IN THE COURT OF APPEALS OF THE STATE OF OREGON … · Eugene, OR 97401-3273 (541) 485.0220 James Dumas, OSB #771671 ... even though it did not harm Mrs. Schwarz, because the low-tar

(Additional Counsel On Inside Cover) January 2014

IN THE COURT OF APPEALS OF THE STATE OF OREGON

PAUL SCOTT SCHWARZ, PersonalRepresentative of the Estate OfMichelle Schwarz,

Plaintiff-Respondent,

vs.

PHILIP MORRIS USA INC., a foreigncorporation,

Defendant-Appellant

and

ROTHS I.G.A. FOOD LINER,INCORPORATED,

Defendant.

Multnomah County Circuit CourtCase No. 0002-01376

CA A152354

DEFENDANT-APPELLANT PHILIPMORRIS USA INC.’S REPLY BRIEFAND SUPPLEMENTAL EXCERPT

OF RECORD

Circuit Court for Multnomah CountyThe Honorable, Judge Henry Kantor

William F. Gary, OSB #[email protected] A. Rudnick, OSB #[email protected] LONG GARY RUDNICK P.C.360 East 10th Avenue, Suite 300Eugene, OR 97401-3273(541) 485.0220

James Dumas, OSB #[email protected] HART NEIL & WEIGLER

LLP1300 SW 5th Avenue, Suite 3400Portland, OR 97201(503) 548-6135

January 2014

Frank Kelly, III, Pro Hac [email protected], HARDY & BACON LLP1 Montgomery Street, Suite 2700San Francisco, CA 94104-4505(415) 544-1948

Robert A. McCarter, III, Pro Hac [email protected], HARDY & BACON L.L.P.1155 F Street NW, Suite 200Washington, D.C. 20004-1305(202) 639-5638

Lauren R. Goldman, Pro Hac [email protected] A. Chesin, Pro Hac [email protected] [email protected] BROWN LLP1675 BroadwayNew York, NY 10019(212) 506-2647

Of Attorneys for Defendant-Appellant

Charles S. Tauman, OSB #[email protected] S. TAUMAN PCPO Box 19631Portland, OR 97280(503) 849-9281

D. Lawrence Wobbrock, OSB #[email protected] WOBBROCK P.C.2151 Crest DriveLake Oswego, OR 97034(503) 349-4141

James Coon, OSB #[email protected] THOMAS & COON

820 SW Second Ave., Suite 200Portland, OR 97204(503) 228-5222

Richard A. Lane, OSB #[email protected] A. LANE ATTORNEY AT LAW

707 SW Washington St Ste 600Portland, OR 97205

(503) 228-6600

Of Attorneys for Plaintiff-Respondent

i

TABLE OF CONTENTS

Pages

INTRODUCTION .........................................................................................1

ARGUMENT..................................................................................................3

I. FIRST ASSIGNMENT OF ERROR: THE PUNITIVEDAMAGES AWARD IS ARBITRARY AND EXCESSIVE. .........3

A. Any Punitive Award Above A Nominal Amount Would BeArbitrary. .....................................................................................3

1. The “Some Evidence” Standard Does Not Apply. ...........3

2. Plaintiff Gave the Jury No Meaningful InformationAbout the Low-Tar Fraud. ................................................4

3. Plaintiff Failed to Meet Its Burden Under ORS30.925(2)...........................................................................9

B. The Punitive Award Is Grossly And UnconstitutionallyExcessive.................................................................................. 12

1. The 148:1 Ratio of Punitive to CompensatoryDamages Is Presumptively Unconstitutional................. 12

2. The State Farm Exceptions Do Not Apply. .................. 14

3. The Williams Exception Is Inapplicable. ....................... 15

4. The “Comparable Penalties” Guidepost Has LittleUtility Here. ................................................................... 16

5. The $25 Million Award Is Not Necessary to ServeOregon’s Interests in Punishment or Deterrence........... 17

II. SECOND, THIRD, AND FOURTH ASSIGNMENTS OFERROR.............................................................................................. 18

CONCLUSION ........................................................................................... 19

ii

TABLE OF AUTHORITIES

Cases Page(s)

Bains LLC v. Arco Prods. Co.,405 F3d 764 (9th Cir. 2005) ...............................................................................13

BMW of N. Am., Inc. v. Gore,517 US 559, 116 S Ct 1589, 134 L Ed 2d 809 (1996) .......................................18

Bolt v. Influence, Inc.,333 Or 572, 43 P3d 425 (2002) ........................................................................3, 4

Goddard v. Farmers Ins. Co.,344 Or 232, 179 P3d 645 (2008) ........................................................................17

Greist v. Phillips,322 Or 281, 906 P2d 789 (1995) ........................................................................13

Parrott v. Carr Chevrolet, Inc.,331 Or 537, 17 P3d 473 (2001) ..........................................................................17

State Farm Mut. Auto. Ins. Co. v. Campbell,538 US 408, 123 S Ct 1513, 155 L Ed 2d 585 (2003) .............................7, 14, 16

State v. Barnes,329 Or 327, 986 P2d 1160 (1999) ......................................................................18

TXO Prod. Corp. v. Alliance Res. Corp.,509 US 443, 131 S Ct 2711, 125 L Ed 2d 366 (1993) .......................................12

Vasquez-Lopez v. Beneficial Or., Inc.,210 Or App 553, 152 P3d 940 (2007) ................................................................13

Williams v. Philip Morris Inc.,340 Or 35, 127 P3d 1165 (2006) ..................................................................15, 16

Statutes

ORS 30.020..............................................................................................................13

ORS 30.925................................................................................................4, 9, 10, 11

ORS 31.730................................................................................................................4

ORS 161.655............................................................................................................17

1

INTRODUCTION

Plaintiff’s appellate strategy echoes its retrial strategy: (1) cite almost no

evidence related to the alleged low-tar fraud, the sole claim for which plaintiff

sought punitive damages; and (2) focus instead on conduct—misrepresentations

about the health hazards and addictiveness of smoking generally—for which the

first jury expressly found PM USA not liable. That strategy resulted in an

arbitrary and excessive award at trial and cannot justify affirmance on appeal.

Plaintiff argues that the alleged “smoking-and-health fraud” is relevant,

even though it did not harm Mrs. Schwarz, because the low-tar fraud “was the

logical sequel” to that earlier conduct. But to determine the appropriate amount

of punitive damages in this case, the jury needed evidence that would enable it

to assess the reprehensibility of the low-tar fraud itself, not some other alleged

misdeeds that did not harm Mrs. Schwarz. Plaintiff chose not to provide the

information that the jury needed to make this assessment.

It is worth pausing for a moment and wondering, “why not”? Plaintiff

certainly could have introduced the evidence related to low-tar marketing that it

introduced in the first trial, but presumably deemed it tactically advantageous to

shift the jury’s focus from the low-tar fraud to other, largely irrelevant matters.

That tactical choice has consequences: plaintiff should not be awarded $25

million in punitive damages for conduct that was barely discussed during the

retrial.

2

Plaintiff next argues that, notwithstanding the absence of direct evidence,

the jury could have gleaned enough about the low-tar fraud to rationally assess

punitive damages by reading the first jury’s verdict and a couple of documents

introduced during plaintiff’s rebuttal case. Despite plaintiff’s attempt to pile

inference upon inference, however, the verdict and documents reveal next to

nothing about the conduct at issue and therefore cannot support any more than a

nominal punitive damages award under Oregon law and federal due process.

Plaintiff also provides no convincing response to PM USA’s argument

that the $25 million punitive award is unconstitutionally excessive. Plaintiff

takes no issue with the authorities establishing that a ratio of punitive to

compensatory damages greater than 9:1—let alone the 148:1 ratio here—is

presumptively unconstitutional. Instead, plaintiff argues that the court must

consider “the ratio of the jury’s $25 million award to the harm and potential

harm to Michelle Schwarz.” The “potential harm” rubric is irrelevant here,

however, because this case does not involve an unsuccessful tortious scheme.

Nor does plaintiff’s evidence establish the “extraordinary

reprehensibility” that the Oregon Supreme Court has held can justify an

exception to the ratio presumption. To the contrary, there was virtually no

evidence bearing on the reprehensibility of the low-tar fraud. At a minimum,

therefore, the punitive damages award should be reduced to an amount no more

than nine times the compensatory damages.

3

Finally, even putting the ratio requirement to one side, other factors—

including PM USA’s uncontradicted mitigation evidence and the fact that it is

virtually impossible for the conduct to recur—confirm that this is not a case

where any substantial punishment is necessary to serve the State’s interests in

deterrence and punishment; certainly, the maximum constitutionally

permissible award is far lower than $25 million.

ARGUMENT

I. FIRST ASSIGNMENT OF ERROR: THE PUNITIVE DAMAGESAWARD IS ARBITRARY AND EXCESSIVE.

A. Any Punitive Award Above A Nominal Amount Would BeArbitrary.

PM USA argued that because plaintiff adduced no evidence from which

the jury could rationally determine an appropriate amount of punitive damages,

the award must be reduced to a nominal amount under both Oregon law and

federal due process. See Def. Br. 16-22. Plaintiff’s response rests upon

misunderstandings and distortions of the governing legal standard, the record,

and the statutory factors.1

1. The “Some Evidence” Standard Does Not Apply.

In Bolt v. Influence, Inc., 333 Or 572, 43 P3d 425 (2002), the Oregon

Supreme Court held that a motion for “directed verdict” fails if there is “some

1 Plaintiff does not dispute that any reduction of the punitive award shouldbe unconditional rather than by remittitur. See Def. Br. 32-33.

4

evidence to support the elements of [the] complaint.” Id. at 578. Plaintiff

argues that this “some evidence” rule applies here. Pl. Br. 2-3, 17.

Plaintiff is mistaken. The first assignment of error does not seek a

directed verdict; it seeks a reduction in the amount of punitive damages

pursuant to ORS 31.730. See Def. Br. 16-22, 32-33. Under ORS 31.730, this

court must reduce the award if it is not within “the range of damages that a

rational juror would be entitled to award based on the record as a whole.”

Nothing in the statute or the case law indicates that this inquiry is governed by

the “some evidence” standard. It turns instead on application of the mandatory

ORS 30.925(2) factors and principles of federal due process. See Def. Br.

16-17.

2. Plaintiff Gave the Jury No Meaningful InformationAbout the Low-Tar Fraud.

Plaintiff’s evidence gave the jury no basis to evaluate the character of PM

USA’s conduct in light of the legal criteria established by ORS 30.925 and

federal due process. Def. Br. 18-21. The jury had no way of determining what

PM USA’s misrepresentations were; what PM USA knew about the underlying

facts and when; how any misrepresentations were made; how often; for how

long; or whether they were made to anyone other than Mrs. Schwarz. Plaintiff

does not appear to dispute that it introduced scant evidence on these subjects

during its case-in-chief (cf. Pl. Br. 18 n.9), but argues that the jury could

nonetheless have determined a proper punitive award based on the first jury’s

5

verdict, evidence about the health hazards and addictiveness of smoking

generally, and documents plaintiff read to the jury during its rebuttal and

closing. Taken individually or together, these items cannot support more than

minimal punitive damages.

a. The first verdict

Plaintiff contends that the first verdict “required” the retrial jury to “find

that defendant intentionally misled its customers, including Mrs. Schwarz, as to

the safety of its product in a national campaign selling Merit cigarettes as ‘low

tar’ for 35 years, knowing lives and health were at risk and profiting greatly

from its fraud.” Pl. Br. 18. Plaintiff is wrong.

The first jury answered “yes” to the following question:

“Did Philip Morris make falserepresentations that ‘low tar’ cigarettesdelivered less tar and nicotine to thesmoker and were therefore safer andhealthier than regular cigarettes and analternative to quitting smoking uponwhich Michelle Schwarz reasonablyrelied, and if so, were such falserepresentations and reliance a cause ofMichelle Schwarz’ death?”

ER-11.

This verdict does not establish—either explicitly or by reasonable

inference—that the low-tar fraud lasted “for 35 years”; how many “customers”

other than Mrs. Schwarz were “misled” by (i.e., relied upon) PM USA’s

conduct; that PM USA knew that “lives and health were at risk”; or that PM

6

USA “profit[ed] greatly from its fraud.” Pl. Br. 18. If combined with a proper

finding of punitive liability (but see Def. Br. 40-43), the verdict would establish

only that PM USA’s conduct reached the minimum level that would support the

imposition of some punitive damages (see id. 15). As the trial court warned,

plaintiff bore the burden of “giv[ing] * * * context to the [first jury’s] findings,”

so that the retrial jury could “determine how reprehensible” PM USA’s conduct

was and therefore “how much punishment [wa]s necessary.” Tr. 907, 936.

Plaintiff ignored that advice.

b. Evidence of conduct that did not harm Mrs.Schwarz

The first jury found PM USA not liable on two of plaintiff’s fraud

theories: alleged false representations about (1) the link between smoking and

disease and (2) the addictiveness of cigarettes. ER-11. Yet plaintiff relies

significantly on evidence pertaining solely to those theories. See, e.g., Pl. Br. 5,

8-9, 18 n.9, 19-20. Plaintiff argues that this evidence is relevant because

“Defendant’s ‘low tar’ fraud was a continuation and extension of its fraudulent

denial and minimization of the adverse health effects of cigarette smoking.” Id.

3-4; see also id. 5, 20 n.10.

But plaintiff does not contest that under Oregon law and federal due

process, PM USA cannot be punished for conduct that did not harm Mrs.

Schwarz. See Def. Br. 16. Accordingly, even if evidence of other conduct were

marginally relevant, and therefore admissible, it did not inform the jury about

7

the conduct it was being asked to punish. The U.S. Supreme Court rejected an

analogous attempt to rely on evidence of acts that did not harm the plaintiff in

State Farm Mutual Automobile Insurance Company v. Campbell, 538 US 408,

422-23, 123 S Ct 1513, 155 L Ed 2d 585 (2003).

c. The documents cited in plaintiff’s brief

The only low-tar fraud exhibit plaintiff discusses in significant detail was

introduced during rebuttal: a 1990 speech about the “history of Merit

cigarettes.” Pl. Br. 3, 5, 10-14, 17, 20, 30. No witness testified about this

exhibit, and plaintiff made only a brief, cryptic reference to it in closing

argument:

“[MR. WOBROCK:] Exhibit 427, ‘MeritHistory,’ * * * referring to the* * * fourth page, ‘Remember 45 millionin 1976. This was a record amount for anew brand introduction. To put this intoperspective, Marlboro whose share at thetime was 16, spent 36 million that year.’”

Tr. 4386.

Plaintiff now seeks to imbue this document with tremendous breadth,

suggesting that the jury could somehow have discerned, from a close reading in

the jury room, that for 35 years PM USA marketed Merit cigarettes as “safer,”

“healthier,” and “better for you” than regular cigarettes; that those statements

were fraudulent; and that they deceived “many smokers.” Pl. Br. 3, 11-13, 17,

20.

8

The document says nothing of the sort. It does not use the terms “safe,”

“safer,” “safety,” “health,” “healthier,” or “healthy.” Nor does it establish the

length or impact of any tortious scheme. To the contrary, it explains that Merits

were marketed primarily as delivering more flavor and better taste than other

low-tar cigarettes, and proposes ways to address Merit’s “taste/perception”

problem. See, e.g., SER-2-7, 13, 23.

