Litigation Documents: Plaintiffs' (Corrected) Memorandum Of Points And Authorities In Opposition To Defendants' Motion To Dismiss (1/97)

INTRODUCTION

This case is about a decades-long conspiracy of lies and deceit involving the nation's leading tobacco companies and their public relations arms ("the tobacco defendants" or "defendants"). The objects of this conspiracy are two-fold. First, by engaging in a campaign of disinformation targeted at consumers and public health providers alike, defendants have sought to insure inflated profits. Second, defendants have sought to avoid responsibility for the tragic results of their deception — death, disease and massive costs for public health care.

The tobacco defendants achieved the objects of their conspiracy by systematically suppressing and manipulating the truth about the adverse health consequences of smoking and the highly addictive nature of nicotine. After pledging to conduct and make public the results of "objective" research by "distinguished" scientists, the defendants kept secret this research, distorting or burying the results in order to cast smoking in a more favorable light. With respect to nicotine, defendants concealed what they have known since at least the early 1960s: "We are, then, in the business of selling nicotine, an addictive drug effective in the release of stress mechanisms." As recently as 1994, defendants' top executives swore in front of Congress that cigarettes are not addictive.

As detailed in the First Amended Complaint, the defendants have engaged in these and other deceptive activities, notwithstanding their public pronouncements, starting as early as 1954, that the "people's health [is] a basic responsibility, paramount to every other consideration in our business." Defendants expressly pledged to "cooperate closely with those whose task it is to safeguard the public health," but in fact did just the opposite.

Defendants' deceit is extreme. Moreover, the harm that has resulted, including the plaintiff Counties' required payment of enormous sums to treat their indigent residents' smoking-related illnesses, was entirely foreseeable and direct. [/ Plaintiffs are the City and County of San Francisco, and the Counties of Alameda, Contra Costa, Marin, Sacramento, San Bernadino, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, and Shasta ("the Counties").] The tobacco defendants have wrongfully benefited from their misconduct, and are accountable both in law and in equity.

Not surprisingly, defendants contend that they are not liable for these harms and seek the extraordinary remedy of dismissal. However, the defendants do not challenge the sufficiency of the Counties' allegations. Nor do defendants parse the elements of the different state law claims made by the Counties, some of which are legal and others of which are equitable. Instead, defendants assert two general propositions which they say require the summary dismissal of all of the Counties' claims. First, defendants contend that the Counties' harm is "derivative" and "remote," and therefore not actionable. Second, defendants mischaracterize the case as a products liability action for personal injuries in order to argue that they are immune from liability for those types of injuries. Neither argument succeeds.

Defendants' first proposition rests on a fundamental misperception of the Counties' allegations. Defendants misapply concepts of causation sounding in negligence to claims of fraud and intentional breach of an assumed duty. In the realm of intentional torts, unlike in negligence, the reach of liability is extended to more "remote" injuries. Intentional tortfeasors are held directly liable to those whom they harm if, as alleged here, their wrongdoing was a substantial factor in causing the harm.

The Counties do allege one claim that sounds partly in negligence. Count IV asserts that defendants negligently breached duties they assumed toward the Counties and the public. Even here, however, defendants' argument concerning remoteness fails because defendants completely misstate the applicable California law.

Defendants' assertion that the Counties' harm is too remote also hinges on inapposite cases, where a plaintiff's harm is incidental to a contract. Here, in marked contrast, the economic losses sustained by the Counties were a necessary, foreseeable consequence of their long-standing statutory obligation to care for their indigent residents.

Defendants' second general proposition similarly misconceives the Counties' action. Here, defendants contend that the Counties' state law claims fall within the immunity provided by California Civil Code § 1714.45 for product liability actions brought by consumers. But this is not a product liability action brought by consumers for personal injuries. This is an action brought by governmental entities for economic losses resulting from fraud and breach of assumed duties. In any event, section 1714.45 speaks only to tort claims for damages; it does not address the Counties' equitable claims for restitution and unjust enrichment, and it specifically allows claims for breach of an express warranty, which the Counties have alleged. Moreover, contrary to defendants' arguments, California Government Code § 23004.1 does not limit the Counties' remedy to claims in subrogation. To the contrary, section 23004.1 expressly provides the Counties with a direct statutory right of recovery, a right that is in addition to the Counties' preexisting claims at common law. Neither statute serves as a bar to the Counties' legal or equitable claims.

Finally, defendants argue that the Counties' RICO claims are barred because the injuries alleged are too remote and not of the type deemed recoverable under RICO. However, the Counties' RICO claims are neither derivative of, nor shared with, the RICO claim of any other party. The Counties' allegations satisfy the Supreme Court's test for proximate cause in the RICO context, in that (1) the Counties were directly injured; (2) they stand at the same level of injury as do others injured by defendants' violative acts; (3) the Counties' claims do not present a risk of multiple recoveries or require apportionment of damages among the Counties and third parties; and (4) there is no third party who is in a superior position or has greater incentive to assert the Counties' RICO claims. Moreover, the Counties' economic losses qualify as a RICO injury. The Supreme Court has confirmed that the same RICO violations that cause personal injuries to some victims also may cause RICO-compensable injuries to the business or property of others.

Far from extending traditional principles of civil liability, as defendants' histrionics would have it, the Counties have alleged facts that give rise to liability both in law and equity. The defendants' motion should be denied.

STATEMENT OF FACTS

By the early 1950s, scientific studies had begun to suggest a link between cigarette smoking and cancer. First Amended Complaint ("Com."), ¶ 53. The widespread reporting of this emerging science caused what tobacco officials later termed, the "Big Scare." Id. According to contemporaneous industry documents, the tobacco companies viewed the emerging science as "extremely serious and worthy of drastic action . . . salesmen in the [tobacco] industry are frantically alarmed . . . the decline in tobacco stocks on the stock exchange market has caused grave concern." Id. In response to this perceived threat to profitability, on December 15, 1953, senior executives of the leading cigarette manufacturers met. Id., ¶ 54. In attendance were representatives of the public relations firm Hill and Knowlton. Id.

At this meeting and in subsequent consultations with their public relations firm, the tobacco companies formulated a strategy to subvert the emerging science with a far-ranging and carefully planned campaign to obscure the facts and confuse the public. The companies

agreed to go along with a public relations program on the health issue . . . they are also emphatic in saying that the entire activity is a long-term, continuing program, since they feel that the problem is one of promoting cigarettes and protecting them from these and other attacks that may be expected in the future.

Id. As Hill and Knowlton advised, "[i]t is important that the industry do nothing to appear in the light of being callous to considerations of health or of belittling medical research which goes against cigarettes." Id., ¶ 57 (emphasis added). Thus, the decision was made by five of the six cigarette manufacturers to form the Tobacco Industry Research Committee ("TIRC"). [/ Liggett Group, Inc., joined TIRC in 1964, the same year the Surgeon General issued his first report linking cigarette smoking to lung cancer. Com. , ¶ 58. Also in 1964, TIRC changed its name to the Council for Tobacco Research ("CTR"). Id. In 1958, a second trade group, the Tobacco Institute, was formed. Id. Both CTR and the Tobacco Institute are defendants in this action.] Id., ¶ 58.

On January 4, 1954, the tobacco companies announced the formation of TIRC, pledging that through TIRC, they would conduct and report objective research regarding smoking and health. Id., ¶ 62. This pledge was set forth in a full-page newspaper advertisement entitled, "A Frank Statement to Cigarette Smokers." Id., ¶63. The companies placed the "Frank Statement" in 448 newspapers, such that it circulated to a readership of 43,245,000 in 258 cities nation-wide. Id.

In the "Frank Statement," the tobacco companies expressly assumed duties to the public and to those charged with safeguarding the public health:

We accept an interest in people's health as a basic responsibility, paramount to every other consideration in our business.

T]here is no proof that cigarette smoking is one of the causes [of lung cancer].

We believe the products we make are not injurious to health.

We always have and always will cooperate closely with those whose task it is to safeguard the public health.

We are pledging aid and assistance to the research effort into all phases of tobacco use and health.

For this purpose we are establishing a joint industry group consisting initially of the undersigned. This group will be known as the TOBACCO INDUSTRY RESEARCH COMMITTEE.

In charge of the research activities of the Committee will be a scientist of unimpeachable integrity and national repute. In addition there will be an Advisory Board of scientists disinterested in the cigarette industry. A group of distinguished men from medicine, science, and education will be invited to serve on this Board. These scientists will advise the Committee on its research activities.

This statement is being issued because we believe the people are entitled to know where we stand on this matter and what we intend to do about it.

Id., ¶ 64.

In fact, from the start, TIRC was an industry front. Hill and Knowlton, not independent scientists, operated and effectively controlled TIRC, which was located just one floor below Hill and Knowlton’s offices. Id., ¶¶ 59-60. In 1954 alone, 35 staff members of Hill and Knowlton worked for TIRC; over 50% of TIRC’s budget was used to pay for these services. Id., ¶ 61. Moreover, even as the companies publicly stated that there "is no proof" that smoking causes cancer, they knew that eight years earlier, an industry researcher who later joined the Board of defendant Lorillard Tobacco Company had reported the following:

Certain scientists and medical authorities have claimed for many years that the use of tobacco contributes to cancer development in susceptible people. Just enough evidence has been presented to justify the possibility of such a presumption.

Id., ¶ 66 (emphasis added).

After issuing the "Frank Statement," the tobacco companies accumulated overwhelming evidence of the injurious effects of smoking, all of which was either concealed from the public or, if made public, attacked. Id., ¶¶67-73. Industry documents reflect the companies’ awareness:

[T]he evidence . . . is building up that heavy cigarette smoking contributes to lung cancer . . . .

There are biologically active materials present in cigarette smoke. These are: (a) cancer causing (b) cancer promoting (c) poisonous . . . .

Basically, we accept the inference of a causal relationship between the chemical properties of ingested tobacco smoke and the development of carcinoma . . . .

Id., ¶ 68.

The information contained in these and other internal documents contrasts sharply with the industry’s public statements. For example, in its report to the Surgeon General in 1963, defendant Liggett Group omitted the views of its researchers and consultants regarding the link between smoking and cancer. Id., ¶¶ 69-70. The tobacco companies also consistently reaffirmed in public statements the undertakings contained in the "Frank Statement," while denying knowledge of the ill health effects of smoking. Id., ¶¶74-82.

We recognize that we have a special responsibility to the public -- to help scientists determine the facts about tobacco and health, and about certain diseases that have been associated with tobacco use. We accepted this responsibility in 1954 by establishing the TIRC, which provides research grants to independent scientists. We pledge continued support of this program of research until the facts are known.

We shall continue all possible efforts to bring the facts to light.

After millions of dollars and over 20 years of research, the question about smoking and health is still a question.

In the interest of absolute objectivity, the tobacco industry has supported totally independent research efforts with completely non-restrictive funding.

[The industry] believes the American public is entitled to complete, authenticated information about cigarette smoking and health . . . . The tobacco industry recognizes and accepts a responsibility to promote the progress of independent scientific research in the field of tobacco and health.

Id., ¶¶75-78; see also id., ¶¶79-82.

These representations about sponsoring "independent" research and bringing the truth to light were false and deceptive. Again, internal industry documents reveal the cynical objectives of defendants' research: to enhance their public relations and maintain the fiction that a scientific controversy continued to exist about whether smoking causes cancer and other diseases. Id., ¶¶ 87-93.

