV, "Limits of Powers?" Right?
    A. "Limit of Powers."
    Q. "Limit of Powers." And then it says, "The purposes and objectives of the Committee" --
    That's the Tobacco Industry Research Committee; right?
    A. That's correct.
    Q. -- "are to aid and assist research into tobacco use and health, and particularly into the alleged relationship between the use of tobacco and lung cancer, and to make available to the public factual information on this subject. It is the considered judgment of the Committee that its activities shall be confined to the purposes set forth above, and that it is in nowise to be considered or to operate as a trade association or to participate in any activity, or give consideration to any matters, affecting the business conduct or activities of its members, and that its activities in every respect shall conform to law and all decrees or judgments of courts affecting or relating to the tobacco industry. To this end the Committee is proceeding under the advice of legal counsel selected from among the counsel or nominees of its members." Do you see that?
    *8 A. Yes, I do.
    Q. And this information was provided to the head of the Antitrust Division of the Department of Justice.
    A. That's correct.
    Q. Now one of the documents that you cited as being a document that was consistent with the Hill & Knowlton proposal was Exhibit 10598. Would you take a look at that.
    A. Yes, I have that.
    Q. Now you quoted the following language from this document: "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 other companies not to pursue this line. The danger was that one company might get some form of endorsement from the government for this technique."
    You read that, but that's the only thing from this document you read from the jury; wasn't it?
    A. That is correct.
    Q. And in fact the document discloses itself that L&M was developing a technique for reducing biological activity; right?
    A. That's --
    Q. The document itself says that.
    A. That's what it indicates, yes.
    Q. The portion that you cited.
    A. Yes.
    Q. That Liggett & Myers, L&M, was in fact doing biological research.
    A. Right. Although it doesn't indicate that they were doing it in their own facilities as opposed to through contract research.
    Q. No. But they were doing biological research.
    A. That's correct.
    Q. But what this document does also say --
    This is a B.A.T document; right?
    A. BATCo, yes.
    Q. BATCo document. This --
    If you turn back to page one of this document, this document reports that BATCo was doing biological research at that time; doesn't it?
    A. Yes, that's correct.
    Q. You didn't read that language; did you?
    A. That's correct.
    Q. The language on the first page, "Report by Dr. Green," "Dr. Green referred to this method of testing the nitro methane fraction developed in the Hamburg laboratory. The importance of this was that tests had some considerable measure of validity on correlation with biological tests."
    So not only was L&M doing biological research at this time, but BATCo was doing biological research at this time; right?
    A. Yes, I think that's correct.
    Q. Now turn back to page three, if you would. The paragraph immediately following the one that you read, do you see that, the one that begins with the words "As regards...?"
    A. Yes.
    Q. "As regards the companies' attitudes to research, Reynolds was undertaking more and more research and Philip Morris was not far behind them...," do you see that?
    A. Yes.
    Q. In other words, this document discloses that Reynolds was doing biological research; right?
    A. I don't think it says biological research.
    Q. What do you think it means?
    A. I don't think you can tell from the context what kind of research they're talking about here.
    Q. You can't tell. You interpreted these documents but you can't tell from this one that they're referring to biological research; is that right?
    *9 A. No. I think it says quite clearly "research," it doesn't say  "biological research," so I wouldn't interpret that to mean specifically biological research.
    Q. Isn't the --
    A. Even the previous paragraph doesn't use the phrase "biological research," so there's -- there's not really any antecedent that would lead you to believe that that is precisely what they meant there. I mean we know that -- this is 1974 -- that Reynolds had terminated its in-house biological research facilities about four years earlier. I don't question that Reynolds was doing research or that Philip Morris was doing research, although we do know from the answers to interrogatories what the total amount of that research was over the entire period.
    Q. So at the very moment that this document was prepared, the document that you cited as being consistent with the Hill & Knowlton document and the proposal in the Hill & Knowlton document, we have Reynolds, Philip Morris, B&W -- I mean BATCo and L&M, Liggett & Myers, all doing biological research; right?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: You may answer.
