Opinion ID: 187362
Heading Depth: 1
Heading Rank: 4

Heading: Specific Challenges to Fraud Liability

Text: The first specific fraud finding Defendants challenge relates to their marketing of light cigarettes. The district court found: As their internal documents reveal, Defendants engaged in massive, sustained, and highly sophisticated marketing and promotional campaigns to portray their light brands as less harmful than regular cigarettes. Philip Morris, 449 F.Supp.2d at 860. The court concluded Defendants have known for decades that filtered and low tar cigarettes do not offer a meaningful reduction of risk, and that their marketing which emphasized reductions in tar and nicotine was false and misleading. Id. Defendants contend they should be immune from liability because the Federal Trade Commission (FTC) has blessed their use of labels such as light and low tar. This argument is entirely foreclosed by the Supreme Court's recent decision in Altria v. Good, ___ U.S. ____, 129 S.Ct. 538, 172 L.Ed.2d 398 (2008), concluding the FTC has never condoned the use of light or low tar descriptors. Id. at 550. Defendants point to a 1966 industry guidance letter from the FTC stating that a factual statement of the tar and nicotine content (expressed in milligrams) of the mainstream smoke from a cigarette, as measured by the Cambridge Filter Method, was permissible under the FTC Act. Id. at 549. The Commission made clear, however, that the guidance applied only to factual assertions of tar and nicotine yields and did not invite any `collateral representations... made, expressly or by implication, as to reduction or elimination of health hazards.' Id. Despite Defendants' argument to the contrary, the FTC has in fact never required that cigarette manufacturers disclose tar and nicotine yields, nor has it condoned representations of those yields through the use of `light' or `low tar' descriptors. Id. at 550. Although the FTC never prevented Defendants from using misleading descriptors, agency nonenforcement of a federal statute is not the same as a policy of approval. Id. As the Supreme Court held, neither the handful of industry guidances and consent orders on which petitioners rely nor the FTC's inaction with regard to `light' descriptors even arguably justifies the pre-emption argument advanced by Defendants. Id. at 551. For the same reasons, these actions fail to constitute FTC authorization of the descriptors that could defeat a finding of specific intent to defraud. It is also worth noting that the district court in this case did not find liability solely based on the use of descriptors such as light and low tar. The court found Defendants orchestrated highly sophisticated marketing and promotional campaigns to portray their light brands as less harmful than regular cigarettes. Philip Morris, 449 F.Supp.2d at 860. In addition to the misleading use of descriptors, the district court found [Defendants'] public statements are blatantly false in relation to the marketing of light cigarettes. Id. at 861. The district court went on to find that [a]s part of the Enterprise's scheme to defraud smokers, Defendants withheld and suppressed their extensive knowledge and understanding of nicotine-driven smoker compensation. Id. These findings reveal that fraudulent activity surrounding light cigarettes was not merely limited to the use of misleading descriptors. In addition to the fact that the descriptors were not authorized by the FTC, the district court relied on other fraudulent activity by Defendants. Independent of their FTC-authorization argument, Defendants also insist terms such as light cigarettes are not misleading to the public. They analogize light cigarettes to sodas which are low caffeine and cookies which are low fat. According to Defendants, the public knows that drinking many low caffeine sodas can result in higher levels of caffeine consumption, and eating many low fat cookies can result in higher levels of fat consumption. Defendants thus analogize to light cigarettes, maintaining that it is obvious that smoking many light cigarettes can result in higher levels of nicotine and tar consumption. But the analogy to light cigarettes is inapt. Unlike drinking sodas and eating cookies, the factors behind compensation in light cigarettes are largely subconscious: the smoker will subconsciously adjust his puff volume and frequency, and smoking frequency, so as to obtain and maintain his per hour and per day requirement for nicotine. Philip Morris, 449 F.Supp.2d at 467 (citing internal tobacco company documents). Not only is smoker compensation subconscious, but factors such as puff volume and frequency are not even tied to the number of light cigarettes smoked. The analogy to sodas and cookies fails; the subconscious nature of smoker compensation enabled Defendants to mislead the public about the health effects of light cigarettes. Finally, Defendants argue their descriptors were simply verbal representations of numerical ratings authorized by the FTC, and thus were literally true. Even leaving aside the fact that literally true statements may nevertheless constitute fraud, this claim founders on the district court's finding that there are lights of certain brands with higher tar levels than regulars of other brands from the same company, and there are also lights and regulars of the same brands that have the same FTC tar rating. Id. at 861. This finding, which Defendants do not attempt to show is clearly erroneous, reveals the descriptors were not simply representations of numerical ratings and thus were not literally true.
