McLaughlin v. Philip Morris USA, Inc.
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Opinion
06-4666-cv McLaughlin v. Philip Morris USA, Inc.
1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 August Term 2006 5 6 (Argued: July 10, 2007 Decided: April 3, 2008) 7 8 Docket No. 06-4666-cv 9 -----------------------------------------------------x 10 KAREN MCLAUGHLIN, JANE AMODEO, DAVID TUTTLEMAN, SUSAN 11 BAILEY, BARBARA BISHOP, TREVOR CAMPBELL, FERGAL 12 FURLONG, DAVID ROGERS, BARBARA SCHWAB, PATRICIA 13 SCOCOZZA, and JIM SHERMAN, 14 15 Plaintiffs-Appellees, 16 17 -- v. -- 18 19 AMERICAN TOBACCO COMPANY, ALTRIA GROUP, INC., PHILIP 20 MORRIS USA INC., LORILLARD TOBACCO CO, BRITISH 21 AMERICAN TOBACCO LIMITED, LIGGETT GROUP, INC., B.A.T. 22 INDUSTRIES P.L.C., and R.J. REYNOLDS TOBACCO CO., 23 24 Defendants-Appellants. 25 26 -----------------------------------------------------x 27 28 B e f o r e : WINTER, WALKER, and POOLER, Circuit Judges.
29 Appeal from an order of the United States District Court for
30 the Eastern District of New York (Jack B. Weinstein, Judge)
31 certifying a class consisting of cigarette smokers allegedly
32 deceived into believing that “light” cigarettes were healthier
33 than “full-flavored” cigarettes. Because individual issues
34 outweigh issues susceptible to common proof, the class is not
35 maintainable under Federal Rule of Civil Procedure 23(b)(3).
36 REVERSED.
-1- 1 THEODORE M. GROSSMAN, Jones 2 Day, Cleveland, Ohio (Robert 3 H. Klonoff and Mark A. 4 Belasic, Jones Day, Cleveland, 5 Ohio, Todd R. Geremia, Jones 6 Day, New York, N.Y., Murray R. 7 Garnick, Judith Bernstein- 8 Gaeta, and James M. Rosenthal, 9 Arnold & Porter LLP, Wash., 10 D.C., David M. Bernick, 11 Kirkland & Ellis LLP, Chi., 12 Ill., Guy Miller Struve, 13 Frances E. Bivens, and Phineas 14 E. Leahey, Davis Polk & 15 Wardwell, New York, N.Y., 16 Gregory M. Loss, Thomas E. 17 Riley, and Joseph G. Falcone, 18 Chadbourne & Parke LLP, New 19 York, N.Y., Alan Mansfield and 20 Stephen L. Saxl, Greenberg 21 Traurig, LLP, New York, N.Y., 22 William L. Allinder, Shook, 23 Hardy & Bacon LLP, Kansas 24 City, Mo., Aaron H. Marks, 25 Leonard A. Feiwus, and Julie 26 R. Fischer, Kasowitz, Benson, 27 Torres & Friedman LLP, New 28 York, N.Y., on the brief), for 29 Defendants-Appellants. 30 31 MICHAEL D. HAUSFELD, Cohen, 32 Milstein, Hausfeld & Toll, 33 P.L.L.C., Wash., D.C. 34 (Benjamin D. Brown, James J. 35 Pizzirusso, Brent W. Landau, 36 Andrea L. Hertzfeld, Cohen, 37 Milstein, Hausfeld & Toll, 38 P.L.L.C., Wash., D.C., Burton 39 H. Finkelstein and Richard M. 40 Volin, Finkelstein, Thompson & 41 Loughran, Wash., D.C., on the 42 brief), for Plaintiffs- 43 Appellees. 44 45 Harvey Kurzweil, Dewey & 46 LeBoeuf LLP, New York, N.Y. 47 (Matthew L. DiRisio and Emilie 48 B. Cooper, Dewey & LeBoeuf
-2- 1 LLP, New York, N.Y., on the 2 brief), for Amicus Curiae 3 Citizens’ Commission To 4 Protect the Truth.
5 John H. Beisner, O’Melveny & 6 Myers LLP, Wash., D.C. 7 (Jessica Davidson Miller and 8 Charles E. Borden, O’Melveny & 9 Myers LLP, Wash., D.C., Hugh 10 F. Young, Jr., Product 11 Liability Advisory Council, 12 Inc., Reston, Va., on the 13 brief), for Amicus Curiae 14 Product Liability Advisory 15 Council, Inc.
16 Alan E. Untereiner, Robbins, 17 Russell, Englert, Orseck & 18 Untereiner LLP, Wash., D.C., 19 (Matthew R. Segal, Russell, 20 Englert, Orseck & Untereiner 21 LLP, Wash., D.C., Robin S. 22 Conrad and Amar D. Sarwal, 23 National Chamber Litigation 24 Center, Wash, D.C., on the 25 brief), for Amicus Curiae 26 Chamber of Commerce of the 27 United States of America.
28 Richard A. Daynard, 29 Northeastern University School 30 of Law, Boston, Mass. 31 (Christopher N. Banthin, 32 Public Health Advocacy 33 Institute, Inc., Boston, 34 Mass., on the brief), for 35 Amici Curiae Tobacco Control 36 Resource Center Division of 37 the Public Health Institute, 38 Inc., and the Tobacco Control 39 Legal Consortium.
40 JOHN M. WALKER, JR., Circuit Judge:
41 While redressing injuries caused by the cigarette industry
42 is “one of the most troubling . . . problems facing our Nation
-3- 1 today,” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,
2 125 (2000), not every wrong can have a legal remedy, cf. Pearl v.
3 City of Long Beach, 296 F.3d 76, 89 (2d Cir. 2002), at least not
4 without causing collateral damage to the fabric of our laws.
5 Plaintiffs’ putative class action suffers from an insurmountable
6 deficit of collective legal or factual questions. Their claims
7 are brought as based in fraud under the Racketeer Influenced and
8 Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, but
9 under RICO, each plaintiff must prove reliance, injury, and
10 damages. Moreover, some undetermined number of plaintiffs’
11 claims are time-barred. Rule 23 is not a one-way ratchet,
12 empowering a judge to conform the law to the proof. We therefore
13 reverse the order of the district court and decertify the class.
14 BACKGROUND1
15 Plaintiffs, a group of smokers allegedly deceived -- by
16 defendants’ marketing and branding -- into believing that “light”
17 cigarettes (“Lights”) were healthier than “full-flavored”
18 cigarettes, sought and were granted class certification. Schwab
19 v. Philip Morris USA, Inc., 449 F. Supp. 2d 992 (E.D.N.Y. 2006)
20 (Jack B. Weinstein, Judge). Plaintiffs’ suit is brought under
21 RICO, with mail and wire fraud as the necessary predicate acts.
22 See 18 U.S.C. § 1962(c) (forbidding “any person employed by or
1 1 For an exhaustive description of this case, we refer the 2 interested reader to the district court’s class-certification 3 opinion below.
-4- 1 associated with any enterprise engaged in, or the activities of
2 which affect, interstate or foreign commerce, to conduct or
3 participate, directly or indirectly, in the conduct of such
4 enterprise’s affairs through a pattern of racketeering
5 activity”); see also id. § 1961(1) (providing that mail and wire
6 fraud constitute racketeering activity); cf. id. § 1341 (mail
7 fraud statute); id. § 1343 (wire fraud statute). The gravamen of
8 plaintiffs’ complaint is that defendants’ implicit representation
9 that Lights were healthier led them to buy Lights in greater
10 quantity than they otherwise would have and at an artificially
11 high price, resulting in plaintiffs’ overpayment for cigarettes.
12 Plaintiffs allege claims arising from their purchase of Lights
13 from 1971, when defendants first introduced Lights, until the
14 date on which trial commences.2
2 1 We assume for purposes of this decision that defendants 2 represented that Lights were “healthier” than full-flavored 3 cigarettes, rather than that Lights were simply lower in tar and 4 nicotine. Cf. Schwab, 449 F. Supp. 2d at 1127. Indeed, it makes 5 little sense to argue that defendants’ tar- and nicotine-content 6 representations were untrue or deceptive. Cf. Brown v. Brown & 7 Williamson Tobacco Corp., 479 F.3d 383, 392 (5th Cir.
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06-4666-cv McLaughlin v. Philip Morris USA, Inc.
