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JUL-31-1997 11:48 II. Advertising and Marketing Restrictions. P. 32i'71 The proposed settlement includes restriction.s on marketing and advertising that extend beyond the FDA's 1996 regulation. • FDA's 1996 nites restrict tobacco advertising to FDA approved media; restrict advertising to black text on white background in publications likely to reach minors; ban tobacco billboards within 1000 feet of schools and playgrounds; require tobacco products and advertisements to include the label "nicotine delivery device;" ban the use of promotional merchandise; ban offers of gifts; and ban sponsorship of conceru and sporting events. • The proposed settlement would incorporate requirements at least this restrictive in the legislation. • In addition, the settlement would ban all use of human images and cartoon characters in any advertising; ban all billboard advertising; prohibit tobacco advertising on the Interaet; ban indirect payments to movies and music videos to glamorize smoking; require new and more emphatic warning labels ("WARNING: Smoking can kill you", etc.); attd require that warning labels comprise 25 % of front panels of packages. (1) First Amendment Issues. One issue raised by these advertising restrictions is whether they will survive judicial challenge based on the First Amendment. • We believe that the courts would ultimately uphold the FDA's 1996 advertising regulations, given the record compiled by FDA showing a compelling public health rationale for reducing underage smoking, and the fact that FDA's regulations are limited to media likely to be seen by minors. Because the provisions of the proposed settlement go beyond the FDA regulations, they would likely encounter a more vigorous First Amendment challenge. • We do not suggest that these provisions cannot be defended with equal vigor, nor do we believe that they would be struck down. But the probability of sustaining them would be somewhat lower than is the case with respect to the FDA regulations. • In order to maximize the chances that all advertising restrictions will be upheld, any legislation resulting from the proposed settlement should include express 11 I a

JUL-31-1997 11:50 P.36/71 • FDA's 1996 rules adopt a national minimum age for purchase of 18; require retailers to verify age by photographic ID; prohibit vending machines in places frequented by persons under 18; and ban sampling of tobacco products. 0 • In addition, the settlement would require that all sales of tobacco take place through face-to-face transactions (no vending machines). • Another important new provision regarding access is a national licensing scheme for retail tobacco product sellers. • Finally, the proposed settlement includes a number of provisions designed to encourage greater state efforts to enforce laws regarding sales of tobacco products to minors. In general the licensing and state enforcement provisions appear to represent a substantial advance beyond the program adopted by FDA in August 1996. The access provisions should be drafted to avoid the constitutional problems that led the Supreme Court recently to invalidate portions of the Brady Bill' ' The proposed settlement would incorporate requirements at least this restrictive in legislation. • With proper drafting, it would appear that virtually all of the access regulations can be implemented as conditions attached to federal grants given to states. Further consideration should therefore be given to the mechanics of the flow of funds from the tobacco companies to the states, in order to assure that the grants to the states properly qualify as "federal funds" and thus that the conditions imposed on receipt of those funds satisfy constitutional requirements. In addition, the enforcement provisions of the access regulations should be strengthened_ The civil sanctions set forth in Appendix II, in particular, provide for very modest civil fines and suspension periods for selling tobacco products to minors. A retailer's license is to be.pettnanently revoked only ".`or the tenth offense within any two year period." ~. These wholly inadequate civil sanctions can aptly be described as "ten strikes aad you're our." S pu= v. United States, 65 U.S.L.W. 4731 (June 27,1997). 15

JUL-31-1997 11:49 • Such image advertising serves no purpose other than to make tobacco products Therefore, the Task Force recommends that the tombstone-only restriction on tobacco product advertising be extended to all publications, including those that have a predominantly adult audience. P.34i71 • To the extent that image advertising affects overall levels of smoking, it represents a serious public health concern, whether the target of the advertising is adults or adolescents. • Also, of course, some image advertising in publications primarily read by adults will also reach adolescents and children. • Perhaps most impottantly, the presence of image advertising in publications helps to reinforce a social attitude that smoking is acceptable. This attitude helps to perpetuate smoking by adults and increases its allure for teens. (3) Advertising Restrictions As A Five Year Trial Period. The AMA House of Delegates has previously adopted a resolution advocating the complete prohibition of tobacco product advertising.` We do not regard the proposed settlement as inconsistent with this resolution, or as precluding its eventual realization. • The proposed settlement provides that the advertising restrictions it imposes "shall be allowed to operate" for five years. Thereafter, "the FDA would be authorized to review and revise the rttles under applicable Agency procedures" (Lintroducdon.). , 0 more attractive and hence to stimulate demand for their use. It appears, therefore, that FDA is free to revisit the advertising restrictions after 5 years and, if it deems it appropriate, to adopt tougher restrictions, such as a complere ban on tobacco advertising. On this understanding, we believe that allowing the restrictions of the proposed settlement to take effect for a five year trial period -- especially if supplemented by requiring tombstone advertising in all print media -- is an acceptable first step in dealing with tobacco advertising. ` AMA Policy No. 500.980, AMA Policy Compendium (1997 ed.). 13 ~ 0 V N O A ~ 0 4

