Romero v. Philip Morris, Inc.

• Decision Date: 18 November 2008
• Docket Number: No. 26,993.,26,993.
• Parties: Beatrice C. ROMERO, and Michael Ferree, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. PHILIP MORRIS, INC.; R.J. Reynolds Tobacco Co.; Brown & Williamson Tobacco Corp.; Lorillard Tobacco Co.; Liggett Group, Inc.; and Brooke Group, Ltd., Defendants-Appellees.
• Court: Court of Appeals of New Mexico

203 P.3d 873

2009 NMCA 022

Beatrice C. ROMERO, and Michael Ferree, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. PHILIP MORRIS, INC.; R.J. Reynolds Tobacco Co.; Brown & Williamson Tobacco Corp.; Lorillard Tobacco Co.; Liggett Group, Inc.; and Brooke Group, Ltd., Defendants-Appellees.

No. 26,993.

Court of Appeals of New Mexico.

November 18, 2008.

Certiorari Granted, No. 31,433, February 27, 2009.

Shane C. Youtz, Youtz & Valdez, P.C., Albuquerque, NM, Daniel Cohen, Jonathan W. Cuneo, Cuneo Gilbert & Laduca, L.L.P., Megan Jones, Michael D. Hausfeld, Paul Gallagher, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Washington, DC, Gordon Ball, Law Offices of Gordon Ball, Knoxville, TN, for Appellants.

Sarah M. Singleton, Andrew S. Montgomery, Kenneth Chernof, Montgomery & Andrews, P.A., Santa Fe, NM, Andrew G. Schultz, Rodey, Dickason, Sloan, Akin & Robb, P.A., Patricia G. Williams, Wiggins, Williams & Wiggins, P.C., Eric R. Burris, Amy J. Diaz, Brownstein, Hyatt & Farber, P.C., Albuquerque, NM, Colin R. Kass, Kirkland & Ellis L.L.P., Holly E. Loiseau, Cleveland Lawrence III, Peter D. Isakoff, Weil, Gotshal & Manges, L.L.P., Edwin L. Fountain, William V. O'Reilly, Thomas F. Cullen, Jr., Washington, DC, Irving Scher, Weil, Gotshal & Manges, L.L.P., David Boies, Jack O. Stern, Amy J. Mauser, Boies, Schiller & Flexner, L.L.P., Leonard A. Fiewus, Julie R. Fischer, Kasowitz, Benson, Torres & Friedman, L.L.P., New York, NY, Stephen R. Patton, Andrew R. McGaan, Barack S. Echols, Kirkland & Ellis, L.L.P., Chicago, IL, James F. Speyer, Arnold & Porter, L.L.P., Los Angeles, CA, for Appellees.

OPINION

ALARID, Judge.

{1} This is an appeal from the district court's grant of summary judgment in favor of Defendants on Plaintiffs' claim that Defendants engaged in an unlawful conspiracy to fix the prices of cigarettes sold in New Mexico. We affirm the summary judgment in favor of Defendants Liggett and Lorillard; we reverse the summary judgment in favor of Defendants Philip Morris, Brown & Williamson, and R.J. Reynolds.

BACKGROUND

{2} Plaintiffs-Appellants are a statewide class of retail customers who purchased cigarettes manufactured by Defendants during an approximately seven-year period commencing in 1993. Defendants-Appellees are five leading domestic manufacturers of cigarettes: Philip Morris, Incorporated (Philip Morris), R.J. Reynolds Tobacco Company (R.J. Reynolds), Brown & Williamson Tobacco Corporation (Brown & Williamson), Lorillard Tobacco Company (Lorillard), and Liggett Group, Incorporated (Liggett).

{3} The American tobacco industry is a textbook example of an oligopoly: an industry in which production is concentrated in a handful of manufacturers. See generally Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 213-15, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993); Walter Adams & James W. Brock, Tobacco: Predation and Persistent Market Power, in Market Dominance: How Firms Gain, Hold, or Lose It and the Impact on Economic Performance 39 (David I. Rosenbaum ed. (1998)) (hereinafter Market Dominance). "[T]he cigarette industry is one of the most concentrated industries in the United States and has been so throughout the postwar [World War II] period." Walter Adams & James W. Brock, The Structure of American Industry 52 (11th ed.2005) (hereinafter Structure of American Industry).

{4} There were two major outbreaks of price competition within the domestic tobacco industry during the 20th century. The first outbreak occurred during the Great Depression of the 1930s, with the introduction of cheaply priced "ten-cent brands." Market Dominance at 44. "To contain this outbreak of competition, the oligopoly responded with a lethal price-cost predation squeeze." Id. The industry's response was both effective in suppressing the competition from ten-cent brands—and illegal. The United States brought criminal charges against three of the major domestic cigarette manufacturers of the time, charging that the defendants restrained and monopolized the cigarette industry in violation of the Sherman Antitrust Act. Id. at 45. The three defendants were convicted by a jury, and the convictions ultimately were upheld by the Supreme Court. Am. Tobacco Co. v. United States, 328 U.S. 781, 66 S.Ct. 1125, 90 L.Ed. 1575 (1946).

