Recent Cases

Recent Cases

Please click on a topic for more information about recent cases:

Tobacco Product Sales Regulation: National Association of Tobacco Outlets, Inc. v. City of Providence

FDA Regulation of Tobacco:  Discount Tobacco & Lottery v. U.S.

FDA Graphic Warnings:  RJ. Reynolds v. United States Food and Drug Administration

Collecting Cigarette Taxes from Native American Retailers:  Cayuga Indian Nation/Seneca Nation

Flavored Tobacco Regulation: USST v. City of New York

Tobacco Retail Licensing Fees:  Long Island Gasoline Retailers Ass’n

Point-of-Sale Health Warnings:  23-94th St. Grocery Corp.

Prevent All Cigarette Trafficking (PACT) Act Challenge:  Red Earth LLC

Racketeer Influenced and Corrupt Organizations Act [RICO]: United States v. Phillip Morris

Tobacco Product Sales Regulation

National Association of Tobacco Outlets, Inc. v. City of Providence , No. 12-96-ML., 2012 WL 6128707 ( D.R.I. Dec. 10, 2012)

On December 10, 2012, the U.S. District Court for the District of Rhode Island upheld two tobacco control ordinances adopted by the City of Providence early this year.  In her opinion, Judge Lisi held that the laws, which restrict price discounting of tobacco products as well as the sale of flavored products, do not violate the U.S. Constitution nor are they preempted by federal law.

Plaintiffs, the National Association of Tobacco Outlets Inc., the Cigar Association of America (CAA), and seven tobacco manufacturers and distributors, filed suit against the city soon after the laws were adopted.  The laws at issue prohibit tobacco retailers from accepting or redeeming coupons and multi-pack discounts for any tobacco products or cigarettes (Ordinance 14-303 or “price ordinance”) and restrict the sale of flavored tobacco products, except menthol products (Ordinance 14-309 or “flavor ordinance”).   The plaintiffs argued that the laws violate the First Amendment and are preempted by the Federal Cigarette Labeling and Advertising Act (“Labeling Act”) and the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”). The court found the following:The actions prohibited by the ordinances do not amount to commercial speech or expressive conduct and are not protected by the First Amendment.

Plaintiffs argued that both the price and flavor ordinances violated their First Amendment rights. They argued that the “price ordinance” unconstitutionally restricted “commercial speech” by restricting communication with consumers about the price of tobacco products.  The Court, looking to the plain language of the ordinance, found that cigarette companies could still distribute discount coupons within the city limits; however, tobacco retailers within the city cannot accept or redeem those coupons in connection with a sale. The plaintiffs argued in the alternative that the price ordinance regulates “expressive conduct,” also protected by the First Amendment. Again, the court found that the ordinance prohibited the redemption, not the dissemination, of coupons and multi-pack discounts. As a result,   the activity prohibited by the price ordinance is not subject to First Amendment protection.

Turning to the flavor ordinance, Plaintiffs attempted to craft a First Amendment argument stating that the ordinance presumptively bans products based on what Plaintiffs say about them (e.g. how they describe them) and further provides a non-exhaustive list of prohibited “concepts,” tastes, and aromas making the flavor ordinance unconstitutionally vague. Again, the Court found that the ordinance regulates the sale of a product, not commercial speech or expressive conduct associated with the conduct. The Court stated that plaintiffs are still free to describe their flavored products in any way they wish but are precluded from selling flavored products in Providence.  (The Court did strike language from the ordinance that could be interpreted as prohibiting the sale of menthol, mint or wintergreen products that are still permitted to be sold under the ordinance. )The ordinances are not preempted by federal law.

Plaintiffs also argued that the ordinances were preempted (or barred) by federal law, specifically, the Labeling Act and the FSPTCA. The Labeling Act was enacted in 1965 to establish uniform labeling and warning requirements for all cigarettes, and until recently prohibited states and local governments from establishing their own requirements and possibly setting up a confusing system for tobacco companies to follow.  In 2009, Congress amended the Labeling act through the FSPTCA and explicitly authorized states and local governments to enact laws to regulate the time, place, and manner, but not the content, of cigarette advertising or promotion.

In this case, Plaintiffs argued that the price ordinance was preempted by the Labeling Act as it was a wholesale attack on promotion. The court disagreed finding the price ordinance is a proper regulation of the time, place, and manner of cigarette promotion in the City of Providence.  In other words, the ordinance regulates the manner in which these products are sold; specifically, without the application of discounts through coupons or multi-pack offers.

Plaintiffs also argued that the flavor ordinance was preempted by the FSPTCA—that it sought to regulate beyond the FSPTCA and was a de facto regulation of tobacco product standards, which is a power reserved to the Food and Drug Administration (FDA).  The FSTPCA prohibits flavors other than tobacco and menthol in cigarettes, but permits the manufacture of other tobacco products with flavors. The federal law also preempts state and local action on tobacco product manufacturing standards.  However, the law specifically authorizes states and localities to regulate the sale and distribution of tobacco products.  As a result, the court found that the restriction of the sale of flavored tobacco products was proper under the FSPTCA.

The Court dismissed these claims, as well as the state claims brought by the plaintiffs.  The plaintiffs are likely to appeal the decision to the U.S. Court of Appeals.

