C CAUSE NO. 9994 IN THE MATTER OF THE ACQUISITION OF CONTROL OF FARMERS GROUP, INC., FARMERS TEXAS COUNTY MUTUAL INSURAWE COMPANY, TEXAS FARMERS INSURANCE COMPANY AND MID-CE14TURY INSURANCE CCMPANY OF TEXAS BY BATUS FINANCIAL SERVICES INC., BATUS INC., AND B.A.T INDUSTRIES P.L.C. BEFORE THE HONORABLE DOYCE R. LEE COMMISSIONER OF INSURA11CE STATE OF TEXAS MEMORANDUM IN OPPOSITION TO FARMERS GROUP INC.S REQ0EST FOR COMMISSION FOR TAKING OF EVIDENCE OF DR. S.J. GREEN I. DISCOVERY CONCERNING TOBACCO RESEARCH IS NOT RELEVA11T Farmers' request for a commission for the depobLtion of Dr. S-J. Green is its latest and most intemperate attempL to convert this insurance proceeding into an inquisition on Lhe history of the tobacco industry and the science of disease causation. Farmers has failed to convince any of the eiLjlit insurance commissioners who have considered the acquisition thus far to expand the scope of discovery to include materials relating to the issues of smoking and disease. Now, in Texas, Farmers has broadened its request for the irrelevant by making irresponsible charges fabricated out of "accusations, insinuations and suspicions." By this most recent attempt to divert the Texas proceeding to immaterial issues, Farmers asks the Commissioner to exceed his statutory authority by attempting to compel the appearance of a witness for depositicn who resides not cnLy outside cE the State of Texas but also outside of the United BAT Industries document for Province of British Columbia 5 November 1999 States. Farmers' request for this unauthorized arid irrelevant discovery shotild be denied. The Form A proceeding is not a proper or competent forum in which to determine the causes of disease, the significance of scientific research, or the Legality of cigarettes. The irrelevance of discovery on these topics has been confirmed by the rulings in the state insurance proceedings that have already taken place. Despite repeated requests by Farmers for similar discovery, no state has required the production of any documents or issued a single subpoena for the purpose of taking evi,lence regarding tobacco research. Indeed, when Farmers' couns.l. recently made similar "representations" to the California Superior Court in Los Angeles in an "Offer'of Proof" regarding B.A.T's 4 tobacco business, the Court denied Farmers' request for additional discovery similar to that sought here, including a reque-~t to compel the deposition of Dr. Green. In rejecting the request, the Court found that Farmers' alleged proof was no more Lhati "accusations, insinuations and suspicions." (See Ruling of August 5, 1988 attached as Exhibit A). The Court found further that "the role of smoking in cancer" was not an issue Notwithstanding allusions to several current controversial issues, including the role of smoking in cancer, . . . ~:he only determination presented to this court in these proceedings for adjudication is whether the Insurance Commissioner of the State of CaliforIlLa performed her duties and whether site properly appLied the applicable 3ections of the Insurance code in BATUS' C-- r\-) -2- (--Q BAT Industries document for Province of British Columbia 5 November 1999 application for a certificate of authority in its proposed acquisition of Real Party in Interest, Farmers rnsurance Group. The "tobacco" issues are irrelevant to the Texas statutory criteria which are similar to the California criteria and should be excluded from the hearing.1 By seeking discovery of scientific research on tobacco Farmers seeks to erect a facade to divert the Commissioner's attention from the statutory criteria which BATUS will prove it meets. We discuss first the facts and then briefly the "accusations, insinuations and susp1clor.s." First, BATUS will continue non-smoker discounts. BATUS does not plan to discontinue any of Farmers' existing pr,,duct lines, including its policies with non-smoking discounts. The unequivocal testimony in all of the state proceedings hale been that Farmers will continue to market policies with non-smoking discounts after the acquisition. BATUS was aware that Farmers offers non-smoking discounts to its policyholders when iL first evaluated Farmers and determined to offer $4.5 billion to acquire the company, and BATUS has repeatedly stated that Farmers will be free to continue to market insurance discounts for non-simokers after the acquisition. On that basis, hearing officers found in California, Arizona, Ohio and Idaho that BATUS would continue The Brief filed by the Staff notes that it bases