One of America's Top Plaintiffs' Lawyers Makes a Key Tactical Error During Oral Argument in a Case Against Big Tobacco: When Bad Things Happen to Smart Lawyers

Last week, one of America's premier class action plaintiffs' lawyers went to the U.S. Court of Appeals for the Second Circuit to defend the certification of perhaps the largest class action in the history of the world. The lawyer is Michael Hausfeld, and the case involves a nationwide racketeering suit against the tobacco industry, worth an estimated $800 billion. Despite his well-known skill, during this oral argument, Hausfeld got slaughtered. This column, thus, is a reflection on what happens when bad things happen to smart lawyers at oral argument.

The Case: A Potentially Massive Class Action

I have written about this case before. It is now called McLaughlin, et. al. v. American Tobacco, Co., et. al.. However, when it was the subject of a 2006 decision by Judge Jack Weinstein of the U.S. District Court of the Eastern District of New York, it was known as Schwab, et. al. v. Philip Morris.

The theory of the case is deceptively simple: By 2001, a consensus had developed among public health officials that "lights" cigarettes were no safer than regular, full-flavored cigarettes, for a variety of reasons. The most important of these reasons was that, although lights cigarettes generated less tar and nicotine under ideal laboratory conditions, in the real world smokers tended to compensate for the fact that they received less of the bad stuff they craved either by unconsciously puffing harder on lights cigarettes, or by simply smoking more of them.

Plaintiffs attorneys including Michael Hausfeld contended that the cigarette industry had known for years that real-world use of lights cigarettes was no safer than that of regular cigarettes. Yet, the attorneys said, Big Tobacco had nevertheless introduced the moniker "lights" with the expectation that consumers would associate the term with healthfulness, and buy light cigarettes instead of cutting back or quitting.

Misrepresentations In Search of a Legal Theory of Damages

Plaintiffs' lawyers have known for years that there is a good case to be made that Big Tobacco introduced lights cigarettes in order to maintain their market--not to make people healthier. However, the problem with frame such allegations as a lawsuit has always been: Where are the damages? Since a significant number of people who switched to lights cigarettes would have smoked regular cigarettes anyway (they would not have quit in the end), where is the added harm of lies that were told about the healthfulness of lights?

Had they known the truth, people who actually believed that light cigarettes were safer would have merely had to give up the fantasy that they could smoke and remain healthy, but statistically still would have had trouble quitting. Meanwhile, people who never really believed that light cigarettes were safer (and there seem to be many) never really relied on the "lights" claims, and thus suffered no damages from them.

Hausfeld Comes Up with a Clever Theory: Damage At the Time of Purchase

Mike Hausfeld came up with a creative theory to solve this problem with the case. He decided to sue the tobacco industry under the federal racketeering law, known as RICO. This gave him two advantages: First, a suit under RICO meant that he could create a huge class action, since federal law is in force in all fifty states.

Second, a suit under RICO would frame the harm in terms of the money that was taken from smokers as consumers, not the injury that they may or may not have suffered as smokers. As long as Hausfeld could prove that a smoker got less than what she paid for when she bought lights cigarettes, and that she bought the lights because of a misrepresentation made by the tobacco companies, then he had a RICO class action--or so he thought.

Big Tobacco aggressively fought Hausfeld's suit, but they had two major problems to overcome. First, as noted above, half of the story Hausfeld was telling was obviously true: In fact, the whole history of the development of light cigarettes reflects a cynical attempt to market a fiction: Big Tobacco knew when it introduced "lights" that they were no safer than other cigarettes, and deliberately concealed that fact. Second, the judge who was going to decide whether to certify the class action was Jack Weinstein, an expert in class action law who has overseen a number of large tort cases, and is not loath to certify a class action when the circumstances militate in its favor.

A Big Win for Plaintiffs: Class Action Certification

One of the best-known dilemmas of consumer fraud law, state or federal, is that most fraudulent conduct is never the subject of litigation, simply because it doesn't pay to sue. A lawsuit against someone who lies about their product might cost thousands of dollars to bring, yet the compensatory damages--even if they are trebled--might be relatively small. Since, in America, lawyers' fees are paid out of the damages won by the plaintiff--if she wins--it is thus no surprise that most "small ticket" frauds are never the subject of litigation, even if, in theory, they are slam-dunk cases. (For truly heinous conduct, punitive damages can be awarded, but the Supreme Court has, as I discussed in a prior column, reined in punitive damages by imposing a ratio of punitive to compensatory damages.)

