Judge’s ruling could be ‘death penalty’ for e-cigarette maker Juul in NC lawsuit
The N.C. Attorney’s General’s Office won a major victory Monday when a judge agreed e-cigarette company Juul had destroyed documents, ignored court orders and should face sanctions that could reach into the millions of dollars.
Durham County Superior Court Judge Orlando Hudson ruled in favor of a pre-trial motion that argued Juul Labs Inc. violated court orders on providing pre-trial evidence in a civil lawsuit brought by Attorney General Josh Stein. The lawsuit contends the company, the nation’s biggest e-cigarette maker, marketed its products to minors.
Hudson agreed the company should face the stiffest sanctions the state requested, sanctions that a Juul attorney had called the death penalty for its defense.
After the ruling, as Special Deputy Attorney General Brian Rabinovitz started summarizing the sanctions, Juul attorney Andrew McGann interrupted.
“I’m sorry,” he said. “I want to get clarity on what is happening here. Is it your ruling that every single sanction that the state asked for you are awarding?” Or, he asked, was the judge just giving guidance on each ruling?
“I have granted the state’s request,” Hudson said. “I think their request for the ultimate sanctions is warranted by the arguments I heard.”
“All of the sanctions they asked for?” McGann repeated.
“Yes,” said Hudson, Durham’s senior resident judge.
After a break, the attorneys indicated they wanted to continue talking and would return to court Thursday.
The ruling was the latest blow to Juul’s defense. Earlier this month, Hudson also excluded testimony from at least two of Juul’s expert witnesses.
Kia Vernon, an N.C. Central University law professor, said Monday’s ruling marks a huge win for the state that could lead to settlement negotiations.
The sanctions makes it really difficult for Juul to overcome obstacles in the trial that, under Hudson’s order, would include instructions to the jury that they can assume the documents Juul were unable to produce were harmful to the company’s case.
The case is set to go trial June 7.
North Carolina vs. Juul
Stein sued Juul in May 2019, accusing it of violating North Carolina’s Unfair and Deceptive Trade Practices Act, a common claim in business and consumer lawsuits.
Stein contends the company, which has 75% of the e-cigarette market, unlawfully marketed to youth through its device design, advertising and social media and failed to ensure that online customers were over 18. The lawsuit also contends the company misrepresented how much nicotine is in its product, making it easier for people to get addicted.
Juul played a central role in fostering an e-cigarette epidemic, the lawsuit states, as its market share went from 24% to 75% in 2019, reversing a historic decline for teen tobacco use.
From 2018 to 2019, use of e-cigarettes rose 78% among high schoolers and 48% among middle schoolers according to the N.C. Youth Tobacco Survey.
“It is no accident that Juul has achieved such striking success in attracting underage users,” the lawsuit states. “Juul’s popularity among teens is the predictable result of Juul’s youth-focused business strategy.”
After facing federal and state investigations, as well as lawsuits, however, the company’s value has fallen to about $10 billion, The Wall Street Journal reported in October. That’s down from the $38 billion it was worth when Altria Group Inc., whose companies includes PhilipMorrisUSA, bought 35% in 2018, according to the newspaper.
In addition to civil penalties, the North Carolina lawsuit seeks to limit Juul’s advertising to adults and its flavors to tobacco and menthol, as well as prevent it from selling or marketing e-cigarettes to the state’s minors.
To address Juul’s allegedly deleting social media posts and age verification data, along with providing thousands of irrelevant documents before trial, the state successfully proposed sanctions that partially decided the case.
Hudson determined Juul had violated the Unfair or Deceptive Trade Practices Act — which can carry an up to $5,000 fine for each violation — thousands of times.
Hudson also agreed to tell the jury at the upcoming trial that it may “draw adverse inference that all the social media posts Juul deleted or caused to be deleted were youth oriented.”
According to Juul, in September 2019, a new chief executive officer announced changes that included suspending all broadcast, print and digital product advertising. The next month the company suspended sale of non-tobacco, non-menthol-based flavors in the U.S, including mango, creme, fruit and cucumber.
Meanwhile, Juul attorneys have argued that its marketing targeted adults ages 24 to 35 and that the lawsuit is counterproductive to public health goals.
“The state’s attack on Juul products is particularly misguided because the purpose of the Juul products is to offer adult smokers a satisfying, acceptable alternative to combustible cigarettes,” according to Juul court documents.
