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BC & BS OF N.J. v. PHILIP MORRIS

March 30, 1999

BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., AND ITS SUBSIDIARY, MEDIGROUP OF NEW JERSEY, INC. (D/B/A HMO BLUE); ASSOCIATED HOSPITAL SERVICE OF MAINE (D/B/A BLUE CROSS AND BLUE SHIELD OF MAINE), AND ITS SUBSIDIARIES, MACHIGONNE, INC. (D/B/A BENEFIT MANAGEMENT OF MAINE) AND BENEFIT MANAGEMENT, INC.; BCBSD, INC. (D/B/A BLUE CROSS BLUE SHIELD OF DELAWARE); BLUE CROSS AND BLUE SHIELD OF FLORIDA, INC., AND ITS AFFILIATES, HEALTH OPTIONS, INC. AND CAPITAL GROUP HEALTH SERVICES OF FLORIDA, INC. (D/B/A CAPITAL HEALTH PLAN); BLUECROSS BLUESHIELD OF GEORGIA, INC., AND ITS AFFILIATE, HMO GEORGIA, INC.; BLUE CROSS AND BLUE SHIELD OF MASSACHUSETTS, INC.; BLUE CROSS BLUE SHIELD OF MICHIGAN; BLUE CROSS & BLUE SHIELD OF MISSISSIPPI, A MUTUAL INSURANCE COMPANY, AND ITS AFFILIATES, HMO OF MISSISSIPPI, INC., EMPLOYER BENEFITS ADMINISTRATORS, INC., AND BLUEBONNET LIFE INSURANCE COMPANY; BLUECROSS BLUESHIELD OF NORTH CAROLINA; BLUE CROSS & BLUE SHIELD OF RHODE ISLAND, AND ITS SUBSIDIARY, COORDINATED HEALTH PARTNERS, INC.; BLUE CROSS AND BLUE SHIELD OF SOUTH CAROLINA, AND ITS SUBSIDIARIES, COMPANION HEALTHCARE CORPORATION AND PREFERRED HEALTH SYSTEMS, INCORPORATED; BLUE CROSS AND BLUE SHIELD OF VERMONT; CALIFORNIA PHYSICIANS' SERVICE (D/B/A BLUE SHIELD OF CALIFORNIA), AND ITS AFFILIATES, CAREAMERICA-SOUTHERN CALIFORNIA, INC., CPIC LIFE INSURANCE COMPANY, AND CAREAMERICA LIFE INSURANCE COMPANY; CAREFIRST OF MARYLAND, INC.; EMPIRE BLUE CROSS AND BLUE SHIELD; GROUP HOSPITALIZATION & MEDICAL SERVICES, INC. (D/B/A BLUE CROSS BLUE SHIELD OF THE NATIONAL CAPITAL AREA); LOUISIANA HEALTH SERVICE & INDEMNITY COMPANY, INC. (D/B/A BLUE CROSS AND BLUE SHIELD OF LOUISIANA); MOUNTAIN STATE BLUE CROSS & BLUE SHIELD, INC., AND ITS SUBSIDIARY, PARKER BENEFITS, INC. (D/B/A SUPER BLUE HMO); NEW HAMPSHIRE-VERMONT HEALTH SERVICE (D/B/A BLUE CROSS BLUE SHIELD OF NEW HAMPSHIRE), AND ITS SUBSIDIARIES, MATTHEW THORNTON HEALTH PLAN, INC., MATTHEW THORNTON INSURANCE, INC., AND HEALTH INITIATIVES, INC.; NEW YORK CARE PLUS INSURANCE COMPANY, INC., (D/B/A BLUE CROSS AND BLUE SHIELD OF WESTERN NEW YORK, BLUE SHIELD OF NORTHEASTERN NEW WEST PAGE 561 YORK); TRIGON INSURANCE COMPANY (D/B/A TRIGON BLUE CROSS BLUE SHIELD), AND ITS AFFILIATES, PHYSICIANS HEALTH PLAN, INC., HEALTHKEEPERS, INC., PRIORITY HEALTH CARE, INC., PENINSULA HEALTH CARE, INC., TRIGON ADMINISTRATORS, INC., AND MID-SOUTH INSURANCE COMPANY; AND EXCELLUS, INC., AND ITS SUBSIDIARIES, THE FINGER LAKES COMPANIES, INC. (AND ITS SUBSIDIARIES, FINGER LAKES HEALTH INSURANCE COMPANY, INC. AND FINGER LAKES MEDICAL INSURANCE COMPANY, INC.), EXCELLUS OF CENTRAL NEW YORK, INC. (AND ITS SUBSIDIARY EXCELLUS HEALTH PLAN, INC.), AND UPSTATE HOLDING COMPANY, INC. (AND ITS SUBSIDIARY, UTICA-WATERTOWN HEALTH INSURANCE CO., INC.), PLAINTIFFS,
v.
PHILIP MORRIS, INCORPORATED; R.J. REYNOLDS TOBACCO COMPANY; BROWN & WILLIAMSON TOBACCO CORPORATION; B.A.T. INDUSTRIES P.L.C.; BRITISH AMERICAN TOBACCO COMPANY, LTD.; LORILLARD TOBACCO COMPANY; LIGGETT GROUP, INC.; LIGGETT & MYERS INC.; UNITED STATES TOBACCO COMPANY; THE TOBACCO INSTITUTE, INC.; THE COUNCIL FOR TOBACCO RESEARCH — U.S.A., INC.; THE SMOKELESS TOBACCO COUNCIL, INC.; HILL AND KNOWLTON, INC.; AND UNKNOWN CORPORATIONS A-Z, DEFENDANTS.



