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Tobacco companies accused of lying about the dangers of smoking by Empire Blue Cross & Blue Shield of New York cannot claim as a defense that increased health costs associated with the deception have been passed on to consumers, Senior Judge Jack B. Weinstein of the U.S. District Court for the Eastern District of New York has ruled. Weinstein told lawyers in the first of several suits brought by Blue Cross & Blue Shield organizations from around the country that such a “pass-on” defense is not available in a fraud action brought under the Racketeer Influenced and Corrupt Organizations statute. But Weinstein said the jury in the four-week-old trial will nonetheless hear “evidence of the basic facts of the insurance industry — including pass-on premium practice to cover increased costs.” “The instant action involves a conflict between two huge, complex industries — tobacco and insurance,” Weinstein said. “To decide, each of the jurors must have a sense of how these industries operate in order to avoid egregious errors and to permit a more accurate assessment of the facts.” The judge’s written decision in Blue Cross and Blue Shield of New Jersey Inc. v. Philip Morris Inc., 98 CV 3287, came after he issued a bench ruling. The trial is expected to last another four weeks, followed by trials in companion suits brought by Blue Cross and Blue Shield groups in New Jersey, Michigan and other states. The plaintiffs, who are also suing for fraud, are seeking $800 million in damages, which could be trebled under RICO. Empire had moved during trial to bar evidence that showed it had passed the higher health care costs associated with smoking on to consumers in the form of higher premiums. Judge Weinstein drew an analogy between the issue at hand and that addressed by the U.S. Supreme Court in the landmark case of Hanover Shoe Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). In Hanover Shoe, the Supreme Court rejected such a “pass-on” defense in an antitrust context, ruling that a defendant cannot introduce evidence that a third party absorbed the plaintiff’s increased costs. Weinstein said the high court recognized only two limited exceptions to this rule: “where a customer is locked-in to buying a fixed quantity of goods in advance regardless of price,” or “where the direct purchaser is owned or controlled by its customer.” “These antitrust principles extend to federal RICO claims,” Weinstein said. “The damages provision in a RICO action is virtually the same as that under the antitrust laws.” Moreover, Weinstein said, “the same concerns which moved [the Supreme Court] to bar the pass-on defense in antitrust actions — reducing the complexity in apportioning damages and encouraging deterrence by creating private attorneys general — apply with equal force in the RICO setting.” JUST THE FACTS In deciding that jurors would nonetheless hear evidence of the “basic facts” of the insurance industry, Weinstein said, “erring on the side of openness is often needed in complex cases with strong public policy concerns, given the sophistication of the evidence presented.” Calling it “a difficult and significant case,” Weinstein said he was allowing the jury to hear evidence about pass-on, even though such evidence is “outside the traditionally scope of relevancy,” as defined in the Federal Rules of Evidence. “[A]dmitting evidence of pass-on in the form of higher premiums and pass back through future premiums to dispel them as factors to be considered during deliberation is likely to have the positive effect of ensuring that the jury makes lawful findings, without sub rosa formulations distorting the verdict,” he said. “A strong charge on their irrelevance in deciding damages will be given.” Weinstein added that “having observed this responsible and dedicated jury” during selection and trial, “the court is convinced that in this case the benefits of the proposed course outweigh its risks.” Representing Empire Blue Cross & Blue Shield in the litigation is Dewey Ballantine. Arnold & Porter, and Sedgwick, Detert, Moran & Arnold represent Philip Morris Inc. Sedgwick, Detert, Moran & Arnold, and Kirkland & Ellis are counsel for Brown & Williamson Tobacco Corp. Greenberg Traurig, and Shook, Hardy & Bacon represent Lorillard Tobacco Co. Debevoise & Plimpton represents the Council for Tobacco Research U.S.A. Inc. Jacob, Medinger & Finnegan represents the Smokeless Tobacco Council Inc. Womble Carlyle Sandridge & Rice, and Collier Shannon Scott represent R.J. Reynolds Tobacco Co. and RJR Nabisco Inc. Chadbourne & Parke represents British American Tobacco. BAT Industries is represented by Simpson Thacher & Bartlett, while Davis & Gilbert is handling the case for Hill & Knowlton Inc. Kasowitz, Benson, Torres & Friedman represents Ligget Group Inc., Ligget & Myers and Brooke Group Ltd. And Seward & Kissel represents the Tobacco Institute.

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