JUL-31-1997 11:44 P.23/71 the Koop-Kessler Advisory Committee Report.` Such a package might include full, immediate, and complete authority for FDA to regulate all tobacco products and their ingredients; a complete prohibition on tobacco advertising and promotion; a substantial increase in excise taxes to raise the price of tobacco products; and complete disclosure of all confidential tobacco company documents dealing with the composition of health and safety issues related to tobacco products and marketing efforts. The proposed settlement falls short of the ideal on these and many other issues. Such, however, is the nature of settlements. The AMA remains committed to achieving all the positions set forth in its existing policy statements. Nevertheless, the fact that the proposed settlement is less than ideal does not necessarily mean that a comprehensive settlement should be rejected from a public health perspective. There are a number of advantages to addressing the tobacco problem by a comprehensive settlement rather than by continuing litigation and piece-meal legislation. These advantages include the following: • The settlement would generate between $4.5 billion and $7.5 billion per year in funding for public health programs, including FDA enforcement initiatives. This is far more money than would be appropriated by Congress in conjunction with stand alone legislation or continuation of FDA's current regulatory efforts. • Because the substantial Annual Payments required by the settlement (rising to $15 billion per year after year four) must be passed through to consumers, the settlement operates like a de facto &ales tax increase for cigarettes and smokeless tobacco. It is possible, but highly uncertain, that an explicit sales or excise tax increase of the same magnitude could be enacted in the near future. ~ The major tobacco companies would enter consent decrees in which they would promise to abide by restrictions on advertising and other constraints even if the parallel provisions in the legislation were declared unconstitutional. This provides additional assurance that the agreement's advertising controls can be put in place and remain effective. The funding generated by the settlement can be disbursed to the states by the federal government, thereby providing a secure constitutional foundation for federal standards for state retail licensing statutes and other desirable measures ' that might exceed the authority of the federal government to impose on the states directly. ` Final Report of the Advisory Committee on Tobacco Policy and Public Health, Co-Chairs: C. Everett Koop, M.D., Sc.D. and David A. Kessler, M.D. (July 1997). I

JUL-31-1997 11:45 P.24i71 • A system of financial incentives on tobacco companies is put in place to reduce underage smoking. Imposing a similar system on companies without their consent would be difficult to achieve politically. • The settlement provides for the establishment of a national tobacco document depository open to the public containing many previously non public or confidential documents from the files of the tobacco industry. Although tobacco companies can still invoke common law privileges with respect to these documents, stand alone legislation requiring the creation of such a depository would encounter stiff resistance and legal challenges from the companies. • The settlement provides for the enactmenI of The Smoke-Free Environment Act of 1993, which adopts tough minimal federal standards for second hand tobacco smoke in all public buildings. It is doubtful that this legislation would otherwise be adopted in this form in the foreseeable future. Although OSHA could promulgate similar tules for worksites under its current authority, to date it has not done so and any such action would be delayed by judicial challenges. • Resolving tobacco litigation by settlement permits both sides to save litigation costs. These savings can be devoted, in pan, to activities with direct public health benefits. • Perhaps most importantly, settlement allows a new regulatory regime for tobacco products to be put into place immediately. Continuing down the current path of litigation plus efforts to regulate under FDA's and other agencies' existing authority would result in a tobacco control policy that is uncertain. uneven, and burdened by protracted delays. Taken together, the advantages of settlement suggest that some compromise relative to the ideal package of legislative refotms is justifiable. This does not mean, of course, that the particular compromises contained in the proposed settlement are acceptable. In this document, the Task Force has endeavored to assess the public health implications of the proposed settlement, suggest clarifications that appear to be within the overall expectations of the negotiators, and recommend certain modifications that we regard as essential if tobacco use - particularly use by minors -- is to be meaningfully curtailed. We have approached this task as physicians whose primary concern is to promote, preserve, and protect their patients' health. We hope that our analysis will be of assistance to the Administration, the Congress, and members of the public.

