Schwab v. Philip Morris USA, Inc.

Full title: BARBARA SCHWAB et al., individually and on behalf of all others similarly…

Court: United States District Court, E.D. New York

Date published: Sep 25, 2006

Facts

Tobacco has been a significant part of American history since the 1620s, and in recent times, it has become the basis for a pandemic causing premature deaths. The defendants have been accused of fraudulently marketing “light” cigarettes to cozen smokers into continuing to buy their products, leading to a class action lawsuit. The plaintiffs argue that the defendants’ actions constituted a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), warranting trebled money damages. The plaintiffs claim that plaintiff smokers bought cigarettes labeled as “light” at the suggestion of the defendants, who were aware of their dangers. They claim that the carcinogenic and other adverse effects were not reduced by smoking “light” cigarettes and that the defendants knew this was the case. The plaintiffs seek class certification on behalf of a prospective class of persons who purchased cigarettes labeled as “Lights” or “Light” and are not members of a certified state class seeking economic damages.

The case involves a class action lawsuit against tens of millions of smokers who were induced by fraud to buy “light” cigarettes. The plaintiffs argue that they suffered financial damage because they did not receive a more valuable, safer cigarette. They use federal substantive statutes, the combined “RICO” and Mail and Wire Fraud Acts, to avoid the difficulties of national class cigarette actions and avoid conduct and motive differences among class members. The defendants argue that they committed no fraud, the statute of limitations has run, and class action procedures are not applicable. They move to dismiss and deny class certification. The jury’s constitutional role and the American legal system’s ability to overcome defenses that plaintiffs’ claims are too large and diverse, should be considered. The case highlights the importance of ubi jus, ibi remedium, which means every violation of a right should have a remedy in court.

Issue

Decision

Bruce M. Owen, Ph., is the Morris M. Doyle Centennial Professor of Public Policy in the School of Humanities and Sciences and Gordon Cain Senior Fellow in the Stanford Institute for Economic Policy Research at Stanford University. He was Chief Economist of the Antitrust Division of the United States Department of Justice. As a defense witness, he is critical of the work of Drs. John C. Beyer and Jeffrey E. Harris for plaintiffs. His main conclusions are:

• In this case, compensation for economic injury is an alternative way of compensating individuals for personal injury. If personal injuries have been or will be compensated in other cases, damages resulting from this economic injury suit lead to defendants’ having to pay double damages.

• Plaintiffs’ proposed damages models would result in compensation for some smokers who did not rely on the alleged fraud.

• Plaintiffs’ proposed damages models would result in compensation for some smokers who have not suffered economic injury because the amount of the economic loss associated with the fraud did not reduce the value of their purchases below what they paid.

• Plaintiffs’ proposed class combines dissimilar smokers who have conflicting interests.

• Dr. Beyer’s price impact method suffers from numerous fatal conceptual errors and estimation errors. When errors are corrected or when reasonable alternatives are considered, there is no basis to conclude that the defendants’ alleged fraud significantly increased the price of cigarettes.

• Dr. Harris’s loss of value method is incapable of appropriately estimating causation, injury, and damages. His estimate of the value of light cigarettes has fatal conceptual flaws and is exaggerated by his unsupported assumption that a “safer” cigarette would have been available but for the alleged fraud.

Bruce M. Owen’s proposed testimony complies with Rules 702 and 703 of the Federal Rules of Evidence.

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