Juul Quietly Revamped Its E-Cigarette, Risking the FDA’s Rebuke
(Bloomberg Businessweek) -- The e-cigarette Juul Labs Inc. introduced in the spring of 2015 was known internally by an eccentric code name: Splinter, after a rodent martial-arts master in the comic Teenage Mutant Ninja Turtles. Splinter, about the size of a thumb drive, got off to an undeniably splashy start. It appeared on billboards in Times Square. Influencers flashed it on Instagram. Wired magazine ran a story on Juul headlined “This Might Just Be the First Great E-Cig.”
Three years later, despite having entered the market almost last, Juul became its No. 1 seller. This unlikely coup was in large part about the cool factor and how it drew in younger people, ultimately engulfing middle schools and high schools across America. But Juul didn’t just outmaneuver its competitors. It did the same with regulators.
For all the market share, fame, and opprobrium Juul captured as it ascended, Splinter was a flawed product. The little plastic pods that held the device’s nicotine solution leaked. Customers complained of the liquid burning lips and blistering tongues. The stuff also seeped into the device’s circuitry at times, causing it to fail. That was a potential catastrophe for a venture-capital-backed startup facing a phalanx of competitors, almost all from the deep-pocketed tobacco industry.
So Juul quietly did something that manufacturers in other industries do as a matter of course: It fixed the product. According to four former employees who spoke on condition of anonymity, the company’s engineers changed the pod design, added new, heartier internal components to resist the shutdown problem, and rewrote the device’s firmware. The updated model, delivered in late 2017, was given the internal code name Jagwar, after another Ninja Turtles character.
No fanfare accompanied the launch of Jagwar, which looked identical to Splinter. Users who bought a Juul in early 2018 wouldn’t have had any clue it was an upgraded device. They probably never noticed any change at all. Instead, the new Juul likely made customers less prone to turn to a competing product, or throw their Juul in the trash, or—this would be the worst outcome for a company that had vowed to destroy the tobacco industry—go back to regular cigarettes.
Federal regulators were similarly unaware of the full extent of the product changes, even as the Food and Drug Administration crawled all over the company for months in an effort to curb a widening youth nicotine epidemic. And therein lay the potential peril for Juul.
In August 2016, more than a year before Jagwar was released, the FDA had formally deemed e-cigarettes tobacco products. The deeming rule, as it’s known, brought the industry under agency regulations for conventional cigarettes and other tobacco products. These regulations included one particularly important provision: Manufacturers were required to secure the agency’s authorization before putting a new product on the market or modifying an existing one. The rule gave the agency breathing room to build a more robust regulatory framework for the relatively new devices. The industry was effectively frozen in place.
At that point Juul had less than 4% of the domestic market, according to data from the Centers for Disease Control and Prevention, and was behind 16 other e-cigarette makers globally. Freezing in place potentially meant accepting its status as a minor player. It also meant living with a subpar device, anathema to a company born in Silicon Valley, where the blueprint depends on rapidly solving problems and improving a product until people can’t resist adopting it. Juul wasn’t prepared to settle.
Revelations about Juul’s product changes come at a moment when the company’s future rests in the government’s hands. Already, Juul is under investigation by multiple federal agencies, including the FDA, the Federal Trade Commission, and the Securities and Exchange Commission. The reasons behind those probes include questions about whether the company illegally marketed its devices to kids and whether it engaged in anticompetitive conduct. Separately, federal prosecutors in San Francisco are probing whether Juul was truthful in its interactions with the FDA, according to a person familiar with that investigation.
Just as critical, Juul is preparing to submit its Premarket Tobacco Product Application to the FDA—essentially a request for permission to keep its product on the market. E-cigarette manufacturers have to submit such applications for their existing products by Sept. 9.
In response to requests for comment, Juul provided written answers to a list of questions. “We comply with the requirements applicable to our products. This includes the premarket-review process for new tobacco products as well as modifications to such products before they are introduced in the U.S.,” a spokesman said in a written statement. “We take our compliance obligations very seriously and understand the impact of making unauthorized modifications. We believe our products are in compliance with FDA regulation.”
The FDA launched its formal probe into Juul in the spring of 2018, when the agency sent a letter to the company requesting that it hand over documents that could shed light on the high rates of youth use and the particular youth appeal of its products. As the company’s lawyers began preparing for what would inevitably become a period of heightened scrutiny, the issue of the undisclosed modifications became a focus internally. Former Juul insiders describe an effort to limit the amount of information given to FDA officials about the changes, despite a growing sense of unease among top executives. These executives and regulatory lawyers debated whether to disclose the changes to the FDA. They did not.
