Reports that Matter

United States v. Philip Morris USA Inc.: Amended Final Opinion

Defendants' Marketing Successfully Reaches Youth

Section 75 of 129

Defendants' Marketing Successfully Reaches Youth

a. Defendants' Spending on Marketing and Promotion Has Continually Increased 3024. Statistics recently released by the FTC in its 2001 Report show that cigarette company

Defendants' advertising and promotional expenses rose significantly after the signing of the MSA in November 1998. 1900082-0107 (US 60663).

  1. From 1998 to 1999, Defendants' total advertising and promotional expenditures rose 22.3% to $8.24 billion, the highest ever reported to the FTC by the cigarette companies. Id. Defendants' marketing spending rose from $6.6 billion in 1994 to almost $12 billion in 2001. Dolan WD, 61:15-16.

  2. While cigarette company Defendants reported substantial decreases for outdoor advertising (down 81.7% from 1998 to 1999) and transit advertising (down 86.1%) due to the restrictions of the MSA, increases in expenditures for promotional allowances and retail "value added" account for virtually all of the overall rise in spending. 1900082-0107 (US 60663). After signing the MSA, Cigarette Company Defendants reported to the FTC significant increases in spending for newspapers (up 73%), magazines (up 34.2%), and direct mail (up 63.8%). Distribution of free cigarettes rose by 133.5%. Id.

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  1. Cigarette company Defendants' expenditures on cigarette advertising and promotion, historically and currently, remain high on both an absolute basis and as compared to other industries. For example, domestic cigarette advertising and promotion in 1999 totaled $8.24 billion, an increase of 22% over 1998, and a six-fold increase over 1963, after adjusting for inflation. In the nine-year period from 1991-1999, domestic cigarette advertising and promotional expenditures totaled $51.4 billion (unadjusted for inflation). Again, promotional allowances figure prominently as the single largest category of expenditure each year since 1994. Id.

  2. Philip Morris's marketing spending increased significantly in every year from 1998 to 2002. Its 1997 budget for total spending, including advertising, events, price, direct mail, point of sale materials, and all other marketing activities was $1.6 billion, while its total spending in 2002 was projected to more than triple to $5 billion. 2085298135-8136 (US 25253); LeVan PD, United States v. Philip Morris, 6/25/02, 73:4-75:1.

  3. Since 1998, Philip Morris has increased the amount it has spent on price promotions for Marlboro, its largest selling brand, from $806 million in 1998 to an estimated $4 billion in 2002, and on product promotions, such as free packs with a purchase, from $106 million in 1998 to $500 million in 2002. Id. at 58:19-60:11, 63:14-64:12.

  4. According to David Beran, Executive Vice President of Strategy, Communications and Consumer Contact for Philip Morris, in 2004, Philip Morris's marketing expenditures were $6.56 billion, of which $5.587 billion was for price promotions, and $252.1 million was for product promotions. Beran TT, 4/18/05, 19417:17-19418:1 (Confidential -- Under Seal). The large majority of Philip Morris's marketing funds are for promotional activities which occur at retail locations. Beran WD, 15; 2085298135-8136 (US 25253); Beran TT, 4/18/05, 19273:10-17, 19274:5-10. The large jump in Philip Morris marketing expenditures in the recent past is attributable to increases in price and product promotion. Beran TT, 4/18/05, 19274:11-25.

1154

  1. According to Victor Lindsley, Lorillard's Senior Brand Manager, Lorillard has increased its marketing expenditures since it entered the MSA. Lindsley PD, United States v. Philip Morris, 5/16/02, 23:21-24:3.

  2. Lynn Beasley, President and Chief Operating Officer at RJR, admitted that the MSA did not limit RJR's expenditures on advertising, or promotion, including retail value added, coupons, and direct mail. Beasley TT, 3/31/05, 17370:17-17371:13. Marketing is so important to RJR that the company's market share will decline if it does not support its brands through marketing. Beasley TT, 3/30/05, 17309:6-8, 17310:21-17311:4. Much of Ms. Beasley's testimony on cross-examination was flatly not believable. Two examples will suffice. First, even though she was President and Chief Operating Officer at RJR, and a long-time employee of the company, she denied knowing that RJR's leading cigarette brand, Camel, is the third most commonly smoked brand among twelve to seventeen year olds. Beasley TT, 3/31/05, 17358:1-17359:16. Second, she stated that in March 2001, RJR removed Rolling Stone and other magazines from its list of magazines approved for youth readership; she was then shown four different 2005 Rolling Stone magazine editions that contained RJR cigarette brand ads for Camel, in direct contradiction of her testimony. Id. at 17364:11- 17369:23. Therefore, the Court rejects her testimony that Reynolds's marketing, particularly in magazines, is not directed at youth.

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b. Defendants Advertise in Youth-Oriented Publications 3033. Numerous academic studies have found that Defendants increased the number of

advertisements they placed in youth oriented magazines after signing the MSA. Krugman WD, 124:13-127:4.

  1. Mediamark Research Inc. ("MRI") is a leading United States supplier of multimedia audience research. It offers comprehensive demographic data, lifestyle data, product usage data and data that measures exposure of people sampled to all forms of traditional media, including magazines, radio, and television. Currently, MRI measures the readership of over 300 national magazines. The sample data can be generalized to the entire population of the United States age twelve years and above. MRI's national syndicated data are widely used by advertising agencies as the basis for media and marketing plans designed for advertised brands in the United States, particularly those that advertise in magazines. Id. at 116:3-122:7.

  2. TNS Media Intelligence/CMR ("CMR") is a leading provider of marketing communication and advertising expenditure information to advertising agencies, advertisers, broadcasters and publishers. CMR measures advertising expenditures by national or regional advertisers in approximately 700 magazines. Id.

  3. As set forth below, each Defendant at different times over the last forty years has claimed to have adopted and publicized advertising policies that prevent it from marketing to youth. Defendants also claim to follow the industry's Advertising Code which states that "[c]igarette advertising shall not appear . . . in publications directed primarily to those under 21 years of age." 2070557699-7702 (US 20519). However, MRI and CMR data over the last decade demonstrate that the Defendants continue to advertise heavily in magazines with "substantial youth readership." That term is applied to magazines having either on average, over two million teen readers ages twelve to seventeen per issue or over 15% of total readership, per issue, ages twelve to seventeen years. Krugman WD, 116:3-122:7.

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(1) Philip Morris 3037. Philip Morris's stated media policy until the mid-1990s was to place cigarette

advertisements in publications where 80% or more of a magazine's readership was twenty-one years and older. Philip Morris's evaluation process was not quantitative. Rather, the Philip Morris Media Department, along with legal counsel, simply made subjective determinations and recommendations for publication placements based upon personal review of the "content" of the publication, including consideration of whether the publication's editorial content was directed towards adults and whether other products advertised in the publication were for adult consumption. Through this subjective determination process, Philip Morris's media employees and attorneys would decide whether a publication passed muster under the advertising guidelines as set forth in the industry's Cigarette Advertising and Promotion Code. Virtually no magazines failed to qualify for placement of Philip Morris cigarette advertisements under Philip Morris's subjective review process during this period. Camisa PD, United States v. Philip Morris, 6/28/02, 24:23-27:10, 32:19-33:11, 51:19-52:4, 81:14- 82:16.

  1. In approximately 1995 or 1996, Philip Morris's stated media policy changed: cigarette advertisements were to be placed only in publications where 85% or more of the magazine's readership was twenty-one years and older. Philip Morris's evaluation process remained a subjective, rather than quantitative one, although it had some quantitative data upon which to base its decisions.
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At this time, Philip Morris continued to advertise in many magazines with high youth readership such as Rolling Stone. Id. at 24:23-27-24, 51:19-52:8, 81:14-82:16.

  1. Philip Morris has purchased readership data from MRI on readers under the age of eighteen since as early as 1995. Despite the fact that Philip Morris and its Director of Media, Richard Camisa, knew from this readership data that its magazine advertisements were read by many thousands of young people ages twelve to seventeen, Philip Morris continued to rely upon its own internal subjective review standards. Camisa PD, United States v. Philip Morris, 7/11/03, 243:17- 244:23, 310:8-15; 2071239702-9705 (US 40405).

  2. A September 17, 1996 draft presentation titled "MRI and Simmons," with the handwritten notation "prepared for counsel," was developed for "internal PMUSA discussion only" and confirms Philip Morris had access at that time to MRI and Simmons data that showed the number of twelve to seventeen year olds reading the magazines in which Philip Morris advertised. 2071294033-4042 (US 20525); 207354075-4088 (US 21930).

