Distributor Dilemmas
R.J. Reynolds Tobacco Co. is awaiting a trial date in its racketeering suit against a wholesaler and four retailers that allegedly stole promotional funds from the company. More suits are likely this year.
The suit, filed in federal court in the Middle District of North Carolina, contends that two wholesalers and the retailers concocted fake sales orders and invoices to gain trade promotion “buy-down” money that RJR pays retailers to discount cigarettes. RJR alleges that the defendants stole millions of dollars through the fraud.
“We filed this lawsuit on the heels of criminal prosecutions and guilty pleas. We are committed to ferreting out this type of fraud and abuse, and will bring civil and criminal actions against anyone engaged in this type of activity,” says Seth Moskowitz, RJR director of corporate communications. RJR has also intensified its audit procedures to detect fraud, and has identified other parties now under investigation.
The suit was filed March 15 against wholesaler Southern Sales & Import and retailers S K Everhart, Inc. (d.b.a. Trindale Foods), Southland Trade Corp., Great Steaks, and Kingsway Enterprises, Inc. A second wholesaler, Central Wholesalers, admitted involvement, paid restitution to RJR, and gave evidence against the defendants. RJR, which considers buy-downs “one of [our] most important promotions,” is asking for $5 million in compensatory damages.
Meanwhile, Coca-Cola lost a suit against a Canadian who independently exported its soft drinks as “gray goods” to Hong Kong and Japan. In May, the Canadian Supreme Court refused to hear Coke’s appeal against exporter Mushi Pardhan, who bought Coca-Cola wholesale in Canada and shipped it overseas for resale at a tidy 14-percent margin.
The Tanzanian immigrant reported annual sales as high as $4.8 million on weekly sales of 50,000-plus cases, which he bought for $4.25 per case (plus $1 transport cost) and resold for more than $6 each, according to Associated Press reports. Coke sued for trademark infringement and shut Pardhan down in 1995. A federal judge ruled that Pardhan bought and sold the product legally. Appeals favored Pardhan, and the Supreme Court refusal was Coke’s last option.
The loss shows that nimble entrepreneurs can make end-runs around even global brands. As new markets and retail channels open, manufacturers will be forced to rethink their distribution systems. In the meantime, they’ll keep defending them in court.
