Philip Morris Case Study by Bryce Spivey

Philip Morris & the FDA: “If you can’t beat ‘em, join ‘em.”

Angela Patterson Bryce Spivey Jalyce Mangum Maisha Chowdhury

Table of Contents I. Case Study………………………………………………………………………………..……………….….1 A. Introduction…………………………………………………………………….…..…………..…4 B. Background of Industry……………………………………………………….………………….…5 1. Tobacco: The Beginning…………………………………………………….…………..…5 2. Early Regulation…………………………………………..……………………….………5 3. Growth of Tobacco Industry……………………………….………………...……………6 4. Taxing Tobacco……………………………………………..………...……………….…6 5. Hazardous Discoveries………………………………………..………………...…………7 C. Background of Philip Morris…………………………………………………………..……………11 1. Philip Morris Esquire………………………………………………………………...……11 2. Philip Morris and the Altria Group………………………………………...………………11 D. Background of the Case………………………………………………......….……………………12 1. PM USA and Regulation…………………………………………………...……………..12 2. Philip Morris Anti-Teenaged Smoking Campaign…………………………...………...……13 3. The Fist Comes Down……………………………………………………………………13 4. FDA v. Brown & Williamson Tobacco Corporation……………………..….………………14 5. All Falls Down………………………………………………………...…………………14 E. Current Issue…………………………………………………………………...…………………16 1. Second Chances: Change of Heart…………………………………...……………………16 F. Publics ……………………………………………………………………………………………17 1. Main Public: FDA………………………………………….………..……………………17 a) Relevance…………………………………………………….…..……………17 b) Involvement………………………………………………..………….………18 c) Stance…………………………………………………………………………20 2. Other Publics………………………………………....……………………….…………20 a) Shareholders………………………………………………………...…………20 b) The Antis: Health Advocacy Groups……………………………………………21 G. Strategies…………………………………..……………….…………………….…….…………22 1. Strategies and Responses: The “MISSION”…………………….…………...………………22 2. FDA in Transition………………………………………………………….….…………22 3. Communicating with Shareholders……………………………………………….……..…23 4. Anti-Tobacco Industry Divide…………………………………………………….………23 5. Timeline…………………………………………………………………………………24

3 H. Implication………………………………………………………………………...…………..…27 II. Teaching Note………………………………………………………………………………………...……28 III. Bibliography…………………………………………………………………………………………..……30

I. Case Study A. Introduction The tobacco industry faced its first liability lawsuit in 1954 (Murray). Over the last forty years, the tobacco industry has faced increased scrutiny. Public opinion has shifted out of its favor. Philip Morris USA (PM), the nation’s largest cigarette company, has incurred harder criticism, negative press and tumbling stock prices as a result. In 1993, government officials, health, consumer and religious groups began pushing for increased U.S. Food and Drug Administration (FDA) involvement in the tobacco industry. August 1995, President Bill Clinton responded to anti-tobacco discontent by approving the FDA’s authority to regulate nicotine (Schwartz). In the following years, the tobacco industry faced multiple suits from private citizens and organizations and endured confrontations with the U.S. Government. Despite attempts to curb its negative image through campaigns such as the AntiTeenaged Smoking Campaign, Philip Morris continued to experience damage to its brand and financial future. In 2007, Philip Morris responded with a simple answer - “If you can’t beat ‘em, join ‘em.” The company took that stance when it announced plans to support proposed legislation for tobacco regulation (Lengell). The Family Smoking Prevention and Tobacco Control Act, passed by the House April 2, 2009, gives the FDA authority to regulate the advertising, marketing, and manufacturing of tobacco products in order to protect public health (Ligthfoot). Ultimately, the legislation benefits the company’s bottom line and cements “Philip Morris as the nation’s No. 1 cigarette maker” (“Regulating tobacco”). The shift in PM’s policy came when the company realized it could either fight “’inch by inch against every initiative launched by the other side, or try an end run/proactive initiative’” (Landman). In due course, PM chose the proactive initiative and sided with the opposition, the FDA. “Philip Morris & the FDA: “If you can’t beat ‘em, join ‘em.”” explores PM’s proactive strategy in addressing the FDA and growing number of health advocacy groups which served to benefit the company in the end.

B. Background of Industry 1. Tobacco: The Beginning The Tobacco Industry has been a conquering section of the United States economy since the signing of the Declaration of Independence. The seed was planted in 1613 when John Rolfe experimentally introduced tobacco cultivation in what is now Virginia (McGrew). The crop fared well in Virginia and Maryland. For a while, Virginia exported nothing but tobacco to England. Tobacco was an important commodity, often used as money (McGrew). The crop even helped fund the American Revolutionary War by serving as collateral for loans Americans borrowed from France (McGrew).

