Harley roars off over smoke ads

Hard-image motorcycle maker is revved up over a name licensing deal. Paul Rodgers reports

HARLEY-DAVIDSON motorcycles have a certain image: the throaty roar of a twin-cylinder 1,000cc engine, the glitter of polished chrome and enamel, the sweet smell of motor oil and tanned leather. Their bearded riders epitomise freedom on the American highway - rugged individualists with a legendary disdain for authority.

It is not the sort of image that fits with no-smoking signs. Yet the company in Milwaukee, Wisconsin, that makes the bikes is furiously trying to stub out a nine-year-old licence agreement that allows Lorillard, America's oldest tobacco company, to use its name.

The dispute first hit the courts - secretly - more than a year ago after Harley-Davidson objected to Lorillard's advertising campaign, and it has since snowballed into a bitter legal battle. The bike-maker's biggest fear now is that it might get stung for some of the $5,100bn (£3,400bn) in lawsuits filed against Lorillard for smoking-related damages.

The story begins in1986, when Harley-Davidson was recovering from near- collapse.

Following a financial restructuring, and just before it went public, the motorcycle company was looking for ways to cash in on its famous brand name, an icon of Americana.

Enter Loews Corporation, a New York group with interests ranging from Bulova watches through hotels, cinemas and CNA Financial to a large minority stake in the CBS television network. The group is controlled by its founders, Larry Tisch and his brother Bob, a former US Postmaster General. It also owns Lorillard, best known for its Kent and Newport brands.

The tobacco company wanted to market cigarettes using the Harley-Davidson name. The bike-maker, reasoning that most of its customers were also die- hard smokers, figured it made sense. The brand would have a macho appeal similar to Philip Morris's Marlboro Man. The deal would also advertise the motorcycle's name at no cost to the manufacturer. To date, Harley- Davidson has received more than $5m in payments.

Much of that was from fixed annual fees rather than royalties, as Lorillard spent an unusually long period - seven years - test- marketing the product. In 1993, Harley-Davidson enjoyed a burst of publicity around its 90th birthday. More than 100,000 enthusiasts, including many from the UK, gathered in Milwaukee. Lorillard chose that point to roll out its new cigarettes.

But when Harley-Davidson executives saw the proposed advertising campaign, they blew their gaskets. The adverts featured a "faceless Darth Vader- yype character, astride a motorcycle against a neon-colored background," according to a writ filed by Harley-Davidson in the Southern District Court of New York last month.

"In both their highly stylised image and their surreal color and appearance, the advertisements were clearly derivative of comic book characters and `heavy metal' art that are extremely popular among teenagers," the writ added.

At the time, Harley-Davidson said that Lorillard was unable to provide studies showing whether or not the adverts would attract children, so it commissioned one of its own. An independent researcher determined that the adverts would appeal to a "significant minority" of children, so Harley-Davidson vetoed them. In its recent writ, the company blasted Lorillard's "don't ask" policy as "irresponsible".

Lorillard's response to the veto was to file a writ - secretly because it contained proprietary information - claiming $50m in damages. Spurred by that action, Harley-Davidson executives took a close look at the agreement for the first time since it was signed in 1986 and became increasingly worried that they might be vulnerable to litigation by smokers.

The two sides reached an out-of-court settlement in December 1993 that allowed the cigarettes to be sold - eventually using adverts showing only Harley-Davidson's shield and eagle logo - and calling for Lorillard to protect the bike manufacturer from liability. The launch proceeded, and the cigarettes are now available in 38 American states, Japan and Hong Kong.

But the revised deal came apart almost immediately when Lorillard found its accountants would not issue a statement saying the company's liability exposure had not increased since 1986. Harley-Davidson claims it later discovered from documents filed with the US Government that Lorillard was a defendant in 14 cigarette lawsuits claiming $100bn in compensatory damages and $5,000bn in punitive damages, and was also the subject of a federal criminal investigation and an anti-trust probe by the Justice Department. Lorillard maintains the litigation will have no material adverse effect on its financial condition.

Harley-Davidson also alleges that Lorillard's dividend payments to Loews were "fraudulent conveyances" under state law. A probe into the tobacco company's books last summer revealed that its dividends were greater than its net income.

As a result, the company's retained earnings have dropped 70 per cent from $279m in 1990 to $84m in 1993.

Both Lorillard and its parent group refuse to comment publicly on the cases, but in court documents filed in New York recently they claimed $320m (£214m) in compensatory and punitive damages, saying the motorcycle company was acting in bad faith in its rush to get out of the deal.

Tim Hoelter, Harley-Davidson's vice-president and general counsel, denies that charge. "We have a corporate value which states that we keep our promises," he said. However, he conceded that his company "would not license Harley-Davidson's trademark for use on cigarettes if asked to make that decision today".

The bike company unilaterally cancelled the licence agreement two weeks ago, although the cigarettes were still on sale last week at the economy price of $1.50 a pack. Ironically, Harley-Davidson owners are not as eager to light up their favourite brand as the bike company had originally expected. Even hardened easy riders have been butting out.