[The CTR's (formerly TIRC’s) scientific projects] have not been selected against specific scientific goals, but rather for various purposes such as public relations, political relations, position for litigation, etc. Thus, it seems obvious that reviews of such programs for scientific relevance and merit in the smoking and health field are not likely to produce high ratings.

[The CTR is] an industry shield . . . . The ‘public relations’ value of CTR must be considered and continued . . . . It is extremely important that the industry continue to spend their dollars on research to show that we don't agree that the case against smoking is closed . . . . There is a ‘CTR basket’ which must be maintained for ‘PR’ purposes . . . .

Id., ¶¶88, 90 (emphasis added). Indeed, in 1993, a former employee of CTR confirmed that "[w]hen CTR researchers found out that cigarettes were bad and it was better not to smoke, we didn’t publicize that." Id., ¶ 91. He continued, "The CTR is just a lobbying thing. We were lobbying for cigarettes." Id. This remained CTR’s unstated purpose throughout its existence:

In the cigarette controversy, the public — especially those who are present and potential supporters (e.g., tobacco state congressmen and heavy smokers) — must perceive, understand, and believe in evidence to sustain their opinions that smoking may not be the causal factor.

Id., ¶89.

In addition to using the guise of "objective" research to misrepresent and suppress the facts relating to the adverse effects of smoking, the tobacco companies continually misrepresented and suppressed the real reason people smoke. By the early 1960's, the tobacco companies knew that

. . . nicotine is addictive. We are, then, in the business of selling nicotine, an addictive drug . . . .

The cigarette should be conceived not as a product but as a package. The product is nicotine. . . . Think of the cigarette pack as a storage container for a day's supply of nicotine. . . . Think of the cigarette as a dispenser for a dose unit of nicotine.

Id., ¶¶124, 137 (emphasis added).

To this day, the tobacco companies have concealed this information from the public and public health officials. Id., ¶¶ 122-149. The companies have long understood that to do otherwise would hurt sales: "If the industry’s introduction of acceptable low-nicotine products does make it easier for dedicated smokers to quit, then the wisdom of the introduction is open to debate." Id., ¶ 142 (quoting a 1978 Philip Morris report). [/ In a secret Brown & Williamson memorandum that only recently came to light, senior executives recommended in the late 1970's that the company discontinue efforts to develop an alternative cigarette product unless the product was as addictive as cigarettes: We are searching explicitly for a socially acceptable addictive product involving: a pattern of repeated consumption. . . . [T]he essential constituent is most likely to be nicotine or a ‘direct’ substitute for it. . . . [W]e . . . think that consideration should be given to the hypothesis that the high profits additionally associated with the tobacco industry are directly related to the fact that the customer is dependent upon the product . Looked at another way, it does not follow that future alternative ‘product X’ would sustain a profit level above most other products/business activities unless, like tobacco, it was associated with dependence . If, in fact, it were not able to sustain a high profit level then there is no ‘a priori’ reason why tobacco companies should take the risk of investing in a new speculative area but rather should consider investment into established business. (August 28, 1979 memorandum, attached as Exhibit G to the Declaration of Robert J. Nelson in Opposition to Motion to Dismiss ) (" Nelson Decl. ") (emphasis added).] Thus, the tobacco companies chose to use their superior knowledge not to "cooperate closely with those whose task it is to safeguard the public health," as they promised in the "Frank Statement," but rather, secretly to control and manipulate the nicotine content of cigarettes, thereby addicting smokers more effectively. Id., ¶¶ 150-181. To this ignominious end, the tobacco companies have (1) selectively bred, cultivated and selected tobacco plants for nicotine content, (2) developed hybrid tobacco plants with super-high nicotine levels, and (3) added extraneous chemicals to increase the amount of nicotine absorbed. Id.

Finally, the companies’ scheme to deceive the public and those responsible for safeguarding the "people’s health" extended to the most vulnerable in society, children and adolescents. The tobacco companies know that the overwhelming percentage of smokers begin smoking and become addicted before the age of 18. Id., ¶¶ 182-185. For that reason, although publicly denying it, the industry consciously has targeted this group through promotional and sales techniques designed to influence them to smoke. Id., ¶¶ 186-192. As RJR’s "Winston Man" testified before Congress:

I was clearly told that young people were the market that we were going after . . . it was made clear to us that this image was important because kids like to role play, and we were to provide the attractive role models for them to follow . . . I was told I was a live version of the GI Joe . . . .

Id., ¶ 191.

LEGAL STANDARD

When acting on a motion to dismiss, a court must assume the plaintiff's allegations are true and construe the complaint in the light most favorable to the plaintiff. See, e.g., Parks School of Business v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995); United States v. Redwood City, 640 F.2d 963 (9th Cir. 1981). "The accepted rule is that a complaint is not to be dismissed 'unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Redwood City, 640 F.2d at 966 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L. Ed. 2d 80 (1957)).

Even if the face of the pleadings indicate that recovery is "very remote, the claimant is still entitled to offer evidence to support its claims." Redwood City, 640 F.2d at 966 (citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)). Under this rule, "it is only the extraordinary case in which dismissal is proper." Redwood City, 640 F.2d at 966 (citing Corsican Productions v. Pitchess, 338 F.2d 441, 442 (9th Cir. 1964); 5 C. Wright & A. Miller, Federal Practice and Procedure, § 1357 at 598 (1969)). As discussed below, the Counties have sufficiently alleged both legal and equitable claims.

ARGUMENT

I. THE COUNTIES STATE CLAIMS FOR FRAUD AND CONSPIRACY

The Counties allege that beginning in 1953 and continuing to this day, the tobacco defendants have engaged in fraud and conspiracy to commit fraud on an unprecedented scale. Defendants argue that the Counties' claims should be dismissed because the Counties' injuries are somehow "too remote" or "derivative." Defendants' Memorandum of Points and Authorities In Support of Motion to Dismiss ("Deft. Mem."), at 3, 8-30. Defendants' argument fails for two fundamental reasons. First, it relies on the doctrine of proximate cause developed in the context of negligence. This claim is based on allegations of intentional misconduct, where the law of causation is qualitatively different. Second, defendants' argument depends on cases where the harm to the plaintiff is incidental to a contract. Here, the harm to the Counties was a necessary, foreseeable and inevitable consequence of a statutory obligation to provide care to their indigent residents.

A. The Counties Allege Intentional Misconduct, Not Negligence

The Counties' claims for fraud and conspiracy to commit fraud are based on the tobacco defendants' deliberate and concerted campaign of deception since 1953. Defendants have repeatedly made false statements calculated to lull the public into believing that smoking is not dangerous or addictive and to reassure public health officials that the industry would conduct and make public objective research on smoking and health. See, e.g., Com., ¶¶63, 74-81. When defendants' internal research showed that smoking was dangerous and addictive, defendants shut down the research and buried the results. Id., ¶¶94-105.

Further, while publicly denying that cigarettes are addictive, defendants have known privately for years that "[w]e are, then, in the business of selling nicotine, an addictive drug . . . ." Id., ¶124(c); see also id., ¶¶122-49. Defendants secretly manipulated the level and effect of nicotine to increase the addictiveness of their product, even boosting the nicotine content of tobacco through genetic engineering. Id., ¶¶150-68. Knowing that most smokers start as teenagers only to become addicted for life, defendants deliberately targeted youth in their marketing strategy, again, publicly denying doing so. Id., ¶¶182-92.

Defendants engaged in several different kinds of fraud. See generally, Cal. Civil Code §1710. Making a promise or giving an assurance without any intention of performing is fraud. See, e.g., Union Flower Market v. Southern California Flower Market, 10 Cal. 2d 671, 76 P.2d 503 (1938). Intentionally making false statements with the intent to induce others to act or to refrain from acting is fraud. See, e.g., Lacher v. Superior Court, 230 Cal. App. 3d 1038, 281 Cal. Rptr. 640 (1991). Speaking half truths while deliberately concealing relevant facts is fraud. See e.g., Bank of America v. Greenbach, 98 Cal. App. 2d 220, 234, 219 P.2d 818 (1950).

1. The Doctrine of Proximate Cause Does Not Apply to Intentional Torts

In California, as elsewhere, proximate cause has little application to intentional torts. Instead, intentional tortfeasors are directly liable to those whom they harm if their wrongdoing was a substantial factor in causing the harm. As the court stated in Tate v. Canonica, 180 Cal. App. 2d 898, 5 Cal. Rptr. 28 (1960):

The law has for a long time recognized a distinction between intentional and negligent torts, and has generally recognized fewer defenses, and been more inclined to find that defendants' conduct was the legal cause of the harm complained of, where the tort is intentional. Indeed, it appears that many of the limitations upon liability that are subsumed under the doctrine of 'proximate cause,' as usually expounded in negligence cases, do not apply to intentional torts.

Id. at 904 (citations omitted, emphasis added).

In Tate, the court approved a wrongful death action where the plaintiff alleged that a third party's intentional infliction of emotional distress upon her husband caused his suicide. The defendants contended that the suicide was an independent, intervening — i.e., superseding — cause. The court emphatically rejected this argument: "The notion of independent intervening cause has no place in the law of intentional torts, so long as there is a factual chain of causation." Id. at 907 (citation omitted, emphasis added); see also 5 Witkin, Summary of California Law, Torts (9th ed. 1988), § 18 at p. 79.

In Helm v. K. O. G. Alarm Company, 4 Cal. App. 4th 194, 5 Cal. Rptr. 2d 615 (1992), the plaintiff sued a burglar alarm company for fraud and intentional misrepresentation. The plaintiff suffered injuries when the alarm did not function as represented, and the residence was burgled and arsoned. Relying on a negligence case, Guthrie v. American Protection Industries, 160 Cal. App. 3d 951, 206 Cal. Rptr. 834 (1984), the trial court granted a motion for nonsuit, holding that the plaintiff could not, as a matter of law, establish causation. Although the court of appeals affirmed the judgment, the court expressly rejected the trial court's finding on causation as a matter of law:

Whatever the particular definition of 'cause' may be in cases such as Guthrie (see Mitchell v. Gonzales, 54 Cal. 3d 1041 (1991)), the definition of 'cause' in cases involving intentional torts appears much broader: 'Indeed, it appears that many of the limitations upon liability that are subsumed under the doctrine of 'proximate cause', as usually expounded in negligence cases, do not apply to intentional torts.' (Tate v. Canonica, 180 Cal.App.2d 898 (1960)).

Helm, 4 Cal. App. 4th at 201-02 (emphasis added). [/ As the court explained in Maupin v. Widling , 192 Cal. App. 3d 568, 237 Cal. Rptr. 521 (1987), proximate cause differs from cause in fact: "Proximate cause asks the larger, more abstract question: should the defendant be held responsible for negligently causing the plaintiff's injury? Whether a defendant's conduct is an actual cause of a plaintiff's harm is a question of fact, but the existence and extent of a defendant's liability is a question of law and social policy." Id. at 573 (citations omitted, emphasis added).]

The Ninth Circuit also has recognized this fundamental distinction in applying California law:

The fundamental inquiry is of course different in the case of intentional torts. Foreseeability is not at issue because it is not a requisite to recovery. Since all consequences, no matter how remote, harming a party with a cause of action for an intentional tort give rise to defendant's liability, the inquiry focuses on the inherent and relational quality of the wrongful act rather than on the foreseeability of its consequences.

DeVoto v. Pacific Fidelity Life Insurance Co., 618 F.2d 1340, 1350 (9th Cir. 1980) (emphasis added).

