Opinion

Schwab v. Philip Morris USA, Inc.

449 F. Supp. 2d 992
2006 U.S. Dist. LEXIS 73196
2006 WL 2726102

Court: District Court, E.D. New York
Filed: Sep 25, 2006
Status: Published
Author: Weinstein
On the bench: Weinstein
Cited by: 47 cases
Authority: More cited than 86.3%

Reversed on other grounds by McLaughlin v. American Tobacco Co., 522 F.3d 215 (2008)

holding that plaintiffs’ misrepresentation claim under the Illinois Consumer Fraud Act based on defendants’ use of the terms “Lights” and “Lowered Tar and Nicotine” is “wholly unrelated to any failure to warn claim and, therefore, not preempted.”

How later courts described this case

holding that plaintiffs’ misrepresentation claim under the Illinois Consumer Fraud Act based on defendants’ use of the terms “Lights” and “Lowered Tar and Nicotine” is “wholly unrelated to any failure to warn claim and, therefore, not preempted.”
recognizing that Basic is “neither binding in this case, nor identical in reasoning,” but holding that “[s]uch a presumption may be appropriate in the present ease”
permitting generalized proof of reliance including "surveys, expert evidence on marketplace principles, and extrapolated and statistic analysis of individuals and groups in the class"
“evidence that the FTC approved defendants’ representations [as to tar and nicotine content] might tend to disprove the existence of a scheme to defraud”

Written by the judges who cited it.

The opinion

MEMORANDUM & ORDER

WEINSTEIN, Senior District Judge.

TABLE OF CONTENTS

I. Introduction................ 1018

II. Allegations..............................................................1025

A. Burden of Proof................................'.....................1025

1. Class Certification..............................’.................1025

2. Summary Judgment .............................................1025

B. Sources of Proof........................................... 1026

C. Overview of the Conspiracy and Fraud.................................1028

D. Other “Light” Cigarette Fraud Actions .. .•................'.............1029

III. Racketeer Influenced and Corrupt Organizations Act.........................1031

A. Violation of Criminal RICO......................i.. i.................1032

1. Conduct of a Racketeering Enterprise (§ 1962(c))....................1032

a. Enterprise.................................................1032

b. Conduct..............................••....................1033

c. Racketeering activity........................................1033

d. Pattern....................:............................... 1034

2. Conspiracy (§ 1962(d))..........................-.................1035

a. Cofacredit.................................................1035

b. Supreme Court precedent....................................1036

c. Subsequent decisions of the Second Circuit and district courts----1038

d. Other circuits..............................................1038

e. Conclusion on conspiracy requirements........................1039

B. Injury to Property ..............................................: • ■ ■ 1039

1. Law ...........................................................1039

2. Defendants’ Motion for Summary Judgment on Injury................1039

a. Proprietary injury..........................................1040

b. Personal injury.............................................1042

3. Conclusion on Injury.............................................1043

C. Causation and Reliance..............................................1043

1. Law ...........................................................1043

a. Factual causation...........................................1043

b. Proximate causation....................:....................1043

c. Reliance.............. 1044

i. Reliance is required.....................................1044

ii. Role of reliance ........................................1045

(a) Direct reliance......................................1045

(b) Third-party reliance.................................1045

d. Transaction causation and loss causation.......................1045

2. Defendants’ Motion for Summary Judgment on Causation.............1046

a. Reliance...................................................1046

i. Plaintiffs’ claims of reliance..............................1046

ii. Reliance showing required in this case.....................1047

iii. Plaintiffs have demonstrated reliance......................1048

b. Indirect purchaser rule......................................1050

Illinois

Brick..........'................................1052

ii. Inapplicability of

Illinois Brick

rule.......................1053

3. Conclusion on Causation..........................................1056

D. Computation of Total Damages ....................".......■............1056

*1014

1. Plaintiffs’ Models................................................1057

a. “Loss of market” model......................................1057

b. “Loss of value” model.......................................1057

c. “Price impact” model........................................1058

2. Law ...........................................................1058

a. Practice under common law..................................1058

b. Practice under securities law.................................1059

i. 1933 Act...............................................1060

ii. 1934 Act...............................................1060

(a) Explicit rights of action..............................1060

(b) Implied rights of action..............................1060

c. Practice under antitrust law..................................1061

3. Application of Law to Facts.......................................1063

a. Appropriate measure........................................1063

b. Degree of precision required.................................1065

4. Equitable Relief.................................................1067

5. Conclusion on Computation of Total Damages.......................1067

E. Statute of Limitations................................................1067

1. Law ...........................................................1067

a. Accrual....................................................1068

b. Equitable tolling............................................1068

2. Procedural History..............................................1068

3. Application of Law to Facts.......................................1070

a. Actual knowledge...........................................1070

b. Imputed knowledge.........................................1070

i. Class counsel’s knowledge...............................1071

ii. Class members’ knowledge ..............................1072

e. Separate accrual............................................1074

d. Equitable tolling............................................1074

4. Conclusion on Statute of Limitations...............................1075

IV. Collateral Estoppel......................................................1076

A. Law...............................................................1076

B. Preclusive Effect in Possible Future Bodily Injury Cases.................1076

C. Claim Splitting......................................................1077

D. Preclusive Effect of

United States v. Philip

Morris......................1077

E. Preclusive Effect of Overlapping Class Actions..........................1079

V. Defendants’ Other Summary Judgment Motions.............................1079

A. Mutagenicity of “Light” Cigarettes....................................1079

B. Defendant BATCo’s Separate Motion for Summary Judgment on All

Claims...........................................................1080

1. Extraterritoriality of RICO.......................................1081

a. Law.......................................................1081

b. Application of law to facts....................................1081

2. BATCo’s Liability...............................................1082

a. BATCo’s conduct of the enterprise............................1082

b. BATCo’s participation in the conspiracy.......................1083

c. Damages..................................................1083

d. BATCo’s association with Brown & Williamson.................1083

3. Conclusion on BATCo’s Separate Motion ...........................1084

C. Defendant Philip Morris’ Separate Motion for Summary Judgment on

All Claims After November 2002 ....................................1084

1. Facts ..........................................................1084

a. PM USA’s disclosures.......................................1084

b. Plaintiffs’ “concession” ......................................1085

2. Law ...........................................................1086

3. Application of Law to Facts.......................................1086

a. Absence of a scheme to defraud...............................1086

*1015

b. Reasonable reliance.........................................1087

c. Judicial estoppel............................................1088

d. Findings on continued increases in nicotine inhaled from “light” cigarettes .........................................1089

4. Conclusion on Philip Morris’ Separate Motion.......................1089

VI. Plaintiffs’ Motions for Summary Judgment..................................1089

A. FTC Defense.......................................................1089

1. Facts ..........................................................1089

a. FTC action ................................................1089

b. Procedural history..........................................1091

2. Law...............................................:...........1092

3. Application of Law to Facts.......................................1092

a. “New” evidence ............................................1092

b. Defendants’ stated position...................................1093

4. Conclusion on FTC Defense.......................................1094

B. Compensation Defense...............................................1094

C. Compliance with Public Health Community Defense.....................1096

D. Meaning of “Lights” Descriptor.......................................1097

VII. Plaintiffs’ Motion for Class Certification....................................1097

A. Class Certification Under Rule 23 .....................................1097

1. Burden of Proof.................................................1097

2. Purpose of Rule 23...............................................1098

B. Rule 23(a) Prerequisites..............................................1101

1. Numerosity.....................................................1101

a. Law.......................................................1101

b. Application of law to facts....................................1101

2. Commonality....................................................1101

a. Law.......................................................1101

b. Application of law to facts....................................1103

3. Typicality.......................................................1104

a. Law.......................................................1104

i. Unique defenses........................................1104

ii. Subclasses.............................................1105

b. Application of law to facts....................................1105

4. Adequacy of Representation ......................................1106

a. Law.......................................................1106

i. Class counsel ..........................................1106

ii. Class representatives lacking interests antagonistic to the class.............................................1107

iii. Other factors...........................................1108

(a) Knowledge of the case and ability to supervise counsel..........................................1108

