Defendants' Efforts to Develop/Market Potentially Less Hazardous Non-Conventional Products

Philip Morris

Accord

¶1857. In the early 1970s, Philip Morris began work on Project Delta, an early, but important, precursor to the electrically heated cigarette. Farone TT, 10/7/04 Tr., 1841:21-1842:11. Prior to the Accord, Philip Morris worked on other non-conventional cigarette projects called Delta and Sigma. Lilly United States Dep., 5/15/02, 73:16-17, 78:17-79:4. Project Delta used carbon as the heat source for the tobacco, thereby reducing the temperature under which smoke was generated. Lilly, United States Dep., 5/15/02, 73:16-17, 78:17-79:4. With lower temperature, both combustion and pyrolysis are reduced resulting in reductions in the formation of PAHs and aldehydes, both of which are carcinogenic compounds in cigarette smoke. Farone TT, 10/6/04, 1694:4-16, 1694:20-1695:6.

¶1858. Philip Morris devoted a significant number of scientists to researching the chemical, physical and thermodynamic flow of the Delta cigarette. This work led to publications, patents, and later to the development, in the 1980s, of the projects which preceded today's Accord. Lilly, United States Dep., 5/15/02, 79:6-14, 80:6-18.

¶1859. Philip Morris developed Accord to, among other things, "address consumer concerns about health risks" and as a direct competitive response to R.J. Reynolds's "Premier" product. 2046741061-1074 at 1061-62 (US 22185) (following R.J. Reynolds's introduction of Premier, Philip Morris "immediately accelerated its work in this area to develop a competitive smokeless product"); see Section V(D)(5)(b)((2))((a)) , infra, on Premier.

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¶1860. Philip Morris spent, through 2003, over $370 million in operating expenses and nearly $50 million in capital expenses developing the Accord cigarette. Szymanczyk WD, 170:9- 171:3. See also 2046741061-1074 at 1074 (US 22185) (noting plans to have forty-four researchers working on the Beta/Accord project and projecting a $100 to $150 million five-year development cost). In 1998, Philip Morris began to sell it in one limited domestic test market.

¶1861. With the Accord, Philip Morris's electrically-heated smoking "system," the purchaser receives a kit -- a starter set of shorter, specially-designed cigarettes and a dark rectangular heating device approximately the size of a large candy bar. To smoke Accord, the smoker inserts a cigarette into the end of the heating device. When a smoker inhales on the inserted cigarette, the inhalation triggers the device's electrical heating element, which heats the cigarette to a temperature below that necessary to create combustion and delivers smoke to the smoker. The device permits a maximum of eight puffs per cigarette, and information about the activity and puff count is provided to the smoker on a small LED [light emitting diode] display on the device. As a result smokers cannot compensate by drawing harder or blocking ventilation holes. 525335580-6084 at 5678 (US 20919).

¶1862. Accord substantially reduced harmful constituents compared to some of the best-selling products on the market today. Farone TT, 10/7/04, 1845:21-1848:3; see also PM3001435021-5261 (JD 050079); JDEM 040039. Philip Morris's own internal research demonstrated that Accord substantially reduced the delivery of fifty-two harmful constituents believed likely to contribute to smoking-related diseases. For example, the level of total polycyclic aromatic hydrocarbons dropped below a measurable amount, the carbon monoxide delivery became extremely low, there was a 90% reduction in 1.3-butadiene production, and the delivery of tobacco-specific nitrosamines ("TSNAs") dropped 50% below conventional cigarettes. Philip Morris research has shown that mutagenic activity in the Accord cigarette is lower than in conventional cigarettes, and the Ames test on Accord found essentially no mutagenic activity in the Accord. Lilly PD, United States v. Philip Morris, 5/14/02, 246; 525335580-6084 at 5678 (US 20919).

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¶1863. However, Philip Morris has never informed potential consumers in the test market, through promotional or marketing materials, of its conclusion that Accord is a reduced exposure product and a potentially reduced harm product. Farone WD, 179:13-23. Indeed, in a presentation to the Altria Board of Directors in late 1996, Philip Morris stated, "By controlling the heat applied to the tobacco, [Accord] addresses in significant ways criticisms made of our current cigarettes," but that in marketing Accord to consumers, "we do not want to disparage our existing brands." 2086120855-0890 at 0855, 0871 (US 45812).

¶1864. In 2001-2002, Philip Morris commissioned its longtime advertising agency, Leo Burnett, to develop a set of Accord ads that included the messages that Accord "reduces certain smoke compounds," including fifty-two compounds that "are harmful to smokers." The advertisements also included a chart that compared Accord to an unidentified light cigarette in its reduction of harmful compounds. Philip Morris has not used these ads. Instead, the Accord advertising campaign continues to focus on sidestream smoke alone (i.e., that Accord is less annoying to others because less smoke is emitted), rather than health issues. Dudreck PD, United States v. Philip Morris, 6/21/02, 33:1-34:24; Dudreck PD, United States v. Philip Morris, 8/26/03, 465:22-466:25, 467:21-468:12 (Confidential); LB0037946-7950 (US 21855); Harris WD, 229:10- 230:23.

¶1865. Philip Morris continues its efforts to improve the acceptability of Accord and to develop sound scientific evidence to support a claim for risk reduction.

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¶1866. In response to the theory advanced by some segments of the public health community that a cigarette with very little nicotine would potentially reduce the harm associated with cigarette smoking, Philip Morris developed and marketed cigarettes with virtually no nicotine. Beran WD, 3-11.

¶1867. In the mid-1980s, Philip Morris purchased General Foods which, among other things, manufactured decaffeinated coffee with a process called super-critical extraction. Philip Morris scientists developed a method to use the same process to remove nicotine from tobacco.

¶1868. In 1989, Philip Morris introduced de-nicotinized cigarettes under the brand name of Next De-Nic in certain test markets. The Next De-Nic marketing was followed by a test market launch of Benson & Hedges De-Nic, in order to associate the de-nic concept with a successful existing brand. Beran WD, 155:23-156:3, 157:15-17; (no bates) (JD 053828); (no bates) (JD 053835); Lilly United States Dep. 5/14/02 at 169:15-170:7, 176:8-18; Langenfeld WD, 136:7-8. Philip Morris wanted to communicate to consumers that this was a breakthrough product which had removed virtually all of the nicotine from the cigarette. Beran WD, 159:2-5

¶1869. Because consumers complained that the taste was flat and too mild, Philip Morris made an enormous effort to improve the flavor and taste. The company expended approximately $300 million in attempting to develop and commercialize the de-nic product. Beran WD, 156:5- 157:17; 2024750510-0522 (JD 053838); 202425677-5997 (JD 055103); Lilly United States Dep. 5/14/02 at 177:10- 178:4; see also Townsend WD, 27:9-13.

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¶1870. At the same time, certain members of the public health community and anti-smoking organizations opposed Philip Morris's effort to market a virtually nicotine-free cigarette. For instance, the Coalition on Smoking OR Health filed a petition with the FTC and alleged:

The package labels and advertisements for Next cigarettes falsely and misleadingly imply that Next cigarettes are a safe, non-addictive alternative to traditional tobacco products. . . . Philip Morris USA has not substantiated and cannot substantiate any implied claims that Next cigarettes contain so little nicotine as to eliminate the concern about either addiction or the health effects of nicotine. In addition, Next cigarettes may be more dangerous than traditional ultra-low "tar" cigarettes because Next cigarettes contain far higher levels of "tar" than other cigarettes with comparable levels of nicotine and higher levels of carbon monoxide than several other brands of ultra-low tar cigarettes.

¶Langenfeld WD, 136:8-30; (no bates) (JD 067562 at 2).

¶1871. The Coalition requested that the FTC take action against Philip Morris:

[The Coalition] urge[s] the Federal Trade Commission to take prompt action (1) to require Philip Morris USA to stop making the false and deceptive claims currently begin made for Next cigarettes and (2) to require Philip Morris USA to take corrective action to undo the false and misleading statements provided by Philip Morris USA to consumers with regard to these products.

¶Langenfeld WD, 136:8-30; (no bates) (JD 067562 at 14).

¶1872. The FTC opened an investigation into Next cigarettes and requested that Philip Morris provide information regarding its advertising and marketing of Next De-Nic. Ultimately, Philip Morris withdrew the other "De-Nic" products from the market in 1991, claiming poor consumer acceptance. Thereafter, the FTC closed its investigation of Next De-Nic. Langenfeld WD, 136:31-137:9.

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Nicotine Analogue Program

¶1873. Over a period of more than ten years from the early 1970s to the mid-1980s, Philip Morris attempted to identify a synthetic nicotine analogue that would replace the nicotine naturally found in cigarettes. Development of a synthetic nicotine analogue would reduce the adverse cardiovascular effects of smoking, such as increased blood pressure and increased heart rate. Mele WD, 7:16-8:3; DeNoble WD, 5:7-11, 7:8-22; DeNoble TT, 1/6/05, 8990:10-17; Levy WD, 6:27-31; Levy TT, 2/9/05, 12701:10-25.

¶1874. As part of the program, Philip Morris created a laboratory of chemists who, over a period of years, produced hundreds of synthetic nicotine analogues. DeNoble TT, 1/6/05, 8991:8-24. The company invested substantial research and development funds in these efforts. DeNoble TT, 10/7/04, 1968:2-5.

¶1875. Philip Morris scientists wrote numerous published articles about the research being conducted in connection with its nicotine analogue program. Farone TT, 10/7/04, 1968:16-21. While the project was going on, Philip Morris communicated with the Government about its nicotine analogue program and the company sought patents on inventions that were produced from the program's research. Farone TT, 10/7/04, 1968:12-15, 22-24.

¶1876. The procedure for developing and testing nicotine analogues at Philip Morris was as follows: Organic chemists within Philip Morris would create a synthetic nicotine analogue. Drs. DeNoble and Mele would then perform testing with rats in-house at Philip Morris to assess the analogue's central nervous system effects. The analogue was then sent to scientists outside of Philip Morris, who conducted tests to assess its cardiovascular effects. Mele WD, 8:4-12; DeNoble WD,

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¶8:16-19, 13:11-22; DeNoble TT, 1/6/05, 8993:3-18, 8993:22-8995:4 (DeNoble); Levy TT, 2/9/05, 12702:5-12703:3.

¶1877. The evidence at trial demonstrated that 2'-methylnicotine was tested and was shown to cause some cardiovascular effects, predominantly an increase in blood pressure. DeNoble TT, 1/6/05, 8997:25-9000:4, 9001:13-9007:3; 2056152563-2575 (JD 043875); 202345389-0704 (JD 054257).

¶1878. The Government presented no evidence as to what occurred in connection with Philip Morris's nicotine analogue program after 1984. Dr. Farone, for example, testified merely that the Philip Morris nicotine analogue program continued after he left the company. Farone TT, 10/7/04, 1968:9-11. Dr. DeNoble testified that he does not know whether Philip Morris continued its nicotine analogue research after he and Dr. Mele left the company in 1984. DeNoble TT, 1/6/04, 9007:4-10, 9008:9-12.

