NO. ________________________

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

__________________________________________ ) PHILIP MORRIS USA, INC. et al., ) ) Petitioners, ) ) v. ) ) BARBARA SCHWAB, et al., individually and ) on behalf of all others similarly situated, ) ) Respondents. ) __________________________________________)

PETITIONERS’ MOTION FOR AN IMMEDIATE STAY PENDING THEIR PETITION FOR REVIEW AND ANY SUBSEQUENT APPEAL THAT THE COURT PERMITS

UNDER FEDERAL RULE OF CIVIL PROCEDURE 23(f)

TABLE OF CONTENTS

Page

-i-

TABLE OF AUTHORITIES ......................................................................................................... ii

INTRODUCTION ......................................................................................................................... 1

ARGUMENT................................................................................................................................. 4

A. The District Court’s Certification Order Is Erroneous .............................. 6

1. Each Plaintiff’s Reliance On The Alleged Fraud Is An Individual Issue.............................................................................. 6

2. Whether Each Plaintiff Received What Was Allegedly Promised—Less Tar And Nicotine—Is An Individual Issue ........ 9

3. The Statute Of Limitations Is An Individual Issue In This Case.............................................................................................. 10

4. The District Court’s Use Of Fluid Recovery Conflicts With This Court’s Long-Established Precedent ................................... 11

5. The District Court’s Approach To “Aggregate” Litigation Violates The Rules Enabling Act And Petitioners’ Constitutional Rights ................................................................... 13

B. Petitioners Should Not Be Subjected To An Imminent, Unlawful Trial Where Plaintiffs Seek Hundreds Of Billions of Dollars ................. 15

C. Plaintiffs Will Not Be Harmed In The Absence Of A Stay..................... 18

CONCLUSION............................................................................................................................ 20

ii

TABLE OF AUTHORITIES

CASES

Agency Holding Corp. v. Malley-Duff & Associates, Inc.,

483 U.S. 143 (1987).............................................................................................................9 In re Agent Orange Product Liability Litigation,

818 F.2d 179 (2d Cir. 1987)...............................................................................................12 Amchem Products, Inc. v. Windsor,

521 U.S. 591 (1997)...........................................................................................................13 Bank of China v. NBM L.L.C.,

359 F.3d 171 (2d Cir. 2004), cert. dismissed, 126 S. Ct. 675 (2005) ..............................6, 8 Barnes v. American Tobacco Co.,

161 F.3d 127 (3d Cir. 1998)...........................................................................................8, 10 Blair v. Equifax Check Services, Inc.,

181 F.3d 832 (7th Cir. 1999) .............................................................................................17 Broussard v. Meineke Discount Muffler Shops, Inc.,

155 F.3d 331 (4th Cir. 1998) ...................................................................................7, 10, 14 Castano v. American Tobacco Co.,

84 F.3d 734 (5th Cir. 1996) .................................................................................................8 Culver v. City of Milwaukee,

277 F.3d 908 (7th Cir. 2002) .............................................................................................18 Dura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336 (2005).............................................................................................................9 Eisen v. Carlisle & Jacquelin,

479 F.2d 1005 (2d. Cir. 1973), vacated and remanded, on other grounds, 417 U.S. 156 (1974)......................................................................................2, 3, 11, 12, 13

Falise v. American Tobacco Co.,

94 F. Supp. 2d 316 (E.D.N.Y. 2000) ...................................................................................7 First Nationwide Bank v. Gelt Funding Corp.,

27 F.3d 763 (2d Cir. 1994)...................................................................................................6 In re Lorazepam & Clorazepate Antitrust Litigation,

208 F.R.D. 1 (D.D.C. 2002)...............................................................................................17

iii

In re Merrill Lynch Limited Partnerships Litigation,

154 F.3d 56 (2d Cir. 1998).................................................................................................10 Molski v. Gleich,

318 F.3d 937 (9th Cir. 2003) .............................................................................................13 Moore v. PaineWebber, Inc.,

189 F.3d 165 (2d Cir. 1999).................................................................................................6 Ortiz v. Fibreboard Corp.,

527 U.S. 815 (1999)...........................................................................................................13 Powers v. British Vita, P.L.C.,

57 F.3d 176 (2d Cir. 1995)...................................................................................................9 In re Repetitive Stress Injury Litigation,

11 F.3d 368 (2d Cir. 1993).................................................................................................14 Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co.,

319 F.3d 205 (5th Cir. 2003) ...............................................................................................8 In re Simon II Litigation,

407 F.3d 125 (2d Cir. 2005)...........................................................................................2, 18 Sumitomo Copper Litigation v. Credit Lyonnais Rouse, Ltd.,

262 F.3d 134 (2d Cir. 2001)...........................................................................................5, 17 In re Tobacco Litigation,

192 F.R.D. 90 (E.D.N.Y. 2000) ...........................................................................................4 Van Gemert v. Boeing Co.,

553 F.2d 812 (2d Cir. 1977)...............................................................................................12

FEDERAL RULES Fed. R. Civ. P. 23................................................................................................................... passim

OTHER AUTHORITY 5 JAMES W. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 23.88[2][d] (3d ed. 1998)..................5

INTRODUCTION

This is a fraud-based RICO action claiming that cigarette smokers were purportedly

deceived by the descriptor “light” and suffered economic losses as a result. The district court

(Weinstein, D.J.) has certified a class that includes nearly everyone who has ever purchased a

light cigarette in this country for the past thirty years—an estimated 50 million people—

regardless of their reasons, their brand, or their understanding of the cigarettes’ risks. Plaintiffs

seek more than $280 billion in economic damages, trebled under RICO to over $800 billion.

