Altria Quit Vaping Market in Secret Deal With Juul, FTC Says

(Bloomberg) -- Altria Group Inc. pulled out of the e-cigarette market in the fall of 2018 because of a secret deal with rival Juul Labs Inc. -- not because of the public-health concerns it cited publicly at the time, according to U.S. antitrust officials.

The Federal Trade Commission revealed the agreement between the two companies in an antitrust complaint made public Friday. The complaint cites new evidence about the negotiations between the two companies that resulted in Altria’s $12.8 billion investment in Juul in December 2018.

The complaint from the FTC, which sued on Wednesday to block the deal and ordered Altria and Juul to unwind the investment, states that Altria pulled its MarkTen product from the market as a condition of investing in Juul.

Juul’s “executives made clear their position that Altria could not remain a competitor in the relevant market if there was to be a deal,” according to the complaint. During negotiations, Juul insisted, “and Altria recognized, that Altria’s exit from the e-cigarette market was a non-negotiable condition for any deal.”

Altria had told the Food and Drug Administration in an Oct. 25, 2018, letter that it believed kids shouldn’t use tobacco and it would remove its e-cigarette products MarkTen Elite and Apex by MarkTen from the market, and remove all flavors except for menthol and mint from its other, similar products. On Dec. 7 of that year, the maker of Marlboro cigarettes announced it was winding down the rest of the e-cigarette business. Less than two weeks later, Altria had a deal to take a 35% stake in Juul.

Altria was facing intense competition at the time from Juul, which was the market leader with 70% of the market at the time, according to the FTC. The $12.8 billion investment, which Altria has since written down, eliminated competition between the two companies, leaving consumers with reduced choice, according to the FTC.

Juul spokesman Austin Finan said in a statement that the company disagrees with the “factual and legal allegations” in the FTC’s complaint and “will respond through the appropriate administrative process.”

“We believe that our investment in Juul does not harm competition and that the FTC misunderstood the facts,” said Murray Garnick, Altria’s executive vice president and general counsel. He said he’s disappointed with the FTC’s decision and “believe we have a strong defense and will vigorously defend our investment.”

Hotel Meeting

According to the FTC’s complaint, in August 2018, executives and board members from the two companies, including Juul’s then-Chief Executive Officer Kevin Burns and Altria CEO Howard Willard, met at the Park Hyatt hotel in Washington without any lawyers to discuss a deal. As talks continued that month, Juul made it clear that Altria had to exit the market, according to the complaint. When Altria tried to modify the non-compete terms, Juul “responded negatively and reiterated its demands,” the FTC said in the complaint.

Negotiations stalled, and Altria executives knew they had to meet Juul’s insistence on not competing if talks were to restart, according to the complaint. In October, Altria’s Willard made assurances to Juul’s CEO and board members. What exactly he promised is redacted in the complaint. But Juul’s Burns forwarded Willard’s letter to Juul’s chief legal officer with a “simple note” and talks resumed.

“Altria’s agreement to exit the relevant market eliminated one of JLI’s most dangerous rivals,” the FTC said, referring to Juul. “As a large, well-established, and well-funded company with long­ standing relationships and significant shelf space with retailers nationwide, Altria had the resources and infrastructure to drive sales and compete aggressively.”

The FTC claims the companies cannot show the investment led to any efficiencies that would outweigh the lack of competition the deal resulted in. They also say the new contract the companies negotiated in January eliminated Altria’s marketing help, “further reducing the scope of theoretical benefits from the agreements.”

Under the revised terms, Altria limited its help to advising Juul on a regulatory application seeking permission from the FDA to continue selling its e-cigarettes in the U.S. The changes also gave Altria a way out of the non-compete agreement should Juul’s application be denied.

Altria noted that just before it announced the deal in December 2018, it said it was withdrawing its e-cigarette products for reasons other than youth appeal. It cited “the current and expected financial performance of these products,” as well as regulatory restrictions.

And according to the final deal’s non-compete clause, Altria could keep competing with Juul’s products via its Green Smoke and MarkTen and MarkTen Elite brands, subject to certain conditions.

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