(b) Credibility of representatives.........................1109

b. Application of law to facts....................................1109

i. Named plaintiffs........................................1109

ii. Proposed class counsel..................................1112

C. Rule 23(b)(2): Injunctive or Declaratory Relief..........................1112

1. Law ...........................................................1112

2. Application of Law to Facts.......................................1113

D. Rule 23(b)(3): Money Damages.......................................1114

1. Law ...........................................................1114

a. Predominance of common questions of law or fact...............1114

i. Violation of RICO mail or wire fraud......................1115

ii. Causation and reliance..................................1115

(a) General proof of reliance.............................1115

(b) Individual proof of reliance...........................1117

iii. Injury to property and damages..........................1119

*1016

b. Superiority ................................................1120

2. Application of Law to Facts.......................................1121

a. Class action is superior method of adjudication .................1121

b. Common questions of law or fact predominate..................1123

i. Reliance...............................................1124

ii. Injury to property and damages..........................1127

iii. Statute of limitations....................................1130

E. Rule 23(g): Adequacy of Class Counsel ................................1131

F. RICO and Class Certification.........................................1131

G. Conclusion on Certification of Class....................................1131

VIII. Admissibility of Expert Evidence..........................................1132

A. Motions Regarding Admissibility of Expert Reports.....................1132

B. Rules 702 and 703 of the Federal Rules of Evidence .....................1132

C. Qualifications of Expert Witnesses.....................................1133

D. Helpfulness and Relevance...........................................1133

E. Reliability..........................................................1135

F. Individual Experts’ Reports..........................................1137

1. Challenges to Plaintiffs’ Experts...................................1138

a. John C. Beyer..............................................1138

b. David M. Burns ............................................1149

e. Joel B. Cohen..............................................1150

d. K. Michael Cummings.......................................1153

e. Michael J. Dennis...........................................1157

f. Robbin Derry..............................................1159

g. Marvin E. Goldberg.........................................1159

h. Jeffrey Harris..............................................1163

i. John R. Hauser.............................................1166

j. Katherine Kinsella..........................................1170

k. Matthew L. Myers..........................................1172

l. Blaine F. Nye..............................................1177

m. Richard W. Pollay..........................................1184

n. Robert N. Proctor..........................................1193

o. Paul Slovic.................................................1209

p. Joseph E. Stiglitz...........................................1215

2. Challenges to Defendants’ Experts.................................1221

a. Michael Dixon..............................................1221

b. Jeffery Gentry.............................................1222

c. Jane E. Lewis..............................................1222

d. Arnold T. Mosberg..........................................1223

e. Kenneth R. Podraza.........................................1224

f. Graham A. Read............................................1225

g. Edward A. Robinson........................................1225

h. William Wecker ............................................1226

3. Minor or No Challenges to Plaintiffs’ and Defendants’ Experts........1226

a. Neal L. Benowitz...........................................1226

b. Michael F. Borderding......................................1227

c. Gregory N. Connolly........................................1227

d. Richard Cox ...............................................1227

e. Wayne S. Desaro...........................................1227

f. Peter C. English............................................1227

g. Barry E. Goodstadt.........................................1227

h. Stephen Heeht.............................................1228

i. Lucy L. Henke.............................................1228

j. Jack E. Henningfield........................................1228

k. Jacob Jacoby...............................................1228

l. James A. Langenfeld........................................1228

m. Nancy A. Mathiowetz .......................................1229

n. Kenneth A. Mundt..........................................1229

*1017

o. Kevin M. Murphy...........................................1230

p. Bruce Neidle...............................................1230

q. Bruce M. Owen.............................................1230

r. Stanley Presser ............................................1231

s. Michael Schaller............................................1231

t. George Seiden..............................................1231

u. Peter G. Shields............................................1232

v. David W. Stewart...........................................1232

w. Charles R. Taylor...........................................1233

x. Michael Thun..............................................1233

y. Peter A. Valberg ...........................................1233

z. W. Kip Viscusi .............................................1234

aa. Errol Zeiger...............................................1234

G. Plaintiffs’ Motion to Exclude Expert Testimony that “Light” Cigarettes are Safer.........................................................1236

H. Defendants’ Motion to Exclude Expert Evidence of Impact of Marketing of “Light” Cigarettes on Smoking Rates....................1236

1. Relevance ......................................................1236

2. Reliability......................................................1236

I. Defendants’ Motion to Exclude Expert Testimony Regarding Mutagenicity of “Light” Cigarettes..................................1239

J. Further Rulings as Case Develops.....................................1239

IX. Management Issues......................................................1239

A. Aggregate Proof....................................................1239

1. Federal Rules of Civil Procedure and Evidence......................1241

2. Appropriateness of Sampling and Survey Techniques.................1244

3. Due Process....................................................1246

4. Jury Right......................................................1248

B. Distribution of Any Damages.........................................1251

1. Fluid Recovery..................................................1252

a. Nature and use.............................................1252

b. Interaction with procedural and substantive law................1254

c. General law................................................1255

2. Second Circuit Law on Fluid Recovery.............................1260

3. Application of Law to Facts.......................................1268

Eisen

and

Van

Gemert......................................1269

b. Due process and Seventh Amendment issues...................1270

c. Rules Enabling Act.........................................1271

4. Conclusion on Fluid Recovery.....................................1272

C. Allocation of Damages Among Defendants..............................1272

1. National Common Law...........................................1273

2. Joint and Several Liability........................................1273

3. Market Share...................................................1274

4. Other Systems..................................................1276

X. Certification of Interlocutory Appeal.......................................1276

XI. Stay...................................................................1277

XII. Conclusion..............................................................1277

Appendix A:

United States v. Philip

Morris.......................................1278

Appendix B:

Blue Cross & Blue Shield of New Jersey v. Philip

Morris................1278

Appendix C:

Price v. Philip Morris

..............................................1279

Appendix D:

In re Simon II

Litigation...........................................1298

*1018

Appendix E: Monograph 13 ............................ 1298

Appendix F: Report of Massachusetts Department of Health 1351

I. Introduction

Tobacco has been woven into the fabric of American history and society since the 1620’s when, as the first cash crop, it saved the colony of Virginia and then, together with cotton, established the economic base for slavery. Edmund S. Morgan,

American Slavery, American Freedom, The Ordeal of Colonial Virginia

112, 310 (Francis Parkman Prize Ed., 2005).

In more recent times, through cigarettes — produced and allegedly fraudulently merchandised on a massive scale — it has become the basis for a pandemic, causing the premature deaths of tens of millions of Americans. This case represents one event in this long narrative: the alleged successful effort of defendants to cozen smokers into continuing to buy their products by convincing them that smoking “light” cigarettes was safer for their health.

It is plaintiffs’ view that this campaign caused smokers to buy “light” cigarettes, in large amounts, at a price greater than they would have paid had the truth been acknowledged by defendants. Defendants’ acts, plaintiffs contend, constituted a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961

jf,

warranting trebled money damages. 18 U.S.C. § 1964 (c). Class action status is sought to bring to bear, on a consolidated basis, the weight of all United States smokers’ claims.

It is charged- — with substantial evidence to support the contention — that plaintiff smokers bought cigarettes characterized as “light,” on the suggestion of defendants — the major cigarette manufacturers — that they were less harmful than “regular” cigarettes, when in fact they were at least as dangerous and defendants knew of their dangers. The claim is that the carcinogenic and other adverse effects smokers sought to avoid were not reduced by smoking “light” rather than other cigarettes; that defendants knew this was the case; that they concealed this fact; that they urged plaintiffs — through advertising and other public statements — to smoke these “lights” knowing smokers were being misled; and that they defrauded purchasers of billions of dollars spent for light cigarettes worth less than their purchase price.

On behalf of a prospective class, the named plaintiffs seek class certification pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(2) and (3) on behalf of the class of persons defined as:

All United States residents who purchased in the United States, not for resale, cigarettes labeled as “Lights” and/or “Light” (collectively “light cigarettes”) that were manufactured and/or sold by Defendants during the period commencing on the first date that Defendants began selling light cigarettes until the date trial commences (the “Class Period”), and who are not, as of the date of trial, members of a certified state class seeking economic damages stemming from their purchases of light cigarettes or having obtained an award of, or a denial of, such damages. Excluded from the Class are individuals who are directors and officers of the Defendants’ corporations, their parents, subsidiaries and/or affiliates.

This litigation is another in the continuing battle of plaintiffs’ lawyers and their clients with the cigarette industry. While

*1019

limited success by smokers in some suits— and the cost of litigating — have probably had some deterrent effect on aggressive marketing of a product defendants now partly acknowledge to be dangerous, this, and other suits like it, probably have had only a minimal value in reducing what even defendants now concede are the enormous costs to public health of widespread cigarette smoking. More effective in alleviating smoking dangers are probably such legislative and administrative efforts as prohibiting smoking in public and commercial areas, and raising prices, primarily through taxes. Nevertheless, where a cigarette smoker can demonstrate that he or a group of smokers has been damaged by the cigarette industry, the help of the court in resolving the claim and defenses is mandatory. The independent political-economic arrangement defendants made with the states to pay them billions of dollars over many years has not compensated smokers for the individual damages they have allegedly suffered.

