BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2496
                                                                  Page  1

          Date of Hearing:  April 20, 2010

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     AB 2496 (Nava) - As Amended: April 14, 2010

           SUBJECT  :   CIGARETTE AND TOBACCO PRODUCTS

           KEY ISSUE  :  Should California amend the laws implementing the  
          1998 Master Settlement Agreement (MSA) with the major tobacco  
          companies, in order to strengthen enforcement against  
          "non-participating manufacturers" and thereby ensure continued  
          MSA payments from participating manufacturers? 

           FISCAL EFFECT  :  As currently in print this bill is keyed fiscal.

                                      SYNOPSIS

          Sponsored by the California Department of Justice, this bill  
          amends several existing laws relating to the sale, taxation, and  
          licensing of cigarettes and tobacco products.  Specifically,  
          this bill seeks to expand and clarify obligations relating to  
          the 1998 Master Settlement Agreement (MSA) between several  
          states and four major tobacco companies.  The 1998 MSA settled  
          dozens of lawsuits that had been brought by more than forty  
          states, each one seeking to recover the public costs stemming  
          from smoking-related illnesses.  In brief, the MSA relieved the  
          tobacco companies from past, present, and certain future legal  
          actions brought by the states for recovery of smoking-related  
          public health expenses.  In exchange for this immunity from  
          state actions, the tobacco companies agreed to make payments to  
          the states in perpetuity and to make changes in their  
          advertising and marketing practices.  However, because several  
          smaller tobacco manufacturers were not signatories or did not  
          subsequently agree to the terms of the settlement, the MSA also  
          called upon each state to enact a "Model Reserve Fund Statute."   
          The model statutes would impose similar obligations on  
          "non-participating manufacturers" (or NPMs) so that they would  
          not enjoy a competitive advantage.  California's version of  
          "Model Reserve Fund Statute," much like ones adopted in all  
          other states, required the NPMs, as a condition of operating in  
          the state, to deposit funds into a qualified escrow account.   
          The amount of the required deposit would approximate the MSA  
          payments required of the participating manufacturers (or PMs).   
          Escrow funds could be used to secure judgments or settlements  








                                                                  AB 2496
                                                                  Page  2

          that might result from future actions brought by the state  
          against the NPM.  The MSA included another provision requiring  
          states to "diligently enforce" provisions against the NPMs or  
          face the prospect of having MSA payments reduced.  The author  
          and sponsor contend that, in addition to enhancing the  
          enforcement of existing laws against the NPMs, this bill will  
          also ensure that PMs do not attempt to reduce MSA payments or  
          contend in possible future litigation that California has failed  
          to "diligently enforce" provisions against the NPMs.  This  
          relatively non-controversial measure passed out of the Assembly  
          Government Organization Committee on a 17-1 vote.  There is no  
          known opposition. 

           SUMMARY  :  Amends provisions of California's Cigarette and  
          Tobacco Products Licensing Act (Tobacco Licensing Act),  
          Cigarette and Tobacco Products Tax Law (Tobacco Tax Law), and  
          other statutes as they relate to the obligations of  
          participating tobacco manufacturers who were not original  
          signatories or did not elect to agree to the terms of the Master  
          Settlement Agreement (MSA) between the State and the major  
          tobacco manufacturers.  Specifically,  this bill  : 

          1)Requires a manufacturer or importer of tobacco products, as a  
            condition of obtaining and maintaining a license to operate in  
            California, to do all of the following:

             a)   Consent to jurisdiction of the California courts for the  
               purpose of enforcement of the Tobacco Licensing Act, the  
               MSA and the Tobacco Tax Law.
             b)   Waive any sovereign immunity defense that may apply to  
               any action brought by the state Attorney General or Board  
               of Equalization (BOE) to enforce the Tobacco Licensing Act,  
               the Tobacco Tax Law, or the MSA. 
             c)   Provide a copy of any valid, corresponding federal  
               permit issued by the United States Treasury, Alcohol and  
               Tobacco Tax and Trade Bureau. 
             d)   Certify that it is either a "participating manufacturer"  
               (PM) in the Master Settlement Agreement or that it is in  
               full compliance with escrow fund requirements for  
               non-participating manufacturers (NPM) and related  
               provisions of state tobacco laws.  

          2)Authorizes a peace officer or a BOE employee that has been  
            granted limited peace officer status to inspect any site with  
            respect to certification, cigarette tax stamp and meter  








                                                                  AB 2496
                                                                  Page  3

            requirements, and disclosures under the Tobacco Tax Law.

