Healthcare Insurer's Direct Action Against Tobacco Companies for Injuries Resulting from Violation of New York General Business Law Section 349 Is Too Remote
December, 2004
The United States Court of Appeals for the Second Circuit certified the following question for review by the New York Court of Appeals: “Are claims by a third party payer of health care costs seeking to recover costs of services provided to subscribers as a result of those subscribers being harmed by a defendant(s)’ violation of NY Gen. Bus. Law sec. 349 too remote to permit suit under that statute?” Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris USA Inc., 344 F.3d 211, 229 (2003).
The New York Court of Appeals answered the question in the affirmative. Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris USA Inc., 2004 WL 2339565 (Oct. 19, 2004) . A third-party payer has no standing to bring an action under NY Gen. Bus. Law §349 because its claims are too remote. The insurer or third-party payer’s only remedy is an action in equitable subrogation.
Plaintiff Empire Blue Cross and Blue Shield commenced an action in the United States District Court for the Eastern District of New York against Defendant tobacco companies alleging that Defendants engaged in “deceptive practices designed to mislead the public regarding the harmful and addictive properties of cigarette smoking.” At trial, Plaintiff’s claims against Defendants included direct and subrogated causes of actions for engaging in deceptive business practices in violation of NY Gen. Bus. Law §349. The jury determined that Plaintiff had proven its §349 claims and awarded $17,782,702.00 on its direct action and $11,829,784.00 on its subrogated action. Following the verdict, Defendants moved for judgment as a matter of law. The District Court denied the motion, finding that Plaintiff’s injury was “not too remote to allow recovery under section 349 and that victims of indirect injuries could recover under the statute.” The United States Court of Appeals for the Second Circuit reversed the jury’s award on the subrogation claim because Plaintiff “failed to identify individually injured plan members for the purpose of allowing defendants to investigate and defend the action.” The Second Circuit also found that “there were unresolved issues of New York law that would be determinative in the appeal” and certified the above question for the New York Court of Appeals’ review.
The New York Court of Appeals accepted certification and answered the question in the affirmative. New York General Business Law §349 is a consumer protection statute designed to protect against “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.” NY Gen. Bus. Law §349(a). Originally intended to be enforced by the attorney general, a 1980 amendment included a private right of action, to afford additional protection for consumers. Thus, “any person who has been injured by reason of any violation of this section may bring an action in his own name to enjoin such unlawful act or practice, an action to recover his actual damages or fifty dollars, whichever is greater, or both such actions.” NY Gen. Bus. Law §349(h).
In reviewing §349, the New York Court of Appeals acknowledged that the scope of the statute “is intentionally broad, applying ‘to virtually all economic activity.’” (internal citations omitted). To sustain a valid §349 claim, a plaintiff must allege: (1) a deceptive act or practice directed toward consumers, and (2) that such act or practice resulted in actual injury to the plaintiff.
In the case at bar, Plaintiff alleged that: (1) Defendants knew that smoking causes cancer, misrepresented the dangers of smoking and engaged in a campaign to encourage consumers to smoke; and (2) consequently, medical costs increased, resulting in actual damages to Plaintiff-insurer who bore such costs. In essence, Plaintiff's alleged injuries were derivative of the actual injuries incurred by its insureds/subscribers. Under New York common law, however, an insurer or third-party payer may not recover derivatively for injuries suffered by its insured. In such circumstances, an insurer’s sole remedy is in equitable subrogation.
Despite this common law restriction, Plaintiff argued that, in enacting NY Gen. Bus. Law §349, the Legislature “intended to abrogate the common law rule and permit recovery for derivative injuries.” The New York Court of Appeals was not persuaded by this argument. Although the language of the statute permits recovery by any person injured “by reason of” a deceptive business practice, the Court would not “presume an intent to include recovery for derivative injuries in the absence of a clear indication of such intent from the Legislature” and cautioned against expanding the scope of the statute. In so holding, the Court expressly recognized that while §349 is “a broad, remedial statute,” under which proximate cause is not required, that proximate cause can not be confused with the concept of indirect injury. An injury is indirect or derivative when it arises solely as a result of injuries sustained by another. Although Plaintiff actually paid the costs incurred by its insureds/subscribers, its injuries are indirect because they “arose wholly as a result of smoking related illnesses suffered by those subscribers.” The Court stated that what is necessary to bring a suit under §349 is that the party actually injured be the one to bring suit. Plaintiff in the instant case was not directly injured in this sense.
Accordingly, the Court answered the certified question in the affirmative and held that a third-party payer has no standing to bring a direct action under NY Gen. Bus. Law §349 because its claims are too remote. An insurer or third-party payer’s remedy remains an action in equitable subrogation.
Learning Point:
The New York Court of Appeals now has resolved the issue of whether an insurer or third-party payer can bring an action alleging deceptive business practices under New York Gen. Bus. Law §349. Insurers or third-party payers do not have standing to bring direct actions under §349, because their claims are too remote. A §349 claim can not survive unless a plaintiff can show direct actual injury suffered by the plaintiff itself. Since an insurer or third-party payer’s injuries are derivative of their insured’s/subscriber’s injuries, insurers and third-party payers may only file §349 actions in equitable subrogation. •
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