268 F.3d 103 (2nd Cir. 2001), 2001, Atty. Gen. Canada v R.J. Reynolds Tobacco

Docket Nº:Spring Term, 2001
Citation:268 F.3d 103
Party Name:THE ATTORNEY GENERAL OF CANADA, PLAINTIFF-APPELLANT, v. R.J. REYNOLDS TOBACCO HOLDINGS, INC., R.J. REYNOLDS TOBACCO CO., R.J. REYNOLDS TOBACCO INTERNATIONAL, INC., RJR-MACDONALD, INC., R.J. REYNOLDS TOBACCO COMPANY, PUERTO RICO, NORTHERN BRANDS INTERNATIONAL, INC., AND CANADIAN TOBACCO MANUFACTURERS COUNCIL, DEFENDANTS-APPELLEES. Docket No. 00-7972
Case Date:October 12, 2001
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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268 F.3d 103 (2nd Cir. 2001)

THE ATTORNEY GENERAL OF CANADA, PLAINTIFF-APPELLANT,

v.

R.J. REYNOLDS TOBACCO HOLDINGS, INC., R.J. REYNOLDS TOBACCO CO., R.J. REYNOLDS TOBACCO INTERNATIONAL, INC., RJR-MACDONALD, INC., R.J. REYNOLDS TOBACCO COMPANY, PUERTO RICO, NORTHERN BRANDS INTERNATIONAL, INC., AND CANADIAN TOBACCO MANUFACTURERS COUNCIL, DEFENDANTS-APPELLEES.

Docket No. 00-7972

Spring Term, 2001

United States Court of Appeals, Second Circuit

October 12, 2001

Argued: May 30, 2001

Plaintiff-Appellant appeals from a judgment of the United States District Court for the Northern District of New York (Thomas J. McAvoy, Chief Judge), granting defendants' motion to dismiss because plaintiff's cause of action was barred in part by the revenue rule and failed to state a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.

The judgment is affirmed, with Judge Calabresi dissenting.

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Philip S. Beck (Fred H. Bartlit, Jr., Jason L. Peltz, Lester C. Houtz, Christopher D. Landgraff, Karma M. Giulianelli, on the brief), Bartlit Beck Herman Palenchar & Scott, Chicago, Illinois; G. Robert Blakey, Notre Dame, Indiana; Robert A. Barrer, Hiscock & Barclay, Llp, Syracuse, New York, on behalf of Plaintiff-Appellant The Attorney General of Canada.

Jeffrey S. Sutton, Jones, Day, Reavis & Pogue, Columbus, Ohio; Timothy J. Finn, Christopher F. Dugan, Jones, Day, Reavis & Pogue, Washington, D.C.; Alan S. Burstein, Scolaro, Shulman, Cohen, Lawler & Burstein, P.C., Syracuse, New York, on behalf of Defendants-Appellees R.J. Reynolds Tobacco Holdings, Inc. and R.J. Reynolds Tobacco Co.

William C. Hendricks, III, King & Spalding, Washington, D.C.; Richard A. Schneider, King & Spalding, Atlanta, Georgia; Patricia A. Griffin & Danielle Sallah, King & Spalding, New York, New York, on behalf of Defendant-Appellee The Canadian Tobacco Manufacturers Council.

C. Stephen Heard, Jr. (Charles Sullivan, Kerry S. Sullivan, Edmund M. O'Toole, on the brief), Sullivan & Heard Llp, New York, New York, on behalf of Defendants-Appellees R.J. Reynolds Tobacco International, Inc., R.J. Reynolds Tobacco Company, Pr, RJR-MacDonald, Inc., and Northern Brands International, Inc.

John J. Halloran, Jr. (Frank H. Granito, III, Frank H. Granito, Jr., Kenneth P. Nolan, on the brief), Speiser Krause Nolan & Granito, New York, New York; Kevin A. Malone & Carlos A. Acevedo, Krupnick Campbell Malone Roselli Buser Slama Hancock McNelis Liberman & McKee, Fort Lauderdale, Florida; Andrew B. Sacks, Stuart H. Smith, John K. Weston, Sacks and Smith, L.L.C., New Orleans, Louisiana, on behalf of Amicus Curiae The European Community.

Jan Amundson, National Association of Manufacturers, Washington, D.C.; Robin S. Conrad, National Chamber Litigation Center, Inc., Washington, D.C.; Theodore B. Olson (Thomas G. Hungar, Jeffrey A. Wadsworth, on the brief), Gibson, Dunn & Crutcher Llp, Washington, D.C., on behalf of Amici Curiae The National Association of Manufacturers and The United States Chamber of Commerce.

Before: Calabresi and Katzmann, Circuit Judges, and Kaplan, District Judge.[*]

Katzmann, Circuit Judge.

This action was brought by the Attorney General of Canada ("Canada") on behalf of the government of Canada for damages based on lost tax revenue and additional law enforcement costs. Canada alleges that these damages resulted from a scheme facilitated by defendants to avoid various Canadian cigarette taxes by smuggling cigarettes across the United States-Canadian border for sale on the Canadian black market. Under the Racketeer Influenced and Corrupt Organizations Act

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("RICO"), 18 U.S.C. § 1961 et seq., Canada seeks revenue that it lost "from the evasion of tobacco duties and taxes," and from "[d]efendants' conduct [that] compelled [Canada] to rollback duties and taxes," as well as monies spent "seeking to stop the smuggling and catch the wrongdoers."

