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This is a Draft Document--NCSL would appreciate any comments or corrections.
Contact Bill Waren or Ellona Wilner at (202) 624-5400.

State Interests in National Tobacco Legislation: An Analysis

Contents:

Fiscal Issues
Preemption Issues
Constitutional and Federalism Issues
Conclusion

State-Federal Relations

The prospect of national tobacco legislation presents states with unique opportunities and high risk. Such legislation could provide states with an opportunity to collect hundreds of billions of dollars over the next quarter century as compensation for the cost of tobacco-related health care and other civil wrongs. The risk is that states could lose substantial authority over their public health and civil justice systems. There is even a risk that provisions in national tobacco legislation could violate Tenth Amendment protections of state sovereignty. Any bill that passes will inevitably involve trade-offs for the states, most likely in the form of authority traded for money. The prospect of national legislation, in other words, presents a dilemma, or at least a series of hard choices.

The dilemma arises from the unusual circumstances under which the issue has been brought to Congress. Forty-one state attorneys general sued the tobacco industry for restitution of the extraordinary expense to state Medicaid systems resulting from tobacco-related illness, for violation of consumer protection and antitrust laws, and for similar civil wrongs. The industry agreed on June 20, 1997 to settle all the lawsuits for $368.5 billion over the first 25 years of the agreement alone, provided that certain conditions are met by new provisions in federal law, in particular federal preemption of state product liability law to limit the industry's exposure to future private lawsuits and to bar future state and local suits. Also included in the proposed global settlement are national public health standards and programs, largely aimed at curbing teen smoking, that similarly would be mandated by federal legislation.

Congressional leaders, to say nothing of state legislators and governors, were not parties to the proposed agreement; as a consequence, they will not simply enact the agreement as it was presented to them. Several bills, however, have already been introduced. Senator John McCain, chairman of the Senate Commerce Committee, has introduced a bill, S.1415, that in many respects tracks the settlement agreement, though he describes it only as a starting point for negotiations. Among others, Senators Orrin Hatch and Edward Kennedy also have introduced tobacco compensation bills, S.1530 and S.1492 respectively.

State concerns with tobacco settlement legislation fall into three categories: fiscal issues, preemption issues, and constitutional issues, especially those related to federalism.

1. Fiscal Issues

The attraction for states of national tobacco legislation, of course, is the opportunity over the next twenty-five years for financial compensation in the $100 billion to $300 billion range, for Medicaid costs incurred and other civil wrongs committed by the tobacco industry. Compensation awards, however, are not the only fiscal issue. A major question is whether state legislatures will retain their constitutional authority to appropriate tobacco compensation dollars. National legislation, also, would affect state tobacco tax receipts, as increases in the price per pack of cigarettes dampen demand. And, restrictions would be placed on how states spend the money. The only question is the type and the severity of such restrictions. Will monies be earmarked for particular purposes? Will extensive conditions, mandates or regulations be imposed on states that take tobacco money? Finally, will the federal government be allowed to recoup state tobacco settlement dollars attributable to Medicaid expenditures, as the Clinton Administration is demanding?

A. Compensation Awards: Under the June agreement, tobacco companies would be assessed $368.5 billion over the first twenty-five years. This assessment would be passed through to consumers, resulting in an increase in the price of a pack of cigarettes of approximately 62 cents. Attorney General Mike Fisher of Pennsylvania says that states would directly get $193.5 billion of this money over the first 25 years, plus much of the remainder in grants to administer programs contemplated by the agreement.

The McCain bill, in its first draft, is not as specific regarding the state allotment, but presumably the intent, again, is for states to get most of the money.

The Kennedy bill would apply a surcharge of $1.50 on each pack of cigarettes, resulting in a $650 billion assessment on the industry for the first twenty-five years. States would receive 43 percent of this total or $279.5 billion over 25 years, all of it earmarked for children's programs. States would also get grants for tobacco use reduction and education programs under the Kennedy plan.

Legislation introduced by Senator Orrin Hatch of Utah would assess the industry $398 billion over 25 years. Most of the assessment would be placed in a National Tobacco Settlement Trust Fund, though $95 billion in punitive damages would be deposited directly into a research fund. An unspecified portion of the remaining $303 billion would be put aside for agricultural assistance before dividing the remainder between state and federal sources. In other words, the state share would be one-half of whatever remains of the $303 billion after providing an allotment for tobacco farmers.