Plaintiff also briefly refers to three other documents it introduced on

cross-examination or rebuttal: a 1974 PM USA document stating that the FTC

standardized test for measuring tar levels should be retained because it “gives

low numbers” (Pl. Br. 10); a 1966 PM USA memorandum stating that “the

illusion of filtration is as important as the fact of filtration” (id. 11); and a

document explaining some of the changes that would result from federal

regulation (id. 14-15). The opening brief explained why none of these

documents enabled the jury to assess PM USA’s conduct: the first reflects only

what PM USA affirmatively advised the FTC; the second reflects the speaker’s

belief that cigarettes needed a visible filter in addition to having lower tar; and

the third shows nothing more than PM USA’s compliance with legislation that

it supported. Def. Br. 27-29. Plaintiff offers no response.

Finally, plaintiff makes various citation-free assertions that are contrary

to the record, including that “[t]here was only one reason to smoke ‘low tar’—

the false impression created by defendant that they were safer cigarettes.” Pl.

9

Br. 22; see also id. 10 (asserting that defendant developed low-tar brands to

address “concerns of those who no longer believed in its denials”). In fact,

many people continue to smoke lower-yield brands even though public health

authorities now express the view that these brands are not safer—a view to

which PM USA and other major tobacco manufacturers defer. See Def. Br.

30-31. Plaintiff’s reliance on wholly unsupported allegations only underscores

its failure to justify a large award to the jury.

3. Plaintiff Failed to Meet Its Burden Under ORS30.925(2).

Plaintiff’s response to PM USA’s argument regarding the ORS 30.925(2)

factors (Def. Br. 18-20) is unconvincing.

a. ORS 30.925(2)(a)-(b): The likelihood at the timethat serious harm would arise from thedefendant’s misconduct, and the degree of thedefendant’s awareness of that likelihood

Plaintiff’s arguments (Pl. Br. 19-21) regarding the first two factors either

have nothing to do with low-tar fraud or have no basis in the retrial record. For

example, plaintiff asserts that “[d]efendant knew the safety issue included fatal

diseases such as lung cancer and heart disease nationwide” (unrelated to low-tar

fraud); that “many smokers were getting [PM USA’s] false message and acting

on it” (no basis in the evidence); that “millions of smokers switched from

regular to ‘low tar’ cigarettes” (not informative of any harm that switch was

likely to cause); and that convincing people to “smoke ‘low tar’ cigarettes

10

rather than quitting * * * was the desired result of [PM USA’s] false

representations that ‘low tar’ cigarettes were safer” (no basis in the evidence).

Id. 19-20.

Nor could the first jury’s verdict have helped the retrial jury apply these

two statutory factors. Cf. id. 19. The verdict establishes that PM USA made

misrepresentations about low-tar cigarettes, that one person—Mrs. Schwarz—

relied on those misrepresentations, and that serious harm to Mrs. Schwarz did

result from PM USA’s conduct. ER-11. It says nothing about the likelihood at

the time that serious harm would result, let alone the degree of PM USA’s

awareness of that likelihood.

b. ORS 30.925(2)(c)-(d): The profitability ofdefendant’s misconduct, and the duration of themisconduct and any concealment of it

Plaintiff’s arguments on these two factors (Pl. Br. 21-23) ignore the terms

“profitability” and “misconduct.” Evidence of revenues is not evidence of

profits; nor do the financial results achieved from PM USA’s sales of low-tar

cigarettes generally establish the profitability and duration of any tortious

conduct. See Def. Br. 20.

Plaintiff responds (Pl. Br. 21-23) that every sale of low-tar cigarettes was

tortious—and indeed that every time PM USA used the term “low tar” and told

consumers that Merit was “a low tar cigarette with good taste,” it committed a

tort. That is untenable. PM USA’s statements about Merits—a legal product—

11

were not tortious unless they were (1) intentional misrepresentations that were

(2) reasonably relied upon by smokers who (3) unknowingly compensated and

(4) failed to obtain less tar and nicotine. There was no evidence indicating how

many people other than Mrs. Schwarz switched to low-tar cigarettes in reliance

on PM USA’s alleged misrepresentations (and without knowing that

compensation might diminish any health benefits from the switch). There was

no evidence from which the jury could have determined what PM USA knew,

and when, about the risks of these cigarettes. There was no evidence to indicate

how many low-tar smokers, had they been fully informed of the dangers of

low-tar cigarettes, would simply have continued to smoke full-flavored

cigarettes instead of quitting. And there was certainly no basis to assume that

all Merit smokers were defrauded by false safety claims.

c. ORS 30.925(2)(e): The attitude and conduct of thedefendant upon discovery of the misconduct

Plaintiff now invokes ORS 30.925(2)(e) (Pl. Br. 23-24) even though it

conceded below that it did not present evidence on this factor (see Pl.’s Resp. to

Def.’s Mot. for Directed Verdict (Feb. 9, 2012) at 15). Plaintiff suggests only

that the jury could have disbelieved PM USA’s mitigating evidence on this

factor, which contributes nothing to plaintiff’s burden of proof. Pl. Br. 24.

In short, because the jury had no way of making a rational, non-arbitrary

determination of the appropriate amount of punitive damages, the award should

be reduced to a nominal amount.

12

B. The Punitive Award Is Grossly and UnconstitutionallyExcessive.

When plaintiff’s evidentiary failures are viewed in light of the other

traditional components of excessiveness analysis, it becomes even clearer that

the $25 million punitive award is both unconstitutionally excessive and far

greater than necessary today to punish and deter the decades-old conduct that

harmed Mrs. Schwarz; it must be substantially reduced. See Def. Br. 22-32.

1. The 148:1 Ratio of Punitive to Compensatory DamagesIs Presumptively Unconstitutional.

Plaintiff does not dispute that a ratio above single digits—let alone a ratio

of 148 to 1—is presumptively unconstitutional. Instead, plaintiff argues that

because the “compensatory award did not compensate for the loss of Michelle

Schwarz’s life,” the court should not compare the punitive award to the

compensatory damages calculated by the first jury, but should rather examine

“the ratio of the jury’s $25 million award to the harm and potential harm to

Michelle Schwarz.” Pl. Br. 5, 31 (emphasis in original).

Plaintiff misunderstands the concept of “potential harm.” This concept

refers to harm that did not result, but could have resulted, if a defendant’s

thwarted tortious scheme had been successful. See TXO Prod. Corp. v. Alliance

Res. Corp., 509 US 443, 460, 131 S Ct 2711, 125 L Ed 2d 366 (1993) (plurality

opinion) (“It is appropriate to consider the magnitude of the potential harm that

the defendant’s conduct would have caused to its intended victim if the

13

wrongful plan had succeeded * * *.”) (second emphasis added); Bains LLC v.

Arco Prods. Co., 405 F3d 764, 776 (9th Cir. 2005) (“TXO was speaking of the

potential harm ‘if the wrongful plan had succeeded * * *.’ Here the wrongful

conduct did succeed.”); see also Vasquez-Lopez v. Beneficial Or., Inc., 210 Or

App 553, 584, 152 P3d 940 (2007) (ratio guidepost “compar[es] the punitive

damages award and the harm likely to result from the defendant’s conduct as

well as the harm that actually has occurred”) (internal quotation marks omitted).

In a wrongful death case such as this one, loss of life occurred. Hypothetical

damages for loss of life are not “potential” harm; they are a theoretical element

of actual harm, but one neither awarded by the jury nor recoverable in Oregon.

At bottom, plaintiff’s argument is that the first jury’s compensatory

award was insufficient to compensate Mrs. Schwarz’s estate for the loss of her

life. But the Oregon legislature has made a clear policy determination that

damages for loss of life are not available to wrongful-death plaintiffs. It has

permitted such plaintiffs to recover only medical and funeral expenses;

compensation for pain, suffering, and loss of income before death; “pecuniary

loss to the decedent’s estate”; “pecuniary loss and * * * loss of * * * society

[and] companionship” damages incurred by survivors; and punitive damages.

ORS 30.020(2); see also Greist v. Phillips, 322 Or 281, 291, 294-95, 906 P2d

789 (1995). Allowing a wrongful-death plaintiff to inflate what would

otherwise be the maximum permissible punitive damages award by taking into

14

account hypothetical loss-of-life damages would directly contravene the

legislature’s unequivocal decision to make such damages unavailable. In any

event, because plaintiff produced no evidence about the value of Mrs.

Schwarz’s life, any award of punitive damages on that basis would be entirely

speculative.

2. The State Farm Exceptions Do Not Apply.

Plaintiff argues next that this case falls within an exception to the ratio

guidepost discussed in State Farm because “the value of a human life is

‘difficult to determine.’” Pl. Br. 33; see also Def. Br. 24-25. Once again, “the

value of a human life” is not a compensable harm in an Oregon wrongful-death

action. And the harms that are compensable under the wrongful death statute

(medical expenses, pain and suffering, loss of income, loss of society, etc.) are

calculated by juries in personal injury cases every day. If those harms qualified

for the third State Farm exception, the exception would swallow the rule.

Moreover, State Farm did not suggest that a difficult-to-determine harm

could justify any ratio; the Court simply noted its previous holding that a

“higher ratio might be necessary” under these circumstances. 538 US at 425

(emphasis in original). The Court then immediately made clear that “[w]hen

compensatory damages are substantial,” as they are in this case, “then a lesser

ratio, perhaps only equal to compensatory damages, can reach the outermost

limit of the due process guarantee.” Id.

15

3. The Williams Exception Is Inapplicable.

Plaintiff invokes the Oregon Supreme Court’s decision in Williams, but

that decision permits a greater than single-digit ratio only where the defendant’s

conduct toward the plaintiff was “extraordinarily reprehensible.” Williams v.

Philip Morris Inc., 340 Or 35, 63, 127 P3d 1165 (2006) (emphasis added).

Plaintiff made no such showing here. As shown in PM USA’s opening brief

(Def. Br. 25-30) and in Part I.A (pp. 3-11, supra), the paucity of evidence

regarding the character of the punishable conduct precludes any finding of more

than minimal reprehensibility and thus renders the $25 million punitive verdict

grossly excessive.

Plaintiff responds with assertions that have no basis in either the first

jury’s verdict or the evidence at retrial. See, e.g., Pl. Br. 27 (“[T]he jury could

have found a long-running, highly profitable fraudulent scheme that put

millions of smokers at risk of serious physical harm and death and caused Mrs.

Schwarz’s death.”). Plaintiff also suggests yet again that PM USA should be

punished for conduct for which the first jury found it not liable: the alleged

“false controversy about the health effects of cigarettes.” Id. 5. And plaintiff

argues (id. 27) that the court should ignore PM USA’s undisputed evidence that

its actions were consistent with the beliefs and goals of the public health

community because the evidence “contradicts the first jury’s verdict”—even

16

though that verdict says nothing about what the public health community

recommended at the time.

Plaintiff then argues that the five reprehensibility factors set forth in State

Farm “are satisfied at the highest level in this case.” Id. 30. Even if the record

could support a finding that all five factors are satisfied (and it cannot, see Def.

Br. 18-20, 41-43; pp. 3-11, supra), it still would not permit a ratio above 9:1.

State Farm made clear that, while satisfaction of all five factors may permit an

award towards the upper end of the single-digit range, it does not permit a court

to disregard the ratio guidepost entirely. Two of the factors (intentional deceit

and a financially vulnerable victim) were satisfied in State Farm, and the Court

nevertheless stated that a ratio of 1:1 approached the constitutional maximum.

See 538 US at 429. And the Williams Court made clear that its exception was

to be invoked only in “extreme and outrageous circumstances,” 340 Or at 63—

not in every wrongful-death case involving fraudulent misrepresentations, as

plaintiff’s argument would suggest.

4. The “Comparable Penalties” Guidepost Has LittleUtility Here.

Plaintiff argues that the third BMW/State Farm guidepost, comparable

penalties, supports the jury’s award because “causing death by fraud amounts,

at least, to second degree manslaughter.” Pl. Br. 33. This argument is

inconsistent with State Farm itself. See 538 US at 428 (“The existence of a

criminal penalty does have bearing on the seriousness with which a State views

17

the wrongful action. When used to determine the dollar amount of the award,

however, the criminal penalty has less utility. * * * Punitive damages are not a

substitute for the criminal process, and the remote possibility of a criminal

sanction does not automatically sustain a punitive damages award.”); see also

Goddard v. Farmers Ins. Co., 344 Or 232, 257, 179 P3d 645 (2008) (third

guidepost “fail[ed] to provide a quantitative measuring stick”).

In any event, Oregon law would permit a criminal penalty in a case like

this of up to $50,000 or double the profit resulting “from the commission of the

offense.” ORS 161.655(1)(a)(3). Twenty-five million dollars exceeds by

several orders of magnitude any profits PM USA could possibly have made

from “the offense”—i.e., sales of Merits to Mrs. Schwarz.

5. The $25 Million Award Is Not Necessary to ServeOregon’s Interests in Punishment or Deterrence.

Plaintiff offers no response to PM USA’s argument that, even apart from

considerations of ratio and reprehensibility, there is no need for additional

deterrence in the form of punitive damages because of the internal policies and

external constraints under which PM USA now operates. See Def. Br. 30-32.

The award is thus not “rational in light of [its] purpose to punish what has

occurred and to deter its repetition,” Parrott v. Carr Chevrolet, Inc., 331 Or

537, 550 n.9, 17 P3d 473 (2001) (alteration in original), and it cannot be upheld.

18

* * *

Even in absolute terms, without regard to the ratio guidepost, it is clear

that a $25 million punishment is grossly excessive in this case. First, plaintiff’s

meager evidence falls well short of establishing the high degree of

reprehensibility that could support an exaction of this size. Second, plaintiff’s

attempt to remedy this shortcoming by reliance on general smoking-and-health

evidence is barred by the first jury’s verdict. Third, PM USA’s uncontradicted

mitigation evidence further diminishes the degree of reprehensibility that can

properly be attributed to that fraud on this record. And fourth, as just noted,

there is little or no need for a large punishment from a deterrence perspective.

These considerations dramatically differentiate this case from the typical

smoking-and-health case and demonstrate that the $25 million judgment cannot

be sustained.

II. SECOND, THIRD, AND FOURTH ASSIGNMENTS OF ERROR

PM USA rests primarily on its opening brief with respect to the other

three assignments of error. See Def. Br. 33-43. But two points are warranted

here. First, plaintiff’s argument that a “reasonable relationship” instruction has

never been held to be constitutionally required (Pl. Br. 36-38) does not change

the fact that this instruction was a correct statement of federal constitutional

law, see BMW of N. Am., Inc. v. Gore, 517 US 559, 580, 116 S Ct 1589, 134 L

Ed 2d 809 (1996), and thus needed to be given under Oregon law, see State v.

19

Barnes, 329 Or 327, 334, 986 P2d 1160 (1999). Second, plaintiff’s argument

that PM USA’s instruction was incomplete because it did not include the

“potential harm” to Mrs. Schwarz (Pl. Br. 38-39) fails because, as explained

above, the concept of “potential harm” is inapplicable here (see pp. 12-13,

supra).

