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(Table of contents)

PROPOSED RESOLUTION

PREAMBLE

This legislation would mandate a total reformation andrestructuring of how tobacco products are manufactured, marketed and distributedin this country. The nation can thereby see real and swift progress inpreventing underage use of tobacco, addressing the adverse health effectsof tobacco use and changing the corporate culture of the tobacco industry.

The Food and Drug Administration ("FDA") andother public health authorities view the use of tobacco products by ournation's children as a "pediatric disease" of epic and worseningproportions that results in new generations of tobacco dependent childrenand adults. There is also a consensus within the scientific and medicalcommunities that tobacco products are inherently dangerous and cause cancer,heart disease and other serious adverse health effects.

The FDA and other health authorities have concluded thatvirtually all new users of tobacco products are under legal age. PresidentClinton, the FDA, the Federal Trade Commission ("FTC"), stateAttorneys General and public health authorities all believe that tobaccoadvertising and marketing contribute significantly to the use of nicotine-containingtobacco products by adolescents. These officials have concluded that becausepast efforts to restrict advertising and marketing have failed to curbadolescent tobacco use, sweeping new restrictions on the sale, promotionand distribution of such products are needed.

Until now, federal and state governments have lacked manyof the legal means and resources they need to address the societal problemscaused by the use of tobacco products. These officials have been armedonly with crude regulatory tools which they view as inadequate to achievethe public health objectives with which they are charged.

This legislation greatly strengthens both the federaland state governments' regulatory arsenal and furnishes them with additionalresources needed to address a public health problem that affects millionsof Americans, including most importantly underage tobacco use. Further,it is contemplated that certain of the obligations of the tobacco companieswill be implemented by a binding, enforceable contractual protocol.

The legislation reaffirms individuals' right of accessto the courts, to civil trial by jury and to full compensatory damages.Resolution through the Act of potential punitive damages liability of thetobacco industry for past conduct is only made in the context of the comprehensivesettlement proposed by the legislation. It is not intended to have precedentialeffect, nor does it express any position adverse to the imposition of punitivedamages in general or as applied to any other specific industry, case,controversy or product and does not provide any authority whatsoever regardingthe propriety of punitive damages.

Among other things, the new regime would:

-- Confirm FDA's authority to regulate tobacco productsunder the Food, Drug and Cosmetic Act, making FDA not only the preeminentregulatory agency with respect to the manufacture, marketing and distributionof tobacco products but also requiring the tobacco industry to fund FDA'soversight out of ongoing payments by the manufacturers pursuant to thenew regime ("Industry Payments").

-- Go beyond FDA's current regulations to ban all outdoortobacco advertising and to eliminate cartoon characters and human figures,such as Joe Camel and the Marlboro Man, two tobacco icons which the publichealth community has long assailed as advertising appealing to our nation'syouth.

-- Impose and provide funding out of the Industry Paymentsfor an aggressive federal enforcement program, including a State-administeredretail licensing system, to stop minors from obtaining tobacco products,while in no way preventing the States from enacting additional measures.

-- Ensure that the FDA and the States have the regulatoryflexibility to address issues of particular concern to public health officials,such as youth tobacco usage and tobacco dependence.

-- Subject the tobacco industry to severe financial surchargesin the event underage tobacco use does not decline radically over the nextdecade.

-- Empower the federal government to set national standardscontrolling the manufacturing of tobacco products and the ingredients usedin such products.

-- Provide new and flexible regulatory enforcement powersto ensure that the tobacco industry works to develop and introduce less-hazardoustobacco products," including, among other things, vesting FDA withthe power to regulate the levels of nicotine in tobacco products.

-- Require the manufacturers of tobacco products to discloseall previously non-public internal laboratory research and all new internallaboratory research generated in the future relating to the health effectsor safety of their products.

-- Establish a minimum federal standard with tough restrictionson smoking in public places with enforcement funding from the IndustryPayments, while preserving the authority of state and local governmentsto enact even more severe standards.

Authorize and fund from Industry Payments a $500 millionannual, national education-oriented counter-advertising and tobacco controlcampaign seeking to discourage the initiation of tobacco use by childrenand adolescents and to encourage current tobacco product users to quituse of the products.

-- Authorize and fund from Industry Payments the annualpayment to all States of significant, ongoing financial compensation tofund health benefits program expenditures and to establish and fund a tobaccoproducts liability judgments and settlement fund.

-- Authorize and fund from Industry Payments a nationwideprogram, administered through State governments and the private sector,of smoking cessation.

The sale of tobacco products to adults would remain legalbut subject to restrictive measures to ensure that they are not sold tounderage purchasers. These measures respond directly to concerns voicedby federal and state public health officials, the public health communityand the public at large that the tobacco industry should be subject tothe strictest scrutiny and regulatory oversight. This statute imposes regulatorycontrols, including civil and criminal penalties, equal to, and in manyrespects exceeding, those imposed on other regulated industries. Further,it imposes on tobacco manufacturers the obligation to provide funding fromIndustry Payments for an array of public health initiatives.

The sale, distribution, marketing, advertising and useof tobacco products are activities substantially affecting interstate commerce.Such products are sold, marketed, advertised and distributed in interstatecommerce on a nationwide basis, and have a substantial effect on the nation'seconomy. The sale, distribution, marketing, advertising and use of suchproducts are also activities substantially affecting interstate commerceby virtue of the health care and other costs that federal and State governmentalauthorities have attributed to usage of tobacco products.

Various civil actions are pending in state and federalcourts arising from the use, marketing or sale of tobacco products. Amongthese actions are cases brought by some 40 state Attorneys General, casesbrought by certain cities and counties, the Commonwealth of Puerto Rico,and other third-party payor cases seeking to recover monies spent treatingtobacco-related diseases and for the protection of minors and consumers.Also pending in courts throughout the United States are various privateputative class action lawsuits brought on behalf of individuals claimingto be dependent upon and injured by tobacco products. Additionally, a multitudeof individual suits have been filed against the tobacco products manufacturersand/or their distributors, trade associations, law firms and consultants.

All of these civil actions are complex, slow-moving, expensiveand burdensome, not only for the litigants but also for the nation's stateand federal judiciaries. Moreover, none of those litigation's has to dateresulted in the collection of any monies to compensate smokers or third-partypayors. Only national legislation offers the prospect of a swift, fair,equitable and consistent result that would serve the public interest by(1) ensuring that a portion of the costs of treatment for diseases andadverse health effects linked to the use of tobacco products is borne bythe manufacturers of these products, and (2) restricting nationwide thesale, distribution, marketing and advertising of tobacco products to personsof legal age. The unique position occupied by tobacco in the nation's historyand economy, the magnitude of actual and potential tobacco-related litigation,the need to avoid the cost, expense, uncertainty and inconsistency associatedwith such protracted litigation, the need to limit the sale, distribution,marketing and advertising of tobacco products to persons of legal age,and the need to educate the public, especially young people, of the healtheffects of using tobacco products all dictate that it would be in the publicinterest to enact this legislation to facilitate a resolution of the mattersdescribed.

Public health authorities believe that the societal benefitsof this legislation, in human and economic terms, would be vast. In particular,FDA has found that reducing underage tobacco use by 50% "would preventwell over 60,000 early deaths." FDA has estimated that the monetaryvalue of its present regulations will be worth up to $43 billion per yearin reduced medical costs, improved productivity and the benefit of avoidingthe premature death of loved ones. This statute, which extends far beyondanything FDA has previously proposed or attempted, can be expected to producehuman and economic benefits many times greater than such existing regulations.

As part of this settlement, the tobacco companies recognizethe historic changes that will be occurring to their business. They willfully comply with increased federal regulation, focus intense efforts ondramatic reductions in youth access and youth tobacco usage, recognizethat the regulatory scheme encourages the development of products withreduced risk and acknowledge the predominant public health positions associatedwith the use of tobacco products.

[Source/precedent: FDA Rule]

Contents

Preamble

Title I: Reformation of the TobaccoIndustry

A. Restrictions on Marketing and Advertising
B. Warnings, Labelingand Packaging
C. Restrictions on Accessto Tobacco Products
D. Licensing of RetailTobacco Product Sellers
E. Regulation of TobaccoProduct Development and Manufacturing
F. Non-tobacco Ingredients
G. Compliance and CorporateCulture
H. Effective Dates

Title II: "Look Back"Provisions/State Enforcement Incentives

Title III: Penalties and Enforcement;Consent Decrees; Non-Participating Companies

A. Penalties and Enforcement
B. Consent Decrees
C. Non-participating Companies

Title IV: Nationwide Standardsto Minimize Involuntary Exposure to Environmental Tobacco Smoke

Title V: Scope and Effect

    A. Scope of FDA Authority
    B. State Authority

Title VI: Programs/Funding

A. Up Front Commitment
B. Base Annual Payments
C. Applicability
D. Tax Treatment

Title VII: Public Health FundsFrom Tobacco Settlement As Recommended by The Attorneys General For Considerationby the President and the Congress

Title VIII: Civil Liability

A. General
B. Provisions asto Civil Liability for Past Conduct
C. Provisions asto Civil Liability for Future Conduct

TitleIX: Board Approval

Appendices:

Appendix I: Warnings in Advertisements

Appendix II: Retail TobaccoProduct Seller Penalties

Appendix III: Application toIndian Tribes

Appendix IV: Industry Associations

Appendix V: "Look Back"

Appendix VI: State EnforcementIncentives

Appendix VII: Restrictionson Point of Sale Advertising

Appendix VIII: Public Disclosureof Past and Future Tobacco Industry Documents and Health Research


TITLE I: Reformation Of The TobaccoIndustry

Title I of the legislation would incorporate and expandupon FDA's recent regulation of nicotine-containing tobacco products.

The following rules would apply to all tobacco productssold in the U.S. (including all its territories and possessions, as wellas duty-free shops within U.S. borders). The new regime would be allowedto operate as described below for five years. FDA would have authorityto make revisions even within this period under extraordinary circumstances.Thereafter, the FDA would be authorized to review and revise the rulesunder applicable Agency procedures.

A. Restrictions on Marketing and Advertising

The advertising and marketing of tobacco products wouldbe drastically curtailed, including in ways that exceed the FDA rule asoriginally promulgated and in ways that have previously been challengedon First Amendment grounds. As in the FDA rule the new regime would:

-- Prohibit the use of non-tobacco brand names as brandnames of tobacco products except for tobacco products in existence as ofJanuary 1,1995 (897.16(a)) (The citations in this and in the next sectionare to Part 897 of the FDA's tobacco regulations, 61 Fed. Reg. 44396 (August28, 1996).

-- Restrict tobacco product advertising to FDA specifiedmedia (897.30(a)(1 )-(2))

-- Restrict permissible tobacco product advertising toblack text on a white background except for advertising in adult-only facilitiesand in adult publications (897.32(a)-(b))

-- Require cigarette and smokeless tobacco product advertisementsto carry the FDA-mandated statement of intended use ("Nicotine DeliveryDevice") (897.32(c))

-- Ban all non-tobacco merchandise, including caps, jacketsor bags bearing the name, logo or selling message of a tobacco brand (897.34(a)).

-- Ban offers of non-tobacco items or gifts based on proofof purchase of tobacco products (897.34(b))

-- Ban sponsorships, including concerts and sporting events,in the name, logo or selling message of a tobacco brand (897.34(c))

Further, building on and going beyond the FDA rule, thenew regime would:

-- Ban the use of human images and cartoon characters- thereby eliminating Joe Camel and the Marlboro Man - in all tobacco advertisingand on tobacco product packages

-- Ban all outdoor tobacco product advertising, includingin enclosed stadia as well as brand advertising directed outside from aretail establishment (modifies 897.30(a)(1) and extends 897.30(b))

-- Prohibit tobacco product advertising on the Internetunless designed to be inaccessible in or from the United States

-- Establish nationwide restrictions in non adult-onlyfacilities on point of sale advertising with a view toward minimizing theimpact of such advertising on minors. These provisions, which are detailedin Appendix VII, restrict point of sale advertising that was otherwisepermitted in retail establishments by the FDA rule.

