Vaping Pioneer Juul Asks Agency to Block Pod-Making Competitors
Vaping Pioneer Juul Asks Agency to Block Pod-Making Competitors
(Bloomberg) -- As U.S. regulators take aim at vaping, one of the biggest makers of electronic cigarettes says it can help keep the devices away from kids if a trade agency protects it from foreign competitors.
Juul Labs Inc. is asking the U.S. International Trade Commission to block imports of nicotine pods made by competitors for Juul devices, saying its patents are being infringed. The San Francisco-based company says it is pursuing the case, which begins Tuesday in Washington, in part to keep flavored e-cigarettes out of the hands of kids.
In opening arguments Tuesday, though, Juul focused on the company’s history as a game-changer in the market for electronic cigarettes. After entering the market with its device in 2015, the company reported $10 million in sales in 2016; two years later it logged revenue of $1.2 billion, said Juul lawyer Daniel Yonan of Sterne Kessler Goldstein & Fox in Washington.
Others entered the market and “shamelessly copied in order to capitalize on our success,” Yonan told trade Judge Sandra Dee Lord.
While in court documents Juul has positioned its cases as part of efforts to curb under-aged smoking, others say money is as big a motivator.
“This is all about trying to establish a monopoly in the market,” said Robert Jackler, a professor at Stanford University School of Medicine who heads a group that researches the promotional activities of the tobacco industry. The copycats are “the biggest commercial threat to them.”
The case, the second of two, was filed at the ITC a year ago and began trial as regulators investigate the company’s marketing practices and an outbreak of a mysterious vaping-related illness has led to calls for greater regulation of vaping. More than 500 people in the U.S. have been sickened and at least seven have died.
While Juul is the top-selling e-cigarette company, its pods are pre-loaded with nicotine and haven’t been identified as central to the outbreak. Nevertheless, the Centers for Disease Control and Prevention has recommended people stop using all e-cigarettes until more is known.
Juul’s rechargeable electronic nicotine delivery systems, known as vaporizers, have an element that heats the liquid in a transparent cartridge, known as a pod, to deliver nicotine to the user. Much like makers of printers for computers that make much of their profit off sales of toner cartridges, Juul sells its devices at a relatively low price and makes money on sales of the pods.
Juul’s pod sales were about 72% by revenue of the U.S. pod refill market last year, the company said in filings with the agency. All of this has made Juul one of the most richly valued startups. Marlboro maker Altria Group Inc. last year invested about $13 billion for a 35% stake in the company.
Juul voluntarily pulled many of its flavors, with the exception of mint and menthol, out of stores in response to the youth vaping epidemic. Those shelves were filled with pods advertised as being compatible with the Juul device and sold -- at a lower cost -- in flavors like strawberry milk or watermelon.
Juul’s patents, which expire in 2034, cover the mouthpiece, heating chamber and storage compartment for the liquid nicotine. The copycat devices, it says, are “inferior copies” that are “made with materials and processes of unknown quality,” and are designed to be marketed to underage users.
Some companies have already agreed to stop selling their products to end the cases, while others didn’t bother to respond to the complaint.
ZPod maker Zlab SA announced it was settling the case moments after Yonan completed his opening arguments Tuesday. Zlab lawyer Steven Susser, of Carlson Gaskey & Olds, in Birmingham, Michigan, said the terms weren’t going to be disclosed immediately; Yonan told the judge the settlement contract was being written.
The surprise settlement threw the trial into disarray, since Zlab had been leading the arguments that the patents were invalid. The remaining companies are Maduro Distributors Inc., Twist Vapor Franchising LLC, Vaportronix and Vapor 4 Life Holdings Inc.
Vapor 4 Life lawyer Clifton McCann of Thomson Hine said the patents in the case were the result of “routine engineering” that had nothing to do with the success of Juul.
The main drivers of the $1 billion in sales were the potency of the nicotine and “the hip and aggressive marketing campaign to appeal to youth,” McCann told the judge.
When Juul introduced its namesake device in June 2015, it revolutionized the decade-old industry. Here was a sleek device that resembled a USB drive with a higher nicotine content than other vaping devices but smoother flavor. It was likened to Apple Inc.’s iPhone, which transformed the smartphone industry in 2007.
The company has promoted its product as a way for smokers looking to kick the habit to get nicotine without the cancer-causing tar and other chemicals. In court papers, Juul has described itself as “on a mission to improve the lives of the world’s one billion adult smokers by eliminating traditional combustible cigarettes.”
The key to Juul’s success is the high level of nicotine. A single pod has the same amount of nicotine as a pack of cigarettes. Juul was quickly adopted by America’s youth, who were able to easily hide the devices from parents and teachers.
The company used youthful models, held “vaping parties” and did other things to promote its product, McCann said. By the time the U.S. Food and Drug Administration started imposing regulations on vaping, Juul had established itself and while others found it harder to enter the market, he said.
Part of this swing can be attributed to its cost compared to traditional cigarettes. A research study by Stanford’s Jackler concluded that high nicotine e-cigarettes have reduced the cost of addictive levels of nicotine, thus encouraging use by price-sensitive populations including the youth, minorities and the poor.
Juul said it took steps to lessen the appeal to young users by establishing an adult verification system on its website and limited store sales. It claims the rival pods aren’t taking age-verification as seriously.
“We see this as a somewhat cynical attempt by Juul,” Susser said in an interview a week before the trial. “They are trying to blame all the other companies and re.-create themselves as the good guys.”
Th companies still in the case, which revolves around the pods, have conceded that their products infringe the patents. Still remaining questions involve validity and whether any order would extend to products already on the market, with Lord scheduled to release her findings in late December. A different ITC judge is expected to release his findings in November, in a case that focused on the devices and the pods.
“Juul started it, but now it’s a much bigger market,” Jackler said. “Juul is threatened by that.”
To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;Evan Sully in Washington at esully2@bloomberg.net
To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Elizabeth Wasserman
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