CONCLUSION

For the foregoing reasons and those in the opening brief, the judgment

should be reversed.

Respectfully submitted this 23rd day of January, 2014.

HARRANG LONG GARY RUDNICK P.C.

By: s/William F. GaryWilliam F. Gary, OSB #[email protected] A. Rudnick, OSB #[email protected]

Of Attorneys for Defendant-Appellant PHILIP MORRIS USAINC., a foreign corporation

INDEX FOR SUPPLEMENTAL EXCERPT OF RECORD

SER Page # Record Material Court Record #

SER 1 – 24 Merit History N/A

2500114485 Page 1 of 25

MERIT HISTORY k2 ._1V/7/5.6)

II/ AS MOST OF YOU KNOW,_MERIT IS AN IMPORTANT

INTERNATIONAL TRADEMARK FOR PHILIP MORRIS.

WE'VE BEEN ASKED TO SHARE WITH YOU THE KEY MARKETING ELEMENTS WHICH HELPED BUILD THIS BRAND IN THE U.S., AND MORE RECENTLY HAVE HELPED STABILIZE IT IN THE PAST FEW YEARS. PERHAPS BY SHARING OUR EXPERIENCES WITH ALL OF YOU, WE MIGHT STIR SOME NEW THINKING ON HOW TO BETTER EXPLOIT MERIT IN THE APPROPRIATE INTERNATIONAL MARKETS.

MERIT'S STORY WOULD MAKE A VERY INTERESTING CASE STUDY. HERE IS A BRAND THAT AFTER ITS INTRODUCTION IN 1976 WAS WIDELY ACCLAIMED IN THE U.S. AS THE MOST SUCCESSFUL NEW RAND INTRODUCTION SINCE THE ADVERTISING BROADCAST BAJOIFIN FACT MERIT GAINED AN AVERAGE OF ONE SHARE POINT PER YEAR FOR ITS FIRST FOUR YEARS, UNFORTUNATELY, BEGINNING IN THE EARLY 1980'S MERIT FACED SOME HARD TIMES.

EXHIBIT 427

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2500114485 Page 1 of 25

MERIT HISTORY k2 ._1V/7/5.6)

II/ AS MOST OF YOU KNOW,_MERIT IS AN IMPORTANT

INTERNATIONAL TRADEMARK FOR PHILIP MORRIS.

WE'VE BEEN ASKED TO SHARE WITH YOU THE KEY MARKETING ELEMENTS WHICH HELPED BUILD THIS BRAND IN THE U.S., AND MORE RECENTLY HAVE HELPED STABILIZE IT IN THE PAST FEW YEARS. PERHAPS BY SHARING OUR EXPERIENCES WITH ALL OF YOU, WE MIGHT STIR SOME NEW THINKING ON HOW TO BETTER EXPLOIT MERIT IN THE APPROPRIATE INTERNATIONAL MARKETS.

MERIT'S STORY WOULD MAKE A VERY INTERESTING CASE STUDY. HERE IS A BRAND THAT AFTER ITS INTRODUCTION IN 1976 WAS WIDELY ACCLAIMED IN THE U.S. AS THE MOST SUCCESSFUL NEW RAND INTRODUCTION SINCE THE ADVERTISING BROADCAST BAJOIFIN FACT MERIT GAINED AN AVERAGE OF ONE SHARE POINT PER YEAR FOR ITS FIRST FOUR YEARS, UNFORTUNATELY, BEGINNING IN THE EARLY 1980'S MERIT FACED SOME HARD TIMES.

EXHIBIT 427


SER-1SER-1

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2

IN LOOKING BACK TO 1976, MERIT'S SUCCESS WAS DUE TO A COMBINATION OF FACTORS:

MERIT WAS THE RIGHT PRODUCT, AT THE- RIGHT TIME, WHICH WAS FUELED BY CONSISTENT AND HEAVY MARKETING SUPPORT.

11?ET ME SET THE STAGE FOR YOU. IN THE MID 1970'S CONSUMERS IN THE UNITED STATES WERE CHANGING THEIR TASTES TO LIGHTER PRODUCTS. CHICKEN INSTEAD OF RED MEAT, WHITE WINE INSTEAD OF SCOTCH AND BOURBON, LIGHT BEERS, DIET COLAS, ETC. CIGARETTE SMOKERS WERT THROUGH THE SAME PROCESS.

LOU TAR AND NICOTINE BRANDS WERE NOT NEW WHEN MERIT WAS INTRODUCED IN 1976AN FACT MARLBORO LIGHTS WAS INTRODUCED IN 1971.110BRANDS LIKE TRUE, KENT AND VANTAGE HAD ALREADY BEEN IN THE MARKET BY THE MID 70'S BUT FULL FLAVOR SMOKERS WERE HAVING DIFFICULTY STAYING WITH THESE

LOW TAR BRANDS. . ALTHOUGH, THEY ALL ADVERTISED GREAT TASTE

ALONG NITH THEIR LOW TAR NUMBERS MOST SMOKERS DIDN'T AGREE. ALL OF THAT CHANGED WHEN MERIT WAS INTRODUCED IN 1976. IT WAS THE FIRST LOW TAR BRAND THAT CAME THROUGH ON THE PROMISE OF LOW TAR AND GREAT TASTE.

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2

IN LOOKING BACK TO 1976, MERIT'S SUCCESS WAS DUE TO A COMBINATION OF FACTORS:

MERIT WAS THE RIGHT PRODUCT, AT THE- RIGHT TIME, WHICH WAS FUELED BY CONSISTENT AND HEAVY MARKETING SUPPORT.

11?ET ME SET THE STAGE FOR YOU. IN THE MID 1970'S CONSUMERS IN THE UNITED STATES WERE CHANGING THEIR TASTES TO LIGHTER PRODUCTS. CHICKEN INSTEAD OF RED MEAT, WHITE WINE INSTEAD OF SCOTCH AND BOURBON, LIGHT BEERS, DIET COLAS, ETC. CIGARETTE SMOKERS WERT THROUGH THE SAME PROCESS.

LOU TAR AND NICOTINE BRANDS WERE NOT NEW WHEN MERIT WAS INTRODUCED IN 1976AN FACT MARLBORO LIGHTS WAS INTRODUCED IN 1971.110BRANDS LIKE TRUE, KENT AND VANTAGE HAD ALREADY BEEN IN THE MARKET BY THE MID 70'S BUT FULL FLAVOR SMOKERS WERE HAVING DIFFICULTY STAYING WITH THESE

LOW TAR BRANDS. . ALTHOUGH, THEY ALL ADVERTISED GREAT TASTE

ALONG NITH THEIR LOW TAR NUMBERS MOST SMOKERS DIDN'T AGREE. ALL OF THAT CHANGED WHEN MERIT WAS INTRODUCED IN 1976. IT WAS THE FIRST LOW TAR BRAND THAT CAME THROUGH ON THE PROMISE OF LOW TAR AND GREAT TASTE.

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SER-2SER-2

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3.

UP TILL THEN, MANUFACTURERS WERE APPROACHING THE TASTE PROBLEM THROUGH FILTRATION. MERIT WAS THE FIRST TO APPROACH THE PROBLEM AT THE BUSINESS END OF THE CIGARETTE, THE TOBACCO END.

II/ I THINK YOU ALL KNOW THE STORY. IT TOOK R&) 12 YEARS

TO DEVELOP THE ENRICHED FLAVOR TECHNOLOGY. THEY STARTED BY STUDYING CIGARS Q SMOKE TO BETTER UNDERSTAND THE ELEMENTS OF FLAVOR.1111THEY USED AN INSTRUMENT CALLED A FRACTOMETER AND BEGAN "CRACKING" CIGARETTE SMOKE DOWN INTO VARIOUS COMPONENTS. WHAT THEY DISCOVERED WAS THAT THERE ARE INGREDIENTS IN TOBACCO - BASIC FLAVOR UNITS - THAT DELIVER TASTE WAY OUT OF PROPORTION TO TAR LEVELS. THEY SELECTED THOSE UNITS THAT HAD HIGH FLAVOR YET WERE LOW TAR PRODUCERS, DEVELOPED WHAT WE NOW CALL ENRICHED FLAVOR AND MADE MERIT.

410 WE THEN BEGAN A SERIES OF TASTE TESTS THAT WERE TO

PROVE WE REALLY HAD SOME REAL NEWS FOR SMOKERS. MERIT AT 9MG TAR WAS TASTE TESTED AGAINST THE FIVE LEADING LOW TAR BRANDS RANGING FROM 11 MG TO 15 MG TAR. THOUSANDS OF SMOKERS WERE INVOLVED AND THE RESULTS WERE CONCLUSIVE: EVEN IF A CIGARETTE HAD UP TO 60% MORE TAR THAN MERIT, A

IPSIGNIFICANT MAJORITY OF ALL SMOKERS TESTED REPORTED THAT MERIT HAD MORE TASTE. THIS RESEARCH PROVIDED THE BASIS OF MERIT'S INTRODUCTORY CAMPAIGN. 0

•

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3.

UP TILL THEN, MANUFACTURERS WERE APPROACHING THE TASTE PROBLEM THROUGH FILTRATION. MERIT WAS THE FIRST TO APPROACH THE PROBLEM AT THE BUSINESS END OF THE CIGARETTE, THE TOBACCO END.

II/ I THINK YOU ALL KNOW THE STORY. IT TOOK R&) 12 YEARS

TO DEVELOP THE ENRICHED FLAVOR TECHNOLOGY. THEY STARTED BY STUDYING CIGARS Q SMOKE TO BETTER UNDERSTAND THE ELEMENTS OF FLAVOR.1111THEY USED AN INSTRUMENT CALLED A FRACTOMETER AND BEGAN "CRACKING" CIGARETTE SMOKE DOWN INTO VARIOUS COMPONENTS. WHAT THEY DISCOVERED WAS THAT THERE ARE INGREDIENTS IN TOBACCO - BASIC FLAVOR UNITS - THAT DELIVER TASTE WAY OUT OF PROPORTION TO TAR LEVELS. THEY SELECTED THOSE UNITS THAT HAD HIGH FLAVOR YET WERE LOW TAR PRODUCERS, DEVELOPED WHAT WE NOW CALL ENRICHED FLAVOR AND MADE MERIT.

410 WE THEN BEGAN A SERIES OF TASTE TESTS THAT WERE TO

PROVE WE REALLY HAD SOME REAL NEWS FOR SMOKERS. MERIT AT 9MG TAR WAS TASTE TESTED AGAINST THE FIVE LEADING LOW TAR BRANDS RANGING FROM 11 MG TO 15 MG TAR. THOUSANDS OF SMOKERS WERE INVOLVED AND THE RESULTS WERE CONCLUSIVE: EVEN IF A CIGARETTE HAD UP TO 60% MORE TAR THAN MERIT, A

IPSIGNIFICANT MAJORITY OF ALL SMOKERS TESTED REPORTED THAT MERIT HAD MORE TASTE. THIS RESEARCH PROVIDED THE BASIS OF MERIT'S INTRODUCTORY CAMPAIGN. 0

•


SER-3SER-3

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5

410 SWITCHING AMONG BRAND FAMILIES. IN THE MID-70'S APPROXIMATELY 15% OF ALL SMOKERS HAS SWITCHED TO A LOW TAR BRAND. IN FACT, AT THE HEIGHT OF THIS LOW TAR BOOM, MARLBORO RED DOWNSWITCHERS CONTRIBUTED ABOUT ONE-THIRD OF MERIT'S TOTAL VOLUME.

MERIT'S igTRODUCTION GAVE BIRTH TO A SERIES OF ME-TOO'S,!FACTNAS INTRODUCED IN 2976, FAILED OUISLY, AND WAS RE-LAUNCHED IN 1978 WITH NO BETTER RESULT, RJR TRIED TO COUNTER MERIT'S TECHNOLOGICAL ENRICHED FLAVOR STORY WITH THEIR ALL NATURACREAC LAUNCHED IN MID 1976, WHICH WAS A REAL BOMB. 'TECADE(f WHICH WAS LAUNCHED OM THE PLATFORM OF "THE CIGARS THAT TOOK 10 YEARS TO CREATE" FAILED IN ABOUT 10 DAYS. TER, BARCLAY WAS INTRODUCED AND HAD SOME SHORT TERM SUCCESS.

LET ME STOP HERE TO SUMMARIZE WHAT I BELIEVE WERE THE KEY MARKETING ELEMENTS IN THE SUCCESSFUL LAUNCH OF MERIT.

WE HAD THE BEST LOW TAR PRODUCT

o 414 WERE CONFIDENT ENOUGH TO ROLE THE DICE AND LAUNCH MERIT WITHOUT TESTING FIRST - SO

WE HAD THE ELEMENT OF SURPRISE

o THE TIMING WAS PERFECT - SMOKERS WERE LOOKING FOR A LOW TAR BRAND WITH TASTE

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5

410 SWITCHING AMONG BRAND FAMILIES. IN THE MID-70'S APPROXIMATELY 15% OF ALL SMOKERS HAS SWITCHED TO A LOW TAR BRAND. IN FACT, AT THE HEIGHT OF THIS LOW TAR BOOM, MARLBORO RED DOWNSWITCHERS CONTRIBUTED ABOUT ONE-THIRD OF MERIT'S TOTAL VOLUME.

MERIT'S igTRODUCTION GAVE BIRTH TO A SERIES OF ME-TOO'S,!FACTNAS INTRODUCED IN 2976, FAILED OUISLY, AND WAS RE-LAUNCHED IN 1978 WITH NO BETTER RESULT, RJR TRIED TO COUNTER MERIT'S TECHNOLOGICAL ENRICHED FLAVOR STORY WITH THEIR ALL NATURACREAC LAUNCHED IN MID 1976, WHICH WAS A REAL BOMB. 'TECADE(f WHICH WAS LAUNCHED OM THE PLATFORM OF "THE CIGARS THAT TOOK 10 YEARS TO CREATE" FAILED IN ABOUT 10 DAYS. TER, BARCLAY WAS INTRODUCED AND HAD SOME SHORT TERM SUCCESS.

LET ME STOP HERE TO SUMMARIZE WHAT I BELIEVE WERE THE KEY MARKETING ELEMENTS IN THE SUCCESSFUL LAUNCH OF MERIT.

WE HAD THE BEST LOW TAR PRODUCT

o 414 WERE CONFIDENT ENOUGH TO ROLE THE DICE AND LAUNCH MERIT WITHOUT TESTING FIRST - SO

WE HAD THE ELEMENT OF SURPRISE

o THE TIMING WAS PERFECT - SMOKERS WERE LOOKING FOR A LOW TAR BRAND WITH TASTE

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SER-4SER-4

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24

• IF YOU LOOK AT MERIT'S SHARE OF THE LOW TAR CATEGORY

WITHOUT PRICE/VALUE INCLUDED YOU CAN SEE THE RESULTS. UNFORTUNATELY, PRICE IS NOW A REALITY IN THE U.S. MARKET. IN THE LONG TERM MERIT MAY-NEED ANOTHER BREAKTHROUGH TO ATTRACT NEW SMOKERS TO THE FRANCHISE TO REPLACE THOSE LEAVING TO GO TO PRICE/VALUE. MERIT NEEDS TO COME UP WITH SOMETHING NEW AND SOON) m OUR EXISTING PROBLEMS WILL BE INTENSIFIED.