-- Ban direct and indirect payments for tobacco productplacement in movies, television programs and video games

-- Prohibit direct and indirect payments to "glamorize"tobacco use in media appealing to minors, including recorded and live performancesof music -- Without limiting the FDA's normal rulemaking authority in thisarea, require that the use, in both existing and future brand styles, ofwords currently employed as product descriptors (e.g., "light"or "low tar") be accompanied by a mandatory disclaimer in advertisements(e.g., "Brand X not shown to be less hazardous than other cigarettes");exemplars of all new advertising and tobacco products labeling shall besubmitted to FDA concurrently with their introduction into the marketplacefor FDA's ongoing review.

[Source/precedent: FDA Rule; 21 C.F.R. 101.70]

B. Warnings, Labeling and Packaging

The federally-mandated warning labels on cigarettes werelast changed in 1984. Since then a number of countries, including Canadaand members of the European Union, have imposed new warning labels. Further,the Federal Trade Commission's methodology to measure the "tar"and nicotine yields of cigarettes has been criticized as producing misleadinginformation.

1. The legislation, through amendments to the FederalCigarette Labeling and Advertising Act and the Comprehensive SmokelessTobacco Health Education Act, would mandate new rotating warnings, to beintroduced concurrently into the distribution chain on all tobacco productpackages and cartons, and to be rotated quarterly in all advertisements.For cigarettes, the warnings would be:

-- "WARNING: Cigarettes are addictive"

-- "WARNING: Tobacco smoke can harm your children"

-- "WARNING: Cigarettes cause fatal lung disease"

-- "WARNING: Cigarettes cause cancer"

-- "WARNING: Cigarettes cause strokes and heart disease"

-- "WARNING: Smoking during pregnancy can harm yourbaby"

-- "WARNING: Smoking can kill you"

-- "WARNING: Tobacco smoke causes fatal lung diseasein non-smokers"

-- "WARNING: Quitting smoking now greatly reducesserious risks to your health"

For smokeless tobacco products, the warnings would be:

-- "WARNING: This product can cause mouth cancer"

-- "WARNING: This product can cause gum disease andtooth loss"

-- "WARNING: This product is not a safe alternativeto cigarettes"

--"WARNING: Smokeless tobacco is addictive"

For cigarettes, the warnings would occupy 25% of the frontpanel of the package (including packs and cartons) and would appear onthe upper portion thereof. The legislation would contain a grandfatherprovision for existing brands with flip-top boxes comprising less than25% of the front panel. For smokeless tobacco products, the warnings wouldappear on the principal display panel (e.g., a band around the can formoist smokeless tobacco products) and would occupy 25% of the display panel.The warnings would be printed in line with current Canadian standards (e.g.,17 point type with appropriate adjustments depending on length of requiredtext) and in an alternating black on white and white on black format. Thesize and placement of warnings in advertisements would follow the requirementsset forth in the existing United Kingdom standards. As described in AppendixI, the warning text and, where relevant, "tar" and nicotine (orother constituent) yield information would occupy 20% of press advertisements.

Cigarette and smokeless tobacco product packages wouldalso carry the FDA mandated statement of intended use ("Nicotine DeliveryDevice") on the side of pack.

2. The FDA would be required to promulgate a rule governingthe testing, reporting and disclosure of tobacco smoke constituents thatthe Agency determines the public should be informed of to protect publichealth, including, but not limited to "tar," nicotine and carbonmonoxide. This authority would be transferred from the FTC and would includethe authority to require label and advertising disclosures relating to"tar" and nicotine, as well as disclosures by other means relatingto other constituents.

[Source/precedent: Canadian warning regulations; FDA Rule;FDCA, 21 U.S.C. Sec. 360h, with conforming amendment in light of FCLAA]

C. Restrictions on Access to TobaccoProducts

Preventing youth access to tobacco products is a majorobjective of this legislation and the FDA Rule. Without preventing stateand local governments from imposing stricter measures, the legislationwould incorporate every access restriction of the FDA Rule, and more. Asin the FDA Rule, the legislation would:

-- Set a minimum age of 18 to purchase tobacco products(897.14(a))

-- Require retailers to check photo identification ofanyone under 27 (897.1 4(b)( 1 )-(2))

-- Establish the basic requirement of face-to-face transactionsfor all sales of tobacco products (897.14(c))

-- Ban the sale of tobacco products from opened packages(897.14(d))

-- Establish a minimum package size of 20 cigarettes (897.16(b))

-- Impose retailer compliance obligations to ensure thatall self-service displays, advertising, labeling and other items conformwith all applicable requirements (897.14(e))

-- Ban the sampling of tobacco products (897.16(d))

-- Ban the distribution of tobacco products through themail, including redemption of coupons, except for sales subject to proofof age, with a review after 2 years by FDA to determine if minors are obtainingtobacco products through the mail (goes beyond 897.16(c)(2)(i))

Building on and going beyond the FDA Rule, the legislationwould:

-- Ban all sales of tobacco products through vending machines(goes beyond 897.16(c)(2)(ii))

-- Ban self-service displays of tobacco products exceptin adult-only facilities. In all other retail outlets, tobacco productsmust be placed out of reach of consumers (i.e., behind the counter or underlock-and-key) or, if on the counter, not visible or accessible to consumers(goes beyond (897.1 6(c)(2)(ii))

[Source/precedent: FDA Rule]

D. Licensing of Retail Tobacco ProductSellers

The legislation would mandate minimum federal standardsfor a retail licensing program that the federal government and state andlocal authorities would enforce through funding provided by the IndustryPayments. Any entity that sells directly to consumers - whether a manufacturer,wholesaler, importer, distributor or retailer -would require a license.

Elements of the licensing program would include:

-- Mandating compliance with the Act as a condition toobtain and hold a license

-- Penalties for violations (See Appendix II)

-- Suspension or revocation of licenses (on a site-by-sitebasis) for certain violations (see Appendix II)

-- A requirement that distribution of tobacco productsfor resale to consumers be made only to licensed entities

-- Licensing fees to cover the administrative costs ofissuing state licenses (all other costs covered as noted above)

-- Comparable federal licensing programs (with federalenforcement) for military facilities, U.S. government installations abroad,and other U.S. territories and possessions not otherwise under the jurisdictionof the States (including duty-free shops within U.S. borders)

-- Comparable licensing programs to govern tobacco productsales on Indian lands (see Appendix III)

(Source/precedent: Various state laws governing salesof tobacco products and alcoholic beverages)

E. Regulation of Tobacco Product Developmentand Manufacturing

This legislation, for the first time, would impose a regulatoryregime to govern the development and manufacturing of cigarettes and smokelesstobacco products, including FDA approval of the ingredients used in suchproducts and imposition of standards for reducing the level of certainconstituents, including nicotine.

Elements of the regulatory regime would include:

1. Tobacco products shall have the same definition ascontained in the FDA Rule. Jurisdiction shall also cover Roll Your Own,Little Cigars, Fine Cut, etc.

2. Tobacco will continue to be categorized as a "drug"and a "device" under the Food, Drug and Cosmetic Act ("FDCA").The Agency's authority to regulate the products as restricted medical devices"will be explicitly recognized and tobacco products will be classified asa new subcategory of a Class II device pursuant to 21 U.S.C. section 360c.FDCA shall apply to these products as provided by the Act and the amendmentsto FDCA contained herein.

3. The Class II classification shall permit FDA to requireproduct modification of tobacco products, including the regulation of nicotinecontent, and shall provide that the sale of tobacco products to adultsin the form that conforms to Performance Standards established for tobaccoproducts pursuant to Section 514 ("Section 514") of the FDCA(21 U.S.C. Section 360d) shall be permitted notwithstanding 21 U.S.C. Sections360f, 352(j) and 360h(e)

4. Reduced Risks Products

Products sold that an objective, reasonable consumer wouldbelieve pose less of a health risk:

-- Tobacco product manufacturers will be barred from makingclaims that could reasonably be interpreted to state or imply a reducedhealth risk unless the manufacturer demonstrates to FDA that the productscientifically does in fact "significantly reduce the risk to health"from ordinary tobacco products. Currently employed product descriptorssuch as "light" and "low tar" will be regulated asdescribed in 1(A) above.

-- FDA would have to approve all health claims (director implied), as well as the content and placement of any such claims inadvertisements, to prevent the public from being misled and to preventthe advertisement from being used to expand, or prevent the contractionof, the marketplace.

-- For "less hazardous tobacco products," FDAwill be authorized to permit scientifically-based specific health claimsand to permit exceptions to the advertising restrictions that apply toother products if FDA determines that such advertising would reduce harmand promote the public health. The FDA will promulgate a rule to governhow these determinations will be made.

-- The manufacturers will be required to notify FDA ofany technology that they develop or acquire and that reduces the risk fromtobacco products and, for a commercially reasonable fee, to cross licenseall such technology, but only to those companies also covered by the sameobligations. Procedural protections will be built in to resolve licensefee disputes, if the private parties cannot agree among themselves first.If the technology reported to the FDA is in the early development stages,the manufacturer will be provided confidentiality protection during thedevelopment process.

-- The Agency shall also have the authority to mandatethe introduction of "less hazardous tobacco products" that aretechnologically feasible, after a formal rule making subject to the AdministrativeProcedures Act ("APA"), with the right of judicial review. Indoing so, the Agency shall have the authority to mandate that a manufacturersubject to this Act who owns such technology (at such manufacturer's election)either introduce such products, or, at a commercially reasonable marketrate, license such technology to a manufacturer who agrees to bring thetechnology to market in a reasonable time frame. In the event that no manufactureror licensee introduces such "less hazardous tobacco products,"within a reasonable time frame set by FDA, then the U.S. Public HealthService may produce either itself, or through a licensing arrangement,any such product.

-- The goal of any rule mandating the introduction intothe marketplace of "less hazardous tobacco products" for whichthe technology exists is to guarantee that a mechanism exists to ensurethat products which appear to hold out the hope of reducing risk are actuallytested and made available in the marketplace and not held back.

5. Performance Standards

To further the public health, to promote the productionof "reduced risk" tobacco products, and to minimize the harmto consumers of tobacco products by insuring that the best available, feasiblesafety technology becomes the industry standard, FDA will have the authorityto promulgate Performance Standards pursuant to Section 514 that requirethe modification of tobacco products to reduce the harm caused by thoseproducts (including the components that produce drug dependence), providedthat the standard shall not require the prohibition on the sale to adultsof traditional tobacco products in the basic form as described in the August28, 1996 FDA Rule at 61 Fed. Reg. at 44616 (to be codified at 21 C.F.R.Section 897.3).

Specifically:

A. For a period of no fewer than twelve years followingthe effective date of the Act, the product Performance Standards will begoverned by the following: The Agency shall be permitted to adopt performancestandards that require the modification of existing tobacco products, includingthe gradual reduction, but not the elimination, of nicotine yields, andthe possible elimination of other constituents or other harmful componentsof the tobacco product, based upon a finding that the modification: (a)will result in a significant reduction of the health risks associated withsuch products to consumers thereof, (b) is technologically feasible, and(c) will not result in the creation of a significant demand for contrabandor other tobacco products that do not meet the product safety standard.In determining the risk of the demand for a market in contraband products,the FDA shall take into account the number of dependent tobacco productusers and the availability, or lack thereof, of alternative products thenon the market and such other factors as the Agency may deem relevant.

The authority to require such product modification canbe exercised upon a showing of "substantial evidence," basedupon an administrative record developed through a formal rule making subjectto the Administrative Procedures Act, with the right of judicial review,and any such modification shall be subject to the current procedures ofthe Regulatory Reform Act of 1996 to provide time and a process for Congressto intervene should it so choose. In the event a party subsequently filesa petition seeking an administrative review of whether a modification has,in fact, resulted in the creation of a significant demand for contrabandor other tobacco products that do not meet the safety standard and FDAdenies the petition, the petitioner shall have the right to seek judicialreview of the denial of the petition.

Additionally:

-- Within one year of the effective date of this Act,the FDA shall establish a Scientific Advisory Committee to examine anddetermine the effects of the alteration of nicotine yield levels and toexamine and determine whether there is a threshold level below which nicotineyields do not produce drug dependence and, if so, to determine that level,and also review any other safety, dependence or health issue so designatedby FDA.

