Blue Cross & Blue Shield of N.J. v. Philip Morris

Decision Date19 September 2000
Docket NumberNo. 98 CV 3287.,98 CV 3287.
Citation113 F.Supp.2d 345
PartiesBLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., et al., Plaintiffs, v. PHILIP MORRIS, INCORPORATED, et al., Defendants.
CourtU.S. District Court — Eastern District of New York

Dewey Ballantine LLP, New York by Paul J. Bschorr, Vincent R. FitzPatrick, Jr., Jack E. Pace III, Paul B. Carberry, Robert J. Morrow, Dewey Ballantine LLP, Washington, DC, by Martha J. Talley, for Plaintiffs Blue Cross, et al.

Arnold & Porter, Washington, DC by Murray R. Garnick, Sedgwick, Detert, Moran & Arnold, San Francisco, CA, by Kevin J. Dunne, Sedgwick, Detert, Moran & Arnold, New York City by James T. Conlon, for Defendant Philip Morris, Incorporated.

Sedgwick, Detert, Moran & Arnold, New York City by David M. Covey, Kirland & Ellis, Washington, DC by Kenneth N. Bass, for Defendant Brown & Williamson Tobacco Corporation.

Greenberg Traurig, LLP, New York City by Alan Mansfield, Shook, Hardy & Bacon, LLP, Kansas City, MO by Gary R. Long, for Defendants Lorillard Tobacco Company, Lorillard, Inc.

Debevoise & Plimpton, New York City by Steven Klugman, for Defendant Council for Tobacco Research, U.S.A., Inc.

Jacob, Medinger & Finnegan, LLP, New York, By Barry S. Schaevitz, for Defendant Smokeless Tobacco Council, Inc.

Womble, Carlyle, Sandridge, & Rice, PLLC, Atlanta, GA by R. Dal Burton, for Defendants R.J. Reynolds Tobacco Co., and RJR Nabisco, Inc.

Chadbourne & Parke LLP, New York City by Thomas J. McCormack, for Defendant British American Tobacco (Investments) Limited (formerly known as British-American Tobacco Company Limited).

Simpson Thacher & Bartlett, New York City by Joseph McLaughlin, for Defendant BAT Industries P.L.C.

Davis & Gilbert, LLP, New York City by Bruce M. Ginsberg, for Defendant Hill & Knowlton, Inc.

Kasowitz, Benson, Torres & Friedman LLP, New York City by Michael M. Fay, for Defendants Liggest Group Inc., Liggest & Myers, Inc., and Brooke Group Ltd.

Skadden, Arps, Slate, Meagher & Flom, LLP, New York City by Peter J. McKenna, for Defendant United States Tobacco Company.

Seward & Kissel, New York City by Anthony R. Mansfield, for Defendant The Tobacco Institute, Inc.

MEMORANDUM & ORDER

WEINSTEIN, Senior District Judge.

                                           TABLE OF CONTENTS
                  I  INTRODUCTION .................................................. 352
                 II  FACTS ......................................................... 354
                     A. Blues ...................................................... 354
                     B. Tobacco .................................................... 355
                        1. Health Effects .......................................... 355
                        2. Industry Conspiracy ..................................... 356
                           a. Formation and Execution .............................. 356
                           b. Knowledge ............................................ 358
                           c. Coverup .............................................. 359
                           d. Other Deceptive Conduct .............................. 360
                III  SUMMARY JUDGMENT STANDARD ..................................... 363
                 IV  RICO .......................................................... 364
                     A. Racketeering ............................................... 364
                        1. Scheme Components ....................................... 364
                        2. Application to B.A.T. ................................... 367
                     B. Section 1962(c) ............................................ 368
                        1. Direct Claims ........................................... 368
                           a. Causation-In-Fact: Reliance .......................... 369
                           b. Proximate Causation .................................. 371
                        2. Subrogated Claims ....................................... 372
                           a. Constitutional Challenges ............................ 372
                               i. Due Process ...................................... 373
                              ii. Jury Right ....................................... 375
                           b. State Law Challenges ................................. 376
                                i. Federal Common Law v. New York Law .............. 376
                               ii. Treble Recovery ................................. 378
                              iii. Aggregate Adjudication .......................... 379
                               iv. N.Y. CPLR 4545(c) ............................... 380
                        3. Statute of Limitations .................................. 380
                        4. Future Damages .......................................... 382
                     C. Section 1962(a) ............................................ 383
                     D. Section 1962(d) ............................................ 384
                  V STATE FRAUD-BASED ACTIONS ...................................... 385
                 VI PREEMPTION ..................................................... 386
                VII CONCLUSION ..................................................... 388
                

The defendants have moved for summary judgment on various grounds. See Fed.R.Civ.P. 56. For the reasons indicated below, summary judgment is granted as to some causes of action and denied as to others. The action is ordered to proceed to trial.

