Court Opinion

ID: 2689884
Source: CourtListenerOpinion
Date Created: 2014-08-01 20:23:55.467889+00
Date Added: 2024-06-11T12:51:31.237891
License: Public Domain

[Cite as State ex rel. Petro v. R.J. Reynolds Tobacco Co., 104 Ohio St. 3d 559, 2004-Ohio-7102.]

THE STATE EX REL. PETRO, APPELLEE, v. R.J. REYNOLDS TOBACCO COMPANY,
                                    APPELLANT, ET AL.
 [Cite as State ex rel. Petro v. R.J. Reynolds Tobacco Co., 104 Ohio St. 3d 559,
                                    2004-Ohio-7102.]
Tobacco settlement — Tobacco advertising on matchbooks — Matchbooks are
        merchandise, and the free distribution of matchbooks advertising brand-
        name tobacco products in venues not limited to adults is prohibited by the
        Master Settlement Agreement — Judgment affirmed.
  (No. 2003-0860 – Submitted March 16, 2004 – Decided December 30, 2004.)
APPEAL from the Court of Appeals for Franklin County, No. 02AP-591, 152 Ohio
                              App.3d 345, 2003-Ohio-1654.
                                   _________________
        PFEIFER, J.
                          Factual and Procedural Background
        {¶ 1} The state of Ohio on the relation of appellee, the Attorney General,
sued defendant-appellant, R.J. Reynolds Tobacco Company (“RJR”), and other
tobacco companies in 1997, alleging deceptive trade practices, antitrust violations,
and other claims. The state sought various forms of relief, including recovery of
Medicaid expenditures for alleged tobacco-related illnesses resulting from the use
of tobacco products by Ohio Medicaid recipients. In November 1998, Ohio,
along with the 45 other states and the government territories that had sued tobacco
companies, settled the lawsuits with the nation’s five largest tobacco companies,
including RJR.
        {¶ 2} The parties set forth the terms of their settlement in the Master
Settlement Agreement (“MSA”). On November 25, 1998, the Court of Common
Pleas of Franklin County entered a consent decree approving the MSA.
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          {¶ 3} Under the MSA, the tobacco companies agreed to pay the states
and territorial governments several hundred billion dollars and to accept certain
restrictions on their marketing efforts. For example, the companies agreed to
refrain from any “advertising, promotion or marketing of Tobacco Products”
targeted at youth. In addition, the companies agreed to refrain from certain
defined marketing practices, including the “[u]se of [c]artoons” in advertisements,
the display of certain “[o]utdoor [a]dvertising and [t]ransit [a]dvertisements” such
as advertising in malls, video arcades, or in or near public transportation, and
advertising on billboards and signs larger than 14 square feet, except within an
“Adult-Only Facility.” The companies further agreed to “bans on youth access to
free samples” and gifts to underage persons based on proofs of purchase, and a
limitation on tobacco brand-name sponsorships.
          {¶ 4} The specific portion of the MSA at issue in this case is Section
III(f), which provides:
          {¶ 5} “Beginning July 1, 1999, no Participating Manufacturer may,
within any Settling State, market, distribute, offer, sell, license or cause to be
marketed, distributed, offered, sold or licensed (including, without limitation, by
catalog or direct mail), any apparel or other merchandise (other than Tobacco
Products, items the sole function of which is to advertise Tobacco Products, or
written or electronic publications) which bears a Brand Name.”
          {¶ 6} This case concerns the distribution of paper matchbooks that
contain     RJR   brand   names and whether        those matchbooks constitute
“merchandise” under Section III(f) of the MSA. Appellee claims that in 2000,
more than one billion matchbooks bearing RJR’s signature brand names were
distributed in the United States. RJR has had three separate matchbook programs
in recent years. In one program, RJR purchases matchbooks with advertising
promoting its brands and distributes them in bars, nightclubs, and lounges in
conjunction with RJR’s sponsorship of venues.          In another program, RJR

