0386N/0~_-03-83/WGF
NO. 9994
IN THE MATTER OF THE ACQUISITION BEFORE THE
OF CONTROL OF OR MZRGER WITH H0140RABLE DOYCr_
LEE,
FARMERS GROUP, INC., FARMERS COMMISSIONER OF
INSURANC-Z
TEXAS COUNTY MUTUAL INSURANCE STATE OF TEXAS
COMPANY, TEXAS FARMERS INSURANCE
COMPANY AND MID-CENTURY
INSURANCE COMPANY OF TEXAS BY
BATUS, INC. AN INDIRECT WHOLLY 5
OWNED SUBSIDIARY OF B.A.T.
.7, INDUSTRIES P.L.C.
BRIEF SUPPORTING REQUEST FOR
COMMISSION FOR TAKING OF EVIDENCE
OF DR. S. J. GREEN
Farmers has submitted a request for the commission
of Dr.
S.J. Green. Dr. Green was B.A.T's Director of
Research from
L! 1960 through 1979. Dr. Green's testimony is
necessary for the
Commissioner to determine fully three significant
issues before
him, namely, whether he should not approve BAT's
proposed
acquisition of Farmers on the grounds that:
(1) The financial condition of BAT and BATUS' is
so
threatened by massive new potential for
successful product liability claims that the
proposed acquisition would jeopardize the
financial stability of Farmers and prejudice the
intere;t of policyholders; see Article 21.49-1
5(c)(iii); and
(2) Senior officers of BAT and proposed future
directors of Farmers have demonstrated such a
lack of integrity and trustworthiness in their
testimony in depositions and proceedings in other
states in two particular areas (a) knowledge of
1. In this Brief, "B.A.T- will refer to B.A.T
Industries,
P.l.c. "BATUS' will refer to BATUS, Inc., and its
sub 34 diaries. "BAT" will refer to both B.A.T and
BATUS.
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0386N/09--03-33/WGF
BAT research, its results, and the health risks
of smoking; and (b) SAT's plans for Farmers,
non-smoker discount programs. On this bas4s, i--
would not te in the interest of policyholders ant
of the public to permit them or BAT to acquire
concral of Farmers; see Article 21.49-1 5(c)(v);
(3) BAT is highly likely an the basis of its pas--
conduct in suppressing development and markenng
of a safe cigarette to suppress similarly the
sale of non-smoker discount policies. Any suc"
interference would be unfair, prejudicial a n
unreasonable to policyholders and not in the
public interest. See Article 21.49-1 5(c)(iv).
Dr. Green's testimony is necessary for the
Commissicner's
determination of each of these issues. It will
show that in
the 1960s BAT conducted extensive scientific
research which
indicated that smoking caused health risks. It
will fu.-ther
show that these research results were reported to
and discussed
by the Board of Directors of B.A.T. and that in
response, B.A.7
commissioned development of a "safe cigarette." It
will reveal
that plans to market such a -safe cigarette* were
abandoned due
to the likely negative impact on tobacco sales of
any imp!-;cit
r
L. concession, by selling a *safe cigarette," that
smoking was
unsafe and the potentially devastating impact of s
u ch a
concession on BAT's defense in tobacco product
liability
actions. Dr. Green's evidence there~'ore will
demonstrate:
(1) that BAT was aware of the health risks of
smokina
when it suppressed research results showina
adverse effects on health from smokinq, abandoned
Plans for a "safe ciqarette" and Pressed on with
marketinq of a product whose danqers it well
knew; Farmers submits that the implications of
this newly exposed policy in terms of tobacco
product liability are apocalyptic for BAT.
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(2) that Mr. Sheehv and Mr. Garraway den-4-2,!
knowledoe
of the extensive research c:nducted bv BAT into
the health risks of smok '4na desoite the fact
that
the research results were oresented to the B.A.T.
Board of Directors; and that M r . Garrawav
disouted the accuracv of statements in. Farmers'
promotional literature that smokino causes health
risks desuite the fac: that th:s was the
7 conclusion of B.A.T. 's own D; rector of
Research
and was substantiated bv B.A.T. 's own research
efforts; Farmers submits that, in this context,
the 'see no evil, hear no evil- approach of Mr.
Sheehy and Mr. Garraway stretches credulity.
Moreover, these same senior BAT executives and
possible directors of Farmers have de-Eended BAT's
prospective veto on use by Farmers of health-risk
promotions of its non-smoke: discounts on the
grounds that the statements in the literature are
untrue or have not been proven to be true. Dr.
Green's evidence will show this defense is
motivated not by genuine uncertainty as to the
health risks of smoking but rather by a cynical
assessment of the impact of such literature upon
"
"
the BAT balance sheet under
Sales
and
"Liabilities .- It is therefore central to the
f issue of the integrity o f the prospective
controllers of Farmers.
(3) that BAT suporessed production and marketinc
of
'safe cioarette,"
the a product of enormous
potential public benefit, when it was perceived
to conflict with BAT's laraer ambitions for
tobacco sales qenerallv and its strateqy in
tobacco products litiaation. Farmers submits
that this is a very unfortunate precedent when
n ,
c
o s dering the likely fate of Farmers non-smoker
discount policies in BAT hands. It also further
undermines the integrity of BAT by revealing a
readiness to subjugate clear public interest to
commercial expedience.
In short, Dr. Green's testimony will show that
B.A.T's and
BATUS's financial condition is imperiled, that
B.A.T and
BATUS's officers are not trustworthy and lack the
public
integrity to acquire a major insurance group, and
that B.A.T
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0386N/08-03-88/WGF
and BATUS officers are not credible when they deny
that they
have no plans with zespect to cu r t aImen: of
Farmers'
non-smoker discounts.
