KAREN MCLAUGHLIN, JANE AMODEO, DAVID TUTTLEMAN, SUSAN BAILEY, BARBARA BISHOP, TREVOR CAMPBELL, FERGAL FURLONG, DAVID ROGERS, BARBARA SCHWAB, PATRICIA SCOCOZZA, and JIM SHERMAN, Plaintiffs-Appellees, v. AMERICAN TOBACCO COMPANY, ALTRIA GROUP, INC., PHILIP MORRIS USA INC., LORILLARD TOBACCO CO, BRITISH AMERICAN TOBACCO LIMITED, LIGGETT GROUP, INC., B.A.T. INDUSTRIES P.L.C., and R.J. REYNOLDS TOBACCO CO., Defendants-Appellants.
06-4666-cv
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
April 3, 2008
August Term 2006 (Argued: July 10, 2007 Decided: April 3, 2008)
Before: WINTER, WALKER, and POOLER, Circuit Judges.
REVERSED.
MICHAEL D. HAUSFELD, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Wash., D.C. (Benjamin D. Brown, James J. Pizzirusso, Brent W. Landau, Andrea L. Hertzfeld, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Wash., D.C., Burton H. Finkelstein and Richard M. Volin, Finkelstein, Thompson & Loughran, Wash., D.C., on the brief), for Plaintiffs-Appellees.
Harvey Kurzweil, Dewey & LeBoeuf LLP, New York, N.Y. (Matthew L. DiRisio and Emilie B. Cooper, Dewey & LeBoeuf
John H. Beisner, O‘Melveny & Myers LLP, Wash., D.C. (Jessica Davidson Miller and Charles E. Borden, O‘Melveny & Myers LLP, Wash., D.C., Hugh F. Young, Jr., Product Liability Advisory Council, Inc., Reston, Va., on the brief), for Amicus Curiae Product Liability Advisory Council, Inc.
Alan E. Untereiner, Robbins, Russell, Englert, Orseck & Untereiner LLP, Wash., D.C., (Matthew R. Segal, Russell, Englert, Orseck & Untereiner LLP, Wash., D.C., Robin S. Conrad and Amar D. Sarwal, National Chamber Litigation Center, Wash, D.C., on the brief), for Amicus Curiae Chamber of Commerce of the United States of America.
Richard A. Daynard, Northeastern University School of Law, Boston, Mass. (Christopher N. Banthin, Public Health Advocacy Institute, Inc., Boston, Mass., on the brief), for Amici Curiae Tobacco Control Resource Center Division of the Public Health Institute, Inc., and the Tobacco Control Legal Consortium.
JOHN M. WALKER, JR., Circuit Judge:
While redressing injuries caused by the cigarette industry is “one of the most troubling . . . problems facing our Nation
BACKGROUND1
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., 449 F. Supp. 2d 992 (E.D.N.Y. 2006) (Jack B. Weinstein, Judge). Plaintiffs’ suit is brought under RICO, with mail and wire fraud as the necessary predicate acts. See
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 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, 449 F. Supp. 2d at 1094, neither of which a machine is capable of doing. Cigarette manufacturers have apparently been aware of this phenomenon for some time. See Philip Morris, 449 F. Supp. 2d at 438; Aspinall v. Philip Morris Cos., 813 N.E.2d 476, 481 n.9 (Mass. 2004). But some smokers continued at least until 2000 to believe that Lights were healthier than full-flavored cigarettes. As the district court noted, citing a 1977 Brown & Williamson Internal Marketing Study, “[a]lmost all smokers agree that the primary reason for the increasing acceptance of [Lights] is based on the health reassurance they seem to offer.” Schwab, 449 F. Supp. 2d at 1095 (internal quotation marks and citation omitted).
