COURT REJECTS FDA TOBACCO RULES

Says Administration Can't Limit Advertising, Marketing

RICHMOND, Va., -- A U.S. appeals court panel yesterday blocked Food and
Drug Administration plans to begin regulating cigarettes, saying the
Clinton administration has no authority to limit advertising and
marketing of tobacco products.

"It's another in a string of favorable rulings for the tobacco
industry," said Gary Black, tobacco analyst at Sanford C. Bernstein and
Co.

In a 2-1 decision, a panel of the Richmond-based 4th U.S. Circuit Court
of Appeals, said Congress didn't intend to allow regulation of tobacco
when it passed a 1938 law that gave the FDA general authority over drugs
and medical devices.

U.S. Circuit Court Judge H. Emory Widener, who wrote the 53-page
opinion, rejected the government's view that the FDA could classify it
as a "drug-delivery device."

The Justice Department quickly announced that it would ask the full
14-member court to review the decision.

The decision is a major setback for President Bill Clinton and former
FDA Commissioner David Kessler, who together proposed the restrictions
that were struck down yesterday. The tobacco companies offered Clinton
and Kessler, now a leading public health advocate, some of what they
wanted as part of the June 1997 proposed tobacco settlement. Clinton and
Kessler rejected the settlement as insufficient, sought more sweeping
authority and were turned down first by Congress -- and now by the
courts.

"There was some overreaching," said Mary Aronson, head of Aronson
Research in Washington.

Kessler, now the dean of Yale Medical School, said he would fight on.
"We always knew this would end up going all the way to the Supreme
Court," Kessler said. "These are chapters in a book that is still being
written. In the end, the words of (the law) must govern and the FDA law
says it has authority to regulate drugs. Nicotine is a drug."

After Congress rejected legislation based on the 1997 settlement, the
industry and attorneys general representing the states with pending
claims began discussing a more-limited settlement, one that would not
address the FDA issue. Attorney Joe Rice, a negotiator for many of the
states, said yesterday's ruling isn't likely to affect those
negotiations.

"I don't think there was much that was in the FDA rule that overlaps
with our lawsuits," he said.

The court ruling did little for tobacco stocks. Philip Morris Cos.
shares rose 13/16 to close at 42BC, while shares of RJR Nabisco Holding
Corp. fell 1/16 to 2315/16.

One reason: Tobacco companies still face an uncertain legal landscape,
particularly the possibility of extended courtroom battles with states
seeking reimbursement for Medicaid money spent treating sick smokers.

Analysts said investors may be missing the point. "This is a huge
victory for the industry. It strikes me as strange investors are not
reacting to this string of events," said Goldman, Sachs & Co. tobacco
analyst Marc Cohen. "Investors seem to want iron-clad certainty."

Unless the decision is overturned on appeal, the only alternative for
Clinton and public health advocates would be to ask Congress to give the
FDA explicit regulatory authority over nicotine, and so far Congress has
been unwilling to grant that.

Checked-by: willtoo