The changes to Juul’s device haven’t been previously reported. FDA spokeswoman Alison Hunt said in a statement that the agency was at no point made aware that Juul had changed the device’s internal components or firmware, though inspectors had learned about changes to the pod. Informed by Bloomberg Businessweek about the additional modifications, the agency declined to take a position on whether the changes, or their incomplete disclosure, broke the law. Enforcement decisions are left up to the agency’s discretion, and some legal and regulatory experts say the FDA wouldn’t be inclined to bring down the hammer on a company that made changes to fix a defective product, rather than, say, making the device more addictive or more attractive to teenage users.
Scott Gottlieb, a former FDA commissioner who announced his departure from the agency in March 2019, wrestled with Juul for months as he witnessed the birth of a new youth nicotine epidemic after years of declining tobacco usage among teens. Under his watch, the agency assigned a team of investigators to dig into the company’s marketing practices and develop policies designed to stanch what he described in a November 2018 statement as “astonishing increases in kids’ use of e-cigarettes.” The data showing rising youth use of e-cigarettes, he said then, “shock my conscience.” At the time, the FDA had grown interested in learning everything it could about Juul, including anything the startup might have done to make its device unusually addictive or appealing to youth, according to another former FDA official. The agency had even probed whether Juul had modified its device in such a way that the cloud of vapor became more inconspicuous and therefore more easily used by teens in a clandestine fashion, according to that person. No such evidence was ever found.
Contrary to popular belief, and despite all the hype, Juul was far from an overnight sensation. In 2007, Stanford grads James Monsees and Adam Bowen started a company called Ploom. That became Pax Labs, which developed the device that’s now so familiar and which later spun off Juul Labs. Even after the original Juul hit the market in June 2015, it took months for it to make serious inroads. In time the velocity of the company’s growth became impressive—in 2017 sales grew more than 600%—but two years after its cold start, Juul still accounted for less than 10% of all e-cigarettes sold in the U.S.
Product flaws were a limiting factor. The company received complaints from about 150,000 users from June 2015 to September 2018, many of them involving juice leaking from the pods into users’ mouths. One woman complained that her throat bled after she accidentally ingested some of the liquid.
Even more complaints could be found on Reddit and other online forums, where bad word-of-mouth could be ruinous. And so Juul scrambled. Engineers fiddled with different designs to establish a tighter fit for the pods. They compared the viscosity of different e-liquid formulations. They tested the pods by flipping them on one side, then another, then another, trying to figure out what was going on. They settled ultimately on a combination of steps that reduced, but didn’t completely stop, the leaks.
The shutdowns were a thornier problem. The cause was simple enough to determine: The leaking fluid compromised a tiny pressure sensor inside the device. The sensor’s role was to recognize the airflow of a user sucking on the device and trigger its battery to heat up the liquid, producing vapor. When the sensor failed, the user was unable to take a hit.
While it worked to fix these problems, the company attracted investors. In December 2017, Juul raised $111.5 million in venture funding. The company was now worth $10 billion—and under constant pressure to justify that valuation. It was on high alert for ways to eliminate what marketers call friction, sticking points for potential customers, according to two people familiar with internal company discussions. Early on, the company had virtually no age verification on its website. Employees didn’t double-check serial numbers before remitting free products when a customer complained about, say, a device that had stopped working. Some customers caught on. One college student was able to use the same serial number to obtain more than 150 free Juuls, which the student then resold, according to a person familiar with the case.
“We regularly look to strengthen and improve our warranty policy,” said the Juul spokesman in the written statement. “Today, in order to receive a warranty, all users must create an age-verified account through our third-party age- and identity-verification technology on our website.”
Ultimately, these scams might not have mattered to Juul. They ended up helping the company accomplish its goal of putting its product into the hands of as many people as possible in the shortest amount of time.
The FDA has been regulating cigarettes and smokeless tobacco products only since 2009, when Congress passed the Family Smoking Prevention and Tobacco Control Act. That capped off an almost two-decade fight that centered on the agency’s insistence that because cigarettes contained nicotine they should be regulated like any other drug or drug-delivery device. After a long and tangled political and legal battle, Congress ultimately gave regulatory responsibility for cigarettes and smokeless tobacco to a new unit within the FDA called the Center for Tobacco Products.
At the time the law was passed, e-cigarettes had barely registered on anyone’s radar, so they weren’t mentioned in the legislation. That left the new products in a lawless zone. In the absence of federal oversight, Juul and the makers of other nicotine-delivery gadgets were free to flood the market with their devices.
