Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 1 of 34
`
`
`
`Barrett Beasley (SBN: 194143)
`SALIM BEASLEY LLC
`1901 Texas Street
`Natchitoches, LA 71457
`Tel: (318) 354-1043
`Fax: (318) 354-1227
`bbeasely@salim-beasley.com
`
`Michael M. Buchman (pro hac vice pending)
`Michelle C. Clerkin (pro hac vice pending)
`MOTLEY RICE LLC
`777 Third Avenue, 27th Floor
`New York, NY 10017
`Tel: (212) 577-0050
`Fax: (212) 577-0054
`mbuchman@motleyrice.com
`mclerkin@motleyrice.com
`
`Attorneys for Plaintiff Douglas J. Reece
`
`
`UNITED STATES DISTRICT COURT
`NORTHERN DISTRCT OF CALIFORNIA
`SAN FRANCISCO DIVISION
`
`
`DOUGLAS J. REECE, on his own behalf and
`all others similarly situated,
`
`
`Plaintiff,
`
`v.
`
`
`
`
`ALTRIA GROUP, INC., and JUUL LABS,
`INC.,
`
`
`Defendants.
`
`
`
`
`
`
`
`
`
`Civil Action No.
`
`
`CLASS ACTION COMPLAINT
`
`
`
`DEMAND FOR JURY TRIAL
`
`
`
`Plaintiff Douglas J. Reece, on behalf of himself and all others similarly situated, brings this
`
`Class Action Complaint against Defendants Altria Group, Inc. and Juul Labs, Inc., for violations
`
`of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2 and Section 7 of the Clayton Act, 15
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 2 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`U.S.C. § 18. Plaintiff alleges, based upon the investigation of counsel and personal knowledge as
`
`to paragraph 16, as follows:
`
`I.
`
`INTRODUCTION
`
`1.
`
`This is an antitrust class action against Defendants Altria Group, Inc. (“Altria”)
`
`and Juul Labs, Inc. (“Juul”), concerning anticompetitive agreements between them in which
`
`Altria agreed to refrain from competing against Juul in the United States market for closed-
`
`system electronic cigarettes (“e-cigarettes”) in return for a substantial ownership interest in Juul.
`
`Juul was and is the dominant player in the sale of closed-system electronic cigarettes (“e-
`
`cigarettes”) in the United States (“relevant market”). E-cigarettes are electronic devices that
`
`10
`
`deliver nicotine to a user by vaporizing a liquid nicotine solution. In a closed system, the liquid
`
`11
`
`is contained in a pre-filled, sealed cartridge or pod.
`
`12
`
`2.
`
`In light of declining sales in the market for traditional cigarettes and a shift by
`
`13
`
`consumers to alternative nicotine delivery devices, Altria viewed participation in the e-cigarette
`
`14
`
`market as essential to its long-term survival. In 2013, Altria entered the market through its
`
`15
`
`subsidiary Nu Mark LLC. Its flagship product was the MarkTen e-cigarette.
`
`16
`
`3.
`
`In 2015, Juul entered the relevant market with a sleek new device and quickly
`
`17
`
`captured a substantial share of the market. By 2018, Juul had amassed market share of over 70
`
`18
`
`percent1 stunning Altria and other competitors. Juul’s swift rise posed a grave competitive threat
`
`19
`
`to Altria in the both the e-cigarette and traditional cigarette markets. To eliminate that threat,
`
`20
`
`Altria began a two-prong strategy of trying to acquire Juul while continuing to compete
`
`21
`
`aggressively against it. Its efforts to acquire Juul were unsuccessful initially, and Altria
`
`22
`
`introduced a new product known as the MarkTen Elite which closely resembled Juul’s product.
`
`23
`
`4.
`
`Altria continued to press the acquisition. In the fall of 2018, Juul agreed to
`
`24
`
`negotiate with Altria under the condition that Altria stop competing with Juul in the market for e-
`
`25
`
`26
`
`27
`
`28
`
`
`
`
`1 Bonnie Herzog & Patty Kanada, Nielsen: Tobacco All Channel Data Thru 8/11 at 10, Wells
`Fargo Securities (Aug. 21, 2018), available at https://athra.org.au/wpcontent/uploads/2018/09/
`Wells-Fargo-Nielsen-Tobacco-All-Channel-Report-Period-Ending-8.11.18.pdf.
