LENNON v. PHILIP MORRIS COMPANIES INC (2001)

Motion sequences # 003, 004, and 006 are consolidated for purposes of disposition.

In this purported antitrust class action commenced on behalf of smokers, defendants, Philip Morris Companies, Inc., Philip Morris Incorporated (Philip Morris), R.J.R. Nabisco Holdings Corp., R.J. Reynolds Tobacco Co. (RJR), B.A.T. Industries, PLC, British American Tobacco Co., Ltd. (BAT), Batus Holdings, Inc., Brown & Williamson Tobacco Corp., Lorillard Tobacco, Inc., Loews Corporation, Liggett Group, Inc., and Brooke Group, Ltd. (defendants), move to dismiss, pursuant to CPLR § 3211[a][5] and CPLR § 3211[a][7], on the grounds that CPLR § 901(b) prohibits action, such as this, seeking treble damages.

Plaintiffs, Virginia Lennon, Joseph Nierman, and Dorothy Sylvester, claim that defendants have violated New York General Business Law (GBL) § 340[6], commonly referred to as the Donnelly Act (the Act), by engaging in price fixing and other anti-competitive activities.   They sue on behalf of all those who had purchased cigarettes in New York indirectly from the defendants, and their affiliates and subsidiaries, from November 1, 1993 to the present.

The facts alleged in the complaint are unchallenged by defendants, and therefore, are presumed to be true, as this Court must for the purpose of these motions (Leon v. Martinez, 84 N.Y.2d 83, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1994] concluding that allegations in the complaint are assumed to be true and the complaint is to be construed in the nonmoving party's favor when deciding a motion under CPLR § 3211;  In re Colt Industries, 155 A.D.2d 154, 553 N.Y.S.2d 138 [1st Dep't 1990] finding that any error, if there is to be one, should be made in favor of allowing class action treatment).

During much of the 20th century, the U.S. cigarette industry has been dominated by four to six major firms.   Five major firms produce more than 99 percent of cigarettes sold in the United States.   According to the complaint, those firms and their approximate shares of the U.S. cigarette market as of 1998 were:  Philip Morris, Inc., 52.68 %;  R.J. Reynolds Tobacco Company, 24%;  Brown & Williamson Tobacco Corporation, the U.S. subsidiary of British American Tobacco Industries of Britain, 16%;  Lorillard, Inc., 6.2% and Liggett Group, Inc., 1.1%. Plaintiffs contend that the U.S. tobacco market has annual revenues of approximately $45 billion.

According to the complaint, between 1950 and 1980, price competition was completely absent from the U.S. cigarette market.   Quoting from a U.S. Supreme Court decision, plaintiff alleges that in 1993, “[t]he [pre-1980's] cigarette industry ․ has long been one of America's most profitable, in part because for many years there was no significant price competition among the rival firms ․ List prices for cigarettes increased in lock-step twice a year, for a number of years, irrespective of the rate of inflation, changes in the cost of production, or shifts in consumer demand.”  (Quoting, Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 213, 113 S.Ct. 2578, 125 L.Ed.2d 168 [1993] ).

Plaintiffs contend that lock-step pricing practices continued.   On March 7, 1997, in response to the proposed $368 billion tobacco/health-care settlement, RJR announced that the prices of its cigarettes would increase by four to five cents per pack.   Shortly thereafter, Philip Morris announced an even higher price increase.   The other defendants, including RJR, followed suit, matching the Philip Morris price increase.

Between July 1997 and November 1998, the defendants entered settlements with individual states regarding health-care lawsuits brought by the states.   After each settlement, each of the defendants raised the prices of their cigarettes by the identical amount even though these price increases exceeded the amount necessary to cover the costs of each particular settlement.

On November 18, 1998, Philip Morris and RJR announced, just moments apart, that each company would increase the prices for all their cigarette brands by a record 45 cents per pack.   The other defendants raised their prices to match this increase shortly thereafter.¹

Then, on August 27, 1999, Philip Morris announced that it would raise prices on its cigarette products by 18 cents per pack in order to cover the upcoming ten cents per pack increase in federal excise taxes.   The other defendants immediately followed suit, matching Philip Morris' price increase for their products.

On January 14, 2000, Philip Morris and RJR again announced that they would both increase prices by 13 cents per pack.   Again, the other defendants immediately followed suit and raised their prices by the same amount.

