[Federal Register: August 28, 1996 (Rules and Regulations)]
[Page 44546-44596]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
 
[[pp. 44546-44596]] Regulations Restricting the Sale and Distribution of Cigarettes 
and Smokeless Tobacco to Protect Children and Adolescents

[[Continued from page 44545]]

[[Page 44546]]

labeling and advertising regulations.'' As a specific example of 
potential separate and conflicting Federal standards, some of the 
comments noted that proposed Sec. 897.34 would completely prohibit the 
use of some promotional items that are exempted by FTC from the 
congressionally mandated warning under the Cigarette Act.
    FDA disagrees with these comments. When Congress enacted the 
Cigarette Act and the Smokeless Act, it very carefully considered the 
proper scope of preclusion applicable to Federal agencies in the 
regulation of tobacco products. The express terms of 15 U.S.C. 1334(a) 
and 15 U.S.C. 4406(a) clearly reflect the full scope of preclusion of 
Federal agencies intended by Congress.
    Had Congress believed more preclusion to be necessary, it could 
have easily expanded the express scope of 15 U.S.C. 1334(a) and 15 
U.S.C. 4406(a). (See Banzhaf, 405 F.2d at 1089 (Had Congress intended 
to foreclose other types of Federal regulation, ``it might reasonably 
be expected to have said so directly--especially where it was careful 
to include a section entitled `Preemption' specifically forbidding 
designated types of regulatory action''); Central Bank of Denver v. 
First Interstate Bank, 114 S. Ct. 1439, 1448 (1994) (Congress knows how 
to enact legislation expressly).) Indeed, Congress took this very 
approach with respect to the scope of preemption applicable to States 
under the Cigarette Act when it drafted 15 U.S.C. 1334(b) in a broad 
manner to encompass ``requirement[s]'' and ``prohibition[s].''
    The discrepancy in Congress' choice of words with regard to the 
scope of 15 U.S.C. 1334(a) and (b) is significant in its implications. 
By not including ``requirement or prohibition'' in 15 U.S.C. 1334(a) 
and expressly foreclosing only ``statements'' relating to smoking and 
health, Congress clearly intended to narrowly limit the scope of 
foreclosure of regulation applicable to Federal agencies. (See Brown v. 
Gardner, 115 S. Ct. 552, 556 (1994) (```[w]here Congress includes 
particular language in one section of a statute but omits it in another 
section of the same Act, it is generally presumed that Congress acts 
intentionally and purposely in the disparate inclusion or exclusion''') 
(citation omitted).) In a similar fashion, Congress demonstrated an 
intent to restrict the scope of Federal preclusion under 15 U.S.C. 
4406(a) by narrowly tailoring the language of that subsection.
    Thus, given the narrow scope of 15 U.S.C. 1334(a) and 15 U.S.C. 
4406(a), the Cigarette Act and the Smokeless Act do not foreclose 
``separate'' Federal requirements, other than cautionary health-based 
statements as discussed in sections X.A. and X.B. of this document. 
Although the final rule imposes requirements on tobacco product 
manufacturers, these requirements do not conflict with the Cigarette 
Act or the Smokeless Act and, consequently, are not precluded by those 
statutes. Moreover, that FTC might allow certain actions under its 
statutory mandate does not preclude FDA from prohibiting such actions 
under a different statutory mandate. (See New York Shipping Ass'n v. 
Federal Maritime Comm'n, 854 F.2d 1338, 1367 (D.C. Cir. 1988) (``there 
is no anomaly if conduct privileged under one statute is nonetheless 
condemned by another''), cert. denied, 488 U.S. 1041 (1989).)
    (5) Some of the comments asserted that Congress intended that the 
sole health-based restraints that were to be imposed on the commerce of 
tobacco products were to be those provided in the Cigarette Act and the 
Smokeless Act.
    FDA disagrees with this assertion. First, FDA clearly may exercise 
legal authority to regulate tobacco products when the evidence 
establishes that the products have intended uses that fall within the 
act's definition of a ``drug.'' Indeed, the agency has done so in 
several instances. (See, e.g., United States v. 354 Bulk Cartons * * * 
Trim Reducing-Aid Cigarettes, 178 F. Supp. 847, 851 (D.N.J. 1959) 
(cigarettes claimed to reduce weight were drugs because they were 
intended to affect the structure or function of the body); United 
States v. 46 Cartons, More or Less, Containing Fairfax Cigarettes, 113 
F. Supp. 336, 338-39 (D.N.J. 1953) (cigarettes claimed to prevent 
respiratory diseases were drugs because they were intended to treat or 
prevent disease).) Moreover, the comments' assertion that health-based 
constraints can be imposed upon tobacco products only under the 
Cigarette Act and the Smokeless Act necessarily leads to the erroneous 
conclusion that much Federal and State regulation, such as health-based 
workplace smoking restrictions and health-based age limits on access, 
is foreclosed. As other comments recognized, Congress obviously did not 
intend for such broad preclusion to be the case. (See Banzhaf, 405 F.2d 
at 1089 (finding that ``[n]othing in the [Cigarette Act] indicates that 
Congress had any intent at all with respect to other types of 
regulation by other agencies--much less that it specifically meant to 
foreclose all such regulation'').)
    (6) Some comments asserted that FDA's proposed restrictions on 
certain advertising for tobacco products are at odds with congressional 
intent to allow the continued use of advertising for these products in 
conjunction with the statutorily required warnings.
    FDA disagrees. As discussed in sections X.A. and X.B. of this 
document, preclusion of Federal regulation of advertising for tobacco 
products is very narrow in scope and does not encompass FDA's final 
rule. Moreover, as one court has noted:
    [T]here is no anomaly if conduct privileged under one statute is 
nonetheless condemned by another; we expect persons in a complex 
regulatory state to conform their behavior to the dictates of many 
laws, each serving its own special purpose.
(New York Shipping Ass'n, 854 F.2d at 1367)
Thus, the mere fact that certain advertising for tobacco products is 
permitted under the current regulatory scheme for those products does 
not preclude FDA from placing restrictions on such advertising.
    (7) Some comments alleged that the 1995 proposed rule would 
conflict with Federal law and congressional intent because it would 
have an impact on the commerce of tobacco products.
    FDA disagrees. Any proscriptive regulation of tobacco products 
inevitably imposes economic burdens upon commerce of those products. 
Thus, following the comments' line of argument, all proscriptive 
regulation of cigarettes is foreclosed by the Cigarette Act and the 
Smokeless Act. As explained in this section, however, by enacting 15 
U.S.C. 1334(a) and 15 U.S.C. 4406(a), Congress chose the proper level 
of limitation on Federal regulations that it concluded was necessary to 
protect the commerce of tobacco products from being unduly economically 
burdened. Because requirements contained in the final rule are not 
precluded under those provisions, the fact that the requirements will 
have economic consequences upon the commerce of tobacco does not mean 
those requirements are foreclosed.
    (8) One comment argued that the 1995 proposed rule is precluded 
because Congress could not have intended for any agency to have the 
authority to prohibit the sale of cigarettes. The comment derived this 
``intent'' from pieces of legislation enacted by Congress that provide 
for the regulation of specific aspects of cigarettes but do not 
prohibit their sale.
    FDA disagrees. Enactment of legislation giving other agencies 
authority over particular aspects of

[[Page 44547]]

cigarettes means only that Congress has decided to take those 
particular actions; it does not imply that Congress has determined that 
other Federal regulation is prohibited. Congress can implement policy 
in only one way: passage of a bill by the House and the Senate that is 
either signed by the President or approved by an overridden veto. (INS 
v. Chadha, 462 U.S. 919, 954-58 (1983); Central Bank, 114 S. Ct. at 
1453.) Because Congress has not adopted any legislation that 
specifically prohibits FDA from regulating tobacco products, the final 
rule is not precluded.
    In summary, FDA's final rule has been narrowly tailored so that it 
does not conflict with the existing statutory scheme governing tobacco 
products, and the final rule is not precluded.
2. The PHS Act
    Section 1926 of the PHS Act conditions a State's receipt of the 
full amount of Federal block grants (to be used for prevention and 
treatment of substance abuse) upon the recipient State having in effect 
a law that makes it ``unlawful for any manufacturer, retailer, or 
distributor of tobacco products to sell or distribute any such product 
to any individual under the age of 18'' (42 U.S.C. 300x-26(a)(1)).
    (9) Some of the comments argued that section 1926 of the PHS Act 
demonstrates an intent on the part of Congress to preserve, and 
encourage enforcement of, State youth access restrictions. The comments 
asserted that because FDA regulation of youth access to tobacco 
products would have a preemptive effect upon some State regulation in 
this area, the 1995 proposed rule conflicts with this congressional 
intent. Accordingly, argued the comments, section 1926 of the PHS Act 
precludes FDA from regulating youth access.
    While FDA agrees that section 1926 of the PHS Act indicates a 
congressional intent to encourage States to establish age limits on the 
purchase of tobacco products, neither the statute's language nor its 
legislative history prohibits Federal regulation of youth access. The 
restrictions in the final rule regarding the sale and distribution of 
tobacco products do not conflict with section 1926 of the PHS Act, and, 
in fact, facilitate the end result that Congress sought--reducing youth 
smoking--by ``reducing the appeal of cigarettes and smokeless tobacco 
to, and limiting access by, persons under 18 years of age.'' (See 60 FR 
41314 at 41321.) Accordingly, FDA's regulation of youth access is not 
precluded by the existence of section 1926 of the PHS Act. (See 61 FR 
1492, January 19, 1996.)
    (10) One comment asserted that the 1995 proposed rule is precluded 
by section 1926 of the PHS Act because, ``in the legislative process 
that led to enactment of [section 1926], Congress considered and 
rejected a variety of specific requirements of the very type that FDA 
now proposes.'' The Supreme Court, however, has made clear that courts 
are ```reluctant to draw inferences from Congress' failure to act.''' 
(Brecht v. Abrahamson, 113 S. Ct. 1710, 1719 (1993) (citations 
omitted).) The mere fact that Congress, in enacting section 1926 of the 
PHS Act, did not incorporate requirements of the type FDA is now 
imposing in no way precludes FDA's final rule which was issued under 
the agency's regulatory authority under the act.

D. Occupation of the Field

    (11) Numerous comments asserted that the 1995 proposed rule is 
impliedly precluded by the comprehensiveness of existing legislation 
relating to regulation of tobacco products. Several comments argued 
that Congress has specifically reserved the power to regulate tobacco 
for itself, and thereby has occupied the field. A number of comments 
asserted that the present system of congressional control over tobacco 
products precludes FDA regulation absent a new mandate from Congress.
    FDA disagrees with these comments. The statutes enacted by Congress 
for regulation of tobacco products do not amount to a comprehensive 
scheme. Rather, they address only a few specific aspects relating to 
regulation of tobacco products. Moreover, even if Congress' actions in 
this area were ``comprehensive,'' Congress clearly did not intend for 
regulation under the Cigarette Act and the Smokeless Act to be 
exclusive. (See Banzhaf, 405 F.2d at 1089 (finding that Congress did 
not intend to foreclose Federal regulation of cigarettes outside the 
narrow scope of preclusion contemplated by the Cigarette Act).) As 
explained in greater detail in sections X.A., X.B., and X.C. of this 
document, the statutes that the comments cite, whether viewed 
individually or collectively, do not preclude FDA from regulating 
tobacco products.
    First, as some comments noted, Congress has not taken action to 
exclude from FDA's jurisdiction tobacco products that fall within the 
act's definitions of ``drug'' and ``device.'' The face of the statute 
is the first place that a court must look to determine whether Congress 
has spoken to a particular issue and whether congressional intent in 
regard to that issue is clear. (Kofa v. INS, 60 F.3d 1084, 1088 (4th 
Cir. 1995); Metropolitan Stevedore Co. v. Rambo, 115 S. Ct. 2144, 2147 
(1995).) Under the act, FDA has jurisdiction over products that are 
intended to address disease or to affect the structure or any function 
of the body. (See section 201(g) and (h) of the act, 21 U.S.C. 321(g) 
and (h); 60 FR 41314 at 41463.) Thus, the relevant language of the 
act--``intended to affect the structure or any function of the body''--
does not on its face exclude tobacco products.
    Congress is able to exclude and has excluded specific products, 
including tobacco products, from a statute's reach when it wishes to do 
so. For example, Congress has expressly excluded other products from 
FDA's jurisdiction under the act. (See, e.g., section 201(i) of the act 
(21 U.S.C. 321(i)) (excluding ``soap'' from definition of 
``cosmetic''); section 201(s) of the act (excluding ``color additive'' 
from definition of ``food additive'').) Moreover, Congress has 
expressly excluded tobacco products from the reach of other regulatory 
statutes. (See, e.g., 15 U.S.C. 2052(a)(1)(B) (Consumer Product Safety 
Act); 15 U.S.C. 1261(f)(2) (Federal Hazardous Substances Act); 15 
U.S.C. 2602(2)(B)(iii) (Toxic Substances Control Act); 21 U.S.C. 802(6) 
(Controlled Substances Act); 15 U.S.C. 1459(a)(1) (Fair Packaging and 
Labeling Act).) Indeed, tobacco is excluded from the definition of 
``dietary supplement'' under the act, but no similar exclusion appears 
in the definition of ``drug'' or ``device.'' See section 201(g), (h), 
and (ff) of the act (21 U.S.C. 321(g), (h), and (ff)). The absence of 
an express exclusion for tobacco products from the act's definitions of 
``drug'' and ``device'' eviscerates the contention that Congress 
clearly intended to preclude FDA from regulating tobacco products.
    Second, as recognized by some comments, the fact that statutes such 
as the Cigarette Act and the Smokeless Act delegate some regulatory 
authority over tobacco products to other Federal agencies does not 
preclude FDA's rule. Numerous Federal agencies have overlapping and 
complementary jurisdiction that arises from their differing missions 
and expertise. (See, e.g., Rueth v. EPA, 13 F.3d 227, 228 (7th Cir. 
1993) (EPA and Army Corps of Engineers have concurrent jurisdiction 
under the Clean Water Act); Public Utility Dist. No. 1 v. Bonneville 
Power Admin., 947 F.2d 386, 395 (9th Cir. 1991) (FERC has concurrent 
jurisdiction

[[Page 44548]]

with other Federal agencies as well as States over hydroelectric 
projects), cert. denied, 112 S. Ct. 1759 (1992); United Packinghouse, 
Food and Allied Workers Int'l Union v. NLRB, 416 F.2d 1126, 1133-34 
n.11 (D.C. Cir.) (NLRB and EEOC have concurrent jurisdiction over 
racial discrimination claims), cert. denied, 396 U.S. 903 (1969).) As 
discussed in section X.C. of this document, the fact that several 
agencies are already charged with regulating certain aspects of tobacco 
does not preclude FDA from asserting jurisdiction for different 
purposes. (See Banzhaf, 405 F.2d at 1089 (``Nothing in the [Cigarette 
Act] indicates that Congress had any intent at all with respect to 
other types of regulation by other agencies--much less that it 
specifically meant to foreclose all such regulation'').)
    In conclusion, FDA's final rule is not precluded by the existing 
regulatory scheme for tobacco products.

E. Preemption of State and Local Requirements Under Section 521(a) of 
the Act

    Under proposed Sec. 897.42, State or local requirements that are 
more stringent than, and do not conflict with, requirements imposed 
under FDA's final rule would not have been preempted under section 521 
of the act (21 U.S.C. 360k).
    (12) Several comments supported the intended exclusion from 
preemption under proposed Sec. 897.42, noting that it is essential that 
State and local officials retain the ability to enact and enforce laws 
which they believe are most effective when actively enforced at the 
local level.
    In contrast, several comments took issue with the proposed 
exclusion and asserted that regulation of tobacco products by FDA as 
drug delivery devices would result in the preemption of State and local 
laws. The comments characterized the ``blanket'' exclusion from 
preemption under proposed Sec. 897.42 as being at odds with the 
statutory preemption established by section 521(a) of the act and with 
the exemption procedures established by section 521(b) and by FDA's 
regulations.
    Several comments argued that proposed Sec. 897.42 would conflict 
with congressional intent behind the act. One comment noted that 
preemption under section 521(a) of the act was intended to establish 
national uniformity in medical device regulation, protecting such 
products from onerous burdens on interstate commerce created by a 
patchwork of State and local requirements. The comment argued that the 
proposed exclusion from preemption would cause uniform Federal 
standards to become displaced by diverse State and local requirements. 
Another comment asserted that, by allowing more stringent State and 
local requirements, proposed Sec. 897.42 was at odds with the act 
because Congress did not intend for FDA's device regulations to be 
minimum standards; rather, it intended for those regulations to be the 
governing standards unless local circumstances justified an exception.
    Finally, one comment pointed out that the 1995 proposed rule would 
permit only those State and local requirements that are at least as 
``stringent'' as the requirements imposed under FDA's rule. The comment 
asserted that FDA may not preempt any State laws, however, without 
first showing a ``clear and manifest congressional intent'' to 
authorize preemption of those State laws.
    As a preliminary matter, two points of clarification are necessary. 
First, proposed Sec. 897.42 would not have caused State and local laws 
to become Federal requirements, as one of the comments anticipated. 
Rather, the 1995 proposed rule would have allowed State and local laws 
to remain in force subject solely to State or local enforcement.
    Second, proposed Sec. 897.42 would not have ``resuscitated'' State 
and local laws that would otherwise be preempted by the Cigarette Act 
or the Smokeless Act, as some of the comments anticipated. Instead, the 
exclusion from preemption in proposed Sec. 897.42 would have applied 
only to preemption under section 521 of the act.
    Upon consideration of all of the comments relating to proposed 
Sec. 897.42, the agency recognizes that significant concerns have been 
raised with regard to the validity of FDA's proposed preemption 
exclusion for all more stringent State and local legislative 
enactments. Most notably, the agency concurs that the notice and 
comment process of the current rulemaking does not provide the type of 
opportunity for an oral hearing contemplated under section 521(b) of 
the act. In light of this concern, FDA has deleted proposed 
Sec. 897.42.
    The agency's 1995 proposed rule to exclude all more stringent State 
and local requirements from any preemptive effect under this rule was 
based on a recognition of the pioneering and continuing role in the 
area of regulation of youth access to tobacco products that States have 
played, particularly certain active tobacco-control States. Federal 
cooperation with, and continued reliance upon, innovative and 
aggressive State and local enforcement efforts is essential.
    FDA believes the requirements it is establishing in this final rule 
set an appropriate floor for regulation of youth access to tobacco 
products but do not, as a policy matter, reflect a judgment that more 
stringent State or local requirements are inappropriate. For example, 
FDA chose 18 as the age below which cigarettes and smokeless tobacco 
may not be marketed to children and adolescents. This choice reflected 
a finding that all but four States have a comparable restriction which 
addresses the most vulnerable population. However, many comments argued 
that a higher age would be more effective. While FDA has decided not to 
establish an age above 18 in the final rule, the agency may, under the 
exemption process established under section 521(b) of the act, defer to 
those States that conclude that a higher age is more effective and that 
apply for an exemption.
    In implementing section 521 of the act, FDA has historically 
interpreted that provision narrowly and found it to have preemptive 
effect only for those State and local requirements that in fact clearly 
impose specific requirements with respect to specific devices that are 
manifestly in addition to analogous Federal requirements. (See 
Sec. 808.1(d) (21 CFR 808.1(d)).) Moreover, section 521 of the act 
``does not preempt State or local requirements that are equal to, or 
substantially identical to, requirements imposed by or under the act'' 
(Sec. 808.1(d)(2)).
    The agency's assertion of jurisdiction over tobacco products does 
not preclude any State or local requirements other than those expressly 
preempted by section 521(a) of the act. Moreover, consistent with FDA's 
interpretation of section 521(a) of the act, only a limited number of 
State and local requirements are preempted and even those may qualify 
for exemption from preemption under section 521(b) of the act.
    Examples of State and local laws FDA believes are preempted, 
consistent with its longstanding approach to implementing section 521 
of the act, are the following:
<bullet> More stringent age restrictions--Three States restrict 
cigarette sales to anyone under 19 years of age, and one State has 21 
years as the minimum age. These restrictions are preempted because they 
are more stringent than the final rule, which prohibits sales only to 
individuals under age 18.

[[Page 44549]]

<bullet> Restrictions on the distribution of free samples of tobacco 
products--Approximately 40 States, the District of Columbia, and many 
local governments restrict the distribution of free samples of tobacco 
products. For example, Nebraska bans samples, coupons, and rebate 
offers for smokeless tobacco. Oklahoma and several other States 
prohibit the free distribution of tobacco to individuals under 18 and 
within 500 feet of schools, playgrounds, or other locations used 
primarily by individuals under 18. Approximately 12 States restrict 
where free samples may be distributed. These restrictions are preempted 
to the extent that they are different from, or in addition to, the 
final rule, which prohibits any distribution of free samples.
<bullet> Restrictions on placement of vending machines--Most States, 
the District of Columbia, and several local governments impose 
restrictions on the placement of vending machines. These restrictions 
are preempted to the extent that they are different from, or in 
addition to, the final rule, which prohibits the use of vending 
machines except in certain locations and under certain conditions.
<bullet> Restrictions on outdoor advertising--Restrictions on outdoor 
advertising are preempted to the extent that they are different from, 
or in addition to, the final rule, which restricts the location, 
format, and content of such advertising. For example, Ordinance 307, 
which was enacted by the Mayor and City Council of Baltimore, MD, 
prohibits the placement of any sign that ``advertises cigarettes in a 
publicly visible location,'' i.e., on ``outdoor billboards, sides of 
building[s], and free standing signboards.'' This ordinance was upheld 
by the Fourth Circuit in the face of a challenge based on preemption 
under the Cigarette Act and on First Amendment grounds. (See Penn 
Advertising of Baltimore, Inc. v. Mayor and City Council of Baltimore, 
63 F.3d 1318 (4th Cir. 1995), vacated and remanded, 116 S. Ct. 2574 
(1996).) Subsequently, the Supreme Court vacated judgment in Penn 
Advertising and remanded the case to the United States Court of Appeals 
for the Fourth Circuit for further consideration in light of 44 
Liquormart, Inc. v. Rhode Island, 116 S. Ct. 1697 (1996). If Ordinance 
307 is ultimately upheld in its present form, it will be preempted 
under section 521 of the act to the extent that it is different from, 
or in addition to, the final rule.
<bullet> Prohibitions and restrictions relating to free-standing 
displays--Prohibitions and restrictions relating to free-standing 
displays are preempted to the extent that they are different from, or 
in addition to, the final rule, which allows free-standing displays but 
restricts the location, format, and content of such displays.
<bullet> Requirements relating to identification checks for purposes of 
age verification--Requirements relating to identification checks for 
purposes of age verification are preempted to the extent that they are 
different from, or in addition to, the final rule, which requires 
identification checks for anyone under the age of 26.
    Examples of State or local laws or regulations that are not 
preempted include:
<bullet> Equivalent age restrictions--Most States establish 18 years as 
the minimum age for purchasing cigarettes or smokeless tobacco. These 
restrictions are not preempted because they are equal to, or 
substantially identical to, requirements imposed under the final rule. 
(See Sec. 808.1(d)(2).)
<bullet> Restrictions on the sale or distribution of tobacco products--
Several local governments restrict the locations (such as public parks, 
public buildings, etc.) at which tobacco products may be sold or 
distributed. These restrictions are not preempted because the final 
rule does not establish specific counterpart regulations or other 
specific requirements relating to the locations at which tobacco 
products may be sold or distributed.
<bullet> Restrictions on smoking in public places--Approximately 48 
states, the District of Columbia, and many local governments have some 
restrictions on smoking in public places. These restrictions are not 
preempted because the final rule does not establish specific 
counterpart regulations or other specific requirements relating to 
restrictions on smoking in public places.
<bullet> Penalties on underage persons who purchase tobacco products--
These penalties are not preempted because the final rule does not 
establish specific counterpart regulations or other specific 
requirements relating to penalties on underage persons who purchase 
tobacco products.
<bullet> Prohibition on use or possession of tobacco products by 
underage persons--These prohibitions are not preempted because the 
final rule does not establish specific counterpart regulations or other 
specific requirements relating to prohibitions on the use or possession 
of tobacco products by underage persons.
<bullet> Age restrictions on persons who sell tobacco products--Some 
local governments have statutes or regulations that establish a minimum 
age for persons selling tobacco products. These restrictions are not 
preempted because the final rule does not establish specific 
counterpart regulations or other specific requirements relating to age 
restrictions on persons who sell tobacco products.
<bullet> Tobacco excise taxes--All 50 States and the District of 
Columbia have excise taxes on cigarettes, and 42 States have excise 
taxes on smokeless tobacco. These excise taxes are not preempted 
because they are not ``requirements applicable to a device'' within the 
meaning of section 521(a) of the act. (See Sec. 808.1(d)(8).)
<bullet> Access-control mechanism requirements for vending machines--
Approximately six States and some local governments require access-
control mechanisms on vending machines, such as locking devices or 
token acceptors. These requirements are not preempted because the final 
rule does not establish specific counterpart regulations or other 
specific requirements relating to access-control mechanisms for vending 
machines.
<bullet> Posting of signs--Approximately 24 States have statutes 
requiring certain parties to post signs at vending machines stating 
that sales to underage persons are prohibited. One State requires 
owners or operators of vending machines to post signs warning of the 
dangers of cigarette use during pregnancy. In addition, many local 
governments require that signs be posted in areas in which smoking is 
prohibited by law. These requirements are not preempted because the 
final rule does not establish specific counterpart regulations or other 
specific requirements relating to the posting of signs.
<bullet> License requirements--Some local governments impose license 
requirements upon retailers of tobacco products. These requirements are 
not preempted because they are not ``requirements applicable to a 
device'' within the meaning of section 521(a) of the act. (Cf. 
Sec. 808.1(d)(3).)
    The examples set forth above reflect the types of State or local 
requirements of which the agency is currently aware. \254\ There may be 
other State or local requirements pertaining to cigarettes and 
smokeless tobacco. With regard to particular State or local 
requirements that are not described above, any State, political 
subdivision, or other interested party may, in accordance with 
Sec. 808.5 (21 CFR 808.5),

[[Page 44550]]

request an advisory opinion from the agency as to whether such State or 
local requirements are preempted.
---------------------------------------------------------------------------

    \254\ State Legislated Actions on Tobacco Issues, Coalition on 
Smoking OR Health, Bartelt, J., ed., December 31, 1995.
---------------------------------------------------------------------------

    State and local requirements that are preempted by the requirements 
of FDA's final rule may be exempted from preemption in accordance with 
section 521(b) of the act and its implementing regulation, part 808 (21 
CFR part 808). Section 521(b) of the act and part 808 provide that FDA 
may, by regulation issued after notice and an opportunity for an oral 
hearing, exempt a State or local device requirement from preemption 
under such conditions as the Commissioner of Food and Drugs (the 
Commissioner), may prescribe if the requirement is: (1) More stringent 
than Federal requirements applicable to the device under the act; or 
(2) required by compelling local conditions, and compliance with the 
State or local requirement would not cause the device to be in 
violation of any requirement applicable under the act.
    By a separate document to be published in the Federal Register, FDA 
will be informing all State and local governments that they may submit 
applications to exempt from preemption under section 521(b) of the act 
those State and local requirements pertaining to cigarettes and 
smokeless tobacco that are preempted by the final rule. A State or 
local requirement will be exempted from preemption under section 521(b) 
of the act if the State or local requirement: meets the exemption 
requirements established under that section and is consistent with the 
goals in the final rule. Exemptions from preemption that FDA grants 
apply only to preemption under section 521 of the act.
    Because the issues raised by these applications for exemption will 
be similar or related, the Commissioner has determined that it would be 
advantageous for all concerned to propose a single regulation granting 
or denying exemptions for each particular State or local requirement, 
and, if necessary, to hold a single hearing covering all applications 
for exemption from preemption for requirements pertaining to cigarettes 
and smokeless tobacco. Although each application will be considered as 
part of a single proceeding, each individual application will be 
evaluated on its merits and the circumstances applicable to the 
particular submitting jurisdiction.

F. Preemption of State Product Liability Claims Under Section 521(a) of 
the Act

    (13) Several comments asserted that, under section 521(a) of the 
act, State product liability claims would be preempted if FDA asserts 
jurisdiction over tobacco products as drug delivery devices.
    Based on FDA's understanding of the theories of recovery advanced 
in tobacco product liability cases, and the nature of the Federal 
requirements being established in the final rule, FDA does not expect 
any of these Federal requirements to preempt any tort claims relating 
to tobacco products. The following analysis explains this conclusion.
    The Supreme Court recently held that the scope of preemption under 
section 521(a) with regard to State product liability claims is very 
narrow. Indeed, a plurality of the Court noted that ``few, if any, 
common-law duties have been pre-empted by [section 521(a)].'' 
Medtronic, Inc. v. Lohr, 64 U.S.L.W. 4625, 4634 (U.S. June 26, 1996) 
(Nos. 95-754 and 95-886) (plurality opinion).
    Preemption occurs ``only where a particular state requirement 
threatens to interfere with a specific federal interest.'' Medtronic, 
64 U.S.L.W. at 4634. Thus, State requirements of ``general 
applicability'' such as State product liability claims are not 
preempted, except where they have ``the effect of establishing a 
substantive requirement for a specific device'' that is ``different 
from, or in addition to,'' a specific requirement imposed under the act 
(Sec. 808.1(d); Medtronic, 64 U.S.L.W. at 4633-34). Moreover, Federal 
requirements must be ``applicable to the device'' in question, and they 
preempt State product liability claims only if the Federal requirements 
are ``specific counterpart regulations'' or ``specific'' to a 
``particular device'' (Sec. 808.1(d); Medtronic, 64 U.S.L.W. at 4634).
    In summary, FDA is aware of no tort claims against tobacco products 
that will be preempted by the Federal requirements being established in 
the final rule.

XI. Miscellaneous Constitutional Issues

A. Takings Under the Fifth Amendment

    (1) Several industry, retail, and individual comments argued that 
parts of the regulations effect takings compensable under the Fifth 
Amendment's Takings Clause (the Takings Clause), which provides that 
``private property [shall not] be taken for public use, without just 
compensation.'' For example, comments argued that proposed Sec. 897.34 
will restrict or even prohibit tobacco manufacturers' use of their 
trademarks and copyrighted property, or that it will deprive industry 
members both of the goodwill generated by their sponsorship of sports 
and cultural events and of valuable tobacco trademarks. Comments argued 
that Sec. 897.16(a) effects a taking of intellectual property because 
it prohibits the use of nontobacco trademarks (with grandfathered 
exceptions) to market tobacco products. Several comments argued that 
Sec. 897.16(c) effects a taking of vending machines and self-service 
displays, as well as contractual rights to place tobacco vending 
machines on other people's property. Comments argued that the 
requirement that advertising use only black text on white background in 
Sec. 897.32(a) effects a taking because nonconforming signs--for buses 
and on billboards, for example--will have to be destroyed, as would 
tobacco advertisements on billboards and signs within 1,000 feet of 
schools and public playgrounds under Sec. 897.30(b).
    Comments also argued that the proposed ban on mail-order sales of 
tobacco products would effect a taking of mail-order businesses. Mail-
order sales, however, are not prohibited under the final rule. Many 
retailers argued that the prohibition of self-service displays and the 
corresponding requirement that tobacco products be shelved behind sales 
counters violate the Fifth Amendment.
    The Food and Drug Administration (FDA) disagrees that any of these 
provisions effects a taking in violation of the Fifth Amendment.
    In its final form, Sec. 897.16(a) prohibits manufacturers from 
using the trade or brand name of a nontobacco product as the trade or 
brand name of a cigarette or smokeless tobacco product, with the 
exception of those names on both tobacco and nontobacco products that 
were sold in the United States on January 1, 1995. In its final form, 
Sec. 897.16(c) prohibits the use of vending machines and self-service 
displays to sell cigarettes and smokeless tobacco, except that vending 
machines (including those that sell packaged, single cigarettes) and 
self-service displays may be used to sell these tobacco products in 
adult-only establishments. (As proposed in the 1995 proposed rule, 
Sec. 897.16(c) would have prohibited their use entirely.)
    In its final form, Sec. 897.30(b) prohibits tobacco product 
advertisements within 1,000 feet of a public playground or a secondary 
or elementary school. In its final form, Sec. 897.32(a) permits only 
advertising that uses black text on a white background (except in adult 
publications and in facilities where persons under 18 are not present 
or permitted). In its final form, Sec. 897.34(a)

