The opinion of the court was delivered by: Weinstein, Senior District Judge.
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
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.
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
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
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.
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
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.
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
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) . . . .
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
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.
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
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)
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
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.
There is no deficiency in the first two counts of the
complaint with respect to the relevant provisions of the RICO
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.
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
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
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
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
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 ...