`
`- 2 -
`
`CLASS ACTION COMPLAINT
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 3 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`cigarettes. Discussions would not begin until Altria had pulled its products off the shelves.
`
`Altria, at first, refused to consider this condition, but in October 2018 it succumbed to the
`
`pressure and began to withdraw its e-cigarette products from the relevant market.
`
`5.
`
`Two months later in December of 2018, Altria announced its intention to cease
`
`competing entirely in the relevant market.2
`
`6.
`
`Approximately two weeks after making this announcement, Altria disclosed that,
`
`on October 20, 2018, it had executed a Purchase Agreement and related agreements (the
`
`“Transaction”) with Juul.
`
`7.
`
`Under the Purchase Agreement, Altria purchased a 35% non-voting stake in Juul,
`
`10
`
`which Altria could convert to a voting stake upon receiving Hart-Scott Rodino approval. In
`
`11
`
`addition, Altria and Juul executed: (i) a Relationship Agreement, which contained a non-compete
`
`12
`
`provision ("the “Non-Compete”) restricting Altria from competing in the relevant market; (ii) a
`
`13
`
`Services Agreement, whereby Altria agreed to provide a variety of support services for Juul; (iii)
`
`14
`
`an Intellectual Property License Agreement licensing Altria's e-cigarette intellectual property to
`
`15
`
`Juul; and (iv) a Voting Agreement providing Altria representation on Juul’s board of directors
`
`16
`
`following the conversion of its shares. Pending Hart-Scott Rodino approval, the transaction
`
`17
`
`provided Altria the right to appoint one of its executives to a non-voting “observer” position on
`
`18
`
`Juul’s board.
`
`19
`
`8.
`
`Altria’s investment in Juul and its exit from the market not only eliminated its
`
`20
`
`existing e-cigarette product but also, through the Non-Compete, halted its ongoing innovation
`
`21
`
`efforts toward developing a new and improved portfolio of products. Thus, consumers lost the
`
`22
`
`benefit of current and future head-to-head competition between Altria and Juul, and between
`
`23
`
`Altria and other competitors.
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`
`2 See MarkTen Discontinuation Notice (Dec. 19, 2018), https://www.markten.com.
`
`- 3 -
`
`CLASS ACTION COMPLAINT
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 4 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`9.
`
`The transaction eliminated a threat to Juul’s market dominance and required
`
`Altria to dedicate its vast resources, including distribution and shelf-space, to ensure Juul’s
`
`continued market dominance.
`
`10.
`
`After executing the transaction, Altria appointed its Chief Growth Officer as its
`
`observer on the Juul board of directors. Following that executive’s departure from Altria to
`
`become Chief Executive Officer of Juul, Altria appointed its Chief Financial Officer and Vice
`
`Chairman to fill the observer position.
`
`11.
`
`The Transaction’s anticompetitive effects were particularly clear in the market for
`
`closed-system e-cigarettes given high barriers to entry, such as U.S. Food & Drug
`
`10
`
`Administration (“FDA”) approval. Repositioning new products in the market was also
`
`11
`
`unavailing to counter the anticompetitive impact of the Transaction. Defendants cannot show the
`
`12
`
`transaction restricting competition resulted in cognizable efficiencies sufficient to outweigh the
`
`13
`
`competitive harm caused by Altria’s agreement to exit the relevant market. Nor can Defendants
`
`14
`
`point to pro-competitive benefits that could not have been achieved through less restrictive
`
`15
`
`means. In fact, much of the Defendants’ collaboration was restructured in January 2020 to
`
`16
`
`eliminate its marketing aspects, further reducing the scope of theoretical benefits from their
`
`17
`
`agreements.
`
`18
`
`12.
`
`Defendants’ conduct has illegally restrained competition in the relevant market in
`
`19
`
`violation of federal antitrust laws. As a direct and proximate result of Defendants’
`
`20
`
`anticompetitive conduct, entities that purchased Juul products were overcharged and sustained
`
`21
`
`injury to their business and property.
`
`22
`
`23
`
`II.
