Firm Claims It’s Getting Burned By Georgia Tobacco Regs

ATLANTA (CN) —S&M Brands, a Virginia-based tobacco firm, was the 11th Circuit to revive a lawsuit in which the company claims Georgia’s tobacco regulations are an unconstitutional restraint of trade.

S&M Brands, maker of the Tahoe, Bailey’s and Riverside brand of cigarettes, claimed  in its lawsuit that Georgia’s revised Model Escrow Agreement unconstitutionally impairs the company’s contract with its bank, unfairly restricts escrow investments and violates the Equal Protection Clause of the U.S. Constitution.

S&M sought declaratory and injunctive relief on its claims.

But on May 30, 2017, a federal judge threw out the lawsuit stating he lacked subject matter jurisdiction over the matter.

The MSA was created after state Attorneys General for 46 states sued the four largest U.S. tobacco manufacturers on claims that the companies misled the public about the health effects of smoking.

The agreement requires tobacco companies to pay into escrow accounts and imposes restrictions on the sale and marketing of cigarettes. States use the funds in the escrow accounts to resolve Medicaid claims and other lawsuits against the tobacco industry.

State legislatures around the country adopted Model Escrow Agreements to require tobacco manufacturers who did not participate in the settlement to make quarterly escrow deposits.

In 2016, the Georgia state legislature altered the escrow agreement to require tobacco manufacturers to maintain a compulsory principal balance.

The state legislature also changed the rules surrounding the permissible investment tools tobacco companies could use to place funds in escrow, eliminating 30-year bonds as an option and mandating that only 20-year bonds can be used.

S&M, a non-participating member in the original settlement, argued before a three-judge 11th Circuit panel Tuesday that the restrictions violate the Equal Protection Clause of the Constitution by placing an undue burden on the company.

Representing S&M, attorney Chris Browning Jr. asserted that S&M has the right to have escrow invested in 30-year bonds.

Browning was quickly interrupted by U.S. Circuit Judge Ursula Ungaro, who asked, “What is the damage to S&M with that change?”

“The objective is to keep a level playing field between the participating members [in the settlement] and the non-participating members, right?” U.S. Circuit Judge Gerald Tjoflat asked.

“The participating members [in the settlement] gave up their First Amendment rights and now we’re being punished for exercising ours,” Browning responded.

“What First Amendment right? What speech have you been precluded from exercising?” U.S. Circuit Judge Robin Rosenbaum asked.

Browning responded that S&M’s commercial speech was being infringed upon by the state, referencing the allegedly inflated financial stress the state’s new regulations impose on the company and citing a reduced ability to produce ads and broker sponsorships.

“The only way to keep that level playing field is to impose on our free speech by ratcheting up our costs,” Browning said.

Browning alleged that Georgia’s new regulations have added significantly to S&M’s manufacturing costs per cigarette.

Browning refused to give further information about specific damages and costs incurred by the company.

Seemingly unconvinced, Tjoflat asked Browning how the company knows that it has been injured.

“We can no longer invest in 20-year bonds,” Browning argued. “It has impacted the profitability of the company.”

But Forrest Pearce, an attorney representing the state, argued that the regulations are not only fair, they’re necessary.

“The money in the escrow account ensures that there is money to pay claims arising from the health risks the tobacco companies create,” Pearce said.

Under questioning from Tjoflat, Pearce admitted that the state has never brought any claims against S&M.

“So we have an industry that may cause injury so you want them to pay a deposit to the state to pay claims which may arise?” Tjoflat asked.

“That’s unique,” he said, “Asking a company to provide a nest egg to do business in a state in case they cause damages.”

Although Pearce pointed out that 52 jurisdictions across the country have similar requirements, Tjoflat remained incredulous.

“This is an exercise in police power,” he said. “If a company causes injury to the state, that’s why the money is put up. And the legislature gets to determine if there’s enough money in the pot … It’s not about level playing fields … They must have a crystal ball to know how much money they need and they need a pot of gold.”

Browning agreed with Tjoflat in his rebuttal to the state’s arguments.

“This is about getting as much money into the hands of the state as possible and trampling on our constitutional rights. We want the decision reversed,” Browning said.

A representative for Georgia Attorney General Christopher Carr did not immediately respond to a request for comment.

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