Klein v. Altria Grp., Inc.

• Decision Date: 12 March 2021
• Docket Number: Civil No. 3:20cv75 (DJN)
• Citation: 525 F.Supp.3d 638
• Parties: Gabby KLEIN, et al., Plaintiffs, v. ALTRIA GROUP, INC. et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

525 F.Supp.3d 638

Gabby KLEIN, et al., Plaintiffs,

v.ALTRIA GROUP, INC. et al., Defendants.

Civil No. 3:20cv75 (DJN)

United States District Court, E.D. Virginia, Richmond Division.

Signed March 12, 2021

Jeremy Alan Lieberman, J. Alexander Hood, J. Alexander Hood, II, Pomerantz LLP, New York, NY, Patrick V. Dahlstrom, Pomerantz Grossman Hufford Dahlstrom & Gross LLP, Chicago, IL, for Plaintiff Gabby Klein.

Steven Jeffrey Toll, Cohen Milstein Sellers & Toll PLLC, Washington, DC, David Avi Rosenfeld, Philip Thomas Merenda, Pro Hac Vice, Samuel Howard Rudman, Pro Hac Vice, Robbins Geller Rudman & Dowd, LLP, Melville, NY, Jeremy A. Lieberman, Pro Hac Vice, Michael Jonathan Wernke, Pro Hac Vice, Pomerantz Grossman Hufford Dahlstrom & Gross LLP, New York, NY, for Plaintiff Construction Laborers Pension Trust of Greater St. Louis.

Steven Jeffrey Toll, Cohen Milstein Sellers & Toll PLLC, Washington, DC, David Avi Rosenfeld, Pro Hac Vice, Philip Thomas Merenda, Pro Hac Vice, Samuel Howard Rudman, Pro Hac Vice, Robbins Geller Rudman & Dowd, LLP, Melville, NY, Jeremy A. Lieberman, Pro Hac Vice, Jeremy Alan Lieberman, Michael Jonathan Wernke, Pomerantz Grossman Hufford Dahlstrom & Gross LLP, New York, NY, for Plaintiffs Donald Sherbondy, Sarah Sherbondy.

Johnathon Earl Schronce, Edward Joseph Fuhr, Eric Harrison Feiler, Hunton Andrews Kurth LLP, Richmond, VA, Stephen Richard DiPrima, Benjamin D. Klein, Wachtell, Lipton, Rosen & Katz, New York, NY, for Defendants Altria Group Inc., Howard A. Willard, III, William F. Gifford, Jr.

Kevin Ross Powell, II, Warren Neil Eggleston, Joshua Zev Rabinovitz, Pro Hac Vice, Thomas Patrick Weir, Pro Hac Vice, Kirkland & Ellis LLP, Washington, DC, for Defendant Juul Labs, Inc.

Brian Emory Pumphrey, Brian Charles Riopelle, McGuireWoods LLP, Richmond, VA, Eugene Illovsky, Pro Hac Vice, Kevin Calia, Pro Hac Vice, Boersch & Illovsky LLP, Oakland, CA, for Defendant Adam Bowen.

James W. Burke, Elizabeth Anne Marshall, Orrick Herrington & Sutcliffe LLP, Washington, DC, Alexander K. Talarides, Pro Hac Vice, James Kramer, Pro Hac Vice, Walter Jr. Brown, Pro Hac Vice, Orrick Herrington & Sutcliffe LLP, San Francisco, CA, for Defendant James Monsees.

Robert Armistead Angle, Troutman Pepper Hamilton Sanders LLP, Richmond, VA, Elliot Remsen Peters, Pro Hac Vice, Eric H. MacMichael, Pro Hac Vice, Keker Van Nest & Peters LLP, San Francisco, CA, for Defendant Kevin Burns.

James Christian Word, Latham & Watkins LLP, Chicago, IL, Andrew Clubok, Pro Hac Vice, Matthew J. Peters, Pro Hac Vice, Susan E. Engel, Pro Hac Vice, Latham & Watkins LLP, Washington, DC, for Defendant K.C. Crosthwaite.

MEMORANDUM OPINION

David J. Novak, United States District Judge This action arises out of Defendant Altria Group, Inc.’s ("Altria") $12.8 billion investment in JUUL Labs, Inc. ("JUUL"). The investment proved unwise, and now investors in Altria allege that the two companies defrauded them by not disclosing the risks created by JUUL's illegal marketing practices targeting underage consumers. The investors have now filed this securities fraud action to recover the damages suffered as a result of this alleged fraud. Defendants have all moved to dismiss this action.

Specifically, this matter comes before the Court on the Altria Defendants’ Motion to Dismiss (ECF No. 117) filed by Defendants Altria, William Gifford ("Gifford") and Howard Willard ("Willard"); the Motion to Dismiss (ECF No. 119) filed by JUUL, Adam Bowen ("Bowen") and Kevin Bums ("Burns"); Defendant James Monsees’ ("Monsees") Joinder and Motion to Dismiss Plaintiffs’ Consolidated Class Action Complaint (ECF No. 121); and Defendant K.C. Crosthwaite's ("Crosthwaite") Motion to Dismiss the Corrected Consolidated Class Action Complaint (ECF No. 123).¹ For the following reasons, Defendants’ Motions to Dismiss will be DENIED, with the exception of Defendant Crosthwaite's Motion to Dismiss, which will be GRANTED IN PART and DENIED IN PART. Defendant Crosthwaite's Motion is GRANTED with respect to Plaintiffs’ claims against Crosthwaite brought under Securities Exchange Commission ("SEC") Rule 10b-5(b). The Motion is DENIED with respect to all other claims that Plaintiffs bring against him.