While Juul was clawing its way to the top, federal officials were sprinting to finalize the FDA’s deeming rule. In August 2016 it finally took effect. From that point forward, any modification—defined in agency guidelines as “a change in design, any component, any part or any constituent”—would render the device “a new tobacco product,” making it subject to a fresh scientific review by the agency that would need to be completed before the device could be sold. Products sold without the required premarket authorization could be considered “adulterated” and subject to removal from the market. Violations of the law could also result in civil penalties.
Meanwhile, by the fall of 2017, Juul found a more advanced and sturdier sensor and decided to use it. Inserting it into the device caused an engineering domino effect, according to three people familiar with the matter. The new sensor took up more space, which meant the device required a bigger circuit board. The underlying firmware also had to be revised to accommodate the component.
By the beginning of 2018, Jagwar was hitting the U.S. market. Juul now accounted for just under 30% of all e-cigarette sales. In July 2018 the company raised $1.2 billion, its biggest funding round yet, and its valuation was almost $15 billion. By the end of the year, Juul’s domestic market share was 60%. Youth vaping was reaching alarming levels, with 3.6 million middle school and high school students in the U.S. saying they were current e-cig users—Juul was their overwhelming favorite—up more than 70% from the previous year, according to the U.S. government’s National Youth Tobacco Survey. Juul was also the bestseller worldwide, according to Euromonitor International Ltd. The company’s name had become a verb—“Juuling” was synonymous with vaping.
That year also marked a turning point in the FDA’s regulatory approach. In the spring, then-Commissioner Gottlieb announced a nationwide undercover “blitz” that he said was designed “to crack down on the sale of Juul to minors at both brick-and-mortar and online retailers.”
Inside the company, tensions rose. Executives, including then-Chief Executive Officer Kevin Burns, were bracing for when—not if—the FDA would show up at Juul’s offices. Lawyers sent periodic reminders to staff members, telling them not to put anything in writing that could be communicated in person. Executives participated in practice sessions on how to interact with federal officials and respond to their questions, according to three people familiar with the discussions.
More than a dozen Juul employees were schooled using a technique called “hats on-hats off,” according to one of those people. During hats on, a designated person would play the role of an FDA inspector, asking probing questions. That was followed by hats off, in which the person evaluated the performance of the employee and offered tips on doing better. Employees were coached on specific FDA techniques they were told might be used to try to get them to talk more than they should. In at least one coaching session that included Juul’s chief quality officer, Joanna Engelke, employees were instructed on how to respond to questions about device modifications. If asked, acknowledge the changes, they were told. But don’t volunteer any information.
“Like other companies regulated by the FDA, Juul Labs undertook thorough preparations for an FDA inspection,” wrote the Juul spokesman. “Those preparations included identifying subject matter experts in areas of potential FDA inquiry and explaining to Juul Labs employees what an inspection would entail, as well as the need at all times to be cooperative, truthful, and accurate.”
One morning in September 2018, a team of federal agents filed into Juul’s building in San Francisco’s Dogpatch neighborhood. Their presence cast a pall over what had been, all things considered, a pretty sunny workplace. Some people had come to the company excited over its potential to end the scourge of cigarette smoking, according to interviews with more than a dozen current and former Juul employees. Others wanted big tech-startup paychecks. Plenty dreamed of both. Now they were being led into hastily arranged interview rooms and grilled by the feds.
Over the course of four days, the inspectors camped in a conference room. A Juul executive was always in the room with them. As stenographers took notes, employees were brought in to answer questions. When the inspectors wanted a document, someone would message people in a pair of rooms that had been set up with computers and printers, and it would be delivered. The environment was sometimes tense, according to people present for some interviews, with occasional small talk about the weather. Everyone was polite.
The inspectors already knew something about Juul’s product modifications. Four months earlier, while inspecting one of the company’s pod-filling contractors in North Carolina, they found evidence that Juul had tweaked the design of its pods to address the leaking problem. That change hadn’t been previously disclosed to the agency, according to the FDA inspection report from the facility, which was reviewed by Bloomberg Businessweek. In a later interview with FDA inspectors, a Juul executive acknowledged that the company had made changes to its pods and that FDA rules prevented it from making any more without submitting a new request to the agency, according to a separate report from the 2018 Juul inspection.
The agency ultimately opted not to take action in that instance. “The FDA makes determinations of whether or not to enforce against a specific violation at a specific time on a case-by-case basis,” Hunt, the agency spokeswoman, said in a written statement. “In this case, we considered the magnitude of change to the products, the impact the change had on the performance of the product, public health questions and if the change made to the product addressed a product safety concern or adverse event related to product design. The FDA concluded that the change here addressed a product safety concern.”
