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THE EUROPEAN COMMUNITY v. JAPAN TOBACCO

February 19, 2002

THE EUROPEAN COMMUNITY, ET AL. PLAINTIFFS,
V.
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 the 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 entirety.

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.

Discussion

I. Standard of Review

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).
II. The Revenue Rule
A. Introduction
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
1. The Rule
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.
2. Triggering the Rule
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
4. Overriding the Rule
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
A. The RICO claims
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, 496, 105 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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