When ABC News apologized to Philip Morris last August for an award-winning 1994 Day One investigation called "Smoke Screen," about the manipulation of nicotine in cigarettes, most journalists were stunned.

 For sixteen months, ABC had been defending the newsmagazine vigorously in court, at a cost of several million dollars in legal fees. Its producer and on-air correspondent insisted the story was accurate. Its outside lawyers expected a court victory. What happened?

Commentators posited a simple, cynical answer: with ABC News, already subsumed by a huge, cost-conscious corporate parent, about to become part of the even huger Disney entertainment empire, the logical impulse was to close the books on this case.

The tobacco company's response to the settlement -- which included an apology for some elements of the show but also reiterated ABC's support for others (see page 31) -- was to blanket the country with full-page advertisements headlined "Apology Accepted."

The settlement is momentous for several reasons. For one, a top-notch news organization was damaged and journalists everywhere have suffered loss of credibility. In addition, investigative reporting may well have been undermined because of plaintiff tactics and judicial rulings during the pretrial phase. The most far-reaching fallout involves two kinds of protection: a reporter's ability to get information by protecting confidential sources and a company's ability to restrict information by protecting internal documents from the public. Furthermore, the hush orders imposed on human sources from both sides have left legacies that will hamstring future investigations of a story with serious national health policy implications.

This is the story of:

Who the journalists were that Day One sent on its year-long investigation of nicotine;

Why Philip Morris, the nation's largest tobacco company, sued for libel despite being mentioned only superficially -- then pursued ABC with unprecedented aggressiveness at a cost of approximately $1 million per month;

 What exactly ABC apologized for, and how damaging the apology is to the network and the credibility of the profession;

When ABC News's corporate parent decided to freeze out its hand-picked litigation specialists and apologize.

The chronological account that follows is based on four months of research, beginning eleven weeks before the self-imposed silence agreed to in the settlement, and continuing for five weeks after the clampdown.

THE JOURNALIST

Eight years ago, after exposing unregulated medical laboratories in The Wall Street Journal, Walt Bogdanich won the Pulitzer Prize.

 Deficient laboratories became part of Bogdanich's 1991 book The Great White Lie: Dishonesty, Waste and Incompetence in the Medical Community. The book contains twenty-seven pages of source notes and no anonymous sources.

 Then in late 1992 Bogdanich decided to try television. ABC's newsmagazine Day One hired him to find topics to investigate that would work on television, with its demand for visuals. It was quite a switch from The Wall Street Journal, which does not even use photographs.

 Building on his track record in covering health care, Bogdanich started pulling together information about the effects of nicotine. "Secret Sickness," about poisoning among tobacco field workers, appeared on November 22, 1993, with news veteran John Martin as on-air correspondent. Tobacco field workers, medical researchers, hospital staff, government regulators, and an industry official appear, on the record, testifying to the toxicity of nicotine.

The November 22 piece never became part of Philip Morris's lawsuit. In fact, media coverage of the Philip Morris-ABC controversy scarcely mentions the segment. That is significant, because when the Day One coverage is looked at as a whole -- as Bogdanich, whose credit is "producer," intended -- the portions of parts two and three later alleged by Philip Morris to be libelous take on new context. They come across as a small part of the big picture about nicotine -- from field to transport to factory to retail outlet to smokers.

"Smoke Screen," the second piece, aired three months later, on February 28, 1994. It grew out of a conversation about fifteen months earlier between Bogdanich and Clifford Douglas, a lawyer turned anti-tobacco advocate.

 According to Bogdanich's sworn affidavit in the eventual lawsuit, Douglas "told me he believed that cigarettes are addictive because cigarette manufacturers deliberately manipulate and control nicotine levels in them. Mr. Douglas said that nicotine, a substance found naturally in tobacco leaves, was removed from tobacco during the manufacturing process, but was later artificially added back to the tobacco. Mr. Douglas said there was evidence to support this conclusion in tobacco industry literature and patents. . . . He also said that he had a tobacco industry source who was . . . familiar with these manufacturing practices. He did not then identify this person."

The source would become known as Deep Cough.

THE INVESTIGATION

The newsmagazine had made an unusual decision -- that the nicotine investigation was worth a year's investment of personnel and resources. According to his affidavit, Bogdanich and associate producer Keith Summa "began our investigation by conducting an extensive review of industry literature. We read books about cigarette manufacturing, tobacco trade journals, scientific articles, and newspaper stories."

