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ASH Daily News for 16 April 2010

HEADLINES

  • Makers and retailers fined £225m over tobacco pricing

    The competition watchdog today hit ten retailers and two tobacco manufacturers with fines totalling £225 million for "unlawful practices" in pricing of cigarettes, cigars and rolling tobacco.

    The fine - the largest total ever imposed by the Office of Fair Trading (OFT) - came after Imperial Tobacco and Gallaher struck 'price matching' arrangements with retailers in which the prices of their tobacco products were linked to those made by rivals.

    Simon Williams, the OFT's senior director of goods, said: "Practices such as these, which restrict the ability of retailers to set their resale prices for competing brands independently, are unlawful.

    "They can lead to reduced competition and ultimately disadvantage consumers."

    The OFT said the breaches took place between 2001 and 2003.

    The retailers caught up in the case were Asda, the Co-operative Group, First Quench, Morrisons, One Stop Stores (formerly T&S Stores), Safeway, Sainsbury's, Shell, Somerfield and TM Retail, the owner of the McColls and Martins chains.

    Safeway has since been bought by Morrisons, the Co-operative has acquired Somerfield and First Quench - which owned off-licence Threshers - went into administration last year.

    The watchdog said the agreements over price links between rival brands "restricted the ability of these retailers to determine their selling prices independently".

    Supermarket Asda, one of the six firms which applied for leniency from the OFT in 2008, was fined £14.1 million, while the Co-operative Group was handed a £14.2 million penalty.

    Sainsbury's escaped a fine because it blew the whistle on the practices, while the watchdog has dropped allegations against market leader Tesco due to lack of evidence.

    Imperial Tobacco, whose tobacco brands include Lambert & Butler, received the biggest fine - £112.3 million - but denied "categorically" that its pricing practices were anti-competitive or impacted consumers.

    The group plans to appeal and added: "The purpose of these arrangements was to encourage our brands to be priced competitively and that the promotional discounts given to retailers were passed on to consumers in the form of lower retail prices.

    "Far from being anti-competitive, these arrangements were pro-competitive and to the benefit of consumers. Retailers remained free to set their own prices."

    Gallaher, which was bought by Japan Tobacco in 2007 and makes Silk Cut cigarettes, was fined £50.3 million.

     

    Further coverage of this story:

    - OFT levies £225m fine for cigarette price fixing - The Guardian

    - OFT imposes record £225m fine over tobacco price-fixing - The Telegraph

    - 'Unlawful' tobacco pricing leads to £225m fine by OFT - BBC News

    - Supermarkets fined £225m for fixing tobacco prices - Times Online

    - OFT fines retailers and tobacco groups - Financial Times

    - Response to Office of Fair Trading ("OFT") Decision - Imperial Tobacco

    Source: The Independent - 16 April 2010
    Link: http://bit.ly/bhDyHx

  • Ireland: Tobacco smuggling costing 556m euro

    Cigarette smuggling cost the Government 556 million euro in lost taxes and duty last year, it has been revealed.

    Retailers also wrote off 692 million euro in lost sales due to the lucrative illegal trade, although nine shops are being investigated by customs officers for selling counterfeit brands.

    A review by cigarette giant Japan Tobacco International (JTI) found customs seized 218.5 million cigarettes last year, valued at just over 92 million euro.

    Finance Minister Brian Lenihan said he did not increase excise on cigarettes in the December budget fearing the already high price - around 8.45 euro for a pack of 20 - could contribute further to the smuggling problem.

    "Tobacco smuggling is a serious problem for Ireland. It deprives the state of the revenues from the sale of legitimate products, and is damaging to both the tobacco industry and the retail trade," the minister said.

    "The tobacco industry itself has a crucial contribution to make in dealing with the threats posed by smuggling. I did not increase the excise duty on tobacco products in my December Budget as I believe the high price is contributing to increased cigarette smuggling."

    JTI said the most common platforms for selling illegal cigarettes were unlicensed street markets and door-to-door sales, with even bread vans and a postman reported to be engaged in the trade in 2009.