[[Page 44551]]

prohibits the sale of nontobacco items or services that bear the brand 
names or other indicia of identification for cigarettes or smokeless 
tobacco. In its final form, Sec. 897.34(c) prohibits the sponsorship of 
athletic, musical, cultural, or other social or cultural events in the 
brand names or other indicia of identification for cigarettes or 
smokeless tobacco.
    A takings analysis begins with a determination of what interest a 
person has in the thing that is allegedly taken--in this case, in 
vending machines and self-service displays, copyrighted material, and 
trademarks and goodwill--and whether that interest ``can be considered 
property for the purposes of the Taking Clause of the Fifth 
Amendment.'' (See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001 
(1984).) If a cognizable property interest is identified, the Supreme 
Court has developed three factors for courts to consider in assessing 
whether a regulatory taking has occurred: (1) The character of the 
governmental action; (2) its economic impact; and (3) its interference 
with reasonable investment-backed expectations (Id. at 1005).
1. The Interests at Issue
    Some of the interests affected by the final rule--vending machines, 
self-service displays, and existing nonconforming advertising on signs 
and billboards, for example--is tangible property, whereas contract 
rights, trademarks and goodwill, and copyrighted material (e.g., the 
nonconforming copyrighted material on signs and billboards) affected by 
these provisions are intangible property interests.
    Tangible personal property--such as vending machines, self-service 
displays, and signs and billboards advertising tobacco products--is 
property for purposes of the Takings Clause (see United States v. 
General Motors Corp., 323 U.S. 373, 383-84 (1945)), although personal 
commercial property is afforded less protection than real property 
under the Takings Clause (see, e.g., Lucas v. South Carolina Coastal 
Council, 112 S. Ct. 2886, 2899 (1992)).
    Intangible interests may be compensable under the Takings Clause as 
well. For example, in Ruckelshaus, the Supreme Court determined that 
trade secret information--which is intangible--was property compensable 
under the Takings Clause. The Court noted that the extent of the 
property right in trade secret information ``is defined by the extent 
to which the owner of the secret protects his interest from disclosure 
to others,'' (that is, it is property only insofar as others are 
excluded from its use) and that it has ``many of the characteristics of 
more tangible forms of property''--for example, trade secret 
information is assignable, it can form the res of a trust, and it 
passes to a trustee in bankruptcy (Ruckelshaus, 467 U.S. at 1002).
    Vending machine owners may have contracts that give them exclusive 
rights to sell tobacco products at a particular location. These 
contract rights would typically be assignable, they may form the res of 
a trust (see, e.g., Wadsworth v. Bank of California, 777 P.2d 975, 978 
(Or. Ct. App. 1989)), and rights of action based upon them can become 
part of a bankruptcy estate (e.g., In re Ryerson, 739 F.2d 1423, 1425 
(9th Cir. 1984)). (See also U.C.C. 9-106.) Such vending machine owners' 
contracts may therefore create contract rights that would be 
compensable property under the Takings Clause.
    Material can be copyrighted if it is an original work of 
authorship--such as written, musical, pictorial, or graphic work--that 
is fixed in a tangible medium of expression from which the work can be 
reproduced (17 U.S.C. 102(a)). By Federal statute a copyright is 
assignable (17 U.S.C. 201), and there are rights to exclusive use (17 
U.S.C. 106), subject to certain limitations (17 U.S.C. 107-20) and 
enforceable through infringement actions (e.g., 17 U.S.C. 501). A 
copyright can form the res of a trust (Bartok v. Boosey & Hawkes, Inc., 
523 F.2d 941, 948 (2d Cir. 1975)) and it can become property of an 
estate in bankruptcy (United States v. Inslaw, Inc., 932 F.2d 1467, 
1471 (D.C. Cir. 1991), cert. denied, 502 U.S. 1048 (1992)). Sharing 
many of the characteristics of more tangible property, a copyright is 
also compensable property under the Takings Clause.
    Trademarks are words, names, symbols, devices, or combinations 
thereof that a person uses, or intends to use and has applied to 
register, to identify or distinguish his or her goods from others on 
the market and to identify their source (15 U.S.C. 1127). The primary 
purpose of trademarks is to protect consumers by preventing deceitful 
marketing of one product or service as another. As the Supreme Court 
has stated,
    [t]he law of unfair competition has its roots in the common-law 
tort of deceit: its general concern is with protecting consumers 
from confusion as to source. While that concern may result in the 
creation of ``quasi-property rights'' in communicative symbols, the 
focus is on the protection of consumers, not the protection of 
producers as an incentive to product innovation.
(Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157 
(1989))
    When associated with goodwill, trademarks also share--with trade 
secret information and copyrights--the features of more tangible 
property. For example, the Lanham Act (15 U.S.C. 1053 et seq.) allows 
assignment of a trademark only ``with the goodwill of the business in 
which the mark is used or with that part of the goodwill of the 
business connected with the use of and symbolized by the mark'' (15 
U.S.C. 1060). Indeed, when Congress amended the Lanham Act in 1988 to 
allow intent-to-use applications for registration of trademarks, it 
prohibited assignment of such applications to be ``consistent with the 
principle that a mark may be validly assigned only with the business or 
goodwill attached to the use of the mark'' (S. Rept. 515, 100th Cong., 
2d sess. 31 (1988), reprinted in 1988 U.S.C.C.A.N. 5577, 5593-5594).
    Owners of trademarks also have rights of exclusive use of marks--
that is, against infringement--because ``[b]y applying a trademark to 
goods produced by one other than the trademark's owner, the infringer 
deprives the owner of the goodwill which he spent energy, time, and 
money to obtain'' (Inwood Laboratories, Inc. v. Ives Laboratories, 
Inc., 456 U.S. 844, 854 n.14 (1982)). ``Registration bestows upon the 
owner of the mark the limited right to protect his goodwill from 
possible harm by those uses of another as may engender a belief in the 
mind of the public that the product identified by the infringing mark 
is made or sponsored by the owner of the mark'' (Societe Comptoir de 
L'Industrie Cotonniere Etablissements Boussac v. Alexander's Dep't 
Stores, Inc., 299 F.2d 33, 36 (2d Cir. 1962)). Like trade secret 
information, a trademark can be the res of a trust (see Coca-Cola 
Bottling Co. v. Coca-Cola Co., 988 F.2d 414, 430-432 (3d Cir. 1993)) 
and it can pass to the trustee in bankruptcy (Inslaw, 932 F.2d at 
1471).
    The agency notes that a trademark itself, unaccompanied by 
goodwill, lacks these characteristics of property. The agency therefore 
believes that a trademark itself is not property cognizable under the 
Takings Clause. Based on the foregoing analysis, however, the agency 
believes that a trademark and the accompanying goodwill together are 
property cognizable under the Takings Clause. These conclusions are 
consonant with the recognition that a trademark has

[[Page 44552]]

value as property for the owner ``only in the sense that a man's right 
to the continued enjoyment of his trade reputation and the good will 
that flows from it, free from unwarranted interference by others, is a 
property right, for the protection of which a trademark is an 
instrumentality'' (Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 
413 (1916); see also S. Rept. 1333, 79th Cong., 2d sess. (1946), 
reprinted in 1946 U.S. Code Cong. & Admin. News 1274, 1277 (``the 
protection of trade-marks is merely protection to goodwill'')).
    Nevertheless, this conclusion must be reconciled with Supreme Court 
precedent on takings of goodwill. In particular, the comments cited 
Kimball Laundry Co. v. United States, 338 U.S. 1 (1949), for the 
proposition that the Takings Clause requires compensation for a 
regulatory taking of goodwill. The general rule is that the Takings 
Clause does not require compensation for goodwill when the Government 
takes a place of business because the business's goodwill may be 
transferred to a new place of business (338 U.S. at 11-12 and 15; see 
also General Motors, 323 U.S. at 379 (when Government permanently takes 
land, ``compensation for that interest does not include * * * [even] 
the loss of goodwill which inheres in the location of the land'')). In 
Kimball, however, the Court allowed compensation for loss of a laundry 
business's goodwill, or going-concern value, incident to the physical 
taking of the laundry. It did so because the Government intended to 
operate the laundry temporarily during wartime, after which the laundry 
would revert to the business; the business could not invest in a new 
laundry because it would someday be the owner of two laundries, neither 
of which it could then operate profitably (338 U.S. at 14-15). The 
Court therefore likened the situation to those in which the Government 
takes a utility with the intention of operating it itself; the going-
concern value of the utility is taken in those cases and is therefore 
compensable (Id. at 12-13).
    Kimball and General Motors therefore indicate that goodwill is 
compensable under the Takings Clause only when no business remains 
after a taking to whose benefit the goodwill may inure. (See also 
District of Columbia v. 13 Parcels of Land, 534 F.2d 337, 349 & n.7 
(D.C. Cir. 1976).) With respect to goodwill associated with a 
trademark, use of which is limited by a regulation, these cases 
indicate that the property interest may be compensable only if the 
regulation allows no goodwill to inure to the benefit of the owner.
    For purposes of the following analysis of whether the regulations 
effect a taking, the agency assumes that copyrighted material, the 
interests in trademarks and associated goodwill, contracts, self-
service displays, vending machines, and tobacco advertising on signs 
and billboards are property interests that may be compensable under the 
Takings Clause if taken.
2. The Takings Analysis
    [W]hat constitutes a ``taking'' for purposes of the Fifth 
Amendment has proved to be a problem of considerable difficulty. 
While this Court has recognized that the ``Fifth Amendment's 
guarantee * * * [is] designed to bar Government from forcing some 
people alone to bear public burdens which, in all fairness and 
justice, should be borne by the public as a whole,'' this Court, 
quite simply, has been unable to develop any ``set formula'' for 
determining when ``justice and fairness'' require that economic 
injuries caused by public action be compensated by the government, 
rather than remain disproportionately concentrated on a few persons.
(Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 123-24 
(1978) (citation omitted) (alterations and deletions in original); 
Ruckelshaus, 467 U.S. at 1005)
Still, the Supreme Court has identified three factors for courts to 
consider in assessing whether a regulatory taking has occurred: (1) The 
character of the governmental action; (2) its economic impact; and (3) 
its interference with reasonable investment-backed expectations 
(Ruckelshaus, 467 U.S. at 1005; Penn Central, 438 U.S. at 124).
    The force of any one of these factors may be ``so overwhelming * * 
* that it disposes of the taking question'' (Ruckelshaus, 467 U.S. at 
1005 (finding interference with reasonable investment-backed 
expectations by use of trade secret information in pesticide approval 
process to be decisive)). So, for example, if the economic impact is to 
rob real property of ``all economically beneficial uses,'' the 
regulation effects a taking (Lucas, 505 U.S. at 1019 (emphasis in 
original); see also id. at 1027-1028 (limiting holding to real 
property)). When examined in light of these three factors, FDA's 
proposed regulations do not effect a compensable taking under the Fifth 
Amendment of the Constitution.
3. The Character of the Governmental Action
    With respect to the first factor, courts are more likely to find a 
taking when the interference with property can be characterized as a 
physical invasion by the Government (e.g., United States v. Causby, 328 
U.S. 256, 261-62 (1946) (characterizing Government's use of flight path 
just over property as physical invasion)) than when the interference is 
caused by a regulatory program that ``adjust[s] the benefits and 
burdens of economic life to promote the common good'' (Penn Central, 
438 U.S. at 124). Courts have accorded particular deference to 
governmental action taken to protect the public interest in health, 
safety, and welfare. (See Keystone Bituminous Coal Ass'n v. 
DeBenedictis, 480 U.S. 470, 488 (1987); Penn Central, 438 U.S. at 125-
26; Atlas Corp. v. United States, 895 F.2d 745, 757-58 (Fed. Cir.), 
cert. denied, 498 U.S. 811 (1990).) In addition, the Supreme Court has 
repeatedly rejected compensation claims when the Government has 
regulated in order to prevent harmful activity:
    The power which the States have of prohibiting such use by 
individuals of their property as will be prejudicial to the health, 
the morals, or the safety of the public, is not--and, consistently 
with the existence and safety of organized society, cannot be--
burdened with the condition that the State must compensate such 
individual owners for pecuniary losses they may sustain, by reason 
of their not being permitted, by noxious use of their property, to 
inflict injury upon the community.
(Mugler v. Kansas, 123 U.S. 623, 669 (1887) (holding that State law 
prohibiting manufacture or sale of alcohol effected no taking of 
brewery even though law entirely destroyed brewery's beneficial use); 
see also Keystone, 480 U.S. 470 (1987) (no taking by law prohibiting 
mining of coal); Goldblatt v. Town of Hempstead, 369 U.S. 590 (1962) 
(no taking effected by regulation that closed gravel pit); Miller v. 
Schoene, 276 U.S. 272 (1928) (no taking effected by State-ordered 
felling of cedar trees); Hadacheck v. Sebastian, 239 U.S. 394 (1915) 
(no taking effected by ordinance prohibiting operation of brickyard in 
residential area); Reinman v. City of Little Rock, 237 U.S. 171 (1915) 
(no taking effected by ordinance prohibiting stable in residential 
area); Powell v. Pennsylvania, 127 U.S. 678 (1888) (no taking effected 
by law preventing manufacture of margarine)).
    First, the final rule's interference with property interests cannot 
be characterized as a physical invasion of property. The final rule 
prohibits some uses of some types of property, but the Government is 
neither using nor acquiring property under the regulations (Penn 
Central, 438 U.S. at 128). For example, certain uses of vending

[[Page 44553]]

machines, self-service displays, and signs and billboards are 
prohibited, but the Government is itself neither using nor acquiring 
them. The same is true of the intangible property at issue, contracts, 
copyrights, and trademarks and the associated goodwill: The agency is 
prohibiting certain uses--indeed, all uses of tobacco trademarks on 
nontobacco items, including when tobacco companies have also registered 
the tobacco mark as a mark for nontobacco products or services--but the 
Government is not itself using these contract rights, copyrights, or 
trademarks (and thereby tobacco companies' goodwill). It ``has taken 
nothing for its own use'' (Connolly v. Pension Benefit Guar. Corp., 475 
U.S. 211, 224 (1986)).
    Second, these final regulations seek to promote the public health 
by limiting access to tobacco products by consumers in the age group 
most likely to become addicted to them: Those under the age of 18. The 
regulations are intended to help reduce significantly the harms that 
use of tobacco products among this age group causes. They do so by 
prohibiting the sale of tobacco products to persons under the age of 
18; that is, the regulations require modes of sale through which the 
retailer can verify the age of the purchaser or to which only those 18 
or over will have access. In particular, the final rule permits vending 
machines and self-service displays and accompanying advertising only in 
places to which young people do not have access.
    The final regulations also limit promotion of tobacco products to 
persons under the age of 18. They do so by prohibiting certain venues 
for tobacco advertising, namely, within 1,000 feet of schools and 
public playgrounds. They also require black text/white background 
advertisements in remaining venues with the exception of adult 
newspapers, magazines, periodicals, and other publications, and in 
adult-only establishments. They also prohibit use of tobacco trademarks 
on nontobacco products and in the sponsorship of events. As a 
consequence, use of tobacco industry trademarks, copyrights, and 
advertising techniques is limited, although not ended. Nonconforming 
signs and billboards will be prohibited, thereby reducing the remaining 
useful life of those currently in use when the regulations become 
effective. Use of nontobacco trademarks is limited only by prohibiting 
their use on tobacco products (except for nontobacco trademarks used on 
tobacco products in the United States on January 1, 1995).
    These regulations substantially advance, and are rationally related 
to, FDA's legitimate interest in promoting the public health and 
reducing harm by limiting both youth access to tobacco products and, as 
discussed in the context of the First Amendment, their promotion to 
youth. (See Keystone, 480 U.S. at 485; see also Pace Resources, Inc. v. 
Shrewsbury Township, 808 F.2d 1023, 1030 (3d Cir.) (``[T]he 
governmental action is entitled to a presumption that it does advance 
the public interest.''), cert. denied, 482 U.S. 906 (1987).) Moreover, 
they are directed at stopping activity that is illegal in every State: 
Sales of tobacco products to those under the age of 18 (Keystone, 480 
U.S. at 492 n.22). This factor of the takings analysis indicates that 
these regulations effect no takings.
4. The Economic Impact of the Governmental Action
    The second factor to consider is the economic impact of the 
governmental action. ``There is no fixed formula to determine how much 
diminution in market value is allowable without the fifth amendment 
coming into play'' (Florida Rock Indus., Inc. v. United States, 791 
F.2d 893, 901 (Fed. Cir. 1986), cert. denied, 479 U.S. 1053 (1987)). It 
is clear, however, that a regulation's economic impact may be great 
without rising to the level of a taking. (See Pace Resources, 808 F.2d 
at 1031 (citing Hadacheck v. Sebastian, 239 U.S. 394 (1915)) (no taking 
even given reduction in value from $800,000 to $60,000); Village of 
Euclid v. Ambler Realty Co., 272 U.S. 365 (1926) (no taking despite 75 
percent diminution in value).) Mere denial of the most profitable or 
beneficial use of property does not require a finding that a taking has 
occurred. (See Florida Rock, 791 F.2d at 901; see also Andrus v. 
Allard, 444 U.S. 51, 66 (1979).) Rather, courts look for drastic 
interference with a property's possible uses. (See Pace Resources, 808 
F.2d at 1031.)
    In assessing whether a regulation effects a taking, the Supreme 
Court has considered whether the regulation denies an owner the 
``economically viable use'' of his property. (See, e.g., Keystone, 480 
U.S. at 499.) Courts focus on the remaining uses permitted and the 
residual value of the property. (See Pace Resources, 808 F.2d at 1031.)
    Although certain uses of copyrights and copyrighted material 
developed by tobacco companies and of tobacco and nontobacco trademarks 
will be prohibited or curtailed, other uses will remain once the final 
rule takes effect. That is, under Sec. 897.16(a), nontobacco trademarks 
may not be used to market tobacco products (with the exception of 
trademarks that had such uses before January 1, 1995) and so they may 
lose the (speculative) value of such licensing arrangements, but they 
retain the vast bulk of their value as trademarks for the product or 
brand for which they were originally developed, and they retain the 
value of their potential use to market all legal, nontobacco products. 
Under Secs. 897.30(b) and 897.32(a), some copyrighted advertising 
material that appears on billboards or signs within 1,000 feet of a 
school or playground or that is not black text/white background may be 
rendered useless when the rule becomes effective (the copyrighted 
design itself may be used in other venues, such as adult publications 
or in adult-only establishments). Under Sec. 897.34(a), tobacco product 
brand names and logos may be used only to market tobacco products; they 
therefore lose the value of any use on nontobacco products and, under 
Sec. 897.34(c), they lose the value of any use to sponsor events when 
the rule becomes effective. By and large, however, tobacco copyrights 
and trademarks will retain significant, economically viable uses when 
the rule becomes effective.
    Tobacco companies have, however, registered some of their tobacco 
trademarks (e.g., Skoal Bandit on a race car as an entertainment 
service mark, Marlboro on tennis caps), or marks that incorporate a 
tobacco trademark (e.g., The Marlboro Country Store on, for example, 
hats and boots; Skoal Pro Rodeo promoting and sponsoring rodeos; 
Winston West promoting and sponsoring auto racing events), as marks for 
nontobacco products, services, or events. Under Sec. 897.34, all use of 
these registered nontobacco marks will be prohibited when the rule 
becomes effective. With respect to these registered nontobacco 
trademarks, and indeed with respect to all tobacco company trademarks, 
their associated goodwill will remain with the tobacco companies and 
will inure to their benefit in the sale of tobacco products. 
Accordingly, this factor of the takings analysis indicates that the 
final rule effects no taking of these interests.
    Section 897.16(c) prohibits the use of tobacco product vending 
machines and self-service displays except in adult-only establishments 
(where graphic advertisements will also be permitted). This restricted 
use may limit the number of venues in which these

[[Page 44554]]

vending machines and self-service displays may be used and may exclude 
venues where their use is most profitable. The value of vending 
machines and self-service displays may therefore drop. But diminutions 
in property value do not establish a taking. (See Penn Central, 438 
U.S. at 131.) Indeed, ``[g]overnment hardly could go on if to some 
extent values incident to property could not be diminished without 
paying for every such change in the general law'' (Pennsylvania Coal 
Co. v. Mahon, 260 U.S. 393, 413 (1922)). Vending machines and self-
service displays may have to be moved from currently legal venues to 
adult-only establishments or to warehouses, or they may need to be 
retrofitted for use with other products if retrofitting is possible. 
Although compliance may require vending machine and self-service 
display owners to spend money, ``[r]equiring money to be spent is not a 
taking of property'' (Atlas Corp., 895 F.2d at 756 (discussing 
regulatory requirement that mining corporations reclaim uranium and 
thorium tailings and decommission mills)). Finally, if there are not 
sufficient numbers of adult-only establishments, some vending machines 
and self-service displays may have no economically viable use because 
of the final regulation, but a regulation that makes personal 
commercial property ``economically worthless'' does not effect a per se 
taking, as it would with real property. (See Lucas, 505 U.S. at 1027-
1028.) Contracts to offer exclusively tobacco products in vending 
machines at nonadult-only establishments may also become ``economically 
worthless'' once the regulation becomes effective. Likewise, although 
Secs. 897.32(a) and 897.30(b) may shorten the useful life of 
advertising materials on placards and billboards that are not black 
text/white background or that are near schools and playgrounds (albeit 
with a grace period of at least the delayed effective date) and such 
materials may be ``economically worthless'' as a result, this does not 
effect a taking per se.
    In summary, examination of the economic impact factor of the 
takings analysis suggests that the regulations, when they finally 
become effective, will effect no takings of trademarks and goodwill, 
copyrights, and many vending machines and self-service displays. It 
leaves open the possibility, however, that the rule may effect a taking 
of some vending machines and contracts, and of some self-service 
displays and of nonconforming signs and billboards.
5. Interference with Reasonable Investment-backed Expectations
    The final factor to consider is whether a company has a reasonable 
investment-backed expectation in continuing to use the property at 
issue, whether it be vending machines, self-service displays, 
nonconforming signs and billboards, copyrighted material, or trademarks 
and goodwill. To be reasonable, expectations must take into account the 
power of the State to regulate in the public interest. (See Pace 
Resources, 808 F.2d at 1033.) Reasonable expectations must also take 
into account the regulatory environment, including the foreseeability 
of changes in the regulatory scheme. ``In an industry that long has 
been the focus of great public concern and significant government 
regulation,'' Monsanto, 467 U.S. at 1008, the possibility is 
substantial that there will be additional regulatory requirements. 
``Those who do business in the regulated field cannot object if the 
legislative scheme is buttressed by subsequent amendments to achieve 
the legislative end'' (Connolly, 475 U.S. at 227 (citation omitted)). 
Given a long history of Government regulation of an industry, its 
members are ``on notice that [they] might be subjected to different 
regulatory burdens over time'' (California Hous. Sec., Inc. v. United 
States, 959 F.2d 955, 959 (Fed. Cir.), cert. denied, 506 U.S. 916 
(1992)).
    Commerce in tobacco products has been regulated for years on the 
Federal, State, and local levels. For example, States first began 
restricting tobacco sales to minors, distribution of free samples, and 
vending machine sales in the 1970's. By 1994 all 50 States prohibited 
tobacco sales to young people, 38 States restricted the distribution of 
free tobacco products, and 28 States imposed restrictions on vending 
machine sales (``State Legislated Actions on Tobacco Issues,'' 
Coalition on Smoking OR Health (Washington, DC 1994)). Tobacco 
manufacturers as well as distributors and retailers who have chosen to 
distribute or sell tobacco products have therefore had reasonable 
notice that the regulatory scheme to limit use of tobacco products by 
minors might change.
    Moreover, the particular restrictions on access and on promotion 
adopted in these regulations, or variations thereof, have been proposed 
or considered for several years by Government bodies, including 
Congress, the States, and public health agencies. (See, e.g., H. Rept. 
5041, 101st Cong., 2d sess. (1990); H. Rept. 1250, 101st Cong., 1st 
sess. (1989).) For example, on at least two occasions a tobacco 
industry representative testified before Congress that pending 
legislation would, like several previous legislative proposals, 
effectively ban advertisements for tobacco products (``Tobacco Control 
and Marketing: Hearings on H. Rept. 5041 Before the Subcommittee on 
Health and the Environment of the House Committee on Energy and 
Commerce,'' 101st Cong., 2d sess. 491-494 (1990) (statement of Charles 
O. Whitley on behalf of The Tobacco Institute); ``Tobacco Issues: 
Hearings on H. Rept. 1250 Before the Subcomm. on Transp. and Hazardous 
Materials of the House Comm. on Energy and Commerce,'' 101st Cong., 1st 
sess. 302 (1989) (statement of Charles O. Whitley on behalf of The 
Tobacco Institute)), making for far more restrictive limits on 
advertisements and promotion than those imposed by this rule. Given 
these facts, a reasonable person should have expected the possibility 
of regulations such as these. In addition, when sales to young people 
are illegal, investments in promotions designed to appeal to young 
people cannot be considered reasonable (see discussion of R. J. 
Reynolds' use of promotional materials in the Joe Camel Campaign in 
section VI. of this document). In any case, once the agency gave notice 
of its proposed rulemaking with respect to tobacco, tobacco 
manufacturers, distributors, and retailers had notice that certain 
investments were risky, and they will enjoy the economic benefit of 
those investments and of investments that they had previously made 
until the rule is finally effective.
    As discussed in section IV. of this document, the number of tobacco 
product vending machines fell by half between 1988 and 1993 and, since 
1990, virtually no new tobacco product vending machines have been 
manufactured (60 FR 41314 at 41325); because the market in tobacco 
product vending machines is declining, investment-backed expectations 
in both vending machines and vending machine contracts are not 
reasonable. Moreover, many self-service displays were given to 
retailers by tobacco manufacturers (see 60 FR 41314 at 41323); to that 
extent, the retailers have no investment-backed expectation in them.
    Finally, the Supreme Court has stated that it is unreasonable to 
have high investment-backed expectations in personal property:
    [I]n the case of personal property, by reason of the State's 
traditionally high degree of control over commercial dealings, [the

[[Page 44555]]

property owner] ought to be aware of the possibility that new 
regulation might even render his property economically worthless (at 
least if the property's only economically productive use is sale or 
manufacture for sale).
(Lucas, 505 U.S. at 1027-1028)
    Since all of the property at issue here--vending machines, self-
service displays, the advertising material on signs and billboards, 
contract rights, copyrights, and trademarks and associated goodwill--is 
personal property, there can be no reasonable investment-backed 
expectation that regulation will not render them economically 
worthless. Consideration of this factor of the takings analysis 
indicates that the final rule effects no takings of any property.
6. Summary
    With respect to trademarks and goodwill and copyrights, the three 
factors in a takings analysis indicate that these regulations will 
effect no takings. Only the economic impact of the rule on advertising 
materials on signs and billboards and on some vending machines and 
related contract rights and some self-service displays leaves open the 
possibility that a taking may occur, but the impossibility of 
reasonable investment-backed expectations with respect to personal 
property used for sale strongly counters this factor, as stated by the 
Supreme Court in Lucas, as does the harm-prevention character of this 
regulation. Analysis of the three factors considered together shows 
that these final regulations do not effect a taking of vending 
machines, self-service displays, signs and billboards advertising 
tobacco products, contract rights, or copyrights and trademarks and 
goodwill. The agency concludes that the comments that argued that the 
regulation effects takings are, for the above-stated reasons, 
unpersuasive.

B. Substantive Due Process, Equal Protection, and Restrictions on Use 
of Trade Names

    (2) Comments argued that Sec. 897.16(a) (which restricts the use of 
nontobacco trade or brand names as the trade or brand name of 
cigarettes or smokeless tobacco) and Sec. 897.34(a) (which prohibits 
the marketing of nontobacco items and services that bear tobacco brand 
names and other symbols of cigarettes and smokeless tobacco) violate 
the Due Process Clause of the Fifth Amendment to the Constitution and 
the Equal Protection Clause of the Fourteenth Amendment. One comment 
asserted that each of these provisions prevents companies from entering 
a completely legal business using their own trade names but provided no 
further explanation of its reasoning; FDA therefore understands it to 
suggest that these provisions classify companies as either tobacco or 
nontobacco companies, that this classification violates equal 
protection, and that these provisions violate due process in that they 
infringe on property interests in trade names by prohibiting companies 
from entering legal businesses using their own trade names. Another 
comment echoed this latter point and argued that the agency was denying 
tobacco companies due process because it has no authority to prohibit 
the lawful use of tobacco trademarks on other products.
    The agency disagrees with these comments. The Fifth Amendment Due 
Process Clause states that ``[n]o person shall * * * be deprived of 
life, liberty, or property, without due process of law.'' Under due 
process as applied to economic regulation, ``[i]t is enough that there 
is an evil at hand for correction, and that it might be thought that 
the particular legislative measure was a rational way to correct it'' 
(Williamson v. Lee Optical of Oklahoma, Inc., 348 U.S. 483, 488 
(1955)). (The agency has addressed why it has the statutory authority 
to issue this rule in section II. of this document.)
    The Fourteenth Amendment's Equal Protection Clause states that 
``[n]o State shall * * * deny to any person the equal protection of the 
laws.'' By its terms, the Fourteenth Amendment does not apply to action 
by the Federal Government, as it is directed at the States. But the 
Supreme Court has held that the Fifth Amendment's Due Process Clause 
includes an equal protection component equivalent to the Fourteenth 
Amendment's Equal Protection Clause. (See Bolling v. Sharpe, 347 U.S. 
497 (1954); see also Buckley v. Valeo, 424 U.S. 1, 93 (1976) (per 
curiam) (``Equal protection analysis in the Fifth Amendment area is the 
same as that under the Fourteenth Amendment'').) Under equal protection 
review, an economic regulation is valid as long as the classification 
that it makes is ``rationally related to a legitimate state interest'' 
(City of New Orleans v. Dukes, 427 U.S. 297, 303 (1976)).
    Sections 897.16(a) and 897.34(a) easily pass muster under the 
requirements of both due process and equal protection. FDA's interest 
in the health and well-being of children and adolescents is certainly 
legitimate (indeed, it is a compelling interest). (See New York v. 
Ferber, 458 U.S. 747, 757-58 and n.9 (1982).) Moreover, because they 
limit trade and brand name uses that enhance the appeal and promote the 
use of cigarettes and smokeless tobacco to young people, the provisions 
are rationally related to this interest and are a rational way to 
reduce addiction to tobacco products and the health consequences that 
follow.

C. Procedural Due Process Under the Fifth Amendment

    (3) An industry comment asserted that the regulation of tobacco 
manufacturers' use of their copyrights and trademarks affects a 
property interest so as to require an adjudication; put another way, 
the comment argued that use of rulemaking to adopt a regulation 
effecting these property interests violates the Fifth Amendment Due 
Process Clause, which states that ``[n]o person shall * * * be deprived 
of life, liberty, or property, without due process of law.''
    The agency disagrees. The agency has issued this final rule under 
its ``authority to promulgate regulations for the efficient enforcement 
of the Act'' under section 701(a) of the Federal Food, Drug, and 
Cosmetic Act (the act) (21 U.S.C. 371(a)) and its authority under 
section 520(e) of the act (21 U.S.C. 360j(e)) to issue regulations to 
restrict the sale, distribution, or use of a device. The agency issues 
such regulations under the rulemaking procedures established by the 
Administrative Procedure Act (APA) in 5 U.S.C. 553 and its own 
regulations in part 10 (21 CFR part 10), in particular Sec. 10.40. 
Neither the act, the APA, nor the agency's regulations require a 
hearing for a rulemaking under sections 701(a) and 520(e) of the act.
    The comment nevertheless contended that due process requires that 
tobacco manufacturers be provided the opportunity for a formal hearing 
(i.e., more than just an opportunity to provide written comments). A 
formal hearing is required, according to the comment, because FDA is 
asserting jurisdiction over cigarettes and smokeless tobacco based upon 
a determination of the intent of all tobacco manufacturers, but it is 
relying on evidence of intent with regard to only a subset of tobacco 
manufacturers.
    As discussed in the 1996 Jurisdictional Determination annexed 
hereto, the evidence shows that cigarettes and smokeless tobacco are 
highly addictive, cause other psychoactive effects (such as relaxation 
and stimulation), and affect weight

[[Page 44556]]

regulation, and that these effects are widely accepted in the 
scientific community. Based on this evidence, it is foreseeable to any 
reasonable manufacturer that consumers will use such products for their 
addictive, psychoactive, and other pharmacological effects. The 
evidence also shows that actual consumer use of these products for 
their pharmacological effects is predominant and, in fact, nearly 
exclusive. Based on this evidence of the foreseeable and actual 
consumer use of these products for their pharmacological effects, the 
agency has concluded that all cigarette and smokeless tobacco 
manufacturers ``intend'' their products to affect the structure or 
function of the body, and that these products are, therefore, nicotine 
delivery devices under the act. In addition, the agency collected 
evidence of the tobacco industry's statements, actions, and research 
demonstrating awareness of the addictive and other pharmacological 
effects of these products, the industry's knowledge that consumers use 
these products for these effects, and the industry's deliberate 
manipulation of levels of nicotine in these products to ensure that 
adequate amounts of nicotine are delivered to consumers. These internal 
documents are further evidence in support of the conclusion that 
cigarette and smokeless tobacco manufacturers intend their products to 
be drug delivery devices, but they are not necessary for that 
conclusion. The agency, therefore, has not inferred the intent of one 
company based exclusively on the internal documents of another. 
Moreover, assuming that copyrights and trademarks are property 
protected by the Fifth Amendment's Due Process Clause, due process does 
not require that FDA provide tobacco manufacturers with a hearing 
beyond the opportunity for notice and comment that it has already 
provided. The Supreme Court has stated that the APA established ``the 
maximum procedural requirements'' that the courts can impose upon 
agencies in conducting rulemaking procedures and that the circumstances 
in which courts may require additional procedures, ``if they exist, are 
extremely rare'' (Vermont Yankee Nuclear Power Corp. v. Natural 
Resources Defense Council, 435 U.S. 519, 524 (1978)). The Court further 
stated that due process may ``in some circumstances'' require 
``additional procedures'' beyond those required by the APA ``when an 
agency is making a `quasi-judicial' determination by which a very small 
number of persons are `exceptionally affected, in each case upon 
individual grounds''' (Id. at 542 (quoting United States v. Florida 
East Coast Ry., 410 U.S. 224, 242-245 (1973))).
    By this test, due process does not require that the agency provide 
tobacco manufacturers with a hearing. Simply put, the agency is not 
making ``a quasi-judicial determination by which a very small number of 
persons are exceptionally affected, in each case upon individual 
grounds'' (Vermont Yankee, 435 U.S. at 542 (quotations omitted)). The 
final rule at issue here prospectively limits the sale and promotion of 
cigarettes and smokeless tobacco to individuals under the age of 18; it 
imposes conditions on all manufacturers, distributors, and retailers of 
tobacco products and will affect the access to tobacco products of 
millions of individuals under the age of 18. The final rule is 
therefore ``an agency statement of general * * * applicability and 
future effect designed to implement, interpret, or prescribe law or 
policy'' (5 U.S.C. 551(4)); in other words, it is a rule under the APA, 
and the agency followed APA rulemaking in formulating it (5 U.S.C. 
551(5)). Like the nuclear fuel cycle rulemaking in Vermont Yankee, 435 
U.S. at 528-530, and the rulemaking about ambient air quality standards 
for lead in Lead Indus. Ass'n v. Environmental Protection Agency, 647 
F.2d 1130, 1136-1144 (D.C. Cir.), cert. denied, 449 U.S. 1042 (1980), 
this process is ``a rulemaking proceeding in its purest form,'' and not 
a ``quasi-judicial determination'' to which due process requirements 
beyond the requirements of the APA might apply. (See Vermont Yankee, 
435 U.S. at 542 n.16; Lead Indus. Ass'n, 647 F.2d at 1171 n.119.)
    In any case, manufacturers have had ample opportunity during the 
comment period for this rulemaking to submit evidence--including other 
internal tobacco industry documents or affidavits from their 
employees--that contradicts any evidence, including internal tobacco 
industry documents, that the agency has placed in the administrative 
record. And they have submitted voluminous comments with supporting 
documentation to the agency. The manufacturers have therefore been 
``afforded a meaningful opportunity to be heard and to controvert the 
evidence. Fairness demands no more'' (Lead Indus. Ass'n, 647 F.2d at 
1170 (quotations omitted)).
    In summary, due process does not require that FDA provide 
manufacturers with an adjudicative hearing. The notice and opportunity 
for comment provided in this rulemaking are all that fairness and due 
process require here. And, as discussed in greater detail in section 
XII. of this document, this rulemaking meets all the requirements of 
the APA for informal rulemaking.