          3)Prohibits any importer, distributor, wholesaler, or retailer  
            from acquiring a package of cigarettes to which a stamp or  
            meter impression may not be affixed in accordance with the  
            requirements of the Tobacco Tax Law. 

          4)Authorizes a tobacco product manufacturer that elects to place  
            funds into a qualified escrow fund to make an irrevocable  
            assignment of its interest in the funds to the State of  
            California. Requires any funds assigned to the state that are  
            withdrawn to be deposited into the General Fund as a credit  
            against any judgment or settlement which may be obtained  
            against the tobacco product manufacturer who has assigned the  
            funds. 

          5)Expands the definition of tobacco products commonly known as  
            "bidis" and "beedies" (tobacco products wrapped in temburni or  
            tendu leaves) to include any product that is marketed and sold  
            as "bidis" or "beedies." 

          6)Amends provisions of the Tobacco Tax Law relating to  
            certification of tobacco product manufacturers, including  
            expanding the information that a non-participating  
            manufacturer (NPM) must certify, including, in the case of a  
            NPM located outside of the United States, a declaration from  
            each of the NPM's importers, as specified, that the importer  
            accepts joint and several liability with the NPM for all  
            required escrow fund deposits and related penalties and fees.   


          7)Sets forth the circumstances under which (and the procedures  
            by which) a PM, NPM, or "brand family," as defined, shall be  
            included or excluded on, or restored to, the Attorney  
            General's directory of manufacturers and distributors that are  
            in compliance with the Tobacco Licensing Act, Tobacco Tax Law,  
            and MSA.  Specifies that a person is prohibited from shipping  
            or distributing into or within this state, for consumption in  
            California, the products of any manufacturer or brand family  
            not included in the directory. 

          8)Sets forth the circumstances by which a licensed distributor  
            or wholesaler shall be entitled to a refund from a tobacco  
            manufacturer or importer for any money paid by the licensed  
            distributor or wholesaler for tobacco products in the event  








                                                                  AB 2496
                                                                  Page  4

            that the manufacturer or importer is removed from the Attorney  
            General's directory.  Similarly sets forth the circumstances  
            by which a licensed retailer shall be entitled to a refund  
            from a licensed distributor or wholesaler when a manufacturer  
            or importer has been removed from the directory. 

          9)Gives the Attorney General additional authority to conduct  
            audits and investigations in order to enforce the MSA, Tobacco  
            Licensing Act, and Tobacco Tax Law, and, as necessary, to  
            issue subpoenas, compel attendance of witnesses, administer  
            oaths, take depositions, and compel the production of books,  
            records, and other documents relevant to an audit or  
            investigation. 

          10)Requires, as a condition of selling cigarettes in California,  
            a tobacco manufacturer to provide certain federal tax returns  
            and forms.  Makes failure to file forms, or the submission of  
            false forms, subject to civil penalties and removal from the  
            Attorney General's directory. 

          11)Amends Tobacco Tax Law so that it conforms to recently  
            enacted federal legislation regulating the sale and  
            distribution of tobacco products over the Internet or in any  
            other non-face-to-face manner.  Clarifies that provisions of  
            federal law that require Internet sellers to comply with state  
            laws would also require compliance with state laws governing  
            escrow fund obligations and specified provisions of the  
            Tobacco Licensing Act and Tobacco Tax Law. 

          12)Specifies that existing provisions of the Tobacco Tax Law  
            that permit the BOE to seize tobacco products for certain  
            violations of the law will also permit seizure for violation  
            of the provisions in this bill.

          EXISTING LAW  :  

          1)Provides, under the California and Tobacco Products Licensing  
            Act of 2003, for the licensure of manufacturers, importers,  
            distributors, wholesalers, and retailers of cigarettes or  
            tobacco products; imposes certain fees, reporting  
            requirements, and practices on the part of licensees; and  
            authorizes the imposition of civil and criminal penalties on  
            individuals who violate provisions of the act or other  
            tobacco-related laws, including prohibitions on the sale of  
            tobacco products without a license or to minors.  (Business &  








                                                                  AB 2496
                                                                  Page  5

            Professions Code Section 22970 et seq.) 

