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February 26, 1997

PHILIP MORRIS, INC., et al., Defendants.

The opinion of the court was delivered by: JENSEN

 On January 22, 1997, the Court heard argument on defendants' motion to dismiss and defendants' motion to disqualify Lieff, Cabraser, Heimann & Bernstein. Elizabeth D. Laporte, Richard M. Heimann, Robert J. Nelson, and Jennifer H. Small appeared on behalf of plaintiffs; Curtis M. Caton, Dan Webb, Kevin J. Dunne, Ronald F. Scholl, H. Christian L'Orange, Susan E. Foe, and Bradley E. Lerman appeared for defendants. Having considered the arguments of counsel, the papers submitted, the applicable law, and the record in this case, the Court hereby DISMISSES plaintiffs' complaint with leave to amend and DENIES defendants' motion to disqualify counsel.


 Plaintiffs are the City and County of San Francisco and ten other California counties. Defendants are cigarette manufacturers and their trade associations. Plaintiffs allege that defendants have engaged in a conspiracy to mislead plaintiffs and their residents regarding the dangers associated with smoking and the addictiveness of nicotine, resulting in plaintiffs spending millions of dollars each year to provide medical services to their indigent residents suffering from diseases caused by smoking. Plaintiffs seek economic damages for their smoking-related costs, including expenditures for medical care for their residents and for health insurance for their employees. Plaintiffs also request equitable relief, including an injunction requiring defendants to disclose their research on smoking, to fund a remedial public education campaign on the health consequences of smoking, and to fund smoking cessation programs. Finally, plaintiffs seek restitution and declaratory relief.

 In their first amended complaint ("FAC"), plaintiffs assert federal claims for violations of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(c) and (d), against all defendants except The Tobacco Institute, Inc. ("TI") and The Council for Tobacco Research -- U.S.A., Inc ("CTR") (Count I), and 18 U.S.C. §§ 1962(a) and (d), against all defendants (Count II). In addition, plaintiffs allege state law causes of action against all defendants for fraud and misrepresentation (Count III); breach of special duty (Count IV); breach of express and implied warranty (except against defendants TI and CTR) (Count V); restitution (Count VI); unjust enrichment (Count VII); and conspiracy (Count VIII).

 Defendants now move the Court to dismiss plaintiffs' complaint in its entirety. As a preliminary matter, the Court will briefly address defendants' motion to disqualify plaintiffs' private counsel, which motion was denied at the January 22, 1997 hearing.


 A. Motion to Disqualify Counsel

 Plaintiffs have contracted with Lieff, Cabraser, Heimann & Bernstein to have Lieff, Cabraser act as "Special Attorneys" pursuant to a contingent fee arrangement. Lieff, Cabraser will be paid only if plaintiffs recover money from defendants. *fn2" Defendants, citing People ex rel. Clancy v. Superior Court, 39 Cal. 3d 740, 745, 218 Cal. Rptr. 24, 705 P.2d 347 (1986), argue that the Court should disqualify Lieff, Cabraser, as courts have the authority to disqualify counsel when necessary in the furtherance of justice.

 In Clancy, the court disqualified private counsel hired pursuant to a contingent fee arrangement to represent the city in a public nuisance action. Because a government lawyer's neutrality is essential to a fair outcome for the litigants and to the proper function of the judicial process, the court held that a government attorney may be disqualified if he or she has a personal interest in the litigation extraneous to his or her official functions. Id. at 746. Nonetheless, under appropriate circumstances, the government may engage private counsel. Id. at 748; see also Denio v. City of Huntington Beach, 22 Cal. 2d 580, 140 P.2d 392 (1943).

 While the contingent fee arrangement here clearly gives Lieff, Cabraser a stake in the litigation, the Court finds that this case is sufficiently distinguishable from Clancy to allow for the government's retention of private counsel. First, as plaintiffs explain, Lieff, Cabraser is acting here as co-counsel, with plaintiffs' respective government attorneys retaining full control over the course of the litigation. Because plaintiffs' public counsel are actually directing this litigation, the Court finds that the concerns expressed in Clancy regarding overzealousness on the part of private counsel have been adequately addressed by the arrangement between Lieff, Cabraser and the plaintiffs.

 The Court also finds that the civil tort nature of this action meaningfully distinguishes it from Clancy. This lawsuit, which is basically a fraud action, does not raise concerns analogous to those in the public nuisance or eminent domain contexts discussed in Clancy. Plaintiffs' role in this suit is that of a tort victim, rather than a sovereign seeking to vindicate the rights of its residents or exercising governmental powers.

 Finally, the case as it stands now will not require the private attorneys to argue about the policy choices or value judgments suggested by defendants regarding the regulation of tobacco. Rather, plaintiffs' attorneys simply will be arguing, as they likely have in many other cases for private sector clients, that a tort has been committed against their clients.

 B. Motion to Dismiss for Failure to State a Claim

 1. Legal Standard

 Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether a plaintiff will prevail in the action, but whether she is entitled to offer evidence in support of her claim. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974).

 In answering this question, the Court must assume that plaintiff's allegations are true and must draw all reasonable inferences in plaintiff's favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow plaintiff to develop her case at this stage of the proceedings. United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981).

 If the Court chooses to dismiss the complaint, it must then decide whether to grant leave to amend. In general, leave to amend is only denied if it is clear that amendment would be futile and "that the deficiencies of the complaint could not be cured by amendment." Noll v. Carlson, 809 F.2d 1446, 1448 (9th Cir. 1987) (quoting Broughton v. Cutter Laboratories, 622 F.2d 458, 460 (9th Cir. 1980) (per curiam)); see Poling v. Morgan, 829 F.2d 882, 886 (9th Cir. 1987) (citing Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962)) (futility is basis for denying amendment under Rule 15).

 2. Plaintiffs' Federal Claims

 In Counts I and II of their FAC, plaintiffs assert violations of RICO §§ 1962(a), (c), and (d), which sections provide as follows:

(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. . . .
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . .
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.

 18 U.S.C. § 1962.

 Plaintiffs allege in Count I that defendants' predicate acts of racketeering are wire and mail fraud in violation of 18 U.S.C. §§ 1341 and 1342, in that defendants used the U.S. mails and wires to engage in schemes to defraud members of the public by suppressing information regarding the health consequences of smoking and by making fraudulent misrepresentations. FAC at P 200. In addition, plaintiffs allege predicate acts of obstruction of justice in the form of threatening and intimidating a witness in violation of 18 U.S.C. §§ 1512 and 1513, and engaging in interstate or foreign travel in aid of racketeering activities in violation of 18 U.S.C. § 1952. Id. In Count II, plaintiffs allege violations of RICO § 1962(a) based on defendants' use of the proceeds of their racketeering activities to invest in enterprises engaged in racketeering activities. Finally, plaintiffs allege conspiracy to violate RICO §§ 1962(a) and (c), in violation of § 1962(d). According to plaintiffs, as a result of defendants' RICO violations, plaintiffs have been injured in their business and property because plaintiffs have had to incur significant health care costs and expenses related to tobacco use.

 Defendants contend that the remote and derivative nature of plaintiffs' injuries requires dismissal of the two RICO causes of action. Alternatively, defendants assert that even if plaintiffs' injuries are not too remote, plaintiffs are alleging personal injuries, which are not actionable under RICO.

a. Proximate Cause
RICO's provision for civil actions ...

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