I. BACKGROUND

A. Factual Allegations

At this stage, the Court must accept as true the facts set forth in the Corrected Consolidated Class Action Complaint ("Complaint" (ECF No. 108)). Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Against this backdrop, the Court accepts the following facts as alleged for purposes of resolving the instant Motions.

i. Parties

Plaintiffs bring this action against multiple defendants, including Altria, a tobacco company located in Richmond, Virginia, whose stock trades on the New York Stock Exchange under the ticker symbol "MO." (Compl. ¶ 23.) Altria has historically played a large part in the market for combustible cigarettes and smokeless tobacco. (Compl. ¶ 36.) Defendant Willard served as Altria's Chief Executive Officer. (Compl. ¶ 24.) Defendant Gifford served as Altria's Vice Chairman and Chief Financial Officer during the times relevant to this action. (Compl. ¶ 25.)

JUUL, a Delaware corporation with its principal place of business in San Francisco, California, sells e-cigarettes, which pack nicotine salts from leaf tobacco into single use "pods," creating a vapor for inhalation when heated. (Compl. ¶¶ 26, 37.) Defendant Bowen co-founded JUUL and served on the Board of Directors and as Chief Technology Officer of JUUL through October 2019, before transitioning to an advisory role assisting JUUL's CEO. (Compl. ¶ 26.) Defendant Monsees also co-founded JUUL, serving on the Board of Directors until March of 2020, and as Chief Product Officer of JUUL through October 2019, before transitioning to an advisory role assisting JUUL's CEO. (Compl. ¶ 28.) Defendant Bums served as JUUL's CEO from December 2017 until September 2019. (Compl. ¶ 29.) Defendant Crosthwaite now serves as the CEO of JUUL, having previously served as Altria's Chief Growth Officer and as an observer on JUUL's Board of Directors following Altria's investment in JUUL. (Compl. ¶¶ 3, 30).

Lead Plaintiffs Donald Sherbondy, Sarah Sherbondy and Construction Laborers Pension Trust of Greater St. Louis ("Plaintiffs") represent a putative class of all persons and entities who purchased or otherwise acquired Altria securities between December 20, 2018, and February 21, 2020. (Compl. ¶¶ 1-2.)

ii. Tobacco Industry's History of Targeting Youth

The tobacco industry, including Altria, has sold billions of dollars in combustible cigarettes over the years, driven by aggressive and successful marketing, that has resulted in hundreds of thousands of deaths and illnesses due to the harmful effects of nicotine found in cigarettes. (Compl. ¶ 41.) This campaign included efforts to target young, impressionable consumers with fruity flavors. (Compl. ¶ 42.) Over the years, the tobacco industry has faced decades of litigation over its efforts targeting youth and its failure to adequately warn of the dangers associated with smoking. (Compl. ¶ 43.)

In 1998, 46 states entered into the Tobacco Master Settlement Agreement ("MSA") stemming from much of the litigation, and the Department of Justice reached a separate settlement with the tobacco companies prohibiting them from selling flavored cigarettes. (Compl. ¶¶ 43-44.) The litigation revealed that the tobacco industry aggressively marketed its products to underage consumers to create "replacement smokers" who would then become customers for life. (Compl. ¶¶ 46-48.) The strategy further involved suppressing research, destroying documents and manipulating the nicotine levels to perpetuate addiction. (Compl. ¶ 48.)

iii. JUUL's Efforts to Target Youth

Plaintiffs allege that JUUL, specifically Monsees and Bowen, carefully studied those marketing strategies, advertisements and product designs of the tobacco industry that the documents from the tobacco litigation revealed. (Compl. ¶ 88.) Plaintiffs allege that JUUL, using this information, then designed its e-cigarettes to appeal to underage consumers. (Compl. ¶ 87.) This included developing a nicotine delivery system designed to maximize nicotine delivery while minimizing the harshness of the "throat hit" associated with traditional cigarettes. (Compl. ¶ 99, 103-16.) Additionally, this involved creating e-cigarettes with a sleek, high-tech design that would appeal to teenagers. (Compl. ¶¶ 121-23.) Likewise, JUUL introduced fruity, kid-friendly flavors, such as "Fruit," "Bruule," "Miint," "Cool Mint," "Cucumber," and "Mango," to entice youth to use its products. (Compl. ¶¶ 127-35.)

Plaintiffs further allege that JUUL undertook marketing campaigns "directed specifically at a youthful audience both in its substance and its delivery." (Compl. ¶¶ 200-02, 208.) These campaigns included colorful, inviting advertisements, social media activity, JUUL-hosted parties and other targeted marketing, all designed to attract underage consumers. (Compl. ¶¶ 205-08.) In its social media activity, JUUL marketed its products in areas that were the near-exclusive domain of underage consumers. (Compl. ¶¶ 210-13.) Similarly, JUUL placed advertisements on websites and television channels frequented by underage consumers. (Compl. ¶¶ 214-25.) In fact, JUUL advertised on Nickelodeon's websites and Cartoon Network's website, which both offer children's programming and games. (Compl. ¶¶ 218-19.) Additionally, JUUL purchased advertisements on other websites designed for children, including allfreekidscrafts.com, hellokids.com and kidsgameheroes.com, among other websites targeting young boys and girls. (Compl. ¶¶ 220-21.) Moreover, JUUL implemented no safeguards to ensure that underage individuals could not view their websites or social media accounts. (Compl. ¶¶ 232-35.) Likewise, JUUL went into New York high schools to give presentations about the safety of JUUL products. (Compl. ¶¶ 288-91.)

Plaintiffs claim that internal documents...