Opinion ID: 766109
Heading Depth: 2
Heading Rank: 3

Heading: Applying the Direct Injury Test to Instant Case

Text: 45 The defendants' principal point on appeal is that the plaintiffs' damages are entirely derivative of the harm suffered by individual smokers as a result of defendants' acts. Hence, defendants believe that plaintiffs' alleged injuries are indirect, since they flow from the misfortunes visited upon third persons, and that plaintiffs therefore stand at too remote a distance to recover. 46 In response, plaintiffs declare that their complaint alleges a direct injury brought about by defendants' misconduct towards the Funds themselves. Plaintiffs allege that defendants misrepresented the health risks of smoking and the addictiveness of nicotine, causing the Funds to fail to implement smoking cessation programs, and deliberately shifting the costs of health care for tobacco related illnesses from the tobacco companies to the Funds. In turn, this led to what the district court termed harm to [plaintiffs'] infrastructure, financial stability, [and] ability to project costs. Laborers Local 17, 7 F. Supp. 2d at 285. Plaintiffs insist that these injuries were direct, since the activities of the Funds themselves were affected by defendants' misconduct. 47 Ultimately, however, whether plaintiffs' injuries are labeled as infrastructure harm or harm to financial stability, their damages are entirely derivative of the harm suffered by plan participants as a result of using tobacco products. Without injury to the individual smokers, the Funds would not have incurred any increased costs in the form of the payment of benefits, nor would they have experienced the difficulties of cost prediction and control that constituted the crux of their infrastructure harms. Being purely contingent on harm to third parties, these injuries are indirect. Consequently, because defendants' alleged misconduct did not proximately cause the injuries alleged, plaintiffs lack standing to bring RICO claims against defendants.
48 Further, this conclusion is consistent with the three policy factors addressed by Holmes, which buttress the principle that plaintiffs with indirect injuries lack standing to sue under RICO. 503 U.S. at 269-70. First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent, factors. Id. at 269 (citing AGC, 459 U.S. at 542-43). For instance, in Holmes, it was difficult to tell whether plaintiff's inability to collect from certain brokers had resulted from the defendants' conspiracy to manipulate the brokers or, instead, from the brokers' poor business practices. Id. at 273. The present case is similar because the damage claims here are incredibly speculative. It will be virtually impossible for plaintiffs to prove with any certainty: (1) the effect any smoking cessation programs or incentives would have had on the number of smokers among the plan beneficiaries; (2) the countereffect that the tobacco companies' direct fraud would have had on the smokers, despite the best efforts of the Funds; and (3) other reasons why individual smokers would continue smoking, even after having been informed of the dangers of smoking and having been offered smoking cessation programs. On a fundamental level, these difficulties of proving damages stem from the agency of the individual smokers in deciding whether, and how frequently, to smoke. In this light, the direct injury test can be seen as wisely limiting standing to sue to those situations where the chain of causation leading to damages is not complicated by the intervening agency of third parties (here, the smokers) from whom the plaintiffs' injuries derive. 49 These concerns become particularly pointed in a case, like the present one, where the injuries are alleged to derive not simply from defendants' affirmative misconduct but also from plaintiffs' fraudulently induced inaction. That is, it is often easier to ascertain the damages that flow from actual, affirmative conduct, than to speculate what damages arose from a party's failure to act. In the latter situation, as in the case at hand, it becomes difficult to distinguish among the multitude of factors that might have affected the damages. Here, for example, plaintiffs' alleged damages might have derived from inefficiencies in the Funds' own management, as well as from non-smoking related health problems suffered by the smokers, and it would be the sheerest sort of speculation to determine how these damages might have been lessened had the Funds adopted the measures defendants allegedly induced them not to adopt. 