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INTERIM REPORT TO THE MANAGEMENT OF Ff1IL1__P MORRIS U.S.A. REGARDING IMPLEMENTATION OF THE ACTION AGAINST ACCESS PROGRAM Warren- B . Rudinan Paul, Weiss, Rifldnd, Wharton & Garrison July 19, 1996

39 concern among Philip Morris field personnel that our presence could hi.nder the success of the legislation, and we therefore have agreed to speak with legislators and other interested parties in any given state only after final action is taken. As a result, we have decided for purposes of this interim report to summarize our findings with respect to three states in which legislation was passed during 1996: Virginia, Delaware and Kansas. In these states, we reviewed the legislation enacted, interviewed Philip Morris personnel who advanced the legislation, and interviewed key state legislators. Because of this limited investigation, we will defer our overall appraisal of this element of the AAA program until our Fall 1996 report. l. Findins and State-Specific Conclusions. Delaware Findinu. Delaware added the following provisions to its previous law'--1I regulating tobacco sales: (a) liability for suspension of a retail tobacco license after the second or subsequent fine for unlawful sales to minors; (b) revision of penalties for sales to minors: $250 for first offense, $500 for second offense, $1,000 for a subsequent offense; (c) creation of penalties ($50 and up to 25 hours community service) for attempts by minors to purchase cigarettes; (d) retailers authorized to request proof of age; (e) $100 penalty for failure to post warning signs in a retail outlet; (f) restriction of vending machines to limited retail settings; and (g) preemption of local laws on the same subject. PMUSA personnel who represent the company before the Delaware legislature informed us that the legislation was relatively noncontroversial. This is reflected in the passage of the legislation by a4l-0 vote in the Delaware House of Representatives. This lack of opposition was confirmed by the state legislators we interviewed. There was no organized opposition to the legislation while it was considered in hearings in the respective committees. Representative Joe zii Tobacco license required, but revocation not directly tied to sales to minors; Class B misdemeanor fines for sale to minors of up to $500 for individuals, up to $2,000 for corporations, with possible six-month incarceration; no provisions on proof of age, warning signs, inspections of retail outlet, vending machines, or uniformity. DociJ: DCI :4I044.3 1317A

40 Petrilli, Majority Leader of the Delaware House of Representatives, attributes this to negotiations held early in 1996 between bill sponsors and staff of the Governor of Delaware, in which the major potential controversies were discussed and compromise positions were reached. Restaurant and tavern owners voiced some concerns, particularly with respect to the vending machine restrictions, but no attempts were made to amend the bill. There was no objection to the bill from the retail community. Health groups, such as heart and lung associations, objected to provisions preempting local laws on this subject. However, it was clear to Delaware legislators that sufficient votes existed in both bodies to pass a preemption provision, and the Governor's staff convinced these groups to support the legislation notwithstanding their opposition to the preemption provision, because of the importance of the remaining provisions.___ __ __ State legislators informed us that Philip Morris (and other tobacco companies) played an important role in negotiating a bill that the Governor could support and in expressing support for the bill to the legislature. While there was no "full-court press" by tobacco interests in the legislature on behalf of the legislation, the legislators with whom we spoke noted that large-scale advocacy was not necessary because the bill had sufficient underlying support. Initial Conclusion. Delaware appears to have been a receptive jurisdiction with respect to most elements of the AAA legislation. There were clear opportunities to enact new provisions, including the insertion of license revocation for underage tobacco sales and the insertion of warning sign and proof of age requirements, and there was little organized opposition to such proposals. Opposition appears to have been blunted by the early negotiations regarding the legislation, with the Governor's office facilitating a compromise bill. While uniformity provisions caused concern among some health groups, _his provision clearly had the support of a majority of the legislature. In short, Philip Morris expended sufficient resources and political capital in Delaware to enact the major objectives of its AAA program. Kansas 1~'indinas. Kansas added the following provisions to its prior law regulating tobacco sales:22/ (a) an increase in licensing fees, and authorizing the 22/ Previously, Kansas licensed retailers but could revoke licenses for sales (continued.. . ) Doc#:DC1:41044.3 7317A

41 state to revoke licenses for violations of tobacco sales laws; (b) a strengthening of the penalties against retailers for sales to minors (creating a misdemeanor fine of at least $200); (c) addition of proof of age procedures, which if followed create an affirmative defense against penalties for sales to minors; (d) requiring the posting of warning signs at tobacco retail outlets; and (e) requiring vending machines to possess lock-out devices, or to be restricted to places that are inaccessible to minors. An earlier version of the legislation was passed by the Kansas House in 1995. In 1996, the legislation was introduced in amended form in .the Kansas Senate and processed through the appropriate committee. There was no opposition to the legislation in committee: the main concern was revising the penalty provisions to ensure that children fined for attempting to purchase cigarettes were not considered "delinquent" for purposes of the child welfare system. When the legislation reached the Senate floor, an amendment advanced by the tobacco industry was inserted which preempted local laws on tobacco sales. Upon adoption of the amendment, local governments and health groups announced their opposition to the entire legislation. In response, a compromise was reached which permitted a vote on a motion to "reconsider" and delete the preemption amendment. Tobacco interests, including Philip Morris, did not object to the motion, and it was approved by a wide margin. The entire legislation was then approved by a conference committee, the conference bill was approved by both houses, and the governor signed the bill on May 11, 1996: State legislators involved in the handling of the legislation informed us that Philip Morris played a supportive and constructive role in the legislative process. Our interviews discovered no lack of support from Philip Morris for the more controversial aspects of AAA legislation -- the licensing of tobacco retailers and the imposition of meaningful penalties against persons who sell cigarettes to minors. When the legislation was taken up by the full Senate, there was some concern among the legislators that the preemption amendment was_being_ offered by tobacco interests, in-an effort-to derail-the legislation.- However, state legislators were pleased when tobacco interests agreed to delete 3 (... continued) only, not for distribution; and imposed severe penalties for sales to minors, of up to $1,000 and one year imprisonment (which state legislators told us were so strict that they were not enforced). Doa:DC1:41044.3 1317A