The opinion of the court was delivered by: Weinstein, Senior District Judge.

  MEMORANDUM AND ORDER
I.    INTRODUCTION .................................................. 564
II.   COMPLAINT ..................................................... 565
      A.  RICO ...................................................... 565
      B.  FEDERAL ANTITRUST ......................................... 566
      C.  STATE LAW CLAIMS .......................................... 566
III.  FACTS AND LAW ................................................. 566
      A.  RICO ...................................................... 566
         1.  Racketeering Enterprise Affecting Interstate Commerce .. 566
         2.  Standing ............................................... 568
             a.  Injury to Business or Property ..................... 569
                 (1)  Plaintiffs' Business and Property Losses ...... 569
                 (2)  "Pass-Through" ................................ 569
                 (3)  Purely Economic vs. Personal Injury Claims .... 570
             b.  Proximate Cause .................................... 573
                 (1)  Holmes Standard ............................... 573
                      (a)  Ascertainable damages .................... 575
                      (b)  Apportioning Damages ..................... 576
                      (c)  Sufficient deterrence .................... 576
                 (2)  Second Circuit Cases .......................... 577
                 (3)  "Rule" of Remoteness .......................... 579
         3.  Subrogation ............................................ 585
      B.  ANTITRUST ................................................. 588
      C.  STATE LAW ................................................. 588
      D.  INDISPENSABLE PARTIES AND PLEADING FRAUD .................. 588
IV.   CONCLUSION .................................................... 589

I. INTRODUCTION

There is now presented another battle in the modern tobacco litigation war. The case pits major portions of the health care industry against the leading cigarette manufacturers.

This memorandum deals primarily with defendants' motion to dismiss on the pleadings. The motion is denied.

Because of its complexity, the litigation will be limited and closely supervised by the court pursuant to Rule 16 and by analogy to Rule 23. Subject to motions and a full opportunity to be heard, the case is scheduled for trial in January of 2000 solely on the theory that defendants violated the Racketeer Influenced and Corrupt Organizations Act (RICO). In view of the sums sought, and the treble recoveries and legal fees and costs recoverable by a successful plaintiff in a RICO suit, the stakes are substantial.

Defendants are the major tobacco manufacturers and related entities. They have moved on the pleadings to dismiss various claims in the complaint for failure to state a claim (Fed.R.Civ. P. 12(b)(6)), failure to join an indispensable party (Fed.R.Civ.P.12(b)(7),19), and failure to plead fraud with particularity (Fed.R.Civ.P.9).

For purposes of this motion the propositions of fact in plaintiffs' pleadings must be assumed to be true. Nevertheless, in view of what medical professionals have long known about the addictive and deleterious effects of tobacco, some skepticism about the accuracy of the allegations is in order. Resolution on the facts can only take place after discovery, which will be expedited by the magistrate judge.

II. COMPLAINT

A. RICO

The first two counts in the complaint purport to state a cause of action under the federal RICO statute. Count one alleges that ten of the defendants conducted and conspired to conduct a pattern of racketeering activity through enterprises engaged in interstate commerce. See 18 U.S.C. § 1962(c) and 1962(d).

Count two alleges that all of the defendants invested and conspired to invest racketeering proceeds in the acquisition, establishment, and operation of enterprises engaged in interstate commerce. See 18 U.S.C. § 1962(a) and 1962(d).

