S. 1415: National Tobacco Policy and Youth Smoking Reduction Act

U.S. Senate Republican Policy Committee - Larry E. Craig, Chairman - Jade West, Staff Director

May 14, 1998

S. 1415 -- The National Tobacco Policy
and Youth Smoking Reduction Act

Calendar No. 353

Report filed and placed on the Calendar May 1, 1998 from the Committee on Commerce, Science, and Transportation with an amendment in the nature of a substitute by a vote of 19-1 (Senator Ashcroft voting no).

NOTEWORTHY

As of press time, the current procedural situation is fluid. We anticipate that cloture will be filed on the motion to proceed to S. 1415. A vote on that motion could occur as early as Monday. The Senate Finance Committee was given referral of the bill on May 13 for one day. The Finance Committee must report by 9 p.m. today or the bill will be discharged from the Committee and placed on the Calendar. The Committee is considering proposals to convert tobacco revenues to excise taxes, offset the tax increases with health care related tax cuts, strike and modify the trade provisions, and make modifications to the distribution of the States' share. The Committee is also considering modifying expenditures from the Tobacco Trust Fund.

The Commerce Committee, too, is contemplating major changes in its bill. This Legislative Notice is based on the bill reported from the Commerce Committee. RPC will later provide information on changes as further information becomes available.

HIGHLIGHTS

S. 1415 establishes the National Tobacco Settlement Trust Fund (NTSTF) which receives payments from tobacco manufacturers. RPC conducted its own preliminary (and partial) examination of the revenue in the bill (see RPC paper, "Estimating the Revenues of S. 1415," 5/8/98). Under the assumptions specified in the paper, RPC found that the NTSTF will receive payments in the following ranges from the industry:

$102.1 billion to $109.9 billion over first 5 years;
$231.2 billion to $260.4 billion over first 10 years; and
$755.3 billion to $868.9 billion over 25 years.

The low-range numbers match OMB's 25-year inflation-adjusted estimate of $755.9 billion.

RPC counts in the bill six new Trust Funds (and a number of new Accounts); 10 new programs within the Department of Health and Human Services; 2 new Nonprofit Corporations; and 2 Hybrid arrangements for documents (see RPC paper, "The Tobacco Bill and New Government," 5/11/98).

RPC counts in the bill 27 new spending programs or new funding streams for old programs. Some of the programs have triggers guaranteeing that specific funding levels must be met. Thirteen other programs have unspecified costs; and at least two existing programs (Medicaid and Veterans) may incur costs that are not provided for in this bill. Calculating programs that have specified costs in the bill, the new spending would total:

$93 billion over the first 5 years;
$185 billion over the first 10 years; and
$414 billion over 25 years.

Some of the provisions in S. 1415 contemplate voluntary participation by the tobacco companies. Because the companies have indicated that they no longer support the bill, these provisions now raise constitutional issues because the provisions were premised on the companies voluntarily waiving certain of their constitutional rights. The Senate Judiciary Committee held a hearing on May 13 to address some of those issues including the constitutionality of the "look-back" provisions, the advertising restrictions, the international provisions, the payments, and the annual licensing fee.

The bill provides increased FDA regulation over tobacco; targets for youth smoking reductions; establishes a new retail facility inspection regime; a new smoking cessation program which provides undefined grants to individuals; a ban on smoking in most public facilities; grants to tobacco farmers; and a tobacco asbestos trust fund.

Agriculture Committee Chairman Lugar is considering an amendment to S. 1415 that would modify the tobacco farmer provision currently in the bill. The Lugar amendment would phase out federal support for the production and marketing of tobacco, with fair compensation to quota owners, growers, and affected communities, and is consistent with the phase-out of other farm programs accomplished under the Freedom to Farm Act of 1996. [See further discussion of this provision under Bill Provisions, Title X.]

BACKGROUND

The June 20th Agreement

On June 20, 1997, tobacco manufacturers, public health representatives, private plaintiff attorneys and state attorneys general announced that they had reached agreement (hereafter referred to as "Agreement") on a process that could dramatically change the way tobacco is marketed, sold and consumed in the United States. In the Agreement, participating tobacco companies agreed to make large payments -- $368.5 billion over 25 years (in constant 1999 dollars) -- to reimburse states for tobacco-related medical costs and to pay for tobacco control programs to reduce tobacco use among teenagers. In return, the tobacco manufacturers were to receive protection from class action civil liability lawsuits.
The Agreement was a response to the lawsuits filed by 41 states and Puerto Rico against tobacco companies to recover the states' medical costs of treating smoking-related illnesses. To date, four states (Florida, Texas, Mississippi and Minnesota) have reached agreements with the tobacco companies and settled their lawsuits. In addition, the Liggett Group has reached separate agreements with 41 states.
The Agreement reached by the negotiators included a regulatory structure and settlement procedure that requires legislative action. Specifically, the Agreement contemplated new trust funds, programs, commissions, grant programs and committees, and new funding streams for existing programs. For example, the Agreement proposed to: (1) give the Food and Drug Administration (FDA) wide authority to regulate tobacco products and smoking and to codify existing regulations; (2) mandate that states enact a retail licensing scheme and require them to conduct random, unannounced inspections of retail establishments; (3) create a federal standard directing OSHA to restrict smoking in public facilities; (4) create new programs that might be viewed as entitlements, such as the Tobacco Use Cessation program that would give money to individuals to quit smoking; and (5) require states to have in effect a "no sales to minors" law.
All of these provisions require legislative action, but were agreed to by the tobacco manufacturers, public health officials, plaintiff attorneys, and state attorneys general, without any Congressional participation or input. Since only Congress can write and amend statutes, the Agreement could not take effect without Congressional action.
S. 1415 attempts to legislate the structural framework of the Agreement, but with some significant differences. For example, according to the Commerce Committee's Report, the bill increases industry payments, doubles the penalties the industry would pay for failure to meet youth tobacco reductions, and bolsters FDA authority over nicotine and tobacco products. The bill also modifies the civil liability proposals by imposing only a yearly cap on civil liability and settling only state and local government suits and the Castano class action claims (the Agreement also restricted private class action suits against the industry). [To assist readers, RPC has noted throughout this Notice, for many of the major provisions, whether the language was or was not a part of the Agreement, although these notations are not comprehensive.]
The tobacco manufacturers have since announced that they no longer support the bill. A number of provisions in the bill contemplate the voluntary participation of the tobacco companies, but because they are no longer willing to participate, provisions in the bill now raise a number of constitutional issues. The Judiciary Committee held a hearing on May 13^th to discuss the constitutional issues, and the following issues were among those that were raised: A number of scholars and lawyers have argued both before Judiciary and the Commerce Committees that the advertising ban and restrictions violate the First Amendment unless the tobacco companies voluntarily waive their constitutional rights. The look-back provisions are similarly constitutionally questionable, since they may constitute an unconstitutional penalty -- which cannot be imposed without a showing of fault -- unless the companies agree to participate voluntarily. The payments required of the tobacco companies may be an unconstitutional taking under the Fifth Amendment to the Constitution. The licensing fees and the international provisions raise additional constitutional questions. In addition to these possible constitutional questions, the bill raises a number of budgetary issues.
Budgetary Issues

S. 1415 raises a number of budgetary issues and contains many provisions to which the Budget Act would apply -- including new mandatory spending programs, the establishment of new trust funds, and various financial mechanisms within the bill. However, the central budgetary issue of S. 1415 is its intended off-budget status. The Senate Budget Committee has produced a chart ("Informed Budgeteer," 5/11/98) that demonstrates the daunting complexity of S.1415's financing mechanisms.
By taking the NTSTF off-budget, all of the fiscal procedures of normal budget process would be circumvented -- spending caps, Pay-Go offset requirements, budget resolution parameters, as well as all of the relevant enforcement mechanisms such as 60-vote points of order.
While the bill intends to create an off-budget NTSTF, CBO cannot score the bill as off-budget until such language actually becomes law. Thus CBO will score S. 1415 as though it were a normal on-budget entity. Such scoring will result in at least two 60-vote points of order being raised against the bill (for violating the FY 1998 budget resolution's aggregate spending level and for violating the Commerce Committee's allocation of budget authority and outlays).
Finally, the attempt to take the NTSTF off-budget creates additional budget problems. It is itself a violation of the Budget Act (Section 306 of the Budget Act) and will result in 60-vote point of order. Currently, only two entities have off-budget status: Social Security and the Postal Service. Efforts to extend off-budget treatment have consistently been resisted as being bad budget policy because of the removal of fiscal discipline and oversight that such removal entails, as well as undermining the federal budget's purpose of measuring the federal government's total impact on the economy.
BILL PROVISIONS

Sec. 1: Short Title and Table of Contents [Bill, pp. 239-244]
Sec. 2: Findings [Bill, pp. 244-251]
Sec. 3: Purpose [Bill, pp. 251-254]
Sec. 4: Scope and Effect [Bill, pp 254-256]
Sec. 5: Non-preemption of More Restrictive Laws [Bill, pp. 256-257]
Sec. 6: Definitions [Bill, pp 257-263]
Sec. 7: Notification if Youthful Cigarette Smoking Restrictions Increase Youthful Pipe and Cigar Smoking [Bill, p. 263]
Sec. 8: Liability Provisions Disappear if Tobacco Product Manufacturers Challenge Advertising Limits [Bill, pp. 263-264]
Sec. 9: FTC Jurisdiction Not Affected [Bill, p. 264]
Sec. 10: Congressional Review Provisions [Bill, p. 264]
Title I -- Regulation of the Tobacco Industry
Subtitle A -- Jurisdiction of FDA
Sec. 101, Amendment of Federal Food, Drug, and Cosmetic Act (FDCA) of 1938: Subtitle A creates a new chapter IX within the FDCA giving the Food and Drug Administration (FDA) comprehensive statutory authority to regulate tobacco products. The current chapter IX is redesignated as chapter X of the FDCA. The following is a description of the new FDCA sections:

FDCA Sec. 901, FDA Regulations in Effect: The bill also provides the FDA with the authority to regulate tobacco products as medical devices by deeming to be in effect FDA's regulations issued August 28, 1996 [Sec. 901(c)]. (The U.S. District Court of North Carolina, ruled that the FDA did not have statutory authority to issue regulations restricting tobacco advertising. The ruling is currently under appeal.)