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distributes matchbooks at musical and sporting events that it may sponsor under
the MSA. The venues where RJR distributes matchbooks pursuant to these two
programs are restricted to adults, and the state does not now challenge RJR’s
distribution of matchbooks in those contexts.
       {¶ 7} The state challenges RJR in this case for its distribution of
matchbooks at venues that are not limited to adults.           This distribution was
achieved through RJR’s relationship with D.D. Bean & Sons Company (“Bean”),
a New Hampshire-based matchbook manufacturer and distributor.                  RJR
contracted with Bean, not to purchase matchbooks, but to purchase space on those
matchbooks for advertising. Bean has an extensive distribution network through
which it sells matchbooks to wholesalers who distribute tobacco products. These
distributors sell the matchbooks once again to a variety of retailers like tobacco
specialty stores, convenience stores, grocery stores, gas stations, bars, and liquor
stores. The branded matchbooks are then generally distributed free to consumers,
primarily to people who purchase tobacco products.
       {¶ 8} It has been said that “Close cover before striking” is the most
printed phrase in the history of the world, and Bean’s promotional materials relate
the pervasiveness of branded matches, not just to the smoking set, but to millions
of other consumers:
       {¶ 9} “[Bean’s] matches can be found in just about every convenience
store, supermarket, liquor store, wholesale club and candy/tobacco stand in the
country. While a direct link to smokers, matches are used and seen on a daily
basis by millions of non-smokers as well. * * * [An advertiser’s] logo or message
will be picked up by millions of consumers in virtually every city and town in
America. Matches are a direct link to smokers, but millions of non-smokers also
use the product to light candles, stoves, grills, campfires, etc.”
       {¶ 10} Bean also relates that “for every person who picks up a matchbook,
there are 8 other people who typically see it as well. These exposures, along with

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other opportunities for non-smokers to see the match covers, * * * will give [an
advertiser] an extended consumer reach.”
       {¶ 11} RJR claims that the focus of its matchbook marketing effort is
adult smokers.   To that end, RJR matchbooks have traditionally contained a
statement that they are not to be distributed to minors. The wrappers on packs of
matchbooks have long contained a similar statement. In 2001, RJR revised its
package wrappers to include the statement that the matches are to be distributed
“at no extra charge with the purchase of tobacco products.”
       {¶ 12} RJR matchbooks are given away for their advertising benefit, a
practice consistent with the history of matchbooks in this country. In the 1890s,
the Diamond Match Company opened a paper-matchbook-production facility in
Barberton. A Diamond Match salesman, Henry Traute, is not only credited with
putting an end to pocket fires – by insisting that the striker be moved from the
inside to the outside of the matchbook – but also with sparking the use of
matchbooks as an advertising medium. Traute’s first customers were the Pabst
Brewery in Milwaukee, which bought 10 million matchbooks advertising Pabst
Blue Ribbon beer. James Duke, a tobacco tycoon, purchased 30 million books.
William Wrigley ordered a billion books advertising Wrigley chewing gum. Over
time, match manufacturers began distributing the matchbooks themselves.
Consumers have become accustomed to the availability of free paper matchbooks.
       {¶ 13} However, while most matchbooks are given away, many are
purchased at retail. As the appellate court below observed, the United States
Consumer Product Safety Commission has estimated that “12-20 percent of
matchbooks are purchased at retail by consumers.” Further, Bean manufactures
and sells private-label matchbooks for supermarket chains, drug stores, and mass
merchandisers, who offer them for sale to consumers. Matches sold at retail
account for 40 percent of Bean’s total business. Also, even RJR’s Winston
branded matchbooks have been sold at retail in Ohio.

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       {¶ 14} In 1999, a number of state attorneys general, including then
Attorney General Betty Montgomery, raised concerns with RJR regarding its
matchbook advertising. RJR was the only signatory to the MSA that continued to
distribute branded matchbooks. Informal attempts to resolve the issue failed, and
Ohio and 15 other states notified RJR that they would seek enforcement of the
MSA.
       {¶ 15} On March 19, 2001, the state moved for a show-cause order in
contempt against RJR, contending that RJR’s use of advertising matchbooks
violated the portion of the consent decree incorporating MSA Section III(f)’s
brand-name-merchandise ban. The state later withdrew the request for civil-
contempt sanctions and instead sought a declaration that the MSA’s bar on
distributing brand-name merchandise included matchbooks bearing brand names.
The parties submitted stipulated facts and memoranda for the court’s
consideration.
       {¶ 16} On April 26, 2002, the trial court denied the state’s        motion,
finding that the RJR matchbooks are not “merchandise” within Section III(f)’s
prohibition of “apparel or other merchandise * * * which bears a Brand Name.”
Since the MSA does not contain a definition of “merchandise,” the court applied a
definition that included “goods, wares, commodities, finished articles, or wares
held in temporary inventory by a merchant/business or which are bought and sold,
wholesale, retail or in trade, in commerce, for profit.” The trial court recognized
that matchbooks constituted merchandise in the transactions between the
manufacturer and the wholesalers and in the transactions between the wholesalers
and the retailers. However, the fact that most matchbooks are given away at the
retail level, the court found, disrupts “the merchandise definitional chain,”
transforming the matchbooks into nonmerchandise. The court found that while
some matchbooks are sold at retail, most are not. The court found the purpose of

