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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 ruled Tuesday that insurance companies cannot directly recover under the consumer protection law for injuries sustained by their customers. Tuesday’s ruling means that the only remedy for insurers who claim 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 unanimously 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. Blue Cross and Blue Shield of New Jersey Inc. v. Philip Morris, 82, 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 Eastern District Judge Jack B. Weinstein found six tobacco firms liable under New York’s consumer protection statute, General Business Law �349. Empire was awarded $17.7 million in compensatory damages and $38 million in attorney’s fees. That verdict was appealed to the 2nd U.S. Circuit Court of Appeals, which certified to the state 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. Judge Ciparick observed that the state Legislature amended �349 in 1980 to permit a private right of action in consumer protection cases. Previously, only the attorney general could enforce �349. But the Legislature has 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 �349 does not mean that �349 is available only to consumers. It also stressed that its ruling in no way impedes the traditional subrogation remedy. “[I]t is beyond dispute that [�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 Arnold & Porter in Washington, D.C., 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 Manhattan, appeared for Empire. Both Garnick and Bschorr declined to comment. Philip Morris said Tuesday’s decision should end the federal case. “Today’s ruling should result in the verdict being set aside and the conclusion of the case,” William S. Ohlemeyer, Philip Morris USA vice president and associate general counsel, said 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 in the statement that the case decided Tuesday 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 the insurer had no valid claims.

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