While redressing injuries caused by the cigarette industry is “one of the most troubling ... problems facing our Nation today,”
FDA v. Brown & Williamson Tobacco Corp.,
BACKGROUND 1
Plaintiffs, a group of smokers allegedly deceived — by defendants’ marketing and branding — into believing that “light” cigarettes (“Lights”) were healthier than “full-flavored” cigarettes, sought and were granted class certification.
Schwab v. Philip Morris USA, Inc.,
We pause in our narrative briefly to explain the history of Lights, as that history bears on plaintiffs’ claims. In 1955, the Federal Trade Commission (FTC) adopted the “Cigarette Advertising Guides,” which proscribed “any implicit or explicit health claims in cigarette advertising .... [except claims] that a cigarette was low in nicotine or tars’ provided it ha[d] ‘been established by competent scientific proof ... that the claim [wa]s true, and if true, that such difference or differences [we]re significant.’ ”
United States v. Philip Morris USA Inc.,
Several years later, in 1967, the FTC introduced the “Cambridge Filter Method” for calculating tar and nicotine yield. The Cambridge Filter Method, however, which relies upon a machine to test the tar and nicotine content of cigarettes, is quite unreliable. Most smokers who smoke Lights
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obtain just as much tar and nicotine as they would if they smoked full-flavored cigarettes, principally by “compensating” — that is, either by inhaling more smoke per cigarette (e.g., by covering ventilation holes, drawing more deeply with each puff, etc.) or by buying more cigarettes,
Schwab,
In 2001, however, the National Cancer Institute published a report, “Monograph 13,” that “review[ed] evidence on the FTC method for measuring tar and nicotine yields and the disease risks of machine-measured low-tar cigarettes.” J.A. at 855. The stated objective of the report was “to determine whether the evidence taken as a whole shows that the cumulative effect of engineering changes in cigarette design over the last 50 years has reduced disease risks in smokers.” Id. Monograph 13 discussed the introduction and marketing of low-yield cigarettes, the growing use of these cigarettes, and the practice of compensatory smoking. Ultimately, it concluded that there was “no convincing evidence that changes in cigarette design between 1950 and the mid 1980s have resulted in an important decrease in the disease burden caused by cigarette use either for smokers as a group or for the whole population.” Id. at 992. The publication of Monograph 13 sparked both this suit, filed in May 2004, and a parallel civil RICO action brought by the federal government. 3
Plaintiffs seek $800 billion in economic damages (trebled) stemming from their purchases of Lights. On September 25, 2006, the district court certified their proposed class of Lights smokers. On November 16, 2006, this court stayed the proceedings below and granted defendants leave to take an interlocutory appeal under Federal Rule of Civil Procedure 23(f). We now reverse the district court’s class certification order and decertify the class.
DISCUSSION
We review the district court’s certification order for abuse of discretion.
See Moore v. PaineWebber, Inc.,
*222 Rule 23(a) requires that a class action possess four familiar features: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. If those criteria are met, the district court must next determine whether the class can be maintained under any one of the three subdivisions of Rule 23(b). With respect to class actions for money damages sought under Rule 23(b)(3), the district court must also find that “questions of law or fact common to class members predominate over any questions affecting only individual members,” and that the class action “is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed.R.Civ.P. 23(b)(3). 4 The primary issue in this case, to which we now turn, is whether the requirement that common questions predominate has been met. Because we answer this question in the negative, we need not address whether a class action is a superior method of adjudicating plaintiffs’ claims.
I. Elements of a Civil RICO Claim and the Predominance Requirement
Section 1964(c) of Title 18 (“civil RICO”) gives private citizens a cause of action under RICO by providing that “[a]ny person injured in his business or property by reason of a violation of [RICO’s substantive provisions] may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee.” 18 U.S.C. § 1964(c). To fulfill the requirement that the injury occur “by reason of’ a defendant’s action, a plaintiff must show “that the defendant’s violation not only was a ‘but for’ cause of his injury, but was the proximate cause as well.”
Holmes v. Sec. Investor Prot. Corp.,
A. Causation
1. Reliance
In cases such as this one when mail or wire fraud is the predicate act for a civil RICO claim, the transaction or “but for” causation element requires the plaintiff to demonstrate that he relied on the defendant’s misrepresentation.
See Cavi
*223
ness v. Derand Res. Corp.,
But proof of misrepresentation- — even widespread and uniform misrepresentation — only satisfies half of the equation; the other half, reliance on the misrepresentation, cannot be the subject of general proof. Individualized proof is needed to 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.
