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Tobacco Manufacturers

TITLE 11 – DEPARTMENT OF JUSTICE NOTICE OF PROPOSED ACTION

Notice is hereby given that the Department of Justice (DOJ) has approved regulations, effective April 15, 2001, relating to the Attorney General's review of non-participating tobacco product manufacturer compliance with reserve funds requirements of Health and Safety Code sections 104555 - 104557.

HEARING DATE AND LOCATION

DOJ will hold a public hearing for interested persons to present statements, arguments, or contentions relevant to the regulatory action. The initial public hearing will be held at the Office of the Attorney General, 1300 "I" Street, 11th floor press conference room, Sacramento, California, on June 26, 2001, beginning at 10:30 a.m.

ACCESS TO HEARING ROOM

The facility to be used for the public hearing is a barrier free facility in accordance with the Americans With Disabilities Act. Persons with sight or hearing impairments are asked to contact Nancy Wagner, Attorney General's Office, at P.O. Box 944255, Sacramento, California 94244-2550, (916) 323-3724, in order to make special arrangements, if necessary.

AUTHORITY AND REFERENCE

DOJ approved these regulations that add sections 999.10, 999.11, 999.12, and 999.13 to Title 11 of the California Code of Regulations, pursuant to the authority of section 104557 of the Health and Safety Code, and Article 5 section 13, California Constitution, to implement, enforce, interpret and make uniform and specific Division 103, Part 3, Chapter 1, Article 3 (§§ 104555 - 104557) of the Health and Safety Code, relating to the tobacco product manufacturers which choose not to participate in the tobacco Master Settlement Agreement of November 23, 1998.

INFORMATIVE DIGEST/POLICY STATEMENT OVERVIEW

On November 23, 1998, leading United States tobacco product manufacturers entered into a settlement agreement, entitled the Master Settlement Agreement, with the state acting through the California Attorney General. The Master Settlement Agreement obligates these manufacturers, in return for a release of past, present, and certain future claims against them as described in the agreement, to pay substantial sums to the state (tied in part to their volume of sales); to fund a national foundation devoted to the interests of public health; and to make substantial changes in their advertising and marketing practices and corporate culture, with the intention, among others, of reducing underage smoking. As provided in the Master Settlement Agreement, the Attorney General recommended and the California Legislature adopted reserve fund requirements for tobacco product manufacturers which decide not to enter into the Master Settlement Agreement (Calif. Health & Saf. Code, §§ 104555 - 104557). The legislature determined that it would be contrary to the policy of the state if tobacco product manufacturers which do not participate in the Master Settlement Agreement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the state will have an eventual source of recovery from them if they are proved to have acted culpably. (Calif. Health & Saf. Code, § 104555(f).) The legislature determined that it is in the interest of the state to require that these non-participating manufacturers establish a reserve fund to guarantee a source of compensation and to prevent those manufacturers from becoming judgment proof before liability may arise. (Calif. Health & Saf. Code, § 104555(f).) The deposited funds are released from escrow and revert back to the manufacturer after twenty-five years. Health and Safety Code section 104557(c) authorizes the Attorney General to enforce compliance with Health and Safety Code sections 104555 through 104557. Health and Safety Code section 10455, Article 5, section 13 of the California Constitution and Government Code section 12510 et seq. authorize the Attorney General to adopt regulations to make uniform and ensure adequate enforcement of Health and Safety Code sections 104555 through 104557. Sections 999.10, 999.11, 999.12, and 999.13 of Title 11 of the California Code of Regulations contain these regulations.

Health and Safety Code sections 104555 through 104557 provide that non-participating tobacco product manufacturers must establish reserve funds based upon their volume of cigarette sales in California. The reserve funds are to be deposited into escrow accounts. Every year, the non-participating manufacturers must certify compliance with the reserve fund requirements to the Attorney General. The primary purpose of the proposed regulations is to describe the tobacco products that are subject to the reserve fund requirements, the confirmation of compliance and the reporting required to allow monitoring and enforcement, the certification of compliance required and a certification form, and the escrow agreement terms and form.

Proposed section 999.10.a implements Health and Safety Code sections 104555 through 104557 by describing every tobacco product that would constitute a "cigarette" and be subject to the reserve fund requirements that require certification of compliance to the Attorney General. Under proposed section 999.10.a, a cigarette is any tobacco product that is likely to be offered to, or purchased by, consumers as a cigarette or used to make a cigarette (including "roll-your-own" tobacco and little cigars that weigh three pounds or less per thousand (Rev. & Tax. Code, §30003.).) Finally, proposed section 999.10.a clarifies that definitions for "distributor" (Rev. & Tax. Code, § 30011.) and "wholesaler" (Rev. & Tax. Code, § 30016.) are those in the specified sections of the Revenue and Taxation Code.

Proposed section 999.10.b requires wholesalers and distributors to ask for written confirmation from a tobacco product manufacturer of compliance with Health and Safety Code section 104557 prior to purchasing or accepting orders for cigarettes. Section 104557 requires a tobacco product manufacturer either to become a participating manufacturer under the Master Settlement Agreement or to make the appropriate escrow deposits and certification of compliance required of non-participating manufacturers. Proposed section 999.10.b requires wholesalers and distributors to report inadequate confirmation or failures to provide confirmation to the Board of Equalization (BOE) and the Attorney General. Upon request of the Attorney General, wholesalers and distributors are also required to provide such further information as may be required by the Attorney General to seek a temporary restraining order barring sales by the manufacturer pending proof of compliance by the manufacturer, or any other appropriate enforcement action.