          2)Requires a manufacturer or importer of tobacco products, as a  
            condition of obtaining and maintaining a license to operate in  
            this state, to do all of the following:

             a)   Submit to the BOE a list of all "brand families," as  
               defined, that they manufacture or import and to update that  
               list when a new brand family is added. 
             b)   Consent to the jurisdiction of the California courts for  
               the purpose of enforcing the Tobacco Licensing Act and to  
               appoint a registered agent for service of process in this  
               state. 
             c)   Certify that it is either a "participating manufacturer"  
               (PM) in the Master Settlement Agreement, or that it is in  
               full compliance with escrow fund requirements for  
               non-participating manufacturers (NPM).  (Business &  
               Professions Code Section 22979.)

          3)Authorizes any peace officer, or BOE employee granted limited  
            peace officer status, to conduct on-site inspections to ensure  
            compliance with the Tobacco Licensing Act and other  
            tobacco-related laws and regulations.  (Business & Professions  
            Code Section 22980.) 

          4)Prohibits a tobacco manufacturer, importer, distributor, or  
            wholesaler from selling tobacco products to another  
            distributor, wholesaler, retailer, or other person who is not  
            licensed in the state, except as specified.  Provides further  
            that no retailer, distributor, or wholesaler shall purchase  
            tobacco products from a manufacturer or importer that is not  
            licensed in this state.  (Business & Professions Code Section  
            22980.1.) 

          5)Prohibits an importer, distributor, wholesaler, or retailer  
            from purchasing or otherwise acquiring any package of  
            cigarettes to which a stamp or meter impression may not be  
            affixed in accordance with provisions of the Tobacco Tax Law.   
            (Id.) 

          6)Prohibits the sale, distribution, or import of "bidis" or  
            "beedies" (defined as a product containing tobacco that is  
            wrapped in temburni leaf or tendu leaf) unless it is sold or  
            intended for sale in business establishments that exclude  
            minors.  (Penal Code Section 308.1.)








                                                                  AB 2496
                                                                  Page  6


          7)Requires every tobacco manufacturer whose cigarettes are sold  
            in this state, whether directly or through a distributor,  
            retailer, or similar intermediary, to execute and deliver to  
            the Attorney General a prescribed form certifying that it is  
            either a PM in the MSA or a NPM that is in full compliance  
            with the escrow fund deposit requirements.  Prescribes the  
            information that must be included in the certification form.  
            Requires the Attorney General to maintain a directory of  
            persons or entities that have complied with the certification  
            requirements.  (Revenue & Taxation Code Section 30165.1.)

          8)Requires, under the Tobacco Tax Law, a tax on cigarettes and  
            tobacco products, paid by distributors, through the use of  
            stamp or meter impressions, and generally prohibits the sale  
            or distribution of products that lack the required stamp or  
            meter impressions.  Further authorizes the BOE to conduct  
            on-site inspections to ensure compliance and to seize any  
            non-complying property, as specified.  (Revenue & Taxation  
            Code Sections 30163, 30165.1, and 30431 through 30436.) 

          9)Provides, under the Master Settlement Agreement (MSA) entered  
            into by the several state attorneys general and various  
            tobacco companies, that, in return for a release from certain  
            claims brought against them, the tobacco companies agree to  
            pay substantial sums to the states based on volume of sales;  
            fund a national foundation devoted to the interests of public  
            health; and make substantial changes in their advertising and  
            marketing practices, especially with the intention of reducing  
            underage smoking.  (See description of MSA in Health & Safety  
            Code Section 104555 (e).) 

          10)Requires any tobacco product manufacturer selling cigarettes  
            to consumers within this state, whether directly or through a  
            distributor, retailer, or similar intermediary, to either  
            become a participating manufacturer as that term is used in  
            the MSA, or place into a qualified escrow account fund  
            specified amounts based on the volume of products sold within  
            the state.  (Health & Safety Code Section 104557.) 

          11)Provides, under the federal Prevent All Cigarette Trafficking  
            Act of 2009 (PACT Act), that persons or businesses that sell  
            cigarettes and smokeless tobacco products via the Internet or  
            other non-face-to-face means must pay all applicable federal,  
            state, local, or Tribal taxes and affix appropriate stamps;  








                                                                  AB 2496
                                                                  Page  7

            comply with various state and local laws as if the Internet or  
            other non-face-to-face sellers were tobacco product retailers  
            in the same state as their customers; and check the age of  
            identification of customers both at the point of sale and at  
            the point of delivery. 