While this case will not be binding on courts in New York, it does provide support for these types of tobacco regulations.  Together with the Second Circuit decision upholding the restriction on the sale of flavored tobacco products in New York City, this decision bolsters our efforts to reduce the appeal of tobacco products to youth, and to reduce youth exposure to point-of-sale marketing (e.g., price discounts).

The full text of the decision is available here.

FDA Regulation of Tobacco

Discount Tobacco & Lottery v. United States, Nos. 10-5234 and 10-5235, 674 F.3d 509 (6th Cir. 2012)

On March 19, 2012, the U.S. Court of Appeals for the Sixth Circuit issued a decision in Discount Tobacco City & Lottery v. United States upholding nearly all challenged aspects of the Family Smoking Prevention and Tobacco Control Act (FSPTCA).  This was the first federal appeals court opinion in over a decade to discuss how the First Amendment applies to tobacco marketing.  The opinion makes it clear that tobacco marketing practices that are proven to appeal to youth can be restricted without violating the First Amendment.  The decision therefore provides a boost to state and local efforts to protect youth by restricting tobacco advertising and promotion at the point-of-sale.

Background:  Shortly after President Obama signed the FSPTCA in 2009, a group of tobacco manufacturers and retailers filed suit in federal court in Kentucky challenging numerous provision of the law, primarily on First Amendment grounds.  In January 2010, a district court judge upheld most provisions of the law, but found that two sections were unconstitutional:  the prohibition on the use of color and graphics in tobacco advertising, and the ban on claiming FDA authorization or approval for tobacco products.  Both sides appealed to the Sixth Circuit.

The Decision:  On appeal, the Sixth Circuit affirmed all of the district court’s conclusions, with two exceptions.  It found that the restriction on claiming FDA authorization or approval for tobacco products was constitutional.  But it concluded that the law’s ban on “continuity programs” (giveaways of free items to reward frequent customers), which had been upheld by the district court, was invalid.

Next Step:  Either party may appeal the ruling to the Supreme Court.  The Supreme Court can choose whether or not to review the case.

Key Points: 

  • The court agreed with the government that tobacco marketing is a major cause of youth smoking.  The court rejected the tobacco companies’ claim that their marketing is only intended to promote brand-switching among adults.  Some key quotes: 
    • “Though [the tobacco companies] would have us believe that there is no causal connection between product advertising and the consumer behavior of children, such a claim stretches the bounds of credulity, even in the absence of the extensive record submitted by the government, which indicates the contrary.”
    • “[T]he record suggests that the massive amount of money invested by the tobacco industry in advertising and marketing is largely devoted to (1) attracting new young adult and juvenile smokers, and (2) brand competition in the young adult and juvenile market.  The record shows that tobacco advertising has a dramatic impact on juveniles’ decision to use tobacco products.”
    • “[C]redible evidence has been presented to support the conclusion that the advertising and marketing practices of the tobacco industry more heavily influence juveniles than adults.”
  • Applying the Central Hudson test, the Court concluded that “there is a substantial state interest in curbing juvenile tobacco use that can be directly advanced by imposing limitations on the marketing of tobacco products.”
    • To support a restriction on marketing, the government must present evidence that the marketing technique in question influences youth tobacco use.
    • The government must also establish the restriction is not more extensive than necessary, recognizing the tobacco companies’ interest in “conveying truthful information about their products to adults.” 
    • In this case, most of the marketing restrictions in the FSPTCA passed the Central Hudson test and did not violate the First Amendment. 
    • The same First Amendment standards would apply to actions by state and local governments.

The Details: 

Cigarette Graphic Health Warnings:  By a 2-1 decision, the court upheld the requirement for cigarette companies to place updated health warnings, including graphic images, on the top 50% of cigarette packages and on 20% of all cigarette advertisements.  (The was the only section of the opinion where there was a split opinion; the rest of the court’s conclusions were unanimous.)  While the court considered only the validity of graphic warnings requirement, and not the specific images selected by the FDA, its reasoning clearly conflicts with the recent decision by a federal district court judge in D.C. invalidating the rule that the FDA issued pursuant to this provision.  That separate ruling is currently being appealed to the U.S. Court of Appeals for the District of Columbia.

The majority explained that the government can require the disclosure of factual information needed to inform consumers of the health risks of tobacco, particularly because the tobacco companies “knowingly and actively conspired to deceive the public about the health risks and addictiveness of smoking for decades.”  Presenting the warnings in graphic form is appropriate because “abundant evidence” – including the experience of other countries – “establishes that larger warnings including graphics promote a greater understanding of tobacco-related health risks and materially affect consumers’ decisions regarding tobacco use.”  The majority specifically rejected the D.C. district court’s argument that graphic warnings that cause strong emotional reactions are impermissible, writing that the legal test “turns on whether the disclosure conveys factual information . . . not on whether the disclosure emotionally affects its audience or incites controversy.”

Modified Risk Tobacco Product (MRTP) Regulation: This section of the FSPTCA requires FDA approval before the introduction of a tobacco product into the marketplace that claims to present a reduced risk of harm when compared to other tobacco products.  The court held that this provision does not unconstitutionally restrain speech, because “[t]here is no question that the harm caused by the tobacco industry’s use of misleading advertising and marketing tactics regarding the relative risks of certain tobacco products is real and significant.”  Given this historical context, Congress had a valid reason for requiring prior approval and validation of reduced risk claims.