¶1879. No evidence has been presented that Philip Morris ever identified or developed any workable nicotine analogue, or suppressed the development or marketing of any such analogue.

R.J. Reynolds

The Multijet Filter

¶1880. By the late 1960s, RJR had developed a cigarette filter that, according to Reynolds's research, reduced the retention of smoke particulate matter in a smoker's lungs by 63%. Unlike the filters Defendants designed for cigarettes they marketed as "low tar" cigarettes, the "multijet" filter limited one form of smoker compensation -- puffing harder on cigarettes to obtain more nicotine -- and yielded tar and nicotine deliveries to human smokers that closely matched their FTC machine-measured yields. The multijet filter accomplished this by increasing its efficiency as flow rate increased -- that is, the harder a smoker puffed on the cigarette, the less material passed through to the smoker. Farone WD, 133:13-134:1. See 514901941-1966 at 1941 (US 30086); 504210090-0091 (US 29749); see also Townsend TT, 3/8/05, 14790:25-14800:1, 14801:17-14803:9.

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¶1881. By 1971, RJR believed its multijet filter product had a "satisfactory taste" and work had "progressed to the point where a complete cigarette design . . . [was] feasible and makable." 512279835-9836 at 9835 (US 30037). The company found that this prototype compared favorably to an existing Reynolds brand on the market, Vantage, which Reynolds admitted was commercially feasible at the time. 512279835-9836 at 9835 (US 30037); see also Townsend TT, 3/8/05, 14810:2- 21.

¶1882. The same document notes that the marketing department "had reservations" about selling it because Reynolds's marketers expressed "concern that the utilization [in marketing] of the retention story, scientifically endorsed, may jeopardize the rest of the Company's cigarette business." 512279835-9836 (US 30037).

¶1883. Reynolds never incorporated the multijet filter into marketed products. RJR revived the idea in the 1990s, again recognizing its potential ability to modify the particle size of the smoke aerosol delivered to smokers, but again did not develop the filter for use in any commercialized product. 510926982-6983 (US 87554); 510827052-7068 (US 87555). Townsend testified that the product had significant problems: (1) the jet would become clogged and (2) it was difficult to draw smoke through the cigarette. Townsend WD, 157:21-158:6.

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Heated Tobacco Products

Premier

¶1884. R.J. Reynolds actively pursued a program to develop, and ultimately market, a cigarette that heated, rather than burned, tobacco. In the early 1980s, Reynolds's researchers discovered that a small carbon heat source, combined with an aluminum heat conductor, tobacco and glycerol, could produce smoke without burning the tobacco. Townsend WD, 142:11-21. With that innovation, RJR began work on what would become Premier. The product development objectives for Premier were to simplify the mainstream and sidestream smoke chemistry by eliminating or reducing harmful compounds produced by burning tobacco, to minimize the potential for biological activity (as measured by toxicological assays and tests frequently used to study cigarettes and cigarette smoke), and to minimize environmental tobacco smoke. Townsend WD, 126:6-9; Burger, United States Dep., 7/26/01 71:4-72:8; see also 507141075-1463 (JD 060325). Reynolds succeeded in meeting all of its product development objectives. Townsend WD, 126:10-11; 507141075-1463 at 1080-83 (JD 060325).

¶1885. The Premier cigarette had two major sections: (1) a front-end piece containing an insulated carbon heat source, tobacco, and an aluminum capsule containing tobacco, flavor and glycerol; and (2) the mouth-end piece containing a two-part filtration system. Townsend WD, 127:1- 128:8; 507141075-1463 (JD 060325); (no bates) (JDEM 060500).

¶1886. With the exception of the tobacco roll, no component of Premier was available on the market when its development of Premier began. Townsend WD, 142:11-21. The technology underlying Premier was so innovative that Reynolds secured sixty foreign and domestic patents covering it. Townsend WD, 126:12-15; Farone TT, 10/12/04, 2078:6-23 (Farone).

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¶1887. Premier was lit and smoked similarly to other cigarettes, but it did not burn tobacco and burned very little paper. See Gentry TT, 10/14/04, 2387:6-9 (Gentry). Unlike other cigarettes, it did not burn down to a butt, nor did it produce loose ash. Townsend WD, 140:22-141:2. When a smoker puffed on Premier, heated air was drawn through an aluminum capsule, where it volatilized glycerol, flavors from natural spray-dried tobacco, and a small amount of added flavor contained within a porous alpha-alumina substrate. Townsend WD, 128:9-20. Heated air also passed through and volatilized natural tobacco flavor from a tobacco roll that surrounded the capsule. The vapor then passed through a tobacco-paper filter, which imparted additional tobacco flavor. The vapor was cooled within the tobacco-paper filter, allowing it to condense and form an aerosol that contained the particulate and vapor phases of the mainstream smoke of Premier. Gentry TT, 10/14/04, 2386:12-21; Coggins, United States Dep., 6/27/02, 84:12-85:9. Finally, the smoke passed through a polypropylene filter. Townsend WD, 128:9-20.

¶1888. The smoke from conventional cigarettes that burn tobacco is an aerosol generated by cooling a mixture of hot gases produced by the combustion, pyrolysis and distillation of tobacco. In contrast, Premier's smoke was an aerosol generated primarily by distilling and condensing glycerol and volatile tobacco constituents. (no bates) (JDEM 060498); (no bates) (JDEM 060499); 507141075-1463 at 1151-1155 (JD 060325). Compared to a tobacco-burning reference cigarette, the smoke from Premier demonstrated a reduction in the number of compounds detected by 82-96%, and a reduction in the amount (by weight) of the compounds detected by 84-97%. (no bates) (JDEM 060499); 507141075-1463 at 1155-1161 (JD 060325); see also Farone TT, 10/6/04, 1618:24- 1620:11. For example, reductions in specific mainstream smoke constituents of Premier versus a reference cigarette included a 99% reduction in polycyclic aromatic hydrocarbons (including BaP), a 96% reduction in phenols, a 91% reduction in carbonyls (some of which are ciliastats), a 95% reduction in NOx, a 99% reduction in hydrogen cyanide, a nearly 93% reduction in benzene, and 99% reduction in acrylonitrile, and a 90-plus % reduction in nitrosamines. Townsend WD, 131:1-17 (discussing JDEM 060499); see also Farone TT, 10/6/04, 1618:24-1620:11.

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¶1889. Over the course of the approximately eight-year period of research, development and ultimate test marketing of Premier, Reynolds dedicated hundreds of scientists, as well as other employees to the project. See Iauco, United States Dep., 5/7/02, 143:1-25. From beginning to end, Reynolds spent nearly $1 billion on the Premier project. Townsend WD, 125:22-126:2; id. at 143:7- 11; Farone TT, 10/7/04, 1813:19-1814:11.

¶1890. In addition to the smoke chemistry tests described above, Reynolds conducted a battery of biological and toxicological tests on Premier, both in vivo (live animal) and in vitro (testing on cells outside a living animal), as well as testing with smokers of Premier. Townsend WD, 132:21-24.

¶1891. Reynolds's genetic toxicity testing of Premier versus reference cigarettes indicated that Premier's smoke was not genotoxic in any of the numerous in vitro or in vivo assays used. Townsend WD, 133:1-12.

¶1892. Pharmacokinetic and smoking behavior studies revealed that there was no difference in the relative amounts of plasma cotinine, the major human nicotine metabolite, formed from nicotine absorbed from the reference cigarette and Premier. Townsend WD, 134:4-9; see also 507141075-1463 at 1259-1312 (JD 060325). The presence of plasma cotinine is significant because it indicates the amount of nicotine exposure.

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¶1893. Following the research, development and testing of Premier, Reynolds retained a peer review committee composed of scientists and various members of the public health community (some connected to the tobacco industry and some totally independent of it) to review its work. 507141075-1463 at 1080 (JD 060325); Suber, Small and Fubini Dep., 11/20/97, 166:16-167:5. The peer review committee members were Dr. James Crapo (Department of Medicine, Duke University), Dr. John Doull (Department of Pharmacology, Toxicology and Therapeutics, University of Kansas Medical Center), Dr. Ronald Estabrook (Department of Biochemistry, Southwestern Medical School, University of Texas Health Sciences Center), Dr. Dietrich Hoffmann (American Health Foundation), Dr. Albert Koestner (Department of Pathology, Michigan State University), Dr. Robert Neal (Chemical Industry Institute of Toxicology), Dr. Herbert Rosenkranz (Department of Environmental Health Sciences, Case Western Reserve University School of Medicine), Dr. Thomas Slaga (University of Texas System Cancer Center), Dr. Robert Squire (Division of Comparative Medicine, Johns Hopkins University), Dr. Steven Tannenbaum (Department of Applied Biological Sciences, Massachusetts Institute of Technology), Dr. Mark Utell (Co-director, Pulmonary Disease Unit, University of Rochester Medical Center) and Dr. Gerald Wogan (Professor of Toxicology, Massachusetts Institute of Technology). Townsend WD, 135:6-23. The purpose of the review was to evaluate Reynolds's experimental design and methodology, as well as data interpretations and conclusions, in accordance with processes customarily used in scientific peer reviews. Id. The committee concluded that Reynolds's product development objectives had been achieved through the research and development program. Townsend WD,136:10-18; 507141075-1463 at 1080-83 (JD 060325). The committee did not render any conclusions regarding Premier's potential reduction in health risks. See id. at 1081.

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¶1894. Reynolds published the results of its chemical, biological and toxicological research on Premier in a 743-page peer-reviewed monograph called Chemical and Biological Studies on New Cigarette Prototypes That Heat Instead of Burn Tobacco. Townsend WD, 134:14-18; Farone TT, 10/7/04, 1815:11-1816:9; 507141075-1463 (JD 060325).

¶1895. Reynolds also presented a series of abstracts related to Premier at the Society of Toxicology's annual meeting early in 1988. HHS0830126-0135 (JD 042085).

¶1896. In its monograph and public presentations, Reynolds articulated both Premier's characteristics and Reynolds's goals for the project as follows: (1) "to provide the taste and smoking enjoyment our customers demand;" (2) to the extent possible, "to simplify the chemical composition of mainstream and sidestream smoke emitted by the new cigarette;" (3) "to minimize the biological activity of the mainstream and sidestream smoke emitted by the new cigarette;" and (4) "to achieve significant reduction of environmental tobacco smoke from the new cigarette." 515194617-4619 at 4618 (JD 041998); 507141075-1463 (JD 060325).

¶1897. In August 1988, Reynolds submitted a report explaining the design of its new cigarette to the FDA. (no bates) (JD 060405). In addition, Reynolds submitted a report to the FTC concerning advertising issues and cooperated with FTC requests for information. 507349165-9287 (JD 041934); 575101341-1344 (JD 041947).