 They interviewed political decisionmakers, scientists, and tobacco industry suppliers, reviewed patents held by cigarette manufacturers and arranged for independent laboratory tests of tobacco. Summa attended a national conference on nicotine in Atlanta. Another ABC News employee attended an international trade show in Moscow.

 Bogdanich ultimately became convinced that Douglas's allegations were not the ravings of a fanatical advocate. "The tobacco industry literature we found and read . . . described the industry's intent and ability to manipulate and control the nicotine content of cigarettes to satisfy this consumer demand for nicotine. As the literature described, one linchpin of this effort is the industry's common use of reconstituted tobacco."

Understanding reconstituted tobacco is essential to following the lawsuit. Cigarette companies, it turns out, do not simply harvest whole tobacco leaves and stick them inside rolled paper; stems and small pieces of the leaf itself that break off during the stemming process are reconfigured into tobacco sheets -- through a process used for making paper -- that are then used in the manufacturing of cigarettes. In the process, solubles, including nicotine, must be removed from the tobacco bits by dissolving them in water. Some of the solubles, including nicotine, are added back later.

What struck Bogdanich about all this was the implication that nicotine could be removed from tobacco. "I considered it highly newsworthy that cigarette manufacturers did not have to return the nicotine to the newly manufactured, or 'reconstituted' tobacco," Bogdanich's affidavit continues. "I believed that the option of whether to add -- or not to add -- nicotine to this paper was particularly significant because it suggested that cigarette manufacturers were unnecessarily and purposefully adding to cigarettes a substance that the U.S. Surgeon General and other health officials had concluded was powerfully addictive. I also believed such conduct could provide the basis for government regulation of the manufacture and sale of cigarettes in the United States and abroad, thereby significantly affecting a very powerful industry."

Reconstituted tobacco became Bogdanich's focal point for the segment. Additionally, he learned about ingredients supplied by outside companies, the area that would become Philip Morris's focal point in its suit. By reading documents and interviewing on-the-record sources, Bogdanich says he and Summa "discovered that numerous companies sell tobacco extract containing nicotine to cigarette companies, manufacturers of reconstituted tobacco, and manufacturers of tobacco flavorings." A source at Kimberly-Clark, a maker of reconstituted tobacco, told Bogdanich that her company removes nicotine and adds it back "depending on the customer's need."

Bogdanich never became expert, though, about specific manufacturing processes at Philip Morris; at no point, he says, did he conceive "Smoke Screen" as an exposŽ of Philip Morris.

 ENTER "DEEP COUGH"

The person who turned out to be the most controversial Day One source -- Clifford Douglas's contact -- had been a manager at R.J. Reynolds.

"For almost nine months, I didn't even know our source's name," Bogdanich said in his affadavit. "It took me another three months to get [the source] on the phone. Finally . . . Keith Summa and I met [the source] . . . . We interviewed [the source] for six hours and came away very confident of [the source's] truthfulness."

 Bogdanich felt even more confident after talking to a Food and Drug Administration investigator who also had interviewed Deep Cough. Because he had covered the FDA at The Wall Street Journal, Bogdanich felt he knew whom he could trust at the agency. The FDA source told Bogdanich that Deep Cough's information checked out.

So, on January 23, 1994, Bogdanich and Summa interviewed the source again, this time on tape.

"The . . . source told us that RJR routinely uses reconstituted tobacco to manipulate nicotine levels in cigarettes in order 'to keep the consumer happy,' " Bogdanich said. ". . . This information was entirely consistent with what we had already learned from many other sources. . . . Indeed, we had multiple sources of corroboration for every single piece of information that our confidential RJR source gave us that we used."

As the air date approached, nobody at ABC questioned any part of the show. In depositions, Bogdanich's superiors come across as confident about the segment's accuracy -- including Deep Cough's information -- because of their trust in the Pulitzer PrizeÐwinner.

 Thomas G. Yellin, the top decisionmaker at Day One, said under oath, "I was satisfied based on my experience with Walt and what he told me about the source that the source was A, legitimate and understood what it was they were speaking about, and B, didn't have a particular ax to grind with respect to RJR or other tobacco companies."