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the matchbooks to be promotion and that they “have little or no indicia of
merchandise as defined by either party.” The trial court concluded:
       {¶ 17} “In the context of this case, the matchbooks are a medium of
communication designed to promote the sale of RJR’s tobacco products. Having
considered the context of the word ‘merchandise’ * * *, this Court believes that
Mr. and Mrs. Joe Ohio would agree that the imprinted matchbooks are
advertising.”
       {¶ 18} The state appealed from the trial court decision, and the Tenth
District Court of Appeals reversed the judgment of the trial court. The appellate
court disagreed with the trial court’s conclusion that “merchandise somehow loses
its character as merchandise because it is subsequently offered for free as a
promotional item.” The appellate court opined that the trial court’s holding
“would eviscerate the ban on marketing and distribution of brand name apparel
and other merchandise contained in the MSA.”
       {¶ 19} The appellate court also addressed RJR’s contention that its
matchbooks never were “merchandise” in the first place because they are
commonly given away. The court found that 12 to 20 percent of matchbooks are
purchased at retail by consumers, a significant enough percentage for matchbooks
to be considered merchandise: “To find otherwise would open the door for
tobacco companies to flood the market with free goods in order to circumvent the
ban on distribution of apparel or other merchandise.”
       {¶ 20} Finally, the appellate court found that the historical advertising
function of matchbooks does not take them “outside the common understanding
of the term ‘merchandise,’” since the consumer sees their primary function as a
source of fire. The court found no functional difference between matchbooks and
T-shirts or other apparel that sport a tobacco brand name.
       {¶ 21} The cause is before this court upon the acceptance of a
discretionary appeal.

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                                January Term, 2004

                                 Law and Analysis
       {¶ 22} In this case, we are called upon to resolve a narrow question: For
the purposes of Section III(f) of the MSA, do paper matchbooks constitute
“merchandise”? The parties disagree on how to interpret the term “merchandise.”
The state argues for a broad interpretation that would include items that are
bought and sold at the wholesale level but that can be given away at the retail
level. RJR argues that the term is ambiguous and that when using the MSA for
context, the term should be read narrowly and should encompass only items
typically bought and sold at retail. We find that common usage and the context of
the MSA dictate a broader interpretation of “merchandise,” one that includes
matchbooks in its purview.
       {¶ 23} The MSA, like all settlement agreements, is a contract between the
parties. Continental W. Condominium Unit Owners Assn. v. Howard E. Ferguson,
Inc. (1996), 74 Ohio St. 3d 501, 502, 660 N.E.2d 431. We thus employ our usual
method of contract construction in defining disputed terms. “The purpose of
contract construction is to effectuate the intent of the parties,” and that intent “is
presumed to reside in the language they chose to employ in the agreement.” Kelly
v. Med. Life Ins. Co. (1987), 31 Ohio St. 3d 130, 132, 31 OBR 289, 509 N.E.2d
411. Courts resort to extrinsic evidence of the parties’ intent “only where the
language is unclear or ambiguous, or where the circumstances surrounding the
agreement invest the language of the contract with a special meaning.” Id. The
fact that the parties fail to specifically define a term within the contract does not
make the term ambiguous. Nationwide Mut. Fire Ins. Co. v. Guman Bros. Farm
(1995), 73 Ohio St. 3d 107, 108, 652 N.E.2d 684. Instead, common, undefined
words appearing in a written instrument “will be given their ordinary meaning
unless manifest absurdity results, or some other meaning is clearly evidenced
from the face or overall contents of the instrument.” Alexander v. Buckeye Pipe

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Line Co. (1978), 53 Ohio St. 2d 241, 7 O.O.3d 403, 374 N.E.2d 146, paragraph
two of the syllabus.
       {¶ 24} We look, then, to the ordinary meaning of “merchandise.” The
temptation is to define merchandise as Justice Stewart famously identified
obscenity in Jacobellis v. Ohio (1964), 378 U.S. 184, 197, 84 S. Ct. 1676, 12
L. Ed. 2d 793 (Stewart, J., concurring), and simply say that we know merchandise
when we see it. We do, but we will delve deeper.
       {¶ 25} The trial court presided over a battle of dictionaries, statutes, and
case law and meticulously listed at least 15 definitions of “merchandise” from
different sources submitted by the parties. The latest edition of Black’s Law
Dictionary, not yet published at the time of the trial court’s decision, defines
“merchandise” as:
       {¶ 26} “1. In general, a movable object involved in trade or traffic; that
which is passed from hand to hand by purchase and sale. 2. In particular, that
which is dealt in by merchants; an article of trading or the class of objects in
which trade is carried on by physical transfer; collectively, mercantile goods,
wares or commodities, or any subjects of regular trade, animate as well as
inanimate.” Black’s Law Dictionary (8th Ed.2004) 1008.
       {¶ 27} Black’s definition is not at odds with the trial court’s distilled
version of all the definitions that the parties submitted. The trial court wrote:
       {¶ 28} “Nearly all the cited definitions of merchandise include goods
‘bought and sold’ or ‘held for sale’ in a commercial setting either by a merchant
or to a consumer. A ‘merchant’ is defined as ‘a person who buys and sells
commodities for profit.’ The Random House College Dictionary 836 (revised
edition 1984).”
       {¶ 29} We accept the definition of “merchandise” adopted by the trial
court – “goods, wares, commodities, finished articles, or wares held in temporary
inventory by a merchant/business or which are bought and sold, wholesale, retail