1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 August Term 2006 5 6 (Argued: July 10, 2007 Decided: April 3, 2008) 7 8 Docket No. 06-4666-cv 9 -----------------------------------------------------x 10 KAREN MCLAUGHLIN, JANE AMODEO, DAVID TUTTLEMAN, SUSAN 11 BAILEY, BARBARA BISHOP, TREVOR CAMPBELL, FERGAL 12 FURLONG, DAVID ROGERS, BARBARA SCHWAB, PATRICIA 13 SCOCOZZA, and JIM SHERMAN, 14 15 Plaintiffs-Appellees, 16 17 -- v. -- 18 19 AMERICAN TOBACCO COMPANY, ALTRIA GROUP, INC., PHILIP 20 MORRIS USA INC., LORILLARD TOBACCO CO, BRITISH 21 AMERICAN TOBACCO LIMITED, LIGGETT GROUP, INC., B.A.T. 22 INDUSTRIES P.L.C., and R.J. REYNOLDS TOBACCO CO., 23 24 Defendants-Appellants. 25 26 -----------------------------------------------------x 27 28 B e f o r e : WINTER, WALKER, and POOLER, Circuit Judges.
29 Appeal from an order of the United States District Court for
30 the Eastern District of New York (Jack B. Weinstein, Judge)
31 certifying a class consisting of cigarette smokers allegedly
32 deceived into believing that “light” cigarettes were healthier
33 than “full-flavored” cigarettes. Because individual issues
34 outweigh issues susceptible to common proof, the class is not
35 maintainable under Federal Rule of Civil Procedure 23(b)(3).
36 REVERSED.
-1- 1 THEODORE M. GROSSMAN, Jones 2 Day, Cleveland, Ohio (Robert 3 H. Klonoff and Mark A. 4 Belasic, Jones Day, Cleveland, 5 Ohio, Todd R. Geremia, Jones 6 Day, New York, N.Y., Murray R. 7 Garnick, Judith Bernstein- 8 Gaeta, and James M. Rosenthal, 9 Arnold & Porter LLP, Wash., 10 D.C., David M. Bernick, 11 Kirkland & Ellis LLP, Chi., 12 Ill., Guy Miller Struve, 13 Frances E. Bivens, and Phineas 14 E. Leahey, Davis Polk & 15 Wardwell, New York, N.Y., 16 Gregory M. Loss, Thomas E. 17 Riley, and Joseph G. Falcone, 18 Chadbourne & Parke LLP, New 19 York, N.Y., Alan Mansfield and 20 Stephen L. Saxl, Greenberg 21 Traurig, LLP, New York, N.Y., 22 William L. Allinder, Shook, 23 Hardy & Bacon LLP, Kansas 24 City, Mo., Aaron H. Marks, 25 Leonard A. Feiwus, and Julie 26 R. Fischer, Kasowitz, Benson, 27 Torres & Friedman LLP, New 28 York, N.Y., on the brief), for 29 Defendants-Appellants. 30 31 MICHAEL D. HAUSFELD, Cohen, 32 Milstein, Hausfeld & Toll, 33 P.L.L.C., Wash., D.C. 34 (Benjamin D. Brown, James J. 35 Pizzirusso, Brent W. Landau, 36 Andrea L. Hertzfeld, Cohen, 37 Milstein, Hausfeld & Toll, 38 P.L.L.C., Wash., D.C., Burton 39 H. Finkelstein and Richard M. 40 Volin, Finkelstein, Thompson & 41 Loughran, Wash., D.C., on the 42 brief), for Plaintiffs- 43 Appellees. 44 45 Harvey Kurzweil, Dewey & 46 LeBoeuf LLP, New York, N.Y. 47 (Matthew L. DiRisio and Emilie 48 B. Cooper, Dewey & LeBoeuf
-2- 1 LLP, New York, N.Y., on the 2 brief), for Amicus Curiae 3 Citizens’ Commission To 4 Protect the Truth.
5 John H. Beisner, O’Melveny & 6 Myers LLP, Wash., D.C. 7 (Jessica Davidson Miller and 8 Charles E. Borden, O’Melveny & 9 Myers LLP, Wash., D.C., Hugh 10 F. Young, Jr., Product 11 Liability Advisory Council, 12 Inc., Reston, Va., on the 13 brief), for Amicus Curiae 14 Product Liability Advisory 15 Council, Inc.
16 Alan E. Untereiner, Robbins, 17 Russell, Englert, Orseck & 18 Untereiner LLP, Wash., D.C., 19 (Matthew R. Segal, Russell, 20 Englert, Orseck & Untereiner 21 LLP, Wash., D.C., Robin S. 22 Conrad and Amar D. Sarwal, 23 National Chamber Litigation 24 Center, Wash, D.C., on the 25 brief), for Amicus Curiae 26 Chamber of Commerce of the 27 United States of America.
28 Richard A. Daynard, 29 Northeastern University School 30 of Law, Boston, Mass. 31 (Christopher N. Banthin, 32 Public Health Advocacy 33 Institute, Inc., Boston, 34 Mass., on the brief), for 35 Amici Curiae Tobacco Control 36 Resource Center Division of 37 the Public Health Institute, 38 Inc., and the Tobacco Control 39 Legal Consortium.
40 JOHN M. WALKER, JR., Circuit Judge:
41 While redressing injuries caused by the cigarette industry
42 is “one of the most troubling . . . problems facing our Nation
-3- 1 today,” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,
2 125 (2000), not every wrong can have a legal remedy, cf. Pearl v.
3 City of Long Beach, 296 F.3d 76, 89 (2d Cir. 2002), at least not
4 without causing collateral damage to the fabric of our laws.
5 Plaintiffs’ putative class action suffers from an insurmountable
6 deficit of collective legal or factual questions. Their claims
7 are brought as based in fraud under the Racketeer Influenced and
8 Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, but
9 under RICO, each plaintiff must prove reliance, injury, and
10 damages. Moreover, some undetermined number of plaintiffs’
11 claims are time-barred. Rule 23 is not a one-way ratchet,
12 empowering a judge to conform the law to the proof. We therefore
13 reverse the order of the district court and decertify the class.
14 BACKGROUND1
15 Plaintiffs, a group of smokers allegedly deceived -- by
16 defendants’ marketing and branding -- into believing that “light”
17 cigarettes (“Lights”) were healthier than “full-flavored”
18 cigarettes, sought and were granted class certification. Schwab
19 v. Philip Morris USA, Inc., 449 F. Supp. 2d 992 (E.D.N.Y. 2006)
20 (Jack B. Weinstein, Judge). Plaintiffs’ suit is brought under
21 RICO, with mail and wire fraud as the necessary predicate acts.
22 See 18 U.S.C. § 1962(c) (forbidding “any person employed by or
1 1 For an exhaustive description of this case, we refer the 2 interested reader to the district court’s class-certification 3 opinion below.
-4- 1 associated with any enterprise engaged in, or the activities of
2 which affect, interstate or foreign commerce, to conduct or
3 participate, directly or indirectly, in the conduct of such
4 enterprise’s affairs through a pattern of racketeering
5 activity”); see also id. § 1961(1) (providing that mail and wire
6 fraud constitute racketeering activity); cf. id. § 1341 (mail
7 fraud statute); id. § 1343 (wire fraud statute). The gravamen of
8 plaintiffs’ complaint is that defendants’ implicit representation
9 that Lights were healthier led them to buy Lights in greater
10 quantity than they otherwise would have and at an artificially
11 high price, resulting in plaintiffs’ overpayment for cigarettes.
12 Plaintiffs allege claims arising from their purchase of Lights
13 from 1971, when defendants first introduced Lights, until the
14 date on which trial commences.2
2 1 We assume for purposes of this decision that defendants 2 represented that Lights were “healthier” than full-flavored 3 cigarettes, rather than that Lights were simply lower in tar and 4 nicotine. Cf. Schwab, 449 F. Supp. 2d at 1127. Indeed, it makes 5 little sense to argue that defendants’ tar- and nicotine-content 6 representations were untrue or deceptive. Cf. Brown v. Brown & 7 Williamson Tobacco Corp., 479 F.3d 383, 392 (5th Cir. 2007) 8 (noting that “the Manufacturers are essentially forbidden from 9 making any representations as to the tar and nicotine levels in 10 their marketing about tar that are not based on the FTC method,” 11 and concluding that “[t]he terms ‘light’ and ‘lowered tar and 12 nicotine’ cannot, therefore, be inherently deceptive or untrue”). 13 However, we note that this assumption tends to undermine the 14 importance plaintiffs attach to the National Cancer Institute’s 15 publication of “Monograph 13,” a report that described the 16 phenomenon of “compensation,” J.A. at 855, and in particular the 17 practice of drawing more smoke from individual cigarettes; 18 compensation potentially makes deceptive defendants’ contention 19 that Lights are low in tar and nicotine, but it does not truly
-5- 1 We pause in our narrative briefly to explain the history of
2 Lights, as that history bears on plaintiffs’ claims. In 1955,
3 the Federal Trade Commission (FTC) adopted the “Cigarette
4 Advertising Guides,” which proscribed “any implicit or explicit
5 health claims in cigarette advertising. . . . [except claims]
6 that a cigarette was ‘low in nicotine or tars’ provided it ha[d]
7 ‘been established by competent scientific proof . . . that the
8 claim [wa]s true, and if true, that such difference or
9 differences [we]re significant.’” United States v. Philip Morris
10 USA, Inc., 449 F. Supp. 2d 1, 432 (D.D.C. 2006).
11 Several years later, in 1967, the FTC introduced the
12 “Cambridge Filter Method” for calculating tar and nicotine yield.
