1                                 UNITED STATES DISTRICT COURT

                                  EASTERN DISTRICT OF TEXAS

2                                  TEXARKANA DIVISION

3 THE STATE OF TEXAS              *      CIVIL ACTION

                                  *      NO. 5:96cv91

4 Plaintiff,                      *

                                  *      Beaumont, Texas

5 v.                              *

                                  *      September 27, 1996

6 AMERICAN TOBACCO CO., et al     *      9:15 o'clock a.m.

                                  *

7 Defendants.                     *

* * * * * * * * * * * * * * * *

8

                                 TRANSCRIPT OF HEARING ON MOTIONS

9                                BEFORE THE HONORABLE WENDELL C. RADFROD

                                 UNITED STATES MAGISTRATE JUDGE

10

           APPEARANCES:

11

           FOR THE PLAINTIFF, HARRY GRANT POTTER, III

12         The State of Texas: Assistant Attorney General

           Attorney General's Office

13         P.O. Box 12548

           Austin, Texas 78711-2548

14        (512) 463-2120

                and

15         WAYNE A. REAUD

           Reaud, Morgan & Quinn

16         801 Laurel Street

           Beaumont, Texas 77701

17        (409) 838-1000

                and

18         THOMAS WALTER UMPHREY

           GREG THOMPSON

19         Attorneys at Law

           SANDRA PAYNE

20         Legal Assistant

           Provost & Umphrey

21         490 Park Street

           Beaumont, Texas 77704

22         (409) 835-6000

           and

23        JOHN EDDIE WILLIAMS, JR.

          Williams, Bailey & Wesner, L.L.P.

24        8441 Gulf Freeway, Suite 600

          Houston, Texas 777017

25        (713) 649-6464

1        and

         HUGH EDWARD MCNEELY

2        Provost & Umphrey Law Firm, L.L.P.

         2901 Turtle Creek Dr., Suite 250

3        Port Arthur, Texas 77643

         (409) 721-6260

4        and

         HAROLD WAYNE NIX

5        Harold, Nix & Associates

         205 Linda Drive

6        Daingerfiled, Texas 75638

         (903) 654-7333

7        and

         DAVID GRANT KAISER

8        Kaiser & Morrison

         Suite 1440 Lyric Centre

9        440 Louisiana

         Houston, Texas 77002

10       (713) 223-0000

11       ALSO PRESENT: DANYEL CHATAGNIER

         RHETT D. KLOK

12       RICHARD J. CLARKSON

         JOHN A. COWAN

13

         FOR THE DEFENDANT, WALTER J. CRAWFORD, JR.

14       R.J. Reynolds Tobacco CHERYL OLESEN

         Company: Wells, Peyton, Beard, Greenbert,

15       Hunt & Crawford

         550 Fannin

16       Beaumont, Texas 77704

         (409) 838-2644

17       and

         THOMAS E. FENNELL

18       Jones, Day, Reavis & Pogue

         2001 Ross Avenue

19       Dallas, Texas 75201

         (214) 220-3939

20       and

         HIRAM HOWARD WALDROP

21       Atchley, Russell, Waldrop & Hlavinka

22       1710 Moores Lane

         Texarkana, Texas 75505

23       (903) 792-8246

         and

24       PETER BIERSTEKER

         Jones, Day, Reavis & Pogue

25       Washington, D.C.

1        ALSO PRESENT: MARK HALL

         CHARLES MURRAY

2

         FOR THE DEFENDANT, GEORGE L. MCWILLIAMS

3        Brown & Williamson Patton, Haltom, Roberts,

         Tobacco Corporation: McWilliams & Greer, L.L.P.

4        700 Texarkana National Bank, Bldg.

         Texarkana, Texas 75504

5        ( 903) 794-3341

6        ALSO PRESENT: KATHLEEN GALLAGHER

         MICHELLE BROWDY

7        STEVE MCCORMICK

8        FOR THE DEFENDANT, LAWRENCE LOUIS GERMER

         Philip Morris, Incorp.: Germer & Gertz, L.L.P.

9        805 Park Street

         Beaumont, Texas 77704

10       (409) 838-2080

         and

11       HIRAM HOWARD WALDROP

         ATCHLEY, RUSSELL, WALDROP &

12       HLAVINKA

         1710 Moores Lane

13       Texarkana, Texas 75505

         (903) 792-8246

14       and

         MARILYN K. SCANLAN

15       Fulbright & Jaworski, L.L.P.

         1301 McKinney, Suite 5100

16       Houston, Texas 77010

         (713) 651-5151

17       ALSO PRESENT: JOHN SCARBORO

18       PAUL DIESETH

         TOM STOEVER

19       MIKE HALL

         JACK MARONEY

20       MARY JO STAMM

         TOM CUNNINGHAM

21

         FOR THE DEFENDANT, JOHN E. FISCTT

22       Liggett Group, Incorp.: Kasowitz, Hoff, Benson & Torres

         700 Louisiana, Suite 2200

23       Houston, Texas 77002

         (713) 220-8800

24

25

         C. FRANK MCMILLAN (409) 654-2805 or (409) 287-3705

1        FOR THE DEFENDANT, ROBERT A. GWINN

         Lorillard Tobacco Co. Gwinn & Roby

2        Incorporated: 1201 Elm Street, Suite 4100

         Dallas, Texas 75270

3        (214) 698-4100

4        ALSO PRESENT: J. WILLIAM NEWBOLD

         CATHERINE CASTELLVCCIO

5

         FOR THE DEFENDANT, NICHOLAS H. PATTON

6        United States Tobacco Patton, Tidwell, Sandefur & Patton

         Company: 6500 Summerhill Road

7        Texarkana, Texas 75505

         (903) 792-7080

8

         ALSO PRESENT: PETER J. MCKENNA

9

         FOR THE DEFENDANT, WINFORD L. DUNN, JR.

10       Hill & Knowlton, Dunn, Nutter, Morgan & Shaw

         Incorp.: Suite 6 State Line Plaza

11       Texarkana, Arkansas 71854

         (903) 793-5651

12

         FOR THE DEFENDANT, MARK E. LOWES

13       Council for Tobacco WILLIAM KEY WILDE

         Research-USA, Inc.: Bracewell & Patterson, L.L.P.

14       711 Louisiana, Suite 2900

         Houston, Texas 77002

15       (713) 223-2900

16       FOR THE DEFENDANT, LEA F. COURINGTON

         Tobacco Institute, Gwinn & Roby

17       Incorp.: 1201 Elm Street, Suite 4100

         Dallas, Texas 75270

18       (214) 698-4100

19       OTHER ATTORNEYS PRESENT: ANN K. RITTER

         Ness, Motley, Loadholt, Richardson

20       & Poole

         151 Meeting Street, Suite 600

21       Charleston, South Carolina 29412

         and

22       QUENTIN MIMMS

         TUCKER ALAN

23       Dallas, Texas

         and

24       JIM HART

         Williams & Bailey, L.L.P.

25

1        COURT REPORTER: C. FRANK MCMILLAN

         P. O. Box 2664

2        Beaumont, Texas 77704

         (409) 654-2805

3        (409) 287-3705

4

         Proceedings recorded by stenograph shorthand; transcript

5        produced by CAT system.

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1 THE COURT: Thank you. Be seated if you will.

2 First of all, let me apologize about the weather.

3 Maybe some federal judges feel like they can control it, but

4 this is one that knows he can't. I do apologize for that.

5 I want to first thank everybody for coming down

6 here and for letting me assist you all in this matter.

7 The first thing I would like to do is introduce my

8 staff to you and tell you that they're willing to help each

9 and every one of you at any time. My secretary is acting

10 this morning as my Deputy Clerk, is Sherr'e Luke. You can

11 reach her when you call my Chambers. My Law Clerk is Greg

12 Cox, he's a Phi Beta Kappa from The University of Texas and

13 a lot brighter than I am, I think. I'm Wendell Radford.

14 I always wanted to know a little bit about the

15 judge before I had a hearing in front of him. So I can tell

16 you that I was born and raised out here at Nederland, Texas,

17 and did my undergraduate work at Lamar University and

18 graduated from The University of Texas Law School. I worked

19 for about five and a half years as an assistant to the

20 District Attorney, and then entered private practice and

21 worked as a partner in a defense, insurance defense firm for

22 over 20 years. I wanted to be a judge so badly, that I

23 served as a night court judge here in the City of Beaumont

24 for 22 years.

25 I'm board certified in both personal injury and

1 civil trial law, member of some foundations and an active

2 Episcopalian. I was appointed to the Bench here in 1990,

3 and have been involved in several complex litigation cases.

4 I'll be the first one to tell you that I'm just

5 equal to each and every one of you; and the only think I can

6 promise you is, to give you a flat playing field in this

7 matter.

8 With those announcements, I hope everybody has

9 picked up a copy of the Agenda. And I would like to take

10 the appearances of counsel at this time.