Meanwhile, the defendants maintain information in an electronic database in Pittsburgh that reports the discounts and product promotions for all the products of other defendant competitors.   According to the complaint, defendants all have access to the database which they allegedly use to monitor cigarette prices.

Plaintiffs contend that defendants' cigarette prices have been set significantly above competitive levels, despite the fact that, according to plaintiffs, cigarette demand has declined in the United States and defendants have experienced excess cigarette manufacturing capacity.   Plaintiffs also allege that during the class period, the defendants have had an expressed policy that cigarette prices were to be increased at a rate exceeding inflation.

Without describing the factual underpinning of plaintiffs' claims, plaintiffs allege that in acting on their agreement, defendants met to discuss and agree upon future price increases, and shared actual transactional prices.   The effects of their activities were to maintain the price of cigarettes at artificially high levels. They contend that defendants' activities lessen price competition and deprived plaintiffs of the benefit of free and open competition, in violation of the Donnelly Act. Based upon these facts, the complaint also asserts that defendants have violated General Business Law § 349 which prohibits unfair and deceptive business practices.

Defendants seek dismissal of the complaint on the grounds that plaintiffs seek treble damages under the Donnelly Act, which they contend are punitive in nature, and as such, disallows use of the class action statute under CPLR § 901[b].   Defendants also argue that the provision of the Donnelly Act which affords a right of action to indirect purchasers has no retroactive effect, the acts complained of occurred prior to its enactment, and those activities that postdate the 1998 amendment of the Act are insufficient to state a claim.

 The Donnelly Act declares illegal and against public policy “any agreement or monopoly in the conduct of any business or trade whereby competition or the free exercise of any activity in the conduct of any business is retrained” (GBL § 340[1] ).   Violation of the Act permits those who sustain damages to recover treble damages along with costs and attorneys' fees (GBL § 340[5] ).   Until 1998, the law allowed only direct purchasers to sue for violation of the antitrust laws.   GBL § 340[6] extends to indirect purchasers or “any political subdivision, or public authority or any person who has sustained damages by reason of violation of [GBL § 340],” the right to maintain an action to recover damages.   Although GBL § 340[6] gives indirect purchasers, typically end users or consumers of products and services, a right of action, CPLR § 901(b) provides that “[u]nless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action.”   Therefore, if treble damages are found to penalize those who violate the Donnelly Act, then CPLR § 901(b) bars class recoveries in the absence of statutory language which authorizes class action claims.

A long line of federal cases clearly supports plaintiffs' contention that treble damages under the Sherman Act and the Clayton Act are remedial, not punitive, in nature (Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 97 S.Ct. 690, 50 L.Ed.2d 701 [1977], see also, Blue Shield of Virginia v. McCready, 457 U.S. 465, 102 S.Ct. 2540, 73 L.Ed.2d 149 [1982];  Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 [1985], see also, J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557, 101 S.Ct. 1923, 68 L.Ed.2d 442 [1981] ).   The United States Supreme Court has held that treble damages are designed primarily to serve a remedial function (Brunswick Corp. v. Pueblo Bowl-O-Mat, supra ).   In Mitsubishi Motors v. Soler Chrysler-Plymouth, supra, the Supreme Court held that “the private cause of action plays a central role in enforcing” the federal antitrust laws.   It quoted the United States Court of Appeals' decision in the earlier Mitsubishi Motors matter, saying that “a claim under the antitrust laws is not merely a private matter.   The Sherman Act is designed to promote the national interest in a competitive economy;  thus, the plaintiff asserting his rights under the Act has been likened to a private attorney-general who protects the public's interest.' ” (quoting, Mitsubishi Motors v. Soler Chrysler-Plymouth, 723 F.2d 155, 168 [1st Cir.1983] ).   The Supreme Court further stated that “the treble damages provision wielded by the private litigant is a chief tool in the antitrust enforcement schemes, posing a crucial deterrent to potential violators.”  (473 U.S. at 635, 105 S.Ct. 3346).   While recognizing it as an effective tool against violations of the statute, the Court also acknowledged that treble damages are primarily to enable an injured competitor to gain compensation for that injury.   Citing Brunswick and the legislative history of the Sherman Act, the Supreme Court stated that “the treble-damages provision “was conceived of primarily as a remedy for ‘[t]he people of the United States as individuals,’ ” 429 U.S., at 486, n. 10, 97 S.Ct. 690, quoting 21 Cong. Rec. 1767-1768 [1890] (remarks of Sen. George);  when reenacted in 1914 as § 4 of the Clayton Act, 38 Stat. 731, it was still “conceived primarily as ‘open[ing] the door of justice to every man, whenever he may be injured by those who violate the antitrust laws and giv[ing] the injured a party ample damages for the wrong suffered.”  429 U.S., at 486, n. 10, 97 S.Ct. 690, quoting 51 Cong. Rec. 9073 [1914] (remarks of Rep Webb).

