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Upset by reports showing that more than 1 million youths use smokeless tobacco, President Clinton battled in 1995 for marketing restrictions on chewing tobacco and moist snuff. He lent his support in 1996 to former baseball player Joe Garagiola’s campaign to get major leaguers to become better role models by giving up smokeless tobacco. “It furthers the president’s convictions that we really should do everything we can to discourage tobacco use by young people,” White House Press Secretary Mike McCurry said in March 1996. Clinton even has pushed hard for higher tobacco taxes. His 2000 budget calls for a tax increase of 25 cents per package for all smokeless tobacco. The administration has repeatedly said that higher prices discourage youth from using tobacco. Though typically the comments refer to smoking, the president or his spokesmen mentioned smokeless tobacco at least 15 times in the past five years. Throughout these battles, the Federal Trade Commission has been one of the administration’s most effective tools. It stopped the Joe Camel advertising campaign, imposed regulations on tobacco marketing and continues to collect data on cigarette and smokeless tobacco use. ANTI-TOBACCO TAKES A BACK SEAT TO ANTITRUST But now the agency, also an arbiter of antitrust law, finds itself advocating a position seemingly at odds with its role as an anti-tobacco crusader. The merger of two chewing-tobacco companies is forcing the FTC to fight for lower tobacco costs, an outcome that is an anathema to the administration’s tobacco policy. The FTC is preparing to go to court in early September to challenge Swedish Match North America Inc.’s purchase of National Tobacco Co. LP on antitrust grounds. The regulator alleges the transaction would harm consumers because Swedish Match could use its newfound dominance in loose-leaf chewing tobacco to raise prices. “The irony is clearly there,” said one tobacco industry official, who said his colleagues wonder why one agency would fight for lower prices while the rest of the administration wants higher prices. Several anti-tobacco activists contacted for this article, while quick to praise the FTC’s fight against Joe Camel and its other efforts to limit tobacco promotions, also find the situation perplexing. “Every time you raise tobacco prices, it results in a reduction of use, particularly among youth,” said Paul Turner, executive director of the National Spit Tobacco Education Program. Yet there appears to have been little the FTC could do to avoid this pickle, according to agency officials and antitrust lawyers not connected with the case. The deal would merge the first- and third-largest chewing tobacco companies, giving them control over 60 percent of the market. Transactions that result in such high market concentrations and involve a combination among two of the three top players in an industry are almost always blocked. To permit the merger because of some larger societal good would set a dangerous precedent and send a message to business that the regulator might allow more otherwise anti-competitive deals, officials and antitrust lawyers said. “We have a responsibility to enforce the antitrust laws,” FTC spokesman Eric London said. “We don’t make national tobacco policy.” Nor should the public want the FTC to carve out antitrust exemptions of specific industries, said Albert Foer, president of the American Antitrust Institute, a non-profit group that advocates enforcement of competition laws. “They have to go after anti-competitive issues in every market,” Foer said. “Antitrust people come down fairly consistently that you don’t look at the social significance of the product.” The agencies, Foer noted, do have discretion on whether to challenge deals and could be persuaded on borderline cases to let one proceed if it would serve some greater public good. But this merger presents such clear-cut antitrust issues that letting it proceed unchallenged would have sent a dangerous signal to the market about the type of deals the FTC will accept, he said. Meanwhile, one official said the FTC has economic evidence indicating higher prices would not result in less loose-leaf tobacco use. Anti-tobacco activists said studies have found that a 10 percent increase in the price of tobacco results in a 4 percent decline in use. These studies, however, are based primarily on cigarettes and moist snuff, a more refined type of smokeless tobacco than the loose leaf that Swedish Match and National Tobacco sell. The agency official said loose-leaf users tend to be older and less sensitive to price increases — unlikely candidates for abstinence in the case of a price hike. The official also said loose leaf is not the tobacco product of choice for young people, who are the most sensitive to price increases. Thus, cheaper loose-leaf prices would be unlikely to result in more use of the product by young people, the official said. Fortunately for Judge Thomas Hogan, the trial will be free of such issues when it starts on Sept. 5. The FTC plans to present a traditional antitrust case, according to court documents, and the defendants will mount a conventional defense. Occupying center stage will be a fight over product market definition. The government contends that loose-leaf chewing tobacco is a distinct market and only sellers of this type of chew should be considered during the merger review. Swedish Match and National Tobacco take a wider view, arguing that loose leaf is part of a broader, smokeless-tobacco market that includes close substitutes such as moist snuff. Under this view, the merger of Swedish Match and National Tobacco is far less menacing. A check of Web sites selling smokeless tobacco found support for the positions of the companies and the government. For example, at www.smokesgalore.com, moist snuff and chewing tobacco are found on the same order page. This site treats them as a subcategory of general tobacco products, a larger product group that includes everything from rolling paper to Captain Black pipe tobacco. Yet at www.discountcigarettes.net, a single page lists 13 varieties of chewing tobacco for sale, ranging from $16 for a carton of a dozen 3-ounce pouches of Durango to $35.45 for a carton of Black Wild Cherry. Moist snuff gets its own page, with a five-container roll of Skoal Bandit Straight costing $22.99. To