Cigar Industry, FDA Brief Court Over Potential Deregulation of Premium Cigars

Yesterday, the two sides of the federal lawsuit over the regulation of “premium cigars” submitted briefs to the court arguing over what consequences of last month’s ruling should be, setting the stage for a potential deregulation of “premium cigars.”

It’s the latest part of Cigar Association of America et al. v. United States Food and Drug Administration et al., the six-year-old lawsuit over the U.S. Food & Drug Administration’s deeming regulations and their effects on the premium cigar industry. Last month, Judge Amit P. Mehta of the U.S. District Court for the District of Columbia delivered a major victory for the cigar industry, ruling that FDA acted in an arbitrary and capricious manner when it failed to evaluate key evidence while it was drafting the finalized version of the rule.

Specifically, Mehta ruled that during 2014-2016, while the FDA was finalizing its “deeming regulations” for other tobacco products, including cigars, the agency failed to evaluate evidence about whether “premium cigars” might pose less public health risks or might be less attractive to underage smokers than other cigars. In 2014, the agency announced its proposed rules and asked the public to submit comments regarding the risks of premium cigars and Cigar Rights of America (CRA), an industry trade group, submitted a comment with evidence that indicated that most “premium cigar” consumers use less than one cigar per day and do not inhale.

Mehta found in response that FDA ignored such comments:

The agency stated that, “despite our explicit requests,” commenters “did not include data indicating that premium cigar smokers are not subject to disease risk and addiction.” Id. at 29,024. It added that “there were no data provided to support the premise that there are different patterns of use of premium cigars and that these patterns result in lower health risks.” Id. at 29,020. With regard to youth consumption, the FDA observed that “studies indicate that [youth and young adults] are also using premium cigars.” Id. at 29,022. Ultimately, the agency “concluded that deeming all cigars, rather than a subset, more completely protects the public health.” Id. at 29,020.

This is a violation of the Administrative Procedures Act (APA), rules that govern how agencies like FDA can make regulations like the deeming rules.

That ruling set the stage for yesterday’s briefs, which argue about what the judge should do about it. The Department of Justice, which is representing FDA in the lawsuit, is arguing for remand without vacatur, i.e. the court would tell FDA that it acted improperly and must go fix the issues identified in the ruling. The three cigar trade groups that are the plaintiffs—the Cigar Association of America, CRA and the Premium Cigar Association—are arguing for vacating the rule for “premium cigars,” i.e., the deregulation of “premium cigars.”

Of note, the court still needs to define what it considers a “premium cigar.” Mehta has used a definition for “premium cigars” in a previous ruling, though that definition was presented by the Department of Justice, first to a federal court in Maryland, and later to Mehta in an emergency-like scenario. That definition would cover most cigars sold in a humidor, though notably would not include cigars that are flavored or use homogenized wrappers or binders.

Note: What’s written below is some sort of hybrid between hard news and an opinion piece. I’m not an attorney, but I have written quite a bit about this particular subject and have tried to not only break it down into easier-to-understand language but also contextualize the factual record that goes into these arguments. I’m not a legal scholar, so I’m going to avoid speculating about the legal mechanics of the precedent established in Friends of the Earth v. Haaland and how it affects this case.

FDA’s Argument

Technically, FDA is not in court, the Department of Justice is, though representing FDA. The first line of Department of Justice’s brief begins by acknowledging that the normal result for a case like this would be to vacate.

While vacatur is the normal remedy for APA violations, a rule found to violate the APA “need not necessarily be vacated.”

The Department of Justice’s argument boils down to a few main points:

• Deregulating “premium cigars” would potentially increase the consumption of cigars by those “under 21”
• Remanding without vacating would not make life that difficult for companies that make “premium cigars”
• Other tobacco companies might sue over user fees
• The FDA could pretty easily fix the issues the court found

Tobacco 21

Most critically, vacatur would make it legal under federal law to sell premium cigars to youth and young adults under age 21.

The DOJ’s argument is that current federal law says that all deemed tobacco products—this would include traditional products like cigars as well as products like e-cigarettes—are subject to the federal minimum age to purchase tobacco being 21-years-old. This is true, though this argument has a number of flaws.

First, this is a relatively new development. When the deeming regulations went into effect on Aug. 8, 2016, the federal minimum age to purchase tobacco products was only 18. The 21-year-old standard came in December 2019 when President Donald Trump signed a massive $1 trillion spending bill that also included a provision that would increase the minimum age to purchase tobacco products.

At worst, vacating the deeming regulations for “premium cigars” would mean that people who are 18- to 20-years-old would now be able to legally purchase “premium cigars.” It’s unlikely that FDA would have any sort of evidence about what this very specific action would mean in terms of the increased number of smokers.