Plaintiffs’ class certification motion was first argued, along with related motions, for two

days in September 2005. During argument, the district court recognized the radical re-

interpretations of law that would be necessary to certify a class and the great costs of a trial and

expressly ruled that, if a class were certified, all proceedings in the district court would be stayed

pending review by this Court:

THE COURT: [T]his constitutes what the plaintiffs want, a kind of fluid recovery which is in effect a change of substantive law applicable because it’s a class action. Whether that is possible or not, I think, is an open question. . . . And I think that it’s serious. . . . If I decide to let the case go forward, I’m going to certify under 28 U.S.C. 1292(b), an interlocutory appeal on all the critical motions and obviously on certification however I decide it. That can go up under 23(f), but if I decide in favor of the plaintiffs, I’ll also certify that under 28 U.S.C. 1292(b). . . . [I]t would only be fair to not only certify but stay further discovery and further proceedings here to try to save some money. . . . So I want you to understand that I appreciate the seriousness of the problems you raise and that the plaintiffs raise.

9/13/05 Tr. at 216-17 (emphasis added) (attached as Ex. A to the Declaration of Todd R.

Geremia (“Geremia Dec.”)). The Court later memorialized that ruling in a written order. See

9/21/05 Order at 2 (“On decision of the motions, the court intends to order a stay so that

appropriate interlocutory appeals can go forward.”) (Geremia Dec., Ex. B).

2

When the court ultimately decided to certify a class, however, it ruled, even before there

was an application, that it would not issue a stay. To the contrary, it set a remarkably

foreshortened trial date for January 2007, with class notice (of an undetermined type not yet even

briefed) to go out to the estimated 50 million class members as early as November 2006.

Further, the date was set without provision for certain discovery of class members that had been

deferred until after certification was decided;1 and, perhaps most tellingly, without enough time

for this Court to first review the district court’s unprecedented decision. See Schwab v. Philip

Morris USA, Inc., No. 1:04-cv-1945, slip op. at 539 (E.D.N.Y. Sept. 25, 2006) (hereinafter

“Op.”) (“[j]ury selection is set for January 22, 2007, with trial to begin immediately thereafter”;

“details of notice” to be addressed at conferences in October and November). For example, in In

re Simon II Litigation, 407 F.3d 125 (2d Cir. 2005), another nationwide class action against the

tobacco companies that the same district court certified but which was later ordered de-certified

by this Court, more than four months elapsed between when petitioners filed their request for

Rule 23(f) review and this Court’s order granting permission to appeal. See In re Simon II Litig.,

No. 03-7140-cv, Docket (petition filed on Oct. 3, 2002 and granted on Feb. 13, 2003) (Geremia

Dec., Ex. D).

What happened to cause the district court to so reverse its earlier position on a stay?

Certainly it was not a change in the law. To the contrary, the district court’s decision rejected

settled Second Circuit law, entertained novel propositions it had previously said were “absurd,”

and steam-rolled over central provisions of Rule 23 and RICO:

1 See 6/2/05 Order ¶ 2 (“Further consideration of the issue of absent class member discovery is postponed to after the September 12, 2005 hearing . . . .”) (Geremia Dec., Ex. C); id. ¶ 4 (“Further consideration of the issue of friends and family depositions is postponed . . . .”).

3

1. The district court refused to follow this Court’s decision in Eisen v. Carlisle &

Jacquelin, 479 F.2d 1005, 1018 (2d Cir. 1973), vacated and remanded on other grounds, 417

U.S. 156 (1974), which barred “fluid recovery” procedures because they violate defendants’

constitutional rights and the federal rules. Asserting that Eisen should be “confined to its

particular facts,” the district court dismissed the decision as “not in the highest intellectual

tradition of the Second Circuit Court of Appeals.” Op. at 512, 523.

2. Although the district court had repeatedly and unequivocally stated that a

presumption that every purchaser of “light” cigarettes relied on the alleged fraud would be

“absurd,” “preposterous,” contrary to common sense, contrary to all surveys of smokers, and was

akin to treating individuals as “Pavlov’s dogs,”2 the court nonetheless entertained just such a

presumption. Op. at 208 (“Such a presumption may be appropriate in the present case . . . .”).

3. Having repeatedly acknowledged Second Circuit law requiring RICO plaintiffs to

show both transaction (“but for”) causation and loss causation, the district court created a new

and unprecedented exception for these plaintiffs. Op. at 208 (“The law is willing to adjust the

standard of proof in such fraud cases . . . .”); id. at 70 (“Application of the ‘transaction

causation’-‘loss causation’ duo would bar all consumer fraud claims under RICO.”).

2 See, e.g., 8/31/05 Tr. at 25:8-18 (“COURT: To have this Court presume millions of people react in the same way like Pavlov’s dogs is not something that this Court has ever considered doing and I think everybody understood that.”); 9/13/05 Tr. at 268-69 (“I can’t simply accept it [the proposition that ‘the implicit health representation of the term lights contributed to the purchase decision for all cigarette purchasers of light cigarettes.’] I’m not going to rely on that statement. It’s not a reliable statement.”); 5/26/05 Tr. at 22:15-17 (“COURT: If t[h]e plaintiffs[’] position is that everybody who smoked a light had the same reasons, of course, that’s not going to be a valid position.”); id. at 25:16-23 (“COURT: My assumption coming into this case is that there is going to be huge individual variations, as there is in any case involving choices and actions by human beings. We are all different.”). Relevant pages of these transcripts are attached as Exhibit E to the Geremia Declaration.