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
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
DISCUSSION
We review the district court‘s certification order for abuse of discretion. See Moore v. PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002). We will “exercise even greater deference when the district court has certified a class than when it has declined to do so.” Marisol A. by Forbes v. Giuliani, 126 F.3d 372, 375 (2d Cir. 1997). However, as we recently made clear, “a district judge may not certify a class without making a ruling that each Rule 23 requirement is met . . . [and] all . . . evidence must be assessed as with any other threshold issue,” whether or not any such assessment also bears on the merits of
I. Elements of a Civil RICO Claim and the Predominance Requirement
Section 1964(c) of Title 18 (“civil RICO“) gives private
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 Caviness v. Derand Res. Corp., 983 F.2d 1295, 1305 (4th Cir. 1993) (“[A] claim under RICO requires both reliance and damage proximately caused by the violation.“); cf. ATSI Commc‘ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 106-07 (2d Cir. 2007) (noting, in the securities fraud context, that “[a] plaintiff is required to prove both transaction causation (also known as reliance) and loss causation. Transaction causation only requires allegations that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction.” (internal quotation marks and citations omitted)).
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
Plaintiffs and the district court suggest that defendants
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 (describing the securities market as “impersonal, well-developed,” and “information-hungry“); the market for consumer goods, however, is anything but efficient, cf. Sikes v. Teleline, Inc., 281 F.3d 1350, 1364 (5th Cir. 2002) (“[E]ach individual plaintiff is the only person with information about the content of the advertisement upon which he relied.“). Indeed, the fact that the publication of Monograph 13 produced no change in either the sales or the price of Lights shows just how unresponsive the consumer market in Light cigarettes is to the advent of new information. See In re IPO, 471 F.3d at 43 (“Plaintiffs’ own allegations as to how slow the
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., 84 F.3d 734, 745 (5th Cir. 1996), as some fraud actions do appear within the contemplation of Rule 23‘s drafters, see
Plaintiffs suggest that regardless of whether reliance is susceptible to aggregate proof under Moore, they should be entitled to a presumption of reliance in light of the market shift in brand preferences (from nonfiltered 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, 281 F.3d at 1362 n.32, it is insufficient
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., 319 F.3d 205, 220 (5th Cir. 2003) (“Knowledge that invoices charged unlawful rates, but did so according to a prior agreement between the insurer and the policyholder, would eliminate reliance and break the chain of causation.“); Moore v. Am. Fed‘n of Television & Radio Artists, 216 F.3d 1236, 1243 (11th Cir. 2000) (“Some found no error in the statements and accepted them at face value; some relied on their agents to monitor the statements, and they likewise found no error; others spotted what they perceived to be errors and complained to AFTRA . . . .“). Thus, differences in plaintiffs’ knowledge and levels of awareness also defeat the presumption of reliance.
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
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
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 plaintiff‘s injury was caused by the defendant‘s wrongful action as opposed to other external factors.” First Nationwide Bank, 27 F.3d at 770. Here, because factors other than defendants’ misrepresentation may have intervened and affected
B. Injury
Plaintiffs also argue that the requisite injury to “business or property” is susceptible to class-wide proof. See
A plaintiff asserting a claim under
In this case, out-of-pocket losses cannot be shown by common
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., 244 F.R.D. 243, 257 (S.D.N.Y. 2007). Thus, plaintiffs’ alternative theories cannot support their argument for class certification.
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, 449 F. Supp. 2d at 1163. Plaintiffs’ expert “estimated a loss in value of 77.7 percent if the ‘light’ cigarettes sold by defendants were as harmful as regular cigarettes.” Id. at 1057-58.
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, 17 F.3d at 612; 2 McLaughlin on Class Actions § 8:16, at 8-102 (3d ed. Dec. 2006 update). This is a sensible rule, and not derived from our “loss causation” cases, as the district court suggested. Schwab, 449 F. Supp. 2d at 1065. Rather, the rule of general unavailability follows from the text of RICO, which compensates only for injury to “business or property.”
Moreover, even if benefit of the bargain damages could be
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, 471 F.3d at 40 (asserting that, in determining whether the Rule 23 requirements for class certification have been met, it is appropriate for the judge to “resolve[] underlying factual
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, 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
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, 126 S. Ct. at 1997. Specifically, the Court stated that “[t]he cause of [plaintiff‘s] asserted harms . . . is a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State),” and noted that the “attenuation” was “clear.” Id. Importantly, the Court discussed the speculative nature of the proceedings that would follow if [plaintiff] were permitted to maintain its claim. A
Plaintiffs in this case argue that “[u]nlike 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 plaintiff‘s harm, but also to the possibility that damages could have resulted from factors unrelated to the defendant‘s alleged acts of fraud. See 126 S. Ct. at 1997 (“Businesses lose and gain customers for many reasons, and it would require a complex assessment to establish what portion of [plaintiff‘s] lost sales were the product of [defendant‘s] decreased prices.“). And indeed, here, as plaintiffs’ expert concedes, a number of exogenous variables bear on cigarette price, including “rates of cigarette consumption, income levels of smokers, population, taxes, advertising expenditures, production costs, and plaintiffs’ knowledge of
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.