    But the study reveals an upsurge in the number of legitimate shops trading in counterfeit goods, with nine retailers being investigated by customs last year.

    JTI said it is taking a zero tolerance approach to such behaviour and took the "unprecedented" decision to cease trading with a shop in the midlands believed to be selling counterfeit Benson & Hedges Gold Kingsize. Cease and desist letters were also sent to three other shops thought to be dabbling in the trade.

    JTI warned inadequate penalties, low fines, and unregulated street markets continued to make the illicit trade of tobacco a common choice for criminals in Ireland. It said there was a growing link between the trade and hard-core criminality.

    Source: The Belfast Telegraph - 14 April 2010
    Link: http://bit.ly/aBcn6F

  • Spain Government Prepares Law To Ban Smoking In Indoor Public Places

    Spain's government will present a law to Congress to ban smoking in closed public places in June, the Spanish health minister, Trinidad Jimenez, said Thursday in an interview with state-owned TV station TVE-1.

    "The law will be sent to Congress, there could be a debate and then a period of adaptation for the law," a Health Ministry spokeswoman said.

    Last year, Jimenez said Spain was "mature enough" for a full smoking ban.

    In 2006, Spain introduced a smoking ban in workplaces and public places larger than 100 square meters. However, a smoke-free bar or restaurant, for example, in Spain is rare.

    Many of the country's bars and restaurants are smaller than 100 square meters and in larger establishments, few owners enforce the law or have installed nonsmoking sections.

    In Spain, Imperial Tobacco Group PLC's (IMT.LN) Fortuna and Ducados brands are popular, while Phillip Morris International Inc.'s (PM) Marlboro and L&M brands are also big sellers.

    Both companies are Spain's biggest players in the tobacco market and are likely to be the most affected by any drop in consumption.

    Source: Wall Street Journal - 15 April 2010
    Link: http://bit.ly/df2ZUe

  • USA: Oakland Co. plans to sue over Mich. smoking ban

    Oakland County said Thursday it plans to sue the state over a smoking ban that's set to take effect May 1, claiming it's an unfunded mandate for county health departments to enforce.

    The state, however, said it's helping pay for enforcement and a lawsuit would be a waste of money.

    Oakland County Executive L. Brooks Patterson said the county doesn't plan to enforce the ban. He said the county that includes Detroit's northern suburbs doesn't have enough health department resources.

    "Stop sending me responsibilities without funding them," Patterson, a Republican, told WJBK-TV in an interview Wednesday.

    James McCurtis, a spokesman for the Michigan Department of Community Health, said the agency will enforce the ban in non-restaurant settings in Oakland County if needed. He said Oakland County was offered $75,000 over two years from the department to help enforce in those places, but that money was rejected.

    Patterson spokesman Bill Mullan said the Department of Community Health offered the county a two-year grant for education, monitoring and enforcement last year, but that was before the law passed and before its requirements were known.

    In addition to Oakland County, McCurtis said the Department of Community Health plans to handle non-restaurant enforcement for about a dozen local health department that aren't funded to do such inspections.

    Democratic Gov. Jennifer Granholm in December signed the smoking ban into law to make most work places, restaurants and bars smoke-free. The only exceptions are the Detroit casinos, cigar bars, tobacco specialty stores, home offices and motor vehicles.

    "Let him sue," said Granholm spokesman Liz Boyd. She said the governor's office fully supports the smoking ban and said Patterson is interested in wasting money litigating the issue instead of enforcing the ban.

    A message was left Thursday with the Michigan Department of Agriculture, which will oversee the ban in restaurants.

    Some Michigan restaurants already are voluntarily smoke-free, while others have smoking sections. Health departments currently count tables with ashtrays to make sure there's a big enough nonsmoking area, and following the ban those inspectors only would need to ensure that there are no ashtrays, McCurtis noted.

    The state is working out a system for handling smoking complaints, but McCurtis said patrons will be encouraged to report smoking first to the business and, if the complaint isn't addressed, to the state or local officials.