4

4. While expressly ruling that untold numbers of class members are “undoubtedly”

barred from recovery by RICO’s four-year statute of limitations, the court simply decided to

include such barred claimants in the class, anyway, and allow the jury to simply guess the

percentage of class members who are barred. Op. at 117 (“Some [class members] undoubtedly

discovered the alleged fraud earlier [i.e., ‘before May 11, 2000 (four years before the complaint

was filed)’] . . . .”). Moreover, under the district court’s improper “fluid recovery” approach to a

class action, plaintiffs who would be time-barred from asserting a RICO claim in an individual

litigation will nevertheless be able to recover a monetary award.

* * *

The district court’s break-neck rush to conduct a trial where plaintiffs seek $800 billion

and to distribute class notice to an estimated 50 million people on an inordinately compressed

schedule is plainly coercive. It follows a series of other attempts in a variety of tobacco cases

before the same court to coerce a settlement and distribute the proceeds on a cy pres basis. See,

e.g., In re Tobacco Litig., 192 F.R.D. 90, 95 (E.D.N.Y. 2000) (sua sponte consolidating many

tobacco cases “for purposes of settlement”; “[t]he time for bringing a close to tobacco litigation

is nigh”). Indeed, the district court here even asserts that it will entertain a motion to expand the

class to include additional millions who purchased low tar cigarettes not labeled “lights,” and the

court says its purpose in making this proposal is to effect a “global settlement.” Op. at 540.

This case is what stays were created for.

ARGUMENT

In the absence of a stay, extraordinarily intensive work will need to be conducted on a

frantically foreshortened schedule at enormous cost (there are, for example, approximately 50

expert witnesses in this case), and class notice will have to be distributed to tens of millions of

Americans in advance of the January 2007 scheduled trial. All of this will have been for

5

nothing—and the district court will have to distribute an additional, corrective notice to the

millions of class members—if this Court ultimately rules that the class certification was in error.

A stay pending a Rule 23(f) petition and a subsequent appeal should issue where “the

likelihood of error on the part of the district court tips the balance of hardships in favor of the

party seeking the stay.” In re Sumitomo Copper Litig., 262 F.3d 134, 140 (2d Cir. 2001).3

(Because the standards for granting a Rule 23(f) petition and a stay pending Rule 23(f) review

are closely related, petitioners respectfully suggest that the same panel should decide petitioners’

request for Rule 23(f) review and their motion for a stay.) That standard is readily satisfied here.

First of all, the district court’s class certification order is, we respectfully submit, likely to be

reversed if this Court grants petitioners’ request to review it pursuant to Rule 23(f). And there is

no cognizable hardship to plaintiffs if a stay is granted. Plaintiffs claim purely economic injuries

stemming from purchases of light cigarettes made as far back as 1971. There is no harm to

postponing adjudication of these stale “claims”—many of which would be barred by RICO’s

four-year statute of limitations—for a short time longer while this Court reviews the district

court’s class certification order. Further, to reduce delay and because petitioners have an interest

in resolving any appeal as quickly as possible, petitioners will request that this Court expedite

any appeal that the Court permits. In the absence of a stay, however, petitioners will be

subjected to the nightmare scenario of hastily preparing for an imminently scheduled trial where

plaintiffs seek hundreds of billions of dollars. This Court should thus order both an immediate

stay and a stay pending any appeal the Court may permit to put a stop to the wholly unnecessary,

3 See also 5 JAMES W. MOORE ET AL., MOORE’S FEDERAL PRACTICE § 23.88[2][d], at 23-368 to 23-369 (3d ed. 1998) (a stay pending Rule 23(f) review is granted “when the party seeking the stay demonstrates that the probability of error in the class certification decision is high enough that the costs of pressing ahead in the district court exceed the costs of waiting”).

6

but very real, frenzy that the district court has set in motion with its class certification and trial

scheduling order.4

A. The District Court’s Certification Order Is Erroneous

As petitioners set forth in additional detail in their Rule 23(f) petition,5 filed

simultaneously with this motion, the district court’s class certification order abrogates Rule

23(b)(3) by trying to rewrite substantive law to treat individual, plaintiff-specific issues as

“common” ones that can be adjudicated through a wholly improper “group rights” approach to

class actions and RICO. Op. at 227. By scheduling a trial to proceed in just three months and

ordering an expedited schedule for important pre-trial events such as disseminating the requisite

notice to millions of potential class members, the district court is effectively depriving this Court

of the opportunity to conduct a meaningful review of the class certification order.

1. Each Plaintiff’s Reliance On The Alleged Fraud Is An Individual Issue

In a fraud-based RICO action, a plaintiff must show that he or she reasonably relied on

the alleged misrepresentation to recover any damages. See, e.g., Bank of China v. NBM L.L.C.,

359 F.3d 171, 178 (2d Cir. 2004) (“[I]n order to prevail in a civil RICO action predicated on any

4 The Rule 23(f) petition and this motion for a stay is made on behalf of Philip Morris USA Inc., R.J. Reynolds Tobacco Company, Brown & Williamson Holdings, Altria Group, Inc., Lorillard Tobacco Company, British American Tobacco (Investments) Limited, Liggett Group, Inc., and B.A.T Industries p.l.c. B.A.T Industries p.l.c. reserves all rights and defenses, including but not limited to the defense of lack of personal jurisdiction, and nothing herein constitutes a waiver of any of these rights and defenses or a voluntary submission to the jurisdiction of the Court. 5 The Rule 23(f) petition sets forth, for example, that the district court erroneously ruled that plaintiffs may seek so-called “benefit of the bargain” damages under RICO. Op. at 95-96. This Court has made clear, however, that a RICO claimant is limited to only “out-of-pocket” damages, and plaintiffs have none here because the price of light cigarettes has always been the same as counterpart full-flavor cigarettes in a brand family. See Commercial Union Assurance Co. v. Milken, 17 F.3d 608 (2d Cir. 1994) (affirming dismissal of a RICO claim for lack of cognizable injury, despite plaintiffs’ allegation that they deserved benefit-of-the-bargain damages).

