The Stogie Guys

On Friday, numerous news reports indicated President Trump intends to nominate Scott Gottlieb to head the FDA. Gottlieb, a doctor, worked at the FDA during President George W. Bush’s administration in deputy roles and is a fellow with the conservative American Enterprise Institute.

Since the FDA was granted authority to regulate tobacco in 2009, and in 2014 moved to exercise its authority to regulate cigars, the position of FDA commissioner has taken increasing importance to the handmade cigar industry. Opponents of Gottlieb are expected to highlight his ties to the the pharmaceutical industry, though his criticisms of the FDA’s oversight of tobacco are also likely to become an issue during his confirmation hearings.

Gottlieb has been critical of the FDA’s authority to regulate tobacco products. In a Forbes.com article, he wrote the following regarding the “faustian” bargain behind FDA cigar regulation:

It always seemed a naïve aspiration—that FDA would ever sanction such products—and even more uncertain that the anti-tobacco crowd would let this paradigm advance. Now, each side’s ambitions (and the law’s spirit) are being tested.

The tobacco industry’s critics are trying to impede a critical first step that FDA must take in creating that new regulatory architecture. The ability to fulfill all of the law’s goals is on the line.

Proponents of the legislation, after all, admittedly supported it as a vehicle to squeeze tobacco firms under the weight of FDA regulation. Their stated aim was always the dismantling these firms.

In an Associated Press article about the bill that authorized the FDA to regulate tobacco products, Gottlieb was quoted criticizing the bill as undermining the FDA’s primary mission: “I believe it’s going to gut the agency’s resources and distract it from its core mission.”

Specifically on cigars, a New York Post op-ed by Gottlieb regarding FDA cigar regulation and its potential impact on the 2012 election has recieved much attention. In it, he wrote:

About 85,000 Americans work in the premium-cigar business, according to the industry’s main trade group. Many of these jobs would be in jeopardy if the FDA’s regulations went forward. About 75 percent of the domestic importers and producers of cigars are located in Florida, where it’s a $2 billion-a-year industry…

Whatever the FDA does, the fight reveals a broader trend of expanding the scope of regulation to cover areas never envisioned by Congress.

Regulators often prefer to enlarge their jurisdiction rather than tend to their chief obligations. Agencies like the FDA thus divert their attention from important but basic duties.

For example, that 2009 tobacco law was crafted as a way to cut down on underage use of cigarettes. It was, in many respects, a forward-looking measure—envisioning that traditional cigarette makers would gradually transition to developing and marketing smokeless-tobacco products that don’t pose the same health hazards as cigarettes.

But the FDA has been loath to accept that alternative tobacco products could pose a lower health risk than cigarettes. Under the law, it should be examining the relative hazards, rather than spending its energies seeking to expand its powers.

In part because of his writings on FDA tobacco regulations, cigar industry groups have already come out in support of Gottlieb. “We think it’s a very good choice that the president made,” said Craig Williamson, president of the Cigar Association of America, which represents cigar manufacturers.

An IPCPR spokesman praised the pick: “We’re very encouraged by the nomination of Dr. Gottlieb. His past statements and articles show he recognizes the difference between premium cigars and other cigar products, and we’re looking forward to having a productive dialogue with him… should he be approved.”

Glynn Loope, executive director of the Cigar Rights of America, also praised the nomination: “CRA is certainly pleased that the president’s administration is moving swiftly to place new management at the FDA. We hope Dr. Gottlieb brings an air of objectivity and balance to the agency. His previous op-ed piece that addressed the role of premium and large cigars in the regulatory process clearly indicates that he has a working knowledge of our issues, and as to why they should be treated differently.”

“2017 is a critical turning point with Congress and the administration, and these new appointments present a unique opportunity to have discussions and to facilitate actions that can work toward protecting the premium cigar industry from the proposed regulations that can clearly have a detrimental impact on this artisan industry that does not deserve the treatment that has been advanced by the FDA,” Loope continued.