-- Separate from and without detracting from the Agency'sauthority under the requirements of the Section 514 Performance Standardnoted above, effective three years from the date of enactment of this Act,no cigarette shall be sold in the United States which exceeds a 12 mg "tar"yield, using the testing methodology now being used by the Federal TradeCommission.

B. After the initial twelve year period, the Agency willbe permitted to set product safety standards that go beyond the standardsit is authorized to set pursuant to the above noted provisions and, ifit does so, any such product Performance Standards shall be governed bythe following: The Agency will be permitted to require the alteration oftobacco products then being marketed, including the elimination of nicotineand the elimination of other constituents or other demonstrated harmfulcomponents of the tobacco product, (the elimination of nicotine or otherharmful constituent shall not be deemed to violate the prohibition on thesale of traditional tobacco products to adults, even if it results in areduction of the number of the consumers who use the tobacco products thenremaining on the market), based upon a finding that: (a) the safety standardwill result in a significant overall reduction of the health risks to tobaccoconsumers as a group, (this includes the reduction in harm which will resultfrom decreased drug dependence from the reduction and/or elimination ofnicotine from (a) those who continue to use tobacco products, but lessoften, and (b) those who stop using tobacco products), (b) the modificationis technologically feasible, and (c) the modification will not result inthe creation of a significant demand for contraband or other tobacco productsthat do not meet the safety standard. In determining the overall healthbenefit of a change, the Agency shall consider the number of dependenttobacco users then in existence, the availability and demonstrated marketacceptance of alternate products then on the market, and the effectivenessof smoking cessation techniques and devices then on the market and suchother factors as the Agency may deem relevant.

Given the significance of such an action, the Agency willbe permitted to require the elimination of nicotine or take such otheraction that would have an effect comparable to the elimination of nicotinebased upon a "preponderance of the evidence" pursuant to, ata manufacturer's election, a Part 12 hearing, or notice and comment rulemaking, with a right of judicial review. Any such action shall be phasedin, and no such phase-in shall begin in less than two years, to permittime for a meaningful Congressional review pursuant to the current proceduresof the Regulatory Reform Act of 1996. In the event a party subsequentlyfiles a petition seeking an administrative review of whether a modificationhas, in fact, resulted in the creation of a significant demand for contrabandor other tobacco products that do not meet the safety standard and theFDA denies the petition, the petitioner shall have the right to seek judicialreview of the denial of the petition. In any judicial review, the deferenceaccorded to the Agency's findings shall depend upon the extent to whichthe matter at issue is then within the Agency's field of expertise.

6. Manufacturing Oversight

The legislation would subject tobacco product manufacturersto good manufacturing practice standards ("GMPs") comparableto those applicable to medical device manufacturers, food companies andother FDA regulated industries, but tailored specifically to tobacco products.In this regard there would be:

-- Implementation of a quality control system (e.g., toprevent contamination)
-- Inspection of tobacco product materials (e.g., to ensure compliancewith quality standards)
-- Requirements for proper handling of finished product
-- Tolerances for pesticide chemical residues in or on commodities in thepossession of the manufacturer; existing EPA authority and oversight isretained
-- Inspection authority comparable to FDA's authority over other FDA regulatedproducts, including the ability to enter manufacturing plants and demandcertain records
-- Record keeping and reporting requirements

Tobacco farmers will face no greater regulatory burdenthan the producers of other raw products regulated by the federal government.

[Source/precedent: FDA Rule; FDCA, 21 U.S.C. Sections346a; 360]

7. Access to Company Information

-- The Act would ensure that previously non-public orconfidential the files of the tobacco industry - including internal documents- are disclosed to FDA, private litigants The details of the arrangementare set forth in documents from health research and the public. AppendixVI II.

-- Any subpoena authority FDA has with respect to manufacturersof medical devices generally would also apply to tobacco product manufacturers.

F. Non-tobacco Ingredients

Currently, at the federal level, tobacco manufacturersare required only to submit aggregated ingredient information (not by brandor company) to HHS for monitoring and review. Nor do tobacco products manufacturerscurrently disclose to consumers ingredients information for each of thetobacco products they sell.

The legislation would supersede the current often-criticizedfederal ingredient law and confirm FDA's authority to evaluate all additivesin tobacco products. No non-tobacco ingredient could be used in manufacturingtobacco products unless the manufacturer can demonstrate that such ingredientis not harmful under the intended conditions of use. Further, the legislationwould require the manufacturers to disclose to FDA the ingredients andthe amounts thereof in each brand. In addition, it would require manufacturersto disclose ingredient information to the public under regulations comparableto what current federal law requires for food products, reflecting theintended conditions of use.

Under this proposed legislation:

-- Manufacturers would be required to provide FDA on aconfidential basis a list of all ingredients, substances and compounds(other than tobacco, water or reconstituted tobacco sheet made wholly fromtobacco) which are added by the manufacturer to the tobacco, paper or filterof the tobacco product by brand and by quantity in each brand. For eachsuch item, the manufacturer would identify whether or not it believes thatthe item would be exempt from public disclosure under the legislation.

-- Manufacturers would be required to submit, within 5years of the enactment of the Act, for each ingredient currently addedto the tobacco product, a safety assessment, based on the best availableevidence, that there is a reasonable certainty in the minds of competentscientists that the ingredient (up to a specified amount) is not harmfulunder the intended conditions of use. FDA shall promulgate applicable regulationswithin 12 months.

-- Within a statutory time assessment(s) in accordancewithin 90 days, FDA shall period FDA must review with the applicable standard;approve or disapprove an ingredient's safety, and if FDA takes no action,the ingredient is deemed approved. FDA may also challenge any manufacturer'sassertion that an ingredient would be exempt from disclosure to consumersunder applicable regulations comparable to what current federal law requiresfor food products.

-- New ingredients or use of current ingredients beyondthe specified maximum amount are subject to a comparable process priorto use.

-- FDA would be required to protect as strictly confidentialingredient information not otherwise subject to public disclosure. If notsubject to such disclosure, this information will be treated as trade secretsunder federal law, exempt from FOIA requests and protected by procedureswhich shall include the designation of an agent who will store it in alocked cabinet, maintain a record of any person who has access to the informationand require a written confidentiality commitment from any such person.

-- Manufacturers would be required to disclose to thepublic ingredients information pursuant to regulations comparable to whatcurrent federal law requires for food products. During an initial 5 yearperiod, each ingredient that would be exempt from disclosure under thefood regime would be presumed not to be subject to disclosure unless FDAdisproves its safety. However, manufacturers would be required to discloseall ingredients which they have been compelled to publicly disclose withrespect to a particular brand in order to comply with a statute or regulation(e.g., MA Ch 94 §307B).

-- Manufacturers would be required to have proceduresfor the selection, testing, purchase, storage and use of ingredients.

The Act would:

-Provide for record keeping regarding ingredients

-Allow FDA access to such records, with protection ofproprietary information

[Source/precedent: MA Chapter 94, §307B; 21 C.F.R.§§101.4, 101.105, and 101.170; 18 U.S.C. §1905; 5 U.S.C.§552(b)(4); MA proposed reg. 105 C.M.R. §660.200(G)]

G. Compliance and Corporate Culture.

A key element in achieving the Act's goals will be forcinga fundamental change in the way the tobacco industry does business. Accordingly,the Act will provide for means to ensure that the industry will not onlycomply with the letter of the law but will also have powerful incentivesto prevent underage usage of tobacco products and to strive to developand market less hazardous tobacco products.

First manufacturers would be required to create plans,with an annual review and update, to:

-- Ensure compliance with all applicable laws and regulations

-- Identify ways to achieve the goals of reduced youthaccess to and incidence of underage consumption of tobacco products andprovide internal incentives for doing so

-- Provide internal incentives to develop products withreduced risk

Second, with a special emphasis on laws and regulationsthat make it unlawful to sell tobacco products to underage persons andother laws directed at the issue of underage tobacco use, the manufacturersmust implement compliance programs that include, at a minimum, the followingelements:

-- Compliance standards and procedures to be followedby employees and agents that are reasonably capable of reducing the prospectof violations

-- Assignment to specific individual(s) within high-levelpersonnel of the organization of overall responsibility to oversee compliancewith the relevant standards and procedures, especially in regard to preventingunderage tobacco use

-- Use of due care not to delegate substantial discretionaryauthority to individuals who the organization knows, or should have knownthrough the exercise of due diligence, had a propensity to disregard corporatepolicy

-- Steps to communicate relevant standards and proceduresto all employees and other agents (including lobbyists), e.g., by requiringparticipation in training programs or by disseminating publications thatexplain in a practical manner what is required

-- Internal audits, hotlines and other measures to promotecompliance

-- Appropriate disciplinary mechanisms and measures (e.g.,discipline of employees who violate marketing restrictions)

-- Reasonable steps to respond appropriately to a violationand to prevent further similar violations

Furthermore, the Act would provide "whistleblowers"in the tobacco industry with the maximum protection available under currentfederal statutes.

Beyond compliance with the letter of the law, manufacturerswould be required to take affirmative steps in furtherance of the spiritof the new regime, including:

-- Promulgating corporate principles that express andexplain the company's commitment to compliance, reductions of underagetobacco use, and development of reduced risk tobacco products

-- Designating a specific individual within high-levelpersonnel of the organization with appropriate responsibility and authorityto promote efforts to attain these new standards

-- Providing reports to shareholders on compliance aswell as progress toward meeting these new standards

Manufacturers would also be required to work with retailorganizations on compliance, including retailer compliance checks and financialincentives for compliance.

Third, each tobacco manufacturer would require all contractlobbyists (and any other third-parties who may engage in lobbying activitieson behalf of a manufacturer) to agree that they will not support or opposeany state or federal legislation, or seek or oppose any governmental actionon any matter, without the manufacturer's express authorization. Manufacturerswould also require anyone lobbying on their behalf to agree in writingthat a) they are aware of and will fully comply with all applicable lawsand regulations; b) they have reviewed and will fully comply with the Actas it applies to them; c) they have reviewed and will fully comply withthe Consent Decree as it applies to them; and d) they have reviewed andwill fully abide by the manufacturer's business conduct policies and anyother policies and commitments as they apply, especially those relatedto prevention of youth tobacco usage.

Fourth, within ninety days after the Act's effective date,the Tobacco Institute and the Council for Tobacco Research, U.S.A. wouldbe dissolved and disbanded. Tobacco product manufacturers would be permittedto form new trade associations only in accordance with strict proceduresand federal oversight designed to ensure compliance with antitrust andother applicable laws. (See Appendix IV)

Finally, companies would be subject to fines and penalties(including "Scarlet Letter" advertising) for breaching theirobligations vis-a'-vis the development, implementation and enforcementof compliance plans and corporate principles. These penalties shall followthe scheme set forth in the Clean Air Act, up to $25,000 per day per violationwith a total not to exceed $200,000. In addition, each manufacturer's employeesshall be directed to report to that manufacturer's compliance officer anyknown or alleged violations of this Act by retailers or distributors. Inaccordance with procedures established by FDA, the compliance officer shallbe required to furnish all such reports to FDA for reference to appropriatefederal or state enforcement authorities. The manufacturer shall be subjectto fines or penalties in the event its compliance officer fails to furnishany such reports to FDA.

[Source/precedent: Federal Organizational Sentencing Guidelines;various federal consent decrees; various corporate environmental programs]

H. Effective Dates

Many of the foregoing requirements relating to the reformationof the tobacco industry will become effective shortly after the Act issigned by the President; including the following categories of new rules,which will be implemented on the dates indicated:

Category / Effective Dates on Final Passage

Retail Product Displays / 9 months

Retail signage / 5 months

Advertising / 9 months

Package Labeling / 1/3 in 90 days

1/3 in 120 days

1/3 in 180 days

Sponsorships / 12/31/98

Vending machines / 12 months

Sampling / 3 months

GMPs / 24 months in accordance with rulemaking, whicheveris later

Corporate compliance / 12 month

Face-to-face transactions / 3 months

Ban on sales of open packs / 3 months

20 cigarettes per pack minimum / 3 months

Puerto Rico pack size / 12 months

TITLE II: "Look Back"Provisions/State Enforcement incentives

A central aim of this legislation is to achieve dramaticand immediate reductions in the number of underage consumers of tobaccoproducts. The legislation accordingly contains a "look-back"provision giving tobacco product manufacturers significant economic incentivesto take every possible step to ensure that the advertising, marketing anddistribution requirements of this Act are met, and imposing substantialsurcharges on the manufacturers in the event that underage tobacco-usereduction targets are not achieved.