`
`JURISDICTION AND VENUE
`
`13.
`
`This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332(d)
`
`24
`
`because this is a class action involving common questions of law or fact in which the aggregate
`
`25
`
`amount in controversy exceeds $5,000,000, exclusive of interest and costs, there are more than
`
`26
`
`one hundred members of the Class, and at least one member of the putative Class is a citizen of a
`
`27
`
`state different from that of one of the Defendants.
`
`28
`
`
`
`- 4 -
`
`CLASS ACTION COMPLAINT
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 5 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`14.
`
` Venue is appropriate within this district under 28 U.S.C. §1391 because, at all
`
`relevant times, Defendants transacted business within this district, and the interstate trade and
`
`commerce described hereinafter is carried out, in substantial part, in this district. Further,
`
`Defendants and/or their agents may be found in this district.
`
`15.
`
`The Court has personal jurisdiction over each Defendant. Each Defendant has
`
`transacted business, maintained substantial contacts, and/or committed overt acts in furtherance
`
`of the illegal scheme and conspiracy throughout the United States, including in this district. The
`
`scheme and conspiracy have been directed at, and have had the intended effect of, causing injury
`
`to persons residing in, located in, or doing business throughout the United States, including in
`
`10
`
`this district.
`
`11
`
`12
`
`III.
`
`INTRADISTRICT ASSIGNMENT
`
`16.
`
`Assignment to any division in this District is proper because the interstate trade
`
`13
`
`and commerce involved and affected by the violations of the antitrust laws was and is carried out
`
`14
`
`within each division. Defendant Juul Labs, Inc. has its principal place of business in the San
`
`15
`
`Francisco division.
`
`16
`
`17
`
`IV. THE PARTIES
`
`17.
`
`Plaintiff Douglas J. Reece is a resident of the State of California. Douglas J.
`
`18
`
`Reece purchased Juul products directly from Juul on the Juul.com website during the relevant
`
`19
`
`period. Plaintiff was injured in connection with his purchases during the Class Period.
`
`20
`
`18.
`
`Defendant Juul Labs, Inc. (“Juul”), is a Delaware corporation headquartered at
`
`21
`
`560 20th Street, San Francisco, California. Juul is the leading manufacturer of closed-system e-
`
`22
`
`cigarettes, generating over $1 billion in sales in 2018.
`
`23
`
`19.
`
`Defendant Altria is a Virginia corporation headquartered at 6601 West Broad
`
`24
`
`Street, Richmond, Virginia. Altria is one of the country’s largest tobacco companies and was
`
`25
`
`formerly a manufacturer of closed-system e-cigarettes.
`
`26
`
`27
`
`28
`
`
`
`- 5 -
`
`CLASS ACTION COMPLAINT
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 6 of 34
`
`
`
`A.
`
`20.
`
`V. FACTUAL ALLEGATIONS
`
`Industry Background
`
`The e-cigarette industry, to a large extent, reflects an evolution of the traditional
`
`cigarette industry, with many of the same tobacco companies competing to get consumers
`
`hooked on their addictive products.
`
`21.
`
`A 1988 report by the Surgeon General of the United States regarding nicotine and
`
`tobacco reached three conclusions:
`
`(i) Cigarettes and other forms of tobacco are addictive;
`
`(ii) Nicotine is the drug in tobacco that causes addiction;
`
`(iii) The physiological and behavioral processes that determine tobacco addiction are
`
`similar to those that determine heroin and cocaine addiction.
`
`22.
`
`As more research came out during the early 1990s, the addictive nature of
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`nicotine in cigarettes became clearer and better understood. At the same time, big tobacco
`
`14
`
`companies did their best to conceal the science.
`
`15
`
`16
`
`23.
`
`In April of 1994, top executives from the seven largest American tobacco
`
`companies – later dubbed the “seven dwarfs”3 – testified in front of Congress regarding the
`
`17
`
`health effects and addictive nature of their products. At one point during the hearing, Senator
`
`18
`
`Ron Wyden presented a stack of medical research and the 1989 Surgeon General’s report on the
`
`19
`
`perils of smoking before asking each executive, in turn, if he believed cigarettes were addictive.