This relaxed principle of causation in intentional torts specifically applies to cases based on fraud. Over one hundred years ago, the California Supreme Court recognized:

There would be no bounds to actions and litigious intricacies if the ill effects of the negligence of men may be followed down the chain of result to the final effect. Cases where fraud and collusion are alleged and proved constitute exceptions to that rule . . . .

Buckley v. Gray, 110 Cal. 339, 344, 42 P. 900 (1895) (citations omitted, emphasis added).

More recently, in Bily v. Arthur Young & Co., 3 Cal. 4th 370, 11 Cal. Rptr. 2d. 51 (1992), the California Supreme Court considered whether, and to whom, an auditor should be liable. The Court determined that only the expressly intended beneficiaries of the report have a claim of negligent misrepresentation. Id. at 413. By contrast, when an auditor makes a fraudulent misrepresentation, that auditor is liable to all persons whom he or she "reasonably should have foreseen" would rely upon the representation. Id. at 415. The Court cited the seminal case of Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931). There, Justice Cardozo held that the trial court properly dismissed a claim for negligent misrepresentation but erred in dismissing a claim for intentional misrepresentation based on the same set of facts. Bily, supra, 3 Cal. 4th at 387.

Courts in other states have drawn the same distinction between intentional and negligent torts. For example, in Shades Ridge Holding Company v. Cobbs, Allen & Hall Mortgage Company, Inc., 390 So.2d 601 (Ala. 1980), the Alabama Supreme Court observed that "in cases of intentional or aggravated acts there is an extended liability and the rules of proximate causation are more liberally applied than would be justified in negligence cases." Id. at 607. The Court added that "'[o]ne area in which it may be especially likely that the 'foreseeability' limitation will be cast aside is that of intentional torts, as to which it has been said often enough that there is more extended liability.'" Id. at 609 (quoting Prosser, Law of Torts, § 43 at p. 263 (4th ed. 1971)). The Court explained:

This trend is dictated by the policy that liability even though potentially tremendous should be imposed on the wrongdoer rather than the victim be uncompensated. Hence, even very remote causation may be found where the defendant acted intentionally.

Id. at 609 (emphasis added).

2. The Counties' Injuries Are Closely Connected to Defendants' Fraud

In cases involving intentional torts, the causation inquiry is primarily factual and turns on several factors: (1) the defendant's intent to cause harm; (2) the degree of moral culpability; (3) the seriousness of the harm intended; and (4) the relationship between the harm intended and the harm actually caused. See e.g., Tate, supra, 180 Cal. App. 2d at 909 (liability for unintended harm imposed where defendant intended to cause injury and the injury intended was a substantial factor in causing the ultimate unintended harm); Lacher, supra, 230 Cal.App.3d at 1048 (liability imposed in part because of moral blameworthiness and need to deter deceit); accord, Seidel v. Greenberg, 108 N.J. Super. 248, 260 A.2d 863 (1969) (liability for unintended harm imposed because of intention to commit wrongful act, high degree of moral blameworthiness and seriousness of harm that was intended). As stated in the Restatement (Second) of Torts § 435B, when a person engages in intentional conduct that invades the protected interests of another, "his intention to commit an invasion, the degree of his moral wrong in acting, and the seriousness of the harm which he intended are important factors in determining whether he is liable for resulting unintended harm."

In Seidel, supra, 108 N.J. Super. 248, the court relied on Tate and other authorities to distill the considerations relevant to causation in intentional torts:

It is well settled that where the acts of a defendant constitute an intentional tort or reckless misconduct, as distinguished from mere negligence, the aggravated nature of his acts is a matter to be taken into account in determining whether there is a sufficient casual relation to plaintiff's harm to make the actor liable therefore. His intention to commit a wrongful act, the degree of his moral wrong in acting, and the seriousness of the harm which he intended are important factors in determining whether he is liable for resulting unintended harm.

* * *

In [cases of intentional or aggravated acts,] the court can only seek to draw upon such precedents as are available, applying the rules of causation with greater liberality than would be justified in a conventional negligence case. Foreseeability, as such, is not the test. If, weighing the moral fault of a defendant and applying the rules of causation liberally, the consequences have some reasonably close connection with defendant's conduct and the harm threatened, and in themselves, using hindsight, are not deemed preposterous or far-fetched, defendant should be held liable. Concepts of policy, fairness and justice are entitled to great weight.

Id. at 262, 267 (emphasis added).

Among the factors the courts use to assess causation in intentional torts, moral blameworthiness is often paramount and generally tips the balance against any objection of remoteness or indirectness of injury:

The moral element is here the factor that has turned close cases one way or the other. For an intended injury the law is astute to discover even very remote causation . . . . The decisions do not turn on remoteness of causation alone, but upon such remoteness plus freedom from moral fault.

Derosier v. New England Telephone & Telegraph Co., 81 N.H. 451, 463-64, 130 A. 145 (1925). As one court observed in rejecting summary judgment in a case involving an auto part that the defendant allegedly knew to be defective:

The court should not look for ways to protect people from the consequences of intentional, malicious, wanton and oppressive actions which so significantly affect life and death. Such questions are the stuff for which trial by jury is designed.

Martin v. Smith, 534 F. Supp. 804, 807 (W.D.N.C. 1982).

Similarly, in Bily v. Arthur Young, supra, 3 Cal. 4th at 415, the California Supreme Court stressed the factor of moral culpability:

[T]he liability of auditors to third parties presents different policy considerations when intentional fraud is involved. The secondary position of the auditor in the presentation of financial statements, the moral force of the argument against unlimited liability for mere errors or oversights and the uncertain connection between . . . losses and the auditor's report pale as policy factors when intentional misconduct is in issue. By joining with its clients in an intentional deceit, the auditor thrusts itself into a primary and nefarious role in the transaction.

Bily, supra, 3 Cal. 4th at 415 (emphasis added, citation omitted); see also Potter v. Firestone, 6 Cal. 4th 965, 998, 25 Cal. Rptr. 2d 550 (1993) ("Any burden or consequence to society from imposing liability is offset by the deterrent impact of holding morally blameworthy defendants fully responsible for the damages they cause. . . ."); Lacher, supra, 230 Cal. App. 3d at 1048 (court noted the "definitive flavor of immorality" and stated that "[i]mposing liability for deceit in this context should prevent future harm"). See also 6 Witkin, Summary of California Law, Torts (9th ed. 1988), §1323, p. 781.

Not surprisingly, the tobacco defendants avoid any discussion of these factors, including moral culpability. But these conspicuous omissions fatally flaw their analysis of causation. All the factors used by the courts to determine liability to third parties demonstrate that the Counties' injuries from defendants' fraud are closely connected to defendants' wrongful conduct.

First, defendants fully intended to cause harm. They lied to the public and public health officials to create false doubt that smoking was dangerous and addictive. Com., ¶¶53-73; 122-167. They manipulated nicotine to make their product more addictive, suppressed the development of safer cigarettes and pretended that "light cigarettes" were safer and less addictive. Id., ¶¶106-167. They knew, based on their own secret research, that their lies would cause disease and death. Id., ¶¶87-93; 122-135. During their forty-year campaign of deception, they have witnessed the awful consequences of their lies without wavering from their fraudulent scheme. Id., ¶¶86; 177.

Under California law, "'every person is presumed to intend the natural and probable consequences of his acts.'" Gomez v. Acquistapace, 50 Cal. App. 4th 740, 1996 Cal. App. LEXIS 1018 (Oct. 31, 1996) (quoting Lopez v. Surchia, 112 Cal. App. 2d 314, 318, 246 P. 2d 111 (1952)). A person who acts willfully intends, as a matter of law, not only those consequences that he or she wishes to bring about, but also those consequences that are substantially certain to result. Gomez, supra, 1996 Cal. App. LEXIS at *10. Defendants intended the obvious consequences of their fraud: that millions of people, many of them indigent, would become addicted to their product and suffer from smoking-caused illnesses, requiring the Counties to pay for their medical care.

Second, the degree of moral blameworthiness is extreme. Defendants have blatantly lied to the public and public health officials for over four decades. They have conspired secretly together, corrupted scientific research, manipulated nicotine delivery to ensure addiction, and even threatened a former employee who sought to reveal the truth. Com., ¶ 200. And they have focused their deceptive marketing tactics on vulnerable adolescents in order to addict them to cigarettes, all in pursuit of corporate profit at the expense of the public health. Id., ¶¶182-192.

Finally, not only was the harm intended severe, but the relationship between defendants' wrongdoing and the harm ultimately caused was foreseeable, foreseen and inevitable. Id., ¶¶221-224. Defendants' fraud has created enormous public health problems in California. Id., ¶ 224. The harm to smokers inevitably resulted in huge costs to the Counties, which are statutorily obligated to care for the indigent victims. Id., ¶ 201. The fact that indigent smokers would become ill, requiring vast expenditures of public funds, was "'likely enough in the setting of modern life that a reasonably thoughtful [person] would take account of it in guiding practical conduct.'" Cicone v. URS Corporation, 183 Cal. App. 3d 194, 208, 227 Cal. Rptr. 887 (1986) (citation omitted). Put another way, the connection between the harm to indigent County residents and the harm to the Counties is, at a minimum, "reasonably close" and far from "preposterous or far-fetched." Seidel, supra, 108 N.J. Super. at 267. The Counties have stated a claim for fraud.

B. The Counties' Injuries Flow From A Statutory Duty, Not a Contract

Defendants also ignore a second important distinction between this case

and the cases on which they rely. Here, defendants' tortious conduct injures the Counties because the Counties have a statutory obligation to provide care to their indigent ill. In cases where the harm results from a legal duty to care for the tort victim, courts hold that the claims are sufficiently direct.

California Welfare and Institutions Code §§ 17000 et seq. imposes a legal duty on all California counties to provide aid and relief, including health care, to indigent residents. That statutory mandate and its predecessor have been in continuous effect since at least 1933. See Ten Broeck, "California's Welfare Law — Origins and Development," 45 Cal. L. Rev. 241 (1957). Defendants specifically directed their false promises to those responsible for public health across the nation, including the Counties. See e.g., Com. ¶64. They had actual or imputed knowledge of the Counties' legal obligation and therefore knew the harm their fraud would cause the Counties.

Yet defendants rely on cases where, markedly unlike here, the plaintiffs are private insurers or others who have voluntarily contracted for private gain to bear the consequences of injury to third parties. Plaintiffs in those cases allege only that the performance of their contract was made more burdensome by a tort committed against a third party, without any intent to affect the plaintiff. (Indeed, in almost all those cases, the defendant had no intent to harm anyone, but was merely negligent.) In such circumstances, courts generally hold the injury too remote. In Justice Holmes' formulation, "A tort to the person or property of one man does not make the tort-feasor liable to another merely because the injured person was under a contract with that other unknown to the doer of the wrong." Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 309, 48 S. Ct. 134, 72 L. Ed. 290 (1927) (emphasis added).

By contrast, courts recognize that where the plaintiff has a legal duty to care for an injured third party, the injury to the plaintiff is sufficiently direct. For example, in Follansbee v. Benzenberg, 122 Cal. App. 2d 466, 265 P.2d 183 (1954), the court held that a wife could sue the tortfeasor who negligently injured her husband. The wife sought to recover medical expenses incurred by her husband that she was obligated by statute to pay. In light of this legal duty, the court concluded that "[p]laintiff's loss arose directly from the tort of the defendants." Id. at 477 (emphasis added).