The "look-back" provision sets targets for thedramatic reduction of current levels of underage tobacco use (as measuredby the University of Michigan's National High School Drug Use Survey "Monitoringthe Future"). Underage use of cigarette products must decline by atleast 30% from estimated levels over the last decade by the fifth yearafter the legislation takes effect, by at least 50% from estimated levelsover the last decade by the seventh year after the legislation takes effect,by at least 60% from estimated levels over the last decade by the tenthyear after the legislation takes effect, and remain at such reduced levelsor below thereafter. (These required reductions amount to even steeperdeclines from current levels of underage smoking.) Underage use of smokelesstobacco products must decline by at least 25% from current levels by thefifth year after the legislation takes effect, by at least 35% from currentlevels by the seventh year after the legislation takes effect, by at least45% from current levels by the tenth year after the legislation takes effect,and remain at such reduced levels or below thereafter. FDA will annuallyassess the prevalence of underage tobacco use (based on the methodologyemployed by the University of Michigan survey) to determine whether thesetargets have been met.

If a target has not been met, FDA will impose a mandatorysurcharge on the relevant industry (cigarette or smokeless tobacco) basedupon an approximation of the present value of the profit the industry wouldearn over the lives of all underage users in excess of the target (subjectto an annual cap of $2 billion for the cigarette industry (adjusted eachyear for inflation) and a comparably derived cap for the smokeless tobaccoindustry). Tobacco product manufacturers could receive a partial abatementof this surcharge (up to 75%) only if they could thereafter prove to FDAthat they had fully complied with the Act, had taken all reasonably availablemeasures to reduce youth tobacco use and had not taken any action to underminethe achievement of the required reductions.

A fuller description is provided in Appendix V.

In addition, the proposed Act goes well beyond the provisionsof the Synar Amendment's "no tobacco sales to minors" law andrelated regulations, 42 U.S.C. § 300X-26, and the Final Rule promulgatedthereunder, which became effective February 20,1996 (61 Fed. Reg., June19,1996). The proposed Act requires the several States to undertake significantenforcement steps designed to dramatically reduce the incidence of youthsmoking, and youth access to tobacco products. These enforcement obligationsare funded by Industry Payments. Each state must maintain specific levelsof enforcement effort, or the state risks the loss of a significant portionof the health care program funds otherwise payable to the state under theAct. Amounts withheld from states not doing an adequate enforcement jobwill be reallocated to states with a superior "no sales to minors"enforcement record. No state will be held responsible for sales to underageconsumers outside that state's jurisdiction.

The details of these state enforcement incentives areset forth in Appendix VI.

TITLE III: Penalties and Enforcement;Consent Decrees; Non-Participating Companies

A. Penalties and Enforcement

-- This legislation will be enforceable both by the federalgovernment, including FDA and civil and criminal divisions of the Departmentof Justice, and by the several States. FDA will also have the authorityto contract directly with state agencies to assist with enforcement. Ifconduct is subject to a particular State's consumer protection law or similarstatute, such state may proceed under that law.

-- State enforcement actions - whether brought under theAct or a State's consumer protection law - could not impose obligationsor requirements beyond those imposed by the legislation (except where thelegislation does not specifically preempt additional state-law obligations),and would be limited to the civil and criminal penalties established bythe legislation and by the prohibition on duplicative penalties. Stateenforcement proceedings under the Act (or predicated on conduct violatingthe Act), except those exclusively local in nature, would be removableto federal court. Nothing in the Act precludes a State from enforcing itslaws in the ordinary fashion as to matters not covered by the Act or Protocol.

-- Civil and criminal penalties for violations of thelegislation based on those governing other drugs or devices regulated underthe Food, Drug and Cosmetic Act and, where applicable, under Title 18 ofthe U.S. Code.

-- In addition, the industry faces civil penalties ofup to $10 million per violation for any violations of the obligations todisclose to the FDA research about tobacco-product health effects and informationregarding the toxicity of non-tobacco ingredients and constituents usedin their products. This penalty is ten times the largest penalty facedby other drug or device manufacturers for similar violations.

-- To reflect the fact that not all States have filedlawsuits against the tobacco industry, but that the intent of the negotiatorsis to provide the benefits of the settlement to all States, the industryalso will enter into a binding and enforceable national tobacco control

Protocol embodying certain terms of the proposed resolution.As an enforceable contract, which would not be subject to facial constitutionalchallenge, this Protocol will provide benefits and enforcement rights tothe federal government and all states.

B. Consent Decrees

-- Certain terms of the agreement will also be reiteratedin consent decrees between the tobacco industry and the states that willnot take effect until after enactment of the Act. These consent decreeswill be identical to, and will reiterate, the terms of the agreement withrespect to: (1) restrictions on advertising, marketing and youth accessto tobacco products; (2) trade associations; (3) restrictions on lobbying;(4) disclosure of tobacco smoke constituents; (5) disclosure of non-tobaccoingredients; (6) disclosure of existing and future industry documents relatingto health, toxicity and addiction; (7) compliance and corporate culture;(8) obligations to make monetary payments to the States reflecting theirreasonable share of the total provided by the Act; (9) obligations of theindustry to deal only with distributors and retailers that operate in compliancewith applicable provisions of law respecting the distribution, sale andmarketing of tobacco products; (10) warnings, labeling and packaging (tothe extent noted below); and (11) dismissal of other pending litigationspecified by the parties.

-- The consent decrees will not contain provisions asto: (1) product design, performance or modification; (2) manufacturingstandards and good manufacturing practices; (3) testing and regulationwith respect to toxicity and ingredients approval; and (4) the nationalFDA "look back" provisions.

-- The consent decrees will provide that their terms areto be construed in conformity with the Act and the Protocol and with eachother. State proceedings to enforce the provisions of the consent decreesmay be brought in state court, subject to an acceptable procedure to ensureconsistent rulings with respect to conduct that is not exclusively localin character. State proceedings to enforce the consent decrees may seekinjunctive relief only, and may not seek criminal or monetary sanctions.A State shall not be limited from seeking criminal or other sanctions fora company's subsequent violation of an injunction entered by the courtin an action brought to enforce the consent decree

-- The provisions of the consent decrees will remain enforceableregardless of whether subsequent changes in the Act or in any other provisionof law diminish the obligations of the companies in the areas covered bythe consent decrees, except: (1) where such changes create federal requirementsthat produce obligations in conflict with those contained in the consentdecrees; (2) with respect to the allocation of funds; and (3) with respectto warnings, labeling and packaging. With respect to warnings, labelingand packaging, if the requirements of the Act are later modified, or ifCongress subsequently prohibits warnings on tobacco products, the consentdecrees will be modified to conform to such requirements. However, if Congresslater eliminates altogether the warning requirement in the Act, the warningsoriginally set forth in the Act (the so-called Canadian warnings) shallbe mandated and enforceable under the consent decrees.

-- In addition, the parties recognize that certain provisionsof the consent decrees and the agreement may require them to act (or refrainfrom acting) in a manner that they might otherwise claim would violatethe federal or state constitutions. They will therefore in the consentdecrees expressly waive any claim that the provisions of the consent decreesor the agreement violate the federal or state constitutions. The consentdecrees will also state that if a provision of the Act covered by the decreesis subsequently declared unconstitutional, the provision remains an enforceableterm of the consent decrees.

C. Non-participating companies

-- The regime envisioned by the resolution would be substantiallyundercut if certain companies were free to ignore the limitations it imposes,and were instead able to sell tobacco products at lower prices (becausethey were not making the payments described above) and through less restrictedadvertising and marketing activities. The resolution accordingly anticipatesthe possibility that some manufacturers of tobacco products may not consentto the institution of this regime. Rather than seeking to impose on suchmanufacturers the advertising restrictions, full required payments andcorporate culture changes set forth above, the resolution avoids constitutionalquestions that might otherwise be raised by establishing a separate regimefor non-participating manufacturers.

-- Non-participating manufacturers would be subject tothe access restrictions and regulatory oversight set forth above. Theywould receive none of the civil liability protections described in TitleVIII. Their product would be subject to a user fee equal to the portionof the payments by participating manufacturers allocated to fund publichealth programs and federal and state enforcement of the access restrictions.
-- The resolution further recognizes that - unlike the participating manufacturers- non-participating manufacturers will not have made consensual paymentsto settle governmental actions for health care costs, to settle class actionsand in to provide consideration for the partial settlement of individualtort actions (including punitive damages claims). Because such actionswould remain wholly unsatisfied, it is vital that the claimants be ensuredthat funds will be available to satisfy any judgments that may be obtained.Accordingly, the resolution requires that each nonparticipating manufacturerplace into an escrowed reserve fund each year an amount equal to 150% ofits share of the annual payment required of participating manufacturers(other than the portion allocated to public health programs and federaland state enforcement). These escrowed funds would be earmarked for potentialliability payments, and the manufacturer would reclaim them with interest35 years later to the extent they had not been paid out in liability.

-- Moreover, the resolution also recognizes that - becausenonparticipating manufacturers are not subject to the corporate culturecommitments requiring manufacturers to monitor distributor and retailercompliance with the underage access restrictions -distribution and retailsales of those manufacturers' products present a particularly great obstacleto the achievement and enforcement of the access restrictions. Accordingly,the resolution provides that the exemption from civil liability applicableto distributors and retailers of the products of participating manufacturerswill not apply to distributors and retailers who handle tobacco productsof non-participating manufacturers.

Title IV: Nationwide StandardsTo Minimize Involuntary Exposure To Environmental Tobacco Smoke

Until now, there has been no minimum or other federalstandard governing smoking in public places or at work. The legislationwould:

-- Restrict indoor smoking in "public facilities"(i.e., any building regularly entered by 10 or more individuals at leastone day per week) to ventilated areas with systems that:

- Exhaust the air directly to the outside;
- Maintain the smoking area at "negative pressure" compared withadjoining areas; and
- Do not recirculate the air inside the public facility.

-- Ensure that no employee shall be required to entera designated smoking area while smoking is occurring. Cleaning and maintenancework in a designated smoking area shall be conducted while no smoking isoccurring.
-- Exempt restaurants (but not "fast food" restaurants) ("Fastfood" restaurant means any restaurant or chain of restaurants whichprimarily distributes food via customer pick-up (either at a counter ordrive-through window). In addition, OSHA would be authorized to issue regulationsclarifying this definition to the extent necessary to ensure that the intendedinclusion of establishments catering largely to minors is achieved. Anysuch regulation may consider such factors as whether a restaurant eitherhas attached playgrounds or play areas for children, uses ad campaignsthat feature or prominently include cartoon characters and/or toy giveawaysor advertises "happy meal" or other comparable kids-combinationplatters, and other factors OSHA deems relevant.) and bars (including thosein hotels), private clubs, hotel guest rooms, casinos, bingo parlors, tobaccomerchants and prisons.
-- Direct OSHA to issue, not later than one year after the effective dateof the legislation, regulations implementing and enforcing the precedingstandards, with enforcement costs paid out of the Industry Payments. Thesmoking restrictions outlined in this Title would take effect on the firstanniversary of the enactment of the legislation irrespective of whetherthe implementing regulations have been promulgated.

The legislation would not preempt or otherwise affectany other state or local law or regulation that restricts smoking in publicfacilities in an equal or stricter manner. Nor would the legislation preemptor otherwise affect any federal rules that restrict smoking in federalfacilities.

[Source/precedent: H.R. 3434, as reported out of committee;WISHA workplace smoking rule; state law exemptions for the "hospitalitysector"]

TITLE V: Scope and Effect

A. Scope of FDA Authority

-- All product sold in U.S. commerce
-- Covers new entrants; imports; U.S. duty free, etc.
-- BATF to retain fiscal authority over tobacco products
-- FTC to retain existing authority, except for "tar", nicotine,and carbon monoxide testing
-- Grower Limitation: FDA jurisdiction does not extend to the growing,cultivation or curing of raw tobacco (USDA has exclusive authority).

