The opinion of the court was delivered by: BARRY
Plaintiffs, six multi-employer health and welfare trust funds operating in New Jersey (the "Funds")
and providing comprehensive health care benefits to union workers, to their families, and to covered retirees (collectively "participants"), have filed this action against the leading tobacco companies
and their lobbying and public relations agents
(collectively as "defendants").
In their behemoth 124-page, 350-paragraph complaint, the Funds set forth virtually the entire history of the marketing of cigarettes and allege that for decades the defendants have collectively engaged in systematic and calculated misconduct, including, among other things: fraudulently failing to disclose accurate information as to the health risks of smoking, intentionally misrepresenting the addictiveness of nicotine, secretly manipulating and controlling nicotine levels to assure addiction, and purposefully inhibiting the development and marketing of safer, less-addictive cigarettes. Compl. P 4. Defendants' falsehoods and misrepresentations, it is alleged, resulted in an increase in tobacco-related injuries suffered by participants and heightened health care costs for which the Funds were responsible.
The Funds are pursuing claims of fraud (Count VI), federal RICO (Counts I and II), federal and state antitrust (Count III and IV), as well as claims of undertaking and failing to perform a special duty (Count VII), and unjust enrichment (Count XI).
They seek to recover damages presumably in the multi-millions of dollars, including but not limited to the health care costs they paid allegedly because of defendants' activities -- the big ticket item, to be sure. They also seek, among other things, injunctive relief requiring the defendants to disclose research and information, fund corrective public education, fund cessation programs for dependent smokers, disclose nicotine yields in their cigarettes, and cease advertising and promoting smoking to minors. Prayer for Relief, Compl. at 121-122. Aside from common law and statutory claims specific to a particular state, the virtually identical complaint has been filed by the relevant Funds in about forty states. The success of these actions thus far has been less than ringing.
Defendants now move to dismiss the complaint, pursuant to Fed. R. Civ. P. 12(b)(6), for failure to state a claim and, in the alternative, pursuant to Fed. R. Civ. P. 12(b)(7), for failure to join necessary parties.
I. Defendants' 12(b)(6) Motion
The recent explosion of litigation and proposed legislation centering around the tobacco industry has brought many issues to the forefront of public debate. The most fundamental issue, at least in this court's view, is whether smokers should be responsible for their own behavior or whether that behavior should be excused -- or at least explained -- by supposedly wicked forces beyond the control of these malleable and helpless victims, such as advertising. Somewhat related thereto is the issue of whether, as long as tobacco is legal, the tobacco industry should be liable for successfully marketing its legal products. Other issues surface more regularly in the burgeoning litigation. When did the tobacco industry became aware of the health risks of tobacco and the addictiveness of nicotine? Did the tobacco industry knowingly conspire to mislead the public into wrongfully believing that a link between cancer and tobacco use was still an "open question"? Are the risks associated with tobacco products so well-known as to foreclose any claim of justifiable reliance? Would public health organizations and consumers have acted any differently had they been given full disclosure by the tobacco industry? These issues, and more, raise questions which are both complex and important. At this juncture, however, this court must look only to the complaint and decide whether, as alleged, each count of the Funds' complaint states a claim upon which relief can be granted.
Defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) can be granted only if defendants demonstrate "beyond a doubt that plaintiff[s] can prove no set of facts in support of [their] claim which would entitle [them] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). This court must accept as true all well-pleaded allegations of the complaint, see Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972), and all reasonable inferences must be drawn in plaintiffs' favor. See Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991).
This is a very tough standard. Only because it is so tough will a limited portion of the complaint -- a very limited portion -- survive, at least for now. A word of caution, however. Let not the length of this opinion suggest that this court has much confidence that the discrete parts of the three counts which it is compelled to hold in now are going anywhere beyond now. See, e.g., nn.12-14, infra. Indeed, even the Funds apparently do not have much confidence in what will remain given their responses at oral argument to more than one of the court's rather pointed and somewhat cynical questions as to how, if at all, they could prove these claims: "We're entitled to get by under Rule 12" (Tr. 82);
"you're talking about evidence," id. at 95; "this is a Rule 56 issue," id. ; "this is Rule 12," id.
Given the fact that the predominant motion before the court is a 12(b)(6) motion and because there are a handful of "well-pleaded allegations" in the complaint by virtue only of the reasonable inferences which at this juncture must be drawn in favor of the Funds, allegations and inferences only slightly amplified in little more than one page of the Funds' brief, the motion to dismiss will be granted in part and denied in part.