SUL-31-1997 11:47 P.29i71 The most serious and unacceptable limitations on FDA authority are substantive and procedural barriers placed on FDA's authority to issue performance standards requiring the modification of tobacco products to reduce the harm they cause. (b) Restrictions on the FDA's Promulgation of "Performance Standards." The parties to the settlement appear to have reached an understanding to the effect that, for twelve years, FDA may not order a fundamental alteration of traditional tobacco products (for example, by mandating the elimination of nicotine). 0 For the first 12 years, FDA "shall be permitted to adopt performance standards that require the modification of existing tobacco products, including the gradual reduction, but not the elimination, of nicotine yields, and the possible elimination of other constituents or other barmtiul components of the tobacco product" (I.E.5.A.). ( 1 • After the first 12 years, FDA may "require the alteration of tobacco products then being marketed, including the elimination of nicotine and the elimination of other constituents or other demonstrated harmful components of the tobacco product" (LE.5.B.). Although undesirable, this moratorium is undoubtedly the result of compromise. It may be critical to providing some predictability to the tobacco industry about the future course of FDA regulation. However, the language that reflects the 12 year moratorium itieludes a number of troubling ambiguities which should be clarified in a satisfactory fashion. • The proposed settlement says that FDA may not prohibit "the sale to adults of traditional tobacco products" (I.E.5.). Yet it also says that an FDA order requiring a fundamental alteration (such as the eliminadon of nicotine) after the 12 year moratoriuni "shall not be deemed to violate the prohibition on the sale of traditional tobacco products to adults" (LE.5.B.n.1.). This is confusing and a potential source of mischief. The legislation should clarify that only during the first twelve years after implementation of the settlement is FDA prohibited from banning "the sale to adults of traditional tobacco products." 0 must find that its regulation "will not result in the creation of a significant demand for contraband or other tobacco products that do not meet the product safety standard." Such a finding could be virtually impossible to make with In order to require the modification of tobacco products during the first 12 years or direct a fundamental alteration in tobacco products after 12 years, the FDA

JUL-31-1997 11:52 P.42i71 Significant additional benefits would be realized by even higher price increases. Congress should therefore take additional steps, either as part of legislation implementing the settlement or in independent legislation, to push retail tobacco prices to even higher levels. 0 Exactly how high prices should be set in the short run entails a weighing of competing factors. • Economists have estimated that price would have to rise to slightly more than $4.00 per pack before the revenue losses associated with declining sales would overtake the increase in profits due to higher prices. " At a minimum, an immediate price increase in the magnitude of $1.00 per pack should be considered. 0 0 Such an increase would generate measurable additional benefits beyond the $0.62 per pack increase that would result from the proposed settlement. We estimate that a$1.00 per pack increase would translate into a 15% reduction in overall consumption, and a 33% reduction in adolescent consumption. There are at least three ways to achieve an additional price increase to the level of approximately $1.00 per pack. • One would be to increase the federal excise tax on cigarettes. The Kennedy- Hatch Child Health Insurance and Lower Deficit Act that nearly passed the Senate earlier this year called for a $0.43 increase in the cigarette excise tax. Adopting such a provision in conjunction with legislation implementing the proposed settlement would generate a price increase approximately in the $1.00 per pack range. 10 (...continued) National Bureau of Economic Research Working Paper No. 3222 (Cambridge, MA: National Bureau of Economic Research, March 1993); T.E. Keeler, T. Hu, P.G: Barnett, and W.G. Manning, "Taxation, Regulation, and Addiction: A Demand Function for Cigarettes Based on Timeseries Evidence," 118 Journal of Health Economics 12 (1993). ~~ Jeffrcy E. Harris, "American Cigarette Manufacturers' Ability to Pay Damages: Overview and Rough Calculation," 5 Tobacco Coturo1292-294 (1997). 21 f t

3UL-31-1997 11249 P.33i71 findings and statements of purpose that emphasize the importance of reducing smoking among adults as well as minors. Such findings and statements of purpose would make it easier to justify the extension of advertising regulation to adult media. One advantage of the proposed settlement is that it creates a mechanism for increasing the chances that the agreement's advertising regulations will endure regardless of the outcome of First Amendment challenges. The settlement provides that the parties will enter into consent decrees. in which they will "expressly waive any claim that the provisions of the consent decrees or the agreement violate the federal or state constitutions" (IA..B.bullet 5.). In addition, "[t]he consent decrees will also state that if a provision of the Act covered by the decrees is subsequently declared unconstitutional, the provision remains an enforceable term of the consent decrees" (id.). • In other words, the signatories to the proposed settlement -- including, of course, the major tobacco manufacturers - will be bound to observe the advertising restrictions by judicial decrees as well as by statutory regulation. If the statutory law is invalidated on constitutional grounds, the signatories would continue to be required to abide by those restrictions. There is some danger that this "waiver of rights" provision might be struck down under what is called the "unconstitutional conditions" doctrine. • But the parties to the consent decrees are sophisticated and clearly understand their rights; the government has an important interest in obtaining a waiver; and the speech involved is commercial speech that can be subjected to a greater degree of government regulation. The unconstitutional conditions doctrine should therefore not cause the waiver of rights provision to be invalidated. The waiver of rights feature of the settlement substantially increases the probability that impottant advertising restrictions can be put into place in the ~ near future. 1 (2) Tombstone•Only Advertising in AII Publications. Although the proposed settlement would ban image advertising in publications that reach a substantial portion of juvenile readers (15% or more), it would continue to permit color graphics, landscapes, and other evocative images in publications that serve a predominantly adult audience. 12.