    A. No, I think that's directly contradictory to what I said. What I said is the document indicates that L&M was doing some kind of biological research or contracting for some kind of biological research, that BATCo was, and that beyond that what it's indicating is that the companies were doing research.
    Q. Isn't it a fact that at this point in time all four of those companies were doing biological research?
    A. I don't know exactly what Reynolds did when they shut down the Mouse House. At this time Philip Morris was paying for biological research through INBIFO in Germany. And as I've indicated, I've been able to find out less about Lorillard, but you did show me a document earlier that I introduced that showed that they were paying for biological research on a contract basis.
    And I never indicated that the Hill & Knowlton document suggested that nobody was going to do research. I think all of the documents that we looked at the last several days suggest that every one of these companies had research programs and were engaged in research of various kinds, and that in fact they were engaged in biological research on a contract basis. So nothing you've shown me suggests that this document is inconsistent with the Hill & Knowlton documents.
    Q. Now the second piece of evidence that you cited in support or as consistent with the Hill & Knowlton documents was the incident that you described with respect to the dispute between Philip Morris and Brown & Williamson about -- about Barclay cigarettes; right? You remember that?
    A. Well it was a dispute that involved Philip Morris, Brown & Williamson, BATCo and B.A.T Industries, that's correct.
    Q. And you cited that incident as evidence that the Hill & Knowlton proposal was being followed; right?
    A. Yes, I did.
    Q. Now you talked yesterday -- or perhaps it was the day before -- about zealous competition. Do you remember that?
    *10 A. Well I think there was a phrase "excessive competitive zeal" --
    Q. Right.
    A. -- which appeared in the Brown & Williamson document with respect to the Philip Morris subsidiary.
    Q. And you told the jury that blowing up your competitor's factory would be an excess of competitive zeal.
    A. Yes, I think --
    Q. Right?
    A. -- I did say that.
    Q. That's more than excessively zealous competition, it's actually illegal competition; right?
    A. Yes.
    Q. And competitors are required to abide by the law whether they're zealous or not; aren't they?
    A. Yes. I guess what I was trying to convey with that comment, which perhaps was too flippant, was that competitors are supposed to be zealous. So short of illegal behavior, it's hard for me to see how you would characterize competitive zeal as excessive.
    Q. It would also be an excess of competitive zeal to tell lies about your competitors' products; wouldn't it?
    A. Yes, I think so.
    Q. Because fair competition, promoting one's products, should be -- you should state the truth about them; right?
    A. As an economist I try to stay away from "fair." But I would agree with you that competitors should tell the truth.
    Q. And it would come as no surprise to you, therefore, that if one competitor thought another competitor was violating the law in its advertising, they would do something about it.
    A. It would not come as a surprise to me that they would do something about it, that's correct.
    Q. And there's nothing inherently anti-competitive about doing something about that; is there?
    A. There's nothing inherently anti-competitive about doing something, which you haven't specified, with respect to an illegal act by a competitor, no.
    Q. Now you testified about an advertisement that Philip Morris placed in newspapers in Holland in 1983. Remember that, Exhibit 10934?
    A. Yes.
    Q. And you told us, I believe -- and correct me if I'm not stating this exactly right -- that this advertisement was not an excess of competitive zeal.
    A. I think that's what I said, yes.
    Q. Okay. But if the advertisement contained false or misleading statements about Barclay cigarettes and therefore slandered the product, that would be an excess of competitive zeal; wouldn't it?
    A. Well if the ad contained false information -- which is not something that was highlighted as the source of the anger that was felt by BATCo, B.A.T Industries and Brown & Williamson -- then I think an argument could be made that it was an excess of competitive zeal. I haven't seen any evidence presented by those companies that this ad which reports on some information that had been provided by another organization was in fact slanderous.
    Q. You don't have any personal knowledge of whether that advertisement was true or false; do you?
    A. I have only the information that I have from the documents, which do not indicate any evidence, for example, presented by BATCo in their discussions with Philip Morris that this contained false information.
