Case 1:09-cv-00117-JHM-ERG Document 71-16 Filed … › FDA-2014-N-0189-76048 ›...

Case 1:09-cv-00117-JHM-ERG Document 71-16 Filed 11/13/2009 Page 1 of 17001015

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF KENTUCKY

BOWLING GREEN DIVISION

COMMONWEALTH BRANDS, INC.;

CONWOOD COMPANY, LLC; DISCOUNT

TOBACCO CITY & LOITERY, INC.;

LORILLARD, INC.; NATIONAL TOBACCO

COMPANY, L.P.; R.J. REYNOLDS TOBACCO

COMPANY;

Plaintiffs.

UNITED STATES OF AMERICA; U.S. FOOD

AND DRUG ADMINISTRATION; MARGARE1

HAMBURG, Commissioner of the United States

Food and Drug Administration; and KATHLEENSEBEL1US, Secretary of the United StatesDepartment of Health and Human Services;

Defendants.

CIVIL ACTION

NO. l:09-cv-U7-M

(Electronically filed)

DECLARATION OF MICHAEL G. TERRY

1, Michael G. Terry, declare under penalty of perjury that the following is true and correct

to the best of my knowledge, information, and belief:

Introduction

1. My name is Michael G. Terry. I am Vice President of Marketing at plaintiff

National Tobacco Company L.P. ("National"). 1 am submitting this declaration in accordance

with the Court's Order entered on October 5, 2009 and in support of the motion for summary

judgment that will be filed by National and other plaintiffs in this action.

Case 1:09-cv-00117-JHM-ERG Document 71-15 Filed 11/13/2009 Page33of33001014

Date


2. National is a Delaware limited partnership whose general partner is National

Tobacco Finance Corporation and whose limited partner is North Atlantic Trading Company,

Inc. National's principal place of business is in Louisville, Kentucky and its manufacturing

operations are in Kentucky and Tennessee.

3. National manufactures and distributes smokeless tobacco products, roll-your-own

tobacco and pipe tobacco and also distributes cigarette papers and other roll-your-own products.

Its products are sold under the brand names Beech-Nut®. Stoker's®, Durango®, Havana

Blossom®, Trophy® and Zig-Zag®, among others.

4. I have been National's Vice President of Marketing since January 2006. I

currently have responsibility for marketing National's brands to adult consumers. My

responsibilities include overall brand strategic planning, advertising and marketing

communications with adult consumers, including product packaging and retail point-of-sale

marketing. 1 am also responsible for overseeing National's customer service. I am the senior

executive overseeing consumer marketing functions at National.

5. 1 received a liberal arts degree from Bowdoin College in 1983 and a Master's

Degree in Business Administration in 1987 from the Ross School of Business at the University

of Michigan. 1 have worked in brand marketing since I finished business school. Before joining

National in January 2006, I held brand marketing positions with RJR/Nabisco, Tropicana,

Dannon Yogurt and US Smokeless 'Tobacco.

6. My statements in this declaration are based upon my personal knowledge,

education, training, experience and judgment.

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National's Consumer Marketing

7. National's marketing is directed to existing adult tobacco consumers. National's

marketing focuses on reinforcing the brand loyalty of adult consumers who already buy our

products and on encouraging adult consumers who buy our competitors' products to choose our

products instead. Encouraging adult consumers to switch to our products is the best opportunity

we have to grow our business and increase our market share among existing adult tobacco

consumers.

8. Marketing communications are the only way National can tell adult tobacco

consumers about our products and build brand equity (that is, brand recognition and positive

associations with our brands in the minds of adult consumers). Marketing communications are

critically important to our ability to compete in the marketplace.

9. National's primary consumer marketing tools are:

• product packaging,

• point-of-sale (that is, in-store) marketing at retail stores, and

• direct marketing to adult tobacco consumers.

10. National is currently a relatively small company compared to others in the

marketplace. We therefore have a limited marketing budget. We rely very heavily on our

product packaging, point-of-sale marketing and direct marketing to build brand equity and to

distinguish our products from our competitors' products.

11. Our advertising is intended to get the attention of adult tobacco consumers and

communicate to them a particular message about our brands, to retain adult consumers who

already buy our products and reinforce brand loyalty, to build brand equity and to encourage

other adult consumers who buy our competitors' products to switch to our products.