Provides FDA with "not less than" $300 million annually for implementing and enforcing the regulation of tobacco products. This amount will be in addition to current appropriations ($657 million for all FDA activities in FY98) and will come from the National Tobacco Settlement Trust Fund [Bill, title IV, p. 413].
Clarifies that FDA will not have authority to regulate the activities of tobacco growers or tobacco grower cooperatives [Bill, pp. 267-269].

FDCA Sec. 902, Adulterated Tobacco Products: Deems any tobacco product to be adulterated for purposes of drug and device law if it fails any of seven tests including a product that is "contaminated by any poisonous or deleterious substance that may render the product injurious to health" [Bill, pp. 268-269].

FDCA Sec. 903, Misbranded Tobacco Products: Contains misbranding provisions similar to FDCA provisions for medical devices. The bill authorizes the FDA to: specify the regulated established name of a tobacco product; require the established name to appear on the product's label; and to require adequate directions for the product's use and adequate warning against use by children [Bill, pp. 269-273].

The bill deems a tobacco product's advertising "misbranded" if its labeling is false or misleading in any particular [p. 269] and unless it contains: a brief statement of the uses of the product, relevant warnings, precautions, side effects, and contraindications [p. 272]. In addition, each label must contain:

the name of the manufacturer, packer, or distributor;

an accurate statement of the quantity of the contents in terms of weight, measure, or numerical count;

any such symbols that the FDA prescribes as part of its uniform system for the identification of tobacco products;

a full description (if required by the FDA) showing quantitatively each ingredient in the product; and

the FDA is authorized to require prior approval of any statement made on the label of a tobacco product, if the FDA requires such approval [Bill, pp. 269-272].

FDCA Sec. 904, Submission of Health Information: Within 6 months of enactment (to be updated annually thereafter), each tobacco manufacturer or tobacco importer must, among other document requirements, submit to the FDA:

All documents relating to research activities, research findings, conducted, supported, or possessed by the manufacturer on tobacco or tobacco-related products;

All documents relating to research concerning the use of technology to reduce health risks associated with the use of tobacco; and

All documents relating to marketing research on tobacco products.

FDCA Sec. 905, Annual Registration: Tobacco manufacturers and processors are required to register each year with the FDA their names, places of business, and all establishments held by them. Information in the registry will be subject to public inspection. In addition:

All entities registered with the FDA are subject to FDA inspection at least once every two years [Bill, p. 278].
Foreign manufacturers of tobacco products are not required to register with the FDA [Bill, p. 278].
All persons who register must also file with the FDA a list of all tobacco-related products involved in manufacturing along with copies of all labeling and consumer information associated with such products [Bill, pp. 279-280]; and
Each June and each December of every year all persons registering with the FDA must submit a list of any tobacco-related product that has been newly introduced or discontinued by the registrant, and must list any material change in any information previously submitted to the FDA [Bill, pp. 280-281].

FDCA Sec. 906, Restrictions on Sale, Distribution, and Use of Tobacco: Gives the FDA authority to restrict the sale, distribution, promotion of, or access to tobacco products or to impose a ban on any tobacco product or any class of tobacco products, including a ban on nicotine, if the FDA determines that doing so would be appropriate for the protection of the public health [Bill, pp. 283-286].

Because S. 1415 deems certain regulations to be law, there are a number of restrictions that do not appear in this bill which will be in effect under Sec. 901(c) [Bill, p. 266]. Among the restrictions contained in the regulations are:

A federal minimum age limit on the purchase of tobacco at 18 and retailers are required to check the photo identification of persons younger than 27;

All sales of tobacco products must be face-to-face and self service displays are prohibited;

Vending machine sales are prohibited except in adult-only establishments. Vending machine owners and operators will be compensated at fair market value through the Tobacco Vending Reimbursement Corporation to be funded from the Trust Fund; and

Sales of fewer than 20 cigarettes and free samples of tobacco are prohibited.

For purposes of issuing regulations to restrict or ban tobacco products, the bill directs the FDA to take into account the risks and benefits of such a restriction to the population as a whole, including users and non-users of the tobacco product [Bill, p. 285].

No regulation to restrict or to ban the sale of any class of tobacco products will take effect until two years after the President has notified Congress that a final regulation has been issued [Bill, p. 286].

The FDA may not require that the sale or distribution of a tobacco product be limited to medical prescription-use only [Bill, p. 286].

FDCA Sec. 906(e), Good Manufacturing Practices: Section 906(e) specifies the methods, facilities, and controls to be used in the manufacture, preproduction design validation, packing, and storage of tobacco products [Bill, pp. 286-292].

Prior to issuing good manufacturing practices, the FDA is directed to take into account the recommendations of the Tobacco Products Scientific Advisory Committee and to consider among other factors the financial resources of the tobacco manufacturer in question.

FDCA Sec. 907, Performance Standards Requirements for Manufacturers: Section 907 applies performance standards to tobacco products that are nearly identical to those used for medical devices under chapter V of the FDCA. Under Section 907:

The FDA is given authority to eliminate nicotine or other tobacco ingredients pursuant to issuance of a performance standard [pp. 292-293].
Prior to eliminating nicotine from tobacco or banning any class of tobacco products, the FDA must take into consideration the views of the Tobacco Products Advisory Committee and the President is required to notify Congress two years in advance of the ban's effective date.

FDCA Sec. 908, Notification and Recall Authority: Section 908 gives the FDA authority to issue public notices regarding any tobacco product which it determines presents an unreasonable risk of substantial harm to the public health. In addition:

The FDA may order the recall of any tobacco product that contains a defect not ordinarily contained in tobacco products that would cause serious, adverse health consequences.
Section 908 states that compliance with the bill's notification and recall provisions does not relieve any individual from liability under state or federal law [Bill, p. 301].

FDCA Sec. 909, Records and Reports: The FDA may require a tobacco manufacturer or importer to report any information that suggests one of its products may have caused or contributed to an unexpected adverse experience associated with its use or any significant increase in any expected adverse experience associated with the product's use [Bill, pp. 303-306].

FDCA Sec. 910, Premarket Approval Requirement for New Tobacco Products: Section 910 requires FDA premarket approval of any tobacco product that was not commercially available as of August 11, 1995, unless the FDA has determined (based on a premarket notification submitted by the manufacturer) that the product is substantially equivalent to an already available product [Bill, pp. 307-318] .

FDCA Sec. 911, Judicial Review: Section 911 gives tobacco manufacturers 30 days in which to appeal an FDA ruling to restrict or ban a tobacco product (under section 907 performance standards) or to appeal an FDA denial for product approval (under section 910 premarket approval) [Bill, pp. 318-321].

FDCA Sec. 912, Postmarket Surveillance: Section 912 authorizes the FDA to require tobacco manufacturers to conduct postmarket surveillance of a product if FDA finds that such surveillance is "necessary to protect the public health or is necessary to provide information regarding the health risks and other issues involving the tobacco product" [Bill, p. 322]. In addition:

A manufacturer will have 30 days following FDA notice in which to submit a protocol for the collection of product data; and
The FDA will have 60 days to determine if the investigative entity proposed by the manufacturer is sufficiently qualified to conduct the product study [Bill, pp. 321-322].

FDCA Sec. 913, Reduced Risk Tobacco Products: Only those products designated as such by the FDA may be marketed and labeled as a "reduced risk" tobacco product.

A product that is designated by the FDA as low risk will not be subject to regulation as a drug or medical device.
FDA may designate as "reduced risk tobacco" if it finds that "the product will significantly reduce harm to individuals caused by a tobacco product and is otherwise appropriate to protect public health".
FDA may revoke this designation at any time, upon certain findings [Bill, pp. 322-326].

FDCA Sec. 914, State and Local Authority: Section 914 makes clear that states and localities are permitted to impose and enforce additional or more stringent tobacco regulations than those contained in the bill. However, state and local governments may not impose regulations relating to: performance standards, premarket approval, product adulteration, misbranding, registration, reporting, good manufacturing standards, or reduced risk products [Bill, pp. 326-328].

FDCA Sec. 915, Tobacco Products Scientific Advisory Committee: Within one year of enactment, the FDA is required to establish a nine-member scientific advisory committee to advise the FDA on:

the effects of altering nicotine yields from tobacco products;
whether there is threshold level below which nicotine yields do not produce a dependence on tobacco; and
various safety, health, and dependence issues related to tobacco products upon request by the FDA [Bill, pp. 328-331].

FDCA Sec. 916, Equal Treatment of Retail Outlets: Directs FDA to promulgate regulations requiring retail establishments whose business is primarily the sale of tobacco to comply with the bill's advertising restrictions as they apply to retailers whose establishments are accessible to individuals under age 18. (Section 123 prohibits "point-of-sale" advertising in any retail establishment that allow persons under age 18 to enter [Bill, p. 331].)

Sec. 102, Tobacco Exports And Conforming Amendments: Section 102 gives FDA authority to regulate the export of tobacco products. Investigational tobacco products, tobacco products that are not in compliance with section 907 (performance standards), or products that are not in compliance with section 910 (premarket approval) would not be eligible for export unless:

The FDA has determined that "exportation of the tobacco product is not contrary to the public health and safety" [p. 336] ; and
The manufacturer has the approval of the importing country; or
The manufacturer has obtained a "valid marketing authorization" under section 802 of the FDCA [Bill, pp. 331-338].

Subtitle B -- Tobacco Advertising

Sec. 121, Advertising Provisions in Protocol Legally Enforceable: Section 121 states that the tobacco protocol (i.e., the June 20, 1997 proposed settlement) will contain legally enforceable restrictions on tobacco advertising in which the tobacco industry will voluntarily participate. On page 338 the bill states:
"The Protocol shall contain provisions enforceable at law under which tobacco product manufacturers commit to observe limitations on advertising."

