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Operators of cigarette vending machines who are suing the U.S. government lost an important battle Thursday as a federal court flatly rejected one of two arguments the companies are pursuing. In a unanimous decision, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., ruled that regulations designed to keep kids away from cigarettes did not amount to an unconstitutional “taking” of the vending machine companies’ contracts. The case turned on a California statute passed in response to federal regulations. The state-federal connection had drawn attention among constitutional scholars for its argument that the U.S. Treasury could be on the hook for actions by state governments trying to comply with federal rules. Thursday’s ruling dealt with the suit brought by Los Angeles-based B&G Enterprises. But B&G’s lawyer says the decision — if not overturned on an appeal to the full 12-member court — will affect about 500 similar cases pending in a trial court. All told, the companies are claiming that two sets of federal regulations cost them more than $1 billion, says Douglas McFadden of Washington, D.C.’s McFadden & Shoreman. He represents all of the plaintiffs picked by the Illinois-based Amusement and Music Operators Association. Thursday’s decision in B&G Enterprises v. United States stemmed from a 1992 act of Congress that gave the Department of Health and Human Services (HHS) authority to restrict block grants to states that didn’t prohibit the sale of tobacco products to minors. Congress didn’t require the states to restrict access to vending machines, but HHS strongly suggested states do so in order to qualify for federal funds. In 1993, HHS proposed regulations requiring states to prohibit “over-the-counter and vending machine sales” of tobacco products to minors. Moreover, HHS provided states with a model statute that banned cigarette vending machines altogether. California didn’t go that far, but state lawmakers in 1994 restricted cigarette vending machines to establishments that sold alcoholic beverages. As a result, B&G said it lost contracts with other venues for its machines. In the U.S. Court of Federal Claims, B&G said California was an agent for the federal government that was responsible for B&G’s lost business. In recent years, the Claims Court, the Federal Circuit, and the Supreme Court have become more receptive to cases in which businesses say federal regulations that effectively ruin business prospects violate the Fifth Amendment’s guarantee against the government taking property without just compensation. But last year, Claims Court Judge Robert Hodges granted the government summary judgment, and on Thursday Judges Alan Lourie, Raymond Clevenger, and Richard Linn of the U.S. Court of Appeals for the Federal Circuit affirmed the ruling. “It was California’s decision to create restrictions on the placement of tobacco vending machines,” wrote Lourie for the panel. “Congress may have provided the bait, but California decided to bite,” he added. A Justice Department spokeswoman says the government is pleased with the ruling. But the case is not over. B&G lawyer McFadden says it’s likely he will seek en banc review. He says the ruling conflicts with a 1996 en banc decision in Preseault v. United States, which held the government liable for a city’s taking of property when acting under federal authority. In that ruling, Lourie was part of the majority decision, but Clevenger dissented. Linn, a 1999 Clinton appointee, was not on the court. “The cases are still alive,” adds McFadden. His other theory centers on the Food and Drug Administration’s restrictions on cigarette vending machines that were in place for four years, until the U.S. Supreme Court struck down the FDA’s regulation of tobacco this past March.

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