11 Frank McMillan is our court reporter, and I'm sorry

12 I didn't introduce him. Tammy Kotz, who's not here at this

13 time but is stranded someplace between Port Neches and

14 Beaumont, is my regular Deputy Clerk; and she'll be glad to

15 help you if you need that information. Any of you want to

16 get a copy of the transcript, it will give you all that

17 information that I've given you this morning.

18 On behalf of the Plaintiff, can you identify who is

19 going to make the arguments concerning the Plaintiff's

20 Motion to Compel?

21 MR. UMPHREY: Myself will, Your Honor, with the

22 assistants of Mr. Thompson.

23 THE COURT: For the record, let's show Mr. Walter

24 Umphrey for the Plaintiff and Mr. Greg Thompson.

25 On behalf of the Defendants have you had an

1 opportunity to reflect whether or not you want to pool your

2 times, otherwise I'm going to allow each of the 11

3 Defendants five minutes apiece.

4 I have received a note that J. Pultman, who is

5 apparently the attorney for the British Tobacco Company, is

6 stranded at the airport and nobody will drive him in.

7 So, if somebody here would like to volunteer to

8 represent them in the matter. Do I have a representative

9 from -- well. I don't think I do.

10 MR. MCCORMICK: Your Honor, my name is Steve

11 McCormick, and I'm here on behalf of American Tobacco and

12 Brown & Williamson. I believe that the B.A.T. motion that

13 relates to them specifically is the last thing on your

14 agenda, and I think that Mr. Pultman probably can get here

15 by then. I can speak for B.A.T with respect to these first

16 two motions, if that's necessary, Your Honor.

17 THE COURT: Thank you, sir, I appreciate it and

18 if -- Mr. Germer?

19 MR. GERMER: Your Honor, we have had an opportunity

20 to try to allocate our time and we've worked out a schedule.

21 We'll have several people talking in response to

22 the first motion; we'll have several people talking about a

23 general response, including myself; and then perhaps a few

24 individual Defendants' attorneys -- or a few individual

25 Defendants may make very brief comments.

1 THE COURT: Okay. I want to assure everybody here

2 that I have read thoroughly, at least twice, everybody's

3 motions and their exhibits and that you do not need, in

4 arguing your motions, if you would just please hit the high

5 points of it, I sure would appreciate it.

6 Mr. Umphrey, can I hear from the Plaintiffs, then,

7 in regard to your motion?

8 MR. UMPHREY: Yes, Your Honor.

9 By way of introduction, the principal players that

10 represent The State of Texas, Mr. Harry Potter, seated in

11 the jury box, is a Special Assistant to the Attorney General

12 of Texas. Harold Nix on my left from Daingerfield. Of

13 course, you know Greg Thompson with my office and John E.

14 Williams from Houston. Mr. Reaud called, got flooded out on

15 Delaware. I believe he'll be here later. John O'Quinn had

16 a previous commitment today and could not be here.

17 Your Honor, the history of this case, I think you

18 are familiar, is that these five Firms represent The State

19 of Texas. It involves an attempt to recoup tax money that

20 was spent on what we believe to be medical care under the

21 Medicaid provisions of the federal and state laws which

22 amounts to an excess of $400 million a year on behalf of

23 Texas alone.

24 The Tobacco Industry, in our opinion, is known as

25 "The King of Concealment." We filed a memorandum brief with

1 the Court setting out specifics in different cases all over

2 the country for the last 20 years as to their tactics and

3 various measures that they have used to avoid disclosure and

4 concealment of evidence regarding their product. They have

5 a long history of delay, intimidation and abuse. They

6 threaten the Court's ability to, through this delay process

7 and abuse process, to provide equal justice for all,

8 primarily in our case, of course, Texas.

9 We could have filed this case in any of 254

10 counties in Texas or any federal district in Texas, but we

11 selected the Eastern District. And we did that primarily

12 because of the Civil Justice Expense and Delay Reduction

13 Plan. The Court has operated under these since, I think

14 February of 1992, in which you're personally familiar and

15 deal with this Plan on a daily basis.

16 This Plan is not discretionary on behalf of the

17 Defendants. It has mandatory language, and it says

18 specifically what the duties and responsibilities are going

19 to be of any Defendant that appears in the Eastern District.

20 We brought this case here on a large part because

21 it reduces the opportunity for the Tobacco Industry to abuse

22 the discovery process. This circumstance -- and to my

23 knowledge, this is the first case that the Industry has been

24 in a federal court and faced with the, what I call "The

25 Plan." So far they've ignored it.

1 We are prepared and we have filed various summaries

2 of what each of these ten Defendants has produced under the

3 Plan since April of 1996, when Judge Folsom ordered them to

4 make their initial disclosures no later than June the 5th of

5 '96. In effect, they have ignored the Court's order and the

6 Federal Rules.

7 We're here today and we have filed a detailed

8 motion requesting specifications of which the Court's

9 familiar -- and I noticed that you don't want us going into

10 other than the high points of what we're requesting.

11 But, basically, Judge Folsom, in his venue order,

12 where we had the hearing in Texarkana on venue of this case,

13 said that an important part of his decision to keep the case

14 in the Eastern District rather than transfer it to the

15 Austin District was the Plan. That, in his opinion, that

16 the abuse process of discovery could be eliminated by the

17 use of this Plan in the Eastern District and they didn't

18 have the Plan where they requested this case be transferred.

19 The Industry is faced with making a full

20 disclosure, as you well know, on any issue that bears

21 significantly on anything that's pled or any defense that's

22 pled. We're probably talking millions of documents that

23 have been accumulated over a period of 40 years or more.

24 We're prepared to receive these documents in Beaumont under

25 some type of systematic orders of the Court.

1 I think the Court can see what would happen if the

2 Plan were not implemented or if the Defendants where allowed

3 to ignore or abuse the process.

4 The affirmative duties created by the Federal Rules

5 and, again, what I call "the Plan," call for a voluntary

6 disclosure, even though it's mandatory, on any issue that

7 bears significantly on any item that's pled or any defense

8 that's made. We went through the times of disclosure that

9 have previously been ordered by Judge Folsom and ignored.

10 We have not had one document presented to us by any of the

11 ten Defendants.

12 Yesterday at noon was the first time that any

13 Defendant, RJR, made any attempt to identify any document

14 they claimed to be privileged that was hand-delivered to our

15 Firm yesterday. This is the first time that we've had

16 anybody claim privilege on any document since we filed the

17 case. They've ignored the process, they're doing what I

18 call the "Cafeteria Plan," where they can go down the line

19 pick and choose and give us what they want to and not give

20 us what they want to. In effect, what they have done is

21 refer us to -- or requested that we submit ourselves to the

22 jurisdiction of the state court in Minnesota and enter into

23 certain confidentiality agreements that the lawyers in

24 Minnesota have. I don't think that's the intent of the

25 Federal Rules. I think that we have a right to handle our

1 discovery under the rules that apply in the Eastern District

2 of Texas where we elected to file this case. We have a

3 right to go under the Discovery Process, as well as the

4 Procedural Rules, as well as the Federal Rules of Evidence.

5 I have no idea what the rules in Minnesota are and could

6 care less.

7 I assure you, Your Honor, unless we're ordered to

8 do so by the Court, we are not going to subject the

9 sovereignty of The State of Texas to jurisdiction in

10 Minnesota, nor are we going to enter into any

11 confidentiality agreement whatsoever. This matter involves

12 the public health of Texas, it involves the public welfare;

13 it involves taxpayers' expenditures of approximately $400

14 million a year. We have no intent to attempt to keep any

15 matter confidential that affects Texas. As the Court well

16 knows, we're not required to file a discovery request, but

17 it's mandatory on their part to disclose.

18 As the Court knows, that they're obligated under

19 the Rule to give us the name, the address, telephone number

20 and so forth and a brief summary of the substance of the

21 information known by that particular person who may have any

22 knowledge that bears substantially on our issues. They have

23 completely ignored this. They have furnished some names,

24 they have furnished a few organizational charts of the

25 corporation, they have given no telephone numbers and no

1 addresses, any of the ten Defendants. They've completely

2 been selective, extremely selective, and absolutely ignored

3 this provision of the Plan.

4 They're required, and I read into this rule, at

5 their own expense they're required to give us a copy of all

6 of the documents that bear significance. We have no

7 documents, as I called to the attention of the Court

8 earlier.

9 This is going to be a substantial expense. But the

10 history of the Tobacco Industry is that, they spend

11 substantial dollars in defending these cases over the last

12 forty years. These are multibillion-dollar industries.

13 They are defending these cases as a unit. They coordinate

14 all of their efforts as a group, as well as individually.

15 The expense involved in producing these documents and

16 bringing them to Texas weighed against the welfare of the

17 state and the citizens of Texas in tax payer dollars is

18 nothing to these corporations.

