DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO
Case No. 97CV3432
STATE OF COLORADO, ex rel. GALE A. NORTON, ATTORNEY
GENERAL,
Plaintiff,
v.
R.J. REYNOLDS TOBACCO CO., et al.,
Defendants.
RESPONSE TO MOTION OF CERTAIN DEFENDANTS TO DISMISS
THE STATE'S AMENDED COMPLAINT
GALE A. NORTON
Attorney General
MARTHA PHILLIPS ALLBRIGHT
Chief Deputy Attorney General
RICHARD A. WESTFALL
Solicitor General
JAN MICHAEL ZAVISLAN*
First Assistant Attorney General
MARIA E. BERKENKOTTER*
Assistant Attorney General
Attorneys for Plaintiff
Tobacco Litigation Unit
1525 Sherman Street, 5th Floor
Denver, Colorado 80203
Telephone: (303) 866-5079
FAX: (303) 866-5691
*Counsel of Record
Plaintiff State of Colorado, ex rel. Gale A. Norton, through the
undersigned attorneys, hereby responds to the Motion of Certain Defendants to Dismiss the
State's Amended Complaint.1
INTRODUCTION
On June 5, 1997, the State filed a Complaint against seven domestic
producers of tobacco products, the foreign parent corporation of Brown & Williamson,
and two industry trade associations, challenging a massive and unprecedented course of
unlawful conduct by the defendants. The Attorney General brings this action in a dual
capacity: as attorney for the State of Colorado, and as the chief law enforcement officer
empowered to protect the public health, safety and welfare.
It is critical for this Court to recognize that the defendants generally
do not challenge the Attorney General's ability to seek civil penalties, injunctive relief
or other enforcement remedies in this action. Instead, defendants focus their arguments on
whether the State is entitled to damages as a remedy for their violations of the various
statutes pled in the Amended Complaint. For the reasons set forth below, the motion to
dismiss must be denied.
BACKGROUND
A. Statement of Facts.
The defendants are engaged in the business of producing and/or promoting
the sale of a product which, when used as intended, exacts a staggering toll on society.
Over 400,000 Americans die each year from smoking-related illnesses. Smoking is
responsible for the death of about 90% of all people who die from lung cancer; 87% of all
people who die from chronic obstructive pulmonary diseases; 21% of all people who die from
coronary heart disease; and 18% of all people who die from strokes. (Amended Complaint ¶
146).2 Smokeless tobacco can be equally hazardous. It
increases the risk of oral cancer, and cancers of the esophagus, gum, pharynx and larynx.
(Amended Complaint ¶ 148).
When the first scientific studies were published suggesting a connection
between defendants' tobacco products and these illnesses, the defendants responded quickly
to what they termed the "Big Scare." (Amended Complaint ¶¶ 12, 43-50). Their
principal response was to form, in 1953, a far-reaching conspiracy the central mission of
which was to deceive and to mislead the American public about the health consequences of
tobacco use. (Amended Complaint ¶¶ 49-56). Forty-five years later, this conspiracy is
still in place. Defendants, individually and through their captive trade associations (the
Council for Tobacco Research -- U.S.A., Inc. ("CTR"), which was originally
called the Tobacco Industry Research Committee ("TIRC"), and the Tobacco
Institute ("TI")), made repeated representations about the safety of their
tobacco products. (Amended Complaint ¶¶ 59-63). Defendants sought to cast doubt on the
veracity of scientific studies critical of their products, and to offer supposedly
independent research conducted under the auspices of the CTR. (Amended Complaint ¶¶ 57,
58). Defendants continue to deny that tobacco products cause cancer and other illnesses,
even though their own research has long-confirmed the connection. (Amended Complaint ¶¶
100-108).
Defendants also misrepresented the addictive nature of tobacco products
-- continuously representing to the public that cigarettes and smokeless tobacco were not
addictive. (Amended Complaint ¶¶ 5, 114). Notwithstanding these public statements,
numerous internal documents of the defendants contain admissions by tobacco company
researchers and executives acknowledging that nicotine is, in fact, addictive. (Amended
Complaint ¶¶ 110-111). Defendants lied about their ability to control nicotine levels in
their products, and hid the fact that they added chemicals to their products to enhance
the addictive effect of nicotine. (Amended Complaint ¶¶ 115-116).
While defendants knew of both the addictive nature of nicotine and of
the hazards of tobacco use, they nonetheless conspired to suppress and to restrain
development of safer products. (Amended Complaint ¶¶ 73, 75, 79, 80, 85-91). As a result
of this conspiracy, and despite their ability to produce "safer" cigarettes, the
defendants did not market such products. (Amended Complaint ¶ 75).
Finally, and what is perhaps their most egregious offense, defendants
have engaged in a long-standing advertising and marketing campaign directed at youth.
These efforts have included sponsorship of athletic events and concerts and other
entertainment venues particularly appealing to minors (Amended Complaint ¶ 131), and the
use of advertising images particularly appealing to minors. (Amended Complaint ¶¶
128-135). Advertising dollars focused on magazines and youth-oriented publications.
(Amended Complaint ¶¶ 136-139).
Defendants' conduct, as alleged in the Amended Complaint, violates the
Colorado Consumer Protection Act, §§ 6-1-101 through 115, C.R.S. (1997)
("CCPA"); the Colorado Antitrust Act of 1992, §§ 6-4-101 through 122, C.R.S.
(1997); the Colorado Organized Crime Control Act, §§ 18-17-101 through 109, C.R.S.
(1997) ("COCCA"); and the Abatement of Public Nuisance Act, §§ 16-13-301
through 316, C.R.S. (1997).
As a result of these statutory violations, the State has been forced to
spend millions of dollars each year to provide or pay for health care for state employees,
as well as for indigent and other eligible Colorado residents. (Amended Complaint ¶ 162).
In fulfilling its statutory duties, the State has expended and will continue to expend
substantial sums of money due to the increased cost of providing health care services for
treatment of tobacco-caused diseases. As detailed in the Amended Complaint, these
increased expenditures have been caused by the unlawful actions of the Defendants.
(Amended Complaint ¶ 163).
B. The Legal Standard.
Motions to dismiss for failure to state a claim under Rule 12(b)(5),
C.R.C.P., are viewed with disfavor by the courts. Rosenthal v. Dean Witter Reynolds,
Inc., 908 P.2d 1095, 1099 (Colo. 1995). Such motions should be granted only if
"it appears beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." Dunlap v. Colorado Springs
Cablevision, Inc., 829 P.2d 1286, 1291 (Colo. 1992) (quoting Davison v. Dill,
503 P.2d 157, 162 (Colo. 1972)). Such motions "are rarely granted under our `notice
pleadings.'" Id.
The allegations set forth in the Amended Complaint "must be viewed
in the light most favorable to the plaintiff." Rosenthal, 908 P.2d at 1099.
The chief function of a complaint is to give notice to the defendant of
the transaction or occurrence that is the subject of plaintiff's claims. (Citations
omitted) Such a complaint should not be dismissed on motion for failure to state a claim
so long as the pleader is entitled to some relief "upon any theory of the law."
(Citations omitted).
Id. at 1099-1100 (emphasis in original).
Defendants expend considerable energy challenging particular remedies
sought by the State under the statutory violations pled. However, a motion to dismiss for
failure to state a claim is not intended to address the availability of the relief
requested. "[I]t need not appear that plaintiff can obtain the particular relief
prayed for, so long as the court can ascertain that some relief may be granted." 5A
Wright & Miller, Federal Practice and Procedure §1357 at 339 (2d ed. 1987); see
Norwalk CORE v. Norwalk Redevelopment Agency, 395 F.2d 920, 925-26 (2d Cir. 1968)
(complaint should not be dismissed for legal insufficiency "except where there is a
failure to state a claim on which some relief, not limited by the request in the
complaint, can be granted"); Asher v. Reliance Ins. Co., 308 F. Supp. 847, 850
(N.D. Cal. 1970) (unavailability of certain forms of relief does not render claim
susceptible to motion to dismiss); McHugh v. Reserve Mining Co., 27 F.R.D. 505, 506
(N.D. Ohio 1961) (unavailability of some part of the relief sought "is of no
importance at all"). Thus, in those instances in which defendants' motion challenges
only a limited part of the relief sought by the State, the motion must be denied so long
as some relief may be granted to the State.
ARGUMENT
I. THE STATE'S CLAIMS ARE NOT
PRECLUDED BY THE COLORADO MEDICAL ASSISTANCE ACT OR BY ISSUES RELATED TO
PROXIMATE CAUSE
A. The Colorado Medical Assistance Act Does
Not Bar the State's Statutory Claims.
The Attorney General brings this case pursuant to her constitutional and
statutory duties as legal counselor and advisor to the State and as the chief law
enforcement officer responsible for prosecuting civil law enforcement actions on behalf of
the people of the State of Colorado. The Attorney General asserts only statutory claims
for relief in the Amended Complaint, choosing not to assert any claims under the common
law or under the reimbursement provisions of the Colorado Medical Assistance Act,
§ 26-4-403(3), C.R.S. (1997) ("CMAA").
It is true that, at common law, a party generally could not assert tort
claims for injuries suffered by a third party. The defendants have provided ample support
for this proposition. In this limited context, the CMAA's abrogation of that common law
rule creates an exclusive remedy had the State pursued common law tort claims against
these defendants.3 Thus, it is obvious why the
defendants resort to recasting the State's Amended Complaint as one sounding in tort. The
State, however, has not asserted any common law tort claims.
As detailed in the Amended Complaint, the State alleges that defendants
have engaged in a long-standing conspiracy to restrain competition, to deceive and mislead
the American public, and to encourage Colorado's youth to begin a life-long addiction to
tobacco products. When these statutory violations are established at trial, the State will
be entitled to recover its damages proximately caused by defendants' conduct, as well as a
variety of civil penalties and other sanctions. That one measure of those damages may be
the State's increased health care costs, including Medicaid expenditures, does not convert
this case into a tort action to recover Medicaid costs under the CMAA.
There are basically two ways that one statute can preclude application
of another. First, a statute may contain language expressly evincing the General
Assembly's intent to exclude the application of other statutory remedies. See Collard
v. Hohnstein, 174 P. 596, 597 (Colo. 1918) ("The rule is that a remedy provided
by one statute does not abolish that given by another, or by common law, unless
specifically so provided"). There is absolutely no language in the CMAA that
specifically provides, or even suggests, that the CMAA is intended to be the exclusive
remedy for damages caused by violations of other statutes.4
Second, if a general provision in a statute conflicts with a special
provision in another, and that conflict is irreconcilable, then the special provision will
supersede the general provision. § 2-4-205, C.R.S. (1997). There is no conflict, let
alone an irreconcilable one, between the State's statutory claims and the application of
the CMAA. Each of the statutes relied upon by the State arise out of the exercise of the
State's police power, and are deemed necessary to safeguard the health, welfare, and
safety of the State and its citizens. It is safe to say that an action under section
403(3) of the CMAA by the Colorado State Department of Health Care Policy and Finance
against a third party who may be liable to a recipient of medical assistance, especially
where such liability is predicated on the tortious conduct of that third party, serves a
different purpose.
For these reasons, defendants' motion to dismiss on the basis of the
"exclusivity" of the CMAA must be denied.
B. The State Has Adequately Pled That Its
Injuries Were Proximately Caused By Defendants' Conduct.
In arguing that all of the State's damages claims must be dismissed,
defendants mix together concepts of proximate cause, remoteness and directness of injury,
as well as principles of standing. All of these arguments are addressed in the State's
specific responses to challenges under the CCPA, the Colorado Antitrust Act, the Public
Nuisance Act and COCCA. What will be discussed here is the gravamen of defendants'
challenge to the State's damages claims -- that there are "too many intervening
factors and contingencies that must be considered before any damages could be properly and
legally assessed." (Defendants' Memorandum, p. 16.)
Proximate cause is a question of fact. Graven v. Vail Assocs., Inc.,
909 P.2d 514, 521 (Colo. 1996). When issues turn upon disputed facts, the matter may not
be disposed of in a pretrial motion under Rule 12. Cline v. Rabson, 856 P.2d 1, 2-3
(Colo. App. 1992) (inappropriate for trial court to act in capacity of pre-trial
factfinder).