  3. In 1997 and 1998, Leo Burnett, Philip Morris's advertising agency, sent at least seven faxed reports to Philip Morris's Marketing Department and Media Department employees containing information derived from the MRI 12+ Studies (including data on twelve to seventeen year olds) and the Simmons studies. On January 23, 1998, Andrea Starshak, Account Manager for the Simmons Marketing Research Bureau, faxed a report which contained "horizontal percentages reflect[ing] the portion of each magazine that is comprised of teens age 12-17" from STARS+ 1996 data. 2071294089-4090 (US 21945); 2071294011-4032 (US 20524); 2071294007-4009 (US 21946); 2071294086-4088 (US 20523); 2071294061-4063 (US 21948); 2071294004-4005 (US 20522*);

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  1. A March 1998 draft letter from the files of Philip Morris USA demonstrates that at that time Philip Morris had access to 1997 MRI data showing that magazines in which Philip Morris advertised had substantial youth readership of above two million and 15% of total readership aged twelve to seventeen. 2069603598-3600 (US 27252); 2069603601-3601 (US 27253).

  2. In 1998, Philip Morris initiated a new media placement policy that required publishers to provide a signed statement that their magazine was "primarily directed at adults" and to provide data on the percentages of adult (twenty-one and older) subscriptions, circulation or readership as measured by the publisher's own research or by the MRI study. Philip Morris accepted subscription numbers as the sole source of data for determining eligibility for advertising without regard to how many magazines were sold at newsstands. For instance, even if only 20% of a magazine's issues were sold through subscriptions, as opposed to at newsstands, Philip Morris would accept subscription data as evidence that the publication was "primarily directed at adults." With certification and publisher data in hand, Philip Morris again conducted its own "subjective review" of the publication content before determining whether to approve the placement of advertising in certain publications. Camisa PD, United States v. Philip Morris, 6/28/02, 29:4-30:19; Camisa PD, United States v. Philip Morris, 7/11/03, 266:10-267:13, 270:23-272:14.

  3. Although Philip Morris had been aware since at least 1998 that relying only on subscription data, instead of total circulation or readership data, would provide limited information about a magazine's audience, it did not change its policies until 2000. In 2000, it adopted the policy that, if a magazine's subscriptions made up less than 60% of its total circulation, then the publisher was required to provide a combination of subscription and newsstand data. Camisa PD, United States v. Philip Morris, 7/11/03, 270:23-272:14, 288:8-289:5; 2071228372-8378 (US 22199).

1159

  1. In 1998 and 1999, Philip Morris's stated Media Goals for Marlboro were to reinforce and maintain "Marlboro's leadership position," and "to identify new impactful opportunities that maximize visibility and brand essence with an emphasis on young adult smokers." According to Philip Morris's 1999 Media Plan, it was recommended that Philip Morris increase its spending towards the so-called "young adult smoker" audience, focus on young adult smoker magazines, and increase the placement of Marlboro advertising in magazines with high youth readership, including Rolling Stone, Cosmopolitan, Vogue, Sports Illustrated, Entertainment Weekly, Playboy, ESPN, InStyle, GQ and Mademoiselle. Camisa PD, United States v. Philip Morris, 6/28/02, 107:6-115:11; 2071230813-0888 (US 40404).

  2. Philip Morris developed a "Print Leadership Initiative" for execution in 1999 which was intended to "showcase Marlboro's leadership position in print" by placing Marlboro advertisements in key locations in magazines, such as the back cover, the inside cover and the centerfold. These placements would communicate that Marlboro was "the number one brand." As Camisa, the Director of Media, described the initiative,

in a very cluttered print environment where you have so many advertisers vying for presence in a magazine, are there things that you can do that could help your ad stand out versus others . . . not just be wallpaper and just be one of ad after ad which people see.

Camisa provided examples of such placements, including: special impact units (three to four page units that may appear in a publication, as opposed to a single page); the "second" cover; page one (the inside of the front cover and first page); the back cover; or, the center spread in a magazine that is stapled so that a reader naturally opens up to the magazine's center to see a showcased advertisement. Camisa PD, United States v. Philip Morris, 6/28/02, 113:6-114:24; 20804998299896 (US 20536). Such placements grab the attention of the reader and have far more impact on his or her buying decisions.

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  1. Camisa further explained Philip Morris's print leadership initiative as follows:

[L]eadership position is really, as it pertains to Marlboro, what we like to do is we like to see when we advertise in print, for example, that being the number one brand, we like to have Marlboro in the first tobacco position, which essentially is when you start reading a magazine, that of all the tobacco brands that may be advertised in that publication, we would like to have the first position. Because we think that is reflective of the brand's leadership position in the marketplace . . . showcase [Marlboro] as the first ad as you open the magazine.

Camisa PD, United States v. Philip Morris, 6/28/02, 111:22-113:5; 2071230813-0888 (US 40404).

  1. Under the Print Leadership Initiative, Philip Morris advertised Marlboro in leadership positions in the following youth oriented publications: Rolling Stone, Playboy, GQ, Spin, Car &

Driver, Hot Rod, Penthouse, Vibe, Stereo Review, Car Craft, Cycle World,4 One cannot help wondering whether this litigation was the best vehicle for attempting to hold Defendants accountable for their indifference to the health of American citizens. In a democracy, it is the body elected by the people, namely Congress, that should step up to the plate and address national issues with such enormous economic, public health, commercial, and social ramifications, rather than the courts which are limited to deciding only the particular case presented to them in litigation. However, this will certainly not be the first, nor the last, time that litigants seek to use the courts and existing legislation to address broad-scale economic and social problems which might be far better and more appropriately grappled with by our elected representatives. Wheel, POV,

Motorcyclist, Four Wheeler, and ESPN through at least January 2000. Camisa PD, United States v. Philip Morris, 6/28/02, 149:2-152:6; 2080499829-9896 at 9837 (US 20536).

  1. Even publishers of youth magazines pointed out that Philip Morris's advertisement placements in magazines such as Rolling Stone were aimed at teenagers. In a November 5, 1999 letter to Ellen Merlo, Senior Vice President at Philip Morris, Spin Publisher Malcolm Campbell criticized Philip Morris's decision, made under external pressure, to pull advertisements from Spin:

From a couple of terse phone conversations, I think our demise is based on a perception that Spin is too youthful. I respect your right to subjectively critique publications, however, to single Spin out for being too young, while continuing to support magazines, such as Rolling Stone or Details is ludicrous. I find an inconsistency in the logic that you cannot use Spin, but you will run a centerspread in the current Rolling Stone with a 10 page cover line feature on "The

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Secret Life of Teenage Girls." Only Rolling Stone has put teen phenoms Britney [Spears], Ricky Martin, The Back Street Boys and Jar Jar Binks on their cover this year, and all with pull-out posters for nifty bedroom collages. These edit packages are clearly targeted at teens, so comparatively, Spin's edit looks quite sophisticated.

2070748847-8852 at 8847 (US 21819*) (emphasis in original).

  1. Philip Morris placed numerous back cover advertisements in magazines with substantial youth readership. For example: in 1999, Philip Morris had 8 (or 67%) of Car Craft's back covers;6 See United States' Preliminary Proposed Findings of Fact at 14. -11- (or 50%) of Hot Rod's back covers;8 To the extent that they are relevant, all arguments of the intervenors and amici have been considered and addressed. -14- (or 33%) of Rolling Stone's back covers;11 Lorillard did not participate in the second phase of funding for the Brotman/Freedman research. (US 30450). -147- (or 22%) of Sports Illustrated's back covers; and 21 (or 40%) of TV Guide's back covers. Advertisements that appear on the back covers of magazines are highly priced by magazines and highly valued by advertisers because they reach many more individuals than those placed inside magazines. 2085313542-3545 (US 88803).

  2. In May 2000, Philip Morris once again changed its magazine policy to incorporate a definition of "adult-oriented publication" that had been included in a draft proposal to regulate tobacco advertising issued by the FDA in 1996. Camisa PD, United States v. Philip Morris, 6/28/02, 52:9-55:3; 2085314209-4215 (US 45714); 2085314271-4271 (US 45716). The definition described an "adult-oriented publication" as one: (a) whose readers younger than eighteen years of age constitute 15% or less of the total readership as measured by competent and reliable survey evidence; and (b) that is read by fewer than two million persons younger than eighteen years of age as measured by competent and reliable survey evidence. 2085314271-4271 (US 45716).

  3. Forty of the publications in which Philip Morris had placed advertisements failed to meet the 15% and two million readership standard using MRI and Simmons data in June 2000. They included Sports Illustrated, Rolling Stone, and Entertainment Weekly. As Richard Camisa wrote in a May 19, 2000 letter to Fabio Freyre, the publisher of Sports Illustrated, "[t]he 1999 MRI Twelve Plus Study reports reach for your publication of 21.4% for persons below the age of 18 and reports readership of 17% for persons below the age of 18." 2085314266-4267 at 4267 (US 25275). Application of this new standard also ended Philip Morris' advertising in Rolling Stone. Application of the 1999 MRI Twelve Plus [12+] Study reported for Rolling Stone a "reach" of 11.1% for persons below the age of eighteen, and readership of 24% for persons below the age of eighteen. Camisa PD, United States v. Philip Morris, 6/28/02, 153:8-156:5; 2085314264-4265 at 4265 (US 45715). Between June 2000 and June 2002, another five to ten publications in which Philip Morris advertised cigarettes have failed the FDA standards. Camisa PD, United States v. Philip Morris, 6/28/02, 62:16-76:23.