`
`20
`
`Each said they believed nicotine was not addictive.4 James W. Johnston, chairman and chief
`
`21
`
`executive of R.J. Reynolds Tobacco Company (“RJR”), insisted that the risks associated with
`
`cigarettes were similar to those of other products, such as Twinkies or cola.5
`
`
`3 Sheryl Stolberg, Where There’s Smoke, There’s Deceit, L.A. Times (June 23, 1996),
`https://www.latimes.com/archives/la-xpm-1996-06-23-bk-17610-story.html.
`
`4 Philip J. Hilts, Tobacco Chiefs Say Cigarettes Aren't Addictive, N.Y. Times (Apr. 15, 1994),
`https://www.nytimes.com/1994/04/15/us/tobacco-chiefs-say-cigarettes-aren-t-addictive.html.
`
`5 Id.
`
`- 6 -
`
`CLASS ACTION COMPLAINT
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 7 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`24.
`
`As the 1990s progressed the country learned, in part through information brought
`
`to light in lawsuits filed by states and their attorneys, that despite tobacco representatives sworn
`
`testimony to Congress nicotine was indeed addictive and tobacco was a nicotine delivery system.
`
`25.
`
`According to the National Institutes of Health, the “amount and speed of nicotine
`
`delivery . . . plays a critical role in the potential for abuse of tobacco products.”6 The cigarette
`
`industry has long known that “nicotine is the addicting agent in cigarettes”7 and that “nicotine
`
`satisfaction is the dominant desire” of nicotine addicts.8
`
`26.
`
`For this reason, cigarette companies spent decades manipulating nicotine in order
`
`to foster and maintain addiction in their customers. For example, RJR developed and patented
`
`10
`
`nicotine salt additives such as nicotine benzoate to increase nicotine delivery in cigarette smoke.
`
`11
`
`As detailed in an RJR memorandum titled “Cigarette concept to assure RJR a larger segment of
`
`12
`
`the youth market,” manipulating the pH of nicotine was expected to give cigarettes an
`
`13
`
`14
`
`15
`
`“additional nicotine ‘kick’.”9 This kick is caused by increased nicotine absorption associated
`
`with higher pH.10
`
`27.
`
`Nicotine fosters addiction through the brain’s “reward” pathway. A stimulant and
`
`16
`
`a relaxant, nicotine affects the central nervous system; increases blood pressure, pulse, and
`
`17
`
`metabolic rate; constricts blood vessels of the heart and skin, and causes muscle relaxation.
`
`18
`
`When nicotine is inhaled it enters the bloodstream through membranes in the mouth and upper
`
`
`6 How Tobacco Smoke Causes Disease: The Biology and Behavioral Basis for Smoking-
`Attributable Disease: A Report of the Surgeon General, Chapter 4, Nicotine Addiction: Past and
`Present (2010), www.ncbi.nlm.nih.gov/books/NBK53017/ .
`
`7 Tobacco Industry Quotes on Nicotine Addiction, https://www.ok.gov/okswat/documents/
`Tobacco%20Industry%20Quotes%20on%20Nicotine %20Addiction.pdf (last accessed Apr.
`7, 2020) (quoting Brown & Williamson official A.J. Mellman, 1989).
`
`8 Id. (quoting R.J. Reynolds Tobacco Co. marketing memo, 1972).
`
`9 Id. (quoting 1973 R.J. Reynolds Tobacco Co. memo titled, “Cigarette concept to assure RJR a
`larger segment of the youth market.”).
`
`10 Pickworth et al., Nicotine Absorption from Smokeless Tobacco Modified to Adjust pH, J
`Addict Res Ther. 2014; 5(3): 1000184,
`https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4271311/pdf/nihms-648030.pdf.
`
`- 7 -
`
`CLASS ACTION COMPLAINT
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 8 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`respiratory tract and through the lungs. Once nicotine in the bloodstream reaches the brain, it
`
`binds to receptors, triggering a series of physiologic effects in the user that are perceived as a
`
`“buzz” that includes pleasure, arousal, and relaxation of stress and anxiety. These effects are
`
`caused by the release of dopamine, acetylcholine, epinephrine, norepinephrine, vasopressin,
`
`serotonin, and beta endorphin. With regular nicotine use, however, these feelings diminish and
`
`the user must consume increasing amounts of nicotine to achieve the same pleasurable effects.11
`
`28.