–Patrick S

photo credits: Scott-Gottlieb.com

Each Saturday and Sunday we’ll post a Quick Smoke: not quite a full review, just our brief take on a single cigar.

My first experience with Undercrown Shade was a bit of a mixed bag: well-made, promising flavors, but marred by a hint of bitterness and an unpleasant grassy element. This more recent experience was markedly better. With an Ecuadorian wrapper, Sumatra binder, and Nicaraguan and Domincan fillers, this cigar was well-balanced and medium bodied. Flavors included roasted cashews, cafe-au-lait, and cedar. With Drew Estate’s characteristic excellent construction, it is an excellent smoke anytime of day.

Verdict = Buy.

–Patrick S

photo credit: Stogie Guys

Almost certainly, the timing of the FDA’s long-awaited deeming rule regulating cigars was influenced by a law passed two decades earlier called the Congressional Review Act. That legislation has long been interpreted to allow Congress to overturn agency rules and regulations within 60 legislative days of their enactment.

The Review Act works like this: If simple majorities of both the House and Senate vote in favor of a resolution to overturn an agency regulation, it then goes to the president’s desk. Unless the president vetoes the resolution, the regulation is not only overturned, but the agency is barred from enacting a similar rule again unless Congress specifically authorizes it to do so.

Because of the way the Congressional legislative calendar works, when the Food and Drug Administration (FDA) published the rule on May 10, 2016, the 60 legislative days were then guaranteed to pass in a way where even if Congress used the Congressional Review Act to attempt to overturn the regulation, such an action would land on President Obama’s desk. Given that the Obama Administration had initiated the new rule and that Obama had signed the Tobacco Control Act into law that authorized the cigar rules, a veto was guaranteed.

Had the FDA waited until later (June 13 turned out to be the cutoff, although the exact date wasn’t known until later), the Congressional Review Act action might have ended up on the next president’s desk. Thus, by getting the cigar deeming rule published in early May 2016, it appeared it was insulated from being overturned by the Congressional Review Act by a waiting Obama veto threat.

However, as detailed in a Wall Street Journal article published last week, one of the original drafters of the Congressional Review Act says that’s not how the 60-day clock was intended to work and, in fact, numerous regulations going back years could still be overturned using the Congressional Review Act:

Here’s how it works: It turns out that the first line of the CRA requires any federal agency promulgating a rule to submit a “report” on it to the House and Senate. The 60-day clock starts either when the rule is published or when Congress receives the report—whichever comes later.

“There was always intended to be consequences if agencies didn’t deliver these reports,” Mr. Gaziano [who was involved in drafting and passing the law] tells me. “And while some Obama agencies may have been better at sending reports, others, through incompetence or spite, likely didn’t.” Bottom line: There are rules for which there are no reports. And if the Trump administration were now to submit those reports—for rules implemented long ago—Congress would be free to vote the regulations down.

There’s more. It turns out the CRA has a expansive definition of what counts as a “rule”—and it isn’t limited to those published in the Federal Register. The CRA also applies to “guidance” that agencies issue.

If this interpretation of the Congressional Review Act is correct, could it be used to repeal the FDA’s cigar rules? Opponents of the regualtuons say they are looking into the possibility. Inquiries to the FDA’s media office were directed to the agency’s Freedom of Information Act contact, but the FDA’s Tobacco Products’ page listing reports to Congress shows no reports on implementation of the Tobacco Control Act since 2013. (Even if a timely report was submitted, guidance documents necessary for enforcing the FDA cigar rules could still be challenged under Gaziano’s interpretation.)

For opponents of the FDA’s cigar regulations, the benefits of this line of attack are two-fold. First, it would eliminate the Senate filibuster as a means of stopping Congress from sending the repeal to President Trump. And second, unlike new agency rule-making to undo the regulation, using the Congressional Review Act would bar the FDA from reissuing the rule (or something similar under a different administration).

Of course, it’s hardly a given that the Republicans in Congress will try this strategy, which even its proponents admit is “aggressive” and would require significant “intestinal fortitude.” Still, an alternative pathway to permanent repeal of the FDA cigar rules has presented itself, if those who say they oppose out-of-control regulation are willing to back up their words with actions.

