Opinion ID: 187362
Heading Depth: 1
Heading Rank: 3

Heading: General Challenges to Fraud Liability

Text: The predicate acts of racketeering in this case were all acts of mail or wire fraud, which require specific intent to defraud. Post v. United States, 407 F.2d 319, 329 (D.C.Cir.1968). Defendants challenge the district court's conclusion that they acted with specific intent, arguing that the district court applied an impermissible collective intent standard and that the government did not present any evidence to support a finding of specific intent under the correct formulation. Corporations may be held liable for specific intent offenses based on the knowledge and intent of their employees. N.Y. Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481, 495, 29 S.Ct. 304, 53 L.Ed. 613 (1909); see United States v. A & P Trucking Co., 358 U.S. 121, 125, 79 S.Ct. 203, 3 L.Ed.2d 165 (1958). Because a corporation only acts and wills by virtue of its employees, the proscribed corporate intent depends on the wrongful intent of specific employees. See Saba v. Compagnie Nationale Air France, 78 F.3d 664, 670 (D.C.Cir.1996). Thus, to determine whether a corporation made a false or misleading statement with specific intent to defraud, we look to the state of mind of the individual corporate officers and employees who made, ordered, or approved the statement. Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 366 (5th Cir.2004). A person's state of mind is rarely susceptible of proof by direct evidence, so specific intent to defraud may be, and most often is, inferred from the totality of the circumstances, including indirect and circumstantial evidence. United States v. Alston, 609 F.2d 531, 538 (D.C.Cir.1979); United States v. Reid, 533 F.2d 1255, 1264 (D.C.Cir.1976). We refer to this inference when, in the common law fraud context, we say that the factfinder is permitted to impute knowledge of the falsity of the statements to the accused, not as a matter of law but as a consequence of inferences reasonably drawn from the facts shown. United States v. Avant, 275 F.2d 650, 653 (D.C.Cir.1960). Here, the district court concluded that the chief executive officers and other highly placed officials in the Defendant corporations made or approved statements they knew to be false or misleading, evincing their specific intent to defraud consumers. In some instances, the court found by direct evidence that representatives of the Defendant companies willfully stat[ed] something which they knew to be untrue. Philip Morris, 449 F.Supp.2d at 895. For example, the court found that, in a televised interview in 1971, Philip Morris President Joseph Cullman III denied that cigarettes posed a health hazard to pregnant women or their infants, contradict[ing] the information Helmut Wakeham, Philip Morris's Vice President for Corporate Research and Development, had given him two years earlier. Id. at 193-94. In the main, however, the district court relied on indirect and circumstantial evidence indicating that the senior corporate officials knew that their public statements, and those that they approved for their corporations, were false or misleading. In the majority of instances, the authors of the fraudulent statements alleged as Racketeering Acts were executives, including high level scientistsCEOs, Vice Presidents, Heads of Research & Development, not entry level employeesat each of the Defendant companies who would reasonably be expected to have knowledge of the company's internal research, public positions, and long term strategies. Id. at 897. The court reasoned: [I]t is absurd to believe that the highly-ranked representatives and agents of these corporations and entities had no knowledge that their public statements were false and fraudulent. The Findings of Fact are replete with examples of C.E.O.s, Vice-Presidents, and Directors of Research and Development, as well as the Defendants' lawyers, making statements which were inconsistent with the internal knowledge and practice of the corporation itself. Id. at 853. The district court did not commit legal error by imputing to Defendants' executives knowledge of the falsity of their statements based on inferences reasonably drawn from the facts shown, and sufficient evidence supported these inferences. The government presented decades of evidence that scientists within the Defendant corporations and outside scientists hired by the corporations and their joint entities were continually conducting research and reviewing the research of other scientists regarding cigarettes and health, addiction, nicotine and tar manipulation, and secondhand smoke. The evidence at trial demonstrated that the results of this researchessential to the core of Defendants' operations, including strategic planning, product development, and advertisingwere well known, acknowledged, and accepted throughout the corporations. These results established that cigarette smoking causes disease, that nicotine is addictive, that light cigarettes do not present lower health risks than regular cigarettes due to smoker compensation, and that secondhand smoke is hazardous to health. Dr. William Farone, a scientist who worked at Philip Morris for eighteen years and whom the district court found to be impressive and credible as both a fact and expert witness, id. at 186, testified about the understanding within Philip Morris on the question of whether cigarette smoking is a cause of lung cancer and other diseases: There was widespread acceptance that smoking caused disease. I never talked with a scientist at Philip Morris who said that smoking doesn't cause disease. [This was based on the] compelling epidemiology such as that recounted in the Surgeon's [sic] General's reports, and our knowledge about the chemicals that were created by cigarettes and what was delivered to the smoker, hundreds of times per day on average. Id. at 187 (quoting Farone testimony). When asked whether, in his discussions with Philip Morris executives, any of them challenged the validity of the scientific evidence that smoking causes disease, Farone answered, No. Their comments generally focused on how the company could or should respond, not to whether the scientific