`
`The neurological changes caused by nicotine create addiction. Repeated exposure
`
`to nicotine causes neurons in the brain to adapt to the action of the drug and return brain function
`
`to normal. This process, called neuroadaptation, leads to the development of tolerance in which a
`
`given level of nicotine begins to have less of an effect on the user.12
`
`29.
`
`Once a brain is addicted to nicotine, the absence of nicotine causes compulsive
`
`12
`
`drug-seeking behavior, which, if not satisfied, results in withdrawal symptoms including anxiety,
`
`13
`
`tension, depression, irritability, difficulty in concentrating, disorientation, increased eating,
`
`14
`
`restlessness, headaches, sweating, insomnia, heart palpitations and tremors – and intense
`
`15
`
`cravings for nicotine. Though smokers commonly report pleasure and reduced anger, tension,
`
`16
`
`depression and stress after smoking a cigarette, many of these effects are actually due to the
`
`17
`
`relief of unpleasant withdrawal symptoms that occur when a person stops smoking and deprives
`
`18
`
`the brain and body of nicotine. Studies have found that most smokers do not like smoking most
`
`of the time, but do so to avoid withdrawal symptoms.13
`
`
`11 Neal L. Benowitz, Pharmacology of Nicotine: Addiction, Smoking-Induced Disease, and
`Therapeutics, Annu Rev Pharmacol Toxicol 2009; 49: 57-71,
`www.ncbi.nlm.nih.gov/pmc/articles/PMC2946180/.
`
`12 Id.
`
`13 Rigotti, Strategies to help a smoker who is struggling to quit JAMA 2012; 308(15):1573-1580,
`www.ncbi.nlm.nih.gov/pmc/articles/PMC4562427/; Paolini & De Biasi, Mechanistic insights
`into nicotine withdrawal Biochem Pharmacol 2011; 82(8):996-1007,
`www.ncbi.nlm.nih.gov/pmc/articles/PMC3312005/.
`
`- 8 -
`
`CLASS ACTION COMPLAINT
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 9 of 34
`
`
`
`B.
`
`30.
`
`The Rise of E-Cigarettes and Juul
`
`The discovery of the negative impacts of tobacco use changed American society.
`
`Laws were enacted banning cigarette smoking in public places such as restaurants and bars. The
`
`prohibition sparked changes in Americans’ smoking habits and added to increasing social
`
`stigma. Dramatically increased taxes provided another disincentive, and many Americans gave
`
`up smoking to live a healthier life. Rates of traditional smoking among the younger generations
`
`decreased drastically.
`
`31.
`
`In the face of withering profits from traditional cigarettes, tobacco companies
`
`searched for other ways to profit off of nicotine addiction. The first modern electronic cigarettes
`
`emerged in China in 2003, and they appeared in the U.S. market by the mid-2000s.14
`
`32.
`
`Around 2010, traditional tobacco companies started either entering the market
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`with their own products or acquiring existing e-cigarette companies.
`
`13
`
`33.
`
`Altria entered the market with its MarkTen e-cigarette in 2013, and over the next
`
`14
`
`several years spent well over $100 million acquiring other existing e-cigarette platforms in order
`
`15
`
`to augment its portfolio.
`
`16
`
`34.
`
`James Monsees, the founder of Juul, saw the potential of e-cigarettes. Monsees
`
`17
`
`has described the cigarette as “the most successful consumer product of all time . . . an amazing
`
`product.”15 Because of “some problems” inherent in the cigarette, Juul’s founders set out to
`
`“deliver[] solutions that refresh the magic and luxury of the tobacco category.”16
`
`
`14 U.S. Department of Health and Human Services, E-Cigarette Use Among Youth and Young
`Adults: A Report of the Surgeon General at 10 (2016),
`ncbi.nlm.nih.gov/books/NBK538680/pdf/Bookshelf_NBK538680.pdf.
