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December 9th, 2019

“Reversing the Youth Tobacco Epidemic Act of 2019” Reveals New Regulations with Some Welcome News for Premium Cigars

On November 13 of this year, the U.S. House of Representatives Subcommittee on Health passed H.R. 2339, the “Reversing the Youth Tobacco Epidemic Act of 2019.” The intent of the legislative bill – introduced by Energy and Commerce Chairman Frank Pallone Jr. (D-NJ) and Rep. Donna Shalala (D-FL) – was to target the vaping and cigarette industry. However, the language of the bill clearly states that all tobacco products would require “retail sales through a direct, face-to-face exchange between a retailer and a consumer;” keyword “all tobacco products,” meaning, premium cigars would also be affected by the bill. Since the bill would require “a direct, face-to-face exchange” between consumers and retailers, catalog and internet sales for e-cigarettes and tobacco products would be eliminated. That alone would strike a crushing blow to the premium cigar industry which relies heavily on the direct mail and internet marketing channels.

As a number of states and municipalities around the country have already done, the bill would made 21 the national tobacco purchasing age, including those serving in the Armed Forces. H.R. 2339 would also allow the FDA to collect an additional $100 million in user fees from the tobacco industry as a whole. There would also be a ban on all flavorings other than tobacco flavorings, with the exception of tobacco cessation devices approved by the U.S. Food & Drug Administration. Graphic warning labels for cigarettes would be required within the two year window following passage, but would not apply to cigars.

Another essential part of the premium cigar industry is promotion, which includes logoed hats, t-shirts, and other swag, including the sponsorship of sporting events and festivals. H.R. 2339 includes language which, under the Master Settle Agreement would restrict all cigarette, non-cigarette, and cigar companies from producing swag or any other non-tobacco products with their logos or images, as well as from participating in event sponsorships.

With regard to user fees, e-cigarettes and vaping products, which don’t currently pay user fees, would now be subject to them under H.R. 2339. However, although the existing aggregate number, $712 million, is split between the respective industries, the cigar industry would pay less in user fees.

An Exemption That Would Spell Some Relief for Premium Cigars

On November 19, one week after H.R. 2339 was passed by the Subcommittee on Health, an amendment proposed by Rep. Kathy Castor (D-FL) that would exempt premium cigars from the legislation was voted on along partisan lines, which the Committee passed by a vote of 28-24. Representative Castor based her exemption proposal on the fact that premium cigar manufacturers do not market to children.

“The FDA’s own science underscored our legislative intent,” said Castor. “FDA and FDA-funded reports found that traditional, handcrafted premium cigars are not marketed [to] or used by children in any significant way.” Rep. Shalala was also in favor of the exemption.

Additionally, the House Committee agreed that any cigar defined as a “premium” (per the proposed language in H.R. 1854), with a cost of $12 or more would be exempt from H.R. 2339 regulations. That would include many of the larger format cigars, with the exception of large infused and flavored cigars like ACID and CAO flavours, respectively. Moreover, traditionally blended premiums sold at $12 and above would not be subject to the FDA’s Substantial Equivalence process.

Some pundits believe that the $12+ exemption may be unconstitutional and unenforceable. For example, the state tax on cigars in some states could make many cigars reach the $12 threshold, while other states would not. In states where there is no sales tax, premium cigars that sell for less than $12 would not be able to meet the requirement, while states like California and Utah, which have exorbitantly high wholesale taxes on cigars would more easily meet the threshold.

Rep. Pallone was originally opposed to the broader exemption, but now supports it, mainly because of the $12+ price point. Speaking of a broader exemption, Rep. Richard Hudson (R-NC), proposed a separate amendment that would have also exempted flavored cigars and cigarettes from H.R. 2339 restrictions, but it was voted down 25-28 in favor of the Republicans.

Drew Newman, general counsel for J.C. Newman Cigar Co., who has been following the hearings closely, stated: “[This] is a huge step forward for the premium cigar industry. For the first time ever, Congress has supported regulating premium cigars differently than all other types of tobacco. A minimum price of $12 per cigar is problematic, particularly since the price of premium cigars varies greatly across the country due to different state tax rates. Additionally, FDA’s own data shows that fewer than 25 percent of premium cigars are sold for more than $10. We will continue to work to improve the legislation and hope that Congress can enact it into law in the coming months.”

Another question that arises regarding the exemption is whether the anti-smoking advocates on the committee will stand in the way of the amendment succeeding. It should also be understood that Rep. Castor’s amendment would only remove premium cigars from H.R.2339, not an exemption from the FDA’s regulations.

Where Does the Bill Go From Here?

“Although today’s vote is significant progress towards saving America’s historic premium cigar industry, we still have more work to do,” added Mr. Newman. With that, the bill is still in its early stages and has a long road to travel before it’s signed into law. Even if it makes it through the House, it still has to be passed by the Senate. Of course, if the Senate makes any changes, the bill goes back to the House for another vote.

Odds are, H.R. 2339 will not pass the Senate. That will depend on Senate Majority Leader, Mitch McConnell (R-KY). There is also a concern that by the time the bill makes it to the Senate floor, it will either be watered down to the point where big tobacco will go along with it; or, there will be so many pernicious amendments, that the Dems would have to go back to square one. Since McConnell also decides what legislation gets voted on – the Majority Leader sets the schedule – the vote on the bill could be delayed indefinitely. Currently, there are over 250 bills passed by the House that are still yet to be voted on by the Senate.

Should H.R. 2339 eventually get to the President’s desk and signed into law, it will not go into effect for two more years. Moreover, delays from lawsuits and/or the FDA, itself, may push the bill’s effective date out even further.

And here’s the rub. . .

For now, H.R. 2339’s exemptions give the premium cigar industry some wiggle room. It should be pointed out, however, that H.R.2339 includes many new restrictions on cigars and other tobacco products. Therefore, if passed, it could cause the cigar industry irreparable damage. Most, but not all of the bill’s language is aimed at the e-cigarette and vaping product industries. Yet, what’s most lamentable for manufacturers of premium cigars and their consumers is that they’re caught up in the middle of the turmoil.