XII. Procedural Issues

A. Introduction

    The Food and Drug Administration (FDA) went to great lengths to 
involve the public in this proceeding. On February 25, 1994, David A. 
Kessler, Commissioner of Food and Drugs (the Commissioner) wrote to 
Scott Ballin, chairman of the Coalition on Smoking OR Health, regarding 
the possibility of FDA regulation of cigarettes in response to certain 
petitions that had been filed with the agency. The Commissioner 
explained:
    [T]he agency has examined the current data and information on 
the effects of nicotine in cigarettes * * *. Evidence brought to our 
attention is accumulating that suggests that cigarette manufacturers 
may intend that their products contain nicotine to satisfy an 
addiction on the part of some of their customers * * *. This 
evidence * * * suggests that cigarette vendors intend the obvious--
that many people buy cigarettes to satisfy their nicotine addiction. 
Should the agency make this finding based on an appropriate record 
or be able to prove these facts in court, it would have a legal 
basis on which to regulate these products * * *.
    In the months that followed, the Commissioner testified twice 
before Congress regarding the accumulating evidence relating to the 
intended use of cigarettes. \255\ That testimony was extensive and 
detailed.
---------------------------------------------------------------------------

    \255\ Statement by the Commissioner on Nicotine-Containing 
Cigarettes, before the Subcommittee on Health and the Environment, 
Committee on Energy and Commerce, U.S. House of Representatives 
(Mar. 25, 1994); Statement by the Commissioner on the Control and 
Manipulation of Nicotine in Cigarettes, before the Subcommittee on 
Health and the Environment, Committee on Energy and Commerce, U.S. 
House of Representatives (June 21, 1994).
---------------------------------------------------------------------------

    In July and August of that year, FDA Associate Commissioner for 
Regulatory Affairs, Ronald G. Chesemore wrote to the major cigarette 
and smokeless tobacco companies requesting all documents relating to 
``all research on nicotine * * *, including their pharmacological 
effects, and all documents relevant to the nicotine'' in their 
products. On August 1, 1994, FDA held a Drug Abuse Advisory Committee 
meeting that was fully open to the public on the subject of the abuse 
potential of nicotine.
    On August 11, 1995, FDA provided the public with an extensive 
Federal Register document setting forth its

[[Page 44557]]

rationale for proposing to restrict the sale of cigarettes and 
smokeless tobacco in a 60 page discussion supported by 442 endnotes 
(the 1995 proposed rule) (60 FR 41314 to 41375). The agency carefully 
documented each of the essential propositions offered in support of its 
reasoning. Indeed, most of the 442 endnotes in the 1995 proposed rule 
contain multiple authorities for the agency's position and, in all 
cases, the agency provided the reader with specific page references to 
the numerous studies, reports, and industry documents on which it 
relied.
    In the same issue of the Federal Register in a document entitled 
``Analysis Regarding The Food and Drug Administration's Jurisdiction 
Over Nicotine-Containing Cigarettes and Smokeless Tobacco Products,'' 
FDA also provided an analysis of the agency's authority to assert 
jurisdiction over cigarettes and smokeless tobacco based on the 
evidence before the agency at that time (the 1995 Jurisdictional 
Analysis) (60 FR 41453 to 41787). In the text of the 1995 
Jurisdictional Analysis, the agency supported its reasoning with 
appropriate citations to case law, statutes, and regulations. In 
addition, the 1995 Jurisdictional Analysis was supported by over 600 
footnotes, each of which provided the factual context for the agency's 
legal position.
    On August 16, 1995, the agency placed on public display some 20,000 
pages of materials that it cited in the 1995 proposed rule and in the 
1995 Jurisdictional Analysis. With the exception of three documents, 
which the agency referenced only in the 1995 Jurisdictional Analysis, 
the agency made available to the public all of the materials on which 
it was relying on as of that time for support.
    On September 29, 1995, the agency supplemented the administrative 
record by putting on public display approximately 13,000 documents 
comprising some 190,000 pages of factual and analytical materials the 
agency considered in the course of issuing the 1995 proposed rule and 
the 1995 Jurisdictional Analysis. Although it was under no legal 
obligation to do so, the agency made these additional materials 
available because of the importance of this proceeding.
    The agency also made two other significant additions to the public 
record. On December 1, 1995, the agency announced the findings of focus 
group studies concerning possible brief statements to be included on 
all cigarette advertising (60 FR 61670), and added to the record for 
the rulemaking proceeding a report of these findings and approximately 
1,500 pages of supporting documentation. Second, in the Federal 
Register of March 20, 1996 (61 FR 11349), the agency published notice 
of an additional 30 day comment period limited to specific documents 
the agency added to the proposed rulemaking docket, and to the docket 
in support of the agency's analysis of its jurisdiction (61 FR 11419). 
These materials consisted of two declarations and a report from three 
former tobacco industry employees, as well as FDA memoranda to the 
record regarding adult publications and billboards.
    In addition, the agency has added to the final record of this 
proceeding a comparatively small number of documents that expand upon 
or confirm information made available in the 1995 proposed rule or the 
1995 Jurisdictional Analysis, or that address alleged deficiencies in 
the agency's initial record.
    The administrative record now also includes the comments received 
from the public. The agency received over 700,000 comments, some 
directed to the 1995 Jurisdictional Analysis, some directed to the 1995 
proposed rule, and many with overlapping discussions. Though many 
comments consisted of form letters, the agency received over 95,000 
distinct or unique sets of comments. Five major cigarette manufacturers 
jointly submitted 2,000 pages of comments and 45,000 pages of exhibits. 
The major smokeless tobacco manufacturers jointly submitted 474 pages 
of comments and 3,372 pages of exhibits. The initial comment period 
remained open for 144 days.
    (1) Despite the agency's extraordinary efforts to involve the 
public in this proceeding, FDA received several comments regarding the 
procedures the agency followed in providing notice of the 1995 proposed 
rule and in publishing the 1995 Jurisdictional Analysis. Some of these 
comments complained that the agency designated certain documents in the 
administrative record as ``confidential,'' and that the shielding of 
these documents denied the public a meaningful opportunity to 
participate in the rulemaking process. One of these comments also 
contended that FDA refused to disclose certain nonconfidential 
information on which the agency had relied. Some comments also argued 
that FDA failed to set forth a balanced view of the issues presented by 
the 1995 proposed rule, thereby rendering the notice inadequate and 
``misleading'' under the Administrative Procedure Act (the APA). In 
their view, FDA concealed certain issues in order to deny the public 
the right to participate in the rulemaking process. Finally, at least 
one interested person maintained that the comment period for the 1995 
proposed rule was so short as to be arbitrary and capricious.
    As the discussion that follows in this section of the document 
demonstrates, the agency's notice, the public availability of the 
information the agency relied upon at the notice stage of this 
proceeding, and the opportunity for comment, went well beyond the 
requirements of the APA, well beyond what is required by case law 
construing the APA, and well beyond the agency's own procedural 
requirements for informal rulemaking.

B. Adequacy of the Record

    (2) Several industry comments complained about the adequacy of the 
record in support of the 1995 proposed rule. They contended that the 
agency violated the APA, 5 U.S.C. 553(b) and (c), and the Due Process 
Clause of the Fifth Amendment to the Constitution, by failing to 
disclose all of the information the agency ``considered or relied upon 
in the proceeding.'' \256\ In particular, these comments complained 
that the public was deprived of the opportunity to comment meaningfully 
because, according to these comments, the agency relied on confidential 
documents and on substantial amounts of undisclosed data. One comment 
went so far as to claim that ``a substantial portion'' of the material 
FDA relied upon was not made available for public scrutiny.
---------------------------------------------------------------------------

    \256\ Because the APA in this context provides the public at 
least as much protection as the Due Process Clause of the 
Constitution, the agency will address these procedural objections 
solely under the APA. See Forester v. Consumer Prod. Safety Comm'n, 
559 F.2d 774, 787 (D.C. Cir. 1977); Ass'n of Nat'l Advertisers, 
Inc., v. Federal Trade Comm'n, 627 F.2d 1151, 1166 (D.C. Cir. 1979), 
cert. denied, 447 U.S. 921 (1980).
---------------------------------------------------------------------------

    The record in support of the 1995 proposed rule provided the public 
not only with a ``reasonable opportunity'' for comment, but with an 
extraordinary opportunity to examine the agency's position. The claim 
that the agency withheld ``a substantial portion'' of the materials on 
which it relied is simply unfounded.
1. The Administrative Record
    In an informal rulemaking proceeding, the APA itself requires only 
that the ``notice of proposed rule making'' include a statement of the 
time, place, and nature of the proceeding, ``reference to the legal

[[Page 44558]]

authority under which the rule is proposed,'' and ``either the terms or 
substance of the proposed rule or a description of the subjects and 
issues involved'' (5 U.S.C. 553(b)). The APA, thus, does not expressly 
require disclosure of the information on which the agency relies in 
proposing a regulation.
    Nevertheless, courts have implied under the APA a requirement that 
an agency give notice of the information on which it actually relies to 
support a proposed rule, and make that information available to the 
extent it is not readily accessible to the public. (See Davis, K. and 
R. Pierce, Jr., Administrative Law Treatise, vol. 3, section 7.3 at 
305-09 (3d ed. 1994) (discussing one of the seminal cases on disclosure 
of data relied on to support a rulemaking proceeding, Portland Cement 
Ass'n v. Ruckelshaus, 486 F.2d 375 (D.C. Cir. 1973), cert. denied, 417 
U.S. 921 (1974)).) No court, however, has required the degree of public 
disclosure at the notice stage of a rulemaking proceeding that FDA 
undertook here.
    Indeed, the primary cases cited by the comments, namely, Portland 
Cement Ass'n, supra, United States v. Nova Scotia Food Products Corp., 
568 F.2d 240 (2d Cir. 1977), and United States Lines, Inc. v. Federal 
Maritime Comm'n, 584 F.2d 519 (D.C. Cir. 1978), address agency conduct 
that bears little resemblance to FDA's efforts in this proceeding. 
While FDA has provided a remarkable degree of factual support and 
procedural openness, these cases involved instances in which agencies 
provided the public with no information whatsoever or otherwise 
excluded a study that was critical to the administrative proceeding. In 
Portland Cement, the Environmental Protection Agency altogether failed 
to provide the public an opportunity to comment on the test results and 
procedures on which the agency relied as the critical'' basis for the 
emission control level adopted by the agency. That is, the agency set 
very specific pollution control limits, but failed to make public until 
after the close of the comment period the details of crucial tests 
relied upon to determine these limits (486 F.2d at 392).
    In Nova Scotia Food Prods., ``all the scientific research was 
collected by the agency, and none of it was disclosed to interested 
parties as the material upon which the proposed rule would be 
fashioned'' (568 F.2d at 251) (emphasis added). And in United States 
Lines, where a common carrier challenged an order of the Federal 
Maritime Commission amending a contract between two competitors, the 
court found that the Commission had made ``critical findings'' on the 
basis of data which was neither identified in its decision nor included 
in the administrative record. Rather, the Commission based its decision 
on ``reliable data reposing in the files of the Commission'' (584 F.2d 
at 533). The reviewing court simply had no idea of the factors or data 
on which the Commission had relied (Id.).
    Thus, at best, the case law requires agencies to disclose studies 
and data actually relied upon by the agency. Even then, the cases that 
have struck down agency rulemaking are generally confined to instances 
in which the agency provided woefully inadequate information to the 
public or failed to disclose a critical piece of information. (See, 
e.g., Kennecott Corp. v. Environmental Protection Agency, 684 F.2d 
1007, 1018-19 (D.C. Cir. 1982) (agency acted arbitrarily and 
capriciously when it failed to include in the public docket during the 
comment period any documents supporting a particular proposed 
regulation); compare Personal Watercraft Indus. Ass'n v. Department of 
Commerce, 48 F.3d 540, 544-45 (D.C. Cir. 1995) (while agency must 
disclose information critical to its decision to regulate a particular 
activity, absent prejudice an agency may rely on studies developed 
after close of comment period that are not critical to the underlying 
proposal).)
    Finally, FDA's own procedural regulations require that the agency 
include with the notice of proposed rulemaking, among other things, 
``references to all information on which the Commissioner relies for 
the proposal * * *'' (Sec. 10.40(b)(vii) (21 CFR 10.40(b)(vii)) 
(emphasis added); see 21 CFR 10.3 (defining the term ``administrative 
record'' to mean the materials on which the agency ``relies to support 
the action''). Thus, even under the agency's own procedural 
regulations, FDA is required--when it initiates informal rulemaking--to 
supply the public only with the materials the agency is relying upon to 
support the proposed action.
    Here, the materials the agency relied on are the materials the 
agency cited in the 1995 proposed rule and the 1995 Jurisdictional 
Analysis. Not only did the agency provide these materials to the 
public, but it also provided the roughly 190,000 pages of factual and 
analytical materials the agency considered but did not rely upon in 
either the 1995 proposed rule or the 1995 Jurisdictional Analysis. 
Moreover, the agency provided over 1,000 endnotes and footnotes 
directing readers to each and every document, including every study, 
Government report, journal article, industry document, and agency 
record on which FDA relied to support the 1995 proposed rule and the 
1995 Jurisdictional Analysis.
    Out of all this material, the only nonpublic materials on which the 
agency relied were two confidential documents \257\ and two lines of 
text the agency redacted from a document the agency placed on the 
public record. \258\ The agency relied on this material only in the 
context of the agency's 1995 Jurisdictional Analysis. None of these 
documents is pivotal to the analysis of jurisdiction in that none 
provides the sole or principal basis for the agency's conclusion that 
cigarettes and smokeless tobacco are drug delivery devices under the 
Federal Food, Drug, and Cosmetic Act (the act). Further, as discussed 
in the 1996 Jurisdictional Determination annexed hereto, the decision 
to keep these materials confidential did not in any way undermine the 
quality of the public participation in this proceeding. In sum, the 
procedures the agency followed in assembling a public record in this 
proceeding simply are not in line with the facts described in cases 
like Portland Cement, Nova Scotia Food Products, and United States 
Lines.
---------------------------------------------------------------------------

    \257\ The two confidential documents the agency directly 
referenced are the 1991 Handbook on Leaf Blending and Product 
Development (Confidential Document 75) and the unredacted summary of 
notes of FDA trip visits (Confidential Document 74). The summary was 
compiled from notes and handouts that are also designated as 
confidential (Confidential Documents 69, 70, 71, 72, and 73). The 
agency views the summary as a stand-alone document to the extent it 
distills a large volume of disparate handwritten notes and handouts. 
Also, the agency cited only to the summary itself. Nevertheless, 
even if the summary were counted as five documents rather than one, 
the agency at most relied on six confidential documents. The 
agency's basis for relying on these documents in the 1995 
Jurisdictional Analysis is discussed in detail in the 1996 
Jurisdictional Determination, annexed hereto.
    \258\ On page 255 of the 1995 Jurisdictional Analysis (60 FR 
41453, 41716), the agency redacted several lines of text along with 
a footnote that identified the sources for the redacted text. The 
footnote consisted of references to two sources, both of which 
appeared on the agency's public docket for the 1995 Jurisdictional 
Analysis: J. E. Kiefer, ``Cigarette Filters for Altering the 
Nicotine Content of Smoke'' (Report No. 71 5003 7), Tennesee Eastman 
Co., pp. 1-2; August 18, 1971, and J. G. Curran, Jr., and E. G. 
Miller, ``Factors Influencing the Elution of High Boiling Components 
of Cigarette Smoke from Filters,'' Beitr. Tabakforsch, pp. 5 and 67, 
1969. The Kiefer document appeared on the public docket with certain 
trade secret information redacted from the document. The Curran 
document was made available to the public in full.

---------------------------------------------------------------------------

[[Page 44559]]

2. The Agency's Use of Confidential Documents
    a. Confidential documents on which the agency did not rely. The 
agency placed in a confidential docket 75 documents from the 
approximately 210,000 pages of materials the agency made available at 
the opening of this proceeding. The agency identified each of these 75 
documents for the public in an index filed on September 29, 1995, on 
the public docket. (See 60 FR 66981 at 66982, December 27, 1995.) Of 
these 75 documents, 73 were not even relied upon by the agency to 
support either the 1995 proposed rule or the 1995 Jurisdictional 
Analysis.
    Sixty-one of these 73 confidential documents consisted either of 
commercial information and trade secrets that the industry urged FDA to 
keep confidential (Confidential Documents 1-12, 16-21, and 62-73), or 
unpublished manuscripts for which the agency lacked the authors' 
permission, as of September 29, 1995, to make them available for 
widespread dissemination (Confidential Documents 22-52). The remaining 
12 documents were either proprietary reports and other copyrighted 
information--such as financial reports generated by Dun and 
Bradstreet--which the agency lacked permission to reprint (Confidential 
Documents 13-15, and 53-58), or confidential documents that supported a 
pending new drug application (Confidential Documents 59-61).
    Again, the agency did not rely on any of these 73 documents as 
support for the 1995 proposed rule. Therefore, the agency was not even 
required to include these documents in the administrative record of the 
notice of proposed rulemaking. (See 21 CFR 10.40(b)(vii).) It likewise 
follows that because the agency did not rely upon these documents, the 
decision to protect them cannot be said to have unfairly interfered 
with the public's ability to question the agency's rationale for the 
rule. (See Mid-Tex Electric Coop., Inc. v. Federal Energy Regulatory 
Comm'n, 773 F.2d 327, 344 (D.C. Cir. 1985) (agency's failure to 
disclose two studies was ``manifestly harmless'' because the agency did 
not rely on the studies to support any finding or conclusion); 
Conference of State Bank Supervisors v. Office of Thrift Supervision, 
792 F. Supp. 837, 843 (D.D.C. 1992) (there is no violation of the APA's 
notice requirements where the agency has declined to disclose materials 
on which it did not rely in proposing the rule); B.F. Goodrich Co. v. 
Department of Transp., 541 F.2d 1178, 1184 (6th Cir. 1976) (only the 
basic data ``upon which the agency relied in formulating the 
regulation'' must be published for public comment), cert. denied, 430 
U.S. 930 (1977); K. Davis, Administrative Law Treatise, section 7.3 at 
307 (3d ed. 1994) (``If an agency does not attempt to support its final 
rule by reference to an undisclosed study, it seems apparent that the 
agency was not required to make the study available to potential 
commentators.'').) The agency went well beyond existing requirements to 
make publicly available thousands of additional documents for public 
review--in recognition of the uniqueness and public importance of this 
proceeding. This effort by the agency should not be used now as a basis 
for suggesting that the agency was required to publish all information 
that it had on hand.
    Finally, at the close of this rulemaking proceeding and with the 
publication of the annexed 1996 Jurisdictional Determination, the 
agency will supplement the public docket with copies of those 
confidential items for which the agency previously lacked permission to 
publish, but for which permission has now been granted. Most of the 
unpublished manuscripts in the confidential docket--none of which were 
relied upon by the agency to support the rule--will be available 
through this addition to the public record.
    b. Confidential documents on which the agency relied. In support of 
the 1995 Jurisdictional Analysis, FDA relied on only 2 of the 75 
documents designated as confidential: A summary of notes taken by FDA 
investigators during site visits to manufacturing plants run by Brown 
and Williamson, Philip Morris, and R. J. Reynolds (Confidential 
Document 74); and a 1991 Brown and Williamson handbook on leaf blending 
and product development (Confidential Document 75). \259\ In addition, 
the agency relied in its 1995 Jurisdictional Analysis on two lines of 
text that were redacted from a document that appeared on the public 
docket. \260\ The 1995 proposed rule itself did not rely on any of 
these documents. \261\ A thorough discussion of these three documents, 
and the agency's basis for relying on them to support its analysis of 
jurisdiction, is provided in section VI. of the 1996 Jurisdictional 
Determination, annexed hereto.
---------------------------------------------------------------------------

    \259\ The agency did not acknowledge ownership of the handbook 
in the 1995 Jurisdictional Analysis, or in the September 29, 1995, 
index to the administrative record. However, in a set of comments 
filed by Brown & Williamson, the company itself acknowledged 
publicly its ownership of the handbook. (See Brown & Williamson 
Tobacco Corp., Comment (Jan. 2, 1996), pp. 37-38).
    \260\ Kiefer, J. E., ``Cigarette Filters for Altering the 
Nicotine Content of Smoke,'' Tennessee Eastman Co., Report No.71 
5003 7, pp. 1-2, August 18, 1971.
    \261\ One comment noted that the agency relied in the 1995 
proposed rule on undisclosed information gathered from former 
industry sales representatives and managers. (See 60 FR 41314 at 
41323.) The reference in the rule to interviews with former sales 
representatives and managers appears in the discussion of proposed 
Sec. 897.12 Additional Responsibilities of Manufacturers. The agency 
used the information gathered from these individuals to support the 
proposition that manufacturers direct their sales representatives to 
police retailers' cigarette and smokeless tobacco displays. 
Accordingly, the agency proposed to require sales representatives to 
be responsible for removing violative visual displays and 
advertising used in retail outlets. In light of comments received, 
the agency has decided to revise Sec. 897.12 to eliminate this 
requirement. Because manufacturer sales representatives will no 
longer be held responsible for maintaining retailers' fixtures, the 
agency's reliance on the interviews in the 1995 proposed rule, and 
the issue of whether the agency should have made more information on 
this matter available to the public, is moot. Davis, K. C., and R. 
J. Pierce, Jr., Administrative Law Treatise, vol. 1, section 7.3 at 
p. 307 (3d ed. 1994) (``If an agency does not attempt to support its 
final rule by reference to an undisclosed study, it seems apparent 
that the agency was not required to make the study available to 
potential commentators''). Finally, as the agency explained in its 
December 27, 1995, Federal Register notice, the agency has not made 
such information available to the public because of the need to 
protect the identity of individuals who came forward during the 
agency's investigation and who might not otherwise have come forward 
(see 60 FR 66981, 66982). As discussed in section VI. of the 1996 
Jurisdictional Determination, FDA believes there are circumstances 
in which an agency may rely on confidential information in a 
rulemaking proceeding, and that there are ways in which an agency 
may present such information in order to preserve the public's right 
to a reasonable opportunity to participate in the proceeding (60 FR 
66981). The agency, however, has not relied on any such material in 
this final rulemaking.
---------------------------------------------------------------------------

3. The Claim that FDA Relied on ``Unknown'' Undisclosed Data
    (3) An association representing the tobacco industry also claimed 
that the agency withheld certain data and calculations used to 
construct a series of charts showing that nicotine and tar levels in 
smoke have risen steadily from 1982 to 1991. (See 60 FR 41453 at 41728 
to 41731.) These charts appeared only in the context of the agency's 
1995 Jurisdictional Analysis. A thorough discussion of how the agency 
constructed these charts, and on what data the agency relied, is 
provided in sections II. and VI. of the 1996 Jurisdictional 
Determination, annexed hereto.

[[Page 44560]]

4. The Claim that FDA Failed to Include in the Record New Drug 
Application (NDA) Data on Which it Relied
    (4) One comment claimed that the agency relied on studies in seven 
NDA's for the proposition that a high proportion of smokers are 
addicted to nicotine, but failed to make adequate disclosure of these 
NDA's. In particular, this comment stated that the agency failed to 
include any information in the public docket for NDA 18-612 (Nicorette 
gum, 2 milligrams (mg)) and NDA 20-385 (Nicotine nasal spray), and 
included only summaries for five other NDA's the agency cited. To the 
extent the agency relied on any of these NDA's, it did so only in the 
context of the 1995 Jurisdictional Analysis. A comprehensive discussion 
of the agency's reliance on this material is provided in section VI. of 
the 1996 Jurisdictional Determination, annexed hereto.
5. The Agency's Reliance in the Final Rulemaking on New Materials
    In an FDA informal rulemaking proceeding, the final administrative 
record must contain the proposed rule, including all information that 
the Commissioner identifies or files with the proposal, all comments 
received on the proposal, including all information submitted as part 
of the comments, and the notice issuing the final regulation, including 
all information that the Commissioner identifies or files with the 
final regulation (Sec. 10.40(g)). An agency may rely on information and 
data that were not included at the proposal stage that expands on or 
confirms information in the proposal or addresses alleged deficiencies 
in the preexisting data, provided that no prejudice is shown. \262\ 
Otherwise, ``[r]ulemaking proceedings would never end if an agency's 
response to comments must always be made the subject of additional 
comments'' (Community Nutrition Inst. v. Block, 749 F.2d 50, at 58). 
Accordingly, the agency has cited in this preamble and in the 1996 
Jurisdictional Determination annexed hereto, a small amount of 
information that is needed to respond fully to the comments or that 
otherwise supplements the information contained in or filed with the 
1995 proposed rule. These documents include published scientific 
articles, reference texts, letters to tobacco industry counsel, an 
abstract that the tobacco industry asked to include in the record, 
three publicly released tobacco company documents, Congressional 
hearing transcripts, and newspaper articles. The agency has placed this 
cited information in the administrative record.
---------------------------------------------------------------------------

    \262\ See, e.g., Personal Watercraft v. Department of Commerce, 
48 F.3d 540, 544 (D.C. Cir. 1995) (``Agencies may develop additional 
information in response to public comments and rely on that 
information without starting anew unless prejudice is shown.''); 
Solite Corp. v. Environmental Protection Agency, 952 F.2d 473, 484 
(D.C. Cir. 1991) (``[C]onsistent with the APA, an agency may use 
`supplementary' data, unavailable during the notice and comment 
period, that expands on and confirms information contained in the 
proposed rulemaking and addresses alleged deficiencies in the 
preexisting data, so long as no prejudice is shown.''); Community 
Nutrition Inst. v. Block, 749 F.2d 50, 57-58 (D.C. Cir. 1984) 
(agency may rely on information that ``expanded on and confirmed'' 
information in the 1995 proposed rule and addressed alleged 
deficiencies in the record); see also Davis, K. C. and R. J. Pierce, 
Jr., Administrative Law Treatise, section 7.3 (3d ed. 1994).
---------------------------------------------------------------------------

C. Adequacy of the Notice

    (5) Two industry comments argued that the public's participation in 
the rulemaking process has been frustrated because the agency presented 
a ``one-sided'' view in its 1995 notice of proposed rulemaking. They 
claimed that FDA failed to satisfy the APA's notice requirement for 
informal rulemaking because the agency neither disclosed nor discussed 
the supposedly ``large body'' of information that is ``inconsistent 
with, or otherwise not supportive of, the proposed rule.'' Further, the 
agency did not, in their view, provide a ``reasoned explanation'' for 
departing from past precedent on the issue of whether FDA should 
regulate all cigarettes and smokeless tobacco.
    These comments provided no legal authority to support the 
proposition that, at the notice stage of a proceeding, the agency is 
required to anticipate all challenges to its reasoning, and must 
attempt to answer those challenges. Rather, at the notice stage of a 
rulemaking proceeding, the agency's obligation is to include sufficient 
detail on the content of the rule, and on the basis in law and fact for 
the rule, to allow for meaningful and informed comment. (See American 
Medical Ass'n v. Reno, 57 F.3d 1129, 1132 (D.C. Cir. 1995); Home Box 
Office, Inc. v. Federal Communications Comm'n, 567 F.2d 9, 35-36 (D.C. 
Cir.), cert. denied, 434 U.S. 829 (1977).)
    More specifically, in an informal rulemaking proceeding, the APA 
requires public notice of an agency's intention to issue a regulation 
(5 U.S.C. 553(b)). The notice must include ``reference to the legal 
authority under which the rule is proposed,'' and ``either the terms or 
substance of the proposed rule or a description of the subjects and 
issues involved'' (5 U.S.C. 553(b)(2) and (b)(3)). FDA's own 
regulations require that a notice of proposed rulemaking include ``a 
preamble that summarizes the proposal and the facts and policy 
underlying it, * * * all information on which the Commissioner relies 
for the proposal, * * * and cites the authority under which the 
regulation is proposed'' (21 CFR 10.40(b)(vii)).
    Under case law construing section 553 of the APA, notice of 
informal rulemaking must be ``sufficiently descriptive of the 'subjects 
and issues involved' so that interested parties may offer informed 
criticism and comments'' (Ethyl Corp. v. Environmental Protection 
Agency, 541 F.2d 1, 48 (D.C. Cir.) (en banc), cert. denied 426 U.S. 941 
(1976)). Notice is sufficient under the APA ``if it affords interested 
parties a reasonable opportunity to participate in the rulemaking 
process'' (Forester, 559 F.2d at 787; accord State of South Carolina ex 
rel. Tindal v. Block, 717 F.2d 874, 885 (4th Cir. 1983), cert. denied, 
465 U. S. 1080 (1984)). And, insofar as the 1995 proposed rule relied 
on a technical study or specific data essential to an understanding of 
the rule, the notice should have disclosed this information to the 
extent needed to allow for ``meaningful commentary'' (Connecticut Light 
and Power Co. v. Nuclear Regulatory Comm'n, 673 F.2d 525, 530-31 (D.C. 
Cir.), cert. denied, 459 U. S. 835 (1982)).
    In this instance, the 1995 proposed rule met both the APA's notice 
requirements (as interpreted by prevailing case law), as well as FDA's 
own procedural requirements. The agency by any standard ``fulfilled its 
obligation to make its views known to the public in a concrete and 
focused form so as to make criticism or formulation of alternatives 
possible'' (Air Transport Ass'n of America v. Civil Aeronautics Board, 
732 F.2d 219, 225 (D.C. Cir. 1984) (quoting Home Box Office, Inc., 567 
F.2d at 36)).
1. The Agency Provided Adequate Notice of the Key Legal and Factual 
Issues
    Although the APA's notice requirements could have been met by a far 
briefer presentation, the agency chose to supply the public with a 
notice that explored in full the wide range of factual and legal issues 
presented. In doing so, the agency discussed the most significant 
issues that the two industry comments claimed were missing from the 
notice.
    (6) The comments contended that the agency failed to discuss past 
instances

[[Page 44561]]

in which it declined to exercise jurisdiction over cigarettes and 
smokeless tobacco, including FDA's response to a 1977 citizen petition. 
One comment in particular insisted that such a discussion would have 
alerted the public to the idea that Congress enacted preemptive 
legislation in reliance on FDA's past pronouncements, legislation which 
the comments argue bars FDA from regulating these products.
    The agency acknowledged in the 1995 Jurisdictional Analysis, 
published in conjunction with the 1995 proposed rule, that it has in 
the past refrained from exercising jurisdiction generally over all 
cigarettes and smokeless tobacco (unless claims were made for the 
product) (60 FR 41453 at 41482 n. 5). Among other things, the agency 
referred readers to the published decision in Action on Smoking and 
Health [ASH] v. Harris, 655 F.2d 236 (D.C. Cir. 1980). That decision 
discussed, and indeed arose from, the 1977 citizen petition which, as 
one comment claimed, the agency ``conscientiously avoid[ed]'' in order 
to ``mislead[]'' the public. Not only does the ASH opinion discuss the 
petition and the agency's position at that time with respect to 
exercising jurisdiction generally over cigarettes, it also recounts for 
the reader the agency's historical position on the issue (Id. at 237-
241). Moreover, the agency placed in the administrative record copies 
of documents in which FDA declined to exercise jurisdiction, including 
FDA's response to ASH's 1977 citizen petition. \263\
---------------------------------------------------------------------------

    \263\ Letter from D. Kennedy (FDA) to J. Banzhaf (ASH) of Dec. 
5, 1977, (denial of 1977 petition); Letter from J. E. Goyan (FDA) to 
J. Banzhaf (ASH) of Nov. 25, 1980; Public Health Cigarette 
Amendments of 1971, Hearings Before the Consumer Subcommittee of the 
Committee on Commerce, U.S. Senate, 92d Cong., 2d sess., pp. 239-
246.
---------------------------------------------------------------------------

    In addition, the agency attached as part of an appendix to its 1995 
Jurisdictional Analysis copies of the Commissioner's testimony before 
the House Subcommittee on Health and the Environment of the Committee 
on Energy and Commerce on March 25, 1994 (Appendix 7). At the outset, 
the Commissioner stated:
    Although FDA has long recognized that the nicotine in tobacco 
products produces drug-like effects, we never stepped in to regulate 
most tobacco products as drugs. One of the obstacles has been a 
legal one. A product is subject to regulation as a drug based 
primarily on its intended use. * * * With certain exceptions, we 
have not had sufficient evidence of such intent with regard to 
nicotine in tobacco products. * * *
    Mr. Chairman, we now have cause to reconsider this historical 
view. * * * This question arises today because of an accumulation of 
information in recent months and years. In my testimony today, I 
will describe some of that information.
(Appendix 7 at 1-2 (footnote omitted)) This testimony, like the 
reference to the ASH decision, adequately put the public on notice of 
FDA's past position. \264\
---------------------------------------------------------------------------

    \264\ As discussed in section IV. of the 1996 Jurisdictional 
Determination, the agency's decision not to include a prolonged 
discussion of past agency decisions is based on the fact that the 
agency is now operating under a different set of facts. The agency 
did not commit a procedural error by failing to chronicle 
exhaustively decisions it made in a factually distinguishable 
context. Moreover, one of the comments faulted the agency for 
failing to give notice of the ``several'' citizen petitions filed 
since 1977 that requested that the agency regulate cigarettes. In 
fact, the agency incorporated by reference into the opening docket 
for the 1995 Jurisdictional Analysis all significant dockets opened 
since the conclusion of the ASH litigation that relate to the 
agency's jurisdiction over cigarettes and other nicotine delivery 
systems. The index the agency provided to the public on September 
29, 1995, in conjunction with the public display of the 
administrative record (as of that date), included a description of 
nine dockets the agency incorporated by reference into the record 
supporting the 1995 Jurisdictional Analysis.
---------------------------------------------------------------------------

    Nor does FDA agree with the comment's argument that Congress, in 
reliance on past FDA pronouncements, enacted legislation precluding FDA 
from regulating tobacco products under the act. As discussed in detail 
in sections IV. and V. of the annexed 1996 Jurisdictional 
Determination, the agency has never categorically disclaimed 
jurisdiction over tobacco products and Congress has never expressly 
forbidden FDA from asserting jurisdiction over these products. The 
agency has no affirmative obligation to posit in its notice of proposed 
rulemaking arguments it believes are legally infirm. (Cf. Florida Power 
and Light Co. v. United States, 846 F.2d 765, 771 (D.C. Cir. 1988), 
cert. denied, 490 U.S. 1045 (1989).)
    Two tobacco industry comments also claimed that the agency unfairly 
underplayed the complexity of issues such as ``intended use,'' product 
categorization, regulatory authority over combination products, and the 
applicability of the medical device provisions of the act to cigarettes 
and smokeless tobacco. Instead, one of these comments asserted that all 
the agency had done was publish ``a tendentious anti-tobacco, pro-FDA-
regulation manifesto'' and, as such, the agency's notice was 
``fraudulent.'' The agency disagrees with this characterization. More 
to the point, the agency disagrees with the argument that the agency 
somehow deprived the public of fair notice.
    Again, to satisfy the APA's notice requirement, the agency must 
specify with particularity the legal authority on which its proposal is 
based (K. C. Davis & R. J. Pierce, Jr., Administrative Law Treatise 
(vol. 1, 3d ed. 1994) section 7.3 at 299). Notice must be 
``informative'' and must ``fairly apprise'' interested persons (Id. at 
299 and 300). The agency need not, however, unravel for the public each 
and every theoretical step in the analysis. (See Chemical Waste 
Management, Inc. v. Environmental Protection Agency, 869 F.2d 1526, 
1535 (D.C. Cir. 1989) (even where agency statement in notice of 
rulemaking assumes rather than invites comments on an issue, notice is 
sufficient if it provides interested parties ``with a clear indication 
of the agency's intended course of action * * *.''); Center for Auto 
Safety v. Peck, 751 F.2d 1336, 1361 (D.C. Cir. 1985) (``It is simply 
not the case, however, that all of the essential postulates for an 
agency rule must be contained in the record.'')).
    Nevertheless, the agency provided the public a detailed explanation 
of why it regards cigarettes and smokeless tobacco as drug/device 
combination products, and why it believes the device provisions of the 
act may, and should, be used to regulate these products. The agency set 
forth its rationale for regulating these products as devices in both 
the August 11, 1995, proposed rule (see 60 FR 41314 at 41348 to 41350) 
and again in the August 11, 1995 Jurisdictional Analysis (see 60 FR 
41453 at 41521 to 41525). Further, the agency identified the precise 
statutory provisions under which it proposed to regulate these products 
(see 60 FR 41314 at 41346 to 41352, and 41372).
    The agency also put the public on notice, by referencing the 
Intercenter Agreement between the Center for Drug Evaluation and 
Research and the Center for Devices and Radiological Health, that 
preloaded drug delivery systems are often regulated using the drug 
authorities under the act. The agency adequately explained--for notice 
purposes--why in this instance it proposed a different approach (60 FR 
41314 at 41348 to 41350).
    With respect to the application of the concept of ``intended use,'' 
the lengthy discussion in Part II of the 1995 Jurisdictional Analysis 
provided the public with full disclosure of the agency's rationale for 
regulating cigarettes and smokeless tobacco based on the ``intended 
use'' of these products. The core facts and precedents on which