Count VI of the complaint alleges that defendants intentionally engaged in fraudulent misrepresentations and concealment of the health hazards of smoking and its addictiveness which induced participants to smoke and continue to smoke, causing the Funds to incur increased health care costs. Compl. PP 297-311. Defendants make two arguments in support of their motion to dismiss Count VI. First, defendants argue that the fraud claim fails because the Funds' injuries, if any, are too remote from defendants' alleged misconduct. Specifically, defendants assert that any fraudulent misrepresentations or concealment by defendants and any injuries or damages incurred because of that misconduct were directed at and suffered by smokers and potential smokers, not the health and welfare funds bringing suit here. Second, defendants argue that, aside from what has come to be referred to as "remoteness," the Funds' fraud claim has not been pled with particularity, as required by Fed. R. Civ. P. 9(b).
To effectively analyze the issue of remoteness, it is imperative to recognize that the Funds allege misconduct essentially directed at two different groups: participants who smoked and the Funds themselves. Although seeking relief for fraud perpetrated by the defendants against both groups, it is the fraud allegedly directed at the Funds themselves which is the supposed "focus" of the Funds' fraud claim (Tr. 5). Thus, the argument goes, the tobacco defendants aimed misconduct directly at the Funds as providers of health care services to "shield themselves from having to pay the health care costs of tobacco-related diseases and to shift those costs to others, including plaintiffs...." Compl. P 307. By virtue of this misconduct, the Funds were prevented from restructuring their health care programs to discourage or reduce tobacco use by their participants. See Compl. at P 304 (as a result of defendants' misconduct, the Funds "relied on false or incomplete information in taking or not taking actions to discourage and reduce tobacco use by plaintiffs' participants"); Compl. at P 309 (by relying on defendants' misrepresentations and nondisclosures, the Funds' "failed to take or would have taken sooner actions to more appropriately treat tobacco-related injuries and diseases as well as to discourage and reduce cigarette and smokeless tobacco use, and the costs associated therewith").
The Funds' "alternative and distinctly secondary claim" (Tr. at 5) is to recover their increased health care costs due to defendants' fraudulent acts "directed at the [participants as] users of tobacco products." Pl. Opp. Br. at 29. See, e.g., Compl. at P 310 ("participants, and the general public, also relied on the nondisclosures of material facts about tobacco use and health, and were thereby induced to purchase, smoke (or chew) and become addicted to Defendants' deadly and defective products, to the detriment of Plaintiffs and members of the Class"); Compl. at P 307 ("defendants' fraudulent statements, concealment and conduct ... was a substantial cause persuading ... participants to purchase and use a deadly and addictive product"); Compl. at P 308 ("the facts concealed by Defendants about tobacco use, health and addiction were material in that a reasonable consumer would have considered them important in deciding whether to purchase and smoke cigarettes"). Parenthetically, the "secondary"' nature of the claim of fraud directed at the participants is certainly not apparent to the court given that this claim is where the real money is and, thus, dominates the complaint to the virtual exclusion of the claim of fraud directed at the Funds.
Distinguishing between the two groups is crucial in addressing defendants' argument that the Funds' injuries are too remote because, while the claim of fraud directed at the Funds survives -- albeit barely -- defendants' motion to dismiss, the Funds may not recover for fraud directed at their participants.
a. Allegations of Misconduct Directed at Participants
Taking the Funds' "secondary" claim first, the Funds may not recover for any damages incurred due to fraud directed at the Funds' participants because the Funds' injuries are too remote. Proximate cause, a requisite element of any tort claim, see Greater Rockford Energy and Tech. Corp. v. Shell Oil Co., 998 F.2d 391, 395 (7th Cir. 1993) (elements of a tort claim are duty, breach, proximate cause and injury) (citing to W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 30, at 164-65 (5th ed. 1984)), cert. denied, 510 U.S. 1111, 127 L. Ed. 2d 375, 114 S. Ct. 1054 (1994), involves two distinct inquiries: (1) foreseeability and (2) "a policy element that encompasses concepts of equity and standing." Oregon Laborers-Employers, slip op. at 6. While the Funds' increased health care costs may have been a foreseeable consequence of an alleged fraud levied against participant smokers, not every foreseeable harm is recoverable. Indeed, courts have established parameters by which to determine, as a matter of law, whether injuries are too remote to warrant recovery.
It has long been recognized that
as a practical matter, legal responsibility must be limited to those causes which are so closely connected with the result and of such significance that the law is justified in imposing liability. Some boundary must be set to liability for the consequences of any act, upon the basis of some social idea of justice or policy.