1162

  1. A Philip Morris document, titled "2000 Marlboro Key Media Issues," stated that, because of the suspension of Philip Morris cigarette brand advertising in thirty-two magazines, its 2000 Media Plan was "less efficient due to loss of mass reach titles [such as] . . . SI [Sports Illustrated], Rolling Stone, Cosmopolitan, People, etc." 2085152525-2525 (US 25190).

  2. Philip Morris's Director of Media Camisa claimed that prior to adoption of the 2000 FTC standard for advertising in publications, he was not aware of the number of teens who were being reached by Philip Morris's advertisements in publications. That testimony is rejected as not being credible, particularly in light of his acknowledgment that the Media Department created binders of "cheat sheets," similar to "Cliff's Notes," for the Philip Morris Brand Groups that contained synopses of each magazine in which Philip Morris cigarette advertisements could be published. Those synopses included basic readership demographic data, including information on a magazine's age of readers, theme, and target audience. Camisa PD, United States v. Philip Morris, 6/28/02, 85:20-87:2, 92:2-93:15.

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  1. As recently as June 2002, Philip Morris maintained a total "consideration set" of approximately 100 publications in which it may choose to advertise its cigarettes. As of June 2002, of those 100 publications, Philip Morris was currently placing cigarette advertisements in fifteen to twenty because only they had passed muster under the 15% or two million readership standard as measured by the MRI or Simmons studies. Because the remaining eighty to eighty-five publications are not measured by the MRI or Simmons studies, Philip Morris takes the position that the FTC guidelines cannot be applied to them. Those approximately eighty publications would be measured against Philip Morris's "print certification" process which states that 85% or more of the subscription or circulation must be twenty-one plus. Thus, under its own internal policies, Philip Morris may in the future continue to advertise in those eighty publications, particularly for new product introductions, based upon its subjective review process. Camisa PD, United States v. Philip Morris, 6/28/02, 72:7-73:15, 76:24-81:4.

  2. MRI and CMR data for the years 1993 to 2003 demonstrate that Philip Morris spent almost $600 million advertising its cigarette brands in magazines with substantial youth readership, i.e., on average have either over two million readers ages twelve to seventeen per issue or over 15% of total readership ages twelve to seventeen years old per issue. Philip Morris's largest annual expenditure for advertising its cigarette brands in these publications was over $96 million, occurring in 1999, the first year after the MSA was signed. Krugman WD, 116:3-122:7.

  3. Philip Morris advertised in Sports Illustrated, a magazine that the MRI data indicates averaged more than 4,700,000 readers ages twelve to seventeen for each issue published during the time period from 1992-2002. From January 1993 to May 2003, Philip Morris USA spent a total of $133,727,300 on cigarette brand advertising in Sports Illustrated. In 1993 alone, Philip Morris USA spent $10,883,500 on cigarette brand advertising in Sports Illustrated; the MRI data indicates that, in 1993, on average more than 17% of the total readers of Sports Illustrated were teenagers ages twelve to seventeen years old. Id.

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  1. As of June 2002, Philip Morris was still placing cigarette advertisements in magazines with high youth readership, including Outdoor Life and GQ. Camisa PD, United States v. Philip Morris, 6/28/02, 87:1-91:25, 95:1-96:22.

(2) Liggett 3059. Liggett's Vector Brand's current print advertising policy is not to advertise in any

publications with over 15% under eighteen readership. Taylor PD, United States v. Philip Morris, 6/14/02, 95:8-25, 97:5-99:6.

  1. Based on MRI and CMR data for magazines with substantial youth readership from 1993 to 2003, Liggett began advertising its cigarette brands in publications with a substantial youth readership for the first time in 2001. It has increased its expenditures on such advertisements in both 2002 and 2003. Since 2001, Liggett has spent over $6 million advertising its cigarette brands in magazines with substantial youth readership. Krugman WD, 116:3-122:7.

  2. The majority of Liggett's expenditures on its cigarette brand advertisements in magazines with substantial youth readership has been spent on advertisements in People, a magazine which had, on average, more than three million readers ages twelve to seventeen years old per issue from 1992 through 2002. Id.

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(3) Lorillard 3062. As of June 1998, it was Lorillard's policy not to advertise in publications that were

primarily subscribed to by minors or distributed to minors. Lorillard's Media Services Department relied on a computer program designed by an independent outside agency to identify the magazines in which it was not appropriate to place Lorillard advertisements. Lorillard only looked at readership information on people eighteen years old and older in making its determination. Lorillard would then use its "best judgment" based on the information provided by the publications about the readership of people eighteen years of age and older to make a recommendation as to whether or not to advertise in a particular publication. The recommendations were made by Lorillard's media department in conjunction with its outside advertising agency. The recommendations were then reviewed and considered by Lorillard's brand group. Lindsley PD, Massachusetts v. Philip Morris, 6/8/98, 65:13-70:17; Lindsley PD, California v. Philip Morris, 6/9/98, 164:17-171:6.

  1. A document dated Fall 1999 titled "Lorillard Marketing Regulation Manual (A Guide From Counsel)" stated: "Lorillard does not and will not advertise its products in publications directed primarily to persons under 21 years of age, including school, college or university media (such as athletic, theatrical or other programs), comic books or comic supplements." 83675546-5629 at 5591 (US 67506).

  2. Lorillard's magazine advertising policy as of June 2002 was not to advertise in magazines that have greater than 18% youth readership (twelve to seventeen year olds). This advertising policy was based on the percentage, not the total number, of youth readers; therefore, Lorillard can and does place advertisements in magazines which have millions of young readers ages twelve to seventeen. Two syndicated services, MRI and Simmons, provide information to Lorillard on the percentage and total number of youth readership. Lindsley PD, United States v. Philip Morris, 5/16/02, 83:6-84:19; Telford PD, United States v. Philip Morris, 6/26/02, 34:8-35:4.

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  1. It was also Lorillard's policy to place Newport and other brand advertisements in magazines even when there was no youth readership information available from MRI or Simmons. For example, Lorillard has placed its cigarette advertisements in ESPN magazine although MRI and Simmons data subsequently indicated that there was greater than 18% youth readership. Lindsley PD, United States v. Philip Morris, 5/16/02, 81:2-81:13; Telford PD, United States v. Philip Morris, 6/26/02, 35:5-35:8, 36:21-36:25.

  2. Lorillard places advertisements in magazines to reach the respective brands' targeted consumers, as defined by brand marketing plans. In making a decision to place Newport advertisements in magazines, Lorillard considers the readership age of the magazine. Lindsley PD, United States v. Philip Morris, 5/16/02, 53:24-54:19. Lorillard tailors its advertising placement for different brands based on the desired demographic profile of those brands. For example, Lorillard advertises for Newport in younger publications like Sports Illustrated, Playboy, and Penthouse. Telford PD, United States v. Philip Morris, 6/26/02, 61:9-62-2, 62:9-17, 62:22-63:1; 92278882-8951 at 8898 (US 21114).

  3. Based on MRI and CMR data for the years 1993 to 2003, Lorillard spent over $60 million advertising its cigarette brands in magazines with substantial youth readership, i.e., that the magazines have on average either over two million teen readers ages twelve to seventeen per issue or over 15% of total readership, per issue, aged twelve to seventeen years. Lorillard's expenditures for cigarette brand advertisements in these publications almost doubled from 1997 through 2000, rising from $4.2 million in 1997 to $7.8 million in 2000, even though the MSA was signed in 1998. Krugman WD, 116:3-122:7.

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(4) Brown & Williamson 3068. In December 1999, after receiving a complaint from the National Association of

Attorneys General (NAAG), B&W agreed to restrict the placement of the company's cigarette advertisements to magazines whose under-twenty-one readership did not exceed 15% of the magazine's total readership. B&W initially relied on information provided by the publishers of the magazines in which it advertised in order to determine whether the under-twenty-one readership of a magazine exceeded 15%. B&W also examined the editorial content of the magazines in which it advertised. Ivey WD, 16:7-16; Ivey TT, 11/16/04, 6118:3-10.

  1. B&W continued its "B Kool" campaign through the year 2000. Further, during this period, the "B Kool" campaign appeared in magazines, such as Rolling Stone, whose readership exceeded the 15% threshold. Smith WD, 7:3-10; 282300205-0207 (US 20574).

