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Harley Is Suing To Get Its Name Off Cigarettes

March 23, 1995

Harley-Davidson Inc. is fighting to break a nine-year-old licensing deal that put its name on cigarettes, citing fears that the cigarettes appeal to kids and the deal could draw the motorcycle maker into a liability quagmire.

In a long-simmering war that burst into the open on Wednesday, Harley-Davidson sued Lorillard Tobacco Co., saying it’s worried that a growing number of liability suits against the cigarette maker could leave it too weak to honor its contract with Harley.

``Lorillard’s financial promises to us are worthless once litigation forces cigarette manufacturers into distress or bankruptcy,″ says Richard Teerlink, Harley chief executive. ``We are not required to wait until Lorillard has declared bankruptcy before ending this relationship.″

Harley claimed that Lorillard has already ``depleted its assets″ by paying large dividends to Loews Corp., its parent company led by New York investor Laurence Tisch and his family. Harley alleges the dividends have caused Lorillard’s retained earnings, or accumulated profit, to fall to $84 million in 1993 from $279 million in 1990.

The Milwaukee motorcycle maker’s move reflects a growing alarm among companies that do business with cigarette makers. While major tobacco companies have endured years of criticism from activists and saber-rattling by regulators, an explosion of tobacco liability litigation is for the first time prompting open defections by the industry’s suppliers and licensers fearful of being dragged into the fray.

``We have not been sued, but our name is out there on cigarettes,″ says Tim Hoelter, Harley’s general counsel. ``And we are seeing these massive claims. Our goal is to close the barn door before the horse runs away.″

Earlier this month, Manville Corp.’s Schuller International Inc. unit sued to stop RJR Nabisco Holdings Corp. from using its fiberglass in cigarettes. In its suit, Manville, which was driven into bankruptcy by asbestos-related litigation and emerged in 1988, said it agreed to supply RJR with the material for product development, but not for commercial production of a new cigarette.

Thomas C. Morrison, an attorney in New York’s Patterson, Belknap, Webb & Tyler, which is representing Lorillard in litigation, declined to comment.

Lorillard filed suit late last month charging that Harley tried to get out of the agreement beginning in 1991, and that it threatened to take the dispute public in 1993. Lorillard alleges it has paid some $5.6 million in royalties to the motorcycle company. It demands that Harley reimburse $70 million that Lorillard spent to develop the Harley brand and for damages of at least that much.

Mr. Hoelter, Harley’s general counsel, says the disagreement with Lorillard began in 1993, when Harley became concerned that a planned ad campaign for Harley cigarettes would appeal to children.

``They told us they don’t test their advertising on children,″ Mr. Hoelter says. Harley, he says, then took the ads to a consulting firm that specializes in child behavioral research, which concluded they ``would appeal to a substantial minority of children.″

The motorcycle maker says the ads showed a Darth Vader-like character on a motorcycle against a neon background. It alleges the ads ``were clearly derivative of comic book characters and `heavy metal’ art that are extremely popular among teenagers.″

``We were dismayed by Lorillard’s `don’t ask’ policy when we sought information about how their ads affected kids,″ says Mr. Teerlink, Harley’s chief executive.

But in its suit Lorillard says the ads were ``innocuous and were essentially identical″ to ones Harley had repeatedly approved in test-marketing the cigarettes. Lorillard also says it ``actively discourages children from smoking.″

The cigarette industry’s latest foe is an unlikely public-health crusader. Harley voiced no concern about the safety of cigarettes when it first licensed its name to Lorillard nine years ago.

And as several states pushed legislation requiring motorcycle riders to wear helmets, Harley has pointedly not supported the bills.

``We don’t think it’s the business of government to force motorcycle riders to wear helmets. We believe it should be a matter of free choice,″ says Mr. Hoelter.

Harley’s refusal to approve Lorillard’s ads led the cigarette maker to sue Harley in federal court in Manhattan in 1993, which Lorillard succeeded in keeping under seal.

Under the settlement, Harley says it was to get written assurances from Lorillard’s accountant that there had been no material adverse change in Lorillard’s finances _ which Lorillard says reputable accounting firms won’t provide. Lorillard says Harley then refused to approve ``virtually any advertising that contains a picture of a biker and-or a motorcycle.″

Although the motorcycle company says Lorillard has assumed the liability risks of the Harley-Davidson cigarette, it was worried about the tobacco litigation. Failing to get the financial assurances it wanted, Harley late last year asked Lorillard to end the agreement. Lorillard responded with its suit, and Harley with its countersuit.

Mr. Hoelter, the general counsel, says public attitudes have changed since the licensing agreement was signed in 1986, and many of Harley’s own customers have quit smoking.

Harley-Davidson cigarettes, sold in 38 states and overseas, have a tiny share of the huge cigarette market. But a spokesman says Harley customers and dealers complained about the brand, which was launched in 1993. A spokesman said the company could tell where they were doing test marketing just by the complaints from each area.

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