    *11 Q. Take a look, if you would, at Exhibit 11512, which is the letter to which you referred yesterday from Mr. Sheehy to Mr. Weissman.
    A. Yes, I have it.
    Q. In the first sentence of that letter, Mr. Sheehy states tha PM violated Dutch law by republishing a slander of Barclay. Do you see that?
    A. Yes, it does say that. But in my last answer, what I indicated was that he doesn't provide the evidence that it was in fact false or slanderous. He just --
    Q. And -- I'm sorry.
    A. -- asserts that it's slanderous.
    Q. But you agreed with me that you don't know whether it was true or false; do you?
    A. I don't have any information except what was presented here. And I would certainly think that if Mr. Sheehy had evidence that it was false and thereby slanderous, that he would have included that evidence in his letter to the chairman of Philip Morris.
    Q. Well let me ask you this: Do you know whether they sued Philip Morris?
    A. The letters indicate an intention to sue Philip Morris. They don't really make exactly clear how that proceeded.
    Q. Did you ever find out whether they sued Philip Morris, BATCo sued Philip Morris?
    A. I didn't find that out. As I said yesterday, part of what is important about this incident to me is not what Philip Morris did and whether or not it was in fact illegal in Holland, but what we see, for example, in the BATCo document and in the Brown & Williamson document, is that what they were concerned about, what BATCo was concerned about and what Brown & Williamson was concerned about does not appear to have been that it was a violation of Dutch law, but rather what it indicated about the breakdown of industry cooperation. So it wasn't important for my opinion to attempt to determine whether in fact Philip Morris was sued in Holland.
    Q. Your opinion is, based on your reading of that letter, that BATCo wasn't really worried about whether it violated the law; is that right?
    A. Well it wasn't this letter, it was the document that we looked at yesterday, which was a memorandum to the No. 1s of the operating companies that explicitly stated that their -- the first thing they raise as the source of their concern is that there was a breakdown in industry cooperation.
    Q. Turn to Exhibit 10933, please.
    MR. GILL: Your Honor, excuse me, I'm not sure if the witness had completed his answer there.
    THE WITNESS: I think I was finished, yes.
    A. I have it.
    Q. This is another document that you showed the jury yesterday, and you read the language in the numbered paragraphs one and two, but you didn't read the balance of the language on that page.
    MR. GILL: That assumes facts not in evidence, Your Honor.
    Q. "Our lawyers in Holland immediately advised the Philip Morris company that they were breaking the Dutch law in three ways, namely:
    "Using comparative advertising
    "Using misleading advertising," and
    "Infringing the Trade Descriptions Act...." Do you see that?
    *12 A. Yes. I discussed that language specifically yesterday and expressed the opinion that you can tell from the memo that the first issue that's raised at the top is the raising the health issue and the quoting a report, and that only after that do they get to the issue of breaking the law. I didn't conceal that from the jury.
    Q. Do you know whether Philip Morris agreed to publish a retraction?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: Sustained.
    MR. BLEAKLEY: I asked whether he knew.
    THE COURT: Sustained.
    Q. Do you know whether Philip Morris published a retraction?
    MR. GILL: Same question, Your Honor. Same objection.
    THE COURT: Sustained.
    Q. Do you know whether legal proceedings were instituted by BATCo against Philip Morris in Holland?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: Okay. I think that's been asked once.
    Q. Do you know whether BATCo filed lawsuits against Philip Morris in other countries on the same subject matter.
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: You can answer if you know.
    A. I haven't seen any evidence of that, no.
    Q. Is it your belief that this was the end of the dispute between Philip Morris and BATCo about Barclay?
    A. I -- no, I don't -- I don't know one way or the other. This is the information that -- that I have regarding specifically this advertisement. I know that there was additional discussion in the United States regarding Barclay, and I don't recall exactly what role Philip Morris played in that.
    Q. You didn't do research to find out exactly what happened with that dispute in the United States?
    A. Well I've looked at the information that I found about it, and it doesn't seem to bear directly on this competitive issue, and so I -- I haven't done anything more with it.
