The MSA Has Not Sufficiently Altered Defendants' Conduct to Justify Not

¶Imposing Appropriate Remedies

¶While the MSA has made significant strides towards preventing Defendants' fraudulent activities, for several reasons it alone cannot remove the reasonable likelihood of Defendants' future

¶RICO violations.46 As this Court has already noted:

In arguing that the MSA obviates the need for injunctive relief, Defendants implicitly ask the Court to make the following two assumptions: that Defendants have complied with and will continue to comply with the terms of the MSA, and that the MSA has adequate enforcement mechanisms in the event of noncompliance.

¶United States v. Philip Morris Inc., 116 F. Supp. 2d at 149 (D.D.C. 2000).

¶First, Defendants have not fully complied with the letter or spirit of the MSA. For example:

Even in the core area of youth marketing, RJR did nothing to change its magazine placement policies after signing the MSA in November 1998 until the day that the California attorney general filed suit against it in March 2001 (in a suit which found that both RJR's initial and March 2001 policies violated the MSA). People ex rel. Lockyer v.R.J. Reynolds Tobacco Co.,¹¹¹¹ Lorillard did not participate in the second phase of funding for the Brotman/Freedman research. (US 30450). -147- Cal. Rptr. 3d 317, 322-23 & n.3 (Cal. Ct. App. 2004). Indeed, the appellate court affirmed the trial court's determination that RJR "'studiously avoided' measuring its advertising exposure to youth, probably because [it] 'knew the likely result of such analysis.'" Id. at 327 (quoting trial court decision); see generally Findings of Fact Section VI(B)(2, 3).

Likewise, after entering the MSA in November 1998, Lorillard did not change its principal "Pleasure" advertising campaign for Newport, the second-leading brand smoked among youth ages 12 to 17. Milstein TT, 1/10/05, 9312:1-

¶A defendant seeking to escape a permanent injunction bears the burden of demonstrating that "subsequent events made it absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur." United States v. Concentrated Phosphate Export Ass'n, 393 U.S. 199, 203 (1968) (emphasis added); United States v. W.T. Grant Co., 345U.S. 629, 632 (1953).

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9314:9; 9417:18-9421:25, discussed in Findings of Fact Section VI(B)(3).

Defendants increased price promotions more than seven-fold from 1998 to 2003 after the MSA banned outdoor and billboard ads, even though youth are particularly vulnerable to such price promotions.

Defendants Philip Morris and Altria continue to sponsor two Marlboro motor sports teams which receive heavy media coverage in the United States, despite the MSA's limitation of one sports sponsorship per MSA signatory. They rationalize this on the grounds that Altria is officially not a signatory to the MSA, overlooking the fact that Philip Morris CEO and chairman Michael Szymanczyk sits on Altria's Corporate Management Committee, and that Philip Morris is, of course, a signatory to the MSA. See Findings of Fact Section VI(B)(2, 3).

Despite the same limitation of one sponsorship per signatory, Philip Morris decided in 2001 to sponsor Marlboro race cars in two different auto racing leagues in 2001 -- the Indy Racing League and the CART racing league -- and then changed course immediately when Washington State attorney general Christine Gregoire protested, suggesting that Philip Morris was well aware that its decision violated the MSA. Id.

Even though the MSA required Defendants to shut down and disband CIAR, Philip Morris has reconstituted it at the same address and with the same director, under the name of the Philip Morris External Research Program. Id.

¶These are not the actions of companies which have fundamentally altered their conduct since entering the MSA.

¶Second, the Court is unable to rely upon the states to vigorously enforce the MSA. This comment is not a criticism, but rather a realistic acknowledgment that enforcement depends upon the commitment of resources by each state and that many are stretched very thin financially. Even though the MSA allots a certain amount of money to each state for purposes of enforcement, in light of the fiscal pressures on states and the constant compromises they must make in reference to their financial priorities, this Court cannot be assured that adequate resources will be available in the future to enforce the MSA.

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¶The MSA provision that authorizes the state attorneys general to inspect Defendants' books and interview their personnel begins expiring in 2006. See MSA § VII(g) at 52 (granting inspection authority to each State "following State-Specific Finality in a Settling State and for seven years thereafter"). This provision creates some amount of transparency in Defendants' business practices. Even if the Court were to accept Defendants' view that the MSA currently has adequate enforcement mechanisms while the states' inspection authority remains intact, the MSA's enforcement mechanisms will steadily become less and less adequate as the authority begins to expire in one state after another, starting this year. Additional inspection and discovery authority will be required to ensure that the MSA remains meaningful.

¶In addition, while the MSA requires "mandatory consultation and discussion" for every alleged violation, this leads to time-consuming enforcement efforts. JD FF ch. 12, ¶ 58 (citing MSA §§ VII.(b)-(c), XVIII(m) (JD 045158)). See, e.g., Ohio ex rel. Petro v. R.J. Reynolds Tobacco Co., 820 N.E.2d 910 (Oh. 2004) (over five years required to achieve final court ruling that RJR violated MSA by advertising cigarette brand logos on promotional matchbooks); People ex rel. Lockyer v. R.J. Reynolds Tobacco Co.,¹¹¹¹ Lorillard did not participate in the second phase of funding for the Brotman/Freedman research. (US 30450). -147- Cal. Rptr. 3d 317 (Cal. Ct. App. 2004) (over four and a half years required to achieve ruling that RJR violated MSA by failing to modify magazine placement policies). Moreover, the MSA prohibits the states from seeking to enforce it on one another's behalf, MSA § VII(b), (c)(1) at 49 (JD 045158). Together, these structural issues in the MSA make it a far less powerful enforcement mechanism than Defendants claim.

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¶Defendants nevertheless assert that the MSA's "liaison mechanism for mandatory consultation and discussion" "has almost always resulted in a satisfactory resolution of [the states'] concerns." JD FF ch. 12, ¶ 58. What Defendants do not acknowledge is that they are free to ignore complaints brought to their attention through this mandatory process. At trial, former Brown & Williamson executives Susan Ivey (now Chairman and CEO of RJR and President and CEO of RJR's parent company, Reynolds American Inc.) and Susan Smith (now Vice President of Marketing Services for RJR) acknowledged that although Brown & Williamson received complaints from NAAG and from Governor Laughton Chiles of Florida about its "B Kool" advertising campaign, the company took no action in response and suffered no consequences as a result. Smith WD, 32:20- 33:8; Ivey WD, 11:4-12:1

¶Finally, two Defendants -- BATCo and Altria – are not even subject to the provisions of the MSA, while another, Liggett, is only subject to some MSA provisions. As the Court previously recognized, "the MSA cannot preclude relief in this RICO action because two of the Defendants, BATCo and Altria, are not even signatories to that Agreement." Philip Morris USA, 316 F. Supp. 2d at 12. The point is underscored by Defendants' rationalization – discussed above – that Philip Morris and Altria are free to sponsor multiple Marlboro auto racing teams because their Marlboro Formula 1 sponsorship is officially controlled by Altria, and Altria did not sign the MSA. See Findings of Fact V(F)(5)(e)(2).

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As to Certain Defendants, There is Not a Reasonable Likelihood of Future

¶Violations of 18 U.S.C. § 1962 (c) and (d)47