    Source: Examiner - 15 April 2010
    Link: http://bit.ly/cZhQrB

  • McCarthy Tétrault, Jones Day on giant Canadian tobacco smuggling settlement

    On Tuesday, R.J. Reynolds Tobacco Company and JTI-Macdonald Corp., a subsidiary of Japan Tobacco International, agreed to pay the Canadian government a combined $550 million to resolve allegations in the Ontario Court of Justice that the companies engaged in a tobacco smuggling scheme in the 1980s and early 1990s.

    The Canadian government alleged in essence that the companies shipped cigarettes to the United States from Canada and then smuggled them back into Canada, where they were sold on the cheap, without the proper excise taxes being paid. The Canadian government earlier claimed that billions of dollars in tax revenue were lost in the scheme.

    Winston-Salem, N.C.-based R.J. Reynolds paid $325 million to resolve potential civil liability that could have been in the billions of dollars, says one lawyer involved. A defunct R.J. Reynolds Tobacco Holdings subsidiary, Northern Brands Inc. (NBI), paid $75 million. NBI also pleaded guilty to a criminal conspiracy charge of breaching Canada's Excise Act.

    Toronto-based JTI Macdonald paid $150 million to resolve a regulatory offense that it "[aided] persons to sell and be in possession of tobacco not packaged in accordance with the Excise Act." It also agreed to expand its compliance programs related to the marketing and sale of cigarettes. 
    (JTI acquired the former RJR-Macdonald Inc. as part of its acquisition of R.J. Reynolds' international business in 1997. At the time, JTI received indemnification against future liability in the litigation, according to an R.J. Reynolds spokesman.)

    Combined with two previous settlements last year with other tobacco companies, some $1.7 billion has been paid to the Canadian government in the settlements, Canada Revenue Agency said in a release Wednesday.

    McCarthy Tétrault partner W. Niels Ortved represented R.J. Reynolds and NBI before the Canadian court; the company also looked to William Plesec and Robert McDermott at Jones Day to help manage the litigation. JTI Macdonald relied on Douglas Hunt of Toronto's seven-lawyer Hunt Partners.

    The case has a long and tangled litigation history. In 1994 the U.S. government began investigating alleged schemes by R.J. Reynolds affiliates to defraud the U.S. and Canadian governments of tax revenue. The investigation centered on the movement of tobacco and liquor products from the U.S. into Canada via the St. Regis Mohawk Indian Reservation.

    In 1998, NBI pleaded guilty in federal district court in Binghamton, N.Y., to a criminal charge of helping customers to avoid paying millions of dollars in U.S. excise taxes (it was the first such guilty plea by an affiliate of a major tobacco company). NBI paid $15 million in penalties.
    Canada's attorney general immediately filed a RICO action in federal district court in Binghamton against R.J. Reynolds and several affiliates. But the judge in the case ruled that it wasn't up to U.S. courts to collect taxes for other countries, a ruling that was upheld by the Second Circuit on appeal.

    The Canadian government subsequently mounted a legal challenge in Toronto's Ontario Court of Justice in 2003. Three U.S. subsidiaries of R.J. Reynolds were discharged from the case by the presiding judge in early 2004, when the court ruled that the companies couldn't be brought before Canadian courts because they didn't have business in Canada. Nonetheless, R.J. Reynolds, because of its indemnification of JTI, remained on the hook financially.

    Preliminary evidentiary hearings--roughly the Canadian equivalent of the U.S. grand jury system, but in a public, adversarial process before a judge---against JTI and eight executives began in 2005 and lasted for 135 days, recalls JTI's longtime lawyer, Douglas Hunt. The hearings ended in 2006, when JTI Macdonald and a single executive were committed for trial.

    After a decade in court, R.J. Reynolds Tobacco Company general counsel Martin Holton III tells The Am Law Daily, "this settlement enables us to eliminate the continuing expense, inconvenience, and distraction to our core business, and the uncertainties inherent in continuing to litigate complex matters of this nature."

    Source: The Am Law Daily - 14 April 2010
    Link: http://bit.ly/b32OJ8