19 As I mentioned, there's only one company who has

20 claimed any privilege whatsoever, that was RJR yesterday. I

21 think the Court could very well interpret this as being an

22 absolute waiver of claiming any privilege on any document

23 that they may produce in the future. And there's case law

24 to back that up.

25 The Defendants admit that they have not literally

1 complied with the Plan itself. All they've done, at a

2 meeting that we had in June in Houston, was say, go north to

3 Minnesota, subject yourself to the jurisdiction of a foreign

4 state court, and whatever's there you're welcome to review

5 it and use it in your case. That is discovery abuse. Texas

6 has no intention of subjecting itself to that type of

7 treatment, and we're relying on the Court to enforce the

8 rules of this Court.

9 And the nature of this case involving these

10 companies, as large as they are, the dollars that are

11 involved in damages to Texas, if the Court does not strictly

12 comply and order compliance with these rules, you might as

13 well tear the pages out of the book. There's no reason that

14 these tobacco companies, because of their wealth, should be

15 treated any differently in this Court than any other company

16 corporation or individual. They stand before you subject to

17 the same rules that anyone else does, whether it's an

18 injured refinery worker or a small corporation. We are here

19 to ask strict compliance with the Plan as implemented in the

20 Eastern District.

21 Texas has had no opportunity to provide any input

22 at all into the Minnesota depository. We weren't asked, we

23 don't receive that much cooperation, nor do we ask for

24 cooperation from the State of Minnesota, because we're not

25 required to do so. We have a right to prepare our own case,

1 under our own rules, in our own jurisdiction, without the

2 confidentiality agreements.

3 The Minnesota action does not involve a RICO count

4 such as our case, nor have they pled the federal antitrust

5 statute. In addition, Minnesota does not have a common law

6 public nuisance allegation, a breach of express or implied

7 warranty, they have not pled strict liability for conduct,

8 or any abnormal dangerous activity such as we have in our

9 complaint. Their issues are completely different,

10 especially in regard to the RICO and the antitrust

11 allegation. We have a provision in our complaint that

12 allows us to prove our damages statistically under the

13 federal antitrust law that's a very important part of our

14 case. We have the rules that require mandatory disclosure,

15 and we certainly expect it.

16 We've covered the waiver of privileges. I would

17 ask the Court to give that matter special attention, Your

18 Honor. And if you require a brief from the parties, we

19 would be more than happy to do so. There's also an

20 important case out of the state in New York in the federal

21 supplement that says that the Attorney General of the State

22 of New York has a duty to protect the public health of the

23 citizens of New York, which would relate to us, which say

24 that, in effect, that any documents produced should not be

25 under any kind of confidentiality or privileged agreement.

1 That's cited in our brief that we submitted.

2 In summary, Your Honor, we're saying that whatever

3 documents were produced in Minnesota should be produced in

4 Texas, in addition to the RICO antitrust and additional

5 allegations which we have that are not included in the

6 complaint in Minnesota. We're requesting copies of all of

7 these documents. We feel that Beaumont has the facilities

8 to handle these. We are prepared to receive them in an

9 orderly manner. We are requesting the data base index be

10 produced that was the subject matter of a United States

11 Supreme Court decision recently, involving the Minnesota

12 case. There are two of these indexes. They're referred to

13 as 4(b) and 4(a), and we're requesting both of those. This

14 will save a great deal of time and expense, which is the

15 intent behind the Plan itself. We're certainly requesting

16 copies of all documents that bear significantly on any claim

17 or defense.

18 I would think it would be reasonable, Your Honor,

19 that any document that has been produced in any state by

20 these Defendants in the Medicaid Litigation should be

21 produced in Texas.

22 We don't have access now, because of these

23 confidentiality agreements that they've secured all over the

24 country, to documents produced in other states. If they're

25 material to those states and if they're important enough to

1 get a confidentiality agreement, certainly they bear

2 significantly on our pleadings.

3 We have prepared, Your Honor, a proposed order that

4 we will file with the Court today, if you request, outlining

5 exactly what we feel that we're entitled to under our local

6 federal Plan.

7 The Eastern District was one of the first districts

8 to implement the Plan. It's a model for the nation. It

9 will absolutely eliminate the smoke screens, the delay, the

10 intimidation, and the cost involved to prepare these cases.

11 As the Court well knows, there are 15 states that currently

12 have cases on file. In the absence of confidentiality

13 agreements and mandatory disclosures, we think this Court

14 can do all of these states a great justice by speeding up

15 the process, saving money and making justice available if

16 the jury feels that appropriate.

17 To point out to the Court, that there's nothing

18 that these Defendants can stand up and say under this Rule

19 and the Plan that will give them any excuse for

20 non-compliance. The Plan does not provide for any type of

21 excuse, even if they haven't fulfilled the full

22 investigation of their case, or because it challenges the

23 sufficiency of another parties' disclosures, or even if the

24 party has made no disclosure, the other party such as the

25 state. None of these items, under the Plan, are any type of

1 excuse and there's none provided whatsoever. And there's

2 nothing in that Plan that says that they can ship us out to

3 another state 1,000 miles away and refer us to something

4 that some other lawyers have been involved in in preparing

5 that we have no knowledge.

6 You know, I think the position of the Tobacco

7 Industry over the years is pretty well summarized, and I

8 would like to read it to the Court. This item was

9 discovered in a letter written by the defense counsel for

10 RJR in one of their cases to the other defense counsel, and

11 basically here's what they said, and this is reflective of

12 their attitude, it says: "The aggressive posture we have

13 taken regarding depositions and discovery in general,

14 continues to make these cases extremely burdensome and

15 expensive for the Plaintiffs' lawyers, particularly their

16 solo practitioners. To paraphrase General Patton, the way

17 we won these cases was not by spending all of Reynolds'

18 money, but by making sure that the other SOBs spent all of

19 theirs."

20 By ordering the implementation with the Plan, you

21 can eliminate this, Your Honor. With the five law firms

22 involved in this case, it might take them a little longer to

23 run us out of money than it would some of them, but it's

24 certainly possible and that is not the intent of due

25 process.

1 In conclusion, Judge, in our memorandum brief that

2 we filed in support of our allegations of the Defendants

3 being -- continued concealment, I would like to make a

4 little short review where we feel that a critical question

5 is presented before the Court. This question being: can a

6 multibillion-dollar industry, because of its wealth, power

7 and influence, continue to addict and kill millions of

8 Americans, manipulate the legal system in such a way to

9 preclude an honest look at the industry and continue to have

10 the tax payers foot the medical bills for all of the

11 suffering caused by the intended use of its products?

12 Research shows a forty-year history of tobacco

13 litigation is filed with sickness, deaths and delay. The

14 hazards of tobacco have been used and caused a public health

15 crisis. The evasive and deceptive behavior of the Tobacco

16 Industry have been compounded by the evasive and obstructive

17 behavior in litigation. The gross disparity between the

18 resources of the parties and the use of the great wealth

19 have made many questions whether our system of justice can

20 work in this situation. Beginning early and through today,

21 the Tobacco Industry has never flinched at spending whatever

22 amount necessary and doing whatever amount necessary to

23 stifle adverse litigation.

24 Texas respectfully request that it's time to

25 enforce the Plan. This is an issue that we've never been

1 faced before with. One absolute complete disclosure on

2 significant issues can delay and safe a fortune in the

3 future for various states as well as Texas and see that due

4 process is fulfilled. Thank you, Your Honor.

5 THE COURT: Mr. Thompson.

6 MR. THOMPSON: Nothing, Your Honor.

7 THE COURT: Thank you. Mr. Germer.

8 MR. GERMER: May it please the Court.

9 THE COURT: Yes, sir.

10 MR. GERMER: Larry Germer representing Philip

11 Morris.

12 For almost 30 years I've been in the difficult

13 position of having jury cases against Walter, and he always

14 makes great jury arguments that puts him over the top, and

15 that's sort of what we've heard again today.

16 The Court, I know, will listen to the legal

17 arguments and listen to the arguments and briefs about the

18 issues we're here about as opposed to the, I think,

19 unwarranted attacks on the industry and their attorneys.

20 The Tobacco Litigation that was mentioned is really

21 no stranger to this area. In the '80s, as the Court knows,

22 there was substantial litigation here and in Houston, and

23 Walter Crawford and I and a number of local attorneys were

24 involved. We had cases pending in Judge King's Court, Judge

25 Thomas' Court against Bill Townsley and Bill Watkins, and we

1 litigated fairly -- it was tough litigation, but it was fair

2 litigation. I've always felt like with Bill Watkins that we

3 were the ones that were out gunned and outmanned, but it was

4 handled like any other major litigation should have been

5 handled. And we know it will be handled that way in this

6 litigation.

7 The Plaintiff in the -- Plaintiffs in the

8 litigation in the '80s, it is true, ended up dismissing

9 almost all of their cases. But that, I will submit, was

10 because they found out they had weak cases that they could

11 not win.