    Q. Do you know whether Philip Morris complained to the Federal Trade Commission?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: Sustained.
    Q. Did the Federal Trade Commission bring a lawsuit against Brown & Williamson?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: The objection is sustained.
    Q. Isn't it a fact that the battle between Philip Morris and Brown & Williamson and BATCo over Barclay advertising continued in the courts for several years?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    THE COURT: If you know it, you can answer it.
    A. I don't know if that's true or not.
    Q. I want you to assume for the moment that BATCo filed suit against Philip Morris in several countries and that Philip Morris complained to the Federal Trade Commission and that the Federal Trade Commission brought an action all relating to the Barclay advertising. Does that sound like two companies engaged in a conspiracy?
    MR. GILL: Your Honor, no predicate for that hypothetical.
    THE COURT: Do you have any basis for that hypothetical, counsel?
    *13 MR. BLEAKLEY: Yes, I do.
    THE COURT: Okay. Let's have it.
    MR. BLEAKLEY: Do you want me to bring it to the side-bar, Your Honor?
    THE COURT: Give it to the witness.
    MR. BLEAKLEY: Okay.
BY MR. BLEAKLEY:
    Q. Do you have before you, professor, Exhibit GL0000 -- I don't remember how many I said -- five zeroes one?
    A. Does it have a tab?
    Q. It's not a tab, it's a separate document there.
    A. Okay.
    Q. GL000001.
    A. Okay. It's here.
    MR. GILL: I don't believe that I have it.
 (Document handed to Mr. Gill.)
    MR. GILL: Your Honor, this particular document was designated at eight o'clock last night. Prior to that defendants had designated over a hundred documents, which this witness has reviewed. I did not show him documents that came in at eight o'clock last night, which I didn't even see until nine. I believe the witness was in bed.
    MR. BLEAKLEY: Your Honor, both sides in a case this complicated have designated exhibits late. It's almost inevitable in a proceeding this long.  There has not been a witness yet in this case in which plaintiffs have not designated exhibits late. It happens. It's part of life in a case like this.
    THE COURT: I wish I could have gone to bed that early.
 (Laughter.)
    MR. GILL: Your Honor, there were four other exhibits that were designated late, we made no objections to those, but with regard to five exhibits that we were provided last night, which I saw at nine o'clock, which are about three inches thick and comprise over 300 pages, I did not give those to the witness after he'd already reviewed over a hundred documents.
    THE COURT: Well as I view GL000001, this looks like the citation to a case. Is that correct?
    MR. BLEAKLEY: Yes, Your Honor.
    THE COURT: Okay.
    MR. BLEAKLEY: The decision of the United States Court of Appeals for the District of Columbia Circuit.
    THE COURT: Are you going to qualify him as an attorney here, counsel?
    MR. BLEAKLEY: No.
    THE COURT: All right.
    MR. BLEAKLEY: I just want to know if he knows about it.
    THE COURT: You can answer the question.
    A. I don't know about it.
    Q. Have you ever seen it before?
    A. I don't believe I've seen it before.
    MR. BLEAKLEY: So he doesn't know about the Federal Trade Commission action, and I won't ask any more questions about it.
    Q. Now let's get to the prongs, I think was the term you used, of the alleged conspiracy, the first of which was that the defendants would do no in- house animal research; is that right?
    A. Relating to smoking and health.
    Q. Relating to smoking and health.
    A. That's correct.
    Q. So this prong of the conspiracy did not forbid biological research other than animal research; right?
    A. Well I think as we talked about yesterday, that's a little bit unclear. Dr. Wakeham in his deposition characterized it more broadly; they would have included any biological research relating to smoking and health. A number of the documents describe it as an agreement not to engage in animal research in- house. And I haven't reached the specific opinion about how broad it was.
    *14 Q. But it had -- at least as you described this prong of the conspiracy, it applied only to animal research, not to other biological research, and only to in-house animal research, not to contract research; right?
    A. Well it certainly didn't apply to contract research. I guess I would prefer my characterization with respect to the animal issue, which was that it clearly -- that was a major focus of it, but that it may have been broader than that.