12. National is a compliant Non-Participating Manufacturer with regard to the 1998

Master Settlement Agreement among 46 states and the four major tobacco companies at that time

(Reynolds, Philip Morris, Brown & Williamson and Lorillard). National makes substantial

monetary deposits for the benefit of settling states in a complete and timely manner.

The Act's Impact on National's Consumer Marketing

13. 1 understand that this lawsuit challenges certain new restrictions on consumer

marketing contained in the Family Smoking Prevention and Tobacco Control Act (the "Act"').

Based on my experience and judgment, those new restrictions would severely impair National's

ability to communicate with adult tobacco consumers. The Act restricts the ways we

communicate with adult consumers who already buy our products and with other adult tobacco

consumers.

Ban on Color and Graphics in Advertising

14. Section 102(a)(2) of the Act (creating new 21 C.F.R. § 897.32(a)) limits tobacco

product advertising to black and white text only, except in certain adult-only facilities and in

certain adult publications.

15. As explained above, we rely heavily on point-of-sale marketing. We have

typically used color, graphics and images, brand names and brand logos in these

communications. In my judgment, it is essential for us to be able to use color and graphics in our

advertising. Using only black-and-white text would eliminate our ability to highlight the

differences between our products and our competitors' products and to communicate the essence

of our brands to adult consumers.

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16. Some examples of our point-of-sale materials follow.

^G-24,MAKE YOUR OWN CENTER

Make a BetterCigaretteand save!

ztg-Zag it* mat Easy

NEW BUY BIG-SAVE BIG

NEW LOOK!rmtsH scal-

MetalcaN• AMI

PRIMIUNtobacco

17. Color, graphics and images are an essential part of conveying a message to adult

consumers in an efficient and effective way. This is particularly true when we launch a new

product, in order to communicate the differences that set our new product apart. Among other

things, it is important to show the consumer a picture of the new product so that the consumer

will know what to look for. Text-only advertising cannot do that. Also, without color or images,

it is virtually impossible to distinguish one product from another.


18. Furthermore, a number of National's federally-registered trademarks include

designs. Our registered trademarks include the following design marks, among others, BEECH

NUT and design (Reg. No. 3,703,294) and STOKER'S and design (Reg. No. 2,071,640):

Under the Act, as it is written, because our design marks contain graphics and images, National

would be prohibited from using those trademarks in its advertising, except in certain adults-only

facilities and adult publications.

19. In fact, under the Act, color, graphics and images are barred from almost every

avenue we use to communicate with adult tobacco consumers (including adult consumers who

already buy our products), including retail point-of-sale materials.

20. Under the Act, with almost all advertising limited to black-and-white and text-

only, we will have a number of problems marketing National's products. First, all of National's

advertising will look the same, no matter what brand or product it concerns. Furthermore, all of

National's advertising will look just like our competitors' materials. It will be much harder to

communicate effectively, because advertisements will be less noticeable. We will also lose the

ability to use color and design to communicate key brand equities and product attributes to adult

consumers. If our advertising looks very similar to our competitors' advertising, adult

consumers are likely to believe there are few real differences in the products. That would make

it more difficult to communicate about core brand attributes. In addition, we would lose the

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value of our trademarks, logos and color schemes, and all the associated good will that has been

built up over time.

21. The ban on color and graphics contains an exception for consumer advertising in

certain adult-only facilities. However, this exception is so narrow that, in practice, it does not

reduce the harm caused by the ban on color, graphics and images in advertising.

22. To qualify for the exception, the Act requires that the retailer must "ensure! j" tnat

no person younger than 18 years of age is present, or permitted to enter, at any time." 21 C.F.R.

§ 897.32(a), id. § 897.16(c)(2)(ii). In addition, at such locations, the advertisement must be

"affixed to a wall or fixture in the facility" and must not be "visible from outside the facility."

21 C.F.R. § 897.32(a). This exception is unlikely to have any practical benefit. First, this

exception is not available to tobacco specialty stores, even if they do not ever allow minors to

enter. Section 101(b) of the Act (creating new § 913 of the Federal Food, Drug and Cosmetic

Act) dictates that regulations be issued that require tobacco specialty stores to "comply with any

advertising restrictions applicable to retail establishments accessible to individuals under the age

of 18." Second, many retailers who sell National's tobacco products let underage people enter

their stores (for example, convenience and grocery stores). 'Third, many retailers have large plate

glass windows and doors on their stores, which means that much of the inside of the store is

visible from outside. Thus, in practice, this exception will apparently apply only to adult-only

bars and nightclubs (and only as long as their interiors are not visible from outside). To the best

of my knowledge, National does not sell its products through those types of establishments.