 New York's GBL § 340 is intended to further this protection to citizens of the New York State (see, State v. Mobil Oil Corp., 38 N.Y.2d 460, 464, 381 N.Y.S.2d 426, 344 N.E.2d 357 [1976] ).   The Donnelly Act is often referred to as the “little Sherman Act” (Anheuser-Busch, Inc. v. Abrams, 71 N.Y.2d 327, 335, 525 N.Y.S.2d 816, 520 N.E.2d 535 [1988] ).   The Court of Appeals has held that since the Donnelly Act is modeled after the Sherman Act of 1890, the Act should generally be construed in light of federal precedent, and given different interpretation only where state policy and differences in statutory language justify such deviation (X.L.O. Concrete Corp. v. Rivergate Corp., 83 N.Y.2d 513, 611 N.Y.S.2d 786, 634 N.E.2d 158 [1994], see also, Anheuser-Busch, Inc. v. Abrams, 71 N.Y.2d 327, 525 N.Y.S.2d 816, 520 N.E.2d 535 [1988] ).

A fundamental defect in plaintiffs' argument, however, is that the federal and state antitrust statutes differ when read in light of their statutes' class action counterpart.   Although federal courts have held that treble damages are remedial, not punitive, New York state courts have historically concluded that treble damages are punitive in nature (Fults v. Munro, 202 N.Y. 34, 41, 95 N.E. 23 [1911];  Potter v. Bierwirth, 171 A.D. 175, 157 N.Y.S. 25 [1916];  Lyke v. Anderson, 147 A.D.2d 18, 28, 541 N.Y.S.2d 817 [2d Dept. 1989];  Rental & Management Associates v. Hartford Ins. Co., 206 A.D.2d 288, 614 N.Y.S.2d 513 [1st Dep't 1994];  Hoffman v. Ryan, 101 Misc.2d 845, 422 N.Y.S.2d 288 [Sup. Ct. N.Y. County 1979];  Roxbury Light & Power Co. v. Dimmick, 196 N.Y.S. 320 [Sup. Ct. N.Y. County 1922] see also, Rubin v. Nine West Group, Inc., No. 0763-99, 1992-2 Trade Cases [CCH] ¶ 72,714, 1999 WL 1425364 [Sup. Ct. West Cty. Nov. 3, 1999];  Blumenthal v. American Society of Travel Agents, Inc., 1977 WL 18392 [Sup. Ct. N.Y. County], finding the Donnelly Act “imposes a penalty”-“treble damages are the minimum damages” and that “[t]he statute is mandatory”).   On this basis, several New York courts have disallowed class actions for treble damages under the Donnelly Act (Rubin v. Nine West Group, Inc., supra;  Blumenthal v. American Society of Travel Agents, Inc., supra;  Russo & Dubin v. Allied Maintenance Corp., 95 Misc.2d 344, 407 N.Y.S.2d 617 [Sup. Ct. N.Y. Co. 1978];  Cox v. Microsoft, No. 1051931/2000 [Sup. Ct. N.Y. County Nov. 2000];  Asher v. Abbott Laboratories, No. 123431/1999 977 WL 18392 [Sup. Ct. N.Y. County Oct. 2000] ).   Although the case law may not be controlling, this Court finds that a compelling argument exists for reaching a similar finding.

