Altria and Philip Morris International
by Philip Mattera
Altria and Philip Morris International are the companies that emerged from decisions by the world's largest cigarette maker to divide its U.S. and foreign operations into separate companies and to give the domestic firm a new name that no longer had the stigma of what Business Week once labeled "America's most reviled company."
That revulsion was based on the fact that over decades Philip Morris used marketing campaigns such as the Marlboro Man to lure millions of people to become smokers while joining with the rest of the industry in hiding (and later denying) the fact that tobacco use is strongly linked to cancer and a host of other health ills. It also tried to conceal evidence that the company experimented with ways of making nicotine even more addictive. The company's cynicism was so great that it once put out a report arguing that the early deaths of smokers produced savings for governments on pensions, healthcare and housing for the elderly (amid the ensuing uproar, the company had to apologize).
Philip Morris (and later Altria) fought hard against a series of lawsuits brought on behalf of individuals and governments, but the company eventually admitted in 1999 that smoking causes cancer and supported some federal regulation of its products. Recently, it even put warnings on its new e-cigarette products that were stronger than required.
Philip Morris International, on the contrary, has retained many of the industry's intransigent traits and has sought to use international legal mechanisms to intimidate governments, especially in poor countries, to abandon strong anti-smoking policies.
From Turkish Cigarettes to the Marlboro Man
The companies date back to 1847, when an individual named Philip Morris opened a tobacco shop in London and soon moved into the production of Turkish-style cigarettes. After World War I, the company was taken over by U.S. financiers. During the 1930s Philip Morris became a formidable low-price competitor to the firms (American Tobacco, R.J. Reynolds, Liggett & Myers, and Lorillard) created as a result of the breakup of the Tobacco Trust. It achieved this in large measure through a marketing coup. The company ran an enormously successful ad campaign using a diminutive bellhop singing out "Call for Philip Morris."
The company gained greater stature in 1954 by merging with Benson & Hedges, maker of the Parliament brand of cigarettes. The merger--and especially the "acquisition" of Benson & Hedges executive William Cullman III--stimulated Philip Morris to shoot for the stars in the consumer products world. Led by Cullman, who became president and later chief executive, the company carried out one of the greatest feats in marketing history: transforming Marlboro from a filtered brand oriented to affluent women into a macho product whose success allowed Philip Morris to take over leadership of the cigarette industry at home and to challenge British-American Tobacco's dominance of the market abroad.
Philip Morris applied its marketing prowess to the beer industry after the 1970 purchase of Miller Brewing, turning the lackluster company into a formidable competitor to industry leader Anheuser-Busch. It failed to do the same with soft drink company Seven-Up, which it bought in 1978 but sold eight years later.
Philip Morris did not limit its diversification strategy to beverages. In the 1980s Philip Morris also spent what was then a mind-boggling sum-- some $18 billion--to acquire some of the biggest names in the food industry, including General Foods (cereals, Jell-O, Birdseye frozen foods, etc.) and Kraft (Velveeta cheese spread and Miracle Whip salad dressing). In 2000 it spent roughly the same amount to acquire Nabisco.
Over the following decade the U.S.-based parent company, which renamed itself Altria Group, spun off its major food and beverage businesses, though it still owns a wine operation as well as a 27 percent stake in SABMiller, stemming from the South African company's purchase of Miller Brewing.
In 2008 Altria spun off its overseas cigarette operations as Philip Morris International while expanding its domestic tobacco holdings through the 2009 purchase of smokeless tobacco producer UST.
Environmental and Health Record
Like other companies in the industry, Philip Morris long resisted acknowledging the deleterious effects of tobacco, even after the U.S. Surgeon General issued a report in 1964 linking smoking to lung cancer and other diseases, and Congress mandated warning labels on cigarette packs. Although Congress went on to ban cigarette advertising on radio and television beginning in 1971, the industry continued marketing its products in other ways, with Philip Morris leading the way with relentless promotion of its Marlboro brand. For those who were concerned about the health effects of smoking but could not quit entirely, the company introduced the low-tar brand Merit.
When the U.S. tobacco market began to contract, Philip Morris stepped up its sales effort in other countries where restrictions and awareness of health issues were more limited. This helped inspire a consumer boycott of Philip Morris launched in 1994 by INFACT, now known as Corporate Accountability International, which is still campaigning to rein in the company and the rest of Big Tobacco.