PROCEDURES FOR DR. GREEN'S DEPOSITICN
Farmers has previously stated its pos:~ion that
the
Cc=;.ssioner has the authority to issue
deposit'_:~ns fzr persons
located outside the State of Texas, and --armers
respectEully
refers the Commissioner to part III.A of the Brief
foc a full
discussion.
Farmers initially sought the cooperation of Dr.
Green so
that his deposition could be taken with a minimum
of procedural
difficulty. Dr. Green agreed to appear voluntarily
for a
deposition in England, as long as B.A.T consented.
However,
Dr. Green, after speaking with B.A.T's attorneys,
later told
counsel for Farmers he is unwilling to appear
voluntarily. See
California Offer of Proof and Declaration of David
Battaglia,
attached as Exhibit 'l.' Because of B.A.T's
intervention with
Dr. Green, then, the Commissioner should request
the
cooperation of the British judicial authority
asking that it
use its authority to obtain the attendance and
testimony of Dr.
Green. See Texas APA S 14(d) ("the commission
shall authorize
the issuance of any subpoena necessary to require
that the
witnesses appear'). Once Dr. Green's testimony is
taken by
deposition, his testimony Tmay be used as part of
the record
before the Co=nissioner and any subsequent action
in the
appellate courts. See Tex, R. Civ. Evid. 801,
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The procedures for obtaining the cooperation of
the -Englism
courts are well established. English Courts will
assist in the
obtaining of evidence for foreign proceedings by
ordering tne
examination of a witness in England where his
evidence is
relevant to and required for such foreign
proceedings. Thei:
jurisdiction to do so is conferred by the Evidence
(Proceedings
in Other Jurisdictions) Act 1975 ("the Act'), a
copy of whic'
is annexed as Exhibit 2 to this brief. The
detailed p:ocedural
rules for providing azzistance appear in Order 70
of the Rules
of the Supreme Court. Order 70 is printed with
annotations in
The Supreme Court Practice 1998, an 4official
guide to the
practice and procedure of the English High Court.
A copy cz
the relevant section and the latest supplement to
it is annexed
as Exhibit 3 to this brief. The Commissioner is
respectfully
invited to consider it.
In summary, the English Courts will order the
examination
of a witness resident in England if satisfied that
the
Lj
application is made i= pursuance of a request
issued by a court
or tribunal in a coumtry outside the United
Kingdom, and that
the evidence to which the application relates is
to be obtained
L for the purposes of civil proceedings before the
requesting
court or tribunal.
Since the Commissioner is deciding a contested
proceeding
between Farmers and BAT and which involves
ordinary litigation
procedures (e.g., the taking of evidence,
adversarial
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cross -examination of witnesses, discovery,
rep:esen:ation by
counsel, and findings of fact), Farmers is
confiden: that tne
English court will accept the Letter of Request
iss-.:ed by t-e
Co=issioner for Dr. Green's deposition.
7 ar-ners submits that the evidence of Dr. Green
is necess-=:y
for the determination of issues which have arisen
between
Farmers and SAT in the current proceedings
be--:)re t~e
Com.-iissioner of Insurance. It will reveal the
extenz of E;,7's
knowledge of the health risks of smoking when it
marketed
cigarettes and suppressed development of the safe
cigarette in
the 1960s. It is therefore highly relevant t:
Farmers
challenge to SAT's financial standing on tobacco
liabilizy
grounds under Article 21.49-1(iii) of the Texas
insurance
Code. In addition it goes to the integrity of Mr.
Sheehy and
Mr. Garraway as persons who would control Farmers
after a
successful takeover under Article 21.49-1(v): they
have claimed
in testimony before other state insurance
commissioners thaz
they did not know of BAT research into the health
risks o~-:
smoking and that such health risks were not
proven. The
failure of BAT to market safer tobacco products is
also
relevant to BAT's plans for Farmers' marketing of
non-smoker
discounts under Article 21.49-1, S 5(c)(i)(iv).
The particular
relevance of Dr. Green's testimony to the issues
between the
parties is explained in detail below:
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DR. GREEN'S TESTIMONY REGARDING
BAT's RESEARCH IS NECESSARY TO BAT~s
FINANCIAL CONDITION AND INTEGRITY
Dr. S. James Green was B.A.T's Director of.
Research: f:-:).m
1960 to 1979 and served on the Board of Directors
of 3:i::-:sh
American Tobacco Company from 1974 to 1979.
Despite his c::se
affiliat-:cn with BAT, he has stated publicly on
BBC telev'---
that *smokinq can and does cause harm' and that
"smnokin; i-z a
major f3c--o.- in lung cancer in our society." See
Testimcnv ~f
Brian Garraway, California proceedings, Vol. Vill,
9-73-i8
(attached as Exhibit 4). Dr. Green is an eminent
sc-.en:--*st
thoroughly familiar with the research on smoking
and he -h
conducted by BAT. As Director of Research of BAT's
activi:ies
from 1960 to 1979, Dr. Green is in the best
position to tes:;---y
to BAT's research activities and BAT's responses
to the results
of that research. BAT's own executives have stated
that
Dr. Green is a scientific expert in the field of
smoking.
at 915.
A brief description of BAT's research and the role
played
by Dr. Green appears in the California offer of
Proof and
attached Declaration of David Battaglia, attached
as
Exhibit 'I." As related in the Declaration, Mr.
Battaglia has
interviewed former BAT research scientists, a
former research
scientist of the Council for Tobacco Research, and
one of the
.:,2
individuals involved in developing the safe
cigarette, Unitted
States Patent No. 3,256,015. This investigation,
involved both
personal and/or telephone interviews with these
individuals.