A defendant proximately causes an injury when his or her wrongful
conduct is a substantial factor in bringing about the plaintiff's injury. Lyons v.
Nasby, 770 P.2d 1250, 1256 (Colo. 1989). A defendant's conduct is considered a
substantial factor when it is of sufficient significance in producing the harm so as to
lead reasonable persons to regard it as a cause and to attach responsibility. Sharp v.
Kaiser Found. Health Plan of Colo., 710 P.2d 1153, 1155 (Colo. App. 1985), aff'd,
741 P.2d 714 (Colo. 1987).
Colorado does not require an alleged cause to be the sole cause of an
injury. Nicholas v. North Carolina Med. Ctr., Inc., 902 P.2d 462, 471 (Colo. App.
1995), aff'd, 914 P.2d 902 (Colo. 1996). If a defendant's conduct is a substantial
contributing cause of injury, it is irrelevant to the causation analysis whether other
factors, including forces beyond the defendant's control, also contributed to the injury. Rupert
v. Clayton Brokerage Co. of St. Louis, Inc., 737 P.2d 1106, 1112 (Colo. 1987). When an
injury would not have occurred "but for" the defendant's conduct, causation is
established. Id. Where, as here, the defendants argue that various factors may have
contributed to the State's injuries, the ultimate determination that a particular factor
was a substantial factor for purposes of establishing proximate cause must be made by a
trier of fact. Graven, 909 P.2d at 520-21.
The defendants, citing Lyons, argue that the State's damage
claims must fail because the chain of causation may be so attenuated that no proximate
cause exists as a matter of law. 770 P.2d at 1257. But in Lyons, the Colorado
Supreme Court reversed the district court's order granting the defendant's Rule 12(b)(5)
motion. The Supreme Court held that "[w]hether proximate cause exists is a question
for the jury and only in the clearest of cases, where reasonable minds could draw but one
inference from the evidence, does it become one of law to be determined by the
court." Id. at 1256. See also Sharp, 710 P.2d at 1155.
The State's claims involve allegations of a long-standing conspiracy
among multiple defendants to suppress competition, to defraud the people and the State of
Colorado and to conceal from them material information. While the allegations may be
complex, this factor does not establish that the connections in the evidence are so
attenuated as to make proof of proximate cause impossible as a matter of law. This case is
not so "clear" that reasonable minds could draw only one inference from the
evidence that will be presented. Therefore, dismissal for lack of proximate cause under
Rule 12(b)(5) of the State's request for damages must be denied.
II. THE STATE MAY PURSUE ITS
CONSUMER PROTECTION ACT CLAIMS
A. The Colorado Consumer Protection Act.
The Colorado Consumer Protection Act, §§ 6-1-101 through 307,
C.R.S. (1997) ("CCPA"), is an exercise of the State's police power designed
"to abate evils which are deemed to arise from the pursuit of business." People
ex rel. Dunbar v. Gym of America, Inc., 493 P.2d 660, 667 (Colo. 1972). In adopting
the CCPA, the General Assembly intended to provide "prompt, economical, and readily
available remedies against consumer fraud." Western Food Plan, Inc. v. District
Court, 598 P.2d 1038, 1041 (Colo. 1979).
Section 105 of the CCPA provides a list of legislatively determined
deceptive trade practices, including four specific practices engaged in by the defendants:
§ 105(1)(c) -- knowingly making a false representation as to affiliation, connection, or
association with or certification by another; § 105(1)(e) -- knowingly making a false
representation as to the characteristics, ingredients, uses, benefits, alterations, or
quantities of goods, food, services, or property; § 105(1)(g) -- representing that goods,
food, services, or property are of a particular standard, quality, or grade, or that goods
are of a particular style or model, if the person making the representation knows or
should know that they are of another; and § 105(1)(u) -- failing to disclose material
information concerning goods, services, or property, which information was known at the
time of an advertisement or sale, if such failure to disclose such information was
intended to induce the consumer to enter into a transaction.
To remedy these, and other deceptive trade practices, the General
Assembly has prescribed a number of broad remedies, including injunctive and other
equitable relief (§ 6-1-110), civil penalties (§ 6-1-112), damages, including treble
damages (§ 6-1-113), costs and attorney fees (§ 6-1-113) and certain criminal
penalties (§§ 6-1-114 and 6-1-305).
B. Section 6-1-106(1) of the CCPA Does
Not Insulate Defendants' Conduct.
Section 6-1-106(1) of the CCPA provides a limited exemption for conduct
that is "in compliance with the orders or rules of, or a statute administered
by, a federal, state, or local governmental agency." §§ 6-1-106(1), C.R.S.
(1997) (emphasis added). Defendants, relying on Suarez v. United Van Lines, Inc.,
791 F. Supp. 815 (D. Colo. 1992), argue that their successful use of this exemption
depends only upon a showing that their activities "fall under" any order, rule,
or statute of a federal agency.
Defendants' reliance on Suarez is entirely misplaced.5 Contrary to the dictum in Suarez, section 106(1)
does not offer a defense to a defendant whose conduct merely "falls under" some
federal rule, order or statute. Section 106(1) is much narrower; it expressly immunizes
only conduct that is "in compliance" with a state or federal rule, order, or
statute. § 6-1-106(1), C.R.S. The fact of regulation alone is not enough to meet the
requirements of section 106(1) -- conduct must actually be shown to "comply"
with the dictates of a relevant regulatory scheme. See State ex rel. Woodard v.
May Dep't Stores Co., 849 P. 2d 802, 811 (Colo. App. 1992), aff'd in part, rev'd in
part on other grounds, 863 P.2d 967 (Colo. 1993) (holding that, since May D & F's
conduct was "not in compliance with the applicable FTC guidelines, it is not exempt
from the CCPA").
Defendants also assert that "[t]he State does not, and cannot,
claim that the cigarette manufacturers have not fully complied with the mandates of the
exhaustive federal regulatory program administered by the FTC . . ." (Defendants'
Memorandum, p. 23). At the center of defendants' argument is a trade rule promulgated by
the Federal Trade Commission ("FTC") in 1964, and the extensive findings
supporting that trade rule. See 29 Fed. Reg. 8324-8375 (July 2, 1964)
(Defendants' Memorandum, Exhibit 10). This trade rule, however, was vacated by the
FTC the following year and removed from the Code of Federal Regulations. See 30 Fed.
Reg. 9484, 9485 (July 29, 1965) (TAB B).
Thus, all defendants are left with to support their argument is a
reservation of authority to the FTC "with respect to unfair or deceptive acts or
practices in the advertising of cigarettes" in the Federal Cigarette Labeling and
Advertising Act, 15 U.S.C. § 1336 ("FCLAA"), and a few enforcement actions
undertaken by the FTC in the intervening thirty-three years.6
Defendants make no attempt to explain how either this reservation of enforcement
authority, or the meager enforcement activity of the FTC, constitutes a "rule, order
or statute" with which defendants must comply for purposes of section 106(1) of the
CCPA.7 In any event, the question whether defendants
acted "in compliance" with some federal rule, order or statute is a decidedly
factual one inappropriate for consideration under Rule 12(b)(5).
C. The State Has Standing To Pursue Its CCPA Claims.
Defendants next argue that the State may not seek damages under the CCPA
because the State is not a "person" as defined in the CCPA. This argument does
not in any way challenge the authority of the Attorney General to seek enforcement
remedies against these defendants. A "person" under the CCPA is defined as:
[A]n individual, corporation, business trust, estate, trust,
partnership, unincorporated association, or two or more thereof having a joint or common
interest, or any other legal or commercial entity.
§ 6-1-102(6), C.R.S. (1997) (emphasis added). Defendants argue that
since this definition does not contain the language "government or governmental
subdivision or agency" which is included in Colorado's general statutory definition
of the term "person," § 2-4-401(8), C.R.S. (1997), the General Assembly must
have intended to exclude governmental entities, such as the State, from seeking damages
under the CCPA. This argument, which is wholly unsupported by case law, is unavailing for
several important reasons.
First, the CCPA's definition of "person" contains critical
language which reflects the General Assembly's intent to encompass the State within
section 102(6). Unlike section 2-4-401(8), the CCPA's definition of "person"
includes the phrase "any other legal or commercial entity." The adjective
"any" used in a statute is interpreted to mean "all." Winslow v.
Morgan County Comm'rs, 697 P.2d 1141, 1142 (Colo. 1985); Austin v. Weld County,
702 P.2d 293, 294 (Colo. App. 1985). It cannot be disputed that the State of Colorado is a
"legal entity" under any definition.
Moreover, general provisions, terms, phrases, and expressions used in a
statute are to be liberally construed in order that the true intent and meaning of the
statute can be given effect. § 2-4-212, C.R.S. (1997). The Colorado Supreme Court
has stated that an "expansive approach" must be taken in interpreting the CCPA. May
Dep't Stores Co. v. State ex rel. Woodard, 863 P.2d at 973 n.10. In defining
"person" to include "any other legal or commercial entity" the
legislature evinced no intent to exclude any legal entity from the definition. Rather,
relying on the common usage of the language of section 6-1-102(6), and taking an expansive
approach to interpreting the CCPA, it is clear that the State is a "person"
under the CCPA.
Significantly, in a case involving these same tobacco defendants, a
trial court in Maryland held that the state was a "person" under Maryland's
Consumer Protection Act. Relying on a definition of "person" identical to that
contained in the CCPA, that court was persuaded that the language "or any other legal
or commercial entity" made it clear that the state was a "person" entitled
to seek damages for deceptive trade practices. Maryland v. Philip Morris, Inc., No.
96122017/CL211487, slip op. at 36-37 (Cir. Ct. of Baltimore City, Md., May 21, 1997)
(Defendants' Memorandum, Exhibit 1).
Finally, defendants' argument that the CCPA's internal construction
demonstrates that the Attorney General has no private damage remedy, completely
misses the point. The Attorney General does not seek compensatory damages in this action
in her capacity as law enforcer under the CCPA.8
Rather, with respect to this damages claim, she represents the State of Colorado as its
legal counsel in an effort to recover the State's damages proximately caused by
defendants' deceptive trade practices.
Because the State of Colorado is a "person" under the CCPA, it
is entitled to seek damages under section 113 of that Act. Accordingly, defendants' motion
to dismiss the State's damages claims under the CCPA must be denied.
D. The State's First Claim for Relief is
Not Preempted by the Cigarette Labeling and Advertising Act.
1. Preemption of the State's claims must be
narrowly construed.
Preemption analysis starts with the assumption that federal law does not
supersede the State's historic police powers "unless that is the clear and manifest
purpose of Congress." Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516
(1992) (citing Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)); see
also Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138 (1990) ("[t]he
purpose of Congress [is] the ultimate touchstone" of preemption analysis).
The health and safety of each State's citizens "are primarily, and
historically . . . matter[s] of local concern." Medtronic v. Lohr, ___ U.S.
___, 116 S.Ct. 2240, 2245 (1996). "States traditionally have had great latitude under
their police powers to legislate as to the protection of the lives, limbs, health,
comfort, and quiet of all persons." Id. Accordingly, courts are reluctant to
find preemption where the result would displace the power of a state to protect the health
and safety of its citizens. Wisconsin Public Intervenor v. Mortier, 501 U.S. 597,
605 (1991); Hillsborough County v. Automated Medical Labs, Inc., 471 U.S. 707, 715
(1985).
Courts have expressly applied the health and safety presumption against
challenges that state laws or claims are preempted by the Federal Cigarette Labeling and
Advertising Act ("FCLAA"), 15 U.S.C. §§ 1331-1341. Cipollone, 505 U.S.
at 518; Philip Morris, Inc. v. Harshbarger, 122 F.3d 58, 68 (1st Cir. 1997); Castano
v. American Tobacco Co., 870 F. Supp. 1425, 1431 (E.D. La. 1994). Courts must construe
the express preemption provision in the FCLAA as narrowly as possible so as to preserve
maximum state authority consistent with the Supremacy Clause. See Cipollone,
505 U.S. at 518-520.
2. The CCPA is a proper exercise of police
power.