prepare the judge for trial, the FTC devoted much of a June 23 memorandum to justifying its choice of strategy, calling chewing tobacco a narrow product market that excludes moist snuff. The agency said moist snuff is not a competing product because loose-leaf chewing tobacco producers could raise prices without losing significant sales to the makers of Skoal, Copenhagen and other brands of snuff. “The behavior described in Swedish Match’s own research is that consumers would substitute less expensive loose leaf, but not more expensive moist snuff, if loose-leaf prices increased slightly,” the FTC said. Previewing the evidence to be presented at trial, the FTC cited an excerpt from a National Tobacco filing with the Securities and Exchange Commission in which it claimed to compete in the chewing-tobacco market against three other companies. The SEC filing does not mention moist-snuff makers as competitors. The government also quotes former Swedish Match Senior Vice President Harold Price as saying in an October affidavit that “consumers of moist snuff do not switch to other forms of smokeless tobacco in response to price increases of moist snuff.” Just because both products are smokeless tobacco is not sufficient to make them competitors, the agency said. The FTC likened the argument of the tobacco companies to a firm arguing that bus travel should be considered when reviewing airline mergers. While buses may provide some competition to airlines, they do not constrain prices. “Superficial similarities between products that seem to perform the same functions may be misleading,” the agency said. Chewing tobacco and moist snuff are used differently, the FTC said. Chewing tobacco is sold in 3-ounce pouches for about $1.80. It is made from cheaper Wisconsin and Pennsylvania tobacco, which is air-cured and flavored with seasonings. It tastes sweet and requires frequent spitting, which means the product is intended to be used outside. The FTC has almost always opposed mergers among two of the top three competitors in an industry. In this case, the deal involves the acquisition of the third-largest player by the market leader. Moist snuff, by contrast, is made from Kentucky and Tennessee tobacco, which is cured with smoke, giving it a salty flavor, the FTC said. It is finely ground like coffee and consumed by putting a pinch between the gum and lip. The small amount used requires less spitting, which means moist snuff may be used indoors. Antitrust experts said the government appears to have a strong case. The FTC has almost always opposed mergers among two of the top three competitors in an industry. In this case, the deal involves the acquisition of the third-largest player by the market leader. The result would be a company with a 60 percent market share. The second-largest player would have a 30 percent share, bringing the two-company market concentration to 90 percent. The agencies almost never accept deals with such high concentration levels, the experts said. “The parties were pushing as far as possible and hoping the commission wouldn’t have the guts to sue them,” Foer said. “But now the commission is suing them and they will have to go to trial.” Former FTC Commissioner Mary Azcuenaga said the best chance for the companies is to provide significant economic and factual evidence showing how the products are close substitutes. “It is perfectly possible in a given case for reasonable people to differ quite dramatically over what the market definition is,” she said. That’s just what Swedish Match and National Tobacco plan to do. They contend the FTC just does not understand the smokeless tobacco market. Moist snuff and chewing tobacco compete for many of the same customers and constrain each other’s pricing, they contend. James Kearney, a partner in the New York office of the Latham & Watkins law firm who represents Swedish Match, readily concedes there is a group of loose-leaf users who would never switch to moist stuff regardless of what happens to prices. But he said far more customers are so-called marginal users, which means that they use both moist snuff and loose leaf, that they have little preference for one product or the other, or that they readily switch between loose leaf and moist snuff depending upon price. “It doesn’t matter if there is a group who wouldn’t move no matter what,” he said. “There are a sufficient number of loose-leaf users who are price-sensitive and would likely move to moist snuff in the event of a hypothetical price increase.” The companies will present evidence showing the amount of users who would abandon loose leaf for moist snuff would be so great that a price increase would be uneconomical, he said. That is proof that moist snuff and chewing tobacco are part of the same market, he said. The other plank of the defense rests on market forces. Kearney said the competitive forces that have driven down loose-leaf prices will continue regardless of whether this merger is approved. This means there would not be any consumer harm from the deal. The country has massive overcapacity for loose-leaf production, Kearney said. Because economies of scale dictate that companies should try to maximize production, oversupply in loose leaf is likely to remain a business fact. Further ensuring oversupply are the declining demand for loose leaf, tobacco regulations that make it tougher to sell the product, and more users switching to moist snuff, Kearney said. Finally, retailers are increasingly less willing to stock loose leaf. It is less profitable than other tobacco products because the pouches take up so much space. Kearney said retailers make about $22 per foot of shelf space on moist snuff compared to $2 per foot of shelf space for loose leaf. A random check of spots in downtown Washington D.C. that sell tobacco seem to support that contention. Loose leaf could not be found at five spots that sell tobacco products, while four of them sold moist snuff and all had cigarettes and cigars. The outlets included a chain drug store, local specialty tobacco shop, two liquor stores and a newsstand. Because loose leaf is fighting for shelf space and consumers, companies are more likely to cut prices than raise them, he said. The trial is expected to end Sept. 8 and a decision should come this fall. Copyright (c)2000 TDD, LLC. All rights reserved.

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