13 The Cambridge Filter Method, however, which relies upon a machine
14 to test the tar and nicotine content of cigarettes, is quite
15 unreliable. Most smokers who smoke Lights obtain just as much
16 tar and nicotine as they would if they smoked full-flavored
17 cigarettes, principally by “compensating” -- that is, either by
18 inhaling more smoke per cigarette (e.g., by covering ventilation
19 holes, drawing more deeply with each puff, etc.) or by buying
20 more cigarettes, Schwab, 449 F. Supp. 2d at 1094, neither of
21 which a machine is capable of doing. Cigarette manufacturers
22 have apparently been aware of this phenomenon for some time. See
23 Philip Morris, 449 F. Supp. 2d at 438; Aspinall v. Philip Morris
1 speak to whether or not they are healthier.
-6- 1 Cos., 813 N.E.2d 476, 481 n.9 (Mass. 2004). But some smokers
2 continued at least until 2000 to believe that Lights were
3 healthier than full-flavored cigarettes. As the district court
4 noted, citing a 1977 Brown & Williamson Internal Marketing Study,
5 “[a]lmost all smokers agree that the primary reason for the
6 increasing acceptance of [Lights] is based on the health
7 reassurance they seem to offer.” Schwab, 449 F. Supp. 2d at 1095
8 (internal quotation marks and citation omitted).
9 In 2001, however, the National Cancer Institute published a
10 report, “Monograph 13,” that “review[ed] evidence on the FTC
11 method for measuring tar and nicotine yields and the disease
12 risks of machine-measured low-tar cigarettes.” J.A. at 855. The
13 stated objective of the report was “to determine whether the
14 evidence taken as a whole shows that the cumulative effect of
15 engineering changes in cigarette design over the last 50 years
16 has reduced disease risks in smokers.” Id. Monograph 13
17 discussed the introduction and marketing of low-yield cigarettes,
18 the growing use of these cigarettes, and the practice of
19 compensatory smoking. Ultimately, it concluded that there was
20 “no convincing evidence that changes in cigarette design between
21 1950 and the mid 1980s have resulted in an important decrease in
22 the disease burden caused by cigarette use either for smokers as
23 a group or for the whole population.” Id. at 992. The
24 publication of Monograph 13 sparked both this suit, filed in May
-7- 1 2004, and a parallel civil RICO action brought by the federal
2 government.3
3 Plaintiffs seek $800 billion in economic damages (trebled)
4 stemming from their purchases of Lights. On September 25, 2006,
5 the district court certified their proposed class of Lights
6 smokers. On November 16, 2006, this court stayed the proceedings
7 below and granted defendants leave to take an interlocutory
8 appeal under Federal Rule of Civil Procedure 23(f). We now
9 reverse the district court’s class certification order and
10 decertify the class.
11 DISCUSSION
12 We review the district court’s certification order for abuse
13 of discretion. See Moore v. PaineWebber, Inc., 306 F.3d 1247,
14 1252 (2d Cir. 2002). We will “exercise even greater deference
15 when the district court has certified a class than when it has
16 declined to do so.” Marisol A. by Forbes v. Giuliani, 126 F.3d
17 372, 375 (2d Cir. 1997). However, as we recently made clear, “a
18 district judge may not certify a class without making a ruling
19 that each Rule 23 requirement is met . . . [and] all . . .
20 evidence must be assessed as with any other threshold issue,”
21 whether or not any such assessment also bears on the merits of
3 1 The District Court for the District of Columbia recently 2 found cigarette manufacturers liable for violating RICO, 3 concluding that there was “overwhelming evidence” of defendants’ 4 intentional use of deceptive brand descriptors to induce smokers 5 to purchase Lights. Philip Morris, 449 F. Supp. 2d at 27.
-8- 1 the case. Miles v. Merrill Lynch & Co. (In re Initial Pub.
2 Offerings Sec. Litig.), 471 F.3d 24, 27 (2d Cir. 2006)
3 [hereinafter In re IPO] (emphasis added).
4 Rule 23(a) requires that a class action possess four
5 familiar features: (1) numerosity; (2) commonality; (3)
6 typicality; and (4) adequacy of representation. If those
7 criteria are met, the district court must next determine whether
8 the class can be maintained under any one of the three
9 subdivisions of Rule 23(b). With respect to class actions for
10 money damages sought under Rule 23(b)(3), the district court must
11 also find that “questions of law or fact common to class members
12 predominate over any questions affecting only individual
13 members,” and that the class action “is superior to other
14 available methods for fairly and efficiently adjudicating the
15 controversy.” Fed. R. Civ. P. 23(b)(3).4 The primary issue in
16 this case, to which we now turn, is whether the requirement that
17 common questions predominate has been met. Because we answer
18 this question in the negative, we need not address whether a
19 class action is a superior method of adjudicating plaintiffs’
20 claims.
21 I. Elements of a Civil RICO Claim and the Predominance 22 Requirement 23 24 Section 1964(c) of Title 18 (“civil RICO”) gives private
4 1 All parties concede that this suit is not susceptible to 2 certification under Rule 23(b)(1) or (2).
-9- 1 citizens a cause of action under RICO by providing that “[a]ny
2 person injured in his business or property by reason of a
3 violation of [RICO’s substantive provisions] may sue therefor in
4 any appropriate United States district court and shall recover
5 threefold the damages he sustains and the cost of the suit,
6 including a reasonable attorney’s fee.” 18 U.S.C. § 1964(c). To
7 fulfill the requirement that the injury occur “by reason of” a
8 defendant’s action, a plaintiff must show “that the defendant’s
9 violation not only was a ‘but for’ cause of his injury, but was
10 the proximate cause as well.” Holmes v. Sec. Investor Prot.
11 Corp., 503 U.S. 258, 268 (1992); see also Commercial Cleaning
12 Servs., L.L.C. v. Colin Serv. Sys., Inc., 271 F.3d 374, 380 (2d
13 Cir. 2001) (“RICO’s use of the clause ‘by reason of’ has been
14 held to limit standing to those plaintiffs who allege that the
15 asserted RICO violation was the legal, or proximate, cause of
16 their injury, as well as a logical, or ‘but for,’ cause.”). “But
17 for” causation is also known as “transaction causation,” or
18 “reliance,” while proximate causation is often referred to as
19 “loss causation.” See, e.g., Moore v. PaineWebber, Inc., 189
20 F.3d 165, 169-70 (2d Cir. 1999); Powers v. British Vita, P.L.C.,
21 57 F.3d 176, 189-90 (2d Cir. 1995); see also Dura Pharms., Inc.
22 v. Broudo, 544 U.S. 336, 341 (2005) (noting that reliance is
23 “often referred to . . . as ‘transaction causation’”). Thus, a
24 plaintiff asserting a civil RICO claim must be able to support
-10- 1 allegations of (1) a RICO violation, (2) injury, and (3)
2 transaction and loss causation. First Nationwide Bank v. Gelt
3 Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994). In this case, to
4 prevail in their argument for class certification, plaintiffs
5 must establish that the issues of injury and causation do not
6 defeat the predominance requirement of Rule 23(b)(3). For the
7 reasons that follow, we find that plaintiffs have failed to meet
8 this burden.
9 A. Causation
10 1. Reliance
11 In cases such as this one when mail or wire fraud is the
12 predicate act for a civil RICO claim, the transaction or “but
13 for” causation element requires the plaintiff to demonstrate that
14 he relied on the defendant’s misrepresentation. See Caviness v.