According to the complaint, the defendants' pattern of racketeering dates back to 1953. Specifically, the plaintiffs trace inception to a meeting on December 15, 1953 at the Plaza Hotel in New York City. There R.J. Reynolds, Philip Morris, Lorillard, Brown & Williamson, U.S. Tobacco, Hill and Knowlton and others conspired to conduct a campaign of misinformation to deceive the American public concerning the health consequences and addictive qualities of smoking and tobacco use.

To accomplish this program of misinformation, it is alleged, the defendants established, funded, and directed three entities — The Council for Tobacco Research, the Tobacco Institute, and the Smokeless Tobacco Research Council, Inc. Through them the defendants allegedly conducted a pattern of racketeering which induced the American public, national, state and local governments, and vital segments of the country's health care system, including the plaintiffs, to underestimate the dangers of tobacco use and as a result to suffer vast financial harm.

The defendants conducted their misinformation campaign, it is alleged, through a pattern of racketeering, including acts of mail and wire fraud (18 U.S.C. § 1341, 1343), threatening and intimidating witnesses (18 U.S.C. § 1512, 1513), and interstate and foreign travel in aid of racketeering (18 U.S.C. § 1952).

By far the most extensive allegations of racketeering involve mail and wire fraud. The plaintiffs summarize these allegations as follows:

  Those schemes have involved suppression of
  information regarding the health consequences
  associated with smoking, as well as fraudulent
  misrepresentations and omissions reasonably
  calculated to deceive persons of ordinary prudence
  and comprehension. Defendants' misrepresentations
  and fraudulent concealment of material facts,
  directly or by implication, include but are not
  limited to the following: misrepresentations and
  fraudulent concealment of the addictive nature of
  nicotine and the adverse health consequences of
  tobacco products; misrepresentations that such
  health effects of addictiveness were unknown or
  unproven; misrepresentations about Defendants'
  ability to manipulate and about

  the manipulation of nicotine levels and the
  addictive qualities of cigarettes;
  misrepresentations that they would provide the
  public and governmental authorities with
  objective, scientific information regarding all
  phases of smoking and health; and fraudulent
  concealment of certain aspects of smoking and
  health, including the availability of safer
  cigarettes and less addictive cigarettes.

The result of this fraud upon the American public, the plaintiffs allege, has been enormous profits for the defendants and huge losses to the plaintiffs. According to the second count of the complaint, the defendants have utilized these racketeering profits to acquire interests in and establish or operate their own businesses and other enterprises.

B. FEDERAL ANTITRUST

Counts three and four of the complaint allege violations of federal antitrust law. Plaintiffs contend that the defendants have conspired to restrain trade by eliminating competition in the market for "less harmful" tobacco products. According to the complaint:

  Defendants have conspired: (1) to suppress
  innovation and competition in product quality by
  agreeing not to engage in research, development,
  manufacture and marketing of less harmful
  cigarettes and other nicotine products; (2) to
  suppress output in a market, and to engage in
  concerted refusal to deal, by agreeing to keep at
  zero the output of less harmful cigarettes and
  other nicotine products; and (3) to suppress
  competition in marketing by agreeing not to take
  business from one another by making claims as to
  the relative safety of particular brands, whether
  or not such claims would have been truthful.

As a direct result of this conspiracy, the plaintiffs allege, the public has been deprived of less harmful tobacco products; availability would have greatly reduced the health care costs associated with smoking. Plaintiffs allege that these actions by the defendants violated section one of the Sherman Act and the Clayton Antitrust Act and gave them standing to sue under those acts. 15 U.S.C. § 1, 15.

C. STATE LAW CLAIMS

State law based claims are also included. In counts five through nine plaintiffs allege common law actions of fraudulent misrepresentation, fraudulent concealment, breach of special duty, unjust enrichment, and conspiracy. In counts ten through fifty three, individual plaintiffs allege violations of state statutory law. Typical among these claims are allegations of unfair competition, false advertising, restraint of trade, consumer fraud, false advertising, and state antitrust and RICO.

III. FACTS AND LAW

A. RICO

According to the complaint the plaintiffs have sustained substantial economic injury as a result of the defendants' campaign of deceit concerning the addictive characteristics and health hazards of tobacco products. They allege that the fraudulent conduct amounts to a violation of RICO. 18 U.S.C. § 1962(a), (c) and (d).

