"Little Tobacco" Firms Smoking Out Big Profits From Cigarettes

by Katherine Stapp

(IPS) NEW YORK -- While tobacco multinationals remain the most visible adversaries of anti-smoking activists, smaller companies flying under the radar have taken advantage of Big Tobacco's woes to boost their own profits and, some say, undercut strategies to curb smoking.

Even as R.J. Reynolds, the nation's second biggest tobacco company, lost $3.4 billion last year, "Little Tobacco," as it has come to be called, has increased its market share more than 10-fold, to about 10 percent of U.S. sales.

The trend has some anti-smoking advocates worried the smaller companies are not only sabotaging efforts to price cigarettes out of reach, but sometimes use marketing tactics explicitly banned under a 1998 settlement agreement with the industry.

"When you had three or four companies that controlled 98 percent of the market, it was much easier to have oversight," said Eric Lindblom, manager for policy research at Campaign for Tobacco-Free Kids.

"With the proliferation of smaller tobacco companies, we've seen examples of free cigarettes being handed out near schools."

Under the 1998 agreement, the "Big Four" U.S. tobacco companies -- Philip Morris, Lorillard, Brown & Williamson and R.J. Reynolds -- and several dozen smaller operators agreed to pay about eight billion dollars to state coffers annually to defray the costs of treating tobacco-related diseases, in exchange for the states dropping massive lawsuits against them.

Hundreds of other firms that did not participate in the settlement still had to put a portion of their profits into escrow accounts as insurance against potential lawsuits, and to ensure a "level playing field" in the market.

But because those payments were based on projected national sales, companies that operate in only one or two states have managed to get substantial refunds -- slashing their costs and allowing them to sell cigarettes for as little as $1.50 in some states, compared to at least twice that for premium brands.

"It's clear that a lot of companies are taking advantage of the loophole in this law," Lindblom said in an interview. "Look, anything we can do to increase cigarette prices is good. It's been consistently shown that when costs are raised, smoking declines."

"On the other hand, (closing the loophole) is a way to protect the big companies' market share," he added.

The National Association of Attorneys General, which is now going after the smaller operators, estimates that U.S. states have lost $600 million in revenue because of the refunds.

Many of the small-timers argue they cannot afford to join the settlement, and dispute why they should have to in the first place.

"We, unlike Big Tobacco, have not and will not hide the health dangers of smoking and will not bow down to what amounts to extortion," declares Poison Inc, a North Carolina-based company that sells a brand of cigarettes called "Grim Reaper."

While 19 states have passed laws to close the loophole, some anti-smoking groups argue the problem would also be addressed by the United States adhering to an international treaty that calls for tobacco advertising bans, larger warning labels, tobacco tax and price increases and a crackdown on black-market cigarettes.

Known as the Framework Convention on Tobacco Control (FCTC), the treaty was adopted almost unanimously by the World Health Assembly in May 2003, despite complaints from activists that cigarette companies, abetted by the administration of President George W. Bush, were sparing no effort to subvert the process.

The FCTC has since been signed by 87 countries -- not the United States -- and must be ratified by 40 to take effect.

According to the World Health Organization (WHO), nearly five million people die every year from tobacco use, and that number is expected to rise steeply, particularly in developing countries.

"The regions that really drove this process were Africa, Southeast Asia, the Middle East and the Caribbean," noted Kathryn Mulvey, executive director of Infact, a Boston-based corporate watchdog group that has been very active in promoting the treaty.

Mulvey was optimistic the FCTC would take effect by the end of 2004, despite what she described as continuing pressure on governments by the industry.

"We've seen stalling tactics, just watering down and really trying to overwhelm the process (by the U.S.)," she told IPS. "Given this administration's position in the negotiations, the treaty could end up stronger without the United States."

Although Washington has stalled on signing the FCTC, it is pursuing the tobacco industry at home through a $289 billion racketeering lawsuit, first filed under the administration of Bush's predecessor, Bill Clinton.

The suit, which inched ahead Monday when a federal judge denied an industry motion to dismiss the charges, accuses the companies of deliberately lying about the health effects of smoking, and would require stricter rules on marketing, advertising and warning labels on tobacco products.

A similar lawsuit might soon be heard in Canada, where lawyers have spent nine years compiling a class action against Rothmans, Benson & Hedges, Imperial Tobacco Canada and JTI-Macdonald -- that country's "Big Four" cigarette makers.

Should a judge let it proceed, it would be the biggest class-action suit in Canadian history, and could lead to the kind of comprehensive settlement won by U.S. states six years ago.