ir::; objections to the admission of transcripts of earLi-cr proceedings in other states on concern that "tile scope of inquiry in Texas is much more restricted." -3- CD rQ 4 ~_ BAT Industries document for Province of British Columbia 5 November 1999 Farmers' non-smoker discounts after the acquisition.2 The record testimony of BATUS' witnesses on this issue is undisputed. Moreover, there is nothing extraordinary or incompatible about ownership of an insurance company by a firm that also has an interest in a tobacco company. Loews Corporation, the parent of Lorillard, Inc., owns over 80% of CNA Insurance Company. Franklin Life Insurance is wholly owned by American Brands, which also owns American Tobacco Company. Both CNA and Franklin offer nori-smcking policies. Both have continued to do so after they were acquired by firms that also have an interest in the tobacco industcy. In fact, B.A.T's existing insurance subsidiaries, Eagle Star and Allied Dunbar, already offer similar discounts for non-smokers. Indeed, they began offering such policies after their acquisition by B.A.T. 2 According to the findings in Idaho: Their managing officers have consistently stated that they hoped to continue existing management arid business practices, including "non-smoking" discounts in their insurance sales policy and in their insurance policies. The evidence is that for competitive reasons alone such discounts are essential:and would not be discontinued. All life insurance companies in the United States now offer such discounts. Farmers Insurance Group was a pioneer in this area. Eagle Star offers non-smoking discounts in the United Kingdom, New Zealand and Australia where it conducts its principaL businesses. I conclude that BATUS, if it acquires F~r~ers, ould do nothing to lessen the company's competitive position in the insurance market and would continue iic;i-sinoking discounts. -4- CD BAT Industries document for Province of British Columbia 5 November 1999 Second, Farmers' senior executives do not dispute the competence, trustworthiness, experience, and integrity of those persons who would control the operation of Farmer3 after the acquisition. Farmers' contrived integrity arguments are creations of counsel and are contradicted by the testimony of Farmers' senior executives. The senior management of Farmers, who have failed to appear in a single state thus far, freely acknowledge the integrity and competence of BATUS and B.A.T. Rcbert A. Brown, one of Farmers' directors, testified that "B.A.T is a welL- regarded company in the U.K." and that his impression of B.A.T's management is that they are "reputable, able people." Indeed, Farmers' Chairman Denlea. has described B.A.T's management as "ethical people." Farmer's investment bankers, First Boston Corporation, likewise praised B.A.T's management in a report submitted to Farmers' board. First Boston extolled B.A.T's outside directors, acclaiming that they are a "very stellar group of individuals with long histories of leadership in the (I.K. business community and government." First Boston also commented favorably -on B.A.T's executive directors. The int-agrity of B.A.T and BATUS' management is not an issue to Farmers' management or to Farmers' advisors, and the testimony of a scientist who worked for a B.A.T subsidiary can add nothing of relevance fcr the Commissioner's consideration on this issue. Third, Farmers' arguments about possible future products liability judgments are extremely speculative. Al~houqh Farmers' N) Cr\ BAT Industries document for Province of British Columbia 5 November 1999 disc:7sry requests seek to turn this proceeding into a pr:_`uct liab:.__-_-_*Y trial, there is no basis for Farmers' speculaclz:~ about BATUS' future financial condition. There is no support f:r Farmer-r' contention that BATUS will suffer future material liab-,-'::ies as a result of product liability claims againz: its subs-' iary, Brown & Williamson Tobacco Company. Further, :here is no su:::rt for the claim that such future material liabi!:.:_ies, if any were to occur, would have any effect on the financial stahil:-y of another BATUS subsidiary such as Farmers. -1 - -- ~.' claims '-lave been rejected as irrelevant or speculative under the criter:a of the Holding Company Acts. The Arizona and Was-Zington Insur=_zze Departments totally excluded testimony regarding- poten::sl tobacco liability. (See Order of Arizona Depar:=ent of Insur=--=e dated May 3, 1988, attached as Exhibit B; Order :a Pre-:-:earing Conference of Washington Office of