Pomerantz Defeats Motion to Dismiss in Altria Securities Class Action

On March 12, 2021, in Klein v. Altria Group, Inc. et al (3:20-cv-00075-DJNVAED), U.S. District Judge David J. Novak in the Eastern District of Virginia denied Altria Group, Inc.’s (“Altria”) and JUUL Labs, Inc’s (“JUUL”) motions to dismiss the plaintiffs’ complaint. 

Altria manufactures and markets cigarettes, smokeless products, and wine in the United States. JUUL manufactures electronic cigarettes which deliver nicotine through one-time use cartridges.

The complaint alleges Exchange Act violations against JUUL, Altria and certain officers of each arising from Altria’s investment in JUUL and the failure to disclose their marketing of highly addictive nicotine products to kids and the associated risks.

Specifically, the plaintiffs allege that JUUL (of which Altria owns 35%) engaged in a multi-pronged scheme to target underage consumers and get them addicted to JUUL’s product. JUUL offered an array of kid-friendly flavor options and undertook an advertising campaign specifically aimed at targeting underage consumers. JUUL’s nicotine delivery system also released nicotine more effectively, making the nicotine impact more potent and likely to cause addiction. As the usage of JUUL’s products dramatically increased among youth, JUUL repeatedly denied it had intentionally targeted underage consumers. Instead, JUUL maintained that its mission was to create and sell a product designed to assist adult smokers in moving away from traditional and harmful tobacco products. Plaintiffs allege that Altria learned of JUUL’s improper practices when conducting due diligence for its 35% acquisition but failed to disclose the associated risks to investors. When JUUL and Altria’s scheme was discovered, and regulators began to act, Altria’s investors paid the price. The risks of regulatory scrutiny and extensive litigation began to materialize, resulting in Altria taking two separate write-downs of its JUUL investment for $4.5 billion and $4.1 billion.

JUUL’s primary defense was that the plaintiffs lacked standing to sue JUUL because plaintiffs purchased stock in Altria, not JUUL. Defendants relied on the Second Circuit opinion in Nortel Networks that states “[s]tockholders do not have standing to sue…when the company whose stock they purchased is negatively impacted by the material misstatements of another company.” The court agreed with plaintiffs that the facts in Nortel Networks were distinguishable,   stating that because Altria owned 35% of JUUL and JUUL’s false statements were issued in the press release announcing Altria’s investment, “the intertwined nature of Altria’s and JUUL’s business and the alleged causal effect of JUUL’s misrepresentations on the value of Altria’s stock” was sufficient to establish standing. 

Altria’s primary defense was that none of its statements were misleading because  investors were aware of the allegations concerning JUUL’s marketing at the time the statements were made. The Court rejected this “truth-on-the-market” defense because plaintiffs alleged that defendants “actively denied” that they ever intended to target youth with its marketing. The Court also found that such a factual determination was not suitable for a motion to dismiss.

Finally, the Court held that plaintiffs also adequately alleged “scheme liability” because, in addition to false and misleading statements, plaintiffs alleged that Defendants underlying conduct involved a scheme to deceive the FDA and consumers.

“Plaintiffs have pled sufficient facts that JUUL targeted youth for its products and that all Defendants knew that JUUL targeted youth. Moreover, Plaintiffs have pled sufficient facts that Defendants recognized the risks that this marketing scheme posed to the value of JUUL and Altria, yet they chose not to disclose it to investors for fear of deflating the values of the company. Although Defendants will have the opportunity to present additional facts and defenses as this litigation continues, at this stage the Court finds that Plaintiffs have pled facts sufficient to survive the Motions to Dismiss.”

Pomerantz’s Altria litigation is led by partners Michael J. Wernke and Jeremy A. Lieberman.