Defendants rely heavily on Fifield Manor v. Finston, 54 Cal. 2d 632, 7 Cal. Rptr. 377 (1960). That case held that the plaintiff nursing home, which incurred increased medical costs pursuant to its life care contract with a person injured by a negligent driver, could not sue the driver. However, the California Supreme Court specifically distinguished this indirect injury, which was merely incidental to the contract, from the direct injury in Follansbee:

The analogy which plaintiff attempts to draw between this case and Follansbee v. Benzenberg[] must fail because the wife's recovery in Follansbee depended upon familial status and the duty of support of her husband imposed upon her by statutory law (Civ. Code §§ 171, 176) while plaintiff's claim for recovery is based solely upon a contractual liability between itself and the decedent.

Fifield Manor, supra, 54 Cal. 2d at 637 (emphasis added).

The reason for this distinction is apparent. Contractual obligations arise by voluntary agreement. Each party is free to weigh the foreseeable risks and benefits of the contract before accepting its terms. If certain terms seem too risky, a party may choose not to accept or to charge a higher price to bear the risk. Insurers may adjust their premiums or refuse to insure; employers may bargain over employee benefits or adjust their hiring. Accordingly, the courts do not allow private parties like insurers to re-allocate to negligent tortfeasors the economic consequences of contractual obligations. None of these considerations applies here.

Significantly, as with Fifield Manor, all of the California authorities on which defendants rely are distinguishable based on one or both of these factors: (1) contractual versus legal duties, and (2) negligent versus intentional torts. See e.g., I. J. Weinrot and Son, Inc. v. Jackson, 40 Cal. 3d 327, 220 Cal. Rptr. 103 (1985) (action by employer for medical expenses incurred treating injuries to employee caused by defendant's negligence); Fischl v. Paller & Goldstein, 231 Cal. App. 3d 1299, 282 Cal. Rptr. 802 (1991) (action by employer to recover damages for negligent harm to employee); Herrick v. Superior Court, 188 Cal. App. 3d 787, 233 Cal. Rptr. 675 (1987) (suit by employer for injuries to employee based on defendant motorist's alleged recklessness); Von Batsch v. American District Telegraph Co., 175 Cal. App. 3d 1111, 222 Cal. Rptr. 239 (1985) (action by widow and employer based on employer's contract with burglar alarm company for negligence). Notably, in both Weinrot and Herrick, the courts explicitly recognized that the result would have been otherwise had the defendant acted with intent to do injury. Weinrot, supra, 40 Cal. 3d at 340-341; Herrick, supra, 188 Cal. App. 3d at 791-92; accord, Fifield Manor, supra, 54 Cal. 2d at 635-36 ("[C]ourts have quite consistently refused to recognize a cause of action based on negligent, as opposed to intentional, conduct which interferes with the performance of a contract between third parties or renders its performance more expensive or burdensome.").

Defendants also rely on inapposite out-of-state authorities, especially Anthony v. Slaid, 52 Mass. (11 Met.) 290 (1862). Anthony is distinguishable because the plaintiff there was harmed "not by means of any natural or legal relation between the plaintiff and the party injured" but instead "by means of the special contract by which [the plaintiff ] had undertaken to support the town's paupers." Anthony v. Slaid, 52 Mass. at 291 (emphasis added). Because the injury to the plaintiff was only by reason of the contract (of which the tortfeasor had no reason to be aware), the court found the damage too remote.

Defendants quote dicta in Anthony expressing concern about what would happen if, when "injury is done to the person or property of the town pauper, . . . the town might maintain an action . . . for damages." Dicta in an out-of-state case decided 150 years ago is not controlling, particularly when it conflicts with California authorities recognizing that the outcome should be different when the plaintiff's obligation is statutory. Even in Massachusetts, subsequent cases have strictly limited Anthony to circumstances where the harm to the plaintiff arises from a private contract unknown to the tortfeasor and where the tortfeasor had no intent to harm or design to accomplish its end regardless of the harm to others. See Dennis v. Clark, 2 Cush. 347, 354-55 (1848); Keene Lumber Co. v. Leventhal, 165 F.2d 815, 822-823 n.5 (1st Cir. 1948); see also Chelsea Moving and Trucking Co. v. Ross Tow Boat Co., 280 Mass. 282, 286, 182 NE 477 (1932) (liability would result had the plaintiff alleged that defendant knew of the contract, had malice toward the employer "or toward anybody" or had a "deliberate design . . . to accomplish a definite end regardless of consequences to others." (emphasis added). [/ Nor do the other ancient foreign cases to which defendants cite support a different conclusion. The eighteenth and nineteenth century cases predate the development of the torts of intentional interference with contractual relations and have been superseded. See London Assurance Co. v. Salisbury , 3 Doug. 245 (KB 1783); Tayler v. Neri , 1 Esp. 386, 170 Eng. Rp. 393 (1795); Rockingham Mutual Fire Insurance Co. v. Bosher , 39 Me. 253 (1855); Insurance Co. v. Brame , 95 U.S. 754, 24 L. Ed. 580 (1878). All but one of defendants' other cases involve claims of negligence and harm incidental to a contract. Rockaway Blvd. Wrecking and Lumber Co. v. Raylite Electric Corp. , 26 A.D. 2d 9, 269 NY 2d 926 (1966); Economy Auto Insurance Co. v. Brown , 334 Ill. App. 579, 79 N.E. 2d 854 (1948); Stevenson v. East Ohio Gas Co. , 73 N.E. 200 (Ohio App. 1946); Northern States Contracting Co. v. Oakes , 191 Minn. 88, 253 N.W. 371 (Minn. 1934); Thompson v. Seaboard Airline Ry , 165 N.C. 377, 81 S.E. 315 (N.C. 1914); La Societé Anonyme de Remorquage a Helice v. Bennetts , 1 K.B. 243 (K.B. 1910); Brink v. Wabash R. Co. , 160 Mo. 87, 60 S.W. 1058 (1901); Cattle v. Stockton Water Works Co. , 10 L.R.-Q.B. 453 (Q.B. 1875); Peoria Marine & Fire Insurance Co. v. Frost , 37 Ill. 333 (1865); and Connecticut Mutual Life Insurance Co. v. New York and New Haven Rail Road Co. , 25 Conn. 265 (1856). Philadelphia v. Philadelphia Rapid Transit Co. , 337 Pa. 1, 10 A.2d 434 (1940), involved a negligent tort that harmed the City's employees for which the city sought recovery. Although the court refers to the City's legal duty, the harm actually flowed from the contractual employment relationship. Moreover, several of defendants' cases expressly state that the outcome with respect to the issue of causation would have been different if the case involved intentional misconduct rather than negligence. Economy Auto Insurance Co. v. Brown , 334 Ill. App. 579, 79 N.E. 2d 854, 856 (Ill. App. 1948); Thompson v. Seaboard Airline Railroad , 165 N.C. 377, 81 S.E. 315, 316 (1914); Brink v. Wabash Rail Co. , 160 Mo. 87, 60 S.W. 1058, 1060 (1901); Cattle v. The Stockton Waterworks Co. , 10 L.R.-Q.B. 453, 458 (Q.B. 1875); and Connecticut Mutual Life Insurance Co. v. New York and New Haven Railroad Co. , 25 Conn. 265, 276 (1856).]

Here, defendants perpetrated their fraud knowing of the Counties' long-standing legal obligation to care for their indigent ill. The Counties have stated a claim for fraud.

C. Recent Decisions In Similar Cases Against The Tobacco Companies Support The Counties' Claims

At least 18 states and the City of New York have filed actions against the tobacco defendants premised upon factual and legal claims similar to those asserted in the present action. (A list of the cases and claims alleged in each case is attached to the Nelson Declaration as Exhibit A.) In only three of those cases have courts ruled on the tobacco defendants' motions to dismiss the legal and equitable claims asserted by the public entity plaintiffs. Mike Moore, Attorney General ex rel., State of Mississippi v. American Tobacco Co., No. 94-1429 (Chancery Court, Jackson County, Mississippi); State of Minnesota, et al. v. Philip Morris, Inc., No. C1-94-8565 (Second Judicial District, Ramsey County, Minnesota); State of Florida, et al. v. American Tobacco Co., No. CL-95-1466AH (Fifteenth Judicial Circuit, Palm Beach County, Florida).

Defendants selectively highlight portions of two of these other states' decisions to support their argument that the Counties do not have a direct right of action. Deft. Mem. at 23 (discussing Florida and Minnesota actions). But neither decision cited by defendants dismissed all the claims of the public entity plaintiff — the very action defendants ask this Court to take. Defendants simply ignore altogether the Mississippi court's decision. In fact, every cause of action advanced by the States of Minnesota and Mississippi survived a motion to dismiss or motion for judgment on the pleadings. Moreover, in Florida, the State's negligence and product defect claims, as well as their claims for injunctive relief, survived defendants' motion to dismiss.

In the Mississippi action, the State alleged equitable claims for restitution, unjust enrichment and indemnity to recover the medical costs expended for its indigent citizens who suffer smoking-related injuries. Defendants moved for judgment on the pleadings, arguing that the State was limited to subrogation. See Nelson Decl., Exhibit B (Mississippi defendants' memorandum in support of their motion). The trial court overruled their motion, allowing the State to proceed to trial on all of its equitable claims. See Nelson Decl., Exhibit C (Chancery Court's February 21, 1995 Judgment).

The Minnesota action was brought by both the State of Minnesota and Blue Cross and Blue Shield of Minnesota ("Blue Cross"). The tobacco defendants moved to dismiss Blue Cross for lack of standing. They also moved to dismiss the claims for breach of a special duty and for antitrust violations asserted by both the State and Blue Cross. The trial court denied all of these motions. See Nelson Decl., Exhibit D (a copy of the Minnesota trial court's May 19, 1995 Order). The court held that the State adequately alleged a claim for breach of a specially undertaken duty. Id. at 9-10. The court found that the intentional nature of the alleged conduct was sufficient to demonstrate the breach of a legal duty. Id. Defendants appealed the ruling with respect to plaintiff Blue Cross. Significantly, they did not even try to overturn the ruling allowing the State's claims to proceed.

On appeal, the Supreme Court of Minnesota held that Blue Cross lacked standing to pursue a claim for breach of a special duty. State of Minnesota v. Philip Morris, 551 N.W.2d 490, 1996 Minn. LEXIS 497 (1996). The court relied on Northern States Contracting Co. v. Oakes, 191 Minn. 88, 253 N.W. 371 (Minn. 1934), in which a plaintiff employer was denied recovery of increased insurance premiums against a third party tortfeasor who negligently caused the death of plaintiff's employee. State of Minnesota, supra, 1996 Minn. LEXIS at *13-*15.

The Court's ruling on Blue Cross is readily distinguishable. First, the decision involved a private insurer, not a public entity statutorily obligated to pay for the health care costs of its indigent residents. Second, the Minnesota Supreme Court treated Blue Cross' action as sounding in negligence; here, the Counties allege intentional torts. Just as Fifield Manor is inapplicable to the Counties' allegations, so, too, is Northern States Contracting. Third, Blue Cross' claim for breach of special duty was undermined by the fact that the tobacco companies did not make any affirmative promises to Blue Cross but only to "public health authorities"; the Court therefore held that the insurance company did not have standing to assert the special duty claim. State of Minnesota, supra, 1996 Minn. LEXIS at *14-*15. Fourth, the Court based its ruling on Minnesota's law of negligence. As set forth in Part II infra, the Counties have stated a claim for both intentional and negligent breach of a special undertaking under California law.