Insurance CommiESIoner dated July 11, 1988, attached as Exhibit C). The heari= officers in California, Idaho and Ohio also fouri-I :.hat such e7idence was too speculative. The California Depart~:.erlt, after '--earing Farmers' speculation, held that: The potential liabilities of BATUS' subsidiary, Brown & Williamson, as a result of product liability litigation are speculative at this time. The evidence did not establish that the present or prospective financial condition of B.A.T or BATUS are such as might jeopardize the financial stabiLit,, of the insurer or prejudice the interest of its policyholders. -6- N) C__ r1 i Ul~ BAT Industries document for Province of British Columbia 5 November 1999 The California Department's finding was rendered after the Cipollone 7er:~ict about which Farmers had predicted so much: The panel is not unmindful of the news reports during the week of June 13, 1988, that the jury in a New Jersey Federal District Court case (Cipollone) found liability against the cigarette manufacturer and awarded $400,000 damages. Farmers still attempts to make much of the fact that the jury in Cipollone returned a verdict of $400,000 against Liggett Group, one of the three defendant tobacco companies. Far from supporting Farmers' conzentions, the jury's verdict in Cipollone substantially undercuts Farmers assertions and demonstrates the speculative nature of their predictions. The jury refused to award damages to the smoker, Ms. Cipollone. The jury expressly rejected all claims against all defendants for fraud, conspiracy, and punitive damages. (See Cipollone verdict attached as Exhibit 19 to Farmers' brief). Farmers also mischaracterizes the Cipollone directed verdict opinicn, issued after the plaintiff's case was complete, before the defendants presented any evidence, and, of course, before the jury ruled. After defendants presented their case, the jury rejected all claims against all defendants, except for a single claim for breach of express warranty based on specific advertisemen:s from the 1950's against Liggett. Id. These warranty cla-;=.s are specific to each brand of each manufacturer and each invclve issues of proximate cause, reliance on the -7- r\J BAT Industries document for Province of British Columbia 5 November 1999 warranty, timely filing of the claim within the statute of limitation, and preemption of all claims based on advertising after 1966. Farmers' argument regarding a report by the staff of the Federal Trade Commission for the proposition that "B.A.T and its subsidiary corporations engaged in a marketing effort simiLar to that which led to the finding of liability in Cipollone" is another example of Farmers' fast and loose play with the facts. (Brief at 21). For example, the staff report was rejected by the Federal Trade Commission. Indeed, as Farmers stipulated in Chio, the Chairman of the Federal Trade Commission stated that the report provided no basis for any action against Brown & Williamson. Moreover, the documents reviewed in the FTC staff report were all from the 1970's and could not provide a basis for liability, since any claim based on advertising after 1966 is preempted by the Cigarette Labeling Act.3 The fact that Cipollone is not the watershed case for plaintiffs has been quickly established. Within a few weeks of the Cipollone verdict, a jury in Philadelphia returned a defendant's verdict in the most recent tobacco product liability case. Girton v. American Brands, slip op., No. 85-7100 (E.D.Pa., June 24, 1988). Like Cipollone, the Girton case involved a claim 3 Palmer v. Liggett GrouD, Inc., 825 F-2d 620 (Ist Cir. 1987)(claims based on advertising after 1966 are preempted); Stephen v. American Brands, Inc., 825 F.2d 312 (11th Cir. 1987)(same); Cipollone v -'Et Group, Inc., 789 F.2d 181 Ligge (3 d Cir. 1986)(same). NJ BAT Industries document for Province of British Columbia 5 November 1999 that a former smoker was entitled to recover damages as a result of a tcbacco manufacturer's failure to warn of the risk of smoking prior to 1966. After a three-week trial, the jury deliberated for only four hours before returning a verdict in favor of the defendant, American Brands. These verdicts demonstrate that, contrary to Farmers' speculations about the future, jurors in tobacco product liability cases remain unlikely to return verdicts in favcr of smokers. Fourth, Farmers' arguments are no more than "accusations, insinuations and suspicions." Dr. Green has consistently advised B.A.T that he does not wish to be involved in these