We previously reported that in February 2011, Philip Morris filed a federal lawsuit challenging the United States Department of Agriculture’s (“USDA”) calculation of tobacco buyout assessments under the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) for fiscal years 2011-2014.  The lawsuit challenged a USDA regulation providing that buyout assessments for large cigars for fiscal years 2011-2014 would be calculated using the federal excise tax rate (“FET”) in effect in fiscal year 2005, rather than the new increased FET rates that took effect under the Children’s Heath Insurance Program Reauthorization Act (“CHIPRA”) in April 2009.

According to the lawsuit, the use of pre-CHIPRA FET rates to calculate assessments required cigarette manufacturers and importers to pay a higher assessment than they would pay if the assessment was calculated using the current FET rates. The use of pre-CHIPRA FET rates also resulted in higher annual FDA user fees imposed under the Family Smoking Prevention and Tobacco Control Act of 2009.

After the parties filed motions for summary judgment (including arguments from the Cigar Association of America, which intervened in the lawsuit to support USDA’s position and to oppose Philip Morris’ position), in October 2012, the court ruled in favor of USDA.  The court found that the law was not clear as to whether current or previous FET rates should be used in calculating the buyout assessment.  Deferring to USDA’s expertise in administering the statute, the court upheld USDA’s construction as a reasonable interpretation.

If Philip Morris’ position were accepted, it would have had a significant impact on manufacturers’ buyout obligations, and particularly on cigar manufacturers’ buyout obligations.  For example, for fiscal year 2011, the cigar industry’s payment obligation was roughly 71 million dollars.  If Philip Morris’ position were accepted, the industry’s obligation would have been roughly 194 million dollars, thereby increasing cigar manufacturers’ obligations by 273%.  The cigarette industry, on the other hand, would have paid roughly 130 million dollars less.

Please contact the Troutman Sanders Tobacco Team if you are interested in hearing more information about how the outcome of this lawsuit may affect your USDA payment obligations.

For questions and/or comments, please contact Bryan Haynes, at 804.697.1420 or by email.