Court Opinion

ID: 2632
Source: CourtListenerOpinion
Date Created: 2010-04-24 18:48:35+00
Date Added: 2024-06-11T13:29:33.880016
License: Public Domain

06-4666-cv
     McLaughlin v. Philip Morris USA, Inc.

 1                        UNITED STATES COURT OF APPEALS
 2                            FOR THE SECOND CIRCUIT
 3
 4                                August Term 2006
 5
 6   (Argued: July 10, 2007                            Decided: April 3, 2008)
 7
 8                         Docket No. 06-4666-cv
 9   -----------------------------------------------------x
10   KAREN MCLAUGHLIN, JANE AMODEO, DAVID TUTTLEMAN, SUSAN
11   BAILEY, BARBARA BISHOP, TREVOR CAMPBELL, FERGAL
12   FURLONG, DAVID ROGERS, BARBARA SCHWAB, PATRICIA
13   SCOCOZZA, and JIM SHERMAN,
14
15               Plaintiffs-Appellees,
16
17                           -- v. --
18
19   AMERICAN TOBACCO COMPANY, ALTRIA GROUP, INC., PHILIP
20   MORRIS USA INC., LORILLARD TOBACCO CO, BRITISH
21   AMERICAN TOBACCO LIMITED, LIGGETT GROUP, INC., B.A.T.
22   INDUSTRIES P.L.C., and R.J. REYNOLDS TOBACCO CO.,
23
24               Defendants-Appellants.
25
26   -----------------------------------------------------x
27
28   B e f o r e :     WINTER, WALKER, and POOLER, Circuit Judges.

29         Appeal from an order of the United States District Court for

30   the Eastern District of New York (Jack B. Weinstein, Judge)

31   certifying a class consisting of cigarette smokers allegedly

32   deceived into believing that “light” cigarettes were healthier

33   than “full-flavored” cigarettes.          Because individual issues

34   outweigh issues susceptible to common proof, the class is not

35   maintainable under Federal Rule of Civil Procedure 23(b)(3).

36         REVERSED.

                                             -1-
 1         THEODORE M. GROSSMAN, Jones
 2         Day, Cleveland, Ohio (Robert
 3         H. Klonoff and Mark A.
 4         Belasic, Jones Day, Cleveland,
 5         Ohio, Todd R. Geremia, Jones
 6         Day, New York, N.Y., Murray R.
 7         Garnick, Judith Bernstein-
 8         Gaeta, and James M. Rosenthal,
 9         Arnold & Porter LLP, Wash.,
10         D.C., David M. Bernick,
11         Kirkland & Ellis LLP, Chi.,
12         Ill., Guy Miller Struve,
13         Frances E. Bivens, and Phineas
14         E. Leahey, Davis Polk &
15         Wardwell, New York, N.Y.,
16         Gregory M. Loss, Thomas E.
17         Riley, and Joseph G. Falcone,
18         Chadbourne & Parke LLP, New
19         York, N.Y., Alan Mansfield and
20         Stephen L. Saxl, Greenberg
21         Traurig, LLP, New York, N.Y.,
22         William L. Allinder, Shook,
23         Hardy & Bacon LLP, Kansas
24         City, Mo., Aaron H. Marks,
25         Leonard A. Feiwus, and Julie
26         R. Fischer, Kasowitz, Benson,
27         Torres & Friedman LLP, New
28         York, N.Y., on the brief), for
29         Defendants-Appellants.
30
31         MICHAEL D. HAUSFELD, Cohen,
32         Milstein, Hausfeld & Toll,
33         P.L.L.C., Wash., D.C.
34         (Benjamin D. Brown, James J.
35         Pizzirusso, Brent W. Landau,
36         Andrea L. Hertzfeld, Cohen,
37         Milstein, Hausfeld & Toll,
38         P.L.L.C., Wash., D.C., Burton
39         H. Finkelstein and Richard M.
40         Volin, Finkelstein, Thompson &
41         Loughran, Wash., D.C., on the
42         brief), for Plaintiffs-
43         Appellees.
44
45         Harvey Kurzweil, Dewey &
46         LeBoeuf LLP, New York, N.Y.
47         (Matthew L. DiRisio and Emilie
48         B. Cooper, Dewey & LeBoeuf

     -2-
1                                          LLP, New York, N.Y., on the
2                                          brief), for Amicus Curiae
3                                          Citizens’ Commission To
4                                          Protect the Truth.

 5                                         John H. Beisner, O’Melveny &
 6                                         Myers LLP, Wash., D.C.
 7                                         (Jessica Davidson Miller and
 8                                         Charles E. Borden, O’Melveny &
 9                                         Myers LLP, Wash., D.C., Hugh
10                                         F. Young, Jr., Product
11                                         Liability Advisory Council,
12                                         Inc., Reston, Va., on the
13                                         brief), for Amicus Curiae
14                                         Product Liability Advisory
15                                         Council, Inc.

16                                         Alan E. Untereiner, Robbins,
17                                         Russell, Englert, Orseck &
18                                         Untereiner LLP, Wash., D.C.,
19                                         (Matthew R. Segal, Russell,
20                                         Englert, Orseck & Untereiner
21                                         LLP, Wash., D.C., Robin S.
22                                         Conrad and Amar D. Sarwal,
23                                         National Chamber Litigation
24                                         Center, Wash, D.C., on the
25                                         brief), for Amicus Curiae
26                                         Chamber of Commerce of the
27                                         United States of America.

28                                         Richard A. Daynard,
29                                         Northeastern University School
30                                         of Law, Boston, Mass.
31                                         (Christopher N. Banthin,
32                                         Public Health Advocacy
33                                         Institute, Inc., Boston,
34                                         Mass., on the brief), for
35                                         Amici Curiae Tobacco Control
36                                         Resource Center Division of
37                                         the Public Health Institute,
38                                         Inc., and the Tobacco Control
39                                         Legal Consortium.

40   JOHN M. WALKER, JR., Circuit Judge:

41        While redressing injuries caused by the cigarette industry

42   is “one of the most troubling . . . problems facing our Nation

                                    -3-
1    today,” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,

2    125 (2000), not every wrong can have a legal remedy, cf. Pearl v.

3    City of Long Beach, 296 F.3d 76, 89 (2d Cir. 2002), at least not

4    without causing collateral damage to the fabric of our laws.

5    Plaintiffs’ putative class action suffers from an insurmountable

6    deficit of collective legal or factual questions.    Their claims

7    are brought as based in fraud under the Racketeer Influenced and

8    Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, but

9    under RICO, each plaintiff must prove reliance, injury, and

10   damages.   Moreover, some undetermined number of plaintiffs’

11   claims are time-barred.   Rule 23 is not a one-way ratchet,

12   empowering a judge to conform the law to the proof.    We therefore

13   reverse the order of the district court and decertify the class.

14                                 BACKGROUND1

15        Plaintiffs, a group of smokers allegedly deceived -- by

16   defendants’ marketing and branding -- into believing that “light”

17   cigarettes (“Lights”) were healthier than “full-flavored”

18   cigarettes, sought and were granted class certification.    Schwab

19   v. Philip Morris USA, Inc., 449 F. Supp. 2d 992 (E.D.N.Y. 2006)

20   (Jack B. Weinstein, Judge).    Plaintiffs’ suit is brought under

21   RICO, with mail and wire fraud as the necessary predicate acts.

22   See 18 U.S.C. § 1962(c) (forbidding “any person employed by or

     1
1         For an exhaustive description of this case, we refer the
2    interested reader to the district court’s class-certification
3    opinion below.