 THE TOBACCO COMPANIES

With documents in hand and Deep Cough's taping completed, Bogdanich approached tobacco companies. He wrote Peggy Carter, an R.J. Reynolds public affairs official, asking to interview a scientist and a corporate policymaker of the company's choosing. The letter said, "We'd like to explore your corporate philosophy about nicotine. Included in that discussion would be a look at your reaction to [the] surgeon general; are you really setting out to addict smokers everywhere; high-nicotine versus low-nicotine cigarettes. . . . Basically, does the public have any reason to fear nicotine in RJR products?"

 Pleased about the opportunity to respond, RJR agreed; but also wary, Carter made an agreement with Bogdanich that she could terminate the interview if questions strayed to topics not agreed upon.

 The interview almost did terminate when Martin asked an RJR scientist, "Why are you artificially spiking your cigarettes with nicotine?" In a memo to Martin before the interview, Bogdanich had written, "I think this sudden, out-of-nowhere question is the best way to shake them and get a denial, which is what we want, because then we can tick off our evidence." Even though Carter believed the question had violated the agreement, she allowed the scientist to answer rather than make it appear RJR had stonewalled by walking out with the tape rolling. At the end of the day, Bogdanich knew he had footage he could use to support his theme.

After talking with Peggy Carter, Victor Han, her counterpart at Philip Morris, worried about providing sources from his company, but he did not express his concern to ABC right away. Suspecting stonewalling, and with his air date approaching, Bogdanich took the unusual step of supplying specific questions that addressed points he was raising in the segment. Did Philip Morris treat reconstituted tobacco with tobacco extract? Did the company use alcohol denatured with significant amounts of nicotine? What about a 1972 internal memo from a Philip Morris scientist characterizing the cigarette as a "dispenser for a dose unit of nicotine"?

Within Philip Morris, discussions began about whether and how to reply to the questions. Han helped draft detailed answers. But he and other Philip Morris executives decided to keep those detailed answers to themselves.

 Instead, Bogdanich received a two-paragraph statement three days before the show's air date. The key sentence read, "Nothing done in the processing of tobacco or manufacture of cigarettes by Philip Morris increases the nicotine in the tobacco blend above what is naturally found in the tobacco." Because "Smoke Screen" never made an allegation of larger-than-natural nicotine levels, and because, Bogdanich felt, according to his affidavit, the complete Philip Morris statement largely ignored his real questions, he considered it "non-responsive."

AIRING "SMOKE SCREEN"

With the Deep Cough interview bolstering what the Day One staff considered an already strong segment, it looked like ABC had a blockbuster. Then, the Friday before air date, the U.S. Food and Drug Administration lent further urgency to ABC's story. The FDA commissioner issued a statement saying that because manufacturers appear to manipulate nicotine levels in cigarettes, perhaps nicotine should be regulated as a drug. Two sentences in the FDA letter had special resonance for Bogdanich. One cited "mounting evidence . . . that (1) the nicotine ingredient in cigarettes is a powerfully addictive agent and (2) cigarette vendors control the levels of nicotine that satisfy this addiction."

 The other said "it is our understanding that manufacturers commonly add nicotine to cigarettes to deliver specific amounts of nicotine." The same FDA source who had attested to Deep Cough's credibility told Bogdanich that the word "add" in the commissioner's statement encompassed cigarette manufacturers buying tobacco extract from outside sources. No longer was Day One's project largely a public relations problem for Philip Morris; rather, it might lead to stricter government regulation of the whole industry.

Because of the FDA statement, Bogdanich and Martin added some last-minute lines to the segment:

"How tobacco companies manipulate nicotine and their reluctance to take it out strongly suggests that they want smokers to get nicotine, and they want them to get it in controlled doses. Several months ago, when we tried to get a reaction about all this from the Food and Drug Administration, the agency declined comment, but immediately sent out investigators to look into the matter on their own. Then, learning of our Day One broadcast tonight, the FDA sent this letter on Friday . . . ."

The segment as aired ran eighteen minutes. Bogdanich considered Deep Cough a bit player alongside twelve clearly identified sources. Deep Cough appears in three snippets, voice disguised, wearing a baggy sweatshirt and a billed cap over a silhouetted face. In the first, Deep Cough says, "On the average, the currently marketed brands contain about twenty-two percent reconstituted tobacco. The cut-rate or generic brands typically contain usually about double that."