2. Early Regulation The earliest form of tobacco regulation took effect in the northern colonies (McGrew). On April 16, 1629, an official letter from the New England Company and Massachusetts Bay to settlers prohibited the large scale planting of tobacco for medical reasons (McGrew). The mandate restricted the influence the tobacco industry had in the Massachusetts region. Connecticut mandated a different form of regulation. In an attempt to compete with the southern colonies, Connecticut’s General Court of New Haven initiated a rule stating, “No persons within this jurisdiction shall [smoke] any other Tobacco but such as is or shall be planted within these [districts], except they have license from the Court” (McGrew). England took part in regulating the tobacco industry as well. In spite of King James I’s negative opinion of the industry, he encouraged the growth and cultivation of tobacco (Randall). In 1621, England passed a resolution that only allowed tobacco imports from Virginia and Bermuda. This resolution prohibited the growth of tobacco in England (McGrew). Before the 1900s, regulation efforts transpired because of economic concerns (Randall). The idea that tobacco might be damaging to one’s health was an absurd opinion. The earliest clue that tobacco might to be harmful to one’s health came with the discovery of nicotine in 1826 where scientists exposed it as a dangerous poison (Randall). New Englander Samuel Green went so far as to say that nicotine has the faculty to kill people (McGrew). By the turn of the century, many of the major tobacco product manufacturers incorporated. Although tobacco was an important aspect of the economy,

6 cigarettes had not become a popular form of the crop until about 1870 (McGrew). By 1901, 3.5 billion cigarettes were sold (McGrew).

3. Growth of Tobacco Industry The use of cigarettes ballooned with the advent of World War I (McGrew). Recognizing the importance of tobacco products in the U.S. economy, the federal government enacted bills to help aid growers by encouraging quality and discouraging quantity (McGrew). The first of these measures was the Tobacco Inspection Act establishing quality standards and auction markets (McGrew). The second was the Tobacco Control Act giving congressional approval to state compacts regulating tobacco production and subsidizing state commissions (McGrew). The third measure, the Agricultural Adjustment Act of 1938, met the objective of discouraging quantity (McGrew). This initiative gave parity payments to tobacco producers for abiding by the quality standards and quotas set by the Secretary of Agriculture (McGrew). Cigarette sales exploded again during World War II (McGrew). Many tobacco companies sent cigarettes to soldiers overseas for free to establish brand loyalty (McGrew). However, at the close of WWII more evidence began to surface revealing a link between smoking and lung cancer (McGrew).

4. Taxing Tobacco Federal and state governments sought to ensure the economic stability of the tobacco industry because it provided billions of dollars in taxes (McGrew). Iowa was the first to tax cigarettes in 1921, by 1950, 40 states and the District of Columbia adopted the measure to raise revenue (McGrew). The tax rate continued to rise in the 1960s (McGrew). The following is a table from the Tobacco Tax Council documenting the rise of collections between 1890 and 1970: Years Collections 1890 $1,100,000 1900 4,000,000 1910 7,900,000

7 1920 151,300,000 1930 359,800,000 1940 533,000,000 1950 1,242,800,000 1960 1,863,600.000 1970 2,036,100,000

5. Hazardous Discoveries By 1950, all 50 states established laws banning the sell of tobacco products to minors (McGrew). In 1954, the tobacco industry faced its first liability lawsuit by a lung cancer patient (Murray). During this time, an increasing number of health groups speculated that tobacco affected the health of its users negatively. The American Cancer Society, the American Heart Association and the National Tuberculosis and Respiratory Disease Association began lobbying for the appointment of a commission to conduct a report on smoking and health (McGrew). The purpose of the report was “to consider the responsibilities of government, of business and of voluntary agencies relative to the health hazards of cigarette smoking and to recommend a solution of this health problem that would protect the public and would interfere least with the freedom of industry and the happiness of individuals” (McGrew). In 1962, the requests received a response (McGrew). The Surgeon General, Dr. Luther Terry, established a committee to research the effects of smoking on health (McGrew). In 1964, the committee released a report stating, “Cigarette smoking is a health hazard of sufficient importance in the United States to warrant, appropriate remedial action” (McGrew). In response, the Federal Trade Commission asserted that cigarette advertising was misleading (McGrew). In an effort to achieve transparency, the commission required all cigarette packages and advertising to display a statement cautioning consumers of the potential risks of using tobacco products (McGrew).

Before (Philip Morris 1953)

After (Philip Morris 1987) After a few years of transparency, the FTC issued a study to Congress stating that the warning labels have had no effect on the sale and consumption of tobacco products (McGrew). While there was a temporary drop in sales in 1964 due to the release of the Surgeon General's Report on Smoking and Health, cigarettes sales rose in 1965 to exceed the amount sold in 1963 (McGrew). The following is a table depicting the total number of cigarettes sold between 1963 and 1970:

10 Years Billions 1963 516.5 1964 505.0 1965 521.1 1966 529.9 1967 535.8 1968 540.3 1969 527.9 1970 534.2

In 1971, the FTC officially banned broadcast advertisements for cigarettes. Despite consistent cigarettes sales, the increasing involvement of federal and state government in the tobacco industry was having an effect. Many companies began to diversify their products. For example, Philip Morris USA acquired General Foods in 1985 to tap into another market (McGrew).

C. Background of Philip Morris 1. Philip Morris Esquire Tobacconist and Importer of Fine Seegars, Philip Morris Esq. first introduced his company in 1847 (Crabtree). The shop on Bond St. in London England sold tobacco and ready-made cigarettes (Crabtree). By 1870, PM created two new brands of cigarette: Philip Morris Cambridge and Philip Morris Oxford Blues (Crabtree). Within the next 15 years, three additional brands, Derby, Unis, and Marlborough appeared in the market (Crabtree). The Marlborough cigarettes were the first marketed specifically for women (Crabtree). Philip Morris’s presence in the America’s began in 1902 after incorporation in New York (Crabtree). The ownership of the company divided into two, PM’s British owners and American partners (Crabtree). In 1919, a new firm acquired the US Branch of PM and incorporated in Virginia under the name Philip Morris & Co (Crabtree). By 1938, the new corporation began making regular dividend payments to stockholders, manufacturing cigarettes in a factory purchased in Richmond, VA and offering preferred stock to the public (Crabtree).