                                      -4-
1    associated with any enterprise engaged in, or the activities of

2    which affect, interstate or foreign commerce, to conduct or

3    participate, directly or indirectly, in the conduct of such

4    enterprise’s affairs through a pattern of racketeering

5    activity”); see also id. § 1961(1) (providing that mail and wire

6    fraud constitute racketeering activity); cf. id. § 1341 (mail

7    fraud statute); id. § 1343 (wire fraud statute).   The gravamen of

8    plaintiffs’ complaint is that defendants’ implicit representation

9    that Lights were healthier led them to buy Lights in greater

10   quantity than they otherwise would have and at an artificially

11   high price, resulting in plaintiffs’ overpayment for cigarettes.

12   Plaintiffs allege claims arising from their purchase of Lights

13   from 1971, when defendants first introduced Lights, until the

14   date on which trial commences.2

     2
 1        We assume for purposes of this decision that defendants
 2   represented that Lights were “healthier” than full-flavored
 3   cigarettes, rather than that Lights were simply lower in tar and
 4   nicotine. Cf. Schwab, 449 F. Supp. 2d at 1127. Indeed, it makes
 5   little sense to argue that defendants’ tar- and nicotine-content
 6   representations were untrue or deceptive. Cf. Brown v. Brown &
 7   Williamson Tobacco Corp., 479 F.3d 383, 392 (5th Cir. 2007)
 8   (noting that “the Manufacturers are essentially forbidden from
 9   making any representations as to the tar and nicotine levels in
10   their marketing about tar that are not based on the FTC method,”
11   and concluding that “[t]he terms ‘light’ and ‘lowered tar and
12   nicotine’ cannot, therefore, be inherently deceptive or untrue”).
13   However, we note that this assumption tends to undermine the
14   importance plaintiffs attach to the National Cancer Institute’s
15   publication of “Monograph 13,” a report that described the
16   phenomenon of “compensation,” J.A. at 855, and in particular the
17   practice of drawing more smoke from individual cigarettes;
18   compensation potentially makes deceptive defendants’ contention
19   that Lights are low in tar and nicotine, but it does not truly

                                       -5-
1         We pause in our narrative briefly to explain the history of

2    Lights, as that history bears on plaintiffs’ claims.    In 1955,

3    the Federal Trade Commission (FTC) adopted the “Cigarette

4    Advertising Guides,” which proscribed “any implicit or explicit

5    health claims in cigarette advertising. . . . [except claims]

6    that a cigarette was ‘low in nicotine or tars’ provided it ha[d]

7    ‘been established by competent scientific proof . . . that the

8    claim [wa]s true, and if true, that such difference or

9    differences [we]re significant.’”     United States v. Philip Morris

10   USA, Inc., 449 F. Supp. 2d 1, 432 (D.D.C. 2006).

11        Several years later, in 1967, the FTC introduced the

12   “Cambridge Filter Method” for calculating tar and nicotine yield.

13   The Cambridge Filter Method, however, which relies upon a machine

14   to test the tar and nicotine content of cigarettes, is quite

15   unreliable.   Most smokers who smoke Lights obtain just as much

16   tar and nicotine as they would if they smoked full-flavored

17   cigarettes, principally by “compensating” -- that is, either by

18   inhaling more smoke per cigarette (e.g., by covering ventilation

19   holes, drawing more deeply with each puff, etc.) or by buying

20   more cigarettes, Schwab, 449 F. Supp. 2d at 1094, neither of

21   which a machine is capable of doing.    Cigarette manufacturers

22   have apparently been aware of this phenomenon for some time.      See

23   Philip Morris, 449 F. Supp. 2d at 438; Aspinall v. Philip Morris

1    speak to whether or not they are healthier.

                                     -6-
1    Cos., 813 N.E.2d 476, 481 n.9 (Mass. 2004).     But some smokers

2    continued at least until 2000 to believe that Lights were

3    healthier than full-flavored cigarettes.    As the district court

4    noted, citing a 1977 Brown & Williamson Internal Marketing Study,

5    “[a]lmost all smokers agree that the primary reason for the

6    increasing acceptance of [Lights] is based on the health

7    reassurance they seem to offer.”   Schwab, 449 F. Supp. 2d at 1095

8    (internal quotation marks and citation omitted).

9         In 2001, however, the National Cancer Institute published a

10   report, “Monograph 13,” that “review[ed] evidence on the FTC

11   method for measuring tar and nicotine yields and the disease

12   risks of machine-measured low-tar cigarettes.”     J.A. at 855.    The

13   stated objective of the report was “to determine whether the

14   evidence taken as a whole shows that the cumulative effect of

15   engineering changes in cigarette design over the last 50 years

16   has reduced disease risks in smokers.”    Id.   Monograph 13

17   discussed the introduction and marketing of low-yield cigarettes,

18   the growing use of these cigarettes, and the practice of

19   compensatory smoking.   Ultimately, it concluded that there was

20   “no convincing evidence that changes in cigarette design between

21   1950 and the mid 1980s have resulted in an important decrease in

22   the disease burden caused by cigarette use either for smokers as

23   a group or for the whole population.”    Id. at 992.   The

24   publication of Monograph 13 sparked both this suit, filed in May

                                     -7-
1    2004, and a parallel civil RICO action brought by the federal

2    government.3

3         Plaintiffs seek $800 billion in economic damages (trebled)

4    stemming from their purchases of Lights.   On September 25, 2006,

5    the district court certified their proposed class of Lights

6    smokers.   On November 16, 2006, this court stayed the proceedings

7    below and granted defendants leave to take an interlocutory

8    appeal under Federal Rule of Civil Procedure 23(f).   We now

9    reverse the district court’s class certification order and

10   decertify the class.

11                                DISCUSSION

12        We review the district court’s certification order for abuse

13   of discretion.   See Moore v. PaineWebber, Inc., 306 F.3d 1247,

14   1252 (2d Cir. 2002).   We will “exercise even greater deference

15   when the district court has certified a class than when it has

16   declined to do so.”    Marisol A. by Forbes v. Giuliani, 126 F.3d

17   372, 375 (2d Cir. 1997).   However, as we recently made clear, “a

18   district judge may not certify a class without making a ruling

19   that each Rule 23 requirement is met . . . [and] all . . .

20   evidence must be assessed as with any other threshold issue,”

21   whether or not any such assessment also bears on the merits of

     3
1         The District Court for the District of Columbia recently
2    found cigarette manufacturers liable for violating RICO,
3    concluding that there was “overwhelming evidence” of defendants’
4    intentional use of deceptive brand descriptors to induce smokers
5    to purchase Lights. Philip Morris, 449 F. Supp. 2d at 27.

                                      -8-
1    the case.   Miles v. Merrill Lynch & Co. (In re Initial Pub.

2    Offerings Sec. Litig.), 471 F.3d 24, 27 (2d Cir. 2006)

3    [hereinafter In re IPO] (emphasis added).

4         Rule 23(a) requires that a class action possess four

5    familiar features: (1) numerosity; (2) commonality; (3)

6    typicality; and (4) adequacy of representation.    If those

7    criteria are met, the district court must next determine whether

8    the class can be maintained under any one of the three

9    subdivisions of Rule 23(b).   With respect to class actions for

10   money damages sought under Rule 23(b)(3), the district court must

11   also find that “questions of law or fact common to class members

12   predominate over any questions affecting only individual

13   members,” and that the class action “is superior to other

14   available methods for fairly and efficiently adjudicating the

15   controversy.”   Fed. R. Civ. P. 23(b)(3).4   The primary issue in

16   this case, to which we now turn, is whether the requirement that

17   common questions predominate has been met.    Because we answer

18   this question in the negative, we need not address whether a

19   class action is a superior method of adjudicating plaintiffs’

20   claims.

