Blue Cross v. Philip Morris

• Decision Date: 19 October 2004
• Citation: 785 N.Y.S.2d 399,3 N.Y.3d 200,818 N.E.2d 1140
• Parties: BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., Now Known as HORIZON HEALTHCARE SERVICES, INC., Doing Business as BLUE CROSS BLUE SHIELD OF NEW JERSEY and Others, et al., Respondents, v. PHILIP MORRIS USA INCORPORATED et al., Appellants, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

3 N.Y.3d 200

818 N.E.2d 1140

785 N.Y.S.2d 399

BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., Now Known as HORIZON HEALTHCARE SERVICES, INC., Doing Business as BLUE CROSS BLUE SHIELD OF NEW JERSEY and Others, et al., Respondents, v. PHILIP MORRIS USA INCORPORATED et al., Appellants, et al., Defendants.

Court of Appeals of the State of New York.

Argued September 7, 2004.

Decided October 19, 2004.

Arnold & Porter, Washington, D.C. (Murray R. Garnick and David S. Eggert of counsel), for appellants.

Dewey Ballantine LLP, New York City (Paul J. Bschorr, Joseph Angland, Michael C. Hefter, Robert J. Morrow and Alexander M. Kayne of counsel), for respondent.

Herzfeld & Rubin, P.C., New York City (Michael Hoenig, Aaron D. Twerski and Miriam Skolnik of counsel), and Hugh F. Young, Jr., Reston, Virginia, for Product Liability Advisory Council, Inc., amicus curiae.

Eliot Spitzer, Attorney General, New York City (Caitlin J. Halligan, Thomas G. Conway, Robert H. Easton and Jane M. Azia of counsel), amicus curiae.

Kaye Scholer LLP, New York City (David Klingsberg, Steven Glickstein and Maris Veidemanis of counsel), for Pharmaceutical Research and Manufacturers of America, amicus curiae.

Chief Judge KAYE and Judges G.B. SMITH, ROSENBLATT, GRAFFEO, READ and R.S. SMITH concur.

OPINION OF THE COURT

CIPARICK, J.

Plaintiff Empire Blue Cross and Blue Shield is one of several Blue Cross plans to commence this action against defendant tobacco companies alleging that defendants engaged in deceptive practices designed to mislead the public regarding the harmful and addictive properties of cigarette smoking.¹

The complaint, lodged in the United States District Court for the Eastern District of New York, raised various federal and state claims. By the time of trial, the remaining claims consisted of direct and subrogated actions for violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) (18 USC § 1962), direct and subrogated actions for engaging in deceptive business practices in violation of New York General Business Law § 349, and a subrogation claim for common-law fraud.

The jury determined that Empire had proven its section 349 claims against defendant tobacco companies (with the exception of defendant British American Tobacco Co., Ltd.), and awarded Empire $17,782,702 on its direct action and $11,829,784 on its subrogated action.² After the verdict, defendants moved for judgment as a matter of law (see Fed Rules Civ Pro rule 50 [b]). The District Court denied the motion, finding that Empire's injury was not too remote to allow recovery under section 349 and that victims of indirect injuries could recover under the statute (see Blue Cross & Blue Shield of N.J., Inc. v Philip Morris, Inc., 178 F Supp 2d 198, 230-232 [ED NY 2001]).

The United States Court of Appeals for the Second Circuit reversed the portion of the jury award on Empire's section 349 subrogation claim, because Empire failed to identify individually injured plan members for the purpose of allowing defendants to investigate and defend the action (see Blue Cross & Blue Shield of N.J., Inc. v Philip Morris USA Inc., 344 F3d 211, 217-218 [2003]). The court further found that Empire's standing to bring an action under section 349 was not affected by the fact that it is not a consumer, and that Empire's aggregate proof on the issues of causation and damages was legally sufficient — unless individualized proof is required by section 349. The Second Circuit found, however, that there were unresolved issues of New York law that would be determinative of the present appeal, and certified the following questions for this Court's review:

"1. Are claims by a third party payer of health care costs seeking to recover costs of services provided to subscribers as a result of those subscribers being harmed by a defendant's or defendants' violation of N.Y. Gen. Bus. Law § 349 too remote to permit suit under that statute?

"2. If such an action is not too remote to permit suit, is individualized proof of harm to subscribers required when a third party payer of health care costs seeks to recover costs of services provided to subscribers as a result of those subscribers being harmed by a defendant's or defendants' violation of N.Y. Gen. Bus. Law § 349?" (344 F3d at 229.)