7

type of fraud . . . the plaintiff must establish ‘reasonable reliance’ on the defendants’ purported

misrepresentations or omissions.”), cert. dismissed, 126 S. Ct. 675 (2005). This Court has

repeatedly held that plaintiffs cannot establish reasonable reliance without proof that the alleged

misrepresentation was, at a minimum, a but-for cause of the purchase or transaction. See, e.g.,

Moore v. PaineWebber, Inc., 189 F.3d 165, 172 (2d Cir. 1999) (plaintiffs must show that “but for

the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that

resulted in their losses”) (emphasis in original); First Nationwide Bank v. Gelt Funding Corp., 27

F.3d 763, 769 (2d Cir. 1994) (same). To recover in this case, plaintiffs must therefore be able to

prove that they would not have purchased light cigarettes “but for” the allegedly misleading

connotation of the word “light” and petitioners’ other allegedly fraudulent conduct in connection

with marketing light cigarettes.

The district court initially, and repeatedly, ruled that plaintiffs would be required to show

that they can prove class members’ “but for” reliance before this case could proceed as a class

action. See, e.g., 10/4/05 Order at 6 (“The following assumptions [of plaintiffs] are not

supported: 1) that everyone who purchased ‘light’ cigarettes did so in reliance on the alleged

fraud that they were safer . . . .”) (Geremia Dec., Ex. F); see also supra note 2. But, after

plaintiffs made crystal clear that they could not make that showing,6 the district court changed

the rules. To force this case as a class action, the district court expressly decided not “to require

reliance on specific misrepresentations” (Op. at 206), but to adopt “[t]he burden of proof for

RICO reliance in a suit alleging mass market fraud [as] set out in Falise v. American Tobacco

Co.,” one of Judge Weinstein’s own decisions from a previous tobacco litigation. Under this

6 See, e.g., Pls.’ Resp. to Defs’ Daubert Motion to Exclude Testimony of Dr. John R. Hauser at 20 (where plaintiffs’ acknowledged that their only putative “reliance” witness, Dr. John R. Hauser, “does not opine specifically that a certain percentage of the class did or did not ‘rely’ on Defendants’ fraud in making their purchase of ‘light’ cigarettes”) (Geremia Dec., Ex. G).

8

admittedly “less demanding” approach (see Falise v. Am. Tobacco Co., 94 F. Supp. 2d 316, 335

(E.D.N.Y. 2000)), the district court would have plaintiffs prove “group” reliance, which neither

this Court nor any other court of appeals has ever held is permissible under RICO or in any

context other than the securities laws (where the efficient market hypothesis may give rise to a

fraud-on-the-market presumption of reliance). See Op. at 227 (“Where a defendant specifically

targets a large group and knowingly relies on the group’s dynamics and communications to

succeed in a fraud, that group may assert its ‘group rights’ in holding the defendant accountable

for its conduct.”).

In this way, the district court improperly tried to convert the individualized, plaintiff-

specific issue of reliance into a “common” question capable of class-wide adjudication. Cf.

Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 343 (4th Cir. 1998)

(“[P]laintiffs’ expert based his lost profits testimony on abstract analysis of ‘averages’ . . . . That

this shortcut was necessary in order for this suit to proceed as a class action should have been a

caution signal to the district court . . . .”). Indeed, the district court refused to follow Bank of

China. In Bank of China, the Court made clear that, where plaintiffs “were aware of the

defendants’ purportedly fraudulent representations,” they cannot establish that they “rel[ied] on

the representations.” 359 F.3d at 180. Here, in the face of several surveys showing that the vast

majority of smokers believe that light cigarettes are no less dangerous than full-flavored

cigarettes, the district court nevertheless ruled that the “group may assert its ‘group rights’” and

thereby essentially ignored the RICO requirement to show reasonable reliance on the allegedly

fraudulent statements. Op. at 227.

That determination was error, and on this basis alone the district court’s class certification

order should be reversed. See, e.g., Sandwich Chef of Texas, Inc. v. Reliance Nat’l Indem. Ins.

9

Co., 319 F.3d 205, 219 (5th Cir. 2003) (invoking “a working presumption against class

certification” in “RICO fraud actions”). Indeed, every federal court of appeals to address class

certification of a fraud-based tobacco case has rejected it on, among other grounds, that reliance

is a predominating, individual issue. See, e.g., Castano v. Am. Tobacco Co., 84 F.3d 734, 745

(5th Cir. 1996) (“[A] fraud class action cannot be certified when individual reliance will be an

issue.”); see generally Barnes v. Am. Tobacco Co., 161 F.3d 127, 143 & n.19 (3d Cir. 1998)

(proposed class was not sufficiently “cohesive” under Rule 23(b)(2); “[s]ignificantly, no federal

appeals court has upheld the certification of a class of cigarette smokers or reversed a District

Court’s refusal to certify such a class”).