evidence was valid. Remember, a main reason why they hired me in 1976 was to help develop a less hazardous cigarette. It seemed to me at the time I was hired, and certainly was the case during my entire time there, that hiring me for that job was itself implicit recognition that the cigarettes that were out there being sold were causing disease. Id. (quoting Farone testimony). The Defendant corporations documented the results of the studies regarding disease, nicotine addiction, and smoker compensation in numerous memoranda and reports; the evidence at trial, including internal corporate documents, demonstrated that the executives crafted their corporate priorities and strategies in response to these findings. See, e.g., id. at 165, 180, 218, 219, 232, 240, 258-59, 270, 336, 720. Defendants' own documents also support the inference that Defendants' executives were aware that their public relations strategy of creating the impression of an open question about the link between smoking and disease did not square with their own knowledge about the established link between the two. For example, William Kloepfer, Vice President of Public Relations for the Tobacco Institute, wrote to Earle Clements, President of the Tobacco Institute, admitting that [o]ur basic position in the cigarette controversy is subject to the charge, and may be subject to a finding, that we are making false or misleading statements to promote the sale of cigarettes. Id. at 855. Other documents demonstrate that Defendants' top officials were directly informed of negative research results. For example, in 1977 Philip Morris Assistant General Counsel Alexander Holtzman sent a warning to the company's President, Joseph Cullman, informing him that a research project jointly sponsored by a group of the Defendant companies had concluded that exposure to cigarette smoke causes emphysema. Id. at 183. The government presented similar evidence regarding the other aspects of Defendants' scheme, such as addiction and nicotine. A few examples cannot adequately present the volumes of evidence underlying the district court's findings of fact, but the following provide a fair sample: A 1991 Reynolds Research and Development report acknowledged that [w]e are basically in the nicotine business. Id. at 237. Dr. Farone testified that during his time at Philip Morris there was widespread acceptance internally throughout the companyamong executives, scientists, and marketing people that nicotine was primarily responsible for addiction to smoking. Id. at 858. Indeed, the district court found that internal documents and testimony from former company employees affirmed that within their corporate walls, Defendants openly recognized the addictiveness of cigarettes. Id. Regarding light cigarettes, internal research reports and memoranda at the Defendant companies revealed that they understood the phenomena of smoker compensation and studied how to manipulate it in order to make their light brands appealing to addicted smokers while continuing to be able to advertise the brands as low tar. For example, a 1978 BATCo memorandum about that company's internal research acknowledged that a majority of habitual smokers compensate for changed delivery and explained that if smokers choose [a] lower delivery brand ... than their usual brand they will in fact increase the amounts of tar and gas phase that they take in, in order to take in the same amount of nicotine. Id. at 861. Dr. Farone testified that Defendants' superior knowledge of compensation (compared to that of scientists outside the industry, including the government) was closely held within Philip Morris and the tobacco industry and there was an effort on the part of [his] coworkers at Philip Morris, including [his] supervisors, to restrict any public acknowledgment on the part of Philip Morris of the phenomena of compensation. Id. As these examples and hundreds more findings in the district court's opinion demonstrate, the court had before it sufficient evidence from which to conclude that Defendants' executives, who directed the activities of the Defendant corporations and their joint entities, knew about the negative health consequences of smoking, the addictiveness and manipulation of nicotine, the harmfulness of secondhand smoke, and the concept of smoker compensation, which makes light cigarettes no less harmful than regular cigarettes and possibly more. The government presented evidence indicating that specific high-ranking corporate officials were directly informed about these matters, as well as evidence of pervasive knowledge and acceptance of these propositions throughout the Defendant organizations. The overwhelming indirect and circumstantial evidence was sufficient to allow the district court to reasonably infer that the high level executives, including CEOs, Vice Presidents, [and] Heads of Research & Development for Defendants knew about their respective companies' internal research, public positions, and long term strategies, id. at 897, that is, the internal knowledge and practice of the company, id. at 853. These executives then made, caused to be made, and approved public statements contrary to this knowledge. See, e.g., id. at 190 (Philip Morris Vice President and General Counsel declaring [n]obody has yet been able to find any ingredient as found in tobacco or smoke that causes human disease); id. at 166, 201 (28 years after Reynolds scientists declared the presence of carcinogenic compounds in cigarettes was now well established, a Reynolds press release and newspaper advertisement declared the connection between smoking and disease an open controversy); id. at 772 (TI published booklet declaring that secondhand smoke had not been shown to be a health hazard to nonsmokers); id. at 796 (Lorillard general counsel testified at trial that the company's public position has always been and continues to be that secondhand smoke is not a proven health hazard); id. at 273 (President and CEO of Philip Morris quoted in TIME magazine from deposition testimony claiming that cigarettes are not addictive unless a similar attachment to Gummi Bears is an addiction); id. at 285 (TI's Vice President for Public Affairs on television programs