15 Derand Res. Corp., 983 F.2d 1295, 1305 (4th Cir. 1993) (“[A]
16 claim under RICO requires both reliance and damage proximately
17 caused by the violation.”); cf. ATSI Commc’ns, Inc. v. Shaar
18 Fund, Ltd., 493 F.3d 87, 106-07 (2d Cir. 2007) (noting, in the
19 securities fraud context, that “[a] plaintiff is required to
20 prove both transaction causation (also known as reliance) and
21 loss causation. Transaction causation only requires allegations
22 that but for the claimed misrepresentations or omissions, the
23 plaintiff would not have entered into the detrimental securities
24 transaction.” (internal quotation marks and citations omitted)).
-11- 1 In this case, the plaintiffs argue, and the district court
2 agreed, that they can prove reliance on a class-wide basis, using
3 generalized proof, because defendants conducted a national
4 marketing campaign for Lights and therefore represented that
5 Lights were healthier than full-flavored cigarettes in a
6 “consistent, singular, uniform” fashion. Appellees’ Br. at 15.
7 In other words, plaintiffs underscore that defendants’ fraud
8 resulted from a common course of conduct and therefore argue that
9 common issues predominate. To support their argument, plaintiffs
10 invoke our discussion in Moore, in which we stated that “[f]raud
11 actions must . . . be separated into two categories: fraud claims
12 based on uniform misrepresentations made to all members of the
13 class and fraud claims based on individualized
14 misrepresentations. The former are appropriate subjects for
15 class certification because the standardized misrepresentations
16 may be established by generalized proof.” 306 F.3d at 1253.
17 But proof of misrepresentation -- even widespread and
18 uniform misrepresentation -- only satisfies half of the equation;
19 the other half, reliance on the misrepresentation, cannot be the
20 subject of general proof. Individualized proof is needed to
21 overcome the possibility that a member of the purported class
22 purchased Lights for some reason other than the belief that
23 Lights were a healthier alternative -- for example, if a Lights
24 smoker was unaware of that representation, preferred the taste of
-12- 1 Lights, or chose Lights as an expression of personal style. See
2 id. at 1255 (“In order to establish [defendant’s] liability, each
3 plaintiff must prove that he or she personally received a
4 material misrepresentation, and that his or her reliance on this
5 misrepresentation was the proximate cause of his or her loss.”);
6 cf. Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 435 (4th
7 Cir. 2003) (“[T]he reliance element of . . . fraud and negligent
8 misrepresentation claims is not readily susceptible to class-wide
9 proof; rather, proof of reasonable reliance . . . depends upon a
10 fact-intensive inquiry into what information each plaintiff
11 actually had.” (omissions in original) (alterations, internal
12 quotation marks, and citation omitted)); Simon v. Merrill Lynch,
13 Pierce, Fenner & Smith, Inc., 482 F.2d 880, 882 (5th Cir. 1973)
14 (noting that if written misrepresentations do not actually reach
15 members of the purported class, “they are no more valid a basis
16 for a class action than dissimilar oral representations,” which
17 cannot sustain a class action). We took account of this idea in
18 Moore, when we recognized that, “[o]n the other hand, although
19 having some common core, a fraud case may be unsuited for
20 treatment as a class action if there was material variation . . .
21 in the kinds or degrees of reliance by the persons to whom they
22 were addressed.” 306 F.3d at 1253 (quoting Fed. R. Civ. P.
23 23(b)(3) Advisory Committee Notes).
24 Plaintiffs and the district court suggest that defendants
-13- 1 distorted the body of public information and that, in purchasing
2 Lights, plaintiffs relied upon the public’s general sense that
3 Lights were healthier than full-flavored cigarettes, whether or
4 not individual plaintiffs were actually aware of defendants’
5 alleged misrepresentation. Cf. Falise v. Am. Tobacco Co., 94 F.
6 Supp. 2d 316, 335 (E.D.N.Y. 2000) (“Where . . . the fraudulent
7 scheme is targeted broadly at a large proportion of the American
8 public[,] the requisite showing of reliance is less demanding.
9 Such sophisticated, broad-based fraudulent schemes by their very
10 nature are likely to be designed to distort the entire body of
11 public knowledge . . . .”). Their argument invokes the fraud-on-
12 the-market presumption set forth in Basic Inc. v. Levinson, 485
13 U.S. 224 (1988), which concerned fraud claims in the securities
14 context.5 “The fraud-on-the market doctrine . . . creates a
15 rebuttable presumption that (1) misrepresentations by an issuer
16 affect the price of securities traded in the open market, and (2)
17 investors rely on the market price of securities as an accurate
18 measure of their intrinsic value.” Hevesi v. Citigroup Inc., 366
19 F.3d 70, 77 (2d Cir. 2004). Thus, a plaintiff alleging
20 securities fraud may establish reliance simply by virtue of the
21 defendant’s public dissemination of misleading information. See
5 1 This is so despite plaintiffs’ contention that they “are not 2 advocating the same ‘fraud-on-the-market’ presumption applicable 3 in a securities case.” Appellees’ Br. at 25 n.19; see id. at 4 4 (“Based on a belief in the truth of the representation, the 5 market shifted.”).
-14- 1 Basic, 485 U.S. at 241-42 (noting that because the price of stock
2 in an efficient market reflects all publicly available
3 information, “[m]isleading statements will . . . defraud
4 purchasers of stock even if the purchasers do not directly rely
5 on the misstatements”).
6 We do not think that the Basic presumption, or the district
7 court’s variation of it, applies in this case; we cannot assume
8 that, regardless of whether individual smokers were aware of
9 defendants’ misrepresentation, the market at large internalized
10 the misrepresentation to such an extent that all plaintiffs can
11 be said to have relied on it. Basic involved an efficient market
12 -- the market in securities traded on the New York Stock Exchange
13 -- capable of rapidly assimilating public information into stock
14 prices, see id. at 247, 249 n.29 (describing the securities
15 market as “impersonal, well-developed,” and “information-
16 hungry”); the market for consumer goods, however, is anything but
17 efficient, cf. Sikes v. Teleline, Inc., 281 F.3d 1350, 1364 (5th
18 Cir. 2002) (“[E]ach individual plaintiff is the only person with
19 information about the content of the advertisement upon which he
20 relied.”). Indeed, the fact that the publication of Monograph 13
21 produced no change in either the sales or the price of Lights
22 shows just how unresponsive the consumer market in Light
23 cigarettes is to the advent of new information. See In re IPO,
24 471 F.3d at 43 (“Plaintiffs’ own allegations as to how slow the
-15- 1 market was to correct the alleged price inflation despite what
2 they also allege was widespread knowledge of the scheme indicate
3 the very antithesis of an efficient market.”). As we stated in
4 In re IPO, “[w]ithout the Basic presumption, individual questions
5 of reliance would predominate over common questions.” Id.; see
6 also Gunnells, 348 F.3d at 435 (noting that Basic’s presumption
7 of actual reliance was based on the efficiency of capital
8 markets, which did not apply to plaintiffs’ purchase of health
9 care plans, and that therefore actual reliance could not be
10 presumed and individualized inquiry was required).
11 We need not go so far as to adopt the Fifth Circuit’s
12 blanket rule that “a fraud class action cannot be certified when
13 individual reliance will be an issue,” Castano v. Am. Tobacco
14 Co., 84 F.3d 734, 745 (5th Cir. 1996), as some fraud actions do
15 appear within the contemplation of Rule 23’s drafters, see Fed.