21   I.   Elements of a Civil RICO Claim and the Predominance
22        Requirement
23
24        Section 1964(c) of Title 18 (“civil RICO”) gives private

     4
1         All parties concede that this suit is not susceptible to
2    certification under Rule 23(b)(1) or (2).

                                     -9-
1    citizens a cause of action under RICO by providing that “[a]ny

2    person injured in his business or property by reason of a

3    violation of [RICO’s substantive provisions] may sue therefor in

4    any appropriate United States district court and shall recover

5    threefold the damages he sustains and the cost of the suit,

6    including a reasonable attorney’s fee.”   18 U.S.C. § 1964(c).   To

7    fulfill the requirement that the injury occur “by reason of” a

8    defendant’s action, a plaintiff must show “that the defendant’s

9    violation not only was a ‘but for’ cause of his injury, but was

10   the proximate cause as well.”   Holmes v. Sec. Investor Prot.

11   Corp., 503 U.S. 258, 268 (1992); see also Commercial Cleaning

12   Servs., L.L.C. v. Colin Serv. Sys., Inc., 271 F.3d 374, 380 (2d

13   Cir. 2001) (“RICO’s use of the clause ‘by reason of’ has been

14   held to limit standing to those plaintiffs who allege that the

15   asserted RICO violation was the legal, or proximate, cause of

16   their injury, as well as a logical, or ‘but for,’ cause.”).     “But

17   for” causation is also known as “transaction causation,” or

18   “reliance,” while proximate causation is often referred to as

19   “loss causation.”   See, e.g., Moore v. PaineWebber, Inc., 189

20   F.3d 165, 169-70 (2d Cir. 1999); Powers v. British Vita, P.L.C.,

21   57 F.3d 176, 189-90 (2d Cir. 1995); see also Dura Pharms., Inc.

22   v. Broudo, 544 U.S. 336, 341 (2005) (noting that reliance is

23   “often referred to . . . as ‘transaction causation’”).   Thus, a

24   plaintiff asserting a civil RICO claim must be able to support

                                     -10-
1    allegations of (1) a RICO violation, (2) injury, and (3)

2    transaction and loss causation.   First Nationwide Bank v. Gelt

3    Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994).    In this case, to

4    prevail in their argument for class certification, plaintiffs

5    must establish that the issues of injury and causation do not

6    defeat the predominance requirement of Rule 23(b)(3).   For the

7    reasons that follow, we find that plaintiffs have failed to meet

8    this burden.

9         A.   Causation

10             1.      Reliance

11        In cases such as this one when mail or wire fraud is the

12   predicate act for a civil RICO claim, the transaction or “but

13   for” causation element requires the plaintiff to demonstrate that

14   he relied on the defendant’s misrepresentation.   See Caviness v.

15   Derand Res. Corp., 983 F.2d 1295, 1305 (4th Cir. 1993) (“[A]

16   claim under RICO requires both reliance and damage proximately

17   caused by the violation.”); cf. ATSI Commc’ns, Inc. v. Shaar

18   Fund, Ltd., 493 F.3d 87, 106-07 (2d Cir. 2007) (noting, in the

19   securities fraud context, that “[a] plaintiff is required to

20   prove both transaction causation (also known as reliance) and

21   loss causation.    Transaction causation only requires allegations

22   that but for the claimed misrepresentations or omissions, the

23   plaintiff would not have entered into the detrimental securities

24   transaction.” (internal quotation marks and citations omitted)).

                                     -11-
1    In this case, the plaintiffs argue, and the district court

2    agreed, that they can prove reliance on a class-wide basis, using

3    generalized proof, because defendants conducted a national

4    marketing campaign for Lights and therefore represented that

5    Lights were healthier than full-flavored cigarettes in a

6    “consistent, singular, uniform” fashion.    Appellees’ Br. at 15.

7    In other words, plaintiffs underscore that defendants’ fraud

8    resulted from a common course of conduct and therefore argue that

9    common issues predominate.    To support their argument, plaintiffs

10   invoke our discussion in Moore, in which we stated that “[f]raud

11   actions must . . . be separated into two categories: fraud claims

12   based on uniform misrepresentations made to all members of the

13   class and fraud claims based on individualized

14   misrepresentations.   The former are appropriate subjects for

15   class certification because the standardized misrepresentations

16   may be established by generalized proof.”    306 F.3d at 1253.

17        But proof of misrepresentation -- even widespread and

18   uniform misrepresentation -- only satisfies half of the equation;

19   the other half, reliance on the misrepresentation, cannot be the

20   subject of general proof.    Individualized proof is needed to

21   overcome the possibility that a member of the purported class

22   purchased Lights for some reason other than the belief that

23   Lights were a healthier alternative -- for example, if a Lights

24   smoker was unaware of that representation, preferred the taste of

                                     -12-
1    Lights, or chose Lights as an expression of personal style.    See

2    id. at 1255 (“In order to establish [defendant’s] liability, each

3    plaintiff must prove that he or she personally received a

4    material misrepresentation, and that his or her reliance on this

5    misrepresentation was the proximate cause of his or her loss.”);

6    cf. Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 435 (4th

7    Cir. 2003) (“[T]he reliance element of . . . fraud and negligent

8    misrepresentation claims is not readily susceptible to class-wide

9    proof; rather, proof of reasonable reliance . . . depends upon a

10   fact-intensive inquiry into what information each plaintiff

11   actually had.” (omissions in original) (alterations, internal

12   quotation marks, and citation omitted)); Simon v. Merrill Lynch,

13   Pierce, Fenner & Smith, Inc., 482 F.2d 880, 882 (5th Cir. 1973)

14   (noting that if written misrepresentations do not actually reach

15   members of the purported class, “they are no more valid a basis

16   for a class action than dissimilar oral representations,” which

17   cannot sustain a class action).   We took account of this idea in

18   Moore, when we recognized that, “[o]n the other hand, although

19   having some common core, a fraud case may be unsuited for

20   treatment as a class action if there was material variation . . .

21   in the kinds or degrees of reliance by the persons to whom they

22   were addressed.”   306 F.3d at 1253 (quoting Fed. R. Civ. P.

23   23(b)(3) Advisory Committee Notes).

24          Plaintiffs and the district court suggest that defendants

                                    -13-
1    distorted the body of public information and that, in purchasing

2    Lights, plaintiffs relied upon the public’s general sense that

3    Lights were healthier than full-flavored cigarettes, whether or

4    not individual plaintiffs were actually aware of defendants’

5    alleged misrepresentation.    Cf. Falise v. Am. Tobacco Co., 94 F.

6    Supp. 2d 316, 335 (E.D.N.Y. 2000) (“Where . . . the fraudulent

7    scheme is targeted broadly at a large proportion of the American

8    public[,] the requisite showing of reliance is less demanding.

9    Such sophisticated, broad-based fraudulent schemes by their very

10   nature are likely to be designed to distort the entire body of

11   public knowledge . . . .”).   Their argument invokes the fraud-on-

12   the-market presumption set forth in Basic Inc. v. Levinson, 485

13   U.S. 224 (1988), which concerned fraud claims in the securities

14   context.5   “The fraud-on-the market doctrine . . . creates a

15   rebuttable presumption that (1) misrepresentations by an issuer

16   affect the price of securities traded in the open market, and (2)

17   investors rely on the market price of securities as an accurate

18   measure of their intrinsic value.”     Hevesi v. Citigroup Inc., 366

19   F.3d 70, 77 (2d Cir. 2004).   Thus, a plaintiff alleging

20   securities fraud may establish reliance simply by virtue of the

21   defendant’s public dissemination of misleading information.     See

     5
1         This is so despite plaintiffs’ contention that they “are not
2    advocating the same ‘fraud-on-the-market’ presumption applicable
3    in a securities case.” Appellees’ Br. at 25 n.19; see id. at 4
4    (“Based on a belief in the truth of the representation, the
5    market shifted.”).