–Patrick S

photo credits: Stogie Guys

This week saw the introduction of the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act of 2017 in Congress. Sponsored by Congressman Bill Posey (R-FL), the bill would repeal FDA jurisdiction over premium handmade cigars.

The bill defines a premium cigar as meeting four characteristics: It must (1) be wrapped in 100 percent leaf tobacco and bunched in 100 percent tobacco filler; (2) not contain a filter, tip, or non-tobacco mouthpiece; (3) weigh at least 6 pounds per 1,000 count; and (4) have 100 percent tobacco binder and be hand-rolled, or at least made with human hands to lay the wrapper or binder onto one machine that bunches, wraps, and caps the individual cigars, or have a homogenized tobacco leaf binder and be made in the United States using human hands to lay a 100 percent leaf tobacco wrapper onto one machine that bunches, wraps, and caps each individual cigar.

Cigars meeting this definition would no longer be subject to FDA regulations under the bill and would therefore be exempt from the 499-page rule finalized last year by the FDA. That rule mandates any cigar introduced after 2007 to be approved by the FDA for sale by 2018, and for any new cigar after August 2016 to receive FDA approval before being sold in the United States.

This is the fourth consecutive Congress in which the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act has been introduced. When first introduced in 2011, the bill obtained 220 co-sponsors in the House, while a companion measure sponsored in the Senate by Senator Nelson of Florida gained 13 co-sponsors. More recently, the 2015-16 version garnered 170 sponsors in the House and 22 sponsors in the Senate.

Cigar Rights of America Executive Director Glynn Loope said the following about the introduction of the bill in the 2017 Congress: “Since 2011, this legislation has served as a platform to convey the threat such regulations could pose to the premium cigar industry. Now that threat is reality, and Congress, in concert with the new administration, needs to advance measures that not only mitigate the damage of the rules in front of us, but ensure protection from rules yet to come.”

Analysis

With a new occupant moving into the While House later this week, this is a big year for this legislation. In previous years, even if the bill could have passed both houses of Congress, it faced a likely veto from President Obama who signed the legislation into law authorizing the FDA to regulate cigars back in 2009.

Although incoming President Trump isn’t a cigar smoker (and even cut an anti-smoking PSA), his criticisms of over-regulation have some hopeful that he would sign a bill to protect handmade premium cigars from overbearing FDA rules. Additionally, incoming Vice President Mike Pence is largely viewed as friendly towards tobacco.

But long before this bill gets to the president’s desk, if it ever gets there, it faces significant hurdles. Probably the largest obstacle is opposition in the Senate, where the same anti-tobacco senators that pushed the FDA to accelerate its cigar rules could use the chamber’s filibuster to attempt to block passage, even if there are enough votes in favor.

Still, building support for the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act in the House and Senate sends an important message, even absent the bill becoming law. First, broad support makes it more likely that industry-backed reforms could make it into an appropriations bill. Further, significant support in Congress sends a message to the FDA as the cigar industry continues to lobby the agency to change the rule, or at least implement the regulation in a less-burdensome way.

–Patrick S

photo credits: Stogie Guys

Cigar companies have a big problem. Nearly every business decision they make is impacted by FDA regulations, but the full details of those regulations haven’t yet been determined.

The 499-page deeming regulation finalized last spring officially took effect August 8. While that document provides an outline for the agency’s intentions, it leaves out many important compliance details. Even where guidance documents have been issued, the standards laid out in those documents are not legally binding (i.e., they can be changed at any time). And many other critical questions have not been addressed at all.

The resulting unpredictable cost of compliance is a serious issue for all cigar makers. The burden hits smaller brands the hardest, however, because they are least able to cope with such uncertainty. While FDA user fees are distributed proportionally according to each company’s market share, the unknown cost of successfully applying for FDA approval for a particular tobacco product will effectively be the same whether the company sells a few hundred units per year, or hundreds of thousands of units.