Early in our history the Supreme Court ruled that a federal court must decide cases properly brought. It:

must take jurisdiction if it should. The judiciary cannot, as the legislature may, avoid a measure because it approaches the confines of the constitution. We cannot pass it by because it is doubtful. With whatever doubts, with whatever difficulties, a case may be attended, we must decide it, if it be brought before us. We have no more right to decline the exercise of jurisdiction which is given, than to usurp that which is not given. The one or the other would be treason to the constitution. Questions may occur which we would gladly avoid; but we cannot avoid them.

Cohens v. Virginia,

19 U.S. 264 , 6 Wheat. 264, 404 , 5 L.Ed. 257 (1821).

While “the federal courts may, in their discretion, [in some narrowly specified classes of cases,] properly withhold the exercise of the jurisdiction conferred upon them where there is no want of another suitable forum,”

Massachusetts v. Missouri

308 U.S. 1, 19 , 60 S.Ct. 39 , 84 L.Ed. 3 (1939), the choice in the present case under the federal RICO statute is not between a United States district court and some other forum, but between this court and no effective forum at all.

Plaintiffs have proposed an elegant analysis of the law and facts as a rationale for certifying this litigation as a class action. Their claim is that they, and a class consisting of tens of millions of smokers, were induced by fraud to buy a kind of cigarettes, “lights,” and that they suffered financial damage because they did not get what they thought they were getting — a more valuable, safer cigarette. By relying on federal substantive statutes — the combined “RICO” and Mail and Wire Fraud Acts, 18 U.S.C. §§ 1341 , 1343 — they seek to avoid one of the serious difficulties with national class cigarette actions: the tort law in the fifty states is not uniform.

They also propose to avoid the other main problem with smokers’ class actions: conduct and motive differences among members of the class. Individuals start and quit smoking and choose various types of cigarettes for different reasons and suffer wide variations in possible harm, creating different specific causation and damage issues attributable to each class member. If plaintiffs’ experts are to be credited in the testimony promised by plaintiffs’ counsel, economic loss of value in purchases of cigarettes allegedly touted as “lighter” when they are not safer avoids this problem of human diversity: first, by the equivalent of statistical averaging and, second, should the jury determine total damages to the class, division of the damages

*1020

based on claims of smokers for the relative number of cigarettes they bought during the applicable liability period, with unclaimed proceeds to be distributed on a cy pres basis.

Defendants, by contrast, in powerful briefs and arguments, point to what they believe are critical defects in the plaintiffs’ case on the facts and the law requiring not only denial of class certification, but dismissal of the case. They contend that they committed no fraud, that the statute of limitations has run, and that class action procedures are not applicable. Accordingly, they move to dismiss and to deny class certification.

In considering the matter as it now stands, two powerful factors should be kept in mind: First, is the jury’s constitutional role and its vast discretion in evaluating evidence in a civil suit of this kind under Amendment VII of the United States Constitution. The jury’s power and capacity to deal with complex -facts and come to a reasonable resolution of a dispute should not be underestimated.

Second, is the power of the American legal system to overcome a defense that plaintiffs’ claims are so enormous in scope and time, and in diverse persons affected, that they can never be fairly adjudicated in a reasonably comprehensive and relatively inexpensive way. In this connection it is well to recall a central theme of our American legal system:

ubi jus, ibi remedi-um

— each right has a remedy. Every violation of a right should have a remedy in court, if that is possible.

The very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury. One of the first duties of government is to afford that protection____

“[I]t is a general and indisputable rule, that where there is a legal right, there is also a legal remedy by suit or action at law, whenever that right is invaded.” ...

“[Ejvery right, when withheld, must have a remedy, and every injury its proper redress.” The government of the United States has been emphatically termed a government of laws, and not of men. It will certainly cease to deserve this high appellation, if the laws furnish no remedy for the violation of a vested legal right.

Marbury v. Madison,

5 U.S. 137 , 1 Cranch 137, 163 , 2 L.Ed. 60 (1803) (quoting 3 William Blackstone, Commentaries 23, 109).

In modern times, at least since adoption of the Federal Rules of Civil Procedure and Evidence, the ancient maxim is modified to read, “each violation of a right should have a practicable remedy.” A remedy that is impracticable in execution is — for those whose legal rights have been violated- — no remedy at all. Procedures developed through American class action jurisprudence should not be frustrated when a large number of small claims can be aggregated and tried in a way fair to both plaintiffs and defendants. Current widespread partial acknowledgment by defendants of the dangers of their product and alleged efforts to reduce smoking by minors and others does not negate any liability for past delicts not subject to the statute of limitations.

Resolution of many of the factual disputes in the case depends upon widely divergent possible inferences that may be drawn from a huge amount of already available evidence of activities by defendants and members of the putative class. While the American jury has been more and more controlled by devices such as summary judgment, the strong policy embodied in Amendment VII, and the pre

*1021

sumption that the system can provide a practical remedy for a widespread violation of a right, requires allowing jurors to draw necessary operative factual conclusions wherever reasonable minds could differ.

In the instant case the wisdom embodied in the Constitution is reflected in the ability of a fair cross section of the community to appreciate and understand evidence of why people smoke, why they do it in certain ways, and what impact actions and policies of defendants in such matters as advertising have had in influencing behavior. The federal petty civil jury provides the ultimate focus group of the law.

In deciding the balance between plaintiffs and defendants, the scale tips heavily in the instant case in favor of allowing a jury rather than a judge to decide the case. Here, in a litigation that arguably might go either way on inferences and facts, the Constitution and basic principle point to certification of the class, allowing the matter to proceed before a jury in a way that is practicable. Denial of motions to dismiss and to exclude relevant and reliable proof, scientific and otherwise, will permit the jury to decide the dispute fairly.

Whether plaintiffs can overcome the defendants’ objections to then- proof is subject to trial by jury. There is enough merit to both plaintiffs’ and defendants’ contentions to permit the litigation to go forward. If, as contended by plaintiffs, a huge fraud was perpetrated on tens of millions of people causing them billions of dollars in loss — measured largely by the difference between the value people were led to believe they were getting when they bought “light” cigarettes for safety, and what they received, a non-safe product— recovery dependent on proof should be allowed. The extensive evidence introduced on preliminary motions supports certification of the class and denial of defendants’ motions for summary judgment.

While evidence of fraud on the class appears to be quite strong — and defendants have been less than candid in insisting that there was no fraud — evidence of the percentage of the class which was defrauded and the amount of economic damages it suffered appears to be quite weak — and plaintiffs have been less than candid in failing to acknowledge that deficiency in their proof.

The court in

United States v. Philip Morris,

449 F.Supp.2d 1 (D.D.C.2006), described in Part II.D,

infra

and excerpted in Appendix A,

supra,

has estimated that some fifty percent of those who smoked “light” cigarettes would not have done so had they known the truth.

See

Appendix A at 449 F.Supp.2d at 280 ,

supra.

This estimate, strongly relied on by plaintiffs in argument,

see

Transcript of Sept. 13, 2006, at 52:5-13, 157:22-159:7, does not fill the gap in their proof since, even if the court was right in

United States v. Philip Morris,

a significant portion of that fifty percent might have smoked other types of cigarettes purchased at the same price “lights” were selling for. Contrasting the real diverse universe of “lights” smokers with the countérfactual universe of fully advised “lights” smokers to determine the impact of the fraud on the size of the market and its nature for damage purposes is a daunting enterprise even with the many proffered experts holding up their statistical lanterns to help in the search for the truth.

There is considerable merit to defendants’ experts’ position that many, if not all, the plaintiffs would have bought these light cigarettes' even if they knew they provided no health advantage over regular cigarettes, and that they received full value for their money. There are also serious

*1022

objections to the plaintiffs’ plan to divide any damages based on the relative number of cigarettes claimed to have been bought by claimants during the period found applicable by the jury, with cy pres division of the remainder. This form of fluid recovery tends — like almost all aggregate litigation — to overcompensate some and un-dercompensate other members of the class who may have relied differently on the “lights” designation and may have acted differently and for different reasons relevant to damages. Nevertheless, serious and unique factual-substantive issues now presented can be resolved by the jury with the aid of experts and statistical proof. If plaintiffs are right, they should not be fobbed off by real and imagined barriers of proof and management problems that can be circumvented in a fair adjudication.