                                     -14-
1    Basic, 485 U.S. at 241-42 (noting that because the price of stock

2    in an efficient market reflects all publicly available

3    information, “[m]isleading statements will . . . defraud

4    purchasers of stock even if the purchasers do not directly rely

5    on the misstatements”).

6         We do not think that the Basic presumption, or the district

7    court’s variation of it, applies in this case; we cannot assume

8    that, regardless of whether individual smokers were aware of

9    defendants’ misrepresentation, the market at large internalized

10   the misrepresentation to such an extent that all plaintiffs can

11   be said to have relied on it.   Basic involved an efficient market

12   -- the market in securities traded on the New York Stock Exchange

13   -- capable of rapidly assimilating public information into stock

14   prices, see id. at 247, 249 n.29 (describing the securities

15   market as “impersonal, well-developed,” and “information-

16   hungry”); the market for consumer goods, however, is anything but

17   efficient, cf. Sikes v. Teleline, Inc., 281 F.3d 1350, 1364 (5th

18   Cir. 2002) (“[E]ach individual plaintiff is the only person with

19   information about the content of the advertisement upon which he

20   relied.”).   Indeed, the fact that the publication of Monograph 13

21   produced no change in either the sales or the price of Lights

22   shows just how unresponsive the consumer market in Light

23   cigarettes is to the advent of new information.   See In re IPO,

24   471 F.3d at 43 (“Plaintiffs’ own allegations as to how slow the

                                     -15-
1    market was to correct the alleged price inflation despite what

2    they also allege was widespread knowledge of the scheme indicate

3    the very antithesis of an efficient market.”).   As we stated in

4    In re IPO, “[w]ithout the Basic presumption, individual questions

5    of reliance would predominate over common questions.”   Id.; see

6    also Gunnells, 348 F.3d at 435 (noting that Basic’s presumption

7    of actual reliance was based on the efficiency of capital

8    markets, which did not apply to plaintiffs’ purchase of health

9    care plans, and that therefore actual reliance could not be

10   presumed and individualized inquiry was required).

11        We need not go so far as to adopt the Fifth Circuit’s

12   blanket rule that “a fraud class action cannot be certified when

13   individual reliance will be an issue,” Castano v. Am. Tobacco

14   Co., 84 F.3d 734, 745 (5th Cir. 1996), as some fraud actions do

15   appear within the contemplation of Rule 23’s drafters, see Fed.

16   R. Civ. P. 23(b)(3) Advisory Committee Notes (“[A] fraud

17   perpetrated on numerous persons by the use of similar

18   misrepresentations may be an appealing situation for a class

19   action, and it may remain so despite the need, if liability is

20   found, for separate determination of the damages suffered by

21   individuals within the class.”).   But in this case, reliance is

22   too individualized to admit of common proof.6

     6
1         Plaintiffs’ effort to produce class-wide proof of reliance
2    reinforces the difficulty of coming up with such proof.
3    Plaintiffs’ expert, Dr. John R. Hauser, claimed that 90.1% of

                                   -16-
1         Plaintiffs suggest that regardless of whether reliance is

2    susceptible to aggregate proof under Moore, they should be

3    entitled to a presumption of reliance in light of the market

4    shift in brand preferences (from nonfiltered to filtered to low

5    tar cigarettes) that resulted from defendants’ marketing of

6    Lights.   See Appellees’ Br. at 24-25.   While proof of reliance by

7    circumstantial evidence may be sufficient under certain

8    conditions,7 cf. Sikes, 281 F.3d at 1362 n.32, it is insufficient

1    those who smoked Lights chose to do so because of Lights’ alleged
2    health benefits. Schwab, 449 F. Supp. 2d at 1167-68. But Dr.
3    Hauser came to this conclusion on the basis of a method that
4    determined whether, all things being equal, consumers prefer a
5    safer cigarette to a less safe cigarette. And as plaintiffs
6    conceded at oral argument, no one who understood this question
7    would prefer a more dangerous product to a safer one.
     7
 1        For instance, payment may constitute circumstantial proof of
 2   reliance upon a financial representation. See, e.g., Westways
 3   World Travel, Inc. v. AMR Corp., 218 F.R.D. 223, 238 (C.D. Cal.
 4   2003) (“Class-wide reliance and injury may be established by
 5   virtue of payments class members made to American.”); Chisolm v.
 6   TranSouth Fin. Corp., 194 F.R.D. 538, 561 (E.D. Va. 2000)
 7   (presuming that plaintiffs who paid deficiency judgments “made
 8   payments in reliance upon the assurance that the process of
 9   repossession, sale and all subsequent steps were taken in
10   conformity with the law”). But a financial transaction does not
11   usually implicate the same type or degree of personal
12   idiosyncratic choice as does a consumer purchase.
13        Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004), is
14   distinguishable on this basis. In Klay, the court concluded that
15   it did “not strain credulity to conclude that each plaintiff, in
16   entering into contracts with the defendants, relied upon the
17   defendants’ representations and assumed they would be paid the
18   amounts they were due.” Id. at 1259. But assuming that most
19   individuals are led to believe that they will get paid when they
20   sign a contract calling for payment is very different from
21   assuming that most individuals purchase a consumer good in
22   reliance upon an inference that they draw from its marketing and
23   branding rather than for some other reason.

                                    -17-
1    here.   Just as the Ninth Circuit explained in Poulos v. Caesars

2    World, Inc. that people choose to gamble for any number of

3    reasons, each plaintiff in this case could have elected to

4    purchase light cigarettes for any number of reasons, including a

5    preference for the taste and a feeling that smoking Lights was

6    “cool.”   See 379 F.3d 654, 665-66 (9th Cir. 2004) (“[G]ambling is

7    not a context in which we can assume that potential class members

8    are always similarly situated.    Gamblers do not share a common

9    universe of knowledge and expectations -- one motivation does not

10   ‘fit all.’ . . . Thus, to prove proximate causation in this case,

11   an individualized showing of reliance is required.”); Davies v.

12   Philip Morris U.S.A., Inc., No. 04-2-08174-2 SEA, 2006 WL

13   1600067, at *3 (Wash. Super. Ct. May 26, 2006) (denying

14   plaintiffs’ motion for class certification because “[i]nescapably

15   individual differences cannot be concealed in a throng. . . . Was

16   the consumer motivated by health-related reasons, or . . . by

17   taste, peer influence, price, habit, or simply personal

18   preference? . . . [T]here are numerous non-health-related reasons

19   that people buy light cigarettes.” (internal quotation marks and

20   citation omitted)).   Indeed, the fact that the market did not

21   shift away from light cigarettes after the publication of

22   Monograph 13 is compelling evidence that plaintiffs had other,

23   non-health-related reasons for purchasing Lights.    Three of the

24   six named plaintiffs even continued to purchase Lights after

                                      -18-
1    filing the complaint in this case, suggesting the influence of

2    some other motivation.