Next, Deep Cough responds to the question "They're fortifying the product with nicotine, is that correct?" by saying "The waste filler, yes, they are."

In the final snippet, Deep Cough responds to the question "In commercially sold cigarettes, what percentage of tobacco extract is nicotine?" by answering, "That really depends on what level the process calls for. In other words, I can say to you 'I want it at one percent, I want it at five percent, I want it at ten percent, I want it at fifty percent."

But it was RJR's hand-picked scientist who, Bogdanich felt, really made Day One's case. After denying the assertion that RJR was artificially "spiking" its cigarettes with nicotine, the scientist says, "I think any company involved in the manufacture of tobacco, and whose consumers are demanding a wide range of tar and nicotine products, they have blending and reconstituted tobacco techniques for reaching those . . . ."

Later, in response to Martin's assertion that tobacco companies could eliminate nicotine from cigarettes, he says, "Well, as scientists and engineers here in R&D, I think that that could be done. But I think the real issue here is, is that we, as a company, are providing a legal product to people who are looking for a pleasing sensory experience with mild pharmacology."

THEREACTION

The response to the show from the tobacco companies was predictably outraged, challenging many of the sources and charges.

The one assertion that ABC now concedes it could not support -- made several times in the "Smoke Screen" segment -- was that tobacco companies "add significant amounts of nicotine from outside sources." "Outside sources" is the key phrase here.

Only one of the passages for which corporate ABC admitted error mentions Philip Morris by name. Martin is speaking:

"There's another way nicotine is added to cigarettes, and it begins, perhaps surprisingly, at docks like this one in Newark, New Jersey. It is here that nearly pure nicotine is brought ashore to be combined with alcohol. It's called denaturing. The mixture can then be applied to tobacco during the manufacturing process for, among other things, flavoring. As these trucking records show, Philip Morris, for example, received thousands of gallons of this alcohol mixture during the 1980s. The cigarette makers say this mixture leaves only a tiny amount of nicotine on the tobacco. Still, any kind of nicotine manipulation disturbs critics like Cliff Douglas . . . ."

Philip Morris found the example misleading in the extreme. The facts, according to Philip Morris, are that the amount of nicotine attributable to the use of denatured alcohol represented 1/7000 of the nicotine in one of its brands, "a trace amount which is so small as not even to be measurable by standard analytical methods . . . the use of denatured alcohol as a flavor solvent does not remotely constitute the 'spiking,' 'fortifying,' or 'manipulation' of the nicotine content of the cigarettes."

 Despite the controversy raging around the February 28, 1994, show, Day One followed with another segment a week later. "Smoke Screen, Part Two" focused on a list of 700 cigarette ingredients supplied to the federal government by tobacco companies that includes thirteen substances banned in food. A source told Bogdanich that nicotine sulfate and tobacco extract both appeared on the list. The "trade secrets" were so secret that the U.S. Office of Smoking and Health stored the list in a specially designed combination safe within a locked room. The former director of the agency told ABC News he was unsure if he could have legally shared the list with the president of the United States.

Although Philip Morris includes brief portions of "Smoke Screen, Part Two" in its lawsuit, not once is Philip Morris mentioned by name on the air.

 The Day One nicotine coverage won a George Polk award from Long Island University; "Smoke Screen" was also part of an ABC entry that won a DuPont/Columbia University award.

 THE LAWSUIT

Seventeen days after the final segment aired, and one day before congressional hearings spawned in part by the Day One findings, Philip Morris sued ABC in the circuit court for the city of Richmond, Virginia. (Eleven months later R.J Reynolds also sued.)

Journalists who complain their exposŽs never change anything must have derived a sort of pleasure from Philip Morris's version of the broadcast's impact:

 "The national networks and press accepted as true Day One's supposed 'revelation' that the tobacco industry 'spikes' its cigarettes with extra nicotine and repeated these charges virtually daily. In what can only be described as a public frenzy, reporters, the public, government regulators, and congressmen, 'astonished' and 'shocked' by Day One's 'revelation,' called for governmental and congressional investigation and possible new regulation. Even the president of the United States was misled and stated on an ABC . . . program, '[T]hat really bothered me when I heard that more nicotine was going in to make sure that people were hooked.' And the stock of . . . Philip Morris . . . and other companies having businesses engaged in the tobacco industry fell dramatically. . . ."

