Living by the adage “if you can’t beat them, join them,” tobacco giant Altria Group, Inc. acquired a 35% stake in e-cigarette market leader Juul Labs, Inc. in December 2018. As part of the deal, Altria agreed to not compete with Juul in the e-cigarette market for six years and use its marketing and financial resources to help Juul further cement its dominance.
This deal was always going to face significant antitrust headwinds from regulators. Not only is the transaction an agreement by competitors to coordinate efforts and not compete, but it also involves a legacy firm obtaining sought-after market dominance by purchasing a large share of an effective market disruptor. The Federal Trade Commission is paying particularly close attention to these types of transactions, as demonstrated by its recent challenge of the merger between Harry’s, Inc. and Edgewell Personal Care.
Unsurprisingly, on April 1, 2020, the FTC filed an administrative complaint to unwind the transaction. On the heels of this announcement, a consumer class action was filed in the U.S. District Court for the Northern District of California on April 7, 2020 (Douglas J. Reese v. Altria Group, Inc. and Juul Labs, Inc., 3:20-cv-02345-WHO, N.D. Calif.).
Altria, previously known as Philip Morris, is one of the biggest tobacco companies in the world but has noticed declining revenues from traditional tobacco products in the U.S. To make up for lost revenue, Altria attempted to enter the growing e-cigarette market. As competitors, Altria and Juul monitored each other’s e-cigarette prices closely and raced to innovate, leading to lower prices and higher quality products for consumers.
But Altria was unable to effectively compete against sleeker startups like Juul, which quickly grabbed more than 70% of this market. Altria dealt with this competitive threat by purchasing a substantial ownership interest in Juul. In return, Altria agreed to not compete in this market for at least six years. Juul also granted Altria the right to appoint a non-voting observer to Juul’s Board of Directors. If Altria converts its shares to voting stock, then Altria would be able to appoint three additional members to Juul’s Board.
In its complaint, the FTC alleges that Altria's acquisition of Juul shares and the associated agreements together constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act, and substantially lessen competition in the e-cigarette market in violation of Section 7 of the Clayton Act. The Commission voted unanimously (5-0) to issue the administrative complaint. The administrative trial is scheduled to begin on Jan. 5, 2021.
The private class action similarly argues the transaction violates both the Sherman Act and Clayton Act. The consumer complaint alleges that the deal is anticompetitive, produces no offsetting benefits for consumers, harms innovation, and significantly increases barriers to entry and expansion.
Altria and Juul are no strangers to litigation.
These antitrust actions add to a laundry list of legal troubles for these companies. Altria is still dealing with its 1998 settlement with a consortium of state attorneys general, pursuant to which Altria was required to pay tens of billions of dollars and implement significant behavioral remedies like changing their marketing strategies, funding anti-smoking initiatives, and disbanding tobacco industry groups.
Juul, which claims to provide a safer alternative to smoking, is currently facing a spate of individual and class actions brought by consumers, school districts, and state and local governments. Several of these cases target Juul’s marketing tactics, alleging that Juul unlawfully markets to underage consumers through things like extensive social media advertising. Other cases seek damages for health problems and death caused by Juul’s products.
The nation's antitrust, pro-competition system at work.
As rivals, Altria and Juul engaged in vigorous price and quality competition, which produced benefits for consumers. But, through the transaction and related agreements, Juul and Altria appear to have (i) reduced competition in the e-cigarette market, (ii) coordinated assets to further monopolize that market, and (iii) agreed to split the resulting monopoly profits. Such actions likely run afoul of multiple antitrust laws. The FTC recognized this and correctly sued to unwind the transaction and agreements underlying the unlawful conduct.
Given the nature of the facts alleged in the FTC complaint, it was not surprising to see a private consumer class action follow. While the consumer case faces significant hurdles (e.g., proving damages and/or that Altria would not have exited the market absent the transaction), it could produce a significant damages figure given the size of the class (all direct purchasers of Juul e-cigarettes) and length of the class period (December 2018 – present). And the consumer action will likely benefit from the FTC’s concurrent case involving the same underlying conduct, assuming the FTC does not receive an adverse decision.
So far, this is an example of the system functioning properly. Federal regulators determined the transaction is unlawful and are exercising their power to undo it. Private persons determined they were harmed by the illegal transaction and are exercising their rights to seek compensation for those injuries. Hopefully, this litigation will produce three outcomes: (i) renewed competition in the e-cigarette market, (ii) adequate relief for consumers harmed by the unlawful transaction, and (iii) a disincentive for companies contemplating similar anticompetitive transactions.