    Q. Did you not also say yesterday -- and if I -- I don't mean to put words in your mouth -- that animal research was forbidden under this agreement only if it involved intact animals?
    A. I think one of the documents phrases it that way, but I don't think in general it was characterized or phrased that way.
    Q. But at least one document does.
    A. I think there was one document that describes it that way, yes.
    Q. Now we know, do we not, that most if not all of the defendants did biological research throughout the '60s, '70s, '80s, and are still doing it today; right?
    A. I don't know about throughout. We do know that most of the defendants if not all of the defendants, perhaps, did biological research on a contract basis for significant periods of time in the '60s, '70s, and '80s. But of course we also know, based on Dr. Wakeham's memo and the discussion of the scientists at American Tobacco, precisely why research done on a contract basis was a less- effective way to do that research if the objective was commercial competitive advantage.
    Q. Do you have any personal knowledge of whether or not doing biological research by contract was inadequate?
    A. I don't have personal knowledge, but I do have knowledge as an expert on the economics of research and development. I mean this is a topic that people have written on. There is literature in the economics literature about why it is that research, particularly research relating or leading to product development, is more effective when done on an in-house basis. And interestingly, what the economics literature says about this, which is that when you do it at arm's length, you don't have as much control of it, it's harder to integrate it with the other activities of the company, it's harder to keep it secret, and it's harder to ensure that you exploit the maximum advantage of it, is very similar to the arguments that are articulated by the company scientists in the documents as to why doing it on a contract basis was not as effective.
    Q. Well you have two company documents in which two individual people expressed concerns; right?
    A. Well it's certainly more than two people, because at American it was both Dr. Harlan and Dr. Harlow. And I believe there are other documents that expressed a similar or related idea, but I can't recall them as I sit here.
    Q. And you didn't bring them to the attention of the ladies and gentlemen of the jury; did you?
    A. I -- I couldn't bring all of the documents that had something related to my opinions to the attention of the jury or we would have been here even longer.
    *15 Q. Now let me make sure I heard -- heard you right on one thing. Is it your testimony that these companies were not doing biological research, other than animal research in-house, throughout most of this period?
    A. I'm sorry, that question had two negatives in it. Are you asking me whether they did biological research other than animal research?
    Q. Well we have -- let me try it again.
    A. Okay.
    Q. We have biological research.
    A. Right.
    Q. One component of which or one kind of biological research is animal research; right?
    A. That's correct.
    Q. There's lots of other biological research.
    A. There are other kinds of biological research.
    Q. And those other kinds of biological research these companies were doing throughout the '60s, '70s, '80s and '90s; right?
    A. On a contract basis.
    Q. In-house.
    A. Well actually I haven't seen much evidence of that in the documents.
    Q. You don't know one way or the other; do you?
    A. Well I -- I know what's said by the experts about the, for example, the Mouse House being closed and what happened to the activities that were going on there. They didn't say, "Well we got rid of all the mice and rabbits but we continued the other biological activities." What they said was "We shut down the biological section" and the head of the biological section eventually moved on to another company. So I would say overall the evidence from the depositions and from the documents doesn't really indicate that there was significant biological research other than animals, although that's harder to tell because they're not as specific about that kind of research.
    Q. So the answer is you don't know.
    A. The answer --
    MR. GILL: Your Honor, that assumes facts not in evidence. He just answered the question.
    THE COURT: I think it's been answered.
    Q. Take a look, if you would, at Exhibit 12513, tab five. I'm sorry, tab five in our book.
    A. Ah. Okay.
    Q. I don't know if that's easier or not, but --
    A. I have tab five.
    Q. Okay. This is the RJR document entitled "BIOLOGICAL/CONSUMER PREFERENCE RESEARCH CONDUCTED BY PHILIP MORRIS?"
    A. Yes.
    Q. Do you remember that? This is the document that you referred to, I believe it was yesterday. May have been the day before.