50 The complexity of these calculations makes the ultimate question of damages suffered by the Funds virtually impossible to determine. Indeed, this case seems to present precisely the type of large, complicated damages claims that Holmes and Associated General Contractors sought to avoid. See, e.g., AGC, 459 U.S. at 545 ([M]assive and complex damages litigation not only burdens the courts, but also undermines the effectiveness of treble-damages suits.). Moreover, for us to rule otherwise could lead to a potential explosion in the scope of tort liability, which, while perhaps well-intentioned, is a subject best left to the legislature. 51 The second policy factor addressed in Holmes focuses on the possibility that recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. 503 U.S. at 269 (citing AGC, 459 U.S. at 543-44). Under New York law, the smokers are prohibited from recovering medical costs paid to them by insurers. New York law dictates that where the plaintiff seeks to recover the cost of medical care and the court finds that such costs were reimbursed by an insurance company, the court shall reduce the amount of award by such a finding. N.Y. C.P.L.R. §4545(c) (McKinney 1992). As a result, the district court believed the suit presented no risk of multiple recoveries. See Laborers Local 17, 7 F. Supp. 2d at 285. 52 Admittedly, the smokers in this case do not present a risk of double recovery under RICO. At the same time, however, other remote payors like the employers or health insurers with whom the Funds may contract might bring suit claiming that they ultimately bore the costs. Here, the Funds argue that ERISA prevents the employers from obtaining such a recovery. But the provision cited by plaintiffs merely prevents the assets of the Fund from inuring to the benefit of an employer. See 29 U.S.C. §1103(c)(1) (1994). Although this might prevent recovery by an employer against the Fund, it in no way prevents a suit by the employer against the defendants as tortfeasors. Thus, a possibility of duplicative recoveries exists. 53 In this context, defendants assert that New York State has already sued some of the tobacco companies, seeking recovery of costs it has expended for the medical care of its employees, some of whom are participants in certain of the public-sector union Funds. But, the Funds respond, such duplicative recovery is prevented by the single satisfaction rule. The single satisfaction rule is often used to prevent a single plaintiff from recovering its damages several times over from multiple defendants. But, even were we to assume that the single satisfaction rule would prohibit duplicative recoveries by multiple plaintiffs against a single defendant, it would not cure the ultimate problem set forth in Holmes, that is, that courts would be forced to adopt complicated rules apportioning damages among the Funds, the employers, and perhaps even the unions, each of which is removed at [a] different level[] of injury. Holmes, 503 U.S. at 269. 54 In the third policy factor discussed by Holmes, the Supreme Court concluded that the need to grapple with the problems of calculating and apportioning damages was unjustified where directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely. Id. (citing AGC, 459 U.S. at 541-42). The Funds correctly note that these RICO causes of action could not be asserted by the smokers or by the Funds in a subrogation action because the RICO statute requires an injury to business or property, whereas the smokers' injuries are personal in nature. Hence, the Funds conclude there are no more directly injured private attorneys general who could vindicate the law for these alleged RICO violations. The district court also found that because individual smokers would not be able to bring a RICO action, the harms alleged in plaintiffs' complaint would go unremedied were the Funds' action not allowed to continue. 55 Yet, to the contrary, our holding that plaintiffs lack standing under RICO need not bring about the result plaintiffs fear. The Funds may still bring a subrogation action to recover the medical costs paid out for the individual smokers, and the smokers themselves have sufficient independent incentive to pursue their own causes of action for such additional types of injuries as pain and suffering. Although these will not be RICO claims, they will remedy the harm done by defendants' alleged misconduct. Moreover, these actions will promote the general interest in deterring injurious conduct, which Holmes noted as the objective of this policy factor. 