6175-7: EXHIBIT 7: DECLARATION OF SMITH W. WELBORN, JR. (R.J. Reynolds Tobacco Company)

November 11, 2015 7:08 pm by Gene Borio

The PDF is Here

EXCERPT:

17. All of these factors contribute to my conclusion that, were the Court to start the implementation clock simultaneously with issuing an order setting forth the text of the corrective statements, without honoring the agreement reflected in the Consent Order to hold off on implementation until the conclusion of all appeals on the corrective­ statements remedy, Reynolds would incur substantial burdens and costs, detailed above.

18. Based on the foregoing, and on information and belief, Reynolds would incur significant costs in employee time and third-party vendor time, as well as actual costs in the millions of dollars, if it were to begin implementation based on corrective statements that were subsequently revised based upon further appellate proceedings i n this matter.

END EXCERPT

FULL TEXT:

EXHIBIT 7

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

and

TOBACCO-FREE KIDS

ACTION FUND, et al.

Plaintiff-Intervenors

V.

PHILIP MORRIS USA INC., et al.,

Defendants,

and

ITG BRANDS, LLC, et al.,

Post-Judgment Parties Regarding Remedies.

Civil Action No. 99-CV-2496 (GK)

Next scheduled court appearance: NONE

DECLARATION OF SMITH W. WELBORN, JR.

SMITH W. WELBORN, JR., being duly sworn, deposes and says:

1. I am Senior Manager, Domestic Program Planning, of R.J. Reynolds Tobacco Company (”Reynolds”). Reynolds is a wholly-owned indirect subsidiary of Reynolds American Inc. Reynolds is the second largest tobacco company in the United States and manufactures about one out of three cigarettes sold here. The company ’s cigarette brands include Camel, Newport, Pall Mall, and Doral.

2. I have been employed by Reynolds for thirty-six years. In my current position, I have responsibility for managing projects involving transitioning packaging-

related initiatives into manufacturing. As such, I am knowledgeable about the manufacturing operations process and allocation of personnel and financial resources to implement these matters, among other things. Over the course of my career, I have held numerous positions relating to the manufacturing operations function, giving me specific background, training, and experience in all phases and aspects of the manufacturing and production of Reynolds’ cigarette brands. I have been involved in managing implementation of the corrective statements on packaging onserts, and coordinating a team of individuals who would assist me in implementing this obligation on behalf of Reynolds.

3. My statements in this declaration are based upon my personal knowledge, education, training, experience, and judgment at Reynolds, as well as information provided by others at my direction.

4. I have reviewed Exhibit 3, entitled “Redline comparison of the Court’s June 2, 2014 consent order against The United States’ proposed order,” and Plaintiffs’ legal brief entitled “United States’ Opening Brief in Support of United States Proposed Corrective Statements,” filed October 21, 2015. This exhibit proposes numerous revisions to the June 2, 2014 Consent Order entered by this Court, but retains the essential deadlines imposed in that order relating to the implementation of the corrective statements across the following media: newspapers, television, branded and corporate websites, and brand packaging onserts. Exhibit 3, however, eliminates the previously negotiated and ordered stay on implementation of the corrective statements pending exhaustion of appeals by Reynolds and other defendants. Ex. 3 at p. 7 (deleting definition of “Trigger Date”).

5. For the reasons described below, Plaintiffs’ current proposed revisions to the Consent Order-including, but not limited to, beginning implementation before the end of any further appeal-would materially adversely impact the work required to be done to comply with the requirement that we publish the corrective statements on onserts.

6. Reynolds does not know at this time, and will not know until the Court rules, what the text of the corrective statements will be. As explained in detail below, this uncertainty affects the work required to achieve the deadlines for initiating implementation proposed by Plaintiffs. Further, were the Court to alter the previous agreement to stay implementation pending appeal, the elimination of the incremental time during appellate proceedings, which Reynolds has relied upon being available to implement the corrective statements, would also impact the work requi red to achieve the deadlines for initiating implementation. In addition, were the Court to enter an order in the form proposed by Plaintiffs, and that order was subsequently rejected or modified by the appellate court, Reynolds would incur significant costs in terms of employee time, fees and expenses, and disruption of business operations. Many of those costs incurred before the appellate ruling would not only be lost, but also would have to be incurred anew when the final text of the corrective statements is determined.

Packaging Onserts

7. There is significant complexity and cost from a manufacturing operations standpoint to implementing the corrective statements on package onserts. For the Court’s reference, I describe some of the significant logistical and operational tasks necessary to implement onserts on the packages of Reynolds’ cigarette brands as contemplated in the June 2, 2014 Consent Order. Under the terms of that order, at the point that the Court

starts the implementation clock, Reynolds will have only thirty weeks to begin shipping all of its brand styles with onserts bearing the corrective statements.

8. To provide some context to the magnitude of this undertaking, Reynolds manufactures approximately 145 different brand styles of cigarettes. Each of those must be onserted. Each brand style has a distinct manufacturing protocol. Based on Reynolds’ projections for 2016, I currently estimate that in excess of 150 million packs would need to be onserted in the first two-week installment of required onserts. Because these products will be different from what we ordinarily manufacture, we must create new manufacturing protocols for each brand style. It will take at least several hundred hours of employee time to manage and implement this effort.