See id.
at 1255 (“In order to establish [defendant’s] liability, each plaintiff must prove that he or she personally received a material misrepresentation, and that his or her reliance on this misrepresentation was the proximate cause of his or her loss.”);
cf. Gunnells v. Healthplan Servs., Inc.,
Plaintiffs and the district court suggest that defendants distorted the body of public information and that, in purchasing Lights, plaintiffs relied upon the public’s general sense that Lights were healthier than full-flavored cigarettes, whether or not individual plaintiffs were actually
*224
aware of defendants’ alleged misrepresentation.
Cf. Falise v. Am. Tobacco Co.,
We do not think that the
Basic
presumption, or the district court’s variation of it, applies in this case; we cannot assume that, regardless of whether individual smokers were aware of defendants’ misrepresentation, the market at large internalized the misrepresentation to such an extent that all plaintiffs can be said to have relied on it.
Basic
involved an efficient market — the market in securities traded on the New York Stock Exchange — capable of rapidly assimilating public information into stock prices,
see id.
at 247, 249 n. 29,
We need not go so far as to adopt the Fifth Circuit’s blanket rule that “a fraud class action cannot be certified when individual reliance will be an issue,”
Castano v. Am. Tobacco Co.,
Plaintiffs suggest that regardless of whether reliance is susceptible to aggregate proof under
Moore,
they should be entitled to a presumption of rebanee in light of the market shift in brand preferences (from nonfíltered to filtered to low tar cigarettes) that resulted from defendants’ marketing of Lights.
See
Appellees’ Br. at 24-25. While proof of reliance by circumstantial evidence may be sufficient under certain conditions,
7
cf. Sikes,
... Thus, to prove proximate causation
in this case,
an individualized showing of reliance is required.”);
Davies v. Philip Morris U.S.A., Inc.,
No. 04-2-08174-2 SEA,
Moreover, we are not blind to the indeterminate likelihood that, even before the publication of Monograph 13, 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.
Cf. Sandwich Chef of Tex., Inc. v. Reliance Nat’l Indem. Ins. Co.,
2. Loss Causation
A plaintiff alleging a violation of civil RICO must also establish loss causation, meaning that the defendant’s misrepresentations caused the plaintiff “to suffer economic loss.”
Moore,
This argument fails because the issue of loss causation, much like the issue of reliance, cannot be resolved by way of generalized proof. As we noted above, 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. Thus, establishing the first link in the causal chain- — that defendants’ misrepresentation caused an increase in market demand — would require individualized proof, as any number of other factors could have led to this increase. If smokers purchased more light cigarettes and drove up demand for reasons unrelated to defendants’ misrepresentation, plaintiffs could not show that their economic injury was directly caused by defendants’ fraud.
Cf. Anza,
Given the lack of an appreciable drop in the demand or price of light cigarettes after the truth about Lights was revealed in Monograph 13, plaintiffs’ argument that defendants’ misrepresentation caused the market to shift and the price of Lights to be inflated fails as a matter of law. We have stated that “[t]he key reasons for requiring direct causation include avoiding unworkable difficulties in ascertaining what amount of the plaintiffs injury was caused by the defendant’s wrongful action as opposed to other external factors.”
First Nationwide Bank,
B. Injury
Plaintiffs also argue that the requisite injury to “business or property” is susceptible to class-wide proof.
See
18 U.S.C. § 1964(c);
Sedima, S.P.R.L. v. Imrex Co.,
A plaintiff asserting a claim under 18 U.S.C. § 1964(c) must allege
actual,
quantifiable injury. In
First Nationwide Bank,
a civil RICO case that, like the instant case, centered on the issues of causation and injury, we held that the assumption of additional risk of loss due to undersecured loans was insufficient to support an allegation of injury under RICO.
See
In this case, out-of-pocket losses cannot be shown by common evidence because they constitute an inherently individual inquiry: individual smokers would have incurred different losses depending on what they would have opted to do, but for defendants’ misrepresentation. For example, smokers who would have purchased full-flavored cigarettes instead of Lights had they known that Lights were not healthier would have suffered no injury because Lights have always been priced the same as full-flavored cigarettes. By contrast, those who would have quit smoking altogether could recover their expenses in purchasing Lights. And those who would have continued to smoke, but in greater moderation, could recover something in between. Thus, on the issue of out-of-pocket loss, individual questions predominate; plaintiffs cannot meet their burden of showing that injury is amenable to common proof.
Plaintiffs, no doubt recognizing the above difficulties with certifying a class claiming out-of-pocket losses, offer two other theories of recovery, but neither is cognizable under RICO.
“In re IPO
makes clear that courts may resolve contested factual issues where necessary to decide on class certification, and when a claim cannot succeed as a matter of law, the Court should not certify a class on that issue.”
Velez v. Novartis Pharms. Corp.,
1. Loss of Value
The “loss of value” model purports to measure the difference between the price plaintiffs paid for light cigarettes as represented by defendants and the (presumably lower) price they would have paid (but for defendants’ misrepresentation) had they known the truth — that Lights are
not
healthier than full-flavored cigarettes.