3         Moreover, we are not blind to the indeterminate likelihood

4    that, even before the publication of Monograph 13, some members

5    of plaintiffs’ desired class were aware that Lights are not, in

6    fact, healthier than full-flavored cigarettes, and they therefore

7    could not have relied on defendants’ marketing in deciding to

8    purchase Lights.   Cf. Sandwich Chef of Tex., Inc. v. Reliance

9    Nat’l Indemnification Ins. Co., 319 F.3d 205, 220 (5th Cir. 2003)

10   (“Knowledge that invoices charged unlawful rates, but did so

11   according to a prior agreement between the insurer and the

12   policyholder, would eliminate reliance and break the chain of

13   causation.”); Moore v. Am. Fed’n of Television & Radio Artists,

14   216 F.3d 1236, 1243 (11th Cir. 2000) (“Some found no error in the

15   statements and accepted them at face value; some relied on their

16   agents to monitor the statements, and they likewise found no

17   error; others spotted what they perceived to be errors and

18   complained to AFTRA . . . .”).     Thus, differences in plaintiffs’

19   knowledge and levels of awareness also defeat the presumption of

20   reliance.

21               2.   Loss Causation

22        A plaintiff alleging a violation of civil RICO must also

23   establish loss causation, meaning that the defendant’s

24   misrepresentations caused the plaintiff “to suffer economic

                                       -19-
1    loss.”    Moore, 189 F.3d at 170; see also Anza v. Ideal Steel

2    Supply Corp., 126 S. Ct. 1991, 1998 (2006) (“When a court

3    evaluates a RICO claim for proximate causation, the central

4    question it must ask is whether the alleged violation led

5    directly to the plaintiff’s injuries.”).    “Furthermore, when

6    factors other than the defendant’s fraud are an intervening

7    direct cause of a plaintiff’s injury, that same injury cannot be

8    said to have occurred by reason of the defendant’s actions.”

9    First Nationwide Bank, 27 F.3d at 769.    In this case, plaintiffs’

10   theory is that they suffered an economic loss because they were

11   overcharged for Lights.    Plaintiffs argue that defendants’

12   misrepresentation that Lights were healthier led to an increased

13   market demand for light cigarettes, which drove up the price of

14   Lights.    Thus, plaintiffs contend that they paid more for Lights

15   than they otherwise would have had the truth been known.    As with

16   reliance, plaintiffs claim that they can establish loss causation

17   on a class-wide basis.

18        This argument fails because the issue of loss causation,

19   much like the issue of reliance, cannot be resolved by way of

20   generalized proof.    As we noted above, individuals may have

21   relied on defendants’ misrepresentation to varying degrees in

22   deciding to purchase Lights; some may have relied completely,

23   some in part, and some not at all.     Thus, establishing the first

24   link in the causal chain -- that defendants’ misrepresentation

                                     -20-
1    caused an increase in market demand -- would require

2    individualized proof, as any number of other factors could have

3    led to this increase.    If smokers purchased more light cigarettes

4    and drove up demand for reasons unrelated to defendants’

5    misrepresentation, plaintiffs could not show that their economic

6    injury was directly caused by defendants’ fraud.    Cf. Anza, 126

7    S. Ct. at 1997 (“There is . . . a second discontinuity between

8    the RICO violation and the asserted injury.    [Plaintiff’s] lost

9    sales could have resulted from factors other than [defendant’s]

10   alleged acts of fraud.    Businesses lose and gain customers for

11   many reasons, and it would require a complex assessment to

12   establish what portion of [plaintiff’s] lost sales were the

13   product of [defendant’s] decreased prices.”).

14        Given the lack of an appreciable drop in the demand or price

15   of light cigarettes after the truth about Lights was revealed in

16   Monograph 13, plaintiffs’ argument that defendants’

17   misrepresentation caused the market to shift and the price of

18   Lights to be inflated fails as a matter of law.    We have stated

19   that “[t]he key reasons for requiring direct causation include

20   avoiding unworkable difficulties in ascertaining what amount of

21   the plaintiff’s injury was caused by the defendant’s wrongful

22   action as opposed to other external factors.”    First Nationwide

23   Bank, 27 F.3d at 770.    Here, because factors other than

24   defendants’ misrepresentation may have intervened and affected

                                     -21-
1    the demand and price of Lights, and because determining the

2    portion of plaintiffs’ injury attributable to defendants’

3    wrongdoing would require an individualized inquiry, plaintiffs

4    cannot establish loss causation on a class-wide basis.

5         B.   Injury

6         Plaintiffs also argue that the requisite injury to “business

7    or property” is susceptible to class-wide proof.   See 18 U.S.C. §

8    1964(c); Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)

9    (stating that a RICO plaintiff “only has standing if, and can

10   only recover to the extent that, he has been injured in his

11   business or property by the conduct constituting the violation”).

12   In this case, proof of injury, or whether plaintiffs have been

13   harmed, is bound up in proof of damages, or by how much

14   plaintiffs have been harmed.   Only by showing that plaintiffs

15   paid more for light cigarettes than they would have but for

16   defendants’ misrepresentation can plaintiffs establish the

17   requisite injury under civil RICO.    Cf. Cordes & Co. Fin. Servs.,

18   Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 107 (2d Cir.

19   2007) (“If the fee paid were higher than the but-for fee, then

20   the plaintiff suffered an injury-in-fact.   In this case, the

21   extent of the difference between the but-for fee and the actual

22   fee paid is relevant to the question of damages, but it is from a

23   comparison between the two that the court would be asked to

24   decide the question of injury-in-fact.”).   Plaintiffs have

                                    -22-
1    advanced two theories to support their claim of injury and how

2    the “but for” price of Lights (and thus the resulting damages)

3    might be calculated: the loss of value theory and the price

4    impact model.   However, because neither of these theories is

5    plausible as a matter of law, because both would lead to an

6    impermissible fluid recovery, and because the acceptable measure

7    of injury -- out-of-pocket damages -- would require

8    individualized proof, class-wide issues cannot be said to

9    predominate.

10        A plaintiff asserting a claim under 18 U.S.C. § 1964(c) must

11   allege actual, quantifiable injury.   In First Nationwide Bank, a

12   civil RICO case that, like the instant case, centered on the

13   issues of causation and injury, we held that the assumption of

14   additional risk of loss due to undersecured loans was

15   insufficient to support an allegation of injury under RICO. See

16   27 F.3d at 767-68.   We further stated that “[t]he general rule of

17   fraud damages is that the defrauded plaintiff may recover out-of-

18   pocket losses caused by the fraud.”   Id. at 768; see also

19   Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 612 (2d

20   Cir. 1994) (“[D]amages as compensation under RICO § 1964(c) for

21   injury to property must, under the familiar rule of law, place

22   [plaintiffs] in the same position they would have been in but for

23   the illegal conduct.”).

24        In this case, out-of-pocket losses cannot be shown by common

                                    -23-
1    evidence because they constitute an inherently individual

2    inquiry: individual smokers would have incurred different losses

3    depending on what they would have opted to do, but for

4    defendants’ misrepresentation.    For example, smokers who would

5    have purchased full-flavored cigarettes instead of Lights had

6    they known that Lights were not healthier would have suffered no

7    injury because Lights have always been priced the same as full-

8    flavored cigarettes.   By contrast, those who would have quit

9    smoking altogether could recover their expenses in purchasing

10   Lights.   And those who would have continued to smoke, but in

11   greater moderation, could recover something in between.     Thus, on

12   the issue of out-of-pocket loss, individual questions

13   predominate; plaintiffs cannot meet their burden of showing that

14   injury is amenable to common proof.

15        Plaintiffs, no doubt recognizing the above difficulties with

16   certifying a class claiming out-of-pocket losses, offer two other

17   theories of recovery, but neither is cognizable under RICO.     “In

18   re IPO makes clear that courts may resolve contested factual

19   issues where necessary to decide on class certification, and when

20   a claim cannot succeed as a matter of law, the Court should not

21   certify a class on that issue.”    Velez v. Novartis Pharms. Corp.,

22   244 F.R.D. 243, 257 (S.D.N.Y. 2007).    Thus, plaintiffs’

23   alternative theories cannot support their argument for class

24   certification.

