An Australian memo is at the centre of a $US280 billion legal battle between the tobacco industry and the US Government.

by Caroline Overington and Stewart Fist
With Reuters, Associated Press and Bloomberg

It sounds like a scene from a mobster movie: on a cold day in December 1953, a gang of drug pedlars met beneath a chandelier at New York’s Plaza Hotel.

Given the year, they probably arrived in big American cars. Given the month, they would certainly have been wearing long, cashmere overcoats, perhaps with snow on the shoulders.

This wasn’t a meeting of the Mob. It was a meeting of cigarette company executives. The drug they were pushing was legal: it was nicotine.

However, in a deeply creative move, the US Government has decided to treat them like mobsters.

The Department of Justice has launched a civil action against the tobacco companies that employed those executives, accusing them, of all things, of racketeering. It hopes to use America’s Racketeer-Influenced and Corrupt Organisations (RICO) Act, which is normally used to pursue mobsters, to bring the giant tobacco industry to its knees.

It is the biggest civil racketeering trial in history. The figures are staggering: the US Government, through its lawyers, will seek the largest civil damage award in US history: $US280 billion ($386 billion).

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The Justice Department has spent $US135 million pursuing the case, which started in 1999, although the hearing didn’t get under way in Washington until last week. That amount easily eclipses the estimated $US50 million it spent on the Microsoft antitrust case.

To prepare for the hearing, the Government’s lawyers amassed a document archive of 80 million pages. Cigarette makers have made another 42 million pages available (many tobacco industry documents are publicly available at sites such as The two sides are expected to call as many as 100 witnesses.

In order to prove fraud and racketeering, the Government must convince a single judge that cigarette makers conspired for decades to hide the dangers of smoking by destroying documents and pretending to fund research that showed that smoking wasn’t bad for the health.

Key to the Government’s case is an Australian document known as the Foyle Memorandum. The trial was delayed while an appeals court heard arguments about the memo, which has been described as a document that could “make or break” the case for either side.

No one outside the tobacco industry knows exactly what the document (or documents) contain. US Government lawyers believe it is the advice of a London lawyer, Andrew Foyle, who worked for the Australian office of British American Tobacco, on whether the company should keep or destroy internal paperwork in light of increasing litigation.

The Foyle Memorandum came to light when a Melbourne smoker, Rolah McCabe, sued BAT Australia in 2002 after contracting lung cancer. The court found BAT Australia had destroyed certain documents in what it referred to as part of a “document retention” policy on which it had been advised by lawyers. The findings were later appealed against and overturned, but US lawyers have been chasing the Foyle Memorandum since.

BAT argues the memo is a protected lawyer-client communication. In June, the judge presiding over the US case, Judge Gladys Kessler, ordered BAT to provide the memo, saying the company had engaged in “inexcusable conduct” in its two-year struggle to withhold it.

US Government lawyers believe the document could strengthen their argument that tobacco companies committed fraud by lying about the dangers of smoking and hiding that information from the public.

William Schultz, a former Justice Department lawyer who headed the tobacco case during the Clinton administration, says the memo is key to the Government’s case. “I think, in the context of a fraud case, evidence of intentional document destruction could be very relevant because the whole notion of fraud is that you are deceiving the public,” Schultz said last week. “Document destruction on a systematic basis could be a central activity in the scheme of fraud.”

That legal battle continues, but there are other links to Australia in the US trial. Australian executives managed Philip Morris’s policies on smoking and health at various times in the 1980s and 1990s.

Australia is mentioned in many tobacco industry documents that are already in the public domain. By the late 1980s Australia had developed a reputation in the international industry for the ferocity of its anti-smoking activists. The activist group BUGA UP (Billboard Utilising Graffitists Against Unhealthy Promotions) – which slapped grafitti on tobacco billboards around Sydney – was well known. Documents show US tobacco executives were impressed by the Australian anti-smoking lobby’s success in having a sports and cultural levy added to cigarettes, to fund a ban on tobacco sponsorship of sporting events.