Nor does the Florida court's opinion support defendants. In Agency for Health Care Administration v. Associated Industries of Florida, 678 So. 2d 1239, 1996 Fla. LEXIS 1057 (1996), the Florida Supreme Court considered the constitutionality of 1994 amendments to the State's Medicaid law. These amendments (in combination with the 1990 amendments) clarified the State's ability to bring a direct cause of action against third party tortfeasors and made other changes designed to streamline the State's recovery of its medical costs. Id.

Although the issue in Associated Industries was the constitutionality of these Medicaid amendments, the tobacco defendants rely on the case for the proposition that the State had no preexisting common law right of recovery. Deft. Mem., at 24. However, nowhere in Associated Industries did the Court consider the State's common law rights of recovery. Therefore, on remand, the trial court erred in concluding that the Supreme Court made any judgment regarding common law claims. In any case, the trial court allowed the State's causes of action for negligence and product defect, as well as its claims for injunctive relief, to proceed.

In all three actions then, the governmental plaintiffs either completely or substantially prevailed on their legal and equitable claims. This Court should allow the Counties' claims as well.

D. Allowing The Counties to Proceed Will Not Lead to Unlimited Liability

The tobacco defendants attempt to alarm the Court by suggesting that if it were to allow the Counties to proceed in this case, there would be no limit to liability in other cases. Offering a parade of horribles, defendants ask, "If the Counties can recover, then why can't insurers recover? Or employers? Or business partners? Or creditors, for that matter? And if the Counties can recover from the tobacco companies, then why would they not be able to recover from anyone else who is alleged to have harmed the Counties' indigents and municipal employees? . . ." Deft. Mem. at 21.

The answer is simple. It lies in the specific facts and circumstances that give rise to the Counties' claims. Liability exists where, as alleged here, (1) defendants have engaged in a scheme to defraud the public and those charged with safeguarding the public health about the adverse consequences of using their product (2) after defendants expressly assumed a duty to protect those same groups from such harm, and where (3) defendants' intentional conduct is morally repugnant in that it involves addicting young people to a product that causes disease and death, and (4) the serious harm their conduct causes to the Counties is foreseeable in light of the Counties' statutory obligations to the public. Few other such situations are likely to arise, but for those that do, the law should provide a remedy.

II. THE COUNTIES STATE CLAIMS FOR INTENTIONAL AND NEGLIGENT VIOLATION OF SPECIALLY ASSUMED DUTIES

Count IV of the Complaint alleges that defendants intentionally and negligently breached duties defendants specially assumed to the Counties and to the public. Defendants barely even address these claims. Regarding the intentional breach, defendants' arguments fail for the same reason that their arguments fail with respect to the Counties' fraud and conspiracy claims: The law on which they rely applies only to negligent torts. Regarding the negligent breach, defendants simply ignore the rule that California courts apply to such actions.

A. Defendants Intentionally Breached The Duties They Assumed

To state a claim for the breach of a specially assumed duty, a plaintiff must plead (1) that the defendant undertook to act for the benefit or protection of the plaintiff, (2) that the defendant failed to do so, and (3) that the defendant's breach of the assumed duty either (a) increased the risk of harm to the plaintiff or (b) the plaintiff suffered injury because of reliance upon the undertaking. See Lacher v. Superior Court, supra, 230 Cal. App. 3d at 1042 (developer that voluntarily undertook duty to explain project to neighbors held liable to them for misrepresentations that lulled neighbors into not opposing project); Mann v. State of California, 70 Cal. App. 3d 773, 780, 139 Cal. Rptr. 82 (l977) (reversing directed verdict for highway patrol officer who undertook special duty to protect stranded passenger). As the court in Mann stated:

[O]nce a [defendant] has chosen to investigate the plight of specific persons and informed himself of the foreseeable danger to them . . . , a special relationship requiring him to protect them by readily available means arises and liability may attach if the [defendant's] limited duty to protect these people under these special circumstances is not performed.

Id.

Alternatively, a party may state a claim by pleading (1) that the defendant undertook to act for the benefit or protection of a third party, (2) that the defendant failed to do so, (3) that the defendant should have recognized that the undertaking was necessary to protect the plaintiff's interests, and (4) that either (a) the defendant's breach increased the risk of harm to the plaintiff, (b) the defendant undertook to perform a duty owed by the plaintiff to the third party, or (c) that the harm was suffered because of reliance upon the undertaking by the plaintiff or the third party. FNS Mortgage Service Corp. v. Pacific General Group, Inc., 24 Cal. App. 4th 1564, 1567, 29 Cal. Rptr. 2d 916 (1994) (association that undertook duty to inspect and certify safety of pipe for industry held liable for breach to third party consumers of pipe); Hanberry v. Hearst Corp., 276 Cal. App. 2d 680, 81 Cal. Rptr. 519 (1969) (publisher of Good Housekeeping magazine liable to third party consumer who relied on endorsement of manufactured product); see also United Scottish Ins. v. United States, 692 F.2d 1209 (9th Cir. 1982), rev'd on other grounds, 467 U.S. 797, 104 S. Ct. 2755, 81 L. Ed. 2d 660 (1984) (by undertaking duty to airline to inspect aircraft for safety, governmental agency assumed liability to passengers); Restatement (Second) of Torts, § 324A. [/ The Restatement speaks in terms of physical injury or damage, but economic harm is also clearly recoverable under California law. See, e.g. , J'Aire Corp. v. Gregory , 24 Cal. 3d 799, 805, 157 Cal. Rptr. 407 (1979), Ales-Peratis Foods Internat. v. American Can Co., 164 Cal. App. 3d 277, 287, 209 Cal. Rptr. 917 (1985), Walnut Creek Aggregates Co. v. Testing Engineers , 248 Cal. App. 2d 690, 56 Cal. Rptr. 700 (1967).] Although the law of special duty developed in connection with claims of negligence, the intentional breach of a legal duty provides an even stronger basis for liability. See American Employer's Insurance Co. v. Smith, 105 Cal. App. 3d 94, 101, 163 Cal. Rptr. 649 (1980) (rejecting claim that the defendant "should be exonerated from liability because his [intentional] conduct was more culpable than the [negligence] required to establish liability.")

In this case, the Complaint alleges that defendants voluntarily assumed special duties by issuing the "Frank Statement to Cigarette Smokers":

We accept an interest in people's health as a basic responsibility, paramount to every other consideration in our business.

We always have and always will cooperate closely with those whose task it is to safeguard the public health.

We are pledging aid and assistance to the research effort into all phases of tobacco use and health.

Com., ¶ 64. Later, defendants published "A Statement About Tobacco and Health":

We recognize that we have a special responsibility to the public — to help scientists determine the facts about tobacco and health, and about certain diseases that have been associated with tobacco use. We accepted this responsibility in 1954 by establishing the TIRC . . . . We shall continue all possible efforts to bring the facts to light.

Id., ¶ 75 (emphasis supplied); see also id., ¶¶ 76-82, 93. Over the years, the defendants have re-affirmed these undertakings in various ways. See id.

In making these commitments, defendants assumed duties to both the Counties and to the public in general. As to the Counties and their public health departments, defendants specifically pledged to "cooperate closely with those whose task it is to safeguard the public health." Id., ¶ 64. As to the public, defendants specifically undertook "a special responsibility to the public" and "accept[ed] an interest in people's health as . . . paramount to every other consideration in [their] business." Id.

In accepting these responsibilities, defendants undertook three specific duties. First, by committing themselves to making the people's health their preeminent responsibility, the tobacco companies agreed that they would not sell or continue to sell products which they knew to cause death and disease when used as intended. The violation of this specially assumed duty is the direct cause of the costs incurred by the Counties in treating the illnesses that resulted from defendants' sales of cigarettes.

Second, defendants pledged to cooperate with those responsible for safeguarding the public's health. In fact, they did the opposite. See Com., ¶¶ 66-82.

Third, regardless of whether the tobacco companies had any duty to speak publicly on the subject, having repeatedly undertaken to do so, they were legally bound to speak the full and complete truth. Bank of America v. Greenbach, supra, 98 Cal. App. 2d at 232. Not only did defendants willfully fail to perform this duty; they actively conspired to conceal, suppress and distort the scientifically established facts that they knew.

Defendants do not argue that the Counties have failed to plead adequately the elements of their claim for the intentional breach of a special undertaking. Defendants contend only that the Counties' injuries are so remote or derivative that they were not proximately caused by defendants' conduct. For the reasons set forth above, this contention, based as it is on the law of negligence, has no bearing on the Counties' claims for intentional breach of specially assumed duties.

B. Defendants Negligently Breached The Duties They Assumed

The Complaint also asserts that defendants negligently breached the duties defendants assumed toward the Counties and the public when defendants issued the Frank Statement and related publications. As Justice Cordozo wrote in Glanzer v. Shepard, 233 N.Y. 236, 239, 135 N.E. 275 (N.Y. 1922), "One who assumes to act, even though gratuitously, may thereby become subject to the duty of acting carefully, if he acts at all."

Paragraphs 226 to 230 of the Complaint plead each of the elements of a claim for negligent breach of the duties specially undertaken. Defendants do not contend that those elements are inadequately pleaded. Instead, the tobacco defendants merely repeat the mantra of "remoteness." Yet they never discuss the applicable rule that California's courts have adopted for resolving cases where remoteness is asserted in the context of a specially assumed duty.

In Connor v. Great Western Sav. & Loan Assn., 69 Cal. 2d 850, 73 Cal. Rptr. 369 (1968), Chief Justice Traynor set out the multi-factor analysis applicable in cases involving an assumed duty:

'Privity of contract is not necessary to establish the existence of a duty to exercise ordinary care not to injure another, but such duty may arise out of a voluntarily assumed relationship if public policy dictates the existence of such a duty.' (Citations.) The basic tests for determining the existence of such a duty are clearly set forth in Biakanja v. Irving, supra, 49 Cal.2d 650, as follows: 'The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant's conduct and the injury suffered, [5] the moral blame attached to the defendant's conduct, and [6] the policy of preventing future harm.' [/ In applying these factors, California courts "are influenced more by public policy than they are by whether such cause of action can be comfortably fitted into one of the law's traditional categories of liability." Hanberry , supra , 276 Cal. App. 2d at 683.]

Id. at 865 (emphasis added).

All of the modern California cases involving an allegation of a specially assumed duty apply the test derived from Biakanja to determine whether a defendant is liable to an allegedly remote party. See, e.g., FNS Mortgage, supra, 24 Cal. App. 4th at 156; Walnut Creek Aggregate Co. v. Testing Engineers, Inc., supra, 248 Cal. App. 2d at 695; Lacher v. Superior Court, supra, 230 Cal. App. 3d at 104. As the Supreme Court of California stated in J'Aire Corp. v. Gregory, 24 Cal. 3d 799, 808, 157 Cal. Rptr. 407 (1979), "[t]hese factors and ordinary principles of tort law are fully adequate to limit recovery" and to answer "fears . . . that liability will be imposed for remote consequences . . . ." Id. at 808 (emphasis added).

The Biakanja v. Irving, 49 Cal. 2d 647, 320 P.2d 16 (1958), factors compel the conclusion that the Counties have stated a claim. First, the "Frank Statement" was intended to affect the Counties: defendants pledged to cooperate with "those responsible for the public health." Com., ¶ 64. Defendants also stated that the public's health was their preeminent concern, of greater concern even than their own profits. Id. Defendants further pledged to support research by independent scientists and to share the results. Id. Each of these undertakings was designed, among other purposes, to cause governmental officials to believe that immediate action on their part to curb smoking was not needed. Judicially noticeable evidence in the form of local legislation shows that, as the evidence mounted as to the hazards of smoking, governmental entities began to legislate various controls on smoking and advertising. Defendants' conduct was designed to lull the Counties, among others, to avoid such regulation.

