An Analysis of the FTC's Attempt to Stop the Altria-Juul Labs Deal

COMMENTARY

An Analysis of the FTC’s Attempt to Stop the Altria-Juul Labs Deal

David T. Levy, PhD Clifford E. Douglas, JD Luz Maria Sanchez-Romero, PhD, MD K. Michael Cummings, PhD, MPH David T. Sweanor, JD

On 20 December 2018, Altria, the largest US cigarette company, announced an offer for a 35% share of the large and rapidly growing vaping product company, Juul Labs. On 2 April, 2020, the Federal Trade Commission issued a complaint that the deal was anticompetitive and should be voided. This paper analyzes the deal. We find that the deal gives Altria market power in the e- cigarette market through its support of Juul in retail stores and through the agreement not to otherwise compete in the e-cigarette market. The deal also has implications for its marketing of heated tobacco product IQOS and generally may provide Altria greater control of the broader nicotine delivery product market.

Key words: e-cigarettes, merger, Altria, Juul Tob Regul Sci.™ 2020;6(4):302-305 DOI: doi.org/10.18001/TRS.6.4.7

n December 20, 2018, Altria, Philip Mor- of agreements that eliminated competition and ris USA’s parent company, announced an violated federal antitrust laws. It also found that investment of $12.8 billion for a 35% Altria and Juul had been direct competitors in the Ostake in Juul Labs.1 This deal combines the largest market for closed-system e-cigarettes. Altria also US cigarette manufacturer with the largest US e- leveraged its ownership of leading brands across cigarette company, Juul Labs. Altria is subject to a tobacco categories to secure favorable shelf space 6-year agreement in which it cannot acquire shares from retailers. FTC commissioners voted 5-0 to file above a 35% stake and was required to discontinue an administrative complaint to stop the Altria-Juul their MarkTen e-cigarette brand and to participate Labs deal.2 Although early competition resulted in in the vaping product category exclusively through Altria’s MarkTen e-cigarette becoming the second Juul Labs. most popular brand in 2017, Juul surpassed indus- This deal is subject to antitrust scrutiny by the try leaders Altria (ie, MarkTen) and Reynolds (ie, Federal Trade Commission (FTC).2 On April 2, Vuse) to become the leading US e-cigarette com- 2020, the FTC filed an administrative complaint pany by late 2018.1,3 The FTC alleges that, as com- alleging that Altria and Juul Labs entered a series petitors before the deal, Altria and Juul monitored

David T. Levy, Cancer Prevention and Control, Lombardi Comprehensive Cancer Center, Georgetown University, Washington, DC, USA. Clifford E. Douglas, Vice President, Tobacco Control, American Cancer Society, Atlanta, GA, USA; Adjunct Professor, University of Michigan School of Public Health, Ann Arbor, MI, USA. Luz Maria Sanchez-Romero, Cancer Prevention and Control, Lombardi Comprehensive Cancer Center, Georgetown University, Washington, DC, USA. K. Michael Cummings, Department of Psychiatry & Behavioral Sciences, Medical University of South Carolina, Charleston, SC, USA. David T. Sweanor, Faculty of Law, and The Centre for Health Law, Policy and Ethics, University of Ottawa, Toronto, Canada. Corresponding Author Dr Levy: [email protected]

