ATTY GEN OF CANADA v. RJ REYNOLDS TOBACCO HOLDINGS

The opinion of the court was delivered by: McAVOY, District Judge.

The Attorney General of Canada ("Canada") commenced the instant action against Defendants alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et. seq. arising out of an alleged smuggling scheme designed to avoid the payment of Canadian taxes. Presently before the Court are separate motions by all of the Defendants to dismiss the action pursuant to FED. R. CIV. P. 12.

I. BACKGROUND

Because this matter is before the Court on Defendants' motions to dismiss pursuant to FED. R. CIV. P. 12, the following facts elicited from the Complaint are assumed to be true. See Hartford Fire Ins. Co. v. California, 509 U.S. 764, 113 S.Ct. 2891, 2895, 125 L.Ed.2d 612 (1993).

A. The Parties

Plaintiff is the Attorney General of Canada, who brought the instant action on behalf of the nation of Canada.

At all times relevant hereto, Defendants R.J. Reynolds Tobacco Holdings, Inc. ("RJR-Holdings") (a Delaware corporation with its principal place of business in New York) and R.J. Reynolds Tobacco Company ("RJR-US") (a New Jersey corporation with its principal place of business in North Carolina), were the corporate parents of the other four Defendant corporations herein: RJR-Macdonald, Inc. ("RJR-Macdonald") (a Canadian corporation), R.J. Reynolds Tobacco Company PR ("RJR-PR") (a Delaware corporation with its principal place of business in Puerto Rico), R.J. Reynolds International, Inc. ("RJR-Int.") (a Delaware corporation with its principal place of business in Switzerland), and Northern Brands International, Inc. ("NBI") (a Delaware corporation with its principal place of business in North Carolina), which four companies will collectively be referred to as the "RJR Subsidiaries." Defendant Canadian Tobacco Manufacturers Council ("CTMC") is a Canadian corporation that acts as a trade association for the three major tobacco manufacturers in Canada: Imperial Tobacco Limited; Rothmans, Benson & Hedges, Inc.; and RJR-Macdonald.

B. The Canadian Taxation Scheme

In the 1980s and 1990s, Canada imposed three types of levies, or taxes, on tobacco. The Excise Act imposed taxes at the point of manufacture. The Excise Tax Act imposed taxes on the sale or delivery of tobacco products. Finally, the goods and services tax ("GST") imposed taxes on the sale of tobacco at the wholesale and retail levels. In addition to these national taxes, each of the provincial governments imposed its own duties and taxes on tobacco products in an amount roughly equal to that of the national taxes. See Comp., ¶¶ 47-54.

Between 1982 and 1991, Canada increased the taxes on tobacco products by approximately 550 percent. See id., ¶ 55. Some of these tax increases are purported to have been imposed to reduce tobacco consumption. See id., ¶¶ 57, 59. In 1989, before the major tax increases, the average price per carton for cigarettes in Canada was under $26.00 (CDN). By 1991, the price per carton in Canada ranged from $42.00 to $60.00, the actual price depending upon the amount of taxes imposed by the provincial governments. See id., ¶ 61. The Canadian taxes represented approximately $35.00 of the cost per carton, see id., which created a large discrepancy between the price of tobacco in Canada and the United States. Id., ¶ 60.

Tobacco manufactured in Canada and moved "in bond," or in transit, was exempt from taxation provided that it was not intended for domestic consumption. See Comp., ¶ 51.*fn1 Tobacco manufacturers seeking to move tobacco in bond had to prepare the proper export documentation, which included a representation of the amount of tobacco in each shipment that was to be consumed outside of Canada. See Comp., ¶ 51. Further, tobacco to be exported was required to be marked "Not For Sale in Canada." Id., ¶ 52. Thus, Canadian tobacco exported to the United States could be sold for an approximate average price of $22.00 (CDN) per carton, or approximately one-half the per-carton price in Canada. If tobacco products were imported into designated foreign trade zones ("FTZs") within the United States, United States duties and taxes could also be avoided. See id., ¶ 64. Tobacco goods that are legally imported into Canada are required to be declared. Upon import, the importer of record is obligated to pay any applicable Canadian taxes.