proceedings. Farmers so advised the Kansas hearing officer on July 22, 1968. This followed a conference call on July 18, 1988 among Dr. Green, counsel for Farmers, and counsel for B.A.T durina which Dr. Green asked Farmers to advise the Kansas hearing officer that lie had no desire to become involved in these proceedings. Farmers' assertions about what Dr. Green would or would not state are made without identifying any factual basis. Indeed, during that conference call, Dr. Green stated to Farmers that even if he were to appear Farmers ahould not assume that his testimony wouid be favorable tu it. Astonishingly, knowing full well that Dr. Green has no desire or intention to participate in these proceedings, Farmers now ma.,es wild and unsubstantiated "accusations" and insinuat ions" about Dr. Green's purported testiniony. Apparently, -9- N: BAT Industries document for Province of British Columbia 5 November 1999 although Farmers was prepared to respect Dr. Green's wishes in Kansas, it now acts contrary to his wishes in Texas and, in a desperate attempt to persuade the Contmissioner to order Dr. Green to appear against his express wishes, has made a series of unsupported speculations about what Dr. Green might say. There also is no basis in fact or logic for Farmers' assertion that the testimcny of a former research scientist in the English tobacco subsidiary of B.A.T would be probative on the issue of whether its non-smoker discounts would be continued after the acquisition. In fact, Dr. Green retired from British American Tobacco Company over nine years ago and five years before B.A.T acquired an interest in an insurance company.4 Similarly, there is no basis on which Farmers can support their allegations that Dr. Green, a retired scientist in England, could have relevant testimony concerning Brown & Williamson's marketing in the United States. Farmers' conjecture that Dr. Green might give testimony about activities of a B.A.T subsidiary in England that would somehow demonstrate that Brown & Williamson might be subject to unfavorable verdicts in the United States at some unspecified time in the future, which then might resuit in the insolvency of Oz,:~-.n & Williamson, which then might result in the insolvency of BATUS, which then might result in a threat to the financial stability of 4 B.A.T first acquired an insurance company wish its acquisition of Eagle Star in January, 1984. C\ BAT Industries document for Province of British Columbia 5 November 1999 Farmers, is simply too speculat-47e to merit the Commissioner's attention. Finally, to utilize Dr. Green to explore what research B.A.T did or did not do on the subject of smoking and then to pit his vie. of what some research "proved" or did not "prove" against the current B.A.T management on that subject does not relate to issues of this hearing. Such a debate would call upon each side to embark on a battle of the experts many miles from the inquiry into statutory standards to be met in Texas. The Department should not permit Farmers to set out on that path. II. THE COMMISSIONER HAS NO AUTHORITY TO COMPEL DR. GREEN'S ATTENDANCE. A. Farmers' Request for Discovery Through The Doposition of Dr. S.J. Green Is Defective Under Texas Law. In alleging that, as a matter of law, Farmers has the right to require the Commissioner to issue a commission to take the deposition of any B.A.T witnesses, Farmers ignores two important factors which must be present before the Commissioner is authorized to grant a commission. First, the Commissioner must have the authority to grant the commission. Second, the Commissioner has broad discretion to limit the scope of discovery, particularly where such discovery would result only iii I'vL:elevant, immaterial, or unduly repetitious evidence. Neither the Administrative Procedure and Texas Register Act ("AFTRA") nor the Texas Insurance Code authorizes the Commissioner to issue a commissIcn to take the depositions or CD FIJ C-71 BAT Industries document for Province of British Columbia 5 November 1999 require the attendance at the hearing of persons who reside outside the State of Texas. Farmers states that "no word of limitation appears that the deposition take place within the state or that the witness should be deposed in Texas." However, both the APTRA as well as the Texas Insurance Code specifically provide that the jurisdiction of the Commissioner is limited to the boundaries of the state. APTRA, subsection 3(l) specifically defines "agency" as "any state board, commission, department, or officer having