Philip Morris suggested a motive behind the airing of "Smoke Screen," commenting that "Day One has not been a successful program; its ratings have been deteriorating."

Philip Morris's lawsuit certainly got the attention of headline writers and wire editors with its $10 billion demand -- $5 billion in compensatory damages and $5 billion in punitive damages. What many of those headline writers and wire editors failed to explain, however, is that Virginia law limits punitive damage awards to $350,000 and that the largest libel award ever upheld in court was less than 1 percent of Philip Morris's demand.

At ABC, newspeople saw what they perceived as an immediate chilling effect. The day Philip Morris filed the lawsuit, independent producers Martin and Frank Koughan were notified by a producer at ABC's program Turning Point that their documentary on the tobacco industry's advertising tactics and production transfers to overseas sites was being shelved, despite the outlay of approximately $500,000. Philip Morris is mentioned prominently in the documentary.

 When the Koughan controversy became public three weeks after the filing of the Philip Morris lawsuit, news executives said the shelving was unrelated to the lawsuit, that the documentary, considered compelling by some who saw it, contained too much boring material.

Many libel plaintiffs sue to make an initial splash in the headlines and perhaps chill other investigators, then do little to pursue their case. Not Philip Morris; it committed resources of approximately $1 million a month over a sixteen-month span. Rather than rely entirely on in-house lawyers, the company retained two gigantic law firms, one in New York City, the other in Richmond. ABC responded by hiring its own gigantic law firms in Washington, D.C., and Richmond, giving no indication it would pursue its defense half-heartedly or eventually settle.

THE STRATEGY

Early on, a problem emerged that has bedeviled journalists for decades: litigants (in this case, mostly Philip Morris) that use public courts but convince judges that documents should be sealed from public view. Sealed documents in a public court recently led to a judge's suppressing an article before Business Week magazine could get it into print. The article contained information from sealed documents.

When ABC requested documents, they often arrived marked with trade secret designations. (The boilerplate legal language says, "Trade secret -- produced by Philip Morris -- subject to a court order. . . . This document and its contents shall not be used, shown or distributed except as provided in the court's order.")

The trade secrets order even excluded Bogdanich, a named defendant, from seeing documents produced by Philip Morris that might help his defense. And when ABC filed a memorandum meant to convince the judge to throw out the lawsuit on summary judgment, that memorandum cited documents designated by Philip Morris as secret. As a result, the memorandum was unavailable to the public.

Roger Witten, who along with Stephen Sachs represented ABC, argued, "What ABC had done and the way it reported the story, aside from the confidential sources, has all been produced. Everything except the lawyering. Everything is out there. You can admire or second-guess everything about the way ABC reported the story. [But] everything we have discovered about what [Philip Morris] does is marked a trade secret."

 All the secrecy could not protect Philip Morris from occasional unpleasant disclosures about its manufacturing process. For example, the judge publicly disputed the tobacco company's contention that ABC had misrepresented the cigarette manufacturing process by talking about "adding" nicotine.

 Philip Morris's own documentation "undercuts its argument that 'we simply don't add nicotine,' " Judge Theodore Markow ruled. "It does add nicotine that could be left out."

 Given such setbacks, Philip Morris hired Michael York, a Washington, D.C., lawyer whose specialty was media law, but who had another attractive credential. Like Bogdanich, he had won a Pulitzer Prize for investigative journalism. His unusual access to former colleagues certainly played a role in media coverage of the lawsuit.

After graduating from law school in 1978, he spent eight years at the Lexington Herald-Leader, where he and another reporter won a 1986 Pulitzer for exposing corruption within the University of Kentucky athletic program. In 1987, York moved to The Washington Post.

 In early 1994, soon after he returned to the law, he received an "unexpected feeler" on behalf of Philip Morris. He was "predictably hostile" at first, he says. But as he examined the evidence, "I overcame my self-imposed biases."

 York says he developed some new convictions, too: that many television newsmagazines much of the time are ratings-hungry shows filled with hype masquerading as investigative reporting; and that some journalists have a "jihad" mentality about tobacco.