           COMMENTS  :  In 1998 the Attorney General of California, along  
          with the attorneys general of 45 other states and five U.S.  
          territories, entered into a Master Settlement Agreement (MSA)  
          with four major tobacco companies.  (Four other states reached  
          separate agreements with the tobacco companies.)  The MSA  
          settled more than forty pending lawsuits that were brought on  
          behalf of the states or state entities to recover the public  
          costs of treating smoking-related illnesses.  Under the terms of  
          the MSA, the tobacco companies were released from past, present,  
          and certain future actions brought by the states or state  
          entities for recovering costs associated with smoking-related  
          illnesses.  (It did not release tobacco companies from private  
          civil actions.)  In exchange for this release from state  
          actions, the tobacco companies agreed to make payments to each  
          state that was a party to settlement in amounts based on the  
          volume of sale in that state.  For California, the amount is  
          likely to equal about $25 billion through the year 2025.  Under  
          an implementing Memorandum of Understanding signed in  
          California, those funds are divided between the state and local  
          governments.  In addition to the payments, the participating  
          tobacco companies agreed to fund a national public health  
          foundation and to change certain advertising and marketing  
          practices, especially with the intent of reducing underage  
          smoking. 

          However, the MSA did not apply to many smaller tobacco  
          manufactures that were not part of the agreement.  These  
          "non-participating manufacturers" - or NPMs - are not subject to  
          the payment requirements or advertising changes.  To ensure that  
          NPMs would not enjoy a competitive advantage, the MSA included a  
          "Model Reserve Fund Statute" that each state was encouraged to  
          adopt.  These statutes would require NPMs to deposit funds in an  
          escrow account in amounts similar to those required under the  
          MSA.  Not only would this equalize the playing field between the  
          PMs and NPMs, it would also create a reserve fund to pay  
          judgments or settlements on claims brought against the NPM by  
          the state.  All fifty states have enacted such statutes.  In  
          California, the model statute requires any tobacco manufacturer  
          selling products in this state to either (1) agree to become a  








                                                                  AB 2496
                                                                  Page  8

          "participating manufacturer" and be bound by the terms of the  
          MSA, or (2) place funds into a qualified escrow account, with  
          the amount to be determined by the volume of sales within the  
          state.  The amount that a NPM must place in the escrow account  
          is supposed to approximate the amount that it would be required  
          to pay if it were a participating manufacturer in the MSA  
          agreement.  Existing law provides that any funds not withdrawn  
          will be returned to the NPM after 25 years.  (This bill would  
          amend this provision so as to authorize the NPM to make an  
          irrevocable assignment of its share of the funds to the State of  
          California, with any funds so assigned to the state to be  
          deposited in the General Fund as a credit against any future  
          judgment or settlement.) 

           State Has Duty to "Diligently Enforce" Provisions Against NPMs.    
          According to the author and sponsor, the California Department  
          of Justice, this bill is necessary in order to srtrengthen  
          enforcement against NPMs and follows the lead of other states  
          that have recently enhanced their NPM enforcement legislation.   
          This bill, in particular, seeks to ensure that NPMs are fully  
          compliant not only with the escrow funding requirement, but also  
          to ensure that they are fully compliant with certain provisions  
          of the state's Tobacco Licensing Act and Tobacco Tax Law.  It is  
          particularly important that California update its statute in  
          light of these recent changes in other states because one term  
          of the MSA requires states to "diligently enforce" provisions  
          against NPMs or run the risk of having their MSA payments  
          reduced.  The author and sponsor contend that bringing  
          California law into conformity with those other states will  
          prevent the signatory tobacco companies from reducing MSA  
          payments or arguing in possible future litigation that  
          California has failed to "diligently enforce" provisions against  
          the NPMs.  

          Because this is a long and complicated bill that amends several  
          different code sections, and therefore not easily summarized,  
          the reader is referred to the bill summary that appears at the  
          beginning of this analysis.  However, some of the more important  
          provisions of the bill do the following:

                 Provide that as a condition of obtaining a license in  
               this state, a manufacturer (including an NPM) or importer  
               must consent to the jurisdiction of California courts for  
               the purpose of enforcing the MSA. (Existing law already  
               requires prospective licensees to consent to the  








                                                                  AB 2496
                                                                  Page  9

               jurisdiction of California courts for other matters  
               relating to provisions regulating tobacco.)  In addition, a  
               prospective licensee would also need to waive any sovereign  
               immunity defense in any action brought by the Attorney  
               General or the BOE to enforce various tobacco regulations.   
               This provision was added to the bill because some of the  
               NPMs are owned in whole or in part by foreign nations. 

                 Provide generally that full compliance with the MSA and  
               the model reserve fund statute is a pre-condition for  
               inclusion on the Attorney General's directory of  
               manufacturers and brand families that may legally sell or  
               distribute tobacco products in the state. 