B. State Authority

1. Preservation of State and Local Government Laws andLegal Authority

-- While setting a federal "floor" for tobaccocontrol measures in many substantive areas, this legislation preserves,to the maximum extent, state and local government authority to take additionaltobacco control measures that further restrict or eliminate the product'suse by and accessibility to minors.
-- This legislation also permits state and local governments to enact measuresthat further restrict or eliminate employee and general public exposureto smoking in workplaces and in other public and private places and facilities.
-- The legal authority of a state or local government to further regulate,restrict or eliminate the sale or distribution of tobacco products, andto impose state or local taxes on such products, also remains unchanged.
-- The legislation retains similar flexibility for Indian tribes, militaryfacilities and other federal agencies.

2. Uniformity of Warning Labels, Packaging, Labeling andOther Advertising Requirements; Manufacturing Requirements
-- Current federal law providing for national uniformity of warning labels,packaging and labeling requirements, and advertising and promotion requirementsrelated to tobacco and health, is preserved, except that this legislationgives FDA express authority to require changes in the language of the warnings,subject to the standard requirement that it provide public notice and ahearing opportunity prior to making such changes.
-- Similarly, the provisions of FDCA designed to provide uniformity inproduct manufacturing and design requirements relating to medical deviceswill apply to tobacco products, except that any application by a Stateor locality for an exemption permitting it to adopt additional or differentrequirements relating to performance standards or good manufacturing practicesmay only be granted if the requirement would not unduly burden interstatecommerce. Further, to ensure that FDA has an adequate opportunity to evaluatenon-tobacco ingredients as described in Title 1(F), no exemption relatingto ingredients may be applied for until the fifth anniversary of the effectivedate of the Act.

TITLE VI: Programs/Funding

TOTAL 25 YEAR PACKAGE FACE VALUE - $368.5 Billion

A. Up Front Commitment - Lump Sum CashPayment - $10 Billion

1. Payable on Statute Signing Date.

B. Base Annual Payments - 25 Year TotalFace Value is $358.5 Billion (Figures Subject to Inflation Protection andVolume Adjustments)

1. Duration - annual payments in perpetuity
2. Commencement - 12/31 of first full year after statute signing
3. Face Amounts (includes payments from all industry sources):
Year 1 2 3 4 5 6-8 9 after

Total Payments $8.5B $9.5B $11.5B $14B $15B $15B $15B$15B
Base Amount: $6B $7B $8B $10B $10B $12.5B $15B $15B
Public

Health Trust $2.5B $2.5B $3.5B $4B $5B $2.5B

4. Inflation Protection for Annual Payments

-- Greater of 3% or CPI applied each year on previousyear, beginning with first annual payment.

5. Adjustment for Volume Decrease (Adult Volume Only)or Total Volume Increase

-- Beginning in year 1; payment made equal to scheduledannual payment times the ratio of actual relevant domestic tobacco productunit sales volume to relevant base volume. In the event of a decline involume, relevant actual volume and relevant base volume are adult volumefigures; in the event of an increase in volume, relevant actual volumeand relevant base volume are total volume figures. Base volume is 1996volume.
-- Any reduction in an annual payment will be reduced by 25% of any increaseabove the industry's base year net operating profits (after applicationof inflator discussed above) from domestic sales of tobacco products.

6. Payment Protection

-- Provide for payment priority/continuation during bankruptcy/reorganization proceedings. Protocol cannot be rejected in bankruptcy.Obligation for annual payments responsibility only of entities sellinginto domestic market

7. Pass-Through

-- In order to promote maximum reduction in youth smoking,the statute would provide for the Annual Payments to be reflected in theprices manufacturers charge for tobacco products.

C. Applicability

1. Applicable to All Sellers of Tobacco Products

-- Through protocol and statute to protocol signatories.
-- Through alternative statutory provisions to non-signatories.

D. Tax Treatment

All payments pursuant to this Agreement (including thosepursuant to Title II) shall be deemed ordinary and necessary business expensesfor the year of payment, and no part thereof is either in settlement ofan actual or potential liability for a fine or penalty (civil or criminal)or the cost of a tangible or intangible asset.

TITLE VII: Public Health FundsFrom Tobacco Settlement As Recommended By The Attorneys General For ConsiderationBy The President And The Congress

BASED ON THE PREMISE OF $1 BILLION FOR THE FIRST YEARAND GRADUALLY INCREASING TO $1.5 BILLION THEREAFTER, ADJUSTED FOR INFLATIONAFTER THE FIRST YEAR.

BASED ON THE PREMISE OF $1 BILLION FOR SMOKING CESSATIONFOR THE FIRST 4 YEARS AND $1.5 BILLION THEREAFTER, ADJUSTED FOR INFLATION.

(A) ALLOCATION OF GRANT MONIES AMONG PROGRAMS - The useof moneys under this Section shall be limited to programs established underthis Section, shall be adjusted for inflation annually from the effectivedate, and shall be allocated among such programs as follows:

(1) $125,000,000 for the first three years and $225,000,000annually thereafter to the Secretary of HHS to accomplish the purposesdescribed in Paragraph (B) of this Section (Reduction in Tobacco Usage);
(2) $300,000,000 annually for the FDA to carry out its obligations underand to enforce the terms of this Act, including for grants to the statesto assist in the enforcement of the provisions of the Act;
(3) $75,000,000 for the first two years, $100,000,000 in the third year,and $125,000,000 annually thereafter to fund state and local tobacco controlcommunity based efforts modeled on the ASSIST program, designed to encouragecommunity involvement in reducing tobacco use and the enactment and implementationof policies designed to reduce the use of tobacco products;
(4) $100,000,000 annually to fund research and the development of methodsfor how to discourage individuals from starting to use tobacco and howto help individuals to quit using tobacco;
(5) Beginning in the second year, $75,000,000 annually for a period often (10) years to compensate events, teams or entries in such events, wholose sponsorship by the tobacco industry as a result of this Act, or whocurrently receive tobacco industry funding to sponsor events and electto replace that funding, provided that the event, team, or entry is otherwiseunable to replace its tobacco industry sponsorship during those given years.Funds used for this purpose shall promote a Quit Tobacco Use theme. Aftera ten year period, no additional funds shall be used for this purpose andthe funds previously allocated to this purpose shall be used as follows:50% to supplement funding of the multimedia campaigns in paragraph (1)of this subsection; 25% to supplement the funding of the enforcement provisionsof paragraph (2) of this subsection; and 25% to supplement the fundingof community action programs in paragraph (3) of this subsection.

(B) ESTABLISHMENT OF PROGRAMS BY THE SECRETARY - The Secretaryshall establish programs to accomplish the following purposes---

(1) the reduction of tobacco product usage, both by seekingto discourage the initiation of tobacco use by persons under the age of18 and by encouraging current tobacco users to quit through media-basedand non-media based education, prevention and cessation campaigns. TheSecretary may make grants to state health departments to assist in carryingout the purposes of this provision.
(2) the research into and development and public dissemination of technologiesand methods to reduce the risk of dependence and injury from tobacco productusage and exposure;
(3) the identification, testing and evaluation of the health effects ofboth tobacco and non-tobacco constituents of tobacco products;
(4) the promulgation of such other rules and regulations as are necessaryand proper to carry out the provisions of this Act, as well as the developmentof such other programs as the Secretary determines are consistent withthe goals of the Act.

(C) Public Education Campaign - $500,000,000 shall bespent annually in such multi-media campaigns designed to discourage andde-glamorize the use to tobacco products. To carry out such efforts, anindependent non-profit organization with a Board made up of prestigiousindividuals and the leaders of the major public health organizations shallbe created which shall contract or make grants to non-profit private entitieswho are unaffiliated with tobacco manufacturers or tobacco importers, whohave a demonstrated record of working effectively to reduce tobacco productuse and expertise in multi-media communications campaigns. The independentbody shall be authorized to contract with state health departments, whereappropriate, to run campaigns for their states and communities. In creatingthe program the Secretary or independent body shall also take into accountthe needs of particular populations. The goal shall be the reduction oftobacco product usage, both by seeking to discourage the initiation oftobacco use by persons under the age of 18 and by encouraging current tobaccousers to quit.

(D) Tobacco Use Cessation - For the first 4 years, $1billion, and thereafter, $1.5 billion of the total amount paid by the tobaccoindustry shall be paid into a Trust Fund to be used to assist individualswho want to quit using tobacco to do so.

Within 12 months the Secretary shall promulgate regulationsto govern (1) the establishment of criteria for and a procedure for theapproval of cessation programs and devices for which payment may be madeunder the program, (2) the eligibility requirements for individuals seekingto use moneys from the trust to fund the tobacco cessation efforts, and(3) the procedures to govern the tobacco cessation program.

The goal of the tobacco cessation program shall to enablethe most tobacco users possible to receive assistance in their effort toquit using tobacco by providing financial assistance and identifying theprograms, techniques, and devices that have been shown to be safe and effective.Benefits to individuals should not be limited to a single effort, but shouldbe tailored to the needs of individual smokers according to standards establishedby the Secretary using the best available scientific guidelines.

(E) Public Health Trust Fund Presidential Commission -A Presidential commission will be appointed to include representativesof the public health community, Attorneys General, Castano attorneys andothers to determine the specific tobacco-related medical research for whichthe $25 Billion Public Health Trust Fund will be used.

TITLE VIII: Civil Liability

The following provisions would govern actions for civilliability related to tobacco and health.

A. General

1. Present Attorney General actions (or similar actionsbrought by or on behalf of any governmental entity), parens patriae andclass actions are legislatively settled. No future prosecution of suchactions. All "addiction"/dependence claims are settled and allother personal injury claims are reserved. As to signatory States, pendingCongressional enactment, no stay applications will be made in pending actions,based upon the fact of this resolution, without mutual consent of the parties.
2. Third-party payor (and similar) actions pending as of 6/9/97 are notsettled, but governed by provisions regarding past conduct set forth inSection B below.

B. Provisions as to Civil Liabilityfor Past Conduct

The following provisions apply to suits for relief arisingfrom past conduct - i.e., suits by persons claiming injury or damage causedby conduct taking place prior to the effective date of the Act.

1. All punitive damages claims resolved as part of overallsettlement. No punitive damages in individual tort actions.
2. Individual trials only: i.e., no class actions, joinder, aggregations,consolidations, extrapolations or other devices to resolve cases otherthan on the basis of individual trials, without defendant's consent. Actionremovable by defendant to federal court upon receipt of application to,or order of, state court providing for trial or other procedure in violationof this provision.
3. Except as expressly provided in the Act, FCLAA and applicable case lawunchanged by the Act.
4. Provided that the five negotiating companies enter into the Protocol:Protocol manufacturers to enter into joint sharing agreement for civilliability. Protocol manufacturers not jointly and severally liable forliability of non-Protocol manufacturers. Trials involving both protocoland non-Protocol manufacturers to be severed.
5. Permissible parties:
Plaintiffs -
a. Claims of individuals, or claims derivative of such claims, must bebrought either by person claiming injury or heirs.
b. Third-party payor (and similar) claims not based on subrogation thatwere pending as of 6/9/97.
c. Third-party payor (and similar) claims based on subrogation of individualclaims; no extrapolations, etc.

Defendants
a. maintained only against companies, their assigns, any future fraudulenttransferee, and/or entity for suit designated to survive defunct manufacturer.Actions may be manufacturing successors and
b. Manufacturers of agents agencies and liable vicariously for acts (includingadvertising attorneys).

6. No removal except under paragraph 2 above.

7. The development of "reduced risk" tobaccoproducts after the effective date of the Act is neither admissible nordiscoverable.

8. Statute of limitations: for all actions, individualstate laws governing time periods from injury, discovery, notice or contamination/violation.

9. Annual aggregate cap for judgments/settlements: 33%of annual industry base payment (including any reductions for volume decline).If aggregate judgments/settlements for a year exceed annual aggregate cap,excess does not have to be paid that year and rolls over.