Essentially, the issue before the court is not whether a fraud case be proven, but whether damages can be proven for the period since each smoker started smoking, failed to stop, switched to, or started with “lights” rather than the standard cigarettes in vogue up to the introduction of “lights” on a large scale. That introduction to “light” smoking and encouragement of continued use by defendants was allegedly in response to a widespread, fright induced by the Surgeon General’s reports and other warnings of hundreds of thousands of deaths caused yearly by cancer attributable to smoking.

Plaintiffs have demonstrated that they may be able to produce sufficient proof to satisfy a jury as to damages based largely on statistics, the law of large numbers, and their experts’ analyses to show a reasonable estimate of total damages, without producing proof of reliance and fraud as to each of millions of smokers, with a damage figure assigned to each smoker and each year that he or she smoked.

If each smoker must be considered separately, as defendants suggest is the case, it would be impossible to proceed with a suit of this nature even if it were absolutely clear that each plaintiff had been damaged in the manner plaintiffs allege. The transactional costs and the relatively small recovery for the difference in value between what an individual smoker paid for and what he received would result in damages measured in tens or hundreds of dollars. The huge costs in bringing this action could not be supported by such individual adjudications.

The question then becomes whether the American legal system, faced with an alleged massive fraud, must throw up its hands and conclude that it has no effective remedy for what at this stage of the litigation must be assumed to be a huge continuing violation of consumers’ rights. In the American legal system, whose watchword has been, as already noted, “no right without a remedy,” the answer is that modern civil procedure, scientific analysis, and the law of large numbers used by statisticians provide a legal basis for a practical and effective remedy. The plaintiffs are entitled to the chance to prove their allegations.

Candor impels recognition of the fact that the Courts of Appeals have not been kind to massive claims against tobacco companies. Despite repeated findings of fact by judges and juries supporting claims of fraud, appellate courts have repeatedly dismissed such cases whether the claim was for consumer fraud, personal injury, or third party damages for costs of medical treatment. The defendants make a strong case that this suit, too, must founder on that appellate predilection for individual suits.

The case comes down to the role of the jury: should it be permitted to decide this vexing private litigation on the basis of

*1023

somewhat dubious arguments and questionable proofs when the decision has so many important public social overtones, or should the judges themselves decide by holding that the matter is beyond the ken of a reasonable jury? Here, the fundamentals of the Constitution provide the answer. The first Congress and the States that then constituted the Union still speak clearly enough:

AMENDMENT VII

RIGHTS IN CIVIL CASES

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

See also Brink’s Inc. v. City of New York,

717 F.2d 700 , 711 (2d Cir.1983) (“There is no bright line that divides evidence worthy of consideration by a jury, although subject to heavy counter-attack, from evidence that is not. Especially because of the guaranty of the Seventh Amendment,- a federal court must be exceedingly careful not to set the threshold to the jury room too high.”) (quoting

Herman Schwabe, Inc. v. United Shoe Machinery Corp.,

297 F.2d 906, 912 (2d Cir.),

cert. denied,

369 U.S. 865 , 82 S.Ct. 1031 , 8 L.Ed.2d 85 (1962)).

If this case presents issues for the jury — as is now the decision of this court— then both the certification question and defense motions for summary judgment should be — and now are — decided in plaintiffs’ favor. That the court believes, on the evidence thus far produced, that the amount of possible damages has been grossly exaggerated by plaintiffs is not a basis for denying their right to a jury trial. Adjustments to damages can be made after all the evidence is in and the jury has made its decision, if that decision is unreasonable. ,

In Part II and Appendices A, B, C, and D, allegations and prior findings of fact against the tobacco companies on the fraud issue are sampled: First, is the general fraud in hiding the dangers of smoking, and second, is the particular fraud respecting lights. Appendix E includes portions of a Untied States Surgeon General’s report on the health risks posed by “light” cigarettes and the history of their development. Appendix F includes portions of a recent Commonwealth of Massachusetts report on continuing increases in nicotine inhaled from cigarettes, including those designated as “light.” In Part III, the law of RICO is analyzed and defendants’ central motions for dismissal considered.

In Part IV the court considers the role of collateral estoppel ' in this litigation. Whether an adjudication against either side would be binding on collateral estop-pel grounds in suits based on substantive theories similar to the one implicated in the present litigation when recovery is sought for physical injury to smokers rather than economic loss from the purchase of overpriced cigarettes is important. Recoveries for medical damage to the person of smokers are enormously higher than those sought now. This legal problem and the related problem of splitting a cause of action, also discussed in Part TV, do not trump class action advantages since members of the class can opt out. It is a factor, however, that needs evaluation in the context of certification.

In Parts V and VI, the parties’ additional motions for summary judgment are discussed and resolved. Part. VII addresses the motion for class certification. The question of class certification is critical for this court and the Court of Appeals. No individual can afford to prosecute the case alone. Denial of certification here or on

*1024

appeal would constitute a “death knell.” Part VIII contains an analysis pursuant to Rule 702 of the Federal Rules of Evidence of the proposed testimony of experts for defendants and plaintiffs to determine whether a jury should be permitted to hear them; it is concluded that most experts of both defendants and plaintiffs should be heard. Part IX considers management issues, including the use of aggregate proof and fluid recovery.

Part X considers application of Rule 23(f) or section 1292(b) of title 18 to an interlocutory appeal. Based on experience with the trial and other disposition of a number of aggregate tobacco actions in this court, it is the opinion of the court that this class action can be tried to a final judgment that provides appropriate protection against relitigation of the issues adjudicated with fidelity to the applicable substantive law. Federal courts have the institutional capacity to conduct these proceedings. The representation of defendants and plaintiffs is adequate to conduct the litigation for the benefit of all persons whose interests are being adjudicated.

Am immediate stay is rejected in Part XI. The Court of Appeals has the power to grant such a stay, but the case, in the trial court’s opinion, should promptly proceed in view of its long history.

Part XII orders that the class sought by plaintiffs be certified. The motions for summary judgment are denied.

Numerous interlocutory orders have been issued in this litigation.

See Schwab v. Philip Morris,

No. 04-CV-1945, 2006 WL 721368 (E.D.N.Y. Mar. 20, 2006) (overruling plaintiffs’ objections to magistrate judge’s orders); 2005 WL 3032556 (E.D.N.Y. Nov. 14, 2005) (discussing fluid recovery); 2005 WL 2467766 (E.D.N.Y. Oct. 6, 2005) (denying defendants’ motion for summary judgment on statute of limitations); 2005 WL 2401647 (E.D.N.Y. Sept. 29, 2005)

(Daubert

issues); 2005 WL 2401645 (E.D.N.Y. Sept. 27, 2005) (denying plaintiffs’ motions for partial summary judgment and application of collateral es-toppel); 2005 WL 2401635 (E.D.N.Y. Sept. 27, 2005) (denying defendants’ motion to dismiss claims based on increased muta-genicity of “light” cigarettes); 2005 WL 2401638 (E.D.N.Y. Sept. 27, 2005) (denying plaintiffs’ motion to exclude testimony that “light” cigarettes are safer than regular cigarettes); 2005 WL 2401639 (E.D.N.Y. Sept. 27, 2005) (denying plaintiffs’ Rule 16(c) motion for simplification of the issues); 2005 WL 2401642 (E.D.N.Y. Sept. 27, 2005) (denying defendant BATCo’s motion for summary judgment on all claims); 2005 WL 2401643 (E.D.N.Y. Sept. 27, 2005) (denying defendants’ motion to exclude expert testimony on the impact of “light” cigarette marketing on smoking rates); 2005 WL 2401565 (E.D.N.Y. Sept. 26, 2005) (denying plaintiffs’ motion for partial summary judgment on the existence of defendants’ conspiracy); 2005 WL 2401353 (E.D.N.Y. Sept. 26, 2005) (granting defendant British American Tobacco p.l.c.’s motion to dismiss); 2005 WL 2401350 (E.D.N.Y. Sept. 26, 2005) (denying plaintiffs’ motion for partial summary judgment on defendants’ claim that they complied with the directives of the public health community in developing “light” cigarettes); 2005 WL 2401276 (E.D.N.Y. Sept. 26, 2005) (denying plaintiffs’ motion for partial summary judgment on defendants’ claim that smokers knew about compensation and so were not defrauded); 2005 WL 2401633 (E.D.N.Y. Sept. 26, 2005) (denying plaintiffs’ motion for a permanent injunction prohibiting defendants from marketing or selling any cigarette with a “light” or “lights” descriptor); 2005 WL 2401196 (E.D.N.Y. Sept. 26, 2005) (denying plaintiffs’ motion for partial summary judgment on the meaning of the

*1025

“light” descriptor); 2005 WL 2303821 (E.D.N.Y. Sept. 22, 2005) (granting defendants’ motion for partial summary judgment on plaintiffs’ claims for equitable relief); 2005 WL 2303822 (E.D.N.Y. Sept. 22, 2005) (denying plaintiffs’ motion to strike defendants’ employee-expert reports but requiring those reports to meet the standards of Federal Rule of Civil Procedure 26(a)(2)(B)); 2005 WL 2303823 (E.D.N.Y. Sept. 22, 2005) (granting defendants’ motion to exclude the expert testimony of plaintiffs’ expert on business ethics); 2005 WL 2293381 (E.D.N.Y. Sept. 21, 2005) (denying defendants’ motion for an immediate stay of all proceedings); 2005 WL 2155141 (E.D.N.Y. Aug. 31, 2005) (excluding from consideration on interlocutory orders certain plaintiffs’ experts’ reports); 228 F.R.D. 165 (E.D.N.Y.2005) (preliminary reflections and questions for the parties). This memorandum and order incorporates and modifies the above orders.