Sec. 122, Protocol's Labeling and Advertising Restrictions: In additional to the requirements of the FDCA and the Federal Cigarette Labeling and Advertising Act, Section 122 prohibits the sale or distribution of a tobacco product unless the product's labeling and advertising comply with the following:

No label or advertising may contain a human image, animal image, or cartoon character;
No advertising in an arena or stadium or in a retail establishment if the advertisement is visible from outside the establishment;
No use of words such as "light" or "low" without a disclaimer that the product is no less hazardous than any other tobacco product;
No advertising or use of logos may appear on the Internet unless it is inaccessible to persons in the U.S. under age 18;
Only the use of black text on a white background or "tombstone" print is permitted on packaging, labeling, or advertising except in adult establishments or adult publications;
Only the use of black text on a white background will be permitted in a video format;
Each tobacco product's (cigarettes and smokeless tobacco) must contain the product's established name (e.g., "Cigarettes") followed by the words "A Nicotine Delivery Device";
No music or sound effects are permitted for audio formats;
No logo, symbol, motto, selling message, recognizable color or pattern of colors, or any other representation of a tobacco product may be placed in a movie or video game [Bill, pp. 339-343].
No color print ads may appear on the outside back cover of any magazine; and
No corporate logo or symbol may appear on any product other than a tobacco product.

Under the FDA final rule issued August 28, 1996, and deemed to have been lawfully promulgated [Sec. 9019(c)], outdoor advertising withing 1,000 feet of a school or playground would be banned. All other outdoor advertising would have to comply with black text on white background format.

Sec. 123, Point-of-Sale (POS) Restrictions: Section 123 strictly limits the use of point-of-sale advertising. Specifically:

POS promotional displays are strictly limited (other than in adult-only establishments) to one display per retail establishment, in black letters only, not larger than 576 square inches, and at least two feet removed from any candy display [Bill, pp. 343-345].
[Many provisions in this title were contemplated by the June 20th agreement; however the Committee Report notes that the bill bolsters FDA authority over nicotine and tobacco products. Also, note that these provisions raise significant First Amendment issues if the companies do not voluntarily participate.]

Title II -- Reductions in Underage Tobacco Use
Subtitle A -- Underage Use

Sec 201, Goals for Reducing Underage Tobacco Use: Prescribes reductions in underage use of cigarettes and smokeless tobacco and requires the Secretary, in cooperation with State, Tribal and local authorities, and the private sector, to take all actions necessary to ensure that the prescribed reductions are achieved [Bill, p. 345].

Reductions must be met beginning in the third calendar year after the date of enactment of the bill. The bill sets the following reduction targets [Sec. 201(b), (c), p.346]:

Calendar Year after Date of Enactment Percentage Reduction for Cigarettes Percentage Reduction for Smokeless Tobacco

Years 3 and 4 15 percent 12.5 percent

Years 5 and 6 30 percent 25 percent

Years 7, 8 and 9 50 percent 35 percent

Year 10 and after 60 percent 45 percent

The percentage reductions of underage cigarette and smokeless tobacco use is determined by the Secretary comparing an annual percent incidence of underage use of tobacco with a baseline established by the 1995 University of Michigan Survey [Sec. 202(a), p 346-347].

The University of Michigan National High School Drug Use Survey (entitled "Monitoring the Future") identified the number of youth (age 13-17) who use tobacco daily and calculated the percentage of such tobacco users to the total population in that age bracket [Report, p. 27].
The Secretary is required to conduct an annual survey of the percentage of teens in grade 12 (ages 16 and 17), grade 10 (ages 14 and 15) and grade 8 (age 13) who used cigarettes or smokeless tobacco on a daily basis in the last year [Sec. 202(a), p. 346].
The percentages are to be measured by the Secretary using either the University of Michigan Survey, or a comparable index that uses identical methodology [Bill, p. 347].

Sec. 202, Look-Back Assessment: For each year in which the required percentage reduction in underage use is not met, the Secretary must impose a "look-back" penalty on cigarette and smokeless tobacco manufacturers for non-attainment of the targets. The penalty is progressive and would be assessed on cigarette manufacturers as follows (smokeless have a similar but less costly penalty structure) [Sec. 202(b), pp. 347-349]:

Non-attainment percentage Penalty (adjusted for inflation after yr. 4)

Not more than 5 percent $80 million multiplied by the non-attainment percentage

From 6 to 9 percent $400 million plus $160 million multiplied by the non-attainment percentage in excess of 5 percent but not in excess of 10 percent

From 10 to 19 percent $1.2 billion plus $240 million multiplied by the non-attainment percentage in excess of 10 percent but not in excess of 20 percent

More than 20 percent $3.5 billion cap; industry and individual tobacco manufacturers could lose the civil liability cap provided in Title VII

For example, if in year five, underage use falls by only 23 percent rather than the required 30 percent (a difference of 7 percent), then the industry would be assessed a penalty of $400 million ($80 million multiplied by 5 percent in years one to five) plus $320 million ($160 million multiplied by 2 percent in years six and seven) [Committee Report, p. 28].

Penalties must be paid on or before July 1 and are not tax-deductible as ordinary and necessary business expenses [Sec. 202(e), (f), p. 351].

The Secretary may set an interest rate up to three times the prevailing prime rate and may impose additional charges up to three times the penalty for late payment [Sec. 202(e), p. 351].

This title provides that each manufacturer is jointly and severally liable for the payment [Sec. 202(c), p. 350]. However, the Secretary is required to make allocations according to each manufacturer's share of the domestic market (as determined in the year the penalty is assessed, based on actual federal excise tax payments) [202(d)(1), p. 350].

This title also provides procedures by which tobacco manufacturers can sue each other to recover a portion of the penalty or to reallocate the penalty [Sec. 202(g)].

[This section raises significant constitutional questions since it requires the manufacturers to voluntarily participate. The Finance Committee is taking a look at this provision as an unconstitutional tax.]

Sec. 203, Substantial Non-Attainment of Required Reductions: Sec. 203 provides procedures for the Secretary to remove the civil liability cap provided in Title VII if the non-attainment percentage for any year exceeds 20 percent.

In any year where non-attainment is 20 percent or more, the Secretary shall determine brand-by-brand which tobacco manufacturers are responsible, and may bring an action against the faulted manufacturer [Sec. 203(a)(1), p. 353].
For the faulted manufacturers, a three-judge court could determine, based on the evidence, that the civil liability cap no longer applies [Sec. 203(d), p. 354-355].
The loss of liability will be in effect the later of either two years or when the manufacturer has come into compliance with the Act [Sec. 203(g), p. 356].

Subtitle B -- State Enforcement Incentives

Sec. 211/212, Compliance Bonus Fund and Block Grants: Section 211 creates a separate account--the Compliance Bonus Account for States and Retailers--within the National Tobacco Settlement Trust Fund ("Settlement Fund").

Each year, the Account will receive 5 percent of the penalties paid by the tobacco companies for failure to meet the underage smoking targets, and any amounts withheld under section 213 for noncompliance.
Amounts necessary to carry out the provisions of this subtitle are authorized to be appropriated [Sec. 211(a), (b), pp. 361-362].

The Secretary would award block grants from the Account to states that demonstrate to the satisfaction of the Secretary that fewer than 5 percent of all kids under 18 are able to successfully purchase tobacco products [Sec. 212(a), (b), p. 362].

State Mandates:

Funds in the Account would be distributed to eligible States on the basis of population [Sec. 212(c)(2), p. 363].
States receiving a grant must distribute half of the funds to retailers with outstanding compliance records [Sec. 212(c)(3), p. 363].

Sec. 213, State Enforcement Incentives: Sets out the mandates for States to meet compliance with a law prohibiting the sale of tobacco products to kids under age 18.

States must conduct monthly, random, unannounced inspections of retailers to ensure compliance with the law requiring a minimum age of 18 to purchase tobacco products [Sec. 213(a)(1)(A), p. 363]. Under the FDA section of the bill, retailers are required to check the photo ID of all customers under the age of 27.

The State must conduct at least 250 random, unannounced inspections of retailers for every 1 million residents [Sec. 213(a)(2), pp 364-365].
The inspections must cover a range of retailers and must be conducted to provide a probability sample of outlets [Sec. 213(a)(2), p. 365].
The sample must reflect the distribution of the under-18 population, and the distribution of the retailers accessible to youth [Sec. 213(a)(3), p. 365].

States must submit to the Secretary an annual report describing (i) the activities of the State to enforce underage access laws; and (ii) the extent of success the State has achieved in reducing availability [Sec. 213(a)(1)(B), p. 364]. (The Report indicates Submissions are to the FDA Commissioner.)
The state's report must provide a detailed description of how the inspections were conducted and the methods used to identify retailers; and the identity of a single State entity responsible for implementation of the inspections [Sec. 213(a)(1)(C), p. 364].

A State is deemed in noncompliance if a state fails to comply with the inspection requirements, or fails to demonstrate a compliance rate among retail outlets of at least (1) 75 percent in the 5th and 6th years after enactment of the grant program; (2) 80 percent in the 7th, 8th, and 9th years; and (3) 90 percent beginning with the 10th year and thereafter [Sec. 213(b)(1),(2), p. 366]. The Secretary may withhold up to 5 percent of the State Retailer block grant monies.

Although there appears to be no bill language, the Report states that the Secretary shall reduce section 1921 amounts for noncompliance. This appears to refer to Section 1921 of the Public Health Service Act and a provision known as the "Synar" Amendment [Report, p. 29].

Subtitle C -- Other Programs

Sec. 221, National Smoking Cessation Program: Creates the National Smoking Cessation Program under the jurisdiction of the Secretary of HHS to award grants to public and nonprofit entities and individuals for smoking cessation programs [p. 369].

This section is intended to create a national comprehensive tobacco use treatment program which includes grants to states and localities; support of federal programs providing health services to low-income Americans, training of health care professionals, and other appropriate initiatives to fulfill the purposes of this section [Report, p. 31].

The program is to be funded in the amount necessary to carry out this section from revenues in the Settlement Trust Fund [Sec. 211(f), p. 372].

Public and nonprofit entities are eligible for the grant if they:

prepare and submit to the Secretary an application containing information as the Secretary may require;
provide assurances that the grant money will be used to establish or administer tobacco product use cessation programs that comply with regulations that will be promulgated by the Secretary [Sec. 221(b)(1)(C), (c)(1), pp. 369-371];

The regulations must ensure that tobacco users: (1) have reasonable access to such comprehensive tobacco cessation programs and drugs, human biological products, or medical devices; and (2) have access to a broad range of options that are tailored to the needs of the individual tobacco user [Sec. 221(d)(1), (2), p 371]; and

meet any other requirements determined appropriate by the Secretary.