For years Philip Morris and its competitors vigorously fought product liability suits brought by smokers claiming that cigarettes had given them lung cancer and other diseases. The industry's legal winning streak was unbroken until 1988, when a federal judge declared that the evidence brought out in a trial showed that the industry had engaged in a "conspiracy vast in its scope, devious in its purpose and devastating in its results" to mislead the country about the dangers of smoking.
The jury in the case did not, however, find the defendants--Liggett, Lorillard and Philip Morris--guilty of conspiracy but did find Liggett liable in the death of Rose Cipollone from lung cancer. The jury, which found that Liggett had failed to alert smokers to the health risks of cigarettes in the period before the federal warning label started to be used, ordered a modest award of $400,000 to Cipollone's husband. In 1990 a federal appeals court overturned the verdict but opened the door to suits covering the period after warning labels began to be used.
Philip Morris also sought to suppress or discourage negative research and reporting. In 1994 the company filed a $10 billion defamation lawsuit filed against ABC News, which had televised a report alleging that Philip Morris altered nicotine levels in cigarettes to foster addiction (the case was later settled out of court). That same year, it was revealed that in 1983 Philip Morris had blocked the publication of a scientific paper demonstrating that nicotine was addictive. These developments prompted a Congressional hearing in which Philip Morris president William Campbell and six other industry executives repeatedly expressed their belief that cigarettes were not addictive and that the evidence linking smoking to cancer and other health problems was inconclusive.
The industry's legal problems grew more grave in the mid-1990s when state officials began filing suits seeking to hold the companies liable for public healthcare costs relating to smoking. The first action was brought by Mississippi, whose attorney general stated: "The lawsuit is premised on a simple notion: you caused the health crisis; you pay for it."
In 1995, after obtaining 2,000 pages of internal Philip Morris documents covering the period from 1966 to 1981, the New York Times published a front-page article revealing that the company had done extensive research on the pharmacological effects of nicotine. The revelation contradicted the company's arguments against federal moves to regulate nicotine as a drug. The Wall Street Journal (December 8, 1995) later reported that it had obtained an internal Philip Morris memo describing nicotine as chemically similar to drugs such as cocaine. (Additional company documents describing research on nicotine enhancement methods were disclosed in 1998.)
Resisting Pressures to Restructure
As the lawsuits mounted and the federal government moved to tighten regulation, many Philip Morris investors began pressing management to segregate the tobacco business from its food and beer operations. At first the company's top executives, led by CEO Geoffrey Bible, resisted, insisting that they could resist the onslaught. They resorted to measures such as pressuring arts organizations that had received contributions from Philip Morris to speak out in defense of their patron.
The tobacco industry's united front began crumbling in 1996, when Liggett Group, the smallest of the five major companies, agreed to settle lawsuits brought by four states as well as a class action of individual smokers. Liggett's final settlement with 22 states included an admission by the company that smoking is addictive and causes cancer.
Meanwhile, Philip Morris continued its legal campaign and sought to blunt sweeping regulatory proposals by coming out in support of restrictions that would apply only to youth smoking. However, the Washington Post later revealed internal Philip Morris memos discussing the monitoring of the smoking habits of people as young as 12 and stating that "today's teenager is tomorrow's potential regular customer."
By 1997 the potential liability from the state government lawsuits reached a point that even Philip Morris had to compromise. In June of that year it and four other major cigarette companies reached a settlement requiring them to pay out $368 billion to the states over a period of 25 years. Under the tentative agreement, the companies also agreed to new restrictions on their marketing and the regulation of nicotine as a drug by the U.S. Food and Drug Administration, though the later provision included some limitations on the FDA that were rejected by the Clinton Administration.
While the final settlement was being ironed out, some states struck their own deals with the tobacco giants, while Congress debated an alternative resolution of its own making and the Justice Department pursued a criminal investigation of the industry. All this prompted the states to negotiate a new settlement with the industry in November 1998 that included a reduction in the 25-year payout of $206 billion but it omitted marketing restrictions and provided no protection against private lawsuits. Four states -- Florida, Minnesota, Mississippi and Texas -- stuck with their individual settlements totaling $40 billion.