But that’s not really what would happen anyways. Currently, 38 states have passed their own state laws increasing the minimum age to purchase tobacco products, meaning that only 12 states—and four territories—could be affected in this way because, for example, Texas’ state law—one of the 38 states—requiring people to be 21-years-old to purchase tobacco products would not be affected by a change in the federal law.

Furthermore, even amongst those 12 states that don’t have Tobacco 21 laws, it’s not clear how much would immediately change. The way the federal minimum purchasing age works, there’s no ability for FDA or a federal law enforcement agency to punish an individual under 21-years-old that purchases tobacco products; rather, FDA could punish the retailer. But FDA would need to do this likely by doing an undercover enforcement check, where the agency has a person who pretends to be under the age of 21 buys tobacco products at the store. If the retailer doesn’t follow FDA’s rules, it is subject to warnings and then monetary penalties.

Only, it doesn’t seem likely that FDA actually has this enforcement ability—despite its public claims otherwise—due to some technicalities within H.R. 1865, that $1 trillion spending bill. As part of the language in that bill, the secretary of the Department of Health and Human Services, which FDA falls under, needed to do certain procedural acts, which don’t appear to have been completed. Earlier this year, Sen. Tim Kaine, D-Va., and Sen. Mitch McConnell, R-Ky., sent a letter to FDA complaining about this lack of procedural completeness and there’s no evidence that the agency has corrected this.

User Fees

User fees play a role in different parts of the pro-FDA argument. First, user fees are not all that burdensome—they “average half a cent per cigar” according to the Department of Justice’s brief. Second, the DOJ argues that if “premium cigars” were deregulated and no longer subject to user fees, other tobacco companies would sue because they would have to pay more.

While the math that is used to generate user fees is not all that straightforward, the entire user fee process is largely misunderstood by the cigar industry, in some part due to arguments made by the plaintiffs in this lawsuit. User fees are payments that companies make to FDA to fund FDA’s Center for Tobacco Products. The argument is that rather than making every taxpayer pay for the infrastructure needed to regulate tobacco products, the only people that should pay are those using or selling the products. So, the government assesses user fees to products that are regulated as per a 2009 bill that was passed by Congress.

There are a few very notable parts of this. First, the total amount of money FDA receives is set by Congress and is capped, for FY2022, it’s $712 million. Second, that $712 million is unaffected by how many cigars or cigarettes are sold, FDA will get $712 million regardless of whether sales are up or down. Where it gets confusing is how much each company pays. There are six product categories that Congress said should pay user fees—cigarettes, roll-your own tobacco, snuff, chewing tobacco, cigars, pipe tobacco—and the categories pay different amounts. That amount is calculated by the amount of excise taxes—a completely different form of money tobacco companies pay the government—that the product categories paid in a prior year. A company is then liable for a percentage, corresponding to the percentage of excise taxes it pays in comparison to the rest of the category, of user fees for the category.

For example, the entire cigar category is liable for $86.4 million in user fees for FY2022. If a company was large enough to amount to 1 percent of all of the excise taxes paid on cigars in 2020, it would likely owe 1 percent of the $86.4 million, $864,000. The key though is that all cigar companies will split the $86.4 million and will collectively pay no more and no less than the $86.4 million.

Companies that sell “premium cigars” are unlikely to describe their user fees as a “half a cent” per cigar because that’s not remotely close to what they are paying. In reality, the number has been around 5 cents, if not a bit more, for anything other than the least expensive premium cigars. It’s true that the average could be .5 cents, but it’s not at all what’s being debated for the cigars exclusively discussed in this case.

You will note that e-cigarettes and vaping products—which are regulated by FDA’s Center for Tobacco Products—have not been mentioned regarding user fees, it’s because they don’t pay them. FDA has consistently argued—and courts, including in this lawsuit, have upheld this argument—that it does not have the authority to change how user fees are assessed, meaning it cannot decide to make e-cigarettes subject to user fees. Its contention has been that because Congress wrote the user fee scheme, Congress is the one that has the ability to make adjustments.