2. Whether Each Plaintiff Received What Was Allegedly Promised—Less Tar And Nicotine—Is An Individual Issue

This Court also requires that plaintiffs demonstrate “loss causation” to recover in a fraud-

based RICO case. See, e.g., Powers v. British Vita, P.L.C., 57 F.3d 176, 189 (2d Cir. 1995). To

prove “loss causation,” plaintiffs must demonstrate for each class member “that the defendant’s

fraud caused an economic loss,” i.e., that he or she did not receive what was allegedly promised

(here, less tar and nicotine). See, e.g., Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 337, 344

(2005). The court dealt with this requirement by deeming it “inapplicable” to “consumer fraud

claims under RICO.” Op. at 69-70. But the requirement of loss causation has clear application

here: no plaintiff should be allowed to recover if he or she in fact received what was allegedly

promised.

In this case, plaintiffs allege that they did not receive less tar and nicotine from light

cigarettes because they “compensated,” that is, smoked the cigarettes in such a way (“by inhaling

more deeply, holding smoke in their lungs for a longer period of time, []or by taking more puffs

so as to satisfy their nicotine requirement”) that they received as much tar and nicotine as in a

10

full-flavored cigarette. (Second Am. Compl. ¶ 85.) The proper determination of this loss

causation issue would necessarily turn on highly individualized inquiries of smoking behavior.

Nothing in RICO or this Court’s precedents allows the district court to reject the well-established

requirement for plaintiffs to prove loss causation merely because it may bar some class

members’ claims or preclude class certification here.

3. The Statute Of Limitations Is An Individual Issue In This Case

The statute of limitations for RICO claims is four years. See Agency Holding Corp. v.

Malley-Duff & Assocs., Inc., 483 U.S. 143, 156 (1987). That period begins to run “when the

plaintiff discovers or should have discovered the RICO injury.” In re Merrill Lynch Ltd. P’ships

Litig., 154 F.3d 56, 58 (2d Cir. 1998). Here, because plaintiffs’ counsel filed this putative class

action in May 2004, any class member who was on notice of his or her alleged injury before May

2000 would be time-barred from participating in a class-wide recovery.

The district court recognized that, due to sustained, nationwide media reports from the

1970’s through the year 2000 on the health hazards of smoking light cigarettes and the wide

availability of petitioners’ internal documents on the Internet or in publicly available document

depositories before the year 2000, some class members “undoubtedly” knew of their alleged

“injury” “before May 11, 2000 (four years before the complaint was filed).” Op. at 117; see also

id. at 114 (“[S]ome members of the class almost certainly were aware long before 2000 that

‘light’ cigarettes were not appreciably safer for them than regular cigarettes. The statute would

bar their claims.”). Indeed, the district court expressly ruled that “[u]ntenable is plaintiffs’

extreme position that no member of the class discovered the injury . . . before May 11, 2000 . . . .

Some undoubtedly discovered the alleged fraud earlier . . . .” Op. at 117 (emphasis in original).

The district court nevertheless certified a class where it found that a substantial, but

untold, number of class members’ claims were time-barred. But every federal court of appeals to

11

rule on the subject has held that where resolving a statute of limitations defense requires a

plaintiff-by-plaintiff adjudication—as it plainly does in this case—a claim is not susceptible to

resolution on a class-wide basis. See, e.g., Barnes, 161 F.3d at 149 (“[D]etermining whether

each class member’s claim is barred by the statute of limitations raises individual issues that

prevent class certification.”); Broussard, 155 F.3d at 342 (putative class representatives cannot

be deemed “typical” under Rule 23(a)(3) because “tolling the statute of limitations on each of

plaintiffs’ claims depends on individualized showings”).

The district court proposed that plaintiffs circumvent the individualized nature of the

statute of limitations issues in this case by submitting a “statistical analysis to estimate how

many smokers knew what and when.” Op. at 114. Petitioners vigorously objected to this

improper approach to aggregating individualized issues with “statistical” proof, but, as the

district court noted, plaintiffs withdrew as unreliable the only statistical analysis that that they

conducted in response to the court’s suggestion. Op. at 116. Accordingly, even under the

district court’s improper “aggregate” approach, plaintiffs have failed to show that petitioners’

statute of limitations defense can be adjudicated on a class-wide basis. Once again, on this basis

alone the district court’s certification order should be reversed.

4. The District Court’s Use Of Fluid Recovery Conflicts With This Court’s Long-Established Precedent

The district court attempted to resolve the enormous problems with managing this case as

a class action by stating that damages may be assessed “on an aggregate basis,” with a “fluid

distribution” according to which individual “claimants [will] submit affidavits regarding their

reliance on the ‘lights’ descriptor in addition to information regarding their cigarette purchases.”

Op. at 522. According to the district court, the “residue—if any—can be distributed on the basis

of cy pres principles to be determined at a later time.” Op. at 525. The district court expressly

12

recognized that this plan for a “fluid recovery” “does run the risk of overcompensating some and

undercompensating other members of the class who relied differently on the ‘lights’ designation

and acted differently for different reasons.” Op. at 522.

This Court has repeatedly rejected the use of fluid recovery in the manner proposed here.