In the first major decision interpreting the CCPA, the Colorado Supreme
Court established clearly the purpose and importance of the CCPA:
The right to regulate in the name of the police power is especially
clear when the legislative intent is to regulate commercial activities and practices
which, because of their nature, may prove injurious, offensive, or dangerous to the
public. And this police power relates not only to the public's physical or mental health
and safety, but also to the public financial safety. There is a necessary residuum of
power which the state possesses to safeguard the interests of its people, and pursuant to
this power laws may be passed to protect the public from financial loss, and to abate
evils which are deemed to arise from the pursuit of business.
People ex rel. Dunbar v. Gym of America, Inc., 493 P.2d 660, 667
(Colo. 1972) (citations omitted). Thus, the Court's analysis of the preemptive effect, if
any, of the FCLAA on the First Claim for Relief must be drawn as narrowly as possible.9 Such an analysis must begin with an examination of the
First Claim for Relief in the context of the express preemption language in the original
Act and in the 1969 amendments to that Act.
Adopted in July 1965, section 5 of the original version of the FCLAA
contained the following provision regarding preemption:
(a) No statement relating to smoking and health, other than the
statement required by section 4 of this Act, shall be required on any cigarette package.
(b) No statement relating to smoking and health shall be required in the
advertising of any cigarettes the packages of which are labeled in conformity with the
provisions of this Act.
This original Act was designed to expire on July 1, 1969. Cipollone,
505 U.S. at 514.
Recognizing the precise and narrow nature of this preemption language,
the United States Supreme Court concluded that "these provisions merely prohibited
state and federal rulemaking bodies from mandating particular cautionary statements on
cigarette labels . . . or in cigarette advertisements . . . ." Id. at 518.
This language did not preempt state law damages actions. Id. at 519-20.
Thus, to the extent that the State's Amended Complaint alleges deceptive trade practices
which occurred prior to July 1, 1969, the First Claim for Relief is not preempted by the
FCLAA.
In 1969, Congress passed the Public Health Cigarette Smoking Act which
amended the FCLAA in several ways. In addition to strengthening the warning label required
on cigarette packages, Congress modified the preemption provision by replacing the
original section 5(b) with a provision that reads:
(b) No requirement or prohibition based on smoking and health shall be
imposed under State law with respect to the advertising or promotion of any cigarettes the
packages of which are labeled in conformity with the provisions of this Chapter.
15 U.S.C. § 1334(b). Critical to the analysis of whether a particular
statute or claim is preempted by this provision is the nature of the duty imposed by that
statute or claim. Cipollone, 505 U.S. at 528-29. If a claim imposes a specific duty
"based on smoking and health," then it is preempted. If the duty imposed is a
different or more general one -- such as the duty not to deceive -- then the FCLAA
provides no protection. Id.
The State's First Claim for Relief does not impose a specific duty based
on smoking and health. Rather, it flows from the more general obligation not to deceive
embodied in section 6-1-105(1)(u) of the CCPA. The CPPA was not promulgated by the General
Assembly for the purpose of requiring cigarette manufacturers to warn the public about the
dangers of smoking, or to prohibit the advertising or sale of cigarettes unless
accompanied by a particular warning. It is, instead, a general police power statute
designed to combat deceptive advertising. Gym of America, 493 P.2d at 667.
That such statutory claims survive a preemption analysis under the FCLAA
is clear from the following language in Cipollone:
First, in the 1969 Act, Congress offered no sign that it wished to
insulate cigarette manufacturers from longstanding rules governing fraud. To the
contrary, both the 1965 and the 1969 Acts explicitly reserved the FTC's authority to
identify and punish deceptive advertising practices -- an authority that the FTC had long
exercised and continues to exercise . . . . This indicates that Congress intended the
phrase "relating to smoking and health" (which was essentially unchanged by
the 1969 Act) to be construed narrowly, so as not to proscribe the regulation of
deceptive advertising.
Id. at 529 (emphasis added).10
Other courts have sustained claims under state deceptive trade practices statutes,
concluding that the general duty not to deceive imposed by such statutes took them outside
the preemptive scope of the FCLAA. See Burton v. R.J. Reynolds Tobacco Co.,
884 F. Supp. 1515, 1521 (D. Kan. 1995); Castano v. American Tobacco Co., 870 F.
Supp. 1425, 1433 (E.D. La. 1994).
It would be an incongruous reading of Cipollone to conclude that
the State could challenge defendants' affirmative misrepresentations (which defendants do
not claim are preempted) regarding nicotine addiction, nicotine manipulation and the
health effects of smoking and, at the same time, conclude that defendants' failure to
disclose material information relating to the falsity of those representations was
immunized by the 1969 Act.
In this case, the State does not seek to compel disclosures of product
ingredients, nor to impose greater warning requirements in defendants' advertising or
promotions. This is not a failure to warn case similar to that brought by the
plaintiff in Cipollone.11 Failure to warn
claims challenge the sufficiency of package labels and warnings utilizing common law tort
principles. Clearly, the FCLAA was intended to be preemptive to avoid differing package
labeling requirements from state to state. Cipollone, 505 U.S. at 513-14. In
contrast, the State's First Claim for Relief alleges that defendants committed a deceptive
trade practice by failing to disclose material information that would have revealed the
falsity of the representations that they made to the public. Nothing in the FCLAA suggests
an intent by Congress to preempt the State from enforcing its laws against deceptive and
misleading advertisements.12
Because the State's failure to disclose claim does not arise from a
specific state-imposed duty "with respect to smoking and health" under the 1969
Act, but rather from a general duty not to deceive, it is not preempted under the narrow
holding of Cipollone.
Any preemption analysis of the First Claim for Relief's allegations
concerning deceptive trade practices relating to smokeless tobacco products is governed by
the express language of the Comprehensive Smokeless Tobacco Health Education Act, 15
U.S.C. §§ 4401-4408 ("CSTHEA"). Section 4406(b) provides, with respect to
state and local action:
No statement relating to the use of smokeless tobacco products and
health, other than the statements required by section 4402 of this title, shall be
required by any State or local statute or regulation to be included on any package or in
any advertisement (unless the advertisement is an outdoor billboard advertisement) of a
smokeless tobacco product.
15 U.S.C. § 4406(b). The Supreme Court, in Cipollone,
interpreted this provision to preempt "only positive enactments by legislatures or
administrative agencies that mandate particular warning labels." 505 U.S. at 518-19.
Significantly, the CSTHEA also contains a "savings clause," which narrows the
scope of its preemptive effect to expressly permit state laws and claims unrelated to
"statements required" by the Act:
Nothing in this chapter shall relieve any person from liability at
common law or under State statutory law to any other person.
15 U.S.C. §4406(c). Because the CSTHEA expressly limits its preemptive
effect to state labeling requirements, the State's First Claim for Relief, which contains
no such requirement, is not preempted as it relates to smokeless tobacco products.
III. THE STATE HAS STANDING TO PURSUE ITS ANTITRUST
CLAIMS
The defendants argue that the State's Fifth Claim for Relief should be
dismissed because the State lacks standing to assert an antitrust claim. The defendants'
arguments concerning standing -- none of which are directed at the Attorney General's
authority to pursue injunctions, civil penalties or other sanctions under the Colorado
Antitrust Act -- fundamentally misconstrue both the nature of the State's antitrust claim
and the law of antitrust standing and, for the reasons detailed below, must fail.
A. The Colorado Antitrust Act is Intended to Promote the
Unrestricted Production of the Highest Quality and Safest Goods.
The defendants have not challenged the State's substantive claim that
the defendants violated the Colorado Antitrust Act. Instead, they rely on a handful of
cases, taken out of context, to argue that the State lacks standing to challenge their
anticompetitive conduct. Because the purposes underlying the antitrust laws are such an
integral part of these decisions, a basic review of these laws is imperative in order to
analyze the shortcomings of defendants' standing arguments.
One of the fundamental tenets of the antitrust laws is that unfettered
competition is critical to a free market economy and to the production of the highest
quality goods at the lowest prices. Standard Oil Co. v. F.T.C., 340 U.S. 231, 248
(1951) ("The heart of our national economic policy long has been faith in the value
of competition"); National Society of Professional Engineers v. United States,
435 U.S. 679, 695 (1978) ("The Sherman Act reflects a legislative judgment that
ultimately competition will produce not only lower prices, but also better goods and
services"). Conduct which unreasonably restrains or decreases competition is
antithetical to this fundamental principle. That is why, under both state and federal
antitrust law, it is illegal to conspire, combine or agree to restrain trade or commerce.
§ 6-4-104, C.R.S.; 15 U.S.C. §1.
Certain types of collusive conduct, like price-fixing, bid rigging,
market allocation arrangements, and output restrictions, have such predictable and
pernicious anticompetitive effects, and so lack any redeeming value, that they are
conclusively presumed to be unreasonable and therefore illegal. See, e.g., United
States v. Topco Assocs., Inc., 405 U.S. 596 (1972); Northern Pac. Ry. Co. v. United
States, 356 U.S. 1, 5 (1958); United States v. Socony-Vacuum Oil Co., 310 U.S.
150 (1940).13 This per se label means that a
plaintiff need only prove that the prohibited practice occurred, and is not required
affirmatively to demonstrate its competitive unreasonableness. At the same time, a
defendant is prohibited from attempting to justify the restraint as reasonable. Northern
Pac. Ry. Co., 356 U.S. at 5; Socony-Vacuum, 310 U.S. at 220-21. Additionally,
no elaborate study of the marketplace is required if the restraint is deemed per se
unlawful. National Society of Professional Engineers, 435 U.S. at 692.
It is against this general legal backdrop that the State has alleged --
and for purposes of the defendants' motion these allegations must be accepted as true --
that the defendants have engaged in per se violations of the Colorado Antitrust Act by
participating in two long-standing agreements to restrict output. First, the State has
alleged that the defendants entered into an agreement over 40 years ago, which agreement
continues today, jointly to restrict and suppress their research and development programs
in order to prevent any one of them from manufacturing and selling safer tobacco products.14 This type of collusive output restriction is clearly
prohibited by the antitrust laws Allied Tube & Conduit Corp. v. Indian Head, Inc.,
486 U.S. 492, 500 (1988) (agreements to restrict competition with respect to any aspect of
a product run afoul of the antitrust laws); § 6-4-102, C.R.S. (General Assembly
expressly recognizing that competition is fundamental to production of the highest quality
commodities and services).
Second, the State has alleged that the defendants also conspired to
suppress the flow of complete and accurate information about the health effects of their
products. The defendants' agreement has effectively prohibited the competitive flow of
information from the defendants about the quality and safety characteristics of their
product for more than 40 years, and has deprived consumers of the ability to make informed
choices about the critical issue of safety in a competitive marketplace. Such an agreement
is a patent violation of the antitrust laws. See F.T.C. v. Indiana Federation of
Dentists, 476 U.S. 447 (1986) (dentists and their trade association conspired
unreasonably to restrain trade by agreeing not to provide insurance company with
information requested by insurer to evaluate necessity of services and make payment
decisions); Sugar Institute v. United States, 297 U.S. 553, 596-97 (1936); United
States v. Gasoline Retail Dealers Ass'n, 285 F.2d 688, 691 (7th Cir. 1961) (agreement
to limit advertising held to be a per se violation of the Sherman Act).
These output restrictions, the State contends, ultimately caused the
tobacco products consumed by Colorado citizens to be more hazardous than they would have
been in the absence of the conspiracy. As a direct consequence, the State, which is one of
the largest health care purchasers in Colorado, has incurred and will continue to incur
much higher health care costs for smoking-related illnesses suffered by its indigent
residents and has paid and will continue to pay higher health insurance premiums for its
employees.
The defendants argue that the State's antitrust claim must be dismissed
because the State has not suffered "antitrust injury," and thus lacks antitrust
standing. The basic thrust of this argument is that the State's injuries, if any, flow
from the defendants' tortious conduct, not from their violations of the antitrust law.
There are two basic problems with the defendants' argument concerning
antitrust injury. The first is that it ignores the facts of this case. As explained above,
this case squarely presents serious allegations of anticompetitive conduct which must be
accepted as true for purposes of the defendants' motion.