¶1898. Prior to its test market introduction, Reynolds conducted limited testing of Premier to assess its acceptability with consumers. The first large-scale consumer testing of Premier was conducted in January, 1988. Overall acceptability of Premier was extremely low. The stated intent of consumers to purchase Premier was significantly below that compared to tobacco-burning cigarettes (16% for Premier, versus 51% for Reynolds's Now brand, and 76% for Reynolds's Camel

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¶Light brand). The primary factors limiting the overall acceptance of Premier in the consumer testing were artificial taste, aftertaste, and aroma. Follow-up research suggested that while taste was the primary contributor to the low overall acceptability of Premier, changes in smoking ritual (e.g., lighting difficulty, absence of visual cues indicating remaining puffs) also played a role. 507543977- 4004 at 3981 (JD 041936).

¶1899. Reynolds introduced Premier into test markets on October 17, 1988, in St. Louis, Missouri, and Phoenix and Tucson, Arizona. Townsend WD, 140:12-15. Premier's introduction was accompanied by a print advertising campaign in local media that described the reduced emissions from the new product. (no bates) (JD 065280); (no bates) (JD 065281); (no bates) (JD 065282).

¶1900. At the time Premier was sold, scientists at Reynolds believed that Premier was a potentially less hazardous cigarette because it had significant reductions in harmful compounds and biological activity. Gentry TT, 10/14/04, 2387:10-2388:3; Townsend TT, 3/8/05, 14811:16-14814:5 (indicating Dr. Townsend's belief that Premier is a safer cigarette). However, Reynolds was concerned about the FTC's regulations requiring that all health-related claims be substantiated. Townsend TT, 3/8/05, 14848:12-16.

¶1901. The FTC investigated the scientific claims about Premier to determine whether the statements in Reynolds's advertisements for Premier were substantiated. Townsend WD, 28:11-12. After concluding its investigation, the FTC took no action against Reynolds for its advertising of Premier. Id.

¶1902. On February 28, 1989, RJR withdrew Premier from the test market, citing poor market performance. 507543977-4004 at 3984 (JD 041946); Townsend WD, 142:22-143:6; JD

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¶000866 (at 457) ("A recent attempt to market a modified cigarette that 'heats rather than burns tobacco' has not been accepted by consumers."). Premier's retail share of market in the test cities peaked at 0.57% in the test market's third week. After that point, Premier began to experience a declining share trend. By February, 1989, Premier's market share was down to 0.14% and declining. (no bates) (JD 041936 at 50754 3984).

¶1903. RJR believes that two principal factors led to Premier's poor performance in the test markets: lack of consumer acceptance of the product due to its different taste and different smoking characteristics (i.e., difficult to light and did not burn down), and the negative media attention regarding product taste and possible intervention by the FTC and/or the FDA. (no bates) (JD 060554); HHS1562363-2373 (JD 000557); Townsend WD, 28:5-12, 140:18-141:7; Burger, United States Dep., 7/26/01, 82:8-14; id. at 127:13-128:4; DiMarco, Burton Dep., 8/14/02, at 188:19-20.

¶1904. In an internal Marketing Research Report, titled "Comprehensive Overview of Consumer Reactions to Premier," dated May 11, 1989, RJR's evaluation of the product concluded that "the overall acceptability of Premier NM [non-menthol) was extremely low. . . . Only 9% of Premier smokers were interested in purchasing more product, vs. 28% for NOW and 38% for Camel Lights. 5/11/89 Comprehensive Overview of Consumer Reactions to Premier, 507543977-4004 at 3980-3981 (JD 041936).

¶1905. Premier encountered some resistance from public health advocates, as well. In March 1988, FDA Commissioner Frank Young summarized his meeting with public health groups, stating that

[t]he health professional groups believe that FDA should assert regulatory jurisdiction over this product. They said that there were many unknown variables regarding whether this was actually a safer

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alternative to smoking conventional cigarettes. They argued that the abuse potential with this type of product could actually be higher because the general public perceives this to be a safer alternative and they firmly believe that FDA is the appropriate agency to regulate this product. . . . The health professional groups also said that introduction of this product to the market will encourage a segment of the population to continue to smoke who probably would have stopped smoking conventional cigarettes. They believe a growing population of people in this country are trying to stop smoking and the introduction of this product may encourage these people to continue to smoke and may encourage people to start to smoke at a younger age.

¶HHS0741270-1271 (JD 065276).

¶1906. The following month, Surgeon General Koop voiced similar complaints in a letter to FDA Commissioner Young, noting:

In its public statements and marketing plans, RJR states regarding the product: "a majority of the compounds produced by burning tobacco are eliminated or greatly reduced, including most compounds that are often associated with the smoking and health controversy." To me, this suggests a health claim that the product is "safe" or "safer" than conventional products, which could result in reduced quitting by smokers, increased relapse by ex-smokers, and increased initiation by adolescents.

¶HHS0681659-1660 (JD 042075).

¶1907. The Coalition on Smoking OR Health petitioned the FDA to regulate Premier, stating that

both the specifics and the overall theme of the advertisements are clear; use this product, and you will reduce your risks of cancer and possibly other diseases associated with the smoking habit. . . . This product is a "safer" alternative to using the more conventional cigarettes.

¶It continued, "[w]ho does Reynolds think it is fooling when it uses words like 'controversial compounds' or 'cleaner.' These words are nothing but transparent euphemisms for 'healthier' and

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¶'safer.'" HHS0813096-3110 (JD 042083). John Slade, in his petition, noted that "[p]eople who smoke are not concerned about the dirtiness of smoke; they are concerned about its toxicity. . . . Reynolds is fully aware of this, of course." 10/11/88 letter from J. Slade to F.E. Young, FDA, HHS0830014-0023 (JD 042084).

¶1908. Others in the public health community responded favorably to Premier. In an internal memorandum from Dr. Jack Henningfield, one of the Government's experts in this case, who was at the time working in the Addiction Research Center of the Intramural Research Program in the National Institute on Drug Abuse, to Dr. Jerome Jaffe, the Director of the HHS Addiction Research Center, Dr. Henningfield stated

[f]rom the standpoint of carcinogenicity and possibly other disease states resulting from particulate matter and other combustion products of tobacco smoking, the data and public statements from RJR suggest that this nicotine delivery system is of lower toxicity than conventional cigarettes. These conclusions are consistent with the physical characteristics of the system: there is no direct exposure to either tobacco or tobacco generated smoke although CO [carbon monoxide] and nicotine delivery appear comparable to cigarettes; moreover, no tobacco is burned (RJR: "tobacco is warmed not burned") and no tobacco smoke is either produced or inhaled . . . [t]he available data presented by RJR in scientific meetings, press briefings, and Congressional testimony suggest that this nicotine delivery system is safer than conventional cigarettes with regard to cancer and diseases caused by direct exposure to tobacco or tobacco smoke.

¶HHS0130224-0227 at 0227 (JD 065279).

¶1909. Similarly, an internal appraisal within the FDA stated that Premier appeared to be "a safer alternative." HHS0681735-1757 at 1736 (JD 042077).

¶1910. Despite the internal belief and external acknowledgment of the harm-reducing potential of Premier, Reynolds never directly informed consumers that it was potentially less hazardous and never marketed it with explicit health related messages. Juchatz TT, 11/22/04, 6682:15-20. In fact, the evidence below suggests that years before Premier was test-marketed in 1988, Reynolds's management and counsel had determined that Premier would not be marketed as risk-reducing because it would suggest that smoking conventional cigarettes causes disease. See Section V(H)(1)(a)(¶¶3873-3878), infra (DiMarco/Juchatz evidence).

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¶1911. In 1982, newly appointed Research & Development Department Director Dr. Robert DiMarco indicated, during his "Law Department orientation," that the consensus in the scientific community was that smoking caused disease and that it was his responsibility to make a cigarette with reduced mutagenicity -- a cigarette less likely to cause the cellular changes that can lead to cancer. DiMarco's perspective alarmed the company and the industry. See generally 505741150- 1153 (US 23009); 505741141-1142 (US 20746); 505741143-1147 (US 20747); 505745988-5992 (US 20748). Reynolds's chief counsel at the time, Sam Witt, stated that outside industry lawyers Ed Jacob and Tim Finnegan of Jacob, Medinger and Finnegan felt that it could be "devastating" if Dr. DiMarco, "as the company's chief scientist," were to testify about causation and take a position contrary to that of the industry. See Juchatz TT, 11/22/04, 6672:4-6675:7 (discussing, in part, 505741143-1147 (US 20747), 6684:2-6686:15 (confirming that Witt authored US 20747).

¶1912. Lawyers and management imposed specific conditions on DiMarco in exchange for permitting him to go forward with the development of Premier (and for keeping his job). Specifically, any "less hazardous" product developed by DiMarco was not to have the term "safer" associated with it because it implied that Reynolds's existing products were unsafe -- an admission that could be used against the company in litigation. In addition, he was not to otherwise conduct research that, if subpoenaed, might jeopardize the company's legal defenses, might prove embarrassing for the company, or otherwise would be "hard to handle" for the company. Juchatz TT, 11/18/04, 6585:14-6587:5 (discussing 505741150-1153 (US 23009)); 505741141-1142 (US 20746); 505741143-1147 (US 20747); 505745988-5992 (US 20748)); see also Juchatz TT, 11/18/04, 6590:19-6591:16 (Reynolds Law Department "reach[ing] an understanding . . . to work with him [DiMarco] in an effort to devise a way in which he could do what he wanted without creating any serious legal problems"); id. at 6592:23-6593:21, 6594:25-6596:8 ("The objectives of the Law Department were to allow him to do what he wanted to do, but minimize the risk."); id. at 6609:6- 6611:22 (outside lawyers thought DiMarco should be fired if he did not come around); id. at 6615:19-6617:9 (outside industry counsel Jacob and Finnegan expressed concern to RJR about DiMarco admitting causation).²³²³ While Defendants told the Court that they intended to produce Dr. DiMarco to explain these events, and he was on the defense witness list (see Juchatz TT, 11/18/04, 6618:21- 6619:8), Defendants did not call him. -700-

730

¶1913. In the fall of 1987, Reynolds sent Peter Hutt, a Covington & Burling lawyer who had previously served as Chief Counsel of the United States Food and Drug Administration ("FDA"), to meet with representatives of FDA and other government health officials. According to meeting minutes, Hutt refused to discuss "safety issues" with the FDA because the "tobacco industry" maintained that "conventional cigarettes are not unsafe, and that it would never reverse this position." He made clear that RJR would not

promote or label . . . [Premier] as safer than conventional cigarettes . . . [because] such a claim would be an indictment of the tobacco industry and its long standing position that conventional cigarettes are not unsafe . . . nor did RJR have any intention of jeopardizing the industry's long standing position.

¶HHS0880359-0364 at 0360 (US 85828).

731

¶1914. In a letter about a separate September 1987 meeting he had about Premier with the Director of the Centers for Disease Control's Office on Smoking and Health, Mr. Hutt commented: "[Y]ou asked whether Reynolds agreed that cigarettes caused the health problems I had mentioned. I responded that they did not[;]" and "I again responded that Reynolds did not agree that the current cigarette is unsafe and would not contend that the new cigarette is safer or safe." 506147781-7783 at 7782 (US 93089).