The Committee recommends that grant recipients mirror the tobacco use treatment methods outlined in the 1996 Agency for Health Care Policy Research Clinical Practice Guideline on Smoking Cessation. These guidelines recommend that clinicians record the tobacco-use status of every patient and offer smoking cessation treatment to every smoker at every office visit [Report, p. 31].

Individuals of all ages are eligible to receive grants (which can be in the form of a voucher) if in addition to an application, they provide assurances that the money will be used to enroll in a tobacco cessation program or to purchase approved use cessation products [Sec. 221(b)(2), (c)(2), p. 370]. (The Committee found that the average cost per smoker for smoking cessation is $165) [Report, p. 30].

There appears to be no legislative limit on the size and scope of this program, the number of times you can receive grants from this program, nor a definition of treatment. Also, there is no liability protection for the government if a smoker is unable to quit.

Sec. 222, National Tobacco-Free Public Education Program: Requires the Secretary to establish an independent board -- the Tobacco-Free Education Board -- to enter into contracts or award grants to eligible public and nonprofit private entities to carry out public educational/informational activities to reduce the use of tobacco products.

The section lists the requirements of the Board including: appointment of its nine members; terms of the appointment; and powers [Sec. 222(a)(2)-(5), pp. 372-374].

The Secretary also is required to establish the National Tobacco-Free Public Education Program--under which the Board may enter into contracts or award grants.

The Program shall be funded with revenues from the Settlement Fund at levels necessary to carry out this section [Sec. 222(f), p. 377].

Any State, public entity, or nonprofit entity that is not affiliated with a tobacco manufacturer, and has a demonstrated record of working to reduce tobacco use, and has expertise in conducting multi-media communications ("including proven effective campaigns for minority populations") is eligible for grants [Sec. 222 (c), p. 375].

An entity receiving a grant must use the money to conduct multi-media public educational or information campaigns designed to discourage underage use and to encourage current smokers to quit [Sec. 222(d), p. 376].
The campaigns must include (1) school-based programs focused on areas with high smoking rates and at-risk populations; (2) college- and university-based programs to discourage 18-to-24-year-olds from smoking; or (3) community-based prevention programs focusing on populations most at-risk to use tobacco products [Sec. 222(d)(1)-(3), p. 377].
In awarding grants, the Board shall consider the needs of particular populations, including methods that are proven and effective and are culturally and linguistically appropriate [Sec. 222(e), p. 377].

The Committee intends for the program to provide a national media campaign as well as to provide assistance to state and local efforts to discourage smoking. The Secretary is directed to ensure that any resources and decision-making used to carry out the Program have no connections to tobacco [Report, pp. 32-33].

Sec. 223, National Community Action Program: Establishes the National Community Action Program to award grants to eligible State and local governmental entities to encourage community-based tobacco reduction efforts [p. 378].

The Program is funded from revenues in the Settlement Fund at an amount necessary to carry out the purposes of this section [Sec. 223(c), p. 378].

The Committee noted that research indicates community-based strategies involving parents, mass media and community organizations are important adjuncts to school-based programs [Report, p. 33].

The Committee recognized the American Stop Smoking Intervention Study for Cancer Prevention (ASSIST), which is funded though NIH, for its funding to 17 states to promote comprehensive community-based organizations. The Committee intends that a significant portion of funds from this section be used to expand the ASSIST program [Report, p. 34].

Sec. 224, State Retail Licensing Program: Establishes a program to provide block grants to States that have a law licensing retailers who sell tobacco products directly to consumers [p. 379]. States not participating in the program may be subject to federal retail licensing requirements (including licensing requirements, enforcement measures and applicable penalties) established by the Secretary [Sec. 224(e)].

The funds will be made available from the Settlement Fund [Report, p. 35].

To receive a block grant, a State must:

enter into an agreement with the Secretary to assume responsibilities for the implementation and enforcement of a licensing program;
ensure compliance with the Youth Access Restrictions promulgated by the Secretary (21 CFR 897 et seq.); and
establish to the satisfaction of the Secretary that (1) it has a law requiring each tobacco retailer to obtain a license to sell, (2) it provides criminal penalties for selling without a license and civil penalties for suspension or revocation of licenses, and (3) there are programs in place including fines or revocation of driver's license for underage youths who possess, purchase, or attempt to purchase tobacco [Sec. 224(a)(2), pp. 379-380].

States receiving a grant must enforce compliance with its licensing program in a manner that can be reasonably expected to reduce the sale and distribution of tobacco products to kids under 18. The Secretary may withhold a portion of the funds under this section if the State is not enforcing its program [Sec. 224(c), p. 381].

[Most of the provisions in this title were contemplated in the June 20^th Agreement]

Title III -- Product Warnings and Smoke Constituent Disclosure
Subtitle A -- Product Warnings, Labeling and Packaging

Section 301 provides for new, more emphatic warnings for cigarette labels, packaging and advertising [Bill, pp. 382-388] and mandates the size and format of the warnings. The Secretary of Health and Human Services has the authority to modify the format and text for the warning statements as they appear on cigarette packaging and in cigarette advertising, and to require the disclosure of tar and nicotine, and other materials contained in cigarettes.

Labeling Requirements: All cigarette packages distributed within the United States must contain one of the nine "warnings" specified in the bill [p. 382]. Each label is to be located in the upper portion of the front and rear panels of the package, and comprise at least the top 25 percent of both panels;

Requires the word "WARNING" to appear in capital letters and all text to be in black on a white background, or white on a black background, in conspicuous and legible 17-point type [this size], unless it would occupy over 70 percent of such area and then it may be reduced to cover at least 60 percent of such area.

Applies also to foreign distributors (those who manufacture, package, or import cigarettes for sale or distribution within the United States).

The bill also makes it unlawful for any manufacturer or retailer to advertise in the U.S. unless the advertisements contain these warning statements in compliance with a defined size, format, and sequence.

Advertising Requirements: Specifies the size (20 percent of the ad), location ("in a conspicuous and prominent format and location at the top of each advertisement"), and format, including type and border size, for advertisements: "The text of such label statement shall be in a typeface pro rata to the following requirements: 45-point type for a whole-page broadsheet newspaper advertisement; ... 31.5-point type for a double-page magazine ... [Bill, pp. 385-387].

[This advertising ban raises serious constitutional questions since it requires voluntary participation of the tobacco companies.]

In addition, the bill mandates certain marketing requirements that affect manufacturers, importers, distributors, and retailers:

Requires the warning label statements to be "randomly displayed in each 12-month period, in as equal a number of times as is possible on each brand of the product and be randomly distributed in all areas of the U.S. in which the product is marketed in accordance with a plan submitted by the tobacco product manufacturer, importer, distributor, or retailer and approved by the Secretary." [Bill, p. 387].
"The label statements . . . shall be rotated quarterly in alternating sequence in advertisements for each brand of cigarettes. . ." [Bill, p. 387-388.]
Marketing plans require approval by the Secretary of HHS and require the two aforementioned items, and assurance "that all of the labels required under this section will be displayed by the tobacco product manufacturer, importer, distributor, or retailer at the same time." [Bill, p. 388].

While Section 301 provides the Secretary authority, through rulemaking, to adjust the format and type sizes of warnings, Section 302 gives the Secretary authority to revise the text of cigarette warning label statements if it would "promote greater public understanding of the risks associated with the use of tobacco products" [Bill, pp. 388-389].

Section 303 provides for new, more emphatic warnings for smokeless tobacco labels, packaging and advertising [Bill, pp.389-393], and specifies the four new warnings and requires that these warnings appear in 17-point type and in a defined format similar to that for cigarettes.

Section 304 gives similar authority to the Secretary as provided under Section 302 for smokeless tobacco products.

Section 305 transfers authority over the disclosure of cigarette constituents (tar, nicotine and other constituents) from the Federal Trade Commission to the Secretary of Health and Human Services. The bill gives the Secretary of HHS authority to (1) determine whether cigarette package labels and advertising will report tar and nicotine yields; and (2) specify the format for such disclosures. By rulemaking, the Secretary could require the disclosure of any other smoke constituent. [Bill, pp. 394-395].

Subtitle B -- Testing and Reporting of Tobacco Product Smoke Constituents

Section 311 provides that the Secretary must issue regulations, within two years, to provide for testing, reporting and disclosure to the public of "tobacco product smoke constituents and ingredients that the Secretary determines should be disclosed ... to protect the public health." The disclosures of tar and nicotine may be made through labels and advertising, and the disclosure of other ingredients shall be "as the Secretary determines are necessary..." [Bill, p. 395-396].

[Most of the provisions in this title were contemplated in the June 20^th Agreement]

Title IV -- National Tobacco Settlement Trust Fund
[Note: On May 13, unanimous consent was reached to refer the tobacco bill to the Senate Finance Committee for one day. It was anticipated that the Committee on May 14 would substitute excise taxes for payments, and would address spending issues, including Medicaid. For a discussion on the budgetary issues raised by this bill, see Background at the front of this Notice.]

Title IV contains the primary financing aspects -- both revenue collection and spending -- in the bill. The primary mechanism for these transactions is the National Tobacco Settlement Trust Fund (NTSTF) [Sec. 401, p. 397]. The NTSTF will receive payments from tobacco producers and make disbursements to the various spending programs (including other trust funds established in this legislation) created by S. 1415.

The NTSTF will receive revenues from payments made by the participating tobacco companies, fines or penalties assessed in this title, and "look-back" penalties for failure to meet certain underage smoking targets (see Sec. 202).

The NTSTF may borrow from the General Fund to make any authorized expenditures. [Sec. 397(c)].

Five tobacco manufacturers pay an aggregate $10 billion in the first year (the bill specifies the portion required of each, pp. 401-402). All participating manufacturers are then required to make annual payments for 25 years, apportioned by market share. The first five payments are set in the bill, while the remaining 20 payments are calculated by adjusting the payment in year-four by inflation (the inflation adjustment calculation is specified in the bill, but requires it be at least 3 percent) [For more information, see RPC paper dated May 8 on estimating the revenues of S. 1415.] [Sec. 403].

