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Tuesday June 29 5:21 PM ET

Problems For Philip Morris

By Amy Collins

NEW YORK (Reuters) - A federal judge Tuesday granted a preliminary injunction against the world's biggest cigarette company, Philip Morris Cos. Inc., after three other Big Tobacco companies claimed it was trying to monopolize prime retail space.

The ruling against portions of Philip Morris's ``Retail Leaders'' marketing program, was issued by U.S. District Judge Frank Bullock in Greensboro, N.C.

The program encourages retailers to use a tall behind-the-counter display case that prominently shows Philip Morris brands, including Marlboro, Virginia Slims and basic, while leaving competing bands virtually out of sight.

``The Retail Leaders program will cause all plaintiffs to suffer irreparable harm in the form of loss of advertising opportunities, goodwill, brand equity, and the potential for permanent loss of customers,'' the judge wrote in his decision.

A Philip Morris spokesman said that although the company was disappointed with the ruling, he was pleased it applied to only one of four aspects of the Retail Leaders programs. The packages will still be displayed the same way, but more competitors' ads will be allowed.

``We believe it to be completely lawful,'' said Mike Pfeil, director of communications. Philip Morris expects the entire program will be reinstated in court,'' Pfeil said.

Mark Smith, a spokesman for Brown & Williamson Tobacco, which makes Kool and GPC cigarettes, said. ``We're pleased the court recognized the serious competitive consequences of Philip Morris's marketing program and stopped their unfair marketing practices while the case is in court.''

The case was filed against Philip Morris by R.J. Reynolds Tobacco Holdings Inc., Lorrilard Tobacco Co., a division of Loews Corp, and Brown & Williamson Tobacco Corp, a unit of British American Tobacco Plc .

``This is interfering with a free market, and that's not what this court can do,'' Philip Morris attorney Jerome Chapman said during arguments in the case.

During the trial, R.J. Reynolds attorneys displayed a scale-model of a convenience store counter in the courtroom, including a lottery ticket display, beef jerky, gum and a jar of pigs feet on the counter.

``Reynolds Tobacco believes that the judge's order will help preserve retail competition while the case moves forward to trial,'' said John Singleton, the director of corporate communications for the Winston-Salem, N.C.-based RJR. ``Retail Leaders constitutes unfair competition.''

Smith and Singleton said they expect the case to go to trial in Spring.

Judge Bullock's ruling notes the four major companies control 97 percent of the U.S. tobacco market. In 1998, Philip Morris controlled 53 percent, RJR had 25 percent, B&W had 15 percent and Lorillard held 8 percent.

As the pool of adult smokers shrinks, tobacco companies are seeking to maintain brand loyalty. Within the past two years, 6 million smokers, about 14 percent, switched their usual brand, Bullock notes in the ruling. Point-of-sale advertising has become extremely important to tobacco as its advertising options are restricted and it is the point where a smoker is most likely to decide to try a different brand.

The judge notes there would be no harm to Philip Morris, except short-term ``administrative chaos'' to re-stack their Retail Leaders displays.

News of the judge's ruling had little impact on tobacco stocks, already depressed Tuesday, a day after Philip Morris said its annual earnings would just miss analysts expectations, due largely to declining tobacco volumes and the weak international economic climate. Philip Morris was down $1, to $40; RJR was down 56 cents to $32; Loews was unchanged at $79.25 and BAT's American Depositary shares were up 13 cents at $19.38 cents.


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