Defendants' False and Fraudulent Statements, Representations, and

¶Promises Were Material

¶Materiality is a fundamental element of common law fraud. See Neder v. United States, 527

¶U.S. 1,²²²² Once discovered by RJR, Philip Morris contributed $35 million to tobacco growers to convert their tobacco curing facilities. Philip Morris now requires flue-cured tobacco from all its (continued...) -680- (1999). A matter is material if:

(a) a reasonable [person] would attach importance to its existence or nonexistence in determining his [or her] choice of action in the transaction in question; or

(b) the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his [or her] choice of action, although a reasonable [person] would not so regard it.

¶Restatement (Second) of Torts, § 538(2)(a)-(b) (1977).35

¶With respect to the second prong of the Restatement's definition of materiality, the D.C. Circuit has explained that a fraudulent scheme can exist even when "no reasonable [prudent] person

¶It is noteworthy that cases involving the FTC's determinations of materiality are consistent with the Court's finding here, even though such cases are brought pursuant to the FTC Act rather than the RICO statute. As a general rule, deceptive advertising or claims permit an inference "that the deception will constitute a material factor in a purchaser's decision to buy." FTC v. Colgate-Palmolive Co., 380 U.S. 374, 391-92 (1965); see also FTC v. Brown & Williamson Tobacco Corp., 778 F.2d 35, 40-43 (D.C. Cir. 1985) (holding that deceptive advertising touting Defendants' low tar cigarettes created an "inherent tendency to deceive" consumers and was material); FTC v. Wilcox, 926 F. Supp. 1091, 1098 (S.D. Fla. 1995) ("Express claims or deliberately-made implied claims used to induce the purchase of a particular product or service are presumed to be material"). Moreover, materiality is presumed for matters that "significantly involve health, safety, or other areas with which the reasonable consumer would be concerned." Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000) (quoting Deception Statement, 103 FTC at 182); see also Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992).

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¶would have believed [the defendant's] misrepresentations . . . [or] where [people] unreasonably believed the representations made to them." United Stated v. Maxwell, 920 F.2d 1028, 1036 (D.C. Cir. 1990). Instead, "the only issue is whether there is a plan, scheme or artifice intended to defraud." Id. at 1036 (quoting United States v. Brien, 617 F.2d 299, 311 (1st Cir. 1980)).

¶Although this Circuit emphasizes the second clause of the Restatement definition, this Court concludes that Defendants' statements qualify as material under both clauses. First, Defendants' assertion that no reasonably prudent consumer would have relied upon or believed their fraudulent misrepresentations, because of contrary information available in the public domain, strains credulity. For much of the period during which the alleged racketeering acts took place, Defendants were the primary source of information regarding cigarette smoking and tobacco addiction. See e.g., Findings of Fact at Section V(B)(2)(b). The public health community had a far less sophisticated understanding of the health hazards associated with smoking and for fewer resources to disseminate the information it did have. See id. It would have been reasonable, therefore, for consumers to believe that Defendants' statements accurately reflected current knowledge about the dangers of smoking.

¶In addition, one can only wonder just why Defendants were spending millions upon millions of dollars in advertising every year if they thought no one -- smoker, potential smoker, or member of the public -- was going to believe it and rely on it. The question answers itself. Moreover, Defendants knew, as their many internal documents reveal, just how badly ordinary smokers addicted to nicotine did not want to believe, in the early days, that smoking was disastrous for their health and then as the evidence mounted, wanted to believe that they could smoke low tar light cigarettes and not sacrifice their health. For Defendants to now deny that the "disinformation" they were spending millions on to deceive the public would not have been of import to a reasonable person in determining his or her choice of action is the height of disingenuousness. Thus, Defendants' statements were material under the "reasonable person" standard of the Restatement's definition of materiality.

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¶Second, the Government has produced ample and convincing evidence to show that Defendants' statements were material under the second clause of the Restatement definition as well. Many of Defendants' statements were made with the intention to mislead the public. See generally Findings of Fact. For example, shortly after issuance of the Surgeon General's Report on secondhand smoke, Philip Morris advertisements featured smokers "talking" to the reader and asserting, "Please don't tell me my cigarette smoke is harmful to you. There's just no convincing proof that it is," and "I know there's no proof my smoke can hurt you." (no bates) (US 20554). Defendants' internal documents demonstrate that they expressly recognized that their customers were "likely to regard [these fraudulent misrepresentations] as important in determining [their] choice of action," Restatement (Second) of Torts, § 538(2)(b). See id. at 67-69 & n.4; Order # 235, Mem. Op. at 2. Defendants' conduct is, therefore, material under the second prong of the Restatement definition because Defendants knew that consumers would rely on their advertising and marketing when determining whether to smoke cigarettes.

¶Defendants attempt to show that their statements were not material by defining a "material statement" as one that "must 'be of importance to a reasonable person in making a decision about a particular matter or transaction.'" Defs.' Corrected Post-Trial Brief at 23 (citing United States v. Winstead, 74 F.3d 1313, 1320 (D.C. Cir. 1996). Under that definition, Defendants claim, that their statements could only be material if they were "of that type that reasonable consumers would take into account in purchasing cigarettes." Id. at 73. Applying their narrow definition of materiality, Defendants allege, first, that the Government cannot show that consumers relied on Defendants' statements when considering to purchase cigarettes, see id. at 68, and, second, that the public had reached a "saturation" level of awareness about smoking and "universally disbelieved" statements by Defendants. See id. at 74.

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¶As the Government notes in its brief, however, Defendants' definition of materiality, which focuses solely on the "reasonable person" standard, is insufficient. See Govt Post-Trial Brief at 11. Defendants' liability does not hinge solely upon whether their statements "[were of the type that] reasonable consumers would take into account," Defs.' Corrected Post-Trial Brief at 73, but also on whether "[Defendants'] "knew or [had] reason to know that [consumers of tobacco products] regard[ed] or [were] likely to regard [Defendants' statements] as important in [their decision to smoke cigarettes]," Restatement (Second) of Torts § 538 (2)(b). Contrary to Defendants' assertions, the evidence here demonstrates that their statements are material under both the Restatement tests.36

¶Defendants' attempts to prove that consumers disregarded or disbelieved their statements about the safety hazards associated with smoking are not to be believed. See Defs.' Corrected Post- Trial Brief at 68, 74. The clear weight of the evidence shows that Defendants took advantage of and

¶Defendants also may not escape liability for their scheme to defraud by claiming that the public was not injured by their misconduct. To establish a mail or wire fraud violation, a plaintiff is not required to prove that: (1) the wrongdoer succeeded in deceiving or defrauding the intended victim; (2) the victim suffered any loss of money, property, or other harm; or (3) the intended victim detrimentally relied upon the wrongdoer's fraudulent misconduct. See Philip Morris, 304 F. Supp. 2d at 69-70; Philip Morris, 116 F. Supp. 2d at 153; Philip Morris, 273 F. Supp. 2d at 6. Thus, "the common-law requirements of justifiable reliance and damages . . . plainly have no place in the federal statutes." Neder, 527 U.S. at 24-25.

1617

¶exploited their customers' lack of knowledge concerning cigarette use and nicotine addiction. Thus,

¶Defendants' statements were material to consumers of tobacco products and to others, such as the recipients of secondhand smoke, who were affected by Defendants' products.

¶For all the foregoing reasons, the Court concludes that Defendants are liable for violations of 18 U.S.C. § 1962(D).37