We accepted certification (100 NY2d 636 [2003]) and answer the first question in the affirmative, rendering the second question academic.

Discussion

General Business Law § 349 is a consumer protection statute designed to protect against "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state" (General Business Law § 349 [a]). Though originally intended to be enforced by the Attorney General (see General Business Law § 349 [b]), the statute was amended in 1980 to include a private right of action (L 1980, ch 346). The amendment was intended to afford additional protection for consumers, allowing them to bring suit on their own behalf without relying on the Attorney General for enforcement (see Assembly Mem in Support, Bill Jacket, L 1980, ch 346; see also Mem of Atty Gen, Bill Jacket, L 1980, ch 346 [suggesting that the Attorney General must focus on those cases that have a widespread effect and that the measure would allow individuals to prosecute remaining actions]). Thus, "any person who has been injured by reason of any violation of this section may bring an action in his own name to enjoin such unlawful act or practice, an action to recover his actual damages or fifty dollars, whichever is greater, or both such actions" (General Business Law § 349 [h]).

As we have previously noted, the scope of the statute "is intentionally broad, applying `to virtually all economic activity'" (Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 324 [2002], quoting Karlin v IVF Am., 93 NY2d 282, 290 [1999]). In order to make out a valid section 349 claim, a plaintiff must allege both a deceptive act or practice directed toward consumers and that such act or practice resulted in actual injury to a plaintiff (see Small v Lorillard Tobacco Co., Inc., 94 NY2d 43, 55-56 [1999]; Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, 85 NY2d 20, 25-26 [1995]). The deceptive act or practice alleged here is that defendants, knowing that smoking causes cancer, misrepresented the dangers of smoking and engaged in a campaign to encourage consumers to smoke. Plaintiff further alleges that, as a consequence, medical costs increased, resulting in actual damages to plaintiff insurers who bore such costs.

Under common law, an insurer or other third-party payer of medical expenditures may not recover derivatively for injuries suffered by its insured. Rather, the insurer's sole remedy is in equitable subrogation. "Subrogation is the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible for the loss" (Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 581 [1995] [citations omitted]; see also Allstate Ins. Co. v Stein, 1 N.Y.3d 416 [2004]; Great Am. Ins. Co. v United States, 575 F2d 1031, 1033 [2d Cir 1978] ["There is not a single reported case in American jurisprudence . . . which holds that upon an insurance carrier's payment to its insured, the insurer becomes vested with a claim arising out of an implied contract of indemnity with the tortfeasor who caused the damage necessitating payment by the carrier to the insured. On the contrary, the authorities and the cases unanimously hold that the insurer's recovery is premised exclusively upon subrogation"]).

Nevertheless, plaintiff argues that, in enacting General Business Law § 349, the Legislature intended to abrogate the common-law rule and permit recovery for derivative injuries. But neither the text of the statute nor the legislative history reflect an intent by the Legislature to authorize insurers to bring their own direct (nonsubrogated) actions based upon injuries to their insureds. "It is axiomatic concerning legislative enactments in derogation of common law, and especially those creating liability where none previously existed, that they are deemed to abrogate the common law only to the extent required by the clear import of the statutory language" (Morris v Snappy Car Rental, Inc., 84 NY2d 21, 28 [1994] [citation omitted]).

To be sure, the language of the statute permits recovery by any person injured "by reason of" a deceptive business practice (§ 349 [h]). But we will not presume an intent to include recovery for derivative injuries within the scope of the statute in the absence of a clear indication of such intent from the Legislature. Indeed, we have warned against "the potential for a tidal wave of litigation against businesses that was not intended by the Legislature" (Oswego, 85 NY2d at 26). Moreover, allowing plaintiff's claim would effectively eliminate subrogation actions under section 349 — a result which nothing in the legislative history shows was ever intended.

In holding that third-party payers cannot recover derivatively under the General Business Law, we recognize that section 349 is a broad, remedial statute and that the provision creating a private right of action employs expansive language. We are also mindful that the Attorney General asks us not to adopt an inflexible rule of proximate causation that would limit the tools and remedies available to protect consumers or undermine the State's power to redress deceptive consumer practices. In concluding that derivative actions are barred, we do not agree with plaintiff that precluding recovery here will necessarily limit the scope of section 349 to only consumers, in contravention of the statute's plain language permitting recovery by any person injured "by reason of" any violation (see e.g. Securitron Magnalock Corp. v Schnabolk, 65 F3d 256, 264 [2d Cir 1995], cert denied 516 US...