Second, defendants reasonably should have foreseen the risk of harm to the Counties. Physical injury to cigarette smokers was not only foreseeable, it was contemplated as the inevitable consequence of a breach of defendants' undertakings. With regard to physical addiction, such injury was intended. Defendants knew or should have known of the Counties' statutory obligations to care for indigent residents who suffered the ill effects of smoking.

Third, the Counties have suffered injury. The Complaint alleges that the Counties have had to pay for the health care of their indigent residents, and the costs plaintiffs seek to recover arise directly from defendants' failure to perform properly the duties they assumed. Id., ¶¶ 4-16, 203, 211, 220, 227, 235, 238, 243.

Fourth, the injuries suffered by the Counties are closely connected with defendants' conduct. The Complaint alleges that defendants' breach increased substantially the costs of providing health care to the Counties' indigent residents who smoked. Id.

Fifth, as described in Part I above, defendants' conduct is morally reprehensible. The tobacco defendants undertook a duty to protect the public's health by supporting independent research into the safety of tobacco, disclosing the results of that research, and refraining from marketing products they knew would cause disease and death. Meanwhile, defendants suppressed the results of research demonstrating that smoking caused death and disease and continued to sell products they knew caused death and disease, while at the same time altering their products to make them more addictive and halting the development of safer cigarettes.

Sixth, the preventive policy that underlies tort law calls for imposition of liability. Holding defendants liable will deter their breach of duty in the future by forcing defendants and others to consider carefully the connection between their public pronouncements and their conduct. [/ The only court to have held the "Frank Statement" insufficient to establish liability did so at the summary judgment stage, when satisfied that there was insufficient evidence to satisfy the elements of section 324A of the Restatement (Second) of Torts. See Gunsalus v. Celotex Corp. , 674 F. Supp. 1149, 1155-57 (E.D. Pa. 1987). Notably, that court did not apply California's Biakanja test, which would have lead to a different result. In addition, the court did not have before it the subsequently discovered disclosures and documents detailing defendants' conspiracy and the means they employed to pursue it. See, e.g. , Glantz, et al., "Looking Through a Keyhole at the Tobacco Industry: The Brown and Williamson Documents," 274 The Journal of the American Medical Association (" JAMA "), at 219-24 (1995); Glantz, et al., "Nicotine and Addiction: The Brown and Williamson Documents," 274 JAMA at 225-33; Glantz, et al., "Lawyer Control of the Tobacco Industry's External Research Program," 274 JAMA at 234-40. A copy of each of these articles is attached as Exhibit E to the Nelson Declaration . In any event, defendants have not raised the argument upon which the court in Gunsalus relied.]

Given California's long line of cases applying the Biakanja factors where a defendant has undertaken a specific duty, defendants' reliance on Fifield Manner, supra, 54 Cal. 2d 632, fails. Fifield Manner involved no such undertaking. As the California Supreme Court stated in J'Aire, the defendant in Fifield Manor "had not entered into any relationship or undertaken any activity where negligence on his part was reasonably likely to affect plaintiff adversely." J'Aire, supra, 24 Cal. 3d at 807; accord, Chameleon Engineering Corp. v. Air Dynamics, Inc, 101 Cal. App. 3d 418, 423, 161 Cal. Rptr. 463 (1980). Moreover, the Court in J'Aire questioned the continuing validity of Fifield Manor even outside the context of cases involving assumed duties. J'Aire, 24 Cal. 3d at 807 n.4.

Apparently recognizing J'Aire's applicability, defendants attempt to limit that case to its facts. Deft. Mem. at 16 n.7. Yet defendants never come to grips with the settled rule that it and many other cases establish: the incantation of the phrase "remote damages" does not work magic in California. Application of the Biakanja test to the facts alleged in the Complaint establishes the sufficiency of its allegations.

III. NEITHER CIVIL CODE § 1714.45 NOR GOVERNMENT CODE § 23004.1 BAR THE COUNTIES' CLAIMS

A. Civil Code Section 1714.45 Does Not Immunize the Defendants from Liability

Relying on American Tobacco Co. v. Superior Court , 208 Cal. App. 3d 480, 255 Cal. Rptr. 280 (1989), defendants contend that California Civil Code §1714.45 immunizes them from the Counties' claims. Among other reasons, the argument fails because §1714.45 only applies to "product liability actions" brought by consumers. This is an action brought by governmental entities for fraud and for breach for assumed duties.

1. This Is Not A Product Liability Action

Section 1714.45 provides as follows:

(a) In a product liability action, a manufacturer or seller shall not be liable if:

(1) The product is inherently unsafe and the product is known to be unsafe by the ordinary consumer who consumes the product with the ordinary knowledge common to the community; and

(2) The product is a common consumer product intended for personal consumption, such as sugar, castor oil, alcohol, tobacco, and butter, as identified in comment i to Section 402A of the Restatement (Second) of Torts.

(b) For purposes of this section, the term "product liability action" means any action for injury or death caused by a product, except that the term does not include an action based on a manufacturing defect or breach of an express warranty.

(c) This section is intended to be declarative of and does not alter or amend existing California law, including Cronin v. J.B.E. Olson Corp. (1972) 8 Cal. 3d 121, and shall apply to all product liability actions pending on, or commenced after, January l, 1988.

(Emphasis added).

Defendants contend that this statute bars the Counties' claims because they are based on "injury or death caused by a product" within the meaning of section 1714.45(b). Deft. Mem. at 32. This action, however, is not one for "injury or death," and, even if it were, the Counties' injury was not "caused by a product."

In using the words "any action for injury and death," the legislature plainly had in mind the ordinary meaning of those words — actions for personal injury. See O'Kane v. Irvine, 47 Cal. App. 4th 207, 54 Cal. Rptr. 2d 549, 551 (1996) (courts construe the words in a statute in light of their ordinary meaning). [/ That conclusion finds support in section 1714.45(a)(2), where the statute refers to "sugar, castor oil, alcohol, tobacco, and butter," items of personal consumption that may produce personal injury. See, e.g. , People v. Stout , 18 Cal. App. 3d 172, 177, 95 Cal. Rptr. 593 (1971) (courts resolve ambiguities in the words of statutes by looking at the surrounding language and context).] This action is for purely economic injury.

Indeed, in a different context, a California Superior Court has recently rejected the tobacco companies' attempt to expand the reach of section 1714.45. Cordova v. Liggett Group, et al., No. 651824 (San Diego Superior Court, 10/30/86), Order on Demurrer/Motion to Strike (attached as Exhibit F to Nelson Decl.). There, the tobacco companies argued that section 1714.45 barred a private attorney general action under California's false advertising statute. Cal. Bus. & Prof. Code § 17200 et seq. The companies asserted that as a matter of law, section 1714.45 establishes that consumers cannot be deceived about the harm caused by tobacco. The court disagreed, using reasoning that applies here:

Civil Code § 1714.45 precludes actions for injury and death caused by tobacco. See American Tobacco Co. v. Superior Court (1989) 208 Cal. App. 3d 250, 257. This case is not an action for injury or death.

Cordova, supra, at 2 (emphasis added).

More fundamentally, even if section 1714.45 applied outside the context of claims for personal injury, this is not an action for injury "caused by a product." Rather, this action is for injuries caused by dishonesty and the failure to fulfill commitments. The Counties state claims for fraud and for the violation of assumed duties to cooperate with public health officials, to inform the public about research on cigarettes, and to put health before profits. The injury alleged is not an invasion of the right to safe products, but an invasion of the rights to be dealt with honestly and to have commitments performed. See Cipollone v. Liggett Group, Inc., 505 U.S. 504, 528-29, 112 S. Ct. 2608, 120 L. Ed. 2d 407 (1992) (liability for fraud is based on a "general obligation — the duty not to deceive"). In short, the cause of the harm here was the defendants' conduct, not their products. [/ This point also holds true for the Counties' claims that the defendants breached their specially assumed duty to make safety the companies' primary concern. Had defendants not undertaken such an obligation (and not committed the other misconduct alleged), section 1714.45 would protect them from liability for marketing products that were inherently unsafe. Having publicly committed themselves to safety, however, and having acted to enhance the danger of their products, defendants invaded the public's and the Counties' interests in truthfulness. That legal injury was caused by conduct, not by products.]

The distinction between claims based on dishonest conduct and claims based on defective products is well established in California law. In Khan v. Shiley, 217 Cal. App. 3d 848, 855-58, 266 Cal. Rptr. 106 (1990), the court stated:

Products liability is the name currently given to the area of law involving the liability of those who supply goods or products for the use of others to purchasers, users, and bystanders for losses of various kinds resulting from so-called defects in those products.' (Prosser & Keeton, Torts (5th ed. 1984 §95, p. 677.) Possible theories of recovery include strict liability in tort, negligence (i.e., in creating or failing to discover a flaw, in failing to warn or failing adequately to warn, or in the sale of a defectively designed product) and breach of warranty (express and implied). Allegations of fraud, however, are in a class by themselves . . . . Unlike the other theories, in which the safety and efficacy of the product is assailed, the fraud claim impugns defendants' conduct.

(Emphasis in italics original; emphasis in bold-face added). Based on this distinction, the court dismissed the plaintiffs' claims for emotional distress based on product liability, but upheld her claims based on fraud. See also Westlye v. Look Sports, 17 Cal. App. 4th 1715, 1741-1750, 22 Cal. Rptr. 781 (1993) (classifying claims for products liability separately from claims based on misrepresentation); 6 Witkin, supra, Torts, §§674 et seq., §§948 et seq., §§1241 et seq. (addressing liability for fraud in Chapter VI, separate from discussion in Chapters VII and IX of liability for defective products).

Similar reasoning underlies the Supreme Court's decision in Cipollone v. Liggett Group, Inc., supra, 505 U.S. 504. The plurality held that federal laws mandating warnings on cigarette packages did not preempt state laws permitting recovery for fraud and false advertising. The Court reasoned that the federal statutes only preempted local laws allowing actions "based on smoking and health," and that liability for fraud is predicated "on a more general obligation — the duty not to deceive." Id. at 528-29. Similarly, the Court found no preemption of claims for a breach of express warranty, based as they were on a voluntary undertaking of the manufacturer. Id. at 525-26; accord, Mangini v. R.J. Reynolds Tobacco Co., 7 Cal. 4th 1057, 1068, 31 Cal. Rptr. 2d 358 (1994) (federal law does not preempt California statute that protects minors from cigarette advertising.)