We turn next to Defendants' claim that the district court erred in finding that they fraudulently denied the adverse health effects of secondhand smoke. Federal Rule of Civil Procedure 52 obliges us to uphold the district court's findings of fact unless they are clearly erroneous. FED.R.CIV.P. 52(a)(6). Under this highly deferential standard, we may disturb the district court's findings only if we are left with the definite and firm conviction that a mistake has been committed. E.g., Boca Investerings P'ship v. United States, 314 F.3d 625, 630 (D.C.Cir.2003) (quotation marks omitted). This is so even if we would have decided the case differently, as [w]here there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous. Anderson, 470 U.S. at 574, 105 S.Ct. 1504. Defendants contend that their statements disputing the health hazards of secondhand smoke were merely good-faith expressions of opinion. But the district court found to the contrarythat Defendants' representations were fraudulent and not in good faith. Philip Morris, 449 F.Supp.2d at 853, 864-65. Under Rule 52, then, the question for us is whether this finding was clearly erroneous. The district court criticized Defendants' statements regarding secondhand smoke as contrary to the scientific consensus. Defendants object, emphasizing that the district court found no scientific consensus emerged until the issuance of the Surgeon General's 1986 report determining secondhand smoke to be hazardous. Moreover, they point to evidence of selected post-1986 scientific opinions casting doubt on the dangers of secondhand smoke, arguing that even then they possessed some basis for disputing the consensus. Defendants' objections are beside the point. The district court based its finding of fraudulent intent not just on the existence of a consensus but also on evidence of Defendants' own knowledge. Philip Morris, 449 F.Supp.2d at 864-65. Specifically, the district court found that dating back to the 1970s, Defendants' own research and analysis revealed the hazards of secondhand smoke. For example, the district court found that in 1980 a Philip Morris scientist reviewed a paper concluding that secondhand smoke caused significant damage to airway function in exposed nonsmokers, and found little to criticize, deeming the paper an excellent piece of work which could be very damaging to the industry. Id. at 709 (quotation marks omitted). In 1982, a Philip Morrissponsored research facility concluded that the side stream smoke composing the bulk of secondhand smoke is more irritating and/or toxic than the main stream smoke inhaled by smokers. Id. at 710 (quotation marks omitted). And several TI advertisements and press releases claimed that an independent 1981 study showing a significant correlation between lung cancer and secondhand smoke suffered from a statistical flaw, id. at 715, yet the district court found that industry consultants told TI, Reynolds, and Brown & Williamson that TI knew at the time not only that the statistical error did not exist, but also that the study was in fact correct. Id. at 717-18. In addition to these and other findings providing relatively direct evidence that Defendants were aware of the health risks of secondhand smoke, the district court found that Defendants concealed their role in making statements regarding secondhand smoke. While it may be true that purveyors of consumer products, without fraudulent intent, frequently engage in concealed support of positive research in their industries, the concealment of identity by Defendants over so long a period on a subject of such intense controversy is at the very least consistent with knowledge of the falsity of their statements. Although Defendants insist they had no knowledge of the misleading character of their public statements, they nowhere challenge the accuracy of these or any of the district court's other findings suggestive of their knowledge. Instead, they argue that such findings reveal only facts that were known to the public and that had not, at the time, given rise to a scientific consensus. Again Defendants miss the point. The question is not whether other individuals knew that Defendants' claims were false or misleading; the question is whether Defendants did. Regardless of whether a scientific consensus existed at any point, Defendants may be liable for fraud if they made statements knowing they were false or misleading. Based on voluminous evidence, including that summarized above, the district court circumstantially inferred that Defendants did in fact possess such fraudulent intent. Given these unchallenged findings, we have no basis for saying that the district court clearly erred in drawing that conclusion.