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1. The results of SAT's research. In the 1950's,
Shortly
before Dr. Green becarre Director of Research, BA-
was
con-granted with numerous med -; c a 1 and
scientific studies in
respected publications -4- -; c h stated that
smck-;ng caused
cancer. BAT's executives tecame very concerned
that cigarettes
were hazardous to health, tut also felt that the
public should
not know of this concern.
At that time, SAT's executi--,es possessed both an
attitude
of disbelief that the product they were mass
producing could be
harmful and a genuine interest in determining the
true
relationship between smcking and health. They
instituted
extensive smoking and health research programs in
the early
1960*s, hired respected scientists, such as Dr.
Green, to
perform this research and gave this program a
virtually
unlimited operating budget. SAT also chose to
participate in
trade association research such as that conducted
by the
Tobacco Research Council in England. As BAT's
director of
research during this period, Dr. Green knows the
scope of this
research, and his deposition, when considered as
part of the
hearing before the Commissioner, will produce
specific evidence
as to BAT's research activities during this
period.
During Dr. Green's tenure as Director of Research,
BAT
conducted, sponsored or funded research involving
the painting
of the skins of over 10,000 mice with tobacco
smoke condensate
to determine whether smoking caused cancer. BAT
also conducted
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and s=znsored tests involv~nq t-e forced
inhalation o f
cigare--:e smoke by dc9s, hamsters an,~ monkeys,
as well as tests
invol,~z.ng the injection of nicot--ne into cats
and othe:
animals. The effec--s oic4ga:ette s-oking on
hu:rnans were also
analyzet.
A s=all number of BAT's studies an smoking and
hea-':- are
publis~--ed in scientific journals. Fcwever, most
BA7 resea:c~~
relatir:= to smoking and healt'- is unzublished,
and the r-=;orts
bear le=ends such as "Confidential" or "Must Not
Be S~:cwn to
Unauthc:4-zed Personnel." Therefore, the way to
dismantle the
wall of secrecy erected by SAT is t: obtain
evidence f-.z7. or.
Green cm the record, who was in char;e of such
researct B: the
time it was being conducted.
BA7's smoking and health research was conducted,
sponsored
or funded in numerous laboratories throughout the
wcrld,
includimc the BAT Group Research & Development
Cent:e in
!7 ; England- Brown E. Williamson, BATUS' American
subsidiary, was
the la:zest contributor to this research for many
years,
althoug, smoking and health research was rarely,
if ever,
conducted in the United States by BAT because of a
fear of the
consequences in the American legal system of
conducting such
researct.
The deposition of Dr. Green will show that the
results of
the research conducted, sponsored or funded by BAT
indizated
that c4.;arette smoking is carcinogenic, that
smoking causes
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0 3 a ~-~ N " : ;- - ~ -- - i 2 / wc- -7
cancer, :-a: smokin:; can c-z-.;se carJiovascular
disease, a::-- ::-,at
nico--ine is addic:--',,-e.
Dr. Green's testimony -.;ill show that BAT
executives --;ere
kept at---ised of BAT's rese3rch on s:-.c k i ng
and health :n a
requia: :-=5:s, anc~ that BAT's board often had
discussi-nns =::u:
the to=i:. Dr. G:een's testimony will show that
BAT's B:::-4sh
opera:--:::~s -4ere wi:ling tc admit long ago that
simoking C-a--:5es
diseBse. t u : t ~i -- t Brown & Wi 11 i arsson,
the BAT A:-. e :an
subsid-4---:7, dictated that this did not happen
becaus=- o f
concern -1cr the legal consequences oE such action
in the -'n-;:ed
States.
2. A 'safe" cicarette. Once the research cond-- z:
ed,
sponscre-d- or funded by BAT, and directed by Dr.
Green, beg-an to
reveal t-'-at smoking was harmful to health, BAT
embarked u=cn a
research program to develcp the safest cigarette
poss4----'--.
This was also during Dr. Green's directorship o f
B.1 s
research. Curing this second stage of research
activity, -RAT
F,
1 1--.
was ope:---::ng under the assumptions that
cigarette smcke was
carcinogenic and that the public should have
available :-- -;c
the safes: cigarette which BAT could make.
Amona other research pzojects generally relating
t: :.he
development of a safer cigarette, BAT hired
Bat:e'le
Laboratozies in Geneva, Switzerland, in the
mid-1960's to
design s-.:ch a cigarette. United States patent
no. 3,25E,J-'5,
dated June 28, 1966, attached hereto as Exhibit 5,
is be!-'eved
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03 a 614/08 -0 Z-3 a /Ilic'
to be the cigarette designed for BAT by Battelle
Latoratories
because it is identical to a drawing by a BAT
researc-i
scientist of the safe cigaretze which BAT
developed. The safe
cigarette was patented in the United States by Sir
Charles
Drummond Filis, who was a scien:ific advisor to
BAT. Since Dr.
Green was d;-:ector of reSe3rCh at BAT during this
period, his
"safe- cigaret-te.
testimony will show the development of this
Dr. Green c3ri give evidence tha-- this cigarette
was tested on
animals in the biochemistry department at Battelle
Laboratories
in Geneva and was determined to be much safer than
conventional
cigarettes sold by EA77. The cigarette was
never*marketed.
3. Ma:ketina overrides safetv. Sometime in the
1970's,
BAT's research philosophy changed. The emphasis
shifted from
safety to marketing. Many of BAT's smoking and
health policies
were eliminated for the sake of increased sales,
and products
which had previously'been determined to be too
harmful were
F placed on tne market. Dr. Green will give
evidence as to the
U
7"! elimination of the research programs during
this period and how
BAT curtailed research into the relationship
between smoking
and health. Dr. Green will also testify as to the
elements
which brought about this fundamental change in
philosophy,
which Farmers believes to be pressure by BAT's
marketing
department and concern by Brown & Williamson that
an admission
that smoking was unsafe would substantially harm
its defense in
tobacco product liability actions.