Any judgments/settlements run against defendant? but giverise to 80-cent-on-the-dollar credit against annual payment in year paid.Suitable provision for settlement consultation and permission. Manufacturerscontrol insurance claims, and any insurance recovery obtained by manufacturers(net of cost) on account of judgment and/or settlement covered by abovesharing arrangement allocated 80% to annual payments. Manufacturers retainany insurance proceeds on account of defense costs.

Provision with respect to individual judgments above $1million: amount in excess of $1 million not paid that year unless everyother judgment/settlement can be satisfied within the annual aggregatecap. Excess rolls forward without interest and is paid at the rate of $1million per year, until the first year that the annual aggregate cap isnot exceeded (at which time the remainder is paid in full). For purposesof this provision, a third-party payor (or similar) action not based onsubrogation is treated as having been brought by a single plaintiff andis subject to the $1 million rollover on that basis.

10. In the event that the annual aggregate cap is notreached in any year, a Commission appointed by the President will determinethe appropriate allocation of the amount representing the unused amountof the credit. The Commission will be entitled to consider, among publichealth, governmental entities, and other uses of the funds, applicationsfor compensation from persons, including nonsubrogation claims of thirdparty payors, not otherwise entitled to compensation under the Act.

11. Defense costs paid by manufacturers.

C. Provisions as to Civil Liabilityfor Future Conduct

The following provisions apply to suits for relief arisingfrom future conduct - i.e., suits claiming injury or damage caused by conducttaking place after the effective date of the Act.

1. Paragraphs 2, 3, 5, 6, 7, 8, 9,10 and 11 in SectionB apply.
2. No third-party payor (or similar) claims not based on subrogation.

TITLE IX: Board Approval

The terms of this resolution are subject to approval bythe Boards of Directors of the participating tobacco companies.

Appendix I - Warnings in Advertisements

The space in press and poster advertisements for tobaccoproducts that is to be devoted to the warning and, where relevant, the"tar," nicotine and any other constituent yield statements willbe 20% of the area of the advertisement. The size of the printing of thewarning and the yield statements shall be pro rata to the following examples:

a) Whole page broadsheet newspaper - 45 point type
b) Half page broadsheet newspaper - 39 point type
c) Whole page tabloid newspaper - 39 point type
d) Half page tabloid newspaper - 27 point type
e) DPS magazine - 31.5 point type
f) Whole page magazine - 31.5 point type
g) 28 cm X 3 columns - 22.5 point type
h) 20 cm X 2 columns - 15 point type

FDA may revise the required type sizes within the 20%requirement.

Appendix II - Retail TobaccoProduct Seller Penalties

1. The sale of tobacco products to consumers by an unlicensedseller shall be a criminal violation, and be subject to minimum penaltyof $1,000, or imprisonment, for 6 months, or both, if an individual, orin the case of a corporation, by a maximum penalty of $50,000. Any Stateor local jurisdiction may provide by statute or code more severe penalties.

2. In addition to any criminal penalties which may beimposed under any applicable state or local law, a tobacco product licenseemay be subjected to civil sanctions, including penalties, or license suspensionor revocation (on a site-by-site basis), or a combination thereof, forany violation of the provisions of the State licensing laws regarding salesto minors. Such sanction shall not exceed the following:
(a) For the first offense within any two year period, $500 or a 3 day licensesuspension or both.
(b) For the second offense within any two year period, $1,000 or a 7 daylicense suspension or both.
(c) For the third offense within any two year period, $2,000 or a 30 daylicense suspension or both.
(d) For the fourth offense within any two year period, $5,000 or a 6 monthlicense suspension or both.
(e) For the fifth offense within any two year period, $10,000 or 1 yearlicense suspension or both.
(f) For the sixth and any subsequent offenses within any two year period,$25,000 or a revocation of license with no possibility of reinstatementfor a period of three years.
(g) Permanent license revocation is mandatory for the tenth offense withinany two year period.

Each state must enact a statutory or regulatory enforcementscheme that provides substantially similar penalties to the minimum federalstandards for a retail licensing program.

[Source/Precedent: Washington State Alcohol LicensingAct]

Appendix III - Application toIndian Tribes

A. Application Of Act

1. The provisions of the FDCA, the regulations of theFDA, and the Act relating to the manufacture, distribution and sale oftobacco products shall apply on Indian lands as defined in 18 U.S.C §1151and on any other trust lands subject to the jurisdiction of an Indian tribe.To the extent that an Indian tribe engages in the manufacture, distributionor sale of tobacco products, the provisions of this Act shall apply tosuch tribe.

2. Any federal tax or fee imposed on the manufacture,distribution or sale of tobacco products shall be paid by any Indian tribeengaged in such activities, or by persons engaged in such activities onsuch Indian lands, to the same extent such tax or fee applies to otherpersons under the law.

B. Tribal Programs And Authority

1. For the purposes of the provisions of this Act, FDAis authorized to treat any federally-recognized Indian tribe as a state,and is authorized to provide any such tribe grant and contract assistanceto carry out the licensing and enforcement functions provided by this section.

2. Such treatment shall be authorized only if:
(a) the Indian tribe has a governing body carrying out substantial governmentalpowers and duties;
(b) the functions to be exercised by the Indian tribe under this sectionpertain to activities on trust lands within the jurisdiction of the tribe;and
(c) the Indian tribe is reasonably expected to be capable of carrying outthe functions required under this Act.

[Source/precedent: Clean Air Act, 42 U.S.C. §7601(d)]

3. FDA regulations which establish a retail licensingprogram shall apply on Indian trust lands, and each tribe's program shallbe no less strict than the program of the State in which the tribe is located.

4. If FDA determines that an Indian tribe does not qualifyfor treatment as a state, FDA will directly administer the retailer licensingprogram, or may delegate such authority to the state.

C. Tobacco Compensation And Public Health Grants

1. A portion of the settlement funds to which a stateis otherwise entitled shall be paid to HHS for distribution to the Indiantribes which have been certified by FDA for treatment as states. The fundsto be paid for such purposes on behalf of Indian tribes shall be determinedby the proportion of registered tribal members resident on the reservationto the total population of the state in which the tribe is located. Thefunds to be distributed to Indian tribes shall be used for the same purposesas those funds are to be used by the states and be subject to the samecompliance requirements for retail sales to minors as are the states underthe Act.

2. The Department of Health and Human Services will annuallypay to the governing body of each Indian tribe its share of the funds foruse under an FDA-approved plan after annual certification by FDA, underthe same standards that apply to the States, that the Indian tribe is incompliance with the requirements of the Act and any applicable regulations.

3. If HHS does not distribute all, or a portion, of anIndian tribe's share of the funds in any given year because the tribe hasnot qualified under the terms of this section or has not met the compliancerequirements for retail sales to minors, those funds will be distributedto other qualified tribes in the same state for the same purposes and onthe same proportional basis, less the non-qualified tribe's population,as other settlement funds are to be distributed to the tribes.

D. Obligations of Tobacco Manufacturers

1. Tobacco manufacturers shall not engage in any activityon Indian lands subject to this Act which activity the manufacturers maynot otherwise do within a State.

2. Tobacco manufacturers also agree not to sell tobaccoproducts for manufacture, distribution, or sale to an Indian tribe, orto a manufacturer, distributor, or retail seller subject to the jurisdictionof an Indian tribe, except under the same terms and conditions as the tobaccomanufacturers impose under other manufacturers, distributors and retailsellers under the Act, or any applicable regulations.

Appendix IV - Industry Associations

Within 90 days of the effective date of the Act, the tobaccoproduct manufacturers shall disband and dissolve the Council for TobaccoResearch, U.S.A. and the Tobacco Institute. In addition, with respect toany new trade associations:

A. Tobacco product manufacturers may form or participatein any new tobacco industry trade association. Any such new trade associationshall have an independent board of directors, in accordance with the followingrequirements. For at least 10 years after the formation of the new association,a minimum of 20 percent of the directors, but at least one director, shallbe other than a current or former director, officer or employee of anyassociation member or affiliated company. No other director of a new tradeassociation may be, at the same time, a director of any association memberor affiliated company. The officers shall be appointed by the board andshall be employees of the association, and during their term shall notbe employed by any association member or affiliated company. Legal counselfor any such association shall be independent and not serve as legal counselto any association member or affiliated company while counsel to the association.

B. Any new tobacco product manufacturers' trade associationshall adopt by-laws governing the association's procedures and the activitiesof its members, board, employees, agents and other representatives. Theby-laws shall include, among other things, provisions that:

(1) members who are competitors in the tobacco industryshall not meet on the association's business except under sponsorship ofthe association;
(2) every board of directors meeting, board sub-committee meeting, generalassociation or committee meeting, and any other association sponsored meeting,shall proceed under and strictly adhere to an agenda, approved by legalcounsel and circulated in advance; and
(3) minutes describing the substance of the meetings shall be preparedfor all such meetings, and shall be maintained by the association for aperiod of 5 years.

C. Moreover, under the new regime:

1. The structure, by-laws, and activities of tobacco industrytrade associations shall be subject to continuing oversight by the U.S.Department of Justice and by state antitrust authorities. For a periodof 10 years from the creation of a new trade association, such authoritiesmay, without limitation on whatever other rights to access they may bepermitted, upon reasonable prior notice:

(a) have access during regular office hours to inspectand copy all books, records, meeting agenda and minutes, and other associationdocuments; and
(b) interview the association's directors, officers and employees, whomay have counsel present.

The inspection and discovery rights provided in (a) and(b) above shall be exercised through a multi-state States' Attorneys Generaloversight committee. Any documents and information provided to any statepursuant to (a) and (b) above shall be kept confidential by and among thestates and shall be utilized only for governmental purposes of enforcingthe Act and ancillary documents.

2. In order to achieve the goals of this Agreement andthe Act relating to tobacco use by children and adolescents, the tobaccoproduct manufacturers may, notwithstanding the provisions of the ShermanAct, the Clayton Act, or any other federal or state antitrust law, actunilaterally, or may jointly confer, coordinate or act in concert, forthis limited purpose. Manufacturers must obtain prior approval from theDepartment of Justice of any plan or process for taking action pursuantto this section; however, no approval shall be required of specific actionstaken in accordance with an approved plan. Approval or non-approval ofa plan shall not be grounds for abatement of any surcharge to a manufacturerfor failure to meet the reductions in underage tobacco use contemplatedin this resolution and the Act.

Appendix V - "Look Back"

A summary of the "look-back" provision is asfollows:

A. The Reduction Requirements.

1. The required reductions in underage tobacco use aremeasured against a base percentage. For underage use of cigarettes, thebase percentage is the average weighted by relative population of suchage groups in 1995 as determined by the U.S. Census Bureau, of (a) theaverage of the percentages of 12th graders (ages 16 and 17) from 1986 to1996 who used cigarette products on a daily basis; (b) the average of thepercentages of 10th graders (ages 14 and 15) from 1991 to 1996 who usedcigarette products on a daily basis; and (c) the average of the percentagesof 8th graders (age 13) from 1991 to 1996 who used cigarette products ona daily basis. The percentages are those measured by the University ofMichigan's National High School Drug Use Survey "Monitoring the Future"or by such comparable index using identical methodology as is chosen byFDA after notice and hearing. For underage use of smokeless tobacco products,the base percentage is the average, weighted by relative population ofsuch age groups in 1995 as determined by the U.S. Census Bureau, of (a)the percentage of 12th graders (ages 16 and 17) in 1996 who used smokelesstobacco products on a daily basis; (b) the percentage of 10th graders (ages14 and 15) in 1996 who used smokeless products on a daily basis; and (c)the percentage of 8th graders (age 13) in 1996 who used smokeless tobaccoproducts on a daily basis. These percentages are to be derived from thesame source as are the percentages with respect to use of cigarette products.

2. After the fifth year after enactment of the Act andannually thereafter, the FDA will calculate the incidence of daily useof tobacco products by those under 18 years of age as follows:

For cigarette product use, the FDA will calculate theaverage, weighted by relative population of such age groups in 1995 asdetermined by the U.S. Bureau of Census, of the percentages of 12th graders(ages 16 and 17), 10th graders (ages 14 and 15) and 8th graders (age 13)who used cigarette products on a daily basis during the preceding year.The percentages used in this calculation are to be those measured (a) bythe University of Michigan Survey; or (b) by such comparable index usingidentical methodology as is chosen by the FDA after notice and hearing.If the methodology of the University of Michigan Survey is hereafter changedin a material manner from that employed in 1986-96 (including by changingthe states or regions on which that Survey is based), the FDA shall usethe percentages measured by an index chosen by it after notice and hearinghaving a methodology identical to that employed by the University of MichiganSurvey in 1986-96.