In 1992, in an attempt to reduce the incentive to smuggle exported products back into Canada, Canada imposed an export tax on cigarettes for export or sale through duty-free stores. See id., ¶ 95.

In 1994, in a further effort to combat tobacco smuggling, Canada "rolled back" the excise taxes on tobacco products, reimposed an export tax on Canadian tobacco products, and imposed a three year health promotion surtax on tobacco manufacturing companies' profits. See id., ¶¶ 129-33.

C. The Alleged Smuggling Schemes

Canada alleges that prior to 1991, RJR Int. established the Special Markets Division in North Carolina ("Special Markets"), which sold tobacco products duty-free to Latin America, South America, the Caribbean, Mexico, and Canada. Canada further alleges that RJR-Macdonald exported Canadian tobacco to Special Markets, which then resold the tobacco products to certain customers. With RJR-Macdonald's and RJR-Int.'s participation, these customers then arranged to have the tobacco smuggled back into Canada for sale on the black market, thereby avoiding the payment of Canadian taxes. See id., ¶ 69-71.

According to the Complaint, in order to stave off declining profits, in 1991 and 1992, RJR-Macdonald devised a scheme to export Canadian tobacco to customers who would then ship the product to the St. Regis Mohawk Reservation (the "Reservation"). From the Reservation, which straddles the United States-Canadian border, the tobacco was smuggled back into Canada for sale on the black market, free of duties and taxes. See id., ¶¶ 72-94.

The Complaint alleges that RJR-Macdonald representatives met with Larry Miller and Robert and Lewis Tavano, who operated a company called LBL Importing, Inc. ("LBL"). LBL apparently represented that it was in the business of buying Canadian tobacco and selling it to Native Americans, who then smuggled the tobacco back into Canada for sale on the black market. RJR-Macdonald exported the tobacco from Canada (thereby avoiding any Canadian excise taxes) through FTZs in Buffalo, New York to LBL and other customers. LBL and the other customers then shipped the products to the Reservation to be smuggled back into Canada. See id.

The Complaint further alleges that, in 1992, after Canada imposed the new export tax, RJR-Macdonald moved two production lines for Canadian cigarettes from its plant in Montreal to RJR-PR (thereby avoiding the export tax). The tobacco manufactured at RJR-PR allegedly was packaged in RJR-Macdonald packaging, sold to Caribbean intermediaries, shipped through FTZs to customers in upstate New York, transferred by the customers at the FTZs to the Reservation, and then smuggled into Canada, thereby avoiding any import and sales taxes. See id., ¶¶ 95-105.

It is alleged that in 1993, Defendants established NBI. Under the alleged NBI scheme, RJR-Macdonald manufactured tobacco in Canada and exported it to FTZs in New York. LBL then placed an order with NBI for the tobacco and wired money for the tobacco from LBL's account in New York to NBI's account in North Carolina. NBI paid a portion of the proceeds from LBL to RJR-Macdonald and another portion of the payment to either RJR-Macdonald, RJR-PR, or RJR-Int. After receiving payment, RJR-Macdonald notified the FTZs to transfer title to the customer (such as LBL); the customer then shipped the product to the Reservation; the tobacco was then shipped to the Canadian black market; and the resulting Canadian currency was then used to purchase United States checks and money orders to buy more cigarettes. See id., ¶¶ 110-28.

D. Criminal Proceedings

In 1997, a grand jury indicted twenty-one individuals on various counts alleging that those criminal defendants smuggled tobacco and liquor products from the United States to Canada through the Reservation. See United States v. Miller, 26 F. Supp.2d 415, 419 (N.D.N.Y. 1998). Similar to the Complaint herein, the indictment alleged that the smuggling scheme was designed to avoid the payment of duties and taxes levied by Canada upon the importation of tobacco products. See id. Many of the indicted individuals, including Miller and the Tavanos, pled guilty to violating 18 U.S.C. § 1956(h) (conspiracy to launder monetary instruments or to engage in monetary transactions in property derived from specified unlawful activity).

NBI pled guilty to aiding and abetting others who violated 18 U.S.C. § 542 (Entry of goods by means of false statements).

