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THE EUROPEAN COMMUNITY v. JAPAN TOBACCO
February 19, 2002
THE EUROPEAN COMMUNITY, ET AL. PLAINTIFFS,
JAPAN TOBACCO, INC., ET AL., DEFENDANTS. THE EUROPEAN COMMUNITY, ET AL. PLAINTIFFS, V. RJR NABISCO, INC., ET AL., DEFENDANTS. DEPARTMENT OF AMAZONAS, ET AL. PLAINTIFFS, V. PHILIP MORRIS COMPANIES, INC., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Nicholas G. Garaufis, United States District Judge.
Now before this court are motions by RJR Nabisco, Inc., Philip Morris,
Inc., Japan Tobacco, Inc., and other tobacco industry entities (the
"Defendants") to dismiss the complaints in the above-captioned cases.
The complaints have been brought by the European Community, various
individual member nations of the European Community, and Departments of
nation of Colombia (the "EC," the "Member States," and the
"Departments," respectively, or, together, "Plaintiffs"). Because, for
the purposes of these motions, there are no relevant differences among
the three above-titled cases, this opinion addresses all three. For the
reasons discussed below, Defendants' motions are GRANTED in their
Factual & Procedural History
This action stems from a series of cases that have been before this
court, discussed in The European Community v. RJR Nabisco, Inc.,
150 F. Supp.2d 456, 459-61 (E.D.N.Y. 2001) ("EC I"). The above-titled
cases brought against RJR Nabisco, et al., and against Japan Tobacco,
Inc., et al., were brought by the Member States and the E.C. after E.C.
I, where this court found that the EC, the sole plaintiff in E.C. I,
lacked standing to bring civil claims under the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. § 1962, et seq. ("RICO"). The
claims currently before the court are substantially similar to those of
E.C. I, and this court presumes familiarity with the complex factual and
procedural background reviewed in that opinion. The following brief
factual recitation is taken largely from E.C. I.
Plaintiffs allege, in general terms, that Defendants have been actively
involved in smuggling contraband cigarettes into the EC, the Member
States, and the Departments, as well as various other locations around
the world, for many years; that Defendants' smuggling activities span the
globe, and include conduct and effects in the Eastern District of New
York; that Defendants entered into an agreement with distributors,
customers, agents, consultants and other co-conspirators to participate
in a common scheme to smuggle contraband cigarettes into the EC, the
Member States, and the Departments; that Defendants conspired with others
to promote and conceal their smuggling activities by means including,
inter alia, fixing the price of contraband cigarettes; and that in the
process of smuggling cigarettes, Defendants engaged the business and
services of narcotics traffickers and money launderers, and in so doing
facilitated or engaged in the laundering of tainted money. Plaintiffs
further allege that, as a result of the foregoing, Plaintiffs have
suffered economic harm in the form of lost tax revenues and other costs
attributable to rampant illegal activities. Finally, Plaintiffs allege
that Defendants agreed with co-conspirators to commit tortious acts, and
did in fact commit tortious acts, in conducting the smuggling scheme.
Plaintiffs pray for monetary, declarative, and injunctive relief to
remedy the foregoing actions.
In reviewing a motion brought pursuant to Fed.R.Civ.P. 12(b)(6), the
Court must accept all factual allegations in the complaint as true and
draw all reasonable inferences from those allegations in the light most
favorable to the plaintiff. See Allbright v. Oliver, 510 U.S. 266, 268
(1994); Burnette v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999); Jaghory
v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997). The
complaint may be dismissed only if "it appears beyond doubt, even when
the complaint is liberally construed, that the plaintiff can prove no set
of facts in support of his claim which would entitle him to relief."
Hoover v. Ronwin, 466 U.S. 558, 587 (1984) (citing Conley v. Gibson,
355 U.S. 41, 45-46 (1957)). In deciding such a motion, the "issue is not
whether a plaintiff will ultimately prevail but whether the claimant is
entitled to offer evidence to support the claims." Bernheim v. Litt,
79 F.3d 318,
321 (2d Cir. 1996) (internal quotation marks and citations omitted).