The second problem with the defendants' argument is that it ignores the
law. The defendants' position, albeit an illogical one, seems to be that if they committed
a tort, then they cannot have also violated the antitrust laws. This is simply not the
law. The fact that certain conduct may give rise to both an antitrust claim and another
type of claim for relief, including personal injury claims, does not -- as a matter of law
or public policy -- exempt the conduct at issue from the antitrust laws. See Hayes
v. Solomon, 597 F.2d 958, 972-73 (5th Cir. 1979), cert. denied, 444 U.S.
1078 (1980). Such a holding would effectively vitiate the antitrust laws with respect to
all potentially dangerous goods and services.
The Supreme Court has expressly rejected defendants' argument. National
Society of Professional Engineers, 435 U.S. at 695-96 (exceptions to the Sherman Act
for anticompetitive agreements relating to "potentially dangerous goods and services
would be tantamount to a repeal of the statute"). The State's Amended Complaint
alleges, inter alia, that the defendants engaged in a long-standing
conspiracy pursuant to which they purposefully banned the development and sale of
innovations which would have made their deadly products safer and saved countless lives.
The antitrust laws apply to these defendants just as they apply to every other
manufacturer.
The defendants also have misconstrued the law regarding antitrust
injury. Antitrust injury is one of multiple factors15
which are relevant in determining whether a plaintiff has standing to maintain an
antitrust damages case.16 Antitrust injury is defined
as:
(1) injury of the type the antitrust laws were intended to prevent; and
(2) that flows from that which makes the defendants' acts unlawful.
Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 489 (1977).
The purpose of antitrust injury analysis is to deny standing in
antitrust cases to plaintiffs seeking to recover damages for losses resulting from increased
competition. P. Areeda & H. Hovenkamp, Antitrust Law, ¶ 360a at p. 210 (1995) (at its
most fundamental level, the antitrust injury requirement precludes recovery for losses
resulting from increased competition, even if such competition was caused by
conduct violating the antitrust laws). This is because the antitrust laws are designed to
promote and increase unfettered competition. Allowing a plaintiff to recover for injuries
sustained due to increased competition is antithetical to the purpose of the antitrust
laws. Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 117 (1986)
("threat of lost profits due to possible price competition following a merger does
not constitute threat of antitrust injury"); Brunswick, 429 U.S. 477 (1977); Brown
Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (the antitrust laws were enacted
for "the protection of competition, not competitors").
The State's Amended Complaint, in sharp contrast, seeks to recover
damages which flow from a reduction in competition among the defendants caused by
their conspiracy to restrict the manufacture and sale of safer products and the
dissemination of complete and accurate information about their products. Such harm is
precisely the type of injury that the antitrust laws were designed the prevent. National
Society of Professional Engineers, 435 U.S. at 695; Indiana Federation of Dentists,
476 U.S. 447 (1986).
Significantly, courts considering the issue of antitrust injury in other
state tobacco litigation have reached this same conclusion. See Minnesota v.
Philip Morris, Inc., No. C1-94-8565, slip op. at 7-8 (D. Ramsey County, MN., May 19,
1995) (TAB C) (Order denying defendants' motion to dismiss); Minnesota v. Philip
Morris, Inc., No. C1-94-8565, slip op. at 3-8 (D. Ramsey County, MN., January 26,
1998) (TAB D) (Order denying defendants' motion for summary judgment on the State's
antitrust claims); Washington v. American Tobacco Co., Inc., No. 96-2-15056-8 SEA,
slip op. at 3, 7-10 (King County Super. Ct., WA., November 19, 1996) (TAB E) (Order
on Defendants' Joint motion to dismiss). For all these reasons, the defendants' argument
concerning antitrust injury must fail.
C. The State Need Not Be A Market
Participant Nor Suffer Direct Injuries To Have Standing To Pursue Its Damages Claims.
The defendants also argue that the State lacks standing to seek damages
because it is not suing as a consumer, competitor, or other participant in the Colorado
cigarette market. This argument must be rejected for two reasons. First, the antitrust
laws do not require a plaintiff to be a market participant and, second, Colorado antitrust
law expressly expands the State's standing to seek indirect injuries.
Contrary to the defendants' argument, the antitrust laws do not require
that a plaintiff be a participant in the market that is alleged to have been restrained.
In Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), the Supreme Court
considered this precise issue and held that an individual who was not a participant within
the restrained market had standing to sue for treble damages under § 4 of the Clayton
Act.17 The Court concluded that the plaintiff, who
had been forced to pay costs that she would not have incurred in the absence of the
conspiracy, had standing because the injury she suffered was "inextricably
intertwined with the injury the conspirators sought to inflict on psychologists and the
psychotherapy market." McCready, 457 U.S. at 484.
The Court's decision in McCready was greatly influenced by the
fact that there was relatively little risk of duplicate recovery engendered by the
plaintiff's claim. McCready's psychologist -- who was part of the group targeted by the
alleged conspiracy -- had been paid for his services by McCready, and thus had not been
injured by the anticompetitive conduct at issue. McCready, in contrast, was "out of
pocket" as a consequence of the alleged conspiracy. McCready, 457 U.S. at 475.
Thus, in analyzing this antitrust standing issue the Court looked ultimately to who it was
that bore the costs associated with the conspiracy and whether there was risk of duplicate
recovery.18
In the present case, there is no question that the State has borne the
costs of the conspiracy alleged in the Amended Complaint and that there is almost no risk
of duplicate recoveries. It is clear that with respect to indigent tobacco users, whose
smoking-related health care costs are covered by the State, that it is the State -- not
tobacco users -- that pays for the costs that flow from the conspiracy. Just like the
psychologists in McCready, indigent Colorado residents who suffered adverse health
consequences from smoking would not have standing to assert an antitrust claim. This is
because the increased costs of health care for such residents were either paid for or
reimbursed by the State. See Rozema v. The Marshfield Clinic, 977 F. Supp.
1362 (W.D. Wis. 1997) (indigent plaintiffs who have been reimbursed by co-plaintiff
Wisconsin Department of Health and Family Services had no standing because they had not
suffered any injuries as a result of the defendants' conduct).
The defendants attempt to take advantage of a doctrine that has
developed in federal antitrust law which holds that only parties directly harmed by
antitrust violations have standing to assert damage claims based on such violations. This
standing prerequisite, known as the indirect purchaser doctrine, was first announced by
the Supreme Court in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
In Illinois Brick, the State of Illinois and local governmental
entities brought a treble damages action alleging that certain concrete block
manufacturers had engaged in a price-fixing conspiracy. The defendants moved to dismiss
the complaint on the ground that the plaintiffs lacked standing to assert a damages action
under the Clayton Act. The issue before the Court turned on whether indirect purchasers
(that is, individuals or entities in the chain of manufacturing or distribution other than
the overcharged direct purchaser) had standing to sue under the Clayton Act for treble
damages.
The Court concluded that granting damages standing to such indirect
purchasers would create risks of double recovery against defendants and necessitate
complex and costly inquiries into just how much injury had been passed on to the
plaintiffs. Illinois Brick, 431 U.S. at 730-32. Accordingly, the Court held that
the plaintiffs lacked standing to bring a claim for treble damages to recover for
overcharges resulting from the alleged price-fixing conspiracy. Only those who purchased
directly from the conspirators were determined to have standing.
By arguing that the State is not a participant in the relevant market,
the defendants are essentially trying to argue that the State's injuries in this case are
not sufficiently direct. The critical flaw with this argument is that Colorado's antitrust
statute is fundamentally and purposefully different from the federal antitrust provisions
out of which the indirect purchaser doctrine arises. Section 6-4-111(2), C.R.S. -- which
the defendants do not mention, analyze or even cite -- contains what is known as a partial
Illinois Brick repealer. It expressly provides:
The attorney general may bring a civil action on behalf of any
governmental or public entity, with the written consent of such entity, injured, either
directly or indirectly, in its business or property by reason of any violation of this
article . . . .
§ 6-4-111(2), C.R.S. (emphasis added). This provision of the Colorado
Antitrust Act is designed to grant indirect purchaser standing to the State.19
Not only have the defendants studiously omitted reference to this
statute, they have also overlooked decisions from other jurisdictions, interpreting very
similar indirect purchaser statutes, which have held that other states have standing to
assert antitrust claims against these same defendants for the very same restraints of
trade. Minnesota v. Philip Morris, Inc., slip op. at p. 8 (TAB C); Maryland
v. Philip Morris, Inc., No. 96122017/CL211487, slip op. at 40-41 (Cir. Ct. for
Baltimore City, Md., May 21, 1997) (Defendants' Memorandum, Exhibit 1). See also
Washington v. American Tobacco Co., Inc., No. 96-2-15056-0 SEA, slip op. at 2-10
(King County Super. Ct., Wa., November 19, 1996) (TAB E); McGraw v. The American
Tobacco Co., No. 94-C-1707, slip op. at p. 7-8 (Cir. Ct. of Kanawha County, W.Va., May
9, 1997) (TAB A).
In light of this express grant of standing to assert claims for indirect
injuries sustained by Colorado governmental or public entities, the defendants' argument
must be rejected.
D. The Defendants Have Misconstrued The
"Business Or Property" Component Of Antitrust Standing Analysis.
Finally, the defendants argue that the State lacks standing to bring
this action for
damages because it has not suffered injury to its "business or
property." The shortcomings of this argument, when examined in the context of the
antitrust laws, are readily apparent.
The phrase "business or property" is deemed to have little
effect on modern antitrust cases. P. Areeda & H. Hovenkamp, Antitrust Law, ¶ 360c
(1995). This is because the term "property" has been defined expansively. Id.
at 208. The Supreme Court has held that any person whose money has been diminished by
reason of an antitrust violation is injured in his property. Reiter v. Sonotone Corp.,
442 U.S. 330, 339 (1979). For purposes of antitrust cases, this means that the
"business or property" element is almost always satisfied. P. Areeda & H.
Hovenkamp, Antitrust Law, ¶ 361 (1995). The one State which has ruled on this specific
issue held that the State's increased health care costs constitute a proper allegation of
injury to business or property. People v. Philip Morris, Inc., No. 96 L13146, slip
op. at p. 11 (Cir. Ct. of Cook County, Ill., November 13, 1997) (TAB F).
The defendants try to circumvent this broad definition by relying on a
series of cases involving personal injury claims asserted under the federal Racketeer
Influenced and Corrupt Organizations Act ("RICO") to buttress its contention
that the State has not sustained injury to its business or property. These cases generally
hold that pain and suffering and other "personal injuries" do not constitute
business or property injury.20
There are three significant problems with this argument. The first
problem is that, if it is followed to its logical conclusion, it will mean that
manufacturers of dangerous products who do business in Colorado will be able to enter into
blatantly anticompetitive agreements concerning the safety dimensions of their products
without fear of exposure under the antitrust laws in this State. This is because
manufacturers will be able to argue that any injuries flowing from an agreement not to
compete based on safety issues are really personal injuries. Such a result would not only
be illogical, it would be in direct contravention of the Supreme Court's holdings: (1)
that agreements to restrict competition along any product dimension, including safety,
violate the antitrust laws, National Society of Professional Engineers v. United States,
435 U.S. 679, 695 (1978), and (2) that agreements to restrain the competitive flow of
information from sellers about the quality and characteristics of their products run afoul
of the antitrust laws. F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447
(1986).
The second problem with defendants' argument in this regard is that,
even if this Court concludes that the State's economic injuries are somehow indirect
because they flow from personal injuries sustained by tobacco users, section 6-4-111(2),
C.R.S. clearly grants the State indirect purchaser standing to sue for such economic
injuries in any event.21
The third problem with the defendants' argument concerning business or
property is that the State does not allege that Colorado has somehow become sick, been
wounded or otherwise sustained a "personal injury" as a result of the
defendants' conduct. Instead, the State has alleged that it has incurred, in addition to
other damages, increased health care costs in its capacity as one of the largest
purchasers of health care in Colorado as a direct result of the defendants' patently
anticompetitive agreements. The type of purely economic damages which the State has
sustained flows from the challenged illegal conduct and is encompassed by the Supreme
Court's expansive definition of the term "property." See Reiter,
442 U.S. at 339.
For all of these reasons, the defendants' motion to dismiss the State's
antitrust claim must be denied.