42 the preemption provision once it became clear that this measure could defeat the entire bill. The manager of the Senate bill told us that tobacco interests "got their shot at preemption, but they supported the bill even after it was deleted. " Initial Conclusions. Philip Morris received solid marks from key legislators in this state. The company was credited with promoting comprehensive legislation, giving straight-forward statements of their motivations in supporting its passage, and in agreeing to the deletion of an important item on their AAA agenda (preemption of local laws) in order to save the legislation as a whole. In our view, the Kansas experience provides an example of a commendable commitment on the part of Philip Morris to the principles of the AAA program. Preemption of local tobacco laws facilitates retailer understanding and compliance with prohibitions on underage purchase of cigarettes, but it is not necessarily essential to this goal. Conversely, licensing, warning signs, vending machine restrictions and penalties against noncompliant retailers are essential to this goal. Philip Morris was willing to sacrifice a provision of interest to its retailers in order to preserve the essential deterrents to the underage purchase of tobacco. Virginia Findings. Virginia added the following provisions to its previous tobacco laws:'-'/ (a) proof of age required if a tobacco purchaser appears to be under 18; (b) authority to enforce underage tobacco sales penalties vested in the Department of Agriculture & Consumer Services; and (c) vending machines must be within the line of sight of an employee, or must require tokens. Philip Morris employees responsible for the Virginia legislature, and Members of the Virginia legislature, informed us that the licensing of tobacco retailers was a politically unpopular proposal that was unlikely to pass in 1996. This fact was confirmed by a letter we were shown, authored by a key member of the Virginia House of Delegates, stating that it would be futile to attempt to process legislation which contained retailer licensing provisions. According to state legislators, Philip Morris did provide and transmit draft legislation that contained the entire AAA agenda (including 23/ Sale to minors creates civil fine liability of up to $250; purchase 6y minors prohibited; warning signs required at retail outlet. iV 0 ~ w 0 a n.z ~ T Dac,H: DCI:4I044.3 1317A

43 licensing), and publicly supported this position despite strong opposition to licensing from retail interests -- a traditional ally of tobacco companies in the Virginia legislature. However, Philip Morris was criticized by some Members of the legislature in the following areas: (a) submitting the draft legislation somewhat late in the session, which made committee consideration of it more difficult to achieve; (b) failing to take action to oppose referral of the AAA bill to what was perceived as an unsympathetic committee (Cities, Counties & Towns); and (c) once it became clear that insufficient votes existed to pass "a retailer licensing provision, failing to energetically advocate other compromise provisions (such as undercover "sting" operation authority) on which agreement could possibly have been reached. Philip Morris Virginia personnel informed us that, given the certain failure of a bill with licensing, they made a_pragmatic decision to pass- what was possible. In this instance, whether or not the bill was re-referred to a more sympathetic committee, company representatives believed that the end result would have been the same, and that it was not worth wasting political capital to move a licensing bill that was destined to fail. Initial Conclusions: The letter from a key State legislator in the majority party describing the lack of political support for retailer licensing, and the state legislators with whom we spoke, confirmed that Philip Morris had a difficult task in this session of the Virginia legislature. Our evaluation of its work proceeds in this context. It is unclear whether late delivery of legislative language for the AAA bill was simply a logistical problem or a deliberate act on the part of Philip Morris. However, even assuming the worst motives on the part of Philip Morris (and such motivations have not been confirmed), it does not appear that seeking a later substitute amendment containing the AAA objectives, as opposed to original introduction of legislation with those objectives, would have altered the political landscape in Virginia. Criticism by some state legislators of Philip Morris' failure to seek re-referral of the legislation to a more sympathetic committee is also noteworthy but, in our view, not entirely persuasive. If legislation with retailer licensing clearly did not have the support of a majority of the legislature, the choice of the committee in which the bill would languish does not appear to be a crucial issue. Doc{i:DC1:41044.3 1317A

44 However, we do believe that there is merit in the criticism that Philip Morris failed to seize an opportunity to advocate a reasonable compromise position. One state legislator suggested that creation of authority for "sting" operations, an element of the AAA program, could have passed the legislature. I.nn this instance, choice of committee might have been more important. However, the crucial question is: did Philip Morris defer to retailer pressure in general after licensing became a political dead letter, by failing even to explore other options for strengthening the enforcement of underage tobacco sales laws in Virginia? This final question is important but difficult to answer. State legislators in Virginia answered it in a pragmatic fashion: they will look to Philip Morris in the next session to work on alternative legislation to strengthen the state's enforcement tools. Our verdict on Virginia is thus mixed: this state presented a difficult political dilemma for Philip Morris, but the company perhaps did not expend all of the resources available to it to enact as many AAA objectives as possible. 'p'ne company's actions in the next legislative session will provide the best answer to this question, and we will reserve final judgment until that time. Do,,Y:DC1:41044.3 l3I7A