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The McLaughlin decision represents another chapter in the convoluted history of tobacco mass tort litigation. In addition, the McLaughlin decision represents another landmark reversal in Weinstein's controversial history as the judicial King of Mass Torts.
The McLaughlin decision is significant in several respects. In the narrowest reading, the 2d Circuit has curtailed the utility of civil racketeering claims as a basis for classwide mass tort relief.
In a conventional application of class action principles, the court held that too many individualized issues defeated the predominance requirement for certification of a civil Racketeer Influenced and Corrupt Organizations Act (RICO) claim. The court concluded that the proposed smokers' class suffered from "an insurmountable deficit of collective legal or factual questions." McLaughlin, 2008 WL 878627, at *1.
In a broader constitutional dimension, the 2d Circuit dealt a blow to aggregate fluid-damages models for economic harms, often asserted in class litigation. The court held that the fluid recovery Weinstein approved offended the Rules Enabling Act, 28 U.S.C. 2072(b), as well as the due process clause.
Significantly, the 2d Circuit issued a sweeping policy statement that "not every wrong can have a legal remedy, at least not without causing damage to the fabric of our laws."
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Why the Decision Is Important - and Why the Court of Appeals Refused to Reach Out to Remedy This Wrong
The case, in which plaintiffs alleged that Big Tobacco's marketing of light cigarettes violated the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), involved an estimated 60 million plaintiffs with alleged damages in the $800 billion range. It also claimed still more serious wrongdoing by the tobacco industry: The plaintiffs alleged that the tobacco companies touted light cigarettes as "lower risk," even though they knew full well that the purported health benefits were illusory, because smokers of lights would ultimately receive the same doses of tar and nicotine as smokers of regular cigarettes -- by either inhaling more deeply or smoking more cigarettes to satisfy their cravings.
U.S. District Judge Jack Weinstein, a liberal jurist once considered a leading authority on the rules of federal procedure, had written a 540-page opinion justifying class-action treatment of the plaintiffs' claims. But the three-judge Second Circuit panel that heard the case on appeal, despite recognizing the significant evidence supporting plaintiffs' allegations, nonetheless had little difficulty reversing Weinstein's ruling, and relegating light cigarette smokers to the water torture of litigating their claims against the tobacco companies on an individualized basis.
"While redressing injuries caused by the cigarette industry is 'one of the most troubling ... problems facing our nation today' ... not every wrong can have a legal remedy ... at least not without causing collateral damage to the fabric of our laws," Judge John M. Walker Jr. wrote for the Court of Appeals. .. .
Now, as we watch our financial markets struggle under the weight of questionable mortgage practices - the latest form of corporate excess - the question of how to strike the balance between over- and under-enforcement of the law becomes all the more urgent and timely.
Tobacco companies won a major victory Thursday as a federal appeals court ruled that lawsuits seeking economic damages due to their alleged deception about the relative safety of light cigarettes cannot be pursued as a class action.
Saying the "putative class action suffers from an insurmountable deficit of collective legal or factual questions," the 2nd U.S. Circuit Court of Appeals in McLaughlin v. American Tobacco Co., 06-4666-cv, reversed Eastern District Judge Jack B. Weinstein's decision to certify a class action brought under the Racketeer Influenced and Corrupt Organizations Act. . . .
Michael D. Hausfeld of Cohen, Milstein, Hausfeld & Toll in Washington D.C., who represented the plaintiffs, called the decision "wrong" and said he plans "to pursue the litigation" either through petition for rehearing en banc, petition for a writ of certiorari to the U.S. Supreme Court or through trial. . . .
Hausfeld said the court missed the point here, because the mere "possibility" of divergent reasons for buying light cigarettes ignores the primary reason for certification of a class -- that issues common to the class predominate over individual issues.
The circuit said that Weinstein adopted the so-called "fraud-on-the-market" presumption that is used in securities cases -- the idea that fraud may be established simply by a defendant's widespread dissemination of misleading information.
"But in this case, reliance is too individualized to admit of common proof," Walker said. . . .