[[Page 44562]]

the agency relied were displayed in a manner the agency believes 
invited maximum public scrutiny. The agency even provided the public 
with 11 different examples (9 from the 1980's and 1990's) of the 
application of the intended use concept to the determination of whether 
a product, absent express claims, may be regulated as a drug or a 
device (60 FR 41453 at 41527 to 41531). This level of explanation more 
than satisfied the notice requirements of the APA as interpreted by the 
relevant case law.
    Finally, the quantity and quality of comments the agency received 
on the 1995 proposed rule and the 1995 Jurisdictional Analysis suggest 
that, in fact, the public was adequately notified of the relevant 
issues. The agency received more comments in this proceeding than it 
has ever received on any other subject, with over 700,000 comments 
(including form letters) and over 95,000 distinct or unique sets of 
comments. More important, the agency received hundreds of pages of 
comments on the very issues the agency is said to have hidden from the 
public. Indeed, the two industry comments who complained most 
vigorously about the supposed deficiencies in the agency's notice of 
proposed rulemaking themselves filed volumes of comments on the issues 
they claim the agency concealed. \265\ Even the comments of interested 
nonindustry persons evidenced fair notice of the agency's reasoning for 
applying the device provisions of the act to cigarettes and smokeless 
tobacco. \266\
---------------------------------------------------------------------------

    \265\ See, e.g., Joint Comments of the Smokeless Tobacco 
Manufacturers, Comment (January 2, 1996), at 43 to 73 (discussing 
the agency's historical position on agency jurisdiction over tobacco 
products), at 99-258 (discussing the agency's application of the 
concept of intended use to tobacco products), and at 259-307 
(analyzing the agency's position that cigarettes and smokeless 
tobacco are combination products that may be regulated as restricted 
devices); Joint Comments of Cigarette Manufacturers at, among other 
places, Vol. I (discussing FDA's historical position on 
jurisdiction), Vol. II (discussing the concept of intended use), and 
Vol. V (discussing the regulation of cigarettes as medical devices).
    \266\ See, e.g., Public Citizen Litigation Group, comment 
(January 2, 1996); American Heart Association, comment (December 26, 
1995).
---------------------------------------------------------------------------

    In Chemical Waste Management, the plaintiff complained that the 
Environmental Protection Agency's (EPA) notice of proposed rulemaking 
treated a certain controversial issue ``as an accomplished fact'' (869 
F.2d at 1535). Like two of the comments here, the plaintiff in Chemical 
Waste Management argued that the APA required the agency to highlight 
the fact that its position was subject to debate and to solicit 
comments on the issue. The United States Court of Appeals for the 
District of Columbia rejected this argument because EPA had provided 
notice of its intended course and because the agency in fact received 
numerous comments on the issue (869 F.2d at 1535). (See also Shell Oil 
Co. v. EPA, 950 F.2d 741, 757 (D.C. Cir. 1991) (recognition of a 
certain issue in comments may be used to infer that adequate notice of 
the issue was given); Haralson v. Federal Home Loan Bank Board, 678 F. 
Supp. 925, 926 (D.D.C. 1987) (same).)
    As in cases such as Chemical Waste Management, the comments FDA 
received demonstrate that there is no serious claim to be made that the 
agency has concealed issues from the public. Interested persons 
representing both sides in this controversial proceeding commented on 
the very issues the agency supposedly underplayed in its notice of 
proposed rulemaking. \267\
---------------------------------------------------------------------------

    \267\ The agency also received a comment criticizing the agency 
for failing to discuss the June 1994 Federal Trade Commission's 
(FTC) decision regarding the ``Joe Camel'' advertising campaign. In 
section VI. of this document, the agency discusses the FTC's 
decision, showing that the FTC's decision in 1994 with respect to 
the ``Joe Camel'' campaign was neither relevant to, nor 
contradicted, FDA's discussion of the campaign in the 1995 proposed 
rule.
---------------------------------------------------------------------------

    The comments that challenge the adequacy of the agency's notice 
confuse the merits of the issue with procedure. The supposed 
deficiencies in FDA's legal reasoning, and the supposed failure to 
discuss contrary authorities, raise substantive issues to be resolved 
during the comment and response-to-comment phase of the proceeding. The 
possibility that some of the agency's legal conclusions may be subject 
to debate does not render the notice inadequate. (See Chemical Waste 
Management, Inc., 869 F.2d at 1535; Natural Resources Defense Council, 
Inc. v. Hodel, 618 F. Supp. 848, 864-65 (E.D. Cal. 1985).)
2. The Agency Provided a ``Reasoned Explanation'' for its Current 
Position
    Several tobacco industry comments also claimed that the agency 
violated the APA's notice provisions by failing to include a ``reasoned 
explanation'' for departing from past precedent on the issue of whether 
to regulate all cigarettes and smokeless tobacco. In their view, the 
1995 proposed rule and the 1995 Jurisdictional Analysis were 
procedurally infirm because the agency did not adequately explain its 
basis for past decisions not to regulate these products, and did not 
distinguish those decisions from its present position. One of these 
comments likewise asserted that the agency was required to include in 
the administrative record each and every document ``that formed the 
basis for, or was an expression or reflection of, FDA's consistent 
position over more than 80 years that it does not have jurisdiction to 
regulate cigarettes.'' The absence of this material, according to the 
comment, demonstrates that the agency failed to consider ``obviously 
relevant'' contrary information in proposing to regulate these 
products.
    The authorities cited in the comments at best require that, by the 
close of an administrative proceeding, the agency must provide a 
``reasoned explanation'' to the extent the agency has departed from a 
prior formal position. (See, e.g., RKO Gen., Inc. v. FCC, 670 F.2d 215 
(D.C. Cir. 1980) cert. denied, 456 U.S. 927 (1982) (challenge to final 
order of Federal Communications Commission denying renewal of 
television license); Baltimore and Annapolis R. R. v. Washington Metro. 
Area Transit Comm'n, 642 F.2d 1365 (D.C. Cir. 1980) (challenge to final 
order of transit commission); Greyhound Corp. v. ICC, 551 F.2d 414 
(D.C. Cir. 1977) (challenge to final decision of the labor board); 
International Union, United Auto Workers v. NLRB, 459 F.2d 1329 (D.C. 
Cir. 1972) (challenge to final decision of labor board); see also Motor 
Vehicle Mfrs. Assoc. v. State Farm Mutual Auto Ins., 463 U.S. 29, 43 
(1983) (challenge to final rule rescinding passive restraint seatbelt 
requirement contained in a Department of Transportation standard).) 
None of these cases, which involved challenges to final agency orders 
and final rules, holds that at the notice stage of a proceeding, when 
an agency is proposing to depart from a prior position, the agency must 
provide a comprehensive ``reasoned explanation.''
    The agency nevertheless agrees that the rulemaking proceeding, 
taken as a whole, should clearly and rationally justify changes in 
existing policies. Thus, FDA included in its notice of proposed 
rulemaking and 1995 Jurisdictional Analysis ample reference to its 
prior policy and a more than ample discussion of the agency's rationale 
for changing its policy. Indeed, the very intent of the 1995 
Jurisdictional Analysis, and the 622 footnotes supporting the analysis, 
was to provide the public with a full view of the evidence that 
supports the need for the agency to take a different approach to the 
regulation of these products.

[[Page 44563]]

    As FDA made clear at the outset of its 1995 Jurisdictional 
Analysis, its decision to propose to regulate these products, when in 
the past it chose not to (except where claims were made), is based on 
the fact that ``[t]he quality, quantity, and scope of the evidence 
available to FDA today is far greater than any other time when FDA has 
considered regulation of cigarettes and smokeless products.'' (60 FR 
41453 at 41464, n. 1.) Footnote 5 of the 1995 Jurisdictional Analysis, 
in particular, made clear that: (1) The agency in the past had declined 
to exercise jurisdiction generally over these products; and (2) the 
reason for taking a different position today is that the evidence 
before the agency regarding the intended use of these products ``has 
changed dramatically.'' (60 FR 41453 at 41482, n. 5). In addition, the 
agency repeatedly stated that its analysis was based on ``evidence now 
available to the agency'' (60 FR 41453 at 41464), ``current evidence'' 
(60 FR 41466), evidence accumulated since 1980 (60 FR 41482, n. 5), and 
evidence that has emerged since 1980 or was not widely known until 
recently (60 FR 41453 at 41483 to 41484, and 41539).
    Neither the APA nor the case law cited in the comments requires an 
agency to provide a thorough ``reasoned explanation'' for departing 
from precedent at the notice stage of a proceeding. Rather, the APA at 
best requires that the agency give notice of its proposal to take a 
different position or view, and give enough information to allow the 
public a reasonable opportunity to comment. Not until the close of the 
proceeding, after public comment has been received, must the agency 
ensure that it has provided a ``reasoned explanation.'' The agency 
believes in this instance that its discussion at the notice stage met 
the standard that courts ordinarily do not impose until the close of an 
administrative proceeding. Nonetheless, the agency has provided a 
detailed discussion of the legal and factual bases for taking its 
current position in section IV. of the 1996 Jurisdictional 
Determination, annexed hereto.
    Finally, the agency does not agree that it was required to include 
in the record, at the notice stage of the proceeding, each and every 
prior agency ``decision, statement, and finding.'' Rather, the agency 
appropriately included in the record enough documentation to give the 
public notice of the agency's prior position, and notice of the 
agency's prior reasoning for declining to exercise jurisdiction 
generally over these products (absent express claims). For example, the 
agency incorporated by reference into the administrative record 
supporting the 1995 Jurisdictional Analysis all significant dockets 
opened since the conclusion of the 1977 ASH litigation that relate to 
the agency's jurisdiction over these products. In addition, the agency 
included in the record in support of its 1995 Jurisdictional Analysis 
its response to the original ASH citizen petition. The response to the 
ASH petition outlines in detail the ``contrary'' view the agency 
allegedly concealed, including full discussions of the agency's 
enforcement history with respect to tobacco products and the agency's 
significant past pronouncements on the subject. In any case, the 
tobacco industry itself, through its comments, has introduced many of 
the agency's earlier statements into the administrative record for this 
proceeding. Thus, unlike the facts presented in cases such as Public 
Citizen v. Heckler, 653 F. Supp. 1229 (D.D.C. 1986) or Walter O. 
Boswell Memorial Hospital v. Heckler, 749 F.2d 788 (D.C. Cir. 1984), as 
referenced in the comment, the administrative record for this 
proceeding already contains the ``adverse'' information claimed to be 
lacking, by virtue of the agency's inclusion of documents in the record 
and the comments received by the agency.

D. Adequacy of the Comment Period

    FDA received at least one comment urging that the comment period 
was unreasonably short in light of the complexity of the proposed rule, 
the number of materials the agency put on public display, and the 
possible impact of the rule on the tobacco industry. This comment 
argued that the agency acted arbitrarily and capriciously in deciding 
to ``limit'' the comment period to 144 days from the publication of the 
August 11, 1995, proposal and 95 days from the public release of the 
documents FDA considered but did not rely upon.
    Far from having ``limited'' the comment period, FDA provided more 
than twice as much time for comment as the agency's regulations 
require. (See 60 FR 53560, October 16, 1995 (extending comment period 
for the proposed rule); 60 FR 53620, October 16, 1995 (extending 
comment period on Jurisdictional Analysis).)
    The APA requires only that an agency ``give interested persons an 
opportunity to participate in the rule making through submission of 
written data, views, or arguments * * *.'' (5 U.S.C. 553(c).) This is 
all the APA requires; there is no statutory requirement concerning how 
many days an agency must allow, nor is there a requirement that an 
agency must extend the period at the request of an interested person. 
(See Phillips Petroleum Co. v. EPA, 803 F.2d 545, 559 (10th Cir. 
1986).)
    FDA's own regulations generally afford the public 60 days to 
comment on a proposed rule, unless the Commissioner shortens or 
lengthens the period for good cause (21 CFR 10.40(b)(2)). Executive 
Order 12889 implementing the North American Free Trade Agreement 
prescribes a minimum comment period of 75 days on certain proposed 
rules, except when good cause is shown for a shorter comment period. 
(See 58 FR 69681, December 30, 1993.)
    Here, the agency provided the public with 144 days from the 
publication of the notice, 139 days from the release of the documents 
the agency cited in support of the rule and the 1995 Jurisdictional 
Analysis (on August 16, 1995), and 95 days from the release of the 
materials the agency considered but did not directly rely upon (on 
September 29, 1995). Thus, even when counting from the date the agency 
released additional documents of no direct relevance to the 1995 
proposed rule, the agency provided much more time for comment on the 
notice of proposed rulemaking than its regulations, or the Executive 
Order, require.
    Further, on March 20, 1996, the Federal Register published a notice 
providing an additional 30-day comment period limited to specific 
documents the agency added to the proposed rulemaking docket (see 61 FR 
11349, March 20, 1996) and to the docket in support of the agency's 
analysis of its jurisdiction (see 61 FR 11419, March 20, 1996). 
Although the agency expressly limited the scope of the matters on which 
interested persons could comment, the March 20, 1996, action did 
provide the public with yet another 30 days on which to comment on 
issues related to such core subjects as the manipulation of the 
nicotine content of cigarettes and smokeless tobacco. The March 20, 
1996, action also reopened the comment period with respect to the 
record in support of the agency's proposal to regulate the advertising 
of these products in ``adult publications'' and billboard advertising.
    The agency is not persuaded that any interested person has been 
unfairly prejudiced by the length of the comment period. First, FDA 
considers requests to extend the comment period on a case-by-case 
basis. Here, on the one hand, the

[[Page 44564]]

authors of the comment (the Tobacco Institute together with five major 
tobacco companies) presented in their request for additional time no 
compelling reasons to extend the period (such as a new, material 
study). On the other hand, FDA is faced with a matter raising serious 
public health concerns. For those reasons, the agency denied the 
request to extend the period for as long as had been requested (see 60 
FR 53560).
    Second, each of the five tobacco companies who submitted this joint 
comment complaining about the length of the comment period also filed 
suit against FDA 1 day before the Federal Register published FDA's 
notice of proposed rulemaking. The timing appears to indicate that 
these firms had been preparing to respond to an FDA proposal to 
regulate cigarettes and smokeless tobacco for some time. In any case, 
they were able, jointly, to submit 2,000 pages of comments and 45,000 
pages of exhibits within the time allotted for commenting on the 
Jurisdictional Analysis and the proposed rule. Their submissions far 
outweigh any others. The agency, therefore, is not persuaded that these 
interested persons suffered prejudice as a result of FDA's allowing 
twice as much time as the agency's regulations require. (See Conference 
of State Bank Supervisors v. Office of Thrift Supervision, 792 F. Supp. 
837, 844 (D.D.C. 1992) (in light of the comments received, court 
declined to find that 30-day comment period was insufficient to allow 
opportunity for meaningful public participation); Phillips Petroleum 
Co., 803 F.2d at 559 (citing cases in which courts have upheld notice 
periods of 45 days or less).)
    In sum, the agency believes it provided ample additional time for 
comments--nearly 90 days more than is provided for in the agency's own 
procedural regulation. Given that it received over 95,000 distinct sets 
of comments, the agency is not persuaded that the length of the comment 
period unfairly hampered the quality of the public debate on this 
matter.

E. Conclusion

    Because of the importance of the issues involved in this 
proceeding, the agency compiled the most extensive administrative 
record in support of a proposed rulemaking in its history. FDA employed 
procedures that exceeded all legal requirements in giving the public a 
reasonable opportunity to participate in this matter.

XIII. Executive Orders

A. Executive Order 12606: The Family

    Executive Order 12606 (E.O. 12606) directs Federal agencies to 
determine whether policies and regulations may have a significant 
impact on family formation, maintenance, and general well-being. The 
preamble to the 1995 proposed rule stated that the rule would have ``no 
potential negative impact on family formation, maintenance, and general 
well-being.'' Specifically, the Food and Drug Administration (FDA) said 
that the rule would not affect family stability or marital commitments, 
would not have a significant impact on family earnings, and would not 
impede parental authority and rights in the education, nurture, or 
supervision of children. To the contrary, the preamble to the 1995 
proposed rule said that the rule would ``help the significant majority 
of American families that seek to discourage their children from using 
cigarettes and smokeless tobacco'' because ``[t]he pervasive promotion 
and easy availability of these products * * * severely hinder the 
individual family from carrying out this function by itself'' (60 FR 
41314 at 41356).
    In the Federal Register of August 11, 1995, the preamble to the 
proposed rule (60 FR 41314) (the 1995 proposed rule) also stated that, 
under section 1(g) of the Executive Order (which instructs agencies to 
ask about a rule's ``message'' to young people concerning their 
behavior, their personal responsibility, and societal norms), the rule 
would ``help reduce the conflict between the anti-smoking messages 
issued by Federal and State authorities and the pro-tobacco messages 
seen in advertising'' that are attractive to children. This would 
enable young people ``to understand how prevalent tobacco use is in 
society and also appreciate how their decisions regarding cigarette and 
smokeless tobacco use can affect their health'' (60 FR 41314 at 41356).
    In the 1995 proposed rule, FDA invited comments and suggestions on 
the rule's effect on the family.
    FDA received several comments that disagreed with FDA's analysis.
    (1) One comment said that the rule would have a significant 
economic effect on family earnings through increased costs (in order to 
comply with the rule) or the possible loss of jobs. Another comment 
said that the rule would destroy some family businesses, especially 
those dependent on vending machines selling cigarettes or on 
sponsorships by cigarette or smokeless tobacco manufacturers.
    The agency disagrees with the comments. FDA reiterates that the 
rule does not affect sales to adults. It is narrowly drawn to reduce 
young people's access to cigarettes and smokeless tobacco and to reduce 
the appeal of those products to young people. In short, the rule is 
intended to prevent illegal sales to young people, and the agency has 
no evidence to suggest that a significant number of families depend on 
such sales.
    FDA also notes that the final rule, as amended, permits vending 
machines in facilities that are inaccessible to young people and also 
permits sponsorships under certain restrictions. These changes to the 
rule should reduce the potential economic impact on families dependent 
on vending machine earnings or sponsorships or enable them to adjust 
their affairs to maintain family earnings.
    (2) Several comments said that the rule interferes with parents' 
ability to raise their children, but did not elaborate on how the rule 
supposedly interfered in child-rearing.
    The agency disagrees with the comments. The rule does not direct 
parents to educate or raise their children in any particular manner 
and, insofar as adults are concerned, does not regulate the use of 
cigarettes or smokeless tobacco by adults. It does reduce both their 
access and appeal to young people and, as a result, should help those 
parents who are trying to prevent their children from becoming regular 
users of these products. Thus, the rule does not interfere with 
parental authority or the manner in which parents educate, nurture, or 
supervise their children.
    FDA, therefore, reiterates that the rule does not have a negative 
impact on family formation, maintenance, and general well-being and is 
consistent with Executive Order 12606.

B. Executive Order 12612: Federalism

    Executive Order 12612 (E.O. 12612) requires Federal agencies to 
carefully examine regulatory actions to determine if they have a 
significant impact on the States, on the relationship between the 
States and the Federal government, and on the distribution of power and 
responsibilities among the various levels of government. E.O. 12612 
directs Federal agencies that are formulating and implementing policies 
to be guided by certain federalism principles, such as encouraging a 
``healthy diversity in the public policies adopted by the people of the 
several States according to their own

[[Page 44565]]

conditions, needs, and desires'' (section 2 of E.O. 12612).
    Although Sec. 897.42 of the 1995 proposed rule would have excluded 
from preemption under section 521 of the act more stringent State and 
local requirements that do not conflict with requirements imposed under 
FDA's final rule, FDA has deleted Sec. 897.42 from the final rule 
because of significant concerns with regard to the validity of that 
section's proposed preemption exclusion. See discussion in section X. 
of this document. Thus, under the express provisions of section 521(a) 
of the act, FDA regulation of cigarettes and smokeless tobacco as 
nicotine-delivery devices will result in preemption of State and local 
requirements governing the sale and distribution of cigarettes and 
smokeless tobacco when such requirements are different from, or in 
addition to, the requirements under FDA's final rule.
    FDA received many comments on the 1995 proposed rule regarding its 
possible impact on State and local governments. Most comments came from 
individual State legislators in over 15 States (often using the same 
text or paragraphs). FDA also received comments from United States 
Senators and Representatives, four State governors, three lieutenant 
governors, as well as a number of State and local health departments, 
substance abuse programs, and law enforcement agencies. In addition, 
FDA received comments from industry trade associations and individual 
retailers. After careful consideration of these comments, FDA has 
assessed the rule's impact on the States, on the relationship between 
the States and the Federal government, and on the distribution of power 
and responsibilities among the various levels of government. As 
discussed below in this section, the agency concludes that the 
preemptive effects of the final rule are consistent with E.O. 12612.
    (3) Many comments, including several from legislators, expressed 
opposition to the 1995 proposed rule on the grounds that the rule 
adversely affected State sovereignty by infringing on States' rights to 
regulate tobacco products, to protect their citizens, and to regulate 
businesses within the State. Some comments from State legislators 
criticized the rule, interpreting it as a statement that the State are 
``unable to care for [their] own children,'' while other comments said 
that legislators, not FDA, should address issues affecting private 
citizens because legislators are elected officials who can be held 
politically accountable by their constituents.
    Some comments asserted that the 1995 proposed rule would prevent 
States from experimenting with or trying different local approaches to 
reduce the accessibility and appeal of cigarettes and smokeless tobacco 
products. Some of these comments argued that their State laws were 
either adequate or superior to the 1995 proposed rule, citing, for 
example, State vending machine restrictions, State laws prohibiting 
distribution of tobacco products to minors, and State proof-of-age 
requirements. Moreover, some comments argued that FDA has failed to 
show that youth access to, and use of, tobacco products is a national 
(rather than State) concern warranting Federal action.
    In contrast, several comments from State departments of health and 
State attorneys general noted that tobacco regulation is not solely a 
State issue. Moreover, some of the comments supported the rule for its 
potential impact on public health and on illegal sales of tobacco 
products to young people.
    FDA recognizes the pioneering and continuing role in the area of 
regulation of youth access to tobacco products that States have played, 
particularly certain active tobacco-control States. Federal cooperation 
with, and continued reliance upon, innovative and aggressive State and 
local enforcement efforts is essential.
    As explicitly recognized in E.O. 12612, however, Federal action 
limiting the discretion of State and local governments is appropriate 
``where constitutional authority for the action is clear and certain 
and the national activity is necessitated by the presence of a problem 
of national scope'' (section 3(b) of E.O. 12612). The final rule meets 
both of these conditions. First, the constitutional authority for the 
final rule is clearly rooted in the act which was enacted by Congress 
under the authority of the Commerce Clause of the Constitution, art. I, 
section 8, cl. 3. Second, youth access to cigarettes and smokeless 
tobacco is a problem of national scope that necessitates the provisions 
established by the final rule.
    As discussed in the preamble to the 1995 proposed rule, 
approximately 3 million children under the age of 18 are daily smokers 
(60 FR 41314 at 41317). Moreover, every day, approximately another 
3,000 young people become regular smokers (Id.). Children annually 
consume hundreds of millions of cigarettes, with the estimates ranging 
from 516 million to 947 million packages (Id.). Although most segments 
of the American adult population have decreased their use of 
cigarettes, smoking among young people has recently begun to rise (60 
FR 41314 at 41315). With regard to smokeless tobacco, similar 
statistics demonstrate the extent of the problem in this area--an 
estimated 1 million adolescent males use smokeless tobacco (60 FR 
41314). These figures clearly demonstrate a serious problem which 
exists at a national level. The health effects associated with 
cigarettes and smokeless tobacco are well established and have national 
social and health implications that warrant Federal attention.
    As discussed in section X. of this document, FDA believes the 
requirements it is establishing in this final rule set an appropriate 
floor for regulation of youth access to tobacco products but do not, as 
a policy matter, reflect a judgement that more stringent State or local 
requirements are inappropriate. Indeed, State and local governments may 
apply for exemption from preemption under section 521(b) of the act 
with regard to State and local requirements governing the sale and 
distribution of cigarettes and smokeless tobacco. A State or local 
requirement will be exempted from preemption under section 521(b) of 
the act if the State or local requirement: meets the exemption 
requirements established under that section, and is consistent with the 
goals in the final rule. The availability of exemptions from preemption 
established under section 521(b) of the act enables State and local 
governments to preserve or enact more stringent requirements governing 
the sale and distribution of cigarettes and smokeless tobacco.
    (4) Several comments asserted that States should be free to decide 
how to allocate their resources, including decisions as to whether any 
resources should be spent on tobacco control. Other comments expressed 
concern as to the rule's possible impact on State resources, explaining 
that States lacked resources to enforce the rule or predicting that FDA 
would lack sufficient resources to enforce the rule and, as a result, 
would have States handle enforcement matters.
    FDA believes that these concerns are unfounded. First, because FDA 
is responsible for enforcing this rule, the rule should not require the 
expenditure of State resources for its enforcement. Second, with regard 
to State tobacco control, State and local governments will retain 
flexibility to choose the

[[Page 44566]]

appropriate allocation of their resources in this area through the 
availability of exemptions from preemption under section 521(b) of the 
act.
    (5) Several comments also expressed strong concern regarding the 
rule's possible impact on the State economies, particularly with 
respect to farmers, manufacturers, distributors, and retailers. A 
detailed analysis of the rule's economic impact can be found in section 
XV. of this document.
    Section 3(d)(3) of E.O. 12612 directs Federal departments and 
agencies to consult with appropriate officials and organizations 
representing the States in developing those standards. Similarly, 
section 4(d) of E.O. 12612 instructs Federal departments and agencies 
to consult, to the extent practicable, with State officials and 
organizations when the Federal department or agency ``foresees the 
possibility of a conflict between State law and federally protected 
interests within its area of regulatory responsibility.'' Moreover, 
section 4(e) of E.O. 12612 requires Federal departments and agencies to 
``provide all affected States notice and an opportunity for appropriate 
participation in the proceedings'' when the Federal department or 
agency proposes to act through rulemaking to preempt State law.
    The proposed rule published in the Federal Register of August 11, 
1995, notified States and local governments of the Federal interest in 
regulating the sale and distribution of cigarettes and smokeless 
tobacco in order to protect children and adolescents. FDA, through the 
comment period on the proposed rule, gave State and local governments 
notice and an opportunity to participate in the rulemaking process, as 
required by E.O. 12612. This final rule, as well as the exemption 
document, which appears elsewhere in this issue of the Federal 
Register, provide additional notice to State and local governments. 
Further opportunity for participation is provided by the availability 
of exemptions from preemption set forth in section 521(b) of the act.
    In conclusion, FDA has determined that the preemptive effects of 
the final rule are consistent with E.O. 12612.

C. Executive Order 12630: Governmental Actions and Interference with 
Constitutionally Protected Property Rights

    Executive Order 12630 (E. O. 12630) directs Federal agencies to 
``be sensitive to, anticipate, and account for, the obligations imposed 
by the Just Compensation Clause of the Fifth Amendment in planning and 
carrying out governmental actions so they do not result in the 
imposition of unanticipated or undue additional burdens on the public 
fisc'' (Section 3(a)). Section 3(c) of the order states that actions 
taken to protect the public health and safety ``should be undertaken 
only in response to real and substantial threats to public health and 
safety, be designed to advance significantly the health and safety 
purpose, and be no greater than is necessary to achieve the health and 
safety purpose.'' Additionally, section 4(d) of E.O. 12630 requires, as 
a prerequisite to any proposed action regulating private property use 
for the protection of public health and safety, each agency to: (1) 
Clearly identify the public health or safety risk created by the 
private property use that is the subject of the proposed action; (2) 
establish that the proposed action substantially advances the purpose 
of protecting the public health and safety against the identified risk; 
(3) establish, to the extent possible, that the restrictions imposed on 
private property are not disproportionate to the extent to which the 
use contributes to the overall risk; and (4) estimate, to the extent 
possible, the potential cost to the Government should a court later 
determine that the action constitutes a taking.
    The agency, in the preamble to the 1995 proposed rule, considered 
whether the rule would result in a ``taking'' of private property and 
concluded that, while some requirements might affect private property, 
the rule did not result in a ``taking'' of that property. (See 60 FR 
41314 at 41357 through 41359.) In brief, the preamble to the 1995 
proposed rule noted that the proposal would prohibit the use of a 
nontobacco product trade name on a tobacco product, eliminate vending 
machines and self-service displays, restrict outdoor advertising from 
being placed within 1,000 feet of any elementary or secondary school or 
playground, prohibit all brand identifiable nontobacco items (such as 
hats and tee-shirts), and require established names and a brief 
statement on labels, labeling, and/or advertising. Sponsorship, under 
the 1995 proposed rule, would be limited to the corporate name. The 
preamble to the 1995 proposed rule explained that the rule did not 
result in a ``taking'' because the rule would not require the 
Government to physically invade or occupy private property and would 
not deny all economically viable uses of property. For example, the 
preamble to the 1995 proposed rule also stated that some items, such as 
vending machines, self-service displays, and nontobacco items, could be 
adapted to other uses. The preamble to the 1995 proposed rule also 
found that the rule substantially advanced the purpose of protecting 
the public health and that the restrictions were not disproportionate 
to the extent to which the use of the private property contributed to 
the public health risk (60 FR 41314 at 41357 through 41359). FDA also 
invited interested persons to submit information to enable the agency 
to determine the potential cost to the Government if a court found that 
the actions described in the 1995 proposed rule constituted a taking.
    The final rule, as amended, prohibits the use of a trade name of a 
nontobacco item for any tobacco product, restricts the placement of 
vending machines and self-service displays, restricts outdoor 
advertising from being placed within 1,000 feet of any elementary or 
secondary school or playground, prohibits all brand identifiable 
nontobacco items, such as hats and tee-shirts and requires established 
names on labels, labeling, and/or advertising, and places certain 
restrictions on sponsorship. Thus, the final rule, in many respects, is 
more lenient than the 1995 proposed rule. For example, the 1995 
proposed rule would have eliminated the use of vending machines; the 
final rule permits vending machine sales to occur in locations that are 
inaccessible to young people. The 1995 proposed rule would have 
eliminated mail-order sales; the final rule permits such sales to 
continue. So, given that the 1995 proposed rule did not result in a 
``taking,'' the final rule, being more lenient than the 1995 proposed 
rule, also should not result in a ``taking.''
    Nevertheless, FDA received several comments asserting that the rule 
would effect a ``taking'' of private property. Most comments did not 
assign a specific monetary value to the private property which they 
felt would be ``taken'' or, instead, gave values or figures applicable 
to the entire industry rather than values or figures that would apply 
to the market (which, in this case, would be sales to people under age 
18) affected by the rule.
    (6) Several comments, particularly from retailers, claimed that the 
1995 proposed rule's restrictions on self-service displays constituted 
a ``taking.'' A few comments explained that, for self-service displays, 
requiring the displays to be moved behind the counter would be 
analogous to a Government requiring an easement on real property and, 
as a

[[Page 44567]]

result, would violate the Fifth Amendment. FDA also received a small 
number of comments from firms that manufacture displays; these firms 
argued that the rule would essentially force them out of business and 
represent a ``taking'' of the business.
    FDA disagrees with the comments. The final rule, as amended, 
permits self-service displays (merchandisers only) in facilities that 
are totally inaccessible to young people. Thus, in those facilities 
where merchandisers will be permitted, the rule will not require the 
merchandisers to be removed, and firms that manufacture merchandisers 
will continue to have a market for their merchandisers.
    Retailers might be able to avoid or reduce the rule's impact on 
some merchandisers if those merchandisers could be adapted to other 
uses. For example, a merchandiser that consisted of bare shelves could 
be used to display products other than cigarettes and smokeless 
tobacco. Other merchandisers could be moved and, as a result, would 
retain their utility; for example, a counter display that stands near a 
cash register could be moved behind the counter and still be used for 
cigarettes and smokeless tobacco.
    Additionally, as explained in greater detail in section XI. of this 
document, reductions in personal property's value, even prohibitions on 
all economically viable uses, and financial expenditures to comply with 
a regulatory requirement do not necessarily establish a taking.
    (7) Several comments asserted that the rule would eliminate the use 
of vending machines. In the preamble to the 1995 proposed rule, FDA 
cited an article from a vending machine publication to suggest that 
vending machines could be converted to sell other products and so, 
while the 1995 proposed rule would prohibit the use of vending machines 
for cigarettes and smokeless tobacco, the ability to convert a vending 
machine to other uses reduced the likelihood of a ``taking'' (60 FR 
41314 at 41358). However, FDA received several comments explaining that 
some cigarette vending machines, particularly older models, cannot be 
adapted to other uses so that the 1995 proposed rule would destroy the 
value of those older vending machines.
    As discussed earlier in this document, the final rule permits 
vending machines in facilities that are totally inaccessible to young 
people. While this may limit the number of places where vending 
machines may be used, may exclude vending machines from places where 
they were used most profitably, or, for those vending machines that 
cannot be moved, may compel the vending machine owner to convert the 
machine to other uses, if possible, the final rule's restrictions do 
not constitute a taking. Reductions in personal property's value, even 
prohibitions on all economically viable uses, and financial 
expenditures to comply with a regulatory requirement do not necessarily 
establish a taking.
    (8) Several comments asserted that the rule would reduce sales or 
tax revenues, prompt companies to terminate employees, or suspend 
sponsorship of events, thereby depriving States of revenues associated 
with those sponsored events or eliminating the event itself. For 
example, one State legislator claimed that the rule would adversely 
affect automobile racing events in the State, leading to a loss of 8 
million dollars in revenue and adversely affecting the State's tourism 
department. Another State legislator asserted that the rule's 
sponsorship restrictions would end rodeo events in the State.
    FDA disagrees with the comments. While the rule's economic impacts 
may be significant, those impacts do not necessarily result in a 
taking. For example, the final rule does not require firms to terminate 
employees or to stop sponsoring events. In fact, the final rule 
expressly permits sponsorships in the corporate name. The concerns 
expressed by the comments are also speculative and, to the extent that 
they do occur, would result from decisions made by third parties rather 
than by FDA. The Fifth Amendment requires just compensation for a 
governmental taking of private property; it does not require 
compensation for the consequential damages resulting from the exercise 
of a lawful Government regulation on that property.
    Indeed, as noted in the preamble to the 1995 proposed rule, courts 
have generally required either a physical invasion of the property or a 
denial of all economically beneficial or productive use of the property 
and examined the degree to which the governmental action serves the 
public good, the economic impact of that action, and whether the action 
has interfered with ``reasonable investment-backed expectations'' (60 
FR 41314 at 41357 through 41358). The preamble to the 1995 proposed 
rule noted that deprivation of the most beneficial use of property does 
not constitute a taking and that Government regulation often involves 
adjustment of rights for the public good. If every Government 
regulation resulted in a taking, then the Government would be 
effectively required to ``regulate by purchase'' (60 FR 41314 at 41358 
(citing Andrus v. Allard, 444 U.S. 51, 65 (1979)). Here, the agency is 
not directing retailers to terminate staff, taking revenue belonging to 
retailers, or ending sponsored events. It is only issuing regulations 
to reduce illegal cigarette and smokeless tobacco to young people and 
the appeal of such products to young people. Retailers would still 
receive revenues from legal sales to adults; sponsorships in the 
corporate name could occur.
    Other cases support the notion that lawful regulatory action does 
not constitute a taking merely because the Government action diminishes 
the value of private property, reduces profits, or prevents the most 
beneficial use of property (see Carlin Communications, Inc. v. Federal 
Communications Comm'n, 837 F.2d 546, 557-558 n. 5 (2d Cir.), cert. 
denied, 488 U.S. 924 (1988) (FCC regulation of ``dial-a-porn'' services 
to protect minors did not constitute a taking); Galloway Farms, Inc. v. 
United States, 834 F.2d 998 (Fed. Cir. 1987) (trade embargo, while 
closing off certain markets, did not eliminate all economic value so no 
taking occurred); Minnesota Ass'n of Health Care Facilities, Inc. v. 
Minnesota Dep't of Public Welfare, 742 F.2d 442, 446 (8th Cir. 1984), 
cert. denied, 469 U.S. 1215 (1985) (nursing home's decision to 
participate in Medicaid program was voluntary and so a statute 
pertaining to Medicaid rates did not constitute a taking); Carruth v. 
United States, 627 F.2d 1068, 1081 (Ct. Cl. 1980) (regulation affecting 
contaminated peanuts, while reducing their value, did not constitute a 
taking); Warner-Lambert Co. v. Federal Trade Comm'n, 562 F.2d 749, 759 
n. 45 (D.C. Cir. 1977), cert. denied, 435 U.S. 950 (1978) (FTC order 
requiring corrective advertising did not constitute a taking)).
    Furthermore, courts have generally declined to require compensation 
for the loss of contracts that could not be completed following the 
enactment of a new statute or regulation or action by the Government 
and have not required compensation for the loss of future or 
anticipated profits. In Omnia Commercial Co. v. United States, 261 U.S. 
502 (1923), the Supreme Court had to decide whether the Government's 
acquisition of a steel company's entire production of steel plate 
constituted a taking of a firm's contract for a large quantity of steel 
plate from the same steel company. The Court wrote that, ``There are 
many laws and governmental

[[Page 44568]]

operations which injuriously affect the value of or destroy property--
for example, restrictions upon the height or character of buildings, 
destruction of diseased cattle, trees, etc., to prevent contagion--but 
for which no remedy is afforded. Contracts in this respect do not 
differ from other kinds of property'' (Id. at pp. 508 through 509). The 
Court reviewed earlier decisions and stated that:
    The conclusion to be drawn * * * is, that for consequential loss 
or injury resulting from lawful governmental action, the law affords 
no remedy. The character of the power exercised is not material. * * 
* If, under any power, a contract or other property is taken for 
public use, the Government is liable; but, if injured or destroyed 
by lawful action, without a taking, the Government is not liable.
(Id. at p. 510)
The Court held that while the Government took the steel, it did not 
take the contract itself and that ``[f]rustration and appropriation are 
essentially different things'' (Id. at p. 513). (See also Louisville & 
Nashville R.R. Co. v. Mottley, 219 U.S. 467, 484 (1911); NL Industries, 
Inc. v. United States, 839 F.2d 1578, 1579 (Fed. Cir.), cert. denied, 
488 U.S. 820 (1988) (``frustration of a business by loss of a customer 
was not a taking''); Carruth, 627 F.2d at 1081 (``[I]n cases where 
there has been no direct appropriation of property by governmental 
agencies, consequential damages resulting from the exercise of lawful 
regulations are not compensable takings within the purview of the Fifth 
Amendment'').)
    Thus, FDA disagrees with the comments suggesting that the rule will 
result in a taking of jobs or future revenues associated with sponsored 
events.
    (9) Several comments said that the 1995 proposed rule's 
restrictions on the use of trade names constitute a taking of trade 
names or the goodwill associated with a tradename or asserted that one 
has a ``right'' to use a brand name in any manner.
    As discussed in section XI. of this document, the agency disagrees 
that any provision in this rule effects a taking of trademarks and 
goodwill.