IV. MARKETING TO CHILDREN --
THE STATE'S PUBLIC NUISANCE CLAIMS
The State's Sixth and Seventh Claims for Relief focus primarily on the
defendants' illegal marketing of tobacco products to Colorado's children. Specifically,
the Seventh Claim for Relief alleges that the defendants contributed to the delinquency of
generations of minors, a class 4 felony, by inducing, aiding and encouraging minors to
purchase tobacco products in violation of section 18-13-121(2), C.R.S. (1997) (any person
under the age of eighteen who purchases tobacco products in Colorado commits a class 2
petty offense). The proceeds traceable to such conduct are a class 1 public nuisance
subject to forfeiture under 16-13-303(3)(b), C.R.S. (1997).22
The State's Sixth Claim for Relief asserts that defendants' conduct also
constitutes a class 3 public nuisance as a "business, occupation, operation or
activity prohibited by a Colorado statute." See § 16-13-305(1)(a),
C.R.S. (1997).
Defendants contend that because the State's public nuisance claims
involve allegations that the defendants targeted minors in their advertising campaigns,
they must be preempted under the Federal Cigarette Labeling and Advertising Act, 15 U.S.C.
§§ 1331-1341 ("FCLAA"). In defendants' view, federal law should supersede
and invalidate virtually any effort by a state to protect its children from the dangers of
tobacco, if such effort has any effect whatsoever upon tobacco advertising. Because the
FCLAA is concerned with warning labels on cigarette packages and not with the state's
historic police powers to protect its youth, this argument must fail.
The "appropriate inquiry," in analyzing whether a claim for
relief is preempted under the FCLAA, "is not whether a claim challenges the
`propriety' of advertising and promotion, but whether the claim would require the
imposition under state law of a requirement or prohibition based on smoking and health
with respect to advertising or promotion." Cipollone v. Liggett Group, Inc.,
505 U.S. 504, 525 (1992).23 Even if the State's
public nuisance claims amount to a "requirement or prohibition" within the
meaning of the FCLAA, they are nonetheless not preempted by the FCLAA because they
are neither "based on smoking and health" nor "with respect to advertising
and promotion."
The California Supreme Court recently reviewed an identical preemption
argument under the FCLAA advanced by tobacco company defendants in a lawsuit challenging
R.J. Reynolds "Old Joe Camel" advertising campaign. That court acknowledged the
fallacy of this preemption argument:
Reynolds argues that because its cigarettes are labeled in conformity
with federal law, California may not impose any regulation with respect to advertising the
cigarettes if the regulation is "based on smoking and health." The prohibition
against selling cigarettes to minors is based on underlying health concerns, the argument
continues, and therefore the state may not impose any requirement or prohibition with
respect to advertisements of cigarettes that target minors.
Reynolds contends, in effect, that if it had used billboards depicting
Old Joe Camel stating in huge block letters, "Kids, be the first in your fourth grade
class cool enough to smoke Camels"; or, to use the example of the Court of Appeals,
"if Reynolds had . . . presented Teenage Ninja Mutant Turtles on children's lunch
boxes to promote cigarette smoking," California could do nothing about it, for any
attempt to do so would be a requirement or prohibition "based on smoking and
health." Only the federal government, Reynolds claims, can prevent advertisements
that urge minors to smoke, no matter how blatantly.
Mangini v. R.J. Reynolds Tobacco Co., 875 P.2d 73, 79 (Cal.
1994).
The Mangini court properly applied the Cipollone standards
to conclude that the plaintiff's claims were not preempted by the FCLAA. It held that
"Congress left the states free to exercise their police power to protect minors from
advertising that encourages them to violate the law." Id. at 83.24 The court further held that the plaintiff's claim was not
preempted by the FCLAA because the predicate duty at issue was not based on smoking and
health, but rather on the prohibition against engaging in unfair competition by
advertising illegal conduct or by encouraging others to violate the law. Id. at 80.
"`[T]he phrase based on smoking and health fairly but narrowly construed does not
encompass the more general legal duty not to' unfairly assist or advertise illegal
conduct." Id. (quoting Cipollone, 505 U.S. at 529).25
Similarly, in Penn Adver. of Baltimore, Inc. v. Mayor and City
Council of Baltimore, 63 F.3d 1318 (4th Cir. 1995), vacated and remanded on other
grounds, ___ U.S. ___, 116 S.Ct. 2575, modified, 101 F.3d 332 (4th Cir. 1996),
the Fourth Circuit Court of Appeals held that a Baltimore ordinance prohibiting the
placement of outdoor cigarette advertising in certain areas of the city frequented by
minors was not preempted by the FCLAA. The court of appeals found that the ordinance had
been enacted to effectuate a state prohibition against minors possessing or using tobacco
products. Id. at 1321.
The Colorado statutes at issue here are part of a larger effort by this
State to protect its children at a time in their lives when they are not mature enough to
make informed decisions on their own.26 The duty
underlying the tobacco prohibitions in Colorado is to avoid the physical
and emotional endangerment of children. Because the predicate duty is
not one based upon smoking and health, a claim based upon section 18-13-121, C.R.S.
(1997), is not preempted by the FCLAA.27
Moreover, the prohibitions against the purchase of tobacco products by
minors and contributing to the delinquency of minors are not requirements "with
respect to cigarette advertising or promotion." Cipollone, 505 U.S. at 525.
Neither statute attempts to regulate or control the content of defendants' advertising.
This factor was significant in Penn Advertising, where the regulation "simply
restrict[ed] the location of cigarette advertising signs, irrespective of the nature of
the message communicated." 63 F.3d at 1324.
Likewise, in Mangini, the California Supreme Court held that the
plaintiff's claim was not preempted by the FCLAA because the prohibitions against
advertisements targeting minors did "not require Reynolds to adopt any particular
label or advertisement `with respect to any relationship between smoking and health';
rather, they forbid any advertisements soliciting unlawful purchases by
minors." 875 P.2d at 80 (emphasis added). Unlike the statutes framing the State's
public nuisance claims, and in contrast to the claims and remedies in Penn Advertising
and Mangini, courts have limited the application of Cipollone to
requirements that seek to directly regulate the content and format of advertising. See
Vango Media, Inc. v. City of New York, 34 F.3d 68 (2d Cir. 1994) (city ordinance
requiring the display on city-licensed taxicabs of one public health message relating to
smoking and health for every four cigarette advertisements was preempted under the FCLAA);
Chiglo v. City of Preston, 909 F. Supp. 675 (D. Minn. 1995) (a local ordinance
prohibiting the display of "point of sale" advertising of cigarettes in retail
establishments and dictating the size and content of signage stating that tobacco products
were for sale was preempted).28
For all of these reasons, defendants' preemption argument must fail.
B. The Smokeless Tobacco Act Does Not Preempt the State's Public
Nuisance Claims.
As alleged in the Amended Complaint, a large share of the tobacco
illegally acquired and used by minors in Colorado involves products other than cigarettes,
primarily smokeless tobacco. Smokeless tobacco is regulated under a different federal
statute, the Comprehensive Smokeless Tobacco Health Education Act 15 U.S.C. §§4401-4408
("CSTHEA"). The CSTHEA has its own distinct and decidedly narrow preemption
provision, which expressly defers to claims under state law that concern any issue other
than package labeling. 15 U.S.C. § 4406(c).29
The State's public nuisance claims, which are not based on package labeling, cannot be
preempted by CSTHEA.
C. The Bagby Doctrine Does Not Bar the State's Public Nuisance
Claim.
Defendants argue that the felony of contributing to the delinquency of a
minor cannot form the basis for the State's class 1 public nuisance claim because the
General Assembly intended all prosecutions involving minors and tobacco to be made under
section 18-13-121, C.R.S. (1997). This argument misstates Colorado law relating to the
ability of a prosecutor to charge under either a general or a special criminal statute
unless a legislative intent is shown to limit prosecution to the special statute. See
People v. Westrum, 624 P.2d 1302, 1303 (Colo. 1981).30
The rule defendants seek to invoke to block the State's class 1 public
nuisance claim was first, and most clearly, articulated in People v. Bagby, 734
P.2d 1059 (Colo. 1987). In Bagby, the defendant was charged with a class 5 felony,
offering a false instrument for filing (§ 18-5-114, C.R.S. (1997)). She moved to
dismiss this charge, arguing that the Colorado Liquor Code defined as a misdemeanor the
identical conduct of submitting false information on an application for a liquor license. See
§ 12-47-903(1)(a), C.R.S. (1997) (formerly at § 12-47-130, C.R.S.). Citing the
rule articulated in Westrum, the Supreme Court upheld the dismissal of the felony
count, concluding that the General Assembly intended to limit prosecutions involving
conduct in the context of liquor sales and licensing to the special provisions of the
Colorado Liquor Code. Bagby, 734 P.2d at 1062.
Bagby is inapplicable to the State's class 1 public nuisance
claim for at least two critical reasons. First, the Bagby court limited its holding
to the circumstances of that case. It took great care to describe the Liquor Code as a
"comprehensive regulatory program, with detailed attention to various types of
punishment for different violations thereof." Id. That regulatory scheme
stands in stark contrast to the minimal prohibitions regarding underage tobacco purchases
contained in section 18-13-121(2), C.R.S. (1997). It stretches credulity to argue that
this single section is comparable in any fashion to the comprehensive regulatory structure
of the Liquor Code.31
More fundamentally, unlike the defendant in Bagby, these
defendants could not face prosecution under two enactments providing different degrees of
punishment. The State has not alleged that defendants violated subsection (1) of section
18-13-121 (knowingly furnishing tobacco products to minors), and defendants could not
violate subsection (2) of section 18-31-121 (illegal purchase of tobacco products by
minors). The Amended Complaint only alleges that defendants violated section 18-6-701 by inducing,
aiding or encouraging minors to purchase tobacco products in violation of state law.
Thus, the factual scenario which gave rise to the holding in Bagby, and to
defendants' argument, does not exist here.32
Finally, this Court should ignore defendants' plaintive cry that it is
"inconceivable" that conduct defined as a petty offense under section
18-13-121(1) could be prosecuted as a felony under section 18-6-701. Putting aside the
fact that the State has not alleged that defendants violated 18-13-121(1)
("furnishing" tobacco to minors), this is precisely what the General Assembly
intended when it defined the crime of contributing to the delinquency of minors to include
inducing, aiding or encouraging a child to violate "any federal or state law,
municipal or county ordinance." § 18-6-701(1), C.R.S. (1997) (emphasis added).
The General Assembly properly concluded that conduct aimed at encouraging children to
violate any law was so morally reprehensible as to warrant severe criminal penalties.
D. The State Is Entitled To Establish At Trial That The Proceeds
Of Cigarette Purchases By Minors Are Traceable To Defendants' Conduct.
The defendants contend that the Court should dismiss the State's claim
for proceeds traceable to the defendants' public nuisance because of the complexity
involved in tracing such proceeds. Defendants' argument contravenes the fundamental legal
standards applicable to a Rule 12(b)(5) motion to dismiss and, accordingly, must be
denied.
The court, in reviewing a Rule 12(b)(5) motion, can consider only
matters stated therein and must not go beyond the confines of the pleading. Rosenthal
v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1099 (Colo. 1995). Here, the State has
properly alleged that the defendants engaged in wrongful conduct, that the defendants
obtained proceeds from that conduct, and that all proceeds traceable to the wrongful
conduct should be forfeited to the State. (Amended Complaint ¶¶ 149-153, 190-192). These
factual allegations must be deemed true and admitted for purposes of the defendants'
motion.
Where an issue turns upon disputed facts, the matter may not be disposed
of in a pretrial motion under Rules 12 or 56, C.R.C.P. Cline v. Rabson, 856 P.2d 1,
2-3 (Colo. App. 1992) (inappropriate for trial court to act in capacity of pre-trial
factfinder). Proof that certain proceeds are traceable to the defendants' conduct is an
evidentiary hurdle that the State must establish at trial. But that hurdle remains an
issue of fact, not of law. See Northwest Water Corp. v Pennetta, 479 P.2d
398, 401 (Colo. App. 1970) (issues involved in proving a private nuisance claim are
questions of fact).