16 R. Civ. P. 23(b)(3) Advisory Committee Notes (“[A] fraud
17 perpetrated on numerous persons by the use of similar
18 misrepresentations may be an appealing situation for a class
19 action, and it may remain so despite the need, if liability is
20 found, for separate determination of the damages suffered by
21 individuals within the class.”). But in this case, reliance is
22 too individualized to admit of common proof.6
6 1 Plaintiffs’ effort to produce class-wide proof of reliance 2 reinforces the difficulty of coming up with such proof. 3 Plaintiffs’ expert, Dr. John R. Hauser, claimed that 90.1% of
-16- 1 Plaintiffs suggest that regardless of whether reliance is
2 susceptible to aggregate proof under Moore, they should be
3 entitled to a presumption of reliance in light of the market
4 shift in brand preferences (from nonfiltered to filtered to low
5 tar cigarettes) that resulted from defendants’ marketing of
6 Lights. See Appellees’ Br. at 24-25. While proof of reliance by
7 circumstantial evidence may be sufficient under certain
8 conditions,7 cf. Sikes, 281 F.3d at 1362 n.32, it is insufficient
1 those who smoked Lights chose to do so because of Lights’ alleged 2 health benefits. Schwab, 449 F. Supp. 2d at 1167-68. But Dr. 3 Hauser came to this conclusion on the basis of a method that 4 determined whether, all things being equal, consumers prefer a 5 safer cigarette to a less safe cigarette. And as plaintiffs 6 conceded at oral argument, no one who understood this question 7 would prefer a more dangerous product to a safer one. 7 1 For instance, payment may constitute circumstantial proof of 2 reliance upon a financial representation. See, e.g., Westways 3 World Travel, Inc. v. AMR Corp., 218 F.R.D. 223, 238 (C.D. Cal. 4 2003) (“Class-wide reliance and injury may be established by 5 virtue of payments class members made to American.”); Chisolm v. 6 TranSouth Fin. Corp., 194 F.R.D. 538, 561 (E.D. Va. 2000) 7 (presuming that plaintiffs who paid deficiency judgments “made 8 payments in reliance upon the assurance that the process of 9 repossession, sale and all subsequent steps were taken in 10 conformity with the law”). But a financial transaction does not 11 usually implicate the same type or degree of personal 12 idiosyncratic choice as does a consumer purchase. 13 Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004), is 14 distinguishable on this basis. In Klay, the court concluded that 15 it did “not strain credulity to conclude that each plaintiff, in 16 entering into contracts with the defendants, relied upon the 17 defendants’ representations and assumed they would be paid the 18 amounts they were due.” Id. at 1259. But assuming that most 19 individuals are led to believe that they will get paid when they 20 sign a contract calling for payment is very different from 21 assuming that most individuals purchase a consumer good in 22 reliance upon an inference that they draw from its marketing and 23 branding rather than for some other reason.
-17- 1 here. Just as the Ninth Circuit explained in Poulos v. Caesars
2 World, Inc. that people choose to gamble for any number of
3 reasons, each plaintiff in this case could have elected to
4 purchase light cigarettes for any number of reasons, including a
5 preference for the taste and a feeling that smoking Lights was
6 “cool.” See 379 F.3d 654, 665-66 (9th Cir. 2004) (“[G]ambling is
7 not a context in which we can assume that potential class members
8 are always similarly situated. Gamblers do not share a common
9 universe of knowledge and expectations -- one motivation does not
10 ‘fit all.’ . . . Thus, to prove proximate causation in this case,
11 an individualized showing of reliance is required.”); Davies v.
12 Philip Morris U.S.A., Inc., No. 04-2-08174-2 SEA, 2006 WL
13 1600067, at *3 (Wash. Super. Ct. May 26, 2006) (denying
14 plaintiffs’ motion for class certification because “[i]nescapably
15 individual differences cannot be concealed in a throng. . . . Was
16 the consumer motivated by health-related reasons, or . . . by
17 taste, peer influence, price, habit, or simply personal
18 preference? . . . [T]here are numerous non-health-related reasons
19 that people buy light cigarettes.” (internal quotation marks and
20 citation omitted)). Indeed, the fact that the market did not
21 shift away from light cigarettes after the publication of
22 Monograph 13 is compelling evidence that plaintiffs had other,
23 non-health-related reasons for purchasing Lights. Three of the
24 six named plaintiffs even continued to purchase Lights after
-18- 1 filing the complaint in this case, suggesting the influence of
2 some other motivation.
3 Moreover, we are not blind to the indeterminate likelihood
4 that, even before the publication of Monograph 13, some members
5 of plaintiffs’ desired class were aware that Lights are not, in
6 fact, healthier than full-flavored cigarettes, and they therefore
7 could not have relied on defendants’ marketing in deciding to
8 purchase Lights. Cf. Sandwich Chef of Tex., Inc. v. Reliance
9 Nat’l Indemnification Ins. Co., 319 F.3d 205, 220 (5th Cir. 2003)
10 (“Knowledge that invoices charged unlawful rates, but did so
11 according to a prior agreement between the insurer and the
12 policyholder, would eliminate reliance and break the chain of
13 causation.”); Moore v. Am. Fed’n of Television & Radio Artists,
14 216 F.3d 1236, 1243 (11th Cir. 2000) (“Some found no error in the
15 statements and accepted them at face value; some relied on their
16 agents to monitor the statements, and they likewise found no
17 error; others spotted what they perceived to be errors and
18 complained to AFTRA . . . .”). Thus, differences in plaintiffs’
19 knowledge and levels of awareness also defeat the presumption of
20 reliance.
21 2. Loss Causation
22 A plaintiff alleging a violation of civil RICO must also
23 establish loss causation, meaning that the defendant’s
24 misrepresentations caused the plaintiff “to suffer economic
-19- 1 loss.” Moore, 189 F.3d at 170; see also Anza v. Ideal Steel
2 Supply Corp., 126 S. Ct. 1991, 1998 (2006) (“When a court
3 evaluates a RICO claim for proximate causation, the central
4 question it must ask is whether the alleged violation led
5 directly to the plaintiff’s injuries.”). “Furthermore, when
6 factors other than the defendant’s fraud are an intervening
7 direct cause of a plaintiff’s injury, that same injury cannot be
8 said to have occurred by reason of the defendant’s actions.”
9 First Nationwide Bank, 27 F.3d at 769. In this case, plaintiffs’
10 theory is that they suffered an economic loss because they were
11 overcharged for Lights. Plaintiffs argue that defendants’
12 misrepresentation that Lights were healthier led to an increased
13 market demand for light cigarettes, which drove up the price of
14 Lights. Thus, plaintiffs contend that they paid more for Lights
15 than they otherwise would have had the truth been known. As with
16 reliance, plaintiffs claim that they can establish loss causation
17 on a class-wide basis.
18 This argument fails because the issue of loss causation,
19 much like the issue of reliance, cannot be resolved by way of
20 generalized proof. As we noted above, individuals may have
21 relied on defendants’ misrepresentation to varying degrees in
22 deciding to purchase Lights; some may have relied completely,
23 some in part, and some not at all. Thus, establishing the first
24 link in the causal chain -- that defendants’ misrepresentation
-20- 1 caused an increase in market demand -- would require
2 individualized proof, as any number of other factors could have
3 led to this increase. If smokers purchased more light cigarettes
4 and drove up demand for reasons unrelated to defendants’
5 misrepresentation, plaintiffs could not show that their economic
6 injury was directly caused by defendants’ fraud. Cf. Anza, 126
7 S. Ct. at 1997 (“There is . . . a second discontinuity between
8 the RICO violation and the asserted injury. [Plaintiff’s] lost
9 sales could have resulted from factors other than [defendant’s]
10 alleged acts of fraud. Businesses lose and gain customers for
11 many reasons, and it would require a complex assessment to
12 establish what portion of [plaintiff’s] lost sales were the
13 product of [defendant’s] decreased prices.”).
14 Given the lack of an appreciable drop in the demand or price
15 of light cigarettes after the truth about Lights was revealed in
16 Monograph 13, plaintiffs’ argument that defendants’
17 misrepresentation caused the market to shift and the price of
18 Lights to be inflated fails as a matter of law. We have stated
19 that “[t]he key reasons for requiring direct causation include
20 avoiding unworkable difficulties in ascertaining what amount of
21 the plaintiff’s injury was caused by the defendant’s wrongful
22 action as opposed to other external factors.” First Nationwide
23 Bank, 27 F.3d at 770. Here, because factors other than
24 defendants’ misrepresentation may have intervened and affected
-21- 1 the demand and price of Lights, and because determining the
2 portion of plaintiffs’ injury attributable to defendants’
3 wrongdoing would require an individualized inquiry, plaintiffs
4 cannot establish loss causation on a class-wide basis.
5 B. Injury
6 Plaintiffs also argue that the requisite injury to “business
7 or property” is susceptible to class-wide proof. See 18 U.S.C. §
8 1964(c); Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)
9 (stating that a RICO plaintiff “only has standing if, and can
10 only recover to the extent that, he has been injured in his
11 business or property by the conduct constituting the violation”).
12 In this case, proof of injury, or whether plaintiffs have been
13 harmed, is bound up in proof of damages, or by how much
14 plaintiffs have been harmed. Only by showing that plaintiffs
15 paid more for light cigarettes than they would have but for
16 defendants’ misrepresentation can plaintiffs establish the
17 requisite injury under civil RICO. Cf. Cordes & Co. Fin. Servs.,
18 Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 107 (2d Cir.