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or in trade, in commerce, for profit” – and find that matchbooks fall within that
definition.
       {¶ 30} The manufacture and distribution of matchbooks are not altruistic
enterprises.   Only at one end of the stream of commerce are matchbooks
commonly distributed without a charge. On at least two other levels – from
manufacturers to wholesalers and wholesalers to retailers – matchbooks constitute
goods that are bought and sold by merchants for profit. We agree with the
appellate court that there is no transformational or redemptive power in being
distributed free at retail. Matchbooks are indisputably in the stream of commerce,
and once the plunge into that stream is made, the items remain merchandise.
Metaphorically speaking, an item cannot enter the stream of commerce without
getting wet.
       {¶ 31} We fail to find a meaningful definitional distinction between items
that are sold at retail and those that are sold at wholesale vis-à-vis whether they
constitute merchandise. The matchbooks do not change in character once they
leave the manufacturer. They are not incorporated into another, separate product.
At either level of commerce, they fit within the ordinary meaning of merchandise
— they are traded and trafficked by merchants for sale. The wholesale/retail
debate seems solved by the apocryphal Winston Churchill quip: “We’ve
established what you are, madame – now we’re just quibbling over price.”
       {¶ 32} RJR would have us apply a definition of “merchandise” that
includes the restriction “typically sold at retail.” The evidence submitted by the
parties indicates that paper matchbooks are indeed commonly sold at retail. Bean
relates that 40 percent of the matchbooks it manufactures are sold at retail; United
States Consumer Product Safety Commission has estimated that 12 to 20 percent
of all matchbooks are purchased at retail by consumers. Thus, while not the
norm, the retail sale of matchbooks is not rare. Matchbooks are often sold at the

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retail level. If there were a retail sale requirement for merchandise, the common
sale of matchbooks in the retail marketplace would fulfill it.
       {¶ 33} The fact that most matchbooks are given away is not noteworthy.
Certainly, “free merchandise” is a type of “merchandise.” Free merchandise is
attractive because it has worth but comes without a charge. Its usefulness makes
it desirable to possess. Matchbooks are not a birthright or an entitlement. People
realize that they are manufactured by someone and sold to someone who
distributes them with the hope that they will be a successful advertising tool.
       {¶ 34} Moreover, RJR focuses on branded matchbooks. That focus jumps
a step ahead of the MSA. The first question is whether matchbooks in general are
merchandise; if they are, then they cannot contain a brand name of a tobacco-
company MSA signatory. In other words, would they be merchandise if they did
not contain tobacco advertising?       We have already established above that
nonadvertising matchbooks are sold at retail. Unbranded matchbooks would thus
fit even within RJR’s narrow definition of merchandise.
       {¶ 35} We find that the term “merchandise” in Section III(f) of the MSA
is unambiguous and that its ordinary meaning encompasses matchbooks that are
given away at retail. However, we will still consider the context of the term
within the agreement.
       {¶ 36} The contract language leaves no doubt that a broad interpretation
of the term “merchandise” is to be employed when analyzing the contract. The
section at issue here states: “[N]o participating Manufacturer may * * * distribute
* * *or cause to be * * * distributed * * * any apparel or other merchandise (other
than Tobacco Products, items the sole function of which is to advertise Tobacco
Products, or written or electronic publications) which bears a Brand Name.” The
parenthetical exclusions after the words “other merchandise” indicate that the
parties to the contract have employed an expansive definition of “merchandise.”
The contract excludes from “merchandise” items “the sole function of which is to

