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In a victory for big tobacco companies and a loss for the state’s largest medical insurer, the New York Court of Appeals has ruled that insurance companies cannot directly recover under the consumer protection law for injuries sustained by their customers. Blue Cross and Blue Shield of New Jersey Inc. v. Philip Morris, No. 82. The ruling means that the only remedy for insurers who claim that their costs were driven up by the deceptive advertising of cigarette manufacturers is a subrogation action. The judges recognized the logistical difficulty of establishing the elements of each subscriber’s potential claim, but agreed that an insurance company’s assertion of financial damage is simply too far removed from the actual injury to implicate the consumer protection law. “Insurers cannot sidestep their traditional remedy of subrogation and sue directly for derivative injuries using a statute that creates a cause of action for a person directly injured,” Judge Carmen Beauchamp Ciparick wrote for the unanimous court. This was a test case where 20 Blue Cross/Blue Shield plans sued cigarette manufacturers to recover the cost of smoking-connected health services provided to their customers. One of the plans, Empire HealthChoice Inc., was directed to proceed to trial alone in 2000 and the other actions were stayed pending the outcome of that case. A federal jury before Judge Jack B. Weinstein in the Eastern District of New York found six tobacco firms liable under the state’s consumer protection statute, N.Y. Gen. Bus. Law � 349. Empire was awarded $17.7 million in compensatory damages and $38 million in attorney fees. That verdict was appealed to the 2d U.S. Circuit Court of Appeals, which certified to the state high court questions on the scope of � 349. The key question was whether claims by an insurer “to recover costs of services provided to subscribers as a result of those subscribers being harmed by . . . a violation of” the consumer protection laws were too remote to permit suit. The short answer to that question, the court said, is yes. Ciparick observed that the state Legislature amended Section 349 in 1980 to permit a private right of action in consumer protection cases. Previously, only the attorney general could enforce it. But the Legislature had never expressed an “intent to include recovery for derivative injuries,” and the court will not “presume” such an intent, Ciparick wrote. The court, however, made clear that its holding that third-party payers cannot derivatively recover under Section 349 does not mean that it is available only to consumers. The court stressed that its ruling in no way impedes the traditional subrogation remedy. “[I]t is beyond dispute that [Section 349] permits an actually (non-derivatively) injured party to sue a tortfeasor,” Ciparick wrote. “We hold simply that what is required is that the party actually injured be the one to bring suit. Empire was not directly injured in this sense.” Murray R. Garnick of Washington-based Arnold & Porter, argued for Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., Lorillard Tobacco Co., Liggett Group Inc. and Liggett & Myers Inc. Paul J. Bschorr, a Reed Smith partner in New York, appeared for Empire. “Today’s ruling should result in the verdict being set aside and the conclusion of the case,” said William S. Ohlemeyer, Philip Morris USA vice president and associate general counsel, in a statement. “Today, the highest court in New York agreed with our view that the jury verdict was not supported by New York law.” Ohlemeyer said that the case was one of three that Blue Cross/Blue Shield initiated around the country on similar theories of recovery. He said the other two cases, one in Chicago and another in Seattle, were dismissed after federal circuit courts found that the insurer had no valid claims.

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