statewide jurisdiction. Further, Texas Insurance Code article 1.19-1, a provision expanding on the rights of the Commissioner to issue subpoenas, specifically provides that the Commissioner or board has statewide subpoena power and may compel attendance and production of records before the Commissioner or board or a designee at his or its office in Austin, Texas, or at any other places as the Commissioner or board shall designate, including the offices of any person." The Commissioner has consistently refused to violate his jurisdictional bounds. To the knowledge of counsel in this matter, the State Board has never issued a subpoena, or a commission for the issuance of a subpoena to require a party .residing outside the State of Texas appear or !:,,& Iepcsed for purposes of an administrative hearing. Further, no Texas case can be found where any state agency's authority has been expanded to allow the issuance of subpoenas or commissions outside the -12- BAT Industries document for Province of British Columbia 5 November 1999 geographical boundaries of this state. In fact, in the pre- hearing conference held on July 25, 1988 in this matter Farmers' counsel, Mr- Fred Werkenthin, stated that %t1he authority of the Commission :o require witnesses from outside the state as -- or persons outside the state to attend as witnesses is not clear." F%;rther, the nature of administrative proceedings is such that urless the legislature specifically grants the Commissioner authority to take depositions out of state, the Commissioner does not have that authority. "The board can exercise only such authority as is conferred upon it by law in clear and u=.mistakable terms and the same will not be construed as being conferred by implication." Board of Ins. Comm'r v. Guardian Life Ins. Co., 180 S.W.2d. 906, 908 (Tex. 1944). See also, Key Western Life Ins. Co. v. State Board of Ins., 350 S.W.2d 839 (Tex. 1961). Thus, any subpoena issued would be a nullity and could nct be enforced- A4-ditionally, the Commissioner has broad discretion to limit the s:ope of discovery in this case. BATUS currenzly has motions before the Commissioner specifically requesting that the scope of th-'s hearing be limited~ and that Farmers be denied additional discovery, -and, in fact, requesting that no additional discovery should occur in this proceeding. -a:.mers' counsel suggested at the pre-hearing conference that if the Commissioner does not have the power to require depositicnE cr attendance of witnesses at this hearing, he at -13- C:) r\j LN, Un BAT Industries document for Province of British Columbia 5 November 1999 least has the power to "request" this testimony. Again, the Commissioner is given only the power to require attendance of a witness pursuant to AFTRA Article 6252-13a(14)(c) and to require a witness deposition to be taken pursuant to either APTRA article 6252-13a(d) or Insurance Code article 1.19-1(a). Neither of these statutes provides for a "request" by the Commissioner. Under these provisions, the Commissioner must have the right tc issue a subpoena for attendance of a witness at a hearing or issue a commi_=Sion for a witness to be deposed before Farmers has the right to either of these forms of discovery. S. Farmers' Request for Discovery Through The DepcEition of Dr. S.J. Green Is Defective Under English Law. The English law and procedure relating to the c~)taining and pr-.vision of evidence to foreign courts and tribunals is set out in the Evidence (Proceedings In Other Jurisdictions) Acts 1975 (the "Act") and Order 70 of the Rules of the Supreme Court. (Attac'-ed as Exhibits D and E). In determining whether to grant a request from a foreign court cr trihunal, the English court that must pass on an-i discovery request has to-be satisfied on two issues: (i) that it has jurisdiction to order the requested evidence; and (i-;) that it should in the circumstances exercise its inherent discretion to order the request. The first precondition is satisfied if the application to the Englis` court is made by or on behalf of a court or -14- rQ CD BAT Industries document for Province of British Columbia 5 November 1999 tribunaL exercising jurisdiction out of England and Wales, and the application relates to civil proceedings which either have been -4-.stituted before the requesting court or where inst-'tuticn is ccntemplated, Section l(b) of the Act. The Court of Appeal in Re State of Norway's Aonlication (No.2) Times, January 8, 1988, held by a majority that the ex-zressicn "civil proceedings" had to be interpreted