19 2007) (“If the fee paid were higher than the but-for fee, then
20 the plaintiff suffered an injury-in-fact. In this case, the
21 extent of the difference between the but-for fee and the actual
22 fee paid is relevant to the question of damages, but it is from a
23 comparison between the two that the court would be asked to
24 decide the question of injury-in-fact.”). Plaintiffs have
-22- 1 advanced two theories to support their claim of injury and how
2 the “but for” price of Lights (and thus the resulting damages)
3 might be calculated: the loss of value theory and the price
4 impact model. However, because neither of these theories is
5 plausible as a matter of law, because both would lead to an
6 impermissible fluid recovery, and because the acceptable measure
7 of injury -- out-of-pocket damages -- would require
8 individualized proof, class-wide issues cannot be said to
9 predominate.
10 A plaintiff asserting a claim under 18 U.S.C. § 1964(c) must
11 allege actual, quantifiable injury. In First Nationwide Bank, a
12 civil RICO case that, like the instant case, centered on the
13 issues of causation and injury, we held that the assumption of
14 additional risk of loss due to undersecured loans was
15 insufficient to support an allegation of injury under RICO. See
16 27 F.3d at 767-68. We further stated that “[t]he general rule of
17 fraud damages is that the defrauded plaintiff may recover out-of-
18 pocket losses caused by the fraud.” Id. at 768; see also
19 Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 612 (2d
20 Cir. 1994) (“[D]amages as compensation under RICO § 1964(c) for
21 injury to property must, under the familiar rule of law, place
22 [plaintiffs] in the same position they would have been in but for
23 the illegal conduct.”).
24 In this case, out-of-pocket losses cannot be shown by common
-23- 1 evidence because they constitute an inherently individual
2 inquiry: individual smokers would have incurred different losses
3 depending on what they would have opted to do, but for
4 defendants’ misrepresentation. For example, smokers who would
5 have purchased full-flavored cigarettes instead of Lights had
6 they known that Lights were not healthier would have suffered no
7 injury because Lights have always been priced the same as full-
8 flavored cigarettes. By contrast, those who would have quit
9 smoking altogether could recover their expenses in purchasing
10 Lights. And those who would have continued to smoke, but in
11 greater moderation, could recover something in between. Thus, on
12 the issue of out-of-pocket loss, individual questions
13 predominate; plaintiffs cannot meet their burden of showing that
14 injury is amenable to common proof.
15 Plaintiffs, no doubt recognizing the above difficulties with
16 certifying a class claiming out-of-pocket losses, offer two other
17 theories of recovery, but neither is cognizable under RICO. “In
18 re IPO makes clear that courts may resolve contested factual
19 issues where necessary to decide on class certification, and when
20 a claim cannot succeed as a matter of law, the Court should not
21 certify a class on that issue.” Velez v. Novartis Pharms. Corp.,
22 244 F.R.D. 243, 257 (S.D.N.Y. 2007). Thus, plaintiffs’
23 alternative theories cannot support their argument for class
24 certification.
-24- 1 1. Loss of Value
2 The “loss of value” model purports to measure the difference
3 between the price plaintiffs paid for light cigarettes as
4 represented by defendants and the (presumably lower) price they
5 would have paid (but for defendants’ misrepresentation) had they
6 known the truth -- that Lights are not healthier than full-
7 flavored cigarettes. Schwab, 449 F. Supp. 2d at 1163.
8 Plaintiffs’ expert “estimated a loss in value of 77.7 percent if
9 the ‘light’ cigarettes sold by defendants were as harmful as
10 regular cigarettes.” Id. at 1057-58.
11 But the loss of value model is designed to award plaintiffs
12 damages based on the benefit of their bargain. Such damages are
13 generally unavailable in RICO suits. See Commercial Union, 17
14 F.3d at 612; 2 McLaughlin on Class Actions § 8:16, at 8-102 (3d
15 ed. Dec. 2006 update). This is a sensible rule, and not derived
16 from our “loss causation” cases, as the district court suggested.
17 Schwab, 449 F. Supp. 2d at 1065. Rather, the rule of general
18 unavailability follows from the text of RICO, which compensates
19 only for injury to “business or property.” 18 U.S.C. § 1964(c).
20 Indeed, plaintiffs have not explained how a party’s
21 “expectation” can constitute “business or property.” See
22 Heinhold v. Perlstein, 651 F. Supp. 1410, 1412 (E.D. Pa. 1987)
23 (holding that a plaintiff does not have standing to sue under
24 RICO when “the only property to which a plaintiff alleges injury
-25- 1 is an expectation interest that would not have existed but for
2 the alleged RICO violation”); cf. Oscar v. Univ. Students Coop.
3 Ass’n, 965 F.2d 783, 785 (9th Cir. 1992) (en banc) (“[A] showing
4 of ‘injury’ requires proof of concrete financial loss, and not
5 mere ‘injury to a valuable intangible property interest.’”
6 (emphasis added) (citation omitted)). While we need not and do
7 not decide whether expectancy damages are ever available under
8 RICO, cf. Fleischhauer v. Feltner, 879 F.2d 1290, 1300 (6th Cir.
9 1989), in cases that sound in fraud in the inducement, they
10 plainly are not.8 Here, the cigarette packs that plaintiffs
11 purchased all bore the Surgeon General’s warning that cigarettes
12 may cause cancer and other diseases. Defendants’
13 misrepresentation could in no way have reduced the value of the
14 cigarettes that plaintiffs actually purchased; they simply could
15 have induced plaintiffs to buy Lights instead of full-flavored
16 cigarettes. See Appellants’ Reply Br. at 19 (“[P]laintiffs’
17 alleged lost expectation of a safer cigarette arose only because
18 of the alleged fraud.”).
19 Morever, even if benefit of the bargain damages could be
8 1 In Heinhold, for instance, the defendant misrepresented the 2 value of a diamond ring ultimately purchased by the plaintiff. 3 The plaintiff did not overpay -- the diamond ring was presumably 4 worth its purchase price -- but he did not make his expected 5 profit. 651 F. Supp. at 1411. As the Sixth Circuit subsequently 6 explained, “the fraud [did] not simultaneously induce plaintiffs 7 to invest and reduce the value of the investment’s object.” 8 Fleischhauer, 879 F.2d at 1300 (emphasis added) (citing 9 Heinhold).
-26- 1 awarded, there is no reasonable means of calculating them in this
2 case. Cf. Fleischhauer, 879 F.2d at 1300 (“[T]here was no
3 realistic evidence presented as to a reasonable value or estimate
4 of lost profits or of the ‘bargain’ based on analogy, experience,
5 or practice.”). We are asked to conceptualize the impossible --
6 a healthy cigarette -- and then to imagine what a consumer might
7 have paid for such a thing. Indeed, Dr. Jeffrey Harris,
8 proponent of the loss of value theory, asked survey respondents
9 to “make binary comparisons between a ‘genuine’ light cigarette
10 that reduced risk . . . and a ‘misrepresented’ light cigarette
11 that was no less harmful than conventional cigarettes.” Schwab,
12 449 F. Supp. 2d at 1164. He concluded that “virtually all
13 respondents reported a non-zero loss in value.” Id. While the
14 district court is quite correct that “damages need not [usually]
15 be demonstrated with precision,” id. at 1065, plaintiffs’ theory
16 is pure speculation, as the survey response to Dr. Harris
17 exemplifies.
18 Thus, plaintiffs’ legal theory fails at its inception and,
19 even if it did not, plaintiffs have not made the requisite
20 showing under In re IPO that they could, at trial, marshal facts
21 sufficient to permit them to rely upon it. See In re IPO, 471
22 F.3d at 40 (asserting that, in determining whether the Rule 23
23 requirements for class certification have been met, it is
24 appropriate for the judge to “resolve[] underlying factual
-27- 1 disputes,” and that “as to these disputes, the judge must be
2 persuaded that the fact at issue has been established”); id. at
3 41 (noting that even when there is overlap between a Rule 23
4 requirement and a merits issue, “the district judge must receive
5 enough evidence, by affidavits, documents, or testimony, to be
6 satisfied that each Rule 23 requirement has been met”).
7 2. Price Impact
8 Plaintiffs also assert a damages theory based on an estimate
9 of the “price impact” that a disclosure that Lights were not
10 safer than full-flavored cigarettes would have had on the market.
11 Using multiple regression analysis, plaintiffs seek to show the
12 amount by which defendants would have had to reduce their prices
13 to account for the concomitant reduced demand. Even if that
14 amount could be proven by common evidence, as with the loss of
15 value model, plaintiffs have failed as a matter of law to adduce
16 sufficient facts to show that the price impact model is a tenable
17 measure of harm. Cf. supra Part I.B.1 (discussing In re IPO).