Defendants also claim that the district court clearly erred in finding their representations disputing the addictiveness of cigarettes to be intentionally misleading. We analyze the district court's factual finding as to the misleading character of Defendants' commercial statements for clear error. E.g., FTC v. Brown & Williamson Tobacco Corp., 778 F.2d 35, 41-42 & n. 3 (D.C.Cir.1985). We find none. Defendants claim that their statements regarding addiction were not intentionally misleading because the term addiction is ambiguous. Pointing to the district court's findings that the meaning of the term addiction in the scientific community changed over time, Defendants insist that their statements merely clung to the earlier, narrower, definitions of the term, and claim that the district court erroneously converted a semantic dispute into a fraud case. But the district court did not find only that Defendants insisted on retaining an earlier definition of addiction. It found that they did so as part of a concerted effort to misrepresent the difficulty of quitting smoking. Philip Morris, 449 F.Supp.2d at 208-09, 308, 857-59. Defendants fail to demonstrate that this finding was clearly erroneous. To begin with, Defendants never challenge the district court's findings documenting the impact of nicotine on the body and, more importantly, Defendants' understanding of its effects. Id. at 209-11, 216-71. As early as 1963, Brown & Williamson's general counsel wrote a confidential memorandum stating: We are, then, in the business of selling nicotine, an addictive drug effective in the release of stress mechanisms. Id. at 259 (quotation marks omitted). Further, the district court found that Defendants were aware that cigarette dependence was stronger than mere habit formation. In 1974, a Philip Morris scientist told the company's president that it was simply not an adequate explanation to say that smoking is a habit, or that it is social behavior. Id. at 223 (quotation marks omitted). In 1981, a Philip Morris executive wrote in an article: Cigarettes are not just habit formingthe body builds up a requirement for them. Id. at 228 (quotation marks omitted). Although several industry attorneys expressed dismay at the publication of the article, none disagreed with it. Id. In 1985, Philip Morris's top management was informed that research showed that the majority of smokers wished they did not smoke. Id. at 229 (quotation marks omitted). These and numerous other findingsall unchallengedsupport the district court's conclusion that Defendants were aware that nicotine creates a chemical dependency far stronger than a mere habit. The district court found that despite their knowledge Defendants made numerous statements trivializing and outright denying the dependence cigarettes cause. For example, in 1982 TI issued a press release summarizing testimony that smoking caused an attachment comparable to that produced by tennis, jogging, candy, rock music, Coca-cola, members of the opposite sex and hamburgers. Id. at 281 (quotation marks omitted). In 1997, Philip Morris's CEO testified, If [cigarettes] are behaviorally addictive or habit forming, they are much more like ... Gummi Bears, and I eat Gummi Bears, and I don't like it when I don't eat my Gummi Bears, but I'm certainly not addicted to them. Id. at 273 (quotation marks omitted). In a 1994 television interview, a TI official claimed that there was no chemical addiction to nicotine and stated, [S]ometimes we use the word `addiction' in very broad terms. We talk about being, you know, news junkies. We talk about being chocoholics. Id. at 285 (quotation marks omitted). A 1988 TI press release declared that it has been impossible to establish that the feelings persons have upon giving up smoking are anything but that which would be expected when one is frustrated by giving up any desired habit.  Id. at 283 (quotation marks omitted, emphases added). Most directly, the district court found that Defendants had their representatives testify that nicotine did not cause addiction or dependence,  id. at 281 (emphasis added), rendering any supposed ambiguities in the word addiction beside the point. The district court concluded that these and other findings reflected a campaign of statements intended to mislead the public into believing that giving up smoking is not markedly more difficult than giving up everyday habits. Although not every statement Defendants made was literally false, even partially true statements can be actionable fraud if intentionally misleading as to facts. See, e.g., Emery v. Am. Gen. Fin., Inc., 71 F.3d 1343, 1348 (7th Cir. 1995) (A half truth, or what is usually the same thing a misleading omission, is actionable as fraud, including mail fraud if the mails are used to further it, if it is intended to induce a false belief and resulting action to the advantage of the misleader and the disadvantage of the misled.). The district court concluded that Defendants' statements regarding addiction were misleading in this way, and given the above unchallenged factual findings we are not left with the definite and firm conviction that a mistake has been committed. Boca Investerings, 314 F.3d at 630.