Non-participating manufacturers are required by proposed section 999.10.b to cooperate and provide any information needed by the BOE or distributors, retailers or other intermediaries to comply with the reporting requirements of the BOE to implement California Health & Safety Code sections 104555 - 104557. Non-participating tobacco product manufacturers are also required to provide information needed by the Attorney General or wholesalers to confirm compliance with the reserve fund requirements of Health and Safety Code sections 104555 -104557. Proposed section 999.10.b specifies the critical, core information needed from the wholesalers and distributors. Finally, for the purposes of the reports required by the BOE or the Attorney General, proposed section 999.10.b requires distributors and wholesalers to presume that a brand was manufactured by a non-participating manufacturer if the brand is not made by a manufacturer on the list of participating manufacturers provided by the Board to the distributor for use in making its reports on Cigarette Schedule F.

Proposed section 999.11 specifies the certificate of compliance form which is to be used uniformly by non-participating tobacco product manufacturers.

Proposed section 999.12 specifies the conditions required in escrow agreements and which are uniformly required of non-participating tobacco product manufacturers unless the manufacturer obtains the prior written approval of a deviation from the Attorney General.

Finally, Proposed section 999.13 specifies the escrow agreement form which is to be used uniformly by non-participating tobacco product manufacturers unless the manufacturer obtains the prior written approval of a deviation from the Attorney General.

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DISCLOSURES REGARDING THE REGULATIONS

  • Cost or savings to State Agencies: None

  • Mandate and cost to any local agency or school district: None

  • Other non-discretionary cost or savings imposed upon local agencies: None

  • Cost or savings in federal funding to the state: None

  • Cost impacts on representative private persons or businesses: The DOJ is not aware of any cost impacts that a representative private person or business would necessarily incur in reasonable compliance with the proposed action

  • Significant statewide adverse economic impact: None. The DOJ has made an initial determination that the proposed action will not have a significant statewide adverse economic impact directly affecting business, including the ability of California businesses to compete with businesses in other States.

  • Effect on small business: Small business may be affected. The DOJ has made an initial determination that the provision of specific definitions, procedures, certificate of compliance forms, escrow agreement forms will make compliance much easier but does not create costs beyond what was already required by the Legislature in enacting Health and Safety Code sections 104555 - 104557.

  • Significant effect on housing costs: None

In accordance with Government Code section 11346.3, the following are required responses of state agencies proposing to adopt or amend any administrative regulations to assess whether and to what extent it will affect the following:

  • The creation or elimination of jobs within the State of California: None

  • The creation of new businesses or the elimination of existing businesses within the State of California: None

  • The expansion of businesses currently doing business within the State of California: None

INITIAL STATEMENT OF REASONS AND INFORMATION

The Attorney General's Office has prepared an initial statement of reasons for the proposed action and has available all the information upon which the proposal is based (rulemaking file).

TEXT OF REGULATIONS AND INITIAL STATEMENT OF REASONS

Copies of the exact language of the amendments and additions to the regulations and of the initial statement of reasons and all the information upon which the proposal is based (rulemaking file) may be obtained upon request from the Office of the Attorney General, 1300 "I" Street, Room 125, P.O. Box 944255, Sacramento, California 94244-2550, or by telephoning the contact person listed below. In addition, the above-cited materials may be accessed on DOJ's website at www.caag.state.ca.us.

CONTACT PERSON

Non-substantive inquiries concerning this action, such as requests for copies of the text of the proposed regulations, may be directed to Linda Barragan at (916) 323-3613. The back up contact person is Nancy Wagner, (916) 323-3724. Inquiries regarding the substance of the proposed regulations may be directed to Deputy Attorney General William F. Soo Hoo at the above address or at (916) 323-3853.

PRESENTATION OF ORAL AND/OR WRITTEN COMMENTS

Interested persons are invited to submit written comments on the adoption of the regulations. A public comment period is provided from May 11, 2001 through June 26, 2001. Filing of written statements will be accepted at the Office of the Attorney General (Attention: William F. Soo Hoo, Deputy Attorney General), 1300 I Street, Room 125, P.O. Box 944255, Sacramento, California 94244-2550, through close of business 5:00 p.m., June 26, 2001, at the public hearing. The Attorney General's Office will not consider written comments received after June 26, 2001 unless that deadline is extended to provide additional public participation.

PROPOSED REVISIONS, FINAL ADOPTION OF REGULATIONS

Following the public hearing, Attorney General may adopt, as final, the regulations described in this Notice and Informative Digest. Copies of the Regulations, as finally adopted, will be sent to all persons requesting copies. If, as a result of public comment (oral or written), changes to regulations are deemed appropriate, copies of the proposed changes will be sent to all persons who previously requested copies, all persons who testified at the public hearing or submitted written comments during the comment period or at the public hearing, and to those who have requested copies of information regarding the regulations.

Thereafter, the Attorney General's Office will accept written comments, arguments, evidence and the like for a period of at least 15 days after the date upon which changes were made available. If adopted, the regulations will appear in the California Code of Regulations, Title 11, Division 1, Chapter 16, Sections 999.10 – 999.13.

The Attorney General's Office must determine that no reasonable alternative considered or that has otherwise been identified and brought to the attention of this office, would be more effective in carrying out the purpose for which the action is proposed or would be as effective and less burdensome to affected private persons than the proposed action.

AVAILABILITY OF THE FINAL STATEMENT OF REASONS

Upon its completion, the Final State of Reasons will be available and copies may be requested from the contact person named in this notice.

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