503 U.S. at 269. Especially where such other actions are available, the lack of a RICO damages remedy for even direct personal injuries (such as those suffered by the individual smokers) actually weighs heavily against RICO standing for parties (such as the Funds) alleging harms that are purely contingent on personal injuries suffered by others. 56 In sum, the policy considerations highlighted in Holmes support our conclusion that the Funds have failed to establish proximate causation and that, accordingly, they lack standing to sue the defendants under RICO. 57 III Is a Defendant's Specific Intent to Harm a Plaintiff An Exception to the Direct-Injury Rule? 58 Plaintiffs aver that even if their claims fail the direct injury test, they should still have standing to sue because an exception to this rule exists where the defendants specifically intend to harm plaintiffs. The complaint asserts that the tobacco companies intended to injure the Funds. The Funds urge that AGC - a case that discusses the principles of proximate cause in the antitrust context and upon which Holmes heavily relied - quotes a scholarly treatise to this effect, '[w]here the plaintiff sustains injury from the defendant's conduct to a third person, it is too remote ... unless the wrongful act is willful for that purpose.' 459 U.S. at 532 n.25 (quoting 1 J.G. Sutherland, A Treatise on the Law of Damages 55-56 (1883)). 59 Yet, contrary to plaintiffs' argument, this view was specifically rejected in AGC. The Court there stated that although buttressed by an allegation of intent to harm the [plaintiffs] the complaint was insufficient as a matter of law for several reasons, including the fact that the plaintiffs alleged merely indirect injuries and were therefore barred from recovery as lacking proximate cause. 459 U.S. at 545. In addition, the Court observed that the availability of a remedy in that case was 'not a question of the specific intent of the conspirators.' Id. at 537 (quoting Blue Shield v. McCready, 457 U.S. 465, 479 (1982)). The Ninth Circuit has also interpreted AGC to mean that [t]he existence of specific intent does not answer the question of whether the injury is specifically direct. Pillsbury, Madison & Sutro v. Lerner, 31 F.3d 924, 929 (9th Cir. 1994). Moreover, that court stated that nothing in Holmes suggests that allegations of specific intent to cause RICO harm override the necessity to evaluate the directness of injury. Id. 60 In addition, the cases plaintiffs cite to support their argument are not persuasive, either because their discussion of intent is dicta or they involve a direct injury. See Chelsea Moving & Trucking Co. v. Ross Towboat Co., 280 Mass. 282, 286, 182 N.E. 477, 479 (1932) (noting in dicta that malice was not alleged in that case); Crab Orchard Improvement Co. v. Chesapeake & Ohio Ry. Co., 115 F.2d 277, 282-83 (4th Cir. 1940) (suggesting in dicta that an employer may maintain a suit against a tortfeasor who injured an employee, if the tortfeasor intended to harm the employer in his contractual obligations); GICC, 30 F.3d at 292-93 (examining intent, but ultimately involving a direct injury, as discussed above); Manson, 11 F.3d at 1130 (noting that the defendants in Bankers Trust had acted for the direct purpose of harming the plaintiffs; however, Bankers Trust involved a direct injury, as discussed above). 61 As such, these decisions regarding specific intent do not support the proposition that an indirect injury is actionable where the injury was specifically intended by the defendant. In other words, an allegation of specific intent does not overcome the requirement that there must be a direct injury to maintain this action. 5 IV Common Law Fraud and Special Duty Claims 62 Our inquiry into RICO standing began with the Supreme Court's holding in Holmes that the statute requires that at least the proximate causation principles found generally in the common law, including the direct injury requirement discussed above, be met. These principles also apply in general terms to the fraud and special duty causes of action asserted by plaintiffs under New York common law. See, e.g., Ferguson v. Green Island Contracting Corp., 36 NY2d 742, 743, 368 N.Y.S.2d 163, 163 (1975) (per curiam) (employer may not recover damages it sustains when key employee is injured by third-party tortfeasor); see also Rockaway Blvd. Wrecking & Lumber Corp. v. Raylite Elec. Corp., 26 AD2d 9, 12, 269 N.Y.S.2d 926, 929 (1st Dep't 1966) (per curiam) ('where a third person suffers damage