Schwab,
But the loss of value model is designed to award plaintiffs damages based on the benefit of their bargain. Such damages are generally unavailable in RICO suits.
See Commercial Union,
Indeed, plaintiffs have not explained how a party’s “expectation” can constitute “business or property.”
See Heinhold v. Perlstein,
Moreover, even if benefit of the bargain damages could be awarded, there is no reasonable means of calculating them in this case.
Cf. Fleischhauer,
Thus, plaintiffs’ legal theory fails at its inception and, even if it did not, plaintiffs have not made the requisite showing under
In re IPO
that they could, at trial, marshal facts sufficient to permit them to rely upon it.
See In re IPO,
2. Price Impact
Plaintiffs also assert a damages theory based on an estimate of the “price impact” that a disclosure that Lights were not safer than full-flavored cigarettes would have had on the market. Using multiple regression analysis, plaintiffs seek to show the amount by which defendants would have had to reduce their prices to account for the concomitant reduced demand. Even if that amount could be proven by common evidence, as with the loss of value model, plaintiffs have failed as a matter of law to adduce sufficient facts to show that the price impact model is a tenable measure of harm. Cf. supra Part I.B.1 (discussing In re IPO).
Indeed, plaintiffs have not come forward with any meaningful means of estimating how the market has changed or might change in the future in response to fluctuations in the demand for light cigarettes. For instance, as we have already noted,
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Lights have always been priced the same as full-flavored cigarettes. Furthermore, if plaintiffs’ theory of a health-driven preference for Lights were correct, one would have expected demand to drop following the publication of Monograph 13 as people returned to smoking regular cigarettes or quit smoking altogether and, correspondingly, prices to fall. But nothing of the sort happened; the market did not shift appreciably following the publication of Monograph 13.
Cf. In re Burlington Coat Factory Sec. Litig.,
The price impact model exemplifies the kind of vague inquiry into damages that the Supreme Court forbade in
Anza.
In that case, the plaintiff (a steel products vendor) sued a competitor, alleging that the competitor’s practice of tax evasion had permitted it to charge lower prices than the plaintiff. The Supreme Court concluded that the plaintiff had failed adequately to plead a RICO violation because the injury it had suffered to its business was too remote from the predicate racketeering acts.
See Anza,
the speculative nature of the proceedings that would follow if [plaintiff] were permitted to maintain its claim. A court considering the claim would need to begin by calculating the portion of [defendant’s] price drop attributable to the alleged pattern of racketeering activity. It next would have to calculate the portion of [plaintiffs] lost sales attributable to the relevant part of the price drop.
Id. at 1998. Similarly, in this case, a court considering plaintiffs’ price impact model would have to engage in a series of speculative calculations to ascertain whether, and in what amount, plaintiffs suffered a loss.
Plaintiffs in this case argue that “[u]n-like in
Anza ...
the class members here are the ‘immediate victims’ of the RICO violation, and the causal chain is no more ‘attenuated’ than in any case in which an economist calculates an overcharge resulting from a defendant’s unlawful activities.” Appellees’ Br. at 43. But
Anza
spoke not only to the remoteness of the action that had allegedly caused the plaintiffs harm, but also to the possibility that damages could have resulted from factors unrelated to the defendant’s alleged acts of fraud.
See
Thus, plaintiffs cannot show injury due to overall price impact on a class-wide basis and thereby satisfy Rule 23’s predominance requirement because their price impact theory, like their loss of value theory, fails as a matter of law. Under In re IPO, plaintiffs must produce persuasive facts at trial that will enable them to prove injury to business or property under RICO. They have failed to persuade us that they can do so.
*231 II. Calculation of Damages
The district court concluded that plaintiffs could prove collective damages on a class-wide basis, and individual plaintiffs would then claim shares of this fund:
First, defendant’s aggregate liability is determined in a single, class-wide adjudication and paid into a class fund. Second, “individual class members are afforded an opportunity to collect their individual shares,” usually through a simplified proof of claim procedure. 9 Third, any residue remaining after individual claims have been paid is distributed to the class’ benefit under cy pres or other doctrines.
Id.
at 1254 (citations omitted). But such “fluid recovery” has been forbidden in this circuit since
Eisen v. Carlisle & Jacquelin,
We reject plaintiffs’ proposed distribution of any recovery they might receive because it offends both the Rules Enabling Act and the Due Process Clause. The distribution method at issue would involve an initial estimate of the percentage of class members who were defrauded (and who therefore have valid claims). The total amount of damages suffered would then be calculated based on this estimate (and, presumably, on an estimate of the average loss for each plaintiff). But such an aggregate determination 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. This kind of disconnect offends the Rules Enabling Act, which provides that federal rules of procedure, such as Rule 23, cannot be used to “abridge, enlarge, or modify any substantive right.” 28 U.S.C. § 2072(b).