1. Racketeering Enterprise Affecting Interstate Commerce

Section 1962(c) makes it illegal to conduct the affairs of an "enterprise" through a pattern of racketeering. It provides:

  It shall be unlawful for any person employed by or
  associated with any enterprise engaged in, or the
  activities of which affect, interstate or foreign
  commerce, to conduct or participate, directly or
  indirectly, in the conduct of such enterprise's
  affairs through a pattern of racketeering activity

The defendants in this case allegedly conducted a decades-long scheme to deceive the American public concerning the health hazards and addictive characteristics of their tobacco products. In conducting this campaign of fraud the defendants made extensive use of mail and wire services. Such actions qualify as "racketeering" as defined in the statute. The statute reads:

  "racketeering activity" means . . . (B) any act
  which is indictable under any of the following
  provisions of title 18, United States Code: . . .
  section 1341 (relating to mail fraud), section
  1343 (relating to wire fraud) . . . section 1512
  (relating to tampering with a witness, victim, or
  an informant), section 1513 (relating to
  retaliating against a witness, victim, or an
  informant) . . . .

18 U.S.C. § 1961(1).

Section 1961(4) broadly defines "enterprise" as including:

  any individual, partnership, corporation,
  association, or other legal entity . . . or group
  of individuals associated in fact although not a
  legal entity.

18 U.S.C. § 1961(4).

Two different types of enterprise are alleged. First, plaintiffs claim that the Tobacco Institute, the Council for Tobacco Research, and the Smokeless Tobacco Research Council, Inc. each individually constitute an enterprise. Each of these organizations are New York non-profit corporations. Since enterprises for RICO purposes include "every kind of legal entity," these non-profit corporations satisfy the § 1961(4) definition. See United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir. 1989).

Second, plaintiffs allege that all three organizations collectively constitute an enterprise (the "Public Relations Enterprise"). Since the "Public Relations Enterprise" is not alleged to be a legal entity in itself, the question is whether it is an "association in fact" that would constitute an enterprise for purposes of RICO. See United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981) (association in fact enterprise is entity or group of persons "associated together for a common purpose of engaging in a course of conduct"). An "association in fact" enterprise must have an ongoing organization, formal or informal, and must function as a continuing unit. Id.

Distinct entities can jointly function as an enterprise for RICO purposes when they are "connected by a defendant's participation in them through a pattern of racketeering activity." United States v. Stolfi, 889 F.2d 378, 380 (2d Cir. 1989); see also United States v. Coonan, 938 F.2d 1553, 1559 (2d Cir. 1991) ("Common sense suggests that the existence of an association-in-fact is oftentimes more readily proven by `what it does, rather than by abstract analysis of its structure.'" (quoting United States v. Bagaric, 706 F.2d 42, 56 (2d Cir. 1983))).

Plaintiffs have more than adequately alleged the on-going nature, structure, and unity of purpose required by Turkette in their description of the "Public Relations Enterprise." See, e.g., Compl. ¶ 106 (quoting 1953 memorandum of defendants stating, "the [defendants] do not favor the incorporation of a formal association . . . . Instead, they prefer strongly the organization of an informal committee which will be specifically charged with the public relations function").

The enterprises described in the complaint would have a substantial effect on interstate commerce. See 18 U.S.C. § 1962(a).

A RICO violation requires proof of a "pattern of racketeering activity," through "at least two acts of racketeering activity . . . the last of which occurred within ten years." 18 U.S.C. § 1961(5). Many such acts up to the present are alleged.

The Act also makes it illegal to receive income from or invest the proceeds of a racketeering activity. Section 1962(a) provides:

  It shall be unlawful for any person who has
  received any income derived, directly or
  indirectly, from a pattern of racketeering
  activity . . . to use or invest, directly or
  indirectly, any part of such income, or the
  proceeds of such income, in acquisition of any
  interest in, or the establishment or operation of,
  any enterprise which is engaged in, or the
  activities of which affect, interstate or foreign
  commerce.

If true, the allegations in the second count of the complaint demonstrate that the defendants have reaped profits from the charged racketeering conduct and have channeled these profits into a number of "enterprises" affecting commerce.

Section 1962(d) of title 18 makes it unlawful for anyone to conspire to violate subsections (a) or (c) of section 1962. The allegations support the charge that the defendants have conspired to racketeer.

There is no deficiency in the first two counts of the complaint with respect to the relevant provisions of the RICO statute.

2. Standing

Civil remedies for RICO violations are provided by section 1964 of title 18. The crux of the defendants' motion to dismiss the RICO claims lies in their challenge to the standing of plaintiffs to bring this civil suit. RICO grants standing to those injured in their "business or property" as a result of racketeering. It provides:

  Any person injured in his business or property by
  reason of a violation of section 1962 of this
  chapter 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).