Caputzal v. Lindsay Co., 48 N.J. 69, 78, 222 A.2d 513 (1966) (citation omitted); see also Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268-69, 117 L. Ed. 2d 532, 112 S. Ct. 1311 (1992) (historically, "a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts was generally said to stand at too remote a distance to recover") (citing to 1 J. Sutherland, Law of Damages 55-56 (1882)). Proximate cause is "that combination of 'logic, common sense, justice, policy and precedent' that fixes a point in a chain of events, some foreseeable and some unforeseeable, beyond which the law will bar recovery." Williamson v. Waldman, 150 N.J. 232, 246, 696 A.2d 14 (1997) (citations omitted).
One such fixed point is this: one who pays the medical expenses of another may not bring a direct action to recover those expenses from the tortfeasor who caused the increased medical expenses. See Anthony v. Slaid, 53 Mass. (11 Met.) 290, 291 (1846) (plaintiff, who agreed to support all of the town paupers, could not recover against defendant for the assault and battery by defendant's wife of one of the paupers, thereby increasing plaintiff's expenses, because the injury was too remote). This rule is traditionally invoked in the context of insurers who attempt to recover their increased costs directly from the tortfeasor. Courts have consistently disallowed such direct recovery, holding that because the tortfeasor directly harmed the insured individual, the insurer's damages were too remote to be recovered in a direct action.
Indeed, as the Second Circuit has observed, "there is not a single reported case in American jurisprudence cited ... or discovered by this court which holds that upon an insurance carrier's payment to its insured, the insurer becomes vested with a claim arising out of an implied contract of indemnity with the tortfeasor who caused the damage necessitating payment by the carrier to the insured." Great American Ins. Co. v. United States, 575 F.2d 1031, 1033 (2d Cir. 1978) (citing cases from 1890 to 1975).
This is not to say that insurance companies may not -- and do not -- recoup losses caused by third-party tortfeasors, but only that their redress is limited to a right of subrogation. A subrogated insurer's right of recovery against a third-party tortfeasor is not inconsistent with what is essentially the rule that an insurer's loss is too remote and not proximately caused by the tortfeasor's acts because the subrogee (the insurer) "steps in the shoes" of the subrogor (the insured). Chemical Bank of New Jersey Nat. Ass'n v. Bailey, 296 N.J. Super. 515, 524, 687 A.2d 316 (App. Div. 1997), certif. denied, 150 N.J. 28 (1997); Economy Auto Ins. Co., 79 N.E.2d at 858 (subrogation does not violate requirement of proximate cause). Remoteness concerns are not much of a concern at all in the subrogation setting because the insurer may recover against the tortfeasor only if the insured could recover. In other words, the insurer, as subrogee, becomes subject to all defenses that were available against the insured party. Great American Ins. Co., 575 F.2d at 1034 (subrogation is an "exclusively derivative remedy which depends upon the claim of the insured and is subject to whatever defenses the tortfeasor has against the insured"); Holloway v. State, 125 N.J. 386, 396, 593 A.2d 716 (1991).
This rule against recovery for remote injuries applies with equal force to the Funds even though they are admittedly distinguishable from traditional insurance companies. The rationale for requiring insurers -- and, likewise, the Funds -- to stand in the shoes of the insureds -- or the Funds' participants -- in order to recover their health care costs is to be certain that the tortfeasor is actually responsible for those costs. By allowing direct recovery from a third-party tortfeasor independent of the insured's claims against the tortfeasor, a remote payor could bypass both the causation link between the tortfeasor and the insured who was injured, as well as any defenses that could be raised, and simply recover based on a unilateral declaration by the payor that the tortfeasor did in fact cause the injury to the insured. See Industrial Risk Insurers v. Creole Prod. Servs., Inc., 746 F.2d 526, 528-29 (9th Cir. 1984) (refusing to allow an insurance company to avoid the comparative negligence of its insured by bringing an independent indemnity claim against the tortfeasor because it would force the alleged tortfeasor to "pay for losses for which it would not otherwise be liable").