 Federal case law upon which plaintiffs rely is inapposite, because it does not contemplate, and therefore, fails to demonstrate how a treble damages class action can bypass CPLR 901[b]'s prohibition.   Class action section 23 of the Federal Rules of Civil Procedure has no such similar prohibition.   Contrary to plaintiffs' contention that federal precedent applies, here, this Court is bound to give effect to a state policy where state law deviates from the federal statute (Anheuser-Busch, Inc. v. Abrams, supra, 71 N.Y.2d at 335, 525 N.Y.S.2d 816, 520 N.E.2d 535).   As previously stated, historically, treble damages have been found punitive in nature, particularly where the claim is commenced as a class.   Apparently, CPLR § 901[b] was “designed to discourage ․recovery of a statutory minimum by each class member [that] results in ‘annihilatory punishment.’ ”   (McLaughlin, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR C901:7, at 327-28, citing, Vickers v. Home Federal, 87 Misc.2d 880, 386 N.Y.S.2d 291 [ ] ).  Undoubtedly, a class action for treble damages will have punitive effect on any defendant.   Even where treble damages are discretionary and need not be sought by the injured party, it is this Court's understanding that no New York court has sustained such a claim either under the Donnelly Act or any other statutory provision.   No direct purchaser has been apparently permitted to maintain a class claim.   Although, a more realistic and accurate view of the antitrust laws is that they perform both remedial and policing functions, New York's class action procedures and the prevailing interpretation of the word “penalty” require that plaintiffs identify express authorizing language (cf., Carter v. Frito-Lay, Inc., 74 A.D.2d 550, 551, 425 N.Y.S.2d 115 [1st Dept. 1980] ), or otherwise be barred from maintaining this claim.

The Donnelly Act is silent on whether class actions can be commenced by indirect purchasers.   Plaintiffs rely on transcripts from the May 1998 Assembly floor debate regarding the amendment to § 340, adding Section 6 to that provision.   These transcripts show an exchange between Assemblyman Straniere and Assemblyman Brodsky, the sponsor of the amendment in the Assembly, where Brodsky informs the Assembly that this amendment is intended to allow for class actions suits brought under the Act (Assembly Debate Transcripts, May 26, 1998, Page 34).   Plaintiffs also submit an excerpt from a letter addressed to Governor Pataki and written by the Business Council of New York State, an opponent of the amendment, which stated that the amendment “simply provides an additional and unnecessary avenue for the litigation of consumer class actions.”  (Letter to Hon. James McGuire, Counsel to the Governor, November 18, 1998).   The excerpts from the floor debate and the letter in opposition may indicate that the legislature intended to allow class actions by indirect purchasers.   However, the rules of statutory construction clearly preclude this Court from reaching the provision's legislative history when, as in this case, the language is unambiguously silent;  there is no language for this Court to construe (Raritan Dev. Corp. v. Silva, 91 N.Y.2d 98, 106-07, 667 N.Y.S.2d 327, 689 N.E.2d 1373 [1997] ).

Indirect purchasers have been afforded essentially a right of action which is hollow in effect, despite the purpose of GBL § 340(6) and what the legislature may have intended.   The most prevalent indirect purchaser, the consumer, will have little incentive to pursue protracted antitrust litigation when the loss at stake is their own personal loss.   Nor will individual consumers have the resources to sustain a claim against defendants such as the tobacco manufacturers.   Without the class action procedure, indirect purchasers are unlikely to utilize GBL § 340(6).

Further, this Court believes that class actions are the only means of avoiding multiple liability for the same harm and to ensure indirect purchasers have full benefit of the right to sue for antitrust violation.   Then “coordination of recovery for all those affected by price fixing might be achieved ․ by embracing all direct and indirect purchasers, with damages to be allocated” accordingly (Givens, Supplementary, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 19, Gen. Bus. Law § 340, 2001 Pocket Part, at 209).   While this reasoning clearly favors permitting a class claim, this Court cannot ignore that since enacting the Donnelly Act, the New York State Legislature has twice considered the indirect purchasers right to bring suit.   Yet, no express languages in the statute, as required by CPLR § 901[b], has been adopted which authorizes the maintenance of a class action.   Omissions in a statute cannot be supplied by construction (see, N.Y. Statutes § 363;  Kessel v. Dodd, 46 A.D.2d 645, 359 N.Y.S.2d 594 [2nd Dept. 1974] ), and where the statute is clear and complete as written, the judiciary cannot rewrite the law (N.Y. Statutes § 94).   This Court is constrained to find that in the absence of any legal authority, CPLR § 901[b] prohibits this class action claim.

