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Cigarette Class Action Defense Cases–McLaughlin v. Philip Morris: Second Circuit Reverses Certification Of Class Action Alleging Deceptive Advertising Of “Light” Cigarettes Holding Individual Questions of Reliance Predominate

Class Action Alleging Fraud Under RICO in Advertising of Light Cigarettes Fails to Satisfy Prerequisites for Class Action Certification Under Rule 23 because Individual Issues Predominate Second Circuit Holds

Judge Jack Weinstein of the United States District Court for the Eastern District of New York certified a class action against Philip Morris USA, R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., Lorillard Tobacco Co., Ligget Group, American Tobacco Co., Altria Group, and British American Tobacco; the underlying class action complaint alleged the tobacco companies duped smokers into believing that “light” cigarettes were less harmful to them. See Schwab v. Phillip Morris USA, Inc., 449 F.Supp.2d 992 (E.D.N.Y. 2006). We have previously reported on the district court’s 540-page opinion in that class action, and a copy of that summary may be found here. The theory underlying the class action was that defendants deceived smokers “by convincing them that smoking ‘light’ cigarettes was safer for their health.” 449 F.Supp.2d at 1018. As the Second Circuit explained, the class action claims were “brought as based in fraud under the Racketeer Influenced and Corrupt Organizations Act (RICO)…, but under RICO, each plaintiff must prove reliance, injury, and damages.” McLaughlin v. Philip Morris USA, Inc., ___ F.3d ___ (2d Cir. April 3, 2008) [Slip Opn., at 4]. Accordingly, the Circuit Court reversed class action certification, finding that “Plaintiffs’ putative class action suffers from an insurmountable deficit of collective legal or factual questions.” Id.

The district court based its certification of the class action on its belief that there was “evidence of fraud on the class appears to be quite strong”: “If, as contended by plaintiffs, a huge fraud was perpetrated on tens of millions of people causing them billions of dollars in loss—measured largely by the difference between the value people were led to believe they were getting when they bought ‘light’ cigarettes for safety, and what they received, a non-safe product—recovery dependent on proof should be allowed.” Schwab, at 1021. The district court explained at page 1018:

It is charged—with substantial evidence to support the contention—that plaintiff smokers bought cigarettes characterized as “light,” on the suggestion of defendants—the major cigarette manufacturers—that they were less harmful than “regular” cigarettes, when in fact they were at least as dangerous and defendants knew of their dangers. The claim is that the carcinogenic and other adverse effects smokers sought to avoid were not reduced by smoking “light” rather than other cigarettes; that defendants knew this was the case; that they concealed this fact; that they urged plaintiffs—through advertising and other public statements—to smoke these “lights” knowing smokers were being misled; and that they defrauded purchasers of billions of dollars spent for light cigarettes worth less than their purchase price. [¶] According to plaintiffs’ lawyers, virtually all smokers in the class purchased “light” cigarettes for health reasons rather than for taste, and class members would not have paid as much for “light” cigarettes had they known that, in fact, they were just as harmful as regular cigarettes. On the other hand, according to defense attorneys, the court would be required to inquire into each smoker’s reasons for choosing “light” cigarettes.

The Second Circuit agreed with defense attorneys, concluding that the requirements for class action certification under Rule 23(b)(3) could not be met because individual questions predominate. McLaughlin, at 9. The Court explained that in order to prevail the plaintiffs would have to establish “(1) a RICO violation, (2) injury, and (3) transaction and loss causation.” Id., at 10-11 (citation omitted). And in order to obtain class action certification, plaintiffs were required to demonstrate “that the issues of injury and causation do not defeat the predominance requirement of Rule 23(b)(3).” Id., at 11. This is where plaintiffs failed.

To establish causation, plaintiffs must demonstrate that the members of the putative class relied on defendants’ misrepresentations, McLaughlin, at 11. The district court accepted plaintiffs’ “fraud on the public” theory – i.e., that plaintiffs “can prove reliance on a class-wide basis, using generalized proof, because defendants conducted a national marketing campaign for Lights and therefore represented that Lights were healthier than full-flavored cigarettes in a ‘consistent, singular, uniform’ fashion.” Id., at 12. But the Second Circuit rejected this conclusion, explaining at page 12 that “reliance on the misrepresentation[] cannot be the subject of general proof.” Without such individualized proof, plaintiffs could not “overcome the possibility that a member of the purported class purchased Lights for some reason other than the belief that Lights were a healthier alternative – for example, if a Lights smoker was unaware of that representation, preferred the taste of Lights, or chose Lights as an expression of personal style.” Id., at 12-13. At bottom, the Circuit Court rejected a “fraud on the market” approach to class certification, id., at 15. The Court also refused to blind itself to the obvious: “we are not blind to the indeterminate likelihood that…some members of plaintiffs’ desired class were aware that Lights are not, in fact, healthier than full-flavored cigarettes, and they therefore could not have relied on defendants’ marketing in deciding to purchase Lights.” Id., at 19 (citations omitted).

The Second Circuit additionally held that plaintiffs could not establish that members of the putative class suffered “economic loss.” McLaughlin, at 19-20. The court explained at page 20 that “the issue of loss causation, much like the issue of reliance, cannot be resolved by way of generalized proof.” Put simply, “individuals may have relied on defendants’ misrepresentation to varying degrees in deciding to purchase Lights; some may have relied completely, some in part, and some not at all.” Id. Nor did the Court accept plaintiffs’ theory that defendants’ misrepresentations affected demand and price, id., at 21-22. The Circuit Court held at page 22 that “Only by showing that plaintiffs paid more for light cigarettes than they would have but for defendants’ misrepresentation can plaintiffs establish the requisite injury under civil RICO.” The Court concluded that plaintiffs failed to establish such injury. See id., at 22-31.

Finally, we note that while plaintiffs sought $800 billion in damages, McLaughlin, at 8, the Circuit Court found that plaintiffs’ methodology for calculating damages “is likely to result in an astronomical damages figure that does not accurately reflect the number of plaintiffs actually injured by defendants and that bears little or no relationship to the amount of economic harm actually caused by defendants,” id., at 32-33. Accordingly, the Second Circuit reversed the grant of class certification.

Download PDF file of McLaughlin v. Philip Morris USA, Inc.