2. Philip Morris and the Altria Group By 1983, Philip Morris had become the largest cigarette company in the United States. In 1985, Philip Morris Companies came together to become the Altria Group (Crabtree). The Altria Group is the parent company of Philip Morris USA, U.S. Smokeless Tobacco Company, John Middleton, Ste. Michelle Wine Estates and Philip Morris Capital Corporation (Crabtree). Under the Altria Group, Philip Morris ventured into different industries. In 1985, PM acquired General Foods (Altria). Three years later, the company also bought Kraft Foods and merged it with General Foods (Altria).

D. Background of the case 1. Philip Morris USA and Regulation The push for FDA involvement in the regulation of the cigarette industry began in 1993 when House Representatives Mike Synar (D-Okla.) and Richard J. Durbin (D-Ill.) introduced a bill that would allow the FDA to regulate the manufacture, sale, labeling and advertising of tobacco products (Schwartz). The goal of the Fairness in Tobacco and Nicotine Regulation Act of 1993 was to centralize the regulation of the tobacco industry (Schwartz). At the time, tobacco regulation was the responsibility of agencies ranging from the FTC to the Department of Health and Human Services (Schwartz). Prior to the introduction of the bill, the FDA resisted asserting power over most tobacco products (Schwartz). The only products the FDA regulated were nicotine in chewing gum and patches to quit smoking (Schwartz). However, after the creation of the bill and the release of a report by the American Broadcasting Co asserting that tobacco companies manipulated nicotine levels to maintain addictiveness, the FDA released a statement affirming its readiness to consider regulation (Schwartz). The Tobacco Institute, a trade and lobbying association for the tobacco industry, vehemently denied the report (Schwartz). March 24, 1994 PM, one of the companies accused, announced a $10 million libel suit against the ABC (Schwartz). The case ended in settlement with ABC issuing a public apology. In spite of this, the FDA commissioner David A. Kessler suggested that, for the first time, tobacco could be considered a drug because of ABC’s claim (Schwartz). If the FDA did start tobacco regulation it “could mean, ultimately, removal from the market of tobacco products” with high levels of nicotine,” Kessler said (Schwartz). Kessler charged Congress to “to resolve, once and for all, the regulatory status of cigarettes under the Food, Drug and Cosmetic Act” (Schwartz). Nearly one year after the bill’s introduction and assignment to a sub-committee, representatives Synar and Durbin announced a plan to bypass the committee process and attach the bill to the annual agriculture appropriations bill (Greiger). By bypassing the committee process, the representatives hoped to avoid the typical death smoking bills experienced in house committees (Greiger). The Tobacco Institute opposed this move calling tobacco regulation a new beginning to the “era of prohibition” (Greiger).

2. Philip Morris Anti-Teenaged Smoking Campaign In an astringent report, the National Academy of Sciences the report stated, “tobacco use was essentially an addiction that began in childhood or youth, and that the best way to prevent it was to enact strict new Federal and state regulations that would make it harder for those under 18 to start” (Hilts). "Growing Up Tobacco Free: Preventing Nicotine Addiction in Children and Youths” suggested the following: “*The Federal Government should be given the power to regulate tobacco. *The states should be given the power to impose advertising bans within their boundaries. *Cigarette vending machines should be outlawed. *Congress should immediately raise the excise tax on cigarettes, and eventually push the amount up to $2 a pack or more. *States should require all those who sell cigarettes to be licensed, and there should be strict enforcement, including undercover operations, against those who sell tobacco products to minors” (Hilts). By the end of 1994, 75 health, consumer and religious groups joined forces in support of the bill empowering the FDA to regulate the tobacco industry led by the former Surgeon General C. Everett Koop and the Coalition on Smoking or Health (Hilts). In a response to negative press and tumbling stock prices, Philip Morris announced a national campaign the curb underage smoking in 1995 (Matthews). The company also pledged to put a stop to mailing and giving away up to 25 million cigarettes a year (Matthews). Philip Morris pledged to put “Underage Sale Prohibited” on packaging and work with state officials to enforce youth anti-smoking laws (Matthews). Anti-Smoking groups speculated that PM began national campaign in an effort to thwart efforts toward FDA regulation (Matthews). PM responded stating, "There isn't anything we can possibly do, no matter how far-reaching, that will satisfy our critics" (Matthews).

3. The Fist Comes Down As the bill waned in congress, on August 10, 1995 President Bill Clinton gave authority to the FDA to regulate nicotine as an addictive drug in an effort to curb teenaged tobacco use (Schwartz). The FDA immediately issued a list of regulatory measures that would cut teen smoking in half within seven

14 years (Schwartz). The FDA’s list included bans on cigarettes machines, self-service displays and cigarette advertisements at sporting events (Schwartz).