Section 403(f) provides an exception from the payment requirements for a participating manufacturer that has resolved tobacco-related civil actions with more than 25 States before January 1, 1998. This exemption only applies to Liggett Group [Bill, p. 406].
Section 404 adjusts the annual payments for inflation and for volume. In 2005, the base payments will be adjusted upward or downward to reflect any changes in the volume of domestic shares [Bill, p. 408].

[This payment section raises a constitutional question and may violate the Takings Clause as it requires voluntary participation by the companies.]

Section 405 requires that these payments be passed through to consumers in the form of higher prices. Failure to do so will result in the manufacturer being penalized (at an amount equal to 110 percent of the shortfall) with an additional penalty being assessed if the failure is determined to be intentional (125 percent of shortfall) [Bill, p 409].

Section 406 stipulates that the payments will be "considered ordinary and necessary business expenses for purposes of tax treatment in accordance with current law (however, penalties assessed under title 2 are not deductible).

This will result in lower receipts to the General Treasury due to the so-called "income tax offset" effect [this was examined in the context of the Highway Trust Fund in the 10/6/97 RPC Paper: Riding the Paper Tiger: The Highway Trust Fund "Surplus"]. It is unclear whether the NTSTF will be credited with gross or net receipts.

Failure to make any of the required payments or penalties within 60 days will result in a civil penalty of $100,000. [Sec. 407, p. 411]

If at the end of one year, a participating tobacco manufacturer fails to make any of the payments, the company will no longer be eligible for the cap on civil liability provided in this bill [Sec. 407].

The NTSTF's largest expenditure will be a $196 billion payment to the states over 25 years [Sec. 402].

This money will be kept in a separate NTSTF account known as the State Litigation Settlement Account. Money in this account will be distributed to the states "without further appropriation" and is therefore mandatory spending for Budget Act purposes. The states may use this money as they wish except that it "will not be deemed as reimbursement for Medicaid expenditures or as Medicaid over-payments for purposes of recoupment" (Report, page 37).

The NTSTF is also authorized "without further appropriation" to spend 15 percent of the funds on (1) prevention of smoking; (2) education (this does not appear to be limited to tobacco education); (3) State, local, and private control of tobacco product use; and (4) smoking cessation [Sec. 401(d), pp. 398-399].

Section 408 provides that at least $300 million should be available annually, without further appropriation, to pay the FDA for enforcement related to tobacco. (This would result in more spending than is currently made for all drugs and devices under FDA jurisdiction.)

Section 411 authorizes a transfer of funds to expand the Child Care Development block grant. The Committee report suggests $4 billion per year. [This provision was not included in the original June 20 tobacco settlement.]

Amounts provided to the States are intended to supplement, not supplant, other federal, state and local funds for programs that serve the health and developmental needs of children [Sec. 412(b), p. 414].

[The payments and look-back penalties were contemplated at lower levels in the June 20^th Agreement. However, most of the spending decisions were made in Committee.]

Title V -- Standards to Reduce Involuntary Exposure to Tobacco Smoke

Sec. 502(a) mandates that "public facilities" must adopt a smoke-free environmental policy.

A "public facility" is defined as "any building used for purposes that affect interstate or foreign commerce that is regularly entered by 10 or more individuals at least one day per week, including any building owned by or leased to an agency, independent establishment, department, or branch of the United States Government."
The definition of "public facility," does not include a building used for residential purposes, or a restaurant (other than a fast food restaurant), bar, private club, hotel guest room or common area, casino, bingo parlor, tobacconist's shop, or prison."
A "fast food restaurant" is defined as "any restaurant or chain of restaurants that primarily distributes food through a customer pick-up (either at a counter or drive-through window)". The Assistant Secretary of OSHA is authorized to promulgate regulations to ensure that the intended inclusion of establishments catering to individuals under 18 years of age is achieved [Sec. 501(2), p. 414].

The owner or lessee of a public facility must prohibit smoking inside the facility and around the immediate vicinity of the entrance to the facility. It also requires the posting of no-smoking notices in prominent places [Sec. 502(b)(1), p. 417].

A public facility is allowed to provide for specially designated smoking areas within the facility if those smoking areas are:

ventilated according to specifications set forth by the Assistant Secretary;
maintained at negative pressure relative to non-smoking areas as described in regulation by the Assistant Secretary;
non-smokers do not have to enter the area while smoking is occurring; and
no smoking is occurring during cleaning and maintenance of the area [Sec. 502(b)(2), (c), p. 417-418].

This title allows for citizen actions to enforce this title. Any aggrieved person, state or local government, or the Assistant Secretary may bring an action against the defendant for failure to meet this mandate [Sec. 503(a), p. 418]. (This raises the potential for nuisance lawsuits.)

Civil penalties of up to $5,000 per day can be assessed, and the defendant can be enjoined for any violation [Sec. 503(b), pp. 418-419].
Further, courts are allowed to apply any civil penalties assessed to projects which further the policies of a smoke-free environment [Sec. 503(e), p. 419].

Federal, state or local law that provides greater protection from environmental tobacco smoke is not pre-empted [Sec. 504, p. 420].

The Assistant Secretary of OSHA is given authority to promulgate any regulations he or she may deem necessary to carry out the provisions of this title [Sec. 505, p. 420].

States have until the January following their regularly scheduled meeting of the legislature to opt-out of these provisions [Sec. 506-507, p. 420].

[The provisions in this title were contemplated in the June 20^th Agreement]

Title VI -- Application to Indian Tribes
[Note that the Commerce Committee stated that this title was still being negotiated and that consensus language was expected to be included in a manager's amendment. See Chairman McCain's Additional Views in the Committee Report re. this title, pps. 73-75. Further, we understand that Indian Affairs Committee Chairman Campbell may offer an amendment to this title.]

Sec. 602 states the purposes, which include the intent to ensure that funding is available to ensure the regulation of tobacco distributors and products on Indian lands.

Sec. 603 states the application of this bill to native Americans. The Act applies to the manufacture, distribution, or sale of tobacco or tobacco products in Indian country and other trust lands under the jurisdiction of an Indian tribe and to Indian tribes engaged in such activities. A limited exception is made for traditional, religious and ceremonial use of tobacco by members of Indian tribes, including minors.

Sec. 603(c) makes any Indian tribe engaged in the manufacture of tobacco products liable for any annual fee payments levied on other manufacturers in this Act. Failure to pay such fees will make a tribe a nonparticipating tobacco product manufacturer and therefore, the limitations on liability contained in Title VII of this Act do not apply.
Sec. 603(d) applies the provisions of the federal Food, Drug, and Cosmetic Act (FDCA) related to tobacco to Indian country and tribal lands, and Section 603(e) subjects any Indian tribe wishing to sell tobacco products to the FDCA's retail licensing requirements.
Sec. 603(f) sets up a public health grant program for participating tribes that submit an approved anti-smoking plan, and sets up the procedures for establishing the grant amounts.

Sec. 604 requires tribes to collect State excise and sales taxes on tobacco and tobacco products purchased on Indian lands by non-Indians. Those monies are to be remitted to the U.S. Treasury and then returned to the State in which they were collected. The Committee Report notes the purpose of this section is to "eliminate sources, for non-tribal members, of cheaper tobacco products" [p. 42].

[The June 20th Agreement contemplated application to Indian Tribes.]
Title VII -- Civil Liability

Title VII sets out the rules for liability of the industry but does not limit that liability; nevertheless, section 706 generally caps the industry's annual payout at $6.5 billion (see discussion below). Most of the rules respecting the annual caps are contained in Title VII. [However, we are aware of four other provisions of the bill that relate to the annual caps:

Section 8 provides that any manufacturer that challenges the advertising restrictions loses its liability limits.
Section 203(d) provides that a manufacturer loses its liability limits if it fails to comply with the Act or undermines the Act with respect to reducing tobacco use by minors. This provision and the one below link the liability limit to the targets to "underage tobacco use."
Section 801(d) provides that a tobacco product manufacturer may have its annual caps suspended if it creates a "clear and present danger to the attainment of the targets for underage smoking reduction."
Section 1301-"9104" provides that any amount recovered for damages caused by tobacco to veterans during active military service is exempt from the annual limitation on damages.]

The rules in Title VII preempt all rules to the contrary. The rules cover tobacco claims against "participating tobacco project manufacturers" and their affiliates and agents and insurers; nonparticipants are not, of course, covered by the Act. (Nonparticipants are charged fees of 150 percent of the annual payments made by participants, thereby providing a strong incentive to become a "participant," sec. 708.)

[Not all kinds of tobacco cases are covered by Title VII, e.g., workers' compensation cases, securities cases, cases brought by the United States, certain environmental cases, and other cases are not covered.]

States have a one-time option for deciding not to participate in the Act. If States do not opt out, then they and their political subdivisions are bound by the provisions of the Act and may not file a tobacco claim except as provided by the Act. Of course, those that opt-in are entitled to billions of dollars in payments from the National Tobacco Settlement Trust Fund.

Subsection 704(c) settles the pending private class-action litigation over addiction and dependency (known as the Castano cases), although individual plaintiffs could refile their lawsuits. Insofar as Title VII applies to any case, no claim of addiction dependence may be filed, sec. 705(c).

The Committee report says (at p. 42) that section 705 "establishes a federal cause of action for tobacco claims, based upon the substantive law of the state in which an action is brought. This federal cause of action is the exclusive cause of action for tobacco claims, and all other bases for claims are preempted. This approach of creating a federal cause of action allows this Act to cover all tobacco claims, while both permitting existing state law to apply to those actions and avoiding bringing all tobacco claims into the Federal court system." Subsection 705(e) provides that participating manufacturers are jointly and severally liable with each other but not with nonparticipating manufacturers.

Section 706 limits the annual payout to $6.5 billion and establishes a program for paying and recording the judgments and settlements. Liability in any year may be any amount; but if the liability is more than $6.5 billion in a year, the industry will pay $6.5 billion that year and "roll over" the balance into subsequent years.

[This provision is one of the main differences from the June 20^th Agreement.]

Section 707 does not limit attorney's fees, but rather sets up an arbitration procedure for awarding attorney's fees to plaintiffs' attorneys. If the parties cannot agree on fees, an arbitration panel may be used: The panel comprises three persons, one chosen by the plaintiff, one by the attorney, and a third chosen by the first two. The section sets out criteria that the panel is to use in making an award.