23. In addition, the retail exception's requirement that an advertisement be attached to

a wall or fixture would prevent the use of promotional displays and other materials that National


now uses regularly. For example, we regularly use free-standing product displays, like the

examples in the following pictures.

Sf 99 *"-••—€jnve '2"Q Now!

pgECH-NUt

24. These displays are particularly critical in generating awareness and getting adult

consumers to try new products. We also use them to reinforce adult consumer loyalty to our

existing products and encourage adult consumers of our competitors' products to try our

products and switch to them. We also use counter mats, floor decals and other point-of-sale

advertising that does not affix to a wall or fixture.

25. In short, the exception for certain adult-only facilities has little practical

application. 'The Act will, in effect, foreclose National from using color, graphics or imagery in

its point-of-sale materials.

Drastic Changes to Product Packaging

26. Section 201(a) of the Act drastically changes the text and configuration of current

warnings on packaging and advertising on tobacco products. 'These new requirements will

severely impair our ability to communicate with adult consumers through our product packaging.


27. For roll-your-own tobacco, the Act dictates that the top 50% of the front and back

of the package must display a government-mandated message and color graphics depicting

illnesses caused by tobacco use. For smokeless tobacco products, the Act requires that 30% of

the two primary display panels on the package display a government-mandated message. In

addition to the warning statements, the Act requires the tobacco package to contain additional

items: the statement "Sale only allowed in the United States," the product's established name

(e.g., "chewing tobacco," "roll-your-own tobacco," "moist snuff), the quantity of contents, the

percent domestic/foreign grown tobacco, and the name and location of manufacturer, packer or

distributor.

28. Packaging is an important part of how we communicate with adult consumers.

We design our packaging carefully to reinforce brand equity, to convey information about our

brands to our adult consumers and to differentiate our brands from competitors' brands. This is

particularly true since there is a limited amount of space on tobacco packaging.

29. For example, on the back of the package for our Stoker's® 24C® chewing tobacco,

we tell the story of the Stoker family tradition of producing quality chewing tobacco and

providing good value ("a good chew at a fair price") since 1940. That text communicates an

important brand message to adult consumers. Pictures of the front and back of the packaging for

that product follow.

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24C

It will not be possible to convey the same brand message effectively if 30% of the front and back

of the package are taken up by a government-mandated message.

30. The Act will take up either 30% or 50%, depending on the product, of the primary

display panels. With that much space occupied by a government-mandated message, we will

have to redesign all of our existing packaging, and the amount of information we are able to

include on packaging will be reduced.

Restrictions on Sampling

31. Section § 102(a)(2)(G) of the Act (which creates new 21 C.F.R. § 897.15(g))

restricts distribution of smokeless tobacco product samples to locations that meet the definition

of a "Qualified Adult-only Facility."

32. Like many consumer goods manufacturers, National uses product sampling to

introduce new products to adult consumers and to encourage adult consumers of competitive

brands to try (and hopefully switch to) its brands. Offering samples facilitates communication

with adult consumers because it gives them something of value.

33. National engages in product sampling with adult tobacco consumers. As a small

company with a limited marketing budget, National relies heavily on one-on-one contact with

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adult tobacco consumers to build its brand equity, to generate positive word of mouth and to

encourage consumers to remain loyal to its products or to switch to its products from

competitors' brands. In fact, sampling is one of the most effective ways to convince an adult

consumer of a competitor's brand to switch to one of our brands. An adult consumer who is

currently satisfied with his or her brand may not be influenced to try our brands by in-store

advertising. Sampling allows us to give one of our brands to an adult consumer, so that he or she

can try it without spending any money. Once the adult consumer has tried the sample, that

consumer can understand our brand's competitive point of difference (for example, good quality

and good value) and switch to one of our brands.

34. National, as a matter of company policy, strictly prohibits distribution of samples

of tobacco products to minors. We distribute samples to adult consumers only after verifying

their ages by checking their government-issued identification.

35. The new restrictions on sampling of smokeless tobacco products are so onerous

that they will greatly harm National's ability to communicate with adult consumers.