B. State Legislative Appropriations Authority: Who in the states should decide how tobacco settlement dollars should be spent? NCSL strongly believes that it must be the state legislature and is urging that any national tobacco legislation must include language insuring that the state legislative appropriations authority is respected. Such a provision, the so-called Brown Amendment, was included in federal welfare reform legislation. The purpose is to ensure respect for the separation of powers and to ensure that these decisions are made in the open, with ample opportunity for public participation.

C. Restrictions on State Use of Tobacco Money: All the bills currently introduced in Congress impose mandates, requirements, or earmarks as conditions for states to receive their tobacco dollars.

Senator Kennedy would earmark state tobacco compensation awards, requiring them to be largely spent on established federal children's programs, such as Head Start or the child care development block grant.

The McCain bill, by contrast, would not explicitly earmark state tobacco dollars, but it would give the Secretary of Health and Human Services broad discretion to disapprove state spending plans. States also would be required to sign consent decrees with detailed specification of how they should run their anti-tobacco programs.

The Hatch bill would require states to meet federal standards by passing laws related to underage smoking, retail licensing and enforcement, and product liability litigation involving tobacco. States also would be required to sign consent decrees, with detailed specification of their obligation to establish anti-tobacco programs and enforce prescribed public health standards. Funds received by the states that are not attributable to its Medicaid matching share would have to be spent on federally-approved anti-tobacco programs.

In short, if legislation is passed, states will have to deal with federal restrictions on how they spend their own money. No global settlement is possible without congressional action, but Congress is not in the habit of sending money to the states without earmarking it for specific purposes or without imposing regulations and mandates.

D. Federal Recoupment of State Tobacco Money: On November 3, 1997, Sally Richardson, Director of the Medicaid division within the U.S. Department of Health and Human Services' Health Care Financing Administration (HCFA), sent a letter to state Medicaid directors. The letter informed the states that any Medicaid-related recoveries resulting from litigation with tobacco companies must be reported to HHS and must be "equitably" shared in accordance with the state's Medicaid matching rate (endnote 1). The letter also clarified that costs attributable to the recovery were eligible for the 50 percent federal matching payments normally available for administrative costs. During testimony on November 13, 1997, before the House Commerce Committee, Secretary Shalala described to the committee the alleged statutory basis within the Medicaid program for the "recoupment." (endnote 2).

Forty-seven state attorneys general protested the HHS recoupment demand in a November 7 letter to President Clinton, noting that "the federal government makes this claim despite the fact these recoveries will represent success in state suits, under state law theories, for a variety of claims unrelated to Medicaid payments. The federal government has declined to bring its own suit against the industry." The National Governors' Association and NCSL later adopted policy resolutions objecting to the HHS recoupment effort, as well as any future efforts by the Department of Defense, the Veterans Administration or other federal agencies to recoup state dollars.

Representative Michael Bilirakis (R-FL) and Senator Bob Graham (D-FL) have introduced legislation, H.R.2938 and S.1471, that would prohibit HHS from treating Medicaid-related funds paid to a state as part of a settlement or judgment reached in litigation initiated by a state against one or more tobacco companies, as an overpayment under the provisions of section 1903(d) of the Social Security Act. NCSL and other groups representing states, objecting to the HHS recoupment effort, support the legislation sponsored by Representative Bilirakis and Senator Graham. NCSL policy calls for the issue to be addressed as part of the overall tobacco settlement. The Graham/Bilirakis bill does not address how settlement funds would be distributed. This would become part of the overall negotiation of the settlement.

With respect to "global settlement" bills now pending in Congress, the Kennedy bill accepts the HHS figure of a 57 percent recoupment verbatim, though it ups the assessment on the industry to $650 billion over twenty-five years, thus providing the states $279.5 billion over this period or more than any other current legislative proposal. Senator Hatch leaves the states with less than half of his $398 billion assessment of the industry (i.e., less that $150 billion). This is all in contrast to the June 20 agreement in which the states would get $193.5 out of $368.5 billion, plus much of the remainder in federal grants.

2. Preemption Issues

Two types of preemption issues are presented by national tobacco legislation: those related to state civil liability law, and those related to public health.

A. Civil Justice Preemption: A major controversy when Congress votes on a tobacco bill will be whether to preempt state tort law to give the tobacco companies protection from liability.

Senator Kennedy's bill stands in contrast to all the other proposals: it would not terminate current or future suits by states or localities and it would not preempt the states' tort law in order to protect the industry.