The bill, as reported, does not have a section 710. However, the report (at page 44) contains the following explanation for a future section 710: "This section establishes a Tort Trust Fund, as requested by the Administration, to ensure that individual claimants have a source for payment of judgments and settlements against the tobacco companies. This section is a place holder and will be revised."

Title VIII -- Industry Compliance

Sec. 801 establishes a "Tobacco Agreement Accountability" advisory panel [TAAP] composed of the Surgeon General, the Director of the Centers for Disease Control (or delegate) and the Director of the Health and Human Services Office of Minority Health.

Each tobacco product manufacturer must (within one year of enactment and annually thereafter)submit to the FDA Commissioner its plan to achieve the required reduction in underage tobacco use. The TAAP will review each manufacturer's plan and is authorized to recommend amendments to any plan.

TAAP must submit each year a report to Congress to include assessment of manufacturer compliance with this Act and its plan; likelihood that the manufacturers can meet the underage-smoking-reduction targets; and recommendations if necessary.

The TAAP may declare a "public health emergency" if its members unanimously determine that a manufacturer's actions present a "clear and present danger" to the attainment of underage smoking target levels, and if the FDA Commissioner determines the TAPP's report is supported by "clear and convincing evidence." The Commissioner could then bring a court action [see section 203] seeking to immediately suspend the manufacturer's annual cap on civil liability payments. (Bill, pps. 460-461)

The Committee Report indicates that if a manufacturer fails to meet its youth reduction targets by more than 20 percentage points, the Secretary must either (a) bring an action suspending the civil liability cap [section 203], or (b) issue a finding that the manufacturer made "reasonable efforts" to reach attainment. According to the Report [p. 45], compliance with all TAAP recommendations is prima facie evidence of "reasonable efforts." However, the bill only makes provisions for court action under section 203.

Sec. 802 prohibits tobacco product manufacturers from taking actions against employees, such as discharging, demoting or otherwise discriminating (e.g., compensation and benefits), if the action is a response to the employee behaving to ensure the manufacturer's compliance with this Act (specific protected behaviors are listed in the bill, p. 461).

Affected employees may within 180 days file a complaint with the HHS Secretary.
The Secretary has 30 days to investigate the complaint, and within 90 days, must issue an order providing relief (including compensatory damages) or rejection of the complaint.
The Secretary may enter into a settlement between the parties but only with the consent of the employee (Bill, p. 463).
Judicial review is provided (Bill, pps. 465-466).
Provisions of this section must be "prominently posted" in the workplace.

[Many of the provisions in this title were contemplated in the June 20^th Agreement.]

Title IX -- Disclosure of Tobacco Industry Documents

Section 903 provides for National Tobacco Document Depository [hereafter referred to as NTDD], which participating tobacco manufacturers must establish in the Washington, D.C. region within 180 days of this bill's enactment. The cost of establishment and continuing its operation shall be divided among manufacturers on a market-share basis. The depository "would greatly facilitate individuals in bringing lawsuits against the tobacco manufacturers to gain compensation for injuries related to tobacco use" [Committee Report, p. 46].

[This provision raises constitutional issues since it requires tobacco companies to voluntarily participate].

Within 30 days after establishment of the NTDD, all manufacturers must submit the following documents: all original laboratory research conducted or funded by manufacturers; all documents demanded during discovery in any state action brought after January 1, 1994; all documents demanded by the Federal Trade Commission in connection with the "Joe Camel" investigation and any underage marketing documents; all documents demanded during discovery in any private litigation; all documents contained within the following cases: Philip Morris v. American Broadcasting Co.; Estate of Butler v. R.J. Reynolds Tobacco Co.; Haines v. Liggett Group; and Cipollone v. Liggett Group; all indices of documents relating to tobacco products and health; a "privilege log" describing all documents exempted from public disclosure; and a "trade secrecy log" describing all documents that manufacturers maintain is exempt from public disclosure.

The following documents produced after enactment of this Act shall be submitted in accordance with a schedule developed by the Board of the NTDD: all original laboratory research conducted or funded by manufacturers; all studies conducted or funded relating to underage tobacco use; all documents relating to advertising and promotion to minors; a "privilege log" describing all documents exempted from public disclosure; and a "trade secrecy log" describing all documents that manufacturers maintain is exempt from public disclosure.

Section 904 addresses privilege and trade secret claims: any document claimed to be protected by attorney-client privilege, attorney work product, or trade secret protection must be marked as such and separately submitted to the NTDD. "Compliance with this subsection shall not be deemed to be a waiver of any applicable claim or privilege or trade secret protection" [Bill, p. 474]. All information provided shall be kept confidential "by and among" the agencies needed for enforcement. State inspection and discovery rights shall be exercised by each State but coordinated by a multi-state Attorneys General oversight committee. Within 15 days of submitting privileged and trade secret documents to the NTDD, each manufacturer must submit a "comprehensive log" of such documents. Each manufacturer must submit a declaration of full "good faith de novo" compliance with this title, in accordance with section 1746 of title 28, U.S.C.

Section 905 provides that within 30 days after receipt of the documents not covered by privilege, the documents shall be made available on the Internet.

Section 906 establishes the National Tobacco Documents Review Board [hereafter referred as the NTDRB] composed of five members serving seven years, and all appointed by the President with the consent of the Senate.

Section 907 provides for resolution of privilege disputes and section 908 sets up the appeal process of NTDRB decisions.

Section 910 provides penalties. If a tobacco manufacture is found not to have acted in good faith then certain costs and attorney's fees may be imposed. If the manufacturer is found to have acted in "bad faith" then civil penalties may be imposed up to $10,000 per violation. Failure to produce each document in a timely manner is punishable by a civil penalty of up to $500 per violation with a maximum total penalty of $10,000.

[Many of the provisions in this title were contemplated in the June 20^th Agreement.]

Title X -- Long-Term Assistance For Farmers

While the original tobacco settlement did not address the concerns of farmers and the tobacco-dependent communities, Title X includes the "Tobacco Community Revitalization Trust Fund," a Ford/Hollings proposal to provide compensation and economic adjustment assistance for tobacco farmers and rural communities.

[Agriculture Chairman Lugar has a different approach: he is likely to offer as an amendment a modified version of S. 1313, the Tobacco Transition Act, which he introduced on October 24, 1997. The Lugar amendment would end the federal program by phasing out the federal support for the production and marketing of tobacco, with fair compensation to quota owners, growers, and affected communities. It is consistent with the phase-out of other farm programs accomplished under the Freedom to Farm Act of 1996. The quota program would end in 1999 and the price support program would be phased out over a three-year period, starting in 1999. Quota owners would receive a buyout payment of $8.00 per pound of quota, to be paid in three equal installments over three years. Growers who do not own quota would receive transition payments of $4.00 per pound of tobacco they produced (average of '95-'97 production), to be paid in three equal installments over three years. Tobacco-dependent communities would receive $1 billion in block grants over 5 years. The costs of certain governmental activities related to the production of tobacco, such as tobacco grading and crop insurance subsidies, would be paid by the tobacco companies, as would the cost of administering the price support program during the 1991-2001 phase-out. The Lugar amendment would cost $18 billion.]

Section 1011 establishes the Community Trust Fund [Bill, p. 489] to be funded by assessments to tobacco manufacturers and importers out of the National Tobacco Settlement Trust Fund [section 403]. There are authorized to be appropriated to the Trust Fund, as repayable advances, such sums as may be necessary to make expenditures from the Trust Fund. Repayable advances would be repaid with interest to the general fund of the Treasury when the Secretary of the Treasury determines that moneys are available in the Trust Fund to make the payments [Bill, p. 490].

Section 1012 provides that tobacco manufacturers and importers must contribute a total of $28.5 billion to the Community Fund on a market share basis: $2.1 billion per year for first 10 years, and $500 million annually for next 15 years (2009-2023). For 2024 and later years the contribution shall be an amount needed to cover government costs associated with tobacco production (see section 1022).

Of the $28.5 billion earmark, the Committee Report specifies the fund will be used for [report, p. 49, see also details in bullet-points, below]: payments for lost tobacco quota, up to $1.65 billion per year for 25 years; community economic development grants, up to $10.5 billion over 25 years (up to $375 million for each of FY's 1999-2008 and up to $450 million for each of FY's 2009-2023); tobacco worker transition program, up to $25 million per year; higher education opportunity grants, up to $1.44 billion over 25 years; and reimburse USDA for administration of the program, such sums as necessary [Bill, pp. 525-526].

Section 1021 [Bill, pp. 495-524] provides Tobacco Market Transition Assistance: Beginning in 1999, the Secretary of Agriculture is to make payments for lost tobacco quota as a result of declines in the tobacco market. For all types of quota other than flue-cured, quota holders are given a one-time optional buy-out at $8 per pound, in exchange for relinquishing their quota. Payments will be made over 10 years. In general, payments are to be accelerated any time the national marketing quota is below 50 percent of the national tobacco marketing quota for the 1998 marketing year for three consecutive years, or if Congress abolishes the tobacco support program [Bill, pp. 513-514; report, p. 51]. The bill abolishes the quota system for flue-cured tobacco in exchange for $8 per pound over 10 years and replaces it with a federal tobacco permit system (section 1024).

Section 1024 provides a federal tobacco permit system: Active quota holders must obtain official permits (including production and acreage allotment limits) from USDA to farm tobacco [Bill, pp. 534-556].

Section 1023 [Bill, pp. 526-534] establishes Tobacco Community Economic Development Grants: Authorizes USDA to award economic development grants to tobacco-growing communities, with the amount of the grants to be based on the amount of the state's farm income pursuant to the 1995-99 marketing years. Grants are set at $375 million annually minus administrative costs for first 10 years, and $450 million annually for next 15 years. The grants may be used for loan assistance programs for restructuring communities or for support of new industries, including: rural business enterprise grants, farm ownership loans, initiatives which create farm and off-farm employment, expanding infrastructure, long-term business technical assistance, value-added agricultural initiatives, and compensation to warehouse owners [Bill, pp. 528-530]. Although states are given latitude in determining the use of grant funds, the legislation earmarks a minimum of 30 percent [report, p. 52].