The only authority that defendants rely upon to support their concern
that the State faces an impossible task in tracing the proceeds from their conduct is People
v. Cerrone, 780 P.2d 562 (Colo. App. 1989). This case is irrelevant because, in
relation to the items of personal property which the trial court ordered forfeited, it
involved an appeal from a full evidentiary hearing on the merits before a trial court
acting as finder of fact. Although the defendants may later try to argue that Cerrone
outlines the burden of proof that the State bears at trial, Cerrone does not
suggest that this Court may rule on this factual issue in the context of a Rule 12(b)(5)
motion to dismiss.
V. THE STATE'S COCCA CLAIMS SHOULD NOT BE DISMISSED.
The defendants argue that the State's claims for damages under the
Colorado Organized Crime Control Act, §§ 18-17-101 through 109, C.R.S. (1997)
("COCCA"), should be dismissed because the State: (1) is not a
"person" with standing to sue for treble damages; (2) has not alleged that it
detrimentally relied upon the defendants' alleged acts of mail and wire fraud; and (3) has
not sufficiently alleged defendants' violations of COCCA. Defendants do not challenge the
Attorney General's authority to seek an injunction or other civil sanctions under COCCA.
Defendants' arguments misconstrue the plain language of COCCA, and merely raise factual
issues about defendants' alleged conduct which are inappropriate for resolution in a Rule
12(b)(5) motion. None of these arguments provides a basis for dismissal of the State's
COCCA claims.
COCCA was adopted by the Colorado General Assembly in 1981 to provide
enhanced criminal sanctions and civil remedies for certain types of unlawful
business-related activities. People v. Chaussee, 880 P.2d 749, 754 (Colo. 1994).
COCCA imposes stringent civil remedies upon those who use or invest proceeds received from
a pattern of racketeering in the establishment or operation of an enterprise,
§ 18-17-104(1), C.R.S. (1997); acquire or maintain an interest in or control of an
enterprise through a pattern of racketeering, § 18-17-104(2), C.R.S. (1997);
knowingly conduct or participate in an enterprise through a pattern of racketeering,
§ 18-17-104(3), C.R.S. (1997); or conspire to engage in any of these other
prohibitions, § 18-17-104(4), C.R.S. (1997). Such racketeering activity generally
consists of a series of related felonies defined by state and federal law.
§ 18-17-103(3) and (5), C.R.S. (1997).
COCCA was patterned after the federal Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. §§ 1961-1968 ("RICO"). Federal cases
interpreting RICO, while not dispositive, are instructive in analyzing similar issues
arising under COCCA. New Crawford Valley, Ltd. v. Benedict, 877 P.2d 1363, 1370
(Colo. App. 1993). Where there is Colorado authority interpreting COCCA, that authority is
controlling. Tallitsch v. Child Support Servs., Inc., 926 P.2d 143, 147 (Colo. App.
1996). When construing the provisions of COCCA, the court is required to use rules of
liberal construction to effectuate the intent and purpose of the statute.
§ 18-17-108, C.R.S. (1997).
COCCA varies from its counterpart RICO provisions in several critical
respects. A comparison of the parallel provisions of both statutes reveals COCCA's
broader, more flexible terms, as well as its more expansive remedies. Compare
§ 18-17-106(1)-(12), C.R.S. (1997) with 18 U.S.C. § 1964(a)-(d). For instance,
COCCA provides a damages remedy for "any person injured" by a statutory
violation, not merely for those injured in their "business or property" as
required by RICO. Compare § 18-17-106(7), C.R.S. (1997) with 18 U.S.C.
§ 1964(c).
COCCA's comprehensive civil remedies are available to the Attorney
General, the state district attorneys, and to any person injured by reason of any of these
unlawful acts. § 18-17-106, C.R.S. These remedies include injunctive relief, property
seizures and forfeitures, treble damages, attorney fees, and costs. § 18-17-106,
C.R.S. (1997).
The State's Amended Complaint sets forth two COCCA claims. The Eighth
Claim for Relief alleges that each defendant associated with a racketeering enterprise --
in this case, a collective group of tobacco companies, public relations firms, trade
associations, research entities and other persons -- and knowingly conducted and
participated in the affairs of the enterprise through a pattern of racketeering activities
(mail and wire fraud), in violation of § 18-17-104(3). (Amended Complaint
¶ 194).
The Ninth Claim for Relief alleges that the defendants conspired to
receive racketeering proceeds and to use such proceeds to establish a racketeering
enterprise; maintained an interest in or control of such enterprise; and knowingly
conducted or participated in the enterprise through certain mail and wire fraud
racketeering activities, in violation of § 18-17-104(4) (Amended Complaint
¶ 196).
Each of these COCCA violations has caused the State of Colorado to
sustain damages in the form of millions of dollars in additional health care expenditures
for its employees and indigent residents.
A. The State Is A "Person" Entitled To Seek Treble
Damages, Attorney Fees And Costs Under COCCA.
Defendants argue that the State lacks standing to seek treble damages
pursuant to its Eighth and Ninth Claims for Relief because the State is not an injured
"person" under COCCA.33 This argument
overlooks the plain language of COCCA and conflicts with its underlying intent and
purpose.
COCCA defines the term "person" as "any individual
or entity holding or capable of holding a legal or beneficial interest in
property." § 18-17-103(4), C.R.S. (emphasis added). The phrase "any
entity" clearly indicates the General Assembly's intent to extend COCCA's provisions
to the State as an entity capable of holding a legal or beneficial interest in property.
Numerous Colorado statutes recognize this capability. See, e.g. Colo. Const.
Art. XXVII, § 1; § 24-80-209, C.R.S. (1997); §§ 25-25-104(1) and 108,
C.R.S. (1997); § 17-24-106.6, C.R.S. (1997); § 24-1-133, C.R.S. (1997).
In an attempt to show that the State is not a person under COCCA, the
defendants rely upon United States v. Bonanno, 879 F.2d 20 (2nd Cir. 1989), a
Second Circuit opinion holding that the United States was not a "person" capable
of recovering treble damages under RICO. This case provides no support for the defendants'
argument.
Defendants' use Bonanno to draw an analogy between the federal
government suing for damages under RICO and the State of Colorado suing for damages under
COCCA. The holding in Bonanno does not apply to COCCA, because the dual structure
of RICO which formed the basis for that decision has no parallel in COCCA. In Bonanno,
the Court relied on the distinctive "dual structure" of RICO, establishing
"two classes of actions," whereby the governing sovereign has a host of
exclusive enforcement remedies, including criminal sanctions, penalties, forfeitures and
injunctive relief, while injured parties other than the government have recourse only to
damages. 879 F.2d at 24. The same cannot be said of COCCA, which has its own unique
structure. Both the State of Colorado, through the Attorney General, and private persons
may seek enforcement remedies under COCCA, including: injunctive relief,
§ 18-17-106(5), C.R.S. (1997) (state enforcement) and § 18-17-106(6), C.R.S.
(1997) (any person injured); and civil forfeiture, § 18-17-106(2), C.R.S. (1997)
(state enforcement) and § 18-17-106(7)(b), C.R.S. (1997) (any injured person has
right or claim to forfeited property). In fact, the only remedy reserved exclusively to
the State in its enforcement capacity is criminal sanctions, § 18-17-105, C.R.S.
(1997).
More importantly, the court in Bonanno expressly recognized that
state governmental entities and their subdivisions are "persons" that have
standing to sue for damages under RICO. 879 F.2d at 25.34
It would be illogical to conclude that, while the State could sue for damages under RICO,
it could not proceed similarly under COCCA. This is especially true given the fact that,
in enacting COCCA, the General Assembly expressed its intent to enhance sanctions and
expand remedies because the remedies available to the State at the time were
"unnecessarily limited in scope and impact." § 18-17-102, C.R.S. (1997).
The defendants' argument that the State is not a person under COCCA must
fail.
B. The State Has Sufficiently Alleged The Defendants' Pattern Of
Racketeering Activity.
Defendants argue that the State's Amended Complaint fails to describe
the conduct which gives rise to the COCCA predicate offenses of mail and wire fraud. They
further argue that the Amended Complaint fails to describe how the State was affected by
defendants' fraudulent conduct. These arguments ignore the fact that the Amended Complaint
details the numerous, repeated and intentional racketeering activities engaged in by the
defendants over a period of decades, and its impact upon the State of Colorado. Certainly,
the State's Amended Complaint provides defendants sufficient information to understand the
allegations and to prepare a response.
To state a claim under COCCA, the State must describe defendants'
pattern of racketeering activity. A pattern of racketeering activity means "engaging
in at least two acts of racketeering activity which are related to the conduct of the
enterprise." § 18-17-103(3), C.R.S.; Chaussee, 880 P.2d at 758. Such
violations are known as "predicate acts." See, e.g., New
Crawford Valley, 877 P.2d at 1371.
In this action, the State alleges that during the relevant times
described in the Amended Complaint, defendants engaged in a pattern of racketeering
activity by repeatedly violating two federal criminal statutes -- mail fraud, 18 U.S.C.
§ 1341, and wire fraud, 18 U.S.C. § 1343. The elements of mail fraud are (1) a
scheme to defraud, and (2) a mailing made for the purpose of executing the scheme. Schmuck
v. United States, 489 U.S. 705, 710 (1989). The elements of wire fraud are virtually
identical to mail fraud, the only difference being that the fraudulent scheme must be
facilitated by an interstate wire communication, typically by telephone, radio, or
television. 18 U.S.C. § 1343.
The State has pled each of the elements of its COCCA claims with
sufficient particularity under Rule 9(b), C.R.C.P. The Amended Complaint meets these
standards because it describes clearly and in detail the ongoing fraudulent schemes that
the defendants utilized to market their tobacco products and to maximize their monetary
profits. The Amended Complaint describes defendants' coordinated efforts, beginning in
1953, to form an enterprise to disseminate misleading information about defendants'
tobacco companies and their products. (Amended Complaint ¶¶ 51-53). Among other
things, this enterprise disseminated false or fraudulent advertisements, broadcast
commercials, and other communications which were intended by defendants to mislead the
public about the health effects of tobacco use. (Amended Complaint ¶¶ 57-63, 69, 120).
The Amended Complaint also describes how the activities were facilitated in the normal
course of defendants' business through the use of mail, radio, television, and telephone
communications for the purpose of maximizing sales of defendants' tobacco products and
obtaining money from those sales. (Amended Complaint ¶¶ 155-160). Finally, the Amended
Complaint describes how, as a result of defendants' conduct, the State has incurred
millions of dollars in costs annually for its increased health care expenditures related
to tobacco illnesses. (Amended Complaint, ¶¶ 162-163).
C. The State Is Not Required To Show That It Relied Upon
Defendants' Fraudulent Conduct.
Next, the defendants argue, without the benefit of any legal authority,
that the State's request for damages under COCCA must be dismissed because the State has
failed to allege that it was the intended recipient of the defendants' fraudulent conduct
or that it relied upon any fraudulent communication made by any of the defendants.
Colorado courts have not yet addressed this legal issue in the context
of a COCCA case. While detrimental reliance is required under RICO, such reliance need not
be that of the plaintiff. Armco Indus. Credit Corp. v. SLT Warehouse Co., 782 F.2d
475, 482 (5th Cir. 1986) ("[t]o find a violation of the federal mail fraud statute
[as an alleged predicate act under RICO] it is not necessary that the victim have
detrimentally relied on the mailed representations"). See also Israel
Travel Advisory Serv. v. Israel Identity Tours, 61 F.3d 1250, 1257 (7th Cir. 1995) (a
business may assert a RICO injury where defendant directs a campaign of misinformation at
its customers); Mid Atlantic Telecom, Inc. v. Long Distance Servs., Inc., 18
F.3d 260 (4th Cir. 1994), cert. denied, 513 U.S. 931 (1994) (long distance
telephone carrier permitted to maintain RICO claim against competitor for allegedly
fraudulently billing customers and diverting business away from plaintiff); Prudential
Ins. Co. of America v. United States Gypsum Co., 828 F. Supp. 287 (D.N.J. 1993)
(building owner permitted to maintain RICO claim for economic injuries against asbestos
manufacturers who allegedly misinformed the public about the safety of asbestos); Galerie
Furstenberg v. Coffaro, 697 F. Supp. 1282 (S.D.N.Y. 1988) (plaintiff properly alleged
predicate acts of mail and wire fraud by claiming that defendant sold counterfeit artwork
to third party customers, thereby depriving plaintiff of sales of original works).