410 I HOPE THIS OVERVIEW ON MERIT HAS BEEN HELPFUL IN

UNDERSTANDING ROW THE BRAND DEVELOPED IN THE U.S. AND HOW WE ARE POSITIONING IT FOR THE FUTURE.

THEM NOW. 1:D_DE HAPPY-TO-ANSWER

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24

• IF YOU LOOK AT MERIT'S SHARE OF THE LOW TAR CATEGORY

WITHOUT PRICE/VALUE INCLUDED YOU CAN SEE THE RESULTS. UNFORTUNATELY, PRICE IS NOW A REALITY IN THE U.S. MARKET. IN THE LONG TERM MERIT MAY-NEED ANOTHER BREAKTHROUGH TO ATTRACT NEW SMOKERS TO THE FRANCHISE TO REPLACE THOSE LEAVING TO GO TO PRICE/VALUE. MERIT NEEDS TO COME UP WITH SOMETHING NEW AND SOON) m OUR EXISTING PROBLEMS WILL BE INTENSIFIED.

410 I HOPE THIS OVERVIEW ON MERIT HAS BEEN HELPFUL IN

UNDERSTANDING ROW THE BRAND DEVELOPED IN THE U.S. AND HOW WE ARE POSITIONING IT FOR THE FUTURE.

THEM NOW. 1:D_DE HAPPY-TO-ANSWER

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SER-5SER-5

2500114485 Page 6 of 25

‘. t) of Me arS ircseitt...6ii, 2 S

CARLOS ARANAS

PRESENTATION

4110 IN SUMMARY WE FEEL THE MARKETING TACTICS WE HAVE

CHOSEN OVER THE PAST SEVERAL YEARS SEEM TO HAVE WORKED.

40 o WE HAVE IDENTIFIED OUR PROBLEM:

TASTE/PERCEPTION

PWE DEVELOPED A UNIQUE PROGRAM TO FIGHT THIS

PROBLEM: THE BLIND CHALLENGE

NEW ADVERTISING WAS DEVELOPED WHICH FIT THE

CHROMOSOMES OF THE BRAND

410 0 AND AN EXCITING NEW EVENT PROMOTION, MERIT

COMEDY, WILL HELP US REACH YOUNGER ADULT

SMOKERS

or

0


2500114485 Page 6 of 25

‘. t) of Me arS ircseitt...6ii, 2 S

CARLOS ARANAS

PRESENTATION

4110 IN SUMMARY WE FEEL THE MARKETING TACTICS WE HAVE

CHOSEN OVER THE PAST SEVERAL YEARS SEEM TO HAVE WORKED.

40 o WE HAVE IDENTIFIED OUR PROBLEM:

TASTE/PERCEPTION

PWE DEVELOPED A UNIQUE PROGRAM TO FIGHT THIS

PROBLEM: THE BLIND CHALLENGE

NEW ADVERTISING WAS DEVELOPED WHICH FIT THE

CHROMOSOMES OF THE BRAND

410 0 AND AN EXCITING NEW EVENT PROMOTION, MERIT

COMEDY, WILL HELP US REACH YOUNGER ADULT

SMOKERS

or

0


SER-6SER-6

2500114485 Page 7 of 25

22

IN 1990, WE ARE CONTINUING TO ADDRESS ME 'S WEAK TASTE PERCEPTION THROUGH THE BLIND CHALLENGE. THIS YEAR WE MAILED TO 550,000 COMPETITIVE SMOKERS AND ADVERTISED THROUGH PEOPLE, ROLLING STONE, AND COSMOPOLITAN MAGAZINES. INITIAL RESULTS INDICATE THAT 30% OR 93,000 SMOKERS WHICH PARTICIPATED IN BLIND CHALLENGE 1990 ARE LIKELY TO MAKE MERIT THEIR REGULAR BRAND.

4111tE ALSO BEGAN TO IMPLEMENT PROGRAMS TO ATTRACT YOUNG ADULT SMOKERS TO THE FRANCHISE. IN THE PAST MERIT DIDN'T HAVE A VEHICLE TO ATTRACT THESE CONSUMERS SINCE THE B.C. PROGRAM TENDS TO ATTRACT OLDER SMOKERS. BUT BEGINNING THIS FALLIF WILL BE IMPLEMENTING AN EXCITING NEW EVENT PROMOTIONTNERIT COMEDY. THIS PROGRAM IS DESIGNED TO REINFORCE THE BRAND'S IMAGE AMONG ADULTS 22 TO 35 YEARS OLD, AND TO ESTABLISH MERIT' AS A MAJOR SPONSOR WITHIN THE

COMEDY INDUSTRY. CARLOS ARANA, THE MANAGER or THE PROGRAM WILL NOW GO INTO MORE DETAIL ON THE PROGRAM.

t 61

7t,T

TO

OS

Z

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22

IN 1990, WE ARE CONTINUING TO ADDRESS ME 'S WEAK TASTE PERCEPTION THROUGH THE BLIND CHALLENGE. THIS YEAR WE MAILED TO 550,000 COMPETITIVE SMOKERS AND ADVERTISED THROUGH PEOPLE, ROLLING STONE, AND COSMOPOLITAN MAGAZINES. INITIAL RESULTS INDICATE THAT 30% OR 93,000 SMOKERS WHICH PARTICIPATED IN BLIND CHALLENGE 1990 ARE LIKELY TO MAKE MERIT THEIR REGULAR BRAND.

4111tE ALSO BEGAN TO IMPLEMENT PROGRAMS TO ATTRACT YOUNG ADULT SMOKERS TO THE FRANCHISE. IN THE PAST MERIT DIDN'T HAVE A VEHICLE TO ATTRACT THESE CONSUMERS SINCE THE B.C. PROGRAM TENDS TO ATTRACT OLDER SMOKERS. BUT BEGINNING THIS FALLIF WILL BE IMPLEMENTING AN EXCITING NEW EVENT PROMOTIONTNERIT COMEDY. THIS PROGRAM IS DESIGNED TO REINFORCE THE BRAND'S IMAGE AMONG ADULTS 22 TO 35 YEARS OLD, AND TO ESTABLISH MERIT' AS A MAJOR SPONSOR WITHIN THE

COMEDY INDUSTRY. CARLOS ARANA, THE MANAGER or THE PROGRAM WILL NOW GO INTO MORE DETAIL ON THE PROGRAM.

t 61

7t,T

TO

OS

Z


SER-7SER-7

2500114485 Page 8 of 25

IN 1990, WE ARE FIGHTING THIS PROBLEM BY OFFERING OUR SMOKERS VARIOUS RETAIL AND CONTINUITY PROGRAMS IN ORDER TO KEEP THEM IN THE FRANCHISE.

AT RETAIL WE ARE OFFERING THE CONSUMERIPPAIRaRF SUNGLASSES FREE WITH THREE PACK PURCHASE IN gpusTrA FUJI CAMERA WITH A CARTON PUKHASE ALSO IN AUGUST MD A WALLET WITH A BOUNCE BACK FOR rMERIT' WEEKEND BAG IN DECEMBER.

WE ARE ALSO OFFERING SMOKERS THE OPPORTUNITY TO RECEIVE THIS BAG THROUGH A DIRECT MAIL VOLUME BUILDING PROGRAM. THE BAG WHICH HAS A RETAIL VALUE OF 530.00 IS FREE TO MI CONSUMERS BY SENDING US 5 CARTON UPC CODES FROM MERIT. THE PROGRAM WILL BE CONDUCTED IN THE NORTH CENTRAL AND NORTH WEST REGIONS OF THE U.S. WHERE PRICE/VALUE BRANDS HAVE MADE CONSIDERABLE INROADS. THE MAILING IS TARGETED TO POTENTIAL MERIT OUTSWITCHERS; TRADITIONAL MERIT SMOKERS;AND COMPETITIVE AND PRICE/VALUE SMOKERS WITH MERIT IN THEIR CONSIDERATION SET.

0 ei •

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IN 1990, WE ARE FIGHTING THIS PROBLEM BY OFFERING OUR SMOKERS VARIOUS RETAIL AND CONTINUITY PROGRAMS IN ORDER TO KEEP THEM IN THE FRANCHISE.

AT RETAIL WE ARE OFFERING THE CONSUMERIPPAIRaRF SUNGLASSES FREE WITH THREE PACK PURCHASE IN gpusTrA FUJI CAMERA WITH A CARTON PUKHASE ALSO IN AUGUST MD A WALLET WITH A BOUNCE BACK FOR rMERIT' WEEKEND BAG IN DECEMBER.

WE ARE ALSO OFFERING SMOKERS THE OPPORTUNITY TO RECEIVE THIS BAG THROUGH A DIRECT MAIL VOLUME BUILDING PROGRAM. THE BAG WHICH HAS A RETAIL VALUE OF 530.00 IS FREE TO MI CONSUMERS BY SENDING US 5 CARTON UPC CODES FROM MERIT. THE PROGRAM WILL BE CONDUCTED IN THE NORTH CENTRAL AND NORTH WEST REGIONS OF THE U.S. WHERE PRICE/VALUE BRANDS HAVE MADE CONSIDERABLE INROADS. THE MAILING IS TARGETED TO POTENTIAL MERIT OUTSWITCHERS; TRADITIONAL MERIT SMOKERS;AND COMPETITIVE AND PRICE/VALUE SMOKERS WITH MERIT IN THEIR CONSIDERATION SET.

0 ei •

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SER-8SER-8

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20

MERIT'S POSITION IN THE MARKET, WE STILL FACE SOME MAJOR BUSINESS PROBLEMS.

-T YEAR-END 1.989 MERIT'S VOLUME WAS OFF -5.6%, HOWEVER, OUR SHARE WAS UP +0.01 MIS IS MAINLY DUE TO RJR GETTING OUT OF THE LOADING GAME. MERIT'S CURRENT YEAR-TO-DATE PERFORMANCE itionAT&156 CONTINUATION OF THIS DOWNWARD TREND WITH VOLUME Mat VERSUS YAG. •

THIS DECLINE WE FEEL IS MAINLY DUE TO THE tPLOSIVE GROWTH OF THE PRICE-VALUE CATEGORY WHICH HAS COME AT THE EXPENSE OF MANY FULL MARGIN BRANDS INCLUDING MERIT. IN FACT WE HAVE RESEARCH THAT SUGGESTS THAT MERIT IS MORE VULNERABLE TO THIS CATEGORY THAN THE AVERAGE BRAND. ONE REASON MAY BE BECAUSE UP UNTIL RECENTLY WE HAVEN'T GIVEN MERIT SMOKERS ENOUGH OF A REASON TO STAY WITH THE BRAND. ANOTHER PART OF THIS VULNERABILITY IS DUE TO THE TYPE OF SMOKER MERIT ATTRACTS. WE CALL THEN RATIONAL SMOKERS. THEY DON'T SEEM TO BE INFLUENCED BY LIFESTYLE IMAGE CAMPAIGNS. WHAT IS MORE RATIONAL THAN BUYING CIGARETTES FOR LESS MONEY? ESPECIALLY IF THEY TASTE GOOD, CAMBRIDGE, DORAL AND ALPINE ARE ALL GOOD PRODUCTS, PERHAPS TOO GOOD FOR THE PRICE.


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20

MERIT'S POSITION IN THE MARKET, WE STILL FACE SOME MAJOR BUSINESS PROBLEMS.

-T YEAR-END 1.989 MERIT'S VOLUME WAS OFF -5.6%, HOWEVER, OUR SHARE WAS UP +0.01 MIS IS MAINLY DUE TO RJR GETTING OUT OF THE LOADING GAME. MERIT'S CURRENT YEAR-TO-DATE PERFORMANCE itionAT&156 CONTINUATION OF THIS DOWNWARD TREND WITH VOLUME Mat VERSUS YAG. •

THIS DECLINE WE FEEL IS MAINLY DUE TO THE tPLOSIVE GROWTH OF THE PRICE-VALUE CATEGORY WHICH HAS COME AT THE EXPENSE OF MANY FULL MARGIN BRANDS INCLUDING MERIT. IN FACT WE HAVE RESEARCH THAT SUGGESTS THAT MERIT IS MORE VULNERABLE TO THIS CATEGORY THAN THE AVERAGE BRAND. ONE REASON MAY BE BECAUSE UP UNTIL RECENTLY WE HAVEN'T GIVEN MERIT SMOKERS ENOUGH OF A REASON TO STAY WITH THE BRAND. ANOTHER PART OF THIS VULNERABILITY IS DUE TO THE TYPE OF SMOKER MERIT ATTRACTS. WE CALL THEN RATIONAL SMOKERS. THEY DON'T SEEM TO BE INFLUENCED BY LIFESTYLE IMAGE CAMPAIGNS. WHAT IS MORE RATIONAL THAN BUYING CIGARETTES FOR LESS MONEY? ESPECIALLY IF THEY TASTE GOOD, CAMBRIDGE, DORAL AND ALPINE ARE ALL GOOD PRODUCTS, PERHAPS TOO GOOD FOR THE PRICE.


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410 THE NEW REPORTORIAL CAMPAIGN.

SINCE IT WAS OUR BELIEF T PEOPLE RARELY READ THE

SAME MATERIAL MORE THAN ONcE, DECIDED TO CONTINUALLY CHANGE HEADLINES AND BODY COP ND RUN SEVERAL ADS AT THE SAME TIME.

dtHEORETICALLY, WE WANTED TO LIMIT THE DUPLICATION OF ANY ONE EXECUTION TO A GIVEN AUDIENCE, WHILE STILL MAINTAINING EXTENSIVE REACH. •

WE RECOGNIZED EARLY ON THAT WE NEEDED TO CHALLENGE READERS TO NOTICE US AND TO READ ABOUT MERIT'S STORY.

414TITUDE IS AN IMPORTANT PART OF THE CAMPAIGN. WE TREAT OUR READERS AS IF THEY HAVE A BRAIN.

WE RUN A VARIETY OF HEADLINES. SOME, LIKE FLAVOR, GET THE POINT ACROSS RIGHT IN THE HEADLINEPbTHERSAyEASE THE CONSUMER TO READ THE BODY COPY FOR THE PAYOFF?ItTILL OTHERS MENTION THE DIFFERENCE BETWE N MERIT'S ADVEUISING AND THE COMPETITION'SZVERTISING.4SOME USE HUMOR, OME ARE STRAW FORWARD.WSOME MENTION THE COMPETITION IN THE HEADLINOTITHERS COMPARE MERIT IN THE BODY COPY.

WHILE THIS ONE-TWO PUNCH OF THE BLIND CHALLENGE AND NEW ADVERTISING HAVE MET OUR OBJECTIVES OF RENEWING

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410 THE NEW REPORTORIAL CAMPAIGN.

SINCE IT WAS OUR BELIEF T PEOPLE RARELY READ THE

SAME MATERIAL MORE THAN ONcE, DECIDED TO CONTINUALLY CHANGE HEADLINES AND BODY COP ND RUN SEVERAL ADS AT THE SAME TIME.

dtHEORETICALLY, WE WANTED TO LIMIT THE DUPLICATION OF ANY ONE EXECUTION TO A GIVEN AUDIENCE, WHILE STILL MAINTAINING EXTENSIVE REACH. •

WE RECOGNIZED EARLY ON THAT WE NEEDED TO CHALLENGE READERS TO NOTICE US AND TO READ ABOUT MERIT'S STORY.

