Chapter 34, Part 1

By Frank Tursi, Susan E. White and Steve McQuilkin
JOURNAL REPORTERS
© 1999 Winston-Salem Journal

The paper sign taped to the metal door inside the nondescript office building reads simply: R.J. Reynolds.

Behind the door, a towering maze of dingy brown cardboard boxes is stacked from the floor to the ceiling. Inside the boxes are millions of pages of once-secret memos, reports, surveys and clippings -- all copied from RJR's files. Down the hall, other rooms are filled to capacity with similar boxes containing paperwork from Philip Morris, Brown & Williamson, Lorillard, Liggett, the Council for Tobacco Research, and the Tobacco Institute.

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

Some 30 million pages of cigarette-industry documents are housed at the depository in St. Paul, Minn. To plaintiffs' lawyers, the building and the documents inside are a milestone victory in the 40-year tobacco war. To the cigarette companies, they are simple reminders of a failed peace accord.

In June 1997, the nation's attorneys general announced to the world that they had signed a $368.5 billion agreement with the tobacco industry. The settlement was supposed to end the states' Medicaid lawsuits and force cigarette companies to make significant changes in the way they operated. At the time, the only thing missing was approval from Congress. It didn't come.

Instead, by April 1998, the tobacco industry -- led by Steven Goldstone, the chief executive of RJR Nabisco -- announced that it was pulling out of the settlement, which by then had ballooned to a $506-billion agreement. By walking away, the industry left itself vulnerable to litigation. Though three states had settled -- Mississippi, Texas and Florida -- a national settlement would have wiped out the 40 remaining state Medicaid cases still facing the companies. Now the industry had to prepare to defend each one.

It wasn't a fight to look forward to. The companies' legal costs would certainly climb. But the biggest concern lay with the courts. If the states won their cases, the companies might be forced to deal with 40 different regulations on selling cigarettes. The industry had faced a similar fight 30 years earlier when states started to push for their own version of the cigarette warning label.

For tobacco lawyers, the legal nightmare would begin in Minnesota. The case would have resounding repercussions and force tobacco and the states' attorneys general back to the bargaining table.

Ready to Fight

From the moment Minnesota Attorney General Hubert "Skip" Humphrey saw the 1997 proposed settlement, he knew he couldn't sign it. It was just too lenient. Proposals for the Food and Drug Administration to regulate tobacco fell short, as did punitive damage awards. The settlement also protected the companies from future litigation and from acknowledging a connection between smoking and illness.

''This fight was supposed to be about lies and cover-ups, but this deal allows lies and cover-ups to live on,'' Humphrey said after reviewing the agreement. ''No other business in America gets that kind of special treatment, and that's outrageous.''

Tobacco executives had promised in 1954 that they would put consumers' health above any other considerations. Yet early discoveries in the Minnesota case had unearthed documents showing that the companies knew that smoking was dangerous and that they had hidden that from the public. Some memos suggested at least one company had altered the levels of nicotine in its cigarettes, while others showed the industry's interest in teen smokers.

Humphrey believed that the tobacco companies needed to be severely punished. A settlement -- or at least the one being batted around Capitol Hill at the time -- wasn't enough.

''We need to change the way in which this industry operates so that we can begin to help people change the way in which they approach the issue of smoking and their attitudes toward tobacco,'' Humphrey said.

Michael Ciresi, whom Humphrey chose to represent the state, couldn't have agreed more. Ciresi had been contemplating a tobacco lawsuit since the late 1980s. After hearing of Humphrey's interest in a case, the timing finally seemed right to file.

But Minnesota's lawsuit would have to be different. Humphrey eventually teamed up with the state's Blue Cross/Blue Shield to file a joint suit. It was the first time a private business had pursued such a case.

One thing was clear: Individual cases just didn't cut it anymore. Even class actions weren't making it very far in the courts. Only one had managed to get any money out of the industry.

