Sinking almost $13 billion into the leading electronic cigarette manufacturer Juul Labs was almost a no-brainer for Altria (NYSE:MO) -- sales were surging, and Juul had a virtual lock on the market with a 75% share.

Yet federal data suggests that the dominance might have been achieved on the backs of teenagers, and the Federal Trade Commission is now looking into whether Juul improperly targeted them by using youthful models in its advertising. And coming after the Food & Drug Administration crackdown on e-cigs over teen use, suddenly the 35% stake Altria bought in the e-cig maker is looking instead like a really bad decision.

Young teen using an electronic cigarette

Image source: Getty Images.

No youthful indiscretion

According to The Wall Street Journal, which first reported the existence of the FTC's probe, the investigation actually began before Altria paid $12.8 billion for a 35% share of Juul, but it was classified as not public. That raises the question of whether Altria discovered the investigation in its due diligence related to its Juul investment. The agency is investigating whether Juul engaged in deceptive marketing and is considering whether to seek monetary damages.

At issue was Juul's first media campaign, called Vaporized, that featured people in their 20s and 30s using the device, which looks like an oversized thumb drive. Apparently, using such youthful individuals in marketing is taboo -- it not only causes people in the same age range to find the device attractive, it also makes teens feel the same way. 

Similarly themed marketing on Facebook and Instagram was also criticized. That campaign ended with Juul shutting down its social media accounts altogether, and it now only uses people 35 and over. The Journal quotes a Juul spokesman as saying: "There is no evidence that it drove use, youth or otherwise. Nonetheless, we regret that the campaign was executed in a way that was perceived as appealing to minors."

The FDA previously criticized Juul's marketing tactics, and after demanding it submit documentation on how Juul manufactured its device as well as its advertising principles, the agency made an unannounced visit to Juul's offices and removed documents related to those issues.

Taking a stand against teen use

Government data says teen use of electronic cigarettes reportedly surged 78% between 2015 and 2017, and though that obviously includes many who never smoked before, part of the dramatic jump is a result of teens switching to e-cigs from cigarettes. One university study found teen smoking fell to historic lows in 2017, the first year e-cig use was measured.

Juul maintains it has never marketed to teens, and like other tobacco companies, there is an age-gate on its website. It has also undertaken numerous other strategies to prevent teens from buying its devices, including:

  • Voluntarily pulling its flavored e-cigs from retail stores that were open to the general public.
  • Supporting raising the legal age to purchase tobacco and e-cigs to 21.
  • Introducing an age-verification ID scanning system for retailers to use before selling a customer a Juul product.
  • Creating Track & Trace, an online portal that will allow parents, teachers, and law enforcement to identify where a confiscated Juul was purchased by using the serial number printed on every device.
  • Considering opening its own retail stores so it can tightly control to whom it sells e-cigs.

It's clear Juul understands the seriousness of limiting access to teens, but health professionals are concerned about the long-term effects of e-cigs. The FDA is investigating hundreds of potential cases where use has led to illness, serious injury, or even death.

But many of the cases also involve the use of marijuana. And because the agency is warning against modifying the devices or making home-brew e-liquids, it sounds as if people are using e-cigs outside the proper recommendations. So it may be that it's not the e-cigs themselves as much as users tampering with them that's causing much of the harm.

A cloudy future

Former FDA commissioner Scott Gottlieb has already expressed doubts that Juul Labs will be able to make it through the regulatory process when it is required to submit pre-marketing applications to the agency for approval next year. 

Juul Labs and Altria may find that the door to further opportunity in the U.S. is closing, with several government agencies actively investigating their business and anti-smoking activists seeking to prohibit all access to e-cigs, even if they could be better for smokers. So international markets may be the only available avenue for growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.