The FDA never learned, however, about other changes to the device—the new sensor and circuit board and the revised firmware. “We gave the company every opportunity to disclose information about all modifications,” Hunt said.
The inspectors might not have asked the exact right question, or pulled on the exact right thread, says one person present for the inspection. And therefore, Juul executives and employees, per the company’s coaching, didn’t volunteer anything.
While the deeming rule was meant to bring order to the e-cigarette industry, it left manufacturers in what many experts describe as a legal gray zone. Companies are often unsure about what is and is not allowed under the new regime, says Azim Chowdhury, a regulatory attorney who represents other e-cigarette companies at law firm Keller Heckman in Washington. “The FDA’s deeming rule is antiquated,” he says. “It wasn’t structured in a way that made it easy for companies to make changes that resulted in safer products, or fixing a product that was otherwise dangerous.”
In November 2019 the agency attempted to provide some clarity, saying it didn’t intend to enforce the modification ban in two instances: Companies could change their devices’ batteries to comply with a new industry safety standard. And they could update the design of their liquid containers to prevent accidental nicotine poisoning. In most other instances, Chowdhury says, if a company is contemplating even minor changes to improve a product’s reliability or safety, “we’d have to advise clients that FDA may view that as a new product.”
Other experts say the FDA’s deeming rule is unambiguous. “Any modification is a modification,” says David Ashley, who helped draft the FDA’s tobacco rules as director of the Office of Science at the agency’s Center for Tobacco Products. “Companies can’t say, ‘We’re going to change that,’ and put it back on the market. They have to come to the FDA first and put in a new application.” Nevertheless, Ashley, now a professor in the School of Public Health at Georgia State University, says decisions about whether to bring an enforcement action against a company are largely up to the agency.
When Bloomberg Businessweek told former FDA Commissioner Gottlieb about Juul’s device modifications, he was taken aback that such information was surfacing only now, months after the agency tried to pin the company down. “If they did make a modification and they concealed it, that’s a pretty serious infraction,” he said in an interview.
In December 2018, just a few weeks after the FDA inspectors carted off boxes of documents and hard drives from the company’s offices, Juul announced that it had received a $12.8 billion investment from Altria Group Inc., the largest sum raised by a U.S.-based venture-capital-backed company over the past two decades, according to data from PitchBook. Taking an investment from the company that makes the world’s most popular cigarette, Marlboro, shattered Juul’s antitobacco halo and fueled critics who were already suspicious of its ambitions. Still, the deal boosted the company’s value to $38 billion.
That high point didn’t last long. Around the time of the Altria deal, scores of consumers and state attorneys general began filing lawsuits against the company, alleging that Juul engaged in advertising practices designed to hook teens, such as placing banner ads on the Cartoon Network website and providing free Juuls to young influencers, including one described by pop-culture site Complex as “the Internet’s Coolest Teenager.” Juul has embarked on what it calls a “reset.” It has pulled back in key international markets, ceasing operations in South Korea and considering an exit from at least five countries in Western and Central Europe. It’s also ended its U.S. advertising campaigns, taken its popular dessert-flavored pods off the market, and slashed its own internal valuation to $13 billion. For the past year the company has undergone waves of layoffs amid a $1 billion corporate restructuring, shedding more than 1,000 jobs, about 40% of its workforce.
The FDA probably won’t rule on Juul’s Premarket Tobacco Product Application until a year or more after the September deadline. While it waits, the company is forging ahead with other innovations. In the U.K. and Canada it’s already selling an e-cigarette called C1, which uses Bluetooth to pair with an app that can help prevent minors from using it by allowing it to be locked and monitored. Recently, Juul published a patent application for a heated tobacco product, known internally as Caterpillar. In drawings the device has roughly the shape of the current Juul, but instead of pods filled with nicotine-laced liquid, it uses little cartridges stuffed with flexible sheets of tobacco, which are heated and vaporized using battery power. Juul engineers have also toyed with developing a device that would give users more control over their nicotine intake from each puff, according to three people familiar with the matter. The company declined to comment on the devices under development.
In May, Juul announced that it’s moving its headquarters from San Francisco to Washington, D.C.—a signal that its center of gravity is shifting squarely into the regulators’ orbit.
“It’s not where their customers are,” says Steven Blank, an expert in startups and an adjunct professor at Stanford University and senior fellow for entrepreneurship at Columbia University. “It’s where their life and death is.” —With Angelica LaVito
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