Philip Morris and British-American Tobacco, the world's two biggest tobacco companies, secretly joined forces to fix cigarette prices and divide markets in Argentina, Venezuela and other Latin American countries, according to internal documents that explicitly describe the deals and the involvement of some of the firms' most senior executives.
In Argentina, the companies' subsidiaries set prices and allocated market shares, relying on "verbal agreements" because "there can be nothing in writing in Argentina on the subject," said a 1989 memo by a BATCo director.
In Costa Rica, their accord even dictated the amount of TV advertising each firm could buy and what incentives they could offer retailers to promote their brands, according to a February 1992 letter from the head of BATCo's Costa Rican subsidiary.
Another price-fixing agreement covered Venezuela, but when a price war broke out between the firms' Venezuelan affiliates, each began smuggling cigarettes into the country through Aruba and Colombia to avoid paying taxes, a 1992 BATCo memo said.
Elizabeth Cho, a spokeswoman for Philip Morris International, said she believes the company had done nothing wrong. "Since we must comply with local laws and regulations in every country in which we do business, we expect that there has been no improper conduct in the countries that you have referenced," she said.
The tobacco industry in recent years has been repeatedly embarrassed by internal documents contradicting its public stands on the dangers and addictiveness of smoking. But the price-fixing memos, which surfaced in a suit against the industry by the state of Washington, appear to be the first to reveal the existence of sweeping anti-competitive deals.
The secret agreements are in marked contrast to the public display of tooth-and-nail competition between the world's two biggest cigarette makers. And with tobacco companies increasingly seeking their fortune outside the U.S. and Europe, the documents provide an unusual glimpse of clandestine cooperation on a wide frontier and raise questions about their marketing practices around the world.
Dating from 1988 to 1992, the papers reveal that "the two world-dominant companies . . . very carefully rigged the entire Latin American market," said Jon Ferguson, senior counsel in the Washington Attorney General's office.
But whereas activities described in the memos would be plainly illegal if carried out in the U.S., the legal ramifications are less clear in the countries where they occurred.
Ferguson said preliminary research by his office showed price fixing was banned under Argentina's laws during the time of the Argentine deal and that Panama and Costa Rica had antitrust provisions in their constitutions.
Companies' Lawyers Decline Comment
Lawyers and spokesmen for BATCo and its U.S. affiliate, Brown & Williamson Tobacco Corp., declined to comment on the documents, except to say they are irrelevant to issues in the Washington case.
Washington authorities have charged tobacco firms with violating antitrust laws, including refusing to compete on making safer cigarettes, but have not accused the industry of creating price-fixing or market-share deals.
Some authorities said the legal status of the price-fixing deals may be a bit murky, since antitrust law in Latin America has been in an evolutionary stage. "Latin America only recently began to develop any type of competition law," said Robert Lutz, a professor of international business law at Southwestern University Law School.
Robert Lande, a law professor at the University of Baltimore who has advised the governments of Venezuela and Peru on antitrust matters, said he too was uncertain if the deals were legal. "I can say it's immoral. . . . but that's just one opinion," he said.
Lawyers for the state of Washington extracted the memos from a depository of BATCo documents set up in England to house documents demanded by the state of Minnesota. Nearly all the papers were written by BATCo officials, although one is a note from the head of Philip Morris' Latin America operations to his counterparts at the British firm.
Several of the memos describe the situation in Argentina, where officials of Philip Morris and BATCo subsidiaries, although distrustful of each other, were struggling to cooperate on price and market share.
In a memo titled "Argentina Market Share Agreement," Peter J.C. Hazel, a BATCo director responsible for its South American and Caribbean operations, complained that the Philip Morris subsidiary Massalin-Particulares, S.A., had begun "to drag their feet on price increases" because they were "unhappy with their declining market share."