The McCain and Hatch bills, like the June 20 agreement, provide for extensive preemption of state product liability law as it applies to tobacco companies. All state and local suits would be terminated. Future suits would be banned. With respect to future private litigation against tobacco companies, class action suits would be prohibited, no punitive damages would be allowed, and traditional joint and several liability would be abolished. Suits based on addiction or dependence would be banned. Annual caps would be established for aggregate industry liability (to be shared equally among tobacco companies).

B. Public Health Preemption: The national tobacco legislation proposed in the June 20 agreement, as well as the three Senate bills discussed in this paper, would establish a national anti-tobacco program and set minimum federal standards related to public health and tobacco. Until recently, most of these issues were handled by state legislatures, not Congress and federal agencies.

With respect to youth access, an important area of traditional state responsibility, the Food and Drug Administration rule of August 28, 1996 bans sales to children under 18 years of age, requires proof of age prior to sale, limits vending machine sales and self-service displays, and prohibits the sale of single cigarettes. The McCain and Hatch bills would largely incorporate these rules into statutory law, thus helping to protect them from legal challenge, and would go substantially beyond existing regulations to deny children access to tobacco products. The two bills, again reflecting the settlement, would ban all vending machine sales, would require the placement of tobacco products behind the counter, and would impose additional restrictions on mail order sales. The Kennedy bill, by contrast, is much more respectful of states' rights in this connection, and includes none of these provisions dictating state policy related to underage smoking, although it would by its silence leave the current FDA rule in place.

The McCain and Hatch bills also track the settlement agreement by seeking to re-establish the FDA's youth advertising and marketing rules, which were struck down earlier this year by a federal district court. That FDA rule would have required tobacco advertisements to carry an FDA-approved statement on intended use, banned offers of gifts in return for purchasing tobacco products, banned logos on clothing and similar non-tobacco products, limited brand name event sponsorship, restricted ads in youth magazines to text only, limited billboards to text without color, and limited billboards in proximity to schools. Going beyond the proposed FDA rule, the McCain and Hatch bills would eliminate all billboards and outdoor signs, including those in sports arenas, eliminate all human and cartoon characters, i.e. Joe Camel and the Marlboro Man, for both advertising and cigarette packages, restrict point-of-purchase ads, eliminate internet ads, prohibit product placement in movies and television programs, and restrict unjustified marketing based on health claims, such as "light" cigarettes (endnote 3).

Beyond provisions related to current FDA rules, the federal law requiring warning labels on cigarette packs under all three bills would be strengthened (i.e., "Warning: cigarettes can kill you"), and all three bills in line with current federal law would preempt any state labeling regulation. Also, the Kennedy and McCain bills would fund a national anti-tobacco advertising campaign, similar to those conducted by California and Massachusetts. The Hatch bill makes a somewhat more general provision for public education programs. Funding also would be provided to states for tobacco cessation programs, though the Kennedy and especially the Hatch bill would reserve a portion of this money for states, while McCain would have states compete for grants against non-profits and others. The FDA's authority to regulate tobacco ingredients and manufacture would be strengthened by all three measures. This could open the door to regulatory preemption of state law by the FDA because of the broad discretion invested in the agency. Moreover, the McCain bill, reflecting the June agreement, would preempt Massachusetts and Minnesota measures requiring the disclosure of tobacco ingredients by barring FDA action on ingredient disclosure for five years.

All three bills would preempt the role of the states in regulating smoking in public places and the workplace, largely incorporating the provisions of H.R.3434, a bill introduced by Congressman Henry Waxman in this regard. States would be able to adopt stricter standards, but not ones that are more lax.

Perhaps the most innovative feature of the national settlement and all three bills are the so-called "look-back" provisions, which would set national goals for reductions in youth smoking and fine the industry if those goals are not met. The goals would be a reduction in youth smoking by 30 percent in five years, 50 percent in seven years, and 60 percent in 10 years. Under the settlement agreement, the industry would be fined every year approximately $80 million for each percentage point it falls below the target goal for reduced youth smoking. The Kennedy bill would impose tougher, company-specific sanctions.

Finally, the McCain and Hatch bills would build upon the so-called Synar Amendment to mandate tough state tobacco sales licensing and enforcement activities, a provision that like several others may raise Tenth Amendment problems. The Kennedy bill omits the provision.