Ban on the Use of Color and Graphics:  Under this provision, makers and sellers of tobacco products are required to label and advertise cigarettes and smokeless tobacco using only black text on white background, with some narrow exceptions.  Like the district court, the appeals court concluded that this provision was too broad because it prohibits the use of color and graphics even in cases where they would hold no appeal for youth.  The court suggested that a narrower restriction would have been upheld.

Marketing Restrictions:  The court upheld the FSPTCA’s restrictions on giving out free samples of tobacco products, distributing branded non-tobacco items such as hats and t-shirts, and sponsoring athletic and cultural events.  It found that the government had introduced evidence establishing that all of these practices increased youth tobacco use.  It further concluded that these restrictions were narrowly targeted at the problems identified (in other words, they did not restrict much more speech than necessary).

The court however, ruled that the restriction on “continuity programs” was invalid because the evidence introduced by the government to support the measure was limited and dated.  (The only evidence introduced was a study conducted in 1996 and a poll conducted in 1992.)  Importantly, if the government had introduced more recent evidence to support this provision, it likely would have been upheld.

Claims of FDA Approval:  The FSPTCA prohibits mentioning FDA regulation of tobacco on product packaging or in advertising in order to avoid misleading consumers into believing a tobacco product is safe or less harmful by virtue of its regulation by the FDA.  The district court had invalidated the provision because of its concern that it was worded too openly and could have been applied to anyone, including doctors and journalists, who made public statements about FDA regulation of tobacco products.  The appeals court held that the language of the statute applied only to the makers and sellers of tobacco products, and it was therefore a valid restriction on commercial speech.


FDA Graphic Warnings

RJ. Reynolds v. United States Food and Drug Administration, 696 F.3d 1205 (2012).

In August 2012 The U.S. Court of Appeals for the D.C. Circuit issued a ruling finding the FDA’s new graphic health warning requirement for cigarettes and advertising unlawful.  The FDA rule, which was scheduled to go into effect in September 2012, would require larger health warnings that cover the top 50 percent of the front and back panels of cigarette packages and the top 20 percent of printed cigarette advertisements.  The rule was mandated by Congress as part of the 2009 Family Smoking Prevention and Tobacco Control Act (FSPTCA).  More information on the proposed warnings is available here.

Several tobacco companies challenged the FDA rule in federal court, claiming that it violated their First Amendment rights by restricting their speech and requiring them to distribute a message with which they did not agree. In February, U.S. District Court Judge Richard Leon ruled that the FDA rule requiring graphic warning labels on cigarette packs violated the First Amendment.  On August 24th, the D.C. Circuit Court agreed, for different reasons, in a 2-1 decision filed by Circuit Judge Janice Rogers Brown. The U.S. government has decided against pursuing an appeal and the FDA is going to review and create new warning labels.

In a separate case, the Sixth Circuit Court of Appeals issued a 2-1 decision in March upholding the FSPTCA’s requirement for the graphic warnings.  The Sixth Circuit panel concluded that there is “abundant evidence that larger warnings with graphics promote a greater understanding of tobacco related health risks and materially affect consumers’ decisions regarding tobacco use.”  The D.C. Circuit Court, however, insisted that the FDA must show evidence that the warnings would reduce smoking rates (not merely educate consumers), and it found that the FDA had not done so.  The court was not persuaded by the evidence from other countries, insisting that such evidence could not show that the warnings themselves directly accomplished the reduction in tobacco use found in those countries (because other tobacco-control measures were implemented around the same time).

In our view, the decision is flawed in many respects.  First, the Court misapplied the Central Hudson test, which is typically used to analyze restrictions on commercial speech; this case pertains to the doctrine of compelled speech, which applies when the government requires private parties to carry a message on behalf of the government.  (For more information about the First Amendment and tobacco control issues, click here.)  Second, the court ignored the government’s interest in effectively communicating information about the health consequences of tobacco use. Finally, the court dismissed out of hand the significant evidence offered by the government that demonstrates that its graphic warnings would directly advance its substantial interest in communicating this information and reducing tobacco use.

New York State contractors should note that this case does not affect your work on the Point-of-Sale Initiative.  The law pertaining to display restrictions and licensing restrictions remains unchanged.  What it does mean is that, at the very least, the implementation of the FSPTCA’s graphic warnings requirement will be significantly delayed even if the FDA ultimately wins this case.  These warnings would have a significant impact on the point-of-sale environment—their delayed implementation (or their failure to eventually pass muster under the First Amendment) means that your work to address tobacco marketing at the point-of-sale is as important as ever.

The full text of the decision is available here.

Commentary from the Campaign from Tobacco-Free Kids is available here.

Collecting Cigarette Taxes from Native American Retailers

Cayuga Indian Nation of N.Y. v. Gould, 930 N.E.2d 233 (N.Y. 2010)

Seneca Nation of Indians v. Paterson, 2010 U.S. Dist. LEXIS 109525 (W.D.N.Y. 2010) (Case No. 10-CV-687)

Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154 (2d Cir. 2011) 

Another in a series of periodic showdowns over the collection of New York State cigarette taxes for sales made to non-Native Americans by retailers on tribal reservations began as a result of a May 2010 New York Court of Appeals decision and emergency regulations enacted by the New York Department of Taxation (“Department”).

A 1976 U.S. Supreme Court ruling set the stage for ongoing conflict by holding that States may collect tax from sales of goods made by Native Americans on reservation land to non-Native American or non-members of the particular nation. Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 483 (1976).