                                      -24-
1              1.   Loss of Value

2         The “loss of value” model purports to measure the difference

3    between the price plaintiffs paid for light cigarettes as

4    represented by defendants and the (presumably lower) price they

5    would have paid (but for defendants’ misrepresentation) had they

6    known the truth -- that Lights are not healthier than full-

7    flavored cigarettes.   Schwab, 449 F. Supp. 2d at 1163.

8    Plaintiffs’ expert “estimated a loss in value of 77.7 percent if

9    the ‘light’ cigarettes sold by defendants were as harmful as

10   regular cigarettes.”   Id. at 1057-58.

11        But the loss of value model is designed to award plaintiffs

12   damages based on the benefit of their bargain.     Such damages are

13   generally unavailable in RICO suits.     See Commercial Union, 17

14   F.3d at 612; 2 McLaughlin on Class Actions § 8:16, at 8-102 (3d

15   ed. Dec. 2006 update).   This is a sensible rule, and not derived

16   from our “loss causation” cases, as the district court suggested.

17   Schwab, 449 F. Supp. 2d at 1065.   Rather, the rule of general

18   unavailability follows from the text of RICO, which compensates

19   only for injury to “business or property.”     18 U.S.C. § 1964(c).

20        Indeed, plaintiffs have not explained how a party’s

21   “expectation” can constitute “business or property.”      See

22   Heinhold v. Perlstein, 651 F. Supp. 1410, 1412 (E.D. Pa. 1987)

23   (holding that a plaintiff does not have standing to sue under

24   RICO when “the only property to which a plaintiff alleges injury

                                    -25-
1    is an expectation interest that would not have existed but for

2    the alleged RICO violation”); cf. Oscar v. Univ. Students Coop.

3    Ass’n, 965 F.2d 783, 785 (9th Cir. 1992) (en banc) (“[A] showing

4    of ‘injury’ requires proof of concrete financial loss, and not

5    mere ‘injury to a valuable intangible property interest.’”

6    (emphasis added) (citation omitted)).    While we need not and do

7    not decide whether expectancy damages are ever available under

8    RICO, cf. Fleischhauer v. Feltner, 879 F.2d 1290, 1300 (6th Cir.

9    1989), in cases that sound in fraud in the inducement, they

10   plainly are not.8   Here, the cigarette packs that plaintiffs

11   purchased all bore the Surgeon General’s warning that cigarettes

12   may cause cancer and other diseases.    Defendants’

13   misrepresentation could in no way have reduced the value of the

14   cigarettes that plaintiffs actually purchased; they simply could

15   have induced plaintiffs to buy Lights instead of full-flavored

16   cigarettes.   See Appellants’ Reply Br. at 19 (“[P]laintiffs’

17   alleged lost expectation of a safer cigarette arose only because

18   of the alleged fraud.”).

19        Morever, even if benefit of the bargain damages could be

     8
1         In Heinhold, for instance, the defendant misrepresented the
2    value of a diamond ring ultimately purchased by the plaintiff.
3    The plaintiff did not overpay -- the diamond ring was presumably
4    worth its purchase price -- but he did not make his expected
5    profit. 651 F. Supp. at 1411. As the Sixth Circuit subsequently
6    explained, “the fraud [did] not simultaneously induce plaintiffs
7    to invest and reduce the value of the investment’s object.”
8    Fleischhauer, 879 F.2d at 1300 (emphasis added) (citing
9    Heinhold).

                                    -26-
1    awarded, there is no reasonable means of calculating them in this

2    case.   Cf. Fleischhauer, 879 F.2d at 1300 (“[T]here was no

3    realistic evidence presented as to a reasonable value or estimate

4    of lost profits or of the ‘bargain’ based on analogy, experience,

5    or practice.”).   We are asked to conceptualize the impossible --

6    a healthy cigarette -- and then to imagine what a consumer might

7    have paid for such a thing.   Indeed, Dr. Jeffrey Harris,

8    proponent of the loss of value theory, asked survey respondents

9    to “make binary comparisons between a ‘genuine’ light cigarette

10   that reduced risk . . . and a ‘misrepresented’ light cigarette

11   that was no less harmful than conventional cigarettes.”     Schwab,

12   449 F. Supp. 2d at 1164.   He concluded that “virtually all

13   respondents reported a non-zero loss in value.”   Id.   While the

14   district court is quite correct that “damages need not [usually]

15   be demonstrated with precision,” id. at 1065, plaintiffs’ theory

16   is pure speculation, as the survey response to Dr. Harris

17   exemplifies.

18        Thus, plaintiffs’ legal theory fails at its inception and,

19   even if it did not, plaintiffs have not made the requisite

20   showing under In re IPO that they could, at trial, marshal facts

21   sufficient to permit them to rely upon it.   See In re IPO, 471

22   F.3d at 40 (asserting that, in determining whether the Rule 23

23   requirements for class certification have been met, it is

24   appropriate for the judge to “resolve[] underlying factual

                                    -27-
1    disputes,” and that “as to these disputes, the judge must be

2    persuaded that the fact at issue has been established”); id. at

3    41 (noting that even when there is overlap between a Rule 23

4    requirement and a merits issue, “the district judge must receive

5    enough evidence, by affidavits, documents, or testimony, to be

6    satisfied that each Rule 23 requirement has been met”).

7              2.     Price Impact

8         Plaintiffs also assert a damages theory based on an estimate

9    of the “price impact” that a disclosure that Lights were not

10   safer than full-flavored cigarettes would have had on the market.

11   Using multiple regression analysis, plaintiffs seek to show the

12   amount by which defendants would have had to reduce their prices

13   to account for the concomitant reduced demand.   Even if that

14   amount could be proven by common evidence, as with the loss of

15   value model, plaintiffs have failed as a matter of law to adduce

16   sufficient facts to show that the price impact model is a tenable

17   measure of harm.   Cf. supra Part I.B.1 (discussing In re IPO).

18        Indeed, plaintiffs have not come forward with any meaningful

19   means of estimating how the market has changed or might change in

20   the future in response to fluctuations in the demand for light

21   cigarettes.    For instance, as we have already noted, Lights have

22   always been priced the same as full-flavored cigarettes.

23   Furthermore, if plaintiffs’ theory of a health-driven preference

24   for Lights were correct, one would have expected demand to drop

                                     -28-
1    following the publication of Monograph 13 as people returned to

2    smoking regular cigarettes or quit smoking altogether and,

3    correspondingly, prices to fall.    But nothing of the sort

4    happened; the market did not shift appreciably following the

5    publication of Monograph 13.    Cf. In re Burlington Coat Factory

6    Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997) (Alito, J.)

7    (“[B]ecause the July 29 disclosure had no effect on BCF’s price,

8    it follows that the information disclosed on September 20 was

9    immaterial as a matter of law.”).

10        The price impact model exemplifies the kind of vague inquiry

11   into damages that the Supreme Court forbade in Anza.     In that

12   case, the plaintiff (a steel products vendor) sued a competitor,

13   alleging that the competitor’s practice of tax evasion had

14   permitted it to charge lower prices than the plaintiff.     The

15   Supreme Court concluded that the plaintiff had failed adequately

16   to plead a RICO violation because the injury it had suffered to

17   its business was too remote from the predicate racketeering acts.

18   See Anza, 126 S. Ct. at 1997.    Specifically, the Court stated

19   that “[t]he cause of [plaintiff’s] asserted harms . . . is a set

20   of actions (offering lower prices) entirely distinct from the

21   alleged RICO violation (defrauding the State),” and noted that

22   the “attenuation” was “clear.”    Id.   Importantly, the Court

23   discussed

24        the speculative nature of the proceedings that would follow
25        if [plaintiff] were permitted to maintain its claim. A

                                      -29-
1         court considering the claim would need to begin by
2         calculating the portion of [defendant’s] price drop
3         attributable to the alleged pattern of racketeering
4         activity. It next would have to calculate the portion of
5         [plaintiff’s] lost sales attributable to the relevant part
6         of the price drop.