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advertise Tobacco Products.” By implication, then, items that have a function
besides advertising tobacco products do constitute merchandise.
       {¶ 37} Advertising is not the sole purpose of paper matchbooks. They are
popular among advertisers because they are so popular among consumers for their
usefulness. They are a source of fire. They light birthday candles, pilot lights,
firecrackers, and kindling; they can be used to mend a frayed shoelace, remove a
stray thread; they can function as notepads, bookmarks, souvenirs, or, in a pinch,
dental floss. Advertising is not their sole function.
       {¶ 38} But for the “sole function” limitation, the contract language
implies that advertising items such as placards, countertop displays, and signage
would be considered merchandise pursuant to the contract. Those are items not
typically sold at retail, yet they were specifically excepted from consideration as
merchandise. The contract thus narrows for certain items the otherwise expansive
definition. Matchbooks are not included in the limiting language and thus reside
within the broader definition of “merchandise.”
       {¶ 39} In a larger sense within the agreement, the parties were agreeing to
put an end to subtle but ubiquitous marketing of tobacco products. When in a
retail establishment, one can expect to encounter the marketing efforts of cigarette
purveyors. The ban on brand-name merchandise bans tobacco advertising from
useful items that make their way into Americans’ lives on a daily basis. We find
matchbooks to be of the same character as key chains, pens, and clothing – items
that, because of their usefulness, become tempting billboards for marketers. The
MSA prohibition eliminates their availability for tobacco-product advertisement.
       {¶ 40} We thus find that the ordinary meaning of the word
“merchandise,” as well as its use within the MSA, necessarily includes
matchbooks.
       {¶ 41} Accordingly, we affirm the judgment of the court of appeals.
                                                                Judgment affirmed.

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                            SUPREME COURT OF OHIO

       MOYER, C.J., RESNICK, F.E. SWEENEY, LUNDBERG STRATTON and
O’CONNOR, JJ., concur.
       O’DONNELL, J., concurs in judgment only.
                              __________________
Jones Day, Jeffrey J. Jones, Matthew A Kairis, Donald B. Ayer, Daniel H.
Bromberg, Jack W. Campbell IV, and Thomas R. McCarthy, for appellant.
       Jim Petro, Attorney General, Douglas R. Cole, State Solicitor, Stephen P.
Carney, Senior Deputy Solicitor, Joseph L. Piccin, Susan C. Walker, and Michael
D. Allen, Assistant Attorneys General, for appellee.
       Vorys, Sater, Seymour & Pease, L.L.P.; J. Scott Jamieson and C. William
O’Neill, urging reversal for amicus curiae, D.D. Bean & Sons Co.
       Gregg Renkes, Alaska Attorney General; Terry Goddard, Arizona
Attorney General; Mike Beebe, Arkansas Attorney General; Bill Lockyer,
California Attorney General; Ken Salazar, Colorado Attorney General; Richard
Blumenthal, Connecticut Attorney General; Mark J. Bennett, Hawaii Attorney
General; Lisa Madigan, Illinois Attorney General; Steve Carter, Indiana Attorney
General; Tom Miller, Iowa Attorney General; Albert Benjamin Chandler III,
Kentucky Attorney General; Steve Rowe, Maine Attorney General; J. Joseph
Curran, Jr., Maryland Attorney General; Tom Reilly, Massachusetts Attorney
General; Mike Cox, Michigan Attorney General; Mike Moore, Mississippi
Attorney General; Jeremiah W. Nixon, Missouri Attorney General; Mike
McGrath, Montana Attorney General; Jon Bruning, Nebraska Attorney General;
Brian Sandoval, Nevada Attorney General; Peter Heed, New Hampshire Attorney
General; Peter C. Harvey, New Jersey Attorney General; Patricia Madrid, New
Mexico Attorney General; Eliot Spitzer, New York Attorney General; Pamela
Brown, Northern Mariana Islands Attorney General; W.A. Drew Edmonson,
Oklahoma Attorney General; Hardy Myers, Oregon Attorney General; Gerald J.
Papert, Pennsylvania Acting Attorney General, Joel M. Ressler, Chief Deputy

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                             January Term, 2004

Attorney General, and Timothy P. Keating, Deputy Attorney General; Anabelle
Rodriquez, Puerto Rico Attorney General; Patrick Lynch, Rhode Island Attorney
General; Henry McMaster, South Carolina Attorney General; Lawrence E. Long,
South Dakota Attorney General; Paul G. Summers, Tennessee Attorney General;
Mark L. Shurtleff, Utah Attorney General; William H. Sorrell, Vermont Attorney
General; Christine Gregoire, Washington Attorney General; Darrell V. McGraw,
West Virginia Attorney General; Peg Lautenschlager, Wisconsin Attorney
General; and Patrick J. Crank, Wyoming Attorney General; amici curiae, urging
affirmance.
                            __________________

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