Why is Imperial Tobacco Group dragging the electronic cigarette industry to court?

[Mark Benson]

This week saw some unexpected news from the US with confirmation that Imperial Tobacco Group is taking 11 electronic cigarette makers to court. These include the likes of Lorillard, NJOY and Vapor Corp and this move has certainly caused a stir in the industry. So why has Imperial Tobacco Group decided to drag the industry through the courts and what is the basis for this legal action?

If you cast your mind back to September 2013 Imperial Tobacco Group acquired the electronic cigarette division of Dragonite International for a payment of $75 million. At the time many people wondered where the value was and why Imperial Tobacco group had paid such a seemingly large amount. It is only over the last few days that the perceived "value" of this acquisition has come to light.

Intellectual property rights


The company believes that intellectual property rights acquired from Dragonite International, now part of the companies Fontem Ventures BV subsidiary, have been infringed by an array of electronic cigarette manufacturers. This is something which has been rumoured and counter rumoured for some time now - who actually holds the underlying intellectual property rights to the modern day electronic cigarette?

So far the company has only confirmed it is seeking unsubstantiated damages and the court action in the US is likely to drag on for some time. This is most certainly the starting shot of a long running battle for control of the industry although why has Imperial Tobacco Group decided now is the time to launch this legal action?

Spoiling tactics?

If you cast your mind back just a few years ago, the tobacco cigarette industry was very dismissive of electronic cigarettes, governments around the world ignored them and regulators showed little interest. However, the situation has changed now with the US market alone expected to be worth in excess of $5 billion by 2015 and all of the tobacco cigarette companies now falling over themselves for a slice of the action.

There have been rumours and counter rumours about back room deals between opponents of the electronic cigarette industry and influential political figures but nothing has been substantiated. Many people believe that the legal action announced by Imperial Tobacco Group could be nothing more than a spoiling tactic to reduce investment in the short-term which will have some effect on sales growth. Whether or not this court action will have any impact in the medium to long term is debatable as some experts believe that the number of electronic cigarette users in the US could outnumber their tobacco cigarette counterparts by 2030!

Conclusion

In many ways the legal action launched by Imperial Tobacco Group is very reminiscent of the tobacco cigarette industry in years gone by. Legal action and counteraction was commonplace, governments were dragged through the courts and delaying tactics often postponed the introduction of potentially damaging regulations. It will be interesting to see how this particular episode pans out and indeed whether it has any impact upon the short, medium and long-term growth of this dynamic industry.

[18sixfifty]

These douchbags remind me of the land grabbers back in the day. They would take anyone's land they could get their hands on if they couldn't prove title to the land they had lived on for years. They use the court system to commit theft. 

This is also another reason why I can't stand IP laws. Intellectual Property laws are bullshit from top to bottom. They are simply protectionist in nature and they don't stop the big boys from taking your design and tweaking it and then turning around and selling it. So it's not about helping the little guy like they claim. 

This will only hurt US companies making e-cigs. China will still be making theirs. If my government does some crap like banning sales from China who will that hurt? All of the people who need cheap mods to get off of cigs, the people who re-sell etc. 

 

[Mark Benson]

You certainly make some very valid points - this looks like delaying tactics to me.

[18sixfifty]

Well it definitely sounds to me like they bought the company with the lawsuits in mind from the start. They could be trying to corner the market or simply hope to put some of the bigger guys out of business or at least drive up their costs so they have less customers. 

I don't think they have a leg to stand on it court. The guys they are suing have been around as long as anyone and just because they bought a company with a dubious claim to patent ownership isn't going to fly. So it's not about compensation. It has to be about tying them up in court and costing them a ton of money. 

They probably did a cost analysis study and figured out how many customers they were losing. How much does a cig company make per year off of each of their cig junkies? Take that number and multiply it by the number of lost customers and decide if it's worth the money in lawyer fees to put some of these guys out of business.  

[Don]

There were 40.5 billion taxed cigarettes (including rollups) smoked in the UK in 2012-13 And they reckon 11.5 billion untaxed ones). 

So there were 50 or so billion cigarettes smoked by something like 5-6 million people.

Which raised 12.6 billion pounds in taxes making the average tax on a pack of 20 around £6.20. Given the average retail price of cheap cigarettes is around £7.20 (or less than half that for smuggled cigarettes which are available everywhere and according to the taxman have 20% of the market already.) there's not a lot of margin for the tobacco companies. e-cigs probably promise them a very much larger margin at least till the taxman gets his claws in. 

It is said that thee are around a million vapers in the UK so that could be a 20% drop or about £2.4 billion in tax revenue gone. (Or 4% of the tax cuts given to bankers! in the 2010 budget.)

One wonders if the UK government is encouraging the tobacco companies in patent trolling just to save revenue. 

I thought it was BAT rather than Imperial that bought the patent portfolio.

[Mark Benson]

This all reminds me so much of the litigation and court cases which have dominated the tobacco cigarette industry of late. Who are the real winners in all of this? I would guess the lawyers on either side.

In many ways it is irrelevant whether or not this case is successful, it will drag the major ecigarette companies through the courts for the next few years.