In 1988, New York created regulations enabling the collection of taxes on cigarette sales to non-Native Americans.  The scheme allowed limited tax-free sales to tribal members by establishing an annual quota or “probable demand” for tax-free sales.   Before implementation, a group of cigarette wholesalers sued, arguing that federal regulations governed trade with Native Americans and that state tax collection was not permitted.  Ultimately, the Supreme Court held that states could collect taxes from Native American retailers if the regulations were not unduly burdensome and followed the limitations of Moe.  Dept of Taxation v. Milhelm, 512 U.S. 61 (1994).

The Milhelm court approved “probable demand” in principle but noted that Native Americans could challenge the regulations if the demand quota was inadequate.  The court also suggested “alternative remedies” such as entering into agreement with tribes and interdiction of untaxed cigarette shipments to retailers located on reservation lands.  Despite the favorable ruling, New York never implemented the regulation, and this resulted in yet another lawsuit filed by a group of convenience store owners in 1995 to compel enforcement of the tax. Matter of New York Assn. of Convenience Stores v. Urbach, 699 N.E.2d 904 (1998).  Plaintiffs claimed the selective collection of cigarette taxes was a violation of their constitutional equal protection rights.  The lower courts agreed, and the case went to the Court of Appeals.  However before it could rule on the case, the regulations were repealed in 1998.

The Court of Appeals then returned the case to the lower courts to see if New York’s now-permanent policy of not collecting taxes from Native American retailers was a violation of other retailers’ equal protection rights.  The rational basis standard was used to determine if different treatment of the parties was appropriate in the absence of specific regulations.  In its holding that forbearance policy did not violate equal protection rights, the Appellate Division noted several factors indicating a rational basis for treating Native American retailers differently than the non-tribal retailers: Native Americans are immune to law suits for failure to collect such taxes, auditors cannot access tribal retailers’ records by visiting the reservation, tribal retailers cannot be compelled by the state to attend audits or produce their records for tax purposes, the Department had unsuccessfully attempted to negotiate an agreement, and the interdiction of shipments to Native American retailers had occasionally led to violent outcomes.  N.Y. Ass’n of Convenience Stores v. Urbach, 275 A.D.2d 520, 522 (N.Y. App. 2000).

An amended tax law was passed in 2005 (Tax Law § 471-e) by the New York legislature with a deadline to implement a new set of regulations by March 1, 2006.  The new regulations involved a coupon system also based on the probable demand framework.  Tobacco wholesalers would prepay sales taxes on all cigarettes sold regardless of whether or not the customers were Native American retailers.  The Department would then issue tax exempt coupons to the tribes equal to the probable demand of tribal members.  These coupons would be provided to wholesalers in lieu of tax payment, and the wholesalers in turn would redeem them at the Department for refunds of the prepaid taxes.

The Department declared a “policy of forbearance” from collecting the tax and never calculated the probable demand or distributed the coupons.  A preliminary injunction was granted declaring the statute unenforceable because the conditions for creating the collection system were not implemented by the March 1, 2006 effective date.  The injunction was upheld on appeal in May 2008.  Day Wholesale, Inc. v. State of N.Y., 856 N.Y.S.2d 808 (2008).

In September 2008, the Cayuga and Seneca County District Attorneys (DAs) requested assistance from the Department to prevent sales of untaxed cigarettes by two retail stores operated in their jurisdictions by the Cayuga and Seneca Nations.  The Department declined to help, citing negotiations between the Governor and the Nations to resolve the issue.  The DAs pressed ahead, issuing warrants executed by law officers who searched and confiscated from the stores unstamped (therefore untaxed) cigarettes.

One day later, before any criminal charges had been filed, the Cayuga Nation brought a declaratory judgment action against the DAs to seek a ruling that they were not obligated to collect taxes since the state statute had not been put into effect. Cayuga Indian Nation of N.Y. v. Gould, 930 N.E.2d 233 (N.Y. 2010).   They also sought an injunction to bar tax evasion charges against the Nation or its employees until a system for calculating and collecting taxes is implemented by the Department.  The DAs sought summary judgment granting them power to enforce the tax law because the land on which the stores were located was not part of a “qualified reservation” according to New York tax law and the Nation could not claim sovereign power over the property.  The court ruled for the DAs and the Nation appealed.

The case was appealed all the way to the Court of Appeals, which ultimately held in a split decision that New York can collect sales tax for goods sold to non-Native Americans on reservation property if an appropriate mechanism is in place.  However, the mechanism must not be overly burdensome.  Since no mechanism was in place, the tribes were not obligated to collect the tax. On June 28th, 2010 a Seneca County judge dismissed criminal tax evasion indictments against the tribes related to the case and ordered the return of over $500,000 worth of cigarettes and computers seized in 2008.

To bolster revenue collections, New York enacted legislation on June 10, 2010 essentially codifying the 2006 regulatory scheme that was never enforced.  On June 22, 2010, the NY Department of Taxation adopted emergency regulations scheduled to take effect on September 1, 2010.  Estimates vary as to how much revenue will be collected.  The New York Senate claims in its justification for the new law, “New York forfeits an estimated $1 billion each year in uncollected taxes from cigarette sales to non-tribal members on Native American reservations.”  Lower estimates of between $150 and $440 million are reported by other sources.