In this case, the State has sufficiently alleged such reliance. The
Amended Complaint adequately describes the defendants' misrepresentations, the fact that
such misrepresentations were made with the express intent that the public would rely on
such representations, and the fact that such misrepresentations encouraged more smoking.
No additional reliance by the State is required to support its damages claim under COCCA.
D. The State Should Be Granted Leave To Amend Its Ninth Claim For
Relief.
The State concedes that its Ninth Claim for Relief is incomplete. Thus,
the State requests leave to amend this claim to include a proper reference to the alleged
violation of section 18-17-104(4), R.C.S. (1997). Granting such leave at this time is
necessary to secure just, speedy, and inexpensive determination of all issues in this case
and would clearly serve the interests of justice. See Varner v. District Court,
618 P.2d 1388, 1390 (Colo. 1980); In re Estate of Blacher, 857 P.2d 566, 568-69
(Colo. App. 1993).
VI. THE ATTORNEY GENERAL MAY SEEK RESTITUTION AND
DISGORGEMENT
Defendants mischaracterize the equitable remedies sought in the Amended
Complaint as just another form of damages to compensate the State of Colorado for its
tobacco-related health care expenditures. They argue that the State is not entitled to the
equitable remedy of restitution, because it has not conferred a benefit upon the
defendants and because it already has an adequate remedy at law.35
This is not, however, a case in which the State seeks restitution to compensate for its
damages caused by defendants' conduct. Rather, as is made clear in the State's Amended
Complaint, it is the Attorney General, relying upon specific statutory authority, who
demands that defendants disgorge the proceeds of their illegal conduct.
A. The Attorney General has Specific Statutory Authority to Seek
Restitution From These Defendants.
The CCPA expressly authorizes the Attorney General to seek restitution
as an enforcement mechanism to enforce its prohibitions against deceptive trade practices.
Section 110 of the CCPA provides, in part;
The court may make such orders or judgments as may be necessary . . . to
prevent any unjust enrichment by any person through the use or employment of any deceptive
trade practice.
§ 6-1-110(1), C.R.S. (1997). The only limitation expressed in
section 110(1) is that the defendants' unjust enrichment must occur "through the use
or employment of any deceptive trade practice." This section does not require that
the State or the Attorney General must first confer some benefit upon a defendant. In
fact, such a requirement would render this legislatively-created enforcement remedy
meaningless for the simple reason that a defendant, engaging in a deceptive trade
practice, would never have a "benefit" conferred upon it by the State. The
legislative purpose behind the CCPA to provide "prompt, economical, and readily
available remedies against consumer fraud" would be frustrated if the Attorney
General could not seek restitution. Western Food Plan, Inc. v. District Court, 598
P.2d 1038, 1041 (Colo. 1979).
Similarly, COCCA permits the Attorney General to obtain "[a]ll
property, real or personal, including money, used in the course of, intended for
use in the course of, derived from, or realized through conduct in violation of . .
. [the Act]." § 18-17-106(2), C.R.S. (1997) (emphasis added). Although
characterized in COCCA as a "civil forfeiture," rather than as restitution or
disgorgement, the purpose is the same -- to deprive a defendant of the proceeds of his
illegal conduct. That clear legislative purpose is not served if the Attorney General must
first establish that the State conferred some benefit upon that defendant.
B. Common law Requirements In Colorado Do Not Apply To The Extent
That They Have Been Modified Or Superseded By Statute.
Where a statute such as the CCPA specifically provides that the court
may order disgorgement, the language of that statute controls, not the common law. In a
statutory enforcement action brought on behalf of the public, the ordinary requirements of
equity are relaxed in order to fulfill the legislative purposes of the statute being
enforced. See Western Food Plan, 598 P.2d at 1041; Lloyd A. Fry Roofing
Co. v. State Dept. of Health Air Pollution Variance Board, 553 P.2d 800, 808 (Colo.
1976) (Attorney General need not show irreparable harm to obtain injunctive relief).
Courts in other jurisdictions have likewise determined that statutory law enforcement
authorities may seek equitable remedies on broader grounds than normally allowed in
private causes of action. See F.T.C. v. GEM Merchandising Corp., 87 F.3d
466, 470 (11th Cir. 1996) (F.T.C. entitled to seek disgorgement of profits, because
purpose "is not to compensate the victims of fraud, but to deprive the wrongdoer of
his ill-gotten gain"); People v. Thomas Shelton Powers, M.D., Inc., 3 Cal.
Rptr. 2d 34 (Cal. App. 1992) (district attorney entitled to seek restitution under state
unfair business practices statute to deprive developer of unjust profits from sale of
homes in violation of city ordinance).
Because the restitution sought by the Attorney General in this case is
specifically authorized by statute, and is designed to divest the defendants of the
proceeds of their illegal conduct, defendants' motion to dismiss these remedies must be
denied.
CONCLUSION
The bulk of defendants' challenge to the Amended Complaint concerns
whether the State, as an injured party, may sue for damages under the various statutory
violations pled. Untouched by credible argument is the Attorney General's enforcement
authority to bring each of the Claims for Relief in the Amended Complaint. This fact alone
is enough to warrant a denial of defendants' motion. To the extent this Court nonetheless
finds it necessary to consider the defendants' motion to dismiss, then, for the reasons
set forth in this Response, each of those challenges must be denied.
DATED this 20th day of March, 1998.
GALE A. NORTON
Attorney General
MARTHA PHILLIPS ALLBRIGHT
Chief Deputy Attorney General
RICHARD A. WESTFALL
Solicitor General
JAN MICHAEL ZAVISLAN, 11636*
First Assistant Attorney General
MARIA E. BERKENKOTTER, 16781*
Assistant Attorney General
Attorneys for Plaintiff
Tobacco Litigation Unit
1525 Sherman Street, 5th Floor
Denver, Colorado 80203
Telephone: (303) 866-3613
FAX: (303) 866-5691 *Counsel of Record
INTRODUCTION 1
BACKGROUND 2
A. Statement of Facts. 2
B. The Legal Standard. 5
ARGUMENT 6
I. THE STATE'S CLAIMS ARE NOT PRECLUDED BY THE COLORADO MEDICAL
ASSISTANCE ACT OR BY ISSUES RELATED TO PROXIMATE CAUSE 6
A. The Colorado Medical Assistance Act Does Not Bar the State's
Statutory Claims. 6
B. The State Has Adequately Pled That Its Injuries Were Proximately
Caused By Defendants' Conduct. 9
II. THE STATE MAY PURSUE ITS CONSUMER PROTECTION ACT CLAIMS 11
A. The Colorado Consumer Protection Act. 11
B. Section 6-1-106(1) of the CCPA Does Not Insulate Defendants' Conduct. 12
C. The State Has Standing To Pursue Its CCPA Claims. 15
D. The State's First Claim for Relief is Not Preempted by the Cigarette
Labeling and Advertising Act. 17
1. Preemption of the State's claims must be narrowly construed. 17
2. The CCPA is a proper exercise of police power.
18
3. The 1965 Act. 19
4. The 1969 Act. 20
5. The Comprehensive Smokeless Tobacco Health Education Act. 23
III. THE STATE HAS STANDING TO PURSUE ITS ANTITRUST CLAIMS 24
A. The Colorado Antitrust Act is Intended to Promote the Unrestricted
Production of the Highest Quality and Safest Goods. 24
B. The State Has Suffered Antitrust Injury. 27
C. The State Need Not Be A Market Participant Nor Suffer Direct Injuries
To Have Standing To Pursue Its Damages Claims. 30
1. The State need not be a market participant. 31
2. The State has standing to sue for its indirect injuries 33
D. The Defendants Have Misconstrued The "Business Or Property"
Component Of Antitrust Standing Analysis. 35
IV. MARKETING TO CHILDREN -- THE STATE'S PUBLIC NUISANCE CLAIMS 38
A. The FCLAA Does Not Preempt the State's Public Nuisance Claims. 39
B. The Smokeless Tobacco Act Does Not Preempt the State's Public
Nuisance Claims. 43
C. The Bagby Doctrine Does Not Bar the State's Public Nuisance Claim. 44
D. The State Is Entitled To Establish At Trial That The Proceeds Of
Cigarette Purchases By Minors Are Traceable To Defendants' Conduct. 46
V. THE STATE'S COCCA CLAIMS SHOULD NOT BE DISMISSED. 48
A. The State Is A "Person" Entitled To Seek Treble Damages,
Attorney Fees And Costs Under COCCA. 51
B. The State Has Sufficiently Alleged The Defendants' Pattern Of
Racketeering Activity. 53
C. The State Is Not Required To Show That It Relied Upon Defendants'
Fraudulent Conduct. 55
D. The State Should Be Granted Leave To Amend Its Ninth Claim For
Relief. 56
VI. THE ATTORNEY GENERAL MAY SEEK RESTITUTION AND DISGORGEMENT 57
A. The Attorney General has Specific Statutory Authority to Seek
Restitution From These Defendants. 57
B. Common law Requirements In Colorado Do Not Apply To The Extent That
They Have Been Modified Or Superseded By Statute. 59
CONCLUSION 60
CASES
Alcorn County v. U.S. Interstate Supplies, Inc., 731 F.2d 1160 (5th Cir.
1984) 53
Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492
(1988) 26
Allman v. Philip Morris, Inc., 865 F. Supp. 665 (S.D. Cal. 1994) 36
Arizona v. Maricopa County Medical Soc., 457 U.S. 332 (1982) 25
Armco Indus. Credit Corp. v. SLT Warehouse Co., 782 F.2d 475, 482 (5th
Cir. 1986) 55
Asher v. Reliance Ins. Co., 308 F. Supp. 847 (N.D. Cal. 1970) 6
Ashmore v. Northeast Petroleum, 843 F. Supp. 759 (D. Me. 1994) 32
Associated Gen. Contractors of Cal., Inc. v. California State Council of
Carpenters, 459 U.S. 519 (1983) 28
Austin v. Weld County, 702 P.2d 293 (Colo. App. 1985) 15
Bailey Employment System, Inc. v. Hahn, 545 F. Supp. 62 (D. Conn. 1982)
14
Bast v. Cohen, Dunn & Sinclair, P.C., 59 F.3d 492 (4th Cir. 1995) 36
Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982) 31, 32
Brown Shoe Co. v. United States, 370 U.S. 294 (1962) 29
Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 489 (1977) 29
California v. ARC America Corp., 490 U.S. 93 (1989) 34
Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104 (1986) 29
Castano v. American Tobacco Co., 870 F. Supp. 1425 (E.D. La. 1994) 18,
21
Chiglo v. City of Preston, 909 F. Supp. 675 (D. Minn. 1995) 43
Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992) 17, 18, 19, 20,
21, 22, 23, 39, 40, 41, 42
City and County of San Francisco v. Philip Morris, Inc., 957 F. Supp.
1130 (N.D. Cal 1997) 37
Cline v. Rabson, 856 P.2d 1 (Colo. App. 1992) 9, 47
Collard v. Hohnstein, 174 P. 596 (Colo. 1918) 8
Crimpers Promotions, Inc. v. Home Box Office, Inc., 724 F.2d 290 (2d
Cir. 1983) 32
Davison v. Dill, 503 P.2d 157 (Colo. 1972) 5
Doe v. Roe, 958 F.2d 763 (7th Cir. 1992) 36
Donahue v. Pendleton Woolen Mills, Inc., 633 F. Supp. 1423 (S.D.N.Y.