This comes into play in this most recent part of the lawsuit because one of the arguments that the Department of Justice made is that if “premium cigars” are deregulated, companies will no longer pay user fees for those cigars. Because the total amounts that FDA gets in user fees are fixed, that means other companies will have to fill the burden and pay more. The Department of Justice argues that this could invite more lawsuits from those other companies:

Moreover, if Plaintiffs were correct that vacatur would exempt premium cigars from user fees, shifting the user fees currently paid by premium cigar manufacturers to manufacturers of other tobacco products would likely be impossible in the short term and more burdensome for both the FDA and manufacturers in the long term. The Act’s user fee calculation methodology is based on excise taxes, but neither excise tax law nor the excise tax information currently submitted to the FDA by rule distinguishes between premium cigars and other cigars. 21 U.S.C. § 387s(b)(5); 26 U.S.C. § 5701(a); 21 C.F.R. § 1150.5(b)(2); see also 81 Fed. Reg. 28,707, 28,713 (May 10, 2016) (noting that rule requiring cigar manufacturers and importers to submit general excise tax information to FDA for user fee calculations is premised on the fact that “[a]ll cigars” — including premium cigars — “have been deemed subject to FDA’s regulation and, as such, are subject to user fees under” the Act). This information would not be granular enough to allow the FDA to shift premium cigar user fees to manufacturers of other products if premium cigars were exempt from user fees by virtue of not being deemed. The FDA would thus need to devise some new method to calculate each manufacturer’s user fees — perhaps including new rulemaking proceedings to implement any such method and to require manufacturers to submit more detailed information needed to perform those calculations.

The argument concludes that this mess that would be created by vacating outweighs the negative consequences for cigar companies of not vacating.

Can FDA Easily Fix the Problem

What seems likely to be the most important part of a successful argument for FDA is the ” likelihood that the agency can substantiate its decision on remand,” basically, how likely is it that the FDA could fix these problems if it were told by a court to do so. The Department of Justice argues that it would not be all that difficult, FDA just needs to actually look at the evidence it said didn’t exist six years ago:

Here, if the Solicitor General decides against appeal from the final judgment, the FDA can readily cure the error found by the Court on remand by adequately addressing the record evidence on premium cigar usage patterns and the health risks associated with those patterns.

While that’s probably true, the question is more likely about how serious the error is, and that’s where the government seems likely to run into issues if it loses this. For example, the Department of Justice writes, “the FDA will properly address this evidence on remand if the government decides not to appeal and the Court remands without vacatur.”

The problem is that FDA was supposed to “properly address this evidence” before it made the decision in 2016, instead, it claimed the evidence didn’t exist. That decision to not evaluate evidence and claim it didn’t exist is precisely why it lost this case to begin with, or as Mehta wrote:

In the end, instead of addressing the relevant data before it, the agency resorted to a common refrain to obscure the issue: “[T]here were no data provided to support the premise that there are different patterns of use of premium cigars and that these patterns result in lower health risks.” 81 Fed. Reg. at 29,020. That statement was not accurate then, and despite litigation counsel’s efforts, it is not accurate now.

The Cigar Industry’s Argument

These briefs were submitted at the same time, so one is not necessarily in response to the other. Though after six years of litigation, the topics are largely the same but with a different spin.

The cigar industry’s brief, led by Michael Edney, focuses on three main arguments:

• FDA already screwed up this process once by ignoring evidence
• There are real costs to keeping “premium cigars” regulated while FDA continues to figure this out
• DOJ cannot prove that this warrants a special circumstance to remand without vacating

FDA Already Screwed Up This Process Once

 

Whether the premium cigar patterns of use— particularly how often they are used—lead to lesser health effects is not just an important aspect of the problem in the abstract, it is one that the FDA identified as a “central consideration” in the Proposed Rule. Op. at 6. And it glided over this “central consideration” by claiming that “all cigars product toxic smoke,” a method of decisionmaking the Court held was “exactly the sort of nonresponsive, circular reasoning the court faulted previously” in its premium health warnings decision.

The cigar industry’s point is more or less what’s above. FDA broke the rules—which the court recently ruled—and the cigar industry should not have to remain regulated. An important to this argument is the type of “rule” that FDA broke, the APA, laws that govern how FDA must act as it comes up with its own regulations. Edney’s contention is that this is a fundamental rule:

The agency’s failures here are not only serious errors, they are serious errors about the most serious issue: Whether to regulate an entire industry or not.

This is key because Edney is hoping that the court follows its normal process when it finds a government agency did not follow the APA:

To justify the exceptional departure from the normal remedy for APA violations, the Government must show that the error made is not serious and that vacatur would be particularly disruptive. Am. Great Lakes, 962 F.3d at 519. Here, the errors made by the agency go to the heart of the decision to regulate premium cigars or not; they are serious.

User Fees & Other Costs

While the Department of Justice claimed that user fees for cigars average .5 cents, Edney argues that the real costs for “premium cigar” companies for user fees is likely $15-20 million annually. Estimates done by halfwheel show, based on Cigar Association of America’s import data, that the number could be as high as $25 million annually, though that number likely includes some cigars that would ultimately not be considered “premium cigars.”