                 Specify that, consistent with federal law, tobacco  
               manufacturers, importers, and distributors that sell  
               products on-line to customers in California must comply  
               with California laws. 

                 Ensure, generally, that regulations pertaining to the  
               sale or distribution of tobacco products, licensing and  
               certification requirements, and taxation and stamping  
               requirements shall apply to both PMs and NPMs.  This bill  
               will also enhance the ability of peace officers and BOE  
               agents to investigate suspected violations of state tobacco  
               laws and seize property that is the subject of a violation.  


           Constitutional Questions Already Addressed  .  Many if not most of  
          the NPMs that would be affected by this bill are located outside  
          of California and, in some cases, outside of the United States.   
          Any state laws that prevent or unduly burden the ability of  
          businesses from outside the state from selling their products  
          within the state create a potential "dormant" commerce clause  
          issue.  Generally, a state cannot impose burdens on interstate  
          commerce or discriminate against out-of-state businesses unless  
          the burdens on commerce are significantly outweighed by the  
          benefits to a legitimate state interest.  However, the federal  
          courts have rejected such challenges in California and  
          elsewhere, holding that the California statute in particular  
          makes no distinction based on the tobacco products' origin - it  
          applies to both in-state and out-of-state businesses - and the  
          burden imposed on interstate commerce does not exceed its  
          putative local benefits.  (PTI, Inc.v. Phillip Morris, Inc.  
          (2000) 100 F. Supp. 2d 1179) (This opinion held, additionally,  








                                                                  AB 2496
                                                                                                                                                Page  10

          that the statute did not violate the Import-Export, free speech,  
          due process, or equal protection clauses of the U.S.  
          Constitution.)  While this bill modestly strengthens existing  
          regulations, the state's right to impose such regulations  
          appears to be on solid constitutional ground.  More recently the  
          court held that California's statute implementing the MSA was  
          not preempted by the Sherman Anti-Trust Act.  (Sanders v. Brown  
          (2007) 504 F.3d 903 (CA 9th); cert denied, 128 S. Ct. 2427.) 

           ARGUMENTS IN SUPPORT  :  The California Department of Justice, the  
          sponsor, argues that this bill will "enhance the department's  
          efforts to enforce existing provisions of state law related to  
          the Master Settlement Agreement between California and the major  
          tobacco manufacturers.  The measure would protect against the  
          sale of cigarettes below market prices, and would help protect  
          the State's share of tobacco settlement payments [due] to it  
          under the Master Settlement Agreement."

          The American Lung Association supports this bill because it will  
          "strengthen existing law regarding payments from  
          'non-participating manufacturers' under the Master Tobacco  
          Settlement Agreement."  The American Lung Association believes  
          that this bill will "provide the state with additional tools to  
          ensure payment of NPMs, especially for new, foreign, and  
          elevated risk NPMs."  The American Lung Association also  
          supports the provision in this bill that allows NPMs to assign  
          their interest in the funds to the State, so that such funds may  
          ultimately be directed toward tobacco prevention efforts.

           Prior Related Legislation  .  SB 822 (Chapter 780, Stats. of 1999)  
          created California's version of the MSA model statute, requiring  
          tobacco manufacturers selling products within the state to  
          either become a participating manufacturer under the terms of  
          the Master Settlement Agreement, or, if a non-participating  
          member, to deposit specified funds in a qualified escrow fund  
          each year. 

          AB 71 (Chapter 890, Stats. of 2003) created the Cigarette and  
          Tobacco Products Licensing Act of 2003, which generally provides  
          for the licensing of tobacco manufacturers, importers,  
          distributors, wholesalers, and retailers, and prohibits any such  
          entity from operating in California without a license.   
          Authorizes BOE to suspend or revoke licenses for violations of  
          the Act and related provisions of law. 









                                                                  AB 2496
                                                                  Page  11

           Related Pending Legislation  .  AB 2733 (Ruskin) amends the  
          Tobacco Licensing Act to prohibit displaying or gifting of  
          cigarettes and tobacco products during any period of license  
          suspension and revocation.  The bill also requires a person that  
          has received a notice of suspension or revocation to post a copy  
          of the notice at the primary entrance and near the cash  
          register.  Passed out of Assembly Government Organization  
          Committee on a 17-0 vote and will be heard by the Assembly  
          Judiciary Committee on April 20. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Department of Justice (sponsor)
          American Lung Association 
          Breathe California 

           Opposition 
           
          None on file 
           
          Analysis Prepared by  :    Thomas Clark/ JUD. / (916) 319-2334