As early as Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1018 (2d Cir. 1973), this Court

declared fluid recovery to be “illegal, inadmissible as a solution of the manageability problems

of class actions and wholly improper.” The Court explained that, even if Rule 23 permitted fluid

recovery, “the courts would have to reject it as an unconstitutional violation of due process of

law.” Id. In so ruling, the Court considered—and implicitly rejected—an article by Judge

Weinstein advocating the precise use of fluid recovery proposed here. See Eisen, 479 F.2d at

1008 & n.2 (citing Jack B. Weinstein, The Class Action Is Not Abusive, NEW YORK LAW

JOURNAL, May 1, 1972, p. 1, and May 2, 1972, p. 1).

Later, in Van Gemert v. Boeing Co., 553 F.2d 812 (2d Cir. 1977), this Court saw “no

reason to change [its] position, firmly stated in [Eisen], disallowing a ‘fluid class’ recovery.” Id.

at 815. And in In re Agent Orange Product Liability Litigation, 818 F.2d 179, 185 (2d Cir.

1987), this Court reaffirmed that fluid recovery cannot be used to “allow[] plaintiffs to satisfy the

manageability requirements of Rule 23 where they otherwise could not.” Id. “[S]uch an

unwarranted relaxation” of Rule 23 would “induce[] plaintiffs to pursue ‘doubtful’ class claims

for ‘astronomical amounts’ and thereby ‘generate . . . leverage and pressure on defendants to

settle.’” Id. at 185 (citation omitted; ellipsis in original).

Faced with overwhelming authority banning the use of fluid recovery, the district court

simply rejected this precedent, suggested that Eisen should be “confined to its particular facts,”

stated that Eisen “did not make clear the foundation for its objections to fluid recovery,” and

13

ultimately derided the decision as “not in the highest intellectual tradition of the Second Circuit

Court of Appeals.” Op. at 512-13, 523.

The district court’s further assertion that post-Eisen Second Circuit law as to fluid

recovery “has been mixed,” id. at 516, is wrong. No post-Eisen Second Circuit case has upheld

a fluid recovery outside the settlement context, and neither plaintiffs nor the district court cite to

any such authority. In fact, in rejecting fluid recovery, Eisen itself drew this precise distinction

between a settlement class and a litigation class, noting that “[t]here is no settlement. Every

issue is contested and litigated.” 479 F.2d at 1012. Accordingly, under Eisen and its progeny,

the Court should reject the district court’s proposed use of “fluid recovery” to resolve the

intractable problems of managing this case as a class action.

5. The District Court’s Approach To “Aggregate” Litigation Violates The Rules Enabling Act And Petitioners’ Constitutional Rights

The district court’s overall approach to this case is to permit plaintiffs to use “statistical

analysis,” “averages,” “extrapolation,” or aggregate “presumption[s]” as proof of issues that

require individualized inquiries.7

This approach violates the Rules Enabling Act and petitioners’ constitutional rights. In

Ortiz v. Fibreboard Corp., 527 U.S. 815, 845 (1999), the Supreme Court held that “[t]he Rules

Enabling Act underscores the need for caution” in aggregating individual tort claims in a class

7 Op. at 208-09 (“Generalized proof may include surveys, expert evidence on marketplace principles, and extrapolated and statistic analysis of individuals and groups in the class . . . .”); id. at 213 (“[T]he matter [of ‘individualized damages issues’] can be handled by statistical averaging over the entire class.”); id. at 215 (“While these problems [‘with respect to individual reliance and damages’] are significant, they are superable. Extrapolation . . . can be carried out using very small samples.”); id. at 220 (plaintiffs “can probably extrapolate to the class as a whole”); id. at 229 (“Reliable statistical evidence is available to help the jury decide . . . how many fall into the defrauded category.”); id. at 233 (“Even if some members of the class would be [time-]barred at different times, the jury will be able to extrapolate the total damages with the aid of experts and statistical analysis.”).

14

action because “no reading of the Rule [23] can ignore the Act’s mandate that rules of procedure

‘shall not abridge, enlarge, or modify any substantive right.’” Id. (quoting 28 U.S.C. § 2072(b);

some internal quotation marks omitted omitted); see also Amchem Prods., Inc. v. Windsor, 521

U.S. 591, 613 (1997). In particular, the Act prohibits the use of the class action device or

aggregate evidence to “circumvent individualized proof requirements and alter[] the substantive

rights at issue.” Molski v. Gleich, 318 F.3d 937, 955 (9th Cir. 2003).

That is precisely what the district court has done here. By ruling that reliance, proximate

causation, and statute of limitations—among other issues—are susceptible of proof by “statistical

analysis” and “extrapolation,” the district court has abrogated these issues and effectively

modified the elements of the asserted RICO claims. See Broussard, 155 F.3d at 345 (“[C]ourts

considering class certification must rigorously apply the requirements of Rule 23 to avoid the

real risk, realized here, of a composite case being much stronger than any plaintiff’s individual

action would be.”). As noted above, for example, the district court’s approach to the reasonable

reliance and proximate cause elements of plaintiffs’ claims is to either reject these requirements

or consider a wholly improper presumption that plaintiffs will satisfy them.

Indeed, the district court expressly acknowledges that the trial in this case will not turn on

the testimony of any “individual smoker[], but on the characteristics of a universe to be

determined with the aid of experts.” Op. at 194. Due process and the Rules Enabling Act

prohibit a court from using “the characteristics of a universe” in this manner to prove issues that

require plaintiff-specific adjudication. See, e.g., In re Repetitive Stress Injury Litig., 11 F.3d 368,

373 (2d Cir. 1993) (“The systematic urge to aggregate litigation must not be allowed to trump

our dedication to individual justice, and we must take care that each individual plaintiff’s—and

defendant’s—cause not be lost in the shadow of a towering mass litigation.”) (internal quotation

15

marks omitted); Broussard, 155 F.3d at 345 (class decertified where “plaintiffs portrayed the

class at trial as a large, unified group that suffered a uniform, collective injury” and defendant

was wrongly “forced to defend against a fictional composite”).

