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The U.S. Domestic E-Cig Market Is About to Be Shaken Up

By Rupert Hargreaves – Mar 20, 2014 at 7:58AM

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Imperial Tobacco has unleashed a wave of patent infringement lawsuits, which could decimate smaller e-cig companies.

Imperial Tobacco (IMBB.Y 2.30%) controls around 5% of the global tobacco market and, like all major tobacco companies, was slow to realize the disruptive potential of the e-cigarette. However, as soon as Imperial's management realized the opportunity that e-cigs offered, it made an acquisition that has turned out to be one of the smartest moves in the industry.

The acquisition
Imperial Tobacco's e-cig division is called Fontem Ventures and around the end of last year, Fontem acquired Dragonite International's e-cig unit for $75 million. Dragonite was founded by Hon Lik, who has remained executive director of the company. What's more, Mr. Lik is also credited with the invention of the e-cig and many of the technologies associated with it. As a result, Dragonite and Lik hold the rights and ownership over an "extensive portfolio" of global patents and pending patents covering e-cig technologies -- of course, Imperial Tobacco and Fontem Ventures now own these rights.

As it turns out, many e-cig start-ups and even tobacco industry giant Lorillard (LO.DL) have infringed on these patents, possibly due to their rush getting e-cig products to market. So, six months on from closing the deal with Dragonite, Fontem Ventures, backed by Imperial Tobacco, has filed nine lawsuits in a federal court, asking the court to rule that the patents infringed were valid, and the defendants should pay as-of-yet unspecified damages. The companies Imperial is taking to court are Lorillard, NJOY, Vapor Corp., VMR Products LLC, Ballantyne Brands LLC, CB Distributors, Spark Industries LLC, Logic Technology Development LLC, FIN Branding Group LLC, Victory Electronic Cigarettes Corp. (NASDAQOTH: ECIG), and DR Distributors LLC. So, it would seem as if Imperial is intending to kill off the majority of its competition before many of them can even get much of a foothold in the market.

The fighting continues
This sheath of lawsuits from Imperial is yet another chapter in what is becoming an aggressive war between tobacco companies to dominate the electronic cigarette market. However, it's not just the tobacco companies that are using underhanded tactics. GlaxoSmithKline (GSK 2.52%) is also employing dirty tricks in an attempt to stop the rise of e-cigs as they are a threat to its business.

Glaxo is the leading marketer of nicotine-replacement therapy products within the United States. NRT includes such items as nicotine gum, lozenges, and patches. Obviously, if smokers who are in the process of quitting turn to e-cigs rather than NRT, Glaxo will lose revenue.

To help try to disrupt the potential of e-cigs, it would appear as if Glaxo is seeking help from the U.S. Food and Drug Administration -- in particular, the head of the FDA's tobacco enforcement division, Mitch Zeller, a former anti-tobacco lobbyist who was appointed head of the FDA's center for tobacco products earlier this year.

Now, Zeller should not be taking sides in this argument, but according to an article published in The Wall Street Journal back in 2009, Zeller disclosed that he "provides consulting support to GlaxoSmithKline consumer health through Pinney Associates on an exclusive basis on issues related to tobacco dependence treatment."

This pharmaceutical consultancy has regulatory authority over competing products, including e-cigs. I must stress that I'm only speculating a link between these two entities.

Foolish summary
Overall, if you've been following the rise of e-cigs, this move by Imperial will be no surprise as tobacco companies all try to outdo each other in an attempt to control the potentially huge juvenile e-cig market. For the likes of Lorillard, Imperial's request for unspecified damages is unlikely to close the company down; damages are unlikely to exceed Lorillard's e-cig sales, which only make up a faction of its overall revenue. However, smaller companies are likely to feel the pinch from these suits, which could reshape the market.

Rupert Hargreaves owns shares in Imperial Tobacco. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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