    A. Yes, I did. It's a pretty long document, I'm just --
    Q. Turn to page 397, to the page Bates stamped 397.
    A. The last three digits?
    Q. Yes, I'm sorry, the last three digits.
    A. All of my last three digits are in four hundreds --
    Q. I'm sorry.
    A. -- and five hundreds.
    Q. Well let me ask you a general question first: If there was an agreement not to conduct in-house animal research, this document shows that at this point in time there were at least two companies who were violating it; doesn't it?
    A. I'm not sure what you mean.
    Q. Well let me ask you the question differently. Isn't it a fact that the documents that you have reviewed in this case show that on numerous occasions, one or more of the companies that you say are part of a conspiracy violated that agreement?
    *16 A. I think what the evidence shows is that Reynolds violated the agreement for several years in the late '60s, and we've seen the consequences of that as a result of the phone call from Philip Morris. That Reynolds understood that Philip Morris was doing research through INBIFO in Germany, so that although it was in- house, it was not in the United States. And as I testified yesterday, I think probably that was unclear as to whether the conspiracy was supposed to extend to research by U.S. companies through their subsidiaries abroad. And it's possible that there were other occurrences where the conspiracy was violated, but I don't think the evidence indicates that that was by any means a sustained or common occurrence beyond the ones that we've talked about.
    Q. Okay. So we have this conspiracy. It's not entirely clear whether it was limited to in-house, or it's not entirely clear whether it was limited to animal or biological research, it's not entirely clear whether it was limited to intact animals or not, and it's not entirely clear whether in-house included or excluded research centers that you might have in another country; is that right?
    A. Yes, I think that's right. It's very hard when you are engaged in tacit collusion and you can't write these things down and sign contracts to cover all eventualities that might arise with respect to the agreement, and so it's natural that the boundaries of that illegal collusive agreement would be somewhat unclear.
    Q. Now the other pages of this document that we looked at yesterday at tab five, Exhibit No. 12513, go on to describe in great detail Philip Morris's very extensive biological research program; right?
    A. Are you talking about the research program at INBIFO?
    Q. I'm talking about Philip Morris's research program. INBIFO was part of Philip Morris; was it not?
    MR. GILL: Can we have a page reference, Your Honor?
    MR. BLEAKLEY: Well the rest of the pages.
    Q. All of the rest of the pages of this agreement describe in great detail the biological research that is being undertaken by Philip Morris.
    THE COURT: Could you note the page numbers for us, please?
    MR. BLEAKLEY: Well we'll start at -- I'm having the same trouble Mr. Gill did of reading some of this small print, but --
    THE COURT: I think the witness is the only one of us that has good eyes.
    MR. BLEAKLEY: Yes, I think -- that's actually, Your Honor, a good point.
    Q. Well let's start with page 3471, title of which is "PM SMOKING AND RESEARCH AND DEVELOPMENT -- SMOKING RESEARCH AND DEVELOPMENT ACTIVITIES" and has several bullet points there. Do you see that, professor?
    A. Yes.
    Q. First describes the staffing and facility, and the second bullet point is biological activities excluding nicotine analogs. Then it goes on to describe in-house research at Richmond. That's Richmond, Virginia; isn't it?
    A. I believe so, yes.
    Q. In the United States; right?
    A. That's correct.
    Q. Cologne, that's --
    *17 A. Germany.
    Q. -- Germany. That's INBIFO.
    A. I believe so, yes.
    Q. Part of Philip Morris.
    A. Correct.
    Q. And then Neuchatel.
    A. Which I think is also in Europe.
    Q. In Switzerland.
    A. Yes.
    Q. Okay. Then go over to the Bates stamp -- the page Bates stamped 3472, reads "PM has been very active in biological research." Do you see that?
    A. Yes.
    Q. Later down the page it says, "PM has had in-house animal facilities or access to such facilities since 1968, perhaps since 1966...." Do you see that?
    A. Right. So they're talking about INBIFO, for example.
    Q. Well we just saw over on the back -- last page that in- house research referred to Richmond, Virginia as well as Cologne; didn't we?