302 Levy et al each other’s e-cigarette prices and raced to innovate. Juul Labs’ current product line, but also will not The deal removed competition between Altria develop new vaping products that might compete and Juul. Soon after Altria declared its intention to with Juul.2 abandon its e-cigarette business, Altria and Juul an- While the FTC narrowly focuses on the closed nounced an agreement that made Altria the largest system e-cigarette market where the 2 companies shareholder of Juul Labs. The agreement allowed most directly compete, it also suggests that the Altria to appoint an observer to Juul Labs’ board of cigarette and e-cigarette markets are inextricably directors, and permitted Altria to appoint 3 mem- linked. Underlying the FTC’s analysis is the rec- bers of the board after converting its shares to vot- ognition that cigarette companies were threatened ing securities. Juul Labs received nearly $13 billion by the increasing sales of e-cigarettes. In particular, and an agreement that Altria would not compete Altria viewed Juul as a threat, since they were los- with Juul Labs for 6 years, as well as provide a range ing highly profitable cigarette sales to smokers who of support services. The FTC alleges that Altria’s were now using Juul. In addition, they were losing acquisition of Juul Labs shares and the associated sales in the important youth and young adult mar- agreements constitute an unreasonable restraint of ket,4 where most cigarette initiation begins. trade in violation of Section 1 of the Sherman Act The purchase of a stake in Juul provided Altria and Section 5 of the FTC Act, and substantially with a hedge against lost profits at a time when the lessened competition in violation of Section 7 of ability to value cigarette companies was thrown the Clayton Act. An administrative hearing to de- into disarray because of a disruptive technology. cide the matter is scheduled to begin on January 5, This meant far less certainty for future cigarette 2021.2 sales. In effect, Juul was a threat to cigarette company valuations much like video streaming services FTC Analysis of the Altria-Juul Deal were a threat to cable television, and Uber to taxi The FTC’s case against the merger focuses on medallions. The complaint states, “Juul’s rise pre- the e-cigarette market, but has important implica- sented Altria with a new threat on 2 fronts: it stood tions for cigarettes. The FTC’s complaint defined in the way of Altria’s goal of leading the e-cigarette the relevant market as closed system e-cigarettes category and threatened to disrupt Altria’s lucrative (including disposable and cartridge/pod systems), traditional cigarette business.” The complaint also which were mainly sold by mass market retailers quotes Mr. Howard Willard, Altria’s current CEO, (eg, 7-Elevens, grocery stores, drug stores). The who, in an interview with the Wall Street Journal, FTC’s complaint does not explicitly consider in- stated, “At a time when e-vapor is going to grow ternet vendors and mentions vape shops only as rapidly and likely cannibalize the consumers we the location where open systems are sold.2 The fo- have in our core business, if you don’t invest in the new areas you potentially put your ability to deliver cus of the FTC’s argument is that entry into the 2 closed system market is difficult, primarily because that financial result at risk.” of slotting fees to purchase retail shelf space and the need for costly and time-consuming government The Broader Anticompetitive and Public Health approval via the Food and Drug Administration’s Implications of the Deal (FDA) premarket tobacco application (PMTA) au- From a public health standpoint, this decision thorization process. is consistent with a harm reduction perspective. The complaint states that the deal “ensured While cigarettes are not included in the “relevant” [Juul’s] dominance by agreeing that Altria would antitrust market, the FTC analysis clearly accepts provide Juul its extensive resources, including its the close relationship between cigarettes and vap- distribution capabilities and its premier shelf space ing products, whereby smokers often partially or at retailers.”2 With Altria’s e-cigarette market share completely switch from cigarettes to e-cigarettes, having declined to a low level just before the merg- with Juul as a particularly appealing alternative.5-11 er, Altria agreed to drop its MarkTen product. The While not argued in the complaint, studies indi- FTC argued that the non-compete clause not only cate that both open and closed system e-cigarettes ensures that Altria will not directly compete with are substitutes for conventional cigarettes.3 Indeed,

Tob Regul Sci.™ 2020;6(4):302-305 DOI: doi.org/10.18001/TRS.6.4.7 303 Commentary: An Analysis of the FTC’s Attempt to Stop the Altria-Juul Labs Deal the loss in cigarette sales motivated the deal. Al- Altria had the resources and infrastructure to drive though share prices are impacted by many factors, sales and compete aggressively.”2 Thus, with their the precipitous decline in the value of Altria, as investment in Juul, Altria has a strong presence in Juul Lab’s market share increased, is notable. In the e-cigarette and conventional cigarette markets mid-2017 Altria shares were trading at $74.47, but as well as other tobacco submarkets. This argument a week before the deal was announced the price for a broader market is not in the FTC analysis, had declined to $52.73, a total market value loss of possibly because it fits less cleanly under the merger more than $40 billion (more than 3 times the in- guidelines. vestment made in Juul) at a time when the overall The deal with Juul Labs positions Altria as the stock market was rising.1,3 market leader for all major nicotine delivery prod- The FTC argued that Altria would be discouraged ucts. With its financial resources and lobbying net- from innovations that lead to the development of work, Altria is well positioned to exert influence products more appealing to consumers and with over regulatory decisions that could disrupt its substantially lower risk.2 Indeed, the deal would dominance in the cigarette business and subcatego- provide precedence not only for Altria, but also for ries of the nicotine delivery market. With the lim- other cigarette companies to control the e-cigarette ited ability of smaller, independent, non-cigarette market. Independent companies, such as Juul Labs firms to capture viable shelf space in retail outlets before the merger, had forced cigarette companies and meet FDA’s PMTA requirements, the Altria- to take seriously the importance of harm reduction Juul Labs deal has strengthened Altria’s dominance products.3 of the nicotine delivery category. They can apply The deal also enables Altria to include Juul as part their long history of marketing experience in sell- of the cigarette company’s broader arsenal of harm ing a highly addictive product to youth as well as reduction products. Altria, to date, is the only com- adults. In short, the deal makes it harder for company in the US authorized by the FDA to sell a panies to offer alternative products to compete heated tobacco product, namely IQOS. Like Juul, against the cigarette companies, which increases IQOS provides smokers an alternative to smoking. the likelihood that cigarettes – the leading cause of Due to the more proprietary nature of the tech- preventable death in the US and worldwide – re- nology, IQOS may provide Altria more potential main the dominant tobacco product. for profits than from Juul, especially if there are fewer competitors in the heated tobacco submar- Conclusions 13 ket compared to e-cigarettes. With prominence in The FTC’s complaint focuses on anticompeti- the heated tobacco product and the vaping market, tive behavior, but confines the analysis to a narrow Altria has a greater ability to thwart competition segment of the nicotine delivery market, closed- from e-cigarettes by manipulating prices and by system e-cigarette products. It does not consider controlling shelf space. In particular, Altria could Altria’s potential to control the broader market. encourage the use of heated tobacco products over Nevertheless, this complaint departs from earli- less harmful vaping products and encourage dual er analysis analyses where the FTC approved the use with cigarettes rather than exclusive use of low- merger of cigarette companies (eg, Reynolds with er-risk products. Lorillard and Brown & Williamson). The 5-0 vote In addition to their control of harm reduction for the FTC complaint against the Altria-Juul deal products, the deal provides Altria a dominant po- represents a rare antitrust challenge to the tobac- sition in the broader nicotine delivery product co industry and the first involving e-cigarettes. It market. Altria now controls 54% of the US ciga- may also signal the willingness of the FTC to ex- rette and through mergers controls 52% of the US amine anti-competitive marketing practices in the smokeless tobacco market12 as well as a major share tobacco industry. While the FTC complaint does of the cigar market.13 Indeed, the FTC complaint not address public health concerns, it challenges states, “As a large, well-established, and well-fund- an important threat to public health: the ability ed company with longstanding relationships and of cigarette firms to dominate the broader market significant shelf space with retailers nationwide, of non-combustible alternative nicotine delivery