Section 1031 establishes the Tobacco Worker Transition Grants [Bill, pp. 562-568]. Establishes a program to be administered by the Labor Department to assist workers in the tobacco industry, including: employment services; training for new employment; and adjustment allowances to aid in the transition to a new job. No person who has received payments for tobacco lost quota is eligible. The program is to be funded at a rate of $25 million yearly through FY 2008, and at least $12.5 million is to be used for the job training program.

Section 1032 establishes Farmer Opportunity Grants [Bill, pp. 568-583]: Amends the Higher Education Act to make tobacco producers and their relatives eligible to receive higher education grants of up to $1,700 per year, adjusted upward every five years by $300. Academic eligibility is modeled after the Pell Grants. The bill provides a maximum of $1.4375 billion over 25 years: $42.5 million per year for the first five years, rising $7.5 million annually during each succeeding five-year period up to $72.5 million per year.

Section 1041 [Bill, p. 583] provides immunity for tobacco producers, tobacco-related growers associations, tobacco warehouse owners and employees from any liability associated with the failure of a tobacco product manufacturer, distributor, or retailer to comply with the national tobacco settlement legislation.

Title XI -- Miscellaneous
Subtitle A -- "Prohibitions Relating to Tobacco Products and Children"
[Includes Prohibitions on Business Activities in Foreign Countries, New Domestic Spending, and Medicaid Mandates]

Sections 1101-1105 make it unlawful for any "domestic tobacco concern" (defined in Bill, p. 586) to use the instrumentalities of interstate commerce (whether directly or indirectly)

to sell or distribute tobacco products to children in a foreign country, or
to advertise or promote tobacco products in a foreign country in a manner that does not comply with the rules applicable within the United States. (Sec. 1102-"805" requires labeling in the primary language of the foreign country.)

Persons who provide information leading to a criminal conviction for violations of these international sales and labeling requirements would be entitled to a reward of up to $125,000.

[These provisions were not contemplated in the June 20^th Agreement.]

Section 1106(a) adds a new Title 28 to the Public Health Service Act and creates several new programs. Pages 55-57 of the Committee Report contain background information on tobacco and health and research. It is against this background that the Committee makes its recommendations.

Section 1106(a)-"2801" authorizes $750,000 for the Institute of Medicine to conduct a study on "the framework for a research agenda and research priorities."
Section 1106(a)-"2802" requires the Secretary to set up a National Tobacco Task Force to "foster coordination among public health agencies, academic bodies, and community groups" with respect to tobacco-related research.
Section 1106(a)-"2803" authorizes $4.195 billion over 10 years for the Centers for Disease Control to conduct "tobacco-related surveillance and epidemiologic studies" and to "develop tobacco control and prevention strategies." The funds are to come from the Tobacco Settlement Trust Fund. The bill specifies the amounts that are authorized for each year, and the amounts vary over the years (page 592). [This was contemplated in the June 20^th Agreement.]
--Section 1106(a)-"2804" authorizes $25 billion (not $20 billion as the Report says) over 10 years to the National Institutes of Health for research on "the prevention and treatment of diseases associated with tobacco use" and "the prevention and treatment of tobacco addiction." At least one-third of the funds must be used for research on addiction. The funds are to come from the Tobacco Settlement Trust Fund. Subsection "(h)" requires the establishment of an Office of Tobacco-Related Research within NIH. [This was contemplated in the June 20 Agreement.]

Section 1106(b) [Bill, p. 598] requires the Secretary of HHS to coordinate research with respect to minority health and to report to Congress biennially on "the amount of Federal funds targeted for research related to minority tobacco-related diseases" and "research into effective smoking cessation programs that are culturally and linguistically appropriate. . . ."

Section 1106(c) amends the Medicaid rules so that States must cover (1) prescription drugs that are used for "smoking cessation" and (2) nonprescription drugs which are approved by the FDA for "smoking cessation" [Bill, pp. 598-599].

Section 1107 amends the Tariff Act of 1930 to ban tobacco products produced (in whole or in part) by child labor.

Subtitle B -- Federal Licensing of Tobacco Product Distribution

Sec. 1121, Licensing of Tobacco Product Distribution: Prohibits any domestic concern from manufacturing or distributing tobacco products for sale in the United States more than one year after passage of this bill without a license from the Secretary [p. 599].

Retailers must comply with the licensing requirements in Section 224 and are not covered under this section.

A license fee is imposed equal to $1 per every 1000 cigarettes manufactured or distributed for sale by a U.S. company either directly or through its foreign subsidiaries, affiliates, joint ventures, or licensees [Sec. 1121(b), p. 600].

A company will receive a credit towards its license fee equal to the amount of federal excise tax that is paid.

[This provision raises a constitutional issue since the fee applies to cigarettes manufactured for export, in violation of the Export Clause.]

Sale or distribution of tobacco without a license will be prohibited, as per section 301 of the Federal Food, Drug, and Cosmetic Act [Sec. 1121(d), p. 600].

Subtitle C -- International Provisions
[This section raises significant trade issues and is currently being redrafted by the Committee with input from the United States Trade Representative; it is also being examined by the Finance Committee.]

Sec. 1131, International Tobacco Control Trust Fund: Establishes in Treasury an International Tobacco Control Trust Fund which would be funded from the licensing fees in Section 1121.

Funds from the International Trust Fund shall be used:

to provide $150 million annually to the American Center on Global Health and Tobacco (see Section 1132);
to provide aid to foreign governments, nongovernmental organizations and international organizations to support tobacco control activities in foreign countries;
to enforce any requirements related to the sale, distribution, marketing or promotion of tobacco products internationally [Sec. 1131(b), p. 601].

Sec. 1132, American Center on Global Health and Tobacco (ACT): This section establishes ACT to assist other countries to reduce and prevent smoking. ACT shall support (1) public education programs to inform the public about the hazards of smoking; (2) mass media counter-advertising campaigns; and (3) education about the economic and social costs of tobacco use, and effective prevention and cessation programs [Sec. 1132(2)(a), pp. 605-606].

This section provides a number of findings including estimated deaths world-wide from smoking, lack of resources in developing countries to address smoking concerns, and the role U.S. tobacco companies have played [Sec. 1132(a)(1)(A)-(H), pp. 602-605].

ACT is to be established as a nonprofit corporation in the District of Columbia. ACT is not intended to be an agency or establishment of the U.S. [Sec. 1132(b)(1), (2), pp 606-607]. ACT will be governed by a board of up to 25 members including Members of Congress [Sec. 1132(b)(4), p. 607]. An International Advisory Council consisting of representatives from global, regional and national public health organizations shall provide advisory assistance [Sec. 1132(b)(5), p. 607].

ACT will receive $300 million annually: $150 million will be from a newly established account in the Settlement Trust Fund--the Global Public Health and Education Resource Account [Sec. 1132(c), p. 608], and another $150 million from the International Trust Fund [See section 1131(b)(1), p. 602].

This section sets up a series of requirements for funding from the Trust Fund. However, it appears that these requirements only apply to the $150 million received from the Global Public Health and Education Resource Account [Sec. 1132(d), pp. 609-613].

Sec. 1133, Prohibition on Use of Funds: Bars any appropriation or use of funds by any officer, employee, department or agency of the U.S. to (1) promote or encourage the export, sale, manufacture, advertising, promotion, distribution, or use of tobacco to or in a foreign country; or (2) seek the removal or reduction by any foreign country of any restriction or proposed restriction in that country on the importation, export, manufacturing, promotion, advertising, distribution, packaging, labeling, use, content imposition of tariffs, or taxation of tobacco products [p. 614].

An exception is provided for certain restrictions or proposed restrictions by a foreign country [Sec. 1133(b), (c), pp. 614-615].

Sec. 1134, Harmonization with U.S. International Commitments and Obligations: This section requires the United States Trade Representative to report to Congress within 90 days of enactment of this bill on any provisions that are inconsistent with U.S. treaties or other international obligations, and with recommendations on how to implement or modify the provision without violating international law [p. 615].

Subtitle D -- Prevention of Tobacco Smuggling

Section 1142, Product Labeling: This section makes it unlawful to in any way obtain or introduce from "interstate or foreign commerce" any tobacco product not packaged and labeled according to this bill [Bill, p. 617].

The Secretary of Treasury is authorized to promulgate regulations to require every tobacco product to have a "unique serial number" so that the manufacturer and date and location of production can be determined. In addition, each tobacco product must be labeled with the name of the country of final destination [Bill, pp. 617-618].

Section 1143, Tracking Requirements: All exporters of tobacco would be required to post a bond with the Secretary of Treasury. The bond must contain a disclosure indicating the country of final destination, and a written statement from the recipient that that person will not violate any of the destination country's tobacco laws, and that the recipient has never been convicted of any tobacco offense [Bill, pp. 618-619].

The Secretary of Treasury is authorized to promulgate regulations to determine the amount and frequency of each bond. The bond cannot be less than the Federal tax imposed on such tobacco products if they were consumed within the United States [Bill, p. 619].
The Secretary would return the bond only after determining that the conditions of the bond were properly met [Bill, pp. 619-20].

Section 1144, Product Permits: Within one year of enactment, the Secretary of Treasury must establish a new program to require permits for all persons involved in the distribution and receipt of tobacco.

Permit holders must keep "chain of custody" records subject to inspection and audit.
Retailers are exempted but must maintain records for inspection and audit [Bill, pp. 620-21].

Section 1145, Prohibitions: This section makes it unlawful, except with legal permit to -- (1) import tobacco products for any commerce; (2) manufacture, package or warehouse any tobacco products for commerce; or (3) purchase tobacco for resale at wholesale prices. This section becomes effective 180 days after enactment [Bill, pp. 621-22].

Section 1146, Pricing and Labeling on Military Installations and by Native Americans: The Secretary of Treasury may issue regulations mandating that the prices of tobacco products on military bases be equal to the average price in the immediately bordering metropolitan area or the highest price for which such product is sold in military installations located in the United States, whichever is greater.

Tobacco products sold on military bases must be labeled as such, and tobacco products sold on Indian reservations must be labeled as such [Bill, p. 623].

Section 1147, Prohibition against Duty-Free Shops: This section makes it illegal to sell tobacco products in any duty-free shop located within the United States or to sell to any duty-free shop [Bill, p. 624].