¶1915. In testimony in this case, RJR's Chief Executive Officer during its test-marketing of Premier, Gerald Long, confirmed RJR's commitment to protect Defendants' position that cigarettes are not harmful:

[O]ne of the guidelines that we had right from the beginning [of putting together the marketing strategy was] that Premier could not be and would not be marketed as a safer cigarette because of the implications on the tremendous business that we had at hand already. . . . [I]f we had come out and stated here you have Premier, the safer cigarette or the safest cigarette or anything indicating to that, the implication would have come back on our own products and our competitive products in the industry which we were aware of that would have stated that they were not safe products, and since our position was that we were marketing, the industry and -- ourselves and the industry were selling and marketing safe cigarettes, then we couldn't say in one of our brands that we were coming out with something that was safe, while all the rest was not safe. . . .

The negative implications, I think, are quite obvious, that if we came out very strongly with a product, presuming that the product could deliver and it was the product that was in our opinion and the research showed it to be some kind of a -- some kind of a product that was considered to be safer than any of the conventional cigarettes on the marketplace, it would have had a substantially negative effect on the rest of the tobacco industry, and we felt we weren't ready to take on that obligation. . . . What kind of negative effects? It would have turned around and said to people, well, the tobacco companies are publicly admitting we do not market safe cigarettes.

732

¶Long PD, United States v. Philip Morris, 10/18/01, 86:3-90:25.

¶1916. Reynolds asserts that Premier failed because of low consumer acceptance. However, RJR knows that consumer acceptance is affected by perceived health benefits. As David Iauco, RJR's head of business development, told the Philadelphia Inquirer in December 1997 (concerning RJR's Eclipse cigarette), "No smoker is going to switch to a lower-risk product unless they know of a benefit and believe it. There will be trade-offs and adjustments, things that the smoker will have to give up." 525413253-3262 at 3259 (US 87556).

¶1917. RJR's marketing of Premier focused not on its potential health benefits, but instead on its purported cleanliness and courtesy benefits. See, e.g., Juchatz TT,11/22/04, 6682:15-19.

¶1918. Reynolds stuck with this advertising plan even though it had learned through testing ad campaigns that "the claim 'smoke-free' didn't mean anything" to consumers. Long PD, United States v. Philip Morris, 10/18/01, 87:5-7. Likewise, Reynolds's marketing executives concluded that

most [smokers] did not realize that the product had other [than low ETS] unique attributes (i.e., . . . reduction in alleged controversial compounds). . . . As a result, many smokers who tried the product were not adequately prepared for its unique properties.

¶507543977-4004 at 3986 (US 85829); see also deBethizy PD, United States v. Philip Morris, 4/17/02, 122:6-8 (Premier's "taste was dramatically different and people were unprepared for it").

¶1919. Philip Morris reached similar conclusions about Reynolds's marketing approach to Premier. Philip Morris hired consultants to evaluate Reynolds's marketing of Premier and found it to suffer from exactly the problem Reynolds's executive Iauco articulated: Premier's advertising was "ineffective in communicating a relative advantage over the smoker's current brand." 2022259027- 9061 at 9027 (US 20363); see also Farone TT, 10/7/04, 1818:10-1819:4, 2107:4-2108:3 (See Farone testimony that Premier print advertisement was "fuzzy" because it didn't compare Premier to other marketed products such as Winston or Marlboro, did not inform consumers that the "compounds" are actually factors that cause disease or that there are carcinogens, and did not identify any chemicals in particular that might be harmful that were reduced by Premier.)

733

¶1920. From beginning to end, RJR spent nearly $1 billion on the Premier project. Townsend WD, 125:22-126:2; 143:7-11.

Eclipse

¶1921. In 1989, after withdrawing Premier from test marketing, RJR shifted its focus to development of another cigarette that reduced the burning temperature to reduce the formation and delivery of harmful constituents. Reynolds first test-marketed this product -- Eclipse -- seven years later, in 1996. Unlike Premier, Reynolds began marketing Eclipse in April 2000 with a claim that it may present less risk of lung cancer, chronic bronchitis, and emphysema. Townsend WD, 143:13- 144:3, 148:7-11, 152:5-8; (no bates) (US 85276); (no bates) (US 85277) (indicating that Reynolds R&D staff were working to achieve major improvements in Eclipse's lightability and taste/satisfaction).

¶1922. As part of Reynolds's efforts to improve the taste characteristics of Eclipse, it added a very small amount of tobacco in lieu of Premier's aluminum capsule, as well as with the carbon heat source. Reynolds also added a small piece of reconstituted tobacco paper that is wrapped around the heat source. Townsend WD, 144:4-23.

¶1923. Eclipse looks like and is smoked much the same way as any other cigarette. (no bates) (JD 065125 at 3). Because Eclipse primarily heats, rather than burns, tobacco, there are some important design differences that distinguish it from other cigarettes. Id. At the tip of Eclipse is a heat source made primarily of high purity carbon. The heat source also contains binders and a small amount of tobacco. The heat source is surrounded by a specially designed continuous-filament glass-mat insulator that reduces heat loss to the surrounding air. The glass-mat insulator is made from a continuous-filament glass that was specifically engineered to be non-respirable. A thin layer of tobacco paper is sandwiched between two layers of the glass insulator. The tobacco paper and the tobacco in the heat source burn when Eclipse is lit to provide tobacco taste when the cigarette is first lit and while it is being smoked. Townsend WD, 144:4-18; (no bates) (JD 065125 at 3).

734

¶1924. Immediately behind the heat source is a tobacco roll that contains two segments. The first segment is a roll of processed cut tobacco that is fortified with glycerin (a common food ingredient that is found in most cigarettes). The second segment of the tobacco roll contains another processed tobacco blend. At the mouth-end of the cigarette is a cigarette filter made from cellulose acetate (the filter material used in most cigarettes). Holding the cigarette together are cigarette papers and laminates of cigarette paper and food-grade aluminum foil. The foil helps to retain the heat and conduct it through the cigarette. (no bates) (JD 065125 at 3).

¶1925. The smoker lights an Eclipse by puffing on the filter while the heat source is exposed to a flame. As the smoker puffs on an Eclipse, heated air flows through the dual segment tobacco roll and the filter. As the heated air passes through the cigarette, it produces smoke by vaporizing the glycerin and by releasing flavorants, aroma, taste and flavor components (including nicotine) from the tobacco. After about six or seven minutes, the heat source self-extinguishes, and the cigarette stops producing smoke. The carbon heat source and a few other components of the heat source assembly are the only parts of the cigarette that burn. Therefore, an Eclipse is the same size when it is finished as it was before it was lit. Id.

735

¶1926. Reynolds's primary internal goal and design criteria for Eclipse was risk reduction. Doolittle PD, United States v. Philip Morris, 5/10/02, 202:4-7. By the time Reynolds first test marketed Eclipse in 1996, it already had concluded that it had met that primary design goal. deBethizy PD, Hoskins v. Reynolds, 9/25/97, 169:15-171:15. However, for the first four years of the Eclipse test-market, from 1996 to 2000, RJR marketed Eclipse in the same way it had marketed Premier as a "cleaner" cigarette because it produced very low levels of secondhand smoke, rather than as a healthier cigarette. deBethizy PD, United States v. Philip Morris, 4/17/02, 56:8-11, 60:3- 61:2, 61:22-63:11, 65:2-5; Doolittle PD, United States v. Philip Morris, 5/10/02, 202:18-23.

¶1927. In 2000, Reynolds began making limited health claims relating to the product. After first advising consumers that the best choice for smokers who worry about their health is to quit, promotional materials state that, compared to other cigarettes, Eclipse "may present less risk of cancer, chronic bronchitis, and possibly emphysema." Townsend WD, 29:22-30:6; id. at 152: 1-8; Beasley WD, 80:8-17; id. at 81:5-7; (no bates) (JDEM 060621); (no bates) (JD 061302).

¶1928. Reynolds communicated its belief that Eclipse may present less risk of certain diseases in advertisements, point of sale materials, and its Eclipse website, www.eclipse.rjrt.com. Townsend WD, 152:9-13; see also (no bates) (JD 061302) (after indicating that "the best choice for smokers who worry about their health is to quit," the advertisement states "Eclipse may present less risk of cancer. Eclipse produces less inflammation in the respiratory system, which suggests a lower risk of chronic bronchitis, and possibly even emphysema."). Today, in 2005, Reynolds says Eclipse "may present less risk of cancer associated with smoking." (no bates) (JD 068012).

¶1929. The delay in making these claims from 1996 until 2000 is attributable to the additional time Reynolds took to construct and apply its own internal scientific testing approach for labeling a cigarette less hazardous -- what it refers to as the "Four Step Methodology." Townsend WD, 149:8-150:8. Reynolds's Four-Step Methodology is a tiered-testing approach to product evaluation. In general, the four steps of the methodology are (1) chemical testing and analysis, (2) biological and toxicological testing, (3) human testing, and (4) independent scientific verification. 525073272-3277 at 3275 (US 78746); 431109741-9741 (US 47648).

736

¶1930. The first step involves an extensive understanding of smoke chemistry. If the chemistry shows a simplification of the smoke, or dramatic reductions in key target compounds, then the product is evaluated under the second step, which is biological testing. At the second step, using both in vivo and in vitro testing, the product is evaluated to determine whether it shows significant reduction in biological activity. If the product makes those showings, then, at the third step, it is evaluated by human smokers to see if there are indications that consumers will purchase the product. If the product shows consumer acceptance potential, the data will, at the fourth step, be evaluated by an expert independent scientific panel which will determine, in its expert judgment, whether the new product presents less risk. Townsend WD, 149:19-150:8.

¶1931. Reynolds conducted extensive testing on Eclipse, including biological studies, (performing genetic toxicology, cytotoxicity, animal studies), human behavior studies and human evaluations. Richter United States Dep. 3/8/02, at 190:3-196:4 (identifying the studies performed by Reynolds). The results of the chemistry studies showed substantial differences between the smoke composition of Eclipse and the tobacco burning cigarettes tested. Townsend WD, 146:2 - 147:11; (no bates) (JDEM 060501); (no bates) (JD 065125). The chemical composition of the smoke from Eclipse is much simpler (i.e., contains fewer compounds and substantially smaller quantities of compounds) than that of cigarettes that produce smoke primarily by burning tobacco. Id. at 2.

737

¶1932. A comprehensive toxicological testing program using in vitro cellular test systems and rodents was developed to assess the potential biological activity of the smoke from Eclipse compared to the smoke of a variety of cigarettes that primarily burn tobacco (the Kentucky 1R4F or 1R5F reference cigarettes or commercially available cigarettes). (no bates) (JD 065125). The results of all the in vitro tests conducted on Eclipse indicate that the smoke from Eclipse is less likely to produce genetic damage and to reduce cellular growth rate than the smoke from tobacco-burning cigarettes. Id. at 25-26.

¶1933. Reynolds also conducted comparative in vivo toxicological assays using rodents on Eclipse compared to tobacco-burning cigarettes. In general, effects observed among the animals exposed to smoke from Eclipse were fewer and less severe (in some cases, entirely absent) compared to those observed among the animals exposed to smoke from the 1R4F. Townsend WD, 147:7-11; (no bates) (JD 065125 at 26-28).