4. FDA v. Brown & Williamson Tobacco Corporation President Clinton’s announcement came with a firestorm of criticism from the tobacco industry and lawmakers’ claiming that FDA had no right to regulate the tobacco industry. August 10, 1995 five tobacco companies, including PM, announced a lawsuit against the FDA (Fletcher). “The plaintiffs include Philip Morris Cos., the Brown & Williamson unit of BAT Industries, RJR Nabisco Holdings Corp.'s RJ Reynolds Tobacco Co., and Loews Corp.'s Lorillard Tobacco Inc.” The companies asserted that although the President targeted regulating under aged smoking, his decision would lead to restrictions on adult smoking (Fletcher). The lawsuit challenged FDA’s authority to regulate tobacco calling it unconstitutional (Fletcher).

5. All Falls Down The case exposed PM documents, damaging the brand and the company’s financial future (Schwartz). One set of documents exposed that PM executives knew the risks of smoking before the surgeon general’s report on smoking and health in 1964 (Murray). December 10, 1995, stocks tumbled on the New York Stock exchange as an internal document likened the sale of tobacco to the sale of cocaine (Schwartz). “Investors fled the stock, driving it down $US1.50 to close at $US89.12, because the report flies in the face of the tobacco industry's insistence that cigarettes are no more addictive than "coffee, tea or Twinkies" - as one senior industry executive said at a Federal Drug Authority hearing last year" (Robinson). The case also brought more calls from PM for legislation to prevent minors from smoking. The calls for legislation did not change PM’s stance on FDA regulation. Philip Morris USA offered an alternative plan to curtail plans to allow the FDA to regulate its industry (Enrico). If the U.S. government accepted the plan, PM would agree to drop the lawsuit (Enrico). The plan included banning tobacco ads within 100 feet of schools, buses and subways and banning the distribution of clothing and accessories with tobacco company logos (Enrico). The plan was not accepted (Enrico).

15 Philip Morris chose to speed up the process while waiting for the trial to take place. On October 16, 1996, PM filed a motion of summary judgment against the FDA seeking a prompt ruling from a judge to avoid a lengthy trial and jury (“Philip Morris Fights FDA Regulation”). In a mixed ruling, U.S. District Judge William L. Osteen Sr. in Greensboro, N.C. sided with the FDA stating that they did have the power to regulate the tobacco industry (Schwartz). The ruling was hailed by President Clinton, congressional representatives and anti smoking activists (Schwartz). This news caused tobacco stock to plunge even further. “The shares of Philip Morris Cos., the world's biggest tobacco company and the manufacturer of Marlboro, fell $ 2.37, or 5.7 percent yesterday” (Mintz). While the FDA won the war, the tobacco industry won a small battle. The decision also included a restriction of the FDA’s control over tobacco advertising (Schwartz). Judge Osteen stated, “The agency did not have the authority under the provision of the Food, Drug and Cosmetics Act that it used to justify the ad ban” (Schwartz). This pleased tobacco affiliates, but many found the ruling to be inconsistent (Schwartz). By May 2, 1997, both the FDA and the tobacco industry filed notice of their intention to appeal to the U.S. Circuit Court of Appeals in Richmond, VA (Torry). Ultimately, the appeals court overturned the previous ruling stating that the FDA has no authority to regulate the Tobacco industry (Schwartz). Disappointed in the ruling, the FDA appealed to the Supreme Court (Schwartz). In 2000, the Supreme Court reversed the appellate decision stating that the FDA did not have authority to regulate the tobacco industry (Biskupic).

E. Current Issue 1. Second Chances: Change of Heart After the Supreme Court ruling, House Energy and Commerce Committee Chairman Henry A. Waxman (D-Beverly Hills) and Sen. Edward M. Kennedy (D-Mass.) took turns to gradually give the FDA the authority to regulate the tobacco industry (Cole). In 2008, a bill allowing the FDA to “reject new tobacco products, restrict advertising and take other steps,” passed in the House of Representatives (Cole). The bill eventually died in the Senate after former President George Bush vowed to veto (Cole). With a new President, S.625, the Family Prevention and Control Act, returned to the House in 2009 (Cole). The question for many proponents of the bill was how the tobacco industry would react. In a move that stunned congressional representatives and activist groups, the tobacco industry fractured its usual strong singular response. Philip Morris deviated from the rest of the industry to support the bill. Competitors resented PM’s dissent. After suing the FDA for enforcing authority over tobacco regulations, PM lobbied for the cause of its former enemy. On April 2, 2009, the House passed the Family Smoking Prevention and Tobacco Control Act allowing FDA regulation (Cole). The challenge for PM was to communicate distinctly to each involved public as to clearly demonstrate its new stance. In addition, PM had to convince shareholders that its change in position was in the best interest of the bottom-line.