12 The issue before the Court is really how we're

13 going to go about discovery, what about the document

14 discovery, what about the witnesses, what kind of process

15 are we going to use to accomplish this. The Court, I can

16 see from the Agenda, is already thinking about having the

17 parties meet and discuss issues, which we applaud. We have

18 been seeking that type of cooperation through letters and

19 verbally for a number of months.

20 Your Honor, I will speak and try to cover for all

21 Defendants some of these general issues that have been

22 raised. Paul Dieseth, an attorney from Minnesota, will

23 speak briefly to help describe to the Court the depository.

24 Jim Scarboro will speak briefly on some of these general

25 issues. Walter Crawford will respond on issues raised about

1 the data base what's called 4(b) and 4(a). It's possible

2 that there would be very brief statements by some individual

3 Defendants, if they feel it's necessary.

4 The Court knows from the papers that this case

5 involves a petition that's 130 pages in length, that covers

6 allegations of conduct over 110 years. It's about as broad

7 allegations as one could imagine. It involves, and will

8 involve, on both sides, both sides, Plaintiff side and

9 Defense side, ultimately, millions of documents, dealing

10 with millions of documents. It will involve, potentially,

11 many, many, many witnesses. Our position is, that all of

12 the Defendants have made a good faith effort under the Plan

13 to make a response under the Eastern District Plan such as

14 it could be made given this type of case.

15 It goes without saying that every document and

16 every witness cannot be listed at this point. I could

17 paraphrase what the Plaintiffs have said in their papers

18 responding to our motion and say to you, "but the fact is,

19 however, that the Defendants are subject to the laws of

20 time, space and physics and simply cannot complete

21 everything in an impossible short period of time." Of

22 course, that's what The State is saying as an excuse for why

23 they haven't done some things. The State also says in a

24 case of this complexity and scope it is simply not possible

25 for The State to file all documents and name all persons in

1 the initial disclosure. I think that goes without saying.

2 This Court is aware that other major cases

3 involving documents, sometimes it's millions, have been

4 handled by courts in the Eastern District and this Court has

5 been involved in them. The Norplant Litigation, handled by

6 Judge Schell, for example, involves literally millions of

7 documents potentially; and the parties, with the Court's

8 help, worked out a plan to accomplish that discovery. That

9 also happened, for example, in the Xerox case that the late

10 Judge Hall handled. But this is not unusual to have to work

11 out how this will all be accomplished in a case of this

12 nature.

13 I would tell the Court, that with the offer that's

14 made of utilizing the Minnesota depository, that is the

15 quickest way to make available to the Plaintiffs many, many,

16 many millions, in fact, of documents that are already

17 indexed, usable, both on -- as a matter of paper and as a

18 matter of computers.

19 I think I've heard one argument that this Court

20 could set something up here and then it could perhaps help

21 people in other states. Well, the fact is, as we're going

22 to talk about a little bit more, that's happened already in

23 Minnesota.

24 Briefly, the Minnesota depository, at this time,

25 has about 7.9 million documents in it. It's anticipated

1 that it will have one million --- excuse me, 15 million or

2 more documents in it. It was set up at a great expense, it

3 works, it covers and it involves a lawsuit that is factually

4 similar to this case. It is true, as Mr. Umphrey says, that

5 there's a few allegations in this case that are not in that

6 case; but if you look at the facts that are involved, the

7 issues that are involved, it's the same.

8 Now, we're not just talking about Minnesota and

9 Texas. There are approximately -- well, exactly, I guess,

10 15 states with similar cases. And I would ask if I could

11 get some help, if we have it. It's shown on a map for the

12 Court and opposing counsel to see. But we've got 15 suits,

13 they're marked basically by the yellow color. There are

14 other suits that are related-type suits that are already in

15 existence. There are also other suits that involve punitive

16 class action claims that have evolved since the Castano

17 opinion. There are other suits, we understand, that are

18 going to be filed; so I don't know what the right number is.

19 But as the Court can see, you already have these suits all

20 over the country and there's more coming; so conservatively

21 we can say we're going to end up with perhaps 20 of these

22 suits.

23 There has to be a solution. If we visualize 15

24 million or plus documents, it cannot be, I would hope for

25 the sake of this process, that we're going to produce 15

1 million documents in each of these states. As it happens,

2 we already have this process going on in Minnesota; and it

3 certainly makes sense to build on that process.

4 I tried to do a calculation as one of our late

5 Presidents, I think, did. If you take a stack of documents,

6 at 15 million documents and you multiply that by 20 or so

7 states, the stack, it may not quite reach the moon, but it

8 could cause an eclipse of the moon. So I think we have to

9 be conscious of that.

10 The depository, Your Honor, it is up, it's running,

11 it's working; we would be pleased if you or Judge Folsom

12 wanted to go see the depository. We would be pleased to

13 have Your Honors look at it, see what's involved. We would

14 be pleased to have the Plaintiffs attorney; and, perhaps,

15 they're already making arrangements to do this. But we

16 would please to have them come up and see the depository.

17 A brief word about the use of depositories. I

18 assume that the Plaintiffs are not saying that there's

19 something wrong with the use of a depository. If you look

20 at the law, you find that there's at least 120 or 140 cases

21 that have talked about using depositories and about how that

22 is an efficient, proper way to do business. The manual for

23 complex litigation talks a lot about use of depositories and

24 how that can be helpful to the parties. There's one case

25 actually that makes the point that, once you have

1 depository, you don't have to set one up in each state.

2 That, of course, would not make any sense at all. In

3 Castano, one of the opinions by the District Court in

4 Castano refers to the fact that Plaintiffs in that case,

5 and, of course, some of those same attorneys are here, were

6 working on their own depository. So, I assume that the

7 Plaintiffs do not oppose, in principal, the use of a

8 depository, particularly one that's already indexed and

9 prepared.

10 So, the question then is, what about using the one

11 in Minnesota that's in existence? What you have heard today

12 and what I read in the briefs was a straw man. The

13 Plaintiffs continue to say The State says, "We're not going

14 to subject ourselves to the sovereignty of Minnesota. We're

15 not going to be controlled by some judge up there," et

16 cetera, et cetera. We have never taken the position that

17 that's the way it has to be. We have taken the position

18 from the beginning, let's use what we have and let's make it

19 available, let's talk about it, let's work out the details,

20 let's work out -- attempt to work out solutions to the

21 problems that are raised.

22 We believe that it should be worked out such that

23 Judge Folsom and Your Honor maintain control of this

24 litigation. They posture as if we're trying to avoid that

25 or trying to create some monster out of state, but that's

1 not what we're trying to do. We're trying to talk with the

2 Plaintiffs about making this work. However it works out,

3 it's going to take some negotiation and thought; but

4 certainly we would conceive that the Court here would

5 control privilege issues, relevance issues, discovery issues

6 in general, trade secret issues, confidentiality and

7 protective orders mentioned by Mr. Umphrey. Certainly the

8 Courts here would make those calls. We disagree with his --

9 The State's edict that they're not going to agree to any

10 type of Confidentiality Order. But, however, that will have

11 to be worked out after negotiations and perhaps by rulings

12 from this Court. But we don't suggest that all of that gets

13 controlled in Minnesota.

14 So, what we do suggest is, that we have documents

15 available, indexed for use that could be made available and

16 we could work out a structure so that the Court here will

17 control the litigation here. All of this has to be worked

18 out, it has to be coordinated given where we are in

19 Minnesota with orders up there.

20 So, there really is a solution if the parties, as I

21 hope the Court is suggesting by its Plan, if the parties can

22 talk about it, agree where they can, not agree where they

23 can't. But, I think, going down this line, there's a

24 logical way to get about getting documents out there.

25 With regard to witnesses, all of the Defendants

1 listed witnesses as best they could at this time. Again,

2 with a petition as far reaching as it is, it's a little

3 difficult to kind of -- to figure out how to answer,

4 specifically, each of these. It's a little difficult to

5 know who to list. But each Defendant made an effort to list

6 who they could. It's certainly a good faith beginning.

7 It's certainly, the Defendants, if one compared, and we're

8 not supposed to do that; but if one compared what the

9 Defendants did with what The State did, the Defendants

10 clearly did a lot more in terms of their disclosure than The

11 State did. The Defendants, by and large, tried to disclose

12 people who were involved as officers, who were involved by

13 categories that we thought would be of interest to the

14 Plaintiffs. We disclosed people that have been involved in

15 other cases. So, we feel like we've made a more than

16 reasonable effort to comply with the Plan as best we could

17 in this type litigation.

18 Your Honor, with the Court's permission, I would

19 like to ask at this time, and my remarks are essentially

20 concluded; but I would like to ask that Mr. Paul Dieseth be

21 permitted to speak just briefly, to give the Court a bit

22 more detail about the Minnesota depository. And after Mr.

23 Dieseth, then perhaps Jim Scarboro would want to say a few

24 words and then Mr. Crawford.

