Lennon v. Philip Morris Cos.

• Citation: 734 N.Y.S.2d 374,189 Misc.2d 577
• Court: United States State Supreme Court (New York)
• Decision Date: 09 October 2001
• Parties: VIRGINIA M. LENNON et al., on Behalf of Themselves and All Others Similarly Situated, Plaintiffs,<BR>v.<BR>PHILIP MORRIS COMPANIES, INC., et al., Defendants.

189 Misc.2d 577

734 N.Y.S.2d 374

VIRGINIA M. LENNON et al., on Behalf of Themselves and All Others Similarly Situated, Plaintiffs,

v.PHILIP MORRIS COMPANIES, INC., et al., Defendants.

October 9, 2001.

Boies, Schiller & Flexner L. L. P. (David Boies and Sherab Posel, Armonk; Donald Flexner and Amy Mauser, Washington, D.C.; and Jack Stern, New York City, of counsel), and Heller Ehrman White & McAuiffe, L. L. P., Washington, D.C. (Darryl Snider and Kenneth Chernof of counsel), for Philip Morris Companies, Inc., defendant.

Davis Polk & Wardwell, New York City (Vincent Chang of counsel), for R.J.R. Nabisco Holdings Corp. and another, defendants.

Jones Day Reavis & Pogue, Washington, D.C. (Thomas F. Cullen, Jr., William V. O'Reilly and Edwin L. Fountain of counsel), for R.J. Reynolds Tobacco Co. and another, defendants.

Simpson Thacher & Bartlett, New York City (Demetra Frawley of counsel), for B.A.T. Industries, PLC, defendant.

Cravath Swaine & Moore, New York City (Ronald S. Rolfe and Max R. Shulman of counsel), for British American Tobacco Co., Ltd., defendant.

Kirkland & Ellis (Colin R. Kass, Washington D.C., and Stephen R. Patton and Andrew R. McGaan, Chicago, Illinois, of counsel), for Batus Holdings, Inc., and another, defendants.

Weil Gotshal & Manges L. L. P., Washington, D.C. (Peter Isakoff and Holly E. Loiseau of counsel), for Lorillard Tobacco, Inc., defendant.

Shook, Hardy & Bacon, L. L. P., Kansas City, Missouri (James Eiszner of counsel), for Loews Corporation, defendant.

Clifford Chance Rogers & Wells L. L. P., Washington, D.C. (Kenneth Gallo of counsel), for Liggett Group, Inc., and another, defendants.

Wechsler Harwood Halebian & Feffer L. L. P., New York City (Robert I. Harwood and Samuel K. Rosen of counsel), for plaintiffs.

Stull, Stull & Brody, New York City, for Joseph Nierman, plaintiff.

Richard B. Brualdi, New York City, for Dorothy Sylvester, plaintiff.

OPINION OF THE COURT

CHARLES EDWARD RAMOS, J.

Motion sequences Nos. 003, 004, and 006 are consolidated for purposes of disposition.

In this purported antitrust class action commenced on behalf of smokers, defendants, Philip Morris Companies, Inc., Philip Morris Incorporated (Philip Morris), R.J.R. Nabisco Holdings Corp., R.J. Reynolds Tobacco Co. (RJR), B.A.T. Industries, PLC, British American Tobacco Co., Ltd. (BAT), Batus Holdings, Inc., Brown & Williamson Tobacco Corp., Lorillard Tobacco, Inc., Loews Corporation, Liggett Group, Inc., and Brooke Group, Ltd. (defendants), move to dismiss, pursuant to CPLR 3211 (a) (5) and (7), on the ground that CPLR 901 (b) prohibits an action, such as this, seeking treble damages.

Plaintiffs, Virginia Lennon, Joseph Nierman, and Dorothy Sylvester, claim that defendants have violated General Business Law § 340 (6), commonly referred to as the Donnelly Act (the Act), by engaging in price fixing and other anticompetitive activities. They sue on behalf of all those who had purchased cigarettes in New York indirectly from the defendants, and their affiliates and subsidiaries, from November 1, 1993 to the present.

The facts alleged in the complaint are unchallenged by defendants, and therefore, are presumed to be true, as this court must for the purpose of these motions (Leon v Martinez, 84 NY2d 83 [1994] [concluding that allegations in the complaint are assumed to be true and the complaint is to be construed in the nonmoving party's favor when deciding a motion under CPLR 3211]; Matter of Colt Indus. Shareholder Litig., 155 AD2d 154 [1st Dept 1990] [finding that any error, if there is to be one, should be made in favor of allowing class action treatment]).