F. Publics 1. Main Public: The FDA a) Relevance The Food and Drug Administration considered the regulation of tobacco products for several years. Being America’s largest cigarette manufacturer, Philip Morris was in the forefront dealing with every legal adjustment of tobacco regulation. Both the FDA and Philip Morris boast similar interests in controlling the tobacco industry. While the FDA desires to reduce the harmful effects of products produced by tobacco industry, Philip Morris wants to enhance its dominance as a tobacco producer by increasing the prominence of its product in the U.S. The 1990’s brought a series of cases against the tobacco industry. New York Times article stated, “State attorneys general sued big tobacco companies, and private class-action suits were mounting” (Nocera). The swell of private class action suits helped cultivate the FDA’s aim to regulate the tobacco industry. The tobacco industry disagreed, arguing that the FDA did not have the authority to regulate a product that was considered neither food nor drugs (Eggen). The United States Supreme Court eventually sided with the tobacco industry asserting that regulation was out of the FDA’s jurisdiction. In 1998, 46 states settled by signing a document called the Master Settlement Agreement (MSA). The agreement financed an anti-smoking ad campaign and limited advertising and marketing efforts of tobacco companies. The document also required big tobacco companies to pay the states $206 billion over 25 years. The remaining four states settled for $40 billion (Nocera). The tobacco industry grew deeper roots into the United States economy. The FDA powerfully regulates and supervises the safety of foods, drugs, medical products, and others alike. According to writer Duff Wilson from The New York Times, “Philip Morris's motives notwithstanding, the legislation has broad support from nearly 1,000 advocacy groups, including the Campaign for Tobacco-Free Kids, which led the negotiations with the company, as well as the American Heart Association, the American Lung Association and the American Cancer Society” (Duff). Joining the efforts of activists by encouraging regulation started to build a positive reputation that has yet to be

18 accomplished by competitors. The FDA’s regulation of tobacco will convey the message that cigarettes are safer. Wide varieties of media outlets convey this distinction. Philip Morris will benefit from the positive face they are creating. In 2003, Philip Morris USA announced its support for FDA regulation. Other cigarette manufacturers were against regulation. The support expressed by Philip Morris gave the firm an edge over its competitors. “For example, a representative of R.J. Reynolds Tobacco Company expressed concern about his company having a "competitive disadvantage" in an era of standardized cigarette ingredients,” said Jean Eggen, a writer for the Connecticut Law Review. “The prospect of FDA regulation has raised a question in some public health circles as to whether regulation of cigarettes would create the erroneous and oddly counterintuitive impression that smoking is safe” (Eggen). American culture is moving toward an anti-smoking society. Seeing regulation as an inevitable outcome, Philip Morris became interested in building bridges with FDA.

b) Involvement FDA has actively voiced their opinions in regards to the tobacco industry. The agency began its pursuit of tobacco regulation based on the reports and indications of health advocacy groups. In 1994, the former Commissioner of the Food and Drug Administration, Dr. David A. Kessler, considered regulation of the tobacco industry when anti-smoking groups and lawmakers began crusade to prevent the harmful effects of nicotine. Around this time, regulation of tobacco was an up and coming hot topic in the media. Kessler was one of many FDA representatives to become highly involved in tobacco regulation. Knowledge of the negative effects of tobacco spurred a flurry of lawsuits filed against Big Tobacco companies. Kessler vigorously attacked Big Tobacco companies with an arsenal of health information. Began a rocky relationship with the FDA when it partnered with other tobacco companies to contest its authority to regulate the tobacco industry in court in 1996. Kessler testified the day after Philip Morris Co. announced a $ 10 billion libel suit against the American Broadcasting Co. over a report that accused manufacturers of spiking cigarettes with extra nicotine to create and maintain smoking addiction. Kessler went to the hearing with charts and evidence drawn from studies, tobacco industry memos and patent applications. "We do not yet have all the evidence necessary to establish

19 cigarette manufacturers' intent" to market cigarettes as a drug, an essential step for legally classifying tobacco products as drugs, he said. "It should be clear, however, that in determining intent, what cigarette manufacturers say can be less important than what they do." (Schwartz)

The images of tobacco companies like Philip Morris began to tarnish. Meanwhile, the FDA continued to introduce reports detailing the harmful effects of tobacco products. The FDA collaborated with a variety of officials to push the regulation of the tobacco industry. Representative Henry A. Waxman, Democrat of California, chairperson of the House of the Energy and Commerce Subcommittee on Health and the Environment partnered with Kessler to testify at a hearing concerning the addictiveness of nicotine. He supported banning cigarettes even though activists, as well as regulators agreed it would cause more problems than due good (Hilts). Even though the FDA attempted to regulate the tobacco industry, they struggled to obtain the proper authority to do so. Congress would not grant FDA the access to regulate tobacco products for reasons ranging from fracturing social ties to economic ties. The FDA has attempted to help smokers quit by developing and approving nicotine replacement products and nicotine-free products. Nicotine gum and patches are intended to reduce cravings and pleasurable effects commonly associated with smoking tobacco. Bupropion and varenicline are nicotine-free drug products that the FDA designed to decrease the desire to smoke (Eschenbach). These alternative options have helped many people overcome their addiction to nicotine. In light of these anti-tobacco tactics, the question remains, why would Philip Morris support FDA regulation of tobacco? The company's central role, in fact, is a reason that some antismoking activists worry that the bill is a deal with the devil. Philip Morris's support is also, why other major tobacco companies -none of which back the legislation -- see a cunning ploy by Marlboro's maker to seal the company's dominant position. In addition, even as Philip Morris has spent years lobbying for the legislation, it has also poured hundreds of millions of dollars into a research center in Richmond, Va., to develop new tobacco products it hopes can pass federal muster -- in particular, smokeless products that can be chewed or sucked or inhaled and do not involve burning tobacco. Few other tobacco companies have the resources to place such bets on the regulatory future. (Werner)

