The 2016 FDA Deeming Regulations are likely to shift competitive advantage in the vaping industry significantly over the next few years.

1. Intellectual Property Related to Vaping, E Liquid & ENDS
The 2016 FDA Deeming Regulations are likely to shift competitive advantage in the vaping industry
significantly over the next few years.
The FDA unwittingly intervened in the middle of the vaping industry’s technology development
cycle and changed the rules of the game. As we all know, that has caused a firestorm of
controversy and some industry paralysis around innovation. Investment in innovation requires clear
business goals and the business environment is unclear until the new deeming regulations are fully
imposed, repealed or scaled-back. Slick, visually appealing, flavorful and compact once drove the
research and development cycle, now accuracy, repeatability, measurability and systems
interaction will take precedence to comply with the new regulations if they stand as I believe they
will.
Thus far, the vaping industry has been built largely on branding, a loyal customer base and trade
secrets to create and protect the competitive advantage that exists in the various vape-related
businesses. Most e-liquid formulations are kept secret although the manner in which the secrets
are kept may not meet the legal hurdle of “due care”. In simple terms, due care requires that one
goes through some extraordinary efforts not to expose the secret information to those who would
disclose it or profit from it. Disclosure nullifies the trade secret and nothing can be done to put
that horse back into the barn. Once a trade secret is in the public domain, it can’t be patented or
made secret again. Beyond trade secrets, mostly around formulae, some patents have been filed
against the various ENDS devices, cartomizers and power supply’s but they are few relative to the
quantity of devices and their derivations on the market today. Very few patents have been filed
against the systems or hardware that blend e-liquid either which suggests that there is either
nothing novel about the equipment or the inventors intend to keep it a trade secret. Moreover,
since demand outpaced supply historically, the need for unique competitive advantage was
somewhat diminished, as I stated in a prior published paper*. Therefore, over the past decade all
boats rose with the tide. Everyone profited from the bow-wave created by the surge in the vaping
market and protection of intellectual property was not a requirement for near term success. Long-
term, sustainable success is a different story. Long-term sustainable success is built on well-
protected intellectual property (IP). It is estimated that around 80% of the total value of the S&P
500 index is attributable to intangible assets, i.e. intellectual property of all types.
The landscape has changed dramatically for all businesses related to the vaping industry however.
The recent deeming regulations will surely to drive a course correction as they kick in through
2018. One thing seems certain, the FDA regulations are here to stay in some form. Whatever
innovation(IP) did exist prior to August 2016 is likely to become partly obsolete or possibly wholly
obsolete dependent on which segment of the business you are in. Why so? Because the methods,
processes, hardware, materials and designs that were sufficient to meet the needs of an
unregulated environment are not likely to be sufficient to meet the needs of the new
regulated environment. It’s that simple. The standard has changed and there is now a higher
science required to meet that standard. The new standard will be grounded in repeatability and
other metrics that are tied more to science, data collection and reporting than marketing alone.
Smart businesses will leverage the science in their marketing pitches and I can already see it
emerging in recent advertisements. The vaping industry supply chain businesses that hope to
. The Impact of the FDA & Automation on Operational Efficiency in E-Liquid Production - XX Issue VaporVoice 2016,
www.processsystemsdesign.com

2. remain viable going forward will need to answer the larger questions. Are the thermo-mechanical
processes executed by the ENDS device to vaporize the liquid repeatable within an “acceptable”
range? Can the ENDS apparatus and the liquid when combined produce repeatable results for the
user? Are the various thermal, chemical and mechanical interactions well understood? Do the
developers and manufacturers of those commodities know what those results are in terms of
toxicology? The answers to those questions and others are the kernels of intellectual property(IP)
that will emerge by necessity from the R&D required to create the solutions. That’s the jist of it.
Those who can determine which IP to create and protect and how to protect it will yield the
golden goose, i.e. long-term competitive advantage.
Most of the heavy-hitters in the tobacco industry have already begun to put IP stakes in the
ground. One indication is that Altria, Reynolds American, Japan Tobacco Int’l and British American
Tobacco have collectively filed for almost 900 patents over the past few years. More than half of
those patent applications are related to vaping in some way. That’s just the IP that we can see in
the public domain via published patent applications. There is much more in trade secrets,
undisclosed processes and know-how behind that. There always is. Think of it as a fence-line.
Patents are the fence-posts. The mesh that covers the posts and creates the barrier are made up
of the intellectual property that you can’t see.
If you are a small to mid-sized business trying to make it in the new world order that the FDA
regulations have yielded, you should be concerned but not dissuaded. Even large companies like
Altria, etc. who have patents in the vaping area do not typically have a comprehensive IP strategy
that is adequate. I lead the team that created the IP strategy approach for The Boeing Company in
recent years and I can tell you that very few large companies do this well. Super high-technology
companies like those found in IT, communications and the pharma industries are the best at
creating and executing an IP strategy. That’s largely because they can afford to invest oodles of
money in patenting and defending their IP around the world. The rest of us have to be much more
efficient at identifying the IP that has real long-term value and then determining how we protect
it. That’s where a comprehensive IP strategy can pay huge dividends for your company, no matter
what size it is. Accessible subject matter expertise and the agility that comes with being smaller
than Altria can be significant strengths in any strategic planning, especially in IP where the kernels
of value need to be identified. Prescriptive IP strategy is beyond the scope of this paper and I have
written volumes on it. It’s different for different industries and different business models within
industries. However, anyone can begin to work through the tenants of creating an IP strategy
which is where most businesses of all sizes miss the mark.
An effective IP strategy starts with a laser focus on business objectives. Your organization, no
matter how small should have a business strategy that drives everything you do. Ask yourself, can
you achieve your business objectives in terms of product line throughput, quality(FDA) cost and
pricing that you need to be market competitive? Do you currently have the technology, processes
and equipment that you need to achieve your business strategy? If not, how will you acquire the
necessary missing elements? Will you create them internally through company funding or acquire
. The Impact of the FDA & Automation on Operational Efficiency in E-Liquid Production - XX Issue VaporVoice 2016,
www.processsystemsdesign.com

3. them externally through in-licensing, supply-chain partnerships or acquisition be it just the IP or
the whole company? Most importantly, do you know which technology, formulae, processes and
equipment will yield the greatest competitive advantage going forward? Where are you in the
supply-chain and how do you intend to monetize your position? This is the most critical aspect of
any worthwhile strategic plan, knowing what’s important to your bottom line and prioritizing
it. Once you know that, you can begin to invest in and protect your existing and emerging IP
commensurate with its value. Patents, copyrights, trades secrets and trademarks are the typical
tools that one would use to protect not only the most critical, but all the intellectual property
that your company has ownership of, rights in or both. All IP has some value. It’s just a matter of
prioritizing the IP according to its value contribution. This extends to teaming agreements and
other contracts wherein the rights and ownership you convey or are conveyed to you are codified
and agreed to. Any solid IP strategy is built around a business, technology, IP relationship that is
well understood by a diverse subject matter expert team and then shared with rest of the
organization. Small, agile organizations can be very good at this because there are less buy-ins
required and less people to share the plan with. Some of this comes down to simply marking all of
your documents correctly and that’s virtually free. It all starts with a solid business plan.
David Cloud – MS, MBA. Dave is a VP at Process, Systems and Design and an independent IP strategy
consultant. dave-cloud@hotmail.com
. The Impact of the FDA & Automation on Operational Efficiency in E-Liquid Production - XX Issue VaporVoice 2016,
www.processsystemsdesign.com