In a recent discussion of the ongoing process of complying with the FDA, Skip Martin of RoMa Craft Tobac described the problem cigar makers big and small face: “What we don’t know is how much that [Substantial Equivalence approval] process will cost us. We don’t know the details of what a substantial equivalence process will look like because there has never been one approved for a cigar ever.”

Even as the FDA delays many deadlines, small companies face tough choices. With product registration deadlines fast approaching, companies have to decide how much to invest in such registrations. Assuming the worst and providing numerous highly detailed registrations may maximize the likelihood of the registrations being approved. But it also increases the costs.

While the cost of gaining FDA approval—most likely through the Substantial Equivalence (SE) pathway, or by being a grandfathered pre-2007 product—is the biggest future hurdle, even the documentation needed for registration carries substantial costs, especially for a small company. Something seemingly as simple as who qualifies as a domestic manufacturer is unclear under the FDA regulations. Cigars may be rolled abroad, but what packaging changes within the United States qualify a brand as a domestic manufacturer?

That is an open question. The answer holds serious implications for the future business prospects of a company.

In the same conversation about the FDA process, attorney Frank Herrera, who represents dozens of cigar companies, gave a most lawyerly answer about whether or not you should register: “If you think you might be [required to register now], do it, list it.” In terms of maximizing the odds of complying with the FDA, Herrera is, of course, correct. For a small company operating on thin profit margins already, though, these costs could be prohibitive, or at least partially unnecessary.

Compliance with the FDA isn’t the only hurdle cigar makers and importers face. Retailers are liable if they sell a non-compliant product. This means retailers—especially large online and catalog sellers—are making buying decisions based on who appears likely (or not) to comply with all FDA regulations. Reports are already surfacing that retailers are cutting back on purchases of cigars they doubt will be on the market in two years.

So even before any deadlines pass, small cigar makers face a dilemma: Not spending money now on FDA compliance to show retailers you are likely to be on the market in two or three years means lost sales today, and those sales today may be the difference between having the funds or not to successfully pursue Substantial Equivalence in the future.

Meanwhile, with it totally unknown exactly how much a successful SE application will cost, continuing to sink money today into a process that ultimately may be cost prohibitive could itself be a fatal business decision. If a cigar maker runs the numbers and decides the volume of sales of product don’t warrant the currently unknown cost of investing in FDA approval, they risk that product being seen by retailers as a “zombie cigar” (destined to be killed off soon by the FDA).

When it comes to complying with costly regulations, larger companies with deep pockets are always better able to deal with the uncertainty. For boutique brands sold in smaller quantities, those costs represent a much higher percentage of their operating costs. As deadlines approach this year, smaller companies face impossible decisions with the fate of their businesses at stake.

–Patrick S

photo credit: Stogie Guys

Yesterday, voters in four states considered ballot measures to hike state tobacco taxes, including on handmade cigars. Voters in North Dakota, Colorado, and Missouri appear rejected the proposed tax hikes, while it  California tax increase is passed.

Below are the latest results, which will be updated as votes are tallied. Here are the final percentages for each vote:

North Dakota Measure 4 (Results: 62% Against)

North Dakota’s Initiated Measure 4 would increase the tax on cigarettes 400% from 44 cents per pack to $2.20. All other tobacco products, including cigars, e-cigarettes, and vaping products, would see state taxes double from 28% of the wholesale purchase price to 56%.

Colorado Amendment 72 (Results: 54% Against)

In Colorado, anti-tobacco forces are trying to alter the state constitution to include triple taxes on tobacco products. The amendment would increase the tobacco tax by $1.75 per pack of 20 cigarettes, from 84 cents to $2.59, and jack up taxes on other tobacco products, including cigars, by 22% of the wholesale list price (on top of the existing 40% tax already in effect).

Missouri Proposition A (Results: 55% Against)

Missouri’s Proposition A would more than double taxes on cigarettes from 17 cents per pack to 40 cents, with the increase being phased in through 2021. Taxes on other tobacco products, including cigars, would increase by 5% of the manufacturer’s invoice price to 15%. Missouri voters are also rejecting Amendment 3, which would hike tobacco taxes 400% from 17 cents to 77 cents, with extra fees being applied to companies not subject to the master agreement settlement with the state.