In addition to the challenges to fraud liability raised by all Defendants, two Defendants Altria and BATComake a number of arguments specific to them. We begin with Defendant Altria, the holding company owner of Defendant Philip Morris, which raises several challenges to the district court's finding of liability. As an initial matter, Altria claims that the district court erred in finding that it used the mails in five of the nine predicate acts it allegedly committed directly. The district court specifically found, based on Defendants' routine mailing practices, that at least two of those five predicate acts were committed through use of the mails. See Philip Morris, 449 F.Supp.2d at 884 (Racketeering Acts 69, 80). We need not decide whether this circumstantial inference amounted to clear error, as the other four predicate acts the district court found Altria committed are themselves sufficient to constitute a pattern of racketeering activity. See id. (Racketeering Acts 71-72, 74-75). Altria's central argument is that mailings sent by lawyers could not possibly be mailings in furtherance of a scheme or artifice to defraud, citing several out-of-circuit cases largely standing for the proposition that ordinary litigation mailings containing false matter typically do not themselves constitute a scheme or artifice to defraud. See United States v. Pendergraft, 297 F.3d 1198, 1209 (11th Cir.2002); Nolan v. Galaxy Scientific Corp., 269 F.Supp.2d 635, 643 (E.D.Pa. 2003); Morin v. Trupin, 711 F.Supp. 97, 105-06 (S.D.N.Y.1989); Paul S. Mullin & Assocs., Inc. v. Bassett, 632 F.Supp. 532, 540 (D.Del.1986); Spiegel v. Cont'l Ill. Nat'l Bank, 609 F.Supp. 1083, 1088-90 (N.D.Ill.1985). Whatever the merit of that proposition, it has nothing to do with the question before us. Altria makes a very different claimthat mailings sent in furtherance of a separately-proven scheme to defraud somehow fall outside the mail fraud statute's coverage because they are drafted and physically sent by lawyers who themselves have no fraudulent intent. This claim is without merit. Nothing in the mail fraud statute requires a mailing to be fraudulent at all, as long as the mailing is in furtherance of a fraudulent scheme. See 18 U.S.C. § 1341 (specifying that the mailing can be any matter or thing whatever to be sent or delivered as long as it is in furtherance of any scheme or artifice to defraud). Moreover, the statute looks to the intent of the individual who caused the mailing, not the individual who drafted or physically mailed it. See United States v. Diggs, 613 F.2d 988, 998 (D.C.Cir.1979) ([A] defendant `causes' the use of the mails where he does an act with knowledge that the use of the mails will follow in the ordinary course of business, or where such use can reasonably be foreseen, even though not actually intended. (quotation marks omitted)). Given that the district court permissibly inferred the corporate Defendants' intent from the intent of numerous high-level executives, Philip Morris, 449 F.Supp.2d at 897, and given that it found that Defendants caused the mailings in order to further the scheme to defraud, id. at 881, the fact that attorneys participated in the actual drafting and mailing provides no immunity. Thus, we conclude that the district court properly found Altria liable for its direct participation in the conduct of the affairs of the enterprise, leaving it unnecessary for us to consider Altria's objections to the findings that it participated through its control of Philip Morris. Finally, Altria claims that the district court clearly erred in finding that the company joined a RICO conspiracy. We disagree. The district court's findings of fact regarding Altria's actions in furtherance of the goals of the enterprise, both directly and through Philip Morris, see id. at 907-08, as well as the voluminous findings of concerted action and explicit agreement by Defendants, amply support the circumstantial inference that Altria conspired with the other Defendants to violate RICO. See, e.g., United States v. Mellen, 393 F.3d 175, 191 (D.C.Cir.2004) ([A] conspiracy can be inferred from a combination of close relationships or knowing presence and other supporting circumstantial evidence. (quotation marks omitted)).