Under the new collection scheme all cigarette packs sold in New York State would bear tax stamps, and all wholesale distributors would prepay taxes when they purchase the stamps.  Native American Nations would obtain tax-free cigarettes for the use of their tribal members by either participating in a coupon system or a prior approval system.  Both systems are based on the annual probable demand of cigarettes by qualified tribal members.

The Department has determined probable demand using a formula incorporating U.S. Census tribal population data and federal government data on the average annual per capita consumption of cigarettes.   For example, the Cayuga tribe, with a population of 947, is allocated 80,400 tax-free packs per year. 20 NYCCR §§ 74.6, 74.7.

Participants in the coupon system would receive quarterly allocations of coupons which they will present to wholesalers allowing them to purchase tax stamped cigarettes tax-free.  In turn, the wholesalers would present the coupons to the Department to receive refunds for the prepaid sales taxes.

The prior approval system will require wholesale dealers or agents to obtain approval from the Department before they may sell untaxed cigarettes to Indian Nations.  The Department will monitor the system to ensure sales do not exceed authorized probable demand quantities.  No system of prior approval is yet in place, though the Department contemplates an interactive Web application.

Spokespersons for Native American retailers reacted angrily to the new legislation, calling the new tax collection scheme “an act of war” and “a deliberate effort to sabotage federal treaty rights and rape our economy to bail out New York State.”  Multiple lawsuits were filed to prevent the new tax regulations from taking effect on September 1.

Between October and November of 2010, Judge Richard Arcara of the Western District of New York denied motions for preliminary injunctions in two separate cases brought by New York tribes.  In reaching these decisions, Acara concluded that “the Nations’ right of tribal sovereignty is not unconstitutionally burdened by implementation of the tax law amendments.”   Seneca Nation of Indians, No. 10-CV-687A, 2010 WL 4027796, at *17 (W.D. N.Y. Oct. 14, 2010). Conversely, on October 14, 2010 Judge Hurd of the Northern District ruled in favor of the Oneida tribe in a similar case. Oneida Nation of N.Y. v. Paterson, No. 6:10-CV-1071, 2010 WL 4053080, at *13 (N.D. N.Y. Oct. 14, 2010). Following conflicting decisions in the Northern and Western districts, a temporary stay order was granted which prevented tax collection from taking place until the Second Circuit Court of Appeals could consider the matter on consolidated appeal. Seneca Nation of Indians, No. 10-CV-687A, 2010 WL 4027795, at *4 (W.D. N.Y. Oct. 14, 2010).

On consolidated appeal, the Second Circuit held that New York’s interest in closing the loophole in its cigarette tax scheme outweighed tribal economic interests in selling tax-free cigarettes on reservations to non-members. Oneida Nation of New York v. Cuomo, Nos. 10-4265(L), 10-4272(con), 10-4598(con), 10-4758(con), 10-4477(XAP), 10-4976(XAP), 10-4981(XAP), 2011 WL 2337372, at *16 (2d Cir. May 9, 2011). Tribal officials responded to this unfavorable outcome by seeking a temporary restraining order from the New York court system to block immediate implementation of the tax system and also requesting a preliminary injunction against implementation. The temporary order was granted but on June 8, 2011, the New York Supreme Court ruled that the state could commence tax collection. Seneca Nation of Indians v. New York State Dept. of Taxation and Finance, No. 2011-0000714, 2011 WL 2436815, at *5 (N.Y. Sup. June 8, 2011). On appeal, the Appellate Division also denied the request for a preliminary injunction and vacated the temporary restraining order, allowing New York to finally collect taxes on cigarette sales made to non-members on reservations.

New York State has now begun to implement its tax collection system.  For more information from the New York State Department of Taxation and Finance, visit http://www.tax.ny.gov/bus/cig/cigind_report_sales.htm.

Flavored Tobacco Regulation

U.S. Smokeless Tobacco Mfg. Co. v. City of New York, 703 F. Supp. 2d 329 (S.D.N.Y. 2010)

New York City has prevailed in its efforts to restrict the wide-spread sale of flavored tobacco products.  On February 26, 2013, the Second Circuit Court of Appeals ruled that a New York City (City) ordinance restricting the sale of flavored tobacco products to tobacco bars is not preempted – or prohibited – by the Family Smoking Prevention and Tobacco Control Act (FSPTCA, 21 USC §387 et. seq.). The City law prohibits the sale of any non-cigarette tobacco product with a “characterizing flavor” (other than tobacco menthol, mint or wintergreen) outside of tobacco bars (NYC Admin. Code §17-715). Prohibited flavors include: any fruit, chocolate, vanilla, honey, alcoholic beverages, clove, licorice, and coffee. Flavored tobacco products entice youth through appealing descriptors and by masking naturally harsh tobacco flavors and aromas. The law does not apply to cigarettes; FSPTCA already prohibits the manufacturing and sale of flavored cigarettes. (21 U.S.C. §387g(a)(1)(A)).

The plaintiffs, manufacturers and wholesalers of flavored smokeless tobacco, appealed a 2011 District Court summary judgment ruling that held the FSPTCA preserves the rights of states and municipalities to enact more restrictive laws and regulations concerning the sale of tobacco products than those in the federal law.