The class action can sometimes change this dismal equation. But for a plaintiffs' lawyer, there is a huge hurdle to overcome to get a judge to certify a class. Under Federal Rule of Civil Procedure 23, a class action can be certified only if a number of conditions are met. A judge must agree with the plaintiff that common issues of fact dominate the case, that class treatment would be superior to individual trials, and that the class representatives chosen by the plaintiffs' lawyers are indeed representative of the rest of the members of the class.

Judge Weinstein held that the class proposed by Hausfeld--persons who purchased lights after May 2000 (four years before the suit was filed) -- satisfied the requirements of Rule 23. The defendants had fought certification by arguing that the central facts of the RICO suit varied identical among class members; smokers of lights cigarettes smoked them for various reasons, not simply because they believed that they were safer. Moreover, Big Tobacco said, the class members also varied in the damages they suffered, for some got cigarettes that were much safer than the cigarettes others received.

The Appeal to the Second Circuit: Why the Plaintiffs Were Fighting an Uphill Battle

Hausfeld was able to get his class certified by Judge Weinstein because the judge was very interested in seeing Big Tobacco put on trial for its sins, and because the judge was willing to bend (or ignore) settled Second Circuit law to get to that goal.

The interlocutory appeal filed by Big Tobacco was another story, however. After Weinstein certified Schwab, the Second Circuit issued its 2006 opinion in In re Initial Public Offering Sec. Litig. There, a unanimous panel of relatively liberal judges (Newman, Sotomayor, and Hall) agreed that Rule 23 had previously been interpreted too loosely by the Second Circuit, and that the test for certification should be stricter than earlier imagined.

Due to this sharp reversal of course, I was a bit surprised when the first words I heard out of Hausfeld's mouth at his oral argument in front of the Second Circuit were to contend that if Judge Weinstein's certification were to be reversed, the panel would also be reversing "twenty years of settled law." After all, IPO had already shown the Second Circuit was inclined, in this area, to depart from its prior interpretation of Rule 23. Moreover, after IPO, it looked like Judge Weinstein had made a bet about where the law was going, and had been proved wrong.

Hausfeld was facing a tough panel, and he needed to be very careful about how he approached his argument. On the political right, Judge Ralph Winter was never going to accept the certification. On the political left, Judge Rosemary Pooler was looking for any excuse not to reverse Judge Weinstein. And in the political middle (sort of), was Judge John Walker. Walker, although a Republican appointee, has a reputation for being pretty independent and fair-minded. Tellingly, his reaction to Hausfeld's opening comment was incredulous. The last thing he wanted to hear was that judicial conservatism somehow required upholding Weinstein's radical move.

The oral argument went downhill from there. Hausfeld lost his case in the first five minutes, when he challenged the panel to adopt a view of the Circuit's own law that bore no resemblance to what they knew that law to be. Perhaps Judge Walker might, before oral argument, have been ready to bend the rules to permit the lights suit to go forward, viewing it as an episode of rough justice against a highly unsympathetic defendant. This is, after all, how the Holocaust slave labor cases made it through the federal courts. But he was certainly not going to pretend that the lights case was not a departure from settled law, which is what Hausfeld was asking him to do.

The Likely Result: Reversal of Judge Weinstein's Certification Decision

I predict that the lights class action will be decertified, dealing a harsh blow to the "lights" litigation. The vote might even be 3-0, since Hausfeld's argument was so outrageous that it left the one liberal on the panel, Judge Pooler, searching for a reason to support him.

This loss for the plaintiffs may well have been inevitable: I don't know whether, even had he taken a different approach, Hausfeld would have been able to cobble together a 2-1 majority to preserve his class action The lesson of Hausfeld's blunder, however, is that a little bit of modesty can go a long way when one is trying to defend a highly controversial lower court opinion in front of an appellate court.