This case involves the construction of RICO in light of the common law doctrine known as the "revenue rule," a long established feature of the law of the United States and other nations including Canada, which holds that the courts of one sovereign will not enforce the tax judgments or claims of another sovereign. RICO broadly created a civil treble damages remedy for any person injured in its business or property by reason of a violation of the statute. Canada's action proceeds on the premise that the taxes it allegedly lost as a result of defendants' alleged RICO violations fall within RICO's damages provision. As the relief Canada seeks would be foreclosed by the revenue rule in the absence of RICO, and as there is no indication that Congress intended RICO to abrogate the revenue rule with respect to claims brought by foreign sovereigns under the statute, we have no choice but to conclude that RICO may not be used by Canada to seek recovery of lost tax revenues and tax enforcement costs as RICO damages. We therefore affirm. Although the judiciary can do no more, we note that Canada can seek recourse through the political branches - the executive and Congress.

Background

Unless otherwise noted, the facts that follow are drawn from the complaint and Civil RICO Statement, the latter filed pursuant to Local Rule 9.2 of the Northern District of New York. On a motion to dismiss, the court must accept as true all of the factual allegations in the complaint, make inferences from those allegations in the light most favorable to plaintiff, and liberally construe the complaint. See, e.g., Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001).

Defendants RJR-MacDonald ("RJR-MacDonald"), a Canadian company, and American companies R.J. Reynolds Tobacco Holdings, Inc. ("Holdings"), Northern Brands International, Inc. ("NBI"), R.J. Reynolds Tobacco Company ("RJR US"), R.J. Reynolds Tobacco International, Inc. ("International"), and R.J. Reynolds Tobacco Company PR ("RJR PR") (collectively "defendants") manufactured and distributed cigarettes during the period relevant to this action. Defendant Canadian Tobacco Manufacturers Council is a trade association to which RJR-MacDonald belongs.

In 1991, Canada doubled its cigarette taxes, raising the average price of a carton of cigarettes from $26 (Canadian) in 1989 to $48 (Canadian) in 1991. After this tax increase, RJR-MacDonald's sales and market share declined. In order to decrease sales prices and increase consumption, defendants developed a scheme to avoid paying Canadian cigarette taxes. They exported cigarettes from Canada to the United States, and RJR-MacDonald falsely declared to Canadian officials that the cigarettes were not for consumption in Canada. Defendants then sold the cigarettes to distributors, whom defendants knew were smugglers, who resold the cigarettes to Canadian black-market distributors. At least some of the smuggling was conducted by selling the Canadian cigarettes to residents of the St. Regis/Akwesasne Indian Reservation ("Reservation") on the New York-Canadian border. The scheme was then refined to take advantage of the Foreign Trade Zones ("FTZs") in upstate New York. Defendants exported Canadian cigarettes from Canada to the

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FTZs, where they were delivered to distributors who shipped the cigarettes to the Reservation. The distributors then smuggled the cigarettes back into Canada.

In 1992, Canada imposed a tax of $8 (Canadian) on each carton of exported cigarettes. To avoid this tax, defendants shipped raw Canadian tobacco to Puerto Rico, where RJR PR manufactured Canadian-style cigarettes made to look as if they had been made by RJR-MacDonald in Canada. These cigarettes were delivered directly or through Caribbean intermediaries to FTZs in New York, then brought to the Reservation to be smuggled into and sold in Canada. In 1992 and 1993, RJR PR manufactured approximately one billion Canadian-style cigarettes each year. RJR-MacDonald also employed Standard Commercial in North Carolina to process Canadian tobacco and package it as an RJR-MacDonald product. The tobacco was then smuggled into Canada for sale on the black market.

In 1993, in an effort to conceal their relationship with smugglers, defendants created NBI and directed their Canadian sales through it. Defendants' Canadian sales increased, and defendants made several hundred million dollars in profit. In 1994, Canada lowered its cigarette taxes. NBI liquidated its inventory at the FTZs by selling the cigarettes at low prices. Defendants continued their smuggling scheme at low levels between 1995 and 1998.

In conducting this scheme, defendants used the United States mails and wires to make payments and to place and receive orders. In 1997 and 1998, the United States indicted NBI and 21 individuals in connection with these smuggling activities. In 1998, NBI pled guilty to aiding and abetting the introduction of merchandise into the United States by means of false and fraudulent practices. Several individuals involved in the scheme pled guilty to crimes such as wire fraud, aiding and abetting smuggling, conspiring to defraud the United States, currency violations, money laundering and criminal RICO violations.

In the present action, Canada brings claims against defendants under RICO's civil enforcement provision. RICO is a broadly worded statute that "has as its purpose the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce." S. Rep. No. 91-617, at 76 (1969); see Statement of Findings and Purpose, Organized Crime Control Act of 1970, Pub. L. 91-452, 84 Stat. 922, 922-23 (1970). "RICO provides that `[a]ny person injured in his business or property by reason of' a RICO violation may bring a civil...

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