The Second Circuit reviewed the grant of summary judgment “de novo,” meaning the Court did not rely on the lower court’s findings and instead reviewed the case as if it were a new trial. In determining whether NYC’s ordinance was preempted (prohibited) by FSPTCA, the Court first examined the FSPTCA and its recognition of state and local authority to enact a law or other measure that is “in addition to, or more stringent than, requirements” under the FSPTCA, “including a law, rule, regulation, or other measure relating to or prohibiting the sale, distribution, possession, exposure to, access to, advertising and promotion of, or use of tobacco products by individuals of any age.” (21 USC §387p(a)(1), emphasis added). This recognition of state rulemaking authority is referred to as the “preservation clause.”

The Court then moved to the FSPTCA’s exceptions to this broad preservation of state authority to regulate tobacco, noting the FSPTCA specifically preempts state or local regulation of “tobacco product standards, premarket review, adulteration, misbranding, labeling, registration, good manufacturing standards, or modified risk tobacco products.” (21 USC §387p(a)(2)(A)). Finally, the court reviewed what it characterized as “an exception to an exception,” or the “savings clause”: A state law which is authorized under the preservation clause, but which falls into the category of preempted regulations, may still be permissible under the FSPTCA.  The FSPTCA “saves” from preemption (permits) state or local “requirements relating to the sale, distribution, possession, information reporting to the State, exposure to, access to, the advertising and promotion of, or use of, tobacco products by individuals of any age.” (21 USC §387p(a)(2)(B)).

The plaintiffs argued, unsuccessfully, that the FSPTCA preempted the City ordinance.  Plaintiffs argued that local governments could not make it impossible for adults to purchase tobacco products that comply with federal standards. The Court disagreed, stating that while the FDA cannot ban entire categories of tobacco products under the FSPTCA, state and local governments were not similarly limited. Instead, the Court noted, the FSPTCA expressly allows local sales prohibitions for tobacco products.

Plaintiffs argued that the City ordinance was an impermissible product standard regulation in disguise. The Court again disagreed. The Court noted that while localities cannot regulate tobacco product standards – this is left to the federal government – state and local governments may regulate the sales of finished tobacco products and other consumer-related aspects of the industry (so long as they do not conflict with federal regulations). The City ordinance does not relate to the ingredients of tobacco products, but simply requires that finished tobacco products that are characterized or marketed as flavored not be sold outside of tobacco bars in the City.

The Court further noted that even if the ordinance were a regulation of product standards preempted by the FSPTCA, the savings clause of the federal law permits local laws relating to the sale of tobacco products. Plaintiffs attempted to argue that the savings clause does not allow a total ban on particular products. The Court did not reach the question of whether a ban would be permissible under the savings clause, finding that the City ordinance allows limited sale of flavored tobacco products at tobacco bars, and is therefore not a complete ban.

In summary, the Second Circuit Court of Appeals found that Congress intended to preserve state and local authority to regulate the sale of tobacco products. The Court found the ordinance to advance the goals of the FSPTCA—in particular, the reduction of tobacco use among youth—and affirmed the award of summary judgment by the District Court.

Tobacco Retail Licensing Fees

Long Island Gasoline Retailers Ass’n v. Paterson, 897 N.Y.S.2d 850 (N.Y. Sup. Ct. 2010) (Nassau County)

Plaintiffs, a group of retail trade associations collectively representing more than 10,000 New York state tobacco retailers, sought an injunction against the implementation of a new law establishing higher licensing fees for tobacco retailers.  Prior to the new law, retailers of tobacco products were subject to a flat rate annual licensing fee of $100.00.  New fees are calculated annually on a sliding scale based on the total sales volume of both tobacco and non-tobacco products.  The minimum fee is one thousand dollars for retailers with aggregate sales under one million dollars, and the maximum fee is five thousand dollars if sales are at least ten million dollars.

The trade groups claimed the higher fees would force up to 40% of tobacco retailers out of business with a corresponding loss of thousands of jobs, and that the sliding fee scale is a discriminatory and therefore unconstitutional tax under Equal Protection and Due Process Clauses of the Fourteenth Amendment.

Defendants argued in their motion to dismiss that the plaintiffs lacked standing to sue, that the legislature did not intend to discriminate among tobacco retailers, and there is no adequate showing for injunctive relief.

To maintain standing to pursue a claim, “[A]n organization plaintiff must demonstrate harmful effects on at least one of its members. . .”  Rudder v. Pataki, 711 N.E.2d 978, 980 (N.Y. 1999), citing Society of Plastics Industry, Inc. v. County of Suffolk, 573 N.E.2d 1034, 1042 (N.Y. 1991).   The court observed that the plaintiff group was unable to show that any one retailer in their constituency had closed or would be forced to close their business due to the higher fee.  Plaintiffs offered no disclosure of a single retailer’s financial statements showing how the higher fee would force them out of business.

In dismissing the claim for lack of standing, the court determined that potential injuries claimed by the plaintiffs were speculative since no harmful effect on at least one of its members was demonstrated.  “Without an allegation of injury-in-fact, plaintiffs’ assertions are little more than an attempt to legislate through the courts.” Id. at 981. Since the threshold issue resulted in dismissal of the action without prejudice, the court did not address the plaintiffs’ constitutional issues.

The plaintiffs appealed the dismissal of the case, and the Appellate Division of the Supreme Court granted Plaintiffs’ motion for a temporary injunction allowing retailers to renew their licenses for $100 pending outcome of an appeal.

On April 19, 2011, the Appellate Division dismissed the appeal as a result of new legislation enacted by the of the New York State Legislature amending the retail license fee to a flat rate of $300 per year.