Roughly estimating the gross damages to the class as a whole and only subsequently allowing for the processing of individual claims would inevitably alter defendants’ substantive right to pay damages reflective of their actual liability.
See, e.g., In re Hotel Tel. Charges,
Moreover, in this case, the district court determined that “evidence of the percentage of the class which was defrauded and the amount of economic damages it suffered appears to be quite weak.” Id. at 1021. It further concluded that “deter-min[ing] the impact of the fraud on the size of the market and its nature for damage purposes is a daunting enterprise even with the many proffered experts holding up their statistical lanterns to help in the search for the truth.” Id. Nevertheless, the district court believed that “the proof of acts of defendants and the various experts’ opinions permit[ ] a finding of damages to the class with sufficient precision to allow a jury award.” Id. at 1137. For the reasons stated above, we disagree, and we further note our skepticism that if statistical experts cannot with accuracy estimate the relevant figures, a jury could do so based on the testimony of those experts.
The district court’s distribution scheme also raises serious due process concerns. As we explained in Eisen,
if the ‘class as a whole’ is or can be substituted for the individual members of the class as claimants, then the number of claims filed is of no consequence and the amount found to be due will be enormous.... Even if amended Rule 23 could be read so as to permit any such fantastic procedure, the courts would have to reject it as an unconstitutional violation of the requirement of due process of law.
III. The Statute of Limitations Defense
As with the difficulty in calculating damages, the presence of individual defenses does not by its terms preclude class certification.
Augustin v. Jablonski (In re Nassau County Strip Search Cases),
The statute of limitations for a civil RICO claim is four years.
Agency Holding Corp. v. Malley-Duff c& Assocs., Inc.,
The Supreme Court’s recent decision in
Ledbetter v. Goodyear Tire & Rubber Co.
casts doubt upon
In re Monumental.
— U.S. -,
First, as defendants note, two class representatives in this case appear to have understood the phenomenon of compensa
*234
tion — and its attendant risks — prior to May 2000 (four years before the complaint was filed). Appellants’ Br. at 37 n. 13. Second, the minimal impact that the publication of Monograph 13 had on the market for Lights suggests that Monograph 13 may have been a reinterpretation of existing studies, as defendants argue,
cf. Schwab,
* * *
In sum, because we find that numerous issues in this case are not susceptible to generalized proof but would require a more individualized inquiry, we conclude that the predominance requirement of Rule 23 has not been satisfied. We recognize that a court may employ Rule 23(c)(4) to certify a class as to common issues that do exist, “regardless of whether the claim as a whole satisfies Rule 23(b)(3)’s predominance requirement.”
In re Nassau County Strip Search Cases,
CONCLUSION
For the foregoing reasons, we ReveRse the judgment of the district court and order the class DeoeRtified.
Notes
. For an exhaustive description of this case, we refer the interested reader to the district court's class-certification opinion below.
. We assume for purposes of this decision that defendants represented that Lights were "healthier” than full-flavored cigarettes, rather than that Lights were simply lower in tar and nicotine.
Cf. Schwab,
. The District Court for the District of Columbia recently found cigarette manufacturers liable for violating RICO, concluding that there was "overwhelming evidence” of defendants' intentional use of deceptive brand descriptors to induce smokers to purchase Lights.
Philip Morris,
. All parties concede that this suit is not susceptible to certification under Rule 23(b)(1) or al
. This is so despite plaintiffs' contention that they "are not advocating the same 'fraud-on-the-market' presumption applicable in a securities case.” Appellees' Br. at 25 n. 19; see id. at 4 ("Based on a belief in the truth of the representation, the market shifted.”).
. Plaintiffs’ effort to produce class-wide proof of reliance reinforces the difficulty of coming up with such proof. Plaintiffs’ expert, Dr. John R. Hauser, claimed that 90.1% of those who smoked Lights chose to do so because of Lights’ alleged health benefits.
Schwab,
. For instance, payment may constitute circumstantial proof of reliance upon a financial representation.
See, e.g., Westways World Travel, Inc. v. AMR Corp.,
Klay v. Humana, Inc.,
. In
Heinold,
for instance, the defendant misrepresented the value of a diamond ring ultimately purchased by the plaintiff. The plaintiff did not overpay — the diamond ring was presumably worth its purchase price — but he did not make his expected profit.
. “Damages would be allocated among class members based on the number of light’ cigarettes purchased by each within the relevant geographic area and time.” Id. at 1252.
. We speak here only of actual notice, as constructive notice is an issue susceptible to common proof; what a "reasonable person” would have known, and when, can be proven on a class-wide basis.
Cf. Lanza v. Merrill Lynch & Co. (In re Merritt Lynch Ltd. P’ships Litig.),