From the start, The Wall Street Journal coverage was different from York's stereotype. The Journal often publishes articles that are tough on the tobacco industry, as evidenced by its October 18 front-page exposŽ of ammonia use, allegedly to enhance nicotine delivery. But Bogdanich has complained that his former employer's coverage distorted the story of the litigation. Perhaps the most influential story during the entire controversy appeared on page one May 23, 1995. The four-deck headline read tar wars/philip morris is putting tv journalism on trial in its suit against abc/first rounds in massive case feature angry lawyers and surprising details/who is guilty of spiking?

The Journal story refocused the issue away from Philip Morris and the question of libel and toward the practices of ABC News. One anecdote that was picked up in subsequent stories reads:

"The Philip Morris contingent hopes to point out what they believe are vulnerabilities in Day One's reporting. They point to an outtake . . . of a key confidential source. . . . In the clip, Deep Cough tells an ABC producer who asked about 'boosting' nicotine levels: 'Now see, I wouldn't say boosting. They're just trying to bring up the level of nicotine to a consistent level from year-in to year-out.' "

The Journal never reported, however, that elsewhere in the outtakes Deep Cough used words as strong or stronger than "boost."

The Journal article also emphasized the tobacco company's contention about the centrality of Deep Cough to the litigation. As Philip Morris commented elsewhere: "By disguising her in bulky clothing, presenting her in darkened silhouette, and distorting her voice, ABC gave 'Deep Cough's' statements the aura of an insider's revelation. . . . Without 'Deep Cough,' ABC's spiking accusation would have no appearance of substantiation. . . . ABC was acutely aware that without 'Deep Cough,' its Day One 'exposŽ' would have been Deep Yawn." The Journal -- like Philip Morris -- played down the independent evidence that corroborates Deep Cough's statements. Asserting that Deep Cough had damaged the industry, Philip Morris wanted to learn that source's identity.

THE SEARCH FOR DEEP COUGH

A public-figure plaintiff who believes a libel has occurred must prove falsity, reckless disregard for truth, and malice. It is obviously more difficult to gather such proof when accusers are unknown. Given its pique, its financial resources, and the stakes involved for an entire industry, Philip Morris would go further than any previous libel plaintiff in trying to strip away confidentiality.

 In an effort to track the source through the reporters' movements, Philip Morris sent subpoenas to companies otherwise uninvolved in the litigation -- American Express, Citibank, AT&T, Cellular One, Sprint, MCI, Bell Atlantic, NYNEX, Hertz, USAir, United Airlines, Continental Airlines, and Adam's Mark Hotels chain -- requesting airline, automobile rental, hotel, credit card, and telephone records of Bogdanich and Summa for January 1994, the month Philip Morris believes the producers met with Deep Cough.

ABC lawyers immediately protested to the judge, arguing that disclosure of such records would invalidate constitutional protections for journalists: "In this modern world, reporters cannot gather news from across the nation without making telephone calls, boarding airplanes, renting cars, staying in hotels, and using credit cards. A reporter's privilege that provides reliable protection only where reporters gather news on foot and by word-of-mouth would be no privilege at all."

Philip Morris's litigator, Herbert Wachtell, responded, "When we issued these subpoenas, maybe we were naive. The last thing in the world that we thought was that we were unleashing some major First Amendment constitutional controversy. . . . We scratched our head and said 'Well, gee, how can we do this so we don't have to go and compel the reporter to answer our questions and so we can satisfy the court [that] we have done reasonably what should be done.' And we got the bright idea, let's go to the credit card company, let's go to the toll record, let's go to the hotel where we think people stayed, and so on. . . ."

 On January 26, 1995, Judge Markow ruled for Philip Morris: "The totality of what 'Deep Cough' said to ABC is relevant to its state of mind, not only what it chose to air. To find otherwise would relieve public-figure defamation defendants of liability for 'knowing falsity or reckless disregard of the truth.' "

The decision surprised ABC's lawyers, especially because the early pages of Markow's ruling suggest he is going to rule in ABC's favor:

 "If Philip Morris were allowed discovery of third-party records in order to determine the identity of ABC's confidential sources, it would be an open invitation for every plaintiff in libel suits . . . to make a pro forma request for this type of discovery whenever a confidential source is known to exist. A reporter's promise to maintain confidentiality would be meaningless if his movements while investigating were open to scrutiny to glean the identity of his confidential source."