XIV. Environmental Impact

    In the Federal Register of August 11, 1995 (60 FR 41314), the 
preamble to the proposed rule stated that FDA had determined under 
Sec. 25.24(a)(8), (a)(11), and (e)(6) that the proposed action was of a 
type that does not individually or cumulatively have a significant 
impact on the human environment. No new information or comments have 
been received that would affect the agency's previous determination 
that this action has no significant impact on the human environment, 
and that neither an environmental assessment nor an environmental 
impact statement is required.

XV. Analysis of Impacts

A. Introduction and Summary

    The Food and Drug Administration (FDA) has examined the impacts of 
the final rule under Executive Order 12866, under the Regulatory 
Flexibility Act (5 U.S.C. 601-612), and under the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4). Executive Order 12866 directs 
agencies to assess all costs and benefits of available regulatory 
alternatives and, when regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety, and other advantages; and 
distributive impacts and equity). If a rule has a significant economic 
impact on a substantial number of small entities, the Regulatory 
Flexibility Act requires agencies to analyze regulatory options that 
would minimize any significant impact of such rule on small entities. 
Section 202 of the Unfunded Mandates Reform Act requires that agencies 
prepare an assessment of anticipated costs and benefits before 
proposing any rule that may result in an expenditure by State, local 
and tribal governments, in the aggregate, or by the private sector, of 
$100,000,000 (adjusted annually for inflation) in any year. Section 205 
of the Unfunded Mandates Reform Act also requires that the agency 
identify and consider a reasonable number of regulatory alternatives 
and from those alternatives select the least costly, most cost-
effective, or least burdensome alternative that achieves the objective 
of the rule. The following analysis, in conjunction with the remainder 
of this preamble, demonstrates that this rule is consistent with the 
principles set forth in the Executive Order and in these two statutes.
    FDA published its preliminary economic analysis in the preamble to 
its 1995 proposed regulation. In response, the agency received 
thousands of comments raising economic issues or concerns. 
Representatives of affected industry sectors emphasized burdens in 
excess of those estimated in the preliminary economic analysis. Other 
comments stressed the considerable economic value of the expected 
public health benefits. Although few comments provided quantifiable 
data on projected economic impacts, whether benefits or burdens, a 
report prepared by the Barents Group and presented as Volume 11 of the 
Tobacco Institute submission provided a comprehensive critique of the 
methodology, assumptions, and cost estimates presented in FDA's 
preliminary economic analysis and developed alternative estimates of 
regulatory costs. Other comments addressed selected economic issues. 
FDA carefully examined and evaluated the reasoning and data presented 
in these comments, accepted those that were persuasive, and presents 
this revised analysis of the final rule.
    In its preliminary analysis, FDA based the benefits of the 1995 
proposed rule on a finding that compliance could help to achieve the 
Department's ``Healthy People 2000'' goal of reducing underage tobacco 
use by one-half. Comments received in response to the proposal have 
reinforced the agency's conviction that this goal can be realized, 
although it will require the active support and participation of State 
and local governments and civic and community organizations, as well as 
manufacturers and retail dispensers of tobacco products. In the Federal 
Register of January 19, 1996 (61 FR 1492), the Substance Abuse and 
Mental Health Services Administration (SAMHSA) issued a regulation 
governing a program of State-operated enforcement activities to 
restrict the sale or distribution of tobacco products to individuals 
under the age of 18. SAMHSA predicted that its rule would cut the rate 
of underage tobacco consumption by between one-tenth and one-third. FDA 
can not separately quantify the incremental benefits of the respective 
agency programs, due to the substantial interdependencies and 
uncertainties regarding future compliance with these rules; but finds 
that its final rule and the SAMHSA regulation are fully complementary 
and, working together, will produce results that would more than equal 
the sum of their independent efforts.
    Each year, an estimated 1 million adolescents under the age of 18 
begin to smoke cigarettes. The Centers for Disease Control and 
Prevention (CDC) estimate that approximately one in three of these 
adolescents will die of smoking-related diseases, and FDA has concluded 
that this projection provides the best estimate of the excess fatality 
rate. FDA finds that even overly conservative projections indicate that 
achieving the ``Healthy People 2000'' goal of reducing underage tobacco 
use by one-half would prevent well over

[[Page 44569]]

60,000 early deaths, gaining over 900,000 future life-years for each 
year's cohort of teenagers who would otherwise begin to smoke. The 
monetary value of these health benefits (at a 3 percent discount rate) 
is estimated to total $28 to $43 billion per year and includes $2.6 
billion in medical cost savings, $900 million in productivity gains 
from reduced morbidity, and $24.6 to $39.7 billion per year in 
willingness-to-pay values for averting premature fatalities. (Because 
of the long periods involved, a 7 percent discount rate reduces the 
total benefits to about $9.2 to $10.4 billion per year). If the 
agency's goal were exceeded, these benefits would be even larger. 
Moreover, if even a fraction of the goal were achieved, the benefits 
would substantially outweigh the costs of the rule. As shown in Table 
1c, halting the onset of smoking for only 1/20 of the 1 million 
adolescents who become new smokers each year would provide annual 
benefits valued at from $2.8 to $4.3 billion a year. In addition, 
although FDA has not quantified the benefits of reducing the number of 
serious illnesses attributable to the use of smokeless tobacco by 
youngsters under the age of 18, the agency is convinced that these 
benefits also will be substantial.

                                      TABLE 1c.--ANNUAL ILLNESS-RELATED BENEFITS OF ALTERNATIVE EFFECTIVENESS RATES                                     
                                       (UNDISCOUNTED LIVES AND LIFE-YEARS; 3% DISCOUNT RATE FOR MONETARY VALUES)<SUP>1                                       
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Fewer                                                            Mortality-Related      Total Benefits   
                                             Teenagers      Smoking                              Morbidity-    Willingness-to-Pay  ---------------------
                                             who will       Related     Life-Years    Medical      Related   ----------------------                     
   Fraction of Teenage Cohort Deterred       Smoke as       Deaths      Saved (No.)   Savings   Productivity  Life-Yrs.    Deaths      Low        High  
                                              Adults<SUP>3       Averted                   ($bils.)     Savings      Saved     Averted    ($bils.)   ($bils.)
                                               (No.)         (No.)                                ($bils.)     ($bils.)   ($bils.)                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
1/2<SUP>2                                         250,000        60,200       905,300          2.6        0.9          24.6       39.7       28.1       43.2 
1/3                                          167,000        40,100       603,600          1.8        0.6          16.4       26.4       18.7       28.8 
1/5                                          100,000        24,100       362,100          1.1        0.4           9.8       15.9       11.2       17.3 
1/10                                          50,000        12,000       181,100          0.5        0.2           4.9        7.9        5.6        8.6 
1/20                                          25,000         6,000        90,500          0.3        0.1           2.5        4.0        2.8        4.3 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Totals may not add due to rounding.                                                                                                                 
\2\ Estimate used in analysis.                                                                                                                          
\3\ Assumes 50% of adolescents who are deterred from smoking continue to refrain as adults.                                                             

    In its evaluation of the economic impact on industry, FDA also 
includes those costs that might be attributable to the SAMHSA program, 
as the rules of both agencies work collectively to reduce youth access 
to tobacco products. As a result, the overall estimated compliance 
costs of the rules range from $174 million to $187 million in one-time 
costs and from $149 million to $185 million in annual operating costs 
(see Table 2). Manufacturers of tobacco products will incur one-time 
costs ranging from $78 million to $91 million, primarily for removing 
prohibited point-of-sale promotional items and self-service displays, 
and for changing package labels. As the responsibility for removing the 
prohibited point-of-sale promotional and display items resides with the 
owner, manufacturers and retailers may ultimately share the costs of 
removal and replacement. FDA's cost estimates assume that manufacturers 
will pay for most removal and installation activities and retailers 
will pay for most replacement items. (If, in fact, retailers assume 
most removal responsibilities, the estimated manufacturer costs fall by 
about $47 million).

[[Page 44570]]

                            TABLE 2.--COSTS OF FDA AND SAMHSA REGULATIONS ($ mils.)<SUP>1                            
----------------------------------------------------------------------------------------------------------------
                    Requirements By Sector                           One-Time Costs       Annual Operating Costs
----------------------------------------------------------------------------------------------------------------
Tobacco Manufacturers                                                             78-91                        2
  Point-of-Sale Advertising                                                          30                         
  Self-Service Ban                                                                   40                         
  Label Changes                                                                    4-17                         
  Paperwork Requirements                                                                                     1.2
  Training                                                                          1.5                      0.2
  Readership Surveys                                                                  2                        1
----------------------------------------------------------------------------------------------------------------
Retail Establishments                                                                96                       78
  Training                                                                           34                       20
  I.D. Checks                                                                                                 43
  Self-Service Ban                                                                   57                       11
  Point-of-Sale Advertising                                                           5                         
  Vending Machines                                                                                           3.5
----------------------------------------------------------------------------------------------------------------
Consumers                                                                                                  41-50
  I.D. Checks                                                                                              41-50
----------------------------------------------------------------------------------------------------------------
Government                                                                                                 28-55
  States (SAMHSA)                                                                                          25-50
  FDA                                                                                                        3-5
----------------------------------------------------------------------------------------------------------------
TOTAL                                                                           174-187                  149-185
----------------------------------------------------------------------------------------------------------------
\1\ Assumes manufacturers remove prohibited retail display. If retailers bear full burden, manufacturer one-time
  costs fall by about $47 million and retailer one-time costs rise by about $17 million. Advertising            
  restrictions are considered under distributional effects. Excludes costs of short-term resource dislocation   
  and educational programs.                                                                                     

    Retail establishments will incur an estimated $96 million in one-
time costs. About $57 million of these costs are due to the self-
service restriction, primarily for replacing display cases and other 
functional promotional items. (If retailers rather than manufacturers 
remove the prohibited point-of-sale advertising and display items, the 
estimated retailer costs rise by about $17 million). The retail sector 
will also incur about $78 million in annual costs. In addition to new 
labor costs attributable to the self-service restrictions, both the FDA 
and SAMHSA rules impose costs for training employees to verify customer 
ages, for routinely checking I.D.'s of young purchasers, and for 
foregoing profits due to reduced vending machine sales. Consumers will 
bear costs of up to $50 million annually for incurring some delay in 
checkout lines. Finally, enforcement of these rules may cost the FDA 
from $3 million to $5 million per year and State governments from $25 
million to $50 million per year for administering various SAMHSA 
enforcement programs.
    FDA could not, however, quantify every regulatory cost. For 
example, the agency may require certain tobacco manufacturers to 
broadcast educational messages under the agency's notification process. 
Cost estimates for these activities will be developed in parallel with 
the program elements. In addition, a number of commercial sectors will 
experience costs for short-term dislocations of current business 
activities. Neither FDA nor any of the industry comments on the 
agency's proposal projected the magnitude of these costs, but they 
would be mitigated for those businesses that anticipate the adjustments 
in long-term business plans.
    In addition to the costs described previously, the rule will create 
significant distributional and transitional effects. Some industry 
comments asserted that FDA had neglected the cost of lost sales 
revenues in its preliminary economic analysis and one industry study 
estimated these ``Illustrative Costs'' at from $1.3 billion to $3.3 
billion per year. In fact, FDA had considered these sector-specific 
revenue reductions, but described the impacts as distributional 
effects, rather than as net societal costs. For example, any lost sales 
experienced by suppliers of advertising were considered distributional 
impacts, because dollars not spent on advertising will not be lost to 
the U.S. economy, but will be spent on other goods and services. As 
acknowledged by the authors of one of the economic impact analyses 
commissioned by the tobacco manufacturing industry:
     * * * when tobacco product manufacturers decrease their 
advertising expenditures, the money not spent translates into 
increased profits for the industry. The increased profits ultimately 
end up in the hands of the companies' owners (shareholders) either 
as direct payouts or as investments on their behalf in other lines 
of business. In general, these profits are ultimately recycled into 
increased consumption and investment by the owners of the companies.

Similarly, the anticipated slow but persistent decline in tobacco 
product sales revenues are not societal costs, because the dollars not 
spent on tobacco-related items will be spent on other goods or 
services.
    Nevertheless, FDA is aware that many tobacco-related industry 
sectors will be adversely affected by this rule. Tobacco manufacturers 
and suppliers will face increasingly smaller sales, because reduced 
tobacco consumption by youth will lead, over time, to reduced tobacco 
consumption by adults. The impact of this trend on industry revenues, 
however, will be extremely gradual, requiring over a decade to reach an 
annual decrease of even 4 percent. Also, if State and Federal excise 
tax rates on tobacco products remain at current levels, tax revenues 
would decrease slowly over time, falling by about $231 million and $196 
million, respectively, by the 10th year following compliance with the 
regulation.
    Tobacco manufacturers spent $6.2 billion on advertising, 
promotional, and marketing programs in 1993, and about 30 percent may 
be substantially altered to reflect the various ``text only''

[[Page 44571]]

restrictions or other prohibitions. If tobacco companies choose to 
reduce advertising and promotional activities due to the FDA 
restrictions, the sectors affected would include advertising agencies 
and communications media, owners of retail and outdoor advertising 
space, and recipients of corporate brand-name sponsorships (especially 
auto racing). These businesses would need to attract new revenues to 
maintain current levels of profitability. Similarly, vending machine 
operators will need to find substitute products to replace up to 3 
percent of their sales revenues.
    In summary, FDA finds that compliance with this rule will bring 
significant health benefits to the U.S. population. The rule will also 
exact long-term revenue losses on the tobacco industry and short-term 
costs on various affiliated industry sectors. With regard to small 
businesses, many near-term impacts will be small or transitory, but 
some business will be adversely affected. For a small retail 
convenience store not currently complying with this rule, the 
additional first year costs could average $400. For those convenience 
stores that already check customer identification, these costs average 
$137, largely to relocate tobacco product displays. Moreover, the rule 
will not produce significant economic problems at the national level, 
as the long-term displacement within tobacco-related sectors will be 
offset by increased output in other areas. Thus, under the Unfunded 
Mandates Act, FDA concludes that the substantial benefits of this 
regulation will greatly exceed the compliance costs that it imposes on 
the U.S. economy. In addition, the agency has considered other 
alternatives and determined that the current rule is the least 
burdensome and most cost-effective alternative that would meet the 
objectives of this rule.

B. Statement of Need for Action

    The need for action stems from the agency's determination to 
ameliorate the enormous toll on the public health that is directly 
attributable to the consumption by adolescents of cigarettes and 
smokeless tobacco. According to the nation's most knowledgeable health 
experts, tobacco use is the most important preventable cause of 
morbidity and premature mortality in the United States, accounting each 
year for over 400,000 deaths (approximately 20 percent of all deaths). 
Moreover, these morbidity and mortality burdens do not spare middle 
aged adults--with the average smoking-related death responsible for the 
loss of up to 15 life-years. \268\
---------------------------------------------------------------------------

    \268\ Statement of Clyde Behney and Maria Hewitt on Smoking-
Related Deaths and Financial Costs: Office of Technology Assessment 
Estimates for 1990 Before the Senate Finance Committee, pp. 1-2, 
April 28, 1994.
---------------------------------------------------------------------------

    In its guidelines for the preparation of Economic Impact Analyses, 
OMB asks that Federal regulatory agencies determine whether a market 
failure exists and if so, whether that market failure could be resolved 
by measures other than Federal regulation. The basis for this request 
derives from standard economic welfare theory, which by assuming that 
each individual is the best judge of his/her own welfare, concludes 
that perfectly competitive private markets provide the most efficient 
use of societal resources. Accordingly, the lack of perfectly 
competitive private markets (market failure) is frequently used to 
justify the need for Government intervention. Common causes of such 
market failures include monopoly power, inadequate information, and 
market externalities or spillover effects.
    While FDA agrees that various elements of market failure are 
relevant to the problem of teenage use and tobacco addiction, the 
agency also believes that this regulatory action would be justified 
even in the absence of a traditional market failure. As noted 
previously, the implications of the market failure logic are rooted in 
a basic premise of the standard economic welfare model--that each 
individual is the best judge of his/her own welfare. FDA, however, is 
convinced that this principle does not apply to children and 
adolescents. Even steadfast defenders of individual choice acknowledge 
the difficulty of applying the ``market failure'' criterion to non 
adults. Littlechild, for example, adds a footnote to the title of his 
chapter on ``Smoking and Market Failure'' \269\ to note that ``[t]he 
economic analysis of market failure deals with choice by adults.'' 
Although both Beales \270\ and Viscusi find that young persons balance 
risks and rewards in making decisions on whether or not to smoke, 
Viscusi explains that:
---------------------------------------------------------------------------

    \269\ Littlechild, S. C., ``Smoking and Market Failure,'' in 
``Smoking and Society: Toward a More Balanced Assessment,'' edited 
by R. D. Tollison, Lexington Books, p. 271, 1986.
    \270\ Beales III, J. Howard, ``Advertising and the Determinants 
of Teenage Smoking Behavior,'' p. 44, 1993.
---------------------------------------------------------------------------

    [n]evertheless, there are some classes of choices that have 
major consequences, and for that reason society may wish to reserve 
the privilege of making these choices until a particular age is 
reached. These limits should, however, be set according to the age 
at which individuals are believed to be capable of making reasonable 
long-term decisions regarding their welfare, rather than some 
arbitrary date independent of the choice context. The emerging 
consensus of smoking restriction policies has focused age 18 as the 
minimum age for the purchase of cigarettes. \271\

    \271\ Viscusi, W. K., ``Smoking: Making the Risky Decision,'' 
Oxford University Press, New York, p. 149, 1992.
---------------------------------------------------------------------------

FDA concludes, therefore, that even if some children do make rational 
choices, the agency's regulatory determinations must reflect the 
societal conviction that children under the age of legal consent cannot 
be assumed to act in their own best interest. \272\
---------------------------------------------------------------------------

    \272\ Goodin, R. E., ``No Smoking: The Ethical Issues,'' 
University of Chicago Press, pp. 30-32, 1989.
---------------------------------------------------------------------------

    In particular, FDA finds that the pervasiveness and imagery used in 
industry advertising and promotional programs often obscure adolescent 
perceptions of the significance of the associated health risks and the 
strength of the addictive power of tobacco products. Section VI. of 
this document describes numerous studies on the shortcomings of the 
risk perceptions held by children. Health economist Victor R. Fuchs 
describes the typical sequence:
    There is considerable evidence that the [time discount] rate 
falls as children mature. Infants and young children tend to live 
very much for the present; the prospect of something only a week in 
the future usually has little influence over their behavior. As 
children get older their time horizons lengthen, but once adult 
status is reached there seems to be little correlation between time 
discount and age. \273\

    \273\ Fuchs, V. R., ``How We Live,'' Harvard University Press, 
Cambridge, MA, pp. 228-229, 1983.+
---------------------------------------------------------------------------

Thus, although most youngsters acknowledge the existence of tobacco-
related health risks, the agency finds that the abridged time horizons 
of youth make them exceptionally vulnerable to the powerful imagery 
advanced through targeted industry advertising and promotional 
campaigns. In effect, these conditions constitute an implicit market 
failure not adequately remedied by existing government action.
    Moreover, the agency does not view these results as inconsistent 
with the growing economic literature based on the Becker and Murphy 
models of ``rational addiction.'' \274\ Although several empirical 
studies have

[[Page 44572]]

demonstrated that, for the general population, cigarette consumption is 
``rationally addictive'' in the sense that current consumption is 
affected by both past and future consumption, \275\ Chaloupka notes 
that this ``rationality'' does not hold for younger or less educated 
persons, for whom past but not future consumption maintains a 
significant effect on current consumption. He concludes, ``[t]he strong 
effects of past consumption and weak effects of future consumption 
among younger or less educated individuals support the a priori 
expectation that these groups behave myopically.'' \276\
---------------------------------------------------------------------------

    \274\ Becker, G. S., and K. M. Murphy, ``A Theory of Rational 
Addiction,'' Journal of Political Economy, vol. 96, No. 4, pp. 675-
700, 1988.
    \275\ Becker, G. S., M. Grossman, and K. M. Murphy, ``An 
Empirical Analysis of Cigarette Addiction,'' The American Economic 
Review, vol. 84, No. 3, pp. 396-418, June 1994; Chaloupka, F., 
``Rational Addictive Behavior and Cigarette Smoking,'' Journal of 
Political Economy, vol. 99, No. 4, pp. 722-742, 1991; Keeler, T. E., 
T. W. Hu, P. G. Barnett, and W. G. Manning, ``Taxation, Regulation, 
and Addiction: A Demand Function for Cigarettes Based on Time-Series 
Evidence,'' Journal of Health Economics, vol. 12, pp. 1-18, 1993.
    \276\ Chaloupka, F., ``Rational Addictive Behavior and Cigarette 
Smoking,'' Journal of Political Economy, vol. 99, No. 4, p. 740, 
1991.
---------------------------------------------------------------------------

    FDA's justification of this regulation relies on the total costs 
associated with childhood addiction to tobacco, rather than on the 
external or spillover costs to nonusers. Nevertheless, a further market 
failure would exist if the use of tobacco imposed such costs on 
nonusers. Many studies have attempted to calculate the societal costs 
of smoking, but few have addressed these externalities. The most 
detailed research on the issue of whether smokers pay their own way is 
the 1991 study by Manning, et al., \277\ which develops estimates of 
the present value of the lifetime external costs attributable to 
smoking. This study examines differences in costs of collectively 
financed programs for smokers and nonsmokers, while simultaneously 
controlling for other personal characteristics that could affect these 
costs (e.g., age, sex, income, education, and other health habits, 
etc.). The authors found that nonsmokers subsidize smokers' medical 
care, but smokers (who die at earlier ages) subsidize nonsmokers' 
pensions. On balance, they calculated that, before accounting for 
excise taxes, smoking creates net external costs of about $0.15 per 
pack of cigarettes in 1986 dollars ($0.33 per pack adjusted to 1995 
dollars by the medical services price index). While acknowledging that 
these estimates ignored external costs associated with lives lost due 
to passive smoking, perinatal deaths due to smoking during pregnancy, 
and deaths and injuries caused by smoking-related fires, the authors 
concluded that there is no net externality, because the sum of all 
smoking-related externalities is probably less than the added payments 
imposed on smokers through current Federal and State cigarette excise 
taxes. A Congressional Research Service Report to Congress concurred 
with the study's conclusion, \278\ although many uncertainties remain 
regarding the potential magnitude of the omitted cost elements.
---------------------------------------------------------------------------

    \277\ Manning, W. G., E. B. Keeler, J. P. Newhouse, E. M. Sloss, 
and J. Wasserman, ``The Costs of Poor Health Habits, A RAND Study,'' 
Harvard University Press, Cambridge, MA, 1991.
    \278\ Gravelle, J. G., and D. Zimmerman, ``CRS Report for 
Congress: Cigarette Taxes to Fund Health Care Reform: An Economic 
Analysis,'' Congressional Research Service, p. 1, March 8, 1994.
---------------------------------------------------------------------------

C. Regulatory Benefits

1. Prevalence-Based Studies
    The benefits of the regulation include the costs that would be 
avoided by reducing the adverse health effects associated with the 
consumption of tobacco products. Most research on the costs of smoking-
related illness has concentrated on the medical costs and productivity 
losses associated with the prevalence of death and illness in a given 
year. These prevalence-based studies typically measure three 
components: (1) The contribution of smoking to annual levels of illness 
and death, (2) the direct costs of providing extra medical care, and 
(3) the indirect costs, or earnings foregone due to smoking-related 
illness or death. \279\
---------------------------------------------------------------------------

    \279\ See ``Smoking and Health in the Americas: A 1992 Report of 
the Surgeon General in collaboration with the Pan American Health 
Organization,'' Department of Health and Human Services (DHHS), 
Public Health Service (PHS), CDC, National Center for Chronic 
Disease Prevention and Health Promotion (NCCDPHP), Office on Smoking 
and Health (OSH), pp. 105-112, 1992, (hereinafter referred to as 
``1992 SGR'') for a full summary of these methodologies and 
findings.
---------------------------------------------------------------------------

    In a recent statement, the former U.S. Office of Technology 
Assessment (OTA) declared that ``the greatest 'costs' of smoking are 
immeasurable insofar as they are related to dying prematurely and 
living with debilitating smoking-related chronic illness with attendant 
poor quality of life.'' Nonetheless, OTA calculated that in 1990 the 
national cost of smoking-related illness and death amounted to $68 
billion and included $20.8 billion in direct health care costs, $6.9 
billion in indirect morbidity costs, and $40.3 billion in lost future 
earnings from premature death. \280\ More recently, the CDC estimated 
the 1993 smoking-attributable costs for medical care, alone, at $50 
billion. \281\ Unfortunately, these prevalence-based studies do not 
answer many of the most important questions related to changes in 
regulatory policy, because they present the aggregate cost of smoking-
related illness in a single year, rather than the lifetime cost of 
illness for an individual smoker. As noted in the 1992 Report of the 
Surgeon General, most prevalence-based studies fail to consider issues 
concerning ``the economic impact of decreased prevalence of cigarette 
smoking, the length of time before economic effects are realized, the 
economic benefits of not smoking, and a comparison of the lifetime 
illness costs of smokers with those of nonsmokers.'' \282\ In effect, 
although these studies are designed to measure the smoking-related draw 
on societal resources, they are not well-suited for analyzing the 
consequences of regulation-induced changes in smoking behavior.
---------------------------------------------------------------------------

    \280\ Statement of Clyde Behney and Maria Hewitt on Smoking-
Related Deaths and Financial Costs: Office of Technology Assessment 
Estimates for 1990 Before the Senate Finance Committee, p. 2, April 
28, 1994.
    \281\ ``Medical-Care Expenditures Attributable to Cigarette 
Smoking--United States, 1993,'' in Morbidity and Mortality Weekly 
Reports (MMWR), CDC, DHHS, vol. 43, No. 26, pp. 469-472, July 8, 
1994.
    \282\ 1992 SGR, p. 111.
---------------------------------------------------------------------------

2. FDA's Methodology
    An alternative methodology, termed incidence-based research, 
compares the lifetime survival probabilities and expenditure patterns 
for smokers and nonsmokers. As this approach models the individual 
life-cycle consequences of tobacco consumption, FDA relied on these 
incidence-based studies for its original analysis of the proposed rule 
to value the beneficial effects of the rule over the lifetime of each 
new cohort of potential smokers. The methodology incorporates the 
following steps:
<bullet> A projection of the extent to which the rule will reduce the 
incidence, or the annual number, of new adolescent users of tobacco 
products;
<bullet> A projection of the extent to which the reduced rates of 
adolescent tobacco consumption will translate to reduced rates of 
lifetime tobacco consumption;
<bullet> A projection of the extent to which the reduced rates of 
lifetime tobacco consumption will decrease the number of premature 
deaths and lost life-years; and
<bullet> An exploration of various means of estimating the monetary 
value of the expected health improvements.

[[Page 44573]]

    The annual benefits of the 1995 proposed rule were measured as the 
present value of the lifetime benefits gained by those youngsters, who 
in the absence of the proposed regulation, would have become new 
smokers. Upon review of the public comments, FDA found none that would 
persuade the agency to revise its projections. In general, the relevant 
comments expressed no objection to the basic methodology or model, but 
some disputed the accuracy of the specific data estimates. The 
following paragraphs describe the FDA assumptions that underlie these 
benefit estimates and present the agency's response to the applicable 
public comments.
3. Reduced Incidence of New Young Smokers
    FDA's preliminary analysis assumed that 1 million youngsters become 
new smokers each year. One trade association comment questioned this 
figure, asserting that the relevant studies included individuals over 
the age of 18. However, the 1985 National Health Interview Survey 
reported 1.08 million 20-year old smokers, and the Combined National 
Health Interview Surveys for 1987-1988 found that 92 percent of 20-year 
old smokers had started smoking by age 18. Taking 92 percent of 1.08 
million yields 993,600 new underage smokers per year. This figure is 
supported by parallel estimates of the SAMHSA. Based on data from the 
1994 National Household Survey on Drug Abuse, SAMHSA estimated that 
1.29 million persons under age 20 became daily smokers in 1993, and 
that 1.1 million of these persons were under the age of 18. As a 
result, FDA retains confidence in its original estimate of 1 million 
new smokers per year.
    The regulation targets youngsters by restricting youth access to 
tobacco products and by limiting advertising activities that affect 
adolescents. Several communities have demonstrated that access 
restrictions are extremely effective when vigorously applied at the 
local level. Woodridge, IL, for example, achieved a compliance rate of 
over 95 percent. Moreover, 2 years after that law was enacted, a survey 
of 12- to 14-year-old students indicated that overall smoking rates 
were down by over 50 percent (over 2/3 for regular smokers). \283\
---------------------------------------------------------------------------

    \283\ Jason, L. A., P. Y. Ji, M. D. Anes, and S. H. Birkhead, 
``Active Enforcement of Cigarette Control Laws in the Prevention of 
Cigarette Sales to Minors,'' The Journal of the Amercian Medical 
Association (JAMA), vol. 266, No. 22, p. 3159, December 11, 1991.
---------------------------------------------------------------------------

    Advertising and promotional restrictions will augment these efforts 
to limit the attractiveness of tobacco products to underage consumers. 
As discussed in detail in section VI. of this document, no one study 
has definitively quantified the precise impact of advertising or of 
advertising restrictions. Nevertheless, much of the relevant research 
indicates that advertising restrictions will reduce consumer demand. 
For example, according to the 1989 report of the Surgeon General, ``The 
most comprehensive review of both the direct and indirect mechanisms 
concluded that the collective empirical, experiential, and logical 
evidence makes it more likely than not that advertising and promotional 
activities do stimulate cigarette consumption.'' \284\ Similarly, after 
a careful examination of available studies, Clive Smee, Chief Economic 
Adviser to the United Kingdom Department of Health determined that, 
``the balance of evidence thus supports the conclusion that advertising 
does have a positive effect on consumption.'' \285\ A detailed 
evaluation of the effects of advertising on youth consumption of 
tobacco products is provided in section VI. of this document.
---------------------------------------------------------------------------

    \284\ DHHS, ``Reducing the Health Consequences of Smoking: 25 
Years of Progress,'' A Report of the Surgeon General, U.S. 
Department of Health and Human Services, Public Health Service, 
Centers for Disease Control, National Center for Chronic Disease 
Prevention and Health Promotion, Office on Smoking and Health, DHHS 
publication No. (CDC) 89-8411, p. 517, 1989 (the 1989 SGR).
    \285\ Leaney, K., ``Effect of Tobacco Advertising on Tobacco 
Consumption: A Discussion Document Reviewing the Evidence,'' 
Economics and Operational Research Division, Department of Health, 
London, p. 22, October 1992.
---------------------------------------------------------------------------

    In Northern California, 24 cities and unincorporated areas in 5 
counties adopted local youth tobacco access ordinances that prohibit 
self-service merchandising and point-of-sale tobacco promotional 
products in retail stores. Survey measures of the impact of these 
ordinances by the Stop Tobacco Access for Minor Project (STAMP) found 
that, on average, tobacco sales to minors dropped by 40 to 80 percent. 
\286\
---------------------------------------------------------------------------

    \286\ Kropp, R., ``A Position Paper on Reducing Tobacco Sales to 
Minors by Prohibiting the Sale of Tobacco Products by Means of Self-
Service Merchandising and Requiring only Vendor-Assisted Tobacco 
Sales,'' North Bay Health Resources Center, Stop Tobacco Access to 
Minors Program (STAMP), Petaluma, CA, p. 4, November 3, 1994.
---------------------------------------------------------------------------

    In its analysis of the 1995 proposed rule, FDA argued that, while 
quantitative estimates of the effectiveness of its regulation cannot be 
made with certainty, comprehensive programs designed to discourage 
youthful tobacco consumption could reasonably achieve the ``Healthy 
People 2000'' goal of halting the onset of smoking for at least half, 
or 500,000, of the 1,000,000 youngsters who presently start to smoke 
each year. In the Federal Register of January 19, 1996 (61 FR 1492) 
SAMHSA published a regulation governing a program of State-operated 
enforcement activities that would restrict the sale or distribution of 
tobacco products to individuals under 18 years of age. SAMHSA had 
originally estimated that its program would reduce tobacco consumption 
by youth and children by from one-third to two-thirds, but subsequently 
determined that reductions of between one-tenth and one-third would be 
``more realistic given the uncertainties implicit in varying levels of 
State enforcement and the absence of meaningful controls on tobacco 
advertising and promotion.'' \287\ While strongly supporting the 
objectives of the SAMHSA program, FDA finds that achieving the 
``Healthy People 2000'' goal will demand a full arsenal of controls to 
complement and fortify the new State inspectional programs, including 
restrictions on industry advertising and promotions and quite possibly 
educational messages to counter the influence of ongoing marketing 
activities.
---------------------------------------------------------------------------

    \287\ 61 FR 1502, January 19, 1996.
---------------------------------------------------------------------------

    Numerous public comments to the 1995 proposal addressed the issue 
of the effectiveness of the regulation. Many argued that tobacco 
advertising does not increase tobacco use, or that the enforcement of 
existing or forthcoming State laws, alone, could accomplish reasonable 
goals. In contrast, many others supported a comprehensive regulation, 
contending that only vigorous enforcement of new restrictions would 
bring significant results. As outlined earlier in the preamble in this 
document, FDA has determined, based on a full examination of the 
evidence, that the combined effect of the regulations (restricting 
advertising and promotion, prohibiting self-service sales, providing 
new labeling information, and imposing age verification obligations) 
and educational programs will significantly diminish the allure as well 
as the access to tobacco products by youth. The agency acknowledges the 
imposing size of the required effort, but is confident that its goals 
are reasonable and presents regulatory benefits based on the 
presumption that the ``Healthy People 2000'' goals will be met.