Discovery violations hearing
On Monday Rabinovitz said he had never previously sought discovery-violation sanctions in his more than a decade with the Attorney’s General’s Office.
“It’s a rare act, to say the least,” he said. “But if any case justifies seeking these sanctions, it’s this case.”
Rabinovitz said California-based Juul deleted “highly relevant” material, dumped millions of documents on attorneys that didn’t meet their request, and ignored Hudson’s February order to provide relevant discovery.
Juul didn’t intentionally destroy any information, McGann countered.
Some of its age-verification data was deleted by third-party companies, and social media accounts were deleted before the company had notice of the North Carolina and other lawsuits, along with a federal investigation, he said.
McGann argued the state was seeking sanctions that would essentially decide the case over a series of last-minute discovery disputes.
Sanctions
The requested sanctions included Hudson granting a yet-to-be-heard motion for partial summary judgment in which the judge would conclude for the jury that Juul knowingly violated the Unfair or Deceptive Trade Practices Act by:
▪ Failing to verify people were over 18 when they ordered online from June 2015 to February 2016 and from August 2017 to the present.
▪ Failing to engage an independent third-party age verification system to ensure customers were over 18,
▪ Allowing minors to obtain Juul products through its warranty replacement program, along with bulk and serial purchasing.
Under the order, each document provided to the state from Juul responding to recent requests to identify the number of times the company may have violated the act through advertising and others actions would be considered a violation of the act.
For example, Rabinovitz said, the state asked for Juul to identify advertisements accessible to consumers in North Carolina. In response, Juul identified about 16,000 documents. In that situation, Juul would have violated the act 16,000 times.
“We get to use that number to count up the violations because that is what we asked Juul for, and this is what they gave us in response,” Rabinovitz said.
Juul document destruction
Rabinovitz said Juul deleted two kinds of documents at the heart of the state’s case.
One of the documents concerned the company’s age verification system, he said.
Juul’s process required customers who failed initial age verification to upload an identification card. Juul contracted Veratad for some age verification services and asked it to store the identification for about 10 days before deletion.
In October 2018, Stein asked Juul for documents related to age verification and social media marketing and put the company on notice to retain related information.
Even before that, however, Rabinovitz argued that Juul should have anticipated litigation after media reporting on its youth-oriented marketing and federal authorities announcing a related investigation in April 2018.
The company should have stopped the deletion of the data, he said, but didn’t.
As late as March 31, 2020, a Juul employee asked Veratad to permanently delete the age verification data, Rabinovitz said. Veratad refused, citing legal constraints.
McGann said Veratad had possession and control of the documents, which it routinely deleted, including for two months after the state put Juul on notice to preserve documents.
McGann described the email the state discusses as an unauthorized request to delete the data following a concern about Canadian privacy rules about whether companies should retain personal information for a set time.
Deleting social media posts
In addition, in July 2017, Juul deleted its Instagram and Facebook posts back to March 2015, Rabinovitz said. The state was able to obtain the text of the posts, but images of young-looking people vaping at parties are gone unless third parties saved them.
The company also caused “tens of thousands” of other social media posts to be deleted after receiving the notice from North Carolina, he said.
McGann said Juul deleted social media posts in response to criticism before being sued. The company did preserve copies of the posts and produced 51,000 related documents, he said.
After being notified of the lawsuit, Juul monitored social media and would contact social media outlets to take down posts by others outside the company that violated its community standards, he said.
Document dump
Since Feb. 4 Juul has provided more than 3 million documents, Rabinovitz argued. Most are irrelevant to the trial, he said.
The state requested videos and displays in North Carolina stores, he said, and the company provided 165,000 documents that included included insurance policies, Google alerts and business agreements.
“If there are responsive documents in there, they are really needles in a hay stack,” he said.
The last-minute response has cost the state more than $100,000 to house the data, he said,.
McGann said officials created a central depository, which is word searchable, for documents sought in multiple lawsuits. Some of the documents were delayed as the company waited for the state to agree to a protective order, he said.
Juul negotiated with the state to identify search terms for documents and address follow-up concerns on multiple occasions, he said.
“After abiding by your honor’s order, engaging with the state on the process, revising it per their request, they are here now saying they want to preclude all evidence on any topic mentioned for the request for production,” he said. “They are asking you to determine the case right now. Just issue a death sentence to Juul.”
This story was originally published May 18, 2021 at 12:10 PM with the headline "Judge’s ruling could be ‘death penalty’ for e-cigarette maker Juul in NC lawsuit."
