What Ch. 11 May Mean For Juul As It Fights To Stay On Market

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By Emily Field  

Embattled Juul’s consideration of Chapter 11 reorganization comes as challenges mount for the e-cigarette giant on multiple legal and regulatory fronts.

These challenges include a recent $438 million settlement with 30-plus states about targeting teens with ads, U.S. Food and Drug Administration setbacks about marketing its vape products and a bellwether trial to begin next month in mass litigation led by California schools.

The activity has been so dizzying that experts say Juul Labs Inc. must now commit itself to one goal.

“If I’m Juul, I want all of this to go away ASAP,” said Azim Chowdhury of Keller & Heckman LLP, who represents vaping companies, in an interview last month. “That’s Juul’s goal, to make all of this go away.”

As recently as Wednesday, as more reports emerged about possible bankruptcy, Juul reiterated how “we engaged advisers to explore several strategic options including Chapter 11 to secure our business and address the impact of the FDA’s stayed order,” referring to the FDA’s pause of its initial ban of Juul’s products.

“We will continue the preparation process for both a restructuring and other strategic options as we determine what path is best for our company, our products and the millions of adult smokers who have or are looking to transition from combustible cigarettes,” a Juul statement said Wednesday.

It was just in 2015 that Juul launched its electronic cigarettes and immediately rose to dominate the nascent market as it advertised its vape pens and flavored cartridges on social media — catching the eye of regulators as the number of teens vaping also rose.

Eventually Juul was forced to take its mango, fruit, creme and cucumber flavors off the marketin November 2018, bowing to pressure from the FDA over its flavors and marketing tactics.

Another pivotal moment arrived in Septemberwhen the company agreed to the $438.5 million settlement with more than 30 states, to be paid out over the next six to 10 years. The company admitted to no wrongdoing but characterized the deal as part of an effort to “resolve issues from the past.”

The big question looming over the deal is whether the FDA will ultimately approve Juul’s menthol and tobacco-flavored vape products — or not.

An FDA denial essentially dooms the company — leaving it without any legal vaping products to sell — and throws its ability to make settlement payments into question.

“Who knows if states will get all their money if Juul doesn’t survive?” Chowdhury said. “Everything is riding on FDA’s authorization; that’s the gatekeeper to the U.S. market.”

The FDA’s initial decision in June to ban Juul e-cigarettes — which the agency stayed shortly after — was based on what it deemed insufficient toxicology evidence to show that marketing the e-cigarettes would be appropriate to protect public health, that the benefit for adult smokers outweighs the risk of youth vaping. While the ban wasn’t unexpected, the reasoning behind it was, as it was widely expected that youth use of Juul products would play a larger role in the FDA’s decision.

The possibility of an FDA ban has already made trouble for Juul in the marketplace. In 2020, Juul had about 40% of the vaping market, but in recent months its share fell to just under 30%, as rival R.J. Reynolds Vapor Co.’s e-cigarette product Vuse — which FDA signed off on last year — rose to 39%.

What the Settlement Deal Leaves Out

It’s unknown whether there are provisions for Juul going out of business in the settlement agreement with the state attorneys general since the settlement documents haven’t been made public yet, but it’s likely that the possibility of bankruptcy was contemplated by the negotiators, experts said.

“If Juul gets to the end of the road with the FDA, and they don’t win any of their appeals, they’re unable to sell a product,” said Desmond Jenson, an attorney at Mitchell Hamline School of Law’s Public Health Law Center in a September interview. “If [Juul goes into] bankruptcy, the states line up with all the other creditors to hopefully get paid.”

The Office of the Attorney General of Texas, one of the lead negotiators of the settlement, told Law360 that it intends to hold Juul to the agreement, when asked if the deal has provisions for a bankruptcy.

“If necessary, we will follow Juul into bankruptcy to hold them accountable,” the office said.

Still, this latest agreement could improve Juul’s chances at ultimately getting marketing authorization from the FDA, according to Marc Scheineson, an Alston & Bird partner and a former agency associate commissioner.

“Settlement of the state claims under conditions to prevent youth usage increases the chance that FDA will approve the [premarket tobacco application] under similar conditions agreed to by RJR Vuse and the similar state settlement marketing provisions,” Scheineson said.

But the fact that the settlement didn’t go beyond restrictions that Juul has already adopted drew criticism from Jenson, who compared Juul’s settlements with the tobacco master settlement agreement, or MSA, of the mid-’90s, saying that they were “worlds apart.”