For smokeless tobacco product use, the FDA will calculatethe average, weighted by relative population of such age groups in 1995as determined by the U.S. Bureau of Census, of the percentages of 8th (age13), 10th (ages 14 and 15) and 12th graders (ages 16 and 17)who used smokeless tobacco products on a daily basis during the precedingyear. This calculation is to be made using the same methodology as withrespect to cigarette product use.

Any data underlying the University of Michigan Surveyshall be available by request from FDA.

3. The reduction requirements (expressed as reductionfrom the base percentage) for cigarette products are as follows:

Year After Enactment Reduction Requirement

years 5-6: 30% reduction
years 7-9: 50% reduction
year 10: (and 60% reduction thereafter)

The reduction requirements (expressed as reduction fromthe base percentage) for smokeless tobacco products are as follows:

Year After Enactment Reduction Requirement

years 5-6: 25% reduction
years 7-9: 35% reduction
year 10 (and thereafter): 45% reduction

B. The Surcharge

Where the FDA's calculation (per the procedure set forthabove) shows that the reduction requirements with respect to underage useof cigarette products were not met in the preceding year, the FDA willimpose a surcharge on the manufacturers of cigarette products. Where theFDA's assessment shows that the Reduction Requirements with respect tounderage use of smokeless tobacco products were not met in the precedingyear, the FDA will impose a surcharge on the manufacturers of smokelesstobacco products.

1. The surcharge with respect to the cigarette industrywill be calculated as follows:

(a) The FDA will the determine the percentage point differencebetween:

(i) the required percentage reduction applicable to agiven year, and
(ii) the percentage by which the percent incidence of underage use of cigaretteproducts for that year is less than the base incidence percentage. (Inthe event that the FDA's calculation of the percent incidence of underageuse of cigarette products for that year is greater than the base incidencepercentage, the number of percentage points used will be (i) the requiredpercentage reduction for that year plus (ii) the percentage by which theactual percent incidence for that year is greater than the base incidencepercentage.)

(b) The surcharge will be $80 million for each percentagepoint derived per the above procedure. This amount reflects an approximationof the present value of the profit the cigarette industry would earn overthe life of underage smokers in excess of the required reduction (at currentlevels of population and profit). This calculation will be subject to thefollowing:

(1) the $80 million will be adjusted proportionately forpercentage increases or decreases compared with 1995 in the populationof persons resident in the United States aged 13-17, inclusive.
(2) the $60 million will be adjusted proportionately for percentage increasesor decreases compared with 1996 in the average profit per unit (measuredin cents and weighted by annual sales) earned by the cigarette industry.(The average profit: per unit in 1996 will be derived from the industry'soperating profit as reported to the SEC; and the average profit per unitfor the year in which the surcharge is being determined will be calculatedand certified to the FDA by a major, nationally recognized accounting firmhaving no existing connection to the tobacco industry using the same methodologyas employed in deriving the average profit per unit for 1996.)
(3) the surcharge will be reduced to prevent double counting of personswhose smoking had already resulted in the imposition of a surcharge inprevious years (to the extent that there were not underage smokers of comparableage in those previous years on whom a surcharge was not paid because ofthe cap set forth in paragraph (d) below).
(4) the surcharge may not exceed $2 billion in any year (as adjusted forinflation).

2. The surcharge with respect to the smokeless tobaccoindustry will be derived through a comparable procedure based upon a baseper-percentage point amount and a cap specific to that industry.

3. The surcharge payable by cigarette manufacturers willbe the joint and several obligation of those manufacturers, allocated byactual market share. The surcharge payable by smokeless tobacco productmanufacturers will be the joint and several obligation of those manufacturers,as allocated in the same manner. Within each such respective product market,the FDA will make such allocations according to each manufacturer's relativemarket volume in the United States domestic cigarette or smokeless tobaccomarkets in the year for which the surcharge is being assessed, based onactual federal excise tax payments.

4. The surcharge for a given year, if any, will be assessedby the FDA by May I of the subsequent calendar year. Surcharge paymentswill be paid on or before July 1 of the year in which they are assessedby the FDA. The FDA may establish, by regulation, interest at a rate up(sentence incomplete)

5. After payment of its share of the surcharge, a tobaccoproduct manufacturer may seek return of up to 75% of that payment throughthe abatement procedures described below.

C. Use of the Surcharge

The Surcharge funds would be used in an manner designedto speed the reduction of the levels of underage tobacco use. Upon finalcompletion and review of any abatement petition, the FDA would transferas grants to state and local government public health agencies, withoutfurther appropriation, 90% of all monies paid as Surcharge amounts. Asa condition of such transfers, the recipients of the transferred fundswould be required to spend them on additional efforts by state and localgovernment agencies, or by contract between such agencies and private entities,to further reduce the use of tobacco products by children and adolescents.The FDA may retain up to 10 percent of such Surcharge amounts for AdministrativeCosts - the administration of the Surcharge provisions of the Act and relatedproceedings, and for other administrative requirements imposed on the FDAby the Act. If 10 percent of the Surcharge amounts exceeds the AdministrativeCosts, the FDA may (1) transfer any portion of the excess to other federalagencies, or to state and local government agencies, to meet the objectiveof reduction of youth tobacco usage, or (2) may expend such amounts directlyto speed the reduction of underage tobacco use.

D. Abatement Procedures

Upon payment of its allocable share of any Surcharge,a tobacco product manufacturer may petition the FDA for an abatement ofthe surcharge, and shall give timely written notice of such petition tothe attorneys general of the several states.

1. The FDA shall conduct a hearing on an abatement petitionpursuant to the procedures set forth in sections 554, 556 and 557 of Title5 of the United States Code.

2. The attorneys general of the several states shall beentitled to be heard and to participate in such a hearing.

3. The burden shall be on the manufacturer to prove, bya preponderance of the evidence, that the manufacturer should be grantedan abatement.

4. The FDA's decision on whether to grant an abatement,and the amount thereof, if any, shall be based on whether:

(a) The manufacturer has acted in good faith and in fullcompliance with the Act, and any FDA rules or regulations promulgated thereunder,and all applicable federal, state or local laws, rules or regulations;

(b) In addition to full compliance as set forth in (a)above, the manufacturer has pursued all reasonably available measures toattain the required reductions;

(c) There is evidence of any action, direct or indirect,taken by the manufacturer to undermine the achievement of the requiredreductions or other terms and objectives of the Act; and

(d) Any other relevant evidence.

5. Upon a finding by the FDA that the manufacturer meetsthe grounds for an abatement under the standards set forth above, it shallorder an abatement of up to 75% of the Surcharge with interest at the averageUnited States 52-Week Treasury Bill rate for the period between paymentand abatement of the surcharge. The FDA may consider all relevant evidencein determining what percentage to order abated.

6. Any manufacturer or state attorney general aggrievedby an abatement petition decision of the FDA may seek judicial review thereofwithin 30 days in the United States Court of Appeals for the District ofColumbia Circuit. Unless otherwise specified in this Act, judicial reviewunder this section shall be governed by sections 701-706 of Title 5 ofthe United States Code.

7. Notwithstanding the foregoing, a tobacco product manufacturermay neither file an abatement petition or seek judicial review of a decisiondenying an abatement if it has failed to pay the surcharge in a timelyfashion.

8. No stay or other injunctive relief enjoining impositionand collection of the surcharge amounts pending appeal or otherwise maybe granted by the FDA or any court.

[Source/precedent: 5 U.S.C. Sections 554, 556-57, 701-06]

Appendix VI: State EnforcementIncentives

The details of the state enforcement incentives are asfollows:

In addition to FDA and other federal agency, state attorneygeneral and 'other existing state and local law enforcement authority undercurrent law, the proposed Act requires the following:

A. States must have in effect a "no sales to minors"law providing that it is unlawful for any manufacturer, retailer or distributorof tobacco products to sell or distribute any such products to any personsunder the age of 18. (42 U.S.C. §300X-26(a)(1); 45 C.F.R. §96.130(b)).This state statutory requirement remains in addition to the federal regulatoryprohibitions on retail sales of tobacco products to children and adolescents(also defined as persons under the age of 18) adopted by the FDA in itsAugust 28, 1996 Final Rule (to be codified at 21 C.F.R. §897.14 etseq.);

B. States must conduct random, unannounced inspectionsat least monthly, and in communities geographically and statistically representativeof the entire state and its youth population to ensure compliance withthe "no sales to minors" law, and implement "any other actionwhich the state believes are necessary to enforce the law." (goesfurther than 45 C.F.R. §96.130(c), 96.1 30(d)(1 ),(d)(2);

C. States must conduct at least 250 random, unannouncedinspections of retailer compliance with the "no sales to minors"law per year for each I million of resident population, as determined bythe most recent decennial census. In the case of tribes, tribes must conductno fewer than 25 such inspections per location of point of sale to consumersper year, conducted throughout the year.

Annual State Reporting Requirements

As a condition to receiving any moneys due and payablepursuant to the Act, States must annually submit a report to the FDA andthe States must make their reports public (except as provided in (C) below)within the state. Such state reports must include at least the following:

A. A detailed description of enforcement activities undertakenby the state and its political subdivisions during the preceding federalfiscal year;

B. A detailed description of the state's progress in reducingthe availability of tobacco products to individuals under the age of 18,including the detailed statistical results of the mandated compliance checks;

C. A detailed description of the methods used in the compliancechecks, and in identifying outlets which were tested, with the FDA providingthe state appropriate confidentiality safeguards for information providedto the agency regarding the timing and investigative techniques of statecompliance checks that depend for their continued efficacy upon such confidentiality;

D. A detailed description of strategies the state intendsto utilize in the current and succeeding years to make further progresson reducing the availability of tobacco products to children and adolescents;and

E. The identity of the "single state agency"responsible for fulfilling the Synar Amendment and the Act's requirements,including the coordination and report of state efforts to reduce youthaccess to tobacco products sold or offered for sale in the state. (strengthensand extends beyond 45 C.F.R. §96.130(e) by adding greater detail tothe requirements and transferring reporting obligation of states to FDAfrom HHS)

Required Attainment Goals for State Enforcement

The FDA is required to make an annual determination, priorto allocating any moneys allocated to the states under the proposed Actfor the purposes of defraying public health care program expenditures (butnot including or conditioning moneys made available under the Act for thepayment of private claims), as to whether each state has "pursuedall reasonably available measures to enforce" the prohibition on salesof tobacco products to children and adolescents.

In addition to the criteria set forth in 45 C.F.R. §96.130,the proposed Act will require the FDA to find presumptively that the statehas not "pursued all reasonably available measures to enforce"the "no sales to minors law" unless the state has achieved, inthe following years, the following compliance rate results for the retailcompliance checks required by the Act:

Federal Fiscal Year Retail Compliance Check
Under Review Performance Target

5th Year after year of 75%
enactment of Act

7th Year after year of 85%
enactment of Act

10th Year after year of 90%
enactment of Act and annually thereafter

These compliance percentages are expressed as the percentageof the random, unannounced compliance checks conducted pursuant to theAct for which the retailer refused sale of tobacco products to the potentialunderage purchaser. (note: these performance targets are far more stringenton the states than those in the Synar Amendment, which sets as a "finalgoal" a target of no less than 80% (i.e., an inspection failure rateof no more than 20%) within "several years. See 45 C.F.R. §96.130.In addition, the proposed Act's targets are mandatory, uniform nationalminimum performance requirements, while the Synar Amendment calls for HHSsimply to "negotiate" an "interim performance target"beginning in 1998).

