Aug 22, 2011
The tobacco industry’s latest legal challenge to increased government regulation may not hold up in court, but it could mean it will be years before cigarette packs carry pictures of a smoker’s corpse or other graphic images meant to convey the dangers of smoking.
Such a delay could save cigarette makers millions of dollars, both in lost sales and increased packaging costs, industry experts say.
Four of the five largest U.S. tobacco companies sued the federal government Tuesday in an attempt to ward off the new labels that are to cover half their packages with disturbing images of the effects of cigarette smoking. The companies said the requirement, set to take effect in 2012, violates their free speech rights.
Research firm IBISWorld has estimated the new labels would cause a decline of less than 1 percent in overall U.S. tobacco sales in 2013. But some marketing experts say the images could have a much stronger impact on consumers than the current written warnings on cigarette packs.
R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and the other companies also say the labels would cost millions of dollars to print. Altria Group Inc., parent company of the nation’s largest cigarette maker, Philip Morris USA, is not a part of the lawsuit.
Experts said that even if the tobacco industry loses its lawsuit, it could at least push back the launch date for the new labels by a few years.
“It probably will slow down the implementation process because they’ll ask for an injunction,” said John Banzhaf, a law professor at George Washington University and a former public interest attorney. “It’s not automatic, but since the court hasn’t had a chance to look at all the evidence they’ll likely put a hold on things and retain the status quo.”
A U.S. District Court judge in Kentucky rejected similar arguments last year in a lawsuit filed by the same companies. Banzhaf noted that the tobacco industry has filed similar lawsuits in Norway, Australia, Ecuador and other countries around the world.
Michael Cummings, chairman of the department of health behavior at Roswell Park Cancer Institute in Buffalo, N.Y., said the tobacco companies appear to be shopping for an amenable courtroom to take on the case.
“They are trying to find a friendly federal judge who will put a stay on the warning labels, let it spend years in court,” Cummings said. He noted he testified as an expert witness in a Louisiana class-action lawsuit against the tobacco industry a decade ago. The industry is just now paying the charges, he said.
The tobacco industry has been regulated for decades, but the government stepped up its oversight in 2009 with the Family Smoking Prevention and Tobacco Control Act. It allows the Food and Drug Administration to regulate a number of aspects of tobacco marketing and manufacturing, though the agency cannot ban nicotine. It can ban candy flavorings and marketing claims such as “low tar” and “light.” It can also regulate what goes into tobacco products and publicize those ingredients.
The new labels would carry graphic pictures meant to portray the effects of smoking, such as a picture of a corpse with its chest sewed up and the words: “Smoking can kill you.”
Professor Deborah Mitchell of the Wisconsin School of Business said that the new labels represent the government’s most drastic attempt to curb cigarette marketing, making the industry’s lawsuit an almost inevitable business decision.
“There is a massive amount of psychological evidence that people are more affected by pictures and visuals than words,” said Mitchell, who specializes in consumer psychology. “The question is: When the government leverages that information to have a negative impact on an entire category, is that fair?”
Analysts say that tobacco companies are increasingly relying on their cigarette packages to build brand loyalty and grab consumers. It’s one of their only advertising levers left to pull since the government has curbed their presence in magazines, billboards and TV.
“These health warnings are going to take up about half the size of a pack,” said Philip Gorham, an equity analyst at Morningstar. “It makes it harder for smokers to see the red of Marlboro or the green of Newport.”
Gorham said that the main marketing tool left to tobacco companies is their database of smokers, to whom they mail fliers and coupons. They can also compete by offering lower prices, although that hurts their profit margins.
The companies that filed the lawsuit said the warnings no longer simply convey facts allowing people to make a decision on whether to smoke. They instead force them to put government anti-smoking advocacy more prominently on their packs than their own brands, the companies say.
“Never before in the United States have producers of a lawful product been required to use their own packaging and advertising to convey an emotionally charged government message urging adult consumers to shun their products,” the companies wrote in the lawsuit filed in federal court in Washington, D.C.
The proportion of Americans who smoke has been steadily declining for decades, from about 42 percent in 1965 to about 20 percent now, according to Jim Royal at The Motley Fool. The cigarette companies have been hurt by high taxes, high-profile lawsuits, and an increasing number of cities that are banning smoking in public places — though there was an uptick in cigarette sales when the recession took hold in 2008, according to IBISWorld.
But the tobacco industry is not teetering. Companies are finding relief in the small but growing sector of smokeless-tobacco products, including dissolvable tobacco lozenges. They continue to enjoy high profit margins and have been able to raise prices even on top of the higher taxes, Royal said. They also have tremendous opportunity for growth in international markets.