25 THE COURT: Mr. Dieseth.

1 MR. DIESETH: Good morning, Your Honor.

2 THE COURT: Yes, sir.

3 MR. DIESETH: Paul Dieseth from the Law Firm of

4 Dorsey & Whitney in Minneapolis, Minnesota. I was invited

5 to come here today to brief the Court on the depository in

6 Minnesota and try to put some flesh on the bones of the

7 facility up there.

8 A depository was formed in late 1995. A site was

9 selected within a few minutes of downtown Minneapolis. At a

10 cost of about $140,000, an office complex was fitted for the

11 purposes of the document production that is taking place.

12 It is about a 15,000 square foot facility. There are --

13 within that facility there are separate document review

14 rooms for the Plaintiffs and for the Defendants. There is a

15 separately enclosed and secure copy facility, a copy set up,

16 that is used to copy all of the documents that are requested

17 by the parties. There is a loading dock at the rear of the

18 facility for the deliveries of the documents by truck that

19 occurs.

20 The bulk of the facility consist of a large secured

21 area where each of the Defendants and the Plaintiffs have a

22 separate secure facility in which all of their documents are

23 stored. And even within those spaces there is a separate

24 facility for the more confidential, highly trade secret

25 documents that the Defendants are producing in Minnesota.

1 There's a sophisticated electronic security system in place

2 that protects the entire building from intrusion.

3 The building, the depository is staffed by a

4 company called "Smart Legal Assistants." There are 12

5 full-time employees that are on-site by Smart. They verify

6 the accuracy of the boxes that we've been talking about;

7 they sort and they store the documents themself; they

8 provide the documents to the parties; they administer the

9 requests that come in from the parties; and they ensure that

10 the copies are provided to the parties as requested.

11 The copy center that is also located within the

12 depository is staffed by a separate company called the

13 "Merrill Copying Service." They function to copy the

14 documents that are being requested by the parties and then

15 they follow a control check in order to ensure the parties

16 get what they have requested.

17 As noted before, Your Honor, there are 220 document

18 requests outstanding in Minnesota that Defendants are

19 responding to. The document requests cover an incredibly

20 broad range, I believe, of concepts and factual allegations;

21 and the Plaintiffs are supplementing these document requests

22 continuously, and those requests are being responded to by

23 the Defendants.

24 This document production effort that's taking place

25 in Minnesota is a staggering, substantial effort. Philip

1 Morris, who our firm represents, has spend over $1 million

2 per week in providing the documents into the depository.

3 There's over 150 full-time attorneys, legal assistants,

4 document clerks and secretaries who are working on the

5 process of putting these documents into the Minnesota

6 depository.

7 As indicated to the Court, about 7.9 million pieces

8 of document have already been provided. Those are stored in

9 about 3,600 Banker's Boxes which are stored on shelves in

10 the depository. Philip Morris alone produced 1.2 million

11 pages in the depository on September the 3rd, filling about

12 500 boxes of documents. The total documents that are left

13 to be produced are about 7.3 million pages, perhaps more

14 than that as we go along and finalize the production. The

15 Court in Minnesota has ordered that document production be

16 completed by all Defendants by December the 31st of this

17 year.

18 The mechanics of the depository is relatively

19 simple and efficient. The production boxes that are placed

20 into the depository are accompanied by document indices.

21 Those indices are capable of being inputted into a computer,

22 into a data base, and they can be susceptible to computer

23 searches by the Plaintiff, or by any party for that matter.

24 Michael Serice (phonetic), as I understand it, submitted an

25 affidavit yesterday, Your Honor, that -- he is the lead

1 counsel for the Minnesota Plaintiffs. And in that

2 affidavit, he himself indicated how helpful the 4(b) Index,

3 which is the document index, what kind of help that can

4 provide to them in searching the depository for documents

5 that are helpful.

6 The depository is open for review from 8:00 o'clock

7 in the morning to 8:00 o'clock at night. When the parties

8 wish to look at documents, they're escorted to the review

9 rooms, they submit requests for certain boxes from the

10 depository staff, who then removes those boxes from the

11 shelves and brings them into the parties. The parties are

12 then given the option of requesting immediate on-site

13 copying. That is what the Plaintiffs do in Minnesota. The

14 Plaintiffs then are in the depository while the copies are

15 provided to them that very same day. They can then take the

16 documents back with them to their offices, and the boxes are

17 then refiled by the depository.

18 To date this depository process has operated

19 extremely well. The Plaintiffs are caught up with the

20 production, they have managed to review all of the boxes

21 that have been produced and have been made available to

22 them. The depository and the parties have cooperated to

23 ensure the continued efficient operation of the facility.

24 We would certainly welcome people from Texas to come to

25 Minnesota. It may be a little bit cooler there in the

1 winter, but we're very hospitable and we could certainly

2 make this depository work for everyone.

3 I believe now Mr. Scarboro has some comments he

4 would like to make.

5 MR. GERMER: Your Honor, one last point. In

6 addition to these documents that are there and are going to

7 be there in Minnesota within a relatively short time, which

8 we believe cover all of the legitimate requests, legitimate

9 requests that the Plaintiffs in this case will have for

10 documents, but in the event that that's not enough we

11 certainly don't suggest that the Plaintiffs are limited to

12 that depository. We would anticipate that the Plaintiffs

13 would get these documents, review them, would make requests

14 of us of additional documents, indicate to us that they felt

15 they were entitled to additional documents; and, of course,

16 this would be dealt with like in my other case. If we

17 didn't think they were relevant or otherwise appropriate, we

18 would be coming to Your Honor or Judge Folsom to deal with

19 it. But certainly this process would in no way limit the

20 right of The State of Texas to whatever documents it's

21 legally entitled to. And with that, I would like to

22 introduce Mr. Scarboro for a few brief comments.

23 MR. SCARBORO: Your Honor, Jim Scarboro

24 representing Philip Morris. Good morning.

25 I just wanted to add one comment, really, to what

1 Mr. Germer has said, because he's covered things pretty

2 thoroughly, from my perspective. But at the present time,

3 as I understand it, there are some negotiations going on

4 whereby the State of Washington is going to participate in

5 the depository and we also understand that other states may

6 be interested in doing so as well.

7 I do not yet -- I don't have a copy of any final

8 agreement. I understand it's the subject of written

9 negotiation now. Perhaps the Plaintiffs -- or perhaps one

10 of the attorneys of the Plaintiff has talked to the State of

11 Washington about this, I don't know. But under the Plan, as

12 I understand it, The State will retain jurisdiction over the

13 documents in Washington, in the sense that issues involving

14 privilege, confidentiality and so forth will be judged in

15 Washington as the production for the State of Washington.

16 That negotiation occurred, as I understand it,

17 because The State called the lawyers for the Attorney

18 General in Minnesota and requested that they have access to

19 the depository, and the Plaintiff has agreed in principal.

20 And there's a three-way negotiation going on now among the

21 Plaintiff, the Defendants and The State over how to

22 accomplish that. I also think that it may be possible that

23 other states are interested as well, perhaps Arizona.

24 So, there is going to be an effort going on to try

25 to bring all of this together in a way that makes sense and

1 is the most efficient for everyone involved.

2 Do you have any questions, Your Honor, about the

3 depository at this stage in the game?

4 THE COURT: No, sir, not at this time.

5 MR. SCARBORO: Okay. Thank you very much.

6 THE COURT: Mr. Crawford.

7 MR. CRAWFORD: May it please the Court, Walter

8 Crawford for R.J. Reynolds.

9 Your Honor, I'm going to address, in a very short

10 length of time, the issue about the data base, the data

11 basis of the various Defendants in this case. To start off,

12 I want to read a quote from a case that I think everybody

13 will be familiar with; and it goes like this: "Discovery was

14 hardly intended to enable a learned profession to perform

15 its functions either without wits or on wits borrowed from

16 the adversary." Hickman versus Taylor, 329 U.S. 495 at 516,

17 1947. The State apparently disagrees with this. Although,

18 the Defendants have offered The State a comprehensive and

19 organized collection of relevant business records and

20 documents, The State has refused to look at those documents.

21 Instead, The State wants access to certain Defendants'

22 attorney work product in the form of litigation support data

23 bases.

24 I have a real, real -- this is a problem with this

25 issue, as I'm sure the Court will have and every lawyer has.

1 Because when you start talking about production of

2 information that you have developed to defend cases, to run

3 a case, to ask questions that involve mental impressions and

4 your work product, that information should be protected.

5 And you shouldn't have to turn your file over to the other

6 side in any lawsuit, and that's basically what we're talking

7 about here. We're talking about data bases that reflect the

8 opinions, mental impressions of attorneys who have arranged

9 documents in a certain way and want to keep that information

10 from being produced. And that's not something that's very

11 foreign or something that the Court should get upset about,

12 us trying to comply with discovery because it's something

13 that every lawyer expects and every Court will honor.