  2. In November 2000, B&W revised its magazine placement policy to rely on MRI and Simmons data to determine whether the youth readership of a magazine exceeded 15%. However, as early as 1996, B&W had magazine readership data from the Simmons Market Research Bureau including demographic groups of twelve to seventeen, eighteen plus, twelve to twenty and twenty-one plus. Prior to November 2000, B&W also relied in part on MRI and Simmons data in developing its media plans. Ivey TT, 11/17/04, 6313:18-6314:3; Ivey WD, 20:5-8; 210210020-0022 (US 20540*).

  3. In an August 15, 2001 press release, B&W announced another revision to its magazine placement policy. Under the new policy, the company placed its advertisements only in certain editions of magazines sent to subscribers over the age of twenty-one. Under this policy, B&W would advertise in magazines such as Rolling Stone regardless of whether the magazine had over 15% youth readership according to MRI or Simmons, if the magazine was able to ensure that the company's advertisements only ran in those editions of the magazine sent to subscribers over twenty-one. B&W received letters from the Attorneys General of Pennsylvania, Maine, and California expressing their concern about this new policy and requesting data on the "pass along" readership among youth of magazines sent directly to subscribers twenty-one years of age and older which are then are passed along to younger readers in the household. B&W did not change its policy in response to these letters and never provided the requested "pass along" readership data. Ivey WD, 21:1- 25:7; 525022464-2464 (US 20918); 282402351-0352 (US 89163); 28250050-0051 (JD 012711); 282500100-0102 (JD 012842); (no bates) (US 90060).

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  1. When B&W adopted its 15% limitation, it did not impose upon itself any limitation on advertising in magazines based on the actual number of readers age twelve to seventeen per issue. Ivey WD, 16:17-17:10.

  2. As of March 19, 2003, it was B&W policy only to advertise in magazines where 85% of the readership is over the age of twenty-one; in addition, the company did not "use any celebrities, any cartoons, any characters that would have specific appeal to youth"; models appearing in any advertising were required to be, and appear to be, twenty-five or older. Wessel PD, United States v. Philip Morris, 3/19/03, 57:20-58:18.

  3. Brown and Williamson continues to advertise its brands in general circulation magazines that it knows reach over two million readers under the age of eighteen. Newton PD, United States v. Philip Morris, 5/15/02, 138:25-146:18. B&W itself, in a July 9, 1985 document, described Rolling Stone, Record, and Spin as "young targeted music books." 670661599-1665 at

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  1. Based on MRI and CMR data for the years 1993 to 2003, B&W spent $223 million advertising its cigarette brands in magazines with substantial youth readership, i.e., that the magazines have on average either over two million teen readers ages twelve to seventeen per issue or over 15% of total readership, per issue, ages twelve to seventeen years old. B&W's largest annual expenditure for advertising its cigarette brands in these publications was over $38 million, occurring in 1999, the first year after the MSA was signed. Krugman WD, 116:3-122:7.

  2. In 2000, B&W placed advertisements for Lucky Strike in InStyle and Spin magazines. MRI data indicates that in 2000, over 22% of the readers of InStyle were between the ages of twelve and seventeen, and 24% of the readers of Spin were between the ages of twelve and seventeen. ADV0850271-0273 (US 14659); ADV0850308-0312 (US 14670); ADV0500461-0463 (US 12225); ADV0500493-0495 (US 12233); ADV0500499-0501 (US 12235); ADV0500511-0515 (US 12239); ADV0500537-0539 (US 12245); ADV0500549-0551 (US 12249); ADV0500569-0571 (US 12255); ADV0500590-0592 (US 12262); ADV0500602-0604 (US 12266); Krugman WD, 116:3-122:7.

  3. Currently, B&W continues to advertise in well known youth magazines such as Rolling Stone and Sports Illustrated.

(5) R.J. Reynolds 3078. Between the 1998 signing of the MSA and June 2000, RJR's print policy did not

change. Beasley PD, United States v. Philip Morris, 6/25/02, 42:8-15. In the years preceding 2000, RJR's print placement policy reflected its interpretation of the Cigarette Advertising Code that prohibited cigarette advertising in any magazine that was primarily directed to underage people. RJR limited its advertising to magazines whose readership was at least 50% adult, adult being defined as twenty-one before May 1992, or eighteen after May 1992. Id. at 55:20-58:3.

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  1. RJR did not look at data that measured youth readership under eighteen years (or twelve plus "teen data") in magazines until after January 2000. Ittermann PD, United States v. Philip Morris, 5/17/01, 52:19-25, 53:1-14, 58:20-22.

  2. In June 2000, RJR revised its advertising policy from placing its advertisements in magazines that had at least 50% adult readership to advertising in magazines having at least two-thirds readership eighteen years or older, if the magazine measured readership data among audiences twelve years old and older. The revised policy permitted the placement of advertisements in publications where no readership data was available. Id. at 34:2-35:19, 43:9-44:15, 58:10-58:18, 81:1-82:18; 522040903-0903 (US 20907); 522041398-1402 at 1399 (US 52796*).

  3. A June 19, 2000 memorandum from Patricia Ittermann, RJR's Media Director, to various RJR employees demonstrates that RJR sought to take immediate advantage of Philip Morris's June 2000 magazine policy adjustment, as described above. RJR researched which magazines Philip Morris was no longer advertising in, with the intent of placing RJR advertisements where Philip Morris had previously advertised. The memorandum discussed obtaining magazine cover spaces that Philip Morris had previously occupied. 522765629-5634 (US 22141); 522642421- 2433 (US 88035); Ittermann PD, United States v. Philip Morris, 5/17/01, 95:21-102:23; 522041457- 1460 (US 20908).

  4. As of March 2001, RJR's stated new youth magazine policy was that 75% of the readership of a given magazine must be eighteen years old or older, for publications in which audience measurement data existed for total readership ages twelve years and older. As of June

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2002, this was still the current print placement policy. Beasley PD, United States v. Philip Morris, 6/25/02, 42:4-6, 44:9-15. RJR used both Simmons and MRI data to evaluate magazine placement. Additionally, it considered other factors, specifically editorial content, the other categories of products advertised, and distribution. Blixt PD, United States v. Philip Morris, 10/31/02, 131:24- 132:10, 137:7-15.

  1. Andrew Schindler, CEO of RJR, made the decision to shift from a two-thirds eighteen plus standard to a "75% 18 plus standard" during the same time frame in which RJR was being sued by the State of California for MSA violations. The issue of "pass along" readership, whereby one reader passes the magazine to another, exposing additional adolescents to RJR's advertisements, was not considered. Specifically, Schindler stated -- with a straight face -- that, when RJR advertised in the 2003 swimsuit issue of Sports Illustrated, it did not occur to him that "the Swimsuit issue, might garner a very high absolute number of adolescent boys looking at it, even if the 25% threshold was not breached" or that "even if actual sales figures for this issues were not astronomically higher for adolescents, this is the one issue that has a huge potential for one tenth grade boy who did buy it to take it to school and share around with all of his pals." Schindler WD, 214:13-215:8. This statement is not credible.

  2. RJR's website states that, "Reynolds Tobacco does not and will not advertise in publications for youth. And, that's why we adhere to a policy that restricts placement of our ads to publications that are predominately adult-oriented." ARU6432629-2633 (US 78283).

  3. Despite the policies discussed above, RJR magazine advertisements reached millions of young people ages twelve to seventeen. Based on MRI and CMR data for the years 1993 to 2003, RJR advertised its cigarette brands in magazines with substantial youth readership. Krugman WD,

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116:3-122:7. In 1999, the first year after the MSA was signed, RJR increased its media spending on advertising in such magazines. 524941712-1722 (US 87804).

  1. As an example of the extraordinary number of youth reached by RJR advertising, according to CMR and MRI data, RJR advertised in Rolling Stone in 1993, during a year in which more than 20% of the readers of Rolling Stone were ages twelve to seventeen. From 1992 to 2002, RJR consistently advertised in Rolling Stone, during which time it had, on average, more than two million readers ages twelve to seventeen years old per issue. Krugman WD, 116:3-122:7.

  2. A document, titled "1999 Camel Media Recommendation Print Categories," recommended that Camel 'Core' magazines should include Bikini, Jane, and Gear, because of their younger reader profiles. 522694030-4038 at 4037 (US 20914); 524726445-6455 (US 88161); 524722990-3002 (US 87858).

  3. As recently as November 1999, internal RJR documents show that it advertised Camel in magazines with substantial twelve to seventeen year old readership percentages. These magazines include: Sports Illustrated (22%), Rolling Stone (28%), Spin (34%), Cosmopolitan (13%), Glamour (20%), Mademoiselle (23%), Car and Driver (17%), Hot Rod (30%), Motor Trend (21%), Popular Mechanics (17%), Cycle World (37%), Four Wheel and Off Road (32%), Guns and Ammo (23%), Motorcyclist (37%), Road and Track (22%), and Sport (39%). 520417937-7939 (US 20883); 524723156-3167 (US 87866); 524723279-3280 (US 87867). As of May 17, 2001, RJR was still advertising in approximately 100 publications, about 25 of which have substantial youth readership, as shown by the MRI and Simmons' studies. Ittermann PD, United States v. Philip Morris, 5/17/01, 46:1-48:24.