by reason of a contractual obligation to the injured party, such damage is too remote and indirect to become the subject of a direct action ex delicto, in the absence of subrogation.' (quoting Forcum-James Co. v. Duke Transp. Co., 231 La. 953, 962, 93 So. 2d 228, 230-31 (1957))); see also Pulka v. Edelman, 40 NY2d 781, 785, 390 N.Y.S.2d 393, 396 (1976) (New York law requires proximate cause in special duty cases). Although New York law appears to permit limited exceptions to the general requirement that the direct injury test be met, see Rockaway, 26 AD2d at 12, plaintiffs have brought no cases to our attention that would permit such a departure from the general rule in the present case. Hence, analogous principles to those that doomed plaintiffs' RICO causes of action also bar plaintiffs' common law fraud and special duty actions. V Remaining Points A. Trust Principles 63 Plaintiffs assert that the direct injury test is not applicable in this case, because certain of the Funds are trusts governed by ERISA and the Taft-Hartley Act and other Funds are non-ERISA not-for-profit public employee trusts. First, plaintiffs contend that the direct injury test is only a rule of state insurance law, and state insurance law is inapplicable to ERISA funds. See 29 U.S.C. §1144(b)(2)(B) (plan not to be subjected to any law ... purporting to regulate . . . insurance contracts). However, as demonstrated by Holmes, AGC, and Kinsman, the proximate cause direct injury requirement is a common law rule of general application, not one simply limited to insurance cases. 64 Second, plaintiffs aver that traditional trust principles apply and displace the direct injury requirement. However, nothing in ERISA supports this argument. Even assuming that trust principles govern, case law suggests that when a Fund brings an action at law for tort against a third person it should be treated like any other plaintiff. See Restatement (Second) of Trusts §280 cmt. a (1959) (If a third person commits a tort with respect to the trust property, the trustee can maintain such actions at law as he could maintain by reason of his ownership of the property as if he held it free of trust.); IV A.W. Scott, The Law of Trusts §280.1 (1967) (remedies for torts against trust property are the same as if the property were held free of trust). Thus, it follows, that both ERISA and non-ERISA funds, like any plaintiff, would be subject to the requirements of proximate cause and its direct injury inquiry. Moreover, the specific civil remedies set forth in ERISA for redressing violations of that statute or of the provisions of an ERISA plan are simply inapplicable here, since no such violation is at issue in this case. 29 U.S.C. §1132; see also Mertens v. Hewitt Assocs., 508 U.S. 248, 253-54 (1993). Therefore, that the funds are governed by ERISA or general trust principles does not, insofar as plaintiffs' complaint is concerned, change the law of proximate cause. B. State Entity Cases 65 Plaintiffs also point to numerous cases that have arisen where States have brought a direct action against the tobacco companies to recover medical costs they expended on smokers, and district courts have upheld their right to sue. But, many of these cases are distinguishable because they involved state statutory provisions that the courts construed as allowing the state to sue directly. See State ex rel. Norton v. R.J. Reynolds Tobacco Co., 1997 CV-003432 (Colo. Dist. Ct. Oct. 2, 1998); State ex rel. Kelley v. Philip Morris, Inc., No. 96-84281-CZ (Mich. Cir. Ct. May 28, 1997); State ex rel. Humphrey v. Philip Morris, Inc., No. C1-94-8565 (Minn. Dist. Ct. Feb. 19, 1998); State v. Philip Morris, Inc., No. S 744-97 CnC (Vt. Super. Ct. Mar. 25, 1998); State v. American Tobacco Co., No. 96-2-15056-8 SEA, 1996 WL 931316 (Wash. Super. Nov. 19, 1996); State ex rel. Bronster v. Brown & Williamson Tobacco Corp., No. 97-0441-01 (Haw. Cir. Ct. Sept. 18, 1998). In addition, in some cases the unique quasi-sovereign rights of a state to sue to protect the health and welfare of their citizens was found to sustain standing. See Texas v. American Tobacco Co., 14 F. Supp. 2d 956, 962-63 (E.D. Tex. 1997). Hence, in general, state cases are often distinguishable on the issue of proximate causation given the state's unique role relative to protection of its citizens, statutes governing Medicaid recoupment, and certain state statutes that permit states to maintain actions on behalf of their citizenry. However, this is not the scenario before us, and we have no reason to pass on it.