3. Constitutional and Federalism Issues

Questions are raised as to whether the settlement proposal is constitutional. One very unusual provision in the settlement agreement, reflected in both the McCain and Hatch bills, would require the parties, the states and the industry, as a condition for participating in the settlement to sign consent decrees -- including a waiver of their constitutional rights. This provision is clearly aimed at preserving the advertising and marketing restrictions on the industry from constitutional challenge. Absent such a waiver, such restrictions on the "commercial speech" of tobacco companies are of very doubtful constitutionality. The question is whether the courts would recognize such a waiver of rights, especially where non-contracting third parties are involved.

More troubling, can the states waive their rights? This is not an academic question. Colorable arguments can be made that several provisions of the McCain and Hatch bills violate the 10^th Amendment. In particular, the scheme for enlisting state and local law enforcement officers to enforce an arguably federal regulatory program for licensing and enforcement activities related to retail sale of tobacco products bears an unmistakable resemblance to the scheme for commandeering state and local law enforcement to carry out the background check provisions of the Brady Gun Law, struck down by the U.S. Supreme Court in Printz v. United States on 10^th Amendment grounds. Although, in fairness, the Brady law directly commandeered the state and local officers without even the formality of "voluntary" state participation resulting from accepting federal money with strings attached.

Applying the principles of Printz to the provisions in the McCain and Hatch bills related to retail licensing and enforcement is complicated by the task of deciding whether the "settlement" money is federal or state money in the first place, such that conditions like retail licensing enforcement may be attached. Moreover, Justice Antonin Scalia's opinion in Printz is not clear about whether the background check provisions in the Brady bill would have been compatible with the Tenth Amendment had they been crafted in the form of grant conditions rather than straightforward commands. (In her concurring opinion in Printz, Justice Sandra Day O'Connor suggests that background check requirements would have been constitutional as a "voluntary" acceptance by the states of a law enforcement responsibility in return for money.)

In other words, one can argue about whether the retail licensing and enforcement provisions in the McCain and Hatch bills are constitutional, but both bills would seek to foreclose making that argument in a court of law by requiring states to waive their rights. Who, it must be asked, has the authority to waive sovereign rights on behalf of the people of a state: the attorney general, the governor, the state legislature, or no one?

Nor is the retail licensing and enforcement provision the only potential Tenth Amendment issue raised by the Hatch and McCain bills. The Hatch bill would mandate state legislation related to tobacco torts and other subjects. Is this a commandeering of the state legislative policy process comparable to the mandated "state" policy related to low level radioactive waste struck down by the Court on 10^th Amendment grounds in New York v. United States, or again simply a routine grant condition? And how about the intrusion into state court autonomy resulting from the civil justice provisions of the McCain and Hatch bills, particularly those provisions related to the admissibility of evidence, discovery of documents, and definition of privileged communications? It may be a stretch to find that Printz applies given that state courts, according to constitutional scholars with a "nationalist" bent, have an appropriate role under the Founder's design in enforcing federal law that was not contemplated for state executive officers and legislatures, but again the issue is debatable and the two bills ask states to waive the right to raise the issue as a condition of taking tobacco settlement dollars.

Regardless of whether the obligations that the Hatch and McCain bills would impose on states are constitutional, one may reasonably ask whether they are as a matter of policy appropriate for our federal system. Both bills contemplate a complex scheme of state-federal cooperation, involving preemption of state law, mandates, and commandeering of state officials. The proposal that states waive their constitutional rights as a condition for participating in the settlement, in particular, is very troubling.

4. Conclusion

Taken as a whole, what are we to make of proposed tobacco settlement legislation? At the very least, we can say that the whole concept of settling forty-one state lawsuits with such national legislation is unprecedented. Lawsuits are ordinarily settled by the parties, on terms confined to the issues in dispute in the litigation, but not in this case (endnote 4).

This is not to say that the terms of the proposed agreement are on balance bad for the states. After all, a great deal of money will be coming to the states as justifiable compensation for wrongs suffered if the settlement, or something close to it, is enacted by Congress into law. And without question, the proposed settlement legislation reflects the views of many state officials that the time has come to forcefully address issues of tobacco and public health with a coordinated state-federal policy. Nevertheless, it blurs the usual lines between litigation and legislation and between state and federal responsibilities.

NCSL staff contacts: Bill Waren; Ellona Wilner

NCSL's overview of the Proposed Tobacco Settlement and Outlook for National Legislation
Link to federal tobacco legislation

State-Federal Relations
 

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