 But Markow opened what he conceded was a "Pandora's box" by ruling that without the identity of Deep Cough, Philip Morris had no chance of proving actual malice:

 "It would be unfair of the court to require a public-figure plaintiff to rely solely on the representations of a defendant as to what it knew in regard to the veracity and reliability of all of its sources. The court can imagine few defendants who will say, 'Sure, I knew my confidential source was lying, but I went ahead with the story anyway.' "

As soon as they got Markow's ruling validating the subpoenas to third parties, Philip Morris's lawyers began contacting the subpoenaed parties. American Express got an early call. Vivian Wilkerson, an American Express clerk, told the tobacco company's lawyers that the documents were ready. A messenger picked them up just before ABC got a court order to halt release pending reconsideration. An ABC lawyer called American Express the same day. That lawyer talked to somebody in Wilkerson's department, somebody who said nothing would be turned over immediately -- not knowing that Wilkerson had already done so.

Wilkerson, it turns out, had sent over far more material than the one month's worth Philip Morris was legally entitled to: seven years of receipts on Bogdanich and Summa as well as perhaps two dozen other journalists with no connection to the Day One investigation -- many of them newspeople at The Wall Street Journal, Bogdanich's former employer.

Desperate to reverse a damaging blow to journalism, ABC wrote a memorandum to Markow requesting reconsideration. ABC lawyers labeled his ruling "internally inconsistent. . . . In spite of the court's eloquent description of the values inherent in the First Amendment and good reasons for the reporter's privilege, there is hardly a case where the privilege could be sustained under the court's rationale."

 Why move so quickly to issue third-party subpoenas, ABC wondered:

 "If, as we expect, discovery confirms that Philip Morris adds nicotine to hook smokers, then defendants will be entitled to summary judgment on the issue of truth and it will never matter at all who the confidential sources may be. . . . That is precisely why Philip Morris is pushing so hard for immediate disclosure of the sources' identities. . . ."

The judge was persuaded and reversed his ruling. "Prudence suggests that Philip Morris go further to establish a record that further convinces the court that its need for discovering the confidential sources is, indeed, compelling. There may yet occur, during the course of discovery, the revelation of sufficient information from other sources that it will not be necessary to impinge on the qualified privilege."

 The eventual settlement leaves the definitive answer to the question of third-party subpoenas for another time. But if plaintiffs' lawyers are able to emulate Philip Morris's tactics in future confidential-source libel cases, the Deep Coughs will dry up forever.

 For now, though, the anguish over the damage to confidentiality agreements has been overshadowed by the puzzling, disturbing settlement itself.

 THE SETTLEMENT

As in many expensive lawsuits, talk about a settlement surfaced from time to time, starting in the summer of 1994, just three months into pretrial discovery -- and just as rumors began that Disney might make ABC part of its entertainment empire. To insiders, settlement talk was no surprise. The company Thomas Murphy helped build, Capital Cities, has a reputation as a tight-fisted organization that runs profitable newsrooms with generally mediocre reputations for newsgathering. After Capital Cities bought ABC in 1985, the news programming improved in some ways, although Murphy never had been perceived by ABC's investigative journalists as a true believer in their mission. Furthermore, Day One journalists doubted Murphy's resolve in the Philip Morris case, partly because while a director of Texaco, he was known to have been shaken by a multibillion-dollar legal defeat at the hands of Pennzoil. That defeat drove the giant Texaco into bankruptcy.

 Bogdanich, too, has been down this road before. In 1981, while at the Cleveland Plain Dealer, he wrote a story saying Teamster boss Jackie Presser took kickbacks and was an FBI informant. A year later, over Bogdanich's objection, the paper ran an apology/retraction that said there was no truth to the story.

 As Presser biographer James Neff discovered in Presser's FBI informant file in 1989, Bogdanich's allegations were true. "In other words, the retraction was a lie -- Presser was a snitch; he did take kickbacks," Neff says.

