Tobacco Memos Show Overseas Price Fixing

Philip Morris and British-American Tobacco, the world’s two biggest tobacco companies, secretly joined forces to fix cigarette prices and divide markets in Argentina, Venezuela and other Latin American countries, according to internal documents that explicitly describe the deals and the involvement of some of the firms’ most senior executives.

In Argentina, the companies’ subsidiaries set prices and allocated market shares, relying on “verbal agreements” because “there can be nothing in writing in Argentina on the subject,” said a 1989 memo by a BATCo director.

In Costa Rica, their accord even dictated the amount of TV advertising each firm could buy and what incentives they could offer retailers to promote their brands, according to a February 1992 letter from the head of BATCo’s Costa Rican subsidiary.

Another price-fixing agreement covered Venezuela, but when a price war broke out between the firms’ Venezuelan affiliates, each began smuggling cigarettes into the country through Aruba and Colombia to avoid paying taxes, a 1992 BATCo memo said.

Elizabeth Cho, a spokeswoman for Philip Morris International, said she believes the company had done nothing wrong. “Since we must comply with local laws and regulations in every country in which we do business, we expect that there has been no improper conduct in the countries that you have referenced,” she said.

The tobacco industry in recent years has been repeatedly embarrassed by internal documents contradicting its public stands on the dangers and addictiveness of smoking. But the price-fixing memos, which surfaced in a suit against the industry by the state of Washington, appear to be the first to reveal the existence of sweeping anti-competitive deals.

The secret agreements are in marked contrast to the public display of tooth-and-nail competition between the world’s two biggest cigarette makers. And with tobacco companies increasingly seeking their fortune outside the U.S. and Europe, the documents provide an unusual glimpse of clandestine cooperation on a wide frontier and raise questions about their marketing practices around the world.

Dating from 1988 to 1992, the papers reveal that “the two world-dominant companies . . . very carefully rigged the entire Latin American market,” said Jon Ferguson, senior counsel in the Washington Attorney General’s office.

But whereas activities described in the memos would be plainly illegal if carried out in the U.S., the legal ramifications are less clear in the countries where they occurred.

Ferguson said preliminary research by his office showed price fixing was banned under Argentina’s laws during the time of the Argentine deal and that Panama and Costa Rica had antitrust provisions in their constitutions.

Companies’ Lawyers Decline Comment

Lawyers and spokesmen for BATCo and its U.S. affiliate, Brown & Williamson Tobacco Corp., declined to comment on the documents, except to say they are irrelevant to issues in the Washington case.

Washington authorities have charged tobacco firms with violating antitrust laws, including refusing to compete on making safer cigarettes, but have not accused the industry of creating price-fixing or market-share deals.

Some authorities said the legal status of the price-fixing deals may be a bit murky, since antitrust law in Latin America has been in an evolutionary stage. “Latin America only recently began to develop any type of competition law,” said Robert Lutz, a professor of international business law at Southwestern University Law School.

Robert Lande, a law professor at the University of Baltimore who has advised the governments of Venezuela and Peru on antitrust matters, said he too was uncertain if the deals were legal. “I can say it’s immoral. . . . but that’s just one opinion,” he said.

Lawyers for the state of Washington extracted the memos from a depository of BATCo documents set up in England to house documents demanded by the state of Minnesota. Nearly all the papers were written by BATCo officials, although one is a note from the head of Philip Morris’ Latin America operations to his counterparts at the British firm.

Several of the memos describe the situation in Argentina, where officials of Philip Morris and BATCo subsidiaries, although distrustful of each other, were struggling to cooperate on price and market share.

In a memo titled “Argentina Market Share Agreement,” Peter J.C. Hazel, a BATCo director responsible for its South American and Caribbean operations, complained that the Philip Morris subsidiary Massalin-Particulares, S.A., had begun “to drag their feet on price increases” because they were “unhappy with their declining market share.”

As a result, the June 19, 1989, memo said, the companies’ pricing agreement would be supplemented by a market-share accord setting Massalin’s share at 45% of the market and the share of the BATCo subsidiary, Nobleza Piccard, at more than 50%. “These are all verbal agreements and there can be nothing in writing in Argentina on the subject,” Hazel wrote.

‘Price Levels Should Be Increased,’ VP Says

In a memo the next year, Hazel described his negotiations with Mark Goldberg, a vice president with Philip Morris International, on a new Argentine pricing accord. “We finally agreed that price levels should be increased as rapidly as politically possible,” Hazel said.

“We would each give our No. 1’s [presidents of the Argentine subsidiaries] until Monday 17th September to come to agreement on exact price increases. . . . If our No 1’s cannot agree by that time then Mark Goldberg and I will communicate by telephone on Monday 17th p.m.,” he said.

“I remain distrustful of my opposite number, but we will have to see whether we can get a rapid agreement.”

The documents show that in Venezuela, BATCo subsidiary Cigarrera Bigott reached an agreement to prop up its weaker rival, Philip Morris affiliate Tabacalera Nacional, or Catana, because Bigott was approaching monopoly status and feared government regulation and a tax increase.

Under the agreement negotiated in 1988, in order “to help Catana sell more, Bigott will not . . . increase promotional activity” or advertising spending, one memo said.

According to another memo concerning Venezuela in January 1991, “PM’s new CEO” had attended a meeting at JFK airport at which “ ‘renegotiation’ of the previously agreed . . . price increase” was discussed. The memo was addressed to B.D. Bramley, then chairman of BATCo, and to David G. Heywood, vice chairman, and R.A. Crichton, a director.

Michael Miles became Philip Morris chairman and CEO later in 1991, but it’s uncertain who the memo referred to.

A January 1992 memo described events in Venezuela after a price war broke out between Catana and Bigott. “Catana exported Astor [one of its brands] to Aruba which then flowed back into Venezuela via Colombia without any duty being paid,” the memo said.

“In order to counter this threat Bigott shipped [two of its brands] in the same manner.”

Several memos describe meetings held every few months between high-ranking executives to discuss problems and resolve disputes. According to the documents, those attending for Philip Morris included Peter Schreer, an executive vice president and chief of Latin American operations, and for BATCo Keith Dunt, who became a board member in 1992.

In November 1990, when Hazel queried his number-ones on what problems to bring up at a meeting with Schreer, Eduardo Grant, president of BATCo’s Argentine subsidiary, said: “There is really only one: proper price increases.”

It seems that Philip Morris’ Massalin-Particulares was again trying to steal market share by refusing to go along with price hikes. “M-P are already showing reluctance to increase at the rate we feel is necessary and they insist on trying to squeeze some advantage out of every increase.”

At another meeting in August 1992, attended by Schreer and two other Philip Morris vice presidents, the Philip Morris delegation complained that BATCo’s Guatemalan subsidiary “had lowered the price” of one of its brands “below that of Marlboro,” according to a BATCo summary of the meeting.

At the same meeting, Philip Morris proposed a market share agreement covering “all four Countries [in Central America] where we compete.” The memo said “BATCo offered to consider this,” but it’s uncertain whether a deal was reached.