flatly denying that nicotine is addictive, stating the attachment is like being a news junkie or chocoholic). Specific intent to defraud may be inferred where, as here, there is a pattern of corporate research revealing a particular proposition, for example, that smoking is addictive; an ensuing pattern of memoranda within the corporation acknowledging that smoking is addictive, even though the memoranda may or may not have gone directly to the executive who makes the contrary statement; and the corporate CEO or other official of high corporate status then makes a public statement stating that smoking is not addictive, contrary to the knowledge within the corporation. Based on this sort of evidence and the inferences reasonably drawn from it, a factfinder could permissibly infer that the speaker harbored specific intent to defraud at the time he or she made the false or misleading statement. Moreover, such pervasive knowledge throughout the organizations demonstrates that Defendants' executives at least acted with reckless disregard for the truth or falsity of their statements. As the district court correctly held, such reckless disregard suffices to demonstrate the requisite intent. Id. at 897. The law then imputes this specific intent to the corporation. Defendants argue that, even if the previous discussion presents a correct statement of the law, it is not the standard that the district court applied here. Rather, Defendants assert that the district court relied on an impermissible collective intent theory to find specific intent based on public statements contradicting the collective knowledge of the Defendant corporations without finding that any employee harbored specific intent to defraud. Like Defendants and other courts, we are dubious of the legal soundness of the collective intent theory. Saba, 78 F.3d at 670 n. 6 (corporate knowledge of certain facts [can be] accumulated from the knowledge of various individuals, but the proscribed intent (willfulness) depend[s] on the wrongful intent of specific employees); see, e.g., Southland Sec. Corp., 365 F.3d at 366; Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1435 (9th Cir. 1995); United States v. Bank of New Eng., N.A., 821 F.2d 844, 855 (1st Cir.1987); Woodmont, Inc. v. Daniels, 274 F.2d 132, 137 (10th Cir.1960); First Equity Corp. v. Standard & Poor's Corp., 690 F.Supp. 256, 260 (S.D.N.Y.1988). We need not pass on the merits of such a standard here, however, because the district court relied on a permissible view of specific intent. Although at times the court articulated a collective intent standard, see Philip Morris, 449 F.Supp.2d at 895-97, it also based its holding on a proper view of specific intent, see id. at 853, 897, and we are satisfied that the court's conclusions based on the proper standard are sufficient to uphold its judgment.
In their next general challenge to fraud liability, Defendants argue that their false and misleading statements about the health effects of smoking cannot, as a legal matter, be fraudulent because their statements were not material. This argument is based on a flawed understanding of the materiality requirement. In order for a false or misleading statement to qualify as mail or wire fraud, it must concern a material or important fact or matter. United States v. Winstead, 74 F.3d 1313, 1320 (D.C.Cir. 1996). This materiality requirement is met if the matter at issue is of importance to a reasonable person in making a decision about a particular matter or transaction. Id. Materiality does not require proof that any specific person (or number of people) purchased cigarettes as a result of the false statements. Nor does it require Defendants' false statements to be the cause, reason, or sufficient condition of any person's decision to purchase cigarettes. Moreover, no subjective evidence regarding any particular person is required; the test is only whether a reasonable person would consider the matter to be of importance regarding the transaction. The false statements identified by the district court would be important to a reasonable person purchasing cigarettes. For example, statements about the adverse health effects of smoking, see Philip Morris, 449 F.Supp.2d at 146-208, would be a matter of importance to a reasonable person deciding to purchase cigarettes. The fact that Defendants continually denied any link between smoking and cancer, see, e.g., id. at 204, suggests they themselves considered the matter material. So, too, regarding Defendants' false statements on other topics, including statements concerning: whether smoking is addictive, id. at 208-308, whether Defendants manipulated their cigarettes to control nicotine delivery, id. at 308-84, whether light cigarettes were less harmful than other cigarettes, id. at 430-561, whether secondhand smoke is hazardous to non-smokers, id. at 692-801, and whether Defendants concealed scientific research and destroyed documents, id. at 801-39. Each of these topics is an important consideration for a reasonable person because each concerns direct and significant consequences of smoking. When deciding whether to smoke cigarettes, tobacco consumers must resolve initial reservations (or lingering qualms) about the potential for cancer, the risk of addiction, or the hazardous effects of secondhand smoke for friends, family, and others who may be exposed. Defendants' prevarications about each of these issues suggests full awareness of this obvious fact; reasonable purchasers of cigarettes would consider these statements important. Defendants further argue that, because the scientific community had reached a consensus regarding the severely adverse health consequences of smoking, their statements to the contrary would not be believed. See Defs. Br. 98 (arguing that the public was aware of smoking's adverse health consequences and thus any inconsistent assertion by defendants could not be material to a reasonable person). The question, however, is not whether a reasonable person would have believed Defendants' false statements, but only whether a reasonable person would have considered the issue of importance, and the issues considered by the district court clearly met the materiality threshold.