[[Page 44574]]

    FDA agrees, however, that these projections are uncertain and 
therefore also presents estimates of benefits at effectiveness levels 
that are considerably smaller. The agency conducted this exercise not 
because its estimates are excessively speculative or arbitrary, as 
suggested by one comment, but because sensitivity analyses are part of 
generally accepted ``best practice'' for the conduct of cost-benefit 
analysis and are recommended by OMB guidance. These results demonstrate 
that even if the rule were only modestly effective in reducing tobacco 
use, it yields justifiable benefits.
    One comment urged the agency to demonstrate the effectiveness of 
tobacco marketing restrictions over and above those for access 
restrictions or public information campaigns. FDA is unable to forecast 
the independent results of each regulatory provision, due to the high 
degree of interdependence among the various requirements, but notes 
that SAMHSA concluded that its access restrictions, alone, would reduce 
underage tobacco consumption by one-tenth to one-third. If so, 
accomplishing the ``Healthy People 2000'' goal implies that the FDA 
rule would generate incremental tobacco use reductions of between 17 
and 40 percent for youngsters under 18 years of age.
4. Reduced Number of Adult Smokers
    The major beneficiaries of the rule are those individuals who would 
otherwise begin using tobacco early in life and who, accordingly, are 
unlikely to start using tobacco products as an adult. Evidence suggests 
that this percentage will be high, as over half of adult smokers had 
become daily cigarette smokers before the age of 18. Moreover, the 1994 
Surgeon General's Report indicates that 82 percent of persons (aged 30 
to 39) who ever smoked daily began to smoke before the age of 18. That 
report concludes that ``if adolescents can be kept tobacco-free, most 
will never start using tobacco.'' \288\ Although some comments 
disagreed with that conclusion, FDA believes that the Surgeon General's 
Report is correct. Nonetheless, to account for the possibility that 
some would-be smokers who are prevented from smoking until they are age 
18 may eventually start smoking as adults, FDA uses the more 
conservative assumption that these rules will lead to a tobacco free 
adult life for only one-half of the estimated 500,000 youngsters who 
will be deterred from starting to smoke each year. Accordingly, FDA 
calculates the annual benefits from the lifetime health gains 
associated with preventing 250,000 adolescents from ever smoking as an 
adult. Further, in response to comments that challenge this estimate, 
FDA presents sensitivity analysis showing results using a wide range of 
alternative rates.
---------------------------------------------------------------------------

    \288\ 1994 SGR, pp. 5 and 65.
---------------------------------------------------------------------------

5. Lives Saved
    Based largely on data from Peto, et al., who found that about half 
of all adolescents who continue to smoke regularly throughout their 
lives will eventually die from a smoking-related disease, \289\ CDC 
estimates that about one in three adolescent smokers will die 
prematurely. \290\ Although the CDC projection provides the best 
estimate of this excess fatality rate, it does not provide a 
distribution of the smoking-related fatalities over time. Consequently, 
FDA derived this distribution by comparing age-specific differences in 
the probability of survival for smokers and nonsmokers. The probability 
of survival data for the agency's estimate are derived from the 
American Cancer Society's Cancer Prevention Study II, as shown in Table 
3.
---------------------------------------------------------------------------

    \289\ Peto, R., A. D. Lopez, J. Boreham, M. Thun, and C. Heath, 
Jr., ``Mortality from Smoking in Developing Countries, 1950-2000,'' 
Oxford University Press, p. A10, 1994. Indirect estimates from 
national vital statistics.
    \290\ Memorandum from Michael P. Eriksen (CDC) to Catherine 
Lorraine (FDA) August 7, 1995 and CDC Fact Sheet; citing Pierce, J. 
P., M. C. Fiore, T. E. Novotny, E. J. Hatziandreu, and R. M. Davis, 
``Trends in Cigarette Smoking in the United States: Projections to 
the Year 2000,'' JAMA, vol. 261, pp. 61-65, 1989; Unpublished data 
from the 1986 National Mortality Followback Survey, CDC, OSH; Peto, 
R., A. D. Lopez, J. Boreham, M. Thun, and C. Heath, ``Mortality from 
Smoking in Developed Countries, 1950-2000: Indirect Estimates from 
national Vital Statistics,'' Oxford University Press, Oxford, 1994.

    TABLE 3.--PROBABILITY OF SURVIVAL BY AGE, SEX, AND SMOKING STATUS   
         (Probabilities of a 17-year-old surviving to age shown)        
------------------------------------------------------------------------
                                                                 Female 
    Age (Years)          Male        Male All       Female        All   
                     Neversmokers     Smokers    Neversmokers   Smokers 
------------------------------------------------------------------------
35................            1             1             1            1
45................        0.986         0.966         0.988        0.984
55................        0.951         0.893         0.962        0.939
65................        0.867         0.733         0.901        0.831
75................        0.689         0.466         0.760        0.630
85................        0.336         0.159         0.453        0.289
------------------------------------------------------------------------
Source: Thomas Hodgson, ``Cigarette Smoking and Lifetime Medical        
  Expenditures,'' The Milbank Quarterly, vol. 70, No. 1, 1992, p. 91.   
  Based on data from the American Cancer Society's Cancer Prevention    
  Study II.                                                             

    FDA initially multiplied differences in the probabilities of death 
for smokers versus nonsmokers within each 10-year period by the number 
of smokers remaining at the start of each 10-year period. Assuming an 
equal number of males and females, the excess deaths among smokers in 
all age groups totaled almost 28 percent of the 250,000 cohort. FDA 
recognizes that this methodology probably understates the current risk 
of smoking, because it arbitrarily assumes that the smoking-related 
risks for females will continue to be smaller than for males, even 
though female smoking patterns are presently comparable to those of 
males. Nevertheless, FDA used this model to support its proposed 
regulation and maintains the calculation to demonstrate the robustness 
of the results. Moreover, because some comments suggested that these 
data may not account for all potentially confounding variables, such as 
alcohol consumption or other lifestyle differences, FDA further 
adjusted the mortality estimate to 24 percent to reflect findings by 
Manning et al., that such nontobacco versus tobacco lifestyle factors 
may account for 13 percent of excess medical care expenditures. Thus, 
the benefits projections presented below conservatively rely on the 
probabilities

[[Page 44575]]

shown in Table 3, corrected by the 13 percent lifestyle influence 
adjustment. In sum, they indicate that achieving the ``Healthy People 
2000'' performance goal will prevent about 60,200 smoking-related 
fatalities among each year's cohort of potential new smokers.
    The economic assessment of health-related variables requires 
discounting the value of future events to make them commensurate with 
the value of present events. For this analysis, a 3 percent discount 
rate is used to calculate the present value of the projections. (This 
rate was recommended by the Panel on Cost-Effectiveness in Health and 
Medicine, a nonfederal multidisciplinary group of experts in cost-
effectiveness analysis, convened by the Office of the Assistant 
Secretary for Health in 1993. \291\ Since the Office of Management and 
Budget (OMB) Circular A-94 recommends the use of 7 percent as a base 
case, FDA presents summary estimates below for discount rates of both 3 
percent and 7 percent.) On the assumption that it would be roughly 20 
years for each year's cohort of new adults to reach the midpoint of the 
35 to 45 age bracket and 60 years to reach the 75 to 85 age bracket, 
these calculations indicate that the present value of these benefits 
equate to 15,863 lives per year.
---------------------------------------------------------------------------

    \291\ Gold, M. R., J. E. Siegel, L. B. Russell, and M. C. 
Weinstein, ``Cost-effectiveness in Health and Medicine,'' Oxford 
University Press, p. 232, 1996.
---------------------------------------------------------------------------

6. Life-Years Saved
    The number of life-years that will be saved by preventing each 
year's cohort of 250,000 adolescents from acquiring a smoking addiction 
was calculated from the same age-specific survival differences between 
smokers and nonsmokers. In each 10-year life span, the number of years 
lived for each cohort of persons who would have been smokers but who 
were deterred was compared to the number of years that would have been 
lived by that same cohort if they had been smokers. The difference 
between these two measures is the life-years saved for that 10-year 
period. \292\ Deducting the 13-percent lifestyle adjustment indicates 
that, over the full lifetime of each cohort, the regulations will gain 
an estimated 905,000 life-years, which translates to almost 4 years per 
smoker and 15 years per life saved. \293\ The present value of these 
additional life-years equates to 211,391 life-years annually.
---------------------------------------------------------------------------

    \292\ For each 10-year age interval, the number of life-years is 
calculated as the number of people in each cohort (250,000) times 
the probability of surviving until the end of that age interval 
times 10 years of life, plus the number expected to die in that 
interval times an assumed 5 years of life.
    \293\ The calculation procedure probably understates total life-
years saved, because it misses smoking related-fatalities that occur 
within the same 10-year age interval. However, because more of these 
misses involve fatalities that, if avoided, would add few life-
years, the resulting 15-year average life-years saved may be high. 
FDA's benefit estimates, however, remain understated because they 
are based on total life-years saved, not average life-years saved.
---------------------------------------------------------------------------

7. Monetized Benefits of Reduced Tobacco Use
    There is no fully appropriate means of assigning a dollar figure to 
represent the attendant benefits of averting thousands of tobacco-
induced illnesses and fatalities. However, to quantify important 
components of the expected economic gains, FDA developed estimates of 
the value of the reduced medical costs and the increased worker 
productivity that will result from fewer tobacco-related illnesses. In 
addition, since productivity measures do not adequately address the 
avoidance of premature death, FDA adopted a willingness-to-pay approach 
to value the benefits of reduced tobacco-related fatalities.
8. Reduced Medical Costs
    On average, at any given age, smokers incur higher medical costs 
than nonsmokers. However, nonsmokers live longer and therefore continue 
to incur medical costs over more years. Several analysts have reported 
conflicting estimates of the net outcome of these factors, but the most 
recent research is the incidence-based study by Hodgson, \294\ who 
found that lifetime medical costs for male smokers were 32 percent 
higher than for male neversmokers and lifetime medical costs for female 
smokers were 24 percent higher than for female neversmokers. Hodgson 
determined that the present value of the lifetime excess costs were 
about $9,400 in 1990 dollars (future costs discounted at 3 percent). 
\295\ As noted earlier, the incidence-based study by Manning, et al., 
implies that about 13 percent of the excess medical costs were 
attributable to factors other than smoking. Accounting for this 
reduction and adjusting by the consumer price index for medical care 
raises the present value of Hodgson's excess medical cost per new 
smoker to $10,590 in 1994 dollars. Thus, those 1,000,000 young people 
under the age of 18, who currently become new smokers each year, are 
responsible for excess lifetime medical costs measured at a present 
value of $10.6 billion (1,000,000 x $10,590). Because FDA projects that 
achieving the ``Healthy People 2000'' goals will prevent 250,000 of 
these individuals from smoking as adults, the medical cost savings are 
estimated at $2.6 billion per year.
---------------------------------------------------------------------------

    \294\ Hodgson, T. A., ``Cigarette Smoking and Lifetime Medical 
Expenditures,'' The Milbank Quarterly, vol. 70, No. 1, p. 97, 1992. 
(Based on data from the American Cancer Society's Cancer Prevention 
Study II).
    \295\ Id. (Using the average of the male and female totals).
---------------------------------------------------------------------------

9. Reduced Morbidity Costs
    An important cost of tobacco-related illness is the value of the 
economic output that is lost while individuals are unable to work. 
Thus, any future reduction in such lost work days contributes to the 
economic benefits of the regulation. Several studies have calculated 
prevalence-based estimates of U.S. productivity losses due to smoking-
related morbidity, but FDA knows of no incidence-based estimates. 
Hodgson, however, has shown that, in certain situations, incidence 
measures can be derived from available prevalence measures. For 
example, he demonstrates that in a steady-state model the only 
difference between prevalence and incidence-based costs is due to 
discounting. \296\ Accordingly, FDA has adopted Hodgson's method to 
develop a rough approximation of incidence-based costs from an 
available prevalence-based estimate of morbidity costs.
---------------------------------------------------------------------------

    \296\ Hodgson, T. A., ``Annual Costs of Illness Versus Lifetime 
Costs of Illness and Implications of Structural Change,'' Drug 
Information Journal, vol. 22, No. 3, p. 329, 1988.
---------------------------------------------------------------------------

    Rice, et al., \297\ found that lost wages due to tobacco-related 
work absences in the United States amounted to $9.3 billion in 1984. 
This equates to $12.3 billion in 1994 dollars when adjusted by the 
percentage change in average employee earnings since 1984. Although FDA 
does not have a precise estimate of the life-cycle timing of these 
morbidity effects, the relevant latency periods would certainly be 
shorter than for mortality effects. Thus, to account for the deferred 
manifestation of smoking-related morbidity effects, FDA assumed that 
they would occur over a time horizon equal to 80 percent of that 
previously measured for mortality effects. Although one comment 
mistakenly assumed that FDA had made no adjustment for lifestyle 
differentials between smokers and nonsmokers, in fact, these estimates 
were further

[[Page 44576]]

reduced by 13 percent to reflect the Manning, et al., findings. 
Finally, because the long-term decline in smoking prevalence has 
exceeded the growth in population, FDA reduced the incidence-based 
costs by another 20 percent. At a 3 percent discount rate, this 
methodology implies that the incidence-based cost of smoking-related 
morbidity, or the present value of the future costs to 1 year's cohort 
of 1,000,000 new smokers, is about $3.5 billion. Thus, the estimated 
annual morbidity-related savings associated with preventing 250,000 new 
youths per year from smoking as adults is estimated at about $879 
million.
---------------------------------------------------------------------------

    \297\ Rice, D. P., et al., ``The Economic Costs of the Health 
Effects of Smoking, 1984,'' The Milbank Quarterly, vol. 64, No. 4, 
p. 526, 1986.
---------------------------------------------------------------------------

10. Benefits of Reduced Mortality Rates
    From a societal welfare perspective, OMB guidance advises that the 
best means of valuing benefits of reduced fatalities is to measure the 
affected group's willingness-to-pay to avoid fatal risks. 
Unfortunately, the specific willingness-to-pay of smokers is unknown, 
because institutional arrangements in the markets for medical care 
obscure direct measurement techniques. \298\ Nevertheless, many studies 
have examined the public's willingness-to-pay to avoid other kinds of 
life-threatening risks, especially workplace and transportation 
hazards. An EPA-supported study \299\ found that most empirical results 
support a range of $1.6 to $8.5 million (in 1986 dollars) per 
statistical life saved, which translates to $2.2 to $11.6 million in 
1994 dollars. However, the uncertainty surrounding such estimates is 
substantial. Moreover, Viscusi has shown that smokers, on average, may 
be willing to accept greater risks than nonsmokers. For example, 
smokers may accept about one-half the average compensation paid to face 
on-the-job-injury risks. \300\ FDA therefore has conservatively used 
$2.5 million per statistical life, which is towards the low end of the 
research findings, to estimate society's willingness-to-pay to avert a 
fatal smoking-related illness. Thus, the annual benefits of avoiding 
the discounted number of 15,863 premature fatalities would be $39.7 
billion.
---------------------------------------------------------------------------

    \298\ Schelling, T. C., ``Economics and Cigarettes,'' Preventive 
Medicine, vol. 15, pp. 549-560, 1986.
    \299\ Fisher, A., L. G. Chestnut, and D. M. Violette, ``The 
Value of Reducing Risks of Death: A Note on New Evidence,'' Journal 
of Policy Analysis and Management, vol. 8, No. 1, pp. 88-100, 1989.
    \300\ Viscusi, W. K., ``Fatal Tradeoffs: Public and Private 
Responsibilities for Risk,'' Oxford University Press, p. 24, 1992.
---------------------------------------------------------------------------

    An alternative method of measuring willingness-to-pay is to 
calculate a value for each life-year saved. This approach is 
intuitively appealing because it places a greater value on the 
avoidance of death at a younger than at an older age and is the 
traditional means of assessing the cost-effectiveness of medical 
interventions. Nevertheless, there have been few attempts to determine 
the appropriate value of a life-year saved. OMB suggests several 
methodologies, including annualizing with an appropriate discount rate 
the estimated value of a statistical life over the average expected 
life-years remaining. For example, at a 3-percent discount rate, a $2.5 
million value per statistical life for an individual with 35 years of 
remaining life-expectancy converts to about $116,500 per life year. 
Since achieving the agency's goals were estimated to save 211,391 
discounted life-years annually, this calculation yields annual benefits 
of $24.6 billion.
    FDA notes that even these values understate the full value of the 
health impact, because they fail to quantify any reduction in either 
the adverse effects attributable to passive smoking or the infant and 
child fatalities caused by mothers' smoking. Moreover, these totals may 
not capture the heavy toll of psychic loss to surviving family members, 
or the corresponding economic losses among family members for the 
mental health care of grief-related depression and other conditions 
that often follow the premature death of middle aged adults. \301\
---------------------------------------------------------------------------

    \301\ Harris, M., ``The Loss That is Forever The Lifelong Impact 
of the Early Death of a Mother or Father,'' Penguin Books, 1995.
---------------------------------------------------------------------------

11. Reduced Fire Costs
    Every year lighted tobacco products are responsible for starting 
fires which cause millions of dollars in property damage and thousands 
of casualties. In 1992, fires started by lighted tobacco products 
caused 1,075 deaths and $318 million in direct property damage. \302\ A 
reduction in the number of smokers, and the corresponding number of 
cigarettes smoked, will result in a drop in the number of future fires. 
In the 1995 proposal, FDA estimated that if the number of fires falls 
by the same percentage as the expected reduction in cigarette sales, 
this implies present value savings of $203 million for the value of 
lives saved and $24 million for the value of averted property damage, 
totaling $227 million annually over a 40-year period.
---------------------------------------------------------------------------

    \302\ Miller, A. L., ``The U.S. Smoking-Material Fire Problem 
Through 1992: The Role of Lighted Tobacco Products in Fire,'' 
National Fire Protection Association, p. 2, 1994.
---------------------------------------------------------------------------

    One comment denied the existence of any association between fires 
and cigarette consumption. FDA acknowledges that the relationship may 
be nonlinear, but finds the asserted lack of a positive correlation 
implausible. This comment further stated that residential fires caused 
by smoking and deaths from residential fires caused by smoking 
decreased from 1983 to 1992 by 39 percent and 40 percent, respectively, 
or about 5.5 percent annually. Accounting for this trend would lower 
FDA's fire cost estimate to a present value savings of $145 million for 
the value of lives saved and $17 million for the value of averted 
property damage, totaling $162 million annually over a 40-year period. 
Even these estimated savings significantly underestimate the potential 
benefits, however, because they exclude both nonfatal injuries and the 
need for temporary housing.
12. Smokeless Tobacco
    The Smokeless Tobacco Council, Inc., remarked that FDA had not 
attempted to measure the benefits that would result from the decreased 
use of smokeless tobacco products by underage youths. The introduction 
to the 1995 proposed regulation, however, explained that the use of 
smokeless tobacco causes severe health effects. While data are not 
available on age-specific differences in the probability of survival 
for smokeless tobacco users as compared to nonusers, the 1994 Surgeon 
General Report indicates that the ``primary health consequences during 
adolescence include leukoplakia, gum recession, nicotine addiction, and 
increased risk of becoming a cigarette smoker. Leukoplakia and/or gum 
recession occur in 40 to 60 percent of smokeless tobacco users.'' \303\ 
Oral leukoplakias have a 5-percent chance of becoming malignancies in 5 
years. \304\ Cancers of the nasal cavity, pharynx, larynx, esophagus, 
stomach, urinary tract and pancreas have also been linked to smokeless 
tobacco use. \305\ Other effects include discoloration of teeth, 
periodontal disease and excessive tooth wear and decay. \306\ One study 
of female snuff users showed that it increased one's risk of developing 
oral and

[[Page 44577]]

pharyngeal cancer between 1.5 to 4.2 times. \307\
---------------------------------------------------------------------------

    \303\ 1994 SGR, p.39.
    \304\ Id.
    \305\ Goolsby, M. J., ``Smokeless Tobacco: The Health 
Consequences of Snuff and Chewing Tobacco'', Nurse Practitioner, 
vol. 17, No. 1, p. 31, January 1992.
    \306\ Id.
    \307\ Winn, D. M., W. J. Blot, C. M. Shy, L. W. Pickle, A. 
Toledo, and J. F. Fraumeni, ``Snuff Dipping and Oral Cancer Among 
Women in the Southern United States,'' The New England Journal of 
Medicine, vol. 304, No. 13, pp. 745-749, Table 2, March 26, 1981.
---------------------------------------------------------------------------

    If the provisions pertaining to smokeless tobacco are as effective 
as those pertaining to cigarettes, the rule will prevent about 36,500 
youths from becoming adult users of smokeless tobacco. This projection 
assumes that the number of underage users will decrease by 50 percent 
and one-half of those youths will remain nonusers after reaching 18 
years of age. The estimate also assumes that the ratio of new underage 
users to total underage users parallels that of cigarette users (i.e., 
approximately one-third) and that about 440,000 youths under the age of 
18 are current users of smokeless tobacco products. \308\
---------------------------------------------------------------------------

    \308\ Estimates of youth smokeless usage vary. This projection 
relies on a conservative estimate of total youth (ages 12-17) usage 
calculated from data in the Statistical Abstract of the U.S. 1995, 
115th edition, Tables 16 and 218.
---------------------------------------------------------------------------

    Leukoplakia and/or gum recession are estimated to occur in 40 to 60 
percent of smokeless users. \309\ If even 50 percent of these cases 
were caused by smokeless tobacco use, the previous assumptions imply 
that these regulations will prevent from 7,300 to 11,000 cases of 
leukoplakia and/or gum recessions per year. Although FDA can not 
estimate the number of oral or other cancers prevented, the realized 
number will be substantial.
---------------------------------------------------------------------------

    \309\ 1994 SGR, p.39.
---------------------------------------------------------------------------

13. Summary of Benefits
    The discussion above demonstrates the formidable magnitude of the 
economic benefits available from smoking reduction efforts. As 
described, FDA forecasts annual net medical cost savings of $2.6 
billion and annual morbidity-related productivity savings of $900 
million. From a willingness-to-pay perspective, the annual benefits of 
reduced smoking-related disease mortality range from $24.6 to $39.7 
billion. As a result, the value of the annual disease-related benefits 
of achieving the ``Healthy People 2000'' goal is projected to range 
from $28.1 to $43.2 billion. (Following Hodgson, this analysis uses a 
3-percent discount rate. A 7-percent rate reduces these benefits to a 
range of $9.2 to $10.4 billion). These totals do not include the 
benefits expected from fewer fires (over $160 million annually), 
reduced passive smoking, or infant death and morbidity associated with 
mothers' smoking. Moreover, while FDA believes these effectiveness 
projections are plausible, much lower rates still yield impressive 
results. Table 1c of this section summarizes the disease-related health 
benefits and illustrates that youth deterrence rates as small as 1/20, 
which would prevent the adult addiction of at least 25,000 of each 
year's cohort of 1,000,000 new adolescent smokers, would provide annual 
benefit values measured in the billions of dollars. Moreover, the 
higher risk estimates suggested by Peto, et al., could significantly 
increase these values. In addition, while FDA could not quantify the 
benefits that will result from the projected decline in the use of 
smokeless tobacco, they would be considerable.

D. Regulatory Costs

    A recently issued guideline for conducting economic analysis of 
Federal regulations, prepared under the auspices of OMB, states that:
    [T]he preferred measure of cost is the ``opportunity cost'' of 
the resources used or the benefits foregone as a result of the 
regulatory action. Opportunity costs include, but are not limited 
to, private-sector compliance costs and government administrative 
costs. Opportunity costs also include losses in consumers' or 
producers' surpluses, discomfort or inconvenience, and loss of time 
* * *. An important, but sometimes difficult, problem in cost 
estimation is to distinguish between real costs and transfer 
payments. Transfer payments are not social costs but rather are 
payments that reflect a redistribution of wealth. While transfers 
should not be included in the [Economic Analyses'] estimates of the 
benefits and costs of a regulation, they may be important for 
describing the distributional effects of a regulation. \310\
---------------------------------------------------------------------------

    \310\ Economic Analysis of Federal Regulations Under Executive 
Order 12866, January 11, 1996. Prepared by interagency group 
convened by OMB and co-chaired by a Member of the Council of 
Economic Advisers.
---------------------------------------------------------------------------

    Accordingly, FDA finds that the final rule will impose new cost 
burdens on manufacturers, retailers, consumers, and Government 
regulators of tobacco products. In addition, certain industry sectors 
will experience lost sales and employment, but these revenue losses 
will be at least partly offset by gains to other sectors, as discussed 
in the ``Distributional Effects'' section of this document. \311\ While 
a number of industry comments argued that the agency's preliminary 
analysis was deficient for not including these lost revenues in its 
cost-benefit assessment, FDA finds that the revenue losses suggested by 
these comments do not meet the previous definition of ``opportunity 
cost;'' because they fail to provide the changes in net costs that are 
necessary to estimate producer surplus, conventionally defined as sales 
minus variable costs. This rule will affect producer surplus in several 
industries and only net changes in these surplus' are social costs. 
Calculating such changes would require a multi-market model of economic 
changes over many years. Such general equilibrium models have not been 
used by Federal agencies for regulatory analyses, are not specifically 
recommended by the OMB guidance, and would be impractical to use, 
especially where major markets are dominated by few firms.
---------------------------------------------------------------------------

    \311\ This analysis evaluates the regulation following the 
Kaldor-Hicks criteria for societal welfare maximization.
---------------------------------------------------------------------------

    The most comprehensive critique of FDA's preliminary economic 
analysis was prepared by the Barents Group, economic consultants to the 
Tobacco Institute. While the Barents Group developed independent 
estimates of economic costs, in many instances its methodology was 
consistent with FDA's analysis of its 1995 proposal. Often, however, 
the Barents Group had access to more recent data, or to additional data 
provided by the affected industries. FDA's revised cost estimates rely 
extensively on these new data, but as described below, the agency's 
final cost estimates are far smaller than those presented by the 
Barents Group.
1. Number of Affected Retail Establishments
    A critical variable underlying the agency's cost estimates is the 
number of retail outlets currently selling over-the-counter (OTC) 
tobacco products. A major confounding factor is that the U.S. Census 
publishes product line data only for establishments with payroll. For 
its original estimate of the number of retail establishments selling 
tobacco products, FDA relied on 1987 Census data to count the number of 
affected payroll establishments and very conservatively included every 
nonpayroll establishment in those categories that traditionally sell 
tobacco products (general merchandise stores, grocery stores, service 
stations, eating and drinking places, drug stores, and liquor stores). 
FDA estimated that the number of establishments selling tobacco 
products OTC included 275,000 payroll establishments and 215,000 
nonpayroll establishments, for a total of 490,000 retail 
establishments. To account for all other business categories that might 
sell

[[Page 44578]]

OTC tobacco products, FDA estimated a total upper bound range of 
600,000 establishments. FDA did not know how many locations currently 
served by cigarette vending machines would convert to OTC operations 
following implementation of the regulation, but estimated the number at 
100,000, raising the upper bound total to 700,000 future 
establishments.
    FDA still has no definitive estimate of the number of retail 
outlets selling tobacco products. For their economic analysis, the 
Barents Group used 1992 U.S. Census estimates for the number of 
affected retail establishments with payroll, but adopted an alternative 
methodology to estimate the number of affected establishments without 
payroll. The Barents Group subdivided retail businesses into 10 
categories: General merchandise stores, supermarket/grocery stores, 
convenience stores without gas, convenience stores with gas, gasoline 
service stations, eating places, drinking places, drug and proprietary 
stores, specialty tobacco stores, and miscellaneous retail stores. 
Within each category, the Barents Group assumed that the percentage of 
nonpayroll establishments selling tobacco products would be the same as 
the percentage of payroll establishments selling tobacco products. As a 
result, they concluded that the number of retail payroll establishments 
selling tobacco products OTC is approximately 283,000, and the number 
of retail nonpayroll establishments selling tobacco products OTC is 
about 107,000, for a total of 390,000 retail outlets. The Barents 
Group's subsequent calculations are less clear and not documented in 
their appendix on methodology. Noting that FDA had estimated an upper 
bound of 600,000 establishments selling OTC tobacco products, they 
assumed the existence of an additional 100,000 to 200,000 nonretail 
establishments, such as operations within manufacturing or service 
businesses, that sell OTC tobacco products. Finally, the Barents Group 
accepted FDA's estimate that about 100,000 current vending machine 
locations would convert to OTC sales for tobacco products and proposed 
total lower and upper bound estimates of from 500,000 to 700,000 
establishments.
    For this final economic analysis, FDA adopts the apparent mid-point 
of the Barents Group's forecast of the number of establishments that 
will sell tobacco products, or about 500,000 current establishments and 
a total of 600,000 future establishments. FDA estimates by business 
category are displayed in Table 4 and follow closely the methodology 
presented by the Barents Group, except for slight adjustments to 
eliminate nonstore outlets. Because Census data on the number of 
establishments without payroll were not reported separately for 
convenience stores, convenience stores with gas, or specialty tobacco 
stores, these outlets are counted with the higher level outlet 
categories.
2. Removing Self-Service and Other Prohibited Retail Displays
    The 1995 proposed regulation restricted all point of purchase 
advertising to ``text only'' and banned the use of all self-service 
displays by requiring vendors to physically provide the regulated 
tobacco product to purchasers. In its original analysis, FDA explained 
that the proposed ban on self-service displays would affect many retail 
stores selling tobacco products, although shoplifting concerns had 
already caused a large number of these stores to place tobacco products 
in areas not directly accessible to customers. Those retailers that 
discontinued self-service displays typically modified their stores by 
either: (1) Placing tobacco products behind or above store cashiers or 
in locked cases located within close reach of store cashiers, (2) 
placing tobacco products behind only one or two checkout lines, similar 
to the ``cash only'' or ``less than 10 items'' lines commonly found in 
supermarkets, (3) dispensing tobacco products from a controlled area of 
the store, where store employees also conduct other administrative or 
customer-service tasks, or (4) installing a signaling system, whereby 
assigned store clerks bring requested tobacco products to individual 
checkout stations. Each store's physical configuration dictates the 
most cost-effective approach, but at least one regional survey found 
that retail outlets readily complied with comparable local ordinances 
without architectural remodeling or substantial refitting of checkout 
counters or store aisles. \312\
---------------------------------------------------------------------------

    \312\ Kropp, R., ``A Position Paper on Reducing Tobacco Sales to 
Minors by Prohibiting the Sale of Tobacco Products by Means of Self-
Service Merchandising and Requiring only Vendor-Assisted Tobacco 
Sales,'' North Bay Health Resources Center, Stop Tobacco Access for 
Minors Project (STAMP), Petaluma, CA, p. 5, November 3, 1994.

