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Are Courts the Right Place to Address Large-Scale Corporate Wrongdoing? The "Light" Cigarette Case as an Example of the Limits of Law


Friday, Apr. 11, 2008

Last week, the United States Court of Appeals for the Second Circuit decertified a nationwide class action that would have provided a single, massive vehicle for suing the tobacco industry in connection with its promotion of "light" cigarettes. The plaintiffs contended the tobacco company defendants had falsely advertised the purported health benefits of "lights," thereby inducing millions of consumers into using light cigarettes, rather than not smoking at all.

The decision is noteworthy in and of itself, and also significant in what it says about the ability of courts to address this kind of nationwide issue of what is alleged to be extremely wrongful corporate behavior.

Why the Decision Is Important - and Why the Court of Appeals Refused to Reach Out to Remedy This Wrong

The case, in which plaintiffs alleged that Big Tobacco's marketing of light cigarettes violated the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), involved an estimated 60 million plaintiffs with alleged damages in the $800 billion range. It also claimed still more serious wrongdoing by the tobacco industry: The plaintiffs alleged that the tobacco companies touted light cigarettes as "lower risk," even though they knew full well that the purported health benefits were illusory, because smokers of lights would ultimately receive the same doses of tar and nicotine as smokers of regular cigarettes -- by either inhaling more deeply or smoking more cigarettes to satisfy their cravings.

U.S. District Judge Jack Weinstein, a liberal jurist once considered a leading authority on the rules of federal procedure, had written a 540-page opinion justifying class-action treatment of the plaintiffs' claims. But the three-judge Second Circuit panel that heard the case on appeal, despite recognizing the significant evidence supporting plaintiffs' allegations, nonetheless had little difficulty reversing Weinstein's ruling, and relegating light cigarette smokers to the water torture of litigating their claims against the tobacco companies on an individualized basis.

"While redressing injuries caused by the cigarette industry is 'one of the most troubling ... problems facing our nation today' ... not every wrong can have a legal remedy ... at least not without causing collateral damage to the fabric of our laws," Judge John M. Walker Jr. wrote for the Court of Appeals.

The problem, as the Court of Appeals perceived it, is that for a class to be certified under RICO, "each plaintiff must prove reliance, injury and damages" - and the element of reliance simply is not susceptible to class-wide proof. As Walker explained, "[i]ndividualized proof is needed to overcome the possibility" that members of the purported class bought light cigarettes for reasons other than health. For example, some light smokers might not have paid attention to the ads, might have preferred the taste of light cigarettes, or might have "chose[n] Lights as an expression of personal style." As a result, the panel ruled, the individualized issues in the case overwhelmed those that might properly be decided on a collective, classwide basis - and, thus, class action treatment was not appropriate.

The decision was a major victory for the tobacco industry, which would have been facing a perilous situation if Judge Weinstein's class certification had been upheld. But beyond the relief provided to the tobacco companies, the decision provides a useful occasion for ruminating briefly on the larger question of whether the courts are still - or ever were - an effective avenue for redressing large-scale corporate malfeasance.

The Historical Perspective: The Ideal of Using Courts to Address Mass Torts Clashes with the Realities of American Litigation

A generation ago, class actions and other forms of mass tort claims were seen as a primary tool for effectively holding corporate America accountable for significant wrongs foisted broadly on the public. Over time, however, this particular vision for achieving social justice through the courts became clouded by the realities of litigation and the legal profession.

To be sure, since then plaintiffs' lawyers have brought plenty of righteous lawsuits seeking widespread redress for corporate wrongdoing. The class action mechanism, coupled with the availability of large punitive damages awards, has often effectively served the twin goals of compensating the victims of corporate malfeasance and deterring such malfeasance through financial penalties. In recent years, some active state attorneys general have also used these mechanisms to good effect, though in many cases the wheels of justice grind slowly indeed.

But class actions and punitive damages have also too often become tools for extorting money from companies that have done little if anything wrong. By subjecting defendant companies to enormous potential liability, class actions and punitive damages have an inevitable in terrorem effect. Many companies would rather settle such cases, even where the plaintiffs' underlying claims are highly dubious, to avoid even a relatively small risk of suffering a crippling adverse judgment.

