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Philip Morris, Big Tobacco in Flap

June 9, 1999

GREENSBORO (AP) _ Marlboro and other Philip Morris brands would gain control of two-thirds of the U.S. cigarette market if allowed to give big discounts to stores that prominently display its brands, rivals warned a court Wednesday.

R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and Brown and Williamson Tobacco Corp. asked U.S. District Judge Frank Bullock for a preliminary injunction to stop Philip Morris from using its ``Retail Leaders″ marketing campaign until there is a jury trial on their lawsuit challenging the program.

The plaintiffs charged that the Philip Morris program violates federal and state antitrust laws. A witness for Philip Morris said the marketing effort doesn’t prevent retailers from making their own decisions on where to display products and advertisements.

First implemented by Philip Morris last fall, the marketing program entitles retailers to rebates of $5.50 or more per cigarette carton and additional payments for devoting their most prominent counter space to Philip Morris products.

Philip Morris products now account for nearly 54 percent of all U.S. retail cigarette sales. Witnesses for the plaintiffs testified Wednesday that the new marketing initiative could give Philip Morris a market share of 60 percent to 70 percent.

Rolf Provan, director of trade strategy for Brown and Williamson, testified that store placement has grown crucial now that the industry agreed to curtail advertising as part of a $206 billion settlement with 46 states, an agreement

Philip Morris’ program would make smaller cigarette-makers ``practically invisible″ by relegating their products to the least conspicuous shelves, he said.

``This case is about Philip Morris’ exercise of market power to unreasonably restrict the advertising by its competitors,″ Richard Cooper, an RJR attorney, said in his opening statement.

``Consumers are best served when retailers can present cigarette brands in the best interests of the consumer, not Philip Morris,″ he said.

The first defense witness, James Mortensen, a co-creator of ``Retail Leaders″ for Philip Morris, said each participating retailer can decide where a product or advertisement is displayed.

``At the end of the day, the decision is up to the retailer,″ he said.

But under cross-examination by Cooper, Mortensen acknowledged that the program prohibited retailers from accepting any offer to improve the positioning of a rival product.

If a retailer accepted such an offer, said Mortensen, he no longer would be considered a ``Retail Leaders″ participant.

Jack Barger, chief operating officer of Morgan Oil & Propane of Waynesville, N.C., testified that he decided against participating in the program, even though his 22-store chain would have received up to $500,000 in financial incentives.

He said the incentives, known as ``buy-downs,″ would have made it possible for his Convenience King stores to sell Philip Morris cigarettes at a lower price, but that he would have had to virtually stop selling rival brands. He couldn’t do it, he said.

``We want to offer as many tobacco products as we can,″ Barger said, adding that vendors of beer, soft drinks and snack food never set conditions on displaying and selling rival products like Philip Morris did.

Randy Spell, Lorillard’s executive vice president of sales and marketing, said ``Retail Leaders″ has had a disastrous affect on his company, with 4,000 of its 88,000 accounts lost in the last 60 to 90 days.

``I’ve been in management with this company for 20 years, and never during my tenure have I seen this kind of decrease,″ Spell said, adding that Lorillard could lose 75 percent of its contract agreements because of Philip Morris’ program.

Testimony was scheduled to continue Thursday. It was unclear whether Bullock would issue an oral ruling at the hearing’s conclusion, or rule in writing later.

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