Grossman said the circuit rebuked Weinstein when it said at the start of the opinion that "Rule 23 is not a one-way ratchet, empowering the judge to conform the law to the proof."
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.
While redressing injuries caused by the cigarette industry is 'one of the most troubling . . . problems facing our Nation today', . . . not every wrong can have a legal remedy, . . . at least not without causing collateral damage to the fabric of our laws. Plaintiffs' putative class action suffers from an insurmountable deficit of collective legal or factual questions.JOHN M. WALKER, JR., Circuit Judge, for the Appeals panel in Schwab.
A federal appeals court decertified a class Thursday in a lawsuit seeking up to $800 billion against Altria Group Inc.'s Philip Morris USA and other cigarette makers over the marketing of "light" cigarettes.
In an order Thursday, the 2nd Circuit Court of Appeals reversed a lower court judge's 2006 decision certifying a class of smokers in the closely watched case. . . .
"Because individual issues outweigh issues susceptible to common proof, the class is not maintainable," the three-judge panel found Thursday. . . .
"Each plaintiff in this case could have elected to purchase light cigarettes for any number of reasons, including a preference for the taste and a feeling that smoking lights was "cool'," the circuit said.
U.S. appeals court judges considered on Tuesday whether a $200 billion lawsuit against big tobacco companies by smokers of "light" cigarettes should be allowed to go ahead as a class action.
The hearing before the U.S. Court of Appeals for the Second Circuit is the latest development in a closely watched case filed by smokers, who say tobacco companies defrauded them into thinking "lights" were safer. Last year a federal judge certified the case as a class action, prompting tobacco companies to appeal.
During the hearing in Manhattan, a three-judge panel asked lawyers whether it could be presumed that smokers who bought "light" cigarettes believed they were safer or whether that had to be worked out on a case-by-case basis.
The judges questioned lawyers about issues such as whether smokers chose "lights" for reasons like taste, and when did smokers actually know about how health risks of smoking lights, compared with smoking regular cigarettes.
What did the individual consumer know, Circuit Judge John Walker said, adding, "That's the big problem here."
A federal appeals court gave a rough reception Tuesday to arguments that tobacco companies owe up to $200 billion to tens of millions of smokers for suggesting over the last three decades that light cigarettes might be less harmful than regular cigarettes.
The three-judge panel of the 2nd U.S. Circuit Court of Appeals has been asked to decide whether to let stand a ruling last summer . . .
Two of the three judges repeatedly expressed doubts about the class action status of the lawsuit as they questioned smokers' attorney Michael D. Hausfeld.
Judge John Walker said he saw a problem in that each smoker would have a different perception of how the tobacco companies marketed the cigarettes. He also said he doubted that the smokers considered health their primary concern since they were deciding to smoke anyway.
"These are all individual decisions," he said.
He also said he believed the statute of limitations may have expired before the lawsuit was filed.
Judge Ralph Winter said he doubted that tobacco companies could convince smokers that light cigarettes were healthier cigarettes with less tar and nicotine because each box still contained a health warning.
"It was a mixed message," he said.
Altria Group Inc.'s (MO) Philip Morris USA and other cigarette makers argued Tuesday that a federal judge erred last year in granting class-action status to a lawsuit over tobacco companies marketing of "light" cigarettes.
At a hearing before the 2nd Circuit Court of Appeals, Theodore M. Grossman, a lawyer for the tobacco companies, said there were 65 different brands of light cigarettes with hundreds of advertising campaigns during the 35-year period covered by the class certification.
He said the certification was "overbroad" and the issues so individualized for each brand or each smoker's own circumstances that the case can't be effectively grouped in such a class.
"Almost all of (the light cigarette brands) never spoke of health or safety as part of their advertising," Grossman said.
Several major tobacco companies are set to go to a U.S. appellate court on Tuesday to argue about whether a $200 billion lawsuit against them by "light" cigarette smokers should proceed as a class action.
The hearing scheduled before the U.S. Court of Appeals for the Second Circuit is the latest development in the closely watched case, which could potentially expose tobacco companies to hundreds of billions of dollars in liabilities. . . .