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A
DR. GREEN'S TESTIMONY WILL 2E RELEVANT TO TF---
ZNTEGRZ7Y AND TRUSTWORTHINESS OF BAT's
OF---!C;-:'RS.
Article 21.49-1, subsection (c)(1) provides, 'The
ccmmissioner shall approve any acquisition of
control . . .
unless, after a public hearing the:eon, he finds
that . . . the
competence, trustworthiness, experience, and
integr--ty of those
persons who would control the operation of the
domestic insurer
are such that it would not be in the interest of
;olicyholders
of the domestic insurer and of the public to
permil- the merge:
or acquisition of control." It is difficult to
fathom more
serious questions about the intec:ity of EAT's
rranager7ent th-an
the issue presented by the denials and statements
by BAT's
executives as to the results of SAT's research an
smoking and
health and its results. Dr. Green's evidence is
particularly
relevant to evaluating the "integrity" and
'trustworthiness" of
BAT as he has direct knowledge regarding the
research efforts
L undertaken by BAT and the responses to the
research conducted.
Such testimony will be directly relevant to the
integrity
and trustworthiness of BAT (and the proposed
directors of
Farmers) who have attempted to deny previous
knowledge of the
risks of smoking. These BAT and BATUS officers
have testified
in proceedings or depositions in other cases and
have denied
knowledge of BAT research activities and their
results.
Patrick Sheehy, who is chairman of the board and
chief
executive officer for BAT Industries, has denied
knowledge of
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038iN/08-03-88/WGF
any SAT research activity regarding t-e health
risks to hu:nan
beings of cigarette smoking an~ of any research by
BAT witn
regard to studies linking smoking and cancer. Mr.
Sheehy also
denied that he had any knowlecce of BAT's invo
lvement in anv
trade association research or any other
collaboration research
arrangement with other tobacco csmoariies in
studying the
results and potential dangers off cigarette
smoking to health.
See Testimony of Patrick Sheehy, decosition in
Oregon
proceedings, at 29-31, attached as Fxhitit 6.
Similarly,
Deputy Chairman of BAT Industries and Chief
Financial Officer
Brian Garraway has also denied any knc-,le~2=e of
the. results cf
any research studies conducted on the link between
smoking and
lung cancer and has denied the truth of the
Surgeon General's
warnings regarding cigarette smoking. See
Testimony of Brian
Garraway, California proceedings, Vol. V111 at
903-04, 916
attached as Exhibit 4. BAT executives have also
denied the
truth of the health warnings in Farmers' "Facts
About Smoking"
brochure. See infra at II.C. BATUS Executive
Leonard W.
Arentsen, who will testify in these Texas
proceedings, has
demonstrated a remarkable lack of cognizance of
the primary
product marketed by the companies he purports to
represent in
these Texas proceedings. See Arentsen testimony,
Idaho
proceedings, Vol. 1, at 87, attached as Exhibit
20; Arentsen
testimony, California proceedings, Vol. VIII, at
957 attached
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038 6N/05 -0 3 -85 /-,;G7
as Exhibit 7 ; ArentSen. testi:ncny, I I! -no is
proceed--ngs, a
243-44 , attached a s Exhibit 8 - The purported
lack c f
knowledge of BAT and BATUS o-.'--icers -;s
demonstrated in the
testimony of Mr. Arentsen in the Kansas
proceedings:
Question: Following that disc-.;ssicn with Mr.
Garraway,
have you done anything as a member of the board
of directors of BATUS, as a memcer of the BA-US
executive cormittee and the number two officer
in BATTJS to determ4ne what BAT's own resea:ch
shows about whether s7~:kinq causes cancer?
Answer: Well, I think I have answered those
questions
earlier. I would like to state once again mr.
Smith, that the research is a responsibility of
our tobacco compan,es. if our tobacco
companies determine what the cause ot cancer
was, I am sure thev would let us kno.. In
fact, the whole world would like to kncw.
Question: Well, I am sure the whole world would
like to
know. The question is, would you like to know
enough that you have ever asked them what their
research shows? . . . And the answer to that
question is no, is it not?
r7 Answer: The answer to that question is, I have
not
asked. I would expect them to tell me if they
knew.
Testimony of Leonard Arentsen, Kansas proceedings,
Vol. V, a t
478-79, attached as Exhibit 9.
Despite the overwhelming amount of scientific
evidence,
confirmed by Dr. Green, one of their own research
officers, BAT
officials have steadfastly denied any link between
smoking and
cancer, apparently only in fear that testifying to
the truth of
that matter would endanger their corporate
profits. See
Testimony of Leonard W. Arentser., Illinois
proceedings, V o1.
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03 ;_z5N/02-0!_-33/WGF
11 :1', at 24,_~-47, attached as Exhibit 8
(stating 't-e:-e has not
teen a dire-zt cause or relationship established
by scient--fic
;rocf" tetween smo k i ng and cancer); Testimony
of Pat-rick
Sheehy, Orecon depcsition, at 107, attached as
Ex~t--tit 10. :n
i:znic jux:a=osition to the professed ignorance of
BAT rese-mrch
regarding the link between smoking and cancer, BA7
offiz-als
-a-ie demonstrated a thorough
familiari:Y w i th a
cuestion-and-answer brochure prepa:-ed ty Brown &
Willia7s-n a:
to how to respond to questions regarding the
1--:-.k te:,;een.
L-7 smoking and cancer. See Testimony of Leonard
W. Aren:sen,
Kansas proceedings, Vol. IV, at 333-38, attached
as Exhiti-_ !I.