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c. Defendants Market to Youth Through Direct Mail (1) Philip Morris USA 3089. Defendants have made extensive use of direct mail marketing to many millions of

individuals to send them coupons, t-shirts, sporting goods, mugs, and magazines, all promoting their brand of cigarettes. These mailings were sent to millions of young people for whom Defendants had nothing more than an unverified representation that s/he was over the age of twenty-one.

  1. Philip Morris keeps a database of names, collected in various way, to whom it sends mailings and promotional materials.

  2. Philip Morris has stated that its policy is not to send any mailings to individuals on its Direct Mail Marketing Database who are under the age of twenty-one. According to Jeanne Bonhomme, Philip Morris Director of Database Management and Direct Marketing Operations from 1998 to 2000, who "had general responsibility for all of the direct mail that Philip Morris USA sent to consumers" from 1998 to 2000 and also had "responsibility for managing the Philip Morris direct mail marketing database," Philip Morris has never knowingly mailed brand mailings to anyone under twenty-one years of age. Bonhomme WD, 4:11-19, 67:9-68:10, 84:6-7, 87:9-14.

  3. Marlboro Unlimited is a glossy, color magazine created by Philip Morris and sent to individuals on Philip Morris's Direct Mail Marketing Database. It contains full color, glossy Marlboro advertisements which are either identical to, or are very similar to, those that Philip Morris has placed in magazines such as Rolling Stone and Sports Illustrated. Marlboro Unlimited was routinely sent through the United States mail to approximately 750,000 to 800,000 people on Philip Morris's Database four times each year. Dudreck PD, United States v. Philip Morris, 8/26/03,

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  1. Starting with its premiere issue in 1996, and continuing to the present day, Philip Morris has sent Marlboro Unlimited to tens of millions of individuals on its Direct Mail Marketing Database. PM3000196002-6092 at 6013 (US 23056).

  2. Millions of copies of the magazine have been sent to individuals for whom Philip Morris has no age information beyond the individual's own unverified representation that he or she is twenty-one or over. In 1999 alone, Philip Morris sent 8,264,645 copies of Marlboro Unlimited to individuals who had only a signature on record to "verify" that they were twenty-one or above. Id. Use of such a procedure raises obvious reliability concerns, because people under twenty-one can provide a false signature. Philip Morris has sent Marlboro Unlimited to many individuals who Philip Morris knew were under the age of twenty-one at the time they received it. For example, in 1999 alone, Philip Morris sent Marlboro Unlimited to 37,826 individuals who were under the age of twenty-one, according to Philip Morris's own records. Id. at 6016.

  3. Philip Morris has also sent marketing mailings other than Marlboro Unlimited, such as products and coupons, to individuals who had only a "signature" on record -- and no identification such as a drivers license -- to "verify" that they were twenty-one or above. Between 1989 and 2003, Philip Morris sent at least 813,905,702 marketing mailings to such individuals. Id. at 6011. In 1999 alone, Philip Morris sent at 69,170,720 cigarette coupons to such individuals. Id. at 6012. In 1993 alone, Philip Morris sent 2,815,036 mailings containing cigarette products to individuals who only had a "signature" on record to "verify" that they were twenty-one or above. Id. at 6013.

  4. Many individuals whose records are contained on Philip Morris's Direct Mail Marketing Database and who had a "signature" on record to "verify" that they were age twenty-one or above were in fact under the age of eighteen at the time they received marketing mailings from

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Philip Morris. In 1993, Philip Morris sent 71,485 marketing mailings to such individuals, including 48,822 coupons and 28,335 gift or continuity items, such as t-shirts, mugs, and sporting goods. In 1994, Philip Morris sent 94,151 marketing mailings to such individuals, including 44,919 coupons and 31,572 gift or continuity items. In 1995, Philip Morris sent 76,378 marketing mailings to such individuals, including 30,190 coupons and 34,909 gift or continuity items. Id. at 6016-6018.

  1. In 1999, Philip Morris USA decided to convert its database to a third-party age verification system, by submission of a Government-issued ID ("GIID") or by electronic age verification ("EAV"). Beran WD, 100:4-9; Beran TT, 4/19/06, 19454:7-19456:11. After requiring third-party age verification in 1999, Philip Morris sought third-party age verification for names previously qualified without such verification. The company sent a number of requalification mailings offering incentives to submit a photocopy of their GIID; held special event programs at which smokers were solicited to submit their GIID; and conducted retail recertification programs at retail outlets across the country, where smokers were offered a coupon in exchange for a photocopy of their GIID. In total, the company has spent over $90 million on these efforts during the past six years. Beran WD, 101:13-102:6. Approximately 85% of the A/Q (qualified to receive mailings) segment of the Database have supplied third-party age verification through either GIID or EAV. Beran WD, 101:13-104:3.

  2. Despite its policy which prohibits it from sending mailings to individuals under age twenty-one, Philip Morris still sends marketing mailings to individuals for whom it has no identification (such as a driver's license) and has no "signature" verifying their age on record. From 1989 to 2003, Philip Morris sent to mailings to 18,847,776 such individuals, including 60,973,164 marketing mailings. 3000196023-6025 at 6023 (US 61452).

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  1. According to Philip Morris's "2003-2007 Five Year Plan" dated April 3, 2003, Philip Morris planned to "improve the vibrancy and reach" of its Direct Mail Marketing Database in 2003 with a newly launched website titled www.smokersignup.com that currently allows people to add their names to the database over the internet. According to the Plan,

[f]rom this expanded database, we plan to increase our use of direct mail as well as increase efficiency through the use of database segmentation strategies that will allow PM USA to better tailor [marketing] communications and promotional offers based on adult smoker preferences.

PM3000540103-540118 at 0107, 0116 (US 88649) (Confidential). As further stated in its "2004 Original Budget & Five Year Plan Presentation," in order to address the "Critical Issue" of the "Loss of mass marketing" that it faces ahead in 2004-2008, Philip Morris plans a short-term strategy of marketing through packaging onserts, expanded direct mail, and a rewards card that is preloaded with a fixed dollar amount for cigarette purchases, and a long-term strategy of controlled internet access, or "internet sites marketing cigarettes" to include selling cigarettes on-line, or by phone, fax or mail orders. PM3000613782-3913 at 3790, 3801, 3804, 3887 (US 88647).

(2) Lorillard 3100. Lorillard currently maintains two databases, both of which contain names of smokers

whose ages have not been verified through a copy of government-issued identification or public records database:

The [first] database . . . Epiphany . . . contains information on smokers who have certified they are 21 years of age or older and want to receive information on our products. Some of the smokers on Epiphany are verified, meaning it has been verified either through a copy of a Government identification or a public records database that they are at least 21 years of age. Smokers whose age is verified are qualified to receive continuity goods. A second database,

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Suppression, contains a list of individuals who for a number of reasons are not eligible to participate in our direct mail program. The purpose of the Suppression list is to ensure that these people cannot get on the Epiphany database.

Orlowsky WD, 60:22-63:22; 82093356-3358 at 3357-3358 (US 22198).

  1. Lorillard, through its CEO Martin Orlowsky, admitted that "at times" it has sent mailings to individuals for whom it has no government-issued identification, and that it does not have third-party verification for every person to whom it mails. Orlowsky TT, 10/13/04, 2277:25- 2278:25.

  2. In 2000, Lorillard sent 4,181,593 mailings that included coupons for cigarettes to 2.6 million individuals for whom Lorillard has no third-party age verification and no government-issued identification on file. 94945731-94945736 at 5734 (US 90002).

  3. In 2003, Lorillard sent promotional mail to 2,261,881 different individuals for whom it had no third-party age verification and no government-issued identification on file. Id.

  4. As of August 16, 2004, Lorillard had sent promotional mailings to more than 1.7 million individuals for whom it had no third-party age verification and no government-issued identification on file. These 1.7 million persons were sent 4.9 million total mailings. Id.

  5. As of August 10, 2004, Lorillard's direct mail marketing database, Epiphany, contained the names of 11,077,551 individuals. Lorillard limits its direct mail marketing to individuals who, at a minimum, self-certify that they are smokers of legal age. In 2002, Lorillard checked all 4.8 million qualified individuals on its database against persons under twenty-one on two public databases, Donnelly and Knowledge Base. Lindsley WD, 52:8-9. Nevertheless, as of August 16, 2004, Lorillard had no government-issued identification or third-party age verification for approximately 2,341,622 individuals contained in the Epiphany direct mail database. Orlowsky TT, 10/13/04, 2279:14-22; 94945731-94945736 at 5732 (US 90002).