9. Reynolds does not manufacture every brand style it sells every day, or even every week. Some brand styles are manufactured only once a quarter. As a result, long lead times in manufacturing will require Reynolds to engage in significant planning and effort to ensure that we have onserted product of every brand style ready for shipment by the beginning of the first two-week onsert installment.1

10. Reynolds has never onserted all of its brand styles of cigarettes simultaneously. Moreover, Reynolds has not onserted a quantity of its production similar to that required by the Consent Order in nearly a decade. Integrating onsert capability

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1 Additionally, the logistical challenge of ensuring that every brand style is manufactured with onserts prior to the first two-week onsert installment is exacerbated by impending transfers of some manufacturing equipment from one facility to another. Such transfers are themselves complex and time-consuming endeavors. For numerous brand styles, this equipment transfer will result in a “dark period” of several months in which none of those brand styles can be produced. Depending on the timing of the Court’s order establishing the text of the corrective statements, and the amount of notice Reynolds receives of the implementation date for the onserts requirement, it is possible that the long-scheduled transfer process and the concomitant “dark periods” could overlap with the time in which onserted product will be manufactured.

into our manufacturing lines will require significant work. That work includes removing onsert machinery from storage, providing basic maintenance to that machinery, installing that machinery into our current manufacturing lines, calibrating it to function properly, training employees on the use and maintenance of that equipment, and conducting extensive testing of that equipment until the manufacturing lines are running properly with the onsert machinery installed. This effort will be time consuming and labor­ intensive, conservatively involving more than 700 hundred hours of employee ti me for the first two week onsert installment. Further, because this effort involves work on our existing manufacturing equipment, it will necessarily be significantly disruptive to our normal manufacturing operations.

11. The modification of our manufacturing equipment to accommodate the separate onserting equipment is not practical to complete in advance of the date from which the implementation clock begins to run. Reynolds’ manufacturing equipment is more difficult to maintain and repair with the onserting equipment installed. Moreover, the onserting equipment will need to be calibrated and tested immediately prior to its actual use in manufacturing. Consequently, the onserting equipment should be installed for each two-week onsert installment and then uninstalled until we must begin production for the next onsert installment period. Every time the onserting equipment is installed into a manufacturing line, we must essentially repeat the work described above (e.g., unpacking, maintenance, calibration, etc.) to ensure that each affected manufacturing line is running properly with the onsert machinery installed.

12. Because of the significant work required to prepare the onsert equipment and train employees on its use, we must commence preparations for the onsert obligation

immediately upon the entry of an order by the Court if, as Plaintiffs now propose, we do not have an assurance of an appeal that would otherwise delay the need for these changes. If, however, after this Court starts the implementation clock, implementation is subsequently delayed or disrupted by a stay pending appeal and/or by further changes to the corrective statements ordered by the appellate court, we will need to remove the onsert machinery from our manufacturing lines and place it back in storage (both of which processes will impose costs). Moreover, after the resolution of the appeal, when the implementation clock begins again, Reynolds would have to retrieve the onserting machinery from storage, service those machines, install them into affected manufacturi ng lines, and test the equipment (all of which will impose costs). Thus, the prospect of having to start, and then stop, this process would be doubly disruptive, expensive, and burdensome to Reynolds.

13. Given that Reynolds does not know the final text of the required corrective statements, the actual product onserts-which must be printed, collated, cut, and shipped to us by a third-party vendor-cannot be designed and ordered in advance. Ifwe requisition corrective statements with text that is subsequently altered by the appellate court, or by this Court at the direction of the appellate court, we must undertake the process-and the corresponding expenses-anew. The employee time devoted to this effort will be lost, and any existing stock of prior corrective statement onserts will need to be destroyed since those resources will be unusable.

14. In addition, Reynolds must order shipping cases for distribution of onserted products. To accommodate the Court’s requirement that we ship onserted product in several two-week installment periods over two years, we need to be able to

label and track onserted product distinctly from non-onserted product. To accomplish this, we will need to order shipping cases customized for the approximately 145 brand styles of onserted product. Moreover, given the large volume of product to be onserted, the quantity of these materials is significant.
15. As described above, the absence of certainty regarding the implementation deadline, and the possibility of a subsequent delay in that deadline, imposes a substantial burden upon Reynolds’ manufacturing operations. Further, it creates a risk that substantial expenditures and employee time would be lost if that process begins but is stopped due to later appellate court action.

16 Finally, if Reynolds has manufactured product with onserts containing particular corrective statement language, and that language is subsequently modified, Reynolds will incur, extraordinary, foreseeable financial burdens of several tens of millions of dollars. That product would have to be destroyed. It could also include costs related to retrieving that product from wholesalers and direct accounts if it had already been shipped. Further, this scenario likely would result in retailers having insufficient current stocks of Reynolds products owing to the lost volume that had been improperly onserted, and further significant financial losses.

Onsert Corrective Statement Implementation Timing

17. All of these factors contribute to my conclusion that, were the Court to start the implementation clock simultaneously with issuing an order setting forth the text of the corrective statements, without honoring the agreement reflected in the Consent Order to hold off on implementation until the conclusion of all appeals on the corrective­ statements remedy, Reynolds would incur substantial burdens and costs, detailed above.

18. Based on the foregoing, and on information and belief, Reynolds would incur significant costs in employee time and third-party vendor time, as well as actual costs in the millions of dollars, if it were to begin implementation based on corrective statements that were subsequently revised based upon further appellate proceedings i n this matter.

I declare, under penalty of perjury, that the foregoing is true and correct. Executed on November 11, 2015, in Winston-Salem, North Carolina.

Smith W. Welborn, Jr.

Senior Manager Domestic Program Planning

R.J. Reynolds Tobacco Company

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