BAT's p.-evious: conduct in relation to the
question cf th e
link between smoking and cancer demonstrates a
serious ques:ion
regarding lack of integrity. BAT's present
management has
r suppressed research into the dangers of smoking
and its
results, and instead have testified under oath
that there is
merely a "statistical association- between smokers
and heilth
r.sks but that smoking is not the cause. See
Testimony of
Leonard Aren:sen, Kansas proceedings, Vol. IV, at
375, attached
as Exhibit 12. BAT has developed a "safe
cigarette," yet it
has not undertaken any procedures to market the
safe
cigarette. See Exhibit 5 (patent application for
sale
cigarette). See also Federal Trade Commission
Staff Recort on
the Ciqarette Advertisinq Investioation, May,
1981, at 2-24
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038i:N/ : :--: -; -531,14G7
(at:ac.-.ez as Exhibit 13) ("Brown & Williamson
chcse nz: to
(ad---e:z:se a ne-, gas cigarette filtration
syszem) in crfe: to
avoid ed'.;=3ting the public about the presence
and haz-t: :--Ls
natu:e cf =ases in cigarette smoke-).
0 :. !-:een's testimony will be particularly
relev2n: z,~~
evaluatin= the trustworthiness of Mr. Sheehv and
Mr. Ga::-2-,a,,
an t~iese :rcs-, impor:ant points since Dr. Green,
as
Research during the crucial period from to
1979, w'-:: be examined as t o the scope of
research conduc:e-t o:
corrnissicned by SAT into the health risks of
smoking, the
identities of the BAT personnel to whom Dr.
Green's re=::--s
were mn a --: eavailable, and BAT's marketing
response t -- :he
growing scientific evidence of the health risks of
smoking by
attempts to suppress the fruits of his research.
Ironic-211Y.
when corf:cnted with a videotape of Dr. Green's
statemen: on
BBC television, BAT Chief Financial Officer Brian
Ga.-:-a-.;2v,
accordinz to the testimony of Leonard Arentsen,
chose to
ques---4::P. Dr. Green's 'c:edibility, ' rather
than to take any
serious e--:ffc-rt to learn the results of BAT
research rega:tinc
health :4-sks from smoking. Arentsen Testimony,
Kansas
proceedin=s, Vol. V, at 476, attached as Exhibit
9.
Simply put, and despite their repeated denials of
the t:-.:th
and relevance of such results, if Mr. Sheehy and
Mr. Gar:away
were "unzwa:e" of BAT's research, how could they
have publicly
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0 -7 3z 5 N / 0 3 - : _7 - 3 3 / W G F
diszuted under oath the validity of statements
about t~,e risks
o smok; nz? As the Ohio proceedings found, BAT is
nc,:
credible. See Ohlo Proceedings, Vol. X!, at 109
(attached as
Exhi bit 14) U*Z~ the extent
that Mr. Sheehy testified that he
did not knc, or c:uld not recall the e:x;stence of
rese3rch
or that ~,e has not discussed, or is not aware of
discussions
re--3ted to Brown & Williamson's potential
exposure, t~~en that
testimony is not credible-).
Moreover, the reputation and integrity of Farmers
generally
will be comoromised, if BAT is allowed to acquire
control, when
it is revealed that its controlling principal has
teen
.L, concealing vital health information from the
public. A
reputation for integrity is essential to the
insurance
F;
L industry, as Article 21.49-1 recognizes,
-[blecause of the
intangible nature of the insurance promise and its
enormous
7 i
significance to the social and*economic structure
(Olur
business Cof insurance] is here highly charged to
the public
L
interest and public trust Proceedings of the
National
Association of insurance Commissioners, 1969
pr6ceedings, Vol.
I, at 178 & n. 21 (adopting Model Holding Company
System
Regulatory Act). This would be particularly true
with
Farmers. After years of marketing "non-smoker-
policies for
not only life but also home-owner policies, see
Exhibit '21,"
Farmers would appear to the public as a corporate
hypocrite if
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BAT is allowed to gain cor--rcl w~.en it is
d--scovered that the
proposed owner, BAT, c o nz2u c t e dresearch
s.-.cw i ng the health
risks of smoking and supp:essed the results of
such research
while repressing the public's concern about the
harmful effects
of smoking.
B.
DR. GR-T-TN*S 7r_S-:MCMY IS RELEVANT 70 THE
FINANC.7AL CONC7710N OF BAT AND BATUS.
A central issue in the proposed acquisition is the
financial risk to BAT and BATUS proposed by the
myriad of
tobacco products liability actions pend--*ng
against the
principal subsidiary cf EA.US, Brown & 4illiamscn
Tobacc-_
Corporation ("Brown & Williamson") , as well as
the risk which
future actions will pose. Farmers has previously
summarized
the relevance of the tobacco issue in its
"Memorandum Regarding
-Issues," and Farmers
Relevance of Tobacco, and Related Financial
respectfully refers the Ccmmissioner to that
Memorandum which
is incorporated herein.
The financial stability of BA7 and its
subsidiaries, BATUS
and Brown & Williamson, is directly relevant in
evaluating the
proposed change of control application. Pursuant
to S 5(c) of
the Insurance Holding Companies System Regulatory
Act, Texas
Insurance Code 21.49-1, the Commissioner must
disapprove an
acquisition of control if, among other factors,
'the financial
condition of the acquiring party is such as miqht
jeocardize
the financial stability of the domestic insurer,
or prejudice
the interest of its policy holders." (Emphasis
added.) Any
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0386N/08-03-88/WGF
evidence pertaining t:~ the financial condition c
f BA7 i
relevant to the disap=roval factor set forth in
5(c) cf
Article 21.49-1.
