Luxembourg/London: Europe's highest court on Wednesday upheld a tough EU law that will standardise cigarette packs, ban menthol flavouring and restrict e-cigarette advertising, paving the way for its adoption this month and dealing a blow to Big Tobacco.
The EU Court of Justice's rejection of a legal challenge brought by Philip Morris International and British American Tobacco (BAT), could weigh on profits for the industry and sets a precedent for other governments to crack down on a habit that causes nearly six million deaths a year worldwide.
"The court finds that, in providing that each unit packet and the outside packaging must carry health warnings... the EU legislature did not go beyond the limits of what is appropriate and necessary," the court said in its decision.
The legal challenge, which was also supported by Japan Tobacco International and Imperial Brands, can now be taken no further and the Tobacco Products Directive (TPD) will take effect on 20 May, though wholesalers and retailers will be given a year's grace to sell stocks manufactured before that date.
The TPD will ban menthol cigarettes by 2020, standardise packs and impose rules on e-cigarettes, such as limits on nicotine strength, tank size and advertising.
The court's validation of TPD bodes poorly for another case tobacco companies have brought against the UK government over its new law aimed at reducing the lure of smoking by forcing tobacco to be sold in uniformly drab packs with no branding.
That law is also due to take effect this month, with the English High Court expected to issue a decision in the coming weeks. Britain's ability to enforce stricter plain packaging is also covered by the TPD.
Shares of BAT and Imperial, the two big tobacco firms that trade in London, were each down by about 1 per cent. Imperial also reported weaker than expected sales volume on Wednesday.
Imperial Chief Executive Alison Cooper told reporters that the new rules would affect different European markets to varying degrees and could lead to an increase in illicit trade.
"Our view on this is that clearly consumers will be making some different choices given some of the changes in the market," Cooper said, adding that Imperial had budgeted tens of millions of pounds for implementation.
The impact of TPD remains unclear because of limited precedent. When it comes to plain packaging, only Australia serves as an example.
In the year after implementation in Australia in December 2012 sales of mainstream and premium brands fell, but value brands rose, suggesting that smokers traded down to cheaper alternatives. Yet there was a significant increase in tobacco tax at the same time, so it's hard to isolate the impact of the switch to plain packaging.
Morningstar analyst Philip Gorham said that margins will be at risk in the UK, with potentially lower sales growth if pricing power is undermined.
Ireland and France have passed similar bills aiming to enforce plain packaging.