Attorney General Lockyer Announces Landmark Agreement with Philip Morris USA to Curb Illegal Internet Cigarette Sales

(SACRAMENTO) – Attorney General Bill Lockyer today announced Philip Morris USA has agreed to implement landmark protocols to reduce the illegal sale of its cigarettes over the Internet and through the mail.

“Internet and mail order cigarette sales are a public health threat because they help put a deadly product in the hands of our children,” said Lockyer. “That is why I have gone to court to put online providers out of business in California and have worked with my fellow Attorneys General to take other steps to combat the problem. This agreement will help fight this danger to our kids.”

Philip Morris voluntarily adopted the protocols pursuant to an agreement reached with Lockyer and Attorneys General in 32 other states, Washington D.C. and three territories.

Under the protocols, Philip Morris will: terminate shipments of cigarettes to any of its direct customers that Attorneys General have found to be engaging in illegal Internet and mail order sales; reduce the amount of products made available to direct customers found by the Attorneys General to be engaged in the illegal resale of Philip Morris cigarettes to Internet vendors; and suspend from the company’s incentive programs any retailer found by the Attorneys General to be engaging in such illegal sales.

Said Denise Keane, Philip Morris USA executive vice president and general counsel: “Our voluntary agreement with the state Attorneys General builds on Philip Morris USA's existing trade programs and policies intended to preserve the integrity of our brands and the legitimate trade channels through which they are sold. It sets a framework for continued information sharing with law enforcement and support of their efforts to eliminate illegal sales of Philip Morris USA products."

Attorneys General believe virtually all Internet sales of cigarettes violate one or more state and federal laws, including: state age verification laws; the federal Jenkins Act, which requires that such sales be reported to state tax authorities; state laws prohibiting or regulating the direct shipment of cigarettes to consumers; state and federal tax laws; federal mail and wire fraud statutes; and the federal Racketeer Influenced and Corrupt Organizations (RICO) statute. Additionally, many sales by foreign web sites also violate federal smuggling, cigarette labeling, money laundering and contraband product laws.

Internet cigarette sales, for two main reasons, pose a significant risk to public health. First, the vast majority of Internet sellers have wholly inadequate systems for verifying the age of their customers. Numerous studies have shown that the earlier an individual begins to smoke, the more likely the person will become addicted. So, age verification through photo IDs is essential to protect children from a lifetime of smoking. Second, most Internet vendors illegally fail to charge taxes, and it is well-established that lower cigarette prices lead to increased smoking rates.

Today’s agreement is the third major development in a multi-pronged effort by Attorneys Generals to restrict the payment, shipment and supply operations of illegal Internet cigarette traffickers. In March 2005, the Attorneys General announced major credit card companies had agreed to stop processing credit card payments for Internet retailers. Later in the year, both DHL and UPS agreed to stop shipping packages for vendors engaged in these illegal sales.

Separate from the multi-state effort, Lockyer in 2003 filed lawsuits against six online sellers. The enforcement actions ultimately put five of the companies out of business in California and enjoined the sixth from doing business in the state unless it complied with state and federal laws. Additionally, the companies paid a combined $5 million in civil penalties.

With the agreement, Philip Morris becomes the first tobacco product manufacturer to agree to reduce the supply of cigarettes to direct customers who, in turn, supply vendors engaged in the illegal resale of its cigarettes on the Internet. The Attorneys General commended Philip Morris for its cooperation in the effort to reduce these illegal sales, and said they will encourage other manufacturers to take similar action.

In addition to Lockyer, the Attorneys General from the following jurisdictions joined this agreement: Alabama, Arkansas, American Samoa, California, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Mexico, New Jersey, New York, Northern Marianas, Oklahoma, Oregon, Puerto Rico, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.