The appellate court's decision, although not expected on Tuesday, would help shape how far the case is ultimately allowed to go, said Benjamin Zipursky, professor at Fordham University School of Law.
At Tuesday's hearing, observers should watch out for any indications that the court might give of its thinking, Zipursky said. "Do the judges appear to be leaving any room for partial classes or subsets?"
Attorneys for plaintiffs in a tobacco liability lawsuit said on Wednesday that they would not seek a court order to try to bar Altria Group Inc.'s spin-off of Kraft Foods Inc. . . .
Law firm Cohen Milstein Hausfeld & Toll in Washington, which represents smokers who contend tobacco companies misled them into thinking that light cigarettes were safer than regular cigarettes, said in a statement that it would not pursue a possible injunction against the planned spin-off.
"After intense investigation and attempted coordination with the United States Department of Justice, which declined to move forward on the issue, Cohen, Milstein, Hausfeld & Toll has concluded that there does not appear a sufficiently strong legal basis to justify proceeding against Altria in an attempt to prevent the spin-off," the law firm said.
The judge overseeing a $200 billion lawsuit by smokers of ``light'' cigarettes against Altria Group's Philip Morris unit said the case won't go forward until an appeals court rules on whether it may proceed as a class action.
The decision, made public today, means it is unlikely that U.S. District Judge Jack B. Weinstein in Brooklyn, New York, will be asked to block Altria's planned spinoff of its Kraft Foods unit, which is scheduled for March 30.
Michael Hausfeld, who represents the nationwide class of light cigarette smokers suing tobacco companies in the Brooklyn case, said today he's considering a legal move to block the Kraft deal, to help ensure that Altria can pay if he wins the case.
``No matters related to this case'' will go forward before the appeal is decided, Weinstein said, according to court records.
"The Altria situation raises a number of issues," said Michael Hausfeld, an attorney at Cohen, Milstein, Hausfeld and Toll.
Hausfeld represents plaintiffs in a case known as Schwab after the lead plaintiff, Barbara Schwab. The case claims tobacco companies deceived smokers for years about the safety of "light" cigarettes.
The lawyer said a court is determining whether to affirm the case's class-action certification, which allows the case to continue as a class action suit.
He said if the certification is upheld, Altria's "litigation position changes dramatically" since the plaintiffs are seeking more than $200 billion in damages. The racketeering law under which the case was filed would triple any damage award. Altria would need to be able to pay any damages without the Kraft subsidiary as an asset to go forward with the spin-off.
Hausfeld said any injunction would have to be filed before the spinoff takes place March 30.
Arguments in the appeal are scheduled for March or early April -- a timeline that may have prompted Altria to announce the spinoff Wednesday, Hausfeld said. . . .
Ronan said any attempt at stopping the spinoff would face a number of hurdles, including proving that Altria would be bankrupted by any damage award resulting from the Schwab case.
"That is a huge hurdle for these plaintiff's lawyers to overcome," Ronan said. "They might be realistic enough to say it's not worth the money."
For all the industry’s apparent troubles, however, the future of cigarettes appears to be brighter than ever.
That at least is the message investors are sending as the Altria Group — the company once known as Philip Morris and the maker of the world’s most popular cigarette, Marlboro — prepares to split itself by spinning off its Kraft Foods division to shareholders and become, once again, primarily a tobacco company. Today, Louis C. Camilleri, the chief executive of Altria, is expected to set a timetable for completing the spinoff.
It is a move that Wall Street is responding to with the equivalent of a standing ovation, but it is not because Kraft Foods, the world’s second-largest food company, after Nestlé, will finally shed the taint of tobacco.
Investors are glad that Altria will finally be rid of Kraft Foods, the maker of Oreo cookies, Velveeta and Tang. Since October, when the company announced its plan for the move, its shares have risen 10 percent.
“Something that is forgotten in all of this is people like to smoke,” said David Adelman, an analyst at Morgan Stanley, who noted that United States tobacco stocks have beaten the Standard & Poor’s 500-stock index in each of the last six years. “It’s enjoyable and there’s not an alternative product.”
He added: “If frozen dinners get too expensive, people will try something else. That’s not true with cigarettes — you are not up at night worried about that product that is going to make cigarettes obsolete.” . . .
