Case 1:20-cv-00393-LMB-WEF Document 1468-12 Filed 04/05/23 Page 1 of 6 PageID# 40835
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`Exhibit 22
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`Case 1:20-cv-00393-LMB-WEF Document 1468-12 Filed 04/05/23 Page 2 of 6 PageID# 40836
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`INTENSITY, LLC
`12730 High Bluff Drive, Suite 300
`San Diego, California 92130
`telephone 858.876.9101
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`www.intensity.com
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`I N T E N SI T Y
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`UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF VIRGINIA
`ALEXANDRIA DIVISION
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`RAI STRATEGIC HOLDINGS, INC. and
`R.J. REYNOLDS VAPOR COMPANY,
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`Plaintiffs and Counterclaim
`Defendants,
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`v.
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`ALTRIA CLIENT SERVICES LLC; PHILIP
`MORRIS USA, INC.; and PHILIP
`MORRIS PRODUCTS S.A.,
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`Defendants and Counterclaim
`Plaintiffs.
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`Case No. 1:20-cv-00393
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`REPORT OF
`RYAN SULLIVAN, Ph.D.
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`____________________________________
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`Ryan Sullivan, Ph.D.
`March 24, 2021
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`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`Case 1:20-cv-00393-LMB-WEF Document 1468-12 Filed 04/05/23 Page 3 of 6 PageID# 40837
`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`China.54 For example, certain Nu Mark MarkTen products were manufactured in China, and
`certain JUUL products are manufactured in China.55 As discussed in Section 3.1, e-cigarettes
`are regulated in the United States by the FDA.56
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`(30)
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`In 2014, there were more than 460 brands of e-cigarettes and 7,700 flavors sold on the
`internet.57 As of 2017, the number of e-cigarette brands decreased to 433, 12 of which were
`operated by major tobacco companies.58 Four companies have achieved more than a 40%
`share in the market since 2012: NJOY, Imperial Brands, British American Tobacco (Reynolds),
`and JUUL.59
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`(31)
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`Reynolds first entered the market with the launch of VUSE Solo in 2013,60 followed by the
`Alto, Ciro, and Vibe.61 Upon its release, VUSE was deemed “technologically interesting,” and
`that “[n]ear-term, [VUSE] clearly raises the competitive stakes[.]”62 Reynolds was the market
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`The New York Times, “China’s Vaping Boo Alarms the Government,” 11/22/2019,
`https://www.nytimes.com/2019/11/22/business/international/china-vaping-ban.html. (“Ninety percent of the world’s e-
`cigarettes are made in China, and most of them are produced in Shenzhen, a southern city that borders Hong Kong.”)
`While some manufacturing is performed in China, Reynolds manufactures its VUSE Solo cartridges in the United States.
`In addition, all of the e-liquid used in the VUSE products is blended in the United States, and e-liquid is a critical
`component of the VUSE products. See:
`Section 7.7.5.
`Juul Labs Press Release, “Juul Labs Commitment to High Manufacturing and Quality Standards,” 8/23/2019,
`https://www.juullabs.com/juul-labs-commitment-to-exacting-standards/. (“JUUL products are manufactured in China,
`Hungary, Mexico, and several locations in the United States.”)
`Appendix 4.1 to “2016 Surgeon General's Report: E-Cigarette Use Among Youth and Young Adults,” at A4.1-2, available
`at: https://www.cdc.gov/tobacco/data_statistics/sgr/e-cigarettes/pdfs/2016_SGR_App_4-1_508.pdf. (“MarkTen is a brand
`from NuMark. MarkTen is manufactured in China, and its e-liquids are produced by an affiliate of NuMark in the United
`States.”)
`Kowitt, Sarah D. et al. (2017), “Attitudes Toward FDA Regulation of Newly Deemed Tobacco Products,” Tobacco Regulatory
`Science 3(4): 504-515 at 504.
`Zhu, Shu-Hong, et al. (2014), “Four Hundred and Sixty Brands of e-Cigarettes and Counting: Implications for Product
`Regulation,” Tobacco Control 23: iii3–iii9, at iii6.