In 1999, Leslie Thompson, an executive of NBI, was indicted and ultimately pled guilty to violating 18 U.S.C. § 1956(h).

E. The Complaint

On December 21, 1999, Canada filed the instant lawsuit. The Complaint asserts four causes of action pursuant to RICO's civil action provision, 18 U.S.C. § 1964(c), alleging violations of 18 U.S.C. § 1962(c)(d) (the First through Fourth Causes of Action), and asserting a common law fraud claim (the Fifth Cause of Action). As required by this District's local rules, Canada also filed a Civil RICO statement. See N.D.N.Y.L.R. § 9.2 (1999).

II. DISCUSSION

A. The Pending Motions

Presently before the Court are motions by all Defendants seeking to dismiss the Complaint. The RJR Defendants (that is, all Defendants except CTMC), move to dismiss on the grounds that Canada's action is barred by the Revenue Rule and that the Complaint fails to state a claim under RICO. Defendants RJR-Holdings and RJR-US further move to dismiss under the Acts of State and Political Question doctrines. Defendants RJR-Int., RJR-Macdonald, RJR-PR, and NBI also move to dismiss this action because it is barred by the applicable statute of limitations. All the RJR Defendants have adopted and incorporated one another's motions to dismiss. The RJR Defendants also assert that, if the Court dismisses the RICO claim, it should decline to exercise supplemental jurisdiction over the common law fraud claim.

CTMC separately moves to dismiss on the grounds of lack of personal jurisdiction and forum non conveniens.

B. Standard of Review of RJR Defendants' Motions to Dismiss

In reviewing motions brought pursuant to FED. R. CIV. P. 12(b)(6), the Court must accept all allegations in the Complaint and draw all reasonable inferences in favor of the nonmoving party. See Burnette v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999). The Complaint may be dismissed only if "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Id. (quoting Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)).

With this standard in mind, the Court will now address the various arguments raised by Defendants.

C. The Revenue Rule

The RJR Defendants argue that Canada should not be entitled to maintain the instant action because it is, in essence, an attempt by Canada to recoup unpaid taxes and enforce its revenue laws (and obtain treble damages along the way), which is barred by the Revenue Rule. Canada responds that the Revenue Rule is inapplicable because it is not seeking to enforce its tax statutes, but, rather, is attempting to recover damages (some of which include lost tax revenues) as a result of violations of United States law (namely, RICO). Canada argues that "Canadian revenue law becomes relevant only as a matter of fact in calculating one component of Canada's damages, not as a matter of law in determining whether Defendants are liable." Dkt. No. 77, at p. 6 (emphasis in original).

The common law Revenue Rule provides that United States "courts will normally not enforce foreign tax judgments, the rationale for which is that issues of foreign relations are assigned to, and better handled by, the legislative and executive branches of the government." United States v. Trapilo, 130 F.3d 547, 550 (2d Cir. 1997), cert. denied, 525 U.S. 812, 119 S.Ct. 45, 142 L.Ed.2d 35 (1998); see also United States v. Boots, 80 F.3d 580, 587 (1st Cir.), cert. denied, 519 U.S. 905, 117 S.Ct. 263, 136 L.Ed.2d 188 (1996); Her Majesty the Queen in Right Of the Province of British Columbia v. Gilbertson, 597 F.2d 1161, 1164 (9th Cir. 1979) (quoting Lord Mansfield's proclamation in Holman v. Johnson, 98 Eng. Rep. 1120, 1121 (1775) that "no country ever takes notice of the revenue laws of another"). As Judge Learned Hand stated more than seventy years ago:

Moore v. Mitchell, 30 F.2d 600, 604 (2d Cir. 1929) (L. Hand, J., concurring), aff'd, 281 U.S. 18, 50 S.Ct. 175, 74 L.Ed. 673 (1930) (declining to express an opinion whether a federal court in one state would enforce the revenue laws of another state); see also United States v. First Nat'l City Bank, 379 U.S. 378, 85 S.Ct. 528, 538, 13 L.Ed.2d 365 (1965) (dissenting opinion) ("Foreign courts in customary international practice . . . do not enforce foreign tax judgments."); Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 84 S.Ct. 923, 932, 950, 11 L.Ed.2d 804 (1964) (noting that federal and state cases have relied on the principle that a court need not give effect to the penal or revenue laws of foreign countries or sister states); Milwaukee County v. M.E. White Co., 296 U.S. 268, 56 S.Ct. 229, 233, 80 L.Ed. 220 (1935) (assuming that courts of one state are not required to entertain a suit to recover taxes levied under the statutes of another, but holding that the courts of one state must give full faith and credit to judgments for such taxes in another state). While the Revenue Rule has not often been litigated in the federal courts, courts have, for example, refused to enforce foreign tax judgments in United States courts. See Gilbertson, 597 F.2d 1161. Moreover, while the origins of the Revenue Rule and its continued applicability are subject to serious question (at least with respect to the enforcement of foreign tax judgments as opposed to unadjudicated tax claims),*fn2 the rule appears to be the law of this Circuit. See U.S. v. First Nat. City Bank, 321 F.2d 14, 23-24 (2d Cir. 1963), rev'd on other grounds, 379 U.S. 378, 85 S.Ct. 528, 13 L.Ed.2d 365 (1965); Moore, 30 F.2d at 602; see also Trapilo, 130 F.3d at 552-53.*fn3

In First Nat. City Bank, the Second Circuit clearly recognized the Revenue Rule when it stated that "[i]t has long been a general rule that one sovereignty may not maintain an action in the courts of another state for the collection of a tax claim." 321 F.2d at 23-24. The Moore Court held such a rule applicable to tax claims among states (although the Supreme Court later held that states must give full faith and credit to tax judgments of other states). See Moore, 30 F.2d 600.

Arguably, the Trapilo Court neither expressly recognized nor disavowed the Revenue Rule. See 130 F.3d at 550. Based upon the Trapilo Court's holding that a prosecution for a violation of 18 U.S.C. § 1343 would not implicate the Revenue Rule because such a prosecution would not necessitate the construction of Canadian revenue law, it was not required to reach the issue currently before this Court. However, it could be argued that the Trapilo Court recognized the existence and potential applicability of the Revenue Rule in a proper case when, in determining that a prosecution for wire fraud did not impinge upon the Revenue Rule, it stated that "[t]he intent to defraud does not hinge on whether or not the appellees were successful in violating Canadian revenue law. . . . Consequently, there is no obligation to pass on the validity of Canadian revenue law, and the common law revenue rule is not properly implicated." 130 F.3d at 552-53. That the Revenue Rule is recognized in this Circuit is supported by the Trapilo Court's further statement that "[t]he simple fact that the scheme to defraud involves a foreign sovereign's revenue laws does not draw our inquiry into forbidden waters reserved exclusively to the legislative and executive branches of our government." Id., at 553. Reading these three cases together, the Court finds the Revenue Rule to be recognized in this Circuit.

The United States — Canadian Income Tax Convention Treaty of 1980 (the "Treaty") does not alter this result. That Treaty permits states to assist Canada in the collection of certain specified taxes (and vice versa). See Dkt. 79, Ex. 17, p. 2351, Art. XXVI A(1). The technical explanation to paragraph 1 explicitly notes that "[t]his provision overrides the traditional rule that a court judgment based on a tax debt is not enforceable in a foreign jurisdiction." Id. (emphasis supplied). Importantly, just as the technical explanation speaks to abrogation of the Revenue Rule with respect to judgments (as opposed to unadjudicated revenue claims), the Treaty itself speaks only to providing assistance with respect to "finally determined" revenue claims. See id. at Art. XXVI A(2). The technical explanation defines "[a] revenue claim [as] finally determined when the applicant State has the right under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted." See id. Thus, the Treaty speaks only to judgments or their equivalent; not to efforts by Canada to enforce its revenue laws in the first instance in courts in the United States. See id. at Art. XXVI A(3),(5). The Treaty further provides that courts in the United States may not engage in "judicial review of . . . [Canada's] finally determined revenue claim . . . based on any such rights that may be available under the laws ...