B. Petitioners Should Not Be Subjected To An Imminent, Unlawful Trial Where Plaintiffs Seek Hundreds Of Billions of Dollars

In light of the merits of an appeal of the district court’s certification order, petitioners will

be severely prejudiced in the absence of a stay. A year ago, the district court ruled that any trial

in this case would be stayed pending any Rule 23(f) petition for review and subsequent appeal in

this Court because a stay would “only be fair” due to the “seriousness” of the issues presented by

this case:

MR. GROSSMAN: Your Honor, Mr. Garnick will be addressing the due process and implications of that in his portion.

THE COURT: It is an important problem. . . . The American Law Institute committee, which is considering this, takes the position that there cannot be any change in the substantive law. And this constitutes what the plaintiffs want, a kind of fluid recovery which is in effect a change of substantive law applicable because it’s a class action. Whether that is possible or not, I think, is an open question. The ALI says in an earlier portion of its draft, it’s not possible. It’s your point. . . .

The Second Circuit seems to say no fluid recoveries. I don’t believe that when the case is posed, that will be its position.

MR. GROSSMAN: Very well, your Honor. Particularly under a RICO recovery where you have a clear public policy involved.

THE COURT: I understand the position. I think it’s a serious position.

MR. GROSSMAN: I know you understand the position, your Honor.

16

THE COURT: And I think that it’s serious. And I think that you are making a good point. . . . I’ve given a lot of thought to the case . . . . If I decide to let the case go forward, I’m going to certify under 28 U.S.C. 1292(b), an interlocutory appeal on all the critical motions and obviously on certification however I decide it. That can go up under 23(f), but if I decide in favor of the plaintiffs, I’ll also certify that under 28 U.S.C. 1292(b). I don’t think they are inconsistent. I think they are parallel.

MR. GROSSMAN: I don’t think so.

THE COURT: . . . . [I]t would only be fair to not only certify but stay further discovery and further proceedings here to try to save some money. Of course, if an individual party wants to go forward with its own preparation, I’m not staying that. It’s just discovery. So I want you to understand that I appreciate the seriousness of the problems you raise and that the plaintiffs raise.

9/13/05 Tr. at 216-17 (emphasis added) (Geremia Dec., Ex. A); see also 9/21/05 Order at 2 (“On

decision of the motions, the court intends to order a stay so that appropriate interlocutory appeals

can go forward.”) (Geremia Dec., Ex. B).

Nothing has changed in the interim to make it any more “fair” to subject petitioners to a

hasty, improper trial before this Court has had the opportunity to review the district court’s

certification order. To the contrary, in the year since the district court first ruled it would enter

an immediate stay of all proceedings pending discretionary review by this Court, the record has

been made crystal clear that plaintiffs have not satisfied their burden to show that reliance and

statute of limitations can be adjudicated on a class-wide basis, even under the improper approach

advocated by the district court whereby individual issues would be resolved with “aggregate”

proof. See supra note 7; Op. at 116 (“time study” survey directed to statute of limitations issues

“has been withdrawn by plaintiffs”). Nevertheless, after certifying a case where the plaintiffs

will be seeking a massive treble damage award on behalf of nearly every person who has ever

smoked a light cigarette in this country for the past thirty years—and making several

17

controversial rulings of law in the process—the district court has changed its mind and ordered

that this case must proceed immediately to a trial, to start in January 2007. See Order at 528

(stating only that “a stay of proceedings is not appropriate”).

The court’s reasons are openly stated: to coerce settlement. The court’s order sua sponte

goes out of its way to encourage plaintiffs to amend their complaint to seek more damages up

until the time of trial “instead of, as is now the case, up to the time of filing the complaint.” Op.

at 539. And, without any prompting from the parties, the court further states that, if it “would

assist the parties in negotiating a global settlement,” the court “will entertain a motion to extend

the class to, for example, encompass all ‘low tar’ brands rather than ‘lights’ alone.” Op. at 540.

Rule 23(f) was enacted for precisely this circumstance. As the Seventh Circuit has stated,

“an appeal under Rule 23(f) is in order” where “a grant of class status can propel the stakes of a

case into the stratosphere . . . . [S]ome plaintiffs or even some district judges may be tempted to

use the class device to wring settlements from defendants whose legal positions are justified but

unpopular.” Blair v. Equifax Check Servs., Inc., 181 F.3d 832, 834 (7th Cir. 1999); see also Fed.

R. Civ. P. 23, Advisory Committee Notes, 1998 Amendments (“An order granting certification

. . . may force a defendant to settle rather than incur the costs of defending a class action and run

the risk of potentially ruinous liability.”).

In sum, without an immediate stay and a stay pending appeal, petitioners will have to

hastily prepare to defend themselves in a class action trial that should not take place and where

plaintiffs’ counsel are seeking hundreds of billions of dollars. Petitioners should not be

subjected to this sort of improper pressure, especially when the underlying order granting

plaintiffs’ motion for class certification is on such shaky legal footing and there is absolutely no

legitimate reason to expedite these proceedings in the manner that the district court has. Cf. In re

18

Lorazepam & Clorazepate Antitrust Litig., 208 F.R.D. 1, 6 (D.D.C. 2002) (“[T]he public interest

is really rooted in the proper resolution of the important issues raised in this case . . . . A short

stay of all matters pending a decision from the Court of Appeals [on petitioners’ Rule 23(f)

petition] therefore is warranted.”) (emphasis in original).