`
`15 Chaykowski, Billionaires-to-be: Cigarette breakers - James Monsees and Adam Bowen have
`cornered the US e-cigarette market with Juul. Up next: The world, Forbes India (Sept. 27, 2018),
`www.forbesindia.com/article/leaderboard/billionairestobe-cigarette-breakers/51425/1.
`
`16 Mings, Ploom model Two Slays Smoking with Slick Design and Heated Tobacco Pods, Solid
`Smack (Apr 23, 2014), www.solidsmack.com/ design/ploom-modeltwo-slick-design-tobacco-
`pods/.
`
`- 9 -
`
`CLASS ACTION COMPLAINT
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 10 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`35. Monsees saw “a huge opportunity for products that speak directly to those
`
`consumers who aren’t perfectly aligned with traditional tobacco products.”17 With a focus on
`
`recreating the “ritual and elegance that smoking once exemplified,”18 Monsees and Adam Bowen
`
`founded Pax Labs in 2007 (from which Juul Labs was spun out in 2017) setting out to “meet the
`
`needs of people who want to enjoy tobacco but don’t self-identify with – or don’t necessarily
`
`want to be associated with – cigarettes.”19
`
`36.
`
`In 2015, Pax Labs launched the Juul e-cigarette, a closed-system in a discreet
`
`“pod-based” format. The device also represented a chemical breakthrough in the speed of its
`
`nicotine delivery. Since the 1960s tobacco companies have manufactured cigarettes that
`
`10
`
`freebase nicotine using ammonia, which liberates the nicotine so that it can be quickly
`
`11
`
`absorbed into the lungs and the brain. As one addiction expert has said, “[t]he modern cigarette
`
`12
`
`does to nicotine what crack does to cocaine.”20 Pax Labs discovered that by adding benzoic
`
`13
`
`acid to nicotine salts, which occur naturally in tobacco, they could mimic a cigarette’s rapid
`
`14
`
`15
`
`nicotine delivery.21
`
`37.
`
`The Juul product is high-tech and also sleek. As depicted below, the Juul e-
`
`16
`
`cigarette looks like a USB flash drive, and it actually charges in a computer’s USB drive. It is
`
`17
`
`about the size and shape of a pack of chewing gum; it is small enough to fit in a closed hand.
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`
`17 Id.
`
`18 James Monsees – Co-founder and CEO of Ploom, IdeaMensch (Apr 11, 2014),
`https://ideamensch.com/james-monsees/.
`
`19 Id.
`
`20 Jia Tolentino, The Promise of Vaping and the Rise of Juul, New Yorker, May 7, 2018,
`https://www.newyorker.com/magazine/2018/05/14/the-promise-of-vaping-and-the-rise-of-juul
`
`21 Id.
`
`- 10 -
`
`CLASS ACTION COMPLAINT
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 11 of 34
`
`
`
`Juul is also easy to conceal. The odor emitted from Juul is a reduced aerosol without much scent
`
`– unlike the distinct smell of conventional cigarettes.
`
`
`
`38.
`
`The thin, rectangular Juul e-cigarette device consists of an aluminum shell, a
`
`battery, a magnet (for the USB-charger), a circuit board, an LED light, and a pressure sensor.
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`Juul manufactures and distributes its nicotine formulation as Juul pods, which contain Juul’s
`
`11
`
`nicotine liquid. During the Class Period (defined below), Juul has sold its pods in four-packs in a
`
`12
`
`variety of flavors, many of which have no combustible cigarette analog, including mango, “cool”
`
`13
`
`cucumber, fruit medley, “cool” mint, and crème brulee.
`
`14
`
`39.
`
` Each Juul pod is a plastic enclosure containing 0.7 milliliters of Juul’s patented
`
`15
`
`nicotine liquid and a coil heater. When a sensor in the Juul e-cigarette detects the movement of
`
`16
`
`air caused by suction on the Juul pod, the battery in the Juul device activates the heating element,
`
`17
`
`which in turn converts the nicotine solution in the Juul pod into a vapor consisting principally of
`
`18
`
`nicotine, benzoic acid, glycerin, and propylene glycol. A light embedded in the Juul device
`
`19
`
`serves as a battery level indicator and lights up in a “party mode” display of rainbow of colors
`
`20
`
`when the device is waved around.
`
`21
`
`40.