This section also makes it illegal to forward through or manufacture any tobacco product in any foreign trade zone.

Section 1148, Jurisdiction, Penalties and Compromise of Liability: Federal District Courts have jurisdiction for suits brought by the government to "prevent and restrain" smuggling violations.

Persons violating this subtitle are to be penalized as if convicted of a felony under title 18 U.S.C. section 3571. The Secretary of Treasury may lessen the penalty for any violation of this subtitle not to exceed $10,000 per violation and may enter into a consent decree to avoid repetitious violations [Bill, pp. 624-25].

Section 1149, Amendments to the Contraband Cigarette Trafficking Act: This section amends the Contraband Cigarette Trafficking Act to include cigars, cigarettes, smokeless tobacco and pipe tobacco. It lowers the threshold amount triggering the Act from 60,000 to 30,000 units.

Adds prohibitions on knowingly failing to "maintain distribution records, alter[ing] or obliterat[ing] required markings or interfer[ing] with any inspection" or knowingly transporting tobacco under a false bill of lading or without a bill of lading [Bill, pp 625-26].

Section 1150, Authorization of Funds: Provides necessary authorization of funds to carry out this subtitle.

Subtitle E -- Limited Antitrust Exemption

Sec. 1161 provides that the antitrust laws of the United States (and any similar law of a State) do not apply to joint "discussion, consideration, review, action, agreement, or understanding" among "participating tobacco product manufacturers" "for the purposes of and limited to"(1) entering into and complying with the Protocol, Trust Agreement, or Consent Decree; (2) refusing to deal with a seller who deals with minors or who otherwise fails to comply with the Act, Protocol, or Consent Decree; or (3) developing and implementing a plan to reduce youth tobacco use (but the plan first must have the certification of the Attorney General that the plan is appropriate and will not unduly restrain competition).
These exemptions are required because (in the words of the report), the "Act requires cooperation by tobacco companies [with each other] . . . in order to ensure a uniform and comprehensive national policy . . . in the public interest" [Committee Report, p. 62]. (In Committee, Senator Dorgan moved to strike the antitrust provisions, but his amendment was defeated by a vote of 4-16.)

Subtitle F -- Special Provisions Concerning Programs for Women, Minorities, and Others

Section 1171(a) requires research on tobacco use and patterns of smoking to include data and analysis "with respect to different factors that may be present in the case of women or minorities. Section 1171(b) requires research "examining patterns of smoking among minorities" to be conducted "at minority education institutions, where available, or [at] institutions that provide the greatest amount of health care to minority populations in a State." The requirements of subsection (b) appear to be based frankly on considerations of race.

Section 1172 authorizes expenditure of "such sums as are necessary" from the National Tobacco Settlement Trust Fund for the Secretary of HHS to establish a grant program for a counter-advertising media campaign. The campaign is to target, "in a culturally and linguistically appropriate manner, adults, children, women, and minorities who have been targeted by tobacco industry advertising."

Section 1173 authorizes an additional $3 billion over 10 years for use in Community, Migrant, and Homeless Health Centers "to provide health services for diseases related to tobacco and to prevent tobacco-related diseases." The funds are to come from the National Tobacco Settlement Trust Fund.

Subtitle G -- Sense of the Senate

Sec. 1181 provides that it is the "sense of the Senate" that revenues from enactment of the bill may be used in 10 specified areas [Bill, p. 633]. Six of these areas are particularly tobacco-related (i.e., tobacco-related Medicare costs; tobacco use prevention and cessation "particularly with respect to youth"; tobacco-related research; assisting tobacco farmers and their communities; a Tobacco Asbestos Trust; and States' tobacco-related health care costs), and two others are health-related but not particular to tobacco (funding for the Black Lung Program, and for NIH clinical trials). The other two are: veterans' benefits; and child care and early childhood development [sec. 412 of the bill authorizes the spending of Trust Fund revenues for these purposes]. The section is not binding and does not purport to limit spending to the programs listed.

Subtitle H -- Ban on Sale of Tobacco Products Through the Use of Vending Machines

Sec. 1191, Ban Sale of Tobacco Products Through the Use of Vending Machines: Beginning 12 months after enactment of this bill, the sale of tobacco products through vending machines would be banned [Bill, p. 634].

This section would establish the Tobacco Vending Reimbursement Corporation--a private, nonprofit corporation in the District of Columbia to reimburse owners and operators of vending machines for the fair market value of their businesses related to the sale of tobacco [Sec. 1191(b), p. 634].

The Corporation would be managed by a Board of Directors consisting of distinguished Americans with experience in finance, public policy, or fund management (including at least one member of the tobacco vending machine industry) [Sec. 1191(b)(3), pp. 635-636].
The Corporation would be funded from sums required to be transferred by the Treasury Secretary out of the Settlement Trust Fund. The Treasury Secretary would transfer such sums as is necessary to make due compensation to owners and operators of tobacco vending machines [Sec. 1191(b)(4), p. 637].

The Corporation shall disburse funds as follows:

the fair market value of each "verified" tobacco vending machine proven to have been in operation before August 10, 1995 (except no reimbursement for spiral glass front vending machine);
administrative costs of the Corporation (but not to exceed 5 percent of total transferred to the Corporation) [Sec. 1191(b)(4)(B), (C), pp. 638-639].

The Corporation dissolves four years after the date of enactment of this bill. Undistributed funds shall be transferred to a public anti-smoking trust, or used for other purposes designated by Congress [Sec. 1191(b)(4)(D), pp. 639-640].

Vending owner acceptance of a payment from the Corporation shall settle all pending and future claims against the United States based on the ban of the use of tobacco vending machines [Sec. 1191(c), p. 640].

Title XII -- Tobacco Asbestos Trust Fund

Title XII sets up within the Treasury of the United States a Tobacco Asbestos Trust Fund which is subdivided equally into two other funds. The Trust Fund is directed by five trustees, two of whom will represent asbestos manufacturers or other defendants and are appointed by the Secretary of HHS and two persons will represent those who have claims against asbestos defendants appointed by the Labor Secretary, and the fifth shall be a health professional with expertise in asbestos (appointed by the other four trustees).

From 1999 through 2014, the Tobacco Asbestos Trust Fund will receive $21 billion from the National Tobacco Settlement Fund (the major fund established under section 401). Payments from the asbestos fund are to be used only for the "tobacco-caused portion" of harm caused by tobacco and asbestos. The Report (at p. 63) says that cigarette smoking "greatly" aggravates health problems that are related to exposure to asbestos.

The two subdivisions are named Fund I and Fund II. Fund I assigns credits to asbestos defendants and asbestos trusts in proportion to their past payments for tobacco-caused harm. The defendants themselves do not receive any funds from Fund I, but they may direct Fund I to pay asbestos claims. Section 1203 gives the formula for allocating resources from Fund I.
Fund II will be used to pay the tobacco-caused portion of future claims. Sections 1204 & 1206 establish the rules for payments out of Fund II. With respect to the rules for Fund II, the report says (in part, at page 65): "Before a lawsuit for harm caused by tobacco and asbestos can proceed to trial or judgment, the plaintiff must submit a claim to Fund II for the tobacco-caused portion of the harm. The plaintiff would receive a determination within 120 days, or earlier if exigent circumstances exist. A claimant who rejects an offer from, or is denied an award by, Fund II may proceed to trial or judgment in a tort action. A claimant who accepts an award from Fund II must execute a release of liability for all tobacco-caused harm. . . . A claimant who accepts an award from Fund II may not sue for tobacco-caused harm. A claimant who rejects an award may sue asbestos defendants for asbestos and tobacco harm in accordance with other applicable law..."

[This title was not contemplated in the June 20^th Agreement]

Title XIII: Veterans' Benefits

Sec. 1301 allows the Secretary of Veterans Affairs, if authorized or required by law, to provide veterans and their families to be compensated for tobacco-related disabilities, injuries, disease, or death attributable in whole or in part to the use of tobacco during active service [Bill, pp. 664-665]. It also allows veterans to be compensated for other tobacco-related injuries (those not covered through the Veterans Administration) [Bill, pp. 667-668].

The Secretary of Veterans Affairs is given broad authority to:

Sue the tobacco manufacturers, distributors, or retailers [report, p. 66];
Establish regulations to determine and establish the value of future benefits to be paid for damages [report, p. 66]; and
Transfer funds to various Department of Veterans Affairs appropriations [Bill, p. 667].

Moneys from the suits are to be placed in a new revolving account, the Department of Veterans Affairs Tobacco Recovery Fund, which appears to be a mandatory account and "shall be available to the Secretary without fiscal year limitation, for . . . veterans benefits programs, including administrative costs" [Bill, p. 666]. The funds recovered by the Veterans Secretary are not subject to the $6.5 billion annual damages cap [report, p. 66].

[This title was not contemplated in the June 20th Agreement]
ADMINISTRATION POSITION

Although discussions have been ongoing with the Administration and the Commerce Committee, as of press time, no formal statement of Administration position has been submitted.
COST

The Congressional Budget Office (CBO) has not yet scored this bill but hopes to have the scoring completed early next week. As the Commerce Committee contemplates further changes in the bill, and with the referral of the bill to the Finance Committee, it is possible that the legislation may come to the floor without a CBO estimate of its cost.
POSSIBLE AMENDMENTS

We will address likely and possible amendments in an Update.

TOP PUBLICATIONS MAIN PAGE

Calendar Year after Date of Enactment	Percentage Reduction for Cigarettes	Percentage Reduction for Smokeless Tobacco
Years 3 and 4	15 percent	12.5 percent
Years 5 and 6	30 percent	25 percent
Years 7, 8 and 9	50 percent	35 percent
Year 10 and after	60 percent	45 percent

Non-attainment percentage	Penalty (adjusted for inflation after yr. 4)
Not more than 5 percent	$80 million multiplied by the non-attainment percentage
From 6 to 9 percent	$400 million plus $160 million multiplied by the non-attainment percentage in excess of 5 percent but not in excess of 10 percent
From 10 to 19 percent	$1.2 billion plus $240 million multiplied by the non-attainment percentage in excess of 10 percent but not in excess of 20 percent
More than 20 percent	$3.5 billion cap; industry and individual tobacco manufacturers could lose the civil liability cap provided in Title VII