C. Plaintiffs Will Not Be Harmed In The Absence Of A Stay

The merits of petitioners’ request for Rule 23(f) review, coupled with the considerable

harm of being subjected to an imminent trial where plaintiffs seek such gargantuan sums of

money, show that “the likelihood of error on the part of the district court tips the balance of

hardships in favor of the party seeking the stay.” In re Sumitomo Copper Litig., 262 F.3d at 140.

Moreover, the Court should order an immediate stay so that absent class members will not

receive notice—which, without an immediate stay, will have to be distributed to tens of millions

of people within the next two months—and then later receive a conflicting notice of

decertification in the event that this Court accepts an appeal and reverses the district court’s

order. See, e.g., Culver v. City of Milwaukee, 277 F.3d 908, 914 (7th Cir. 2002) (district court

must “notify the class members of the decertification of the class”).

In addition, plaintiffs’ counsel’s conduct shows that they have not treated the asserted

claims for economic injury with any sense of urgency. To begin, as the district court noted, the

same counsel who represent plaintiffs in this case “filed four similar ‘light’ cigarettes class

actions in various state courts in 1998 and 1999” and “[o]ther ‘of counsel’ attorneys to the class

filed two ‘light’ cigarettes class actions in state courts during the same period.” Op. at 118.

Thus, plaintiffs’ counsel waited for six years after they filed “lights fraud” cases in state court

until they filed this putative class action in federal court in 2004. (By filing this case in May

2004 as a “related case” to In re Simon II Litigation, plaintiffs’ counsel successfully “shopped”

for a district court judge.)

19

In this case, too, plaintiffs’ counsel has delayed. Their motion for class certification was

fully briefed in August 2005 and then, contrary to the terms of the governing Case Management

Order, plaintiffs’ counsel disclosed reports for ten additional expert witnesses months after their

March 2005 deadline for making expert disclosures. (Case Management Order ¶ I.B.2, attached

as Ex. H to the Geremia Dec.) The district court initially refused to consider these untimely

expert reports. But after two days of oral argument in September 2005—during which

petitioners highlighted the gaps in plaintiffs’ expert submissions—the court reversed itself and

ruled that “[t]hese new materials proffered by plaintiffs may bear on the merits of at least some

of the critical pending motions.” 9/21/05 Order at 2. A one-year delay ensued during which

plaintiffs repeatedly missed court-ordered deadlines, to the point where the magistrate judge

became exasperated with plaintiffs’ counsel and resorted to asking them what deadlines they

would agree to meet.8 Finally, at the end of this period, plaintiffs withdrew their survey directed

to statute of limitations issues that was the principal reason for the one-year delay (Op. at 116)

and conceded that the late-disclosed expert they had billed as their “reliance” witness “does not

opine specifically that a certain percentage of the class did or did not ‘rely’ on Defendants’ fraud

in making their purchase of ‘light’ cigarettes.” See supra note 6.

In these circumstances, plaintiffs cannot credibly contend that they will be prejudiced by

a short stay of all proceedings in the district court while this Court considers petitioners’ request

for Rule 23(f) review and any subsequent appeal the Court permits. And, to reduce any

unnecessary delay, petitioners will request that the Court expedite any appeal in this case. An

8 See 10/26/05 Tr. 9:11-10:16 (“THE COURT: . . . . I’m at the point where I feel as though the deadlines we set are not followed. And I’m loathe to set more, only to set us up for additional frustrating failures . . . . [T]he plaintiffs must understand by now that it is my unequivocal goal to have the materials and witnesses they intend to rely upon in connection with the pending motions identified and discovered before any other events occur in this case. . . . So what schedule would the plaintiffs propose to accomplish these goals?”) (Geremia Dec., Ex. I).

21

David M. Bernick Michelle Browdy KIRKLAND & ELLIS LLP Amoco Building 200 East Randolph Drive Chicago, Illinois 60606 (312) 861-2000

Murray R. Garnick Judith Bernstein-Gaeta James M. Rosenthal ARNOLD & PORTER LLP 555 Twelfth Street, N.W. Washington, D.C. 20004-1206 (202) 942-5000

Peter Bellacosa KIRKLAND AND ELLIS LLP 153 East 53rd Street New York, New York (212) 446-4800 Attorneys for Petitioner Philip Morris USA Inc.

Guy Miller Struve Frances Bivens Matthew S. Stewart DAVIS POLK & WARDWELL 450 Lexington Avenue New York, New York 10017 (212) 450-4000 Attorneys for Petitioner Altria Group, Inc.

Gregory M. Loss CHADBOURNE & PARKE LLP 30 Rockefeller Plaza New York New York 10112 (212) 408-5100 Attorneys for Petitioner British American Tobacco (Investments) Limited

Alan Mansfield Stephen L. Saxl GREENBERG TRAURIG, LLP 200 Park Avenue New York, New York 10166 (212) 801-9200 William L. Allinder SHOOK HARDY & BACON LLP 2555 Grand Boulevard Kansas City, Missouri 64108-2613 (816) 474-6550 Attorneys for Petitioner Lorillard Tobacco Company

Leonard A. Feiwus Julie R. Fischer KASOWITZ, BENSON, TORREST & FRIEDMAN, LLP 1633 Broadway New York, New York 10019-6799 Attorneys for Petitioner, Liggett Group, Inc.