Purpose
Teach how Juul vaping products violated FDA Regulations and led to material ongoing scrutiny and restrictions.
About the Author
My name is Lawrence Hartman and I’m a Columbia Law School graduate and a principal in Compliance Mitigation. I made very poor choices in the growth of my business, financing small public companies, bringing me under investigation for fraud. I believed my actions were protected by loopholes and Safe Harbors, operating by the letter of the law but abusing its spirit. Prosecutors filed a 36-count indictment against my partners and me, while I remained outside of the US. One of my partners went to trial during this time with another testifying against him. The partner who went to trial was found guilty and received a 25-year sentence. The partner who testified received only five. The long arm of the US law eventually caught up with me and I pled out to 10 years. I received invaluable experience both from my own direct exposure and assisting fellow inmates as a jailhouse attorney. Our team at Compliance Mitigation offers services to help develop mitigation strategies leading to lower sentences for people charged with crimes.
Learning Objectives
After completing this case study, participants will be able to:
Understand the need to ensure compliance with government mandated rules.
Describe how failure to monitor the use of a company’s products can lead to government investigations.
Explain that a company needs to carefully and thoughtfully review marketing strategies to ensure that they do not target underage users.
Identify ways in which a new company might act irresponsibly as a result of failure to create sufficient compliance protocol.
Intended Audience
Entrepreneurs and employees who work in a new or innovative industry, subject to complying with rules and regulations not clearly defined to govern their business.
Key Terms
The Family Smoking Prevention and Tobacco Control Act, Food and Drug Administration, Juul, Centers for Disease Control, vaping, Congressional oversight
Current State
The Family Smoking Prevention and Tobacco Control Act (“Tobacco Act”) is a federal statute in the United States that was signed into law by President Barack Obama on June 22, 2009. The Act gives the Food and Drug Administration (“FDA”) the power to regulate the tobacco industry. A signature element of the law imposes new warnings and labels on tobacco packaging and their advertisements, with the goal of discouraging minors and young adults from smoking. The Act also bans flavored cigarettes, places limits on the advertising of tobacco products to minors and requires tobacco companies to seek FDA approval for new tobacco products.
Future State
The smoking-like practice known as vaping was in its infancy in 2009 when the Tobacco Act was passed. As a result, there rules in the Tobacco Act do not specifically pertain to vaping. There are, however, certain important guidelines set forth regarding cigarettes and smokeless tobacco in the Tobacco Act which provide guidance for this new technology. The FDA, moreover, is imbued with general powers to regulate products associated with vaping. Companies selling vaping products can anticipate additional regulations and potential bans for all our part of their product lines as the governing law in this area more fully develops.
Situation
A new industry spawned from innovative technology, with the beneficial intention of weaning people off of cigarette smoking that people perceived as more dangerous. Proof to substantiate such claims, however, required time and research. Further, certain companies utilized marketing techniques and offered product lines that seemingly encouraged underage use of their products. The FDA targeted one of the industry’s largest and fastest growing companies in order send a message and curtail rampant abuse of its rules until such time that sufficient information existed to determine the safety and utility of vaping products.
Background
In 2005, two former cigarette smokers, Adam Bowen and James Monsees met while taking graduate courses in product-design at Stanford University and developed an e-cigarette vaporizer device for cannabis and loose-leaf tobacco. The vaporizer eliminated many of the carcinogenic toxins and chemicals typically associated with smoking cigarettes. The intent of their product was to provide a safe and more satisfying alternative to nicotine patches to help people stop smoking cigarettes.
The product went through several iterations until Bowen and Monsees perfected the design, marketing and distribution of its product named Juul, founding a company of the same name in May of 2015. Juul quickly began taking the country by storm as a device to help reduce smoking, primarily using an oil base ingested in an atomized form, sold in Juul Packs. These Juul packs were also known as pods or vape juice.
The product, however, also found a market with adolescents. Juul’s sleek design led some people to call it the iPhone of cigarettes, making it a rather “cool” habit for high school students. Juul, moreover, sold the Juul packs in a plethora of flavors ranging from a rather normal menthol to mango, crème and even bubble gum. Juul did nothing to counter this troubling development.
Juul became one of the most popular e-cigarette manufacturers in an industry that spawned from nothing in 2006 to over $14 billion in 2019. The company grew from 200 employees in September 2017 to 1,500 by the end of 2018.
In July 2018, Juul raised $650 million, giving it a valuation of $15 billion. On December 20, 2018, Altria, one of the world’s largest cigarette manufacturers, bought 35% of Juul for $12.8 billion. According to Wells Fargo, the deal valued Juul Labs at $38 billion. At the time, Juul had an annual revenue of about $2 billion. Juul bought a building in San Francisco in 2019 for almost $400 million.