¶1934. Reynolds also conducted studies with human smokers of the Eclipse cigarette. Reynolds's studies compared a number of behavioral and physiological end-points in smokers when they were smoking Eclipse compared to when they were smoking their usual brands. Townsend WD, 147:16-148:5; (no bates) (JD 065125 at 36-39). Results indicated that the smokers were exposed to dramatically fewer mutagens when they were smoking Eclipse, compared to when they were smoking their usual brands of tobacco-burning cigarettes. (no bates) (JD 065125 at 34-35).

¶1935. Reynolds shared its research with the public health community. For example:

738

In April 1996, representatives of Reynolds met with the FDA during which they disclosed that R.J. Reynolds intended to conduct a market test of Eclipse. 517663284-3285 (JD 065286). Following that meeting, Reynolds provided the FDA with information relating to the extensive testing done on Eclipse. 520943728 (JD 065287).

On August 23, 1996, RJR funded a conference at Duke University Medical Center titled "Eclipse and the Harm Reduction Strategy for Smoking," where scientists and health researchers discussed whether products like Eclipse were safer. 522269118-9121 (JD 065296).

Reynolds initiated contact with CDC and met on three occasions with CDC representatives in 1997-1998 to discuss scientific studies of Eclipse and plans for marketing the product. See Richter United States Dep. 3/8/02, 188:23- 189:6, 209:7-210:19; 519419882-9884 (JD 065298).

¶1936. Reynolds also made several scientific presentations and published extensively regarding Eclipse. Reynolds's Web site lists more than seventy such presentations or publications since 1995 alone. (no bates) (JD 065125); see also Richter United States Dep. 3/8/02, 201:18-202:2 (acknowledging that Reynolds published many studies in peer reviewed journals). Moreover, Reynolds's patents relating to Eclipse are publicly available. See Richter United States Dep. 3/8/02, 207:23-208:12.

¶1937. Reynolds has established two websites regarding Eclipse. One is for consumers; the other is for scientists. Beasley WD, 82:7-12. All of the data regarding Eclipse and the comparisons to tobacco-burning cigarettes are available are the Internet. deBethizy, United States Dep., 4/17/02, 109:17-110:7; id. at 222:11-21.

¶1938. To evaluate the Eclipse cigarette as a potential product modification aimed at risk reduction, Reynolds asked Dr. Bernard M. Wagner to identify an appropriate group of experts with

739

¶"experience and scientific recognition in the fields of analytical chemistry, genetic toxicology, pharmacology, inhalation toxicology, carcinogenesis, veterinary and human pathology, clinical pulmonary diseases, and clinical cardiology." (no bates) (JD 060235 at 1).

¶1939. The panel concluded:

The chemistry of the mainstream smoke from the ECLIPSE cigarette is much simpler than that of cigarettes that burn tobacco. Many of the compounds that have been identified as possible health hazards have been substantially reduced in this new cigarette."

"The new cigarette produces negligible amounts of sidestream smoke and both the sidestream and related environmental tobacco smoke have been shown to be much simpler in chemical composition when compared with cigarettes that burn tobacco."

"The biological activity of the ECLIPSE mainstream smoke, as well as the smoke condensate, is substantially less than that of cigarettes that burn tobacco."

"In a small number of human studies, smoking ECLIPSE may reduce the risk of inflammatory disease, changes in cellular activity, pulmonary clearance, pulmonary permeability, etc. often associated with smokers, as compared to tobacco-burning cigarettes."

¶(no bates) (JD 060235 at 3); Townsend WD, 151:13-22.

¶1940. The panel's overall study findings suggest that Eclipse may present less risk of developing cancer, chronic bronchitis, and emphysema as compared to tobacco-burning cigarettes. (no bates) (JD 060235 at 32, 34); see also Townsend WD, 151:1-12.

¶1941. By the end of 1999, Reynolds had conducted sufficient research on Eclipse to meet the four criteria it had established for a potentially less hazardous product. As it had in the past, Reynolds contacted the FDA in early 2000 and requested a meeting to discuss the company's plans to test market Eclipse. 520737199-7200 (JD 041953). In March 2000, Reynolds briefed the FDA on Eclipse and provided the FDA with a summary of the science behind Eclipse. 521556628-6628 (JD 041956); 521561627-1627 (JD 041958); see also 521561595-1595 (JD 041957) (advising of test market in Dallas/Fort Worth area and providing letter and large brochure that will be sent to physicians and health care workers). Reynolds's scientists also presented data on Eclipse to the Society of Toxicology, the International Congress of Toxicology and the Tobacco Chemists Conference. Richter United States Dep. 3/8/02, 206:3-15; 206:22-208:20.

740

¶1942. Eclipse was the first product that Reynolds developed for which it felt it had sufficient data to be able to substantiate the claims it was making. Townsend TT, 3/8/05, 14869:23-14870:4, 14873:3-7; Townsend WD, 30:21-23 ("The scientific evidence supporting the claims Reynolds makes for Eclipse is much stronger than any scientific evidence I have seen for any conventional, tobacco-burning cigarette.").

¶1943. As with Premier, Eclipse encountered some resistance from public health advocates. On April 9, 1996, Reynolds announced that it would begin market research on Eclipse in certain cities. Townsend WD, 148:7-11. That same day, a petition was filed asking the FDA to regulate Eclipse. 515218535-8560 (JD 062455); 515443333 (JD 062456); (no bates) JD 062455).

¶1944. In June 2000, the Society for Research on Nicotine and Tobacco (SRNT), a loose-knit organization whose participants included a number of individuals from the government, urged the FDA to assert jurisdiction over Eclipse. 521226957-6960 (JD 041955). Congressman Waxman also relied on the SRNT letter in calling on the FDA to regulate Eclipse. HHA4593094-3095 at 3094 (JD 042057) ("The Society for Research on Nicotine and Tobacco and other experts in tobacco control that have reviewed the publicly available data on Eclipse have concluded that there is insufficient and conflicting evidence to support RJR's claims.").

741

¶1945. On August 1, 2000, the National Center for Tobacco-Free Kids urged the FTC to take action against the advertising for Eclipse. 524543577-3580 (JD 041961); see also 524408016-8026 (JD 065306); 525333677-3678 (JD 065307).

¶1946. On the other hand, some members of the public health community lauded the introduction of Eclipse. HHS0680035 (JD 042072) ("The analyses of the mainstream smoke content show similarity to the 'ultra low tar' reference cigarette, especially in terms of tar, nicotine and particles. However, Eclipse contains less combustion products and more water and glycerin which is the primary aerosol vehicle in Eclipse"); HHS0752062-2064 at 2062 (JD 004667) ("The eclipse product has been designed to lower exposure to such combustion products by heating the tobacco rather than burning it. The smoker is thus able to obtain the aroma and taste of tobacco with less potential toxicity. On the face of it, this is a good idea if you are a smoker. If you will, it is a win/win situation.").

¶1947. In addition, in 1996, public health activist John Slade wrote in a letter to the FDA:

The present management of RJRTC may well be committed to reducing the harm caused by its products. Its willingness to spend large sums to develop Eclipse in the first place, its willingness to openly publish the chemistry and toxicology work on the product, and its eagerness to engage in dialogue with public health workers about this product suggest that this is the case.

¶517156964-6984 at 6973 (JD 041949).

¶1948. Eclipse is currently available nationwide at retail in certain chains such as 7-Eleven and Circle K. Harris WD, 228 8-9; Townsend WD, 148:12-15. There are some smokers who have switched and smoke only Eclipse. However, on the whole, the brand is struggling in the marketplace. Reynolds hopes that as more smokers become aware of the product its market performance will improve. Townsend WD, 148:16-149:6.

742

¶1949. Currently, the FDA is investigating Reynolds's advertisements for Eclipse. Townsend TT, 14866:22-24.

EW/Winston Select

¶1950. The purpose of EW, which built on an earlier research project known as Project CC, was to create a "tobacco burning" cigarette that had the potential to reduce health risks. Gentry WD, 4:4-17, 5:3-6; Gentry TT, 10/14/04, 2385:22-2386:03; id. at 2388:7-8; see also Gentry TT, 3/8/05, 14853:15-14854:13.

¶1951. There were two special components to the EW cigarette RJR introduced. The first was a "carbon scrubber" filter and the second was a "low nitrogen" blend of tobacco. Each contributed independently to EW's risk-reducing potential. The low nitrogen blend reduced constituents such as free radicals and nitrosamines, both of which are believed to play a role in disease formation. The carbon scrubber filter was an updated version of a charcoal filter. As explained further above, charcoal (or activated carbon) has the potential to selectively reduce harm- causing constituents. Cigarettes with such filters have historically earned a small market share in the United States, because of the unpopular "off-taste" associated with it. Gentry WD, 5:18-6:20, 13:6-18; see also Gentry TT, 10/14/04, 2383:18-2384:5; Townsend TT, 3/8/05, 14704:10-14705:5, 513039845-9847 (US 22095) (Confidential). Reynolds concluded that EW's filter "took care of most, if not all" of the taste problem, while at the same time being "more effective" in selectively reducing these harmful constituents than RJR's predecessor charcoal filter product, Tempo, or any other cigarette on the market at the time. Townsend TT, 3/8/05, 14705:6-14706:2; 511689507-9510 (US 22090).

743

¶1952. By 1994, RJR had developed six consumer acceptable EW products -- "four consumer acceptable light styles," and in response to requests from the Marketing Department, "two consumer acceptable full-flavor styles." 511689507-9510 at 9507 (US 22090) (Confidential); see also Gentry WD, 10:11-18.

¶1953. The tobacco blend and filter complemented each other to produce overall reductions in targeted smoke compounds under FTC smoking conditions. Gentry WD, 7:1-10; id. at 13:6-15; see generally id. at 15:16-17:8; see also Report of Canada's Expert Committee on Cigarette Modifications, Conference Proceedings. (no bates) (JD 000676) (at 36-37). However, certain smoke constituents, including some that are suspected carcinogens and tumor promoters (e.g., BaP, formaldehyde and phenols), were either not reduced or increased with the EW technology. Gentry WD, 7:5-6. An aggregation of the mass of all target compounds showed an approximate 50% reduction under FTC conditions. (no bates) (JD 000676) (at 37).

¶1954. Reynolds's biological activity and toxicity testing of EW showed some significant reductions in biological activity under certain tests (e.g., whole smoke cytotoxicity, whole smoke sister chromatid exchange, mutagenicity under one salmonella strain, and irritancy). Mouse skin painting showed that EW did not possess any different toxicity or tumor-promoting potential compared to commercial cigarettes of comparable tar yield. Sub-chronic inhalation studies showed a decrease in nasal histopathology with EW, but no difference in larynx, trachea, or lung biological endpoints when compared to a commercial cigarette of comparable tar. 521753172-3701 at 3191-95 (JD 067735).