1986) 32
Dunlap v. Colorado Springs Cablevision, Inc., 829 P.2d 1286 (Colo. 1992)
5
Earthinfo, Inc. v. Hydrosphere Resource Consultants, Inc., 900 P.2d 113
(Colo. 1995) 57
F.T.C. v. GEM Merchandising Corp., 87 F.3d 466 (11th Cir. 1996) 59
F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986) 26, 30, 37
Galerie Furstenberg v. Coffaro, 697 F. Supp. 1282 (S.D.N.Y. 1988) 56
Genty v. Resolution Trust Corp., 937 F.2d 899 (3rd Cir 1991) 36
Graven v. Vail Associates, Inc., 909 P.2d 514 (Colo. 1996) 9, 10
Grogan v. Platt, 835 F.2d 844 (11th Cir.), cert. denied, 488 U.S. 981
(1988) 36
Hayes v. Solomon, 597 F.2d 958 (5th Cir. 1979), cert. denied, 444 U.S.
1078 (1980) 28
Henry v. Kemp, 829 P.2d 505 (Colo. App. 1992) 8
Hillsborough County v. Automated Medical Labs, Inc., 471 U.S. 707 (1985)
18
Hinds v. Paul's Auto Werkstatt, Inc., 810 P.2d 874 (Ore. App. 1991) 14
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) 33, 34
In re Estate of Blacher, 857 P.2d 566 (Colo. App. 1993) 57
Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990) 17
Iowa v. R.J. Reynolds Tobacco Co., No. CL 71048, slip op. (D. Polk
County, Iowa, August 26, 1997) 7
Israel Travel Advisory Serv. v. Israel Identity Tours, 61 F.3d 1250 (7th
Cir. 1995) 56
Kildahl v. Tagge, 942 P.2d 1283 (Colo. App. 1996), cert. denied, (Sept.
2, 1997) 8
Lloyd A. Fry Roofing Co. v. State Dept. of Health Air Pollution Variance
Board, 553 P.2d 800 (Colo. 1976) 59
Lyons v. Nasby, 770 P.2d 1250 (Colo. 1989) 9, 10
Mandeville Island Farms, Inc. v. American Crystal Sugar Co., 334 U.S.
219 (1948) 32
Mangini v. R.J. Reynolds Tobacco Co., 875 P.2d 73 (Cal. 1994) 40, 41, 42
Maryland v. Philip Morris, Inc., No. 96122017/CL211487, slip op. (Cir.
Ct. of Baltimore City, Md., May 21, 1997) 7, 16, 34
McGraw v. The American Tobacco Co., No. 94-C-1707, Letter Opinion (Cir.
Ct. Kanawha County, W.Va., February 13, 1997) 7, 35
McHugh v. Reserve Mining Co., 27 F.R.D. 505 (N.D. Ohio 1961) 6
Medtronic v. Lohr, ___ U.S. ___, 116 S.Ct. 2240 (1996) 17
Mid Atlantic Telecom, Inc. v. Long Distance Services, Inc., 18 F.3d 260
(4th Cir. 1994), cert. denied, 513 U.S. 931 (1994) 56
Minnesota v. Philip Morris, Inc., No. C1-94-8565, slip op. (D. Ramsey
County, MN., January 26, 1998) 30
Minnesota v. Philip Morris, Inc., No. C1-94-8565, slip op. (D. Ramsey
County, MN., May 19, 1995) 30, 34
National Society of Professional Engineers v. United States, 435 U.S.
679 (1978) 24, 25, 28, 30, 36
New Crawford Valley, Ltd. v. Benedict, 877 P.2d 1363 (Colo. App. 1993)
49, 54
Nicholas v. North Carolina Medical Center, Inc., 902 P.2d 462 (Colo.
App. 1995), aff'd, 914 P.2d 902 (Colo. 1996) 10
Northern Pac. Ry. Co. v. United States, 356 U.S. 1 (1958) 25
Northwest Water Corp. v Pennetta, 479 P.2d 398 (Colo. App. 1970) 47
Norwalk CORE v. Norwalk Redevelopment Agency, 395 F.2d 920 (2d Cir.
1968) 6
Ostrofe v. H.S. Crocker Co., Inc., 740 F.2d 739 (9th Cir. 1984) 32
Penn Adver. of Baltimore, Inc. v. Mayor and City Council of Baltimore,
63 F.3d 1318 (4th Cir. 1995), vacated and remanded on other grounds, ___ U.S. ___, 116
S.Ct. 2575, modified, 101 F.3d 332 (4th Cir. 1996) 41
Pennsylvania v. Cianfrani, 600 F. Supp. 1364 (E.D. Pa. 1985) 53
People ex rel. Dunbar v. Gym of America, Inc., 493 P.2d 660 (Colo. 1972)
11, 19, 21
People v. Bagby, 734 P.2d 1059 (Colo. 1987) 44, 45, 46
People v. Cerrone, 780 P.2d 562 (Colo. App. 1989) 47
People v. Chaussee, 880 P.2d 749 (Colo. 1994) 48, 54
People v. O'Donnell, 926 P.2d 114 (Colo. App. 1996) 46
People v. Philip Morris, Inc., No. 96 L13146, slip op. at p. 11 (Cir.
Ct. of Cook County, Ill., November 13, 1997) 35
People v. Thomas Shelton Powers, M.D., Inc., 3 Cal. Rptr. 2d 34 (Cal.
App. 1992) 59
People v. Westrum, 624 P.2d 1302 (Colo. 1981) 44
Philip Morris, Inc. v. Harshbarger, 122 F.3d 58 (1st Cir. 1997) 18
Prudential Ins. Co. of America v. United States Gypsum Co., 828 F. Supp.
287 (D.N.J. 1993) 56
Reiter v. Sonotone Corp., 442 U.S. 330 (1979) 35, 37
Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947) 17
Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095 (Colo. 1995) 2,
5, 47
Rozema v. The Marshfield Clinic, 977 F. Supp. 1362 (W.D. Wis. 1997) 32
Rupert v. Clayton Brokerage Co. of St. Louis, Inc., 737 P.2d 1106 (Colo.
1987) 10
Schmuck v. United States, 489 U.S. 705 (1989) 54
Sharp v. Kaiser Found. Health Plan of Colo., 710 P.2d 1153 (Colo. App.
1985), aff'd, 741 P.2d 714 (Colo. 1987) 10
Sparks v. R.J. Reynolds Tobacco Co., Case No. C94-783C (W.D. Wa. Dec. 9,
1994) 43
Standard Oil Co. v. F.T.C., 340 U.S. 231 (1951) 24
State v. Amoco Oil Co., 293 N.W.2d 487 (Wis. 1980) 14
Suarez v. United Van Lines, Inc., 791 F. Supp. 815 (D. Colo. 1992) 12,
13
Sugar Institute v. United States, 297 U.S. 553 (1936) 27
Tallitsch v. Child Support Services, Inc., 926 P.2d 143 (Colo. App.
1996) 49
Tucker v. Gorman, 944 P.2d 653 (Colo. App. 1997), cert. granted, (Oct.
20, 1997) 8
United States v. Bonanno, 879 F.2d 20 (2nd Cir. 1989) 51, 52
United States v. Gasoline Retail Dealers Ass'n, 285 F.2d 688 (7th Cir.
1961) 27
United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940) 25
United States v. Topco Associates, Inc., 405 U.S. 596 (1972) 25
Vango Media, Inc. v. City of New York, 34 F.3d 68 (2d Cir. 1994) 43
Varner v. District Court, 618 P.2d 1388 (Colo. 1980) 57
Washington v. American Tobacco Co., Inc., No. 96-2-15056-8 SEA, slip op.
(King County Super. Ct., WA., November 19, 1996) 30, 35
Western Food Plan, Inc. v. District Court, 598 P.2d 1038 (Colo. 1979)
11, 58, 59
Winslow v. Morgan County Comm'rs, 697 P.2d 1141 (Colo. 1985) 15
Wisconsin Public Intervenor v. Mortier, 501 U.S. 597 (1991) 18
Woodard v. May Dep't Stores Co., 849 P. 2d 802 (Colo. App. 1992), aff'd
in part, rev'd in part on other grounds, 863 P.2d 967 (Colo. 1993) 13, 16
STATUTES
Colo. Const. Art. XXVII, § 1 51
OTHER AUTHORITIES
§ 2-4-401(8), C.R.S. (1997) 15
§ 12-47-903(1)(a), C.R.S. (1997) 44
§ 17-24-106.6, C.R.S. (1997) 51
§ 18-13-121(2), C.R.S. (1997) 38, 45, 46
§ 18-13-121, C.R.S. (1997) 42, 44
§ 18-1-408(7), C.R.S. (1997) 45
§ 18-5-114, C.R.S. 44
§ 18-6-701(1), C.R.S. (1997) 46
§ 18-6-701, C.R.S. 45, 46
§ 24-1-133, C.R.S. (1997) 51
§ 2-4-205, C.R.S. (1997) 8
§ 2-4-212, C.R.S. (1997) 16
§ 24-80-209, C.R.S. (1997) 51
§ 26-4-403(3), C.R.S. (1997) 6, 7, 8, 9
§§ 16-13-101 through 317, C.R.S. (1997) 4, 38
§§ 18-17-101 through 109, C.R.S. (1997) 4, 9, 48, 49, 50, 51, 53, 54,
55, 56, 58
§§ 6-1-101 through 115, C.R.S. (1997) 4, 9, 11, 12, 13, 14, 15, 16,
17, 18, 20, 25, 57, 58
§§ 6-4-101 through 122, C.R.S. (1997) 4, 24, 26, 34, 37
§§ 25-25-104(1) and 108, C.R.S. (1997) 51
15 U.S.C. § 1334(b) 20
15 U.S.C. § 1336 14, 18, 19, 20, 21, 39, 40, 41, 42, 43
15 U.S.C. §§ 4401-4408 23, 43, 44
15 U.S.C. §1 25
15 U.S.C. §1337 14
18 U.S.C. § 1341 54
18 U.S.C. § 1343 54
18 U.S.C. §§ 1961-1968 49, 51, 52, 53, 55, 56
18-13-121(1) 46
49 U.S.C. §11707 13
RULES
C.R.C.P. 12 9, 47
C.R.C.P. 56 47
C.R.C.P. 9(b) 54
TREATISES
29 Fed. Reg. 8324-8375 13
30 Fed. Reg. 9484, 9485 14
5A Wright & Miller, Federal Practice and Procedure §1357 at 339 (2d
ed. 1987) 5
P. Areeda & H. Hovenkamp, Antitrust Law ¶ 360c (1995) 35
P. Areeda & H. Hovenkamp, Antitrust Law, ¶ 361 (1995) 35
P. Areeda & H. Hovenkamp, Antitrust Law, 360a at p. 210 (1995) 29
S. Rep. No. 91-566, p. 12 (1969), reprinted in 1970 U.S.C.C.A.N. 2652,
2663 21
OTHER AUTHORITIES
29 Fed. Reg. 8324-8375 13
30 Fed. Reg. 9484, 9485 13
5A Wright & Miller, Federal Practice and Procedure §1357 at 339 (2d
ed. 1987) 5
P. Areeda & H. Hovenkamp, Antitrust Law ¶ 360c (1995) 36
P. Areeda & H. Hovenkamp, Antitrust Law, ¶ 361 (1995) 36
P. Areeda & H. Hovenkamp, Antitrust Law, 360a at p. 210 (1995) 29
S. Rep. No. 91-566, p. 12 (1969), reprinted in 1970 U.S.C.C.A.N. 2652,
2663 21
APPENDIX
TAB A McGraw v. The American Tobacco Co., No. 94-C-1707, slip. Op. (Cir.
Ct. of Kenawha County, W. Va., May 9, 1997)
TAB B 30 Fed. Reg. 9484 (July 29, 1965)
TAB C Minnesota v. Philip Morris, Inc., No. C1-94-8565, slip. Op. (D.
Ramsey County, MN., May 19, 1995)
TAB D Minnesota v. Philip Morris, Inc., No. C1-94-8565, slip. Op. (D.
Ramsey County, MN., January 26, 1998)
TAB E Washington v. American Tobacco Co., Inc., No. 96-2-15056-8 SEA,
slip. Op. (King County Supr. Ct., WA.., November 19, 1996)
TAB F People v. Phili
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