Cigarette makers had a mixed record in the ongoing private cases but then faced a higher legal hurdle when the federal government, having ended its criminal investigation of the industry, filed a civil fraud suit in September 1999 against Philip Morris and its competitors. While that case was pending, the U.S. Supreme Court ruled that the FDA did not have the authority to regulate tobacco. The pendulum swung the other way in July 2000, when a jury in Florida ordered the tobacco industry to pay $144 billion in punitive damages to some 500,000 smokers in the state. Philip Morris itself was hit with a $3 billion judgment in California in 2001 and another for $28 billion in the same state the following year.
Hedging Its Bets on Regulation
Recognizing that Congress might pass legislation giving the FDA oversight powers, Philip Morris let it be known that it was in favor of regulation--as long as it was limited. At the same time, it fought hard against the U.S. government lawsuit, in which federal prosecutors were demanding that the industry forfeit $289 billion in profits. In 2005 an appeals court ruled against the forfeiture effort. Federal prosecutors then sought $130 billion from the industry for a massive anti-smoking campaign, but senior Justice Department officials ordered them to drastically reduce the demand to $10 billion.
Ultimately, the federal judge hearing the case ruled in 2006 that the companies were guilty of racketeering and had caused "an immeasurable amount of human suffering," but Judge Gladys Kessler said that in light of the appeals court decision she had no authority to impose financial penalties on the companies. She did, however, order the industry to stop labeling cigarettes as "low tar" or "light" or "natural." Philip Morris, for example, had to abandon the brand name Marlboro Lights.
Philip Morris ended up prevailing in a number of the lawsuits brought by individuals. For example, in 2005 the Illinois Supreme Court threw out a $10 billion judgment against the company, and the following year the Florida Supreme Court did the same with the $144 billion class-action award. In 2007 the U.S. Supreme Court overturned a $79 million punitive damage award in an Oregon case.
In 2006 a federal judge granted class action status to a suit alleging that Philip Morris and its competitors had deceived tens of millions of smokers through the marketing of "light" cigarettes, but that certification was later overturned at the appellate level. Other class action and individual lawsuits are pending.
In 2009 Congress finally enacted legislation giving the FDA the power to regulate both the content of cigarettes and their marketing. The law specifically mandated more prominent warning labels and banned the use of flavors meant to attract young smokers. The marketing restrictions were challenged in a suit brought by several tobacco companies but not Altria and Philip Morris. In 2012 a federal judge struck down FDA plans to display graphic images as part of the warning labels.
In the past few years, Philip Morris has joined other tobacco companies in introducing their versions of the increasingly popular e-cigarettes. They surprised industry critics by including strong warning labels, a move variously interpreted as a legal precaution or an attempt to project a more responsible image.
Even after the federal lawsuit was resolved, Philip Morris and R.J. Reynolds sparred with federal officials over access to the trove of internal documents the companies had to disclose in the course of the case. In 2011 the companies settled the dispute with the Justice Department by agreeing to pay $6.25 million into a fund earmarked for the online Legacy Tobacco Documents Library operated by the University of California-San Francisco.
The spinoff of Philip Morris International (PMI) in 2008 created a company that could market its dangerous products without worrying about public opinion and legal entanglements in the United States. A front-page story in the Wall Street Journal entitled "Philip Morris Readies Global Tobacco Blitz" reported on company plans such as promoting high-tar cigarettes to smokers in China. These initiatives represented a challenge to the efforts of the World Health Organization (WHO) to get countries to adopt stronger anti-smoking measures via the Framework Convention on Tobacco Control (FCTC).
In 2010 PMI sued the government of Uruguay, alleging that its smoking restrictions were too severe. The move was seen as an act of intimidation in the lead-up to a gathering in the South American country of representatives from 171 nations to discuss plans to improve enforcement of the FCTC. PMI and its subsidiaries brought similar suits against other countries, especially poorer ones, using provisions in global trade agreements. Some of those nations were able to defend themselves only after the Bloomberg Philanthropies provided financial assistance. PMI responded by lobbying the U.S. government to negotiate stronger prohibitions against labeling rules in a proposed new Pacific Rim trade agreement.
PMI has been accused of using its "Be Marlboro" ad campaign to persuade young people to take up smoking.