JUL-31-1997 11Z48 P.31/71 Act of 1996, Pub. L. No. 104-121, which provides that any "major rule" must be submitted to Congress for sixty days to allow Congress to consider enacting a joint resolution of disapproval. Apparently the settlement would mandate that this procedure be followed even if it would not be independently required by the terms of the 1996 Act, or if the 1996 Act were repealed or invalidated. This provision should be deleted. There is no evident justification for the foregoing procedural limitations other than to erect additional barriers to any FDA regulation of tobacco products -- barriers not generally placed in the way of FDA regulation of drugs and devices. Given the moratorium on any FDA action requiring the fundamental alteration of tobacco products, we see no legitimate justification for these procedural hurdles. (C) The Definition of "Tobacco Produet." The proposed settlement gives FDA authority over "tobacco products." This term is said to have the same definition as contained in the FDA's 1996 regulations. The settlement also apparently covers "Roll Your Own, Little Cigars, Fine Cut, etc." (I.E.1.). • Because the FDA in its 1996 regulations elected not to regulate pipe tobacco and cigars, an argument could be made that the regime established by the proposed settlement excludes pipe tobacco and cigars. FDA authority to investigate and regulate pipe tobacco, cigars, and all other tobacco products and nicotine delivery devices should be made explicit. Cigar smoking, including such smoking by young persons, is on the rise. This trend may accelerate, especially if the price of cigarettes rises significantly because of the pass through of Annual Payments required by the settlement. Moreover, future forms of tobacco use, g;gy, variants on "smokeless cigarettes," cannot be foreseen. More generally, there is reason to believe that the market for traditional tobacco products containing nicotine and nicotine delivery devices such as inhalers may soon converge. It would be desirable to have all nicotine delivery devices subject to a single integrated regulatory scheme. • All tobacco products should be subject to a single, comprehensive, regulatory scheme. Any legislationn enacted as a result of the settlement should be drafted so that eventually all nicotine delivery devices - whether based on tobacco or not - are subject to a single, comprehensive, regulatory regime. 10

JUL-31-1997 13:16 • Moreover, the civil sanctions are set forth as a federal maximum which the states "shall not exceed." • Given that the proposed settlement expressly retains authority in the states to impose state criminal sanctions on retailers who sell to minors, there is no sound rationale for preemptive federal standards limiting states to nothing but the most modest civil sanctions. • In formulating any legislation to implement the settlement, Congress should change this federally-imposed schedule of civil sanctions from a maximum to a minimum. More generally. it is important to preserve the role of state and local governments in developing and enforcing access restrictions. • In addition to being allowed to adopt civil penalties for violation of licensing requirements that go beyond the federal minimum, states should be allowed to experiment with additional enforcement tools, such as citizen suits and the use of consumer protection statutes. • States should also be allowed to make it a criminal or civil offense for any person, not just a retailer, to sell cigarettes to a minor. In addition, all too often federal PXs and commissaries serve as major sources of supply of cheap and readily accessible cigarettes to local communities. • State and local access restrictions should be extended by statute to federal enclaves and federal facilities, including military bases and hospitals. The manner in which these state and local rules would be enforced at federal facilities should be determined by Executive Order. 0 In addition, we recommend that a federal use tax -- equal to federal, state and local excise and sales taxes otherwise applicable in the area -- be imposed on tobacco products sold at federal enclaves and facilities. Consideration could be given to dedicating the proceeds of this tax for the benefit of federal service personnel and employees at these federal facilities. IV. Economic Incentives - Smokers. Economists and other public health policy analysts believe that one of the most effective measures for discouraging the initiation of youth smoking and reducing the prevalence of smoking by adults is to increase tobacco product prices. Higher prices 16 I i (~':TQTFlL P.02 P.02i02