744

¶1955. Other tests also showed no significant difference compared to the control cigarette (e.g., condensate toxicity, condensate sister chromatid exchange, and mutagenicity under a different salmonella strain). (no bates) (JD 000676 at 38-39).

¶1956. Reynolds performed additional research on EW by subjecting it to more stressful smoking conditions. The results of the research indicated that the reductions in smoke constituents that were achieved when studying EW under FTC conditions were significantly diminished, or eliminated, when EW was smoked under more human-like conditions. Gentry TT, 10/14/04, 2466:15-17; Townsend WD, 63:18-22. As one example, acetaldehyde showed approximately 50% reduction under FTC smoking conditions, but there was no reduction when EW was smoked under more human-like conditions. Gentry TT, 10/14/04, 2466:16-23; Townsend TT, 3/08/05, 14860:9- 14863:7 (discussing Overview of EW Smoke Chemistry, JD 067874 (at 18-19) (reductions under FTC smoking conditions did not exist under more intense smoking for various constituents). These results led Dr. Townsend to conclude that EW probably did not reduce risk and that there were "serious questions as to whether that particular execution of EW would offer any health benefit as it would be used by smokers." Townsend WD, 63:15-22.

¶1957. By 1993, certain scientists in the company were confident enough of EW's potential to reduce exposure and its performance on established biological tests that they reached a consensus on scientific claims that RJR could place on a package insert for EW. These claims included favorable comparisons to competitors' products, including the Marlboro Lights 85 brand, based on established biological tests. 511689507-9510 at 9507 (US 22090) (Confidential). In testing EW, Reynolds substantiated: (1) reductions in chemistry, Gentry WD, 11:1-5, 15:13-21:19 (discussing data in 515873569-3776 (US 85886), comparing EW version to Marlboro Light 85s), 25:3-28:7

745

¶(compared to Marlboro Light 85s, reporting substantial reductions in nitrosamines, which are possible human carcinogens, and other oxides of nitrogen, which may be linked to emphysema), 28:21-29:3; (2) reductions in biological activity in both in vitro and in vivo tests, Gentry WD, 29:4- 34:1 (discussing 517400643-0671 (US 30327) (Confidential), showing that EW prototypes had "statistically lower" mutagenicity scores compared to Marlboro Light 85s), 34:2-42:19 (discussing genotoxicity results reported in 520984125-4133 (US 80287), 521967676-7677 (US 30519)), 46:18- 56:25 (discussing cytotoxicity results reported in 520984104-4117 (US 80285), 510941930-1938 (US 89101), and 510959750-9752 at 9750, 9752 (US 51536)), 42:23-44:13 and 44:17-46:17 (discussing in vivo sensory/Alarie irritation test results reported in 510768455 (US 87557) and 511325258-5260 (US 30011)); (3) success in human smoker studies, Gentry WD, 58:10-61:10 (discussing 520009013-9027 (US 89100)); and (4) review of this research by a panel of "independent" scientists, Gentry WD, 62:13-68:12 (discussing the data presented to the panel in 515305298-5537 (US 89102) and the panel's report, 518379726-9740 (US 30345)).

¶1958. By 1994, RJR had sponsored extensive consumer concept and product testing for EW and found that the stronger and clearer the reduced exposure message, the greater the consumer interest in the product. 508128536-8563 at 8545, 8553 (US 85883); 515873569-3776 at 3681-3684, 3687-3688 (US 85886) (message of "50% reduction in alleged cancer causing compounds" was preferred over the traditional taste claim in consumer testing by a wider margin than the amount by which the less specific "50% reduction in controversial compounds" was preferred to a taste claim). In light of these results, the marketing research team at RJR repeatedly recommended that its executives use a reduced exposure claim for EW. 515873569-3776 at 3685 (US 85886).

746

¶1959. As it did with Eclipse, Reynolds made the results of its research regarding EW technology publicly available in the peer reviewed literature and at scientific conferences. Gentry WD, 55:14-15; see also 520984104-4117 (US 80285); 520984125-4133 (US 80287).

¶1960. To assess the potential commercial viability of EW, Reynolds incorporated the technology into an existing commercial brand, called "Winston Select", and test marketed it in the state of Oklahoma. Beasley WD, 83:21-84:7. Outside of the test market, Winston Select maintained its original configuration (i.e., it did not contain the EW technology incorporating the carbon filter and low nitrogen blend). Gentry TT, 10/14/04, 2388:20-2389:3; Beasley WD, 84:8-11. Winston Select/EW was sold in Oklahoma for approximately two years, from 1995-1997. Gentry WD, 4:19- 22; Gentry TT, 10/14/04, 2359:15-24; Townsend TT, 14703:19-14704:9; 517005979-5980 (JD 067723).

¶1961. However, RJR never informed consumers in the Oklahoma test market that the EW version of Winston Select had the potential to reduce risk. Instead, the EW/Select marketing campaign focused on taste. Townsend TT, 3/8/05, 14726:10-23.

¶1962. Initially, the new Winston Select performed well and showed an increase in market share. Townsend TT, 3/08/05, 14710:1-5; Beasley WD, 84:16-21. This early success, however, was short-lived and was attributed to heavy promotions and price reductions in the Oklahoma test market, rather than to the product attributes. Beasley WD, 85:3-20; Gentry TT, 10/14/04, 2390:13-14; see also 518793384-3395 at 3385 (JD 067728). Blind product testing indicated that some smokers reported that the taste of the Winston Select/EW was deficient compared to the regular Select brand style. 517005979-5980 (JD 067723). Dissatisfaction with the test marketed Winston Select EW was evidenced by the fact that core smokers of Winston Select began switching to other brand styles.

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¶518793615-3629 (JD 067729). The fall-off in Winston Select/EW market share in the second year of introduction was much more dramatic than in non-EW test markets. 12/18/96 Memorandum from R.C. Pasterczyk to E.C. Leary and J.D. Weber, 517005979-5980 (JD 067723).

¶1963. Winston Select/EW was pulled from the market after it began to lose significant market share. Although Winston Select/EW reached a 1.25% market share when it was first marketed in 1995, its market share later dropped significantly. Before it was pulled from the market, Winston Select/EW's market share had dropped more than one-third from the time of its introduction. Beasley WD, 87:7-16. RJR's standard for whether a new line is sufficiently consumer acceptable is whether, during its start-up or test market period, it achieves sales levels of between 0.3% to 0.5% of market share; sales at such a level would indicate "a very successful product." Townsend TT, 3/8/05, 114681:5-14684:5, 14685:2-14686:13. At no time did Winston Select/EW dip below 0.9% of market share. Reynolds did not consider Winston Select to be a commercial success because it was not a new line extension. Rather, it was a product replacement to an existing line extension, so it benefitted from inheriting market share from its predecessor version of Winston Select. Instead of gaining market share or even holding its own because of that advantage, Winston Select/EW lost market share compared to where it started, and lost market share at a rate twice the national average for regular Winston Select. Beasley WD, 88:7-13.

¶1964. In 1993, RJR chief counsel Wayne Juchatz asked the company's outside law firm Jones Day Reavis and Pogue to conduct a thorough assessment of EW (then named "Project CC" internally) and its proposed potential marketing strategies, and to prepare a report for "attorneys defending Reynolds against future claims involving [EW]." In June 1994 Jones Day provided

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¶Reynolds with a 200-page report containing legal analysis and recommendations. Juchatz TT, 11/22/04, 6687:16-6688:25 (discussing 515873569-3776 at 3575 (US 85886)).

¶1965. Jones Day noted that, in light of the scientific findings and the results of consumer tests conducted in 1993, "it appears that, in terms of both taste and price, [EW] is now ready to be introduced onto the market." Noting that RJR set as a benchmark for EW the reduction of 50% of "alleged carcinogenic compounds," and concluding that they succeeded, Jones Day determined that "there are currently no regulations or statutes that prohibit the marketing of [EW]" as a potentially reduced exposure product. 515873569-3776 at 3581, 3667, 3672, 3699 (US 85886).

¶1966. Jones Day acknowledged that "'50% less claimed cancer causing compounds' is more appealing to consumers than 'reduces controversial compounds' or 'reduces irritancy,'" and that any of these messages regarding "personal concern" were more appealing to consumers than the message concerning the taste of the cigarette. Jones Day advised that any such direct, aggressive claims "may increase Reynolds' exposure to certain claims in smoking and health litigation," the most dangerous of which being that plaintiffs would posit that, with the development of EW, "Reynolds believes that other cigarettes are dangerous and must be redesigned to avoid future liability." 515873569-3776 at 3709-3766 (US 85886). For these reasons, Jones Day recommended against making any reduced risk claims, even watered down ones such as "reduces irritancy" or "cleaner smoke." Juchatz TT, 11/22/04, 6693:23-6694:2.

¶1967. Jones Day's advice was contrary to the desired approach of "[m]any in Reynolds R&D Division, including Dr. David Townsend, [who] appear to favor strongly an aggressive approach . . . ." 515873569-3776 at 3687-3690 (US 85886); Townsend TT, 3/8/05, 14720:21-14721:6

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¶(Townsend admitted that he urged taking an aggressive approach to marketing EW with health claims).

¶1968. Internal disagreement existed amongst scientists at Reynolds continued regarding both the commercial viability and risk-reduction potential of the EW technology. Gentry TT, 10/14/04, 2390:1-8; Townsend TT, 3/8/05, 14728:25-14729:10. While certain scientists believed that EW was consumer acceptable and provided potential risk reductions, others did not agree. Townsend TT, 3/08/05, 14855:17-22; 14857:14-14858:2; (no bates) (JD 067830 at 51758 6757); Townsend TT, 3/08/05, 14858:21-14860:7 (discussing 700248426-8429 at 8429 (US 22184)).

¶1969. An August 1997 memo about EW from Dr. Robert Suber, which was copied to 25 RJR employees, including Gentry, Townsend, and Deborah Pence, titled "Revised Consensus to Claims Using the CS Filter and Low Nitrogen Tobacco," 70028426-8429 (US 22184), demonstrated the existence of a "consensus for commercial EW from a scientific perspective" with regard to the following claims that were reached after "conduct[ing] a number of chemical and biological assays on this product" and "are based on a competitive evaluation of other products within a local market":

-- "The potential risks of smoking may be reduced due to the decrease in irritants, cytotoxins, and some carcinogens in the vapor phase";

-- "Breakthrough filter giving good taste, but [sic] a significant reduction of many controversial or unwanted compounds may (might) reduce potential risks of smoking";

-- "Decrease in many controversial compounds in whole smoke (with explanation insert) may (might) reduce potential smoking risks";

-- "Decrease in irritants which may (might) potentially reduce the risks of smoking – throat harshness[,] throat irritation";

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-- "Decrease in many (some) vapor phase irritants, cytotoxins and genotoxins which may (might) potentially reduce the risks of smoking";

-- "The potential risks of smoking may be reduced due to the decrease in free radicals in smoke";

-- "Decrease in many (or most) controversial compounds in the vapor phase or whole smoke (with further information on pack or insert to define terms "controversial" and "many") may (might) reduce the potential risks of smoking"; and

-- "Breakthrough in filter technology giving good taste, but [sic] significant reduction in most (or many) vapor phase compounds (or reduction in unwanted vapor phase compounds) may (might) reduce potential risks associated with smoking."