“Probably the most important difference between the Juul settlements and the MSA is that the MSA placed marketing and sales restrictions on cigarette manufacturers that didn’t already exist at the time,” Jenson said.

Jenson also said he was disappointed that the settlement didn’t include any disclosures of Juul’s internal documents about its marketing tactics, unlike the trove of tobacco marketing information that was made public as the result of states’ suits against cigarette companies.

“I cannot overstate how important document disclosure has been,” Jenson said. “I’m very surprised that it was left out.”

The documents from the tobacco state litigation, for example, became a large part of the federal government’s racketeering case against the companies, Jenson explained. That racketeering case, filed by the U.S. Department of Justice in 1999, ended with a landmark 2006 ruling that the companies conspired to hide the health effects of smoking. While that decision didn’t include monetary penalties, the companies had to make corrective statements about addiction and the health effects of smoking, and make their internal marketing documents public.

What a Bankruptcy Stay Could Mean for Juul

If Juul files for Chapter 11, it will trigger the automatic stay of litigation that pauses most legal actions against a bankrupt company.

Even though Juul has settled with a majority of states, at least one, Maine, opted out of the deal, while others like Minnesota are intent on pursuing their cases against Juul to trial. And separate from the states’ suits, Juul is also facing a November bellwether trial in multidistrict litigation brought by school districts and Juul consumers.

But the stay includes certain exceptions that could complicate the company’s efforts to restructure.

The stay exception that could most impact Juul is the one covering the police and regulatory powers of government agencies. If the FDA has not yet ruled on its regulatory review of Juul’s vaping products at the time Juul files a potential Chapter 11 petition, the bankruptcy filing likely wouldn’t foreclose on the agency’s ability to uphold its earlier ban.

Similar issues were present in the bankruptcy case of opioid drugmaker Insys Therapeutics, which was facing lawsuits from a number of states over its marketing and sale of pain medication. Insys commenced its bankruptcy in 2019 days after signing a $225 million settlement with the DOJ over the company’s alleged practice of paying doctors to prescribe its powerful opioid pain spray Subsys for off-label purposes.

The issues with the state government lawsuits in that case were resolved by an agreement by the states to pause their lawsuits voluntarily to pursue a settlement, which eventually formed the basis of a confirmed Chapter 11 plan. The DOJ was left to seek recovery on its settlement claim from a pool of cash set aside for other public claimants under the plan.

Juul’s Other Legal Tactics

As Juul explores the possibility of bankruptcy, it’s also fighting for its existence on another front with a suit against the FDA.

Two months after the FDA issued a temporary stay of its initial decision to bar Juul’s vaping products from the market, Juul filed a suitseeking to enforce its Freedom of Information Act requests for the scientific documents underlying that decision, a move by the vaping giant to understand what it needs to show the FDA in order to have its products ultimately allowed back on the market.

If Juul’s FOIA suit is successful, it could mean the company will have insight into the agency’s June decision that there wasn’t sufficient toxicology evidence to show that marketing the vaping products would be appropriate for protecting public health. The stated reason behind the FDA’s decision came as a surprise to legal observers, as Juul had been the target of highly publicized rebukes from the FDA over its now-discontinued fruity flavors, which the agency viewed as appealing to young people, and its marketing practices aimed at minors.

Jonathan Havens of Saul Ewing Arnstein & Lehr LLP, who is regulatory counsel to the FDA’s Center for Tobacco Products, said he believes that a judge would be inclined to side with some of Juul’s arguments, meaning that Juul would get at least some of the information it’s seeking.

While the FDA has argued that those documents are protected by “deliberative process privilege,” which shields from disclosure information about how a government agency made a decision, Juul’s contention is that the privilege doesn’t apply to the agency’s factual conclusions.

“It’s objective scientific conclusions on why or why not granting of the marketing order is appropriate for the protection of public health, because that’s the standard that FDA has to adhere to,” Havens said. “So it just seems like an overbroad application and something that is kind of ripe for attack from Juul here against the FDA.”

The FOIA lawsuit also called out the politics around the FDA’s decision, accusing the agency of “hiding its work in the shadows,” and said that its decision to initially ban Juul was made in a politically charged environment, as members of Congress had called on the FDA for years to demand Juul’s removal from store shelves.

“Obviously, there are members of Congress who don’t like vaping products, and so they might be kind of getting FDA’s ear about this,” Havens said. “But it’s not a political process. It’s a scientific review process. And so I think Juul and the rest of the public needs to understand how this decision was arrived at — is it in fact an appropriate application of the public health standard?”