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(3) Brown & Williamson 3106. As of August 31, 2004, B&W's direct mail marketing database contained the names

of 25,765,233 individuals. The company publicly states that it limits its direct mail marketing to individuals who, at a minimum, self-certify that they are smokers of legal age. As of August 31, 2004, B&W had no government-issued identification age verification or third-party age verification for approximately half of the individuals contained in its direct mail database. Ivey WD, 44:1-45:17; Ivey TT, 11/17/04, 6224:8-6225:25; 469100116-0136 (US 89166) (Confidential); USX5560116- 0119 (US 92039).

  1. In 2000, B&W sent mailings to 12,306,748 individuals whose age had only been self- certified. In 2003, B&W sent mailings to 3,687,547 individuals whose age had not been verified either through government-issued identification or third-party verification. As of August 31, 2004, B&W in 2004 had sent mailings to 2,061,714 individuals whose age had not been verified either through government-issued identification or third-party verification. In 2004, B&W also sent mailings to individuals under twenty-one whose age had not been verified through government-issued identification. Ivey WD, 45:9-46:8; Ivey TT, 11/17/04, 6233:20-6236:22; 469100116-0136 (US 89166) (Confidential); USX5560116-0119 (US 92039).

  2. Although B&W would send advertisements and coupons to individuals whose age had not been independently verified, third-party age verification was required in order for individuals to receive premium items or cigarettes through the mail. Ivey WD, 44:1-45:17; Ivey TT, 11/17/04, 6224:8-6225:25. Contrary to Ivey's testimony in 2004, B&W did send premium items to individuals whose age had not been verified either through government-issued identification or third-party verification. In 2004, B&W also sent cigarettes through the mail to individuals whose age had not been verified through government-issued identification or third-party verification. Ivey TT, 11/17/04, 6241:1-6243:11; 469100116-0136 (US 89166) (Confidential).

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(4) R.J. Reynolds 3109. A January 25, 2002 RJR internal memorandum from Chris Gunzenhauser of Database

Marketing to Peggy Carter of the Personal Relations department describes RJR's process of age verification for names on its database and states:

We historically match about 41% of names we send for age verification. Our matching pattern looks for an exact match on names and address. Approximately 90% of the underage names report to be between 21 and 24. While we are requiring a signature and DOB, we are not currently requiring age verification before mailing to consumers.

RJR0000000008001178700190551-0551 (US 22140*). In order to be on its direct mail database, RJR requires self certification that a person is a smoker of a legal age, which must be verified by a Government-issued identification or through a third-party verification.

d. Defendants Market to Youth Through an Array of Retail Promotions 3110. The retail store has become one of Defendants' central vehicles for communication

of brand imagery and promotional offers. At retail stores, Defendants use retail promotion techniques including cash/rebates, free products, display cases to dealers, and special value added offers such as "two-for-one" to consumers, to encourage retailers to create tobacco friendly environments containing enticing displays, competitive prices, and visible point-of-sale advertising. Krugman WD, 129:17-130:11. The result of offering an array of marketing techniques is that convenience stores and gas stations frequented by teenagers are more likely to be tobacco friendly environments because they contain such a profusion of tobacco messages. A recent study funded by the Robert Wood Johnson Foundation examined the use of advertising and promotion in such stores and concluded that retail environments, such as convenience stores and gas retailers frequented by teenagers heavily promote tobacco use. Id.

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  1. In-store placement displays and signs are key methods by which Defendants communicate brand information and communicate a brand's central message or image. Brand information at the store is coordinated with other advertising to display consistent images. Because of these synergies, advertising and promotion messages in one medium reverberate in another medium. Storefront and in-store advertising can remind the consumer of an overall message or theme encountered in other media and therefore stimulate purchase. For example, a consumer might encounter Marlboro colors and imagery on a placard outside the convenience store which lists per pack prices and then, inside the store, encounter Marlboro stand-up signs, posters, and other imagery behind the counter where the cigarettes are sold. Id. at 41:7-19.

  2. Defendants compete with one another to obtain what they consider prime placement of their products in retail stores in order to achieve high consumer visibility. To ensure such placement, tobacco companies offer a variety of incentive programs (such as volume discounts and buydowns) to retailers. Id. at 129:17-140:2.

  3. A September 1994 Philip Morris USA document, titled "POS [Point of Sale] Visibility Strategy," emphasized the importance of visibility at retail to drive Marlboro performance. The strategy's objective was "[t]o obtain & maintain leadership presence commensurate with Marlboro's market position. In other words, Marlboro should look like the 'BIGGEST BRAND' at retail on an ongoing basis." Further, "[a]s we experienced with MAT, MLP, & PRP [3 Marlboro promotions], Marlboro's increased visibility drove the brand's performance and reinforced Marlboro as the most popular brand in the mind of the consumer." 2060124885-4908 at 4888, 4896 (US 23997).

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  1. In the 1990s, Philip Morris commissioned a study, titled "Metro Area Consumer Retail Study," to learn where it should place its cigarette products in retail stores to ensure that its products drew the maximum amount of consumer attention. As part of the study, consumers wore eye-tracking glasses while shopping so that researchers could track their eye movements to learn what displays and products drew the most consumer attention in retail outlets. The study found that the best, most visible, point of sale spots were "on the counter, behind the counter or cashier, and on and around the door." Currently Philip Morris's cigarette displays are consolidated behind the counter at retail outlets, and its point of sale materials are similarly placed. The study also reported that stores that operated under Philip Morris's retail program, the Retail Masters program (later Retail Leaders program), provided higher visibility for Marlboro than other cigarette brands. Lund PD, United States v. Philip Morris, 6/27/02, 200:25-203:15; 2073194491-4524 at 4492, 4494 (US 42869).

  2. Using research from the 1994 "NACS [National Association of Convenience Stores] State of the Industry Report" showing that tobacco accounted for 20.7% of convenience store profits, Philip Morris presented "What Does Tobacco Do For Your Store" to retailers, urging them to "[p]rominently display the leading brands . . . [and] [u]se cigarette promotions and advertising to build store traffic." 2077232243-2310 at 2250 (US 70700*).

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  1. Philip Morris's Retail Leader program is a "merchandising program that helps ensure . . . visibility at retail." Over 85% of cigarettes are sold in stores which participate in the Retail Leaders program. For retailers who participate in this program, Marlboro will have the number one visibility spot at retail. If a participating store plans to have any cigarettes on the counter, then Marlboro cigarettes must be on the counter and in the number one position. If a retailer chooses to have outdoor signage, then Marlboro signage must be in the number one position. This program has been a major contributor to Marlboro being the number one brand. Willard TT, 4.14/05, 19083:1- 19086:19.

  2. Philip Morris research found that its Retail Visibility Programs, in conjunction with its Retail Masters Program, made Marlboro the leading brand in visibility at convenience stores -- not only ahead of all other cigarette brands, but ahead of any other products carried at these stores. A February 1999 "Marlboro Retail Prominence In-Store Test" stated:

Marlboro is clearly the leading brand in terms of perceived retail visibility, not only compared to other brands of cigarettes, but across categories as well. . . . The Retail Masters program is an effective vehicle for enhancing Marlboro's perceived retail prominence. Even brands as big as Coke and Budweiser lag significantly behind Marlboro's retail visibility, as perceived by adult smokers.

The report further noted that Philip Morris's product displays were most effective at driving visibility:

On counter product displays are more effective in driving visibility than signage . . . Marlboro is overwhelmingly perceived to be the most visible brand of cigarette in the store. . . . [Product] displays, more than signage, are cited for making Marlboro stand out.

2073970827-0848 at 0831, 0832, 0838 (US 43390).

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  1. Philip Morris's Retail Leaders program will suspend retail stores only after three criminal convictions for underage sales. Philip Morris obtains information about convictions in retail stores from only about nineteen states. It does not require the retailer to provide this information. There is no evidence that Philip Morris has ever suspended a retailer for underage sales. Even if suspended, a retailer would remain free to sell Philip Morris cigarettes apart from participating in the program. Permanent termination from the Retail Leaders program is never authorized under any circumstances; a suspended retailer may re-enter a Retail Leaders contract at the start of the next twelve-month contract period. Szymanczyk TT, 4/12/05, 18543:6-18544:6, 18545:19-18546:4; Szymanczyk TT, 4/11/05, 18322:25-18333:4, 18338:22-18339:2, 18332:14-20; Willard TT, 4/14/05, 19130:23-19131:12.

  2. Philip Morris's Retail Leaders 2004 Internal Presentation stated that "Marlboro is bigger than the next nine premium brands combined," is number one in sales and profits, and had an opportunity to improve Marlboro's "look" at retail as well as the presentation of Philip Morris brands at retail and point of sale. PM3002547761-7804 (JD 051493) (Confidential); Beran TT, 4/18/05, 19412:3-19416:7 (closed court).