36. First, the Act would allow the distribution of samples only in a "qualified adult-

only facility," which section 102(a)(2)(G) of the Act (creating 21 C.F.R. § 897.16(d)) defines as:

'(C) For purposes of this paragraph, the term 'qualified adult onlyfacility' means a facility or restricted area that -

'(i) requires each person present to provide to a lawenforcement officer (whether on or off duty) or to asecurity guard licensed by a governmental entitygovernment-issued identification showing a photographand at least the minimum age established by applicable lawfor the purchase of smokeless tobacco;

'(ii) does not sell, serve, or distribute alcohol;

'(iii) is not located adjacent to or immediately across from(in any direction) a space that is used primarily for youthoriented marketing, promotional, or other activities;

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'(iv) is a temporary structure constructed, designated, andoperated as a distinct enclosed area for the purpose ofdistributing free samples of smokeless tobacco inaccordance with this subparagraph;

'(v) is enclosed by a barrier that—

'(I) is constructed of, or covered with, an opaquematerial (except for entrances and exits);

'(II) extends from no more than 12 inches above the

ground or floor (which area at the bottom of thebarrier must be covered with material that restricts

visibility but may allow airflow) to at least 8 feetabove the ground or floor (or to the ceiling); and

'(HI) prevents persons outside the qualified adult-only facility from seeing into the qualified adult-only facility, unless they make unreasonable effortsto do so; and

'(vi) does not display on its exterior—

'(I) any tobacco product advertising;

'(11) a brand name other than in conjunction withwords for an area or enclosure to identify an adult-only facility; or

'(111) any combination of words that would imply toa reasonable observer that the manufacturer,

distributor, or retailer has a sponsorship that wouldviolate section 897.34(c).

37. 'These detailed and onerous requirements that must be satisfied for a location to

qualify as a "qualified adult-only facility" impair our ability to communicate with adults of legal

age about a legal product. Among other things, even if it might be physically possible in a given

location to comply with the many requirements that a location must satisfy to be a "qualified

adult-only facility," the restrictions on exterior signage will make it very difficult for adult

consumers to find us.

38. Second, section 102(a)(2)(G) of the Act (creating new 21 C.F.R. §

897.16(d)(2)(D)) requires that distribution of samples of smokeless tobacco must be limited to no

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more than one package per adult consumer per day and limits each package to no more than 0.53

ounces of smokeless tobacco.

39. This new sample-size restriction will make it exceedingly difficult for National to

communicate its brand messages to adult consumers. One problem is that the Act does not

differentiate among the various forms of smokeless tobacco, which are, in fact, manufactured

differently and consumed differently by adult consumers. National actively markets both major

forms of smokeless tobacco: moist smokeless tobacco (or "dip") and loose-leaf tobacco (or

"chewing tobacco"). The moist smokeless tobacco is finely cut tobacco that is primarily sold in

l.2-ounce cans. The loose-leaf tobacco is more leaf-like, with larger pieces of tobacco, that is

sold primarily in 3-ounce foil bags. Most adult consumers prefer and primarily use one or the

other. Regardless of their primary usage, adult consumers on average consume approximately 3-

4 packages of moist smokeless tobacco or loose-leaf tobacco per week.

40. The mandated .53-ounce sample size does not take into account the difference

between moist smokeless tobacco and loose-leaf smokeless tobacco products. Because

National's loose-leaf smokeless tobacco products are larger cuts, which adult consumers

typically use in larger amounts, a sample of no more than 0.53 ounces of product is too small to

be a viable sample.

41. In addition, for some of National's moist smokeless tobacco and loose-leaf

tobacco products, our competitive difference is value. We package our products differently than

our competitors. We offer larger containers holding more product at a lower price. For our

moist smokeless product, the adult consumer buys a 12-ounce tub (compared to the industry-

standard 1.2-ounce can) then refills a smaller, more portable can or other container himself or

herself. 'This represents a behavioral change for adult consumers because the consumer is doing

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a bit more work, but we are able to offer better value because the consumer is buying in bulk. To

communicate this brand message effectively and to inform adult consumers about this behavioral

change, National typically gives interested adult consumers full-size, 12-ounce samples of our

moist smokeless tobacco products, so that the adult consumers have a realistic product

experience from the samples. National also has brands of loose-leaf tobacco that are similarly

positioned from a value perspective. While the industry standard is 3-ounce foil bags, we offer

8-ounce and 16-ounce foil bags of loose-leaf tobacco. When we sample our loose-leaf products

that are positioned on value, we generally provide adult consumers a sample size of a 16-ounce

bag. We cannot communicate these brand messages of better value to adult consumers if we are

limited to a single sample of no more than 0.53 ounces per consumer per day.

