The opinion of the court was delivered by: McAVOY, District Judge.
MEMORANDUM — DECISION & ORDER
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.
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).
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.
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).
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.
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.
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 ...