During much of the 20th century, the United States cigarette industry has been dominated by four to six major firms. Five major firms produce more than 99% of cigarettes sold in the United States. According to the complaint, those firms and their approximate shares of the United States cigarette market as of 1998 were: Philip Morris, Inc., 52.68%; R.J. Reynolds Tobacco Company, 24%; Brown & Williamson Tobacco Corporation, the United States subsidiary of British American Tobacco Industries of Britain, 16%; Lorillard, Inc., 6.2%; and Liggett Group, Inc., 1.1%. Plaintiffs contend that the United States tobacco market has annual revenues of approximately $45 billion.

According to the complaint, between 1950 and 1980, price competition was completely absent from the United States cigarette market. Quoting from a United States Supreme Court decision, plaintiff alleges that in 1993, "[t]he [pre-1980's] cigarette industry * * * has long been one of America's most profitable, in part because for many years there was no significant price competition among the rival firms * * * List prices for cigarettes increased in lockstep twice a year, for a number of years, irrespective of the rate of inflation, changes in the costs of production, or shifts in consumer demand." (Quoting Brooke Group v Brown & Williamson Tobacco Corp., 509 US 209, 213 [1993].)

Plaintiffs contend that lockstep pricing practices continued. On March 7, 1997, in response to the proposed $368 billion tobacco/health-care settlement, RJR announced that the prices of its cigarettes would increase by 4 to 5 cents per pack. Shortly thereafter, Philip Morris announced an even higher price increase. The other defendants, including RJR, followed suit, matching the Philip Morris price increase.

Between July 1997 and November 1998, the defendants entered settlements with individual states regarding health-care lawsuits brought by the states. After each settlement, each of the defendants raised the prices of their cigarettes by the identical amount even though these price increases exceeded the amount necessary to cover the costs of each particular settlement.

On November 18, 1998, Philip Morris and RJR announced, just moments apart, that each company would increase the prices for all their cigarette brands by a record 45 cents per pack. The other defendants raised their prices to match this increase shortly thereafter.^[*]

Then, on August 27, 1999, Philip Morris announced that it would raise prices on its cigarette products by 18 cents per pack in order to cover the upcoming 10 cents per pack increase in federal excise taxes. The other defendants immediately followed suit, matching Philip Morris' price increase for their products.

On January 14, 2000, Philip Morris and RJR again announced that they would both increase prices by 13 cents per pack. Again, the other defendants immediately followed suit and raised their prices by the same amount.

Meanwhile, the defendants maintain information in an electronic data base in Pittsburgh that reports the discounts and product promotions for all the products of other defendant competitors. According to the complaint, defendants all have access to the data base which they allegedly use to monitor cigarette prices.

Plaintiffs contend that defendants' cigarette prices have been set significantly above competitive levels, despite the fact that, according to plaintiffs, cigarette demand has declined in the United States and defendants have experienced excess cigarette manufacturing capacity. Plaintiffs also allege that during the class period, the defendants have had an expressed policy that cigarette prices were to be increased at a rate exceeding inflation.

Without describing the factual underpinning of plaintiffs' claims, plaintiffs allege that in acting on their agreement, defendants met to discuss and agree upon future price increases, and shared actual transactional prices. The effects of their activities were to maintain the price of cigarettes at artificially high levels. They contend that defendants' activities lessen price competition and deprived plaintiffs of the benefit of free and open competition, in violation of the Donnelly Act. Based upon these facts, the complaint also asserts that defendants have violated General Business Law § 349 which prohibits unfair and deceptive business practices.

Defendants seek dismissal of the complaint on the ground that plaintiffs seek treble damages under the Donnelly Act, which they contend are punitive in nature, and as such, disallows use of the class action statute under CPLR 901 (b). Defendants also argue that the provision of the Donnelly Act which affords a right of action to indirect purchasers has no retroactive effect, the acts complained of occurred prior to its enactment, and those activities that postdate the 1998 amendment of the Act are insufficient to state a claim.

The Donnelly Act declares illegal and against public policy any agreement or monopoly in the conduct of any business or trade whereby "[c]ompetition or the free exercise of any activity in the conduct of any business * * * [is] retrained" (General Business Law § 340 [1]). Violation of the Act permits those who sustain damages to recover treble damages along with costs and attorneys' fees (General Business Law § 340 [5]). Until 1998, the law allowed only direct purchasers to sue for violation of the antitrust laws. General Business Law § 340 (6) extends to indirect purchasers or "any political subdivision or public authority of the state, or any person who has sustained damages by reason of violation of [General Business Law § 340]," the right to maintain an action to recover damages. Although General Business Law § 340 (6) gives indirect purchasers, typically end users or consumers of products and services, a right of action, CPLR 901 (b) provides that "[u]nless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action." Therefore, if treble damages are found to penalize those who violate the Donnelly Act, then CPLR 901 (b) bars class recoveries in the absence of statutory language which authorizes class action claims.

A long...