In the past few years, Philip Morris shifted its strategy from refusal to compliance in dealing with anti-tobacco enthusiast. On April 2, 2009, the Family Smoking Prevention and Tobacco Control Act passed in the House giving FDA powers over the tobacco industry. A TIME magazine article stated, “The measure, passed 298-112, gives the Food and Drug Administration authority to regulate – but not ban – cigarettes and other tobacco products” (Werner).

c) Stance The Food and Drug Administration is an agency in the United States that is in charge of regulating and overseeing the safety of a variety of foods, products and drugs. As stated in the Surgeon General report issued in 1964, cigarettes do not resemble any ability to be a safe product. Nicotine, used in cigarettes, creates the type of addiction usually associated with drugs. The FDA realizes that confusion exists regarding the interpretation of how they are/will regulate tobacco based on their stance. FDA shares the goal of H.R. 1108, the “Family Smoking Prevention and Tobacco Control Act,” – to reduce tobacco use in this country. We agree with the need to address this significant public health problem. But we have concerns with the bill’s proposed means to achieve those objectives. The Agency has three primary categories of concern with the proposed role for FDA.

First, we have concerns that the bill could undermine the public health role of FDA. Second, we have concerns about aspects of the bill that may be extremely difficult for FDA to implement. And third, we have significant concerns about the resources that would be provided under the bill and the expectations it might create. (Eschenbach)

2. Other Publics a) Shareholders Philip Morris USA’s mission is to “responsibly manufacture and market superior branded cigarettes and smokeless products, and distribute John Middleton products, to adult tobacco consumers in a financially disciplined way” (Philip Morris USA). PM’s mission is guided by four strategies:

21 1. Invest in Leadership: We will invest in excellent people, leading brands and external stakeholders important to our business success. 2. Align with Society: We will actively participate in resolving societal concerns that are relevant to our business. 3. Satisfy Adult Consumers: We will convert our deep understanding of adult tobacco consumer needs into better, more creative and more satisfying products. 4. Create Substantial Value for Shareholders: We will execute our business plans to create sustainable growth and generate substantial return for shareholders. (Philip Morris USA) The last strategy has been a guiding factor for why PM responded to FDA regulation negatively. Communication strategies must benefit PM’s bottom line in order to maintain its commitment to shareholders. At the time, regulation appeared to pose a threat to the viability of PM as a brand. The stances of PM shareholders have traditionally been against proposed FDA regulation. In 1996, Geoffrey C. Bible, PM chairman held the company’s annual meeting in the midst of political and economic struggle, over 900 shareholders (Matthews). During the meeting shareholders voted on a measure “to end the firm's efforts to discredit reports of harm from secondhand smoke” (Matthews). The measure was defeated with a hearty 94% voting against the measure (Matthews). Shareholders are bottom-line oriented and recognize threats to the firm’s profits (Matthews).

b) The Antis: Health Advocacy Groups Anti-Smoking groups like the National Campaign for Tobacco-Free Kids have traditionally been against the tobacco industry, supporting strict regulations and an increase of the cigarette tax across the nation (Wilson). They are pivotal to congressional representatives. Most groups have registered lobbyists in state legislatures and on Capitol Hill to combat tobacco industry lobbyists (Wilson). Issuing reports to congress about the dangers of smoking serves to help decrease the number of people who will buy cigarettes. The prominence of such activist groups also challenges the social acceptability of smoking.

G. Strategies 1. Strategies and Responses: The “MISSION” PM began constructing a new way of responding to regulation in 1995, after it joined the rest of the tobacco industry to sue the FDA (Landman). In a report entitled “The Mission,” PM expressed a different method of response to regulation (Landman). “Because some form of [legislated] restriction is inevitable, it is better to shape the agenda than to stand pat and fight” (Landman). The report states two methods of response; “Fighting inch by inch against every initiative launched by the other side, or try an end run/proactive initiative, because the next firestorm could cause a major meltdown” (Landman).

2. FDA in Transition While PM battled the FDA in the courts, PM employees created a 10 to 20 year plan maintaining the “social acceptability of smoking” (Landman). The plan took the approach of the second “end run/ proactive” response to regulation (Landman). After the 2000 Supreme Court decision, PM took the opportunity to change its strategy in preparation of the inevitable confrontation of the horizon. As Congressional leaders moved closer to drafting and presenting a bill give the FDA authority to regulate the tobacco industry, PM issued a statement of support stating, “Philip Morris USA (PM USA) believes regulation of tobacco products by the Food and Drug Administration (FDA) would establish a comprehensive national tobacco policy that could potentially create a competitive framework within which manufacturers are focused on reducing the harm tobacco use causes” (“Letter of Endorsement from PM USA's Chairman and CEO”). PM charged congress to take quick action in the passing the bill. PM’s communication of support changed its relationship with the FDA. 2002 brought a new president. President George W. Bush was not a proponent of the regulation of the tobacco industry solely by the FDA as was former President Clinton. After accepting the oath of office, President Barack Obama appointed former New York City Health Commissioner Dr. Margaret Hamburg (Mussenden). She currently still requires Senate confirmation. While she has declined to respond to PM’s stance and the possible responsibility of regulating the tobacco industry, she is a know proponent of tobacco regulation (Mussenden).

