By Emma Court
Advocates say the changes don't go far enough to protect consumers
Reynolds American Inc. and its Santa Fe Natural Tobacco Company Inc. segment will remove the terms "natural" and "additive-free" from its controversial Natural American Spirit cigarette product labeling and related advertising and promotional materials, as part of a new agreement with the Food and Drug Administration.
The agreement, dated Jan. 19 and disclosed in a public filing in a class-action lawsuit, doesn't cover the product's "organic" label, nor does it affect the brand name, despite the other restrictions on the term "natural."
Advocates say the agreement, disclosed by Reynolds in a Feb. 23 filing in the U.S. District Court in New Mexico, doesn't go far enough to protect consumers.
"Our research shows that a majority of Natural American Spirit smokers incorrectly believe that their cigarettes are safer than other cigarettes," due to its claims of "natural" and "organic," said Robin Koval, chief executive officer and president of the antismoking nonprofit Truth Initiative, which isn't involved in the lawsuit, adding that the "'organic' claim is perhaps most influential to smokers." "This agreement does little to address those widespread and highly dangerous misperceptions," she said.
See: Lifestyle gets blame for 70% to 90% of all cancers (http://www.marketwatch.com/story/your-lifestyle-is-to-blame-for-70---90-of-cancers-2015-12-17)
Santa Fe "does not admit any liability or wrongdoing" as part of the FDA agreement, which gives it seven months to implement the changes.
Still, the agreement could have significant consequences for Reynolds (RAI), which makes the "natural" claim a major part of its marketing programs, and sells the brand at a price that's higher than most other rival brands.
The Natural American Spirit brand is the "fastest growing super-premium cigarette brand and is a top 10 best-selling cigarette brand," according to Reynolds' 10-K filing with the Securities and Exchange Commission. The Santa Fe segment, which manufactures and markets Natural American Spirit, had a 2.2% share of the U.S. retail cigarette market last year.
Removing the terms from its labeling and advertising "could have an adverse effect on the sale of such cigarettes and, as a result, on the results of operations, cash flows and financial position" of the segment and Reynolds as a whole, the company's 10-K said. Santa Fe brought in $546 million in operating income in 2016, according to Reynolds.
And, because Reynolds -- which has owned Santa Fe since 2001 (http://www.marketwatch.com/story/rjr-outbids-rothmans-for-sante-fe-natural-tobacco)-- sold the international rights of Natural American Spirit to Japan Tobacco Inc. (2914.TO) last year (http://www.marketwatch.com/story/reynolds-american-to-sell-some-non-us-assets-for-5-billion-2015-09-29), the company is much more reliant on the U.S. cigarette market, according to the 10-K.
Related:Reynolds American to sell some non-U.S. assets for $5 billion (http://www.marketwatch.com/story/reynolds-american-to-sell-some-non-us-assets-for-5-billion-2015-09-29)
The company advertises Natural American Spirit as containing "TOBACCO + WATER THAT'S ALL," according to a class-action lawsuit filed against Reynolds in June 2016 filed by plaintiffs Jason Cole and Rachael King. The case is one of 16 similar lawsuits across the country, according to Reynolds' 10-K.
But the FDA agreement doesn't come to a conclusion about whether that labeling practice requires a disclosure, such as "Natural American Spirit cigarettes are not safer than other cigarettes."
The Federal Trade Commission -- which since 2000 has required (https://www.ftc.gov/enforcement/cases-proceedings/992-3026/santa-fe-natural-tobacco-company-inc) that Santa Fe advertisements that use labels such as "additive-free" also say it doesn't mean the cigarette is safer --would require such a disclosure, but the FDA would not, according to the agreement. The parties will work to resolve this question within 30 days of the agreement being signed, according to the agreement.
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The FDA specifically targeted the "natural" and "additive free" labels in an August 2015 warning letter (https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2015/ucm459778.htm) to Santa Fe.
Reynolds disclosed the agreement with the FDA as part of a motion to dismiss the June 2016 class-action lawsuit, arguing that "because this is the very conduct that Plaintiffs seek to enjoin...Plaintiffs' claims for injunctive relief are now moot."
The lawsuit alleges that Reynolds chose labeling terms including "natural," "additive free" and "organic" so customers would be misled to think their cigarettes "are less harmful, safer, and less carcinogenic than other tobacco products."
"Defendants were then able to charge more for Natural American Cigarettes than competitors charge, and consumers were willing to pay the higher prices for the supposedly healthier and safer cigarettes," the case states, with those consumers including the lawsuit's plaintiffs. But "the cigarettes are not healthier, safer or less carcinogenic."
Representatives for Reynolds and the FDA declined to comment.
-Emma Court; 415-439-6400; AskNewswires@dowjones.com
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03-02-17 1606ETCopyright (c) 2017 Dow Jones & Company, Inc.