In October 1997, tobacco companies agreed to pay $349 million to a research foundation to settle a class-action filed by flight attendants who claimed they became sick from second-hand smoke on airplanes. The case was named after lead plaintiff Norma Broin and involved about 60,000 nonsmoking flight attendants. The plaintiffs charged that they suffered from cancer and other smoking-related illnesses from years of flying aboard airplanes before smoking was banned on domestic flights in 1990.

The tobacco industry refused to give any money to the individual plaintiffs but did agree to pay Broin's lawyers, Stanley and Susan Rosenblatt, $46 million in legal fees. That the plaintiffs' attorneys would accept such an unheard-of sum only justified what industry lawyers had been saying all along: These cases were about money.

In Minnesota, tobacco lawyers applied much of the same reasoning, though they also criticized Humphrey for using the lawsuit for political gains. The son of the late Sen. Hubert Humphrey, he was running for governor in 1998 (He lost to Jesse Ventura in a three-way race.). Humphrey was accused of trying to legislate public policy through the legal system. Minnesota collected more than $175 million a year from excise taxes on cigarettes. The state could use that money to pay for Medicaid expenses, the industry argued. And of course it could ban smoking, which the state had once done, briefly, 100 years before.

It wasn't publicly known at the time, but the industry was doing some campaigning of its own. In January 1995, the companies had begun secretly paying various groups not associated with tobacco to help push through tort-reform legislation in Minnesota and elsewhere. The companies wanted to make it more difficult for states to sue cigarette manufacturers and pushed for laws that would limit their liability, place caps on punitive damages and limit lawyers' contingency fees. The strategy ultimately failed, though the industry's actions weren't that surprising. Tobacco had a history of influencing public policy.

Now, the companies faced their biggest legal threat. Each of the states' lawsuits was a ''bet-the-company'' case. One loss could potentially spur others and ultimately bankrupt the entire industry.

Minnesota's lawsuit was unique and raised the level of uncertainty. It charged that the companies violated consumer-fraud and antitrust laws. Specifically, the lawsuit accused the companies of conspiring to promote products that they knew were harmful, including addictive, while suppressing research that could have led to the development of a safer product. The lawsuit asked for $1.77 billion to reimburse Medicaid money spent on sick smokers and unlimited punitive damages.

Minnesota lawyers believed that the industry's documents were the key to a guilty verdict. Many had been made public in the last 10 years, but Ciresi wanted more.

The Great Flood

Reynolds' lawyers still shake their heads over how many documents RJR and the other companies produced in Minnesota. Before the attorneys general lawsuits, Reynolds had turned over nearly 700,000 different pieces of paper in the past 40 years of lawsuits. In Minnesota, RJR would produce about six million pages of paper.

''. . . Particularly with the Minnesota case, it became a whole new world,'' said Thomas McKim, RJR's assistant general counsel. ''Everything was open for discovery. Every brand was at issue. Every disease was at issue. So in many respects, we and the other companies had to go back and look for collections of documents that had never before been implicated.''

The discovery request was so broad, in fact, that Reynolds brought in about 100 people just to sort through files. It took more than three years for Minnesota lawyers to accumulate all the requested documents. Tobacco attorneys say that the magnitude of the request overwhelmed the companies. But the plaintiffs accused the industry of delaying production to cover up or to destroy damaging material.

Minnesota Judge Kenneth Fitzpatrick ultimately agreed with the plaintiffs and demanded that the industry turn over its documents. The first order involved more than 800 memos, reports and other material, which had been improperly protected by claims of attorney-client privilege. Word of the documents sent the media into a frenzy. In an odd twist, one of tobacco's best friends in Washington, Rep. Thomas Bliley, a Republican from Virginia, demanded that the companies also turn over copies to him so that Congress could review them.

''If the tobacco industry engaged in criminal or fraudulent activities, then Congress has a right -- a duty -- to know before legislation is enacted granting the industry any form of immunity against the lawsuits,'' Bliley told members of the House Commerce Committee, which he chairs. Many suspected that Bliley was just angry that he had not been included in the settlement negotiations.