3. Communicating with Shareholders Philip Morris’s shift in position shocked many shareholders. To ease concerns, PM went to great lengths communicating their financial advantage in supporting FDA regulation. After taking a different stance in 2003, allbusiness.com published a feature article on PM USA’s new position. The article conveyed PM’s assertion that FDA regulation was critical to its financial future. "The fact is that until FDA oversight is in place, we will not have an accepted and official external process to review our work," said Michael Szymanczyk, CEO of Philip Morris USA (“Philip Morris Touts FDA Regulation of Cigarettes”). PM’s effort to communicate with shareholders yielded positive results. Shareholders trusted the firm’s strategic position. Stocks remained stable between 2003 and 2007.

4. Anti-Tobacco Industry Divide In 1996, Philip Morris engaged in creating an “Anti-Tobacco Industry Plan” to thwart the effect of activist groups (Landman). The plan included an assessment of what the firm calls “the Antis” (Landman). The plan stated, “The antis are well organized. It’s become a business. They are spending millions” (Landman). PM saw “the antis” as a threat. Strategists devised a plan to lessen the impact activists had on its bottom line by “enhancing internal conflicts that already exist within the AntiTobacco Industry, and possibly encourage some new ones” (Landman). By giving in to FDA regulation, PM divided the impact of activist groups (Landman). Some groups responded the PM’s change of position suspiciously deciding if PM is for it, we should be against it (Landman). Anti-tobacco groups asserted that anything good for Philip Morris, the largest manufacture of tobacco products in America, is bad for society. Most activist groups supported FDA regulation with PM. “Philip Morris’s motives notwithstanding, the legislation has broad support from nearly 1,000 advocacy groups, including the Campaign for Tobacco-Free Kids, which led the negotiations with the company, as well as the American Heart Association, the American Lung Association and the American Cancer Society,” as stated in a New York Times article (Wilson). Philip Morris developed a relationship with the National Campaign for Tobacco Free Kids finding a point of agreement on the issue of under-aged smoking. Creating an alliance with the FDA and activist

24 groups allows all parties involved the power to regulate tobacco products which may lead to future restrictions on advertising, warning labels, and reduced levels of nicotine (Henderson).

5. Timeline 1613

Rolfe experimentally introduced tobacco cultivation in what is now Virginia

1632

Illegal to smoke in Massachusetts

1776

During the American Revolutionary War, tobacco helped finance the revolution by serving as collateral for loans the Americans borrowed from France

1826

The pure form of nicotine is discovered. Soon after, scientists conclude that nicotine is a dangerous poison

1836

New Englander Samuel Green stated that tobacco is an insecticide, a poison, and can kill a man

1847

Philip Morris Esq. first introduced his company selling tobacco and readymade cigarettes

1870

Philip Morris begins to produce Philip Morris Cambridge and Philip Morris Oxford Blues

1902

Phillip Morris sets up a New York headquarters to market its cigarettes, including Marlboro brand

1914-

WWI: Cigarette sales ballooned, called â&#x20AC;&#x153;soldierâ&#x20AC;&#x2122;s smokeâ&#x20AC;?

1918 1920

The first Philip Morris Annual Report is published

1921

Iowa the first to tax cigarettes

1928

Philip Morris begins to make regular dividend payments

1929

Philip Morris begins manufacturing its own cigarettes by purchasing a factory in Richmond

1938

The Agricultural Adjustment Act of 1938 passed to meet the objective of discouraging quantity

1941-

WWII cigarette sale explode; tobacco companies sent cigarettes to soldiers

1945

overseas for free to establish brand loyalty

25 1950

All 50 states established laws banning the sell of tobacco products to minors, 40 states and the District of Columbia adopted a measure to raise revenue

1954

The tobacco industry faces its first liability lawsuit by a lung cancer patient

1964

Surgeon general releases a report linking smoking to lung cancer and calling for regulatory action

1965

Federal Cigarette Labeling and Advertising Act requires that all cigarette packages and advertising to display a statement cautioning consumers of the potential risks of using tobacco products

1967

Federal Trade Commission requires one anti-smoking advertisement per three tobacco advertisements

1971

The FTC officially bans broadcast advertisements for cigarettes

1983

Philip Morris is the largest cigarette manufacturer in the United States

1985

Philip Morris Companies came together to become the Altria Group; buys General Foods

1988

Philip Morris buys Kraft Foods and merges it with General Foods

1993

House Representatives Mike Synar (D-Okla.) and Richard J. Durbin (D-Ill.) introduced a the Fairness in Tobacco and Nicotine Regulation Act to allow the FDA to regulate the manufacture labeling and advertising of tobacco products

1994

American Broadcasting Co release a report claiming tobacco companies manipulated nicotine levels to maintain addictiveness

1994

Philip Morris announces a $10 million libel suit against the American Broadcasting Co

1994

FDA commissioner David A. Kessler announces that, for the first time, tobacco could be considered a drug because of ABCâ&#x20AC;&#x2122;s claim

1994

The National Academy of Sciences the report asserting that tobacco addiction that begin in childhood or youth

1994

75 health, consumer and religious groups joined forces in support to the bill empowering the FDA to regulate the tobacco industry

1995

Philip Morris announced a national campaign the curb underage smoking

1995

President Bill Clinton gives authority to the FDA to regulate nicotine as an addictive drug in an effort to curb teenaged tobacco use

