(FORTUNE Magazine) – The law does not apply to companies that make their living off tobacco. We're talking about New York City's Local Law No. 2, Title 17, Chapter 5, which bans smoking in hallways, open work areas, and other spaces in office buildings. Thus, at 120 Park Avenue, world headquarters of Philip Morris, ashtrays seem as plentiful as paper clips. An almost defiant smoking culture permeates the executive floors, whose denizens yank from their pockets flip-top boxes of the house brands -- Marlboro, Merit, Alpine, and Parliament among others -- light up with appropriately branded butane lighters, and then toss their packs on the desk or table for all to see and share. Chairman Hamish Maxwell is a one- pack-a-day man. He says he quits ''for a month or so, every so often, just to show I can. It's not addictive.'' Like others in the industry, Maxwell continues to argue with a straight face that there is no scientific evidence to prove that smoking causes cancer or any other deadly disease. The row over so-called passive smoking, inhaling the fumes of others, is, he says, ''largely a social issue these days, not a medical one.'' Perhaps, but an increasing number of people in the U.S. believe the American Medical Association, the U.S. Surgeon General, and platoons of other health experts who say cigarettes can, and do, kill you. Some 43 million have quit since the mid-1960s, though there are no statistics on how many stayed the course. While Americans still take up the habit at the rate of 3,000 a day, cigarette consumption in the U.S. is declining 2% a year. It is a tribute to Philip Morris's selling skills that it is gaining a growing piece of that contracting pie: 39.3% of the market last year, up from 37.8% in 1987. Marlboro is the big gun, with a full 24.9% of the total market.

Banned like its competitors from television advertising, Philip Morris spends mightily on print advertising and on such promotions as the Virginia Slims women's tennis tournament. The company also lavishes money on Philip Morris, a glossy, bimonthly magazine sent free to more than 12 million smokers. The magazine reports on Philip Morris's generosity (it ranks among the biggest sponsors of museum exhibitions) and altruism (it dispatched 71 tons of food to earthquake-battered Armenia). There are feature articles about health and fitness buffs who still smoke and an editorial bias against any plan to raise cigarette taxes. Andre Soltner, proprietor of Lutece, provided a recent piece on the inconvenience of having to offer smoking and nonsmoking sections in his famous Manhattan restaurant. One of the tobacco industry's biggest worries is not the decline in consumption, but whether a court might ever decide that somebody somewhere had actually died from smoking cigarettes. By 1987 lawyers representing terminally ill smokers and the families of those already dead had filed 152 suits against manufacturers, seeking compensatory damages and usually punitive ones as well. The first verdict against a cigarette company came last year in New Jersey. A jury awarded $400,000 to Antonio Cipollone, widower of 1 1/2-pack-a-day Rose Cipollone, who smoked a variety of brands and died of lung cancer in 1984. As it turned out, the judgment -- which is being appealed by the Liggett Group, maker of L&Ms and Chesterfields -- may actually have been good news for cigarette makers. The jury found that Mrs. Cipollone was 80% responsible for her own death, and acquitted the manufacturers of direct responsibility. But the jurors said Liggett, which ran ads claiming that L&Ms were ''just what the doctor ordered,'' was in breach of a warranty. Just as significant, it cost Cipollone's lawyers more than $500,000 to bring the case to trial. Lawyers around the country, many working on a contingency basis, began to drop similar suits. At present, 78 are outstanding. Says Northeastern University law professor Richard Daynard, who heads the Tobacco Products Liability Project, a public-interest group funded largely by the Rockefeller Family Fund: ''The verdict has put everything in a state of suspended animation.'' William Murray, vice chairman of Philip Morris and head of its tobacco operations, allows that the U.S. market will continue to decline. But he believes that the company, which since 1978 has invested $3.3 billion in the business to become the most efficient manufacturer in the industry, will be able to continue building its share and volume. The real opportunities in tobacco beckon abroad. The increase in smoking overseas, or the upgrading there to American cigarettes, makes such markets worth the hassle to get into them. Japan, where smoking seems endemic, is the real prize. The government gave up its manufacturing monopoly four years ago. Foreign companies still have only a small share, but in the past two years Philip Morris has made big inroads to gain 7.5% of the market. Japan's best- selling import is the Lark brand, which has 4% of the market. Liggett Group makes Larks for the U.S., but Philip Morris produces them for Japan. Who says America can't make anything the Japanese want to buy?