In their final general challenge to fraud liability, Defendants claim at least a portion of their statements qualify as protected activity under the First Amendment. Of course, it is well settled that the First Amendment does not protect fraud. See McIntyre v. Ohio Elections Comm'n, 514 U.S. 334, 357, 115 S.Ct. 1511, 131 L.Ed.2d 426 (1995) (stating that the government may, and does, punish fraud directly). Recognizing this fact, Defendants argue their statements were not fraudulent, but those arguments are discussed and rejected elsewhere in this opinion. See supra Part III.A-B; infra Part IV. Defendants next claim protection under the Noerr-Pennington doctrinea doctrine, rooted in the Petition Clause of the First Amendment, that protects an attempt to persuade the legislature or the executive to take particular action with respect to a law.... E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 136, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961). The protection does not cover activity that was not genuinely intended to influence government action. Allied Tube & Conduit Corp. v. Indian Head, 486 U.S. 492, 508 n. 10, 108 S.Ct. 1931, 100 L.Ed.2d 497 (1988). Defendants' attempt to invoke Noerr-Pennington as protection fails because the doctrine does not protect deliberately false or misleading statements. [N]either the Noerr-Pennington doctrine nor the First Amendment more generally protects petitions predicated on fraud or deliberate misrepresentation. Edmondson & Gallagher v. Alban Towers Tenants Ass'n, 48 F.3d 1260, 1267 (D.C.Cir.1995) (describing the holding in Whelan v. Abell, 48 F.3d 1247 (D.C.Cir. 1995)); see also McDonald v. Smith, 472 U.S. 479, 485, 105 S.Ct. 2787, 86 L.Ed.2d 384 (1985) (finding the Petition Clause does not have special First Amendment status and that petitions are not entitled to greater constitutional protection than other First Amendment expressions); Whelan, 48 F.3d at 1255 (However broad the First Amendment right to petition may be, it cannot be stretched to cover petitions based on known falsehoods.). The district court's valid findings of fraud in this case take Defendants' statements out of the Noerr-Pennington context because they were clearly and deliberately false. The district court provided countless examples of deliberately false statements by Defendants: Cigarette smoking causes disease, suffering, and death. Despite internal recognition of this fact, Defendants have publicly denied, distorted, and minimized the hazards of smoking for decades, Philip Morris, 449 F.Supp.2d at 146; Defendants have researched and recognized, decades before the scientific community did, that nicotine is an addictive drug.... Notwithstanding the understanding and acceptance of each Defendant that smoking and nicotine are addictive, Defendants have publicly denied and distorted the truth as to the addictive nature of their products for several decades, id. at 208-09; Defendants have designed their cigarettes to precisely control nicotine delivery levels and provide doses of nicotine sufficient to create and sustain addiction. At the same time, Defendants have concealed much of their nicotine-related research, and have continuously and vigorously denied their efforts to control nicotine levels and delivery, id. at 309; 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. at 860; Despite their internal acknowledgment of the hazards of secondhand smoke, Defendants have fraudulently denied that [secondhand smoke] causes disease, id. at 864. Were these statements false, but not deliberately so, Defendants would have a better argument. But Defendants knew of their falsity at the time and made the statements with the intent to deceive. Thus, we are not dealing with accidental falsehoods, or sincere attempts to persuade; Defendants' liability rests on deceits perpetrated with knowledge of their falsity. Where statements are deliberately false or misleading, Noerr-Pennington does not apply. See Alban Towers, 48 F.3d at 1267. Indeed, if Defendants' statements had not been made with fraudulent intent, there would be no basis for RICO liability in the first place. The district court found six alleged acts protected by Noerr-Pennington and based its holding on the remaining racketeering activity. Philip Morris, 449 F.Supp.2d at 887. All six excluded acts were instances of testimony to Congress and, given the wealth of unprotected racketeering acts, we need not reach the question whether the district court correctly excluded these acts. The remaining acts were intended to defraud consumers, so Noerr-Pennington protection does not apply.