Sept. 30 (Bloomberg) -- Walgreen Co., the largest U.S. drugstore chain, lost its bid to prevent a San Francisco law banning tobacco sales in drugstores from taking effect tomorrow.

California state court judge Peter Busch in San Francisco said today at a hearing that there was a reasonable basis for the law, and he rejected Walgreen's request to overturn it. The retailer sued the city Sept. 8 claiming the ordinance, the first such law in the U.S. according to the city, is unconstitutional and anticompetitive. Altria Group Inc.'s Philip Morris USA unit filed a similar suit Sept. 24.

Walgreen's lawyer, Daniel Kolkey, said after the ruling that the drugstore chain expects to lose ``roughly 9 percent of its non-pharmacy sales'' in San Francisco to grocery and warehouse stores such as those operated by Safeway Inc. and Costco Wholesale Corp.

Kolkey said the Deerfield, Illinois, company would continue to fight its case in the trial court and appeal the final ruling, if necessary. ``This is simply round one,'' he said.

In court, Busch told Kolkey that the legal standard for Walgreen is a tough one. ``The court only needs to find a reason'' to uphold the law, the judge said.

Busch rejected Walgreen's argument that the ban is arbitrary because it affects drugstores and not grocery and warehouse stores. The judge said drugstores generate a larger percentage of sales from their pharmacies than the other types of stores do, so the city has a rational basis to regulate them differently.

San Francisco's Board of Supervisors passed the ordinance July 29, saying the public views drugstores as promoting health, and selling tobacco products conveys tacit approval of smoking.

Enforcement of Ban

Vince Chhabria, San Francisco's attorney, said the city will begin enforcing the ban tomorrow. He said it's the first local law in the U.S. prohibiting tobacco sales.

San Francisco policy makers will consider extending the ban to other stores that sell tobacco ``if this current ban turns out to be effective,'' Chhabria said.

Boston officials are considering a similar tobacco-sales ban, Chhabria said.

The case is Walgreen Co. v. City and County of San Francisco, 479553, San Francisco Superior Court.

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

Last Updated: September 30, 2008 18:18 EDT