I INTRODUCTION

Plaintiffs, various Blue Cross and Blue Shield Plans ("Blues") from around the Nation, seek recovery against the major tobacco product manufacturers and related entities ("Tobacco") for alleged misrepresentations and omissions of material facts and for similar deceptive conduct regarding the deleterious effects of tobacco use on their clients' ("Plan members") health that has resulted in increased costs for the Blues.

Three of the Blues' theories of recovery are based on alleged racketeering activity pursuant to the Federal Racketeer Influenced Corrupt Organization Act ("RICO"). See 18 U.S.C. §§ 1962, 1964. Summarily stated, these theories are:

1) Tobacco engaged in a fraudulent scheme of misinformation directed at Plan members (and the population at large) to encourage them to smoke (and not to cease smoking) and to use smokeless tobacco products, thus causing them to suffer tobacco-related injuries and illnesses that they otherwise would not have suffered, and in turn forcing the Blues to pay substantially higher amounts for treatment of these maladies than otherwise would have been required, see id. § 1962(c) ("RICO Payment Action") (This action is also pled in the alternative based upon equitable subrogation ("Subrogated RICO Payment Action"));

2) Tobacco engaged in a fraudulent scheme of misinformation directed at the Blues to cover-up, minimize, and create the appearance of an "open controversy" as to the deleterious health effects of tobacco resulting in the Blues detrimentally relying on this information in failing to institute smoking cessation programs, to adopt differential health-insurance premiums for smokers and non-smokers, and to discourage tobacco use among Plan members, see id. § 1962(c) ("RICO Smoking Reduction Action");

3) Tobacco reinvested racketeering income and proceeds from a RICO enterprise directed at the population generally and Plan members and the Blues particularly, see id. § 1962(a) ("RICO Investment Action"). The RICO enterprise sought to control and influence the information distributed to the public concerning the health effects of smoking, to suppress and conceal scientific and medical information regarding the adverse health effects of smoking and the alternatives of safer or less-addictive cigarettes, to manipulate nicotine to create and sustain user addiction, and to avoid and shift tobacco-related health care costs to others including the Blues. See Plfs' Fourth Amended Compl. ¶ 295 (hereinafter "Compl."). The funds generated were reinvested into the RICO enterprise to perpetuate the fraudulent and deceptive conduct. See Compl. ¶ 296.

A fourth theory is based on fraud under state common law. Plaintiffs contend Tobacco engaged in a fraudulent scheme with the specific intent to mislead the Blues into "not taking actions to discourage and reduce tobacco use by the [Blues] Plan[] members," see Compl. ¶¶ 332, 334; see also id. ¶ 353, resulting in an increased incidence of tobacco-related illnesses among Plan members and, in turn, substantially higher health care expenditures by the Blues ("Direct Fraud Action").

A fifth theory is based on combined principles of equitable subrogation and common-law fraud ("Subrogated Fraud Action"). See Compl. ¶¶ 335, 347; see also id. ¶ 354. Plaintiffs contend Tobacco engaged in a fraudulent scheme with the specific intent of misleading the general public, including Plan members, thereby inducing continued purchasing, use and addiction to tobacco products, "to the detriment of the [Blues] which paid for the health care and treatment of the [resulting] tobacco-related illnesses[.]" Compl. ¶¶ 335, 347.

A sixth theory is based on claims under the New York Consumer Protection Act. See N.Y.Gen.Bus.Law §§ 349 (deceptive acts and practices), 350 (false advertising). This action is advanced both as a direct action and as a subrogated action to recover tobacco-related health care outlays made by the Blues on behalf of Plan members.

Finally, plaintiffs have pled a multitude of state law claims specific to the various state Blues.

Plaintiffs' state law claims were earlier stayed. See Blue Cross & Blue Shield of N.J. v. Philip Morris, 36 F.Supp.2d 560, 588 (E.D.N.Y.1999).

As noted by this court in addressing summary judgment motions in a related tobacco case, "[t]he unique character of the massive, nationwide, longstanding, and ongoing fraudulent schemes alleged, and the enormous damages claimed to have resulted, require flexibility in approaching the novel factual and legal issues presented by this extraordinary case." Falise v. American Tobacco, 91 F.Supp.2d 525, 527 (E.D.N.Y.2000) (preliminary summary judgment order). Though the court remains skeptical of plaintiffs' ability to fully support their allegations, a sufficient showing has been...

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