7    Id. at 1998.   Similarly, in this case, a court considering

8    plaintiffs’ price impact model would have to engage in a series

9    of speculative calculations to ascertain whether, and in what

10   amount, plaintiffs suffered a loss.

11        Plaintiffs in this case argue that “[u]nlike in Anza . . .

12   the class members here are the ‘immediate victims’ of the RICO

13   violation, and the causal chain is no more ‘attenuated’ than in

14   any case in which an economist calculates an overcharge resulting

15   from a defendant’s unlawful activities.”    Appellees’ Br. at 43.

16   But Anza spoke not only to the remoteness of the action that had

17   allegedly caused the plaintiff’s harm, but also to the

18   possibility that damages could have resulted from factors

19   unrelated to the defendant’s alleged acts of fraud.    See 126 S.

20   Ct. at 1997 (“Businesses lose and gain customers for many

21   reasons, and it would require a complex assessment to establish

22   what portion of [plaintiff’s] lost sales were the product of

23   [defendant’s] decreased prices.”).    And indeed, here, as

24   plaintiffs’ expert concedes, a number of exogenous variables bear

25   on cigarette price, including “rates of cigarette consumption,

26   income levels of smokers, population, taxes, advertising

27   expenditures, production costs, and plaintiffs’ knowledge of

                                    -30-
1    health risks.”   Schwab, 449 F. Supp. 2d at 1058.

2          Thus, plaintiffs cannot show injury due to overall price

3    impact on a class-wide basis and thereby satisfy Rule 23’s

4    predominance requirement because their price impact theory, like

5    their loss of value theory, fails as a matter of law.   Under In

6    re IPO, plaintiffs must produce persuasive facts at trial that

7    will enable them to prove injury to business or property under

8    RICO.   They have failed to persuade us that they can do so.

9    II.   Calculation of Damages

10         The district court concluded that plaintiffs could prove

11   collective damages on a class-wide basis, and individual

12   plaintiffs would then claim shares of this fund:

13         First, defendant’s aggregate liability is determined in a
14         single, class-wide adjudication and paid into a class fund.
15         Second, “individual class members are afforded an
16         opportunity to collect their individual shares,” usually
17         through a simplified proof of claim procedure.9 Third, any
18         residue remaining after individual claims have been paid is
19         distributed to the class’ benefit under cy pres or other
20         doctrines.
21
22   Id. at 1254 (citations omitted).   But such “fluid recovery” has

23   been forbidden in this circuit since Eisen v. Carlisle &

24   Jacquelin, 479 F.2d 1005, 1008 (2d Cir. 1973) (“[N]o ‘fluid

25   recovery’ procedures are authorized by the text or by any

26   reasonable interpretation of amended Rule 23.”), vacated on other

     9
1         “Damages would be allocated among class members based on the
2    number of ‘light’ cigarettes purchased by each within the
3    relevant geographic area and time.” Id. at 1252.

                                    -31-
1    grounds, 417 U.S. 156 (1974).    And while the fact that damages

2    may have to be ascertained on an individual basis is not,

3    standing alone, sufficient to defeat class certification, see

4    Wal-Mart Stores, Inc. v. Visa U.S.A. Inc. (In re Visa

5    Check/MasterMoney Antitrust Litig.), 280 F.3d 124, 140 (2d Cir.

6    2001) (“The predominance requirement calls only for predominance,

7    not exclusivity, of common questions.” (internal quotation marks

8    and citation omitted)); 6 Alba Conte & Herbert B. Newberg,

9    Newberg on Class Actions § 18:27 (4th ed. 2002) (“A particularly

10   significant aspect of the Rule 23(b)(3) approach is the

11   recognition that individual damages questions do not preclude a

12   Rule 23(b)(3) class action when the issue of liability is common

13   to the class.”), it is nonetheless a factor that we must consider

14   in deciding whether issues susceptible to generalized proof

15   “outweigh” individual issues.

16        We reject plaintiffs’ proposed distribution of any recovery

17   they might receive because it offends both the Rules Enabling Act

18   and the Due Process Clause.     The distribution method at issue

19   would involve an initial estimate of the percentage of class

20   members who were defrauded (and who therefore have valid claims).

21   The total amount of damages suffered would then be calculated

22   based on this estimate (and, presumably, on an estimate of the

23   average loss for each plaintiff).       But such an aggregate

24   determination is likely to result in an astronomical damages

                                      -32-
1    figure that does not accurately reflect the number of plaintiffs

2    actually injured by defendants and that bears little or no

3    relationship to the amount of economic harm actually caused by

4    defendants.   This kind of disconnect offends the Rules Enabling

5    Act, which provides that federal rules of procedure, such as Rule

6    23, cannot be used to “abridge, enlarge, or modify any

7    substantive right.”   28 U.S.C. § 2072(b).

8         Roughly estimating the gross damages to the class as a whole

9    and only subsequently allowing for the processing of individual

10   claims would inevitably alter defendants’ substantive right to

11   pay damages reflective of their actual liability.   See, e.g., In

12   re Hotel Tel. Charges, 500 F.2d 86, 90 (9th Cir. 1974) (rejecting

13   a fluid recovery argument because “allowing gross damages by

14   treating unsubstantiated claims of class members collectively

15   significantly alters substantive rights,” in violation of the

16   Rules Enabling Act); Eisen, 479 F.2d at 1019 (“[P]ossible

17   recoveries run into astronomical amount [and] generate more

18   leverage and pressure on defendants to settle . . . .”); Schwab,

19   449 F. Supp. 2d at 1272 (“A question under the Rules Enabling Act

20   is posed by the danger of overcompensation inherent in the

21   plaintiff’s fluid distribution plan.   It is possible that some

22   claimants will benefit from the plaintiff class’ recovery despite

23   the fact that they did not rely on defendants’ alleged

24   misrepresentations regarding ‘light’ cigarettes and were not,

                                    -33-
1    therefore, injured in their business or property by defendants’

2    actions.”).   We disagree with the district court’s conclusion

3    that “[t]he risk of . . . overcompensation can be limited by

4    requiring proof through claim forms from claimants concerning the

5    extent of their reliance during the distribution stage.”

6    Schwab, 449 F. Supp. 2d at 1272.    Given that any residue would be

7    distributed to the class’s benefit on the basis of cy pres

8    principles rather than returned to defendants, defendants would

9    still be paying the inflated total estimated amount of damages

10   arrived at under the first step of the fluid recovery analysis.

11   See id. at 1254.   Thus, even if defendants were able to avoid

12   overcompensating individual plaintiffs, they would still be

13   overpaying in the aggregate.

14        Moreover, in this case, the district court determined that

15   “evidence of the percentage of the class which was defrauded and

16   the amount of economic damages it suffered appears to be quite

17   weak.”   Id. at 1021.   It further concluded that “determin[ing]

18   the impact of the fraud on the size of the market and its nature

19   for damage purposes is a daunting enterprise even with the many

20   proffered experts holding up their statistical lanterns to help

21   in the search for the truth.”    Id.   Nevertheless, the district

22   court believed that “the proof of acts of defendants and the

23   various experts’ opinions permit[] a finding of damages to the

24   class with sufficient precision to allow a jury award.”     Id. at

                                     -34-
1    1137.   For the reasons stated above, we disagree, and we further

2    note our skepticism that if statistical experts cannot with

3    accuracy estimate the relevant figures, a jury could do so based

4    on the testimony of those experts.