¶70028426-8429 at 8428-8429 (US 22184); Townsend TT, 3/8/05, 14715:6-15, 14716:7-14718:25, 14722:13-14723:1.

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¶1971. RJR has not abandoned the EW concept, and has returned it to the laboratory to improve performance. As of 2004, it was "still working on the technology." Townsend WD, 64:1-5.

BATCo and Brown &Williamson

FACT Cigarette

¶1972. In the mid-1970s, B&W internally acknowledged a "scientific consensus on alleged ill effects of smoking" that included harm from constituents in the gas phase of cigarette smoke, including carbon monoxide ("artherosclerosis, permeable arteries, displacement of oxygen in blood"), nitrogen oxide ("obstructive pulmonary disease, emphysema"), and hydrogen cyanide ("cilatoxic"). In response, B&W developed FACT, a "low gas" cigarette to compete with low tar products:

The gas reduction segment is expected to emerge in the next 1-2 years. The low gas segment is also seen as a means to eventually stem the decline in smoking incidence through positive statements to smoking consumers and passive smokers alike.

¶777076768-6792 at 6773, 6790 (US 54623).

¶1973. While B&W believed that FACT presented a potential health benefit, it also believed there were several impediments to offering "health reassurances." 777076768-6792 at 6768 (US 54623). B&W concluded that Liggett's and Lorillard's prior low gas products had failed in part because of "an inability of the positioning to communicate . . . distinct health hazards arising from cigarette gases." 777076768-6792 at 6771 (US 54623); see also 681879254-9715 at 9293 (US 21020).

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¶1974. B&W chose not to market FACT with health claims. Brown & Williamson concluded, based upon

[e]xtensive testing of FACT advertising over a three-year period," that "consumers do not perceive low gas as a different benefit than low 'tar' [and] low gas per se is not a compelling consumer benefit [and thus] it will not yield successful advertising if presented without substantial problem definition and elaboration.

¶66705296-9299 at 9296 (US 69068); 777076771-6792 at 6771 (US 54623) (four prior attempts by other manufacturers to market low gas products had failed to achieve significant penetration because of "an inability of the positioning to communicate … distinct health hazards arising from cigarette gases."). A B&W Brand Manager stated explicitly in a memorandum to, among others, the Vice President of Brand Management:

We do not support definition in advertising of the problem of gas in order to specifically communicate its consumer benefit and distinguish it from low "tar." To supply such definition would require overt references to the alleged ciliatoxic and cardiovascular ill effects of smoking. The possible ramifications of this in the Legal, Regulatory, and Policy area are appalling.

¶667059296-9299 at 9296 (US 69068) (emphasis in original).

Project Ariel

¶1975. Project Ariel was the first practical device to alter or avoid combustion, and thus reduce delivery of harmful compounds in smoke. Ariel was a ceramic tube placed in the middle of a conventional cigarette to run the complete length of the rod. The tube was connected to a mouthpiece, which was isolated from the tobacco that surrounded the ceramic rod. Nicotine or nicotine plus flavor was placed inside the tube so that when the tobacco burned, the nicotine and flavor were released when the hot zone reached that portion of the ceramic tube. In this way, the tobacco never underwent combustion. Farone WD, 177:22-178:12. It was patented in 1964 and was based on research done for BATCo at Battelle Laboratories. (no bates) (US 20581 at 301121935). Ariel had the look and feel of a regular cigarette. Farone WD, 177:10-179:7.

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¶1976. Some scientists at BATCo believed that Project Ariel was feasible. On February 13, 1963, Sir Charles Ellis wrote to BATCo Production Director D.S.F. Hobson to suggest a gradual transfer of responsibility for Ariel from Battelle to BATCo, and proposing a "definite phrase stating that BAT will undertake the commercial realisation of the project." Ellis went on to state:

There is now no doubt that the project is feasible, and it is important that we carry out this further study to see whether from this beginning we can develop something more sophisticated. I have myself smoked two crude versions of the devices . . . and obtained a marked nicotine effect without, of course, any combustion products.

¶301121935-1936 (US 20581); see also 301121911-1917 at 1917 (US 22023) (February 18, 1963, Battelle report confirming that "it was possible to smoke a complete cigarette and get some satisfaction out of it. These experiments make it appear very likely that a satisfactory device can be developed.")

¶1977. In July 1966, BATCo scientists again confirmed that with regard to Ariel, "the original objective is feasible and achievable." 105534272-4285 at 4283 (US 20241). In May 1967, BATCo in-house scientists also concluded that "the ARIEL design provides . . . a satisfying smoke which, within present knowledge, is 'healthy.'" 301099888-9902 at 9890 (US 21547).

¶1978. There were technical challenges with Project Ariel. B&W Researcher, Dr. Ivor W. ("Wally") Hughes noted that, apart from the technical challenges of constructing such a novel "heat -- don't burn" device, Ariel showed problems with "smoke" quality which could inhibit consumer acceptance of the device. (no bates) (US 20115 at 1-2).

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¶1979. In December 1964, Battelle submitted its "Final Report on the Biological Part of Project Ariel" prior to the transfer of Project Ariel to BAT. Battelle highlighted the principal problem that plagued efforts to develop a "heat-don't burn" device in the 1960s. While "[a] physiologically acceptable aerosol has thus been produced by electrically heating aluminum tubes containing tobacco extract and different additives," 301121057-1086 at 1066 (US 20578) (emphasis in original), there had been no success "changing over from the electric heater to a practical heating system as provided by burning an outer wrapper of treated tobacco." Id. at 1061.

¶1980. In July 1966, a year and a half after Project Ariel had been transferred to BAT, BAT scientists reported, "irritation is above normal; the overall flavour of the smoke is not particularly pleasant and is lacking in 'body' [and] [t]he aerosol itself does not persist as long as that from a normal cigarette. . . ." 105534272-4285 at 4278 (US 20241) at 4. BAT scientists concluded:

The devices which have been made to date are still a considerable way from being acceptable and easily produced, and it would be misleading to under-estimate the amount of effort required to develop the devices to the required acceptability both in smoke quality and ease of production.

¶Id. at 4279.

¶1981. BAT scientists acknowledged that, given the multitude of problems encountered in Project Ariel, "[t]here is some merit in considering the circumstances which led to the origin of the idea" -- the idea of reducing or eliminating smoke components formed during combustion. They noted that, "[i]n this context, the trend to reduction in tar content (in other words, an increase in the nicotine to tar ratio) is becoming increasingly important, and a number of ways of achieving this are available [e.g., the M.A.H. Russell medium nicotine, low tar concept]." Id. at 4283. In the years that followed, BAT gradually shifted its focus to more conventional potentially reduced exposure projects. Read WD, 41:1-6.

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Project Airbus

¶1982. Brown & Williamson briefly re-considered an Ariel-type device -- called "Airbus" -- in the late 1980s. "AIRBUS was intended to directly compete with [R.J. Reynolds's] Premier in the concept of 'heating but not burning' tobacco." 620611363-1377 (JE 053344). Airbus had some technical challenges:

After extensive research with this design, it must be concluded that within the constraints of cigarette size and the properties of known materials, the design cannot deliver a nicotine-flavored aerosol without burning or severely charring tobacco. Over 100 different prototype configurations were constructed using various fuels, insulators and aerosol generator formulations in attempts to lower aerosol generator temperatures below charring conditions.

A mathematical model, constructed to simulate the [Airbus] design, indicated a need for an insulation material ten-times better than conventionally known materials. Only with this type of material could a non-charring condition be achieved. . . .

Even if temperature could be controlled, several other problems exist with the design such as:

¶C Poor delivery efficiency or aerosols/flavors.

¶C Messy debris after burning.

¶C Fallout of aerosol generator during smoking.

Based on all of the above difficulties, no further investigative study is recommended. . . .

¶Id. at 620611369.

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¶1983. Brown & Williamson's "Airbus Review" also advised against further investigation of an Ariel device after Reynolds' failed test market of Premier had "revealed significant product deficiencies in taste, aroma, and smoking mechanics":

Not only are consumers disappointed by Premier's taste and aroma, they are reluctant to make adjustments to their normal smoking routines in order to accommodate the special needs of the product as indicated by the instruction booklet attached to packs. . . .

[This] is further complicated by the fact that Premier is being positioned as part of the cigarette category. . . . Trial, however, leaves people feeling they've been misled. Things like the unusual foil overwrap, the instruction booklet, the need for a certain type of lighter and Premier's physical appearance all surprise the consumer. [The] consensus is that it is not a "real" cigarette.

¶Id. at 620611370.

¶1984. Like BATCo, Brown & Williamson shifted its focus from heat-not-burn-type devices to more conventional potentially reduced exposure projects. Id. at 620611366.

¶1985. In March of 1989, before the September 1989 Vancouver conference for the BAT Research Policy Group,24 "it was agreed at that time that the technology to make Airbus happen had to be further developed and it would be transferred . . . to Southampton and became project Nova." Wigand TT, 11595:1-4; 401062678-2678 (JD 011688).

Advance

¶1986. In November 2001, Brown & Williamson began test-marketing "Advance" -- a conventional potentially reduced-exposure product. Advance contains tobacco cured using a patented process to reduce levels of TSNAs – tobacco-specific nitrosamines that are normally formed during the curing process and have been identified as potential carcinogens – and utilizes a new patented triple filter to further reduce deliveries of toxins produced during combustion. Scientists at B&W believed Advance was a potentially reduced-exposure cigarette. Wessel 30(b)(6) PD, United States v. Philip Morris, 3/19/03, 42:1-43:1 (Confidential); Harris WD, 231:4-10; Honeycutt PD, United States v. Philip Morris, 4/23/02, 13:23-15:6, 61:3-66:6; USX5110274-0292 (US 89063); StarUSvPM000251-0363 (US 85920) (Confidential).

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¶1987. Moreover, Brown & Williamson considered Advance to be the first conventional potentially reduced exposure product that smokes like a "real" cigarette in order to meet the consumer needs of taste, aroma, and smoking mechanics:

Advance . . . is a conventional cigarette. It burns. You get smoke. . . . You don't have to overly manipulate to light it. It lights like a conventional cigarette. . . . You don't have to have a lot of mechanical contraptions, either external to the smoke or internal to the cigarette, to conduct the act of smoking. That is a conventional cigarette.

¶Wessel 30(b)(6), United States Dep., 3/19/03, at 71:16-72:17.

¶1988. In October 1999, B&W entered into an agreement with an independent tobacco company, Star Scientific, Inc., ("Star") to develop a product, called Advance, utilizing tobacco cured by Star's patented process for creating low-TSNA bright tobacco. USX5110274-0292 (US 89063); Honeycutt PD, United States v. Philip Morris, 4/23/02, 59:2-17, 68:25-70:3. Under the agreement, Star was responsible for test marketing Advance, and generating the onserts that were used in the test market. Blackie WD, 180:4-10.

