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On February 2nd, in the Eastern Time zone of the United States, Philip Morris International (PMI) and British American Tobacco (BAT) simultaneously announced the termination of all global patent infringement lawsuits pertaining to heated tobacco and e-cigarette products, thereby reaching a settlement.
In response, 2FIRSTS has invited Senior Partner of Tianyuan Law Firm, Tang Shunliang, an experienced lawyer in the field of tobacco and e-cigarettes, to provide a professional interpretation of the reasons behind the patent dispute settlement between PMI and BAT, as well as the potential impacts it may have.
Below are Counsellor Tang Shunliang's perspectives on the matter.
There were three reasons for the settlement between PMI and BAT:
Firstly, from a perspective of patent wars, in 2014, PMI established a leading market position by leveraging its patent portfolio accumulated over more than 20 years, gaining first-mover advantage in terms of brand recognition through patent means. However, even so, it was not until 2018, when BAT launched its product in Japan, that PMI initiated a lawsuit. During the initial stage, PMI held over 80% market share in the HNB market, which prompted BAT to proactively launch patent lawsuits against PMI in the United States and Europe, challenging the validity of PMI's patents. As a result, the two parties engaged in a five-year long patent war.
However, the technological and industrial characteristics of heating tobacco patents themselves cannot rely solely on patents to guarantee an absolute monopoly in the market. Moreover, the long-term and ongoing patent warfare has consumed a significant amount of human and financial resources. What is more important is that by 2023, some of PMI's technology patents in the HNB (Heated Tobacco Product) field have been successfully invalidated by BAT (Biggest Advantage Takers). This has prompted PMI to reassess the importance of patents.
On the other hand, following the rapid iteration of PMI's iluma, a gap has emerged in terms of patents, rendering many patents obsolete. As a result, in 2023, PMI will strategically adjust by merging, acquiring, and selling traditional tobacco businesses to expedite iluma sales and achieve its 2025 goal, thereby accelerating progress towards its smoke-free initiative.
At present, it is difficult for PMI Company to "upgrade" its research and development efforts and launch updated generation products, which is not in line with the IQOS iluma's basic compatibility with the intelligent manufacturing system. Consequently, in terms of heating devices patents, most of the patents published in the past year are merely improvements. It can be said that the mission of PMI's heating patent pool has been basically accomplished. What remains as their core strategy is the comprehensive coverage of heated tobacco consumables brands. Considering market and smoke-free strategy considerations, patent licensing aligns with its market strategy.
Secondly, from the perspective of tobacco legislation and policies, the conservative forces have been growing stronger amid the global economic downturn, making it difficult for PMI to swiftly change the traditional thinking of the tobacco regulatory agencies through technology and harm reduction measures. Despite the rapid development of e-cigarette technology, it still faces extensive discussions on compliance in 2023. As of November 2023, it is evident that the Framework Convention on Tobacco Control (FCTC) has not brought about revolutionary changes to heated tobacco and e-cigarettes, and PMI's global growth has not seen a significant improvement. However, PMI has no choice but to move forward and can no longer rely on traditional cigarettes to generate profits, even though its smokers may still support traditional cigarette brands such as Marlboro for their cowboy nostalgia. This does not mean that other tobacco companies, such as BAT, will not fill the market share abandoned by PMI in order to offset the costs of new tobacco research and development.
Developed countries as well as low-income countries have not yet fully recognized the harm reduction potential of heat-not-burn (HNB) products, and these innovative tobacco products have also not received sufficient legal recognition.
The vast US market has been out of reach for PMI due to the PMTA and patent issues. However, the recent settlement between the two major companies is sure to aid PMI's plans in the US market. Additionally, with the global economy currently facing a downturn, tobacco taxes serve as a unique financial tool that is protected by local governments. This poses a significant challenge for PMI in promoting smoke-free products, particularly in countries where traditional tobacco remains a major source of tax revenue.
Thirdly, from the perspective of market competition, if PMI strengthens the patent barriers of HNB too much, it could potentially push BAT towards the e-cigarette sector. However, once BAT increases its investment in the e-cigarette sector and completes the acquisition of target companies (including patent holders), it could create a competitive rivalry with HNB and also hinder PMI's expansion in the e-cigarette field. Furthermore, it is of utmost importance that both companies cannot form favorable opinions for heated tobacco when it comes to publishing health science views, lobbying legislation, and regulation. This is also unfavorable for PMI.
In these circumstances, PMI's plan to achieve its smoke-free goals by 2025 has faced challenges, directly impacting the company's growth rate after 2024. As a result, PMI and BAT's top executives have had to balance the opinions of their brand and intellectual property departments, reaching a consensus rather than continuously incurring legal fees. Together, they aim to expand the market for heated tobacco products (HNB), enhance public understanding of reduced harm caused by HNB products, and drive policy formulation by regulatory bodies in different countries.
Finally, attention must be paid to some issues regarding the recent patent lawsuits in the United States concerning e-cigarettes. Of course, companies such as Auriga, JUUL, and NJOY are more concerned about protecting their own territory. The settlement of patents between these two major companies will also impact their patent strategies. However, although the patent barriers in the e-cigarette industry are not as concentrated as those in heated tobacco, it does not prevent them from continuously using the US patent system to target Chinese companies that are not adept at patent warfare in the US. Launching patent lawsuits against Chinese e-cigarette companies during a period of fluctuating regulatory policies in the e-cigarette industry serves as both a way to raise the threshold set by the FDA and to gain an advantage in capturing the US market for e-cigarette companies in China.
Especially with the alliance between British-American Tobacco and NJOY, the patent pool has been enhanced, albeit with the strategy of targeting Chinese companies first, then dividing the focus on American counterparts, or eliminating patent threats before tackling Chinese enterprises.
The alliance of these two giants marks a turning point for the heated tobacco and e-cigarette industries, as it will undoubtedly reshape the landscape of the emerging tobacco market and alter the dynamics of intellectual property. This development could potentially put increased strain on the American e-cigarette market, placing further pressure on e-cigarette companies. Furthermore, it is also possible that PMI and BAT may divert more resources towards the e-cigarette market, leading to further acquisitions of patents related to e-cigarettes.
Peace is achieved through confrontation, as can be seen from the history of patent litigation between the two major tobacco companies. It has always been a game of cat and mouse. However, when it comes to overseas litigation involving Chinese e-cigarette companies, most opt for compromise rather than fighting back. This approach is contrary to the position of Shenzhen's concentration of e-cigarette industry and will only lead to increasing passivity. Furthermore, China's regulatory policies have not offered enough strategic maneuvering options for Chinese e-cigarette companies under pressure from patent litigation. The settlement of global patents by the two major tobacco companies should serve as inspiration for Shenzhen's e-cigarette companies to unite and address future patent lawsuits.
About the Author
Counsellor Tang Shunliang is a partner at Tianyuan Law Firm and has extensive experience in the field of tobacco and e-cigarette law. With over ten years of professional experience in patent disputes, legal legislation, and compliance, Tang Shunliang has a deep understanding of the technology and patent landscape of tobacco and e-cigarettes. He has successfully represented clients in numerous domestic and international compliance issues, particularly achieving significant accomplishments in complex patent infringement disputes. Additionally, he has served as a legal advisor for well-known Chinese e-cigarette and tobacco companies for a long period of time.
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