304 Levy et al products. At the same time, it will be important for trol-2019-055081 the FDA to monitor the overall nicotine delivery 2. Federal Trade Commission BoC. In the Matter of Altria Group, Inc., a corporation; and JUUL Labs, Inc., a cor- market to benefit public health. In that capacity, poration. FTC Matter/File Number: 191 0075, Docket the impact of regulations on market structure in Number: 9393, Enforcement Type: Part III Administra- the various segments of the tobacco and e-cigarette tive Complaint, 2020. industry should be considered. 3. Levy D, Lindblom E, Sweanor D, et al. An economic analysis of the pre-deeming US market for nicotine vaping products. Tob Regul Sci. 2019;5:169-181. Contributors 4. Levy DT, Warner KE, Cummings KM, et al. Examining the relationship of vaping to smoking initiation among DTL wrote the original article with advice and US youth and young adults: a reality check. Tob Control. comments of all coauthors. Each of the coauthors 2019;28:629-635. contributed substantially in the rewriting of the 5. Levy DT, Yuan Z, Luo Y, Abrams DB. The relationship of paper. e-cigarette use to cigarette quit attempts and cessation: in- sights from a large, nationally representative U.S. survey. Nicotine Tob Res. 2018;20:931-939. Funding 6. National Academy of Sciences EaM. Public Health Con- sequences of E-cigarettes. Washington, DC: The National DTL and KMC were funded through a P01 grant Academies Press; 2018. (P01CA200512-01) from the US National Insti- 7. Heckman BW, Fong GT, Borland R, et al. The impact of tutes of Health. DTL, LMS and CED were also vaping and regulatory environment on cigarette demand: funded through TCORS grant U54CA229974 behavioral economic perspective across four countries. Addiction. 2019;114(Suppl 1):123-33. from the National Cancer Institute. Research re- 8. Huang J, Gwarnicki C, Xu X, et al. A comprehensive ex- ported here was supported by the NIH and FDA amination of own- and cross-price elasticities of tobacco Center for Tobacco Products (CTP). The content and nicotine replacement products in the U.S. Prev Med. is solely the responsibility of the authors and does 2018;117:107-114. 9. Huang J, Tauras J, Chaloupka FJ. The impact of price not necessarily represent the official views of the and tobacco control policies on the demand for electron- NIH or the Food and Drug Administration. ic nicotine delivery systems. Tob Control. 2014;23(Suppl 3):iii41-iii7. 10. Stoklosa M, Drope J, Chaloupka FJ. Prices and e-ciga- Competing Interests rette demand: evidence from the European Union. Nico- Dr. Cummings has received grant funding from tine Tob Res. 2016;18:1973-1980. Pfizer, Inc. to study the impact of a hospital-based 11. Zheng Y, Zhen C, Dench D, Nonnemaker JM. U.S. demand for tobacco products in a system framework. tobacco cessation intervention and has served Health Econ. 2017 Aug;26(8):1067-1086. as an expert witness in litigation against tobacco 12. Wells Fargo Securities ER. Nielsen: Tobacco All Channel companies. Data Thru 9/7 - Cig Vol Declines Hold Steady Recent Neg E-Cig News May Be Having Impact September 17, 2019 September 17, 2019. Article available from the lead References author. 1. Levy DT, Sweanor D, Sanchez-Romero LM, et al. Al- 13. Levy D, Chaloupka F, Lindblom E, et al. The US ciga- tria-Juul Labs deal: why did it occur and what does it rette industry: an economic and marketing perspective. mean for the US nicotine delivery product market. Tob Tob Regul Sci. 2019;5:156-168. Control. September 4, 2019. doi: 10.1136/tobaccocon-

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