[[Page 44579]]

                                                TABLE 4.--ESTIMATED NUMBER OF ESTABLISHMENTS CURRENTLY SELLING TOBACCO PRODUCTS OVER-THE-COUNTER                                                
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Percentage of Retail       Number of Retail                                Estimated Number of       Estimated Total of  
                                                Number of Retail       Establishments with      Establishments with     Total Number of Retail   Retail Establishments    Establishments Selling
             Kind of Business                 Establishments with    Payroll Selling Tobacco  Payroll Selling Tobacco   Establishments without  without Payroll Selling   Tobacco Products Over-
                                                    Payroll                  Products                 Products                 Payroll            Tobacco Products<SUP>(j)         the-Counter<SUP>(k)    
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                (1)                      (2)                      (3)                      (4)                      (5)                      (6)
Retail Establishments:                                                                                                                                                                          
  General Merchandise                                        34,606                   35.01%                   12,117               28,010 <SUP>(f)                    9,807                   21,924
  Supermarket/Grocery                                    126,785<SUP>(a)                   56.19%                   71,240                97,061<SUP>(g)                   54,538                  125,778
  Convenience Stores                                         30,748                   95.62%                   29,400                    - <SUP>(h)                        -                   29,400
  Convenience Stores with Gas                             57,033<SUP>(b)                   91.02%                   51,913                    - <SUP>(h)                        -                   51,913
  Service Stations                                        71,336<SUP>(c)                   53.21%                   37,958                   14,248                    7,581                   45,539
  Eating Places                                          377,760<SUP>(d)                    3.17%                   11,992                   96,538                    3,065                   15,057
  Drinking Places                                            55,848                   19.24%                   10,745                   27,733                    5,336                   16,081
  Drug Stores                                                48,142                   60.33%                   29,046                    3,031                    1,829                   30,875
  Tobacco Stores                                              1,477                  100.00%                    1,477                    - <SUP>(h)                        -                    1,477
  Miscellaneous Retail Stores                            273,256<SUP>(e)                    9.15%                   24,995               490,633<SUP>(i)                   44,879                   69,874
Other Establishments                                              -                        -                        -                        -                        -                  100,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total                                                     1,076,991                                           280,883                  757,254                  127,035                  507,918
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(a) Category contains food stores (SIC 54) with payroll, excluding convenience food stores (SIC 541 pt) and convenience food/gasoline stores (SIC 541 pt).                                      
(b) Category contains convenience food/gasoline stores (SIC 541 pt) and gasoline/convenience food stores (SIC 554 pt).                                                                          
(c) Category excludes gasoline/convenience food stores (SIC 554 pt).                                                                                                                            
(d) Category contains eating and drinking places (SIC 58), excluding drinking places (SIC 5813).                                                                                                
(e) Category contains miscellaneous retail stores (SIC 59 ex. 591), excluding nonstore retailers (SIC 596) and tobacco stores and stands (SIC 5993).                                            
(f) 1992 Nonemployer Statistics Series only provides data on variety and miscellaneous general merchandise establishments without payroll.                                                      
(g) 1992 Nonemployer Statistics Series only provides data on grocery stores, retail bakeries, and other food stores without payroll.                                                            
(h) 1992 Nonemployer Statistics Series does not provide data on establishments without payroll for these categories.                                                                            
(i) Category contains miscellaneous retail stores (SIC 59 ex. 591), excluding nonstore retailers (SIC 596).                                                                                     
(j) Column (2) times Column (4).                                                                                                                                                                
(k) Column (3) plus Column (5).                                                                                                                                                                 
Source: Columns (1)-(4) from U.S. Census of Retail Trade Merchandise Line Sales and Nonemployer Statistics Series; Columns (5) and (6) projections according to Barents Group LLC Appendix I    
  methodology.                                                                                                                                                                                  

[[Page 44580]]

    Because prevailing business practice is for tobacco manufacturers 
to assist and even pay for most product display equipment, \313\ FDA 
had assumed that manufacturers would share with retailers any expense 
of relocating displays and that the majority of the costs would be to 
relocate self-service displays for cartons. FDA estimated one-time 
costs of $22 million to be shared by manufacturers and retailers and 
additional annual operating costs of $14 million to be incurred by 
retailers (all in 1994 dollars). In stark contrast, the Barents Group 
projected one-time costs of from $558 to $780 million in 1996 dollars 
($520 to $728 million in current dollars), with 62 percent attributed 
to the replacement of display items by retailers and the remaining 38 
percent to manufacturers due to ``time costs involved in removing 
banned display and promotional items, whether the work would be 
performed directly by a manufacturer's employee or subcontracted out to 
a display distributor.'' As explained below, FDA finds that many 
aspects of the Barents Group's estimates are seriously flawed. 
Nevertheless, the agency has adopted the basic framework of that 
analysis and its revised estimates reflect the Barents Group's 
methodology and data, unless specifically modified as discussed below.
---------------------------------------------------------------------------

    \313\ Id.
---------------------------------------------------------------------------

    a. The Barents Group's methodology. The Barents Group's cost 
projections were based on estimates of an average outlet cost for each 
of seven outlet categories. Each average outlet cost was multiplied by 
the total number of outlets of that category in the United States to 
produce national cost estimates. The actual outlet cost data were 
collected by A. T. Kearney, Inc., still another business consulting 
firm. The Barents Group explained that:
    [O]ur estimates are based on a compliance audit study conducted 
especially for this purpose by A. T. Kearney, Inc. A. T. Kearney 
performed an in-depth study of the actions and efforts that would be 
required of tobacco manufacturers' representatives, of point-of-sale 
display item distributors, and of tobacco retailers in order to 
bring stores into compliance with the proposed regulations. Detailed 
surveys were conducted of seven categories of retail outlets in five 
U.S. metropolitan areas, for a total of 88 retail outlets. Surveyors 
performed a detailed inventory of the many types of tobacco product 
displays and promotional materials which are currently found in 
stores. The surveyors noted which items would need to be modified or 
replaced.
    A. T. Kearney reportedly completed a comprehensive on site 
compliance protocol checklist at 88 establishments randomly selected in 
5 general regions of the United States. The individual display items 
were grouped into 41 discrete item categories and a lengthy discussion 
of the methodology and results are presented as a Technical Appendix to 
the Barents Group's comments.
    b. The Barents Groups's miscalculations. To evaluate these results, 
FDA carefully reviewed the A. T. Kearney survey data and the Barents 
Group's extrapolation procedures and attempted to replicate the 
aggregate estimates. In doing so, numerous computational discrepancies 
were identified. For example, in calculating retailer time costs, the 
Barents Group intended to use an estimated retail employee wage of 
$9.51, but in fact used the estimated wage for a manufacturer's sales 
representative of $25.70. (See Appendix Table ``Initial Compliance 
Effort Costs per Retail Store.'') Also, the Barents Group's 
calculations relied on incorrectly transposed data for the average 
number of disposable displays per store and miscalculated compliance 
effort costs for five of the seven types of business. Further, A. T. 
Kearney reported that only one-third of the lighted signs and clocks 
would need to be replaced by retailers, but the Barents Group's 
calculations assumed that all would be replaced. Finally, A. T. Kearney 
reported that retailers would not replace most promotional posters, 
signs and displays, but the Barents Group's calculations assigned each 
$85 in replacement costs. Correcting these errors reduces the Barents 
Group's low and high cost estimates by $77 and $108 million, 
respectively.
    Even more important, in aggregating the unit costs for ``Compliance 
Activity No. 19--Remove and replace interior newsstands and shopping 
basket racks and baskets and shopping carts,'' A. T. Kearney committed 
a major error that dominates the aggregated cost totals. In discussing 
the costs for this item, A. T. Kearney focused on the need to replace 
shopping basket racks, which ``* * * are free-standing units and 
contain about 20 shopping baskets, that also contain the name or logo 
of the cigarette manufacturer.'' Although it seems probable that the 
logos or brand names affixed to these items could be either removed or 
obscured, the survey data indicate that six supermarket/grocery stores, 
three convenience stores, two tobacco stores and one convenience store 
with gas would replace shopping basket racks. The detailed survey data 
for supermarket/grocery stores, however, reveal that one store 
supposedly possessed 71 racks, two stores 50 racks, and the remaining 
three stores 41, 32, and 10 racks, respectively. Even a casual review 
of these data suggests that individual hand-held shopping baskets 
rather than basket racks were counted. Indeed, an FDA contractor 
visited the five Washington, DC area outlets in which A. T. Kearney 
observed the largest number of racks and found scores of plastic hand-
held baskets adorned with simple advertising stickers, but only a few 
basket racks. \314\
---------------------------------------------------------------------------

    \314\ Buck, E., ``Site Visit Report,'' April 24, 1996.
---------------------------------------------------------------------------

    Although the advertising on these plastic baskets could easily be 
removed or covered, or new plastic baskets purchased quite 
inexpensively, the Barents Group's calculations inadvertently assumed 
that a distribution services contractor would be hired to remove each 
plastic hand-held shopping basket at a fee of $45 apiece and that a 
retailer would spend 30 minutes plus an additional $89 replacement fee 
for each plastic hand-held shopping basket in its possession. Thus, the 
estimated cost attributed to each hand-held basket was $138 and the 
cost for just the one outlet reporting 71 shopping baskets totaled 
$9,850. Extrapolating to each outlet category, the A. T. Kearney 
results implied that removing and replacing plastic hand-held baskets 
would cost, on average, over $1,300 for each supermarket/grocery store 
and $300 for each convenience store in the United States. Its projected 
costs for removing and replacing the hand-held shopping baskets in all 
supermarket/grocery stores in the United States ranged from $163 
million to $229 million. For all outlet types, costs for these hand-
held baskets were estimated at $194 to $271 million, or 43 percent of 
the national point-of-sale costs estimated by the Barents Group.
    Based on site visits, FDA modified Kearney's field data for the 
correct number of shopping basket racks in the Washington, DC area 
establishments. Furthermore, FDA contractors determined that the hand-
held shopping baskets could easily be modified by a marketing 
representative, who would take, at most, 5 minutes to affix new 
stickers on each basket or rack. For a rack of 20 baskets, this task 
was estimated to take a total of 105 minutes, plus about $42 for 
stickers. These adjustments reduce the Barents Group's estimated one-
time costs by $180 to $252 million.

[[Page 44581]]

    c. The Barents Group's extrapolation procedure. The Barents Group 
contributed still another bias by their method of extrapolating these 
survey results to the assumed range of 500,000 to 700,000 retail 
establishments. A. T. Kearney surveyed stores in only seven business 
categories: General Merchandise, Supermarket/Grocery, Tobacco 
Specialty, Convenience Store without Gas, Convenience Store with Gas, 
Service Station, and Drug Store. To represent all affected outlets, the 
Barents Group apportioned the full upper and lower bounds for their 
estimated number of establishments (500,000 and 700,000) among 10 
business categories ``based on the fractions they represent in the 
Census sample of with-payroll retail stores selling tobacco products.'' 
(Eating Places, Drinking Places, and Miscellaneous Retailers were added 
for this outlet allocation, but were assigned no costs because they are 
not ``* * * the types of retail outlets where the vast majority (more 
than 90 percent) of tobacco product sales occur and where promotional 
items are most prevalent.'' That is, the Barents Group used a 
proportional adjustment to raise each establishment category count so 
that the lower and upper bound totals sum to 500,000 and 700,000, 
respectively. The estimated number of establishments in each category 
was then multiplied by the average cost for each business category 
using data from the A. T. Kearney site visits.
    The implications of these inappropriate establishment number 
extrapolations are considerable. For example, A. T. Kearney surveyed a 
sample of 10 outlets from its first business category--General 
Merchandise Stores. These 10 outlets, which include three K-Mart and 
two Wal-Mart stores, averaged over 84,000 square feet of space, with 
the smallest store measuring 40,000 square feet. The U.S. Census 
reports only 12,117 such establishments with payroll. The Barents 
Group's proportional adjustment automatically expanded this outlet type 
count to between 21,299 and 29,818. (See Barents Group's Appendix 
Table.) Thus, to generate a national estimate of costs, the Barents 
Group applied the cost per establishment for its sample of very large 
general merchandise stores to roughly double the number reported in the 
U.S. Census for such establishments with payroll. This methodology 
inappropriately bases the per outlet cost for thousands of small 
nonpayroll and nonretail outlets on the per outlet cost reported for 
very large general merchandise stores.
    The identical problem holds for the Barents Group's projection of 
the A. T. Kearney survey sample of 27 Supermarket/Grocery stores. 
Although this sample includes a few moderately sized establishments (1 
less than 1,000 square feet and 4 less than 5,000 square feet), 21 of 
the establishments exceed 10,000 square feet and the average sized 
facility is almost 35,000 square feet. Nevertheless, the Barents 
Group's apportionment procedure inflates the number of establishments 
in this category from the U.S. Census estimate of 71,240 with payroll 
to 125,222 and 175,311, on the dubious assumption that thousands of 
small nonpayroll or other nonretail establishments are best represented 
by the A. T. Kearney sample of mostly large supermarkets/grocery 
stores.
    FDA's fundamental concern is not with the Barents Group's estimate 
of 500,000 to 700,000 affected establishments (although the upper bound 
of this estimate should be 600,000, because there would be no display 
relocation costs for the additional 100,000 outlets assumed to be 
established at existing vending machine locations), but with the 
allocation of the small establishments among the largest business 
categories surveyed by A. T. Kearney. To offset this bias, FDA 
reallocated the number of establishments in the business categories 
used to extrapolate the outlet cost estimates. As shown, in Table 5, 
FDA takes the number of establishments in the first two business 
categories--General Merchandise and Supermarket/Grocery stores--
directly from the U.S. Census number of establishments with payroll, 
because there would be very few nonpayroll or nonretail establishments 
equivalent to those surveyed. For outlet extrapolation purposes, FDA 
assigns its estimated number of nonpayroll establishments in these two 
business categories to the Convenience Store category, on the 
assumption that this category is most representative of the small 
establishments excluded from the Census product line data. Although the 
Barents Group omitted all costs for Eating Places, Drinking Places, and 
Miscellaneous Retail Stores, FDA groups these outlets under Other 
Establishments and assumes certain minimal costs, as explained below. 
This redistribution of the establishment category groupings reduces the 
Barents Group's low cost estimate by $65 million and its high cost 
estimate by $170 million.

     TABLE 5.--ESTIMATED NUMBER OF ESTABLISHMENTS REMOVING SELF-SERVICE AND OTHER PROHIBITED RETAIL DISPLAYS    
----------------------------------------------------------------------------------------------------------------
                                           Number of Retail       Estimated Number of     Estimated Total Number
                                         Establishments with     Retail Establishments      of Establishments   
           Kind of Business            Payroll Selling Tobacco  without Payroll Selling      Selling Tobacco    
                                          Products Over-the-     Tobacco Products Over-     Products Over-the-  
                                               Counter                the-Counter                Counter        
----------------------------------------------------------------------------------------------------------------
A. T. Kearney Categories:                                                                                       
  General Merchandise                                   12,117                    - <SUP>(A)                   12,117
  Supermarket/Grocery                                   71,240                    - <SUP>(B)                   71,240
  Convenience Stores                                    29,400               64,345 <SUP>(C)                   93,745
  Convenience Stores with Gas                           51,913                    - <SUP>(D)                   51,913
  Service Stations                                      37,958                    7,581                   45,539
  Drug Stores                                           29,046                    1,829                   30,875
  Tobacco Stores                                         1,477                    - <SUP>(E)                    1,477
Other Establishments                                         -                        -              201,012 <SUP>(F)
----------------------------------------------------------------------------------------------------------------
Total                                                  233,151                   73,755                  507,918
----------------------------------------------------------------------------------------------------------------
(A) Variety and miscellaneous general merchandise stores are tallied as convenience stores.                     
(B) Food stores are tallied as convenience stores.                                                              

[[Page 44582]]

                                                                                                                
(C) This category includes food, variety, and miscellaneous general merchandise stores. The 1992 Nonemployer    
  Statistics Series does not provide information about convenience stores without payroll.                      
(D) The 1992 Nonemployer Statistics Series does not provide information about establishments without payroll for
  this category.                                                                                                
(E) The 1992 Nonemployer Statistics Series does not provide information about establishments without payroll for
  this category.                                                                                                
(F) Includes retail establishments excluded from the Kearney field audit and other establishments selling       
  tobacco products over-the-counter.                                                                            

    d. Further modifications. The Barents Group faulted FDA for not 
including costs for the removal of banned display items or for the 
replacement of banned point-of-sale promotional materials. Their 
estimates assumed that manufacturers alone would bear these costs, 
since the proposed regulation required that manufacturers remove all 
prohibited advertising displays. The final regulation, however, places 
this responsibility on the owners of the displays, which may frequently 
be the retail establishments. FDA cannot forecast the ultimate 
distribution of display ownership, but in view of current business 
practices, assumes that the manufacturer representatives will at least 
participate in the removal process. Nevertheless, this change in 
regulatory responsibility is likely to shift a greater share of the 
cost burden to retailers.
    On the other hand, the Barents Group assumed that retailers alone 
would replace those promotional items having a utilitarian function, 
including display cases, signs, shopping carts or baskets, newspaper 
racks, ash trays, and clocks. FDA believes that this assumption is 
unfounded, because many retailers will modify rather than replace these 
items and many manufacturers will share the replacement burden with 
retailers. For example, one report describing the results of a local 
self-service ban indicated that, ``tobacco distributors and tobacco 
company sales representatives furnished behind-the-counter shelving and 
locking cases for tobacco products to retailers at no charge in order 
to assist retailers comply with self-service/vendor-assisted 
regulations.'' \315\ Again, however, the future allocation of these 
costs among manufacturers and retailers is unknown. For its initial 
estimates, except as explained below, FDA maintains the Barents Group's 
assumptions that removal costs are primarily borne by the manufacturer 
and replacement costs by the retailer. In fact, both cost categories 
will be shared and the implications of these assumptions are 
illustrated below through sensitivity analysis.
---------------------------------------------------------------------------

    \315\ Kropp, R., ``A Position Paper on Reducing Tobacco Sales to 
Minors by Prohibiting the Sale of Tobacco Products by Means of Self-
Service Merchandising and Requiring only Vendor-Assisted Tobacco 
Sales,'' North Bay Health Resources Center, Stop Tobacco Access for 
Minors Project (STAMP), Petaluma, CA, p. 5, November 3, 1994.
---------------------------------------------------------------------------

    In February 1996, economic consultants to FDA attempted to 
replicate the A. T. Kearney field audit in Boston (the Eastern Research 
Group, Inc. (ERG),) \316\ and in Washington, DC (an independent 
contractor). While most observations of the number of affected display 
cases were reasonably consistent with the A. T. Kearney findings, the 
observed number of exterior and interior promotional materials deviated 
significantly from the A. T. Kearney audit data. One explanation may be 
that the seasonal items available at the end of November had been 
removed by the following February. As a result, FDA has not adjusted 
its calculations to account for these discrepancies (except for the 
cost of basket racks in the Washington, DC stores), but used certain 
insights from these visits to revise the Barents Group's unit cost 
assumptions, as follows:
---------------------------------------------------------------------------

    \316\ ``ERG's Review of Docket Materials Concerning FDA's 
Proposed Regulations Covering Tobacco Products: Final Site Visit 
Report,'' Eastern Research Group, April 22, 1996.
---------------------------------------------------------------------------

    (i) The agency rejects the Barents Group's assumption that 
retailers rather than manufacturers will bear the costs of replacing 
promotional unattached counter displays. Because many of these items 
will be moved to visible locations behind counters, it is far more 
likely that manufacturers, not retailers, would pay for replacements. 
For its revised estimate, therefore, FDA assumes that manufacturers 
will pay replacement costs for unattached counter displays. Although 
total costs are unchanged, this assumption increases the costs for 
manufacturers by $17 million and decreases the costs for retailers by 
an equal amount.
    (ii) A. T. Kearney and the Barents Group contradict themselves on 
the cost of removing disposable display cases. A. T. Kearney describes 
these units as temporary displays ``frequently found in association 
with promotional offerings, sales, or seasonal themes,'' but assumes 
that retailers will replace them with permanent self-standing retail 
pack cases at $250 each. In contrast, the Barents Group calculations 
imply that a distribution services company will remove each display for 
a fee of $150 and retailers will replace each item for $50. FDA agrees 
with the Barents Group that retailers will not replace temporary units 
with permanent retail pack cases. Moreover, if a marketing 
representative can throw away free-standing ash trays filled with sand, 
as noted by A. T. Kearney, then a marketing representative can also 
dismantle and throw away disposable displays made of cardboard and 
plastic. FDA estimates, therefore, that instead of hiring a 
distribution services company, the manufacturer's representative will 
take no more than 15 minutes to remove each disposable unit, install a 
new unattached counter display and restock any excess inventory in a 
nonself-service area. This assumption decreases the estimated one-time 
costs by $7 million.
    (iii) The A. T. Kearney cost-estimating methodology for the self-
service ban implies that store modifications take place in a sequential 
pattern, with no allowances for economies of scale. For example, the 
outlet cost for hiring a distribution services contractor to relocate 
or replace display cases was calculated as a fixed multiple of the 
number of cases to be removed, even though many establishments must 
remove several display cases. This approach overstates costs by 
ignoring the significant scale economies achievable by performing all 
compliance activities at one time. Thus, FDA modified A. T. Kearney's 
distribution services costs for the removal, relocation and 
installation of small attached, retail pack, and carton self-service 
display cases by assuming that the first display unit in an outlet 
would be removed at a unit charge of $90, $150, or $185, respectively, 
but that each additional unit would be removed at one-half of these 
costs. For those stores with different sizes of display cases, the 
first unit was assumed to be the most expensive to remove (e.g., a 
carton display would be considered the first item when there is also a 
retail pack display or a small attached display). Adjusting for these 
scale economies reduces the estimated total costs by $15 million.
    (iv) A. T. Kearney assumed that many promotional items, such as 
signs and clocks, would be removed by a distribution services company 
hired by the manufacturer. FDA's consultants, however, found that 
almost all of the promotional material observed could be easily removed 
or modified by retail personnel or marketing representatives.

[[Page 44583]]

For example, rather than needing a contractor to remove the lighted 
sign in one of the sampled outlets, ERG found that the front panel was 
easily removable and could be quickly replaced by an acceptable panel. 
Although a few signs may require substantial time to dismantle, most of 
these items will take just a few minutes to remove. To account for this 
range, FDA assumes that a manufacturer's representative will take 15 
minutes to remove and dispose of the various exterior signs, banners, 
clocks and news stand displays, as well as the interior lighted signs 
and clocks, lowering total costs by $27 million.
    (v) A. T. Kearney assumed that many display cases located in 
nonself-service areas would be removed and replaced, because of 
improper advertising. They assumed that the manufacturer would pay for 
the removal of the old case and the installation of the new case, but 
that the retailer would purchase the new display case. Contrary to this 
finding, FDA consultants found no sites in the Boston or Washington, DC 
regions where it was necessary to replace nonself-service displays. 
Because in each instance, all visible advertising could be altered or 
obscured, retailers would almost always opt to cover impermissible 
advertising rather than to purchase new display cases costing up to 
$300. Accordingly, FDA estimated that it would take 15 minutes and $5 
worth of stickers to cover each small attached display; 25 minutes and 
$10 worth of stickers to cover each retail pack display; and 35 minutes 
and $15 worth of stickers to cover each carton display. This 
modification decreases total costs by $20 million.
    (vi) Even though the A. T. Kearney audit identified a number of 
self-service display cases that did not fit in the nonself-service area 
but could be retrofitted with locks, the Barents Group did not include 
cost estimates for these items. FDA estimates that it would take 30 
minutes of retailer time and cost about $10 for materials to add a lock 
to these display cases, increasing the total one-time costs by $1.5 
million.
    (vii) In its analysis of the 1995 proposed regulation, FDA 
acknowledged that the required reconfiguration of tobacco displays may 
also impose added labor costs for some purchase transactions, 
especially for those stores that move inventory to areas located away 
from employee work stations. On the assumption that the ban on self-
service tobacco displays would require 10 seconds of additional labor 
time for 75 percent of all retail transactions involving cartons, FDA 
had estimated costs of about $14 million per year. Although a few 
comments indicated that the self-service ban would increase labor 
costs, the Barents Group did not include such costs in its assessment. 
Nevertheless, FDA believes that some establishments, particularly those 
selling a substantial number of cigarette cartons that could not be 
stored within easy reach of a checkout station, could experience 
increased annual labor costs. Thus, FDA recalculated its estimate based 
on the updated retail employee compensation rate of $9.51 suggested by 
the Barents Group and the new site visit data from the A. T. Kearney 
study, which imply that only about 40 percent of cigarette cartons are 
purchased at establishments that sell cigarette cartons from self-
service areas. These adjustments project additional annual labor costs 
of about $10.9 million per year. \317\
---------------------------------------------------------------------------

    \317\ Derived from assumption that 10 percent of carton 
transactions are for multiple (2) cartons, and that cartons 
constitute 85 percent of tobacco sales at supermarket/grocery 
stores, general merchandise stores, drug stores, and tobacco stores, 
and 10 percent of tobacco sales at other outlets. Tobacco sales data 
from 1992 Census of Retail Trade, pp. 3-31. Kearney site visits 
found that 80 percent of general merchandise stores, 33 percent of 
supermarket/grocery stores, 25 percent of convenience stores, 17 
percent of service stations, 30 percent of drug stores, 42 percent 
of tobacco stores had self-service carton display cases.
---------------------------------------------------------------------------

    Except for those adjustments, FDA used the information found in the 
A. T. Kearney field audit to develop its revised estimate. For 
comparison, the original Barents Group estimates of the number of 
establishments and one-time point-of-sale costs (corrected for 
miscalculations as described above) are shown in Table 6 and FDA 
estimates of one-time costs in Table 7. Detailed summaries of the FDA 
one-time cost estimates are presented in Table 8 and Table 9 and 
indicate that costs related to self-service display cases comprise 73 
percent of the total, followed by 18 percent for promotional materials 
and 9 percent for nonself-service display cases. As explained above, 
these estimates assume that manufacturers will bear the cost of 
removing all promotional items and retailers will bear the cost of 
replacing most functional items. Because the regulation places the 
removal responsibility on owners of the materials, FDA does not know 
how these obligations will be divided. However, if retail outlets, 
rather than manufacturers, must remove these items, the overall cost to 
manufacturers falls by about $47 million and the cost to retailers 
increases by about $17 million. (Retail compensation rates are about 
one-third of manufacturer rates, according to the Barents Group data). 
The following discussion describes specific compliance costs for each 
outlet category.

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[[Page 44584]]

                                                        TABLE 6.--BARENTS GROUP LLC ESTIMATE OF ONE-TIME POINT-OF-SALE REGULATORY COSTS <SUP>1                                                       
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Estimated Number of                     Estimated Point-of-Sale Costs (Lower)     Estimated Point-of-Sale Costs (Upper) 
                                                                          Establishments        Average Cost -----------------------------------------------------------------------------------
                         Kind of Business                          ---------------------------- per Facility  Retail Costs  Manufacturer   Total Costs  Retail Costs  Manufacturer   Total Costs
                                                                        Lower         Upper          ($)           ($)        Costs ($)        ($)           ($)        Costs ($)        ($)    
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
General Merchandise                                                       21,299        29,818         1,067    13,268,172     9,449,404    22,717,576    18,575,066    13,228,900    31,803,966
Supermarket/Grocery                                                      125,222       175,311         2,356   182,028,407   112,960,223   294,988,630   254,840,061   158,144,493   412,984,554
Convenience Stores                                                        51,678        72,349           925    24,408,368    23,382,610    47,790,978    34,171,621    32,735,564    66,907,185
Convenience Stores with Gas                                               91,250       127,750           515    21,656,668    25,294,382    46,951,050    30,319,336    35,412,134    65,731,470
Service Stations                                                          66,721        93,409           217     4,894,902     9,616,053    14,510,955     6,852,833    13,462,416    20,315,250
Drug Stores                                                               51,056        71,478           167     4,472,540     4,054,323     8,526,863     6,261,520     5,676,020    11,937,541
Tobacco Stores                                                             2,596         3,635         2,940     4,486,055     3,147,456     7,633,511     6,281,514     4,407,166    10,688,680
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total                                                                    409,822       573,750                 255,215,112   187,904,451   443,119,563   357,301,952   263,066,694   620,368,645
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Totals may not add due to rounding.                                                                                                                                                         

                                            TABLE 7.--FDA ESTIMATE OF ONE-TIME POINT-OF-SALE REGULATORY COSTS                                           
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Estimated Point-of-Sale Costs<SUP>2                    
        Kind of Business            Estimated Number of      Average Cost Per    -----------------------------------------------------------------------
                                      Establishments<SUP>1          Facility ($)          Retail Costs ($)     Manufacturer Costs ($)      Total Costs ($)   
--------------------------------------------------------------------------------------------------------------------------------------------------------
General Merchandise                    12,117                     919               7,874,058               3,263,894              11,137,952           
Supermarket/Grocery                    71,240                     810              32,655,560              25,067,316              57,722,876           
Convenience Stores                     93,745                     364              12,271,061              21,879,370              34,150,431           
Convenience Stores with Gas            51,913                     213               1,397,066               9,644,359              11,041,425           
Service Stations                       45,539                     122               2,560,164               2,974,000               5,534,164           
Drug Stores                            30,875                     160               2,978,007               1,966,563               4,944,570           
Tobacco Stores                          1,477                   2,175               2,165,591               1,046,163               3,211,753           
Other Establishments                  210,012                      19                 522,765               3,384,741               3,907,506           
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total                                 507,918                                      62,424,273              69,226,404             131,650,677           
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Number of establishments from Table 5.                                                                                                              
\2\ Totals may not add due to rounding.                                                                                                                 

[[Page 44585]]

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[GRAPHIC] [TIFF OMITTED] TR28AU96.002

[[Page 44587]]

[GRAPHIC] [TIFF OMITTED] TR28AU96.003

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[GRAPHIC] [TIFF OMITTED] TR28AU96.004

BILLING CODE 4160-01-C

[[Page 44589]]

    e. General merchandise stores. None of the general merchandise 
stores in the A. T. Kearney sample had exterior promotional materials 
and only a few had interior promotional materials. Eighty percent of 
the stores had only self-service displays, with carton displays more 
numerous than pack displays at these locations. The average per 
facility one-time costs estimated by FDA were $919. Overall, 97 percent 
of the outlet costs related to the replacement of self-service display 
cases, although in some general merchandise stores, tobacco products 
were stocked on shelves rather than in special display cases, which 
suggests that the costs for this business category may be overstated.
    f. Supermarket/grocery. Unlike general merchandise stores, 
supermarkets had significant promotional materials. While both packs 
and cartons were sold at most locations, over 75 percent of the stores 
already had nonself-service display areas. FDA estimates per facility 
costs at $810. Self-service display case removal and replacement amount 
to 85 percent of the total cost, whereas promotional materials account 
for 14 percent. Commenting on the feasibility of the proposed FDA self-
service ban, the Food Marketing Institute argued that most retail food 
stores do not have adequate space at checkout lines for tobacco 
products and rejected the practicability of alternative procedures. 
They suggested that the only option available to many food retailers 
would be to remodel and set-up a controlled area for the sale of 
tobacco products, costing up to $50,000 per store. The A. T. Kearney 
audit, however, found that a majority of supermarket/grocery stores 
have already installed nonself-service areas for tobacco products and 
would not need to reconfigure their stores. While some establishments 
will incur costs above the average, the A. T. Kearney site visit data 
suggest that most stores could comply by either moving inventory to 
nonself-service areas or by purchasing new displays that are compatible 
with existing store configurations.
    g. Convenience stores. Stores in this category exhibited numerous 
interior and exterior promotional items. All of the convenience stores 
surveyed had nonself-service display cases and 50 percent had carton 
displays. FDA estimates per facility costs of $364. Costs for removing 
and replacing self-service display cases made up 59 percent of the 
total, while costs for promotional materials and nonself-service 
display cases were 28 percent and 14 percent, respectively.
    The National Association of Convenience Stores (NACS) faulted FDA 
on its assumption that the main cost of the self-service ban would be 
to relocate tobacco product inventory, contending that their members 
would incur thousands of dollars in reconfiguration costs. According to 
NACS:
    [i]t is largely irrelevant that retailers already keep packs 
behind the counter. Many NACS members keep large quantities of packs 
and cartons in self-service displays and would have to reconfigure 
their stores to comply with the ban on self-service sales.
Based on an estimate from one member with a high volume of self-service 
cigarette sales, NACS suggested it could cost $4,320 and $10,120, 
respectively, to reconfigure a newer and older convenience store.
    Based on other evidence, however, FDA does not believe that a large 
number of stores will be forced to undergo extensive modifications and 
finds that most convenience stores can adequately adapt space either 
behind or above checkout counters. As noted earlier, one regional 
survey reported that retail outlets readily complied with local self-
service restrictions without architectural remodeling or substantial 
refitting of checkout counters or store aisles. \318\ Space above 
counters is typically available for display cases either by suspending 
a case from the ceiling or by supporting a case on beams from the 
counter. In its survey, A. T. Kearney found at least some tobacco 
products sold from nonself-service space in every convenience store. 
Although it is possible that stores might incur added inventory 
handling costs if this space were smaller than optimal, FDA concludes 
that major reconfiguration would rarely be required and relies on the 
A. T. Kearney survey data, as adjusted, to project average costs for 
this sector.
---------------------------------------------------------------------------

    \318\ Kropp, R., ``A Position Paper on Reducing Tobacco Sales to 
Minors by Prohibiting the Sale of Tobacco Products by Means of Self-
Service Merchandising and Requiring Only Vendor-Assisted Tobacco 
Sales,'' North Bay Health Resources Center, Stop Tobacco Access for 
Minors Project (STAMP), Petaluma, CA, p. 5, November 3, 1994.
---------------------------------------------------------------------------

    h. Convenience stores with gas. Like convenience stores without 
gas, these establishments had numerous interior and exterior 
promotional materials. About 89 percent of the stores surveyed had 
nonself-service display cases. FDA estimates per facility costs of 
$213. Consistent with the findings of the Barents Group, the average 
outlet cost for this sector is about one-half that of convenience 
stores without gas.
    In comments to the 1995 proposed rule, the Society of Independent 
Gasoline Marketers of America (SIGMA) did not present specific data on 
the cost to their members, but indicated that many members would be 
required to reconfigure their stores. They stated that:
    [m]any SIGMA members keep large quantities of packs and cartons 
in self-service displays and would have to reconfigure their stores 
to comply with the ban on self-service sales. At a minimum, these 
members would have to install new cabinets to accommodate tobacco 
products behind the counter. Many members would have to enlarge the 
counter area to make room for the new cabinets.
In contrast, the A. T. Kearney field audit found few convenience stores 
with gas that have self-service displays, other than unattached 
promotional counter displays. Costs to remove or replace promotional 
counter displays will be borne primarily by manufacturers, not 
retailers. In sum, the costs for self-service display cases amount to 
about 31 percent of the total, promotional material 30 percent, and 
nonself-service display cases 39 percent.
    i. Service stations. These establishments had both interior and 
exterior promotional material. Seventy-five percent of the locations 
surveyed had only nonself-service display cases and one-fourth had 
carton displays. FDA estimates the per facility cost at $122.
    j. Drug stores. Drug store outlets had few exterior and interior 
promotional materials. As in general merchandise stores, tobacco 
products were stocked on shelves in some locations. Ninety percent of 
the stores surveyed by A. T. Kearney already had nonself-service 
displays and approximately 70 percent had carton displays. FDA 
estimated $160 cost per facility for this category of business. About 
93 percent of the total one-time costs are for replacement of self-
service display cases.
    k. Tobacco stores. These stores had substantial promotional 
materials and multiple display cases. FDA estimates per facility costs 
of $2,175. About 94 percent of the costs are for self-service display 
cases, with promotional materials and nonself-service display cases 
dividing the remaining 6 percent. While not reflected in the cost 
totals, these establishments may choose to operate as ``adult only'' 
restricted areas to avoid replacing self-service display cases.
    l. Other establishments. This category includes eating/drinking 
establishments and miscellaneous retail stores, which

[[Page 44590]]

were excluded from the A. T. Kearney audit, plus the estimated 100,000 
nonretail establishments that sell tobacco products OTC, such as 
hotels, factories and sporting facilities. Due to the low volume of 
tobacco product sales at these establishments, FDA assumed that only a 
small quantity of packs and no cartons would be sold. Lacking detailed 
data, FDA assigned costs of $19 per outlet, based on the costs of 
removing promotional materials and relocating and replacing small 
attached display cases, as reported for drug stores.
3. Label Changes
    The final regulation requires that the tobacco product package 
contain the established name of the tobacco product in a specified 
size. FDA estimated the compliance costs for printing new labels in its 
earlier analysis of the proposed regulation and has received no 
comments that improve those original estimates.
    Approximately 933 varieties of cigarettes are currently produced in 
the United States. \319\ FDA does not have information on the number of 
smokeless tobacco varieties, but assumes that the total number of 
cigarette and smokeless tobacco varieties is roughly 1,000. Because 
most varieties of cigarettes are packaged in both single packs and 
cartons, the total number of labels is assumed to number about 2,000.
---------------------------------------------------------------------------

    \319\ ``Tar, Nicotine, and Carbon Monoxide of the Smoke of 933 
Varieties of Domestic Cigarettes,'' Federal Trade Commission, 1994.
---------------------------------------------------------------------------

    FDA used two approaches to estimate the cost to industry of 
changing these labels. The first approach relied on information 
compiled by The Research Triangle Institute (RTI) for its report to FDA 
on the cost of changing food labels. \320\ RTI reported a cost of about 
$700 for a 1-color change in a lithographic printing process. FDA 
multiplied this figure by 4 to account for a 2-color change on the 
actual warning labels and an additional 2 colors for modifications to 
the existing label to make room for the warning label. This calculation 
yielded incremental printing costs of about $2,800 per label, or $5.6 
million for all 2,000 varieties of affected tobacco products. Adjusting 
this figure downward by RTI's methodology to account for the current 
frequency of label redesign predicts that the total one-time cost of 
completing these label changes within a 1-year compliance period would 
be approximately $4 million.
---------------------------------------------------------------------------

    \320\ French, M. T., D. M. Neighbors, L. K. Carswell, K. B. 
Heller, and G. L. McDougal, ``Compliance Costs of Food Labeling 
Regulations,'' Final Report, RTI Project Number 233U-3972-02 DFR, 
January 1991.
---------------------------------------------------------------------------

    The second approach was to use cost information provided in the 
regulatory impact analysis of a roughly comparable Canadian regulation. 
\321\ The Canadian Government estimated a cost of $30 million to change 
labels for about 300 cigarette varieties. Most Canadian cigarettes are 
likewise sold in two sizes, but about 20 percent are also sold in flip 
top packages. \322\ Canadian labels, however, are typically printed 
using a gravure method; which, according to RTI, is about 3.5 times as 
expensive as the lithography process used in the United States. 
Adjusting the Canadian estimate upward, to account for the larger 
number of cigarette and smokeless tobacco varieties in the United 
States; and downward, for the smaller number of packages per variety 
and the smaller cost of the lithography printing process, provides a 
$17 million estimate for the total cost of these label changes.
---------------------------------------------------------------------------