`Hsu, Greta, Jessica Y Sun, and Shu-Hong Zhu (2018), “Evolution of Electronic Cigarette Brands From 2013-2014 to 2016-
`2017: Analysis of Brand Websites,” Journal of Medical Internet Research 20(3): e80, at pdf 3.
`JP Morgan, “Juul’s Success Triggers FDA Actions. Positive for European Tobacco,” 9/13/2018 at 3. (“[F]our players reached
`more than 40% share in e-cigarettes since 2012 (Njoy, Imperial, British American Tobacco and now Juul).”)
`VUSE Website, Devices, https://vusevapor.com/devices (accessed 3/16/2021). (“Vuse has been pioneering vapor
`technology since 2013, when we launched Vuse Solo – the world’s first truly digital vapor cigarette.”)
`VUSE Website, Devices, https://vusevapor.com/devices (accessed 3/16/2021).
`R.J. Reynolds Vapor Company Website, Vapor, https://www.rjrvapor.com/products/vapor (accessed 3/16/2021).
`Morgan Stanley, “Reynolds American Blazing a Digital Vapor Trail with VUSE Launch,” 6/6/2013, at 1.
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`share leader from 2015 to 2017,63 and their e-vapor developments have been part of Reynolds’
`“multi-decade track-record of thought-leading innovation” in the U.S. tobacco industry.64
`NJOY sells e-cigarettes in two variants, the “ACE” and the “DAILY.65 Imperial Brands sells the
`vapor product “blu” or “myblu”.66 In 2015 JUUL Labs launched JUUL, which has been the
`market share leader since 2017.67 Altria previously operated within the market through their
`subsidiary Nu Mark, with the “MarkTen” and “Green Smoke” products, although both
`products were discontinued as of December 19, 2018.68 The same day, Altria announced its
`offer for a $12.8 billion investment for a 35% share in JUUL.69 Per the terms of their
`investment agreements, Altria is subject to non-competition obligations, restricting them from
`investing or engaging in the e-vapor business other than through JUUL.70 PM USA sells the
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`Levy, David T. et al. (2019), “An Economic Analysis of the Pre-Deeming U.S. Market for Nicotine Vaping Products,” Tobacco
`Regulatory Science, 5(2): 169–181, at 176, Table 2.
`Cowen and Company, “MA+Innovation = Structurally Advantaged Growth; Groans Over Guidance Priced In,” 8/15/2016,
`at 1. (“As seen in Figure 1, RAI has a multidecade track-record of thought-leading innovation in U.S. tobacco, including
`VUSE which is the market share leader in e-cigarettes in traditional retail outlets.)
`NJOY, NJOY ACE, https://shop.njoy.com/shop/devices/njoy-ace/ (accessed 3/16/2021).
`NJOY, NJOY DAILY, https://shop.njoy.com/shop/devices/daily/ (accessed 3/16/2021).
`Imperial Brands Website, Next Generation Products, https://www.imperialbrandsplc.com/about-us/next-generation-
`products.html (accessed 3/5/2021).
`JUUL Labs, Discover JUUL, https://www.juul.com/learn/discover (accessed 3/16/2021).
`Business Insider, “The Precarious Path of E-Cig Startup Juul: From Silicon Valley Darling to $24 Billion Behemoth Under
`Criminal Investigation,” 10/31/2019, https://www.businessinsider.com/juul-timeline-from-startup-to-tobacco-company-
`challenges-bans-2019-9, at PDF 12.
`Barclays, “JUUL – Disruption Comes to Tobacco,” 7/30/2018, at 2.
`Credit Suisse, “US Market Data from Nielsen,” 5/26/2020, at 6.
`MarkTen Website, FAQs, https://www.markten.com/ (accessed 12/3/2020).
`Green Smoke Website, FAQs,
`https://www.greensmoke.com/#:~:text=As%20of%20December%2019th%2C%202018,retail%20locations%20while%20su
`pplies%20last. (accessed 3/4/2021).
