Photographer: Chris Ratcliffe/Bloomberg

Chinese Pharmacist’s E-Cigarette Drags Reynolds Into Vaping War

  • Dispute over e-cigarettes is latest in growing competition
  • Vaping industry estimated worth at $5.2 billion in 2015

A global battle for supremacy in the fast-growing electronic cigarette market has broken out over technology developed by a Chinese pharmacist a decade ago.

Hon Lik invented the modern e-cigarette in an attempt to kick his smoking habit. The device he came up with is now the focus of a patent war between pair of American tobacco giants and a British competitor that has intensified in recent weeks with filings in the U.S. Patent and Trademark Office.

At stake are the profits from a worldwide market that has grown to $5.2 billion and is viewed hopefully in the tobacco industry as a lifeline against declines in traditional smoking.

In 2013, Fontem Ventures, an Amsterdam subsidiary of Imperial Brands Plc, obtained the patents when it bought the e-cigarette unit of Hon’s Dragonite International Ltd.

Since April, Fontem has filed three patent-infringement suits against Reynolds American Inc., the maker of Camels, demanding royalties on the sale of Reynold’s Vuse Solo vapor cigarettes.

Fontem has also filed two against Altria Group Inc.’s Nu Mark, seeking a cut of sales on its MarkTen XL and Green Smoke brands. Altria, based in Richmond, Virginia, sells more than half the cigarettes bought in the U.S., including the top-selling Marlboro brand.

Growth Area

Fontem also is seeking court orders to block further use of its inventions, which could force the companies to make dramatic changes to their products. Fontem is one of Imperial’s top growth areas, both because of patent royalties and its Blu e-cigarette business, which it said is No. 2 in the U.S. behind Reynolds.

At stake are the profits of a rapidly growing industry. The worldwide e-cigarette and vapor market is expected to more than triple to $15.9 billion by 2019, from $5.2 billion last year, according to Bloomberg Intelligence. 

Vaping and other smoking alternatives are replacing cigarettes among U.S. adults.

Tobacco companies are moving aggressively.

“They want to offset a decline in their core business,” Philip Gorham, an analyst with Morningstar Inc. in Amsterdam, said in a phone interview. “Because ultimately it’s their consumer. It’s smokers.”

E-Cigarette Sales

Reynolds, based in Winston-Salem, North Carolina, and Altria are pushing back against Fontem, challenging eight of its patents. In June 28 and July 2 petitions filed with the U.S. patent office, they say the newer patents are simply combinations of old ideas that don’t meet the legal standard of an innovation. In some cases, the newer patents are little different from older Hon patents, they say.

It’s an argument that’s easier to win at the patent office than in district court since the two use different legal standards of review. The agency also can act more quickly than courts.

The patents are "very broad in scope -- they basically cover any aspect of a cigarette," said Ray Story, who heads the Tobacco Vapor Electronic Cigarette Association and is founder of UTVG, which sells brands like Premium Vapes and Vape Master.

‘Tough Battle’

Vaping devices have evolved beyond what’s covered by the Hon patents, said Story, who called them "yesterday’s technology." Still, he said, the U.S. litigation is going to be a "tough battle" and the tobacco giants may be threatening the Fontem patents as a way to angle for cheaper settlements.

Bryan Hatchell, a spokesman for Reynolds, and Brian May, a spokesman for Altria, said the companies had no comment because of the pending litigation. Imperial Brand did not immediately respond to requests for comment.

In 2014, Fontem filed more than two dozen patent-infringement lawsuits against companies including Njoy Inc., Vapor Corp. and CB Distributors Inc. The companies settled their disputes.

"A lot of these companies just buckled under the pressure and just settled," Story said. "Reynolds and Altria are not those players."

For Fontem, the fight is an opportunity to expand its brand in the U.S. where the e-cigarette market is bigger than the next six markets combined.

Health Effects

To be sure, there are risks. The battery-powered devices create a nicotine mist that can be inhaled without exposing the user to some of the dangerous ingredients in traditional cigarettes. Nevertheless, the health effects of vapes are in dispute.

The U.S. Food and Drug Administration in May started regulating the electronic cigarette industry, including vape pens and refillable vaporizers.

Meanwhile, the patent battles continue. Together, Reynolds and Altria have filed 13 separate petitions, sometimes challenging a single patent on multiple grounds.

The agency’s Patent Trial and Appeal Board will do an initial assessment of the petitions and any response Fontem submits over the next six months. If it finds a “reasonable likelihood” that any aspect of Fontem’s patents are invalid, it will institute a review. A final decision for the companies would take another year.

Tobacco Money

In the end, the dispute may mean more to Fontem than the American tobacco companies, who have plenty of money to fight back, said Ken Shea, an analyst with Bloomberg Intelligence.

There is "zero credibility of it being a threat to the companies, because it’s yesterday’s technology,” he said.

“Fontem paid nothing for these patents,” Shea said, referring to the $75 million Imperial paid for Dragonite’s e-cigarette business that included Hon’s patents. “They can make a big threat and hopefully get a settlement -- why not shoot for the stars?”

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