  3. According to Lynn Beasley, President and Chief Operating Officer at RJR, Philip Morris's Retail Leaders Program prevents RJR from getting the highest visibility for its marketing at retail stores. Beasley TT, 3/30/05, 17311:5-25.

  4. Self-service of cigarettes in retail locations (as opposed to behind-the-counter service) allows ease of access to cigarettes, particularly for youth. Philip Morris opposed bans or limitations on self-service display advertising at retail stores which would limit the availability and visibility of their cigarette brands at retail. A Philip Morris document produced from the files of its then-Director of Policy & Programs for Tobacco, Philip Morris Management Corporation, written in or after 1995, provided talking points in "Opposition to Ban on Slotting Allowances":

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Self-service display advertising is an effective means to enhance awareness and encourage loyalty at the point-of-purchase for individual brands among adult smokers. Cigarette racks and promotional displays are positioned to help generate greater visibility and accessibility for adult smokers' favorite brands.

2063018737-8739 at 8737 (US 85164).

  1. Under Lorillard's Excel merchandising program, retailers are provided with monetary incentives in exchange for agreements to provide Lorillard cigarettes with visibility of promotional signage equal to or exceeding that of competitors' brands. Milstein TT, 1/7/05, 9347:20-9348:11. The number of stores under the Excel program has risen in the last several years. Milstein TT, 1/10/05, 9421:4-19.

  2. Lorillard has approximately 79,000 retail stores which participate in Excel. Lorillard does not require retailers to report convictions for underage sales to the company. At present, only four states report convictions to Lorillard. Milstein TT, 1/7/05, 9356:2-16. In the four states reporting, more than 1,000 retailers have been convicted of underage sales. In November 2, 2001, Ron Milstein, Lorillard's General Counsel and Vice President, emailed Steve Watson, the executive level manager designated to reduce youth smoking and access to cigarettes under the MSA, asking him whether he was going to share Lorillard's information about these retailers' convictions for illegal sales with the National Association of Attorneys General or the individual state attorneys general. Watson responded: "Unless you think there is legal reasons [sic] to do so, I would be inclined not to share this info." Watson "was not inclined to share the information at this time with NAAG." Id. at 9356:23-9361:4; 99409377-9377 (US 89183).

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  1. Even if a retailer is convicted of selling to a minor, the Excel program only requires that she obtain training in the We Card Program. (For more detail about the We Card Program, see Section 6, infra.) Upon the second conviction, the retailer is suspended for six months, and upon the third conviction, the retailer can be suspended indefinitely from participating in the Excel program. Such a retailer would, however, continue to be able to sell Lorillard cigarettes, apart from participation in the program. Milstein TT, 1/7/05, 9353:16-9354:24, 9363:2-6.

  2. Lorillard has opposed bans or limitations on self-service display advertising in retail stores in the past and has not changed its position on this issue. Watson PD, United States v. Philip Morris, 4/2/02, 136:11-25. Lorillard continues to oppose legal restrictions on self-service merchandising despite its stated support in its Corporate Principles of "further legislative efforts to curb youth access to tobacco." Milstein TT, 1/7/05, 9338:16-9342:3, 9384:15-25.

  3. Defendants have engaged in a large post-MSA spending increase on various forms of promotion at the retail level. In 2000, tobacco companies spent $9.57 billion dollars to market their products, the overwhelming majority of which was spent on marketing aimed at retail locations such as convenience stores. In those retail locations in 2000, tobacco companies spent $4.26 billion on point of sale advertising (e.g., in-store signs) and promotional allowances (payments to retailers for prime shelf space and in-store displays, as well as volume discounts and buydowns or rebates) and $3.52 billion on retail value added items such as purchase-related gifts and multi-pack discounts. Combining the figures for point of sale advertising and promotional allowances, tobacco companies spent approximately 81.2% of their marketing expenditures at retail locations. Chaloupka WD,

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  1. Philip Morris's spending on Marlboro promotion at retail increased more than a hundred-fold between 1987 and 1997, and then doubled again from 1997 to 2000. Philip Morris's retail promotions budget for Marlboro increased from $16.7 million in 1987 to $469.4 million in 1997. 2085296400-6461 at 6412 (US 45702).

  2. According to its "2003-2007 Five Year Plan," dated April 3, 2003, Philip Morris planned to "test concepts for a new wallet-sized Marlboro rewards card among young adult smokers in the fall of 2003 . . . to reinforce our equity messages and use an innovative approach to deliver incremental value that will continue to set our brands apart from those of our competitors." The proposed card would be preloaded with a fixed dollar amount that allows Marlboro smokers to make purchases wherever a major credit card is honored. Id. at PM3000540103-0118 at 0107, 0116 (US 88649) (Confidential).

  3. Post-MSA, RJR has also increased its promotional spending and discounting. Leary PD, United States v. Philip Morris, 5/2/02, 16:4-17:19, 25:7-27:15, 63:3-64:17; 526293849-4014 (US 87845).

e. Defendants' Promotional Items, Events and Sponsorships Attract Youth (1) Events 3130. Defendants continue to hold and advertise events such as "Bar Nights" that reach

youth.

  1. The cigarette company Defendants have increased their event budgets since signing the MSA. 2085296400-6461 at 6412 (US 45702).

  2. Defendants often promote their events -- and therefore their cigarette brands -- in free newspapers available to anyone. For example, in 2002, Philip Morris continued to place advertisements for its events program Marlboro Bar Nights in "alternative" newspapers, such as the Village Voice, that are free and widely distributed. Camisa PD, United States v. Philip Morris, 7/11/03, 354:18-24, 356:7-18.

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  1. Beginning in 1999, B&W sponsored the Kool Mixx DJ Competition. The objective of the Competition was to

contemporize the Kool image by creating grassroots programs that fuse or mix different elements of hip-hop that will showcase artists' skills and stretch the brand muscles . . . [and] [b]uild awareness, trial and image of Kool among Urban ASU [Adult Smoker Under] 26 year old smokers, both male and female for all cultures.

Competition events were scheduled in major United States cities such as New York, Chicago, Detroit, and Los Angeles. "Communication Vehicles" used to publicize the Competition included an 800 number, radio spots, pack sleeves, and retail tie-ins. B&W continued to sponsor the Kool Mixx DJ Competition in 2002 and 2003. 432210032-0067 at 0036, 0038, 0047 (US 22226); ARU6432538-2543 (US78267).

  1. In 2000, B&W sponsored the "Band to Band" 2000 Music Competition, "a rock- oriented, nationwide band-based talent search" which offered over $100,000 in cash and prizes and promoted one of B&W's flagship brands, Lucky Strike. B&W support for the program, which began in 1996, included "promotions, posters and media buys for the bands." In 2000, "Band to Band" program events were scheduled to take place in major cities such as Washington D.C., Chicago, Miami, Los Angeles, and Houston. 239040063-0065 (US 22201).

  2. The age of individuals attending these events was not always verified. An internal Lorillard document describes how David Desandre, a Lorillard marketing employee, and Beth Crehan, an employee of a marketing promotion firm, were able to attend a Lucky Strike "Band to

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Band" event held at Park West Concert Hall in Chicago on November 11, 2000 without being asked for any identification. Inside the Concert Hall were "pole banners with the Lucky Strike Band to Band tag-line" as well as additional banners and signs. Desandre described how, while he was filling out a form to receive a free CD, a Lucky Strike staff member "threw me a pack of Lucky Strike cigarettes . . . she did not ask me if I was 21 or a smoker. She also did not ask for my id. Beth Crehan was also not asked if she was 21 or a smoker. Beth was also not asked for id." 98600272- 0273 (US 22212).

(2) Sponsorships 3136. Defendants sponsor televised racing events which have great appeal with youth. As

a result, millions of youth watching these events are exposed to Defendants' cigarette marketing imagery.

  1. The cigarette company Defendants have increased their sponsorship budgets since signing the MSA. In 1999, Defendants spent $267.4 million on sponsorships, an increase of 7.6 % from 1998. 1900082-0107 at 5 (US 60663).

  2. Sponsorships allow the cigarette company Defendants to garner national television exposure, despite the broadcast ban on televised cigarette advertising. Races are broadcast on television and radio, and are covered in newspapers and magazines; each of these types of media coverage mention the cigarette brand that sponsors the race itself or the individual race car and driver. For example, the Winston Cup NASCAR race series with over thirty races annually was broadcast on radio and television; race highlights were also shown on television news programs and in newspapers and were featured in magazine sports columns. 507424927-4929 (US 24261). Often, broadcast coverage of Defendant-sponsored races is required under the broadcast contract. For example, in connection with the May 21, 1989 Winston NASCAR race in Charlotte, North Carolina, the broadcast contract called for "a 'mid-race recap' which will air immediately after the second race segment. . . . a [60 second] length [recap] with a superslide of the Winston race logo at the top of the screen with the Nabisco logo displayed below and to the left." 507424864-4864 (US 22895).

