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In a significant win for big tobacco, a federal appeals court has ruled that Pennsylvania consumers cannot pursue claims that they paid inflated prices for smokeless tobacco products unless they can prove that they “justifiably relied” on the alleged deceptive marketing practices that they claim drove up the prices. “The Supreme Court of Pennsylvania has consistently interpreted the Consumer Protection Law’s private-plaintiff standing provision’s causation requirement to demand a showing of justifiable reliance, not simply a causal connection between the misrepresentation and the harm,” U.S. Circuit Judge Thomas L. Ambro wrote in his 25-page opinion in Hunt v. United States Tobacco Co. The ruling vacates a decision by U.S. District Judge Ronald L. Buckwalter that refused to dismiss the suit, and instructs Buckwalter to decide whether the plaintiffs should be allowed to amend the suit to add a claim of justifiable reliance. In the proposed class action suit, Pennsylvania purchasers of snuff and chewing tobacco complain that the leading manufacturer used its monopoly power to drive up prices. The plaintiffs are seeking to capitalize on a massive verdict against U.S. Tobacco, the nation’s No. 1 snuff maker, in which a Kentucky federal court jury awarded $350 million to rival Conwood Co., an award that was automatically trebled to $1.05 billion and later upheld by the Sixth U.S. Circuit Court of Appeals. In the Kentucky suit, Conwood, whose snuff brands include Kodiak and Cougar, accused UST Inc., which sells the Skoal and Copenhagen brands, of misleading retailers to secure prime display space for its brands. Conwood claimed that UST’s conduct was aimed at stifling competition and that its salesmen obscured competitors’ brands or removed their display racks altogether. In the Pennsylvania suit, attorneys Alan M. Sandals and Joseph M. Gordon of Sandals & Associates in Philadelphia, along with Kenneth G. Gilman and Douglas M. Brooks of Gilman & Pastor in Boston, contend that the same deceptive conduct that was found by the Kentucky jury also caused injury to Pennsylvania consumers. The suit alleges that UST deceived consumers in Pennsylvania “into paying artificially high prices for such products” by engaging in “fraudulent and deceptive conduct” that allowed UST to “monopolize the market for moist smokeless tobacco products.” In paying those inflated prices, the suit says, the consumers were relying on “a presumption that they were paying prices set by an efficient market, when in fact they were paying prices artificially inflated by defendants’ anti competitive and deceptive conduct.” According to the suit, UST and its affiliated companies are the world’s largest manufacturers of moist, smokeless tobacco, enjoying a monopoly share of up to 87 percent of the $1.5 billion market. That monopoly, the suit says, was maintained “through illegal and exclusionary conduct that has suppressed competition, raised prices, stifled innovation, and reaped hundreds of millions of dollars in profits every year.” In a motion to dismiss, UST’s lawyers, James R. Kahn of Margolis Edelstein in Philadelphia and Margaret M. Zwisler and Charles H. Samel of Latham & Watkins in Washington, D.C., argued that the claim was fatally flawed. Since there was no “direct relationship” between the plaintiffs and UST, the defense team argued, the plaintiffs cannot establish that they relied on UST’s alleged conduct. But Buckwalter found that the plaintiffs were relying on the “catch all” provision in Pennsylvania’s Unfair Trade Practices and Consumer Protection Law, and that the state and federal courts in Pennsylvania are “divided as to the governing standard for a claim under the catch-all provision of the UTPCPL.” Some courts, Buckwalter said, require a plaintiff asserting a claim under the catch-all provision to meet all the elements of common law fraud, while others read the inclusion of the term “deceptive” in the catch-all provision as “creating an alternative, less rigorous level of proof that falls short of actual fraud.” Buckwalter sided with the second camp, finding that “since the UTPCPL should be liberally construed . . . and in light of the 1996 amendment to the catch all provision, this court agrees with prior decisions holding that the catch all provision does not require a plaintiff to prove all the elements of common law fraud.” As a result, Buckwalter said, the plaintiffs do not need to establish reliance under the catch-all provision. Buckwalter later agreed to certify an immediate appeal, and the Third Circuit has now ruled that his decision was flawed. Ambro, in an opinion joined by Third Circuit Chief Judge Anthony J. Scirica and Judge D. Michael Fisher, found that the Pennsylvania Supreme Court has consistently insisted that private plaintiffs suing under the UTPCPL must prove justifiable reliance. “The Supreme Court of Pennsylvania has announced and applied a broad rule that private plaintiffs must allege justifiable reliance under the Consumer Protection Law. We thus think it imprudent to create an exception here for plaintiffs suing under the ‘deception’ prong of the Consumer Protection Law’s catch all provision, and we decline to do so,” Ambro wrote. Ambro found that the lead plaintiff failed to allege justifiable reliance because “he has not alleged that [UST's] deception induced him to purchase [its] products.” Plaintiffs lawyers argued that consumers “relied on a presumption that they were paying prices set by an efficient market.” Ambro disagreed, saying the suit “leaves us guessing” as to how the knowledge that the market was inefficient would have changed consumer conduct. The plaintiffs lawyers, Ambro said, suggested that such consumer claims enjoy a “presumption of reliance.” Ambro disagreed, saying that, under Pennsylvania law, a plaintiff “cannot enjoy a presumption of what he must prove affirmatively – that is, under the Consumer Protection Law, Hunt must prove justifiable reliance affirmatively.” Without ruling on the question, Ambro suggested that the plaintiffs may find it impossible to prove the requisite reliance. “We are hard-pressed to understand how a potential purchaser’s knowledge that a market for a product is inefficient would influence his decision whether to purchase that product,” Ambro wrote. But Ambro stopped short of ordering that the case be dismissed immediately, finding that under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a plaintiff must be permitted the opportunity to cure such a defect by amending the suit. On remand, Ambro said, Buckwalter “should permit Hunt to amend his complaint if the court finds that he satisfies this standard.” None of the plaintiffs lawyers could be reached for comment.

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