Months later, the industry's documents would again be at the center of controversy. This time, the companies claimed attorney-client privileges on 39,000 documents, which had been randomly pulled from several hundred thousand others. Again, the plaintiffs' attorneys suspected that the privilege claims were being used to keep incriminating documents out of their hands. An independent lawyer assigned to review them eventually concluded that the tobacco companies had abused the attorney-client shield and ordered that the material be released.

The industry took the matter to the U.S. Supreme Court, but it refused to hear the case and let the original order to release the documents stand. The decision, industry lawyers maintained, sent a ''chilling message'' to trial lawyers that the attorney-client privilege was no longer sacred. ''For the future of the plaintiffs' firm, I think it will stand as precedence,'' Charles Blixt, an executive vice president and RJR's general counsel, said of Minnesota's discovery process. ''It will haunt American industry for a long time.''

Humphrey, on the other hand, celebrated. ''This is the truth that we have been seeking. Now the American people will know, and justice is going to be done.''

Hearing of the Supreme Court's ruling, Bliley stepped in again and ordered that copies of the 39,000 documents be handed over to Congress. Once Bliley received them, he posted them on the Internet, giving the public access to some of the most sensitive material ever released by the industry.

But Bliley's postings had some errors. Documents meant to be kept private were released. The most damaging to the industry and to Reynolds was a 400-page memo drafted in 1985 by RJR attorneys at the Cleveland law firm of Jones, Day, Reavis & Pogue. Known as the Corporate Activity Project, the document traces the legal strategies used to defend RJR and other tobacco companies. It outlines how Reynolds occasionally destroyed or suppressed smoking research and, among other things, conspired with other cigarette companies to deny that smoking causes cancer or other health problems. The memo also indicates that tobacco lawyers directed much of the action, primarily to keep the company from being harmed in court.

An accompanying 104-page memo, which was also written by Jones, Day attorneys, was also accidentally released at the same time and details RJR lawyers' involvement with science and research.

The Corporate Activity memo remains one of the more intriguing documents released over the years. RJR's lawyers have fought to keep it out of court. Paul Crist, a partner with Jones, Day and one of the primary authors of the memo, refuses to discuss it in detail because doing so would release the document's attorney-client privilege. Crist will only say that the memo wasn't meant to be objective.

''This document was not written to set forth facts,'' he said. ''This document was written to set forth allegations, to set forth plaintiffs' perspectives and to set forth the kinds of claims that we expected plaintiffs to make based on our effort to reconstruct what plaintiffs were in fact saying. There are passages in which there are at least fumbling attempts to begin to try to figure out how to respond to some of those things.''

Regardless, the Reynolds documents and others like them were more damning than any single witness. Somebody had to answer for the industry's actions. The tenacious Ciresi was prepared to interrogate.

The Defending President

Andy Schindler, the president of Reynolds Tobacco, was exasperated. Minnesota plaintiff's attorney Michael Ciresi had begun hammering away at him almost from the moment he had sat down at the witness stand. Schindler had never testified in a tobacco trial and had been warned about Ciresi, who had a reputation for using theatrics in the courtroom.

The topic at the moment was youth marketing and whether Reynolds had targeted underage smokers. One document produced during the trial was a November 1974 report outlining the company's marketing goals that included nabbing more of the 14-to-24-age group since young smokers were expected to account for a ''key share of the cigarette volume for the next 25 years.''

Ciresi had hounded Philip Morris CEO Geoffrey Bible on the same subject, even getting him to say that he was ''embarrassed'' and ''ashamed'' by formerly secret documents showing his company's interest in teen smokers. Now the attorney seemed determined to get Schindler to admit the same. Was it wrong to even look at that age group? Ciresi asked.