14 The problem with production under the Plan is this:

15 you are required under the Plan to produce information which

16 bears substantially on the issues in these cases. The Plan,

17 however, does not contemplate in any way that we should be

18 required to turn over work product.

19 Now, we have filed an affidavit and a brief, and

20 I'm sure the Court has looked at that. And we believe that

21 that brief and that affidavit adequately covers the issues

22 and that if the Court would considered that, you can see

23 that we should not be required to turn over these data

24 bases.

25 Now, the litigation data bases consist of

1 attorneys' notes, comments, evaluations and summary of

2 information selected by counsel after reviewing Defendants'

3 business records. They're not the Defendants' business

4 records, they're not corporate documents in the full text

5 form in a computer data base, and they do not list or index

6 all documents in the Defendants' file cabinets.

7 So, the litigation data bases are non-evidentiary

8 materials created by defense counsel for litigation support

9 and electronically captured instead of being written down,

10 typed up, or put into trial or preparation notebooks.

11 Because the Defendants believe that the litigation data

12 bases are privileged, Defendants are under no duty to

13 disclose them under the Plan.

14 And so, our bottom line, Judge, is, is that those

15 documents do not bear significantly on the issues because

16 they're privileged and they shouldn't be turned over.

17 Now, Your Honor, we received an affidavit from Mr.

18 Serice and we got that today for the first time. We believe

19 that there's some inaccuracies in there. And we would like

20 the opportunity, if we could, to respond to this and file

21 something in short order, probably by tomorrow, if the Court

22 would allow us to do that.

23 THE COURT: You may, by Monday.

24 MR. CRAWFORD: I'm sorry?

25 THE COURT: You have until Monday, if you'd like.

1 MR. CRAWFORD: Your Honor, one other point I wanted

2 to cover before I sit down. There was a case, of course, in

3 Minnesota that you've heard quite a bit about that one of

4 the issues in that case involved the data bases. It's

5 pretty clear and we've cited some cases for the proposition

6 that even though there is an opinion up there, which we

7 certainly disagree with, we, nevertheless -- and it's a

8 Fifth Circuit case on this, it's cited in the brief that we,

9 really in the Shield's case, which really will allow us to

10 come back and assert that there's been no waiver as a result

11 of the opinion up there. And, of course, that particular

12 decision in Minnesota was decided under Minnesota law. We

13 believe that the Fifth Circuit and federal law will govern

14 here and that, of course, that's something that the Fifth

15 Circuit will have to look at if that issue comes up.

16 Another point and then I'm going to sit down. I

17 think I've said probably too much. But the Plaintiffs in

18 this case, in addition to not going and looking at the stuff

19 that we offered to them to look at, which -- and I believe

20 we've also offered to let them use our index to get through

21 it a little bit more quickly; but the one thing that they

22 have not done here, they have not established need for these

23 documents, which I think is required with regard to any kind

24 of work product.

25 So, with those general parameters of work product,

1 I think the Court, in this case, should certainly order that

2 the data bases are off base and we should not be required to

3 produce them.

4 Does the Court have any questions?

5 THE COURT: No questions.

6 MR. CRAWFORD: Thank you.

7 THE COURT: Mr. Umphrey, you all have some time

8 left on rebuttal if you would like to make any comments.

9 Mr. Thompson.

10 MR. THOMPSON: Your Honor, just briefly. Greg

11 Thompson for The State of Texas.

12 Your Honor, there was some of us in this room that

13 were here when the Plan was prepared and were on the

14 committee that established the Plan and there were very

15 specific reasons for the Eastern District being an early

16 implementation district and for having a very, very strict

17 Plan, with strict interpretations. The "no excuses" part

18 was put in there specifically by the then Chief Judge of the

19 Eastern District to make sure that no party could come in

20 and claim "we don't have to comply with the Plan because

21 they didn't," or because "some other thing and we haven't

22 investigated enough." The Plan must be complied with.

23 The privilege Mr. Crawford talked about, "Well,

24 Your Honor, we don't have to talk about producing privileged

25 documents," the Plan says you do have to produce a

1 privileged index. You must say these are the documents that

2 we claim are privileged, these are why we claim these

3 documents are privileged, so that we have an opportunity to

4 then go to the Court and say, "Your Honor, let's examine

5 this privilege claim." That's absolutely required by the

6 Plan and, quite frankly, it was required on June 5th, 1996.

7 And the only person that has done anything was RJR, who did

8 it on September 25th, 1996. And quite frankly, we believe

9 this Court could argue that those privileges have been

10 waived because of non-compliance with the Plan.

11 These affidavits, we haven't seen these affidavits.

12 These were filed under seal that they have filed. They

13 haven't given us a copy of these affidavits. These are the

14 companies that come up and tell you, "we're being compliant,

15 we're trying to give them all of the information they want."

16 We haven't seen these affidavits, they haven't shown them to

17 us. The data bases they're talking about, at least the 4(a)

18 and the 4(b) indices talked about by Mr. Serice's affidavit,

19 are data bases that have been produced to the Plaintiffs in

20 the Minnesota Litigation, have been given to the Plaintiffs.

21 And in their effort to be cordial and to say "we've produced

22 them all, yes, Your Honor, but maybe we don't have to give

23 them the data bases here in Texas," well, that's just not

24 right. We believe they bear significantly on litigation

25 aspects here in Texas. They've produced them in Minnesota

1 and they ought to produce them here in Texas.

2 They talked talk about "go north to Minnesota," and

3 they've got their map of Minnesota. Quite frankly, Texas is

4 not Minnesota. Texas is at the heartland of this nation.

5 And what they want to tell us is first the situation is: "In

6 Minnesota we've done all of this." Well, first let me point

7 out to you, Your Honor, that in Minnesota what they did was

8 appeal every order of the Court, including to the United

9 States Supreme Court, and only then did they produce the

10 documents they were required to produce. In our case, Your

11 Honor, here in Texas, it would be an extremely disadvantage

12 to the Texas lawyers if we had to subject ourselves to

13 documents not here in Texas, not where we could look at them

14 and not where we could review them, not where we could

15 prepare our case but in Minnesota and send five lawyers up

16 to Minnesota to live for the next year and a half, or the

17 next year to be reviewing these documents. These documents

18 should be produced here in Texas.

19 They talked about other states. I'll tell you that

20 as recently as Wednesday in Mississippi, the Mississippi

21 Court ordered them to produce the documents in Mississippi

22 not in Minnesota, but in Mississippi. Other states are not

23 aligned in agreement to use the Minnesota depository. Texas

24 is not aligned in an agreement to use the Minnesota

25 depository. The documents, absolutely under the Plan,

1 should be produced here.

2 We can't even talk about some of the documents,

3 Judge, that we get with other lawyers because protective

4 orders have been issued. We've got counsel that we can't

5 even talk to about documents because they said -- because I

6 would be violating protective orders. It would be a huge

7 disadvantage to The State to be basically, the Defendants

8 are going to argue, "we are going to self-select the

9 documents you receive under the Plan." Because the Plan

10 does state that they have the affirmative duty to review the

11 documents that bear significantly on any claim or defense.

12 So, they're going to self select the documents, No.

13 1; but we know they would do that in good faith.

14 Second, they're going to self-select The State

15 where they are going to house the documents in; then they're

16 going to self-select the locations of the documents. And

17 it's not fair to the State of Texas to reduce us and reduce

18 our lawyers to living in Minnesota when we have to live with

19 these documents. We have the burden of proof on liability;

20 we are the ones who are going to have to convince a jury of

21 our claims.

22 The Defendants have had these documents for 20, 30

23 years, they've lived with them for that time, we're going to

24 have them for one year, we need them here in Texas, the Plan

25 contemplates that here in Texas; and it would be a huge

1 disadvantage to us, Your Honor, if that Plan was not

2 strictly enforced.

3 And the Plan -- quite frankly, I can disagree with

4 Mr. Germer in good faith, I've got exactly what they did.

5 The Plan calls for three simple things. No. 1,

6 here's the name and address and telephone numbers of persons

7 who have significant knowledge; and give a brief, fair

8 summary of what they show. And I'll tell you, they didn't

9 do that. And maybe they will do it, but they certainly

10 haven't done it yet.

11 Secondly it says: "Provide a copy of all documents

12 that bear significantly on," and they haven't done that at

13 all.

14 And then thirdly it says: "Provide insurance for

15 inspection." And they haven't done that either.

16 So, realistically, Your Honor, in the three things

17 the Plan requires, they've failed woefully on all three.