18 Indeed, plaintiffs have not come forward with any meaningful
19 means of estimating how the market has changed or might change in
20 the future in response to fluctuations in the demand for light
21 cigarettes. For instance, as we have already noted, Lights have
22 always been priced the same as full-flavored cigarettes.
23 Furthermore, if plaintiffs’ theory of a health-driven preference
24 for Lights were correct, one would have expected demand to drop
-28- 1 following the publication of Monograph 13 as people returned to
2 smoking regular cigarettes or quit smoking altogether and,
3 correspondingly, prices to fall. But nothing of the sort
4 happened; the market did not shift appreciably following the
5 publication of Monograph 13. Cf. In re Burlington Coat Factory
6 Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997) (Alito, J.)
7 (“[B]ecause the July 29 disclosure had no effect on BCF’s price,
8 it follows that the information disclosed on September 20 was
9 immaterial as a matter of law.”).
10 The price impact model exemplifies the kind of vague inquiry
11 into damages that the Supreme Court forbade in Anza. In that
12 case, the plaintiff (a steel products vendor) sued a competitor,
13 alleging that the competitor’s practice of tax evasion had
14 permitted it to charge lower prices than the plaintiff. The
15 Supreme Court concluded that the plaintiff had failed adequately
16 to plead a RICO violation because the injury it had suffered to
17 its business was too remote from the predicate racketeering acts.
18 See Anza, 126 S. Ct. at 1997. Specifically, the Court stated
19 that “[t]he cause of [plaintiff’s] asserted harms . . . is a set
20 of actions (offering lower prices) entirely distinct from the
21 alleged RICO violation (defrauding the State),” and noted that
22 the “attenuation” was “clear.” Id. Importantly, the Court
23 discussed
24 the speculative nature of the proceedings that would follow 25 if [plaintiff] were permitted to maintain its claim. A
-29- 1 court considering the claim would need to begin by 2 calculating the portion of [defendant’s] price drop 3 attributable to the alleged pattern of racketeering 4 activity. It next would have to calculate the portion of 5 [plaintiff’s] lost sales attributable to the relevant part 6 of the price drop.
7 Id. at 1998. Similarly, in this case, a court considering
8 plaintiffs’ price impact model would have to engage in a series
9 of speculative calculations to ascertain whether, and in what
10 amount, plaintiffs suffered a loss.
11 Plaintiffs in this case argue that “[u]nlike in Anza . . .
12 the class members here are the ‘immediate victims’ of the RICO
13 violation, and the causal chain is no more ‘attenuated’ than in
14 any case in which an economist calculates an overcharge resulting
15 from a defendant’s unlawful activities.” Appellees’ Br. at 43.
16 But Anza spoke not only to the remoteness of the action that had
17 allegedly caused the plaintiff’s harm, but also to the
18 possibility that damages could have resulted from factors
19 unrelated to the defendant’s alleged acts of fraud. See 126 S.
20 Ct. at 1997 (“Businesses lose and gain customers for many
21 reasons, and it would require a complex assessment to establish
22 what portion of [plaintiff’s] lost sales were the product of
23 [defendant’s] decreased prices.”). And indeed, here, as
24 plaintiffs’ expert concedes, a number of exogenous variables bear
25 on cigarette price, including “rates of cigarette consumption,
26 income levels of smokers, population, taxes, advertising
27 expenditures, production costs, and plaintiffs’ knowledge of
-30- 1 health risks.” Schwab, 449 F. Supp. 2d at 1058.
2 Thus, plaintiffs cannot show injury due to overall price
3 impact on a class-wide basis and thereby satisfy Rule 23’s
4 predominance requirement because their price impact theory, like
5 their loss of value theory, fails as a matter of law. Under In
6 re IPO, plaintiffs must produce persuasive facts at trial that
7 will enable them to prove injury to business or property under
8 RICO. They have failed to persuade us that they can do so.
9 II. Calculation of Damages
10 The district court concluded that plaintiffs could prove
11 collective damages on a class-wide basis, and individual
12 plaintiffs would then claim shares of this fund:
13 First, defendant’s aggregate liability is determined in a 14 single, class-wide adjudication and paid into a class fund. 15 Second, “individual class members are afforded an 16 opportunity to collect their individual shares,” usually 17 through a simplified proof of claim procedure.9 Third, any 18 residue remaining after individual claims have been paid is 19 distributed to the class’ benefit under cy pres or other 20 doctrines. 21 22 Id. at 1254 (citations omitted). But such “fluid recovery” has
23 been forbidden in this circuit since Eisen v. Carlisle &
24 Jacquelin, 479 F.2d 1005, 1008 (2d Cir. 1973) (“[N]o ‘fluid
25 recovery’ procedures are authorized by the text or by any
26 reasonable interpretation of amended Rule 23.”), vacated on other
9 1 “Damages would be allocated among class members based on the 2 number of ‘light’ cigarettes purchased by each within the 3 relevant geographic area and time.” Id. at 1252.
-31- 1 grounds, 417 U.S. 156 (1974). And while the fact that damages
2 may have to be ascertained on an individual basis is not,
3 standing alone, sufficient to defeat class certification, see
4 Wal-Mart Stores, Inc. v. Visa U.S.A. Inc. (In re Visa
5 Check/MasterMoney Antitrust Litig.), 280 F.3d 124, 140 (2d Cir.
6 2001) (“The predominance requirement calls only for predominance,
7 not exclusivity, of common questions.” (internal quotation marks
8 and citation omitted)); 6 Alba Conte & Herbert B. Newberg,
9 Newberg on Class Actions § 18:27 (4th ed. 2002) (“A particularly
10 significant aspect of the Rule 23(b)(3) approach is the
11 recognition that individual damages questions do not preclude a
12 Rule 23(b)(3) class action when the issue of liability is common
13 to the class.”), it is nonetheless a factor that we must consider
14 in deciding whether issues susceptible to generalized proof
15 “outweigh” individual issues.
16 We reject plaintiffs’ proposed distribution of any recovery
17 they might receive because it offends both the Rules Enabling Act
18 and the Due Process Clause. The distribution method at issue
19 would involve an initial estimate of the percentage of class
20 members who were defrauded (and who therefore have valid claims).
21 The total amount of damages suffered would then be calculated
22 based on this estimate (and, presumably, on an estimate of the
23 average loss for each plaintiff). But such an aggregate
24 determination is likely to result in an astronomical damages
-32- 1 figure that does not accurately reflect the number of plaintiffs
2 actually injured by defendants and that bears little or no
3 relationship to the amount of economic harm actually caused by
4 defendants. This kind of disconnect offends the Rules Enabling
5 Act, which provides that federal rules of procedure, such as Rule
6 23, cannot be used to “abridge, enlarge, or modify any
7 substantive right.” 28 U.S.C. § 2072(b).
8 Roughly estimating the gross damages to the class as a whole
9 and only subsequently allowing for the processing of individual
10 claims would inevitably alter defendants’ substantive right to
11 pay damages reflective of their actual liability. See, e.g., In
12 re Hotel Tel. Charges, 500 F.2d 86, 90 (9th Cir. 1974) (rejecting
13 a fluid recovery argument because “allowing gross damages by
14 treating unsubstantiated claims of class members collectively
15 significantly alters substantive rights,” in violation of the
16 Rules Enabling Act); Eisen, 479 F.2d at 1019 (“[P]ossible
17 recoveries run into astronomical amount [and] generate more
18 leverage and pressure on defendants to settle . . . .”); Schwab,
19 449 F. Supp. 2d at 1272 (“A question under the Rules Enabling Act
20 is posed by the danger of overcompensation inherent in the
21 plaintiff’s fluid distribution plan. It is possible that some
22 claimants will benefit from the plaintiff class’ recovery despite
23 the fact that they did not rely on defendants’ alleged
24 misrepresentations regarding ‘light’ cigarettes and were not,
-33- 1 therefore, injured in their business or property by defendants’
2 actions.”). We disagree with the district court’s conclusion
3 that “[t]he risk of . . . overcompensation can be limited by
4 requiring proof through claim forms from claimants concerning the
5 extent of their reliance during the distribution stage.”
6 Schwab, 449 F. Supp. 2d at 1272. Given that any residue would be
7 distributed to the class’s benefit on the basis of cy pres
8 principles rather than returned to defendants, defendants would
9 still be paying the inflated total estimated amount of damages
10 arrived at under the first step of the fluid recovery analysis.
11 See id. at 1254. Thus, even if defendants were able to avoid
12 overcompensating individual plaintiffs, they would still be
13 overpaying in the aggregate.
