Philip Morris Fails to Halt ‘Gray Market’ Cigarette Sales

Philip Morris Cos., the world’s No. 1 tobacco company, lost a bid in federal court to stop U.S.-based distributors and retailers from selling Marlboro cigarettes intended for export.

Philip Morris had asked for a ban on U.S. sales of what cigarette makers call “gray market” goods. U.S. District Judge Jeremy Fogel denied the company’s request in August, and today the 9th Circuit U.S. Court of Appeals upheld his decision.

“We find no abuse of discretion in the court’s declining to impose the specific relief requested” by Philip Morris, a three-member panel of the 9th Circuit said.

Tobacco companies describe gray marketers as those who buy cigarettes abroad and sell them in the U.S. to undercut higher domestic prices. Such cigarettes can be sold for about one-third less than cigarettes manufactured for sale in the U.S.

Philip Morris sued distributors, retailers and wholesalers last year in a federal court in San Jose, seeking unspecified damages and a ban on the sales of the goods.

While declining Philip Morris’ request for a ban, Fogel granted the New York-based company a preliminary injunction that requires the defendants to place disclaimers on cigarette packs and cartons that distinguish them from Philip Morris products manufactured for domestic sale.

“It was not the outcome we had hoped for today, but it’s important to note the district court’s decision remains in place and the case will continue in district court,” said Philip Morris spokesman Michael Pfeil.

Philip Morris said the disclaimers wouldn’t eliminate consumer confusion and turned to the appeals court to challenge the judge’s order. Among other things, a three-member panel of the 9th Circuit found Fogel hadn’t abused his discretion to decline the relief Philip Morris requested.

The company’s suit alleges trademark infringement, false representation of its products and unfair competition.

“We’re happy because Philip Morris did not prove that the district court erred in refusing to grant Philip Morris a total, no-sale injunction,” said defense attorney Paul Fogel, no relation to the judge, who represents gas station operators who sell cigarettes and were sued by Philip Morris.

While Paul Fogel doesn’t dispute that his clients sold Philip Morris cigarettes intended for foreign markets, he challenged the company’s characterization of the products as gray-market goods that violate U.S. trademark law.

State and federal regulators are investigating dozens of instances where distributors imported gray market cigarettes into the U.S. without paying taxes.

Shares of New York-based Philip Morris fell 25 cents to $21.75.