414TITUDE IS AN IMPORTANT PART OF THE CAMPAIGN. WE TREAT OUR READERS AS IF THEY HAVE A BRAIN.

WE RUN A VARIETY OF HEADLINES. SOME, LIKE FLAVOR, GET THE POINT ACROSS RIGHT IN THE HEADLINEPbTHERSAyEASE THE CONSUMER TO READ THE BODY COPY FOR THE PAYOFF?ItTILL OTHERS MENTION THE DIFFERENCE BETWE N MERIT'S ADVEUISING AND THE COMPETITION'SZVERTISING.4SOME USE HUMOR, OME ARE STRAW FORWARD.WSOME MENTION THE COMPETITION IN THE HEADLINOTITHERS COMPARE MERIT IN THE BODY COPY.

WHILE THIS ONE-TWO PUNCH OF THE BLIND CHALLENGE AND NEW ADVERTISING HAVE MET OUR OBJECTIVES OF RENEWING

hap://www.pmdocs.com/getallimg.asp?if=avpidx&DOCID=2500114485/4508 10/22/2001

SER-10SER-10

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INSPIRED BY THE COMPETITIVE NATURE OF THE BLIND CHALLENGE PROMOTION, WE ALSO BECAME MORE AGGRESSIVE WITH THEADVERTISING CAMPAIGN IN EARLY 1987. IN FEBRUARY OF 137,1FWE BEGAN RUNNING THE "BREAKAWAY" CAMPAIGN WHICH COMPARED MERIT ON TASTE AND TAR LEVELS TO COMPETITIVE LOW TAR BRANDS. I E FIRST AD, CONSUMERS WERE ACTUALLY ENCOURAGED TO F THROUGH THE COMPETITIVE PACKS TO REVEAL THE NAME OF THE BRAND CLAIMING GREAT TASTE AND LOWER TAR. INCLUDED IN THE FLAP WAS A BUY ONE GET ONE FREE COUPON. WHILE THIS MESSAGE SEEMED TO BE RIGHT FOR MERIT, THE SEA CAMPAIGN WAS NOT HE PROPER VEHICLE TO DELIVER THIS HARD HITTING MESSAGE:67SO IN JUNE OF 1987 WE FORMALLY BEGAN LOOKING FOR A REPLACEMENT TO THE SEA CAMPAIGN.

THE PRIMARY OBJECTIVES OF THE CAMPAIGN WERE FIRST, TO RE-ESTABLISH MERIT'S FLAVOR STORY, SECOND, TO POINT OUT MERIT'S TAR ADVANTAGE OVER COMPETITIVE LOW TAR BRANDS, AND FINALLY TO CREATE A VISUAL LOOK THAT DIFFERENTIATED THE BRAND FROM THE COMPETITION.

IN AUGUST OF 1987, LEO BURNETT PRESENTED 17 DIFFERENT CAMPAIGNS, AND THE ONE WHICH BEST FIT OUR OBJECTIVES WAS

ca c 0

tti

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INSPIRED BY THE COMPETITIVE NATURE OF THE BLIND CHALLENGE PROMOTION, WE ALSO BECAME MORE AGGRESSIVE WITH THEADVERTISING CAMPAIGN IN EARLY 1987. IN FEBRUARY OF 137,1FWE BEGAN RUNNING THE "BREAKAWAY" CAMPAIGN WHICH COMPARED MERIT ON TASTE AND TAR LEVELS TO COMPETITIVE LOW TAR BRANDS. I E FIRST AD, CONSUMERS WERE ACTUALLY ENCOURAGED TO F THROUGH THE COMPETITIVE PACKS TO REVEAL THE NAME OF THE BRAND CLAIMING GREAT TASTE AND LOWER TAR. INCLUDED IN THE FLAP WAS A BUY ONE GET ONE FREE COUPON. WHILE THIS MESSAGE SEEMED TO BE RIGHT FOR MERIT, THE SEA CAMPAIGN WAS NOT HE PROPER VEHICLE TO DELIVER THIS HARD HITTING MESSAGE:67SO IN JUNE OF 1987 WE FORMALLY BEGAN LOOKING FOR A REPLACEMENT TO THE SEA CAMPAIGN.

THE PRIMARY OBJECTIVES OF THE CAMPAIGN WERE FIRST, TO RE-ESTABLISH MERIT'S FLAVOR STORY, SECOND, TO POINT OUT MERIT'S TAR ADVANTAGE OVER COMPETITIVE LOW TAR BRANDS, AND FINALLY TO CREATE A VISUAL LOOK THAT DIFFERENTIATED THE BRAND FROM THE COMPETITION.

IN AUGUST OF 1987, LEO BURNETT PRESENTED 17 DIFFERENT CAMPAIGNS, AND THE ONE WHICH BEST FIT OUR OBJECTIVES WAS

ca c 0

tti

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WE ALSO INCLUDED A SURVEY IN ORDER TO GET AN UPDATE ON THEIR PURCHASING PATTERNS. THIS IS WHAT WE LEARNED:

270,000 SMOKERS RETURNED THE SURVEY, AND OF THOSE CONSUMERS, 13% SAID THEY WERE NOW MERIT SMOKERS. 20% INDICATED THEY CONSIDERED MERIT TO TASTE MUCH BETTER THAN THEIR REGULAR BRAND. WE ARE ESTIMATING THAT BETWEEN 3 TO 7% OF THE TOTAL PROGRAM PARTICIPANTS SWITCHED TO MERIT.

41111.0 PUT THIS INTO PERSPECTIVE, IF 5% OF THE TOTAL RESPONDERS SWITCHED, THAT WOULD BE AN ADDITIONAL 50,000 MERIT SMOKERS. CONSIDERING THAT THE ESTIMATED SIZE OF MERIT'S FRANCHISE IN THE U.S. IS 2 MILLION ADDING 50,000 NEW SMOKERS EVERY YEAR IS VERY SIGNIFICANT. 54"Kcies

IltHE BLIND CHALLENGE IS AN ENORMOUSLY SUCCESSFUL METHOD OF SAMPLING OUR BRAND IN A VERY }

CONVINCINGWAY.

CONSUMERS HAVE THE CHANCE TO PROVE TO THEMSELVES MERIT TASTES AS GOOD AS OUR BETTER THAN THEIR CURRENT BRAND

II:COMPARE THE TAR DELIVERY TO THEIR OWN BRAND, ANDAHAVE THE OPPORTUNITY TO PURCHASE ADDITIONAL MERIT CARTONS WITH A $2.00 OFF COUPON.

WE BELIEVE THE BLIND CHALLENGE PROGRAM MEETS THE OBJECTIVE OF TRYING TO CHANGE CONSUMERS' PERCEPTION OF MERIT AS A WEAKER TASTING LOW TAR BRAND. IN FACT, THIS HAS BECOME AN ANNUAL PROGRAM FOR MERIT. THE 1990 BLIND CHALLENGE, IS IN PROGRESS AND WE EXPECT TO HAVE SIMILARLY STRONG RESULTS.

9600

1 tO

0gZ

,


2500114485 Page 12 of 25

17

WE ALSO INCLUDED A SURVEY IN ORDER TO GET AN UPDATE ON THEIR PURCHASING PATTERNS. THIS IS WHAT WE LEARNED:

270,000 SMOKERS RETURNED THE SURVEY, AND OF THOSE CONSUMERS, 13% SAID THEY WERE NOW MERIT SMOKERS. 20% INDICATED THEY CONSIDERED MERIT TO TASTE MUCH BETTER THAN THEIR REGULAR BRAND. WE ARE ESTIMATING THAT BETWEEN 3 TO 7% OF THE TOTAL PROGRAM PARTICIPANTS SWITCHED TO MERIT.

41111.0 PUT THIS INTO PERSPECTIVE, IF 5% OF THE TOTAL RESPONDERS SWITCHED, THAT WOULD BE AN ADDITIONAL 50,000 MERIT SMOKERS. CONSIDERING THAT THE ESTIMATED SIZE OF MERIT'S FRANCHISE IN THE U.S. IS 2 MILLION ADDING 50,000 NEW SMOKERS EVERY YEAR IS VERY SIGNIFICANT. 54"Kcies

IltHE BLIND CHALLENGE IS AN ENORMOUSLY SUCCESSFUL METHOD OF SAMPLING OUR BRAND IN A VERY }

CONVINCINGWAY.

CONSUMERS HAVE THE CHANCE TO PROVE TO THEMSELVES MERIT TASTES AS GOOD AS OUR BETTER THAN THEIR CURRENT BRAND

II:COMPARE THE TAR DELIVERY TO THEIR OWN BRAND, ANDAHAVE THE OPPORTUNITY TO PURCHASE ADDITIONAL MERIT CARTONS WITH A $2.00 OFF COUPON.

WE BELIEVE THE BLIND CHALLENGE PROGRAM MEETS THE OBJECTIVE OF TRYING TO CHANGE CONSUMERS' PERCEPTION OF MERIT AS A WEAKER TASTING LOW TAR BRAND. IN FACT, THIS HAS BECOME AN ANNUAL PROGRAM FOR MERIT. THE 1990 BLIND CHALLENGE, IS IN PROGRESS AND WE EXPECT TO HAVE SIMILARLY STRONG RESULTS.

9600

1 tO

0gZ

,


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FOR INSTANCE, IF HE IS A WINSTON LIGHTS 100'S SMOKER, AIVE SENT HIM THE CLOSEST MERIT PACKING, MERIT PARENT 100'S. 4111F HE WAS A SALEM ULTRA LIGHTS KINGS SMOKER, WE SENT HIM

MERIT ULTRA LIGHTS MENTHOL KINGS, AND SO OH. _

Tliik MAILING INCLUDED THE TWO UNIDENTIFIED PACKS OF MERIT gR5 A PERSONALIZED LETTER THANKING THE CONSUMER FOR TAKING THE TASTE CHALLENGE. THE LETTER ALSO EMPHASIZED THE "MYSTERY" BRAND'S BENEFITS VERSUS THEIR OWN BRAND, AND PROMISED TO REVEAL THE BRAND NAME IN A FEW DAYS.

4111 WEEK OR SO LATER, WE SENT THE REVEAL PORTION OF THE PROMOTION WHICH INCLUDED ANOTHER PERSONALIZED LETTER, THE REVEAL BROCHURE, AND FIVE $2.00 OFF CARTON COUPONS.

• or THE ESTIMATED 36 MILLION CIRCULATION, 4.9% OR 1.5

MILLION CONSUMERS PARTICIPATED IN THE 1987 BLIND CHALLENGE. 65% OF THESE SMOKERS, OR 1.1 MILLION RESPONDENTS WERE COMPETITIVE SMOKERS. 26% OF THESE

SMOKERS REDEEMED AT LEAST ONE COUPON AND 11% USED ALL 5 COUPONS, GENERATING 220 MILLION INCREMENTAL UNITS,

IX MONTHS LATER, WE SENT A FOLLOW-UP MAILING TO THESE 1.1 MILLION COMPETITIVE SMOKERS. IN THIS MAILING, WE INCLUDED ANOTHER LETTER REMINDING THEM OF THEIR PARTICIPATION IN THE BLIND CHALLENGE, AND WE INCLUDED A CONTINUITY OFFER, THE MERIT BAG, WHICH COULD BE OBTAINED BY SENDING US PROOF OF PURCHASE FROM 3 CARTONS OF MERIT.

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FOR INSTANCE, IF HE IS A WINSTON LIGHTS 100'S SMOKER, AIVE SENT HIM THE CLOSEST MERIT PACKING, MERIT PARENT 100'S. 4111F HE WAS A SALEM ULTRA LIGHTS KINGS SMOKER, WE SENT HIM

MERIT ULTRA LIGHTS MENTHOL KINGS, AND SO OH. _

Tliik MAILING INCLUDED THE TWO UNIDENTIFIED PACKS OF MERIT gR5 A PERSONALIZED LETTER THANKING THE CONSUMER FOR TAKING THE TASTE CHALLENGE. THE LETTER ALSO EMPHASIZED THE "MYSTERY" BRAND'S BENEFITS VERSUS THEIR OWN BRAND, AND PROMISED TO REVEAL THE BRAND NAME IN A FEW DAYS.

4111 WEEK OR SO LATER, WE SENT THE REVEAL PORTION OF THE PROMOTION WHICH INCLUDED ANOTHER PERSONALIZED LETTER, THE REVEAL BROCHURE, AND FIVE $2.00 OFF CARTON COUPONS.

• or THE ESTIMATED 36 MILLION CIRCULATION, 4.9% OR 1.5

MILLION CONSUMERS PARTICIPATED IN THE 1987 BLIND CHALLENGE. 65% OF THESE SMOKERS, OR 1.1 MILLION RESPONDENTS WERE COMPETITIVE SMOKERS. 26% OF THESE

SMOKERS REDEEMED AT LEAST ONE COUPON AND 11% USED ALL 5 COUPONS, GENERATING 220 MILLION INCREMENTAL UNITS,

IX MONTHS LATER, WE SENT A FOLLOW-UP MAILING TO THESE 1.1 MILLION COMPETITIVE SMOKERS. IN THIS MAILING, WE INCLUDED ANOTHER LETTER REMINDING THEM OF THEIR PARTICIPATION IN THE BLIND CHALLENGE, AND WE INCLUDED A CONTINUITY OFFER, THE MERIT BAG, WHICH COULD BE OBTAINED BY SENDING US PROOF OF PURCHASE FROM 3 CARTONS OF MERIT.

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WHAT WE NEEDED WAS A WAY FOR COMPETITIVE SMOKERS TO TRY MERIT WITHOUT KNOWING WHAT BRAND THEY WERE TRYING.

THE ACCOUNT SUPERVISOR ON MERIT AT LEO BURNETT AT THAT TIME HAD AN IDEA. WHAT IF WE CONDUCT A NATIONAL BLIND TASTE TEST AMONG MILLIONS OF COMPETITIVE SMOKERS ALLOWING THEM TO SAMPLE MERIT WITHOUT PRECONCEIVED BRAND IMPRESSIONS. WE KNEW THAT MERIT WOULD DO WELL, BUT HOW COULD WE PULL OFF SUCH A MASSIVE PROMOTIONPAFTER MONTHS OF PLANNING, THE MERIT BLIND CHALLENGE WAS DEVELOPED. HERE'S HOW IT WORKED.

411tE RAN THIS AD IN SEVEN NATIONAL MAGAZINES IN MARCH OF 1987. THE COMBINED CIRCULATION OF THESE MAGAZINES WAS 36 MILLION. WE MADE CONSUMERS AN OFFER THEY COULDN'T

REFUSE "WE BET YOU TWO FREE PACKS YOU'LL PRE LLR THIS

LEADING LIGHT CIGARETTE TO ANY OTHER BRAND".WWE INCLUDED A POP-UP BUSINESS REPLY CARD WHICH ASKED FOR IMPORTANT INFORMATION ON EACH CONSUMER'S SMOKING HABITS. THIS ALLOWED US TO PERSONALIZE THE OFFER AND MAKE IT MORE TARGETED, EFFECTIVE AND HARD HITTING.