Point-of-Sale Health Warnings

23-34 94th St. Grocery Corp. v. New York City Board of Health, 685 F.3d 174 (2nd Cir. 2012).

On July 10, 2012 the 2nd U.S. Circuit Court of Appeals affirmed a lower court decision ruling that New York City may not require cigarette retailers to post graphic health warnings near cash registers or cigarette displays.

The ruling stemmed from litigation over New York City Board of Health’s 2009 resolution requiring all licensed tobacco retail establishments in the City display one of three graphic signs, each providing information about the adverse effects of tobacco product use with pictures illustrating those effects, and information about how to get help to quit using tobacco. The NYC Department of Health and Mental Hygiene created three signs with graphic, color images of cancerous lungs, a decayed tooth, and a brain damaged by stroke. Each sign had “quit smoking” messages, and provided information about tobacco cessation resources. Retailers were required to post a small sign near the cash register or a larger sign near the area where tobacco products were displayed.

In its July ruling, a panel of Second Circuit judges explained that an existing federal law – the Federal Cigarette Labeling and Advertising Act (FCLAA) – prohibits (or preempts) state or local governments from adopting local rules which “affect the content of the retailers’ and manufacturers’ promotional efforts.”  It ruled that NYC’s required signs were doing just that: impermissibly affecting promotional efforts.  The appeals court reasoned that New York City’s rule “would require additional graphic warnings to be placed in close proximity to the federally mandated ones.”  It added that “[s]uch competing and potentially duplicative warnings are not contemplated by the federal statutory scheme.”

In addition to the preemption challenge, the resolution had been challenged on First Amendment grounds.  The court did not have to address these First Amendment challenges, however, since it ruled the city’s rule was preempted by the FCLAA.

The judges emphasized that states and localities remain free to engage in tobacco control campaigns using their own resources, explaining that their ruling “should not be read to curtail in any way state and locally funded efforts to further educate consumers and counter cigarette advertising and promotion.”

None of the educational initiatives by NY TCP contractors address requiring tobacco retailers to post graphic educational signs, so this decision, while unfortunate (and, we believe, legally misguided), does not impact NY TCP contractor work.

PACT Act

Red Earth LLC v. United States, 728 F. Supp. 2d 238 (W.D.N.Y. 2010)

The Prevent All Cigarette Trafficking Act (the “PACT Act”), P.L. 111-154 was enacted in 2010.  The law is intended to prevent tax evasion and illegal online cigarette sales to youth by (a) prohibiting the use of the U.S. Postal Service to mail tobacco products, (b) requiring remote (internet- or mail-order) sellers to use shipping methods that verify the age of the person receiving tobacco products, and (c) requiring online vendors to ensure that all applicable state and local taxes are paid on the cigarettes they sell.  The law also imposes additional reporting requirements on online vendors and provides the government with enhanced enforcement authority.

Soon after the law was enacted, Red Earth, LLC, a Seneca Nation tobacco retailer (“plaintiff”) filed suit in the U.S. District Court in the Western District of New York challenging the constitutionality of the law.  Plaintiff, who sells tax-free cigarettes via the internet, phone orders, and mail orders, claimed that the PACT Act violates federal Native American treaty rights as well as numerous provisions of the Constitution.

On November 9th 2012 a voluntary dismissal was entered into in the case.  The dismissal is voluntary without prejudice, which means there was no decision on the merits of the case and Plaintiff or others are entitled to later litigate the claims. In dismissing the case, the parties agreed to the following:

  • Plaintiff will provide the name and address of each person receiving a shipment of cigarettes or smokeless tobacco to each and every state where the shipment is made. (California and Pennsylvania will also receive the quantity and brand information.)
  • Plaintiff will provide the name, address, and phone number of every person or company delivering such shipments to each and every State where a shipment is made.
  • Plaintiff will designate an agent authorized to accept delivery on behalf of Plaintiff in each state where a shipment is made. (Plaintiff agreed to, but opposed this stipulation. The opposition is noted on the record, but has no legal significance.)
  • Defendant (the U.S. government), upon the filing of the stipulation, shall remove Plaintiff from the Non-Compliant list, a list of those in violation of the PACT Act who may face criminal and civil penalties.

The case was initially heard in 2010.  Plaintiff challenged many aspects of the law, but the court was most sympathetic to Plaintiff’s claim the law violated the Constitution’s Due Process Clause.  Due Process requires, among other things, that a person or business subjects itself to the laws of a given state, for instance, by being physically present or engaging in some minimum level of business dealings with that state. Plaintiff had argued there were states in which it had not engaged in enough business to subject itself to that state’s law, and Plaintiff was therefore not obligated to pay state taxes in those jurisdictions. Plaintiff further asserted the PACT Act’s requirement that retailers pay a state or local tax in advance of mailing tobacco products violated Due Process, since a retailer may not have met the threshold level of business dealings or “minimum contacts” to trigger the local tax obligation.  The 2010 the court ordered the U.S. to pause enforcement of the PACT Act’s provision requiring advance retailer tax payment while the issue was litigated; the court ruled the U.S. could enforce the remainder of the law. This decision was affirmed on appeal in September of 2011 in the Second Circuit Court of Appeals.

