Altria Group, the largest tobacco company in the U.S., divested its 35 percent stake in the e-cigarette maker Juul Labs early last month. The Federal Trade Commission (FTC) challenged the acquisition in April 2020, alleging that the deal would unreasonably restrain competition in the market for “closed-system electronic cigarettes.”
Shortly after the divestiture, Altria asked the FTC to either dismiss the case as moot or to stay the litigation to allow the parties to discuss settlement. Despite the failure of the investment and Altria’s willingness to comply with the relief sought, the FTC plans to rule on the case next month.
It’s no surprise that the FTC, under Chair Lina Khan’s leadership, is prioritizing litigation over settlement. Chair Khan told Axios last year: “We’re going to be focusing our resources on litigating, rather than on settling.” What is surprising is the FTC insistence on adjudicating an investment that no longer exists.
The FTC’s own administrative law judge (ALJ) dismissed the case against Altria/Juul in February 2022. But the FTC appealed the ALJ’s decision. To whom?, one might ask. The FTC appealed the decision to themselves.
If the FTC loses its initial adjudication, as it did here, it can appeal the case to the Commissioners. And the agency fares well in those appeals. As my colleagues Jessica Melugin and Ryan Young pointed out in a piece for National Review, “In the last 25 years, FTC Commissioners have never ruled against themselves in such an appeal.”
Through its adjudicative procedure, the FTC concurrently operates as the investigator, the prosecutor, the trial court, and the appeals court. The adjective “Kafkaesque” has become somewhat of cliché in modern times, but Franz Kafka would be envious of such a creation.
The case against Altria/Juul highlights growing concerns about the constitutionality of the FTC’s administrative process. The U.S. Supreme Court recently heard oral arguments on a procedural issue in Axon Enterprise, Inc. v. Federal Trade Commission in which the plaintiff argues that FTC’s structure is irreconcilable with the Constitution. And those concerns are also present with the Securities and Exchange Commission’s in-house administrative court.
In light of Altria’s voluntary divestment from Juul and the company’s openness in providing the relief sought in the case, it’s difficult to discern how much more relief the FTC wants.
Regardless of the FTC’s challenge, Altria’s investment in Juul was certainly not a success. When Altria initially acquired a 35 percent stake for $12.8 billion in 2018, Juul was valued at $38 billion and estimated to have captured 75 percent of the e-cigarette market. After four years, Altria’s investment was worth less than 5 percent of its original value, landing somewhere around $450 million. At the end of last year, Altria’s stake in Juul was valued at $250 million.
Altria discontinued its own e-cigarette products, MarkTen and Green Smoke, before investing in Juul. According to Altria, the products failed: “The products were losing a lot of money and we couldn’t make changes due to regulatory requirements, so we pulled them from the market.”
But the company’s struggle with the Food and Drug Administration (FDA) didn’t stop there. The FDA limited the sale of flavored e-cigarette cartridges in 2020 and ordered Juul’s e-cigarettes off the market in 2022. A fortunate court decision stayed the ban, allowing Juul to resume sales while the order undergoes further review. Further, Juul has been on the receiving end of thousands of lawsuits and nearly filed for bankruptcy late last year.
Mergers and acquisitions fail more often than not. In fact, roughly 70 to 90 percent of acquisitions fail. And it’s fair to say that Altria’s five-year investment in Juul failed. But that’s the nature of nascent markets like those involving healthier alternatives to traditional tobacco products. Since 2014, the leader in e-cigarette sales has changed from NJOY to Blu to Vuse to Juul and back to Vuse.
The market for e-cigarettes remains highly competitive and is one that Altria intends to continue to compete in. Following its exit from Juul, Altria announced its intent to purchase NJOY for $2.75 billion. Once a leader in the industry, NJOY has an estimated market share of 2.7 percent. Having already received approval from the FDA for six products, the purchase of NJOY will enable Altria to build and scale those products to better compete with industry leaders Vuse and Juul.
This is good news for consumers, as healthier alternatives to smoking tobacco will be more affordable, effective, and accessible. That means less smoking related deaths. Unfortunately, Lina Khan’s FTC probably won’t see it that way. The present, ideologically-driven FTC will likely view Altria’s acquisition of NJOY as equally anticompetitive to the attempted purchase of Juul.
Just this week, the FTC again overturned a decision by its own ALJ and ordered Illumina to unwind its acquisition of Grail. The merger would have allowed the companies to better integrate their products to increase access to a multi-cancer early detection (MCED) test, another venture that would save lives. Chair Lina Khan has said that the FTC will pay close attention to mergers and acquisitions involving emerging technologies. But consumers will be harmed if the adoption and deployment of these products are faced with unnecessary hurdles from antitrust regulators. Instead of letting the free market work to help consumers, the FTC seems bent on slowing innovation and delaying new and developing technologies that will provide net benefits to society.