As these companies are painfully aware, judges and juries are far from perfect in sorting out valid claims from those that are trumped up. And thus, it is not infrequently simply good business practice to pay off plaintiffs' counsel, rather take a chance on prevailing on the merits of the case after years of litigation - even if the merits of the defense's side are very strong.

Business entities had other fair gripes as well. They often found themselves hauled into notoriously pro-plaintiff jurisdictions, where the legal deck was stacked. In the absence of caps on punitive damages, they were also subject to runaway juries as well as multiple punitive damage awards from different jurisdictions punishing the same conduct.

More Recently, the Courts and Congress Have Acted to Curb Class Actions in Various Respects

While the appointment of numerous pro-business judges to the federal and state courts has greased the wheels, it was probably inevitable, in any event, that the judiciary would eventually respond to the negative aspects of class actions and punitive damages.

Over the last fifteen years, the Supreme Court has imposed a series of limitations on the size of punitive damage awards - which are now rarely allowed to exceed three times the amount of the underlying compensatory damage award. (Technically, the Court tolerates awards of punitive damages that are up to about nine times the sum of compensatory damages, from a Due Process standpoint, but in reality, the ratio is much lower.) The Court has also made it more difficult for plaintiffs to bring certain kinds of claims and has limited the ability of plaintiffs to sue "deep-pocketed" defendants with only tangential involvement in the wrongdoing alleged.

In so doing, the Supreme Court and lower federal courts are both acting on their own initiative and following the lead of Congress. For instance, Congress has re-written some of the underlying statutes to trim corporate exposure and to protect nationwide businesses from the common plaintiff-side practice of bringing suit solely in those relatively few select jurisdictions known to be extremely friendly to plaintiffs.

Meanwhile, at the state level, through both legislation and judicial action, many jurisdictions have eliminated or curtailed a variety of types of torts, thereby doing away with causes of actions for which punitive damages are available. They've also tightened up the prerequisites for obtaining punitive damage awards, or placed statutory caps on how much plaintiffs can recover. Furthermore, at both the state and federal levels, many courts are narrowing the availability of class action status by applying the standards for getting class treatment with increasing rigor.

Given the Trend of Reining in Class Actions, the Second Circuit Ruling Was No Surprise to Most

Against this backdrop, the Second Circuit's decision in the lights cigarettes case was widely expected. (Indeed, my fellow FindLaw columnist Anthony Sebok predicted this result in a prior column.) Judge Weinstein, who certified the class, was once an intellectual pioneer in using courts and legal procedures to address widespread social ills. Now, he is a something of a relic from a bygone age.

One can certainly argue about whether particular aspects of tort reform make sense, or whether the Constitution is properly read as limiting punitive damages awards. From a policy perspective, however, for the reasons noted, it's hard to argue against the proposition that the old system had some pretty profound flaws. It turns out, not so surprisingly for those of us who litigate for a living, that litigation is a blunt instrument, which sometimes solves one set of problems only by creating others.

But "tort reform" - whether legislative or judicial in origin - suffers from a mirror-image failing. As anyone who reads the newspaper knows, corporate malfeasance has not miraculously disappeared. In the absence of strong counter-incentives, corporations and the people who run them sometimes pursue profit at the expense of the public good, and in contravention of the laws that police them.

If, as the strong trend suggests, we are going to sharply curtail civil litigation as a tool for punishing and deterring corporate wrongdoing, then what are we going to replace it with? State attorneys general, in part due to some laxity at the federal level, have tried to step into this void. However, their efforts are now suffering from recent federal court decisions pre-empting state laws designed to regulate sharp business practices. Overall, moreover, government action historically has often proven inconsistent and under-resourced.

Now, as we watch our financial markets struggle under the weight of questionable mortgage practices - the latest form of corporate excess - the question of how to strike the balance between over- and under-enforcement of the law becomes all the more urgent and timely.

Edward Lazarus, a FindLaw columnist, writes about, practices, and teaches law in Los Angeles. A former federal prosecutor, he is the author of two books -- most recently, Closed Chambers: The Rise, Fall, and Future of the Modern Supreme Court.

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