These results are consistent with section 1714.45(a)(2), which expressly refers to comment i of Section 402A of the Restatement (Second) of Torts. Comment i explains that a manufacturer escapes liability where the product is inherently unsafe, but is liable if the manufacturer's conduct adds to the danger of a product. [/ Courts have split on whether comment i even forecloses claims by smokers for strict product liability. Compare, e.g. , Burton v. R.J. Reynolds Co. , 884 F. Supp. 1515 (D. Kan. 1995) (" Burton I ") and Rogers v. R.J. Reynolds Co. , 557 N.E. 2d 1045, 1990 Ind. App. LEXIS 952 (Ind. App. Court 1990) (denying summary judgment to defendants on product liability) with Gunsalus v. Celotex Corp. , 674 F. Supp. 1149 (E.D. Pa. 1987) and Paugh v. R.J. Reynolds Tobacco Co. , 834 F.Supp. 228 (N.D. Ohio 1993) (granting summary judgment on product liability claims). Most of the cases correctly treat consumers' claims for product liability as distinct from their claims for fraudulent concealment and misrepresentation. See, e.g. , Burton I , supra , and Burton v. R.J. Reynolds Co. , 916 F.Supp. 1102 (D.Kan. 1996) (claim for fraudulent concealment was not preempted and was properly stated under state law); but see Paugh v. R.J. Reynolds Tobacco Co. , 834 F.Supp. 228 (N.D. Ohio 1993) (treating claim for fraudulent concealment as claim for failure to warn under Ohio's defective product statute). None of these cases address fraud claims by non-smokers .] For example, Comment i states, "Good tobacco is not unreasonably dangerous merely because the effects of smoking may be harmful; but tobacco containing something like marijuana may be unreasonably dangerous." Here, defendants are alleged to have added to the danger of cigarettes by deliberately enhancing the addictive quality of nicotine. Com., ¶¶ 50, 122-167. Thus, section 1714.45 does not protect defendants from liability caused by their altered product.

Ignoring this and other critical allegations, defendants contend that the Counties' claims fail because they do not fall within the Legislature's two specific exemptions from section 1714.45's immunities. After defining the term "product liability action," section 1714.45(b) creates exceptions for any "[1] action based on a manufacturing defect or [2] breach of an express warranty."

In fact, these exceptions confirm that the Legislature intended to protect inherently unsafe products, but did not intend to immunize misconduct by manufacturers. A breach of an express warranty is an affirmative misrepresentation about the product. A manufacturing defect is a mistake in the manufacturing process that adds to the product's danger. Yet both types of claims fall within the rubric of "product liability actions." See, e.g., Barker v. Lull Engineering, 20 Cal. 3d 413, 429, 143 Cal. Rptr. 225 (1978) (manufacturing defect); Westlye v. Look Sports, supra, 17 Cal. App. 4th at 1748 (express warranty). Therefore, to exclude such misconduct from the reach of section 1714.45 required an express exception.

By contrast, while also involving misconduct, allegations of fraud (or breach of an assumed duty) do not fall within the rubric of product liability; they "are in a class by themselves." Khan, 217 Cal. App. 3d at 857. Therefore, there was no need to name fraud as an exception to section 1714.45's prohibition.

Indeed, to interpret section 1714.45 as barring the Counties' claims would undermine California's well-settled public policy that holds private parties accountable for deceit. See, e.g., Cal. Civ. Code §1668 ("All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud or willful injury to the property of another . . . are against the policy of the law.") In effect, defendants argue that section 1714.45 drills a gaping hole in this policy: deceit is no longer actionable whenever it relates to inherently dangerous products. [/ This interpretation runs counter to the basic rule of statutory construction that the legislature does not intend "to overthrow long-established principles of law unless such intention is made clearly to appear either by express declaration or by necessary implication." County of Los Angeles v. Frisbe , 19 Cal. 2d 634, 644, 122 P. 2d 526 (1942) (citations omitted).] In other words, under defendants' argument, section 1714.45 would protect them from liability for fraud even if they had told the public that cigarettes were safe while systematically adding cyanide to them.

Plaintiffs' Complaint alleges conduct hardly less culpable. Defendants here falsely denied the addictive quality of tobacco while working feverishly to make tobacco more addictive. Defendants pledged to make safety their primary concern and then proceeded to alter their products to make them more dangerous. The defendants promised that they would protect the public's right to know about tobacco's safety and then buried their research on the causal link between tobacco, nicotine and death. In enacting section 1714.45, the Legislature did not immunize such conduct.

American Tobacco Co. v. Superior Court, 208 Cal. App. 3d 480 (1989), says nothing different. American Tobacco was a product liability case brought by consumers for personal injuries. The court held that tobacco manufacturers were entitled to immunity under section 1714.45 without having to admit that cigarettes were dangerous or show that ordinary consumers knew that tobacco products were inherently unsafe. The court had no occasion to consider whether section 1714.45 protected the industry from suits by governmental agencies for fraud and other intentional misconduct.

2. Section 1714.45 Does Not Affect The Counties' Equitable Claims

Defendants' sweeping assertion that section 1714.45 bars all the Counties' state law claims also ignores the basic distinction between the Counties' tort claims and their equitable claims for restitution and unjust enrichment. The former claims are addressed to the Court at law. The latter claims are addressed to the Court in equity. Because defendants miss this basic point, we state the obvious: section 1714.45 is based on the Restatement (Second) of Torts and follows the Restatement's rationale regarding strict liability in tort.

Unlike actions at law which concern liability for damages, "equity acts specifically; it grants specific relief and not damages." (emphasis in original). 11 Witkin, Summary of California Law, § 2(b), p. 680 (9th ed. 1990). The goal of equity is to restore the parties as nearly as possible to the status quo before the fraud or other wrongful behavior occurred. See, e.g., Fletcher v. Security Pacific National Bank, 23 Cal. 3d 442, 153 Cal. Rptr. 28 (1979).

Counts VI and VII of the Counties' Complaint state claims for restitition and unjust enrichment. The Complaint prays for equitable relief, including requiring defendants to disclose their research on smoking, addiction and health, as defendants specifically said they would. The Counties also seek restitution. These are equitable claims and remedies. Even though restitution involves monetary compensation, it is analytically and legally distinct from liability for damages and does not convert an equitable claim into a legal one. Bowen v. Massachusetts, 487 U.S. 879, 893, 108 S. Ct. 2722, 101 L. Ed. 2d 749 (1988).

In short, section 1714.45 only addresses tort liability in actions at law. The statute has no bearing on the County's equitable claims.

3. Section 1714.45 Permits the Counties' Express Warranty Claim

Defendants concede that a claim for breach of express warranty is not barred by section 1714.45. They also concede that privity is not required. However, they argue that only consumers or users may bring this claim. Their sole authority is BAJI Nos. 9.40 and 9.43 (8th ed. 1996). BAJI, in turn, refers to California Commercial Code § 2103(1). But § 2103(1) does not purport to limit express warranty claims. Instead, it simply adopts the definition of buyer and seller in the Uniform Commercial Code ("UCC").

California, however, has not adopted any of the three alternatives proposed by the UCC that addressed the subject of who may bring express warranty claims. See UCC 12-318. California declined to adopt even the most liberal alternative provision, which provided that "[a] seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by breach of the warranty.") (emphasis added). The Legislature did not adopt the UCC provisions because it viewed them as too restrictive compared to existing California law. 3 Witkin, Summary of California Law, Sales, § 95 (9th ed.).

Moreover, in other situations where the right of non-users to sue has been challenged, the non-users have been allowed to proceed. For example, the California Supreme Court extended strict liability to injured parties who are neither consumers nor users. Elmore v. American Motors Corp., 70 Cal. 2d 578, 586, 75 Cal. Rptr. 652 (1969). The Court explained that since bystanders, unlike consumers and users, have no opportunity to protect themselves from injury, "if any distinction should be made between bystanders and users, it should be made . . . to extend greater liability in favor of the bystanders." Id. at 586. The same rationale applies to breach of warranty. There is, then, no basis to find that the Counties are barred as a matter of law from pleading a claim for breach of express warranty. [/ In any event, as defendants suggest, the Counties could always bring an express warranty claim under Government Code § 23004.1.]

4. Section 1714.45 Does Not Apply to CTR and the Tobacco Institute, Which Are Not Manufacturers

Finally, even if defendants' arguments generally had merit, which they do not, the arguments would fail as to defendants CTR and the Tobacco Institute. Section 1714.45 protects manufacturers and sellers. Cal. Civ. Code § 1714.45(A) ("In a product liability action, a manufacturer or seller shall not be liable if . . . .") (emphasis added). CTR and the Tobacco Institute are industry-sponsored lobbying organizations. See, e.g., Com., ¶¶ 25-26. Therefore, section 1714.45 has no application to these two defendants.

B. Government Code § 23004.1 Is Cumulative, Not Exclusive

Defendants also argue that California Government Code § 23004.1 limits the Counties to a right of subrogation. This argument also fails for several reasons.

First, far from limiting the Counties to a right of subrogation, the statute actually adds a direct right of action to Counties to recover medical costs from tortfeasors who injure their residents. Section 23004.1 provides in relevant part that whenever a county provides health care to a person injured by a tortfeasor:

the county shall have a right to recover from said third person the reasonable value of the care and treatment so furnished . . . or shall, as to this right, be subrogated . . . .

Cal. Gov't Code § 23004.1(a) (emphasis added). [/ Language similar to Government Code § 23004.1 in the Medical Care Recovery Act ("MCRA") has been interpreted to give the government a direct claim against the tortfeasor which is "not derivative, but an independent right of action." United States v. Merrigan , 389 F. 2d 21, 24 (3d Cir. 1968). The statutory basis for an independent right of action under Government Code § 23004.1 is even more compelling than under MCRA. In section 23004.1 , the direct right and the right of subrogation are expressed in the disjunctive; in the MCRA, the direct right of recovery and the right of subrogation are expressed in the conjunctive.]

Second, section 23004.1 does not supplant the Counties' right to assert direct claims for fraud and violation of specially assumed duties. The general rule is that "[i]f a right was established at common law or by statute before the new statutory remedy was created, the statutory remedy is usually regarded as merely cumulative, and the older remedy may be pursued at the plaintiff's election." 3 Witkin, California Procedure § 8 at 9 (3d ed. 1985); see Federal Marine Terminals v. Burnside, 394 U.S. 404, 410, 89 S. Ct. 1144, 22 L. Ed. 2d 371 (1969) ("The legislative grant of a new right does not ordinarily cut off or preclude other nonstatutory rights in the absence of clear language to that effect."); Rojo v. Kliger, 52 Cal. 3d 65, 79, 276 Cal. Rptr. 130 (1990) (same). [/ Government Code § 23004.3 provides that it "shall become operative in a county if the board of supervisors of the county, by resolution, elects to be governed" thereby. Most of the plaintiff Counties have adopted resolutions making that election. Of course, defendants' argument that section 23004.1 is exclusive has no application to counties such as San Francisco which have not chosen to adopt it.]

Finally, section 23004.1 only addresses claims sounding in tort, for it applies only "under circumstances creating a tort liability upon some third person . . . ." The statute therefore has no applicability to the Counties' equitable claims.

IV. THE COUNTIES STATE RICO CLAIMS

Defendants do not challenge the adequacy of the Counties' detailed RICO allegations under 18 U.S.C. § 1962(a), (c) or (d). [/ Defendants suggest in a footnote that the Counties have not properly alleged that they were injured by defendants' use or investment of racketeering income. Plaintiffs meet the pleading standard set out by the Ninth Circuit in Nugget Hydroelectric v. Pacific Gas and Electric , 981 F.2d 429, 437 (9th Cir. 1992). The defendants used and invested their racketeering proceeds in the enterprises in order to control, suppress and conceal information regarding the adverse health effects of smoking, to devise means for manipulating nicotine, and to entice individuals to smoke. These activities injured the Counties because they were required to incur significant health-care costs attributable to tobacco-related diseases. See Complaint , ¶¶209 - 211.] Instead, Defendants argue that the Counties have failed to properly plead, as 18 U.S.C. § 1964 requires, that they have been "injured in [their] business or property by reason of a violation of section 1962." First, defendants contend that the Counties' damages are too remote to be proximately caused by the alleged RICO violations. Second, defendants contend that the Counties' damages are not recoverable under RICO because they are personal injury damages.