42. Taken together, the new restrictions on distributing samples of smokeless tobacco

products greatly harm National's ability to communicate about its products with existing adult

consumers of its products and with other adult consumers of legal age.

Impact of Sampling Restrictions on Direct Marketing

43. Direct marketing through sampling is a critical component of National's

consumer marketing. We also rely on direct contact by mail with adult consumers who already

buy our products and with adult consumers who buy our competitors' products to communicate

about new products, to reinforce our brand message about our existing products and to build

brand loyalty by providing coupons and special offers.

44. To that end, we maintain a database of adult consumers who are interested in

getting information about our products. If our ability to distribute samples is impaired, our

ability to develop our direct marketing program will also suffer. That is because one of the

primary ways we develop our database is to add the names of adults who have taken samples of

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our products and who gave us their contact information and indicated they would be interested in

receiving coupon offers and information about our products.

45. If we are restricted from distributing effective samples of our products, it will not

only impair our ability to interact with adult consumers one-on-one, but will also impair our

ability to contact adult consumers who want information about our products through direct mail.

Ban on Brand Name Merchandise

46. Section § 102(a)(2) of the Act (creating new 21 C.F.R. § 897.34(a) and (b)) bans

distribution of any non-tobacco good with a cigarette or smokeless tobacco brand name on it and

further bans the distribution of non-tobacco goods in exchange for purchases of tobacco

products.

47. National has in the past provided adult consumers who buy its products with

utilitarian items bearing National's brand names, including shirts, hats, magnets and the like.

Sometimes, National has given those items away to adult tobacco consumers. From time to time.

National has also offered adult tobacco consumers the opportunity to turn in proofs of purchase

for these items and has offered goods for sale that bear its brand names.

48. We have found that these activities are very popular with adult consumers who

buy our products and are a valuable tool in reinforcing brand loyally and building brand equity.

They are also popular with adult consumers who buy our competitors' products and help to

encourage people to switch to our brands. Because they are popular, these activities provide

National with a valuable opportunity to communicate with adult tobacco consumers and

reinforce our brand messages. The Act would ban all such activities. It would therefore harm

our ability to communicate with adult tobacco consumers.

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Ban on Outdoor Advertising

49. Section § 102(a)(2) of the Act (creating new 21 C.F.R. § 897.30(b)) bans outdoor

advertising for tobacco products located within 1,000 feet of the perimeter of any public

playground, elementary or secondary school. National uses outdoor advertising at retail

locations to let adult tobacco consumers know that a particular store sells its brands and to

market new products or promotional programs. 'This is part of our point-of-sale marketing,

which is critical to building our brand equity and competing against larger, more established

competitors. This new restriction will impair our ability to communicate with adult consumers.

Harm Caused By Implementing ActWhile This Lawsuit Is Pending

50. Implementing the Act while this lawsuit is pending will cause substantial harm to

National. The effective date of all of the provisions of the Act described above (except for roll-

your-own tobacco package warnings) is June 22, 2010. To implement those provisions by that

date, National will need to design and purchase point-of-sale materials that comply with the

requirements described above. We will also have to distribute the new materials to many

retailers nationwide to replace the existing materials. This process will take at least six months.

51. To implement the changes required under the Act to smokeless tobacco product

packaging for all of National's many products, we will need to design and order modified

packages. That process requires at least six months' lead time.

52. To implement the changes required under the Act to smokeless tobacco samples.

National will have to create new sample packaging from scratch. I estimate that it will take at

least 6 to 9 months to design and source that new packaging. If the Act takes effect in June

2010, National could be without any usable samples for several months. Even once we have

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new, compliant sample packaging, National will be foreclosed by the small sample size from

effectively communicatingour brand messages of value to adult consumers.

Conclusion

53. In short, the new restrictions imposed by the Act will severely impair National's

ability to communicate with adult consumers of its products and adult consumers of its

competitors' products. Furthermore, implementing those restrictions while this lawsuit is

pending will result in significant harm to National.

Dated: November /2. 2009867018

Michael G. Terry

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Case 1:09-cv-00117-JHM-ERG Document 71-16 Filed … › FDA-2014-N-0189-76048 ›...

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