    Q. Yes. But later in this document they refer specifically to the fact that where they're violating the agreement is in -- through INBIFO in Cologne -- in Cologne.
    Q. So the conspiracy was being adhered to by Philip Morris conducting the animal research in Cologne, but it was doing the non-animal research that wasn't prohibited by the agreement in Richmond, Virginia?
    A. That's one possible interpretation.
    Q. Turn to page 3499. You got that, page 3499?
    A. Yes.
    Q. That reads "BIOMEDICAL SMOKING-HEALTH ACTIVITIES?" See that?
    A. Yes.
    Q. They are still talking about Philip Morris; aren't they?
    A. Yes, they are.
    Q. Then it says "IN-HOUSE RESEARCH?"
    A. Yes.
    Q. "Animals used in behavioral research in Richmond;" right?
    A. Right. Behavioral research.
    Q. Oh. So we have another exclusion from the conspiracy.
    A. I don't -- I don't know what this refers to, but I'm --
    Q. Animal research is forbidden, but not if it's behavioral research.
    A. I didn't say that. I was just noting that that's what the document indicates --
    Q. All right.
    A. -- is going on in Richmond.
    Q. Turn to page 3508, if you would. Reference to slide six there.
    A. Yes.
    Q. Talking about the staffing and facilities at PM's research facility?
    A. Yes.
    Q. It reads, "In Richmond, Philip Morris's R&D department has one group called "Basic Research and Extramural Activities" under Tom -- Dr. Tom Osdene. It numbers 86, of whom 80 are involved in research" and in collecting and critiquing smoking-health literature. Do you see that?
    A. Yes.
    Q. Now let's turn to a couple of the other exhibits that you referred to. First is Trial Exhibit 2544, which is tab six in our book.
    A. I have that.
    Q. This is the document in which Dr. Wakeham is proposing that Philip Morris conduct in-house biological research?
    A. Yes.
    Q. So what Dr. Wakeham, the head of research and development for Philip Morris, is proposing is a violation of this alleged agreement; right?
    A. He states that himself later on, that he realizes that this is inconsistent with the gentlemen's agreement, but he thinks they should do it anyway. And we know that Mr. Cullman did not, apparently, give that a very favorable response.
    *18 Q. Go on to Exhibit 10257.
    A. Which --
    Q. Which is tab seven --
    A. Okay.
    Q. -- of the book, Trial Exhibit 10257.
    A. Yes, I have it.
    Q. In this memo also, Dr. Wakeham is proposing that Philip Morris conduct in-house biological research; right?
    A. Yes. He was persistent in his belief that that was an important thing for Philip Morris to do.
    Q. And going back to Exhibit 2544, the first of the memoranda from Mr. Wakeham, turn over to page four of that exhibit, would you please.
    A. Of the draft?
    Q. Of the draft. Down at the bottom of the paragraph that begins near the bottom of the page 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" in their own facilities; is that right?
    A. That's what he believed. But as we discussed yesterday, with the exception of Reynolds, it appears that he was incorrect. He thought that American was doing it, but we know from the document describing Janet Brown's meeting with Drs. Harlan and Harlow that they were getting ready -- they were -- they got ready to do it, they wanted to do it, but they didn't. And we know from the discussion of Lorillard and Brown & Williamson in their deposition testimony that there really isn't any evidence that in fact they were doing biological research in-house. So he was -- he thought that that was happening, but it -- the evidence is that, with the exception of Reynolds, which Philip Morris took care of, he was incorrect.
    Q. So your testimony here today still is that these companies were not doing biological research in-house; is that right?
    A. I think we've been over this. I -- I said that they --
    It's unclear in some contexts, you know, whether that's just animals or whether it's all biological research, but that the documentary evidence indicates that for the most part the companies did not do biological research, particularly animal research in- house.
    Q. Now let's talk about what you describe as the Mouse House for a moment. Did the documents that you reviewed reveal that --
    This was the biological research, BRD, which was known as BRD at RJR; right?