The common law revenue rule was crafted in eighteenth-century England,
in a time of intense commercial rivalry between nations. Note, 77 Harv.
L. Rev. 1327, 1328 (1964). The English courts crafted the rule in large
part because "refusing acknowledgment of a foreign revenue law . . .
promote[d] British trade that would otherwise have been unlawful." Barbara
A. Silver, Modernizing the Revenue Rule; The Enforcement of Foreign Tax
Judgments, 22 Ga. J. Int'l & Comp. L. 609, 613 (1992). That rationale
eventually became more of an embarrassment than a boon to British and
American economic and judicial sensibilities. See The Anne, 1 F. Cas.
955, 1 Mason 508, 956 No. 412 (C.C.D. Mass. 1818) (Story, J.) (attacking
the refusal of courts to enforce foreign municipal regulations as
contrary to principles of national comity, sound morals, and public
justice); Kovatch, Recognizing Foreign Tax Judgments, 22 Hous. J. Int'l
L. 265, 287-288 (2000). The revenue rule, however, was never expressly
overturned, and lived on, albeit in somewhat tempered form. See Banco
Frances e Brasileiro v. Doe, 36 N.Y.2d 592, 597 (1975) ("[T]he rule [is
not] analytically justifiable. Indeed, much doubt has been expressed that
the reasons advanced for the rule, if ever valid, remain so. But inroads
have been made.")
Case law in this circuit has recognized the great change in conditions
under which the revenue rule exists. United States v. Trapilo,
130 F.3d 547, 550 n. 4 (2d Cir. 1997) ("In an age when virtually all
states impose and collect taxes and when instantaneous transfer of assets
can be easily arranged, the rationale for not recognizing or enforcing
tax judgments is largely obsolete.") (quoting Restatement (Third) of the
Foreign Relations Law of the United States § 483, Reporters Note 2 at
613 (1987)). To this date, however, the revenue rule has not been
overruled, and while times have changed greatly, the revenue rule has
not. This court is controlled by a still-vital version of the rule,
predicated on considerations of institutional integrity, recently
articulated in Attorney General of Canada v. R.J.
Reynolds Tobacco Holdings, Inc., 268 F.3d 103 (2d Cir. 2001) ("Attorney
General of Canada"). The following discussion is controlled by that
decision's treatment of the revenue rule.
B. The Revenue Rule After Attorney General of Canada
The revenue rule provides "that courts of one sovereign will not
enforce final tax judgments or unadjudicated tax claims of other
sovereigns." Attorney General of Canada, 268 F.3d at 109. Furthermore,
although the Second Circuit, before Attorney General of Canada, "ha[d]
not ruled on the precise scope of the rule," it is now clear that this
Circuit is controlled by "that version of the revenue rule under which
United States courts abstain from assisting foreign sovereign plaintiffs
with extraterritorial tax enforcement." Attorney General of Canada 268
F.3d at 109, 115, 119, 128. Despite the foregoing language, however, this
version of the rule is neither a manifestation of standard abstention
doctrine, nor an invitation to exercise discretion, as Plaintiffs would
have this court understand it. (Pls.' Mem. of Law in Opp'n to Defs.'
Mot. Under 12(B)(6) to Dismiss the Am. Compl. For Failure to State a
Claim Upon Which Relief Can be Granted at 35-39.) Instead, when
triggered, this "time-honored common law prudential rule" will foreclose
relief absent an "indication that Congress
intended . . . to abrogate the revenue rule."*fn1 Attorney General
of Canada 268 F.3d at 106, 129.
In determining whether the revenue rule is triggered, a court that is
"presented with . . . a request which potentially implicates the revenue
rule" must "examine whether the substance of the claim is, either
directly or indirectly, one for tax revenues." Attorney General of
Canada 268 F.3d at 130. The examination is guided by the Second Circuit's
instruction that "[w]hat matters is not the form of the action, but the
substance of the claim." Id. Where a claim seeks to enforce foreign tax
laws, it is of no import that the party bringing the claim does so in
compliance with validly enacted United States law, as the revenue rule
does not entertain "a formalistic distinction between an action based
explicitly and entirely on [foreign] law and one which, in effect, pleads
violations of [foreign] law through the medium of a United States
statute." Attorney General of Canada 268 F.3d at 131, n. 39.