Defendant BATCo claims that the district court erred in imposing liability on the basis of its conduct outside the United States. Noting that the district court found that its activities and statements took place outside of the United States, Philip Morris, 449 F.Supp.2d at 873, BATCo claims that it enjoys immunity from RICO liability because the statute has no extraterritorial reach. We need not decide today whether RICO has true extraterritorial reachthat is, whether it could reach foreign conduct with no impact on the United Statesbecause the district court found BATCo liable on the theory that its conduct had substantial domestic effects. Id. Because conduct with substantial domestic effects implicates a state's legitimate interest in protecting its citizens within its borders, Congress's regulation of foreign conduct meeting this effects test is  not an extraterritorial assertion of jurisdiction. Laker Airways Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909, 923 (D.C.Cir.1984). Thus, when a statute is applied to conduct meeting the effects test, the presumption against extraterritoriality does not apply. See Envtl. Def. Fund, Inc. v. Massey, 986 F.2d 528, 531 (D.C.Cir.1993) (noting that the presumption [against extraterritoriality] is generally not applied where the failure to extend the scope of the statute to a foreign setting will result in adverse effects within the United States, citing Laker Airways ). BATCo argues that the effects test is inapplicable because the United States had no obligation to prove that Defendants' conduct had any effects whatsoever. Although BATCo attributes this to the fact that 18 U.S.C. § 1964(a) does not require the government to prove that it has been injured, we think it better explained by the fact that the mail and wire fraud statutes punish the scheme, not its success. Pasquantino v. United States, 544 U.S. 349, 371, 125 S.Ct. 1766, 161 L.Ed.2d 619 (2005). That said, BATCo's point has nothing to do with the case at hand. Here the district court found that BATCo's conduct had substantial direct effects on the United States. Philip Morris, 449 F.Supp.2d at 873. The fact that some other defendant might commit some other offense without effects in the United States hardly renders BATCo immune from liability for the domestic effects it did cause. Someone who fires a rifle from Canada into the United States and wounds his victim can plainly be convicted of attempted murder. See Laker Airways, 731 F.2d at 922 ([W]hen a malefactor in State A shoots a victim across the border in State B, State B can proscribe the harmful conduct.). This is so even though in general the government may prove attempted murder without establishing that the attempt had any effect whatsoever. Similarly, the fact that effects are not elements of mail and wire fraud offenses or associated RICO violations provides no immunity to those, like BATCo, whose fraud and racketeering has substantial and direct domestic effects. Thus, we need decide only whether the district court erred in applying the effects testwhich asks whether conduct has a substantial, direct, and foreseeable effect within the United States, see Consol. Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 261-62 (2d Cir.1989) (describing substantial effect as direct and foreseeable)to the facts of this case. We see no error. The district court found that as part of the overall scheme to defraud, BATCo conducted sensitive nicotine research for Brown & Williamson abroad and secretly shared the results with Brown & Williamson in the United States. Philip Morris, 449 F.Supp.2d at 298-304. It further found that BATCo, in concert with other Defendants, founded, funded, and actively participated in various international organizations, which Defendants themselves saw as instrumental to their efforts to perpetuate what the district court found to be their fraudulent scheme in the United States. See id. at 119-23. In one example, TI admitted that the back-wash from events and attacks affecting the industry in smaller countries comes back powerfully to the USA, id. at 140 (quotation marks omitted), and praised INFOTAB, an international organization of which BATCo was a founding member, id. at 132, for help[ing] the industry to unite in trying to combat the attacks, id. at 140 (quotation marks omitted). Notwithstanding BATCo's demands for a nearly unattainable level of specificity, these unchallenged findings, together with the findings of the tremendous domestic effects of the fraud scheme generally, see, e.g., id. at 209, 307-08, make clear that the district court committed no error in finding that BATCo's participation had substantial, direct, and foreseeable effects in the United States. Cf. Laker Airways, 731 F.2d at 925-26 (finding allegations that the anticompetitive elimination of a foreign airline increased domestic air fares adequate to support antitrust action without demanding further specificity).