in an -4-ternational sense (civil law rather than common law), and that f--r a distinction between civil matters and other ma--ters it was ne=essary to resort to the distinctions in civil law countries he~:ween private and public law. The judges in their decision took the approach that it was their determination as to the nature of the proceedings that was material, not that of the requesting ccurt. Since the present investigation is a matter of public rather than private law and it involves the application of aci=inistrative law for administrative remedies, it dces not fall within the definition of civil proceedings in the Ac= and Order 70. Therefore, the English court would not have jurisdiction to grant Farmers' r;quest. With respect Lo iLs lnher.nt discretion, the court will nc: exercise such discretion and grant the foreign "court's" re-quest if it characterizes the substance of that request to be frivolous, vexatious or an abuse of the process of the court. In BAT Industries document for Province of British Columbia 5 November 1999 Re Westinghouse Electric Corporation Uranium Contract, (1978) AC 547 (per Lord Diplock). Farmers' request for a deposition of Dr. Green must be characterized as frivolous, vexatious and an abuse of the process of the Department, especially since requests for Dr. Green's deposition and similar discovery have been denied by every other state that has considered it. The frivolous nature of this request is even more striking given the fact that the British government has twice approved B.A.T as fit and proper to acquire an insurance company. As stated above, evidence relating to his research into the health impact of tobacco products is totally irrelevant to the issues to be determined by the Commissioner. In addition, Dr. Green, who is a third party to this proceeding and not employed by 3.A.T, has stated to counsel for Farmers and B.A.T that he does not wish to be involved in these proceedings in any way, In Seyfana v. G.D. Searle & Co.. (1973) 1 QB 148, the court exercised its discretion and refused to order an expert to give evidence against his wishes in a case where he had no current connection with the facts or history of the matter in issue. In view of Dr. Green's expressed desire not to appear as a witness and the total to the Wiatter in issue, Seyfang provides direct authority for the denial of Farmers' request. Further, English courts distinguish between evidence which is requested for the purpose of an actual trial, and that which is essentially in the nature of pretrial discovery, and may -16- (-7. C11 -1 BAT Industries document for Province of British Columbia 5 November 1999 lead to the discovery of admissible evidence. The English court will resist granting discovery where the purpose of the request is not for proof at a foreign trial but is essentially a "fishing expedition." Re Westinqhouse Uranium Contract (1978) AC 547; Radio Corporation of America v. Rauland (1956) 1 QC 214. It is apparent from Westinghouse that the exclusion of this form of discovery from the Hague Convention and the Act applies to oral as well as documentary evidence. Since the purpose of Farmers' request is to determine whether there is evidence relevant to the issues before the Commissioner, the English court required to approve the request would also reject it on this ground. CONCLUSION Farmer3 makes no showing either that Dr. Green's testimony is in any way relevant to the Commissioner's inquiry or that the Commissioner is authorized to issue process for his attendance. This latest effort to distract the Commissioner from the statutory standards is, therefore, without basis and should be denied. Respectfully submitted, -Thompson, Cue, Cousins & Irons By 1~~ 6. ~ ro~ A, David B. 200 Crescent Ct. llth Floor Dallas, TX 75201-1840 -17- NJ cc BAT Industries document for Province of British Columbia 5 November 1999 Heath, Davis & McCalla, P.C. By '9'//& 2~~ Will 0. Davis 200 Perry-Brooks Bldg. Attorneys for BATUS, Inc. and Austin, Texas 78701 B.A.T Industries, p.l.c. Of counsel: Richard C. Cole Dean Hansel LeBOEUF, LAMB, LErBY & McRAE 520 Madison Avenue New York, New York 10022 (212) 715-8000 Ronald S. Rolfe Rory 0. Millson CRAVATH, SWAINE & MOORE One Chase Manhattan Plaza New York, New York 10005 (21-2) 428-1000 Additional Counsel for BATUS, Inc.: Joseph R. Bankoff Gordon A. Smith Daniel J. King KING & SPALDING 2 EOO Trust Company Tower Atlanta, Georgia 30303 (404) 572-4600 Ur C, Ic BAT Industries document for Province of British Columbia 5 November 1999