R&D Cost- And Risk-Pooling Agreement

Additional evidence of the extent to which B&W participated in BAT research can be found in the cost- and risk-pooling agreements between the two companies. According to handwritten notes made sometime in 1980, perhaps by J. K. Wells, B&W's corporate counsel, these agreements dated back at least to April 1958 {1838.01}. At that time, the notes indicate:

We have been pooling the findings and experience resulting from our joint and separate research programmes. {1838.01, p. 1}

The agreement called for costs to be shared on the basis of B&W sales to BAT sales, and the companies shared reports and findings. In 1961 the 1958 agreement was abrogated (as of October 1, 1960), evidently because the sales formula was not working. In its place, an arrangement was made whereby each company bore the cost of its own research. However, the two companies focused on different areas of concern: B&W was "best suited for research [on] seed to warehouse," while BAT was "better suited for work on processing, smoking, [and] smoke effects" {1838.01, p. 1}. A short entry dealing with March 6, 1962, states:

B&W shall have access to everyone else's [research results]—everyone else shall have access to B&W's. {1838.01, p. 1}

In July 1969 a major cost- and risk-pooling agreement, a copy of which appears in the documents {1810.01}, was entered into by the two companies. The agreement was effective as of January 1, 1969, and was to last five years. According to the notes, among the important aspects of the agreement was the fact that it recognized that the parties had for many years exchanged the product of their R&D work to their mutual benefit. The notes describe the opt-out procedure under the agreement and indicate that the costs were shared on the basis of the sales ratios of the two companies {1838.01, p. 2}.

The 1969 agreement was extended indefinitely in June 1974. It was amended in December 1975, limiting the amount payable by either party to $100,000. In February 1977 the agreement was rescinded, effective as of October 1, 1976, and a new agreement became effective {1838.01, p. 2}. A separate document, evidently a cover letter to the new agreement, written on February 7, 1977, by an unknown person at B&W (only the first page of the letter is available) to the secretary of BAT, discusses the review of the old agreement that led to the decision to formulate a new arrangement. Of particular interest is the following observation:

This review has served to underscore the importance of the centralized and coordinated research program which is being carried out by BAT in support of long-range overall Group strategy. {1815.01, p. 1}

The notes discussed above indicate that, under the new agreement, central group research was carried out by BAT for the mutual benefit of itself, B&W, and other affiliates. The research included biological, product, smoker, process, and new smoking material areas. B&W contributed 0.15 percent of its net turnover, and received information in return. In 1979 an amendment was proposed to increase B&W's contribution to 0.21 percent, and it was eventually executed in January 1980. Then, on the last day of 1980, everything was canceled. Finally, in a subscript, the notes state that under the 1977 agreement B&W was paying around one million (presumably dollars), whereas, under the increased factor, it would be paying between two and three million {1838.01, p. 2}.

The two companies continued to operate under cost-sharing arrangements after 1980. This fact is shown in the notes to an R&D meeting of BAT affiliates (the CAC Companies, described above) at Wallingford, England, in September 1985 {1182.01}. Under a section entitled "Funding of BATUKE R&D Centre," the notes state:

In view of the pressure from various countries to have some indication of their likely contribution to this laboratory, ALH [A. L. Heard, chairman of the meeting] presented a proposal for funding BATUKE R&D Centre which reflected the BATCo recommendations at least for the next two years.

Despite the considerable reduction in costs of the laboratory, if CAC's were no longer to contribute, the result would be a considerable increase in the sum paid by BATCo (in addition to the individual BATCo companies), with major savings by all CAC's unless they rapidly scale up their domestic R&D costs which looks improbable (with the possible exception of USA). As a guideline for the next two years it is proposed that BATCo will continue to support the laboratory at its current level and that the balance be shared between CAC countries (not Brazil) using a [specified] formula. {1182.01, pp. 6–7}

As indicated in a letter written on August 20, 1970, by attorney David R. Hardy to DeBaun Bryant, general counsel at B&W {1840.01}, these cost- and risk-pooling agreements created a potential legal problem for B&W. In the letter, Hardy discusses the possible adverse effects of statements made by BAT and B&W scientists in a products liability lawsuit against the company. Hardy points out that such statements could be construed as being contrary to the industry's position that there is no proof that smoking causes disease (see the discussion earlier in this chapter regarding concerns of lawyers about scientists' statements). After explaining how the statements could be used by a plaintiff, Hardy notes that the pooling agreement exacerbated the problem:

Also adding to the need for recognition of the problem created by statements such as those I have described is the existence of the "BAT/B&W R&D Cost and Risk Pooling Agreement" executed in July, 1969. This document creates an inter-relationship (or confirms a relationship which already existed) that would assist a plaintiff's attorney greatly in obtaining information from B&W about BAT research and development work. {1840.01, p. 4}

Later, Hardy notes that:

The findings and opinions of persons engaged in work covered by the "BAT/B&W R&D Cost and Risk Pooling Agreement" are available to both BAT and B&W. Carefully framed discovery would certainly force disclosure of the Agreement as well as other documents bearing on smoking and health issues [emphasis added]. {1840.01, p. 5}