`Altria, Form 10-K, 2018, at 45. (“Altria’s other operating companies included Philip Morris Capital Corporation (“PMCC”).
`. . and Nu Mark LLC (“Nu Mark”), both of which are wholly-owned subsidiaries. In December 2018, Altria announced the
`decision to refocus its innovative product efforts, which includes the discontinuation of production and distribution of all
`MarkTen and Green Smoke e-vapor products. Prior to that time, Nu Mark was engaged in the manufacture and sale of
`innovative tobacco products.”)
`Levy, David T. et al. (2019), “Altria-Juul labs Deal: Why Did it Occur and What Does it Mean for the US Nicotine Delivery
`Product Market,” Tobacco Control 0: 1–4, at 1. (“On 19 December 2018, Altria announced an offer of US$12.8 billion for a
`35% share of Juul Labs.”)
`Altria, Form 10-K, 2019, at 7. (“Our minority investment in JUUL subjects us to non-competition obligations restricting us
`from investing or engaging in the e-vapor business other than through JUUL, subject to certain exceptions.”)
`SEC Exhibit 99.1, “Altria Group, Inc. and Subsidiaries Consolidated Financial Statements as of December 31, 2018 and
`2017, and for Each of the Three Years in the Period Ended December 31, 2018,”
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`Report of Ryan Sullivan, Ph.D.
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`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`heat-not-burn product IQOS in limited markets within the United States through an
`agreement with Philip Morris International, Inc.71 Although not an e-cigarette, IQOS competes
`with e-cigarettes within the U.S. non-combustible market for adult smokers looking for
`alternatives to combustible cigarettes.72
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`(32)
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`As of January 2021, for in-store retail purchases, JUUL accounted for a 52.1% dollar share
`of e-cigarette sales, followed by VUSE at 29.2%, NJOY at 5.0%, blu at 3.5%, Logic at 1.2%,
`and all other brands at an implied 9.0%.73 In the same period, JUUL accounted for a 40.2%
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`https://www.sec.gov/Archives/edgar/data/764180/000076418019000012/exhibit9912018financialsta.htm at PDF 27.
`(“Altria has agreed to non-competition obligations generally requiring that it participate in the e-vapor business only
`through JUUL as long as Altria is supplying JUUL services, which Altria is committed to doing for at least six years.”)
`See also:
`Section 12.3.4.
`Altria, From 10-K, 2020, at 18. (“In March 2020, PM USA temporarily closed its Atlanta and Richmond IQOS stores and
`paused its IQOS interactive marketing efforts. In June 2020, PM USA reopened its Atlanta and Richmond IQOS stores, and
`in July 2020, PM USA launched IQOS in Charlotte, with all stores operating under enhanced safety protocols.”)
`Altria, From 10-K, 2019, at 7. (“Some innovative tobacco products may reduce the health risks associated with current
`tobacco products, while continuing to offer adult tobacco consumers (within and outside the United States) products that
`meet their taste expectations and evolving preferences. . . In addition to internal product development, these efforts
`include arrangements with, or investments in, third parties such as our exclusive arrangement with PMI to sell IQOS and
`related heatstick [sic] products in the United States, which is dependent upon our continued ability to license these
`products from PMI, and our minority investment in JUUL.”)
`Philip Morris International, “2020 First-Quarter Results,” 4/21/2020, at 18, available at:
`https://philipmorrisinternational.gcs-web.com/static-files/4f3ed693-a022-4770-9d6c-ddb2ea81d7d2. (Financial chart
`places IQOS within the RRP category).
`Altria Client Services, “Aerosol Products Global Competitive Landscape,” 4/19/2016, (Altria_IQOS_ITC_0123268–298, at
`Altria_IQOS_ITC_0123271). (Identifies “E-Vapor, Heat-Not-Burn, Tobacco & Vapor, and Inhaler” product categories as
`being “in-scope” and provides VUSE and IQOS as examples of the e-vapor and heat-not-burn categories, respectively.)
