The United States Court of Appeals for the Fourth Circuit is scheduled to hear oral arguments on September 19, 2013 in an appeal filed by Philip Morris.  In October 2012, the United States District Court for the Eastern District of Virginia evaluated the methodology used by the United States Department of Agriculture (“USDA”) to determine the amount of assessments levied against tobacco product manufacturers and importers under the Fair and Equitable Tobacco Reform Act (“FETRA”).  Philip Morris sued the USDA, among others, claiming that the USDA improperly calculated the FETRA assessments.

Under FETRA, Congress adopted a two-step process for the USDA to determine assessments owed by tobacco product manufacturers and importers.  The two-step process administered by the USDA is known as Step A and Step B.  Step A allocates assessments among six classes of tobacco products – cigarettes, cigars, chewing tobacco, pipe tobacco, snuff and roll-your-own tobacco.  Step B then allocates the assessments on a pro-rata basis among the manufacturers and importers within each of the six classes of tobacco products.

The District Court’s review was limited to whether the USDA properly administered the elements of Step A.  Step A is intended to allocate the assessments among the six classes of tobacco products based on each class’s current share of the overall market.  The USDA calculates overall market share by multiplying the volume of taxable units per class by the maximum federal excise tax rate per class at the time FETRA was enacted.  Based on this calculation, the volume of taxable units may vary but the federal excise tax rate remains the same.

Philip Morris argued that the USDA’s methodology for calculating the assessments allocated to each class under Step A is improper.  Philip Morris did not dispute that the volume of taxable units will change when sales in the six classes fluctuate.  Rather, Philip Morris argued that under FETRA the rate must also vary based on changes in a particular year’s maximum federal excise tax rate.  Philip Morris’ view of the Step A calculation follows the enactment of the Children’s Health Insurance Program Reauthorization Act (“CHIPRA”) by Congress.  Although CHIPRA significantly increased the maximum federal excise tax rates on each of the six classes, it had a disproportionate impact on cigars.

FETRA explicitly requires the USDA to periodically adjust the assessments based on changes in volume.  FETRA does not require or prohibit the USDA to make adjustments based on changes to the federal excise tax rate.  Consequently, the District Court held that the USDA’s methodology for determining each class’s share under Step A was reasonable.

We will report back on developments as this case progresses.

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