McLaughlin v. Philip Morris USA, Inc.

Plaintiffs brought a class action against tobacco companies for fraud under the Racketeer Influenced and Corrupt Organizations Act (RICO) for allegedly deceiving the plaintiffs into "believing that 'light' cigarettes were healthier than 'full-flavored' cigarettes."  The Court held that the class did not meet the "predominance" requirements under Federal Rule of Civil Procedure 23(b)(3) (“questions of law or fact common to class members [must] predominate over any questions affecting only individual members"), as not all plaintiffs met RICO's requirement that the each plaintiff be able to prove reliance, injury, and damages. The Court reversed the lower court's class certification of the plaintiffs.

McLaughlin v. Philip Morris USA, Inc., 522 F.3d 215, United States Court of Appeals, Second Circuit (2008).

  • United States
  • Apr 3, 2008
  • U.S. Court of Appeals for the Second Circuit

Parties

Plaintiff

  • Barbara Bishop
  • Barbara Schwab
  • David Rogers
  • David Tuttleman
  • Fergal Furlong
  • Jane Amodeo
  • Jim Sherman
  • Karen McLaughlin
  • Patricia Scocozza
  • Susan Bailey
  • Trevor Campbell

Defendant

  • Altria Group
  • American Tobacco Company
  • B.A.T. Industries P.L.C.
  • British American Tobacco Limited
  • Liggett Group, Inc.
  • Lorillard Tobacco Company
  • Philip Morris, Inc.
  • R.J. Reynolds Tobacco Company

Legislation Cited

Related Documents

Type of Litigation

Tobacco Control Topics

Substantive Issues

Type of Tobacco Product

None

"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 fullflavored 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."
"In this case, plaintiffs' theory is that they suffered an economic loss because they were overcharged for Lights. Plaintiffs argue that defendants' misrepresentation that Lights were healthier led to an increased market demand for light cigarettes, which drove up the price of Lights. Thus, plaintiffs contend that they paid more for Lights than they otherwise would have had the truth been known. As with reliance, plaintiffs claim that they can establish loss causation on a class-wide basis. 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, 126 S.Ct. at 1997 ("There is ... a second discontinuity between the RICO violation and the asserted injury. [Plaintiff's] lost sales could have resulted from factors other than [defendant's] alleged acts of fraud. Businesses lose and gain customers for many reasons, and it would require a complex assessment to establish what portion of [plaintiffs] lost sales were the product of [defendant's] decreased prices."). 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 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, 108 S.Ct. 978 (describing the securities market as "impersonal, well-developed," and "informationhungry"); the market for consumer goods, however, is anything but efficient, cf. Sikes v. Teleline, Inc., 281 F.3d 1350, 1364 (11th 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 market was to correct the alleged price inflation despite what they also allege was widespread knowledge of the scheme indicate the very antithesis of an efficient market."). As we stated in In re IPO, "[w]ithout the Basic presumption, individual questions of reliance would predominate over common questions." Id.; see also Gunnells, 348 F.3d at 435 (noting that Basic's presumption of actual reliance was based on the efficiency of capital markets, which did not apply to plaintiffs' purchase of health care plans, and that therefore actual reliance could not be presumed and individualized inquiry was required)."