18 And we ask for -- the most important thing, we ask

19 those documents be produced and we ask for the documents

20 that have been produced in Minnesota. We ask for the

21 documents that bear significantly on any issue raised in

22 this case. And that includes the RICO action and the

23 federal antitrust action that has not been raised in

24 Minnesota.

25 So, we ask, with all due respect, Your Honor, that

1 this is a mammoth case, it's of extreme importance to the

2 State of Texas, to the public health of the State of Texas;

3 and we deserve to have access to those documents here in

4 Texas.

5 Thank you, Your Honor.

6 MR. UMPHREY: Judge, can I just say a few words.

7 THE COURT: Yes.

8 MR. UMPHREY: Your Honor, you were present in this

9 courtroom in December of 1991 when Judge Parker who, of

10 course, is currently on the Fifth Circuit, put this Plan

11 into effect and explained it to the practicing lawyers and

12 judges in the Eastern District. He made the statement,

13 which is reproduced in certain literature that's in the

14 clerk's office, he said that if any Defendant abused this

15 process or failed to disclose any document that would bear

16 significantly on a pleading or defense, that, in his

17 opinion, he felt it appropriate to strike all defenses.

18 I don't think that's unreasonable in this case.

19 They have intentionally defied the Plan, the rules, they're

20 several months late in producing anything. They have

21 produced no documents whatsoever. Judge Schell, if you'll

22 recall, made the statement that if he were involved in the

23 case as a sitting judge and discovered that a document that

24 bore significantly on an issue was not produced, that he

25 would have no hesitancy in entering a motion for granting a

1 new trial.

2 These two instances, I think, reflect the attitude

3 of the judges in the Eastern District as to the enforcement

4 and the magnitude and the strength to comply with this Plan.

5 And, I think, the Court -- in our motion we

6 requested sanctions, I think that you ought to give that

7 strong consideration.

8 Thank you.

9 THE COURT: Thank you.

10 MR. GERMER: Could we make a very brief correction

11 of one thing that was said, noting that the Plaintiff didn't

12 save the Court as much time as they said they would because

13 they saved a good bit for their rebuttal, just as Mr.

14 Umphrey always does. But if we could have 30 seconds, Your

15 Honor?

16 THE COURT: You have got 30 seconds.

17 All right.

18 MR. SCARBORO: Your Honor, Jim Scarboro again very

19 briefly. I just want to correct the record on the

20 Mississippi case.

21 As I understand it, no state has ordered the

22 Defendants to create a depository anywhere other than in

23 Minnesota. In Mississippi what the Court ordered was that

24 the Defendants should produce the documents that had been

25 selected by the Plaintiff in Minnesota. That's the nature

1 of the production order in Mississippi, not that the

2 document depository should be reproduced in Mississippi.

3 THE COURT: Thank you.

4 The Court is going to take a ten-minute recess at

5 this time, and then we'll hear the Defendants' Motion To

6 Compel Against The Plaintiff.

7 (RECESS AT 10:30 A.M. UNTIL 10:45 A.M.)

8 THE COURT: Thank you. Be seated if you will,

9 please.

10 MR. THOMPSON: Your Honor, I had one brief

11 clarification only.

12 THE COURT: All right.

13 MR. THOMPSON: Judge, just to make sure there's no

14 confusion, we're not asking for a repository to be set up in

15 Texas at all, all we want is the documents that we've

16 requested. So just to clarify.

17 THE COURT: Okay.

18 We're ready now, I think, to proceed with the

19 Defendants' Motion To Compel The Plaintiffs.

20 Are you ready to proceed?

21 MR. FENNELL: We are, Your Honor.

22 THE COURT: Okay.

23 MR. FENNELL: May it please the Court, I'm Tom

24 Fennell from Jones-Day in Dallas representing Reynolds and

25 arguing the Defendants' Motion To Compel Against The State

1 of Texas.

2 Your Honor, our analysis, we believe, has to begin

3 by putting our discovery disputes in perspective. Simply

4 put, I think we need to explain why it is to Your Honor that

5 the Defendants need the discovery that we have sought from

6 The State. And Your Honor has heard much, as we have heard

7 much in the press and otherwise, about the alleged

8 wrongdoing by tobacco companies.

9 But there is much more, Your Honor, to this case,

10 much more than the Plaintiff's or the Attorney General's

11 claims that have been made against the Tobacco Industry.

12 And there's much, much more to this case than the Tobacco

13 Industry's defenses to those particular claims.

14 This case, we submit, Your Honor, is principally,

15 principally about Texas Medicaid cost. In fact, I think it

16 was Mr. Umphrey who said and emphasized that there were

17 costs of $400 million per year.

18 The fact of the matter is, Your Honor, the Texas

19 Medicaid program cost has skyrocketed from $1.9 billion in

20 1987 to approximately $9.7 billion in 1995. And the Texas

21 cost increases in terms of Medicaid have been far greater

22 than many, many other states. For example, in Mississippi

23 the Texas Medicaid costs have increased three times what

24 they've increase in Mississippi and twice what the national

25 average is. Even The State, Your Honor, has said that,

1 quote, the rate of increase -- this is Texas we're talking

2 about for medicaid costs -- the rate of increase is

3 unparalleled by any other function of Government. The core

4 fact issue is, who is accountable for The State's enormous

5 Medicaid costs? Is it private industry, i.e. tobacco,

6 alcohol, fatty foods, or is it The State itself?

7 And, Your Honor, there's also a core legal issue

8 here, and that is whether the Attorney General has the legal

9 right and the evidentiary basis for this matter to seek

10 Medicaid reimbursement from private industry.

11 But these law issues are not being argued today,

12 and I understand that they're being deferred. But as to the

13 fact issue, the AG singles out tobacco from private industry

14 and says it's tobacco that's to blame for these skyrocketing

15 Medicaid costs.

16 And, of course, Your Honor, there's a large body of

17 claims that the Attorney General makes, RICO and otherwise;

18 and there's a large body of defenses that the tobacco

19 companies make to those claims. But there's something else

20 and it's something other than tobacco that we believe

21 strongly is at fault for Medicaid costs skyrocketing and for

22 the high level of Medicaid costs. And that is, The State of

23 Texas; that is, the Government, the State. We believe that

24 The State's own negligence, its own conduct has been a major

25 cause of the increases in Medicaid costs and in the total of

1 Medicaid dollars spent.

2 And we don't say that lightly. There are numerous

3 studies, Your Honor, numerous studies going back to the

4 1970's that evidence The State's waste, its inefficiency,

5 its fraud in the administration of the Medicaid programs.

6 And recommendations have been made over the years to revamp

7 this fragmented organization in Texas, to consolidate

8 agencies to eliminate the duplication, to create

9 coordinating agencies and the like, and they've all failed.

10 All of those recommendations have been ignored or failed.

11 For the most part have failed.

12 A 1991 study, for example, Your Honor, stated that,

13 the state of fragmentation of Health and Human Services in

14 Texas have been well documented. A more recent 1994 study

15 included, "Texas Health and Human Service agencies continue

16 to operate with primarily separate and uncoordinated

17 programs. The concerns over health and human service

18 fragmentation started two decades ago are still being

19 debated. When the programs are considered as a system, they

20 amount to a tangle of purposes, rules, agencies and

21 effects."

22 Your Honor, a couple of days ago there was an

23 article in the Dallas Morning News, dated September 25,

24 1996, I think it's the epitome of what we're talking about.

25 It relates to a new state audit -- which, by the way, we

1 haven't had produced to us -- that says the ten Texas

2 nursing homes -- nursing homes, by the way, Your Honor, is a

3 significant part of medicaid costs and a significant part of

4 what it is that the Attorney General wants reimbursement

5 for. It says a new state audit says ten Texas nursing homes

6 they get taxpayer money spent, $614,000, plus dollars, on

7 such things as jobs for relatives who did not work, Texas

8 Ranger baseball tickets and a Cadillac. The audit also

9 says, five in-home health care companies that receive public

10 funds spent $386,507 on such questionable items as employee

11 parties, car window tinting and leasing an airplane from an

12 employee.

13 You know, the worst thing about this article, Your

14 Honor, is that there's a statement from Terry Trimble, who's

15 acting Commissioner of the Texas Department of Human

16 Services, who says that the question of those expenditures

17 are not illegal under the Texas Medicaid program.

18 Your Honor, there is, at bottom, a serious issue of

19 The State's own conduct, The State's own negligence, its

20 ineptness, its failure to mitigate damages, its comparative

21 responsibility with respect to the Medicaid, skyrocketing

22 Medicaid costs and Medicaid dollars that are being spent.

23 But, Your Honor, there are other issues too.

24 Aside from The State's inept handling of the

25 Medicaid program, we believe that The State has ignored or

1 abandoned or given short shrift to the preventative health

2 programs and enforcement activities that are necessary to

3 mitigate damages, to reduce drug and alcohol abuse, for

4 example, or otherwise reduce other frauds.

5 Again, that conduct by the State, its negligence,

6 its failure to mitiage damages, are among the issues that we

7 have in this case. And, perhaps most importantly, we

8 believe that The State has long been aware, long been aware,

9 of the health risks associated with smoking. And we believe

10 if we could get a full disclosure by The State -- and we

11 haven't got anywhere close to it -- we will be able to show

12 that The State has studied the issue, its educated the

13 public, its educated our children on this issue. Indeed,

14 we, in our own efforts, have uncovered evidence of state

15 awareness back to the 1920's. We haven't got anything back

16 before mid-1980 in The State's production so far.