 Even assuming legal authority supports an antitrust class action claim, plaintiffs' allegations are limited to those events which occurred within the applicable four-year statute of limitation under New York General Business Law § 340[5].   Where a statute instructs that it is “to take effect immediately,” then it is interpreted not to have a retroactive operation or effect (Murphy v. Bd. of Educ., North Bellmore Union Free Sch. Dist., 104 A.D.2d 796, 480 N.Y.S.2d 138 [2nd Dep't 1984], referring to, N.Y. Stat. Law § 51 [McKinney 1971] ).   However, remedial legislation or statutes governing procedural matters should be applied retroactively (Majewski v. Broadalbin-Perth Cent. Sch. Dist., 91 N.Y.2d 577, 584, 673 N.Y.S.2d 966, 696 N.E.2d 978 [1998] ).

Here, the Act states that the amendment's provisions are “to take effect immediately.”  (GBL § 340(6), L. 1998, C. 653).   The defendants claim that statutory amendments will have no retroactive application unless the language of the statute clearly indicates that it shall receive contrary interpretation.   Section 340(6) includes no such provision (N.Y. Stat. Law § 52 McKinney 2000).   In Majewski, the court found that a remedial statute, for statute of limitation purposes, is one which creates no new right of action or increases a defendant's exposure to liability.   Because GBL § 340(6) adds a claim that would not otherwise exist, the amendment is not remedial in effect.   Moreover, courts interpreting provisions of the General Business law have rejected retroactive application of amendments creating new private rights of action (see, Burns v. Volkswagen of America, Inc., 118 Misc.2d 289, 460 N.Y.S.2d 410 [Sup. Ct. Monroe Co. 1982], affd. 97 A.D.2d 977, 468 N.Y.S.2d 1017 [4th Dept. 1983];  Copeland v. Schwartz Moving & Storage Corp., 126 Misc.2d 744, 483 N.Y.S.2d 945 [Civil Court N.Y. County 1985];  Sabater v. Lead Indus. Assoc., 183 Misc.2d 759, 704 N.Y.S.2d 800 [N.Y. Sup. Ct. 2000] ).   Therefore, the statute of limitation cannot be retroactively applied.

 Without allegations of events that postdate the 1998 amendment, the plaintiffs' complaint fails to sufficiently state a claim.   To state a claim, plaintiffs must allege the making of an agreement to fix prices, the terms of that agreement, and specific acts committed in furtherance of the agreement (State v. Milk Handlers and Processors Assoc., Inc., 28 A.D.2d 971, 283 N.Y.S.2d 566 [1st Dept. 1967] ).   Plaintiffs' conclusory statements that throughout the period in question, defendants, through their officers, directors, employees and agents, met to discuss price increases are not enough to demonstrate the existence of a conspiratorial agreement (Battipaglia v. New York State Liquor Authority, 745 F.2d 166, 174-75 [2nd Cir.1984] ).   Also, the defendants' maintenance of an electronic database which enabled each defendant to monitor and match their competitors' prices is not proof of anti-competitive activity (Id.).   Nor, are facts showing defendants engaged in parallel pricing adequate to bolster plaintiffs' claims (Blomkest Fertilizer Inc. v. Potash Corp. of Sask., Inc., 203 F.3d 1028 [8th Cir. Minn. 2000], writ denied, 531 U.S. 815, 121 S.Ct. 50, 148 L.Ed.2d 19 [2000] ).   Parallel price increases, attendance at industry meetings, and the existence of a database, standing alone, are not sufficient to state a claim of conspiracy.

Because plaintiffs fail to oppose defendants' motion to dismiss their claims under New York General Business Law § 349, that claim must also be dismissed.

Accordingly, it is ordered that defendants' motion is granted and the complaint is dismissed in its entirety.

FOOTNOTES

1.   Although not relevant here, if plaintiffs' allegations are true, it would appear that the multi-billion dollar National Tobacco Litigation Settlement (which this Court did not approve) was a brilliant slight-of-hand by the Tobacco companies.   By taking the additional price per pack for cigarettes from smokers and transferring that money to the settling state governments and the lawyers who represented those governments, as the settlement amount, these defendants have not been paying the Settlement out of their own money, they are merely circulating money from smokers to state governments.   It would be as if a retailer found to have over-charged his customers was permitted to repay his customers out of future overcharges.

CHARLES EDWARD RAMOS, J.