The likelihccd of successful product liabili:y
az:ions
became appa rent i th the j u ry's verdict in the
recen -_ Ci co I lone
case. In Ciuollcne GrDUD, Inc., No. 83-22;-:4
(D.N.J.), the jury I:und tnat the tobacco
purveyors there
should have warned cons--7ers regariing health
risks c' smoking;
that the failure to warn of the dangers of smoking
before 19E6
was a proximate cause of Ms. Cipollone's smoking;
and that such
smoking was a proximate cause o-.~ her lung cancer
and death.
See attached Exhibit "19."
The Cioollone verdict belies the tobacco
industry's cry,
reiterated by BAT and BA7US throughout the
acquisition process,
that liability for the sale of tobacco products i
s
speculative. The $400,000 verdict in Cipollone is
concrete
proof otherwise. Brown & W-_lliamson itself, BAT's
American
subsidiary, is currently named as a defendant in
37 tobacco
products liability actions. Moreover, 62% of
BATUS's profits
and 42% of its operating income is generated by
Brown &
Williamson. In the reported opinion at Cipollone
v. Liacett
Group, Inc., 683 F. Supp. 1437 (O.N.J. 1988),
Judge Sarokin
indicated that the evidence presented at trial
suggested that
"the [tobacco] industry . . . entered into a
sophisticated
conspiracy organized to refute, undermine and
neutralize
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inf:rmaticn coming from the scien:-_fic and
metical cZ;=nunity,
ar~! at the sarre time to confuse and mislead the
consuminc
pub:ic in an ez:~fort to encourage existing
smcke:-s to continue
and new perscrs to cor-.7-ence s mc kin g Id. at
1490. The
ev~_,fence presen--ed by the PlaintIffs in
CLoollone, Judge
Sa:okin said, -dernonst rates a delibe:ate intent
and purnose tc
7-
challenge all adverse medical and scientific
evidence regarding
smc~lnq, irrescec:ive of its truth or validity.-
Id.
Dr. Green's testimony will shed light on the
refusal of SAT
officials, such as Mr. Garraway, Mr. Sheehy and
Mr. Arentsen,
to "concede anv relevance to health for fe3r of
making an
a(:L-n 4ss-i-on. -683 F. Supp. at 1-1,91. The
testimony wall also
show that "adverse results (were] generated by
research . . .
conducted by the cigarette companies themselves."
Id. The new
F2 evidence through Dr. Green's testimony will
show that BAT knew
of the harmful risks of smoking, but chose not to
do anything
about it, or, worse, attempted to conceal such
information.
Farmers submits that this fresh evidence will open
the way to
numerous successful suits recovering substantial
damages. see
id. at 1500.
The conduct of the tobacco industry, and of BAT
and its
subsidiaries, reminds one of the tremendous
product liability
which faced the asbestos industry. As the
Commissioner may be
aware, the growing number of products liability
judgments
against Johns-Manville, the leading manufacturer
of asbestos
materials, demonstrated the link between such
materials and
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03 8 5N I O-z -03 -281'e4GF
cancer. The litigation, which tegan i n the early
1980 's.
quickly led to the bankruptcy of a large,
mcnetarily successful
cocporation. Moreover, the link between the
asbestos industry
and the tobacco industry is more than a persuasive
parallel.
Studies have indicated that asbestos workers who
smoke have
five t ime s greater risk of developing lung
cancer than
asbestos-insulation workers who do not s-no ke.
Brown &
Williamson, BAT's subsidiary, is currently a
co-defendant with
asbestos manufacturers in seven pending prcducts
liability
actions. Tobacco Products Liticat-icn Revort,
January-February,
1988, Vol, 3.2.
Farmers seeks evidence which will be directly
relevant to
the issue of BAT*s "financial condition.' As
demonstrated
above, Farmers has already gathered significant
evidence
regarding BAT's research activities and seeks to
prove this
further through Dr. Green's testimony. Moreover,
the cynical
use to which BAT put to its research has been the
subject of a
report by the Federal Trade Commissicn. It readily
appears
from this report that BAT and its subsidiary
corporations
engaged in a marketing effort similar to that
which led to the
finding of liability in CiDOllone. The report
emphasizes that
BAT's subsidiary, Brown & Williamson, in its own
advertising
document, "notes repeatedly that its advertising
campaign must
provide consumers with a rationalization for
smoking and a
'means for repressino their health concerns about
smoking a
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full-flavor Viceroy. Federal Trade Cor-:7-_ss,_cn
S---mff Pe=crt
on the Cicarette Advertisin-z Investic3tion, may,
193-, at 2-13
(quoting from -Viceroy Strategy,- V.C. 8 r : 3
cri, G r ou p Pro j ect
Manager, Brown & W i 111' ams:: n, March 3,
(e:n:;hasis i n
original) (attached as Ex'",.bit '13")). 7'-e F7C
rz-=ort als:
emphasizes : -Other doc,-,-.,en::s submit:ed by
B:cwr: & Willi3msor.
show that the company has attempted to capita::.ze
upon t~:e
erroneous consumer percepticn that there is a
he_=!_~- --enefit tc
smoking mentholated cigarettes. Documents
pertaining to the
marketing of Kool cigarettes demonstrate that t`e
company is
aware of the consumer mispercepticn about t-e
re:a--ve siEet-7
of menthol cigarette (sic) and utilizes it in the
development
of advertising strategies for Kools." Id. at 2-20.
As noted
previo
usly, the FTC report also stresses, that SAT's
American
F7 tobacco subsidiary, Brown & Williamson, refused
to market the
gas cigarette filtration system for fear that it
would educate
the public about the dangers of other cigar s. ng.
Id-
mc k
at 2-24. The refusal to develop safer market
alternatives and
to inform the public about product dangers are
significant
L;
bases for successful products liability suits. W.
Prosser & P.
Keeton, Prosser & Keeton on Torts 685-702 (5th ed.
1984);
Jamoole v. Touchy, 673 S.W.2d 569 (Tex. 1984);
Jackson v.