14 Moreover, in this case, the district court determined that
15 “evidence of the percentage of the class which was defrauded and
16 the amount of economic damages it suffered appears to be quite
17 weak.” Id. at 1021. It further concluded that “determin[ing]
18 the impact of the fraud on the size of the market and its nature
19 for damage purposes is a daunting enterprise even with the many
20 proffered experts holding up their statistical lanterns to help
21 in the search for the truth.” Id. Nevertheless, the district
22 court believed that “the proof of acts of defendants and the
23 various experts’ opinions permit[] a finding of damages to the
24 class with sufficient precision to allow a jury award.” Id. at
-34- 1 1137. For the reasons stated above, we disagree, and we further
2 note our skepticism that if statistical experts cannot with
3 accuracy estimate the relevant figures, a jury could do so based
4 on the testimony of those experts.
5 The district court’s distribution scheme also raises serious
6 due process concerns. As we explained in Eisen,
7 if the ‘class as a whole’ is or can be substituted for the 8 individual members of the class as claimants, then the 9 number of claims filed is of no consequence and the amount 10 found to be due will be enormous . . . . Even if amended 11 Rule 23 could be read so as to permit any such fantastic 12 procedure, the courts would have to reject it as an 13 unconstitutional violation of the requirement of due process 14 of law. 15 16 479 F.2d at 1018. When fluid recovery is used to permit the mass
17 aggregation of claims, the right of defendants to challenge the
18 allegations of individual plaintiffs is lost, resulting in a due
19 process violation. The Third Circuit properly observed in Newton
20 v. Merrill Lynch, Pierce, Fenner & Smith, Inc. that “actual
21 injury cannot be presumed, and defendants have the right to raise
22 individual defenses against each class member.” 259 F.3d 154,
23 191-92 (3d Cir. 2001); see also 2 McLaughlin on Class Actions §
24 8:16, at 8-95 (3d ed. Dec. 2006 update) (“Courts have repeatedly
25 rejected the use of fluid recovery as a substitute for
26 individualized proof when the class pursues claims that require
27 proof of actual damages.”). To be sure, this does not mean that
28 defendants are “constitutionally entitled to compel a parade of
29 individual plaintiffs to establish damages.” In re Antibiotic
-35- 1 Antitrust Actions, 333 F. Supp. 278, 289 (S.D.N.Y. 1971).
2 However, when fluid recovery is used, as here, to mask the
3 prevalence of individual issues, it is an impermissible affront
4 to defendants’ due process rights. Cf. Six (6) Mexican Workers
5 v. Ariz. Citrus Growers, 904 F.2d 1301, 1305-06 (9th Cir. 1990)
6 (dismissing concerns about fluid recovery because, in the case
7 before it, “[t]he district court did not use fluid recovery to
8 avoid individual proof of damages”).
9 III. The Statute of Limitations Defense
10 As with the difficulty in calculating damages, the presence
11 of individual defenses does not by its terms preclude class
12 certification. Augustin v. Jablonski (In re Nassau County Strip
13 Search Cases), 461 F.3d 219, 225 (2d Cir. 2006). But in this
14 case, there is no doubt that a substantial number of class
15 members were on notice of defendants’ alleged fraud before the
16 class period. Such a finding counsels in favor of vacating the
17 district court’s class certification order.10 See Waste Mgmt.
18 Holdings, Inc. v. Mowbray, 208 F.3d 288, 295 (1st Cir. 2000)
19 (“[A]ffirmative defenses should be considered in making class
20 certification decisions.”).
10 1 We speak here only of actual notice, as constructive notice 2 is an issue susceptible to common proof; what a “reasonable 3 person” would have known, and when, can be proven on a class-wide 4 basis. Cf. Lanza v. Merrill Lynch & Co. (In re Merrill Lynch 5 Ltd. P’ships Litig.), 154 F.3d 56, 60 (2d Cir. 1998). 6
-36- 1 The statute of limitations for a civil RICO claim is four
2 years. Agency Holding Corp. v. Malley Duff & Assocs., Inc., 483
3 U.S. 143, 156 (1987). The statute begins to run when the
4 plaintiff discovers -- or should reasonably have discovered --
5 the alleged injury. Rotella v. Wood, 528 U.S. 549, 553-54
6 (2000). As the district court noted, “a troubling critical
7 problem for plaintiffs is that some members of the class almost
8 certainly were aware long before 2000 that ‘light’ cigarettes
9 were not appreciably safer for them than regular cigarettes.”
10 Schwab, 449 F. Supp. 2d at 1069. The district court and
11 plaintiffs rely upon the argument that “the tobacco companies
12 made tremendous efforts to keep the truth about ‘light’
13 cigarettes from smokers and so should be estopped from arguing
14 that the smokers learned the truth anyhow.” Id. at 1075. They
15 point us to the Fifth Circuit’s decision in Bratcher v. National
16 Standard Life Insurance Co. (In re Monumental Life Insurance
17 Co.), which concluded that “[t]o hold that each class member must
18 be deposed as to precisely when, if at all, he learned of
19 defendants’ practices would be tantamount to adopting a per se
20 rule that civil rights cases involving deception or concealment
21 cannot be certified outside a two- or three-year period.” 365
22 F.3d 408, 420 (5th Cir. 2004); see also Winoff Indus., Inc. v.
23 Stone Container Corp. (In re Linerboard Antitrust Litig.), 305
24 F.3d 145, 162-63 (3d Cir. 2002); Mowbray, 208 F.3d at 296.
-37- 1 The Supreme Court’s recent decision in Ledbetter v. Goodyear
2 Tire & Rubber Co. casts doubt upon In re Monumental. 127 S. Ct.
3 2162, 2177 (2007) (holding that statute of limitations barred
4 suit for wage discrimination despite difficulty in discovering
5 such discrimination). But even assuming that In re Monumental
6 remains sound, we are not persuaded that it is on point. In that
7 case, the court determined that “a presumption of unawareness by
8 the plaintiff class is warranted.” In re Monumental, 365 F.3d at
9 420 n.22; see also id. at 420 (“Of the thirteen representative
10 plaintiffs, defendants point to only one, Jo Ella Brown, whose
11 claim may have expired because of actual knowledge of defendants’
12 practices.”). Such a presumption is unwarranted in this case.
13 First, as defendants note, two class representatives in this
14 case appear to have understood the phenomenon of compensation --
15 and its attendant risks -- prior to May 2000 (four years before
16 the complaint was filed). Appellants’ Br. at 37 n.13. Second,
17 the minimal impact that the publication of Monograph 13 had on
18 the market for Lights suggests that Monograph 13 may have been a
19 reinterpretation of existing studies, as defendants argue, cf.
20 Schwab, 449 F. Supp. 2d at 1074, rather than a ground-breaking
21 new study, as plaintiffs would have it. Third, plaintiffs’ own
22 attorneys filed several similar lawsuits prior to May 2000. Id.
23 at 1071. Finally, and most importantly, plaintiffs have offered
24 no reliable means of collectively determining how many class
-38- 1 members’ claims are time-barred. Id. at 1069.
2 * * *
3 In sum, because we find that numerous issues in this case
4 are not susceptible to generalized proof but would require a more
5 individualized inquiry, we conclude that the predominance
6 requirement of Rule 23 has not been satisfied. We recognize that
7 a court may employ Rule 23(c)(4) to certify a class as to common
8 issues that do exist, “regardless of whether the claim as a whole
9 satisfies Rule 23(b)(3)’s predominance requirement.” In re
10 Nassau County Strip Search Cases, 461 F.3d at 227. Nevertheless,
11 in this case, given the number of questions that would remain for
12 individual adjudication, issue certification would not “reduce
13 the range of issues in dispute and promote judicial economy.”
14 Robinson v. Metro-N. Commuter R.R., 267 F.3d 147, 168 (2d Cir.
15 2001). Certifying, for example, the issue of defendants’ scheme
16 to defraud, would not materially advance the litigation because
17 it would not dispose of larger issues such as reliance, injury,
18 and damages. See id. at 167 n.12. We therefore decline
19 plaintiffs’ request for issue certification.
20 CONCLUSION
21 For the foregoing reasons, we REVERSE the judgment of the
22 district court and order the class DECERTIFIED.
-39-
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Cite This Page — Counsel Stack
McLaughlin v. Philip Morris USA, Inc., Counsel Stack Legal Research, https://law.counselstack.com/opinion/mclaughlin-v-philip-morris-usa-inc-ca2-2008.