II. Allegations

A. Burden of Proof

1. Class Certification

On a motion for class certification, plaintiffs bear the burden of proving that the requirements of Rule 23 of the Federal Rules of Civil Procedure have been met.

Amchem Prods., Inc. v. Windsor,

521 U.S. 591, 614 , 117 S.Ct. 2231 , 138 L.Ed.2d 689 (1997);

Caridad v. Metro-North Commuter R.R.,

191 F.3d 283, 291 (2d Cir.1999). At this stage in the litigation they need not show that they are likely to prevail on the merits.

Eisen v. Carlisle & Jacquelin,

417 U.S. 156, 178 , 94 S.Ct. 2140 , 40 L.Ed.2d 732 (1974). But' a “rigorous analysis” to determine that the Rule 23 requirements are met must be conducted.

Gen. Tel. Co. of Southwest v. Falcon,

457 U.S. 147, 161 , 102 S.Ct. 2364 , 72 L.Ed.2d 740 (1982). While it is sometimes mistakenly suggested that “a motion for class certification is not an , occasion for examination of the merits of the case,’ ”

In re Initial Pub. Offering Sec. Litig.,

227 F.R.D. 65, 93 (S.D.N.Y.2004), the courts should not launch the heavy and expensive machinery of the class action unless there is a chance for a recovery. In any event, since defendants combine their opposition to certification with a motion for summary judgment, the merits must be considered.

Summary Judgment

Plaintiffs need not prove that they will prevail at trial in order to survive a motion for summary judgment. Summary judgment is appropriate only if “there is no genuine issue' as to any material fact and ... the moving party is entitled to a judgment- as a matter of law.”

Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 248 , 106 S.Ct. 2505 , 91 L.Ed.2d 202 (1986).

See also Mitchell v. Washingtonville Central School District,

190 F.3d 1, 5 (2d Cir.1999).

The burden rests initially with the moving party to demonstrate the absence of a genuine issue of material fact.

Goenaga v. March of Dimes Birth Defects Found.,

51 F.3d 14, 18 (2d Cir.1995);

See also Metromedia,

983 F.2d at 357 (misrepresentations sent by mail directly to targeted victim). Where, however, the fraudulent scheme is targeted broadly at a large proportion of the American public the requisite showing of reliance is less demanding. Such sophisticated, broad-based fraudulent schemes by their very nature are likely to be designed to distort the entire body of public knowledge rather than to individually mislead millions of people. From the perspective of the fraudulent actors, clear efficiencies are gained by co-opting the media and other outlets of information as unwitting tools for such a pervasive scheme.

If plaintiffs’ allegations are borne out, it was crucial to the success of defendants’ scheme — particularly the public’s willingness to accept the misrepresentations as truths — that the health claims about “light” cigarettes appear to come not only from the defendants themselves, but also to appear as facts, or at least open questions, permeating the entire body of public knowledge.

Cf, e.g., Simon II,

Appendix D, at Part III.B.4,

infra

(it was tobacco industry policy that “reports were to be withheld from the United States Surgeon General” if they implicated cigarettes in causing disease). To require reliance on specific misrepresentations where the concealed and obscured use of indirect channels of communication was integral to the success of the scheme would produce the perverse result of having the most massive and sinister fraudulent schemes be the ones that escape civil RICO liability.

Where such a broad-based fraudulent scheme is alleged, a plaintiff in order to establish reliance for injury causation need only establish (1) that the RICO defendants intentionally engaged in a scheme to distort the body of public knowledge, (2) that the defendants were successful in doing so (i.e., were, a sub

*1048

stantial factor causing the distortion), (3) that there was detrimental reliance on this distorted knowledge by an intended and foreseeable class of victims, (4) that such reliance was reasonable in the totality of the circumstances, and (5) that the plaintiffs were proximately injured by this reliance.

Falise v. American Tobacco Co.,

94 F.Supp.2d 316, 334 (E.D.N.Y.2000).

iii. Plaintiffs have demonstrated reliance

Plaintiffs have met the five

Falise

requirements:

(1) Documents submitted by plaintiffs in this case, experience with like tobacco litigation, the recent opinion after bench trial in

United States v. Philip Morris

(Appendix A,

supra),

the findings of the jury in

Blue Cross

(Appendix B,

supra),

the trial in Illinois state court (Appendix C, infra), and the expert reports of Joseph Stiglitz, Robert Pollay, Richard Proctor, and others provide ample evidence of a scheme by defendants to mislead each potential smoker of “light” cigarettes, and the public generally, about the health risks of “light” cigarettes.

(2) While defendants raise FTC and public health community “approval” as defenses,

see

Parts VIA, VI.C,

infra,

their advertisements and marketing efforts were and are the primary source of information for smokers about defendants’ products.

See United States v. Philip Morris,

Appendix A at 449 F.Supp.2d at 513-61 ,

supra

(detailing marketing efforts). The expert reports of Katherine Kinsella, Marvin Goldberg, Robert Pollay, and others provide evidence on which a rational jury could conclude that defendants’ representations were a substantial factor causing plaintiffs’ misapprehensions.

(3) Plaintiffs’ experts Robert Proctor, K. Michael Cummings, Joel Cohen, and Michael Dennis, among others, provide evidence that “lights” smokers, the class of alleged victims, relied on defendants’ misrepresentations, and that they did not receive what was represented — less tar and nicotine or, more generally, a less dangerous cigarette.

Defendants’ attack on plaintiffs’ failure to produce a single, determinate “reliance number” — the percentage of plaintiffs who relied on defendants’, as opposed to any other party’s, representations — misconceives the allegations in the case. The survey of plaintiffs’ expert John Hauser attempts to fix — within acceptable limits— the percentage of “light” smokers for whom health was a significant contributing factor to the decision to smoke “light” cigarettes.

See

Part VIII.F.Li,

infra

(finding the survey and Dr. Hauser’s opinions based upon it admissible). He concludes, based on his survey, that 90.1 percent of “light” smokers chose their cigarettes based on the desire to reduce health risks.

“Light” cigarettes are an invention of defendants. The true “reliance number” might be expected to closely approximate Dr. Hauser’s number, unless there were other sources of information about “light” cigarettes. There is substantial evidence that, beginning in 1971, defendants marketed their “light” brands aggressively— with advertising expenditures out of proportion to their market share — in order to capitalize on anticipated smoker concerns about health.

See

Expert Report of Marvin Goldberg, Part VIII.F.l.g,

infra.

Defendants’ representations were thus the primary, (and for many years, the only) source of information about “light” cigarettes.

Accord United States v. Philip Morris,

Appendix A at 449 F.Supp.2d at 898-99 ,

supra.

*1049

Plaintiffs further claim, with evidence sufficient to withstand summary judgment, that defendants deceived and misled the FTC and public health authorities — the only other possible sources of information about “light” cigarettes. Reliance on those entities’ statements, under plaintiffs’ view, would in effect be reliance on defendants’ statements. This distortion of the collective body of knowledge would have been a critical component of the alleged fraud’s success. If this aspect of plaintiffs’ claims is proven, Dr. Hauser’s number should be very close to the true “reliance number.” A jury would be justified in basing a determination of causation on it.

(4) Reliance by many, if not all, of the plaintiffs was reasonable in the totality of the circumstances, particularly given the lack of sophistication on such health matters of many, if not most, smokers, combined with the allegedly voluminous distortions and omissions by defendants concerning the dangers of “light” cigarettes.

Plaintiffs’ experts Jeffery Harris, John Beyer, and John Hauser, among others, present admissible reports that provide a basis for a jury determination that plaintiffs suffered compensable economic harms as a result of defendants’ alleged fraud.

See

Part VUI.F.l,

infra.

