Cases & Deals

Tobacco industry wins 2nd Circuit reversal of certification and ultimate dismissal of 50 million member $800 billion RICO fraud class action

Client(s) R.J. Reynolds Tobacco Company and Brown & Williamson Holdings, Inc.

Jones Day represented R.J. Reynolds Tobacco Company and Brown & Williamson Holdings, Inc. as lead counsel in a nationwide class action seeking reimbursement for allegedly misleading consumers by labeling cigarettes as "light." The Second Circuit reversed a class certification order where the district court (Judge Jack B. Weinstein) had certified a nationwide RICO fraud class of every person who had ever purchased a package of lights cigarettes, an estimated 50 to 60 million people claiming more than $800 billion in trebled economic damages. Jones Day partner Ted Grossman, on behalf of all defendants, argued the appeal.

Unlike most other tobacco litigation, this was a "no injury case" in which recovery for personal injuries was not claimed. Rather, plaintiffs sought purely economic damages for alleged fraud in marketing. The Second Circuit's decision, by clarifying the requirements for a fraud action under RICO, by strengthening the predominance requirement under Rule 23, and by reinforcing the due process rights of corporate defendants in mass litigation, was a landmark victory for corporate defendants in all industries. The appeal was covered closely by The New York Times, The Wall Street Journal, and other major media outlets throughout the country.

The plaintiffs' theory was that all smokers had been deceived into believing that lights cigarettes are less dangerous than full-flavored cigarettes, due to the descriptor "lights." The Second Circuit held that the district court abused its discretion in certifying the class because an "insurmountable deficit of collective legal or factual questions" precluded a finding that individual issues predominated. First, the Second Circuit clarified that reliance is a requisite element in a fraud-based RICO claim and that it cannot, except in certain narrow circumstances, be the subject of general proof or a "fraud on the market" presumption. Every plaintiff must show individual reliance. Further, the Court held that "the issue of loss causation [i.e., whether defendants' alleged fraud caused plaintiffs' alleged injury], much like the issue of reliance, cannot be resolved by way of generalized proof." The Second Circuit also clarified that ordinarily only out-of-pocket losses, and not so-called "benefit of the bargain" damages, are available in RICO actions and that, where there are individualized questions of reliance, "out-of-pocket losses cannot be shown by common evidence because they constitute an inherently individual inquiry." The Court then rejected as "pure speculation" several damage models frequently advanced by plaintiffs' counsel in consumer fraud litigation, and held that plaintiffs had not satisfied their burden at the class certification stage to come forward with facts sufficient to permit them to rely on these models at trial. Resolving an issue that has received considerable academic attention for thirty years, the Second Circuit also reaffirmed that corporate defendants may not be subjected to the so-called "fluid class recovery" procedure, a flawed procedure in which defendants are ordered to pay an aggregate damage award which is then allocated among class members in an administrative procedure, with any remaining amounts to be distributed for the class's benefit and not returned to defendants. The Second Circuit ruled that such a procedure, which "is likely to result in an astronomical damages figure," is "an impermissible affront to defendants' due process rights" and "offends the Rules Enabling Act," which provides that Rule 23 and other procedural rules cannot be used to "abridge, enlarge, or modify any substantive right." 28 U.S.C. § 2072(b).

The Court also held that individual statute of limitations issues can preclude class certification. It wrote that because "there is no doubt that a substantial number of class members were on notice of defendants' alleged fraud" for more than four years before plaintiffs' counsel commenced the lawsuit-and thus such class members are time-barred under RICO's statute of limitations-the affirmative defense of statute of limitations presented yet another individual issue that predominated over any common issues in the case. Finally, the Court rejected plaintiffs' request for "issue certification," i.e., certification of certain purportedly common issues for trial while leaving individual issues for adjudication in later individual trials. Issue certification, the Court held, would not "promote judicial economy" or "materially advance the litigation" because "it would not dispose of larger issues such as reliance, injury, and damages."

McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008)