Earlier this morning, the U.S. Food & Drug Administration (FDA) announced its finalized plans to regulate deemed products, including cigars.
Here are the basics and a few quick takeaways from the 499-page document.
FDA will regulate cigars of all shapes, size, origin and flavor. In brief terms, cigars will be divided into three categories:
- Pre-2007 — Any cigar marketed prior to Feb. 15, 2007 is grandfathered and FDA can only impose certain restrictions on these products. Manufacturers will still be required to put warning labels that cover 30 percent of two main parts of the box and will be banned from giving free samples. They will also likely need to submit a document with a list of ingredients. Manufacturers will not have to receive any sort of approval from FDA about these products.
- Post-2007 — Any cigar that is introduced on the market after Feb. 15, 2007, but before the rule goes into effect (Aug. 8, 2016) will be able to remain on the market for at least two years. After two years it will be subject to the same warning label requirements, but manufacturers will have to submit the product to FDA for approval. The cost of this remains unknown (see below).While FDA is reviewing the application, manufacturers will be allowed to sell these products until FDA rejects their applications. Alternatively, manufacturers could choose to keep these products on the market until this time 2018 and then ultimately decide not to submit for FDA approval to avoid paying the fee. However, they would not be able to reintroduce the product to market without getting pre-approval from FDA.
- Post-Rules — After Aug. 8, 2016, a manufacturer will have to submit any new products for approval before they are allowed to enter the market. This would likely include any products that were introduced between Feb. 15, 2007-Aug. 8, 2016; but failed to apply within two years of the rule being introduced.
Walk-in humidors, internet sales and flavored cigars will all remain the same for now. Consumers will still be able to walk into a humidor, pick up and smell a cigar; however, they will not be able to be given a free sample by either a retailer or manufacturer.
Barring a lawsuit where a court grants an injunction or congressional action before Aug. 8, these rules will go into effect. A handful of initial takeaways.
1. THE STORM BEFORE THE CALM: IPCPR 2016
If there was any good news from the document, FDA extended the implementation period from the original 30 days to 90 days. This means the rules will not go into effect until after the 2016 IPCPR Convention & Trade Show, which takes place in late July.
The trade show will be crazy.
Barring any changes, this will be the last trade show where new products can be introduced without approval from FDA and I expect that we will see a record-setting amount of new products.
There doesn’t appear to be any rule that says you have to ship a certain amount of product before Aug. 8, 2016, so expect a lot of manufacturers to introduce a lot of new products before that date and then slowly release it to the market. As long as those products end up at one retailer prior to Aug. 8, that product will likely meet the requirement. These products are not entirely grandfathered–anything introduced after Feb. 15, 2007 will need to apply for FDA approval within two years or be removed from market–but introducing product now, even with a two-year lifespan, will be far more cost effective than introducing it on Aug. 9 and waiting for FDA approval.
It’s unclear what halfwheel will look like after August of this year, the amount of new product will come to a screeching halt barring any changes. FDA will have the ultimate authority of what products are allowed into the market and it’s unclear why they would have any incentive to respond to applications in a timely manner.
2. THE COST AND PROCESS FOR APPROVAL IS STILL UNCLEAR
Going into today the obvious question was what will FDA do. But the second largest question was if FDA chose to regulate premium cigars, how would it do it. Many parts of that answer remain unclear.
The document appears to show no outline on pricing for FDA submission or if the agency has any estimated turnaround time. Rumored numbers have been floated since April 2014, but none of those numbers seem particularly grounded in fact and FDA itself has said that it would likely use a different set of numbers and procedures depending on the product type, something it reiterated today.
Once the document outlining costs and the actually submission and approval process is published, we will know a lot more about whether both newer and smaller brands have a realistic shot of continuing to grow their business and whether new cigars will be able to be introduced.
3. INTERNET CIGAR SALES & FLAVORED CIGAR SALES ARE GOOD FOR NOW
In the draft of the document published today, FDA said it did not intend on eliminating the sale of cigars over the internet or of flavored tobacco—and it made good on that promise. Retailers will be required to ask for ID for any individual they believe to be under 26, but it’s unclear based on today’s document whether that will apply for internet sales—it would appear it will not.
FDA oddly seems less concerned with outlawing internet cigar sales. It remains unclear whether the agency could actually do so, particularly with some Congressional precedent set by the PACT Act, but at least for today, internet sales go on.
For flavored cigars, today is not the end, but FDA has announced that it intends on banning “characterizing flavors” from all tobacco products in the future. No timetable has been set on this, but the fight over “characterizing flavors” will be much more than simply ACID, Java and Tatiana—that fight will include Swisher, White Owl and potentially menthol.
4. THE LEGALIZATION OF CUBAN CIGARS IS DELAYED
Whenever the embargo gets lifted, Habanos S.A. will now need to apply as a new product before its portfolio of Cuban cigars can be sold in U.S. humidors.
Depending on the speed at which FDA decides to approve applications, this could mean that even if the embargo is lifted on Jan. 1, 2019 (just a random date) it might be years before they are legally able to be sold in humidors. The rule is clear that the products must be marketed in the U.S. prior to Feb. 15, 2007, something Cuban cigars cannot legally claim status to.
5. OUR HOPE LIES IN…CONGRESS
Congress hasn’t been the most productive place in the world. Now it’s the likeliest savior for the cigar industry.
While lawsuits are certainly coming and injunctive relief might be granted, it’s an expensive and unclear path to victory. Oddly, a Congress that has been fairly inept at passing much of anything might be the premium cigar community’s best hope.
Last month, the House Appropriations Committee passed a draft of its FY2017 agriculture bill. In it were two provisions that would directly affect today’s rule. One would exempt premium cigars from FDA regulation, the other would change the grandfather date to Aug. 8, 2017. The latter is going to be controversial, particularly because it would also grandfather in almost all of the e-cigarette industry, and anti-tobacco advocates have already seized on it as a major issue.
Exempting premium cigars is less controversial and the hope now for cigar smokers must be that cigar-friendly members of Congress fight to keep the language in the final version of the bill.
Unfortunately for cigar smokers, it’s more likely than not that the final bill will not be voted on until after August. It is possible that the rules go into effect in August and then Congress passes a bill with exemption language, meaning the rules were temporarily enacted and then suspended. The good news is, the Agriculture Bill must be voted on at some point, because otherwise agencies like FDA have no funding; the bad news is it’s probably not going to happen until after the November elections.
It’s important to remember that all is not over.
Once FDA announces the cost of applications for substantial equivalence, we will have a much better grasp of what this means for the cigar industry going forward. The craft beer industry is booming with new products in an industry where most bottles and cans must be approved before they enter the market. Industries adapt and evolve, but they can survive and thrive, even with regulation.
A few years ago when SCHIP was introduced, there was talk of a doomsday scenario for cigar smokers. Today, SCHIP is a forgotten topic of cigar consumers and only occasionally mentioned by retailers and manufacturers. The industry got over the 40 cent hit and has since moved on.
Barring relief from Congress or a court, the industry will look different tomorrow than it did today and much different on Aug. 9. Much of that won’t be positive, but some will be.
That being said, this is the first in many fights. There will be fights over flavored cigars, over internet sales and probably over walk-in humidors. It’s not today, it might not be next year, but this is only the start.