Analysis of whether a claim is a direct claim for foreign tax revenues
turns on "the object of the claim." Id. If, "at bottom, [a foreign
sovereign plaintiff] would have a United States court require defendants
to reimburse [the foreign sovereign plaintiff] for [the foreign
sovereign's] unpaid taxes," then the claim is a direct one. Id.
Indirect claims will also run afoul of the revenue rule, and include any
claim whereby the damages alleged by plaintiff are derivative of unpaid
foreign taxes, or based on the costs of enforcing foreign tax laws. Id.
at 132. Thus, any action in which the court "will have to pass on the
validity of [foreign] revenue laws and their applicability [to the claims
at bar]" constitutes "enforcing [foreign] revenue laws," and thereby
triggers the revenue rule. Attorney General of Canada 268 F.3d 108
(quoting Attorney General of Canada v. RJ Reynolds Tobacco Holdings,
Inc., 103 F. Supp.2d 134, 143 (N.D.N.Y. 2000)).
3. Exceptions to the Rule
Once the revenue rule is triggered, an action is barred from going
forward, with one exception: where the plaintiff can show adequate
manifestation of executive or legislative will sufficient to allay the
foreign relations and separation of powers concerns underlying the
revenue rule, suit may proceed. The exception stems from the fact that
the revenue rule derives its continued vitality from foreign relations
and separation of powers concerns. See Attorney General of Canada 268
F.3d at 115, 119, 125, 126, 128, 132. Thus, the concerns underlying the
current version of the revenue rule are satisfied where the proper
coordinate branch adequately confers its blessings on jurisdiction.
Therefore, in that instance, a court may go forward with suit and pass on
foreign revenue laws, despite the revenue rule. As an example, the
Attorney General of Canada Court indicates that when the United States
brings a suit, action will not be barred by the revenue rule. This is
because, when the United States brings the action, "the United States
Attorney acts in the interest of the United States, and his or her
conduct is subject to the
oversight of the executive branch. Thus, the foreign relations interests
of the United States may be accommodated throughout the litigation."
Attorney General of Canada 268 F.3d at 123.*fn2
Finally, the revenue rule, as a rule of common law, may be abrogated by
superior law. A treaty affirmatively conferring jurisdiction over
foreign revenue laws in contravention of the revenue rule will supplant
the common law rule by virtue of being supreme law of the land.*fn3
U.S. CONST. art. VI. Validly enacted legislation may also abrogate a
common law rule. City of Milwaukee v. Illinois and Michigan, 451 U.S. 304,
313-14 (1981). "In order to abrogate a common-law principle, the statute
must `speak directly' to the question addressed by the common law."
Attorney General of Canada 268 F.3d at 127 (quoting United States v.
Texas, 507 U.S. 529, 534 (1993)). To do so, a statute must demonstrate
"clear evidence of congressional intent to abrogate [the common law
rule]." Attorney General of Canada 268 F.3d at 127.
III. Application of the Revenue Rule to the Case at Bar
Plaintiffs bring various RICO claims predicated on two grounds:
smuggling and money laundering. In this section of the opinion, the
court will consider the RICO claims pursuant to smuggling grounds. The
court will consider the claims in light of the money laundering grounds
at Part IV of this opinion.
1. The RICO Smuggling Claims Trigger the Revenue Rule
Facing a similar set of RICO claims for cigarette smuggling, the trial
court in Attorney General of Canada held,
[T]o state a civil RICO claim, Canada must prove
more than the mere intent to defraud another of
property or the mere establishment of a scheme to
defraud utilizing the mails or wire communications
in furtherance of that scheme. Again, to have
standing to recover, Canada must allege injury in
fact, which ultimately obligates it to prove that
some act or acts in furtherance of the scheme caused
it to sustain injury. See 18 U.S.C. § 1964(c);
[Sedima, S.P.L.R. v. Imex Co., Inc., 473 U.S. 479,
S.Ct. 3275, 3285 (1985)]. This distinction
is critical to the outcome of this action. . . .
Thus, to the extent Canada seeks to prove ...
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