5         The district court’s distribution scheme also raises serious

6    due process concerns.   As we explained in Eisen,

 7        if the ‘class as a whole’ is or can be substituted for the
 8        individual members of the class as claimants, then the
 9        number of claims filed is of no consequence and the amount
10        found to be due will be enormous . . . . Even if amended
11        Rule 23 could be read so as to permit any such fantastic
12        procedure, the courts would have to reject it as an
13        unconstitutional violation of the requirement of due process
14        of law.
15
16   479 F.2d at 1018.    When fluid recovery is used to permit the mass

17   aggregation of claims, the right of defendants to challenge the

18   allegations of individual plaintiffs is lost, resulting in a due

19   process violation.   The Third Circuit properly observed in Newton

20   v. Merrill Lynch, Pierce, Fenner & Smith, Inc. that “actual

21   injury cannot be presumed, and defendants have the right to raise

22   individual defenses against each class member.”     259 F.3d 154,

23   191-92 (3d Cir. 2001); see also 2 McLaughlin on Class Actions §

24   8:16, at 8-95 (3d ed. Dec. 2006 update) (“Courts have repeatedly

25   rejected the use of fluid recovery as a substitute for

26   individualized proof when the class pursues claims that require

27   proof of actual damages.”).   To be sure, this does not mean that

28   defendants are “constitutionally entitled to compel a parade of

29   individual plaintiffs to establish damages.”   In re Antibiotic

                                     -35-
1    Antitrust Actions, 333 F. Supp. 278, 289 (S.D.N.Y. 1971).

2    However, when fluid recovery is used, as here, to mask the

3    prevalence of individual issues, it is an impermissible affront

4    to defendants’ due process rights.     Cf. Six (6) Mexican Workers

5    v. Ariz. Citrus Growers, 904 F.2d 1301, 1305-06 (9th Cir. 1990)

6    (dismissing concerns about fluid recovery because, in the case

7    before it, “[t]he district court did not use fluid recovery to

8    avoid individual proof of damages”).

9    III. The Statute of Limitations Defense

10        As with the difficulty in calculating damages, the presence

11   of individual defenses does not by its terms preclude class

12   certification.   Augustin v. Jablonski (In re Nassau County Strip

13   Search Cases), 461 F.3d 219, 225 (2d Cir. 2006).    But in this

14   case, there is no doubt that a substantial number of class

15   members were on notice of defendants’ alleged fraud before the

16   class period.    Such a finding counsels in favor of vacating the

17   district court’s class certification order.10    See Waste Mgmt.

18   Holdings, Inc. v. Mowbray, 208 F.3d 288, 295 (1st Cir. 2000)

19   (“[A]ffirmative defenses should be considered in making class

20   certification decisions.”).

     10
1         We speak here only of actual notice, as constructive notice
2    is an issue susceptible to common proof; what a “reasonable
3    person” would have known, and when, can be proven on a class-wide
4    basis. Cf. Lanza v. Merrill Lynch & Co. (In re Merrill Lynch
5    Ltd. P’ships Litig.), 154 F.3d 56, 60 (2d Cir. 1998).
6

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1         The statute of limitations for a civil RICO claim is four

2    years.    Agency Holding Corp. v. Malley Duff & Assocs., Inc., 483

3    U.S. 143, 156 (1987).   The statute begins to run when the

4    plaintiff discovers -- or should reasonably have discovered --

5    the alleged injury.   Rotella v. Wood, 528 U.S. 549, 553-54

6    (2000).   As the district court noted, “a troubling critical

7    problem for plaintiffs is that some members of the class almost

8    certainly were aware long before 2000 that ‘light’ cigarettes

9    were not appreciably safer for them than regular cigarettes.”

10   Schwab, 449 F. Supp. 2d at 1069.   The district court and

11   plaintiffs rely upon the argument that “the tobacco companies

12   made tremendous efforts to keep the truth about ‘light’

13   cigarettes from smokers and so should be estopped from arguing

14   that the smokers learned the truth anyhow.”   Id. at 1075.    They

15   point us to the Fifth Circuit’s decision in Bratcher v. National

16   Standard Life Insurance Co. (In re Monumental Life Insurance

17   Co.), which concluded that “[t]o hold that each class member must

18   be deposed as to precisely when, if at all, he learned of

19   defendants’ practices would be tantamount to adopting a per se

20   rule that civil rights cases involving deception or concealment

21   cannot be certified outside a two- or three-year period.”     365

22   F.3d 408, 420 (5th Cir. 2004); see also Winoff Indus., Inc. v.

23   Stone Container Corp. (In re Linerboard Antitrust Litig.), 305

24   F.3d 145, 162-63 (3d Cir. 2002); Mowbray, 208 F.3d at 296.

                                     -37-
1         The Supreme Court’s recent decision in Ledbetter v. Goodyear

2    Tire & Rubber Co. casts doubt upon In re Monumental.   127 S. Ct.

3    2162, 2177 (2007) (holding that statute of limitations barred

4    suit for wage discrimination despite difficulty in discovering

5    such discrimination).   But even assuming that In re Monumental

6    remains sound, we are not persuaded that it is on point.   In that

7    case, the court determined that “a presumption of unawareness by

8    the plaintiff class is warranted.”    In re Monumental, 365 F.3d at

9    420 n.22; see also id. at 420 (“Of the thirteen representative

10   plaintiffs, defendants point to only one, Jo Ella Brown, whose

11   claim may have expired because of actual knowledge of defendants’

12   practices.”).   Such a presumption is unwarranted in this case.

13        First, as defendants note, two class representatives in this

14   case appear to have understood the phenomenon of compensation --

15   and its attendant risks -- prior to May 2000 (four years before

16   the complaint was filed).   Appellants’ Br. at 37 n.13.   Second,

17   the minimal impact that the publication of Monograph 13 had on

18   the market for Lights suggests that Monograph 13 may have been a

19   reinterpretation of existing studies, as defendants argue, cf.

20   Schwab, 449 F. Supp. 2d at 1074, rather than a ground-breaking

21   new study, as plaintiffs would have it.    Third, plaintiffs’ own

22   attorneys filed several similar lawsuits prior to May 2000.    Id.

23   at 1071.   Finally, and most importantly, plaintiffs have offered

24   no reliable means of collectively determining how many class

                                    -38-
1    members’ claims are time-barred.       Id. at 1069.

2                             *         *         *

3         In sum, because we find that numerous issues in this case

4    are not susceptible to generalized proof but would require a more

5    individualized inquiry, we conclude that the predominance

6    requirement of Rule 23 has not been satisfied.        We recognize that

7    a court may employ Rule 23(c)(4) to certify a class as to common

8    issues that do exist, “regardless of whether the claim as a whole

9    satisfies Rule 23(b)(3)’s predominance requirement.”       In re

10   Nassau County Strip Search Cases, 461 F.3d at 227.       Nevertheless,

11   in this case, given the number of questions that would remain for

12   individual adjudication, issue certification would not “reduce

13   the range of issues in dispute and promote judicial economy.”

14   Robinson v. Metro-N. Commuter R.R., 267 F.3d 147, 168 (2d Cir.

15   2001).   Certifying, for example, the issue of defendants’ scheme

16   to defraud, would not materially advance the litigation because

17   it would not dispose of larger issues such as reliance, injury,

18   and damages.   See id. at 167 n.12.      We therefore decline

19   plaintiffs’ request for issue certification.

20                                CONCLUSION

21        For the foregoing reasons, we REVERSE the judgment of the

22   district court and order the class DECERTIFIED.

23

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