26 1995

Five tobacco companies, including PM, announced a lawsuit against the FDA

1995

FDA v. Brown & Williamson Tobacco Corporation documents expose that PM executives knew that risks of smoking before the surgeon general’s report on smoking and health in 1964

1995

PM documents liken the sale of tobacco to the sale of cocaine

1995

PM Stocks tumble on New York Stock exchange

1995

PM offers alternative plan to FDA regulation rejected by U.S. government

1995

PM drafts “The Mission” creating new strategy for dealing with FDA and Anti-Tobacco Industry

1996

PM files a motion of summary judgment against the FDA seeking a prompt ruling from a judge to avoid a lengthy trial and jury

1997

District Court sides with the FDA stating that they did have the power to regulate the tobacco industry

1997

PM stock continues to tumble with loss of case

1997

The tobacco industry filed notice of their intention to appeal to the U.S. Circuit Court of Appeals in Richmond, VA

1998

46 states settled by signing a document called the Master Settlement Agreement

1999

The appeals court overturn previous ruling stating that the FDA has no authority to regulate the Tobacco industry

2000

The Supreme Court reversed the appellate decision stating that the FDA did not have authority to regulate the tobacco industry

2003

PM announces support of FDA regulation

2008

The Family Prevention and Control Act dies in the House after President George Bush vowed to veto

2008

PM announces 12.4% increase in total cigarette retail share

2009

The House of Representatives pass the Family Smoking Prevention and Tobacco Control Act allowing FDA regulation

H. Implication Philip Morris generates significant media attention on a regular basis. Consequently, PM must carefully monitor its “most valuable asset” – reputation (Wilcox and Cameron 268-273). For years, the company failed in attempts to reverse its negative image. Initially, the company held a defensive position. However, after analyzing what was lacking in its image restoration attempts, the company gradually moved to terms of compromise and cooperation. The company subsequently in a visible manner changed its policy, using a new proactive approach in siding with the opposition, the FDA. According to Public Relations Strategies and Tactics, “Returning to the proactive phase of conflict management to improve organizational performance will ultimately improve reputation.” The stance PM took not only effectively positioned the company but also enabled it “to make valuable contributions to stakeholders who depend on the organization” (Wilcox and Cameron 268-273). Philip Morris’ proactive actions demonstrate an effective method of communication. The proactive approach also proved to be in the best interest of PM’s shareholders. The following chart depicts cigarette retail share performance for PM’s brands for the fourth quarter of 2008. In 2002, before PM changed their stance in FDA regulation, its total cigarette retail share was 38.2%. In 2008, five years after PM began pushing for regulation, the total cigarette retail share grew to 50.6% (Philip Morris USA). Philip Morris will never please everyone. The firm recognizes the controversial nature of the industry. However, the firm strictly follows its mandate to always act in the best interest of its shareholders.

II. Teaching Note 1. Why did PM continue to sue the FDA after it established a new response strategy in 1996? A: When PM established its new response strategy, the suit filed against the FDA was well in progress. Therefore, PM continued to pursue litigation instead of suffering substantial financial loss. Once litigation culminated, PM could practice it new policy.

2. Did PM act appropriately when it sided with the FDA? Explain. A: The actions previously taken by PM were ineffective. The company continued to face public scrutiny and plummeting stocks. When PM chose to side with the FDA it took the next appropriate proactive action. The company openly and legitimately went with a new plan.

3. Was PM’s dissent from the tobacco industry wrong? Explain. A: Foremost, Philip Morris holds loyalty to its shareholders. When the company broke from the industry’s ideology, it was looking out for its best interests.

4. Should other tobacco companies follow PM’s action? Explain. A: Tobacco companies should follow PM if the action will benefit its bottom line and refrains from damaging the company’s image or integrity. If the action is damaging the company should refrain.

5. Did PM side with the FDA as a means of practicing reputation management? Explain. A: Philip Morris sided with the FDA in order to cement its stability in the industry and uphold responsibilities to shareholders. Because of its proactive communications approach, the company concurrently practiced reputation management.

6. Has PM’s reputation benefitted from siding with the FDA? Explain.

29 A: Siding with the FDA has not hurt PM’s reputation. Although some activist and health groups doubt the company’s genuineness, some publics positively view PM’s action. Consequently, the publics that favorably view the action also favorably view the organization.

7. Are activist groups satisfied with the FDA-PM collaboration? A: Activist group opinions regarding the collaboration vary. Some groups see the partnership as a positive sign. PM is taking action and assisting in countering the negative effects of tobacco. Other groups view the collaboration as a façade put on by PM in order to increase bottom line profits.

8. Will the FDA-PM collaboration eventually result in complete FDA regulation of the tobacco industry? If so, will the regulation be good or bad? A: Despite the significant gains obtained by the FDA from the Family Smoking Prevention and Tobacco Control Act, tobacco companies will not allow complete government regulation of the industry. If the government controls all aspects of the industry, it will face substantial risks of becoming obsolete. Although activist and health groups would support the measure, the tobacco industry is big business that contributes to the economy.

9. Why does the Page Principle “manage for tomorrow” most directly apply to PM’s communication situation? A: The manage for tomorrow principle “anticipate public reaction and eliminate practices that create difficulties” (The Page Principles).

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