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¶1989. In late 2000 and early 2001, Star Tobacco introduced its initial version of the reduced TSNA cigarette "Advance" in test markets in Richmond, Virginia, and Lexington Kentucky. Wessel 30(b)(6), United States Dep., 3/19/03, at 18:2-19:21.

¶1990. On April 25, 2001, Brown & Williamson and Star Tobacco entered into an agreement to supersede their October 1999 agreement in its entirety and to provide for other commercial agreements. 000251-0363 (US 85920) (Confidential). This "Restated Master Agreement" transferred to Brown & Williamson full responsibility for all aspects of the market testing and product rollout of Advance, including marketing, advertising, packaging, labeling, product design, description, disclosure and comparative contents. Id. B&W began a new test market in Indianapolis in November 2001, using its redesigned packaging and onsert. Wessel 30(b)(6) PD, United States

Philip Morris319032421028115

¶1991. Star Scientific's version of Advance used a charcoal filter. Blackie 30(b)(6), United States Dep., 10/11/01, at 92:15-94:20. In addition to the federally mandated warnings, Star voluntarily placed additional information about the product and the harms of smoking on the package, and added an informational "onsert" attached to the package. Star's package included such statements as "Smoking can take YEARS off your life. It is much safer for you to QUIT than to switch or smoke" and "Star's processing methods greatly reduce SOME cancer-causing chemicals (nitrosamines) and its special filter reduced SOME toxic gases in cigarette smoke." 524942388-2389 (US 52963) (emphasis in original); 524942390-2391 (US 88038*); Wessel 30(b)(6) PD, United States v. Philip Morris, 3/19/03, 19:3-22:23.

¶1992. Brown & Williamson's refined version of Advance used a three-part, TRIONIC™ filter:

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The filter element nearest the tobacco section contains a sophisticated Ion-Exchange Resin (or IER). The IER acts as a pre-filter and pulls out specific substances -- primarily those known as "aldehydes" -- from the smoke passing through it.

The next section of the TRIONIC™ Filter contains a special activated carbon [that] filters as efficiently [as] standard charcoal, but provides better taste. What's more, since the initial IER section has already worked on removing aldehydes from the smoke, the carbon element can now "concentrate" on filtering other substances, such as isoprene.

The third and final stage of the TRIONIC™ Filter is composed entirely of cellulose acetate. Cellulose acts as a filter of "particulates" (sometimes referred to generically as "tar").

¶271098483-8484 at 8483 (JE 036407).

¶1993. Both Star Scientific's Onsert and B&W's Onsert communicated the following:

C Both state the company is providing this information so adult consumers have a basis for making informed choices.

¶C Both state there is no such thing as a safe cigarette.

C Both state there is not enough medical information to know if the product lowers health risks.

¶Compare Star's onserts (no bates) (US 52963) with (no bates) (US 88038)) and Brown & Williamson's onsert (no bates) (US 87216). Both onserts contained the mandatory Surgeon General's warnings. See id. Both Brown & Williamson's and Star Tobacco's onserts contain similar statements about compensation and the limitations of the FTC method for measuring tar and nicotine yields. Id.

¶1994. Brown & Williamson's onsert contained some additional specific information, regarding reductions of toxins and potential carcinogens that Star Tobacco's onsert did not:

C Brown & Williamson's onsert lists 44 of the "Hoffman analytes" -- potentially harmful smoke constituents "listed in proposed regulations by the MA [Massachusetts] Dept. of

760

Public Health" including tar and nicotine -- and reports the reductions of these -- both as absolute levels and percent change -- achieved with the Advance product as compared to the top two selling light cigarettes. Star Tobacco's onsert contains less information about reductions in Hoffman analytes, listing only 16.

¶Compare Star's onserts (no bates) (US 52963) with (no bates) (US 88038) and Brown & Williamson's onsert (no bates) (US 87216.

¶1995. B&W made the following changes in Star's Advance Onsert:

affirmatively removed Star's statements on the package that referred to "cancer-causing chemicals";

deleted Star's statements that "Smoking related diseases can KILL you," "Smoking can take YEARS off your life," and "It is still better to QUIT than to switch or smoke";

eliminated Star's text references to "carcinogens (cancer-causing chemicals)" and "potent cancer causing chemicals in tobacco and tobacco smoke" in the onsert. B&W instead referred to "toxins";

deleted Star's onsert statement that "ALL SMOKED TOBACCO PRODUCTS ARE ADDICTIVE AND POSE SERIOUS HEALTH HAZARDS"; and

deleted Star's statement explaining that "Because many smokers smoke to get nicotine, they tend to smoke more intensely when smoking 'lights' or 'ultra lights,' and that because of such nicotine-driven compensation 'lights' and 'ultra-lights' are NOT NOW viewed by health scientists as reliably less hazardous." Instead, B&W stated in minuscule type only that smokers "can increase or decrease the amount of smoke that they take in depending on how they smoke their cigarettes" and thus actual delivery may differ from the FTC test measurements.

761

¶Compare 524942388-2389 (no bates) (US 52963) with 524942390-2391 (US 88038*) with TLT0960001-0002 (US 87216) (onsert to B&W Advance). See also Wessel 30(b)(6) PD, United States v. Philip Morris, 19:3-22:23; Blackie TT, 10/26/04, 3897:15-3900:15.

¶1996. Before test marketing of the refined Advance product, Brown & Williamson provided copies of its onsert to the National Association of Attorneys General ("NAAG"), which enforces the Master Settlement Agreement ("MSA") reached between Defendants and the states. 282402357- 2454 (JD 012690). In both Arizona and Indiana, where Brown & Williamson conducted extensive test marketing of Advance,

Brown & Williamson personnel went to visit not only the attorney general but also other state officials and local officials, advised them of the [test market] plans, gave them examples of the advertising materials and the cigarettes themselves so that they could be informed about what B&W was doing, and given an opportunity to comment and ask questions.

¶Mellen, United States Dep., 7/22/04, at 314:19-315:23. Neither NAAG, nor its individual member Attorney Generals, have complained about Brown & Williamson's onsert for, or marketing of, Advance. Id.

Lorillard's Zero Tar and PMO Projects

¶1997. As discussed above, ciliastasis is a condition in which the lung's cilia, the hair-like structures lining the lung passageways that are responsible for removing foreign matter such as particulate matter from cigarette smoke, become immobilized, or static, and cease their cleansing function. Lorillard conducted a significant amount of research relating to one compound in particular, phenol methyl oxadiazole ("PMO"), as a possible solution to the problem of ciliastasis.

762

¶See, e.g., (no bates) (JD 020259) (reporting a range of 1969-1970 PMO biological studies); 01417692-7714 at 7692 (US 20047).

¶1998. Lorillard could not demonstrate by consistent experimental proof that PMO resulted in a health benefit. Indeed, a number of the tests, including a long term chronic inhalation study in dogs that was done by the Tobacco Working Group incorporating some of Lorillard's PMO research, did not show that the addition of PMO to tobacco provided any prophylactic effect. (no bates) (JD 020261 at 1); and 504210547-0915 at 0547-0550 (JD 061133). Lorillard never marketed a commercial cigarette containing PMO. Coggins, United States Dep., 06/27/02, at 33:2-21, 148:21- 24.

Liggett's Project XA

¶1999. By the early 1970s, Liggett had developed a new cigarette product, known as "XA," that internal research led it to conclude was less hazardous to smokers. Liggett saw XA as a way to increase its market share, which had fallen to around 5%, by attracting smokers who desired a cigarette that was potentially less harmful than the cigarette they had been smoking. Ross PD, Washington v. American Tobacco, 10/22/98, 97:1-98:25; Harris WD, 174:13-175:2.

¶2000. The XA product utilized palladium as a catalyst to alter the chemical reactions occurring in a burning cigarette, thus modifying the composition of cigarette smoke. LATH00312201-2202 (US 22149); Albino TT, 3/29/05, 17099:11-19, 17106:23-17107:1. By 1972, researchers at Liggett had determined that the smoke from XA cigarettes contained lower concentrations of polycyclic aromatic hydrocarbons ("PAHs"), some of the most harmful constituents in cigarette smoke. 681879254-9715 at 9485 (US 21020); LATH00312201-2202 (US 22149). By 1976, Liggett researchers had concluded, using the standard mouseskin-painting model, that the smoke condensate from XA cigarettes reduced overall tumors in mice by 85-88%, and cancerous tumors by 77-100%. Harris WD, 174:13-175:2; LG 2013584–3587 (US 21208); LG166090–6102 at 6101 (US 21195) (Figure 2); Meyer PT, Washington v. American Tobacco, 11/10/98, 5441:14-5443:2; Mold PD, Cipollone v. Liggett, 11/25/85, 100:2-105:15. Liggett also performed animal inhalation studies and chemical analyses that showed that the addition of palladium did not adversely affect the test animals or create threatening byproducts. Id. at 104:17- 105:15 (skin painting and inhalation studies "demonstrated that we had, in fact, eliminated the animal carcinogenicity"); 681879254-9715 at 9487 (US 21020).

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¶2001. Liggett spent twelve years and significant amounts of money to produce XA. Despite that investment, Liggett chose, for a variety of reasons, not to market it. Albino TT, 3/29/05, 17103:9-11. First, Liggett concluded that the XA cigarette lacked consumer acceptability because it had a metallic taste, like gunpowder, and was not smokeable. Bereman, United States Dep., 4/23/02, at 67:2-13. Second, Liggett also believed that the FTC Guidelines would not permit it to make health claims about XA. Mold, Cipollone Dep., 12/13/85, at 283:22-284:08 ("we had been told that we couldn't say about the health benefits of this directly because The Federal Trade Commission would object"); LG2013239-3253 (US 34095); (no bates) (JD 010547 at 7-11) (discussed with Harris TT, 10/18/04, 2810:20-2816:15); Ross, Washington Dep., 10/22/98, 112:21- 114:21.

¶2002. Third, other Defendants suggested they did not support the marketing of XA. Philip Morris "threatened to do everything in its power to prevent the marketing of the new cigarette." 681879254-9715 at 9295 (US 21020). According to Liggett President Kinsley V. Dey, that pressure from Philip Morris not to market XA in the United States contributed to Liggett's decision. Mold

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¶PD, Cipollone v. Liggett, 11/26/85, 191:17-193:18. Ernest Pepples, B&W's representative on the Tobacco Institute's Committee of Counsel, threatened Liggett's "very existence" if it marketed the XA cigarette, including freezing Liggett out of joint defense agreements, and perhaps excluding Liggett from the Tobacco Institute as well, because selling XA would be an admission against the interest of all Cigarette Company Defendants. Meyer PT, Washington v. American Tobacco, 11/10/98, 5511:4-5518:13.

¶2003. XA's technology remained dormant at Liggett for nearly two decades. Shortly after creation of Liggett's affiliate Vector Tobacco in the late 1990, Drs. Bereman and Albino, Liggett- turned-Vector scientists, developed the Omni cigarette based on the XA technology and managed to market the product.