Firestone Tire & Rubber, Inc., 788 F.2d 1070 (5th
Cir. 1986).
In this regard, Dr. Green's testimony will show
that SAT
conducted extensive research into the risks of
smoking and that
this research indicated that smoking caused a
substantial risk
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,D32E';. -Ji-33-32/WGF
to 1-ne health of smokers. He wi 11 further
testify that t-e
resu' :s of t!~_;s research -ere telivered to and
discussed b,
BAT'S senior executives, whc have steadfastly
denied a n -1
knc-ledge of such researcn. Dr. Green's knowledge
of resea:zh
act-.-'--ies will also show that BAT was aware of
these hacm_-.;l
resu::s of cigarette smoking when it suppressed
produc:;-on cf a
safe cigarette and when it attempted to allay
consure:
concern. Such testi.-rony is hignly relevanr in
assezs;_ng Bm-'s
pros:ective tobacco liability and to determining
the full
effects of Cicollone upon t- e future of BAT and i
t s
subsi~;_aries-
C.
DR. GREEN'S TESTIMCNY IS RELEVANT
TO THE COMMISSIONER IN DETERMINING
THE FUTURE PLANS OF B.A.T AND BATUS REGARCING
NCN-SMOKING ADVERTIS:NG AND MARKETING
A.-ticle 21.49-1, subsection (c)(i)(iv), states
that the
Commissione r must not approve an acquisition of
control if,
arlonc other factors, "the Plans or proposals
which the
acqui:ing party has to . . . make any material
change in its
business or corporate structure or management, or
cause the
insure: to enter into material agreements,
arrangements, or
transactions of any kind w i th, any party, are
unfair,
pre)udicial, hazardous, or unreasonable to
policyholders of the
insurer and not in the public -interest." The
response of BAT
officials and their likely proposals to curtail
marketing of
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0386X/0=_--~!_-83/WGF
non-smok=-7 disc:unts will be "unfair,
prejudicial, hazar_-;::-.;s,
or unreas::nable to policyholders of [Farmte:s)
and not ir. tt~e
public in:arest.-
F a :.Te r s is the nacion's leadec i :_
non-smoker policiz_s,
discounts, and marketing in the insurance
industry. Far7ers
has ah:c,.:: thzee million ncn-smoker policies ;.
n e f f
nationwi-4e, savinc non-smokers roughly S122
million dollars i:.
premiums annualiv. In Texas, a r me : s presently
approxim-azely 107,000 non-smoker homeowner
insurance polic--es
in force. These policies are approximazely 58% of
all Farmers'
homecwne: policies in Texas. Statistically, 59% of
Ficme:s'
homeowners' policies, 33% of Farmers' auto
policies and 55% cf
Farmers' life insurance policies are non-smoking.
A large
portion of the good will in the public mind
towards Farmers is
_7 associated with its campaign encouraging the
public to q-_,it
smoking. See Resolution in Succort of Farmers
Insurance Grouc,
attached as Exhibit 15.
Farme:Z' emphasis on non-smoking policies and
non-smcker
discounts creates an inherent conflict between BAT
and
Farmers. Farmers publishes a pamphlet which it
hands out to
its polic---olders entitled 'Facts About Smoking,'
attached as
Exhibit Z' 1 . The cover of this pamphlet has a
warning sign
with a cica:ette crossed out. The pamphlet
concludes:
(1) Statistical studies and periodic reviews
confirm that
s=oking contributes to early death;
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(2) -_~e inc:e3sed death rate from smoking --s a
result cf
t-e effect of smoking on all parts off tne body -
sc-.e
than others.
e
The pamnrle: emphasizes that smoking is the majzr
cause of 1--ing
cancer an: a significant cause of esophagus,
::-.::)at, mcu:h,
urinary, t-_adder, and pancreas cancer. Farmers
ern,-hasizes in
the broc-u:e that there is a strong relac;_::rsnip
between
smcklng an_~ heart and vascular problems. Farme:s
also stres-zes
in the t::cfture that smoking is a major cause of
errphyse:7a,
chr3nic b:cnchitis, and peptic ulcers.
A siznificant material change will occ-_ - n Fa
rme :s
marketing :f non-smoker discounts if SAT acquires
Farme:s.
While BAT chief financial officer and deputy
chairman Brian
Garraway and BATUS Executive Leonard Arentsen have
testified in
proceedings before other tribunals that they would
not
interfere with the non-smokers discount, see
Garraway
tes--imony, California proceedings, Vol. VIII, at
917, attacned
as Exhibi: 4; Arentsen testimony, Kansas
proceedings, Vol.
IV, at 374, attached as Exhibit 12, BAT has
conceded that it
has problems with the manner in which these
discounts are
marketed. Mr . Garraway testified that BAT wculd
suppress
publication by Farmers of any brochure which
'proselytizes-
non-smoking. Indeed, BAT has testified that they
would go so
far as to rearrange the Farmers' board, if
necessary, to stop
the non-s-mcking brochure. Mr. Garraway testified
in Oregon:
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Questlon: Mr . Ga r raway, i f the acqu i s i t
ion were a 1'. owed
to be compie:ed, 4sn't it correct that Farmecs
would not te per:n--:!:ed to continue advertisinc;
its non-smcker discount policies if those
advertisements c:;r.:ain the warning of the
Surgecn Gene--al, !-hat the Surgeon General has
determined that c 7g3rette smoking is dangerous
to yr-ur heal-h?
Answer: I th:nk I halle al:eady, I think ncw twice
made
the response to that, that we wculd have
difficulty with that, and I think you have to
imply that we wou-'~ have to work cut with the
rarme:s' management after acquisition a way in
whic" to p:omote the policies without the
inclusion of tlicse words . . . .