Neither argument has merit. The Counties have suffered and are seeking to recover for their own economic losses. The Supreme Court has held that real or threatened personal harm can give rise to RICO losses. The Counties' RICO losses, unlike those in the cases relied upon by defendants, are neither shared by or asserted on behalf of third parties. Moreover, the Counties' losses are not caused by the intervening wrongdoing of third parties: the losses are fairly traceable to, and result directly from, the RICO-violative conduct of defendants themselves.

A. The Counties' Claims Satisfy RICO's Actual and Proximate Causation Requirements

Section 1964(c) provides "[a]ny person injured in his business or property by reason of a violation of section 1962" with a right to bring a civil RICO claim. "A person whose property is diminished by a payment of money wrongfully induced is injured in his property." Reiter v. Sonotone, 442 U.S. 330, 339, 99 S. Ct. 2326, 60 L. Ed. 2d 931 (1979). This is precisely the RICO injury the Counties allege.

In Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985), the United States Supreme Court rejected the notion of an "additional, amorphous racketeering injury requirement." "If the defendant engages in a pattern of racketeering activity in a manner forbidden by [section 1962(a), (b) or (c)], and the racketeering activities injure the plaintiff in his business or property, the plaintiff has a claim under section 1964(c)." Id. at 495. The Counties satisfy this actual causation requirement, since the detailed allegations of their Complaint establish an unbroken claim of causation running from defendants' conduct to plaintiffs' damages.

Defendants rely heavily on Holmes v. Securities Investor Protection Corporation, 503 U.S. 258, 112 S. Ct. 1311, 117 L. Ed. 2d 532 (1992). Their treatment of the case, however, is superficial. Accordingly, we address the facts and principles of Holmes in detail, to demonstrate that, upon fair reading and considered application, Holmes and the cases that follow it support plaintiffs' RICO claims.

In Holmes, the Supreme Court held that section 1964(c) also incorporates a proximate cause requirement. The Holmes decision confirms civil RICO's status as a statutory tort with a distinct jurisprudence of causation. The Holmes Court adopted the traditional common law concept of proximate cause to reflect the policy considerations arising specifically from the RICO statute. Id. at 269-270. [/ "Other courts have recognized that civil RICO is 'a statutory tort remedy — simply one with particularly drastic remedies.'" Bieter Co. v. Blomquist , 987 F.2d 1319, 1329 (8th Cir. 1993) (reversing summary judgment for defendants based on "excessively narrow views of causation and injury," id. at 1326, and reinstating RICO claims).] Given that civil RICO is not an exclusive remedy, and (unlike other remedies) imposes treble damages for violations, Holmes required "some direct relation between the injury asserted and the injurious conduct alleged." Id. at 268.

Significantly, however, Holmes declined to take the step that defendants ask this Court to take. Instead, the Court cautioned that "the infinite variety of claims that may arise make it virtually impossible to announce a black-letter rule that will dictate the result in every case." Id. at 272 n.20. As the Court stated:

Here we use 'proximate cause' to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts. At bottom, the notion of proximate cause reflects 'ideas of what justice demands, or of what is administratively possible and convenient."

Id. at 268.

Here, ideas of what justice demands are consonant with the tobacco companies' liability for the known, foreseen, and intended economic consequences of their own conduct. The calculation and award of compensatory damages for the Counties' smoking-related health care expenditures is readily ascertainable. Contrary to defendants' contentions, the harm to the Counties does not "flow merely from the misfortunes visited" upon smokers by the defendants' acts: these acts included representations made to, information concealed from, and affirmative duties undertaken toward the plaintiffs themselves.

Notably, Holmes itself held that one need not be the purchaser or seller of a security in order to assert a civil RICO claim arising from securities fraud. Id. at 276. Thus, there is no principle, in Holmes or elsewhere, that would require plaintiffs to purchase or smoke defendants' products themselves, or to incur personal injury, in order to meet RICO's standards for standing or causation. As to any "direct-injury limitation" under § 1964(c), Holmes warned:

[O]ur use of the term 'direct' should merely be understood as a reference to the proximate-cause enquiry informed by the [RICO-specific] concerns in [three factors articulated in] the text. We do not necessarily use it in the same sense as courts before us have and intimate no opinion on results they reached.

Id. at 272 n.20. The Holmes articulation of RICO proximate cause "is not . . . the same thing as a sole cause," and a RICO violation is actionable if the alleged harm "appears to logically proceed" from the alleged fraud as a "substantial factor in the sequence of responsible causation." Valleyside Dairy Farms, Inc. v. Smith, 1996 U.S. Dist. LEXIS 10982 at *5 (W.D. Mich. 1996). [/ In Holmes , the plaintiff's claims failed not because the plaintiff did not purchase or sell defendant's securities, id . at 275-76, but because its claim, unlike the Counties' claim here, was based solely on an alleged but undefined subrogation claim, and the losses for which recovery was sought were losses the defaulting broker-dealers and their customers had themselves incurred and could have pursued directly. Id . at 270-271. Moreover, these customers had not purchased the manipulated stock involved in the RICO violations; trustees for those who did buy the manipulated stock "bought their own suit against the [RICO] conspirators." Id . at 272 n.18.]

Under Holmes, directness is a relative term: there may be links or steps in the chain of causation between the RICO violation and the RICO injury. The determining factor in establishing proximate cause is not whether the conduct and injury are immediately adjacent, but whether they are sufficiently related. Holmes articulates three RICO-specific factors to be applied in assessing the sufficiency of the violation-injury relationship:

First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent factors.

* * *

Second, . . . recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries

* * *

Finally, the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.

Holmes, supra, 503 U.S. at 269-70.

Neither the proximate cause analysis nor the facts of Holmes support dismissal of the Counties' RICO claims. The Holmes defendants' stock manipulation scheme (indirectly) caused broker-dealers to default on obligations to customers who had not purchased the manipulated stock; these customers lost money as an even more indirect result of the broker-dealers' investments; the SIPC covered those losses, and then asserted RICO claims to recover what it described as "its money paid to customers for customer claims against third parties." Id. at 270. As Holmes concluded, "in sum, subrogation to the rights of the manipulation conspiracy's secondary victims does, and should, run afoul of proximate-causation standards, and SIPC must wait on the outcome of the [manipulated stock customers'] trustees' suit." Id. at 274.

The Counties' situation is completely different. As the Counties allege, and defendants' own public statements demonstrate, defendants' conduct violating RICO was directed simultaneously toward individual smokers and those, like the Counties, responsible for the public health. There is no "intervening" transaction that would break the chain of causation: the Counties' losses result from the same smoking addiction that was the purpose of defendants' conduct. [/ If this case involved plaintiffs' reimbursement of the health care costs of "secondary victims," e.g. non- smokers who became indigent because their costs had allegedly increased as a result of the impact of smoking on the health care system, there might be an arguable analogy to Holmes . Here, certainly, there is no allegation that smoking causes insolvency to smokers or others; the extra steps in the causation sequence that attenuated the SIPC "claims" in Holmes are absent. Both solvent and indigent persons smoke. The former pay their own health care costs; the Counties pay the latter. The losses of both are equally direct. The Counties are analogous to the purchasers of the manipulated stock, and Holmes acknowledged the actionability of such claims.]

All three Holmes factors support plaintiffs' RICO claim. As to the first factor there is a direct, proportional, and calculable relationship between the Counties' expenditures and defendants' conduct: there are no "other, independent factors" that affect the Counties' smoking-related costs. Holmes, supra, 503 U.S. at 269. The second Holmes factor is satisfied because this case does not involve "different levels of injury" or the "risks of multiple recoveries." Id. Plaintiffs are not in competition with any other claimants for the recovery of the Counties' health care costs. The Counties incurred these costs at the "first level" of RICO injury and possess the resulting legal claims. The third factor also supports the Counties' RICO claim, since the indigent smokers are not out of pocket and have no incentive to assert such a claim. Without the Counties' assertion, defendants' injurious conduct remains undeterred and the purpose of RICO is thwarted. Id. at 269-70.

Under the Holmes analysis, the Counties' claims were proximately caused by the defendants' RICO violations. [/ See, e.g. , Valleyside , supra , a post- Holmes decision that denied defendants' summary judgment motion on RICO claims arising from defects in the silos sold by defendant. Fraud was alleged in connection with the representations employed to sell the silos. Valleyside held that, while plaintiff's damages arose immediately from the product defect, this defect was not an intervening cause that broke the chain of RICO causation. As Valleyside noted, "Based on the present record, the alleged defective product does not properly characterize as an intervening cause. Rather, its performance is the very object of the alleged misrepresentation. . . . " Id. at *8. Similarly, the performance of defendants' cigarettes is at once the very object of their alleged misrepresentations, omissions, nicotine manipulation, and other fraudulent conduct, as well as the cause of plaintiffs' health care expenditures. Hence, the chain of causation is both logical and continuous, unbroken by intervening causes.] Defendants foresaw that concealment and suppression of information relating to the health consequences of smoking, their manipulation of the levels of nicotine in cigarettes, and their efforts to avoid responsibility for smoking-related health care costs would increase the costs of public health care. Moreover, as the Complaint alleges, the defendants' fraud on the public regarding the suppression, concealment and misrepresentations of the dangers of smoking have had, as an intended objective, the avoidance of responsibility for health care costs, an injury aimed directly at providers of free medical care. There were no intervening causes to break the causal connection for the Counties have a statutory obligation to pay health care costs, and those costs measurably increased due to the defendants' conduct in violation of RICO.

The Ninth Circuit has applied Holmes' proximate cause analysis to other RICO claims. See, e.g., Pillsbury, Madison & Sutro v. Lerner, 31 F.3d 924 (9th Cir. 1994); Imagineering, Inc. v. Kiewit Pacific, 976 F.2d 1303, 1312 (9th Cir. 1992). Defendants rely on the inapposite facts of Holmes, and the Ninth Circuit's application of Holmes in equally distinguishable cases, and argue that a bright-line rule exists to preclude claims for "indirect, derivative damages." Holmes says the opposite. 503 U.S. at 272.

Moreover, the issue in the cases cited by defendants is really one of intervening causes [/ The so-called "intervening event" invoked by defendants does not so qualify. See, e.g. , Matthews, Weissman & Sturo, 2 Civil RICO Litigation § 8.04[C][5], 8 - 103-105 (2d ed. 1992) ("In order for later events to supersede earlier predicate acts as the proximate cause of injury, however, they normally must (i) in fact intervene between the original acts and the injury so as to render the cause and effect relationship between those acts and the injury more tenuous; (ii) not have been known or foreseeable at the time the original acts occurred; and (iii) not be the 'normal incidents of the risks the defendant has created.'"). "It is important not to neglect the requirement that the intervening forces be casually independent of the forces set in motion by the defendant's conduct." Id. at 8 - 105 (emphasis in original). Here, by contrast, smoking and the resulting diseases are entirely dependent on such forces.] and whether they break the causal link between a plaintiff's injuries and a defendant's RICO acts. In each of the cases on which the defendants rely, there were such intervening causes. Here, there are none.

In Imagineering, minority and women-owned subcontractors ("MWBEs") alleged that a contractor had engaged in a scheme to evade regulations requiring prime contractors to employ MWBEs on public works projects. The Ninth Circuit found that there was no direct relationship between the defendant's scheme and the MWBEs' inability to earn profits on the subcontracts. "It was the intervening inability of the prime contractors to secure the contracts that was the direct cause of plaintiffs' injuries."