Philip Morris IQOS Imports Barred in Reynolds Tobacco Fight

30 Sep 2021, 01:57 PM IST

(Bloomberg) -- Philip Morris International Inc. and partner Altria Group Inc. will be barred from importing the IQOS heated-tobacco sticks into the U.S. after they lost a legal battle with British American Tobacco Plc before a U.S. trade agency. Philip Morris pledged to challenge what it called a “puzzling” decision.

Philip Morris and Altria infringe two patents owned by BAT’s subsidiary Reynolds American Inc., the U.S. International Trade Commission said in a notice posted on the agency’s website. The import ban -- and an order to stop selling any products already imported -- will take effect in 60 days unless it’s overturned by the Biden administration on public policy grounds, though that rarely happens.

Philip Morris became the pioneer in the alternatives market with its IQOS offering, leaving competitors scrambling to catch up. It’s the only heat-not-burn product to be authorized for sale in the U.S., where it’s marketed by Altria. The device also got the U.S. Food and Drug Administration’s nod last year to be marketed as reducing consumers’ exposure to harmful chemicals found in cigarettes, giving Philip Morris even more of an edge against rivals.

Altria investors have been watching this case closely. Altria Chief Executive Officer Billy Gifford said in July that the company decided to delay the expansion of IQOS into new markets while it awaited the ITC decision. It had initially planned to get IQOS into markets that represented 25% of cigarettes sold in the U.S. by the end of this year.

“We are puzzled and concerned by the Commission’s decision,” Philip Morris said in a statement.

The company said it will ask the U.S. Trade Representative to veto the import ban, appeal the underlying decision and “continue to evaluate contingency measures.”

Reynolds said it is “investing significantly behind its unique multicategory portfolio of patented and protected products” and consumers can turn to its Vuse vapor products as an alternative.

“Infringement of our intellectual property undermines our ability to invest and innovate,” Reynolds said.

Globally, the race is heating up. British American Tobacco added a record number of new users to its smoking alternatives in the six months through June, giving the business a much-needed boost as the maker of Lucky Strikes tries to catch up with Philip Morris. It counted 16.1 million consumers in the new category, gaining almost as many as it won in all of 2020. Philip Morris counts more than 20 million non-smoking customers.

“This announcement is clearly unhelpful for IQOS’ U.S. ambitions, but is primarily an issue for Altria’s strategy to move its portfolio towards reduced-risk-products,” Simon Hales, an analyst at Citigroup, wrote in a note. “For now, given that IQOS sales are so small, we see little direct impact on Philip Morris shares.”

While people around the world have been stress-smoking more during the Covid-19 pandemic, the general trend in the developed world is that fewer people are lighting up cigarettes. Cigarettes could even disappear in some countries like the U.S. or the U.K. by 2050, according to some analysts. The tobacco industry has spent billions of dollars developing new alternatives, ranging from heated tobacco to vapes and oral nicotine pouches, to ensure future growth.

The cigarette alternatives have struggled to get U.S. regulatory clearance. Philip Morris, in a filing with the ITC, said that the FDA thus far hasn’t authorized any e-cigarettes and said the “difficult, lengthy, and unpredictable regulatory future that all e-cigarettes face” make it more important that the FDA-approved IQOS be allowed to remain in the U.S. market.

Reynolds, which is seeking authorization for its Vuse Solo and Vuse Vibe e-cigarettes, said the the FDA rejections thus far involved small vaping businesses and Philip Morris is engaging in “pure speculation and ‘fortune-telling”’ of what will happen to applications by major companies like Reynolds.

ITC staff attorneys, who act as a third party in these cases, said there’s no harm to the public if the IQOS products were halted at the border because the devices don’t have wide adoption in the U.S. There are plenty of alternatives to combustion cigarettes, the staff said.

IQOS is currently available only in Georgia, North Carolina, South Carolina and Virginia. Altria and Philip Morris have declined to disclose the financial terms of Altria’s marketing agreement.

Reynolds claimed that Philip Morris infringed three patents -- two for an electrically-powered device with a heater to generate an aerosol and one for a control body. A trade judge in May found infringement of the two device patents and the commission reviewed issues regarding his findings on all three patents and affirmed the judge, with modifications. A full ruling will be available after both sides get a chance to redact confidential information.

The next step in the legal fight will be the U.S. Court of Appeals for the Federal Circuit, which specializes in patent law. Appeals before the court take longer than a year.

The IQOS products, which heat the tobacco enough to create an aerosol but not enough to combust, are made in Malaysia, Switzerland and Italy, according to Reynolds’ original complaint.

Reynolds first sued in April 2020, claiming Philip Morris and Altria copied patented technology that it had developed for its Vuse products. The companies have since lodged additional patent-infringement claims against each other in U.S. courts, and have asked the U.S. Patent and Trademark Office to cancel the other company’s patents. Decisions in some of the cases are expected early next year.

Philip Morris said European patents related to the two in this case “have been repeatedly and universally rejected in European courts and the European Patent Office.”

The case is In the Matter of Certain Tobacco Heating Articles, 337-1199, U.S. International Trade Commission (Washington).