• ABOUT 4 WEEKS AFTER THE CONSUMER SENT BACK THE

BUSINESS REPLY CARD, WE DELIVERED TWO UNIDENTIFIED PACKS

OF MERIT. THE PACKING OF MERIT WE SENT HOST CLOSELY

MATCHED THE CONSUMER'S REGULAR BRAND BASED ON INFORMATION

TAKEN FROM THE BUSINESS REPLY CARD.

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WHAT WE NEEDED WAS A WAY FOR COMPETITIVE SMOKERS TO TRY MERIT WITHOUT KNOWING WHAT BRAND THEY WERE TRYING.

THE ACCOUNT SUPERVISOR ON MERIT AT LEO BURNETT AT THAT TIME HAD AN IDEA. WHAT IF WE CONDUCT A NATIONAL BLIND TASTE TEST AMONG MILLIONS OF COMPETITIVE SMOKERS ALLOWING THEM TO SAMPLE MERIT WITHOUT PRECONCEIVED BRAND IMPRESSIONS. WE KNEW THAT MERIT WOULD DO WELL, BUT HOW COULD WE PULL OFF SUCH A MASSIVE PROMOTIONPAFTER MONTHS OF PLANNING, THE MERIT BLIND CHALLENGE WAS DEVELOPED. HERE'S HOW IT WORKED.

411tE RAN THIS AD IN SEVEN NATIONAL MAGAZINES IN MARCH OF 1987. THE COMBINED CIRCULATION OF THESE MAGAZINES WAS 36 MILLION. WE MADE CONSUMERS AN OFFER THEY COULDN'T

REFUSE "WE BET YOU TWO FREE PACKS YOU'LL PRE LLR THIS

LEADING LIGHT CIGARETTE TO ANY OTHER BRAND".WWE INCLUDED A POP-UP BUSINESS REPLY CARD WHICH ASKED FOR IMPORTANT INFORMATION ON EACH CONSUMER'S SMOKING HABITS. THIS ALLOWED US TO PERSONALIZE THE OFFER AND MAKE IT MORE TARGETED, EFFECTIVE AND HARD HITTING.

• ABOUT 4 WEEKS AFTER THE CONSUMER SENT BACK THE

BUSINESS REPLY CARD, WE DELIVERED TWO UNIDENTIFIED PACKS

OF MERIT. THE PACKING OF MERIT WE SENT HOST CLOSELY

MATCHED THE CONSUMER'S REGULAR BRAND BASED ON INFORMATION

TAKEN FROM THE BUSINESS REPLY CARD.

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BRANDS, SOMETHING THAT MERIT AND THE OTHER FREE STANDING LOW TARS CAN'T COMPETE WITH.

IRS FAR AS OUR ADVERTISING WAS CONCERNED, WE SCORED VERY LOW ON AD AWARENESS EVEN AMONG MERIT SMOKERS. WHEN

AmWE PROBED FURTHER WE FOUND THAT WHILE MOST PEOPLE THOUGHT "FRE PICTURES WERE PLEASANT, THE CAMPAIGN HELD NO RELEVANCE

FOR THEM. altlElf SIMPLY WERE NOT MAKING A CONNECTION BETWEEN THISUALS AND MERIT, AND THEY CERTAINLY WERE HOT COMING AWAY WITH THE FEELING THAT MERIT STANDS FOR TASTE

IN A LOW TAR.I/ADDITIONALLY, SOME SMOKERS USED WORDS LIKE "REFRESHING" AND "COOL" TO DESCRIBE THE CAMPAIGN, WORDS GENERALLY USED TO DESCRIBE MENTHOL CAMPAIGNS.

SO, HERE WAS OUR PROBLEM...WE WENT FROM BEING THE

FIRST LOW TAR BRAND THAT CAME THROUGH ON ITS FLAVOR PROMISE, TO THE PERCEIVED NOTION OF A LOW TAR BRAND THAT WAS NOT AS SATISFYING AS THE LINE EXTENSION LOW TARS. WE HAD A CAMPAIGN THAT WAS DESIGNED TO MAKE MERIT THE FLAVOR BRAND OF LOW TAR SMOKERS AND ENDED UP WITH A NICELY EXECUTED, BUT MOSTLY IRRELEVANT CAMPAIGN THAT SEEMED TO CAMOUFLAGE THE FLAVOR MESSAGE IN LIFESTYLE IMAGERY,

411LW DO WE OVERCOME THIS PROBLEM? FIRST, WE NEEDED A N

VEHICLE TO CHALLENGE SMOKERS TO TRY MERIT. WE KNEW WE HAD

0

A GOOD CIGARETTE BUT WE JUST WEREN'T GETTING ANY NEW TRIAL. WE ALSO HAD TO OVERCOME THE PERCEPTION PROBLEM.


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14

BRANDS, SOMETHING THAT MERIT AND THE OTHER FREE STANDING LOW TARS CAN'T COMPETE WITH.

IRS FAR AS OUR ADVERTISING WAS CONCERNED, WE SCORED VERY LOW ON AD AWARENESS EVEN AMONG MERIT SMOKERS. WHEN

AmWE PROBED FURTHER WE FOUND THAT WHILE MOST PEOPLE THOUGHT "FRE PICTURES WERE PLEASANT, THE CAMPAIGN HELD NO RELEVANCE

FOR THEM. altlElf SIMPLY WERE NOT MAKING A CONNECTION BETWEEN THISUALS AND MERIT, AND THEY CERTAINLY WERE HOT COMING AWAY WITH THE FEELING THAT MERIT STANDS FOR TASTE

IN A LOW TAR.I/ADDITIONALLY, SOME SMOKERS USED WORDS LIKE "REFRESHING" AND "COOL" TO DESCRIBE THE CAMPAIGN, WORDS GENERALLY USED TO DESCRIBE MENTHOL CAMPAIGNS.

SO, HERE WAS OUR PROBLEM...WE WENT FROM BEING THE

FIRST LOW TAR BRAND THAT CAME THROUGH ON ITS FLAVOR PROMISE, TO THE PERCEIVED NOTION OF A LOW TAR BRAND THAT WAS NOT AS SATISFYING AS THE LINE EXTENSION LOW TARS. WE HAD A CAMPAIGN THAT WAS DESIGNED TO MAKE MERIT THE FLAVOR BRAND OF LOW TAR SMOKERS AND ENDED UP WITH A NICELY EXECUTED, BUT MOSTLY IRRELEVANT CAMPAIGN THAT SEEMED TO CAMOUFLAGE THE FLAVOR MESSAGE IN LIFESTYLE IMAGERY,

411LW DO WE OVERCOME THIS PROBLEM? FIRST, WE NEEDED A N

VEHICLE TO CHALLENGE SMOKERS TO TRY MERIT. WE KNEW WE HAD

0

A GOOD CIGARETTE BUT WE JUST WEREN'T GETTING ANY NEW TRIAL. WE ALSO HAD TO OVERCOME THE PERCEPTION PROBLEM.


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/3

AS WE HEADED INTO 1986, AND THE BEGINNING OF OUR SECOND DECADE, MERIT WAS A BRAND WITH SOME MAJOR PROBLEMS.

THE FIRST THING WE NEEDED TO DO WAS TO CHECK IF OUR

PRODUCT STILL DELIVERED WHAT SMOKERS WANTED, GREAT TASTE.

"IFWE CONDUCTED A BLIND TASTE TEST AGAINSTAtiRLBORO LIGHTS

AND WE WERE IMPRESSED WITH THE RESOLTS.IwkERITUAS RATED

ON PAR WITH MARLBORO LIGHTS IN TERMS OF TASTEWHOWEVER WHEN THE SAME TEST WAS CONDUCTED WITH THE BRANDS

IDENTIFIED, MARLBORO LIGHTS SCORES IMPROVED AND MERIT'S

WENT DOWN. THIS WAS OUR FIRST INDICATION THAT MERIT WAS

SUFFERING FROM A TASTE PERCEPTION PROBLEM.

41/ WE THEN CONDUCTED BLIND TASTE TESTS AGAINST THE

LEADING LOW TAR BRANDS, AND AGAIN MERIT SCORED WELL. IN

FACT, MERIT WAS JUDGED TO HAVE AS MUCH OR MORE TASTE THAN

BRANDS WITH UP TO WE MORE TAR.

NEXT, W ALKED TO CONSUMERS ABOUT MERIT'S IMAGE AND

ADVERTISING.witHEY TOLD US THAT MERIT, LIKE OTHER FREE s CH Aar STANDING LOW TAR BRANDS, ENT, VANTAGE, CARLTON, ETC., WERE PERCEIVED TO BE WEER AND HAVE LESS TASTE THAN THE LINE EXTENSION LOW TARSTOARLBORO LIGHTS, WINSTON LIGHTS, CAMEL LIGHTS. APPARENTLY, THESE LINE EXTENSION LOW TARS SHARE THE TASTE HERITAGE OF THEIR PARENT FULL FLAVOR

_


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/3

AS WE HEADED INTO 1986, AND THE BEGINNING OF OUR SECOND DECADE, MERIT WAS A BRAND WITH SOME MAJOR PROBLEMS.

THE FIRST THING WE NEEDED TO DO WAS TO CHECK IF OUR

PRODUCT STILL DELIVERED WHAT SMOKERS WANTED, GREAT TASTE.

"IFWE CONDUCTED A BLIND TASTE TEST AGAINSTAtiRLBORO LIGHTS

AND WE WERE IMPRESSED WITH THE RESOLTS.IwkERITUAS RATED

ON PAR WITH MARLBORO LIGHTS IN TERMS OF TASTEWHOWEVER WHEN THE SAME TEST WAS CONDUCTED WITH THE BRANDS

IDENTIFIED, MARLBORO LIGHTS SCORES IMPROVED AND MERIT'S

WENT DOWN. THIS WAS OUR FIRST INDICATION THAT MERIT WAS

SUFFERING FROM A TASTE PERCEPTION PROBLEM.

41/ WE THEN CONDUCTED BLIND TASTE TESTS AGAINST THE

LEADING LOW TAR BRANDS, AND AGAIN MERIT SCORED WELL. IN

FACT, MERIT WAS JUDGED TO HAVE AS MUCH OR MORE TASTE THAN

BRANDS WITH UP TO WE MORE TAR.

NEXT, W ALKED TO CONSUMERS ABOUT MERIT'S IMAGE AND

ADVERTISING.witHEY TOLD US THAT MERIT, LIKE OTHER FREE s CH Aar STANDING LOW TAR BRANDS, ENT, VANTAGE, CARLTON, ETC., WERE PERCEIVED TO BE WEER AND HAVE LESS TASTE THAN THE LINE EXTENSION LOW TARSTOARLBORO LIGHTS, WINSTON LIGHTS, CAMEL LIGHTS. APPARENTLY, THESE LINE EXTENSION LOW TARS SHARE THE TASTE HERITAGE OF THEIR PARENT FULL FLAVOR

_


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NOME. WE HOW HAD EIGHT PACKINGS COMBINING FOR A 4.5 SHAREPBOT PARENT KINGS REGULAR, THE LARGEST PACKING, HAD DECLINED Egg 2,2 SHARE TO 1.8 IN TWO YEARS. THAT TREND CONTINUED MD BY 1984 KINGS REGULAR WAS DOWN TO A 1.6 SHARE. KINGS REGULAR BOX WAS AIMED IN 1985 CHOPPING ANOTHER 0.3 FROM THE SOFT PACK. whOW WE HAD NINE PACKINGS AND A 4.1 SHARE.

HE TOTAL ULTRA LIGHTS CAT 1978 TO 10% AND STEADY IN 1985. DOING NICELY, GROWING FROM HALF 1.1 IN 1985, BUT WE EXPECT THAT CAME FROM THE PARENT.

0 FORCES WERE NOW EFFECTING E BRANDS PERFORMANCE

4P• FIRST, GENERICS AND PRICE/VALUE HAD GROWN DRAMATICALLY, AND MERIT WAS STARTING TO FEEL THE EFFECTS.

• - SECOND, MARLBORO LIGHTS AS WE HAVE SEEN EXPLODED, HITTING MERIT PARENT ESPECIALLY HARD. MARLBORO LIGHTS HAD NOW REPLACED MERIT AS THE PRIMARY HOME FOR MARLBORO RED DOWNSWITCHERS.OTHIS WAS ESPECIALLY EVIDENT WHEN WE LOOKED AT OUR DECLINING SHARE OF YOUNGER ADULT MALE SMOKERS AND MARLBORO'S GROWTH IN THIS KEY SEGMENT.

WRY HAD GROWN FROM 4% IN irkFRIT ULTRA LIGHTS WAS A SHARE POINT IN 1981 TO A A GOOD PORTION OF THAT

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NOME. WE HOW HAD EIGHT PACKINGS COMBINING FOR A 4.5 SHAREPBOT PARENT KINGS REGULAR, THE LARGEST PACKING, HAD DECLINED Egg 2,2 SHARE TO 1.8 IN TWO YEARS. THAT TREND CONTINUED MD BY 1984 KINGS REGULAR WAS DOWN TO A 1.6 SHARE. KINGS REGULAR BOX WAS AIMED IN 1985 CHOPPING ANOTHER 0.3 FROM THE SOFT PACK. whOW WE HAD NINE PACKINGS AND A 4.1 SHARE.

HE TOTAL ULTRA LIGHTS CAT 1978 TO 10% AND STEADY IN 1985. DOING NICELY, GROWING FROM HALF 1.1 IN 1985, BUT WE EXPECT THAT CAME FROM THE PARENT.

0 FORCES WERE NOW EFFECTING E BRANDS PERFORMANCE

4P• FIRST, GENERICS AND PRICE/VALUE HAD GROWN DRAMATICALLY, AND MERIT WAS STARTING TO FEEL THE EFFECTS.

• - SECOND, MARLBORO LIGHTS AS WE HAVE SEEN EXPLODED, HITTING MERIT PARENT ESPECIALLY HARD. MARLBORO LIGHTS HAD NOW REPLACED MERIT AS THE PRIMARY HOME FOR MARLBORO RED DOWNSWITCHERS.OTHIS WAS ESPECIALLY EVIDENT WHEN WE LOOKED AT OUR DECLINING SHARE OF YOUNGER ADULT MALE SMOKERS AND MARLBORO'S GROWTH IN THIS KEY SEGMENT.

WRY HAD GROWN FROM 4% IN irkFRIT ULTRA LIGHTS WAS A SHARE POINT IN 1981 TO A A GOOD PORTION OF THAT

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4

WE WERE HOW READY FOR THE LAUNCH.

WITH KENT GOLDEN LIGHTS IN TEST MARKET IN THE FALL OF Ai1975, THE DECISION WAS MADE TO BY-PASS A TEST AND PRE-EMPT INERT BY GOING NATIONAL JANUARY 1, 1976.

litE INTRODUCED TWO PACKINGS, REGULAR AND MENTHOL KING SIZE. AND WE MADE AN ALL OUT EFFORT. MERIT WAS THE PRIMARY FOCUS OF THE SALES FORCE FOR A FULL YEAR - WE

APDISTRIBUTED 22 MILLION SAMPLE SIX PACKS -A WE SPENT $45 MILLION OK ADVERTISING - REMEMBER $45 MILLION IN 1976! THIS WAS A RECORD AMOUNT FOR A NEW BRAND INTRODUCTION. TO PUT THIS INTO PERSPECTIVE, MARLBORO, WHOSE SHARE AT TRAT TIME WAS 16, SPENT $36 MILLION THAT YEAR.