Bogdanich had as much reason to worry about ABC's resolve as he had worried earlier about the Plain Dealer's. Informed speculation has it that Philip Morris, sensing weakness at the top of Capital Cities/ABC, made one-sided settlement demands -- so one-sided as to sabotage talks. But Philip Morris had glimpsed an opening. Given the general assumptions about Murphy's skittishness and the recurrent rumors that Disney wanted to acquire ABC -- minus, presumably, a potential multibillion-dollar legal liability -- Philip Morris knew it had a bargaining advantage. (Philip Morris executives also threatened, according to a syndicated column by Jeff Cohen and Norman Solomon, to withdraw their $100-million Miller and Kraft advertising from the network.)

But it wasn't until almost a year later, on June 30, 1995, that The Wall Street Journal reported settlement talks had begun anew. On July 31, Murphy told securities analysts a settlement might be near. That was the same date Disney announced its acquisition of ABC. On August 3, The Wall Street Journal reported Murphy's comments along with the response of an ABC spokeswoman that "We've reached no agreement, and no settlement is imminent. We have never proposed or agreed to any proposal which would involve a repudiation of the broadcast."

By then, however, key ABC News and legal executives had decided that some points made in "Smoke Screen" probably could not withstand scrutiny at trial. Those executives-- over the protests of ABC's litigators, Day One managers, and Bogdanich and Martin -- wanted to end the court proceedings. They wanted the settlement concluded in August, for at least two reasons. First, viewership would be at its lowest, so an on-air apology would be seen by not quite so many people. Second, while a pretrial hearing set for August 18 in Richmond promised to yield embarrassing information about Philip Morris based on documents produced during discovery, it also contained the risk of procedural rulings that would have forced ABC to reveal newsgathering and editing practices (such as putting answers to one question with another) that, while certainly not libelous, could have been embarrassing to the network.

For their part, ABC's trial lawyers assured corporate higher-ups that victory in court seemed quite likely. The lawyers believed the only danger was a jury hostile to the media in general. But, they predicted, even a runaway jury would be only a temporary setback; an appeals court would almost certainly overturn a verdict of libel, as appeals courts tend to do.

Watching ABC's outside lawyers prepare for pretrial hearings and the October trial itself, an observer saw nary a clue that a settlement might be near. Eleven days before the settlement announcement, an ABC litigator wrote a potential key witness: "We are hard at work preparing to defend the libel suit. . . . I am pleased to be able to report that the course of pretrial discovery, despite strenuous efforts by Philip Morris to stonewall, amply confirms the accuracy and fairness of the broadcast. . . . Although we have taken on Big Tobacco in Marlboro Country, we are as confident of victory as any prudent trial lawyers should be." The Friday before the Monday announcement, the litigators worked nearly around the clock preparing for a key pretrial hearing and writing drafts of opening arguments for the trial itself.

 It turned out that the outside lawyers had been kept away from the settlement negotiations. In-house lawyers, who were joined in the final days by renowned First Amendment lawyer Floyd Abrams, worked with Philip Morris's litigators on the language of an apology to the two tobacco companies. Abrams (who is also a professor at Columbia University's Graduate School of Journalism) had worked for ABC in the past, and seemed the logical choice to defend ABC when Philip Morris announced its lawsuit. But from the start, corporate ABC viewed the case as hinging less on a traditional libel defense and more on how much information about manufacturing secrets could be extracted from Philip Morris, so they went for a large Washington law firm, Wilmer Cutler & Pickering -- where top in-house lawyers at the network had been partners. Abrams did come into the case briefly before the settlement talks, when he represented a group of national news organizations in their January 6, 1995, amicus brief on behalf of ABC.

The apology was clearly a victory for Philip Morris, but was it a sell-out for ABC? If "Smoke Screen" contained one or more factual errors, it might be possible to consider the extremely limited language of the apology and the absence of any monetary awards (ABC did agree to pay the other side's legal fees, at least $15 million) a victory of sorts for the network. Moreover, its actions may speak louder than its words. ABC's assertion in the apology letter that it stands behind the show's intended principal focus and the signing of Bogdanich and Martin to new long-term contracts with substantial raises -- even though both refused to sign the settlement -- are a vindication of sorts for the show.

Still, if the owners of ABC News care about good journalism, they will follow the advice of Newsweek columnist Jonathan Alter:

"The Day One story was of historic importance. . . . ABC should delete the small portions it apologized for, and rebroadcast it."

A high ABC official says such a rerun is not beyond the realm of possibility. We'll see.

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