(5) Compared to previous RICO cases supervised by this and other courts, the proximate cause inquiry here is not complex. It does not involve a medical provider suing in subrogation to recover costs incurred as a consequence of medical injuries suffered by smokers because of defendants’ fraudulent conduct,

cf. Blue Cross/ Blue Shield of New Jersey,

344 F.3d at 218 (overturning jury verdict because plaintiff insurer failed to identify individualized subrogor claims); a trust fund suing to recover monies expended on medical services for smokers misled by tobacco companies about the addictiveness and health risks of cigarettes,

cf. Laborers Local 17 Health and Benefit Fund v. Philip Morris, Inc.,

191 F.3d 229, 239 (2d Cir.1999) (dismissing complaint because plaintiff trust fund’s injuries were “entirely derivative” of union smokers’); or workers or entrepreneurs harmed by a business that hired a large number of undocumented immigrants and paid them poorly — depressing local wages or permitting the business to underbid competitors on public contracts.

See, e.g., Williams v. Mohawk Indus., Inc.,

411 F.3d 1252 , 1261 (11th Cir.2005) (wages);

Trollinger v. Tyson Foods, Inc.,

370 F.3d 602, 618-9 (6th Cir.2004) (same);

Mendoza v. Zirkle Fruit Co.,

301 F.3d 1163, 1170-1 (9th Cir.2002) (same);

Commercial Cleaning Servs., L.L.C. v. Colin Serv. Sys., Inc.,

271 F.3d 374, 381-5 (2d Cir.2001) (bidding).

Plaintiffs here allege a simple and short chain of causation: defendants represented that “light” cigarettes provided health benefits that they knew these cigarettes did not provide; plaintiffs believed the misrepresentation and so continued to buy “light” cigarettes in larger numbers than they would have absent the fraud; this kept demand for “light” cigarettes at a much higher level than it otherwise would have been; elevated demand allowed defendants to keep prices higher than they otherwise would have; and plaintiffs paid more for “light” cigarettes than they otherwise would have.

Defendants’ reliance upon

Ideal Steel Supply Corp. v. Anza

is ill-placed. The plaintiff in

Anza

alleged harm to his business by reason of a competitor’s fraudulent submission of false tax claims to state authorities. 126 S.Ct. at 1995 . By failing to pay the sums due the state, he alleged, his competitor was able to lower his prices and so attract more customers.

Id.

at 1997 . Two discontinuities plagued the suit.

*1050

First was the disjuncture between the party allegedly defrauded and the party allegedly harmed. “The cause of [plaintiffs] harms ... is a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State).”

Id.

“The direct victim of this conduct was the State of New York, not Ideal.”

Id.

Second was the “attenuated connection” between the injury and the fraud. Plaintiffs “lost sales could have resulted from factors other than [the competitor’s] alleged acts of fraud. Businesses lose and gain customers for many reasons, and it would require a complex assessment to establish what portion of [plaintiffs] lost sales were the product of National’s decreased prices.”

Id.

Plaintiffs here, by contrast, were both the direct target of the fraud and the party injured. Documentary evidence discussed in some detail at Part VIII,

infra,

strongly suggests that the fraudulent “health reassurance” campaign was the central and predominating reason for plaintiffs’ choice. Relatively straightforward surveys of consumers are possible — and conducted often by these very defendants — to determine what motivated the choice of “light” cigarettes that would be infeasible in the complex, multifactor business and investment environment.

Cf. Holmes

at 272-273, 112 S.Ct. 1311 (“If the nonpurchasing customers were allowed to sue, the district court would first need to determine the extent to which their inability to collect from the broker-dealers was the result of the alleged conspiracy to manipulate, as opposed to, say, the broker-dealers’ poor business practices or their failures to anticipate developments in the financial markets.”).

As explained by Justice Breyer in his concurrence in part and dissent in part, it was the competitive and antitrust implications of Anza’s complaint that mandated a finding of no proximate cause:

In my view, the “antitrust” nature of the treble-damage provision’s source, taken together with both RICO’s basic objectives and important administrative concerns, implies that a cause is “indirect,” i.e., it is not a “proximate cause,” if the causal chain from forbidden act to the injury caused a competitor proceeds through a legitimate business’s ordinary competitive activity. To use a physical metaphor, ordinary competitive actions undertaken by the defendant competitor cut the direct causal link between the plaintiff competitor’s injuries and the forbidden acts.

The basic objective of antitrust law is to encourage the competitive process.

Anza,

126 S.Ct. at 2010 . Proximate cause boundaries on but-for cause are based on policy decisions designed to prevent undue inhibition of activities society encourages— in

Anza,

competition. No public policy supports drawing the proximate cause limitation to preclude these plaintiffs’ suit. They were the persons targeted; they expended their own funds; and they were allegedly damaged by getting less than they paid for, satisfying direct, proximate cause requirements.

Anza

does not appear to shrink the class of plaintiffs who may sue under the principles set forth in

Holmes ,

described

supra. See

126 S.Ct. at 1995 (“Our analysis begins — and, as will become evident, largely ends — with Holmes.”).

b. Indirect purchaser rule

Defendants do not appear to seriously contend that they had no direct duty to plaintiff smokers, or that they did not have a duty to smokers not to make fraudulent representations regarding the safety of their cigarettes. Nevertheless, they continue to rely upon the non-applicable indirect purchaser rule.

*1051

The indirect purchaser rule, or

Illinois Brick

doctrine, precludes an indirect purchaser from suing an antitrust violator for overcharges passed on to the indirect purchaser through intermediaries.

Illinois Brick Co. v. Illinois,

431 U.S. 720, 729 , 97 S.Ct. 2061 , 52 L.Ed.2d 707 (1977). The doctrine equally applies to RICO actions for treble damages.

See, e.g., Sperber v. Boesky,

849 F.2d 60, 65 (2d Cir.1988);

Carter v. Berger, 777

F.2d 1173 (7th Cir.1985).

Defendants contend that the

Illinois Brick

doctrine bars plaintiffs’ claims because plaintiffs seek to recover a portion of the price they allegedly overpaid, and yet they have not bought “light” cigarettes directly from the defendants. Rather, plaintiffs bought from retailers, who bought from wholesalers, who bought from defendants. The gist of defendants’ argument is that any injury plaintiffs have suffered is derivative of injury inflicted, in the first instance, upon the wholesalers. In the context of this litigation, the suggestion that the cause of action belongs to the intermediate chain of purchasers in bulk' — ■ the wholesaler, the large supermarket corporations, or even the corner grocer— rather than the to the smoker-purchaser to whom defendants’ advertising is pitched verges on the bizarre. “ ‘If the law supposes that,’ said Mr. Bumble, ‘the law is a ass, a idiot.’ ” Charles Dickens,

Oliver Twist, in Familiar Quotations

669b (John Bartlett, ed., 14th ed.1968). But it is not such a bumbler.

Plaintiffs do not contest that they are indirect purchasers within this crabbed definition preferred by defendants. Their submission is that the

Illinois Brick

doctrine does not bar their claims because they are the direct victims and targets of defendants’ fraud. First, they point out that the case law does not mandate application of the

Illinois Brick

doctrine in the context of a mail and wire fraud case where the purchasers are the direct victims or intended targets of fraud. Second, they contend that the policy rationale underlying the

Illinois Brick

doctrine — to streamline enforcement by granting full recovery only to the direct victim — does not support divesting direct victims and targets of fraud from a cause of action. Plaintiffs argue that because defendants? fraud was designed to inflate the ultimate purchasers’ demand for “light” cigarettes, they are the ones with the “requisite proximity to injury.”

The notion of separating the concept of direct victim with that of intended target is not without some basis.

Cf. Associated Gen. Contractors, Inc. v. California State Council of Carpenters,

459 U.S. 519, 537, 540 , 103 S.Ct. 897 , 74 L.Ed.2d 723 (1983) (treating the specific intent of antitrust conspirators to target plaintiffs separately from the directness or indirectness of plaintiffs’ injury, which relates to the chain of causation between the injury and the unlawful conduct). Although courts have used the term “direct” with some latitude, under Second Circuit precedent, an injury is direct where plaintiffs harm arises from defendant’s misrepresentations to the plaintiff and not from an injury to a third party.

See Laborers Local 17 Health and Benefit Fund v. Philip Morris, Inc.,

191 F.3d 229, 237-39 (2d Cir.1999) (collecting cases).

Analysis requires considering plaintiffs’ contention that they are both the direct victims and the intended targets of defendants’ fraud.