CREATIVELY, WE USED PROVOCATIVE HEADLINES AND IMPORTly LOOKING COPY WHICH LOOKEDWKE IT HAD REAL NEWS

AWALUE. wYAR/TASTE THEORY EXPLODED! - SMOKE CRACKED! - 4.EASTE BARRIER BROKEN!

416 THE END OF MERIT'S FIRST YEAR, THE BRAND HAD ACHIEVED A 1.4 MARKET SHARE. WE KEPT THE PRESSURE OLAND QUICKLY FOLLOWED UP THE KINGS2TRODUCTION WITH 100' IN LATE 1976. BY THE END OF 197/TERIT HAD GROWN ANOTHER FULL MARKET SHARE POINT TO 2.4% OF THE MARKET.

WITH ALL THE NEW TRIAL OF LOW TAR BRANDS DURING THIS TIME, OUR CONSUMER RESEARCH DEPARTMENT STARTED TRACKING

ZO

SVI I 00

gZ

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4

WE WERE HOW READY FOR THE LAUNCH.

WITH KENT GOLDEN LIGHTS IN TEST MARKET IN THE FALL OF Ai1975, THE DECISION WAS MADE TO BY-PASS A TEST AND PRE-EMPT INERT BY GOING NATIONAL JANUARY 1, 1976.

litE INTRODUCED TWO PACKINGS, REGULAR AND MENTHOL KING SIZE. AND WE MADE AN ALL OUT EFFORT. MERIT WAS THE PRIMARY FOCUS OF THE SALES FORCE FOR A FULL YEAR - WE

APDISTRIBUTED 22 MILLION SAMPLE SIX PACKS -A WE SPENT $45 MILLION OK ADVERTISING - REMEMBER $45 MILLION IN 1976! THIS WAS A RECORD AMOUNT FOR A NEW BRAND INTRODUCTION. TO PUT THIS INTO PERSPECTIVE, MARLBORO, WHOSE SHARE AT TRAT TIME WAS 16, SPENT $36 MILLION THAT YEAR.

CREATIVELY, WE USED PROVOCATIVE HEADLINES AND IMPORTly LOOKING COPY WHICH LOOKEDWKE IT HAD REAL NEWS

AWALUE. wYAR/TASTE THEORY EXPLODED! - SMOKE CRACKED! - 4.EASTE BARRIER BROKEN!

416 THE END OF MERIT'S FIRST YEAR, THE BRAND HAD ACHIEVED A 1.4 MARKET SHARE. WE KEPT THE PRESSURE OLAND QUICKLY FOLLOWED UP THE KINGS2TRODUCTION WITH 100' IN LATE 1976. BY THE END OF 197/TERIT HAD GROWN ANOTHER FULL MARKET SHARE POINT TO 2.4% OF THE MARKET.

WITH ALL THE NEW TRIAL OF LOW TAR BRANDS DURING THIS TIME, OUR CONSUMER RESEARCH DEPARTMENT STARTED TRACKING

ZO

SVI I 00

gZ

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1J

WE BEGAN THE SECOND PHASE OF THE SEA CAMPAIGN - WHICH WE CALLED "SAIL".

• INSTEAD OF CAPTAINS AND WORKING SHIPS, WE SHOWED

YOUNG PEOPLE ON PLWURE BOATS ENJOYING THEIR LEISURE TIME AND SMOKING MERIT.IwkE DELIBERATELY TRIED TO AVOID DANGEROUS LOOKING WATER, AND OR THE MOST PART KEPT LAND IN SIGHT IN THE BACKGROUNDS.nE SOMETIMES SHOWED PEOPLE ON LAND ENJOYING A SMOKE, BUT THEY WERE CLEARLY INVOLVED WITH SAILING.

PROMOTIONALLY, WE FINALLY HAD A CAMPAIGN WE COULD EXTEND. AT RETAIL WE USED WINDSCREEN LIGHTERS, SUNGLASSES, BELTS AND BELT BUCKLEAND SEA COASTERS AS ON-PACK AND ON-CARTON INCENTIVES. E ALSO BEGAN SPONSORING A S ES OF HARBOR FESTIVALS WE CALLED MERIT HARBOR LIGHTS.. HESE WERE HELD ON WEEKENDS AND CONSISTED

SEVERAL SMALLER EVENTS LIKE CONCERTS AND BOAT snows, D CULMINATED WITH A FIREWORKS EXTRAVAGANZA CHOREOGRAPHED

TO MUSIC. THESE HARBOR FESTIVALS PROVIDED MERIT WITH SAMPLING OPPORTUNITIES AND LOCAL P.R.

THE:S A BRIEF RUN-DOWN OF OUR ADVERTISING HISTORY UP TO 19857140W LET ME CATCH YOU UP OH THE BRAND'S PERFORMANCE. WE LEFT YOU IN 1981 WITH THE INTRODUCTION OF MERIT ULTRA LIGHTS KING SIZE. WE QUICKLY FOLLOWED WITH

100'S IN EARLY 1982.


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1J

WE BEGAN THE SECOND PHASE OF THE SEA CAMPAIGN - WHICH WE CALLED "SAIL".

• INSTEAD OF CAPTAINS AND WORKING SHIPS, WE SHOWED

YOUNG PEOPLE ON PLWURE BOATS ENJOYING THEIR LEISURE TIME AND SMOKING MERIT.IwkE DELIBERATELY TRIED TO AVOID DANGEROUS LOOKING WATER, AND OR THE MOST PART KEPT LAND IN SIGHT IN THE BACKGROUNDS.nE SOMETIMES SHOWED PEOPLE ON LAND ENJOYING A SMOKE, BUT THEY WERE CLEARLY INVOLVED WITH SAILING.

PROMOTIONALLY, WE FINALLY HAD A CAMPAIGN WE COULD EXTEND. AT RETAIL WE USED WINDSCREEN LIGHTERS, SUNGLASSES, BELTS AND BELT BUCKLEAND SEA COASTERS AS ON-PACK AND ON-CARTON INCENTIVES. E ALSO BEGAN SPONSORING A S ES OF HARBOR FESTIVALS WE CALLED MERIT HARBOR LIGHTS.. HESE WERE HELD ON WEEKENDS AND CONSISTED

SEVERAL SMALLER EVENTS LIKE CONCERTS AND BOAT snows, D CULMINATED WITH A FIREWORKS EXTRAVAGANZA CHOREOGRAPHED

TO MUSIC. THESE HARBOR FESTIVALS PROVIDED MERIT WITH SAMPLING OPPORTUNITIES AND LOCAL P.R.

THE:S A BRIEF RUN-DOWN OF OUR ADVERTISING HISTORY UP TO 19857140W LET ME CATCH YOU UP OH THE BRAND'S PERFORMANCE. WE LEFT YOU IN 1981 WITH THE INTRODUCTION OF MERIT ULTRA LIGHTS KING SIZE. WE QUICKLY FOLLOWED WITH

100'S IN EARLY 1982.


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io

• ARE PART OF OUR HERITAGE. WE GREW UP ON WESTERNS, AHD THE HEROIC COWBOY FIGURE IN MOVIES AND TELEVISION WAS SOMEONE WE ASPIRED TO BE LIKE.

1111 FOR MOST AMERICANS, THE SEA JUST DOESN'T SPARK THESE EMOTIONS. IN FACT, TO SOME, THE OPEN SEA IS DANGEROUS AND FOREBODING, AND WORKING SEAMEN AND SHIPS HAVE LITTLE APPEAL. SECONDLY, MERIT'S FRANCHISE HAD DEVELOPED A FAIRLY EVEN SPLIT BETWEEN MEN AND WOMEN, AND WOMEN WERE TURNED OFF BY THIS CAMPAIGN.411FINALLY, WE SEEMED TO FALL INTO THWAME TRAP AS OUR COMPETITORS, WE TRIED TO COPY MARLS EN MARLBORO IS THE EXCEPTION, RATHER THAN THE RULE. Y COPYING MARLBORO WE BECAME JUST ANOTHER CIGARETTE BRAND SHOWING A PRETTY PICTURE WITH A SHORT COPY LINE. THIS IS NOT TO DIMINISH LEO BURNETT'S EXECUTIONS, THEY WERE TOP QUALITY, BUT UNFORTUNATELY WE STARTED TO LOSE WHAT MADE MERIT UNIQUE.

• INTERESTINGLY, THE MERIT ULTRA LIGHTS EXECUTIONS

SEEMED TO WORK A LITTLE BETTER FOR CONSUMERS. THE SAILBOATS AND LIGHTER FEEL OF THESE ADS ELIMINATED THE DANGER OF THE OPEN SEA IN WHAT WE REFER TO AS THE "HEAVY METAL" CAMPAIGN AND THE SOFTER FEEL OF THE ADS HAD GREATER APPEAL TO WOMEN.

411) 2 IN 1985 AFTER ONE YEAR, WE DECIDED THAT THE PARENT

CAMPAIGN SHOULD REFLECT A LOOK CLOSER TO ULTRA LIGHTS AND

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io

• ARE PART OF OUR HERITAGE. WE GREW UP ON WESTERNS, AHD THE HEROIC COWBOY FIGURE IN MOVIES AND TELEVISION WAS SOMEONE WE ASPIRED TO BE LIKE.

1111 FOR MOST AMERICANS, THE SEA JUST DOESN'T SPARK THESE EMOTIONS. IN FACT, TO SOME, THE OPEN SEA IS DANGEROUS AND FOREBODING, AND WORKING SEAMEN AND SHIPS HAVE LITTLE APPEAL. SECONDLY, MERIT'S FRANCHISE HAD DEVELOPED A FAIRLY EVEN SPLIT BETWEEN MEN AND WOMEN, AND WOMEN WERE TURNED OFF BY THIS CAMPAIGN.411FINALLY, WE SEEMED TO FALL INTO THWAME TRAP AS OUR COMPETITORS, WE TRIED TO COPY MARLS EN MARLBORO IS THE EXCEPTION, RATHER THAN THE RULE. Y COPYING MARLBORO WE BECAME JUST ANOTHER CIGARETTE BRAND SHOWING A PRETTY PICTURE WITH A SHORT COPY LINE. THIS IS NOT TO DIMINISH LEO BURNETT'S EXECUTIONS, THEY WERE TOP QUALITY, BUT UNFORTUNATELY WE STARTED TO LOSE WHAT MADE MERIT UNIQUE.

• INTERESTINGLY, THE MERIT ULTRA LIGHTS EXECUTIONS

SEEMED TO WORK A LITTLE BETTER FOR CONSUMERS. THE SAILBOATS AND LIGHTER FEEL OF THESE ADS ELIMINATED THE DANGER OF THE OPEN SEA IN WHAT WE REFER TO AS THE "HEAVY METAL" CAMPAIGN AND THE SOFTER FEEL OF THE ADS HAD GREATER APPEAL TO WOMEN.

411) 2 IN 1985 AFTER ONE YEAR, WE DECIDED THAT THE PARENT

CAMPAIGN SHOULD REFLECT A LOOK CLOSER TO ULTRA LIGHTS AND

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411 MERIT CONTINUED TO USE ITS ORIGINAL REPORTORIAL

FORMAT IN THE LATE 70'S, UPDATING THE RGA, OR RESEARCH GENERATED ADVERTISING CLAIMS TO PROVIDE FRESH HEADLINES AND BODY COPY. BUT, IT HAD BECOME APPARENT THAT THIS FORMAT WAS BEGINNING TO WEAR THIN AND THAT A NEW "SUSTAINING" CAMPAIGN WOULD BE NEEDED IF MERIT WERE TO GROW BEYOND THE 4 TO 6 SHARE LEVEL.

4111HE MERIT ULTRA LIGHTS INTRODUCTION BOUGHT US SOME AmiTIME, BUT IN 1982, WE STILL HADN'T FOUND A NEW CAMPAIGN.

41,1NALLY, IN 1983, WE ADOPTED THE SEA CAMPAIGN, WHICH INCIDENTALLY WAS DEVELOPED FOR ANOTHER BRAND. IN HINDSIGHT THIS MAY HAVE BEEN A MISTAKE, BURT THAT TIME,

THE SEA CAMPAIGN FULFILLED TWO OBJECTIVES:ilitIRST, TO

CREATE AN IDENTITY FOR MERIT AS THE TASTE BRAND OF LOW TARS, AND SECOND TO CREATE AN IMAGE FOR THE BRAND WHICH COULD BE EXTENDED INTO PROMOTIONS AND RETAIL MATERIALS.

• IN EFFECT, WE WERE TRYING TO EMULATE MARLBORO'S

SUCCESS AND CREATE AN IMAGE FOR MERIT AS THE MARLBORO OF

THE SEA. OBVIOUSLY, WE DIDN'T SUCCEED. LET ME SPEND A

FEW MINUTES EXPLAINING WHY.

• FIRST, FOR AMERICANS, THE WEST, AS PORTRAYED IN CIL

MARLBORO ADS, REPRESENTS FREEDOM, INDIVIDUALISM AND AN ESCAPE FROM THE COMLLFXITIES OF LIFE TO A TIME WHEN LIFE SEEMED MORE SIMPLOINDDITIONALLY, THE WEST AND COWBOYS

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411 MERIT CONTINUED TO USE ITS ORIGINAL REPORTORIAL

FORMAT IN THE LATE 70'S, UPDATING THE RGA, OR RESEARCH GENERATED ADVERTISING CLAIMS TO PROVIDE FRESH HEADLINES AND BODY COPY. BUT, IT HAD BECOME APPARENT THAT THIS FORMAT WAS BEGINNING TO WEAR THIN AND THAT A NEW "SUSTAINING" CAMPAIGN WOULD BE NEEDED IF MERIT WERE TO GROW BEYOND THE 4 TO 6 SHARE LEVEL.

4111HE MERIT ULTRA LIGHTS INTRODUCTION BOUGHT US SOME AmiTIME, BUT IN 1982, WE STILL HADN'T FOUND A NEW CAMPAIGN.

41,1NALLY, IN 1983, WE ADOPTED THE SEA CAMPAIGN, WHICH INCIDENTALLY WAS DEVELOPED FOR ANOTHER BRAND. IN HINDSIGHT THIS MAY HAVE BEEN A MISTAKE, BURT THAT TIME,

THE SEA CAMPAIGN FULFILLED TWO OBJECTIVES:ilitIRST, TO

CREATE AN IDENTITY FOR MERIT AS THE TASTE BRAND OF LOW TARS, AND SECOND TO CREATE AN IMAGE FOR THE BRAND WHICH COULD BE EXTENDED INTO PROMOTIONS AND RETAIL MATERIALS.

• IN EFFECT, WE WERE TRYING TO EMULATE MARLBORO'S

SUCCESS AND CREATE AN IMAGE FOR MERIT AS THE MARLBORO OF

THE SEA. OBVIOUSLY, WE DIDN'T SUCCEED. LET ME SPEND A

FEW MINUTES EXPLAINING WHY.