17 Nevertheless, Your Honor, despite all of its public

18 criticism -- that's the rage these days, to criticize the

19 tobacco company -- there is ample evidence that The State

20 has pursued a deliberate policy of permitting and of taxing,

21 profiting from participating in the sale of tobacco. And we

22 believe these are important issues in this case. And we

23 need full disclosure from The State as to these issues. And

24 we believe that if we can get the evidence from The State,

25 the proper disclosures, it will demonstrate The State's

1 comparative fault and it will cast serious doubt on any of

2 The State's equitable claims or claims of reliance for

3 conspiracy or concealment, among other issues.

4 And the bottom line point of all of that, Your

5 Honor, is just this: you've heard a lot about claims against

6 tobacco companies, you've heard a lot about it in the press,

7 but that's not all that's at issue here, there are

8 significant other issues.

9 Curiously, in responding to our Motion To Compel,

10 the AG argues that certain of our defenses should not be

11 recognized. And that therefore discovery related to those

12 issues should be denied. He has it backwards if anything.

13 It is the AG, Your Honor, who has in fact framed and posited

14 in this case very novel, heretofore unrecognized causes of

15 action. It is the Attorney General who attempts to cobble

16 together a statistical model not just to quantify damages,

17 as Your Honor will see, but also to prove causation.

18 Your Honor, we agree that legal viability is an

19 important issue in this case but it's an important issue as

20 it relates to the AG's claims and its proofs, not with

21 respect to our defenses.

22 In a recent case which I think is very important,

23 very important on this, is a case on point, and that is the

24 Florida cases that we have provided to Your Honor. And I

25 won't quote from those extensively. I know Your Honor has

1 those as Tabs 1 and 2 to our reply brief.

2 But the bottom line is, that when we're talking

3 about claims like those being asserted here by the Attorney

4 General in this state, in Florida the Court struck 15 of the

5 18 canons.

6 You know in Florida, Your Honor, as you probably

7 know in reading those cases, there was a new cause of action

8 that was created by the Florida legislator to permit Florida

9 to pursue directly, directly, claims against the Tobacco

10 Industry. The Court held that prior to that statute there

11 were no direct claims against the Tobacco Industry, there

12 was no independent cause of action, The State was relegated

13 to subrogation and the assignment remedy. That's the same

14 remedy that the Florida statute provided for before the new

15 one was enacted in 1994 and it's the same remedy, the sole

16 remedy, that's provided here in the State of Texas.

17 We're going to talk about viability of claims, Your

18 Honor, and it goes to their claims not to our defenses. But

19 we're not here to talk about those issues today, we're here

20 to talk about discovery.

21 And you know it was interesting to me, Your Honor,

22 very interesting to me, that Mr. Umphrey and others on

23 behalf of the Attorney General argue that there should be no

24 excuse for our production in this case, in terms of their

25 motion against the Tobacco Industry. And yet, if you look

1 through Plaintiff's disclosures; that is, the Attorney

2 General's disclosures, they are peppered, literally peppered

3 with excuses.

4 And, Your Honor, I'm not going to read them to you

5 again. Mr. Germer cited several of those excuses to you and

6 we have listed them out in the reply. But the bottom line

7 is, that if any one has presented excuses to this Court for

8 its failings in disclosure it is the Attorney General. And

9 there is lots of reasons why the Attorney General should be

10 providing this Court with excuses, because their disclosures

11 were wholly inadequate, as we will see.

12 There is no double standard under the Plan. And

13 that's what The State is arguing for. Interestingly, Mr.

14 Umphrey was trying to say it's the tobacco companies that

15 are somehow going to be arguing for a double standard here

16 because they're big and rich. But that's not what's been

17 happening. What's been happening is, The State has been

18 arguing for a double standard here. And there is no double

19 standard under the Plan. The AG should be treated like any

20 other party. The Attorney General should have to go out

21 there and find documents and do thorough searches and make

22 their disclosures and make them when they're supposed to.

23 You know, we can look at the State's disclosures

24 and we can look at them from a statistical standpoint and

25 confirm there's something wrong. For example, they claim

1 that they have produced some 100,000 plus pages in this

2 case. Although, I must say that if you look carefully

3 through those pages much of it consist of industry documents

4 they've supplied back to us, transmittal letters, letters

5 changing vacation and addresses, and forms. But compare it

6 to Mississippi. Mississippi has produced about 250,000

7 pages; and they're continuing to make a production.

8 Minnesota has produced about 500,000 pages; and they're

9 continuing to make a production. The Texas Medicaid program

10 is much larger than those states. If you measure it by

11 dollars, the Texas program is six times the size of

12 Mississippi, it's three times the size of Minnesota. And

13 moreover, as we know from all the performance reviews and

14 studies, the Texas program is not coordinated and it's

15 spread out. It's spread out among 14 primary Health and

16 Human Service organizations and agencies and 11 others. If

17 anything, Texas should be producing significantly more, not

18 significantly less than these other states.

19 But, Your Honor, it's true, if we look at The

20 State's disclosures from a qualitative standpoint, that

21 proves as well that there are serious problems with The

22 State's disclosures. An example, a base line example might

23 be the 1994 Medicaid Reform Legislation. The State produced

24 that and The State produced approximately 2300 pages,

25 including notes, internal memos and the like, with respect

1 to that 1994 Medicaid Legislation. But the Attorney General

2 produced virtually nothing with respect to all the other

3 legislation that has been -- and initiatives that have been

4 passed on these topics. For example, the 1987 Medicaid

5 Fraud Legislation. This, Your Honor, demonstrates, I think,

6 the lack of consistency and the lack of thoroughness of The

7 State's search effort. Another example is The State's

8 regulation and awareness documents. They've only produced

9 documents, Your Honor, in their disclosures, some documents,

10 that are recent like late 1980's and 1990's. But we know,

11 because we stumbled across them, that these State awareness

12 documents go way back. We found, for example, a 1928 study

13 about tobacco from the Texas Board of Education.

14 Your Honor, there are lots of examples going back a

15 long time. They've made allegations against us in this case

16 going back to the early 1900's. And we're entitled to have

17 this information and they are not producing it to us.

18 Now, in our -- Your Honor, in our briefs, we

19 identified some specific examples; and let me see if I can

20 review those examples. The first is the computation of

21 damages. This is important to us. It's important under the

22 Plan. The Plan says that we have to have it. We need the

23 computation; we need the data; we need all of the documents

24 and evidentiary support for those computations. It says it

25 right in the Plan. The Attorney General says there are

1 three categories of damages: one, state funded health care

2 provider costs; two, state employee insurance and retirement

3 system costs; and three, the biggie, that is, Medicaid

4 reimbursement costs.

5 With respect to the first two, Your Honor, the

6 Attorney General has conceded, conceded that they haven't

7 yet computed their damages; so they haven't given them to us

8 yet. And, of course, they've made no production of

9 documents or other evidentiary material on which the

10 computation is based. So, as to the first two areas of

11 damages that they're asserting in this case, they haven't

12 given us anything.

13 Now, what the AG does say is, "Well, we're going to

14 use this new and, as yet, unfinished CDC model for this

15 purpose," and they cite to a Mississippi paper and they

16 attach it, by the way, to their brief. I invite Your Honor

17 to look at it. It has nothing to do with these categories

18 of damages. There's been no explanation by the Plaintiff as

19 to how they can even apply it to these categories of

20 damages.

21 What about the third category, Medicaid

22 reimbursement costs. The Attorney General says that it

23 intends to use a statistical model to prove causation and

24 Medicaid damages. We need to have whatever model it is that

25 they're going to use. The Plan says we get it. And we've

1 got to have it. Now, as to what it is, the Attorney General

2 continues to take inconsistent positions. He says in his

3 response that his model is, quote, detailed, specific and

4 reliable. Well, that's nice except that buried in the

5 footnote the Attorney General says that it is using a new

6 CDC model, quote, as yet unnamed and not yet completed.

7 Which is it? In addition, the Attorney General says, "Well,

8 there's this model called SAMMEC 2.1. Now understand this

9 is not the CDC model that they're talking about, it's a

10 completely different model. Well, originally they hadn't

11 produced anything to us about the model itself, until two

12 days ago we got some information from them. Actually, it

13 was yesterday, excuse me, we got some information from them

14 on SAMMEC 2.1.

15 But in, any event, Your Honor, are they using the

16 SAMMEC 2.1; or, are they using this new CDC model that's not

17 yet finished yet. Which is it? More importantly, how can

18 the AG's model be detailed and specific and yet be not yet

19 completed, as they say? How can it be, as they say,

20 reliable if it's not yet done? How have they done the

21 testing? How have they had it peer reviewed if it's not yet

2