He also counters a claim made by the Department of Justice that most of the other parts of the regulations that “premium cigar” companies must comply with are largely one-time things that have already been done. The cigar industry’s brief argues that submitting blend details—another deeming regulation requirement—remains ongoing and that remanding the rule back to FDA would leave open the possibility of testing for harmful and potentially harmful constituents (HPHCs), creating an uncertain future for cigar companies.

A “Parallel Regulatory Process”

Edney also argues that remanding it back to FDA might be illogical because of what he describes as a “parallel regulatory process.”

The basic premise is that FDA—as evidenced by this ANPRM in 2018 and a recent report from the National Academy of Sciences—is actively considering regulating “premium cigars” differently than what it announced in 2016. The second part of the “parallel regulatory process” argument is that if Mehta remands this decision back to FDA, the agency would be restricted in only reevaluating what was presented up to as recently as 2016—which is when the deeming process was under consideration and when the specific CRA comment was submitted—and therefore would be forced into making a decision based on older evidence. It’s unclear if the remanded decision would need to be binary between full regulation or no regulation, but the Department of Justice has argued in court that the evidence FDA overlooked wasn’t enough to support no regulation of “premium cigars” anyways.

Edney argues that this would create parallel worlds where in one instance, FDA’s most up-to-date thinking probably is something below “full regulation” of premium cigars but the court-ordered reevaluation of the evidence would produce a result of full regulation, mudding the waters for everyone involved.

As he writes:

As this Court already has explained, vacatur is appropriate because the agency’s intervening actions and ongoing process “creates the distinct possibility that the agency’s approach to premium cigars . . . ‘may itself be changed.’”

REMANDING WITHOUT VACATING IS GOING TO TAKE A WHILE

Edney also argues that FDA is unlikely to act very quickly about fixing these issues, which only further burdens the plaintiffs in this case.

While he doesn’t explicitly, mention each of these, he alludes to the fact that CTP is in the midst of major policy actions including:

• It is still dealing with trying to fully enact its regulations for e-cigarettes and vaping products. For example, it will need to see Juul in court.
• It is in the process of trying to ban menthol cigarettes.
• It is in the in the process of trying to ban flavored cigars.
• It is in the early stages of trying to impose nicotine limits for cigarettes.

Second, he also points out that FDA has not acted very quickly on the substantial equivalence ruling made by Mehta in August 2020, which the Department of Justice had no update for in June 2022. This overall argument could be more persuasive than it is on face value as it would mean that this case would remain open on Mehta’s docket until FDA resolves both the APA issues being directly debated here but then also the substantial equivalence part of the case which remains unresolved pending FDA action.

This more or less counters the arguments made by the Department of Justice that say remanding without vacating is the less harmful pathway, though also appeal to a potentially more direct concern of Mehta, getting this case off his docket.

THE DEFINITION

The definition of a “premium cigar” that the Department of Justice proposed in August 2020—which is wrongfully referred to by many in the cigar industry as the “Mehta definition”—is as follows:

1. is wrapped in whole tobacco leaf;
2. contains a 100 percent leaf tobacco binder;
3. contains at least 50 percent (of the filler by weight) long filler tobacco (i.e., whole tobacco leaves that run the length of the cigar);
4. is handmade or hand rolled (i.e., no machinery was used apart from simple tools, such as scissors to cut the tobacco prior to rolling);
5. has no filter, nontobacco tip, or nontobacco mouthpiece;
6. does not have a characterizing flavor other than tobacco;
7. contains only tobacco, water, and vegetable gum with no other ingredients or additives;
8. and weighs more than 6 pounds per 1,000 units.

Neither side opted to propose an alternative definition of “premium cigar” in their briefs.

For its part, the Department of Justice avoided endorsing a definition but did write in a footnote, “For example, if the Court were to adopt the same eight- pronged definition used in its August 2020 opinion, retailers would have to make difficult decisions at the cash register about whether particular cigars satisfy the definition and thus could lawfully be sold to young adults.”

Edney was more direct, writing, “To do so, the Court’s order should vacate the Rule as to at least those cigars the FDA and the Court defined as ‘premium’ in 2020 for purposes of providing relief from the premarket review process.”

Multiple sources told halfwheel that the cigar industry is concerned with Part 7 of the definition, specifically about what would be considered “vegetable gum” and whether FDA might try to exclude cigars from being defined as “premium” because of that.

Update: An earlier version of this article stayed that 1 percent of $86.4 million was $8.64 million. It is in fact $864,000.