• FIRST, FOR AMERICANS, THE WEST, AS PORTRAYED IN CIL

MARLBORO ADS, REPRESENTS FREEDOM, INDIVIDUALISM AND AN ESCAPE FROM THE COMLLFXITIES OF LIFE TO A TIME WHEN LIFE SEEMED MORE SIMPLOINDDITIONALLY, THE WEST AND COWBOYS

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8

INTRODUCTION OF MERIT ULTRA LIGHTS, BARCLAY AND L&M'S GENERICS WERE ALSO LAUNCHED IN JANUARY 1981.

11.14E IMMEDIATELY RECOGNIZED THE THREAT BARCLAY REPRESENTED. HERE WAS A 1MG. TAR PRODUCT THAT DELIVERED THE TASTE OF A MUCH STRONGER CIGARETTE. OF COURSE WE KNOW HOW THEY DID IT, BUT TO CONSUMERS THE 99% TAR FREE CLAIM WAS INTRIGUING. THEY GENERATED UNPRECEDENTED TUAL

THROUGH A UNIQUE AND QUITE EXPENSIVE PROMOTION.wTHEY OFFERED A FREE CARTON OF CIGARETTES VIA A TOLL FREE TELEPHONE NUMBER44116ILE THEY GAVE AWAY THE STORE, THEY ALSO CAPTURED A ONE SHARE IN THEIR FIRST YEAR. THEY CERTAINLY HAD OUR ATTENTION!

MERIT RESPONDED BY SUPPORTING MERIT ULTRA LIGHTS WITH. AN $80 MILLION MEDIA BUDGET, AND FOR THE FIRST ITEN MONTHS

OF THE YEAR, WE ADVERTISED ULTRA LIGHTS ONLY.INERIT ULTRA LIGHTS CONTRIBUTED HALF A SHARE POINT TO THE FRANCHISE IN '81, BUT, DUE TO CANNIBALIZATION OF THE PARENT, ONLY THREE TENTHS OF A SHARE WAS NET TO THE BRAND.

• AS I MENTIONED, UM'S GENERIC BRANDS WERE INTRODUCED

AS WELL IN 1981. WHILE THIS CATEGORY DID HOT IMMEDIATELY HURT MERIT, THE GROWTH OF THE PRICE/VALUE CATEGORY IN THE LAST FEW YEARS HAS TAKEN A HEALTHY BITE OUT OF MERIT. WE'LL COVER THIS IN MORE DETAIL IN A FEW MINUTES.


2500114485 Page 22 of 25

8

INTRODUCTION OF MERIT ULTRA LIGHTS, BARCLAY AND L&M'S GENERICS WERE ALSO LAUNCHED IN JANUARY 1981.

11.14E IMMEDIATELY RECOGNIZED THE THREAT BARCLAY REPRESENTED. HERE WAS A 1MG. TAR PRODUCT THAT DELIVERED THE TASTE OF A MUCH STRONGER CIGARETTE. OF COURSE WE KNOW HOW THEY DID IT, BUT TO CONSUMERS THE 99% TAR FREE CLAIM WAS INTRIGUING. THEY GENERATED UNPRECEDENTED TUAL

THROUGH A UNIQUE AND QUITE EXPENSIVE PROMOTION.wTHEY OFFERED A FREE CARTON OF CIGARETTES VIA A TOLL FREE TELEPHONE NUMBER44116ILE THEY GAVE AWAY THE STORE, THEY ALSO CAPTURED A ONE SHARE IN THEIR FIRST YEAR. THEY CERTAINLY HAD OUR ATTENTION!

MERIT RESPONDED BY SUPPORTING MERIT ULTRA LIGHTS WITH. AN $80 MILLION MEDIA BUDGET, AND FOR THE FIRST ITEN MONTHS

OF THE YEAR, WE ADVERTISED ULTRA LIGHTS ONLY.INERIT ULTRA LIGHTS CONTRIBUTED HALF A SHARE POINT TO THE FRANCHISE IN '81, BUT, DUE TO CANNIBALIZATION OF THE PARENT, ONLY THREE TENTHS OF A SHARE WAS NET TO THE BRAND.

• AS I MENTIONED, UM'S GENERIC BRANDS WERE INTRODUCED

AS WELL IN 1981. WHILE THIS CATEGORY DID HOT IMMEDIATELY HURT MERIT, THE GROWTH OF THE PRICE/VALUE CATEGORY IN THE LAST FEW YEARS HAS TAKEN A HEALTHY BITE OUT OF MERIT. WE'LL COVER THIS IN MORE DETAIL IN A FEW MINUTES.


SER-22SER-22

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7

BLEND. THE TIPPING PAPER WAS, AND STILL IS WHITE AND THE

ORIGINAL MARLBORO LIGHTS HAD A FUNNY PLASTIC FLUTED

FILTER.

40:6Y 1979, LIGHTS HAD A 2.7 SHARE, E ADVERTISING WAS MORE FULLY INTEGRATED INTO THE FAMILY, ND NOW WITH A REAL

meRLBORO BLEND, LIGHTS WAS READY TO TAKE OFF...AND IT DID.

'PLIGHTS Box WAS INTRODUCED IN 1980 AND BY 1982 MARLBORO LIGHTS HAD DOUBLED ITS SHARE TO 5.3% AND HAD BECOME THE #1

LOW TAR BRAND IN THE U.S.

MARLBORO LIGHTS WASN'T THE ONLY BRAND TO IMPROVE ITS

TOBACCO BLEND. MERIT HAD PROVITHAT A LOW TAR CIGARETTE

COULD ALSO DELIVER GOOD TASTE. VENTUALLY, THE OTHER

LEADING LOW TAR BRANDS IMPROVED THEIR TECHNOLOGY AND

STARTED PRODUCING BETTER LOW TAR CIGARETTES. THE TASTE

ADVANTAGE MERIT ENJOYED IN 1976 WAS BEING DILUTED, AND BY

THE BEGINNING OF THE 1980'S THE LOW TAR CATEGORY HAD

RELATIVE TASTE PARITY, AT LEAST AMONG THE TOP BRANDS.

• IN THE MEANTIME, MERIT KEPT CHUGGING ALONG, THE BRAND

GREW HALF A SHARE POINT1980 TO 4.Z AND REACHED ITS ;NI PEAK SHARE OF 4.5 IN 198NIITH THE INTRODUCTION OF MERIT

ULTRA LIGHTS.

litUT, THE EVENTS OF 1981 WERE TO HAVE SOME LONG TERM COHSE:MENGES FOR. MERIT'S PERFORMANCE. IN ADDITION TO THE


2500114485 Page 23 of 25

7

BLEND. THE TIPPING PAPER WAS, AND STILL IS WHITE AND THE

ORIGINAL MARLBORO LIGHTS HAD A FUNNY PLASTIC FLUTED

FILTER.

40:6Y 1979, LIGHTS HAD A 2.7 SHARE, E ADVERTISING WAS MORE FULLY INTEGRATED INTO THE FAMILY, ND NOW WITH A REAL

meRLBORO BLEND, LIGHTS WAS READY TO TAKE OFF...AND IT DID.

'PLIGHTS Box WAS INTRODUCED IN 1980 AND BY 1982 MARLBORO LIGHTS HAD DOUBLED ITS SHARE TO 5.3% AND HAD BECOME THE #1

LOW TAR BRAND IN THE U.S.

MARLBORO LIGHTS WASN'T THE ONLY BRAND TO IMPROVE ITS

TOBACCO BLEND. MERIT HAD PROVITHAT A LOW TAR CIGARETTE

COULD ALSO DELIVER GOOD TASTE. VENTUALLY, THE OTHER

LEADING LOW TAR BRANDS IMPROVED THEIR TECHNOLOGY AND

STARTED PRODUCING BETTER LOW TAR CIGARETTES. THE TASTE

ADVANTAGE MERIT ENJOYED IN 1976 WAS BEING DILUTED, AND BY

THE BEGINNING OF THE 1980'S THE LOW TAR CATEGORY HAD

RELATIVE TASTE PARITY, AT LEAST AMONG THE TOP BRANDS.

• IN THE MEANTIME, MERIT KEPT CHUGGING ALONG, THE BRAND

GREW HALF A SHARE POINT1980 TO 4.Z AND REACHED ITS ;NI PEAK SHARE OF 4.5 IN 198NIITH THE INTRODUCTION OF MERIT

ULTRA LIGHTS.

litUT, THE EVENTS OF 1981 WERE TO HAVE SOME LONG TERM COHSE:MENGES FOR. MERIT'S PERFORMANCE. IN ADDITION TO THE


SER-23SER-23

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6

40 o THE ADVERTISING WAS DIFFERENT - IMPORTANT

LOOKING - AND RELEVANT TO THE CONSUMER

o litERIT WAS THE TOP PRIORITY FOR PM USA IN TERMS OF SUPPORT AND SALES FORCE TIME

o 416D, MARLBORO RED DOWNSWITCHERS FUELED THE BRANDS GROWTH.

411IN 1979, AN EVENT TOOK PLACE THAT HAS HAD A LONG TERM EFFECT ON MERIT'S PERFORMANCE. MARLBORO LIGHTS 85'5 PRODUCT WAS REFORMULATED, GIVING IT A TRUER MARLBORO BLEND AHD IMPROVED TASTE. THIS IMPROVEMENT WAS MADE TO PROVIDE A MORE ACCEPTABLE PRODUCT FOR MARLBORO'S FULL FLAVOR SMOKERS WHO WERE MOVING TO LOW TAR, AND TO ALSO PROVIDE A MORE COMPETITIVE PRODUCT VIS-A-VIS OTHER LOW TARS, INCLUDING MERIT.

AS MOST OF YOU KNOW, WHEN MARLBORO LIGHTS WAS FIRST INTRODUCED IN 1971, OUR MANAGEMENT MADE A CONSCIOUS DECISION TO DIFFERENTIATE LIGHTS FROM RED.

N THEJARLY YEARS, THE ADVERTISING WAS DRWATICALLY DIFFERENT..ITIRST USING WATER COLORVECUTIONSTIMEN, BIG PACK stigD, A LOT OF WHITE SPACE Alin SMALL COWBOY VISUAL. HE PACKS, AS YOU KNOW ARE GOLD. THE PRODUCT WAS INITIALLY DESIGNED TO HAVE A DIFFERENT TASTE AND TOBACCO

01 0 0

0

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6

40 o THE ADVERTISING WAS DIFFERENT - IMPORTANT

LOOKING - AND RELEVANT TO THE CONSUMER

o litERIT WAS THE TOP PRIORITY FOR PM USA IN TERMS OF SUPPORT AND SALES FORCE TIME

o 416D, MARLBORO RED DOWNSWITCHERS FUELED THE BRANDS GROWTH.

411IN 1979, AN EVENT TOOK PLACE THAT HAS HAD A LONG TERM EFFECT ON MERIT'S PERFORMANCE. MARLBORO LIGHTS 85'5 PRODUCT WAS REFORMULATED, GIVING IT A TRUER MARLBORO BLEND AHD IMPROVED TASTE. THIS IMPROVEMENT WAS MADE TO PROVIDE A MORE ACCEPTABLE PRODUCT FOR MARLBORO'S FULL FLAVOR SMOKERS WHO WERE MOVING TO LOW TAR, AND TO ALSO PROVIDE A MORE COMPETITIVE PRODUCT VIS-A-VIS OTHER LOW TARS, INCLUDING MERIT.

AS MOST OF YOU KNOW, WHEN MARLBORO LIGHTS WAS FIRST INTRODUCED IN 1971, OUR MANAGEMENT MADE A CONSCIOUS DECISION TO DIFFERENTIATE LIGHTS FROM RED.

N THEJARLY YEARS, THE ADVERTISING WAS DRWATICALLY DIFFERENT..ITIRST USING WATER COLORVECUTIONSTIMEN, BIG PACK stigD, A LOT OF WHITE SPACE Alin SMALL COWBOY VISUAL. HE PACKS, AS YOU KNOW ARE GOLD. THE PRODUCT WAS INITIALLY DESIGNED TO HAVE A DIFFERENT TASTE AND TOBACCO

01 0 0

0

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SER-24SER-24

Page 1 – CERTIFICATE OF COMPLIANCE WITH ORAP 5.05(2)(d)

CERTIFICATE OF COMPLIANCE WITH ORAP 5.05(2)(D)

I certify that (1) this brief complies with the word-count limitation in

ORAP 5.05(2)(b), and (2) the word-count of this brief (as described in

ORAP 5.05(2)(a)).

I certify that the size of the type in this brief is not smaller than 14 point

for both the text of the brief and footnotes as required by ORAP 5.05(4)(f).

The court granted a motion to exceed the length limit for this brief. The

order granting that motion was dated January 16, 2014 and permits a brief of up

to 4,300 words in length. I certify that (1) this brief complies with that order,

and (2) the word count of this brief (as described in ORAP 5.05(2)(a)) is 4,292

words.




Page 1 – CERTIFICATE OF FILING AND SERVICE

CERTIFICATE OF FILING AND SERVICE

I certify that on January 23, 2014, I filed the foregoing REPLY BRIEF

AND SUPPLEMENTAL EXCERPT OF RECORD with the Appellate Court

Administrator by using the eFiling system.

Participants in this case who are registered eFilers will be served via the

electronic mail function of the eFiling system.

Charles S. Tauman, OSB #[email protected] S. TAUMAN PCPO Box 19631Portland, OR 97280(503) 849-9281

D. Lawrence Wobbrock, OSB #[email protected] WOBBROCK P.C.2151 Crest DriveLake Oswego, OR 97034(503) 349-4141

James Coon, OSB #[email protected] THOMAS & COON

820 SW Second Ave., Suite 200Portland, OR 97204(503) 228-5222

Of Attorneys for Plaintiff-Respondent

I further certify that on said date I served two true and correct copies of

said document on the party or parties listed below, via first class mail, postage

prepaid, and addressed as follows:

Richard A. Lane, OSB #[email protected] A. LANE ATTORNEY AT LAW

707 SW Washington St Ste 600Portland, OR 97205(503) 228-6600Of Attorney for Plaintiff-Respondent

Page 2 – CERTIFICATE OF FILING AND SERVICE

Frank Kelly, III, Pro Hac [email protected], HARDY & BACON LLP1 Montgomery Street, Suite 2700San Francisco, CA 94104-4505(415) 544-1948

Robert A. McCarter, III, Pro Hac [email protected], HARDY & BACON L.L.P.1155 F Street NW, Suite 200Washington, D.C. 20004-1305(202) 639-5638

Lauren R. Goldman, Pro Hac [email protected] A. Chesin, Pro Hac [email protected] [email protected] BROWN LLP1675 BroadwayNew York, NY 10019(212) 506-2647

James Dumas, OSB #[email protected] HART NEIL & WEIGLER LLP1300 SW 5th Avenue, Suite 3400Portland, OR 97201(503) 548-6135

Of Attorneys for Defendant-Appellant




00561715.2

IN THE COURT OF APPEALS OF THE STATE OF OREGON … · Eugene, OR 97401-3273 (541) 485.0220 James Dumas, OSB #771671 ... even though it did not harm Mrs. Schwarz, because the low-tar

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