Illinois Brick

doctrine does not bar plaintiffs’ claims under either theory. The cases relied on by defendants do not involve indirect purchasers who are direct victims or intended targets of fraud. Barring plaintiffs’ claims would negate the long-standing principle underlying the

Illinois Brick

doctrine that the victim who is

*1052

in the best position to uncover violations gets the full recovery.

See Carter,

777 F.2d at 1176 .

Illinois Brick

The

Illinois Brick

doctrine originated in the context of antitrust law. In

Hanover Shoe, Inc. v. United Shoe Machinery Corp.,

392 U.S. 481 , 88 S.Ct. 2224 , 20 L.Ed.2d 1231 (1968), the Supreme Court rejected an antitrust defendant’s claim that the plaintiff buyer did not suffer a cognizable injury because it passed on the illegal overcharges to his customers. In that case, a shoe manufacturer sued a manufacturer and distributor of shoe machinery on the theory that the defendant monopolized the shoe industry through its practice of leasing shoe equipment, instead of selling it.

Id.

at 483-84 , 88 S.Ct. 2224 . Plaintiff sought to recover the difference between the price of rentals and the amount he would have paid, had defendant been willing to sell the shoe machinery.

Id.

The Supreme Court held that so long as the seller continued to charge the illegal price, the buyer was not barred from recovery even if he had recouped the overcharge by charging higher prices to his customers.

Id.

at 489 , 88 S.Ct. 2224 .

The Court’s first concern was that allowing defendant to assert that plaintiff passed on the overcharges would make it virtually impossible to ascertain how much of the overcharge was passed every time the goods changed hands.

Id.

at 492-93 , 88 S.Ct. 2224 . Second, allowing the pass-on defense would reduce the effectiveness of treble-damages actions because the buyers of single pairs of shoes would have too tiny a stake to sue, and antitrust violators would retain the fruits of their illegality.

Id.

at 494 , 88 S.Ct. 2224 .

Illinois Brick

involved a situation obverse to

Hanover Shoe.

The state of Illinois and local government agencies sued producers of concrete blocks for conspiring to fix prices and alleged that intermediary contractors passed on the overcharge to the government.

Illinois Brick Co.,

431 U.S. at 735 , 97 S.Ct. 2061 . The government agencies did not buy the bricks directly from the producers; rather, the producers sold to masonry contractors, who submitted bids to general contractors, who, in turn, submitted bids to the government agencies.

Id.

at 726 , 97 S.Ct. 2061 . The Supreme Court held that the counties were barred from suing, because giving indirect purchasers standing to sue was inconsistent with the rule of

Hanover Shoe. Id.

at 728-29, 97 S.Ct. 2061 . Precluding defendant from asserting that a direct purchaser passed on an alleged overcharge to indirect purchasers, while allowing an indirect purchaser to recover from the defendant would result in multiple liability for the defendant.

Id.

at 730 , 97 S.Ct. 2061 . Rather than allowing every potentially affected party to sue only for the portion it absorbed, concentrating full recovery in the hands of the direct purchaser would better ensure that violators would not retain the fruits of their illegality.

Id.

at 735 , 97 S.Ct. 2061 .

The Second Circuit has applied the

Illinois Brick

doctrine in the context of proximate causation in a RICO case.

See Sperber,

849 F.2d at 65 (holding that investors’ injuries were not proximately caused by defendant’s acts of insider trading and analogizing the investors to consumers who merely pay higher prices to an intimidated storekeeper). Other circuits have applied the twin holdings of

Hanover Shoe

and

Illinois Brick

to bar both plaintiffs and defendants from asserting the “pass-on” argument in the context of RICO actions for treble damages.

Compare McCarthy v. Recordex Serv., Inc.,

80 F.3d 842 (3d Cir.1996) (barring suit by indirect purchasers of copies of medical records),

*1053

and Carter, 777

F.2d at 1173 (barring suit by taxpayers for injuries resulting from defendant’s illegal underpayment of taxes),

with County of Oakland v. City of Detroit,

866 F.2d 839 (6th Cir.1989) (plaintiff counties were not barred from suit notwithstanding that they may have passed overcharges to customers),

and Terre Du Lac Ass’n, Inc. v. Terre Du Lac, Inc.,

772 F.2d 467 (8th Cir.1985) (property owners association was not barred from suit notwithstanding that it passed costs to its members).

ii. Inapplicability of

Illinois Brick

Rule

The underlying rationales of

Illinois Brick

doctrine do not support barring plaintiffs’ claims. The Supreme Court’s concern in

Illinois Brick

that defendants would be exposed to multiple liability if indirect purchasers are allowed to sue is remote or non-existent in the case before the court. Under defendants’ interpretation of the

Illinois Brick

doctrine, only the wholesalers would have standing to sue, since they are the ones who bought directly from the defendants. It is questionable, however, whether the wholesalers would have standing to recover, if, as plaintiffs allege, defendants’ fraudulent scheme was designed to induce smokers, and not the wholesalers, into buying more “light” cigarettes.

Cf. Abrahams v. Young & Rubicam Inc.,

79 F.3d 234, 238 (2d Cir.1996) (foreign tourist official who alleged injury to his reputation and business from defendants’ scheme to bribe him, which was unbeknownst to him, failed to establish a RICO claim because he was not the target of the enterprise and his injuries did not flow from the harms the predicate acts were intended to cause);

Byrne v. Nezhat, M.D.,

261 F.3d 1075 , 1111-12 (11th Cir.2001) (“when the alleged predicate act is mail fraud, the plaintiff must have been a target of the scheme to defraud and must have relied to his detriment on misrepresentations made in furtherance of that scheme”) (citations and alteration omitted).

But cf. Terre Du Lac Ass’n,

772 F.2d at 472 (RICO standing exists even where plaintiff does not allege that it was a target of the racketeering activity). To the extent that the wholesalers do not have standing to sue, defendants do not face a risk of multiple liability if plaintiffs are allowed to sue.

Second, barring plaintiffs’ claims would vitiate, rather than enhance, the policy of deterrence underlying the

Illinois Brick

doctrine. As explained by the Seventh Circuit in

Carter ,

granting full recovery to a single party rather than spreading recovery amongst all potentially injured parties gives incentive to sue to the person best positioned to uncover violations.

See Carter, 777

F.2d at 1176. Insofar as defendants’ fraud was designed to increase the purchasers’ demand for “light” cigarettes, it would be pointless to concentrate full recovery in the hands of the wholesalers. There is no reason to surmise that the wholesalers would be in a better position to uncover fraud committed upon the consumers. If plaintiffs’ contentions are correct, the wholesalers stood to gain from defendants’ fraud, since it increased total cigarette sales for both producers and wholesalers.

Where the wholesalers have not suffered any injury that might induce them to sue, allowing plaintiffs’ claims is the only way to ensure that the defendants will not retain the fruits of illegal practices. Although individual plaintiffs’ stakes may be smali,

Hanover Shoe,

392 U.S. at 494 , 88 S.Ct. 2224 , aggregating their damages in a class action provides adequate incentive to sue.

Defendants rely on the Second Circuit decision in

Sperber,

849 F.2d at 60 , a civil RICO action by investors in six publicly

*1054

traded companies against a securities trader who had pled'guilty to insider trading. In that case, the plaintiffs alleged that defendant’s acts of insider trading violated the wire and mail fraud statutes, and that plaintiffs were injured when the price of the six stocks fell following defendant’s plea.

Id.

at 61-62 . The court interpreted the allegation to mean that the price of the six stocks was artificially inflated because defendant’s success in other stock drove all stocks up by encouraging more people to enter into the market, or that defendant’s success attracted a “cult of watchers who bought the1 stocks he bought,” thereby raising the prices only of those stocks.

Id.

at 62, 64 . Significantly, plaintiffs did not contend that they were injured from defendant’s illegal trading in the six relevant stocks.

Id.

at 64 . In addition, plaintiffs did not know that defendant was involved in the stocks that they purchased.

Id.

Citing

Illinois Brick,

the court analogized the investors’ situation to consumers, who unaware of any racketeering, pay higher prices to an intimidated storekeeper: “those- consumers are further removed from the racketeer than the storekeeper is and probably cannot recover under RICO, just as they cannot recover under the antitrust laws.”

Id.

at 65 . The court held that the investors’ injuries were too- remote from defendant’s unlawful acts to satisfy proximate cause where the investors “were neither the target of the racketeering enterprise nor the competitors nor the customers of the racketeer,” and where the defendant “did not cheat or deceive plaintiffs in any way with regard to the particular stocks in question since they did not know he had purchased them and he did not trade in them illegally.”

Id.