Reduction of Money Allocated to State Not Meeting PerformanceTargets

If a state does not meet the Act's "no sales to minors"performance targets for retail compliance checks, then the FDA may refuseto pay to that noncomplying state certain moneys otherwise payable to thatstate under the proposed Act. No state shall be held responsible for salesto underage consumers outside that state's jurisdiction. Specifically,the FDA may withhold from such state an amount equal to 1% of moneys otherwisepayable to that state under the Act to defray health care expendituresof public programs of medical assistance for each percentage point by whichthe state's performance on its mandatory compliance checks fails to meetthe required performance targets for that year. In no event may the FDAwithhold more than 20% of the money otherwise allocable to such state underthe Act for such purposes.

The FDA shall reallot any Withhold Amounts, once final,to states that exceed the Act's Performance Targets, in amounts and byan allocation formula determined by the agency to reward those states withthe best record of reducing youth access to tobacco products.

Appeal Following Withhold

Upon notice from the FDA of a withhold of moneys (the"Withhold Amount") allocable to the state under the Act, a statesubject to such notice of withhold may petition the agency for a releaseand disbursement of the Withhold Amount, and shall give timely writtennotice of such petition to the attorney general for that state and to alltobacco product manufacturers. The agency shall hold, and invest in interestbearing securities of the United States government or its agencies, anyWithhold Amounts subject to a pending petition for release and disbursementor related appeal until final disposition of such petition and appeal.

In the case of petition by a state for a release and disbursementof a Withhold Amount, the agency's decision on whether to grant such apetition, and the amount thereby released and disbursed, if any, shallbe based on whether:

(1) the state has acted in good faith and in full compliancewith the Act, and any agency rules or regulations promulgated thereunder;
(2) the state has pursued all reasonably available measures to attain theRetail Compliance Check Performance Targets and Youth Smoking ReductionGoals of the Act;
(3) there is evidence of any action, direct or indirect, taken by the stateto undermine the achievement of the Retail Compliance Check PerformanceTargets and Youth Smoking Reduction Goals or other terms and objectivesof the Act; and
(4) any other relevant evidence.

The burden shall be on the state to prove, by a preponderanceof the evidence, that the state should be granted a release and disbursementof the Withhold Amount or any portion thereof. Prior to decision, the agencyshall hold a hearing on the petition, with notice and opportunity to beheard given to the attorney general of that state and to all domestic tobaccoproduct manufacturers.

Upon a finding by the agency that the state meets thegrounds, as set forth above, and the burden of proof for a release anddisbursement of a Withhold Amount, then it shall order a release and disbursementof up to 75% of the Withhold Amount appealed, and it shall so release anddisburse to the state that amount, with interest at the average UnitedStates 52-Week Treasury Bill rate for the period between notice and releaseof such Withhold Amount. The agency may consider all relevant evidencein determining that percentage of the Withhold Amount to order releasedand disbursed.

Any manufacturer or state attorney general aggrieved bya Withhold Amount decision of the agency may seek judicial review thereofwithin 30 days in the United States Court of Appeals for the District ofColumbia Circuit. Unless otherwise specified in this Act, judicial reviewunder this Section shall be governed by Sections 701-706 of Title 5 ofthe United States Code.

No stay or other injunctive relief enjoining impositionof the withhold pending appeal or otherwise may be granted by the FDA orany court.

No appeal may be taken from an agency decision denyinga petition to release and disburse a Withhold Amount unless filed within30 days following notice of such decision. No stay or other injunctiverelief, enjoining imposition of the withhold pending appeal or otherwise,may be granted, by any court or administrative agency. Appeals filed hereundershall be made to the District of Columbia Circuit Court of Appeals and,on appeal, shall be governed by the procedural and evidentiary provisionsof the Administrative Procedures Act, unless otherwise specified in thisAct. The judgment of the District of Columbia Court of Appeals on appealshall be final.

Appendix VII - Restrictionson Point of Sale Advertising

The details with respect to point of sale advertisingrestrictions are as follows:

1. There shall be no Point of Sale Advertising of tobaccoproducts, excluding adults-only stores and tobacco outlets, except as providedherein:

A. Each manufacturer of tobacco products may have notmore than two separate point of sale advertisements in or at each locationat which tobacco products are offered for sale, except any manufacturerwith 25 percent of market share may have one additional point of sale advertisement.A retailer may have one sign for its own or its wholesaler's contractedhouse retailer or private label brand.

No supplier of tobacco products may enter into any arrangementwith a retailer that limits the retailer's ability to display any formof advertising or promotional material originating with another supplierand permitted by law to be displayed at retail.

B. Point of Sale advertisements permitted herein eachshall be of a display area not larger than 576 square inches (either individuallyor in the aggregate) and shall consist of black letters on white backgroundor recognized typographical marks.

Point of Sale advertisements shall not be attached tonor located within two feet of any fixture on which candy is displayedfor sale. Display fixtures are permitted signs consisting of brand nameand price, not larger than 2 inches in height.

2. Except as provided herein, Point of Sale Advertisingshall mean all printed or graphical materials bearing the brand name (aloneor in conjunction with any other word), logo, symbol, motto, selling message,or any other indicia of product identification identical or similar to,or identifiable with, those used for any brand of cigarettes or smokelesstobacco, which, when used for its intended purpose, can reasonably be anticipatedto be seen by customers at a location at which tobacco products are offeredfor sale.

3. Audio and video formats otherwise permitted under theFDA Rule may be distributed to adult consumers at point of sale but maynot be played or shown at point of sale (i.e., no "static video displays").

Appendix VIII - Public Disclosureof Past and Future Tobacco Industry Documents and Health Research

The legislation would ensure that previously non-publicor confidential documents from the files of the tobacco industry -- includingthe results of internal health research -- are disclosed to the federalgovernment, the States, public and private litigants, health officialsand the public. The legislation also would provide for binding, streamlinedand accelerated judicial determinations with nationwide effect in the eventthat disputes remain over the legitimacy of claims of privileges or protections,including attorney-client privilege, and work product and trade secretprotections.

1. Under the Act, the manufacturers and CTR and TI wouldestablish a national tobacco document depository that is open to the publicand located in the Washington, DC area. This depository would serve asa resource for litigants, public health groups, and anyone else with aninterest in the tobacco industry's corporate records on the subjects ofsmoking and health, addiction or nicotine dependency, safer or less hazardouscigarettes and underage tobacco use and marketing. Specifically:

-- The depository would include all of the documents producedto the other side by the manufacturers, CTR and TI in the Attorneys Generalactions (including all documents selected by plaintiffs from the Guilford,U.K. repository), Philip Morris Companies Inc.'s defamation action againstCapital Citis/ABC News, the FTC's investigation concerning Joe Camel andunderage marketing, the Haines and Cipollone actions andthe Butler action in Mississippi.

-- In the event there are additional existing documentsdiscussing or referring to health research, addiction or dependency, safer/lesshazardous cigarettes, studies of the smoking habits of minors and the relationshipbetween advertising or promotion and youth smoking that the manufacturersor trade associations have not yet completed producing as agreed or requiredin the above actions, such additional documents shall be placed in thedepository commencing within 90 days of the effective date of the Act,and concluding as soon as practicable thereafter.

-- Except for privileged and trade secret materials (whichshall be exempt from disclosure into the depository), all documents placedin the depository shall be produced without any confidentiality designationsof any kind.

-- Along with these document collections, the manufacturersand trade associations shall place into the depository all indices (asdefined by the court's order in the Minnesota Attorney General action)of documents relating to smoking and health, including all indices identifiedby the manufacturers in the Washington, Texas and Minnesota Attorney Generalactions. Any computerized indices shall be produced in both a computerizedand hard-copy form. (If reductions of any such indices are required inorder to protect any privileged or trade secret information, such reductionsshall be subject to the procedures set forth below for adjudicating anydisputes over claims of privilege and trade secrecy.)

-- All documents placed into the depository shall be deemedproduced for purposes of any litigation in the United States. The courtin each underlying action shall retain the discretion to determine theadmissibility on a case-by-case basis of any such produced document.

-- The tobacco industry shall bear the expense of maintainingthe depository.

2. Immediately upon finalizing a resolution of these litigationswith the Attorneys General, without waiting for Congress to embody theserequirement in the proposed legislation, the manufacturers, CTR and TIshall:

-- Commence to conduct a good-faith, de novo, document-by-documentreview of all documents previously withheld from production in tobaccolitigation on grounds of privilege. The purpose of this review shall beto identify documents which the reviewer concludes are not privileged.All documents so identified shall be placed in the depository as soon aspracticable.

-- Prepare and place in the national depository as soonas practicable a comprehensive new privilege log of all documents thatthe manufacturers, CTR and TI, based on their de novo review, continueto deem to be legitimately privileged against disclosure.

-- Itemize on this new privilege log all of the descriptivedetail that the court has required defendants to furnish document-by-documenton their privilege logs in the Minnesota Attorney General action, therebyensuring that there will be sufficient detail on the privilege logs toenable any interested person to determine whether he or she wishes to challengeclaims of privilege or trade secrecy on any particular documents.

3. The Act also would establish a panel of three federalArticle Ill judges, appointed by the Judicial Conference, to hear and decideall disputes over claims of privilege or trade secrets, except for thosedisputes that already have been determined by other federal or state courtsat the time the Act is enacted or are pending in cases prior to the timethe Court has had an opportunity to begin to review privilege claims.

-- The three-judge panel shall decide all privilege ortrade secrecy challenges asserted by the federal government, the States,public and private litigants, health officials and the public with respectto tobacco industry documents.

-- The Act would vest exclusive federal jurisdiction forthe three-judge panel to decide any such disputes in accordance with theABA/ALl Model Rules and/or principles of federal law with respect to privilegeand the Uniform Trade Secrets Act with respect to trade secrecy. Any suchadjudication shall be reviewable only in the manner prescribed by 28 U.S.C.[Sec. 1 25-certiorari].

-- The panel's adjudications shall be binding upon allfederal and state courts in all litigation in the United States.

-- The panel shall be authorized to appoint Special Masterspursuant to Fed. R. Civ. P.53, with the cost to be borne by the tobaccoindustry.

-- Once the Act becomes effective and the three-judgepanel is appointed, all disputes that may arise concerning privilege claimsby the manufacturers or trade associations relating to smoking and healthsubjects must be resolved through this process, except for disputes inpending cases that can be resolved prior to the time the Court has hadan opportunity to begin to renew privilege claims.

-- If a claim of privilege is not upheld, the three-judgepanel shall consider whether the claimant had a good faith factual andlegal basis for an assertion of privilege and, if the claimant did not,shall assess against the claimant costs and attorneys' fees and may assesssuch additional costs or sanctions as the panel may deem appropriate.

4. In order to expedite the process of judicial reviewand to ensure that the federal government, the States, public and privatelitigants, health officials and the public no longer need to be concernedthat claims of privilege and trade secrecy are being asserted improperlyor without legal basis, the legislation would create an accelerated processby which any public or private person or entity, subject to a right ofintervention by any other interested person or entity, may challenge anyclaims of privilege or trade secrecy before the three- judge panel. Underthe Act, a person or entity filing such an action to challenge to privilegeor trade secrecy will not need to make any prima facie showing of any kindas a prerequisite to in camera review of the document or documents at issue.

5. The manufacturers would also be subject to certaincontinuing disclosure obligations over and above the aforementioned provisionsand whatever further judicial discovery may be required in pending or futurecivil actions. Specifically, for the first time ever, the manufacturerswould be required to disclose all original laboratory research relatingto the health or safety of tobacco products, including, without limitation,all laboratory research relating to ways to make tobacco products lesshazardous to consumers.

-- Whenever such research is performed in the future,the manufacturers shall disclose its results to the FDA.

-- In addition, all such research (except for legitimatetrade secrets) shall be produced to the national document depository describedabove. In addition, the manufacturers and trade associations shall produceinto the depository on an ongoing basis any future studies of the smokinghabits of minors or documents discussing or referring to the relationship,if any, between advertising and promotion and underage smoking.

-- No original laboratory research relating to the healthor safety of tobacco products shall be withheld from either the FDA orthe depository on grounds of attorney/client privilege or work productprotection.

6. The tobacco manufacturers' and CTR's and TI's compliancewith any of the provisions of this Act shall not be deemed a waiver ofany applicable privilege or protection.

7. The Act will also incorporate reasonable and appropriateprovisions to protect against the destruction of documents bearing on mattersof public health or safety.

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