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 ci