`Philip Morris International, “PMI/PM USA Meeting, Competitive Intelligence,” 4/30/2018, (Altria_IQOS_ITC_00160771–
`785, at Altria_IQOS_ITC_00160776–77). (“Competitive Intelligence” discusses BAT’s product portfolio including heat-not-
`burn, vapor, and smokeless/snus products.)
`Levy, David T. et al. (2019), “Altria-Juul Labs Deal: Why Did it Occur and What Does it Mean for the US Nicotine Delivery
`Product Market,” Tobacco Control 0: 1–4, at 1. (“Altria has recently gained permission from the FDA to market Phillip
`Morris International (PMI’s) heated-tobacco product, iQOS, which is also likely to compete with vaping products for a
`share of the nicotine delivery market.”)
`Cowen and Company, “Tobacco Analysis: Nielsen xAOC + C-Store,” 1/5/2021, at 7.
`Implied “other brand” dollar share = 100% - (Sum of market shares) = 100% - (52.1% + 29.2% + 3.5% + 1.2% + 5.0%) =
`100% - 91% = 9.0%.
`Data is from the four-week period ending 12/26/2020. Data used for the report is Nielsen xAOC and C-Store purchase
`data. xAOC stands for eXtended All Outlet Combined and C-Store is short for convenience stores. The xAOC data include
`sales from food, drug, mass merchandise, club, and military stores. See:
`CPG Data Insights, “Test Your Knowledge: Are you Syndicated Data Literate? (Part 1),” 5/25/2016,
`https://www.cpgdatainsights.com/get-started-with-nielsen-iri/syndicated-data-literacy/.
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`(200) However, my evaluation of reasonable royalties for the ’911 patent using the Fontem-RJRV
`agreement (see Section 13) also reasonably accounts for any competitive considerations
`between RJRV and PMP.
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`(201) Even further, similar to the ’265 patent, the presence of an acceptable non-infringing
`alternative would mitigate the competitive dynamics at play because PMP would not have as
`much bargaining power for an increased royalty since RJRV would be able to reasonably
`design around the allegedly infringing component in the accused products.
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`10.5. The ’374 patent
`(202) As discussed in Section 9, the hypothetical negotiation for the ’374 patent would occur on or
`around September 24, 2019 between ACS and RJRV. By this time, Nu Mark had discontinued
`its e-cigarette lines of products MarkTen and Green Smoke.435, Upon discontinuing the line in
`December 2018, ACS’ parent company AGI entered into an agreement with JUUL that
`provided them a 35% minority share in JUUL. See Sections 2.5 and 12.3.4. Similarly, PM
`USA first sold its IQOS heat-not-burn device in the United States in August 2019.436 As
`discussed in Section 3, IQOS competes with e-cigarettes within the U.S. non-combustible
`market for adult smokers looking for alternatives to combustible cigarettes. Therefore, the
`parties at the hypothetical negotiation would likely consider the competitive impact of ACS
`granting a license to RJRV to the ’374 patent on JUUL’s e-cigarette products as well as PM
`USA’s IQOS.
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`(203) To the extent the competitive dynamics would influence the negotiation for the ’374 patent,
`my use of the Fontem-RJRV agreement to evaluate reasonable royalties for the ’374 patent
`(see Section 13) would reasonably account for these competitive dynamics.
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`10.6. The ’556 patent
`(204) As discussed in Section 9, the hypothetical negotiation for the ’556 patent would occur on or
`around February 11, 2020 between PMP and RJRV. As discussed above, by this point in time
`PMP had launched IQOS in the United States, which has competed with e-cigarettes in the
`U.S. non-combustible market. However, to the extent competitive dynamics would be a
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`435
`436
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`See Section 2.5.
`Philip Morris Annual Report, 2019, at 1. (“In September, our U.S. licensee, Altria Group, Inc., launched IQOS in the initial
`lead market of Atlanta, GA, followed by a subsequent expansion into the Richmond, VA, market in late 2019.”)
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