The expansive terms of 1964(c) are designed to afford broad standing to RICO plaintiffs. By providing a cause of action to "any person injured" by reason of the law's violation, the statute avoids undue limitations on the classes of plaintiffs eligible to enforce the Act. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 495, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) ("[W]e perceive no distinct `racketeering injury' requirement . . . . If the defendant engages in a pattern of racketeering activity in a manner forbidden by these provisions, and the racketeering activities injure the plaintiff in his business or property, the plaintiff has a claim under § 1964(c)."); cf. Mandeville Island Farms v. American Crystal Sugar Co., 334 U.S. 219, 236, 68 S.Ct. 996, 92 L.Ed. 1328 (1948) (the analogous "any person" provision of the Clayton Act means that, "[t]he statute does not confine its protection to consumers, or to purchasers, or to competitors, or to sellers. . . . The Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated."); Blue Shield of Virginia v. McCready, 457 U.S. 465, 472, 102 S.Ct. 2540, 73 L.Ed.2d 149 (1982) ("Consistent with the congressional purpose, we have refused to engraft artificial limitations on the [standing provision of the Clayton Act].").

Affording broad standing to RICO plaintiffs is consistent with the statute's purpose. It was passed in order to address what was found to be a pervasive and serious problem in our society, namely the proliferation of racketeering within the legitimate business sector.

The criminal penalties for violations of RICO are stiff. Yet civil provisions of RICO recognize that criminal prosecutions alone are inadequate to deal with racketeering. The government is not in a position to identify all significant transgressions. Providing members of the public with a civil cause of action against racketeers allows private parties to effectuate the law's policies and increases the likelihood that instances of racketeering will be punished. Treble damage and other provisions enhance the likelihood that private parties will be induced to assume the role of "private attorneys general," vindicating not only their own interests, but those of society as well. See, e.g., Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 151, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987) ("Both statutes [RICO and Clayton] bring to bear the pressure of `private attorneys general' on a serious national problem for which public prosecutorial resources are deemed inadequate; the mechanism chosen to reach the objective in both the Clayton Act and RICO is the carrot of treble damages.").

The broad scope of the statute's standing provision is not, however, boundless. Only those plaintiffs who have been injured in their "business or property" may sue. Personal injuries are not cognizable, regardless of whether they were caused by racketeering. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 509, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) (Marshall, J., dissenting) (RICO's exclusion of personal injury claims); cf. Reiter v. Sonotone Corp., 442 U.S. 330, 339, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979) (phrase "business or property" in Clayton Act excludes personal injuries). The exclusion of personal injury claims is consistent with the statute's primary aim of protecting legitimate businesses from the influences of racketeering.

A second limitation exists by virtue of the phrase, "injured . . . by reason of a violation of section 1962." "By reason of" has been interpreted by courts to require something more than "but for" causation.

In the leading case, Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992), the Supreme Court interpreted RICO's "injured . . . by reason of language to require a showing of "proximate causation." See also Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23 (2d Cir. 1990) ("[T]he RICO pattern or acts must proximately cause plaintiff's injury.").

a. Injury to Business or Property

(1) Plaintiffs' Business and Property Losses

Plaintiffs have alleged substantial injuries to their business and property. According to the complaint, the defendants' racketeering has caused the plaintiffs to expend billions of dollars in otherwise avoidable medical expenditures.

Such economic losses would constitute an injury to both the plaintiffs' business and property. Money constitutes "property" within the meaning of RICO. Construing the analogous wording of the standing provision of the Clayton Act, the Supreme Court found in Reiter v. Sonotone Corp., 442 U.S. 330, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979), that a consumer stated a valid cause of action under federal antitrust law when she paid higher prices for products than she otherwise would have were it not for the price-fixing schemes of the defendants. See id. at 339, 99 S.Ct. 2326 ("When a commercial enterprise suffers a loss of money it suffers an injury in both its `business' and its `property.'"); see also Town of West Hartford v. Operation Rescue, 915 F.2d 92, 103 (2d Cir. 1990) ("[C]ases interpreting the meaning of `business or property' in the Clayton Act context have applicability in the RICO area, as well.").

Plaintiffs also have standing to sue under RICO by virtue of the injury they have sustained to their business. See id.; Terminate Control Corp. v. Horowitz, 28 F.3d 1335, 1343 (2d Cir. 1994) ("[C]ivil remedy provided in § 1964(c) disjunctively entitles `[a]ny person injured in his business or property by reason of a [RICO] violation . . .' to recover treble damages." (brackets in original)).

The interpretation of the term "business" in the RICO statute has received sparse attention from the courts. This may be because the Supreme Court's expansive definition of the term "property" in this context has greatly reduced the need for plaintiffs to allege, or for the courts to address, a claim of injury to business. In the antitrust context, the Supreme Court has interpreted the term to refer to "commercial interests ...


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