Similar legal challenges to the PACT Act have been filed in D.C. (Gordon v. Holder, 632 F.3d 722 (D.C. Cir. 2011)) and Pennsylvania (Musser v. United States, Case No.5:10-cv-04355-LS (E.D. Pa., filed Aug. 27, 2010)).  Legal proceedings are ongoing in both cases.  In the Pennsylvania case, the district court denied the plaintiff’s request for an injunction, finding that all parts of the PACT Act were likely to survive legal challenge. In the D.C. Circuit case Gordon v. Holder (826 F. Supp. 2d 279 (D.D.C. 2011)), the court held that Plaintiff, a member of the Seneca Indian tribe in New York, demonstrated a likelihood of success on his claim that Due Process was violated as a result of the tax obligation under the PACT Act. This case is currently on appeal in the United States Court of Appeals for the District of Columbia.

For information on the PACT Act read our technical report on tax evasion in New York.

 RICO

United States v. Phillip Morris, 449 F. Supp. 2d 1 (D.D.C.2006)

To partially remedy the long history of “false and misleading [health] claims” in which tobacco manufacturers engaged, a court has issued language that tobacco manufacturers will have to include on all their future advertising.

On November 27, 2012, Senior U.S. District Judge Gladys Kessler issued an order requiring specific statements to be made by tobacco manufacturers as a result of her 2006 United States v. Phillip Morris decision.  In her landmark decision, Judge Kessler found tobacco companies defrauded the public in violation of the Racketeer Influenced and Corrupt Organizations Act [RICO] by concealing known health risks of smoking, including the addictiveness of cigarettes and nicotine.   The 2006 1,683 page opinion also detailed tactics employed by tobacco companies to market their products directly to youth.

As part of the remedy, Judge Kessler ordered companies to issue statements about the dangers associated with tobacco products; the statements must appear in advertisements designed to correct “false and misleading claims” made in the past. Each corrective ad is to be prefaced by a statement that a federal court has concluded that the defendant tobacco companies “deliberately deceived the American public about the health effects of smoking.”  The issuance of the corrective statements was delayed because the tobacco companies appealed Judge Kessler’s initial decision, which was up upheld by the U.S. Court of Appeals in 2009. The corrective statements issued by Judge Kessler were largely based on those proposed by the U.S. Department of Justice (which brought the original suit).

In issuing the corrective statements, the court identified five categories of fraud in which tobacco companies had engaged, based on the explicit findings in the 2006 opinion. According to Judge Kessler,  the depth and nature of tobacco companies’ deception over a period of several decades coupled with the likelihood that they would violate RICO in the future necessitated more complex corrective statements than may be otherwise warranted. Each corrective statement falls within one of the five categories;.

  • Category 1: Adverse Health Effects of Smoking
    • Smoking kills, on average, 1,200 Americans Every day.
    • More people die every year from smoking than from murder, AIDs, suicide, drugs, car crashes, and alcohol, combined.
    • Smoking causes heart disease, emphysema, acute myeloid leukemia, and cancer of the mouth, esophagus, larynx, lung, stomach, kidney, bladder, and pancreas.
    • Smoking also causes reduced fertility, low birth weight in newborns, and cancer of the cervix and uterus.
  • Category 2: Addictiveness of Smoking and Nicotine
    • Smoking is highly addictive. Nicotine is the addictive drug in tobacco.
    • Cigarette companies intentionally designed cigarettes with enough nicotine to create and sustain addiction.
    • It’s not easy to quit.
    • When you smoke, the nicotine actually changes the brain- that’s why quitting is so hard.
  • Category 3: Lack of Significant Health Benefit from Smoking “Low Tar,” “Light,” “Ultra Light,” “Mild,” and “Natural” Cigarettes.
    • Many smokers switch to low tar and light cigarettes rather than quitting because they think low tar and light cigarettes are less harmful. They are not.
    • “Low tar” and filtered cigarette smokers inhale essentially the same amount of tar and nicotine as they would from regular cigarettes.
    • All cigarettes cause cancer, lung disease, heart attacks, and premature death-including lights, low tar, ultra lights, and naturals. There is no safe cigarette.
  • Category 4: Manipulation of Cigarette Design and Composition to Ensure Optimum Nicotine Delivery
    • Defendant tobacco companies intentionally designed cigarettes to make them more addictive.
    • Cigarette companies control the impact and delivery of nicotine in many ways, including designing filters and selecting cigarette paper to maximize the ingestion of nicotine, adding ammonia to make the cigarette taste less harsh, and controlling the physical and chemical make-up of the tobacco blend.
    • When you smoke, the nicotine actually changes the brain- that’s why quitting is so hard
  • Category 5: Adverse Health Effects of Exposure to Secondhand Smoke
    • Secondhand smoke kills over 3,000 Americans each year.
    • Secondhand smoke causes lung cancer and coronary heart disease in adults who do not smoke.
    • Children exposed to secondhand smoke are at an increased risk for sudden infant death syndrome (SIDS), acute respiratory infections, ear problems, severe asthma, and reduced lung function,
    • There is no safe level of exposure to secondhand smoke.

It is important to note that the decision issued can be appealed and these statements will not appear on advertisements and products immediately. Prior to the November 2012 issuance of the statements, tobacco companies argued the statements should solely address the health effects and addictiveness of their products. The statements required to be issued address health effects, but also bring attention to tobacco companies’ prior deceptive actions and statements to manipulate the public into believing there were “safer” tobacco products and intentionally make tobacco products more addictive. The tobacco companies liken the statements to “forced public confessions” designed to humiliate companies and will most certainly appeal the corrective statements Judge Kessler ordered.