Hearing Officer:
and my question to you is that the issue
of this pamphlet comes up after the
acquisition, you C arid the other two SAT
nominees: are on the (Farmers] board and no one
else has been remc---ed, it's a thirteen mef7oe:
board. The ten holdovers [prior to the
acquisition of Far77e:s by BAT] want to pursue
this and do not want to change it (the Facts
About Smoking brochure]. You have testified
what you think about it.
7' Why don*t you tell me what will be the result
and there is going to be no compromise on it.
The ten are very adamant that it (the marketing
of Farmers' pamphlets regarding the dangers of
smoking] be pursued. What is going to occur?
The Witness:
I think we have to say that one - I mean, I
don't actually expect that to happen in that
-7
forum, but if it did occur, I suppose we would
have to arrange the board where we had the
majority. which is not unreasonable it we own
100% of the company.
Testimony of Brian Garraway, Oregon proceedings,
Vol. IV,
426-27, 431-32, attached as Exhibit 16. The
testimony of
Leonard Arentsen has been to the same effect:
Question: Will BATUS allow Farmers to continue to
distribute
Ezhibit 5001 [the Facts About Smoking brochure]?
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0 3 8 6N / 0 8 - 0- 8 E `WG
Answer: No.
Testimony of --eonard Arentsen, Kansas
proceedings, Vol. TV, a::
378, attached as Exhitit 12.
There is an inherent ccn-radiction in the
testimony of t?ie
SAT officers. While or. the ::.-.e hand BAT and
SATUS officers,
such as Garraray and Arentsen, state they would
not interfere
with non-smcking policies, see Ga:raway testimony
California
proceedings, V Z) vl:r, a attached as Exhibit 4;
Arentsen t e s -_ imo ny, Kansas pr~,,ceedinqs,
Vol.. TV, at 374,
attached as Emhibit 12, they also testify on the
other hand
that they wcu:d reorganize -'.-e "tcard of Farmers
if there was
resistance t -_ BAT's po 1 ic, regarding tobacco.
See also
Arentsen Testimony, Illnois pr::ceedings. Vol.
VII, at 245,
attached as Ez~-ibit 8.
The posit--;cn of BAT presents an issue with
regard to the
material chance in Farmers' leadership in the
non-smoker
insurance fie:d, which repcesenzs the bulk of its
business,
that would be necessary so tna: SAT and BATUS
could avoid any
admission of -4:s products liability from the sale
of tobacco
products. This would be a direct disadvantage to
the thousands
of Farmers' policyholders who have benefited from
s u ch
non-smoker discounts.
Given such strong disapproval of the advertising
and
marketing of non-smoker discounts, one begins to
suspect
whether SAT is being candid when BAT states that
it will
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not interfere with the non-smoker disc=unts. or.
Gree."s
testimony is relevant and importanz in determining
how the
attitude of SAT's bcar~ of directors will affect
the
marketing of Farmers' non-smoker d: s ccu n: s
.This is
7 _7 especially true in light of BAT's f-a-lure to
market the
safe cigarette, ancther product w i :` c tv iou s
public
benefit. See infra at 10-11..
Testimony from Dr. Green will also derionstrate
that
BAT officials simply are not being truthful when
they deny
the statements contained in the Farmers' brochures
since
their own corporate research, under the
supervision of Dr.
Green, substantiates statements such as those in
the
Farmers' brochure.
Dr. Green, as BAT's former Director of Research
and as
a former member of the British American Tobacco
Company
board, can testify as to previous responses that
BAT has
made to statements or findings that cigarette
smoking
causes health problems, such as the failure to
market a
safe cigarette. If BAT is willing to deny the
dangers of
cigarette smoking by failing to marke: a safe
cigarette
such as that developed under Dr. Green's
supervision,
there is every reason to believe that BAT will
block
non-smoker discounts. His testimony will be
relevant and
important in resolving the inherent contradiction
in the
testimony of BAT's officers regarding the future
of
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marketing Farmers non-smoker discounts by Farmers.
7 he
public statemen:s by Farmers in ----s promotional
br:)chures
that smo k i ng causes health r k s are s i mi 1 a
:t the
findings announced by or. Green cn B-5C
television.
7
CONCLTUS:,-~N
i s highly re levan:
7 he evidence o Dr. Green :0 the
com:nissioner 's decision as to w!~e:ner the
acquisiticn. shculd be
approved. Texas now has the :=portunity to
de--e---.4-ne more
fully BAT's financial conditisn and corporate
inzeg:ity by
receiving the evidence of or. -5. James Green. C
Green's
evidence will be highly relevan: to SAT's
patent--31 product
liability, integrity and plans --;:;r Farmers. BA7
has so far
avoided the deposition of Dr. Green. Farmers
respectfully
requests that the commission fo: his deposition be
issued and
that the corunission include a letter of request
in the form
attached hereto.
M,
Res=ectfully submitted,
GIBSON, DUNN & CRUTCHER
Wa-.e W. Smith
Rc=ert H. Fairbank
Gail E. Lees
Oav4d A. Battaglia
31-7- South Grand Avenue
Los Angeles, Californ.-a 90071
21-1/229-7000
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J.~ .1aN I U-d O/AUr
AKIN, GUMP, 5-RAUSS, HAUER FELD
Thomas J. Bznd
Paul Stande-er
2100 One C:ngress Plaza
111 CongreES Avenue
Austin, Tex-2-c 78701
512/499-62C:
SMALL, CRA:~--' & WERKENTHIN
Fred B. Werkenthin
Thomas T. R:zers
William R. M-=:Ihany
David L. Gue:ra
W. Gary Fcw:ec
100 Congress, Suite 1100
Austin, Tex-=S 78701
5 12-472-83 -15
By
ATTORNEYS F:-'R FARMERS
7
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