    A. Okay.
    Q. Do you know that?
    A. I don't particularly remember that designation, no.
    Q. You just remember the Mouse House.
    A. Or the biological facilities at the Reynolds research facility.
    Q. Do you know that the BRD at RJR was doing pharmaceutical work in anticipation of RJR's acquiring a drug company?
    MR. GILL: Assumes facts not in evidence, Your Honor.
    MR. BLEAKLEY: "Do you know." I'm asking if he knows it.
    THE COURT: You can answer it if you know.
    A. I've seen documents that describe a variety of things they were doing. I don't remember whether that was part of it or not.
    Q. And do you know whether RJR did in fact buy pharmaceutical -- a drug company?
    A. I don't know.
    Q. Do you know whether or not BRD was doing fine chemical work?
    *19 A. I don't recall.
    Q. Do you know whether in fact RJR ever diversified into fine chemicals?
    A. I don't know.
    Q. Do you know whether BRD was doing starch work for Penick & Ford, the food company owned by RJR?
    MR. GILL: Again assumes facts not in evidence, Your Honor.
    THE COURT: You can answer it if you know.
    A. I don't know.
    Q. Do you know that RJR sold Penick & Ford pursuant to an order of the Federal Trade Commission?
    MR. GILL: Now counsel is testifying, Your Honor.
    THE COURT: You're starting to testify, counsel.
    MR. BLEAKLEY: I'm sorry. I apologize.
BY MR. BLEAKLEY:
    Q. Do you know whether RJR disposed of Penick & Ford or not?
    A. I saw some documents that you designated that talked about that, but it didn't -- doesn't matter to me if there were other things that were part of the biological research division. It's clear from the documents that we've seen that one of the things that was very much going on there was the smoking inhalation work, the work with rats and rabbits, and that that was conveyed to Philip Morris and that that was a concern of Philip Morris, and the facts clearly show that the result of that set of conversations was that the facility was closed. If they were doing other things there as well, I don't see how that relates to the fact that it was in fact closed.
    Q. It is your opinion, based on a review of the documents, that that's why that laboratory was closed; right?
    A. I've expressed that opinion. I think the documents show that quite clearly.
    Q. You believe the documents show that, but that's not what Mr. Senkus -- Dr. Senkus said; is it?
    A. It's not what Dr. Senkus said. Dr. Senkus gave an explanation which really doesn't seem to be consistent with other facts.
    Q. Which included significant changes that RJR had made about the direction of its company and what kind of products it was going to be in and what kind of research that it did. Isn't -- did -- did he not testify to that?
    A. Yes. But I don't understand why decisions regarding their pharmaceutical business or their starch business would explain why they would terminate their experiments with having animals inhale cigarette smoke.
    Q. But that wasn't a decision that you had to make; was it?
    MR. GILL: Objection, Your Honor, argumentative.
    THE COURT: It's argumentative.
BY MR. BLEAKLEY:
    Q. Well you would agree with me, would you not, that if a company that has been doing research in a variety of areas and gets out of a substantial number of those businesses or doesn't diversify into them, that that could be a perfectly legitimate reason for closing the laboratory?
    A. Hypothetically that could be a perfectly reason for -- legitimate reason for closing the laboratory.
    Q. You just don't accept it in this case.
    A. Well I said hypothetically. You -- you didn't describe a set of facts that overall corresponded to the set of facts in this case.
    Q. Correspond to your opinion of the facts in this case.
    *20 MR. GILL: Argumentative, Your Honor.
    THE COURT: You can answer.
    A. Well there are certain things that are -- that are facts, I think. They were doing -- we had multiple documents indicating that they were doing experiments, they'd been doing them for a number of years, in which animals were inhaling cigarette smoke. We have an account, a very detailed account which corresponds very closely to all the documentary evidence. Those are facts.
    MR. BLEAKLEY: Would this be an appropriate time for a break, Your Honor?
    THE COURT: All right. We'll take a recess.
    THE CLERK: Court stands in recess.
 (Recess taken.)
    THE CLERK: The court stands in recess for the day, to reconvene Monday morning at 9:30.
 (Recess taken.)

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