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Tobacco Litigation Update

In Schwab v. Philip Morris, a federal judge in Brooklyn recently approved a class-action racketeering lawsuit against tobacco companies on behalf of millions of smokers of "light" cigarettes. Up to 30 million smokers will be able to sue based on allegations that the tobacco companies exaggerated the health benefits of smoking “light” rather than regular cigarettes. Many smokers compensate for the reduced nicotine in light cigarettes by inhaling more deeply or smoking more cigarettes. That offsets much of the health benefits of light cigarettes. The tobacco giants apparently suspected as much but didn't tell the public. This ruling has triggered debate, since the Federal Trade Commission arguably approved the tobacco companies' use of the “lights” label, as the Illinois Supreme Court concluded last year when it quashed another class action lawsuit against the tobacco companies. But that's relevant to whether Big Tobacco is guilty, rather than whether the case should be handled as a class action. Even if you're guilty, that doesn't mean you can be sued by 30 million people all at once. Under federal court rules, for smokers as a group to bring a class action, they have to show that legal issues that affect all “lights” smokers alike predominate over ones that vary between individual smokers or have to be resolved on a smoker-by-smoker basis. And there are a lot of issues that have to be resolved on a smoker-by-smoker basis. The federal racketeering law, RICO, isn't an anti-lying statute. Even if a tobacco company made false claims, to recover damages, each individual smoker still has to prove he actually believed its claims, and reasonably relied on them, when he bought its cigarettes. That prevents most racketeering lawsuits from being class actions, since issues that vary between smokers (like reliance and damages) tend to outweigh any common issues affecting all plaintiffs equally. As the Fifth Circuit Court of Appeals has held, a lawsuit should not be certified as a class action when plaintiffs have widely varying damage claims, or have to prove they individually relied on a the defendant's lies. To get around that inconvenient fact, Judge Weinstein rewrote the law. He got rid of individual damage issues by proposing to award damages not to individual smokers but to all 30 million smokers at once, using a device called fluid recovery. Fluid recovery is an often-abused practice in which a damage award is first set for the entire class, typically based on testimony from an expert witness hired by the plaintiffs' lawyers. Then, a simplified claims procedure is set up for individual class members (in this case, individual smokers) to demand a share of the loot. Then, if any money is left over that hasn't been assigned to an individual class member —- and, usually, a lot of money is left over —- it is distributed by a concept called cy pres, to charities that supposedly help consumers. In practice, the money usually goes to self-styled consumer groups tied to Ralph Nader, which then lobby against limits on class action lawsuits. (In California state court, it's even worse. There, money from consumer class actions is often diverted through cy pres to left-wing groups like the Employment Law Center that have nothing to do with consumer protection, and focus instead on bringing employment bias lawsuits or fighting conservative ballot initiatives). Judge Weinstein approved fluid recovery even though he conceded that his own appeals court, the Second Circuit, has already condemned fluid recovery in its Eisen decision (although Judge Weinstein says it did so only in dictum, and its decision is thus not binding on him). The tobacco companies can try to appeal Judge Weinstein's decision now, since Federal Rule 23(f) allows the Second Circuit Court to entertain an appeal, if it feels like it. If it grants an appeal, Weinstein's erroneous ruling will likely be reversed, blocking the lawsuit from proceeding as a class action. But the appeals court doesn't have to hear the appeal now if it doesn't want to. It can be lazy and wait instead until the lawsuit is tried to a jury. That could easily result in a multibillion dollar damage award, since New York City courts are famously hostile to tobacco companies. If that happens, the tobacco companies may have to empty their pockets to come up with an appeal bond big enough to avoid paying the damage award prior to an appeal — even if the damage award would probably be overturned on appeal. To avoid such risks, there may be a fat, multimillion dollar settlement, a big share of which will go to the lawyers who sued the tobacco giants.