The industry began to test marketing and legal initiatives in Australia in the 1970s. For instance, the industry successfully trialled scientific PR tours in Australia to test how media would respond to experts wheeled out by the tobacco industry.

A mid-1980s worldwide initiative to counter the rising fear of passive smoking was named Project Downunder in honour of Australian initiatives and possibly Australian executives who championed the cause.

A Tobacco Institute memo from the US dated February 10, 1988, outlines some of project’s aims: “1. Provide smokers with a positive feeling about themselves and their custom through the alleviation of the ‘second-class citizen’ treatment many smokers face in public places. 2. Improve the general PUBLIC perception of smokers, smoking and the tobacco industry…”

A landmark Australian court case on passive smoking also helped shape the tobacco industry’s strategies around the world.

In 1986 the Tobacco Institute of Australia published a newspaper advertisement about cigarette smoke under the heading: “A message from those who do … to those who don’t.” The ad said in part: “There is little evidence and nothing that proves scientifically that cigarette smoking causes diseases in non-smokers.”

The institute later published a correction after prompting by the then Trade Practices Commission. However, Australian consumer groups – represented by the Consumers Federation of Australia (then known as the Australian Federation of Consumer Organisations, or AFCO) – were unsatisfied and sought a ruling in the Federal Court to ensure the institute would not repeat the earlier advertisement.

The case examined whether there was “little evidence” that environmental tobacco smoke (ETS) caused disease in non-smokers and whether there was scientific proof. In 1991 the court ruled the original statement was “false and misleading” as of 1986.

As recorded by a Philip Morris memo issued a week later, Justice Trevor Morling ruled: “There is more than a little evidence and indeed scientific proof that environmental tobacco smoke causes lung cancer, respiratory disease (limited to such disease in children under 12 months of age) and attacks of asthma in non-smokers.”

This case was so significant that it partly prompted the industry in 1987 to form an “international ETS consultant program” overseen from New York.

“Approximately 70 scientists [including three Australians] in the major international markets of concern to [Philip Morris International] have been recruited to the program,” notes a 1989 Philip Morris memo.

“Six of our UK consultants have prepared affadavits that are to be used in defence of the AFCO case in Australia,” notes the memo.

The program completed “several hundred specific activities or events” around the world in the first two years of operation, the memo notes.

“These have included numerous press briefings, repeated briefings of important government officials, the publication of a number of review articles on the science of ETS, several air quality monitoring studies, convening of a number of scientific conferences, submissions of comments on smoking restriction proposals being considered in a number of countries, testimony before a variety of legislative bodies … and approximately 100 separate presentations at major international scientific meetings challenging the unwarranted health claims that have been made concerning ETS,” it says.

Following the 1991 ruling, a group of international industry lawyers met in London to consider the implications for the industry. This became the International ETS Management Committee.

THE current US trial case is about “a 50-year pattern of misrepresentation, half-truths and lies”, the US Justice Department lawyer Frank Marine said in a five-hour opening statement before a Washington court last week.

Marine, who specialises in cases of racketeering and fraud, said cigarette makers deliberately set up bogus research and PR centres such as the now-defunct Tobacco Institute, to con the public into thinking that it was doing research on its products, and that research showed that cigarettes were not necessarily addictive, nor harmful to health.

“Why did the defendants pursue this course of action? Money, pure and simple,” said Marine.

In response, lawyers for the tobacco companies will argue that a key meeting at the New York Plaza Hotel – which resulted in all American cigarette companies agreeing to release a “Frank Statement to Smokers” that said smoking was not harmful to health – was not a secret. Indeed, it was reported by newspapers at the time.

The tobacco industry’s lawyers will also argue that statements it made about the relative safety of smoking were consistent with scientific evidence available in the 1950s and 1960s.

The federal case – which could take as long as six months – is separate from a huge claim bought by America’s state governments that ended in 1998 with tobacco firms agreeing to pay $US250 billion to cover the states’ cost of health care for sick smokers on welfare.

The federal case will also be more difficult to win. To prove racketeering, the US Government must convince the court that cigarette companies not only conspired to hide and deny evidence that smoking could kill, but also that they will offend again.

