12 N.Y.3d 616 (2009)

A municipality lacks standing under General Business Law § 349(h) to sue for lost tax revenue when its injury is derivative of injuries allegedly suffered by consumers misled by deceptive acts, and cannot assert a common law public nuisance claim predicated solely on Public Health Law § 1399-ZZ when the primary legislative intent of that law was to prevent underage smoking, not to address tax evasion.

Summary

The City of New York sued out-of-state cigarette sellers, alleging they illegally marketed and shipped cigarettes to city residents, depriving the city of tax revenue. The City claimed violations of General Business Law § 349 and public nuisance based on Public Health Law § 1399-ZZ. The Court of Appeals held that the City lacked standing under § 349(h) because its injury was derivative of consumer injury. Further, the Court determined that the public nuisance claim, predicated on a statute primarily aimed at preventing underage smoking, could not be used to address alleged tax evasion. This decision reinforces the principle that indirect injuries are not compensable under § 349(h) and clarifies the scope of public nuisance claims related to public health laws.

Facts

Out-of-state cigarette sellers marketed and shipped cigarettes to New York City residents. These sellers were located in states with low cigarette taxes. Some sellers misrepresented that their sales were tax-free, or that customers didn’t have to pay cigarette taxes. The City alleged that these misrepresentations, coupled with failures to file Jenkins Act reports, led to lost tax revenue.

Procedural History

The federal district court dismissed the City’s General Business Law § 349 and public nuisance claims. The Second Circuit certified two questions to the New York Court of Appeals regarding the City’s standing to assert these claims.

Issue(s)

1. Whether the City has standing to assert its claims under General Business Law § 349?
2. Whether the City may assert a common law public nuisance claim that is predicated on N.Y. Public Health Law § 1399-ZZ?

Holding

1. No, because the City’s claimed injury, lost tax revenue, is derivative of injuries allegedly suffered by consumers who purchased cigarettes over the internet.
2. No, because the Legislature did not contemplate that Public Health Law § 1399-ZZ would be used as the predicate for public nuisance actions in cases that primarily involve alleged tax evasion, as its primary purpose was to prevent underage smoking.

Court’s Reasoning

Regarding the General Business Law § 349 claim, the Court relied on its prior decision in Blue Cross & Blue Shield of N.J., Inc. v Philip Morris USA Inc., holding that derivative actions are barred under § 349(h). The Court reasoned that the City’s injury was indirect because it arose solely from injuries sustained by consumers who were allegedly misled. The court emphasized that a “but for” causal connection is insufficient to state a claim under section 349(h). The Court rejected the City’s argument that alleging consumer injury or harm to the public interest was sufficient, stating that such a broad interpretation would lead to a “tidal wave of litigation.”

Regarding the public nuisance claim, the Court noted that while the Legislature has the authority to deem certain activities public nuisances, Public Health Law § 1399-ZZ was primarily aimed at preventing underage smoking, not addressing tax evasion. The Court applied a similar analysis to that used in determining whether an implied private right of action exists, considering whether the City was in the class for whose benefit the statute was enacted, whether recognizing the action would promote the legislative purpose, and whether it would be consistent with the legislative scheme. The Court concluded that allowing the public nuisance claim would not be consistent with the legislative scheme, as the Legislature had entrusted enforcement of penalties to local district attorneys and the Commissioner of Health. As such the court stated, “The presence of such a scheme here, when coupled with the Legislature’s clear expressions that the public health thrust of section 1399-ZZ was related to the prevention of underage smoking, persuades us that the Legislature did not intend its findings to authorize a public nuisance claim based primarily upon alleged tax evasion”.