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  1. Races are preceded by preliminary events (including qualifying races and announcement of pole positions) and followed by highlight footage or the announcement of awards, such as the Winston "No Bull" race awards. In connection with the 1989 Winston NASCAR race in Charlotte, North Carolina, RJR, through its parent RJR Nabisco and Charlotte Motor Speedway, provided pre-race events for broadcast to target markets. For example, RJR, Nabisco, and Charlotte Motor Speedway prepared six to eight driver's columns, video and audio news releases, video feed of open practice sessions, radio promotions and giveaways where "the grand prize will be a first rate weekend at The Winston [Cup]," stories and photographs of practice sessions and color slides of the drivers with the Winston logo, pre-race tours by drivers, as well as post-race coverage of the Winston Million. 507424862-4863 (US 51200); 507424872-4874 (US 51201).

  2. Cigarette brand names are reinforced not only on the race cars themselves, but also on drivers' uniforms, team uniforms, hats, and the large transporters used to move cars from event to event. The events themselves offer marketing opportunities for trackside billboards, sampling, hospitality tents, and promotional giveaways, like hats, sunglasses, and programs. 2072516263-6267 (US 41558); 520809149-9152 (US 52643*).

  3. Defendants falsely deny that the television exposure their cigarette brands garner does not motivate their continued sponsorship of racing events. For example, RJR asserted in its August 1994 statement before the United States House of Representatives Committee on Energy and

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Commerce, Subcommittee on Health and Environment that "radio and television exposure is not a motivating consideration for Reynolds in deciding whether to sponsor an event or a vehicle participating in an event." 509321275-1290 (US 21993). However, Susan Ivey, President and CEO of Reynolds American, acknowledged that one of the benefits of brand sponsorship of televised sporting events is exposure of the brand name on television. Ivey WD, 48:6- 49:4.

  1. The television exposure gained by Defendants' sponsorship of racing events is obviously extremely valuable -- especially in light of the ban on broadcast advertising. For example, in 1999, for the three main tobacco-sponsored auto racing series -- NASCAR Winston Cup, CART FedEx Championship (where Marlboro and Kool sponsor racing teams and Philip Morris offers the Marlboro Pole Award), and NHRA Winston Drag Racing -- the tobacco industry received over $120 million of television exposure in the United States alone. Krugman WD, 116:3-122:7.

  2. Joyce Julius and Associates is an independent company which provides measurement and estimates monetary values of cigarette brand exposures in independent sports and special event programs. Id. According to Joyce Julius data, Defendants' cigarette brands continue to receive considerable television coverage. For instance, in 2002 alone, across all airings of the measured televised racing events, 533,301,591 television viewers tuned in to shows where Defendants' cigarette brands were mentioned or exposed (this is a count of viewing instances and not of unique viewers), whereas only eleven million people actually attended these same races. Id.

  3. Joyce Julius valued the total exposure received by Philip Morris of its cigarette brands at televised racing events during 2002 to be $197 million. Id. The Marlboro cigarette brand was exposed or mentioned to approximately 54 million television viewers and 2.4 million racing event attendees in 2002. Id.

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  1. Joyce Julius valued the total exposure received by B&W of its cigarette brands at televised racing events during 2002 to be $44 million. Id. The Kool cigarette brand was exposed or mentioned to approximately 136 million television viewers and over five million racing event attendees in 2002. Id.

  2. Joyce Julius data valued the total exposure received by RJR of its cigarette brands at televised racing events during 2002 to be $1.2 billion. Id. The Winston cigarette brand was mentioned or exposed at every one of the televised racing events in 2002, reaching over 533 million television viewers and eleven million race attendees. Id.

  3. Minutes from a November 5, 1992 BATCo Management Board Meeting revealed that the company was aware of the monetary value of cigarette brand exposure through the sponsorship of televised sporting events. Specifically, BATCo estimated the value of the television airtime that its brand State Express 555 would receive through its sponsorship of the Subaru International Rally Works Team in the 1993 World and Asian Specific Rallies Championship. The cost of sponsorship would be £5.9 million but it would provide £15.3 million "in television air time benefit and other unquantified media benefits." 320010638-0640 at 0639 (US 28201); 321440293-0311 at 0294 (US 85217).

  4. Races continue to be very popular televised programs. Millions of young people under the age of eighteen watch Defendants' racing events. In April 2000, NASCAR television ratings were double those of an NBA playoff game in a competing time slot. TLT0741089-1089 (US 88741).

  5. Defendants use their race sponsorships, as well as the television broadcast exposure, to promote their cigarette brands at retail. In 1996, RJR displayed at retail locations such as grocery and convenience stores: the Winston Motorsports simulator; the Winston or Camel show car; "well known Winston Cup or Smokin' Joe driver, surrounded by a small army of fans . . . complete with autograph session"; extensive signage; and an inflatable Winston or Camel cigarette pack that was "an awe inspiring 15 feet tall." 514238599-8634 at 8604 (US 51832).

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  1. Similarly, Philip Morris's Marlboro Racing Program included various magazine, newspaper, billboard, and retail advertising components. A Philip Morris planning document for its 1995 Marlboro Racing Program stated:

Philip Morris will implement a comprehensive advertising program to support Marlboro racing and will include the following: Outdoor advertising . . . ROP [free newspapers] . . . USA Today . . . [and] Insertions in racing enthusiast books and national magazines.

Philip Morris planned to "[d]ominate retail environment thirty days prior to the race with three tier wave promotion . . . [and] Display racing POS for 30 days prior to the race." The document also noted that the Marlboro Pole Award "provides Philip Morris with . . . Year-long visibility at all venues." 2060138575-8585 at 8577, 8580, 8581 (US 24004).

  1. Further exposure to the Marlboro trademark occurs through media coverage in the United States of Philip Morris International sponsored races. Szymanczyk TT, 4/11/05, 18372:5- 18413:25. Philip Morris also sponsors an auto racing team, called Marlboro Team Penske, in the Indy Racing League ("IRL") series. The IRL is a racing organization that sponsors a series of races in the United States, the best-known of which is the Indianapolis 500. Szymanczyk WD, 115:14-18; Szymanczyk TT, 18381:2-5.

  2. Philip Morris has long understood how important its use of racing imagery is to attracting young smokers. In a December 1992 marketing review titled "Motorsports Sponsorship,"

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Philip Morris evaluated its racing sponsorships and adjusted its "marketing strategy for motorsports" going forward. To the question of whether Philip Morris should remain in motorsports sponsorships, the answer was: "Yes: It enables us to reach millions of our target market with TV media coverage, and is particularly important in restricted markets." The identified objectives were: (1) to "Regain momentum in the hearts and minds of our target market -- young adult smokers under 25"; and (2) to "look at current and new program opportunities to extend our reach with starters and young adult smokers." One specific Formula 1, a European racing league, marketing strategy was to create a Formula 1 "team of young talent which is not necessarily a winning team, more rebellious, fun, daredevil, more easily identifiable with the young adult target market." The team would feature "[a]nti-establishment gear (jeans/boots)" and a "[c]razy car design." 2501058650-8680 at 8657- 8658, 8661 (US 21702).

(3) Promotional Items 3153. Defendants' marketing reaches youth by providing promotional items -- gifts such

as t-shirts, mugs, or lighters -- at retail and via direct mail.

  1. A 1992 Gallup survey revealed that almost half of adolescent smokers and one quarter of nonsmoking adolescents had received promotional items from tobacco companies. Krugman WD, 107:18-20.

  2. Defendants currently continue to provide individuals with promotional items that appeal to youth. For example, on May 7, 2003, B&W issued a press release titled "Kool Connects Consumers with Free Motorola Pager Offer." The press release described an opportunity for consumers to purchase specially marked packs of Kool and receive coupons redeemable for a Motorola pager. The press release quoted Ledo Cremers, Divisional Vice President for Kool brand marketing, as stating: "Kool celebrates urban living . . . [t]he Motorola pager promotion fits into the liftstyle of Kool consumers who want to be connected." The press release indicated that the Motorola pager promotion would "be supported by advertising in newspapers, national magazines, and alternative media." TLT074110-0110 (US 86668).

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  1. In an April 22, 1981 internal memorandum to Dick Veatch, B&W Brand Promotion Manager, from P.W. Stebbins, B&W employee, memorialized a telephone conversation with Betty Carr regarding a Barclay sampling program, in which Carr reported that her Houston store, Tobacco Road, had been inundated with teenagers trying to sell or exchange the cigarettes they received as part of a Barclay promotion. Carr indicated that a similar situation had occurred with a Kool milds sampling in Houston. 666006105-6106 (US 20959).