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Free Cigarettes Cost $5 Million

R.J. Reynolds Settles Lawsuit Over Distribution of Free Cigarettes

May 8, 2006

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R.J. Reynolds will pay $5 million to resolve a lawsuit in which the California Supreme Court found RJR liable for violating state law when it distributed 108,155 free packs of cigarettes on public grounds.

"RJR flouted an important public health law that combats tobacco addiction among adults and helps keep cigarettes out of the hands of our children," said Attorney General Bill Lockyer. "The Supreme Court ruling that upheld the law, and affirmed RJR's liability for violating it, constitutes a significant legal victory for California's tobacco control efforts."

Under the settlement, RJR will pay $1 million to the Public Health Institute, a nonprofit organization that administers the Public Health Trust and will use the money to fund tobacco control advocacy and education programs.

Additionally, RJR will pay a $3.1 million civil penalty, and $900,000 to cover the Attorney General's costs and fees. The settlement must be approved by the Los Angeles County Superior Court before it becomes final.

A 1991 California law generally prohibits tobacco companies from distributing free cigarettes in any public building or on any public grounds. In the lawsuit filed in 2001 in Los Angeles County Superior Court, Lockyer alleged RJR violated the law in 1999 when the firm gave away 108,155 packs of cigarettes to 14,834 people at six separate events held on public property.

At one event alone held at the Pomona Raceway, RJR distributed 96,000 free packs (9,600 cartons) of Winstons, according to the complaint.

The trial court ruled RJR violated the law and imposed a civil penalty of $14.8 million. The Second District Court of Appeal on October 30, 2003 affirmed both the trial court's finding of liability and the $14.8 million penalty. RJR took the case to the California Supreme Court, which granted review. The high court on December 22, 2005 affirmed the lower courts' finding of liability.

The justices rejected the two main arguments offered by RJR: that the state could not enforce its ban on cigarette giveaways on public property because distribution of free samples constituted a promotion, and federal law preempts state laws regulating advertising and promotion of cigarettes; and that, even if federal law did not prevail, RJR did not violate the state statute because it distributed the free cigarettes in private booths guarded by security personnel to keep children out.

The Supreme Court held that distributing free samples did not constitute a promotion within the meaning of the Federal Cigarette Labeling and Advertising Act of 1965. As a result, the justice ruled, the federal law does not preempt the California ban. States historically have possessed the authority to regulate the sale and distribution of tobacco products, the court held.

In arguing it did not violate the state law because it distributed the free samples in private booths guarded by security personnel, RJR cited a "safe harbor" provision in the California code.

That provision specifies free samples can be distributed on public grounds where minors are prohibited by law, or in public buildings or on public grounds leased for private functions where minors are denied access by law enforcement officers or security personnel.

The Supreme Court, however, ruled the safe harbor did not protect RJR, agreeing with Lockyer that the provision only applies where the entire public building or grounds are off limits to children. In the RJR case, only the booths had limited access, not the entire property.

The Supreme Court remanded back to the trial court the question of whether the $14.8 million civil penalty was too high. Lockyer contended the penalty was justified, based on the extent of RJR's violations and the number of free cigarettes it distributed.

While the settlement provides a smaller payment, Lockyer noted the $5 million still requires RJR to pay $337 per person who received free cigarettes at the six events.

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