Defendants here contend that the facts of

Sperber

closely parallel the plaintiff smokers’ allegations, since- the plaintiffs in

Sperber

had similarly alleged that defendants’ fraud created the demand for stocks. Defendants’ analogy is misplaced. The Second Circuit specifically based its holding in

Sperber

on the fact that plaintiffs were not targets of the racketeering enterprise, and that defendant did not deceive plaintiffs with regard to the relevant stocks. In the case before the court, plaintiffs allege that they were the intended targets of defendants’ fraud, and that the defendant manufacturers deceived them into buying “light” cigarettes.

Also distinguishable are the Third Circuit decision in

McCarthy,

80 F.3d at 842 , which barred suit by hospital patients for inflated photocopying charges, and the Seventh Circuit decision in

Carter,

777 F.2d 1173 , which barred suit by taxpayers for injuries derived from defendant’s tax fraud upon the county. Plaintiffs in

McCarthy

were patients who asserted both antitrust and RICO violations, alleging that the defendant hospitals and copying services conspired to charge excessive prices for photocopies of their medical records.

McCarthy,

80 F.3d at 845 . In practice, the plaintiffs’ attorneys requested the photocopies of their clients’ medical records in the course of their representation, after obtaining consent from their clients.

Id.

Defendants billed the attorneys for the requested photocopies.

Id.

The plaintiffs had contingent fee arrangements with the attorneys, and all but one of the plaintiffs had no obligation under their retainer agreements to reimburse the attorneys for photocopying services, unless the attorney obtained monetary recovery in favor of the respective client.

Id.

at 845-46 . In these circumstances, the Third Circuit held that the indirect purchaser rule barred plaintiffs’ claim, since the attorneys, and not the clients, were direct purchasers of the photocopies.

Id.

at 852 . The contingent basis on which attorneys passed on costs to the clients, if any, would have made it too

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difficult to ascertain what portions of the costs were borne by the clients.

Id.

at 851 .

McCarthy

is not on point because the plaintiffs were not the direct victims or targets of defendant’s unlawful conduct. The patients would have suffered no injury unless their attorneys first obtained monetary recovery in their favor. No allegation was made that the defendant hospitals and copy services induced patients through fraud to request more photocopies of medical records, or that they otherwise targeted the patients. Here, by contrast, plaintiffs have alleged that defendants induced them to buy more “light” cigarettes by falsely representing to them that they would experience reduced health risks from the lower amounts of tar and nicotine in “light” cigarettes.

The

Carter

decision is distinguishable for the same reason. In that case, taxpayers brought a RICO action against a defendant who had previously pled guilty to paying money to county officials to obtain lower tax assessments for his clients.

Carter,

777 F.2d at 1174 . The taxpayers alleged that they had been injured because they had to pay more taxes to make up for the illegal lower assessments.

Id.

The Court of Appeals for the Third Circuit held that the taxpayers did not have standing to sue because their injury was derivative of injury to the county.

Id.

While recognizing that a “fraud committed against one person often injures others,” the court stated that “concentrating the entire right to recover in the hands of the directly injured party promotes deterrence,” because that person has the best opportunity to uncover a violation.

Id.

at 1174, 1176 . While in

Carter

the taxpayers sought to recover for fraud committed against county, plaintiffs in the present case seek to recover for fraud against themselves. They had the best opportunity and motive to uncover the alleged RICO violations and the right to recover properly belongs to them.

Defendants have also relied on three cases which barred RICO defendants from asserting that plaintiffs had no standing to sue because they recouped their losses by passing on the costs to their customers. In the Court of Appeals for the Sixth Circuit case

County of Oakland,

866 F.2d at 839 , plaintiff counties sued the city and the mayor of Detroit under antitrust and RICO theories.

Id.

at 841 . The counties’ allegation was that the city’s charges for sewerage services were inflated because of a price-fixing conspiracy concerning the city’s contracts for sludge disposal.

Id.

The district court had held that the counties had suffered no injury in fact because they passed on the costs to municipalities, which in turn passed on the costs to the ultimate consumers.

Id.

The Court of Appeals for the Sixth Circuit reversed, holding that the counties had standing to bring suit, even if they had passed the overcharge down the chain of distribution to the ultimate consumers.

Id.

at 851 .

Defendants place great emphasis on the Court of Appeals for the Sixth Circuit’s dicta that allowing the defendants to assert the pass-on argument would have transformed the case into a massive class action by the end users and would have presented “enormous evidentiary complexities and uncertainties” in determining each class' member’s damages.

Id.

at 850 (citations omitted). Notwithstanding these rationales,

County of Oakland

did not involve a situation where defendant specifically targeted the' end users or manipulated demand for sewerage services. The court’s holding cannot be extended to a situation where defendants’ fraud directly manipulated the end users’ demand for “light” cigarettes. The public interest in deterring RICO violators by granting rem

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edies to those in the best position to uncover violations outweighs the evidentiary-problems of apportioning damages among the class members.

Defendants cite the decision in

Blue Cross & Blue Shield of New Jersey, Inc. v. Philip Morris, Inc.,

138 F.Supp.2d 357 (E.D.N.Y.2001). In

Blue Cross,

plaintiff insurer asserted a subrogation claim against cigarette manufacturers on the theory that defendants’ deceptions about the adverse health effects of tobacco caused plaintiffs subscribers to incur medical costs, which plaintiff paid.

Id.

at 360, 363 . The court rejected defendants’ claim that the plaintiff insurance company did not suffer any injury because it passed on the increased health care costs to its subscribers.

Id.

at 360, 363-64 . In rejecting the pass-on defense, the court emphasized that plaintiffs “subrogated action [was] not predicated on the idea that costs may have been passed on to its insured in higher premiums,” but was an “independent action in which equitable principles are applied to shift [the] loss to the one who caused [it].”

Id.

at 363 .

Defendants in the present case erroneously claim that

Blue Cross

held that only the direct purchaser can be properly regarded as the damaged party. The plaintiff insurance company in

Blue Cross

was not a purchaser of tobacco, let alone a direct purchaser. Furthermore, plaintiff in

Blue Cross

did not assert a direct RICO claim against defendants in its own right, but rather asserted the rights of its subro-gors.

Blue Cross,

therefore, merely stands for the proposition that insurance subscribers who were injured by paying higher premiums because of tobacco manufacturers’ deceptions had the right to recover.

Defendants here directed their marketing and advertising directly at plaintiff smokers. The smokers’ injury is not derivative of injury to the wholesalers.

Illinois Brick

does not bar the suit.

S. Conclusion on Causation

Plaintiffs’ theory of causation is sound. Their supporting evidence is sufficient to withstand a motion for summary judgment.

D. Computation of Total Damages

This section covers computation of total damages. Distribution of damages through the “fluid recovery” system is covered in Part IX.B,

infra.

Allocation among defendants is dealt with in Part IX.C,

infra.

Damages recoverable under RICO are equivalent to the injury suffered, trebled.

See

18 U.S.C. § 1964 (c). Defendants contend that, even if plaintiffs could prove that defendants intentionally misrepresented the health risks of “light” cigarettes, plaintiffs cannot demonstrate that class members suffered compensable damages. Because plaintiffs have offered two methods of calculating class damages that comport with defendants’ rights and

Daubert

requirements, the contention is rejected.

Plaintiffs’ models for determining loss to the misled purchasers of “lights” come well within the legal boundaries of damages for deceit. As McCormick stated it in his old, but still classic treatise:

As to the measure of damages in deceit, two rules have been adopted in different jurisdictions: (1) The federal rule, followed in a few states, allows the person defrauded to recover the difference between the value of what the plaintiff has parted with and the value of what he has received in the transaction; (2) the majority rule, following the analogy of the measure in actions in contract for breach of warranty, allows recovery of the difference between the actual value

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of what the plaintiff received and the value which it would have had if it had been as represented. The first may be termed the “out-of-pocket loss” rule, and the second, the “loss of bargain” rule.

Charles T. McCormick,

Handbook on the Law of Damages

448 (1935).

See

Part III.D.2.a,

infra.

A certain degree of flexibility in computing damages is allowed, whatever the purist’s view of the applicable of damage law. Even, for example, in condemnations cases, where there is a fairly clear rule that market value is determined by what willing sellers and buyers would pay for comparable properties, the special value to the owner — here, the cigarette purchaser — will be considered.

See, e.g.,

Lewis Orgel,

Valuation Under the Law of Eminent Domain

§ 43 (2d ed.1953) (value to owner may influence estimate of “fair market value”).

1. Plaintiffs’Models

Plaintiffs have offered, as possible measures of the injury they have suffered, models based on profit disgorgement, price impact, loss of value, and loss

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