[Intl-tobacco] Canada Tobacco Suit Far From Over (fwd)

[Robert Weissman]

Tobacco Suit Far From Over
U.S. ruling offers lots of room to appeal
by WILLIAM MARSDEN / The Gazette
Source: Montreal Gazette, Thursday, 7/6/00

The decision by a U.S. federal judge to dismiss Canada's $1-billion
racketeering lawsuit against RJ Reynolds Tobacco Holding does not mean the
case is over.

In fact, the judgment appears to offer plenty of room for appeal.

Close reading of the 52-page ruling appears to show that U.S. federal
court Judge Thomas McAvoy is inviting an appeal on the U.S. Revenue Rule -
a law that even the judge refers to as "outdated" and irrational. It bars
U.S. courts from ruling on foreign tax laws.

In his judgment, McAvoy states that Canada's lawsuit alleging violations
of the Racketeering Influenced and Corrupt Organizations Act (RICO) is
essentially a tax-recovery case that would require his court to interpret
Canadian tax laws.  This is a violation of the Revenue Rule and therefore
McAvoy dismissed the case.

At the June hearing in Binghamton, N.Y., RJR lawyer Stephen Heard
forcefully pushed this issue. He said Canada's suit was essentially an
attempt to recover taxes lost from 1991 to 1997 to tobacco-smuggling. He
also argued it was merely an attempt to use RICO to obtain triple damages,
winning a possible $3 billion U.S.

The federal government's counter-argument appears to have failed. But not
entirely. Canada claimed it was attempting to recover damages caused by a
conspiracy by the tobacco company to aid and abet smuggling. The fact that
the damages included lost taxes, it argued, is incidental in law.

Even though McAvoy agreed with RJR, he clearly believes current
interpretation of the Revenue Rule is obsolete. He seems to be saying that
in a modern world, where sovereign economies are closely entwined, license
has to be given to courts to interpret foreign tax laws.

In a footnote, he finds the Revenue Rule "outdated" and states that the
rational for the rule is "largely unpersuasive." He also quotes two court
decisions. One called the rule "obsolete" and the other states that it is
not "analytically justified."

But while clearly uncomfortable with the law, McAvoy was compelled to
follow earlier rulings of the Second Circuit appeals court.

Essentially, McAvoy seems to be begging Canada to appeal his judgment to
the Second Circuit, which is equivalent to the Quebec Court of Appeal. He
seems to be saying that the court should take a fresh look at the Revenue
Rule and its applicability to RICO.

Indeed, McAvoy rejected or wavered on most of RJR's other dismissal
arguments.  He agreed with Canada's stance that the racketeering case
alleging U.S. mail and wire fraud does not require validation of any
Canadian law.

RJR had argued that the case required an "Act of State Doctrine," which
bars a court from ruling on foreign laws.

Another important issue won by Canada was whether it has standing under
the U.S. civil RICO laws. RJR had argued that since Canada is a sovereign
state, it is immune from prosecution under RICO. Therefore, on the other
side of the coin, it cannot be a plaintiff. McAvoy, however, noted that
the RICO law clearly states that foreign governments can sue. Case closed
and another point to Canada.

Canada lost, however, on a second important point. But even here, the
judge wavered. Under RICO, a plaintiff must show he suffered injuries to
business or property. Canada claims its injuries came in the form of lost
tax revenue and higher law-enforcement costs.

McAvoy ruled that a government cannot claim increased enforcement costs.
He cited the case of the town of West Hartford, Conn., which claimed
damages for increased policing resulting from a demonstration against a
medical facility by anti-abortion activists. The U.S. Second Circuit
appeals court rejected the claim, stating that police were simply a part
of town services, and not a commercial enterprise under RICO. But McAvoy
recognized an importance difference.

Canada claims that its increased law-enforcement costs were a direct
result of RJR's conspiracy to defraud it. For this reason, it claims,
these losses are recognizable under RICO. McAvoy at first agrees with this
argument, but then cites the Second Circuits ruling on the Hartford case
and reverses himself.

Oddly, McAvoy does not even mention RJR's claim that Canada was late in
filing its RICO case. Unless he forgot, he obviously did not believe it
worth addressing.

Gordon Bourgard, general counsel for the Department of Justice, called the
ruling a "very complex judgment." He said the government expects to make a
decision within the next two weeks. It has 30 days to appeal.

RJR has remained largely silent on the judgment. According to RJR official
Guy Cote, the company is "assessing its next move."

With several important openings for an appeal, there may also be openings
for a settlement.

Settlement discussions ended abruptly in December, when the government
launched its massive suit. It has already paid more than $4 million to its
Chicago law firm, Bartlit Beck. RJR lawyer Stephen Heard said in an
interview before the judgment: "Any time you can settle a case on the
basis of fairness, it makes sense."

With this judgment and its cryptic waffling, both sides might tend to be
conciliatory.