{5} The second major outbreak of price competition occurred in 1980, when Liggett became the first major cigarette manufacturer to promote generic cigarettes. Liggett Group, Inc. v. Brown & Williamson Tobacco Corp., 748 F.Supp. 344, 349 (M.D.N.C.1990). At one time Liggett had been one of the larger manufacturers of branded cigarettes,¹ enjoying market shares of over 20 percent; however, by 1980, Liggett's market share had declined to slightly over 2 percent, and Liggett was on the verge of going out of business. Id. "Out of desperation" Liggett turned to a strategy of promoting generic cigarettes. Id. In contrast to branded cigarettes, which have distinctive packaging, are advertised heavily, and are sold at full price, id. n. 8, Liggett's generic cigarettes were sold in plain packages mimicking the packaging of generic groceries, id. n. 9. The principal competitive advantage of generic cigarettes was their lower price. Brooke Group, 509 U.S. at 214, 113 S.Ct. 2578. Liggett's innovation was a success, and by 1984, generic cigarettes accounted for about 4 percent of domestic cigarettes, with Liggett's generic cigarettes accounting for 97 percent of the generic segment. Liggett Group, 748 F.Supp. at 349.

{6} Brown & Williamson, recognizing that it was losing a proportionally greater market share to Liggett than were other manufacturers, decided to wrest leadership of the generic segment from Liggett. Brooke Group, 509 U.S. at 214-15, 113 S.Ct. 2578. Beginning in late May 1984 and continuing until the end of 1985, Liggett found itself embroiled in a fierce price war in the wholesale cigarette market initiated by Brown & Williamson. Liggett Group, 748 F.Supp. at 349-50 (describing "rebate war" between Liggett and Brown & Williamson). In addition to vigorously competing in the marketplace, Liggett responded by suing Brown & Williamson in federal court, alleging, inter alia, that Brown & Williamson had engaged in unlawful predatory pricing by reducing the prices for its generic cigarettes below its average variable costs in order to pressure Liggett to raise its list prices for generic cigarettes. Brooke Group, 509 U.S. at 217, 113 S.Ct. 2578. Liggett claimed that "[t]he resulting reduction in the list price gap . . . would restrain the growth of the economy segment and preserve Brown & Williamson's supracompetitive profits on its branded cigarettes." Id.

{7} After a lengthy trial, a jury found in Liggett's favor and awarded Liggett $49.6 million in actual damages, which the trial court trebled, resulting in an award of nearly $150 million. Liggett Group, 748 F.Supp. at 348. Brown & Williamson filed various post-trial motions, including a motion for judgment notwithstanding the verdict pursuant to Rule 50(b) of the Federal Rules of Civil Procedure. Id. Liggett's case ultimately foundered due to key failures of proof. Liggett's expert had assumed that there was "an alignment of interest" among cigarette manufacturers in protecting the profits generated by premium cigarettes that would lead Brown & Williamson's competitors to join with Brown & Williamson in raising the prices of generic cigarettes so as to narrow the price gap between generic and premium cigarettes (thereby reducing the competitive advantage enjoyed by generic cigarettes and slowing the growth of the generic segment). Id. at 357. The trial court concluded that "[n]o substantial record evidence supports [Liggett's expert's] alignment of interest theory." Id. The trial court emphasized evidence establishing that very early in the development of generic cigarettes, R.J. Reynolds had entered and vigorously promoted the generic segment, that both R.J. Reynolds and Liggett had resisted Brown & Williamson's attempt to raise the prices of generic cigarettes, and that, by the time of trial, five of the six major manufacturers were selling some type of generic cigarettes. Id.

{8} The trial court entered judgment in Brown & Williamson's favor. Id. at 366. Liggett appealed. The Court of Appeals affirmed the trial court, Liggett Group, Inc. v. Brown & Williamson Tobacco Corp., 964 F.2d 335 (4th Cir.1992), and the United States Supreme Court affirmed the Court of Appeals, Brooke Group, 509 U.S. at 242, 113 S.Ct. 2578. Overwhelmed by its rivals and denied protection under federal law, Liggett lost and never recovered leadership of the generic segment. Market Dominance at 48. During the period that the Liggett-Brown & Williamson predatory-pricing litigation was proceeding in the federal court system, the market share of generic and other discount cigarettes² continued to grow. The trend favoring the discount segment cigarettes continued into the next decade, so that by 1993 discount and deep discount cigarettes had captured 40 percent of the United States cigarette market. Williamson Oil Co. v. Philip Morris USA, 346 F.3d 1287, 1292 (11th Cir.2003). However, rather than growing the overall market for cigarettes, the growth of the discount segment depended upon cannibalizing sales of premium cigarettes. Brooke Group, 509 U.S. at 214, 113 S.Ct. 2578. Accordingly, the growth of the discount segment was "extremely undesirable from the perspective of premium-intensive manufacturers like [Philip Morris] and Lorillard." Williamson Oil Co., 346 F.3d at 1292. In an internal document, Philip Morris estimated that each percentage point of market share claimed by the discount segment cost the cigarette industry $150 million per month in income. The industry faced what Philip Morris later described as a "cycle of despair":

Ironically, each manufacturer worked independently to create a self-reinforcing "cycle of despair." . ....