Lawyers for the tobacco companies say this is impossible, since all cigarette packets now carry health warnings, as do advertisements in the US.

Besides BAT, defendants in the trial include Altria Group’s Philip Morris USA, Loews Corporation’s Lorillard Tobacco Company and Vector Group’s Liggett Group.

In its opening statement, delivered to the court last week, Philip Morris USA’s lawyer, Ted Wells, said the tobacco industry never “purposely lied to the public about the dangers of smoking”.

“We do not concede in any shape or form that there was a racketeering conspiracy,” Wells said.

“Some of the conduct by individuals in the past was wrong-headed, mistaken and even regrettable but it wasn’t a conspiracy.”

Tobacco lawyers also argued that the Government’s case was focused entirely on the past, and ignored the fact that cigarette makers today go to great lengths to warn consumers about the dangers of smoking.

“We have acknowledged that we’re in the business of selling a dangerous product,” Wells said.

“Each of the defendants say to the American public in a clear and unambiguous manner that smoking is dangerous. They [the public] can hear our message. It’s an unambiguous and clear message that we sell a dangerous product.”

Judge Kessler – who will decide the case – questioned whether that admission was being communicated directly to the American public.

“Is that succinct and pithy phrase actually on any cigarette packaging or on any company websites anywhere?” she asked.

In his opening statement, Peter Biersteker, a lawyer representing RJ Reynolds, argued that cigarette makers had tried to make their products safer.

As evidence, he cited the development of low-tar or “light” cigarettes in the 1970s. Studies have shown these are no better for smokers than “high-tar” cigarettes but, Biersteker said, nobody understood that at the time. Indeed, until recently, governments advised smokers to switch to “low-tar”, not knowing it did no good.

Biersteker said cigarette companies had rushed to introduce filters when it was shown that the more a person smoked, the more likely he or she was to develop lung cancer. In 1952, only 1 per cent of cigarettes had filters; now, almost all do.

The Government’s first witness – who took the stand on Friday, was the former Food and Drug Administration chief, David Kessler.

He told the court that, as recently as 1994, there was evidence that the tobacco industry was deliberately managing the level of nicotine in cigarettes to keep people addicted.

As well as presenting evidence about the manipulation of nicotine levels, the Government’s lawyers will attempt to demonstrate seven “pillars” to the tobacco industry’s plan to defraud consumers: _A campaign to deny that smoking and exposure to tobacco smoke cause adverse health effects; _Propagation through the tobacco groups of the “myth” that the industry was researching its products; _Denial that nicotine is addictive; _Denial that cigarette makers manipulate nicotine levels to create and sustain addiction among their customers; _Marketing of “light” cigarettes as less hazardous, even though the industry’s own evidence shows they are not; _Marketing to children, and; _Suppression of evidence of smoking’s danger by destroying some incriminating documents.

The grandson of the founder of RJ Reynolds Tobacco, Patrick Reynolds, who is now president of the Foundation for a Tobaccofree Earth, last week told USA Today newspaper that companies like his grandfather’s had for years “claimed publicly that cigarettes never cause disease, and now they should pay the price”.

The US Government will cite studies that suggest cigarettes are responsible for one in five deaths in the United States, or nearly 500,000 deaths a year.

“The defendants’ recent, superficial changes in behaviour in reaction to this and other lawsuits are too little, too late,” said Matt Zabel, deputy associate attorney-general.

If the US Government wins, however, it may have another problem on its hands. A $US280 billion settlement would effectively bankrupt the nation’s cigarette companies if it was payable in a lump sum.

The US would then be faced with a choice: it could either close them down, which would mean the loss of thousands of jobs, or it could sell them to some unknown, probably foreign buyers. Alternatively – and very improbably – it could run them itself. This would, at least, cut out the middle man. As Philip Morris likes to say: “Washington makes more money when Philip Morris sells a pack of cigarettes than Philip Morris does.”

The more likely scenario is that, as with earlier cases, the fine would be paid progressively over a number of years. However, in that case, the tobacco companies could simply raise retail prices to cover the cost of progressive fines.

With Reuters, Associated Press and Bloomberg

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