''I think they were wrong to be doing analysis of brand selections from people who were 14, 15 and 16 years old,'' Schindler said. ''We don't do that today. It shouldn't have been done, in my opinion. And I'm not ashamed of that. I think it was wrong. My personal belief is you don't market cigarettes to people under the legal age to buy the product. If you did that, that would be something to be ashamed of. That is clearly to me unethical. If you start analyzing brand traces of underage (smokers) to project future markets. . . I think it's stupid. . . and it's unnecessary.''

Schindler's comments weren't earth-shattering. Even so, top-ranking tobacco executives had never made such bold statements before. There was no reason to. Now, current executives were being forced to answer for the actions of others.

It remains a touchy subject. The problem, as Goldstone noted, is that there are no easy explanations.

''Some people say silly things and do silly things,'' said Goldstone, the chairman and chief executive of RJR Nabisco until its recent breakup. ''It's up to the top people in the company to make sure that silly things are not done at a companywide level. A lot of this stuff you do have to look at in hindsight. The tobacco industry in the 1950s and '60s operated in a very different environment than it does today.''

The Final Countdown

By May 1998, it was clear that times had changed. Word was that the tobacco companies were considering settling with Minnesota for an estimated $5 billion. The trial, which had begun four months earlier, was now in its final hours. Both sides were preparing to give closing arguments, though settlement discussions had recently intensified. Time was running out.

Humphrey was willing to send the case to the jury, but if he could accomplish his goals through a settlement, then he was ready to deal. On May 8, less than an hour before Ciresi was scheduled to give his closing, the state and tobacco settled for $6.1 billion. Blue Cross/Blue Shield was to be paid an additional $469 million.

''When we launched this historic lawsuit against the tobacco cartel, the critics said we'd never prevail against this powerful industry,'' Humphrey said at a press conference. ''Today, the tobacco industry has surrendered on our terms.''

Minnesota's victory celebration disgusted the tobacco lawyers, who believed the trial was so tainted with errors and that Judge Fitzpatrick was so biased that the companies never had a chance. They had to settle.

''We agreed to the settlement because we concluded that it would be extremely difficult to reach a fair outcome based on what we believe are a series of incorrect rulings by the court favoring the state, which in essence placed a loaded gun to our head,'' RJR wrote in a press release.

''When the government decides to use its coercive powers against a politically unpopular industry it can ultimately produce any result it wants regardless of the merits.''

At least one tobacco executive, however, has said that the reasons for settling were a little more complicated. It was done primarily to save Reynolds, which some industry insiders believed would go bankrupt if the jury leveled a hefty verdict against the companies.

''If they'd have listened to me, we would have gone to verdict in Minnesota,'' Laurence Tisch, the CEO of Lorillard, said last year. ''And I would have appealed if we lost. But RJR couldn't have survived that.''

Not so, say Reynolds' lawyers.

''It's just 180 degrees wrong. We were prepared to go to jury,'' said Blixt.

By settling, the industry agreed to a long list of demands. The companies couldn't use marketing that appeared to target minors and it could no longer advertise on billboards, buses or in transit areas. It also couldn't distribute promotional items such as T-shirts, hats and coats. And it had to close the Council for Tobacco Research, the Washington group accused of controlling unfavorable research.

For Humphrey, one of the sweetest parts of the deal was getting to keep the Minnesota document depository open for 10 years. Though his legal team had revealed lies and cover-ups, Humphrey expected that there was plenty still hidden among the 33 million pages of documents on file.

''I hope that it (the agreement) will ultimately be the foundation for a dramatic attitudinal change throughout the world about the use of tobacco and nicotine in tobacco products,'' Humphrey said.

The industry had settled with Mississippi, Texas, Florida and now Minnesota. But other states were still preparing for trial, including Washington. Tobacco just couldn't take many more hits like the one in Minnesota. What the companies needed was a peacemaker. They would get two. (Smoked: The Inside Story of the Minnesota Tobacco Trial footnote, detailed look at Minnesota's lawsuit.)

• Coming Saturday: Calming the Storm.