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

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

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

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