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, 479 F.2d 1005, 1008 (2d Cir. 1973) (“[N]o ‘fluid recovery’ procedures are authorized by the text or by any reasonable interpretation of amended Rule 23.“), vacated on other
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
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, 500 F.2d 86, 90 (9th Cir. 1974) (rejecting a fluid recovery argument because “allowing gross damages by treating unsubstantiated claims of class members collectively significantly alters substantive rights,” in violation of the Rules Enabling Act); Eisen, 479 F.2d at 1019 (“[P]ossible recoveries run into astronomical amount [and] generate more leverage and pressure on defendants to settle . . . .“); Schwab, 449 F. Supp. 2d at 1272 (“A question under the Rules Enabling Act is posed by the danger of overcompensation inherent in the plaintiff‘s fluid distribution plan. It is possible that some claimants will benefit from the plaintiff class’ recovery despite the fact that they did not rely on defendants’ alleged misrepresentations regarding ‘light’ cigarettes and were not,
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 “determin[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
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.
479 F.2d at 1018. When fluid recovery is used to permit the mass aggregation of claims, the right of defendants to challenge the allegations of individual plaintiffs is lost, resulting in a due process violation. The Third Circuit properly observed in Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc. that “actual injury cannot be presumed, and defendants have the right to raise individual defenses against each class member.” 259 F.3d 154, 191-92 (3d Cir. 2001); see also 2 McLaughlin on Class Actions § 8:16, at 8-95 (3d ed. Dec. 2006 update) (“Courts have repeatedly rejected the use of fluid recovery as a substitute for individualized proof when the class pursues claims that require proof of actual damages.“). To be sure, this does not mean that defendants are “constitutionally entitled to compel a parade of individual plaintiffs to establish damages.” In re Antibiotic Antitrust Actions, 333 F. Supp. 278, 289 (S.D.N.Y. 1971). However, when fluid recovery is used, as here, to mask the prevalence of individual issues, it is an impermissible affront to defendants’ due process rights. Cf. Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1305-06 (9th Cir. 1990) (dismissing concerns about fluid recovery because, in the case before it, “[t]he district court did not use fluid recovery to avoid individual proof of damages“).
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), 461 F.3d 219, 225 (2d Cir. 2006). But in this case, there is no doubt that a substantial number of class members were on notice of defendants’ alleged fraud before the class period. Such a finding counsels in favor of vacating the district court‘s class certification order.10 See Waste Mgmt. Holdings, Inc. v. Mowbray, 208 F.3d 288, 295 (1st Cir. 2000) (“[A]ffirmative defenses should be considered in making class certification decisions.“).
The statute of limitations for a civil RICO claim is four
First, as defendants note, two class representatives in this case appear to have understood the phenomenon of compensation -- 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, 449 F. Supp. 2d at 1074, rather than a ground-breaking new study, as plaintiffs would have it. Third, plaintiffs’ own attorneys filed several similar lawsuits prior to May 2000. Id. at 1071. Finally, and most importantly, plaintiffs have offered no reliable means of collectively determining how many class
* * *
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, 461 F.3d at 227. Nevertheless, in this case, given the number of questions that would remain for individual adjudication, issue certification would not “reduce the range of issues in dispute and promote judicial economy.” Robinson v. Metro-N. Commuter R.R., 267 F.3d 147, 168 (2d Cir. 2001). Certifying, for example, the issue of defendants’ scheme to defraud, would not materially advance the litigation because it would not dispose of larger issues such as reliance, injury, and damages. See id. at 167 n.12. We therefore decline plaintiffs’ request for issue certification.
CONCLUSION
For the foregoing reasons, we REVERSE the judgment of the district court and order the class DECERTIFIED.