Nearly everyone within the to-bacco industry is familiar withthe major tobacco manufactur-

ers’ retail promotion programs, whichpromote certain cigarette brands by re-bating a portion of the product’s price.The rebate payments are made to par-ticipating retailers according to the

terms of contracts signed between themajors and the retailers.

According to the manufacturers,those contracts prevent the retailers fromselling the promotional cigarettes to any-one but consumers and require the con-tracted retailers to pass on the full rebat-ed amount to the consumer through a

reduced retail price. If a retailer buys acarton of cigarettes for the full list priceof $40, for example, and the manufactur-er pays the retailer an $8 rebate pay-ment, the retailer is contractually oblig-ated to resell the carton of cigarettes for$8 less than its normal sale price.

It is the manufacturer’s intent thatcontracts limit the sale of rebated ciga-rettes strictly to consumers in the retail-er’s store, and that only limited quanti-ties of cigarettes (usually three to fivecartons) may be sold to any one cus-tomer at a time. The promotional con-tracts may also contain provisions gov-erning the percentage of the manufactur-er’s cigarettes that must be sold as a per-centage of total sales, the layout of fix-tures and counter displays in stores, andthe maintenance of inventory levels.

The task of explaining the manufac-turer’s policies to retailers and ensuringtheir compliance falls upon the manu-facturer’s sales representatives. But dis-putes arise when reps allegedly tell theretailers that the written agreement’scarton limits and provisions mandatingsales only to consumers, do not apply.

Arguably, sales representativeshave an incentive to waive the manu-facturer’s sales restrictions, since theyare compensated based on productsales in their territories. A waiver of therestrictions can lead to higher sales inthose territories. Relying on the verbalstatements of the manufacturer’s salesreps, retailers then sell cigarettes in ex-cess of the limits established by the par-ties’ written agreements, to consumersor distributors. In many cases, theremay also be an allegation that the man-ufacturer itself is aware of the retailer’sexcess sales, by virtue of the manufac-turer’s access to the retailer’s sales data,and waived those limits by failing toenforce them.

WHEN DISPUTES HEAD TO COURTThe manufacturer inevitably denies thatthe sales representative waived the writ-ten agreement’s sales restrictions or ar-gues that its representative lacked au-thority to waive those restrictions in thefirst place. The issue for the court in suchdisputes is whether the written agree-ment’s provisions are trumped by the

Independent Retailers & Distributors Square off

Against the Majors

>PROMOTION PROGRAMS

The major tobacco product manufacturers’ relationships withretailers and distributors are becoming increasingly contentious.Three tobacco litigators describe the battleground regarding themajors’ retail promotion programs. >BY ASHLEY L. TAYLOR, JR.,ANTHONY F. TROY, AND BRYAN M. HAYNES

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representative’s verbal waiver of thoseprovisions. Established principles of con-tract interpretation often support the re-tailer’s contention that the representa-tives’ statements take precedence overthe written agreements’ sales restrictions.

In another line of cases, the contract-ed retailer arguably violates its agree-ment with the manufacturer by sellingpromotional cigarettes to distributors orto consumers in excess of the writtenagreements’ carton limits. However, themanufacturer does not sue its contractedretailer, with which the manufacturermay often have an established businessrelationship that the manufacturer doesnot want to jeopardize. Instead, the man-ufacturer sues the entities that purchasedthe promotional cigarettes from the con-tracted retailer — often fourth-tier dis-tributors. Because the fourth-tier distrib-utor does not have an agreement withthe manufacturer prohibiting it frompurchasing or selling the manufacturer’sproducts, the manufacturer must rely onsomewhat novel legal theories in orderto assert a claim against the distributor.

In one recent case, the manufacturerasserted a claim under the Racketeer In-fluenced and Corrupt Organizations(“RICO”), a statute enacted by Congressto combat organized crime. The manu-facturer alleged that certain of its con-tracted retailers conspired with fourth-tier distributors and others to misrepre-sent to the manufacturer that promo-tional cigarettes had been sold directlyto consumers.

After the manufacturer discoveredthe alleged breaches by its contractedretailers, the manufacturer terminatedsome —but not all — of their contracts,and initiated litigation against thefourth-tier distributors that purchasedpromotional cigarettes from the con-tracted retailers. In addition to relyingon the federal RICO statute, the manu-facturer has also asserted claims againstthe fourth-tier distributors for tortiousinterference with contract and the stateunfair trade practices statute.

Regardless of whether the manu-facturer’s suit involves a garden-vari-ety claim for breach of the written

sales restrictions or more novel theo-ries that must be implicated when nocontractual obligation exists, disputesbetween the major manufacturers andtheir contracted retailers and non-con-tracted distributors are becoming in-creasingly prevalent. Prudent retailersand distributors are well-advised toseek legal counsel with respect to theirpurchases and sales of the majors’ pro-motional products.

Ashley L. Taylor, Jr. , Anthony F. Troy,and Bryan M. Haynes are partners inthe Richmond office of TroutmanSanders LLP. Ashley Taylor serves aschair of the Tobacco Team; Troy andHaynes are also members of the firm’stobacco team focusing their practice ontobacco regulatory issues and litigation,respectively. The Tobacco Team repre-sents tobacco product manufacturers,importers, distributors, and retailers.They currently represent retailers anddistributors in disputes with the majormanufacturers regarding the majors’ re-tail promotion programs.

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