In addition to the torrent of criticism on safety issues, major U.S. cigarette companies such as Philip Morris faced allegations that they engaged in widespread smuggling to evade tariffs and thus increase their penetration of foreign markets. Documents released as a result of the 1998 legal settlement with the states provided details on the practice, which was the subject of lawsuits filed by various foreign countries in U.S. courts. A 2002 investigation by The Nation, the Center for Investigative Reporting and the PBS program Now With Bill Moyers documented the role of money laundering in the industry's illegal distribution practices in Colombia.
In 2004 PMI paid $1.25 billion to the European Union to settle allegations that the company had intentionally oversupplied low-tax markets so the surplus could be smuggled into countries with higher taxes and sold cheaply.
More recently, PMI has tried to paint itself as a foe of smuggling, though it has done this by sponsoring spurious arguments that the FCTC contributes to illegal sales. The company also compromised INTERPOL's independent status by giving it a 15 million euro donation.
Unlike rival R.J. Reynolds, which has adamantly opposed unions, Philip Morris made its peace with organized labor in the United States back in the 1930s. Relations with the Bakery, Confectionery and Tobacco Workers were so harmonious that the company and the union in 1979 signed an unusual nine-year, no-strike agreement whose wage provisions were renegotiated every three years.
In 2010 Human Rights Watch published a report alleging that farms in Kazakhstan supplying Philip Morris International were making use of a migrant workforce that included children as young as 10 who suffered from rashes and other health effects from exposure to the tobacco, which can be dangerous even before it is smoked. The company later took steps to prevent child labor in Kazakhstan and elsewhere. After HRW published a report in 2014 on child labor in the United States, PMI agreed to purchase exclusively from third-party leaf suppliers who agreed to adhere to the company's guidelines.
Taxes and Subsidies
In 2010 Altria disclosed that it would pay $971 million to the Internal Revenue Service to resolve a tax dispute concerning leasing transactions from 2000 to 2003.
According to the Good Jobs First Subsidy Tracker, Altria has received $49 million in subsidies from state and local governments as well as $28 million in loan guarantees for its wine business from the Export-Import Bank.
Other Information Sources
Violation Tracker summary page
Corporate Accountability International (formerly INFACT)
Key Books and Reports
A Question of Intent: A Great American Battle with a Deadly Industry by David Kessler (PublicAffairs, 2001).
Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris by Richard Kluger (Knopf, 1996).
Big Tobacco's Attempts to Derail the Global Tobacco Treaty: Cases from Battleground Countries (Corporate Accountability International, 2005).
Cigarettes: Anatomy of an Industry from Seed to Smoke by Tara Parker-Pope (The New Press, 2001).
Civil Warriors: The Legal Siege on the Tobacco Industry by Dan Zegart (Delacorte Press, 2001).
Cornered: Big Tobacco at the Bar of Justice by Peter Pringle (Henry Holt, 1998)
Hellish Work: Exploitation of Migrant Tobacco Workers in Kazakhstan (Human Rights Watch, July 2010).
Merchants of Death: The American Tobacco Industry by Larry C. White (William Morrow, 1988).
Philip Morris International Exposed: Alternative Annual Report (Corporate Accountability International, 2011).
Smoke in Their Eyes: Lessons in Movement Leadership from the Tobacco Wars by Michael Pertschuk (Vanderbilt University Press, 2001).
Smokescreen: The Truth Behind the Tobacco Industry Cover-up by Philip Hilts (Addison-Wesley, 1996).
The Cigarette Papers, edited by Stanton Glantz et al. (University of California Press, 1996).
The People vs. Big Tobacco: How the States Took on the Cigarette Giants by Carrick Mollenkamp et al. (Bloomberg Press, 1998).
The Smoke Ring: Tobacco, Money and Multinational Politics by Peter Taylor (Pantheon Books, 1984).
The Tobacco Industry in Transition by William R. Finger (Lexington Books, 1981).
They Satisfy: The Cigarette in American Life by Robert Sobel (Anchor Press, 1978).
Tobacco: A Cultural History of How an Exotic Plant Seduced Civilization by Iain Gately (Grove Press, 2002).
Tobacco's Hidden Children: Hazardous Child Labor in United States Tobacco Farming (Human Rights Watch, May 2014).
You're the Target: New Global Marlboro Campaign Found to Target Teens (Alliance for the Control of Tobacco Use et al., 2014).
Last updated June 14, 2015