Why is Wall Street so infatuated with cigarettes? Cigarettes have certain advantages over other consumer products, not the least of which is that they are addictive. They are inexpensive to make, require almost no innovation, there is a global market for them, and cigarette makers can raise prices without seeing much of a drop in business.
On top of all that, a recent string of court decisions has convinced investors that the worst of the litigation against tobacco companies is over.
That, in turn, has allowed Altria to move forward with a revamping that begins with cutting Kraft loose and will ultimately allow Altria to use the huge amounts of cash generated by cigarettes to buy back stock or acquire other tobacco companies, particularly overseas. . . .
Michael D. Hausfeld, a lawyer in a pending class-action lawsuit against tobacco companies, said he might file an injunction to stop a spinoff of Kraft. The lawsuit, first filed in 2004 and known as the Schwab case after the lead plaintiff, Barbara Schwab, contends that cigarette manufacturers defrauded consumers by marketing light cigarettes as safer than regular cigarettes.
The idea behind seeking an injunction is that a judgment could be so enormous that Altria might need Kraft — with a market capitalization of $57.25 billion — to pay off the damages.
At times, as a tobacco investor or a tobacco analyst, it seems like an unending stream of negative news. You hear about smoking bans, a new piece of legislation. You hear about criticism from the World Health Organization. And then lo and behold, manufacturers release their results. And they are good.David Adelman, an analyst at Morgan Stanley.
If frozen dinners get too expensive, people will try something else. That’s not true with cigarettes — you are not up at night worried about that product that is going to make cigarettes obsolete.David Adelman, an analyst at Morgan Stanley, on Altria's Kraft spinoff.
Tobacco litigation has produced some of the most difficult problems in tort law that the nation has seen in the past twenty years. This may be partly a result of the incredible amounts of money at stake in the litigation: When enough money is at stake, lawyers tend to pursue every possible avenue in an effort to gain an advantage.
Today, I want to discuss a novel problem that may soon be facing the tobacco industry and the judges of the U.S. Court of Appeals for the Second Circuit. The problem is this: Can a federal judge temporarily prevent a multi-billion-dollar tobacco corporation from "spinning off" one of its massive subsidiaries, in order to protect the interest of smokers suing the corporation?
The Huge Schwab Case, Challenging Big Tobacco on Ads for "Light" Cigarettes . . .
While we are waiting for the appellate court to render its judgment about whether a class action was properly certified by Judge Weinstein, another issue has emerged.
Can Altria Go Through with Its Planned Sale of Kraft Foods Stock? . . .
Michael Hausfeld, the plaintiffs' attorney managing the Schwab case, might make the following argument: Suppose the damages from the class action turn out to be so great (for example, in the hundreds of billions of dollars) that Altria needs Kraft to fund the plaintiffs' damages. If so, he might argue, any attempt to separate the two companies could be construed as an attempt to deprive the plaintiffs of their rightful compensation for the injuries Altria caused them. . . .
If the case gets that far, then there is a good chance that the Supreme Court will have a spectacular opportunity to revisit the question of whether federal courts have the power to enjoin major corporate decisions, even before blockbuster tort cases go to trial.
Altria Group Inc.'s Philip Morris USA and other cigarette makers won the right to appeal a lower court decision authorizing a class-action claiming $200 billion in damages on behalf of light-cigarette smokers.
A federal appeals court in New York agreed to review the grant of class-action status in a suit known as the Schwab case, for lead plaintiff Barbara Schwab. The decision, announced in an order today, delays any proceedings in the case, which a judge certified as a group suit in September. A trial of the claim had been scheduled for January.
The suit represents the biggest potential legal liability for the tobacco industry since the U.S. government unsuccessfully sought $280 billion in a 1999 case against the companies. The appeals court's decision to review the case may clear the way for Altria's planned spinoff of its Kraft Foods unit.
``It's hugely positive,'' said Charles Norton, portfolio manager of the $64 million Vice Fund in Dallas, which owns Altria shares. ``Schwab is the last remaining significant legal challenge.''