In April 2018, former Massachusetts Attorney General Martha Coakley joined Juul, working in the government affairs team to coordinate lobbying for the product, while advocating against underage usage. Oakley’s position as a former attorney general, now lobbying state Attorneys General for the vaping industry, called her work into question, particularly since Juul, a leader in the electronic cigarette industry, had been accused of marketing addictive nicotine products to youths.
A mysterious spate of vaping illnesses and deaths began occurring in 2019, causing in excess of 2,500 lung related illnesses and claiming more than 68 lives throughout the United States. The Centers for Disease Control and Food and Drug Administration frantically sought to discover the reason behind the rapid spread of the problem. Juul, as an industry leader in vaping, bore the brunt of considerable political pressure as uncertainty swirled around the root cause of the health issues. While tainted counterfeit pods were eventually blamed, Juul now found itself intensely under the microscope of government regulators.
Analysis
On June 13, 2019, United States House of Representatives launched an investigation into Juul, looking into the business deal with Altria, social media and advertising practices, and communications, spearheaded by Illinois Representative Raja Krishnamoorthi, Chairman of the Oversight Subcommittee on Economic and Consumer Policy. The subcommittee found that “Juul appears to be violating FDA regulations against making unapproved express and implied claims that its product helps users stop smoking cigarettes and is safer than cigarettes.” The subcommittee also accused Juul of “deploying a sophisticated program” to target children and teenagers, including at schools and summer camps, as part of an effort to become the nation’s largest seller of e-cigarettes.
In September 2019, The Food and Drug Administration, in a harsh warning letter Monday, criticized Juul Labs for illegally marketing its e-cigarettes as less harmful than regular cigarettes and ordered the company to correct the violations immediately or face tougher enforcement actions.
The FDA’s warning letter said the testimony showed that Juul marketed its vaping products as “modified risk tobacco products” — meaning the company included claims that the products “present a lower risk of tobacco-related disease or are less harmful than one or more other commercially marketed tobacco products.” Under federal regulations, such “modified-risk claims” must be authorized by the FDA. Juul’s failure to get such authorization, the FDA said, means that the company sold and marketed “adulterated” products.
The FDA, in a second letter, asked the company for documents and information about several marketing and outreach practices detailed in the July congressional hearing. It said that despite Juul’s commitment to address the surge in youth use, the company’s products continue to represent “a significant proportion” of the overall use of e-cigarette products by children. “Some of this youth use appears to have been a direct result of Juul’s product design and promotional activities and outreach efforts,” the FDA said.
On September 25, 2019, it was announced that Kevin Burns was stepping down as CEO of Juul. In October 2019, Juul announced plans to lay off approximately 500 workers by the end of 2019 and several key executives resigned from the company. On October 31, 2019, Altria announced that it was writing down $4.5 billion of the investment it had made in Juul by recording a charge against results.
In the face of a clear upcoming ban, Juul voluntarily discontinued most of its flavored pod products in early 2020.
The FDA currently allows Juul and other vaping manufacturers to continue operations until calendar year 2022 as numerous ongoing studies attempt to determine the safety of vaping products. The goal is to ensure that the FDA has the proper scientific and regulatory foundation to efficiently and effectively implement the Tobacco Act. To make certain that the FDA is striking an appropriate balance between regulation and encouraging development of innovative tobacco products that may be less dangerous than cigarettes.
Recommendations
Companies do well to tread with caution when getting involved in uncharted areas of the law. Along with great opportunity come great pitfalls. For that reason, it’s wise to engage industry professionals from the outset to set up best practices. While compliance is not necessarily front of mind when starting a new business, failure to mindfully account for applicable laws and regulations can lead to investigations and prosecutions down the road.
Marketing products solely with the goal of maximizing sales can also pose serious problems. Companies must account for the likelihood of illicit use of their products and how marketing and sales techniques, might influence such illicit use. In instances when a company’s motivation to act improperly can come into question, the company must act swiftly remedy the offensive practice. The FDA might have reacted less harshly has Juul taken its flavored products off the market sooner, when sale of the products first came into question. Similarly, Juul could have hired former Massachusetts Attorney General Martha Coakley as an adviser to help develop best practices instead of as a lobbyist. Companies demonstrating proper corporate responsibility can expect better treatment from government agencies. The upcoming FDA decision in 2022 may very well be impacted by past actions in the vaping industry.
Sources
- https://en.wikipedia.org/wiki/Juul#:~:text=In%202005%2C%20two%20former%20cigarette,leaf%20tobacco%20before%20founding%20Juul.
- https://juulethicalcase.wordpress.com/
- https://www.ccn.com/juul-vaping-study-tobacco-regulation/
- https://www.totallywicked-eliquid.co.uk/is-vaping-better-than-smoking
- https://www.nytimes.com/interactive/2019/health/vaping-illness-tracker.html
- https://www.fda.gov/news-events/press-announcements/fda-announces-comprehensive-regulatory-plan-shift-trajectory-tobacco-related-disease-death