    \321\ Department of National Health and Welfare, ``Tobacco 
Products Control Regulations, amendment,'' Canada Gazette, Part II, 
vol. 127, No. 16, pp. 3277-3294, August 11, 1993.
    \322\ Kaiserman, M., Department of National Health and Welfare, 
Canadian Government, personal communication, February 1, 1995.
---------------------------------------------------------------------------

4. Educational Program
    FDA may issue notification orders under section 518(a) of the 
Federal Food, Drug, and Cosmetic Act (the act) (21 U.S.C.360h(a)) to 
require manufacturers of cigarettes and smokeless tobacco products to 
fund consumer educational programs. While the precise details of these 
orders are still under development, these orders may involve the 
achievement of specific performance objectives by directing 
manufacturers to initiate informational programs designed to transmit 
messages that will reach the majority of young people. The 1995 
proposed regulation directed manufacturers to spend at least $150 
million annually on this program. While industry comments were 
critical, many other comments suggested that this figure was too low. 
One comment noted that $150 million is equivalent to about one week of 
pro-tobacco expenditures and another that the industry gained $221 
million in profits from underage sales. Still another pointed out that 
the current dollar value of the informational advertising that was 
conducted under the Fairness Doctrine would amount to about $300 
million per year. One study appears to indicate that 75 percent of 
adolescents aged 12 to 17 could have been reached in 1985 to 1986 with 
multiple messages at a cost of about $17 million a year. \323\ FDA is 
still evaluating various types of informational programs, with respect 
to both effectiveness and practicality. Before a final decision is 
reached, the agency will determine the costs of selected alternatives.
---------------------------------------------------------------------------

    \323\ Bauman, K. E., J. D. Brown, E. S. Bryan, L. A. Fisher, C. 
A. Padgett, and J. M. Sweeney, ``Three Mass Media Campaigns to 
Prevent Adolescent Cigarette Smoking,'' Preventive Medicine, vol. 
17, pp. 510-530, 1988.
---------------------------------------------------------------------------

5. Restricted Advertising and Promotional Activities
    a. Tobacco industry. The determination of the societal costs 
attributable to the restrictions on tobacco product advertising and 
promotion is complex. While there is no doubt that individual 
manufacturers realize enhanced goodwill asset values from advertising 
programs, the industry has long held that advertising prompts brand-
switching, but does not increase aggregate sales. Of course, if this 
were true, advertising would be unprofitable from the standpoint of the 
industry as a whole and reduced levels would increase rather than 
decrease aggregate industry profits. In addition, if the primary 
motivation for tobacco advertising is to promote brand-switching, then, 
as long as all firms are equally restricted from advertising, the above 
mentioned loss in goodwill value will be substantially reduced.
    In its comments, the tobacco industry claimed that tobacco 
advertising and promotion have virtually no effect on youth 
consumption. Although FDA does not accept this claim, the agency does 
not consider the expected voluntary reduction in the consumption of 
tobacco products to be a societal cost. Although industry sales will 
fall, they will reflect new consumer preferences and consumer dollars 
no longer used on tobacco products will be redirected to other more 
highly valued areas. Thus, for the most part, the resulting reduction 
in industry sales are not net costs and the potential magnitude of this 
revenue transfer is discussed below under the heading of Distributional 
Effects. Moreover, as shown in that discussion, any short-term 
frictional or relocation impacts will be significantly moderated by the 
gradual phase-in of the economic effects.
    b. Advertising industries. In its original analysis, FDA argued 
that advertising and promotional restrictions will impose no long term 
net costs on society. The Barents Group's study found that the various 
suppliers of

[[Page 44591]]

industry advertising will incur substantial regulatory costs. It 
estimated that illustrative annual costs for this sector could reach 
$722 million to $2.17 billion, or up to one-half of its estimate of the 
total costs of the FDA proposal.
    Upon review, FDA remains firmly convinced that its original 
position was correct. That is, from the standpoint of assessing 
societal costs and benefits, reduced revenues from tobacco advertising 
and promotional activities are not net costs and are appropriately 
considered a distributional impact. Indeed, FDA believes that a strong 
argument can be made that, even irrespective of health benefits, these 
advertising restrictions will decrease net societal costs by freeing 
productive resources for alternative uses. This does not imply that no 
individual business entities will be negatively impacted. Many of the 
companies that currently benefit from tobacco promotions (e.g., 
advertising agencies, publishers, sporting event promoters) will suffer 
lost revenues and those firms that specialize in those activities may 
lose a substantial part of their business. Nevertheless, from a 
societal perspective, these losses will be counterbalanced by an 
increase in demand for other consumption and investment goods, so that 
nontobacco-related entities will gain sales. Although overlooked in 
most industry comments, this result is acknowledged within the comments 
submitted for the Tobacco Institute by the Barents Group:
    A key assumption in the simulations is that, when tobacco 
product manufacturers decrease their advertising expenditures, the 
money not spent translates into increased profits for the industry. 
The increased profits ultimately end up in the hands of the 
companies' owners (shareholders) either as direct payouts or as 
investments on their behalf in other lines of business. In general, 
these profits are ultimately recycled into increased consumption and 
investment by the owners of the companies.
That report also reveals the underlying distributional nature of the 
impacts by explaining that its modeling incorporates the assumption 
that:
     * * * in the long run economic losses in one sector of the 
economy will be redistributed to other sectors of the economy, i.e., 
winners and losers will generally balance out for the economy as a 
whole.
Further discussion of the impact of these revenue transfers is included 
below under the section on ``Distributional Effects.''
    c. Retail sector. In addition to the previously estimated direct 
costs associated with the removal of prohibited point-of-purchase 
advertising, promotional restrictions will impact the retail sector 
because they will lead to a long-term decline in tobacco products sales 
and a potential fall in promotional allowances (slotting fees) from 
manufacturers. Once again, these impacts are not net societal costs, 
since reduced tobacco product sales will be counterbalanced by 
increased sales for other products or services; and smaller promotional 
allowances, if they occur, are gains to tobacco manufacturers that 
would be used for other purchases. Consequently, these impacts also are 
examined below under ``Distributional Effects.''
    d. Consumers. Advertising restrictions may impose costs on society 
if they disrupt the dissemination of relevant information to consumers. 
Firms engage in advertising to inform potential customers about their 
product (informative advertising) or to persuade customers that a 
product is desirable (persuasive advertising). According to the FTC's 
Bureau of Economics, the benefits of advertising derive from:
     * * * its role in increasing the flow and reducing the cost of 
information to consumers * * * First, advertising provides 
information about product characteristics that enables consumers to 
make better choices among available goods * * * Second, theoretical 
arguments and empirical studies indicate that advertising increases 
new entry and price competition and hence reduces market power and 
prices in at least some industries * * *. Third, advertising 
facilitates the development of brand reputations. A reputation, in 
turn, gives a firm an incentive to provide products that are of 
consistently high quality, that live up to claims that are made for 
them, and that satisfy consumers. \324\
---------------------------------------------------------------------------

    \324\ Recommendations of the Staff of the Federal Trade 
Commission, ``Omnibus Petition for Regulation of Unfair and 
Deceptive Alcoholic Beverage Advertising and Marketing Practices,'' 
Appendix A, pp. 3-4, March 1985.
---------------------------------------------------------------------------

    FDA has considered each of these issues. First, while agreeing that 
many forms of advertising offer substantial benefits to consumers, the 
agency nevertheless believes that consumers will lose little utility 
from these particular advertising restrictions. The regulation does not 
prohibit factual, written advertising. Thus, the rule will not impede 
the dissemination of important information to most consumers. In its 
preliminary analysis, the agency concluded that, ``[w]hile imagery and 
promotional activities may be important determinants of consumer 
perceptions and sales, they typically provide little meaningful 
information on essential distinctions among competing tobacco 
products'' (60 FR 41314 at 41368).
    One industry comment strongly opposed this position, arguing that 
advertising is important for product improvement and that past 
restrictions on the advertising of ``low tar'' products retarded 
product innovation. The crux of the argument is that color and/or 
imagery are prerequisites for disseminating relevant quality 
information and that, in its absence, consumers could not be adequately 
informed about the merits of new products. FDA, however, is not 
persuaded that manufacturers will be unable to convey vital 
information. The agency finds that true product improvements in this 
industry are rare, but where they exist, manufacturers could rely on 
traditional ads in adult-oriented publications and on ``text only'' 
advertising elsewhere. Moreover, FDA and other public health agencies 
would likely coordinate with companies in disseminating truly important 
consumer safety information.
    The implications of FTC's second point, which addresses the effect 
of advertising restrictions on market power and prices, are less 
certain, as various empirical studies have reached conflicting 
conclusions. One industry comment insisted that FDA's regulation will 
deprive consumers of the benefits of competition, stating that, 
``[u]ndoubtedly the clearest measure of consumer benefit is the effect 
of advertising on price.'' To support this view, the comment references 
several studies that demonstrate the ability of advertising to reduce 
product prices. The comment also contended that the ``[e]limination of 
advertising will predictably consolidate the market as marginal brands 
are abandoned and fewer brands are introduced'' and that, ``[o]ver time 
this can also reduce the number of players, as companies with dominant 
brands drive out others.''
    FDA agrees that advertising can often lead to decreased product 
prices, but notes that the other industries referenced (e.g., 
eyeglasses and pharmaceuticals) are much more competitive than tobacco 
products. Moreover, economists have found that advertising can also 
serve as a barrier to entry in oligopolistic industries. One author, 
for example, determined that ready-to-eat breakfast foods companies 
used advertising programs to support brand proliferation strategies in 
order to dominate retail shelf space. \325\ These programs helped to 
keep new firms out and prices high without necessarily

[[Page 44592]]

embodying improved quality. Thus, in certain circumstances, 
oligopolistic firms can use extensive advertising to create barriers 
for suppressing innovation and competition. FDA cannot determine 
whether tobacco advertising restrictions would ultimately increase or 
decrease product prices.
---------------------------------------------------------------------------

    \325\ Sutton, J., ``Sunk Costs and Market Structure,'' The MIT 
Press, Cambridge, Massachusetts, pp. 229-247, 1991.
---------------------------------------------------------------------------

    Finally, FTC's third point, which emphasizes the positive aspects 
of advertising in supporting brand reputations, is more relevant for 
long-lived items, such as consumer durables, where purchases are 
infrequent or personal experience is inadequate. Advertising is less 
likely to play a key role in assuring high quality levels for tobacco 
products, where consumer search costs are low and a brand's reputation 
for quality is tested by consumers every day. For these products, high 
quality will remain a prerequisite of commercial success irrespective 
of advertising strategies.
    Other analysts suggest still other potential attributes of product 
advertising. For example, according to F. M. Scherer, author of a 
widely read text on industrial organization:
    Advertising is art, and some of it is good art, with cultural or 
entertainment value in its own right. In addition, it can be argued 
that consumers derive pleasure from the image advertising imparts to 
products, above and beyond the satisfaction flowing in some organic 
sense from the physical attributes of the products. There is no 
simple case in logic for distinguishing between the utility people 
obtain from what they think they are getting and what they actually 
receive. As Galbraith observed, ``The New York housewife who was 
forced to do without Macy's advertising would have a sense of loss 
second only to that from doing without Macy's.'' \326\
---------------------------------------------------------------------------

    \326\ Scherer, F. M., Industrial Market Structure and Economic 
Performance, 2nd edition, Rand McNally College Publishing Co., 
Chicago, IL, p. 380, 1980.
---------------------------------------------------------------------------

    Similarly, Becker and Murphy have argued that advertisements should 
be considered ``goods'' if people are willing to pay for them and as 
``bads'' if people must be paid to accept them. \327\ They explain 
that, in general, the more easily the advertisements can be ignored, 
the more likely it is that the ads themselves provide utility to 
consumers. Newspaper and magazine advertisements, for example, must 
provide positive consumer utility or they would be ignored by readers. 
This final rule allows such advertisements to continue, some in their 
current form, others in a text-only format. (In fact, industry outlays 
for newspaper and magazine advertisements have dropped sharply in 
recent years and currently constitute less than 5 percent of the 
industry's total advertising and promotion budget). \328\ Conversely, 
the extraordinary growth in industry advertising and promotion has 
occurred in areas that are typically bundled with other products, or 
placed in prominent public settings that are difficult to ignore. Thus, 
there is considerable question about the contribution of these programs 
to consumer utility.
---------------------------------------------------------------------------

    \327\ Becker, G. S., and K. M. Murphy, ``A Simple Theory of 
Advertising as a Good or Bad,'' Quarterly Journal of Economics, vol. 
108, p. 941, November 1993.
    \328\ Federal Trade Commission Report to Congress for 1993: 
Pursuant to the Federal Cigarette Labeling and Advertising Act, 
issued 1995.
---------------------------------------------------------------------------

6. Training
    a. Retailers. The final regulation does not explicitly require 
retail employees who sell tobacco products to be trained in checking 
customer I.D.'s. FDA understands, however, that some training is 
essential to effective performance. In its analysis of the proposed 
regulation, FDA estimated total annual costs of $10 million for 
employee training at retail outlets. This estimate assumed that an 
average of 12 employees per store at 467,000 retail stores (assuming 1/
3 of 700,000 stores already conducted training) would receive 15 
minutes of training at a compensation rate of $7.41/hour. The Barents 
Group commented that FDA's analysis did not account for many individual 
cost elements, resulting in a significant underestimate of total 
training costs. It estimated one-time training costs of $184 to $257 
million and recurring annual training costs of $48 to $67 million.
    Specifically, the Barents Group stated that FDA relied on outdated 
compensation data. FDA had obtained these data from a 1992 report 
prepared by Price Waterhouse for the Tobacco Institute, but agrees that 
more recent data are available and employs the suggested compensation 
rate of $9.51 for its revised estimate. The Barents Group also claimed 
that FDA failed to consider recurring training costs due to annual 
employee turnover and annual updating, focusing instead on one-time 
training costs only. This criticism is not valid. Table 2 of the 
original analysis (60 FR 41314 at 41360) clearly lists training costs 
for retail establishments as an annual operating cost and the text (60 
FR 41314 at 41367) refers to a ``per year'' cost. Because employees 
would be trained when first hired, this estimate implied a 100 percent 
employee turnover rate.
    To refine its analysis, however, FDA has disaggregated the cost 
elements. Although the Barents Group accepted FDA's preliminary 
estimate of 12 employees per retail store, FDA now believes that this 
figure is accurate only for retail stores with payroll. Stores without 
payroll constitute a significant percentage of the stores selling 
tobacco products and, on average, are much smaller. As explained above, 
FDA estimates that about 600,000 establishments will sell over-the-
counter tobacco products, including the 100,000 that replace those 
vending machines that are removed. Table 10 presents the data that 
underlie FDA's revised estimates of the number of employees who will be 
trained. For existing retail establishments with payroll, FDA assumes 
that training will be needed for all employees in the affected outlets, 
except in General Merchandise and Supermarket/Grocery stores, where 
one-third of the employees will be trained. For establishments without 
payroll, nonretail establishments, and new establishments replacing 
vending machines, Census data on the number of employees is not 
available, but FDA assumes that an average of six employees will be 
trained. As shown in Table 10, these calculations indicate that 
training will be required for a total of 4.2 million workers.
    The Barents Group further faulted FDA for underestimating the 
training time that would be required to educate retail sales clerks 
about recognizing proper forms of identification and handling related 
customer service problems. It assumed that 2 hours of training would be 
necessary. FDA, however, reviewed the time needed to present the 
training materials from several corporate entities and finds that they 
need not exceed one hour. For example, one large convenience store 
corporation uses a 45 minute training videotape that covers the sale of 
tobacco products, but also covers the sale of alcohol and possible 
inhalants, including means for recognizing inebriated or drugged 
individuals. Moreover, many establishments, especially small stores, 
will provide no formal training, but will provide instruction during 
the work day with minimal lost time. Thus, FDA believes that average 
costs are reasonably based on a 1-hour training program.

[[Page 44593]]

                                                      TABLE 10.--NUMBER OF EMPLOYEES TO BE TRAINED                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Payroll Establishments                     Nonpayroll Establishments              
                                                  ------------------------------------------------------------------------------------------            
                                                                                                                Establishments                  Total   
                 Kind of Business                    Establishments    Employees Per    Percent       No. of        Selling        No. of     Employees 
                                                    Selling Tobacco        Store        Trained     Employees       Tobacco      Employees     Trained  
                                                        Products                                     Trained       Products       Trained<SUP>1              
--------------------------------------------------------------------------------------------------------------------------------------------------------
General Merchandise                                           12,117            60.1          33%      242,593          9,807        58,842      301,435
Supermarket/Grocery                                           71,240            20.9          33%      497,253         54,538       327,228      824,481
Convenience Store/no gas                                      29,400             5.6         100%      164,718            ---           ---      164,718
Convience Store/gas                                           51,913             6.8         100%      353,868            ---           ---      353,868
Gas Station                                                   37,958             6.0         100%      228,002          7,581        45,486      273,488
Eating Place                                                  11,992            16.5         100%      198,212          3,065        18,390      216,602
Drinking Place                                                10,745             5.4         100%       58,498          5,336        32,016       90,514
Drug/Proprietary Store                                        29,046            12.2         100%      354,730          1,829        10,974      365,704
Specialty Tobacco                                              1,477             3.7         100%        5,530            ---           ---        5,530
Miscellaneous                                                 24,995             5.2         100%      130,253         44,879       269,274      399,527
--------------------------------------------------------------------------------------------------------------------------------------------------------
Retail Subtotal                                              280,883                                 2,233,656        127,035       762,210    2,995,867
 Nonretail<SUP>2                                                                                                                                      600,000
Converted Vending Machines<SUP>2                                                                                                                      600,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total                                                                                                                                          4,195,867
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Assumes 6 employees per establishment.                                                                                                               
\2\Assumes 100,000 outlets with 6 employees to be trained.                                                                                              
Sources: Table 4 for description of establishment data; 1992 Census of Retail Trade, Subject Series: Establishment and Firm Size (Table 1) for          
  employment data; FDA estimates for percent trained.                                                                                                   

    Adopting FDA's original estimate that about one-third of all 
affected establishments already provide employee training (also assumed 
by the Barents Group), implies one-time employee training costs of 
$26.6 million (4.2 million employees x 2/3 x $9.51). The Barents Group 
suggested, however, that even employees who currently receive training 
would need 5 extra minutes on the new regulations, which adds about 
$1.0 million to the cost estimate. Next, the Barents Group included 
costs for time spent by trainers, assuming that the training would be 
provided by an outside source. FDA believes that a more typical 
approach would have a store supervisor provide the training. Using 
$13.64 as the compensation rate for a retail manager, as suggested by 
the Barents Group, and adjusting for the assumed one-third current 
compliance rate in existing establishments, yields a one-time cost for 
trainer time of $6 million. Thus, FDA projects total one-time training 
costs of about $33.5 million.
    In addition, FDA estimates that employee turnover, using the 
Barents Group suggested rate of 42 percent, will add annually recurring 
training costs of about $11.2 million. Also, new employees will receive 
I.D. check training as part of their initial orientation activities. 
Since stores may provide this to several new employees at once, using 
either written or video training materials, FDA estimates that retail 
managers, on average, would spend about 1 additional hour per year 
providing this training. This adds $6.0 million to the annual training 
costs. The Barents Group also recommended annual reinforcement 
training. An annual 10-minute reinforcement training period for 
employees of those establishments that do not already have a training 
program will cost about $2.9 million. In sum, these annual recurring 
training costs total about $20 million.
    The Barents Group also assumed that retail managers would need 
extensive training to understand the new regulations. FDA estimated in 
its 1995 proposal that manufacturers' representatives would need about 
8 hours of training on their new responsibilities and the Barents Group 
assumed that retail managers would need a similar duration of training. 
FDA rejects this estimate, however, as the final provisions affecting 
retailers are straight-forward and will be routinely communicated 
through traditional industry channels.
    b. Manufacturers representatives. In its preliminary economic 
analysis, FDA estimated that 7,300 manufacturer representatives would 
be trained for 8 hours at a cost of $25.00 per hour. After noting FDA's 
``undocumented'' cost estimate, the Barents Group proceeded to apply 
the identical number of training hours to their ``documented'' cost 
estimate of $25.70 per hour. They also suggested a 15 percent labor 
turnover premium, giving a total cost of $1.5 million. As the final 
rule eliminates the monitoring burden for these employees, this 
training cost should be correspondingly smaller. Nevertheless, these 
manufacturer employees will still need to determine the types of 
displays that remain permissible. FDA therefore accepts the $1.5 
million cost estimate.
7. Access Restrictions
    a. Manufacturers. Although voluntary decreases in the sale of 
consumer products do not impose long-term net societal costs, mandatory 
restraints on the access of consumers to desired products may imply 
economic costs. Economists typically measure producer-related 
inefficiencies attributable to product bans by calculating lost 
``producers' surplus,'' which is a technical term for describing the 
difference between the amount a producer is paid for each unit of a 
good and the minimum amount the producer would accept to supply each 
unit, or the area between the price and supply curve. Data derived from 
Cummings, et al., indicate that youngsters under the age of 18 consume 
316 million packs of cigarettes per year, leading to industry profits 
of $118 million. \329\ On the assumption that the regulation would 
reduce teenage smoking by one-half, these profits would fall by about 
$59

[[Page 44594]]

million. However, because most of this profit stems from illegal sales 
to youths, FDA has not counted this figure as a societal cost.
---------------------------------------------------------------------------

    \329\ Cummings, K. M., T. Pechacek, and D. Shopland, ``The 
Illegal Sale of Cigarettes to U.S. Minors: Estimates by State,'' 
American Journal of Public Health, vol. 84, No. 2, p. 301, February 
1994, (derived by subtracting sales to 18-years-olds from the 
reported 516 million packs consumed).
---------------------------------------------------------------------------

    b. Consumers. Consumer surplus is a concept that represents the 
amount by which the utility or enjoyment associated with a product 
exceeds the price charged for the product. Because it reflects the 
difference between the price the consumer is willing to pay and the 
actual market price, it is used by economists to measure consumer 
welfare losses imposed by product bans. However, FDA's rule imposes no 
access restrictions on adults, who will be free to consume tobacco 
products if they so desire. Thus, FDA has not included any value for 
lost consumer surplus in its estimate of the societal costs of these 
access restrictions.
8. I.D. Checks
    a. Retailers. For the 1995 proposed regulation, FDA estimated that 
retail establishments would bear annual compliance costs of $28 million 
for consumer identification checks. This figure was derived by 
multiplying the estimated retail employee compensation rate by the 
extra time that might be needed to complete purchase transactions. The 
estimate measured the cost to retailers for either increasing the 
number of working hours of existing staff or for hiring new staff to 
handle the added workload. The Barents Group commented on numerous 
aspects of this compliance cost estimation, accepting several key FDA 
assumptions, but rejecting others in deriving its estimate of $142 
million per year.
    In its preliminary analysis, FDA estimated the number of tobacco 
product transactions for the 18 to 26 year-old age group based on data 
that reflected the tobacco consumption of cigarette smokers 5 to 6 
years after high school \330\ and the annual per capita consumption of 
smokeless tobacco. \331\ The Barents Group faulted FDA for limiting 
these transactions to 18 to 26 year-olds, asserting that the standard 
practice for alcohol sales is to request identification for anyone who 
appears to be 30 years old or younger. The Barents Group calculations 
actually estimated compliance costs on the assumption that customers up 
to age 34 would be asked for identification, because some older 
consumers would appear to be only 30 years old.
---------------------------------------------------------------------------

    \330\ 1994 SGR, p. 85.
    \331\ U.S. Department of Commerce, Statistical Abstract of the 
United States 1993, 113th edition, p. 137, 1993; DHHS, Office of 
Inspector General, Spit Tobacco and Youth; Additional Analysis, June 
1993.
---------------------------------------------------------------------------

    FDA has not accepted this Barents Group assumption for several 
reasons. First, the legal age of purchase for alcohol in all 50 States 
is 21 years, whereas the rule for cigarettes and smokeless tobacco sets 
18 as the legal age of purchase. This 3-year difference implies that 
comparable cigarette and smokeless identification checks would be 
expected only up through age 27. Also, the current policy and practice 
of many retail stores is to request identification from tobacco 
consumers only up to age 26. Requiring proof of age for anyone who 
appears younger than 26 years of age was also recommended by a working 
group of 26 State Attorneys General. \332\ Finally, the Barents Group's 
use of age 34 to provide a margin of safety for identifying those under 
the age of 30 is illogical, since the FDA rule requires retail stores 
to identify consumers who are under the age of 26, not 30.
---------------------------------------------------------------------------

    \332\ ``No Sale: Youth Tobacco and Responsible Retailing,'' 
Findings and Recommendations of Working Group of State Attorneys 
General, p. 28, December 1994.
---------------------------------------------------------------------------

    The Barents Group accepted the FDA assumption that an I.D. check 
would take an average of 10 seconds, but referenced a study by A. T. 
Kearney that found that the actual time needed to verify a photo I.D. 
for a tobacco product sale averaged 8.3 seconds. Because FDA has no 
better data, the agency adopts 8.3 seconds as the average time needed 
to conduct an I.D. check. The Barents Group further commented that FDA 
used outdated employee compensation data in its calculations. FDA's 
revised totals use the Barents Group's employee compensation estimate 
of $9.51/hour (1994 dollars) as the time value for retail sales 
employees.
    FDA originally assumed that only 75 percent of all retail 
transactions for the 18 to 26 year-old age group would be extended due 
to I.D. checks. The Barents Group argued that the correct percentage 
should be 100 percent, as the rule would apply to all sales to the 
relevant age group. FDA continues to believe that this assumption leads 
to an over-estimate of the probable costs. First, not every moment of a 
clerk's time is effectively utilized and a few seconds more per 
transaction will not always result in lost labor productivity. Second, 
many smokers patronize the same retail store almost daily and are well-
known to clerks. I.D. checks for these customers will take little extra 
time. Finally, many customers will take less time to produce an I.D., 
once they realize that identification checks have become routine. 
Nevertheless, FDA adopts the Barents Group's 100-percent assumption to 
assure a full accounting of the relevant costs.
    One comment claimed that FDA failed to include the cost of hiring 
additional sales clerks. As noted above, the FDA calculation does 
reflect the cost of the additional labor time that might be needed. The 
Barents Group also inexplicably asserts that FDA failed to consider 
I.D. checking costs as annual costs, instead listing them as a one-time 
cost. Table 2 of the original analysis (60 FR 41314 at 41360), clearly 
lists the $28 million identification check cost as an annual operating 
cost and the accompanying text (60 FR 41314 at 41367) refers to the 
figure as a ``per year'' cost. The Barents Group further faulted FDA 
for not taking into account the cost of checking I.D.'s for those 
youths under age 18, who will still attempt to buy cigarettes. While a 
small percentage of underage smokers may opt for this course of action, 
few would return to complying outlets. Thus, FDA believes that any 
plausible estimate of the associated costs would be less than $1 
million annually.
    FDA originally estimated the number of tobacco product transactions 
for the 18 to 26 year-old age group at 2.2 billion, but has updated its 
estimate to 2.5 billion. \333\ Also, the 80-percent current 
noncompliance rate that had been assumed for the 1995 proposal may be 
too high, as the Surgeon General estimated that minors are unable to 
make an OTC purchase of tobacco products about one-third of the time. 
\334\ Nevertheless, FDA retains this assumption to calculate a cost to

[[Page 44595]]

retailers for I.D. checks of $43 million per year (2.5 billion 
transactions x 8.3 seconds/transaction x $9.51/hour <divide> 3600 
seconds/hour x 80 percent noncompliance rate). This revised estimate 
exceeds FDA's original $28 million figure, but remains far below the 
$142 million estimate of the Barents Group.
---------------------------------------------------------------------------

    \333\ 1994 Population data for 18 to 26 year-olds from 1995 
Statistical Abstract, Table 16. Cigarettes: Number of smokers for 
age group calculated from Table 217 (1993 data). Average packs/yr. 
and total packs/yr. for smokers aged 18 to 26 calculated from data 
in Table 20, 1994 SGR, p. 85. (Those smoking 1 to 5 cigarettes/day 
assumed to smoke 3, those smoking 20+ cigarettes/day assumed to 
smoke 25). The resulting number of packs smoked by 18 to 26 yr.-olds 
totals about 2.5 billion. If even 1 percent of these transactions 
were for cartons, this number falls to about 2.3 billion. Smokeless: 
Total units of smokeless products sold calculated from data in Spit 
Tobacco and Youth: Additional Analysis, Dept. of Health and Human 
Services, June 1993, Excise Tax calculations, Option 4; Units 
consumed by youths from the Institute of Medicine Report (the IOM 
Report) ``Growing Up Tobacco Free: Preventing Nicotine Addiction in 
Children and Youths'', p. 8. 1994, Usage data and total units (cans 
or pouches) consumed for age group for those aged 18 to 26 from 
``Use of Smokeless Tobacco Among Adults-U.S., 1991'' in ``MMWR'', 
CDC, DHHS, volume 42, No. 14, p. 264, 1993. The number of containers 
sold for 18 to 26 yr. old age group totals about 0.2 billion.
    \334\ IOM Report, p. 202.
---------------------------------------------------------------------------

    b. Consumers. The Barents Group also criticized FDA for not 
quantifying the costs to consumers for the extra time needed to undergo 
I.D. verifications. They estimated this cost at $282 million a year. 
FDA agrees that consumers would incur time costs and, for its revised 
estimates, adopts the analytical framework suggested by the Barents 
Group, which counts only the time lost by young customers. (The Barents 
Group suggests that older consumers also would experience delays, but 
FDA's estimates already account for the cost of additional clerk time 
that would offset longer checkout lines. Younger customers, however, 
must wait while their age is verified, even when additional checkout 
clerks are available.) To estimate the time cost, FDA applies the same 
methodology that was used to estimate the time cost for retail 
employees. That is, 2.5 billion transactions taking an extra 8.3 
seconds each for the 18 to 26 year-old age group, adjusted for a 20 
percent current compliance rate. The Barents Group used an average 
hourly private sector compensation rate ($15.13/hour) as the basis of 
its consumer time cost estimate, but FDA finds this average rate too 
high for young consumers and estimates a range of $9 to $11 per hour. 
\335\ As a result, FDA's estimate of the cost to consumers for lost 
time cost amounts to between $41 and $50 million per year.
---------------------------------------------------------------------------

    \335\ Data from the 1995 Statistical Abstract of the United 
States, Table 677 lists weekly earnings for full time wage and 
salary workers for the group ``16 to 24 year-olds'' in 1994. Table 
682 lists median hourly earnings for workers paid hourly rates for 
the same group in 1994. Assuming a 40 percent increase for benefits, 
the compensation rates for these two tables for 16 to 24 year-olds 
are $9.98/hour and $7.87/hour, respectively.
    Using these figures will result in a low estimate for the 18 to 
26 year-old group because 25 and 26 year-olds earn more than 16 and 
17 year-olds. Conversely, using a benefits/wage ratio of 40 percent 
for 18 to 26 year-olds will overstate the costs because lower paid 
workers (hourly and part-time workers, college students) are more 
likely to have less generous benefits packages (little or none of 
the following: paid vacation, sick leave, employer-paid health 
insurance). FDA increased the estimated compensation rates to $9 to 
$11/hour to assure it does not underestimate the true compensation 
rate.
---------------------------------------------------------------------------

9. Vending Machines
    In its comments on the costs of FDA's proposed vending machine ban, 
the Barents Group reports that automatic vending machine operators will 
lose $403 million in annual revenues. They then subtract an estimated 
$281 million offset for future over-the-counter sales (calculated by 
assuming an equal number of future packs sold and an $.80 price premium 
for vending machine packs) to project a net $122 million of regulatory 
costs to the retail sector. Although not acknowledged, this methodology 
implicitly assumes that a redistribution of revenues (from vending 
machine owners to over-the-counter sellers) does not generate added 
societal costs. Elsewhere, the Barents Group includes distributional 
impacts in cost totals. Nevertheless, even this $122 million estimate 
is far too high.
    The fundamental problem is that changes in revenue, as discussed 
above, do not measure economic costs. The relevant economic measure of 
regulatory costs to an industry is the change in producer surplus that 
a firm makes from selling a good or service. Because producer surplus' 
are difficult to measure, accounting profits are sometimes used as a 
proxy. By examining only lost revenues, the Barents Group ignores the 
difference in the operating costs of the alternative sales channel, 
despite its recognition that ``[i]n general terms, the extra margin at 
vending machines reflects the costs to vending machine owners of 
operating these machines, in addition to a return on their labor effort 
and capital investments.'' In other words, the reason that cigarettes 
purchased from a vending machine are more expensive is that it costs 
more to sell a pack of cigarettes by vending machine. Consequently, if 
cigarette sales shift from more expensive-to-operate vending machines 
to OTC, the loss of industry profits is much smaller than the loss of 
industry revenues.
    An approximate assessment of the net impact on retail profits 
requires a comparison of the pretax profit margins for vending machine 
operations as compared to OTC sales. The Barents Group cited survey 
results from the National Automatic Merchandising Association (NAMA) 
showing an average pretax profit margin of 3.8 percent in 1993 and 2.0 
percent in 1992, for an average 2.9 percent for vending machine 
operations. Because cigarette vending machine sales have decreased in 
recent years, current profit margins might be even smaller. 
Coincidentally, the Barents Group reports that the estimated average 
industry profit margin for convenience stores is also 2.9 percent. If 
this rate applies to cigarette sales at convenience stores and if all 
lost vending machine cigarette sales were transferred to convenience 
stores, the net pretax cost to the industry would be $3.5 million, not 
$122 million ($403 million to $281 million) x 2.9 percent). Moreover, 
NAMA reports that over 50 percent of all vending machines are located 
in bars and taverns and many others in business establishments 
frequented only by adults. The final rule permits vending machines in 
those places where the owner can ensure that no young people under age 
18 are present at any time. FDA does not know how many vending machines 
will be moved to restricted areas in compliance with this rule, but the 
number will further reduce this annual cost.
10. Readership Surveys
    The Barents Group reported that 101 leading national magazines had 
advertisements for tobacco products in 1994. In addition, Barents 
obtained youth and adult readership data for 1994 from MediaMark 
Research, Inc. (MediaMark), for 41 of these 101 magazines. Applying the 
regulatory threshold of 2 million readers or 15 percent of total 
readership below the age of 18, Barents projected that advertisements 
in 32 of the 41 magazines (78 percent) would be restricted to ``text 
only'' by the proposed regulation. In comparison, FDA examined 
copyrighted youth and adult readership data from the Simmons Marketing 
Bureau, Inc. (Simmons), another major marketing research firm, and 
found that only 13 of the 27 magazines with tobacco ads (48 percent) 
had youth readership over the threshold. A comparison of youth 
readership levels from MediaMark and Simmons for magazines that had 
tobacco advertisements in 1992 is shown in Table 11. \336\
---------------------------------------------------------------------------

    \336\ Tobacco industry spending on magazine advertising was 
calculated using tobacco advertising share data from Barents and 
advertising revenues from Advertising Age. Advertising revenue was 
unavailable for five small publications that accounted for less than 
one percent of tobacco magazine advertising spending in 1994. To 
estimate tobacco advertising expenditures in these five 
publications, FDA assumed total advertising revenues for each 
publication equal to $14,388, which is the lowest total revenue 
reported in Advertising Age for 1994.

[[Continued on page 44596]]