`
`The physical design of the Juul device (including its circuit board) and Juul pod
`
`22
`
`determines the amount of aerosolized nicotine the Juul emits. By altering the temperature,
`
`23
`
`maximum puff duration, or airflow, among other things, Juul can finely tune the amount of
`
`nicotine vapor the Juul device delivers.22
`
`
`22 Talih et al., Characteristics and toxicant emissions of Juul electronic cigarette Tob Control.
`054616 (Feb 11, 2019), www.ncbi.nlm.nih.gov/pubmed/30745326/.
`
`- 11 -
`
`CLASS ACTION COMPLAINT
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 12 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`41.
`
`Juul’s product quickly gained traction among consumers, rapidly surpassing
`
`Altria and securing the largest share of the closed-system e-cigarette market.
`
`42.
`
`Juul used the cigarette industry’s prior practices as a playbook. Monsees has
`
`publicly admitted that Juul built its e-cigarette business by first consulting cigarette industry
`
`documents, including board meeting minutes, made public under the Master Tobacco Settlement
`
`Agreement that had been reached between the cigarette industry, governmental officials, and
`
`injured smokers. “[Industry documents] became a very intriguing space for us to investigate
`
`because we had so much information that you wouldn’t normally be able to get in most
`
`industries. And we were able to catch up, right, to a huge, huge industry in no time. And then we
`
`started building prototypes.”23
`
`43.
`
`Juul researched how cigarette companies had chemically manipulated nicotine
`
`12
`
`content to maximize delivery: “We started looking at patent literature. We are pretty fluent in
`
`13
`
`‘Patentese.’ And we were able to deduce what had happened historically in the tobacco
`
`14
`
`industry.” Among the documents Juul would have found were those documenting how to
`
`15
`
`manipulate nicotine pH to maximize the delivery of nicotine in a youth-friendly vapor that
`
`16
`
`delivers minimal “throat hit”—a combination that creates unprecedented risks of nicotine abuse
`
`17
`
`18
`
`and addiction, as detailed further below.24
`
`44.
`
`Juul also engaged former cigarette industry researchers to consult on the design of
`
`19
`
`their product. Juul’s founder James Monsees noted in Wired magazine that “people who
`
`20
`
`understood the science and were listed on previous patents from tobacco companies aren’t at
`
`21
`
`those companies anymore. If you go to Altria’s R&D facility, it’s empty.” The Wired article
`
`stated that “some of those people are now on Pax’s team of advisers, helping develop Juul.”25
`
`
`23 Montoya, Pax Labs: Origins With James Monsees, Social Underground,
`https://socialunderground.com/2015/01/pax-ploom-origins-future-james-monsees/.
`
`24 Id.
`
`25 Pierce, This Might Just Be The First Great E-Cig, Wired (Apr 21, 2015),
`www.wired.com/2015/04/pax-juul-ecig
`
`- 12 -
`
`CLASS ACTION COMPLAINT
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 13 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`45.
`
`Juul delivers doses of nicotine that are materially higher than delivered by
`
`combustible cigarettes. As a paper published by the European Union citing the United Kingdom
`
`Medicines and Healthcare Products Regulatory Agency notes, “an e-cigarette with a
`
`concentration of 20 mg/ml delivers approximately 1 milligram of nicotine in 5 minutes (the time
`
`needed to smoke a traditional cigarette, for which the maximum allowable delivery is 1 mg of
`
`nicotine).”26 With at least 59 mg/mL of nicotine delivered in a salt form that increases the rate
`
`and efficiency of uptake (and even with a lower mg/mL amount), a Juul pod will easily exceed
`
`the nicotine dose of a traditional cigarette.
`
`46.
