The scheme used by Philip Morris to bankrupt Tbilisi Tobacco

საზოგადოება - 20:43, 04 Apr, 2017

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So, there you have it: For the first time in the history of independent Georgia, a local tobacco producer is facing off against a large multinational company with accusations of dumping, or predatory pricing aimed at driving out local competitors from the market with its subsequent monopolization. We are talking about a clash between Tbilisi Tobacco Ltd. and Philip Morris LLC, which the first instance court has settled in favor of the former, obliging the latter to pay a fine of $92 million for introducing price dumping to the market. By the way, dumping itself is not a criminal action, as explains Giga Kverenchkhiladze, lawyer for Tbilisi Tobacco. Moreover, the word “dumping” is not encountered in Georgian legislation at all, yet that’s exactly what Philip Morris did – as an international company, it has been selling its product (Bond brand cigarettes) at below its prime cost, thus killing the local industry.

Giga Kverenchkhiladze, lawyer for Tbilisi Tobacco:

- While it is true that our legislation does not mention dumping at all, it also limits sale of products below their prime cost – which, in essence, is an anti-dumping measure. Again, while the term itself is not encountered, the 6^th paragraph of the law “Regarding Competition” outright prohibits improper pricing by one or more companies currently dominating the market. In this case, “improper pricing” involves pricing below the prime cost.

- If there is such a limitation envisioned by our law, then how did Philip Morris start dumping in the first place?

- That’s the point: This company has violated the law, but did not commit a felony. In short, our legislation fights both monopolist and dumping prices.

- Dumping is also known as undercutting and predatory pricing, is it not?

- Yes; by the way, the court made use of the latter term in its verdict. To boot, the 5^th paragraph of the law “Regarding Tobacco Control” directly states that it is forbidden to sell cigarettes at their prime cost or below it.

- Given that the law has it all covered, shouldn’t there be some institution that would at least issue warnings to those who violate it?

- Let me tell you how it works at the moment. If an entity sustains damage for abovementioned reasons, it’s up to this entity to file a complaint, and that’s what Tbilisi Tobacco did. Besides, the Competition Agency should fine the culpable tobacco importer in the same way it fined an oil importer back in the day. So we’re not talking exclusively about Philip Morris here – we have three major tobacco importers that own almost half of the market.

- And is Philip Morris the only one out of these three that engages in predatory pricing? Why did Tbilisi Tobacco enter a legal dispute with this company alone?

- We are in a legal dispute with a company that we have evidence against. I do not rule out the same happening with other importers.

- With who, exactly?

- I can’t tell you that yet, but let me assure you that there will be lawsuits. As of now, we are suing Philip Morris based on data logs of their business activity from 2013 to 2015. As for later violations, we are going to sue them for financial damages suffered post-2015 as well.

- Mr. Kverenchkhiladze, for me as a consumer, low prices on products – cigarettes or any others – are actually beneficial. So what difference does it make for me if a foreign company engages in predatory pricing?

- Your logic would have a right to exist if a tobacco importer sold cigarettes below their prime cost out of pure altruism. Let me assure you that this is not the case.

- How so?

- Because if dumping is allowed to continue, it will inevitably bankrupt smaller companies. After they are driven out from the market, the larger companies will turn to you to compensate the money they lost by undercutting. So if a product costs 0.5 GEL today, it will cost over 1 GEL tomorrow – not only will they get their money back, they will take it back with interest. That’s what dumping is all about. Long story short, the more intense dumping efforts become, the smaller the market share of Georgian companies becomes – in favor of multinationals, of course. At the moment, Georgian companies hold a meager 6 percent of the local market, and if the situation is not rectified, even this tiny share will vanish and foreign companies will take over entirely. And once this happens, they will establish any price they want.

- Mr. Kverenchkhiladze, international practice shows that dumping usually has local protectors and patrons, often at the governmental level. Could this be true for Georgia as well?

- It might, but I greatly hope that no one in our government is connected to these foreign importers. Still, I am quite surprised by results of research produced by the Competition Agency.

- Why?

- It is an aggregation of data from three years’ worth of cigarette market monitoring, and it points out numerous instances of dumping. Yet its conclusion states that while sale of cigarettes below prime cost did indeed take place, it does not represent a violation of our laws – an action that goes directly against both laws on competition and tobacco regulation! This makes me regard everyone who has acquainted himself with materials pertaining to this case and this research in particular and yet continues to support the importers, as a stooge or an actual lobbyist. And lobbying that takes place in absence of competition-driven interest is not something that “just happens”! By the way, it’s not just our side talking; even evidence provided by the defendant shows that law has been violated.

- What evidence are you talking about, exactly?

- The research done by the Competition Agency, which Philip Morris presented to the court as evidence in its favor; I still cannot understand why. Frankly speaking, back then I had no idea about what was stated in its conclusion and thus opposed it being accepted as evidence; had I known its contents, I would have definitely changed my mind. This research contains documented proof of everything we are asserting.

- Wait a second. Evidence that proves your side right is contained in a conclusion made by the Competition Agency?

- Not solely, of course. There exists other evidence, such as customs tax documentation, all sorts of appendices, etc. By the way, we are in dispute with Philip Morris over just one segment – there are only two or three Georgian tobacco producers at the moment, and “Pirveli” brand cigarettes produced by Tbilisi Tobacco compete precisely against the cigarette type of the “Bond” brand produced by Philip Morris.

In 2013, Georgian companies held 35 percent of the tobacco market, and half of that share was held by Tbilisi Tobacco; however, after 2013 Philip Morris and other multinationals started dumping.