Furthermore, New Jersey has explicitly recognized the rule against direct recovery for remote payors. In Holloway, the Supreme Court of New Jersey held that the State, which is obligated to pay the medical expenses of its prisoners, did not have an independent cause of action against negligent tortfeasors for the medical expenses it had incurred on behalf of a prisoner injured by a tortfeasor. Holloway, 125 N.J. at 395-396. The State's claim for medical expenses could only be based upon equitable subrogation and could not be viewed as independent of whatever entitlement the injured prisoner would have had against the tortfeasor. Id.9
The Funds, understandably, reject subrogation as a remedy, presumably because they would be forced to step into the shoes of their thousands and, perhaps, tens of thousands of participants who smoked over the years and thereby subject themselves to any and all defenses that the defendants may have against each of the smokers. The Funds have failed, however, to provide a single instance and, indeed, this court has been unable to find a single case, in which health and welfare funds have been exempt from the general rule and have been allowed to directly sue tortfeasors for monies expended in health care costs for their participants. Indeed, contrary to the Funds' contention, the Third Circuit made clear that the trustees of a union health plan had only a right of subrogation to recover from coal mine operators the medical benefits paid to the health plan's black lung claimants. Connors v. Tremont Mining Co., 835 F.2d 1028, 1029 (3d Cir. 1987) (finding no federal jurisdiction under ERISA because "having only rights of subrogation," the right of the trustees to recover did not depend on the plan, but on the Black Lung Benefits Act).
As payors of medical expenses, the Funds' injuries are too remote, absent a right of subrogation, to directly sue the defendants -- the alleged tortfeasors -- for the health care costs incurred due to misconduct aimed at their participants. Therefore, insofar as the Funds allege misconduct directed at participants or smokers, the Funds' fraud claim cannot stand.
b. Allegations of Misconduct Directed at the Funds
Although nearly all of the Funds' massive complaint addresses misconduct levied against participants and smokers, parsing through Count VI this court has managed to tease out from the complaint the claimed "focus" of the Funds' fraud claim: a claim of fraud directed at the Funds themselves. As noted above, the Funds assert that for the purpose of shifting health care costs from themselves, defendants aimed misrepresentations and nondisclosures directly at the Funds intending that the Funds would rely upon those representations (or lack thereof) in structuring their health care programs. Because the Funds relied on those misrepresentations and nondisclosures, the Funds failed to treat tobacco-related injuries and diseases and failed to discourage and reduce tobacco use, and the costs associated therewith. The imposition of these health care costs damaged the institutional interests of the Funds by "diminishing the assets of the Funds and depriving the participants as a whole of resources to pay for health care benefits." Pl. Opp. Br. at 9.
Injuries premised upon misconduct directed at the Funds cannot be dismissed as remote because the Funds are not suing on behalf of their participants to recover for smoking-related injuries that the participants sustained, but are suing to recover for the economic injuries that they, as health care organizations, suffered due fraudulent conduct directed at them. Proximate cause is no longer a hurdle and subrogation would be inappropriate because the Funds' claims are independent of any misrepresentation toward, or reliance by, smokers.
Defendants argue, however, that the Funds' "purported 'direct' claim" must be rejected because it is simply a recharacterization of the fraud claim vis-a-vis the Funds' participants as to which the Funds cannot recover as remote payors. Def. Br. at 17; Tr. 24-25; Def. Reply Br. at 4. Moreover, defendants argue, "in the absence of participants who purchased and smoked cigarettes ..., the Funds have no legally cognizable injuries regardless of their now asserted failure to take action to 'protect' themselves." Def. Reply Br. at 4; Tr. 34-35 (the Funds' claims "fall on the remoteness doctrine because all of their injury is still derivative and derives through the individual smokers who were injured"). This court will take each of these concerns in turn.
First, fraud against the Funds in order to shift health care costs onto the Funds is a separate claim -- involving different considerations as to each element of the offense -- than that of fraud against participants in order to encourage them to begin or continue smoking. Fraud against participants would require, for example, proof of justifiable reliance by the participants. Reliance by participants, however, is irrelevant to a claim of fraud against the Funds themselves and whether the Funds justifiably relied by failing to institute smoking cessation programs or impose other cost-saving mechanisms. Defendants are simply incorrect in saying that "the fraud or deception that [the Funds] allege [was] directed at them [requires that] the smoker ... be deceived by the fraud." Tr. 24.
Secondly, the fact that the bulk of the Funds' injuries stem directly from injuries suffered by participants does not make the Funds' claim of injuries from fraud as to them any less direct. An example is helpful. Supposing the inventor of Procedure X approached the Funds and informed them, in order to persuade them to offer health insurance coverage for Procedure X, that it is perfectly safe. Relying on the representation made by the inventor, the Funds offer coverage to their participants for Procedure X. As it turns out, however, Procedure X is extremely dangerous and causes numerous health problems which its inventor knew it would when he or she fraudulently represented its safety to the Funds. The damage to the Funds' business as a result of this fraud would be the money the Funds lost as a ...