1,500 Retailers Face Suits Over Fake Smokes

Ramping up the fight against counterfeit smokes, tobacco giant Philip Morris is preparing to sue about 1,500 more Los Angeles-area merchants, along with importers it says were caught illegally trying to sneak millions of fake Marlboros in through Long Beach Harbor.

In a case to be filed in U.S. District Court in Los Angeles as early as Monday, company officials said they would bring claims of trademark infringement against local retailers who recently sold knockoff Marlboros to an army of undercover buyers.

And for the first time since it launched the legal assault last year, Philip Morris also plans to sue five import businesses linked to recent U.S. Customs seizures of about 43 million phony Marlboros, or 2.15 million packs.

The company said its claims against the importers stem from six customs seizures, one of a shipment from South Korea and five from China, where an estimated 85% of counterfeit cigarettes are produced. Company officials declined to identify the firms.

In suing the importers, Philip Morris is aiming for much higher links in the supply chain than the mostly mom-and-pop retailers who have been targeted so far.

Eager to guard the immense cash flow from its powerhouse brand, Philip Morris has sued hundreds of tobacco retailers in a nationwide dragnet featuring undercover buys at thousands of stores. But though the counterfeits have been a mere trickle in many parts of the country, they appear to be flooding the California market, particularly the Los Angeles area.

To date, suits have been filed against 612 defendants -- 608 tobacco retailers and four distributors. Of the defendants, 566, or more than 90%, are California firms, including 356 in Greater Los Angeles, said John E. “Jack” Holleran, Philip Morris vice president for brand integrity.

The new filings will bring the cast of defendants to more than 2,100, about 1,850 of them in the Southland.

Holleran said that, over the last several months, undercover buys have been made at 11,700 Los Angeles-area stores -- meaning that nearly one in six was stocking counterfeit smokes. He acknowledged that figure might not reflect the full scope of counterfeit sales, because fakes also may be sold by street vendors or from the back of vans.

Philip Morris has hired an army of investigators, including some from Pinkerton Consulting & Investigations Inc., to make the buys.

Counterfeiters target Marlboro because it is the best-selling brand in the United States and the world. Marlboro commands a 38% share of the U.S. market and generated about $25 billion in retail sales last year, including taxes.

Lorillard Tobacco Co. is also trying to stamp out counterfeit versions of its Newport cigarettes. In recent months the company has sued about 75 retailers in five states, said Steve Watson, Lorillard vice president. At least 26 of the defendants are Los Angeles-area stores.

State and federal treasuries have been major victims because counterfeit rings don’t bother to pay cigarette taxes, often covering their tracks with fake tax stamps.

In California, each pack of contraband smokes represents a tax loss of about $1.81 -- the federal cigarette excise tax of 39 cents, the California tax of 87 cents, and about 55 cents to the states as part of the tobacco industry’s settlement of lawsuits by attorneys general.

California is losing as much as $270 million a year to various cigarette tax-evasion schemes, said Gil Haas, chief of investigations for the State Board of Equalization. Most of the loss stems from the use of phony tax stamps on both counterfeit and genuine brands.

“It’s a very significant problem,” Haas said.

In the cases filed so far, Philip Morris has not sought economic damages. Rather it has squeezed retailers for information about their suppliers and for a pledge not to sell counterfeits again.

Despite the wide availability of fake Marlboros, Holleran said the company’s legal strategy is working.

Of a group of 400 retailers who had been caught selling counterfeits, he said follow-up buys showed that 85% were selling the real thing. Of 43 retailers who signed settlement agreements -- including a pledge to refrain from counterfeit sales -- he said none was found to be selling fakes.