Security firm for e-liquid manufacturers raises eyebrows with billing plan

August 11, 2016

The more e-cigarette “juice” for vaping products that is produced by the six new state-approved e-liquid manufacturers, the more money security firm Mulhaupt can charge.

Lafayette-based Mulhaupt’s is billing manufacturers “based on the amount of production (of) Indiana-approved materials,” company president Doug Mulhaupt confirmed in a July 11 federal court hearing.

The unusual arrangement between Mulhaupt’s and the manufacturers—which has been in the spotlight after new state law essentially gave the Lafayette firm veto power over which firms could enter Indiana's vaping industry—has critics of the law crying foul.

Shop owners and other distributors are also experiencing higher pricing for e-liquids since the law went into effect, according to one shop owner who testified at the hearing.

Evan McMahon, chairman of Hoosier Vapers, an advocacy group that represents small shop owners, accused the company of having a "financial benefit that goes beyond just being a typical third-party vendor."

“I find it odd that a company that provides a base service would be changing customers based off how much they produce,” said McMahon,who also owns Indianapolis’ Liberation Vape shop.

“I use ADT and they don’t ask me to see my invoices to determine what my monthly bill is," he said. "My cell phone company doesn’t do that. My internet doesn’t do that. Why is a security company doing that?”

The billing model was highlighted in a July 11 federal court hearing for a lawsuit filed by a Naples, Florida-based e-liquid manufacturer, Goodcat LLC, which was scorned by Mulhaupt’s and therefore shut out of the market. That lawsuit is ongoing.

Bill Nelson, an officer for the Electronic Security Association of Indiana, which is a trade group of security firms, said that a security firm charging by volume is highly unusual.

"In 40 years, I have never heard of any customer being charge(d) higher security alarm protection rates based on any type of volume, be it product or revenue,” Nelson told IBJ in an email.

Mulhaupt admitted the arrangement was unusual, and that his company typically charges based on a period of time, but he defended the practice.

“This is not just a matter of rubber-stamping somebody and saying, ‘Yeah, you got the equipment. You’re in business.’ … We’re out in the field auditing these people on a regular basis and their production directly affects those costs,” Mulhaupt said at the hearing in response to a question about the billing model.

Mulhaupt’s said the volume of a customer affects how much time is required for its auditors to log and weigh every barrel and container of e-liquid. In addition, he said, there is more security video to analyze when more product is produced.

“We’re still learning, but if there are more samples put in that sample room because they’re working 24/7, I got to have more people watching that 24/7," Mulhaupt said.

Asked directly about whether Mulhaupt’s profits would be higher the more product is produced by manufacturers, Mulhaupt said, “I don’t know that yet."

Zak Laikin, who advocated for the state regulations back in 2015 and now runs a trade group that represents the approved manufacturers, did not respond to IBJ’s questions about how much the manufacturers were being charged, and about his thoughts on the billing model.

Jack Thar, a lawyer representing Mulhaupt’s, told IBJ he did not participate in putting together Mulhaupt’s pricing model. He declined to answer questions about it, citing attorney-client privilege.

It still is not clear how Mulhaupt’s gained such an outsized role in Indiana’s vaping industry.

State legislation passed in 2015 and this year imposed oddly specific rules for the credentials of security companies that look over e-liquid manufacturers. The law required manufacturer permitees to first get a five-year contract with a qualified security firm before submitting an application to the state.

Mulhaupt’s was the only company that was able to meet the rules as written in the state law, which include holding a certification from a group of which Mulhaupt himself is the president-elect.

The result of the law was that Mulhaupt’s essentially was able to hand-select the companies that could make product for use or distribution in Indiana forever, since the law prevented new manufacturers from entering the industry on July 1.

Since July 1, prices have drastically increased for e-liquid, according to Amy Lane, an owner of a vape shop in Peru, Indiana, and a sales director for an Illinois e-liquid flavor company.

Lane told the court that before the law went into effect, a 10-milliliter bottle of e-liquid would cost her 68 cents.

Now, one of the Indiana permit holders is offering the same-sized bottle for $5.99.

“I think the saddest part about it is a lot of [shops] have had to close their doors,” Lane said. “They can’t keep up. It’s pretty dismal. We can’t go anywhere and get our e-liquids anywhere else but these permit holders."


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