- Shouldn’t the Competition Agency have taken heed when the first incident of dumping was recorded?

- Not only did it take heed, it engaged in a research effort that confirmed the fact, but the conclusion was pure bogus: “Yes, a violation of law did take place, but we cannot demand accountability for it”.

- Could the Competition Agency have absolved the foreign importers of responsibility for mercantile reasons?

- While there does exist such a suspicion, I do not possess evidence to prove it and will therefore refrain from commenting. According to the Competition Agency research, the prime cost of products of the “Bond” brand in 2014 comprised 24 835 000 GEL, yet it was sold for a total of 23 885 000 GEL – almost a million less than the cost of its production and import. Data for 2015 is far worse, with prime cost being 49 121 000 GEL and sales only amounting to 45 757 000 GEL. I repeat, we are only talking about “Bond” here; the company sells cigarettes of other brands at a profitable price.

- So, Philip Morris cut the price of “Bond” solely because Georgian companies manufacture a similar product. Did I get that right?

- You did. By the way, the aforementioned research shows that in 2013, imported cigarettes occupied 65 percent of the Georgian market, as opposed to Georgian companies’ 35 percent. In 2014 the latter figure dropped to 28 percent, in 2015 – to 16 percent and in 2016 it was reduced to a mere 6 percent. The end of 2015 marked a point of no return in this process; when we realized we could not rectify it via conventional competition, we opted for a lawsuit.

- If the importers went all-in to force you out from the market, why didn’t you do the same?

- If someone commits a crime against you, you should not respond with another crime. Two wrongs do not make a right; this matter must be taken to the police or to the court. Besides, dumping is not something people go to prison for.

- What is the punishment for it, then?

- Fine is the most drastic sanction. However, these multinationals are financial leviathans that make massive profits even while engaging in dumping, so such a punishment is fine by them, pardon the pun.

- By all this you mean to say that undercutting kills local production?

- It does. As I just explained, the market share of foreign importers has grown from 65 to 94 percent in just two years.

- So Philip Morris is an importer rather than an investor?

- Investor? An investor is someone who injects capital into a country. What capital has Philip Morris injected? On the contrary, it brings in imported goods and takes out currency; all of its profits eventually end up abroad.

- So the long-term problem of dumping is that it always results in death of local industries?

- Yes, as I’ve explained before. Predatory pricing renders local producers unable to compete, turning them bankrupt and leaving hundreds of people unemployed. Moreover, local production ensures stability of currency via exports, so bankruptcy wrecks our export capabilities as well. For example, if Tbilisi Tobacco alone goes bankrupt, over 500 people will lose their jobs.

- I still do not understand why did Philip Morris supply the Competition Agency’s research to the court as evidence.

- Because they liked the conclusion, which says that two plus two equals five. Let me quote: “A series of economic agents has displayed a tendency of selling products at or below their prime cost. This fact does not essentially conflict with current legislation, as no legal norms that regulate such facts exist. Moreover, such an approach might be acceptable from the consumers’ viewpoint in the short-term perspective, as they are able to procure the products they need at a relatively profitable price. However, in mid- and long-term perspectives, this tendency is alarming, as companies possessing significant resources might, judging by the studies of the tobacco market, attempt to use this factor for personal gain”. I can see why they liked the “does not essentially conflict with current legislation” part, but the conclusion itself is nonsense, plain and simple.

- The law might not prohibit it directly, but as far as I know, if financial damage is sustained, a company has a right to demand compensation...

- Yes, this is exactly the approach we’ve chosen. Paragraph 992 of the Civil Code states that whoever inflicts damage to another person or entity through negligence or inaction is obliged to compensate for this damage.

- In response to this, your client’s opponent seems to try and divert attention to alleged corruption in the judicial system, claiming that all cases that dealt with dumping were reviewed by the same judge.

- This is nothing but an attempt to mislead the people. Courts are divided into something akin to specializations, which means that cases of a particular type are reviewed by a particular judge. For example, the entirety of production- and industry-related disputes might be managed by a total of three, maybe four, judges. The same goes for family-related disputes and so on. What we have today is the first dumping-related case in Georgian history, which means that related disputes simply could not be dispersed among several judges.

- This might be a superficial statement, but don’t you think that all this has a political tint to it?

- It does, as opposition parties have become involved.

- We have recently been granted visa liberalization. Is it really that much of a long shot to say that someone is trying to tarnish Georgia’s image immediately upon its acceptance into the European family?

- I do not rule this out, but undercutting, due to its effect on local industry, is a problem that not only the European Union, but also the World Trade Organization is trying to tackle. This is something that the West knows far better than we do, as they have decades of experience with free-market economies. Upon encountering a case similar to ours, no one in Europe will be surprised; on the contrary, we will be complimented for taking proper action by taking the matter to court; it’s a shame that political parties have latched onto it for easy dividends, though. Still, have you ever heard an opposition party praise the courts? This simply never happens; however, does that mean that the courts exclusively arrive to wrong decisions?

- To sum it all up, Philip Morris is not as annoyed by the fine it has to pay as it is by the fact that it has been condemned by the court?

- Precisely. They do not want there to be a record of them engaging in dumping, as this is a serious attack on their image. Still, they have decided to take the risk by introducing predatory pricing into Georgia; this was probably done because they considered us a third world country, with all that entails. After all, undercutting is business as usual for multinational companies – they often pull tricks like that in countries like ours, and it’s not at all limited to cigarettes.

By Natia Abashidze