California Proposition 56 (Results: 63% In Favor)

Anti-tobacco forces in California proposed to increase cigarette taxes $2 per pack, from 87 cents to $2.87. Other tobacco products, a tax category that includes cigars, would face a corresponding 230% increase in a state that already has record-high taxes.

The presidential result and Republican control of the House and (likely) Senate also have important implications for cigar smokers when it comes to FDA regulation, taxes, trade, and Cuban policy. More on that in the coming days.

–Patrick S

photo credit: Flickr

With Election Day less than one week away, all eyes are on the presidential race and, to a lesser extent, which party will control the House and Senate next year. But voters in four states will also be weighing in on ballot questions that, if passed, would hike tax rates on tobacco products, including cigars.

California Proposition 56

Anti-tobacco zealots hope to increase cigarette taxes $2 per pack, from $.87 to $2.87. Other tobaco products (OTP), a tax category that includes cigars, would face a corresponding 230% increase. Critics say the tobacco tax hike “lines the pockets of special interests, but fails to address pressing needs facing California families, like fixing schools, roads, water storage, and violent crime.”

North Dakota Measure 4

North Dakota’s Initiated Measure 4 would increase the tax on cigarettes 400% from 44 cents per pack to $2.20. All other tobacco products, including cigars, e-cigarettes, and vaping products, would see state taxes double from 28% of the wholesale purchase price to 56%. Although proponents say the money will be spent on smoking cessation, opponents point out that the measure contains “nine pages of print that only detail four sentences as to how and where this money will be spent,” leading to wide discretion for bureaucrats and politicians to potentially spend the money on pet projects.

Colorado Amendment 72

In Colorado, anti-tobacco forces are trying to alter the state constitution to include triple taxes on tobacco products. The amendment would increase the tobacco tax by $1.75 per pack of 20 cigarettes, from 84 cents to $2.59, and jack up taxes on other tobacco products, including cigars, by 22% of the wholesale list price, on top of the existing 40% tax already in effect. Those against the amendment note that the tax would disproportionately impact low-income people, and that because the revenue would be earmarked in the constitutional ammendment, it couldn’t be directed to government programs where it might be put to better use.

Missouri Proposition A

Missouri’s Proposition A would more than double taxes on cigarettes from 17 cents per pack to 40 cents, with the increase being phased in through 2021. Taxes on OTP, including cigars, would increase by 5% of the manufacturer’s invoice price to 15%. In part because the proposition would automatically repeal the additional taxes if a measure to increase any tax or fee on cigarettes or other tobacco products is certified to appear on any local or statewide ballot, many of the anti-tobacco forces that usually back higher taxes on tobacco actually oppose Proposition A as an impediment to even higher taxes later.

Missouri voters will also vote on Amendment 3, which would hike tobacco taxes 400% from 17 cents to 77 cents, with extra fees being applied to companies not subject to the master agreement settlement with the state. Because it does not impact cigar taxes, many cigar-oriented trade groups, like the International Premium Cigar and Pipe Retailers Association (IPCPR), don’t take a position on Amendment 3. Under Missouri law, if both Amendment 3 and Proposition A pass, the one that passes with the higher percentage takes effect.

As you’d expect, groups like Cigar Rights of America (CRA) and the IPCPR oppose all four ballot questions that would add additional taxes to cigars, which (between state and federal taxes) are already taxed at record-high levels. Opponents of such tobacco taxes point out that they are highly regressive (by impacting those who can least afford them the most) while threatening to put cigar shops out of business, and that if additional revenue is needed a fairer approach would be a broad-based, more evenly-distributed tax instead of one that hits an already targeted minority.

Cigar smokers in California, North Dakota, Colorado, and Missouri should exercise their right to vote NO on Tuesday to prevent further punitive taxes on cigars.

–Patrick S

photo credit: Stogie Guys