`
`Comparison of available data regarding per puff nicotine intake corroborates the
`
`10
`
`other Juul studies (mentioned above), indicating that Juul delivers about 30% more nicotine per
`
`11
`
`puff. Specifically, a recent study of Juul pods found that “[t]he nicotine levels delivered by the
`
`12
`
`Juul are similar to or even higher than those delivered by cigarettes.”27 The Reilly study tested
`
`13
`
`Juul’s Tobacco, Crème Brulee, Fruit Punch, and Mint flavors and found that a puff of Juul
`
`14
`
`delivered 164 ± 41 micrograms of nicotine per puff. By comparison, a 2014 study using larger
`
`15
`
`100 mL puffs found that a Marlboro cigarette delivered 152—193 μg/puff.28 Correcting to
`
`16
`
`account for the different puff sizes between the Reilly and Schroeder studies, this suggests that,
`
`17
`
`at 75ml/puff, a Marlboro would deliver between 114 and 144 μg/puff. In other words, empirical
`
`18
`
`data suggests that Juul delivers up to 36% more nicotine per puff than a Marlboro.
`
`19
`
`47.
`
`Because Juul’s nicotine salts actually increase the rate and magnitude of blood
`
`20
`
`plasma nicotine compared to traditional cigarettes, the risk of nicotine addiction and abuse is
`
`21
`
`higher for Juul e-cigarettes than traditional cigarettes. Thus, Juul pods are foreseeably
`
`
`26 E-Cigarettes, European Commission, https://ec.europa.eu/health//sites/health/files/tobacco
`/docs/fs_ecigarettes_en.pdf (citing United Kingdom Medicines and Healthcare Products
`Regulatory Agency and industry reports).
`
`27 Reilly et al., Free Radical, Carbonyl, and Nicotine Levels Produced by Juul Electronic
`Cigarettes, Nicotine Tob Res 2019; 21(9):1274-1278 (the “Reilly study”),
`https://www.ncbi.nlm.nih.gov/pubmed/30346584.
`
`28 Schroeder & Hoffman, Electronic Cigarettes and Nicotine Clinical Pharmacology (May 2014)
`Tobacco Control 2014: 23:ii30-ii35, www.ncbi.nlm.nih.gov/pmc/articles/PMC3995273/.
`
`- 13 -
`
`CLASS ACTION COMPLAINT
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`

`

`Case 3:20-cv-02345 Document 1 Filed 04/07/20 Page 14 of 34
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`exceptionally addictive when used by persons without prior exposure to nicotine – a fact not
`
`disclosed by Juul. These facts have resulted in increased sales for Juul.
`
`48.
`
`Since its launch in 2015, Juul has become the dominant e-cigarette manufacturer
`
`in the United States. Its revenues grew by 700% in 2017.29 According to a recent Wells Fargo
`
`report, Juul owned three-quarters of the U.S. market for e-cigarettes by the end of 2018.30
`
`C.
`
`49.
`
`Defendants Entered Into an Unlawful Agreement Not to Compete
`
`Despite becoming the dominant market leader, Juul continually feared that its
`
`fierce competitor, Altria, could unseat it given that company’s success, rich history and abundant
`
`human and capital resources. Juul correctly believed that Altria was aiming to take over the
`
`10
`
`relevant market. As part of that effort, Altria began a strategy of attempting to acquire Juul while
`
`11
`
`simultaneously competing aggressively against it in the relevant market. Initially, Juul rebuffed
`
`12
`
`these efforts.
`
`13
`
`50.
`
`In the summer of 2018, Juul took a different course by agreeing to merger
`
`14
`
`negotiations on the non-negotiable condition that Altria pull its competing e-cigarettes from the
`
`15
`
`relevant market. Negotiations had stalled temporarily when Altria previously balked at the
`
`16
`
`condition. Altria eventually acceded to Juul’s demand and began removing its products from the
`
`17
`
`shelves in October 2018. With that commitment secured, negotiations resumed and culminated in
`
`18
`
`a deal.
`
`19
`
`51.
`
`On December 20, 2018, Juul and Altria executed a series of agreements (the
`
`20
`
`“Transaction”) granting Altria a 35% non-voting equity interest in Juul in exchange for a $12.8
`
`21
`
`billion all-cash investment. This investment did not require a notification under the Hart Scott
`
`22
`
`Rodino Act (“HSR”). Defendants’ Purchase Agreement incorporates various ancillary
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`
`29 Durbin et al., Letter from United States Senators to Kevin Burns, CEO, Juul Labs Inc. (Apr 8,
`2019), www.durbin.senate.gov/imo/media/doc/ FINAL%20 Juul%20Letter%204.8.19.pdf.
`
`30 Bonnie