RICO Class Actions — No Fraud on the Market Presumption

The Second Circuit reversed Judge Weinstein’s certification of a RICO class action brought by purchasers of Light Cigarettes in McLaughlin v. Am. Tobacco Co., 2008 U.S. App. LEXIS 7093 (2d Cir. April 3, 2008):

Reliance on Mail Fraud Predicates Required. In cases such as this one when mail or wire fraud is the predicate act for a civil RICO claim, the transaction or ‘but for’ causation element requires the plaintiff to demonstrate that he relied on the defendant's misrepresentation.”

No Fraud on the Market Presumption. “We do not think that the Basic presumption, or the district court's variation of it, applies in this case; we cannot assume that, regardless of whether individual smokers were aware of defendants' misrepresentation, the market at large internalized the misrepresentation to such an extent that all plaintiffs can be said to have relied on it. Basic involved an efficient market — the market in securities traded on the New York Stock Exchange — capable of rapidly assimilating public information into stock prices, see id. at 247, 249 n.29 (describing the securities market as "impersonal, well-developed," and "information-hungry"); the market for consumer goods, however, is anything but efficient, cf. Sikes v. Teleline, Inc., 281 F.3d 1350, 1364 (5th Cir. 2002) (‘[E]ach individual plaintiff is the only person with information about the content of the advertisement upon which he relied.’).... As we stated in In re IPO, ‘[w]ithout the Basic presumption, individual questions of reliance would predominate over common questions.’”

Blanket Rule Against Certification of Fraud Class Action Not Adopted. “We need not go so far as to adopt the Fifth Circuit's blanket rule that ‘a fraud class action cannot be certified when individual reliance will be an issue,’ Castano v. Am. Tobacco Co., 84 F.3d 734, 745 (5th Cir. 1996), as some fraud actions do appear within the contemplation of Rule 23's drafters, see Fed. R. Civ. P. 23(b)(3) Advisory Committee Notes (‘[A] fraud perpetrated on numerous persons by the use of similar misrepresentations may be an appealing situation for a class action, and it may remain so despite the need, if liability is found, for separate determination of the damages suffered by individuals within the class.’). But in this case, reliance is too individualized to admit of common proof.

Individualized Proof of Injury Also Bars Class Action. “In this case, out-of-pocket losses cannot be shown by common evidence because they constitute an inherently individual inquiry: individual smokers would have incurred different losses depending on what they would have opted to do, but for defendants' misrepresentation. For example, smokers who would have purchased full-flavored cigarettes instead of Lights had they known that Lights were not healthier would have suffered no injury because Lights have always been priced the same as full-flavored cigarettes. By contrast, those who would have quit smoking altogether could recover their expenses in purchasing Lights. And those who would have continued to smoke, but in greater moderation, could recover something in between. Thus, on the issue of out-of-pocket loss, individual questions predominate; plaintiffs cannot meet their burden of showing that injury is amenable to common proof.”

Held, class decertified.

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