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Judge Blocks Tobacco Warning Laws

Zacks Equity Research

Tobacco companies heaved a sigh of relief as a federal judge blocked the rule that mandated tobacco warning labels on the cigarette packets. The images and texts or the health warnings, which were designed by the Food and Drug Administration (FDA), were considered to violate these companies’ right of free speech and have been blocked by U.S. District Judge Richard Leon in Washington.

Tobacco giants, Reynolds American Inc. (NYSE: RAI - News), Lorillard Inc. (NYSE: LO - News), Ligget Group, Santa Fe Natural Tobacco, and Commonwealth Brands, filed a case against the FDA for imposing labels that concentrated to chop down the number of smokers rather than helping consumers make a free choice.

The interpreter noted that the ruling of the FDA, which compelled the tobacco giants of United States to print the latest design set by the council on their cigarette packets containing graphic design of a dead body, cancerous lungs and rotten teeth, may “unconstitutionally compel speech.”

According to Judge Leon, the images were digitally enhanced to provoke an emotional response rather than being "purely factual." However, the ruling has not been entirely washed out; the judge only postponed the Sept. 22, 2012, deadline for the regulations to take effect until he finishes reviewing the rulings of the FDA.

The labels had been designed keeping in tune with the ‘Family Smoking Prevention and Tobacco Control Act’ to convey the health hazards of smoking. The council selected nine images out of 36 proposed last year. The warnings will occupy the entire top half, both front and back, of a pack of cigarettes. They must also constitute 20% of all advertisements.

The act provides the FDA with the authority to restrict the tobacco industry’s efforts to tap children, ban the introduction of flavored tobacco products, cut out misleading terms such as “light and “low.” Additionally, the FDA looked set to propagate larger and more effective warning labels and ask for detailed information about all ingredients as well as additives.

The FDA estimates to cut the smoking population by 213,000 in 2013, by using labels that would induce fear and disgust among Americans and discourage them from lighting up.

In America, the smoking population has shrunk dramatically since 1970, from nearly 40% to about 20%. But the declining rate appeared to stall since 2004, with about 46 million adults still into smoking. Analysts feel that the rate hasn't budged owing to the tobacco companies’ discount coupons on cigarettes and lack of funding for anti-smoking programs.

In recent years, more than 40 countries or jurisdictions have introduced labels similar to those created by the FDA. After a survey in countries using graphic labels, The World Health Organization revealed that the visibility of the label was much higher and almost 25% had responded by opting to quit.

United States had been using some of the most weak cigarette warnings in the world, unlike other big nations like Uruguay, Brazil and Canada. After Canada issued the first-of-its-kind law in 2000 about affixing warnings in cigarette packs, smoking rate fell to 20% from 26%.

Reynolds American holds Zacks #4 Rank, which translates into a short-term Sell rating and Lorillard holds Zacks #3 Rank, which translates into a short-term Neutral rating.

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